<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Emmons Transportation Group, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Emmons Transportation Group, Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required*
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
* The filing fee of $427.13 was paid upon the initial filing of the preliminary
proxy materials on March 9, 1999.
<PAGE>
EMONS TRANSPORTATION GROUP, INC.
96 SOUTH GEORGE STREET
YORK, PENNSYLVANIA 17401
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend a
Special Meeting of Stockholders of Emons Transportation Group, Inc. (the
"Company") to be held at 9:00 a.m., local time, on June 23, 1999 at The
Yorktowne Hotel, 48 East Market Street, York, Pennsylvania 17401 (the "Special
Meeting").
I look forward to greeting you personally. The accompanying Proxy
Statement describes the matter to be acted upon at the Special Meeting, and I
urge you to read it carefully.
At the Special Meeting, your Board of Directors is recommending the merger
of ETG Merger Corporation ("Newco"), a newly-formed, wholly-owned subsidiary of
the Company, with and into the Company. Your Board of Directors believes that
the merger of Newco with and into the Company is in the best interests of the
Company and all of its stockholders and recommends that you vote FOR approval of
the proposal.
At the Special Meeting you will also be asked to vote in favor of an
amendment to the Company's charter increasing the number of authorized shares of
Common Stock and to vote in favor of an amendment to the Company's charter
increasing the number of authorized shares of preferred stock. Your Board of
Directors believes that each of these amendments to the Company's charter is in
the best interests of the Company and all of its stockholders and recommends
that you vote FOR approval of each of these proposals.
It is important that your shares be represented at the Special Meeting
regardless of the number of shares you may hold. In order for your vote to be
counted, you must sign, date and return the enclosed proxy card or attend the
meeting in person. I urge you to sign and return the enclosed proxy card
promptly.
Sincerely,
Robert Grossman
Chairman, President
and Chief Executive Officer
York, Pennsylvania
May __, 1999
<PAGE>
EMONS TRANSPORTATION GROUP, INC.
96 SOUTH GEORGE STREET
YORK, PENNSYLVANIA 17401
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 23, 1999
TO THE STOCKHOLDERS OF EMONS TRANSPORTATION GROUP, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Special Meeting") of
the holders (the "Stockholders") of Emons Transportation Group, Inc. (the
"Company") will be held on Wednesday, June 23, 1999, at 9:00 a.m. local time, at
The Yorktowne Hotel, 48 East Market Street, York, Pennsylvania 17401, for the
following purpose:
1. To approve the merger of ETG Merger Corporation, a newly-formed,
wholly-owned subsidiary of the Company, with and into the Company (the
"Merger"). As a result of the Merger (i) each outstanding share of
$.14 Series A Cumulative Convertible Preferred Stock ("Convertible
Preferred Stock"), par value $.01 per share (other than shares owned
by holders exercising appraisal rights under the Delaware General
Corporation Law, as amended) will be exchanged for 1.1 shares of
Common Stock, par value $.01 per share ("Common Stock") (except that
cash shall be paid in lieu of any fractional shares) and (ii) all
shares of Common Stock will remain outstanding, unaffected by the
Merger;
2. To approve an amendment to the Company's charter increasing the number
of authorized shares of Common Stock from 15,000,000 shares to
30,000,000 shares; and
3. To approve an amendment to the Company's charter increasing the number
of authorized shares of preferred stock, par value $.01 per share,
from 3,000,000 shares to 10,000,000 shares.
Provision is made on the enclosed proxy card(s) for your direction as to
the matters set forth above.
Only holders of the Company's Common Stock and Convertible Preferred Stock
of record at the close of business on May 10, 1999 are entitled to receive
notice of and to vote at the Special Meeting and at all adjournments thereof.
A copy of the Company's Proxy Statement is enclosed herewith.
You are cordially invited to attend the Special Meeting in person. If you
would like to attend the Special Meeting and your shares are held by a broker,
bank or other nominee, you must bring to the Special Meeting a recent brokerage
statement or a letter from the nominee confirming your beneficial ownership of
your shares. You must also bring a form of personal identification. Whether
you plan to attend the Special Meeting or not, please sign and date the enclosed
proxy and return it promptly by mail in the enclosed envelope. No postage is
required if mailed in the United States. If you attend the Special Meeting, you
may vote either in person or by proxy.
By Order of the Board of Directors
Scott F. Ziegler
Secretary
York, Pennsylvania
May __, 1999
<PAGE>
PROXY STATEMENT
OF
EMONS TRANSPORTATION GROUP, INC.
FOR THE
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 23, 1999
INTRODUCTION
------------
Solicitation
- ------------
This Solicitation Statement is furnished in connection with the
solicitation by the Board of Directors (sometimes hereinafter referred to as the
"Board") of Emons Transportation Group, Inc., a Delaware corporation (the
"Company"), of proxies to be voted at a special meeting (the "Special Meeting")
of holders ("Stockholders") of the Company's Common Stock, par value $.01 per
share ("Common Stock") and $.14 Series A Cumulative Convertible Preferred Stock,
par value $.01 per share ("Convertible Preferred Stock"), to be held on June 23,
1999, at 9:00 a.m., local time, at The Yorktowne Hotel, 48 East Market Street,
York, Pennsylvania 17401 and any postponement or adjournments thereof.
This Solicitation Statement and the enclosed proxy forms are being
sent to holders of the Company's Common Stock and Convertible Preferred Stock
commencing on or about [May 20], 1999. The principal executive offices of the
Company are located at 96 South George Street, York, Pennsylvania 17401,
telephone (717) 771-1700.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATIONS TO THE CONTRARY ARE UNLAWFUL.
Solicitation will be primarily by mail but may also be made by
personal interview, by telephone, or by facsimile transmission, in each case by
officers and employees of the Company who will not be additionally compensated
therefor. The Company will request persons such as brokers, nominees and
fiduciaries, holding stock in their names for others, or holding stock for
others who have the right to give voting instructions, to forward solicitation
material to their principals and request authority for the execution of the
proxy or consent, as the case may be. The total cost of this solicitation will
be borne by the Company. The Company will not engage a proxy solicitation firm
to assist it in this solicitation.
-1-
<PAGE>
Purpose of this Solicitation
- ----------------------------
The Stockholders are being asked to consider and to vote upon the
proposals described below, which have been approved by the Company's Board of
Directors:
Merger Proposal. The Board is soliciting proxies from the
---------------
holders of the outstanding shares of Common Stock and Convertible
Preferred Stock to approve an Agreement of Merger dated as of April
25, 1999 (the "Merger Agreement") between the Company and ETG Merger
Corporation, a Delaware corporation which is a newly-formed, wholly-
owned subsidiary of the Company ("Newco") (the "Merger Proposal").
The Merger Agreement provides for the merger of Newco into the
Company, with the Company being the surviving corporation in the
merger (the "Merger"). As a result of the Merger (i) each outstanding
share of Convertible Preferred Stock (other than shares owned by
holders exercising appraisal rights under the Delaware General
Corporation Law, as amended (the "DGCL")) will be exchanged for 1.1
shares of Common Stock (except that cash will be paid in lieu of any
fractional shares) and (ii) all shares of Common Stock will remain
outstanding, unaffected by the Merger. See "MERGER PROPOSAL". The
Company anticipates that the Merger will be consummated as promptly as
possible after the Special Meeting, provided all conditions to the
Merger have been satisfied or waived. Approval of (i) the holders of
a majority of the outstanding Common Stock and Convertible Preferred
Stock, voting together as a single class and (ii) the holders of a
majority of the outstanding Convertible Preferred Stock, voting as a
separate class, is required to approve the Merger Proposal. The
Company may withdraw the Merger Proposal if the holders of more than
5% of the outstanding Convertible Preferred Stock have properly
exercised appraisal rights in accordance with Section 262 of the DGCL.
See "MERGER PROPOSAL". The Merger Agreement is attached to this
Solicitation Statement as Annex A.
Common Stock Charter Amendment. At the Special Meeting,
------------------------------
Stockholders also will be asked to consider, independently of the vote
on the Merger Proposal, an amendment to the Company's Certificate of
Incorporation (as previously amended, the "Certificate of
Incorporation") to increase the number of authorized shares of Common
Stock of the Company from 15,000,000 shares to 30,000,000 shares (the
"Common Stock Charter Amendment"). Approval of the holders of a
majority of the outstanding Common Stock and Convertible Preferred
Stock, voting together as a single class, is required to approve the
Common Stock Charter Amendment. The approval of the Common Stock
Charter Amendment is not a condition to the consummation of the Merger
and is being submitted to the Stockholders independently of the Merger
Proposal. See "PROPOSED CHARTER AMENDMENTS - The Common Stock Charter
Amendment".
-2-
<PAGE>
Preferred Stock Charter Amendment. At the Special Meeting,
---------------------------------
Stockholders also will be asked to consider, independently of the vote
on the Merger Proposal and the vote on the Common Stock Charter
Amendment, an amendment to the Certificate of Incorporation to
increase the number of authorized shares of preferred stock, par value
$.01 per share ("Preferred Stock") of the Company from 3,000,000
shares to 10,000,000 shares (the "Preferred Stock Charter Amendment",
and together with the Common Stock Charter Amendment, the "Proposed
Charter Amendments"). Approval of the holders of a majority of the
outstanding Common Stock and Convertible Preferred Stock, voting
together as a single class, is required to approve the Preferred Stock
Charter Amendment. The approval of the Preferred Stock Charter
Amendment is not a condition to the consummation of the Merger and is
being submitted to the Stockholders independently of the Merger
Proposal. See "PROPOSED CHARTER AMENDMENTS - The Preferred Stock
Charter Amendment".
SPECIAL FACTORS
---------------
Rationale for the Merger Proposal
- ---------------------------------
As of May 10, 1999, the Company had 1,485,543 shares of Convertible
Preferred Stock outstanding with a total liquidation preference of $4,738,882,
including accumulated undeclared dividends as of May 10, 1999 of $1,767,796.
The existence of the Convertible Preferred Stock and its accumulated undeclared
dividends creates a claim on the Company's assets, and any future dividends,
ahead of any claims by Common Stock holders or holders of any new issues of
preferred stock. Accordingly, the Company believes such Convertible Preferred
Stock and accumulated undeclared dividends pose a significant obstacle to the
Company's ability to raise the additional equity capital that will be needed for
it to achieve its strategic business plan. A primary goal of the Company's
current business plan is the development, by acquisition and otherwise, of new
businesses which will provide operational, geographical or managerial synergies
related to its existing business of rail freight transportation and distribution
services. See "BUSINESS OF THE COMPANY" and "SPECIAL FACTORS - The Company's
Strategic Business Plan". For this reason, the Company has had to fund recent
acquisitions with internally generated funds and debt. The resulting current
debt level of the Company may make it difficult for the Company to raise
additional debt on favorable terms.
Alternatives Considered
- -----------------------
The Company examined possible ways to eliminate the burden that the
Convertible Preferred Stock and its accumulated undeclared dividends have placed
on the Company's capital structure. The Company considered ways to redeem the
Convertible Preferred Stock in accordance with the redemption provisions of the
Convertible Preferred Stock Terms. Under the redemption provisions of the
Convertible Preferred Stock Terms the Company has the right, at its sole option,
to redeem all outstanding shares of Convertible
-3-
<PAGE>
Preferred Stock for an aggregate price, as of May 10, 1999, of $4,738,882 (or
$2.00 per share plus $1.19 per share in accumulated undeclared dividends) (the
"Redemption Price"). See "DESCRIPTION OF SECURITIES - Convertible Preferred
Stock" for additional information regarding the Convertible Preferred Stock
Terms. Based upon its assessment of the Company's ability to raise new capital
and the amount of internally-generated funds which the Company could apply to
this purpose, the Company concluded that at this time, and in the foreseeable
future, the Company would most likely not be able to fund a total redemption of
the Convertible Preferred Stock at the Redemption Price without seriously
jeopardizing the Company's ability to continue as a going concern or without
materially diluting existing holders of Common Stock.
The Company also believes that the payment of cash consideration to
the holders of Convertible Preferred Stock, instead of the proposed exchange of
shares of Common Stock for the shares of Convertible Preferred Stock, would
significantly limit the Company's ability to invest internally generated funds
for the continued growth of the Company and would prevent the Company from being
able to fully pursue its strategic goals. Accordingly, the Company did not
consider that conducting a full cash redemption of the Convertible Preferred
Stock would be in the best interests of the Company and its Stockholders.
Reasons for Proposed Structure
- ------------------------------
The Company believes that although there may be other structures and
kinds of transactions which, individually or in combination, could be used to
achieve some or all of the goals of the Merger Proposal, the Merger Proposal is
the most attractive way for the Company to achieve all such goals.
Specifically, the Merger Proposal, if adopted, would assure the Company that no
shares of Convertible Preferred Stock would remain outstanding after the
consummation of the Merger.
The Company initially examined possible ways to repurchase the
outstanding shares of Convertible Preferred Stock, either pursuant to the
redemption provisions of the Convertible Preferred Stock Terms or pursuant to a
voluntary exchange offer made by the Company to all holders of Convertible
Preferred Stock. The Company chose not to attempt a redemption pursuant to the
Convertible Preferred Stock Terms since the Redemption Price exceeded the amount
that the Company could apply to that purpose at this time. An offer by the
Company to repurchase the Convertible Preferred Stock outside the redemption
provisions of the Convertible Preferred Stock Terms was also considered but was
rejected because, in the Board's view, such an offer would be likely to be less
advantageous to the Company than the Merger Proposal and because, whatever the
price offered by the Company, the Company could not be assured that it would be
able to repurchase all outstanding shares in such a transaction. If adopted,
the Merger Proposal assures the Company that no shares of Convertible Preferred
Stock will remain outstanding after the consummation of the Merger. See
"SPECIAL FACTORS - Background of the Merger Proposal and Alternatives
Considered".
-4-
<PAGE>
After considering the alternatives referred to above, the Board has
concluded that a transaction structured as a recapitalization through a
statutory merger would be beneficial to the Company and, assuming the necessary
approvals are obtained, would be achievable by the Company both as a financial
and mechanical matter.
Timing of Transaction
- ---------------------
The existence of accumulated undeclared dividends has limited the
Company's ability to raise new equity. The Company financed four acquisitions
in the period from November 1997 to December 1998 with internally generated
funds and debt because the Company was not able to raise equity capital on what
it believed to be favorable terms. The Company's current debt level may make it
difficult for the Company to obtain additional debt on favorable terms. The
Company therefore believes it may be necessary to finance future growth and
profit enhancing projects with additional equity, but the Company believes it
will not be possible to raise such equity on terms acceptable to the Company as
long as the accumulated undeclared dividends on the Convertible Preferred Stock
remains in existence.
Background of the Merger Proposal
- ---------------------------------
At a regular meeting of the Board held on September 18, 1997,
management discussed with the Board the possible recapitalization of the Company
involving an exchange of shares of Common Stock for the shares of Convertible
Preferred Stock. The Board authorized management to engage the investment firm
of Ferris, Baker Watts, Incorporated ("FBW") to evaluate the fairness of a
possible recapitalization proposal. Subsequent to the September 1997 meeting,
the Board authorized management to initiate discussions with a limited number of
institutional holders of the Convertible Preferred Stock to determine whether
those holders would consider favorably a recapitalization of the Convertible
Preferred Stock at a ratio of 1 share of Convertible Preferred Stock for 1 share
of Common Stock. The Company had such discussions with six of the institutional
holders of significant amounts of the Convertible Preferred Stock, including
Chase Manhattan Bank, Bank of America, Bankers Trust Company, Reliance Insurance
Company, State of Michigan Retirement Systems and First Union National Bank.
However, the Company did not receive assurances from a substantial number of
such institutional holders that they would favorably consider a recapitalization
of the Company as discussed. Accordingly, management was uncertain as to
whether a recapitalization transaction would be successful at that time.
In numerous subsequent Board meetings and telephone conferences during
late 1997 and early 1998, management discussed the general structure and terms
of a possible recapitalization of the Convertible Preferred Stock, and at the
November 19, 1998 Board meeting, the Board requested the Company's management to
evaluate a recapitalization transaction with an exchange ratio of up to 1.1
shares of Common Stock for each share of Convertible Preferred Stock or 1 share
of Common Stock plus $0.14 in cash (the amount of the accumulated undeclared
dividends for one year) for each share of Convertible Preferred Stock.
Management did not conduct any in-depth financial analysis to arrive at such an
-5-
<PAGE>
exchange ratio other than considering that the ratio must be greater than .9 to
1 in order to entice the holders of Convertible Preferred Stock to exchange
their shares but should not be so much greater so as to provide holders of
Convertible Preferred Stock with consideration with an aggregate value in excess
of the value of the Convertible Preferred Stock and the accumulated undeclared
dividends thereon of $1.19 per share. The ratio of 1.1 to 1 falls within that
range. FBW was asked by the Company to evaluate the fairness of a
recapitalization proposal based on such an exchange ratio. At a meeting on
February 22, 1999, the Company's management reported to the Board that it would
be in the Company's best interest to propose an exchange transaction at a ratio
of 1.1 shares of Common Stock for each share of Convertible Preferred Stock, and
the terms of the Merger Proposal were presented to, and unanimously approved by,
the Board. See "SPECIAL FACTORS -Recommendation of the Board of Directors;
Fairness". Accordingly, the Merger Proposal is now being submitted to the
Company's Stockholders for approval.
1989 Merger Transaction
- -----------------------
In 1989, the Company engaged in a merger transaction (the "1989
Merger") that was similar in structure and purpose to the proposed Merger. In
the 1989 Merger, the Stockholders approved an agreement of merger dated as of
May 8, 1989 between the Company and its wholly-owned subsidiary, Emons Merger
Corporation. The 1989 Merger was consummated on September 27, 1989 and resulted
in the issuance of the existing Convertible Preferred Stock to holders of the
Company's Senior Preferred Stock, par value $.01 per share, in exchange for such
shares of Senior Preferred Stock. The purpose of the 1989 Merger was to relieve
the Company of the Senior Preferred Stock's uncommon and burdensome terms,
including variable dividend requirements and highly restrictive financial and
operational covenants. The Company had determined that such Senior Preferred
Stock had a negative influence on the Company's ability to conduct its business,
and it restricted the Company's ability to access new capital sources. At the
time of the 1989 Merger, the Company believed it would be able to pay the
dividends on the Convertible Preferred Stock from internally generated funds
without hampering the Company's ability to pursue its strategic goals. However,
due to an unforeseen economic downturn in New England, where a large part of the
Company's business has been focused, and a downturn in the paper industry which
constituted a large part of the Company's business, the Company has not declared
dividends on the Convertible Preferred Stock since July 1990. Although such
economic conditions have improved and the Company's business base has expanded,
the Company's ability to continue growing and investing in profit-enhancing
projects would be hampered if the Company were to pay the undeclared dividends
that have accumulated on the Convertible Preferred Stock since July 1990 or any
dividends that would accrue in the foreseeable future.
Effects of Merger Proposal
- --------------------------
The principal effects of the adoption of the Merger Proposal will be
the exchange of all outstanding shares of Convertible Preferred Stock into
shares of Common Stock and the elimination of the burden that the accumulated
undeclared dividends on the Convertible Preferred Stock are placing on the
Company's capital structure. This will allow
-6-
<PAGE>
the Company to continue investing internally generated funds in the Company's
growth. The Company believes, for the reasons stated below, that the
consummation of the Merger Proposal will benefit the holders of Common Stock,
the holders of Convertible Preferred Stock and the Company as a whole.
Benefits to the Company as a Whole. The Board believes that the
----------------------------------
Convertible Preferred Stock Terms and the existence of the accumulated
undeclared dividends significantly limit the Company's ability to raise
additional capital on favorable terms. The adoption of the Merger Proposal will
benefit the Company financially and will give the Company needed flexibility in
attempting to raise capital in the future.
Benefits to Holders of Convertible Preferred Stock. Since the
--------------------------------------------------
Company's Common Stock has historically traded significantly more actively than
the Company's Convertible Preferred Stock, holders of the Convertible Preferred
Stock may get the benefit of increased liquidity in their investment in the
Company as a direct result of the adoption of the Merger Proposal. The Common
Stock is listed on the NASDAQ SmallCap Market, and the Company intends to
continue that listing subsequent to the adoption of the Merger Proposal.
Holders of Convertible Preferred Stock may also benefit by exchanging their
shares at a ratio of 1.1 shares of Common Stock for each share of Convertible
Preferred Stock, since this ratio exceeds the conversion ratio provided for by
the Convertible Preferred Stock Terms of .9 shares of Common Stock for each
share of Convertible Preferred Stock. Additionally, the Board believes that the
strategic and organizational benefits which are expected to accrue to the
Company as a result of adoption of the Merger Proposal will benefit the holders
of Convertible Preferred Stock as holders, after the Merger, of the Company's
Common Stock.
Benefits to Holders of Common Stock. The Board believes that holders
-----------------------------------
of Common Stock, like the holders of Convertible Preferred Stock, will directly
experience the benefits accruing to the Company as a whole from adoption of the
Merger Proposal. Adoption of the Merger Proposal will give the Company needed
flexibility in attempting to raise capital in the future.
Pro Forma Financial Information
- -------------------------------
The following pro forma financial information demonstrates the impact
of the proposed Merger between the Company and Newco on the earnings applicable
to holders of Common Stock and earnings per share of the Company, and the impact
of the proposed Merger on the consolidated balance sheets of the Company for the
periods presented. The pro forma adjustments include the impact of the
conversion of each share of Convertible Preferred Stock into 1.1 shares of
Common Stock, the inducement premium of .2 shares of Common Stock for each share
of Convertible Preferred Stock, and the anticipated costs to complete the
Merger. The conversion of Convertible Preferred Stock into shares of Common
Stock under the proposed Merger has the impact of diluting pro forma basic and
diluted earnings per common share for the year ended June 30, 1998 by $0.15 and
$0.02 per share, respectively, and diluting pro forma basic and diluted earnings
per common share for the nine months ended March 31, 1999 by $0.01. The .2
share inducement premium under
-7-
<PAGE>
the proposed Merger in the amount of $764,116 for the year ended June 30, 1998
and $742,772 for the nine months ended March 31, 1999 has the impact of diluting
pro forma basic and diluted earnings per common share for the year ended June
30, 1998 by $0.10, and diluting pro forma basic and diluted earnings per common
share for the nine months ended March 31, 1999 by $0.09. The anticipated costs
to complete the proposed Merger are estimated to approximate $250,000, and are
included as a reduction of additional paid-in capital in the pro forma
consolidated balance sheets.
-8-
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31, 1999
------------------------------------------------------------
PRO FORMA ADJUSTMENTS
(UNAUDITED)
---------------------
CONVERSION
HISTORICAL OF PREFERRED PREFERRED PRO FORMA
(UNAUDITED) STOCK/(1)/ DIVIDENDS/(2)/ (UNAUDITED)
-------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Net income $1,093,208 $ - $ - $1,093,208
Convertible Preferred
Stock dividend
requirements 157,042 (157,042) 742,772 742,772
---------- ---------- --------- ----------
Income applicable to
Common Stockholders $ 936,166 $ 157,042 $(742,772) $ (350,436)
========== ========== ========= ==========
Weighted average number of
Common Stock shares
Basic 6,083,485 1,634,097 - 7,717,582
========== ========== ========= ==========
Diluted 7,841,517 288,019 - 8,129,536
========== ========== ========= ==========
Earnings per Common Stock
share
Basic $ 0.15 $ (0.01) $ (0.09) $ 0.05
========== ========== ========= ==========
Diluted $ 0.14 $ (0.01) $ (0.09) $ 0.04
========== ========== ========= ==========
FOR THE FISCAL YEAR ENDED
JUNE 30, 1998
----------------------------------------------------------
PRO FORMA ADJUSTMENTS
(UNAUDITED)
---------------------
CONVERSION
OF PREFERRED PREFERRED PRO FORMA
HISTORICAL STOCK/(1)/ DIVIDENDS/(2)/ (UNAUDITED)
----------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Net income $4,917,622 $ - $ - $4,917,622
Convertible Preferred
Stock dividend
requirements 218,275 (218,275) 764,116 764,116
---------- ---------- --------- ----------
Income applicable to
$4,699,347 $ 218,275 $(764,116) $4,153,506
Common Stockholders ========== ========== ========= ==========
Weighted average number of
Common Stock shares
Basic 5,953,586 1,681,054 - 7,634,640
========== ========== ========= ==========
Diluted 7,829,379 277,860 - 8,107,239
========== ========== ========= ==========
Earnings per Common Stock
share
Basic $ 0.79 $ (0.15) $ (0.10) $ 0.54
========== ========== ========= ==========
Diluted $ 0.63 $ (0.02) $ (0.10) $ 0.51
========== ========== ========= ==========
</TABLE>
(1) Adjustment assumes that the Convertible Preferred Stock outstanding at the
end of the period was converted into Common Stock at the beginning of the
period at a rate of 1.1 shares of Common Stock for each share of Convertible
Preferred Stock. This represents a .2 share, or 22%, inducement premium in
excess of the .9 conversion rate offered under the current terms of the
Convertible Preferred Stock.
(2) Adjustment represents the inducement premium of .2 shares of Common Stock
times the number of Convertible Preferred Stock shares outstanding at the
end of the period times $2.50 (assumed fair market value of the Common Stock
on the conversion date for purposes of this pro forma computation). The
dollar impact of the inducement premium is charged to income applicable to
Common Stockholders for purposes of computing earnings per share.
-9-
<PAGE>
EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,673,406 $(250,000)/(1)/ $ 2,423,406
Accounts receivable, materials and
supplies, and prepaid expenses 3,641,603 3,641,603
Deferred income taxes 476,000 476,000
------------ --------- ------------
Total current assets 6,791,009 (250,000) 6,541,009
Property, plant and equipment, net 26,388,969 26,388,969
Deferred expenses and other assets 770,085 770,085
Deferred income taxes 718,000 718,000
------------ ------------
TOTAL ASSETS $ 34,668,063 $(250,000) $ 34,418,063
============ ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 500,335 $ $ 500,335
Accounts payable and accrued expenses 5,201,517 5,201,517
------------ --------- ------------
Total current liabilities 5,701,852 5,701,852
Long-term debt 15,367,715 15,367,715
Other liabilities 807,925 807,925
------------ --------- ------------
Total Liabilities 21,877,492 21,877,492
------------ --------- ------------
Stockholders' Equity:
Cumulative convertible preferred stock 14,855 (14,855)/(2)/ -
Common stock 61,140 16,341/(2)/ 77,481
Additional paid-in capital 23,835,553 (251,486)/(3)/ 23,584,067
Deficit (10,778,291) (10,778,291)
------------ --------- ------------
13,133,257 (250,000) 12,883,257
Comprehensive income 10,992 10,992
Unearned compensation-restricted stock awards (353,678) (353,678)
------------ --------- ------------
Total Stockholders' Equity 12,790,571 (250,000) 12,540,571
------------ --------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 34,668,063 $(250,000) $ 34,418,063
============ ========= ============
</TABLE>
(1) Adjustment represents the anticipated costs to complete the Merger
Proposal.
(2) Adjustment represents the conversion of Convertible Preferred Stock into
Common Stock at a rate of 1.1 shares of Common Stock for each share of
Convertible Preferred Stock.
(3) Adjustment represents the anticipated costs to complete the proposed Merger
transaction and the difference between the par value of the Convertible
Preferred Stock exchanged and the par value of the Common Stock received.
Possible Detrimental Effects of the Merger Proposal
- ---------------------------------------------------
Although the Board believes that the adoption of the Merger Proposal
would be in the best interests of the Company and all of its Stockholders, the
Board recognizes that under some circumstances the adoption of the Merger
Proposal could turn out to be disadvantageous for some of its Stockholders.
-10-
<PAGE>
Dilution of Existing Common Stockholders. The Merger Proposal will
----------------------------------------
have the effect of diluting the interests of holders of Common Stock. At March
31, 1999, the Company's Common Stockholders' Equity (or "book value"
attributable to Common Stock) was $10,654,909, or $1.74 per share of Common
Stock outstanding on such date (without giving effect to shares issuable upon
exercise of outstanding options). At June 30, 1998, the Company's book value
attributable to Common Stock was $9,436,929 or $1.56 per share of Common Stock
outstanding on such date (without giving effect to shares issuable upon exercise
of outstanding options). Assuming consummation of the Merger Proposal and the
issuance of shares of Common Stock to holders of Convertible Preferred Stock at
a rate of 1.1 shares of Common Stock for each share of Convertible Preferred
Stock in the Merger and assuming a charge of $250,000 to equity for expenses
associated with this transaction, the Company's Common Stockholders' Equity
would have been $12,540,571, or $1.62 per share of Common Stock outstanding, at
March 31, 1999 and $11,383,960, or $1.47 per share of Common Stock outstanding,
at June 30, 1998. See "SPECIAL FACTORS - Pro Forma Financial Information" for
pro forma earnings per share information.
Convertible Preferred Stockholders. The adoption of the Merger
----------------------------------
Proposal will deprive holders of Convertible Preferred Stock of their right to
receive a fixed dividend, if declared, and of their right to receive a
liquidation preference in the amount of $2 per share in any liquidation of the
Company. Additionally, the holders of Convertible Preferred Stock will forego
accumulated undeclared dividends in the amount of $1.19 per share, as of May 10,
1999.
Future Issuances of Preferred Stock. Under the Convertible Preferred
-----------------------------------
Stock Terms, so long as any shares of Convertible Preferred Stock are
outstanding, the Company may not create any class or series of stock ranking
prior to the Convertible Preferred Stock as to payment of dividends or as to
liquidation preferences. Although the Company does not have a present intention
of reissuing the Convertible Preferred Stock or of issuing additional series or
classes of preferred stock, the Company will have the ability to do so after the
adoption of the Merger Proposal. The holders of any shares of preferred stock
that may be issued in the future may have the right to receive a liquidation
preference and an accumulated dividend preference prior to any rights of the
holders of Common Stock.
Recommendation of the Board of Directors; Fairness
- --------------------------------------------------
The Board of Directors, by unanimous vote of the directors, including
all directors who are not employees of the Company, at a meeting held on
February 22, 1999, has approved the Merger Proposal and believes that the Merger
Proposal and the process by which the proposal was determined, are fair to
affiliated and unaffiliated holders of Common Stock and holders of Convertible
Preferred Stock, all of whom are unaffiliated with the Company. Each member of
the Board and each executive officer of the Company has advised the Company that
he or she intends to vote all Common Stock over which he or she exercises voting
power in favor of the Merger Proposal. See "VOTING - Voting Rights and Proxy
Information".
The Board considered the matters described in this Solicitation
Statement at the Board meeting held on February 22, 1999, at which time a
presentation was made by FBW and certain officers of the Company and FBW
delivered its fairness opinion.
-11-
<PAGE>
The Board's recommendation of the Merger Proposal to Stockholders, and
its belief that the proposal is fair to Stockholders, are based upon the
following considerations.
(i) The Board's evaluation of the relative values of the Convertible
Preferred Stock. In this respect, the Board considered the historical market
value of the Convertible Preferred Stock, which had a range from a low bid of
$1.50 to a high bid of $2.875 during the period since the Company's first fiscal
quarter of 1997, and of the Common Stock, which had a range from a low bid of
$1.5625 to a high bid of $5.375 during this period. The Board also considered
the current market value of the Convertible Preferred Stock, which was $2.1875
(based on the average of closing bid and ask prices) as of April 30, 1999 (the
last day of trading prior to May 10, 1999), and of the Common Stock, which was
$2.21875 (based on the average of closing bid and ask prices) as of May 10,
1999. The Board considered the current market value of the Company to be
approximately equivalent to the going concern value of the Company since the
public markets value companies as going concerns. In all such considerations,
the value of the inducement being offered to holders of Convertible Preferred
Stock is less than the value of the accumulated undeclared dividends. Thus, the
amount of consideration to be paid to holders of Convertible Preferred Stock is
beneficial to holders of Common Stock. At the same time, the payment of
consideration in an amount less than the amount of the accumulated undeclared
dividends is considered fair to the Convertible Preferred Stock holders in light
of the low probability that such amounts will ever be paid. Because the Board
believes the Company is most valuable as a going concern, the Board did not
consider valuations of the Company that beared little or no relation to the
Company's going concern value. Specifically, because the net book value of the
Company is based on the historical cost of its assets, the Board did not
consider the Company's net book value. Similarly, because the Company's
liquidation value is only based on the value the Company's assets on an
individual basis, without any consideration for the Company's goodwill, the
Board did not consider the Company's liquidation value. The price paid for
Convertible Preferred Stock in any prior transaction which was required to be
reported by the Company as a "going-private" transaction on Form 13E-3 was not
considered since the Company did not engage in any such transactions with
respect to the Convertible Preferred Stock.
(ii) The Board's assessment of the impact of the Merger Proposal upon
holders of Common Stock. In this respect, the Board considered the fact that
the Merger would eliminate senior claims on the Company's assets, which reduce
the value of the Common Stock. The Board also considered the fairness of the
transaction to the holder's of Common Stock in light of the low probability that
the accumulated undeclared dividends would ever be paid.
(iii) The oral advice and written opinion of FBW that, based upon the
matters described in such opinion, as of the date of such opinion, the
consideration to be received by holders of Convertible Preferred Stock pursuant
to the Merger and the effect on holders of Common Stock is, in each case, fair.
Each of the foregoing factors favored the Board's conclusion that the
Merger is fair. The Board did consider several factors that detracted from its
conclusion that the Merger is fair. These factors include the dilutive affect
that the transaction would have on holders of Common Stock. The conversion of
Convertible Preferred Stock into shares of Common Stock under the proposed
Merger has the impact of diluting pro forma basic and diluted earnings per
common share for the year ended June 30, 1998 by $0.15 and $0.02 per share,
respectively, and diluting pro forma basic and diluted earnings per common share
for the nine months ended March 31, 1999 by $0.01. The .2 share inducement
premium under the proposed Merger in the amount of $764,116 for the year ended
June 30, 1998 and $742,772 for the nine months
-12-
<PAGE>
ended March 31, 1999 has the impact of diluting pro forma basic and diluted
earnings per common share for the year ended June 30, 1998 by $0.10, and
diluting pro forma basic and diluted earnings per common share for the nine
months ended March 31, 1999 by $0.09. Detracting factors also include the costs
that the Company would incur to consummate the Merger, which is anticipated to
be approximately $250,000. Additionally, the fact that there is some
possibility that the accumulated undeclared dividends would be paid, albeit
small, also detracted from the Board's conclusion that the transaction was fair.
However, the Board determined that these factors were outweighed by the factors
that favored its conclusion that the Merger was fair to the Stockholders.
Neither the Company nor Newco has received any other firm offers of
any unaffiliated person during the preceding 18 months for the merger or
consolidation of the Company with or into any other person, the sale or other
transfer of all or any substantial part of the assets of the Company or the
purchase of securities of the issuer which would entitle the holder thereof to
exercise control over the Company. The Board did not assign relative weights to
the various factors considered by it, and individual directors may have weighed
each factor differently.
The Board's belief that the Merger Proposal is fair to holders of
Common Stock in light of the inducement of .2 shares of Common Stock being
offered to holders of Convertible Preferred Stock is based upon the above
factors, which specifically include consideration of the fact that the
accumulated undeclared dividends on the Convertible Preferred Stock would be
eliminated. The Board's belief that the proposal is fair to holders of Common
Stock in light of the dilution such shares would suffer if the Merger Proposal
is approved is based upon the above factors, which specifically included
consideration of the fact that the Merger would not, on a diluted basis, be
significantly dilutive to the Common Stock. The Board did not consider the
dilution on earnings per share caused by the inducement premium in the preceding
analysis (other than considering the dilutive effect, if any, caused by the
issuance of 1.1 shares of Convertible Preferred Stock in exchange for each share
of Common Stock) because the recognition of any charge related to such
inducement is a non-recurring charge that does not affect any future periods.
Similarly, such a charge would not reduce the net asset value of the Company or
have any impact on its cash flow. The impact of the inducement is detailed in
the SPECIAL FACTORS - Pro Forma Financial Information section. The Board's
belief that the proposal is fair to holders of Convertible Preferred Stock in
light of the fact that such holders will forego the right to potentially receive
the accumulated undeclared dividends is based on the above factors, which
specifically include consideration of the facts that the holders of Convertible
Preferred Stock would receive in the Merger Common Stock with a value in excess
of the value of Common Stock that they would receive if such holders converted
their shares of Convertible Preferred Stock to Common Stock in accordance with
the terms of the Convertible Preferred Stock, the Company is not obligated to
pay such accumulated undeclared dividends and the Common Stock offers holders
more liquidity than does the Convertible Preferred Stock. For instance, the
total volume of Common Stock shares traded in the first three quarters fiscal of
1999 was 1,175,515, as compared to a total volume of Convertible Preferred Stock
traded in such quarters of 38,000. See "MARKET FOR COMPANY'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS".
The Board did not ask FBW, in evaluating the fairness of the Merger
Proposal, to consider whether any transactions other than the Merger Proposal
would also be fair to the holders of Common Stock and Convertible Preferred
Stock and achieve the Company's objectives.
-13-
<PAGE>
The Merger Proposal is not specifically structured to require that
unaffiliated holders of at least a majority of the outstanding Common Stock
approve the proposal. However, the Merger will not be consummated unless the
holders of at least a majority of the outstanding Convertible Preferred Stock,
voting as a separate class, vote to approve the Merger Proposal. Since no
director or executive officer of the Company or Newco owns shares of Convertible
Preferred Stock, the Merger cannot be consummated without the approval of the
unaffiliated holders of at least a majority of the outstanding Convertible
Preferred Stock. No representative has been engaged by members of the Board who
are not officers of the Company to act solely on behalf of unaffiliated
Stockholders for purposes of negotiating the terms of the Merger Proposal.
The Board believes the Merger Proposal is procedurally fair because:
(i) the Board retained FBW to evaluate the fairness of the Merger Proposal to
all Stockholders, including affiliated and unaffiliated holders of Common Stock
and Convertible Preferred Stock, (ii) as set forth above, the Merger cannot be
consummated without the approval of the unaffiliated holders of at least a
majority of the outstanding Convertible Preferred Stock, and (iii) appraisal
rights are available to the holders of Convertible Preferred Stock under the
DGCL.
Opinion of Financial Advisor
- ----------------------------
FBW, a Washington, DC-based investment banking firm, was retained by
the Company to act as its financial advisor generally in May 1998, and was
specifically engaged by the Company in connection with the Merger in December
1998 pursuant to an engagement letter dated December 7, 1998 (the "FBW
Engagement Letter"). Specifically, FBW was asked to advise the Board of
Directors of the Company as to the fairness to holders of Convertible Preferred
Stock and holders of Common Stock, from a financial point of view, of the
consideration to be received by the holders of Convertible Preferred Stock in
connection with the Merger. The Board did not ask FBW to, and FBW did not,
consider the fairness of any form of transaction other than the Merger Proposal
or the fairness of conducting the proposed exchange on any terms other than the
terms of the Proposed Merger, including any transaction involving partial or
full cash consideration.
At a meeting of the Company's Board of Directors on February 22, 1999,
FBW rendered its oral opinion and delivered a written copy of its opinion dated
as of such date. FBW subsequently delivered an opinion in writing to the Board
dated as of [May __,] 1999, based upon and subject to the various assumptions,
qualifications and limitations set forth in the opinion, that the consideration
to be received by the holders of Convertible Preferred Stock is fair to the
holders of Common Stock and Convertible Preferred Stock. At a telephonic Board
meeting held on April 23, 1999, the Board set the record date for the vote by
Stockholders of the Merger Proposal and set the date for the Special Meeting.
The full text of the written opinions of FBW dated as of February 22,
1999 and [May __], 1999 and the supporting analysis, assumptions made,
procedures followed, matters considered and limitations on the scope of the
review undertaken by FBW in rendering its opinions, are attached as Annexes B-1,
B-2 and B-3 hereto. Additionally, such opinions and supporting analysis shall
be made available for inspection and copying at the Company's principal
executive offices located at 96 South George Street, York, PA 17401 during the
Company's regular business hours by any interested Stockholder or his
representative who has been so designated in writing. A copy thereof will be
transmitted by the Company to any interested Stockholder or his representative
who has been so designated in writing upon
-14-
<PAGE>
written request and at the expense of the requesting Stockholder. Stockholders
are urged to, and should, read the opinions and the supporting analysis
therefor, carefully and in their entirety in conjunction with this Solicitation
Statement. FBW'S OPINIONS WERE PREPARED AT THE REQUEST OF THE COMPANY'S BOARD
OF DIRECTORS AND DO NOT CONSTITUTE A RECOMMENDATION AS TO HOW A STOCKHOLDER
SHOULD VOTE ON MATTERS ASSOCIATED WITH THE MERGER. The following summarizes all
of the material provisions of the opinions of FBW that are attached hereto in
their entirety.
In connection with the opinions, FBW reviewed, among other things, (i)
the proposed Merger Agreement, (ii) Annual Reports and Form 10-K's for fiscal
years ended June 30, 1996, 1997, 1998, (iii) Quarterly Reports on Form 10-Q for
the periods ended September 30, 1998, December 31, 1998 and March 31, 1999, (iv)
internal, non-public budgets and projections for fiscal years 1999, 2000 and
2001, (v) publicly available financial data of regional railroad companies which
FBW deemed comparable to the Company, and (vi) Notice of Special Meeting of
Stockholders and Proxy Statement, dated August 23, 1989. FBW also held
discussions with management of the Company regarding its past and current
business operations, financial condition and future prospects. FBW also held
discussions with the Company's accountants and counsel and performed such other
investigations as it deemed necessary.
FBW assumed and relied upon the accuracy and completeness of all
financial and other information reviewed by it for the purposes of the opinions
whether publicly available or provided to FBW by the Company, and FBW has not
assumed, and does not assume, any responsibility for independent verification of
such information. FBW has further assumed that the financial budgets and
projections provided to FBW by the Company have been reasonably determined
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company.
FBW expressed no view as to such budgets or projections or the assumptions on
which they were based.
FBW's final opinions are based on economic, market and other
considerations as in effect on, and other information made available to FBW as
of, February 22, 1999, and up-dated information as of [May __,] 1999.
Subsequent events may affect the conclusions reached in the opinions, and FBW
neither has, nor does it assume any obligation to update, revise or reaffirm the
opinions which speak solely as of February 22, 1999 and [May __,] 1999,
respectively, with respect to matters contained therein.
As consideration for the Merger, the holders of Convertible Preferred
Stock shall exchange their shares for shares of Common Stock at a ratio of 1.1
shares of Common Stock for each share of Convertible Preferred Stock (except
that cash shall be paid in lieu of any fractional shares). Since there is no
current mechanism for the holders of Convertible Preferred Stock to force the
Company to pay dividends or redeem the Convertible Preferred Stock and
accumulated undeclared dividends for cash, it is not likely that the holders of
Convertible Preferred Stock will receive such cash payments. In light of this
fact, and in light of the other analyses more fully described below, FBW
determined that the exchange of shares at the aforementioned ratio is fair to
the holders of Convertible Preferred Stock. Additionally, FBW determined that
any ratio that results in consideration equal to or less than $4,946,854, the
expected present value of the Convertible Preferred Stock, is fair to the
holders of Common Stock. The expected present value of the Convertible
Preferred Stock is calculated as (i) the existing redemption value of the
Convertible Preferred Stock plus (ii) the present value of future dividends,
discounted at a rate of 10% (the preferred dividend rate on comparable
securities) and further multiplied by 10% to provide for the low
-15-
<PAGE>
likelihood of payment. The following is a brief summary of all material
analyses performed by FBW in connection with the preparation of the opinion
letters dated February 22, 1999 and [May __,] 1999.
Discounted Free Cash Flow Analysis
----------------------------------
FBW performed a discounted free cash flow analysis based on the
Company's internal projections for fiscal years 1999 through 2001. The analysis
aggregated: (i) the present value of the projected free cash flows (defined as
net operating profit after tax less investment in fixed assets and working
capital) and (ii) the present value of a terminal value (the hypothetical value
of selling the enterprise in its entirety) in the year 2002. The Company's free
cash flow and terminal value were discounted to present values using a weighted
average cost of capital range of 9.80% and 10.73%. The weighted average cost of
capital is based upon a number of factors, including the cost of equity and debt
capital, the capitalization of the Company, the required rate of return to
investors and risks attributable to the uncertainty of achieving the projected
cash flows.
When using a weighted average cost of capital of 10.73%, the fully-
diluted per share value for the Company is $2.35 after giving effect to the
proposed Merger. This per share price implies that, in the proposed Merger, the
holders of Convertible Preferred Stock would receive Common Stock with an
intrinsic value of $3,840,000. While less than the expected present value of
$4,946,854, the aggregate consideration to be received by the holders of
Convertible Preferred Stock in the proposed Merger is $578,000 more than what
would be received if the Convertible Preferred Stock were converted in
accordance with its stated terms into 0.9 shares of Common Stock.
When using a weighted average cost of capital of 9.80%, the fully-
diluted per share value for the Company is $2.78 after giving effect to the
proposed Merger. This per share price implies that, in the proposed Merger, the
holders of Convertible Preferred Stock would receive Common Stock with an
intrinsic value of $4,543,000. While less than the expected present value of
$4,946,854, the aggregate consideration to be received by the holders of
Convertible Preferred Stock in the proposed Merger is $692,000 more than what
would be received if the Convertible Preferred Stock were converted in
accordance with its stated terms into 0.9 shares of Common Stock.
To determine if the proposed Merger is accretive or dilutive to
existing holders of Common Stock, FBW compared the implied value per share
assuming no conversion of the Convertible Preferred Stock to the implied per
share value after giving effect to the proposed Merger. As a result of the
proposed Merger, the intrinsic value per share available to holders of Common
Stock increases from $2.18 to $2.35 when using a weighted average cost of
capital of 10.73% and increases from $2.72 to $2.78 when using the lower
weighted average cost of capital of 9.80%. In addition to the proposed Merger
being accretive to the holders of Common Stock, they also benefit from the
removal of a senior claim from the Company's capital structure and the
preservation of cash, which may be used to fund the growth of the business and
generate higher earnings per share in the future. Based on the foregoing, and
on the facts that the holders of Convertible Preferred Stock do not have the
right to force the Company to pay the accumulated undeclared dividends on the
Convertible Preferred Stock and that the Common Stock offers holders thereof
more liquidity than does the Convertible Preferred Stock, FBW determined that
the transaction was fair to holders of Convertible Preferred Stock in light of
the fact that such holders will forego any accumulated undeclared dividends.
Also, based on the foregoing, the Proposed Merger is fair from a financial point
of view to holders of Common Stock.
-16-
<PAGE>
Comparable Public Company Analysis
----------------------------------
FBW performed a comparable analysis applying the average and median
multiples of similar publicly traded companies to the Company's last twelve
month and estimated future financial results. FBW selected comparable micro-cap
companies (with public market capitalizations of under $250 million) that
generally own and operate short-line railroads. Companies reviewed by FBW
include Providence and Worcester Railroad Company, RailTex, Inc., Genesee &
Wyoming, Inc., RailAmerica, Inc. and Pioneer Railcorp (collectively, the
"Selected Public Companies").
The average and median multiples are derived from ratios commonly used
by the securities industry to determine valuation such as: (i) net market
capital to revenue, (ii) net market capital to earnings before interest and
taxes ("EBIT"), (iii) price to earnings and (iv) price to forward earnings.
Net Market Capital to Revenue
The net market capital to revenue average and median multiples result
in a fully-diluted per share value for the Company of $1.87 and $1.92,
respectively, after giving effect to the proposed Merger. These per share
values imply that, in the proposed Merger, the holders of Convertible Preferred
Stock would receive Common Stock with an intrinsic value of $3,056,000 based on
the average multiple and $3,137,000 based on the median multiple. While less
than the expected present value of $4,946,854, the aggregate consideration to be
received by the holders of Convertible Preferred Stock in the proposed Merger is
$462,000 more when using the average multiple and $477,000 more when using the
median multiple than what would be received if the Convertible Preferred Stock
were converted in accordance with its stated terms into 0.9 shares of Common
Stock.
Net Market Capital to Earnings Before Interest and Taxes
The net market capital to earnings before interest and taxes average
and median multiples result in a fully-diluted per share value for the Company
of $1.51 and $1.10, respectively, after giving effect to the proposed Merger.
These per share values imply that, in the proposed Merger, the holders of
Convertible Preferred Stock would receive Common Stock with an intrinsic value
of $2,467,000 based on the average multiple and $1,797,000 based on the median
multiple. While less than the expected present value of $4,946,854, the
aggregate consideration to be received by the holders of Convertible Preferred
Stock in the proposed Merger is $368,000 more when using the average multiple
and $260,000 more when using the median multiple than what would be received if
the Convertible Preferred Stock were converted in accordance with its stated
terms into 0.9 shares of Common Stock.
Price to Earnings
The price to forward earnings average and median multiples result in a
fully-diluted per share value for the Company of $1.73 and $1.75, respectively,
after giving effect to the proposed Merger. These per share values imply that,
in the proposed Merger, the holders of Convertible Preferred Stock would receive
Common Stock with an intrinsic value of $2,827,000 based on the average
multiple and $2,860,000 based on the median multiple. While less than the
expected present value of $4,946,854, the aggregate consideration to be received
by the holders of Convertible Preferred Stock in the proposed merger is $420,000
more when using the average multiple and $440,000 more when using the median
-17-
<PAGE>
multiple than what would be received if the Convertible Preferred Stock were
converted in accordance with its stated terms into 0.9 shares of Common Stock.
Price to Forward Earnings
The price to forward earnings average and median multiples result in a
fully-diluted per share value for the Company of $1.67 and $1.82, respectively,
after giving effect to the proposed Merger. These per share values imply that,
in the proposed Merger, the holders of Convertible Preferred Stock would receive
Common Stock with an intrinsic value of $2,729,000 based on the average multiple
and $2,974,000 based on the median multiple. While less than the expected
present value of $4,946,854, the aggregate consideration to be received by the
holders of Convertible Preferred Stock in the proposed Merger is $416,000 more
when using the average multiple and $447,000 more when using the median multiple
than what would be received if the Convertible Preferred Stock were converted in
accordance with its stated terms into 0.9 shares of Common Stock.
To determine if the proposed Merger is accretive or dilutive to
existing holders of Common Stock, FBW compared the implied value per share
assuming no conversion of the Convertible Preferred Stock to the implied per
share value after giving effect to the proposed Merger. The multiple analysis
implies that the proposed Merger is accretive to holders of Common Stock when
using (i) the average net market capital to revenue multiple (increasing from
$1.61 to $1.87); (ii) the median net market capital to revenue multiple
(increasing from $1.67 to $1.92); (iii) the average net market capital to
earnings before interest and taxes multiple (increasing from $1.17 to $1.51);
(iv) the median net market capital to earnings before interest and taxes
multiple (increasing from $0.66 to $1.10); (v) the average price to earnings
multiple (increasing from $1.70 to $1.73); and (vi) the median price to earnings
multiple (increasing from $1.72 to $1.75). The multiple analysis implies that
the proposed Merger is dilutive to holders of Common Stock when using (i) the
average price to forward earnings multiple (decreasing from $1.81 to $1.67) and
(ii) the median price to forward earnings multiple (decreasing from $1.97 to
$1.82). While the holders of Common Stock experience some dilution when using
the forward earnings multiple, they benefit from the removal of a senior claim
from the Company's capital structure and the preservation of cash, which may be
used to fund the growth of the business and generate higher earnings per share
in the future. Additionally, the consideration to be received by holders of
Convertible Preferred Stock is less than the expected present value of the
Convertible Preferred Stock of $4,946,854. Based on the foregoing, and on the
facts that the holders of Convertible Preferred Stock do not have the right to
force the Company to pay the accumulated undeclared dividends on the Convertible
Preferred Stock and that the Common Stock offers holders thereof more liquidity
than does the Convertible Preferred Stock, FBW determined that the transaction
was fair to holders of Convertible Preferred Stock in light of the fact that
such holders will forego any accumulated undeclared dividends. Also based on
the foregoing, FBW determined that the proposed Merger was fair from a financial
point of view to the holders of Common Stock.
None of the Selected Public Companies are identical to the Company.
Accordingly, a complete analysis of the results of the foregoing multiples
cannot be limited to a quantitative review of such results and involves
considerations and judgments concerning differences in characteristics of the
Selected Public Companies as well as that of the Company.
FBW performed a variety of financial and comparative analyses for
purposes of determining the fairness of the exchange ratio. In performing its
analysis, FBW made assumptions with respect to
-18-
<PAGE>
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. Any estimates
contained herein are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than those suggested
by such estimates. The analyses performed were prepared solely as part of FBW's
analysis of the fairness of the consideration to be received by the holders of
Convertible Preferred Stock and were conducted in connection with the delivery
of FBW's opinion.
The Board of Directors of the Company retained FBW based upon FBW's
qualifications, experience and expertise. FBW, as part of its investment
banking business, is regularly engaged in the valuation of businesses in
connection with mergers and acquisitions, public offerings and private
placements and valuations for corporate and other purposes.
Pursuant to the FBW Engagement Letter, FBW provided advisory services
and a financial opinion in connection with the consideration to be received by
the holders of Convertible Preferred Stock. The Company has paid FBW $40,000
for the advisory services and financial opinion and has agreed to reimburse FBW
for reasonable out-of-pocket expenses incurred. The Company has also paid FBW
$10,000 for determining the value of the Convertible Preferred Stock as of the
date of its initial issuance in 1989 for purposes of determining the tax
treatment of the Merger Proposal. See "MERGER PROPOSAL -Consequences to Holders
of Convertible Preferred Stock." In addition, the Company has agreed to
indemnify FBW, its directors, officers, agents and employees against certain
liabilities and expenses, including certain liabilities under the federal
securities laws, related to FBW's engagement.
The Company's Strategic Business Plan
- -------------------------------------
One of the Company's primary strategic business goals is the
development, by acquisition or otherwise, of new businesses which will provide
operational, geographical or managerial synergies relating to its existing
business of rail freight transportation and distribution services. The Company
intends, in particular, to continue to pursue acquisition opportunities in the
regional and short-line railroad industry and to expand its rail/truck transload
capabilities. The Company hopes that, by developing those businesses, it will
be able to utilize its existing managerial and administrative capabilities and
realize the benefits of some of its favorable tax attributes (which consist of
approximately $44 million of federal income tax net operating loss
carryforwards). The Company's ability to achieve its goal of developing related
businesses will be dependent upon a number of factors, including the Company's
ability to find attractive acquisition or business development prospects and to
structure and finance the acquisition or development of the prospects which it
finds.
Federal Income Tax Consequences of Merger
- -----------------------------------------
The following discussion considers material Federal income tax
consequences of the Merger to the Company and to Stockholders of the Company,
based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations, and rulings promulgated thereunder and existing judicial decisions,
all of which are subject to change, possibly with retroactive effect. The
discussion does not consider all of the Federal income tax issues that may be
relevant to a particular Stockholder (including potential application of the
alternative minimum tax), to holders of options to acquire stock of the Company,
or to certain types of Stockholders which are subject to special tax treatment
(for example, life insurance companies, tax-exempt organizations, foreign
taxpayers, trusts and the beneficiaries thereof), and
-19-
<PAGE>
does not discuss any aspects of state, local or foreign tax laws. Uncertainties
exist with respect to certain tax consequences of the Merger. Since no ruling
has been or will be requested from the Internal Revenue Service (the "Service")
on any matter relating to the Merger, no assurances can be given as to the
Federal income tax consequences of the Merger. IN ANY EVENT, THE FEDERAL INCOME
TAX CONSEQUENCES OF THE PROPOSED MERGER ARE COMPLEX AND, IN SOME RESPECTS,
UNCERTAIN. EACH STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER'S TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER, INCLUDING THE
APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS.
Tax Consequences to Holders of Convertible Preferred Stock
----------------------------------------------------------
Reorganization Treatment. The Company believes that the Merger should
------------------------
be treated for Federal income tax purposes as a tax-free "recapitalization"
pursuant to section 368(a)(1)(E) of the Code. Accordingly, subject to
discussion of section 305 of the Code below, the Company believes that, in
general: (i) no gain or loss will be recognized to a Stockholder upon the
exchange of Convertible Preferred Stock for Common Stock (except with respect to
cash received in lieu of any fractional shares), (ii) the basis of the Common
Stock received by an exchanging Stockholder will be the same as the
Stockholder's basis in the Convertible Preferred Stock surrendered in exchange
therefor, and (iii) the holding period of the Common Stock received by an
exchanging Stockholder will include such Stockholder's holding period for the
Convertible Preferred Stock surrendered in exchange therefor, provided that each
share of the Convertible Preferred Stock held on the date of the exchange is a
capital asset as defined in section 1221 of the Code.
Code Section 305 Considerations. Pursuant to Treasury regulations
-------------------------------
issued under section 305 of the Code, where a Stockholder owning preferred stock
(such as the Convertible Preferred Stock) with dividends in arrears exchanges
his stock for other stock (such as the Common Stock) and the fair market value
of the stock received in the exchange exceeds the "issue price" of the preferred
stock, then a distribution treated as a dividend pursuant to sections 305(c) and
301 of the Code (to the extent of current or accumulated earnings and profits of
the corporate issuer) will result in an amount equal to the lesser of (i) the
amount by which the fair market value of the stock received in the exchange
exceeds the "issue price" of the preferred stock exchanged or (ii) the amount of
the dividends in arrears. The Company intends to take the position that the
exchange of shares of Common Stock for shares of the Convertible Preferred Stock
will not result in a deemed distribution to Stockholders under sections 301 and
305(c) of the Code. This position is based on the Company's belief that the
"issue price" of the Convertible Preferred Stock should equal or exceed the fair
market value of the Common Stock exchanged therefor. The "issue price" of the
Convertible Preferred Stock should be based on its fair market value determined
at the date of its issuance in 1989. The Company has received a valuation of
the Convertible Preferred Stock as of such date from FBW supporting the
Company's belief about the "issue price". A copy of such valuation is attached
hereto as Annex D. However, any such valuation is not binding on the Service or
the courts and, as a result, no assurance can be given that the Service would
not ultimately be successful if it challenged the Company's valuation. If
successful, an amount not exceeding an exchanging Stockholder's dividends in
arrears could be treated as a dividend taxed as ordinary income, as described
above. In such a case, a corporate Stockholder would ordinarily be entitled to
the 70% dividends received deduction provided by section 243 of the Code
(subject, in the case of a corporate Stockholder which has not held its
Convertible Preferred Stock for at least two years prior to any dividend
announcement date, to possible
-20-
<PAGE>
application of the basis-reduction rules of section 1059 of the Code). If any
gain or other income were required to be recognized as a result of the
application of sections 301 and 305, the tax basis of the Common Stock and the
holding period thereof would also be affected.
Tax Consequences to Holders of Existing Common Stock
----------------------------------------------------
The Company believes that in connection with the Merger, in general:
(i) no gain or loss will be recognized by a Stockholder as a result of its
ownership of Common Stock, and (ii) such Stockholder's basis and holding period
for the Common Stock will not be affected.
Tax Consequences of Exercising Appraisal Rights
-----------------------------------------------
A Stockholder who exercises appraisal rights with respect to all of
the stock owned by such Stockholder (and who is not considered to continue to
own stock of the Company under the constructive ownership rules of section 318
of the Code) will recognize gain or loss to the extent the amount of cash
received in exchange for the shares held by such Stockholder exceeds or is less
than, respectively, the basis of such Stockholder in the shares of Convertible
Preferred Stock. A Stockholder who exercises appraisal rights with respect to
some but not all of the shares of stock in the Company owned by such Stockholder
(directly or constructively) may recognize gain or loss or ordinary income,
depending upon the facts and circumstances of the particular case.
Tax Consequences to the Company
-------------------------------
The Company believes that no gain or loss will be recognized to it in
connection with the Merger and the transactions contemplated thereby.
VOTING
------
Voting Rights and Proxy and Written Consent Information
- -------------------------------------------------------
Record Date. Holders of record of Common Stock and holders of record
-----------
of Convertible Preferred Stock at the close of business on May 10, 1999 (the
"Record Date"), will be entitled to vote at the Special Meeting. On the Record
Date, there were 6,218,986 shares of Common Stock and 1,485,543 shares of
Convertible Preferred Stock outstanding. Each of such shares will be entitled
to one vote at the meeting on the Merger Proposal, on the proposals to approve
each of the Proposed Charter Amendments and any other proposal considered at the
meeting on which they are entitled to vote. Stockholders are not entitled to
cumulate their votes on any matter to be considered at the meeting.
Quorum. The presence at the Special Meeting, in person or by proxy,
------
of the holders of a majority of the total number of shares of Common Stock and
Convertible Preferred Stock, taken together as a single class, outstanding on
the Record Date is required for the transaction of any business requiring the
approval of both such classes at the Special Meeting. At the Special Meeting,
abstentions and broker non-votes (as hereinafter defined) will be counted as
present for the purpose of determining the presence of a quorum.
-21-
<PAGE>
Vote Required. Approval of the Merger Proposal requires the
-------------
affirmative vote of the holders of at least a majority of the outstanding Common
Stock and Convertible Preferred Stock, voting together as a single class.
Additionally, although there is no statutory requirement for the holders of
Convertible Preferred Stock voting as a separate class to approve the Merger
Proposal, the Board has determined that the Company will not consummate the
Merger unless the holders of at least a majority of the outstanding Convertible
Preferred Stock, voting as a separate class, vote to approve the Merger
Proposal. Approval of the holders of a majority of the outstanding Common Stock
and Convertible Preferred Stock, voting together as a single class, is required
to approve each of the Proposed Charter Amendments. For the purpose of
computing the vote required for approval of matters to be voted on at the
Special Meeting, shares held by Stockholders who abstain from voting will be
treated as being "present" and "entitled to vote" on the matter and, thus, an
abstention has the same legal effect as a vote against the matter. Similarly, a
broker non-vote will have the same effect as a vote against the Merger Proposal
and against the proposals to approve each of the Proposed Charter Amendments. A
"broker non-vote" refers to shares represented at the Special Meeting in person
or by proxy by a broker or nominee where such broker or nominee (i) has not
received voting instructions on a particular matter from the beneficial owners
or persons entitled to vote and (ii) the broker or nominee does not have the
discretionary voting power on such matter. The Company may withdraw the Merger
Proposal if the holders of more than 5% of the outstanding Convertible Preferred
Stock have properly exercised appraisal rights in accordance with Section 262 of
the DGCL.
Vote of Directors and Officers. The Company's directors and executive
------------------------------
officers, and their affiliates, all of whom have informed the Company that they
intend to vote for approval of the Merger Proposal and for approval of each of
the Proposed Charter Amendments, had, as of the Record Date, sole or shared
voting power with respect to approximately 861,914 shares (or 14%) of the total
outstanding Common Stock. None of the directors or executive officers of the
Company, or any of their affiliates, owns any Convertible Preferred Stock.
Vote of Escrow Agent. The holder of 1,295,484 shares of Common Stock
--------------------
(or approximately 21% of the outstanding Common Stock) and of 572,199 shares of
Convertible Preferred Stock (or approximately 39% of the outstanding Convertible
Preferred Stock) has advised the Company that it intends to vote such shares, in
person or by proxy, proportionally in accordance with the votes cast on each
matter by the other holders of the outstanding Common Stock and Convertible
Preferred Stock. The holder holds such shares as escrow agent ("Escrow Agent")
for and on behalf of (i) holders of claims against and interests in Emons
Industries, Inc. ("Industries") pursuant to the Second Amended and Restated
Joint Plan of Reorganization of Industries and ET Railcar Corporation dated
November 10, 1986 (the "Industries Reorganization Plan") and (ii) holders of
claims against The Maryland and Pennsylvania Railroad Company, a wholly-owned
subsidiary of the Company ("MPA"), pursuant to a Settlement Agreement dated as
of December 19, 1986 among MPA and certain secured creditors of MPA. In such
capacity the Escrow Agent has the right to vote such shares. See "PRINCIPAL
STOCKHOLDERS".
Required Vote of Unaffiliated Stockholders. The Company will not
------------------------------------------
consummate the Merger unless the holders of at least a majority of the
outstanding Convertible Preferred Stock, voting as a separate class, vote to
approve the Merger Proposal. As of May 10, 1999 the outstanding Convertible
Preferred Stock was held by 641 Stockholders of record. Since no director or
executive officer of the Company or Newco owns shares of Convertible Preferred
Stock, the Merger cannot be consummated without the approval of the unaffiliated
holders of at least a majority of the outstanding Convertible Preferred Stock.
-22-
<PAGE>
Neither the Merger Proposal nor either of the Proposed Charter Amendments is
specifically structured to require that unaffiliated holders of at least a
majority of the outstanding Common Stock approve any such proposal. Neither of
the Proposed Charter Amendments is specifically structured to require that
unaffiliated holders of at least a majority of the outstanding Convertible
Preferred Stock approve such Proposed Charter Amendment.
Right to Adjourn Special Meeting. If at any time prior to the date of
--------------------------------
the Special Meeting the Company has not obtained a sufficient number of votes to
approve the proposal to be presented at the Special Meeting, the Company may
postpone the Special Meeting to provide the Company with additional time to
solicit proxies. Additionally, in the event that a quorum is not present at the
time the Special Meeting is convened, or if for any other reason the Company
believes that additional time should be allowed for the solicitation of proxies,
the Chairman of the meeting may adjourn the Special Meeting, but only upon a
vote of the majority of Stockholders of Common Stock and Convertible Preferred
Stock present at the meeting, voting together as a single class. In addition to
the other matters specifically enumerated in the proxy, the enclosed form of
proxy includes, as a separate item with respect to which Stockholders may grant
or withhold authority, a request that the persons named in the proxy be granted
the authority to vote on "any adjournment of the Special Meeting".
Consequently, if the Company proposes to adjourn the Special Meeting by a vote
of the Stockholders and if authority to vote in their discretion on such matter
has been granted to the persons named in the proxy, the persons named in the
enclosed form of proxy will have the discretion to vote all shares of Common
Stock and all shares of Convertible Preferred Stock for which they have voting
authority in favor of such adjournment.
Proxies. Proxies in the enclosed form are solicited by the Board of
-------
Directors of the Company in order to provide every Stockholder an opportunity to
vote on all matters scheduled to come before the Special Meeting, whether or not
the Stockholder attends in person. If proxies in the enclosed form are properly
executed and returned, the shares represented thereby will be voted at the
meeting in accordance with the Stockholder's directions. IN THE ABSENCE OF
SPECIFIC DIRECTIONS, PROPERLY EXECUTED PROXIES WILL BE VOTED "FOR" THE MERGER
PROPOSAL AND "FOR" EACH OF THE PROPOSED CHARTER AMENDMENTS. A STOCKHOLDER WHO
SUBMITS A PROXY MAY REVOKE IT AT ANY TIME PRIOR TO THE VOTING OF THE PROXY BY
WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY, BY ATTENDING THE MEETING AND
VOTING SUCH STOCKHOLDER'S SHARES IN PERSON OR BY EXECUTING AND DELIVERING A
LATER-DATED PROXY PRIOR TO THE SPECIAL MEETING.
-23-
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
The following table sets forth information concerning beneficial
ownership of the Company's Common Stock as of May 10, 1999 by (a) each director
individually, (b) each executive officer required to be named in the Summary
Compensation Table contained in the Company's Annual Report on Form 10-K, and
(c) all nine directors and executive officers as a group. No director or
executive officer of the Company owns any Convertible Preferred Stock. Each
non-employee director and all executive officers of the Company have been
granted options to purchase Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS NAME OF BENEFICIAL OWNER/+/ BENEFICIAL OWNERSHIP OF CLASS
- ---------------------- --------------------------- -------------------- ---------
<S> <C> <C> <C>
Common Stock Robert Grossman 596,814/1/ 9.06%
Common Stock Michael J. Blake 416,100/2/ 6.69%
Common Stock Scott F. Ziegler 106,500/3/ 1.69%
Common Stock Phillip A. DuPont 71,000/4/ 1.14%
Common Stock Robert J. Smallacombe 65,000/5/ 1.04%
Common Stock Matthew C. Jacobson 56,000/6/ *
Common Stock Alfred P. Smith 51,500/7/ *
Common Stock Dean H. Wise 41,666/8/ *
Common Stock Kimberly A. Madigan 26,000/9/ *
Common Stock All directors and officers 1,430,580/10/ 21.08%
as a group, (9 persons)
</TABLE>
None of the officers and directors of the Company engaged in securities
transactions for which they have failed to file, or failed to file on a timely
basis, Forms 4 or 5 with the Securities and Exchange Commission.
None of the current officers and directors of the Company failed to file,
or failed to file on a timely basis, a Form 3 with the Securities and Exchange
Commission stating that they have assumed the responsibilities of such
respective office.
___________________
* Percentage of shares beneficially owned does not exceed one percent of Common
Stock outstanding.
/+/ The address for all directors and executive officers is c/o Emons
Transportation Group, Inc., 96 South George Street, York, Pennsylvania 17401-
1436.
/1/ Includes (i) 1,000 shares owned by Mr. Grossman's wife, as to which Mr.
Grossman disclaims beneficial ownership; (ii) 37,500 shares of Restricted Common
Stock which have not vested as of May 10, 1999 and are subject to risk of
forfeiture; and (iii) options to purchase 50,000 shares of Common Stock at a
price of $.906 per share, 300,000 shares of Common Stock
-24-
<PAGE>
at a price of $1.0625 per share and 20,000 shares of Common Stock at a price of
$3.25 per share which are currently exercisable or will become exercisable
within 60 days. Does not include unvested options to purchase 30,000 shares of
Common Stock at a price of $3.25 per share.
/2/ Includes options to purchase 5,000 shares of Common Stock at a price of
$3.2188 per share which are currently exercisable. Does not include unvested
options to purchase 10,000 shares of Common Stock at a price of $3.2188 per
share and 10,000 shares of Common Stock at a price of $2.5005 per share.
/3/ Includes (i) 17,500 shares of Restricted Common Stock which have not vested
as of May 10, 1999 and are subject to risk of forfeiture; and (ii) options to
purchase 25,000 shares of Common Stock at a price of $.8125 per share, 20,000
shares of Common Stock at a price of $1.0625 per share, 20,000 shares of Common
Stock at a price of $3.25 per share and 3,000 shares of Common Stock at a price
of $2.875 per share which are currently exercisable or will become exercisable
within 60 days. Does not include unvested options to purchase 5,000 shares of
Common Stock at a price of $1.0625 per share, 30,000 shares of Common Stock at a
price of $3.25 per share, 12,000 shares of Common Stock at a price of $2.875 per
share and 25,000 shares of Common Stock at a price of $2.5005 per share.
/4/ Includes (i) 27,000 shares of Restricted Common Stock which have not vested
as of May 10, 1999 and are subject to risk of forfeiture; and (ii) options to
purchase 2,000 shares of Common Stock at a price of $2.5625 per share, 3,000
shares of Common Stock at a price of $1.875 per share, 3,000 shares of Common
Stock at a price of $3.1563 per share, 5,000 shares of common stock at a price
of $3.9063 per share and 5,000 shares of Common Stock at a price of $2.875 per
share which are currently exercisable or will become exercisable within 60 days.
Does not include unvested options to purchase 3,000 shares of Common Stock at a
price of $2.5625 per share, 12,000 shares of Common Stock at a price of $1.875
per share, 12,000 shares of Common Stock at a price of $3.1563 per share, 10,000
shares of Common Stock at a price of $3.9063 per share, 10,000 shares of Common
Stock at a price of $2.875 per share and 25,000 shares of Common Stock at a
price of $2.5005 per share.
/5/ Includes options to purchase 10,000 shares of Common Stock at a price of
$.906 per share, 15,000 shares of Common Stock at a price of $1.0625 per share
and 10,000 shares of Common Stock at a price of $2.2813 per share which are
currently exercisable or will become exercisable within 60 days. Does not
include unvested options to purchase 5,000 shares of Common Stock at a price of
$2.2813 per share and 7,500 shares of Common Stock at a price of $2.5005 per
share.
/6/ Includes (i) 28,000 shares of Restricted Common Stock which have not vested
as of May 10, 1999 and are subject to risk of forfeiture, and (ii) options to
purchase 9,000 shares of Common Stock at a price of $1.25 per share, 4,000
shares of Common Stock at a price of $3.25 per share, 5,000 shares of Common
Stock at a price of $1.875 per share and 3,000 shares of Common Stock at a price
of $2.875 per share which are currently exercisable or will become exercisable
within 60 days. Does not include unvested options to purchase 6,000 shares of
Common Stock at a price of $1.25 per share, 6,000 shares of Common Stock at a
price of $3.25 per share, 20,000 shares of Common Stock at a price of $1.875 per
share, 12,000 shares of Common Stock at a price of $2.875 per share and 25,000
shares of Common Stock at a price of $2.5005 per share.
/7/ Includes options to purchase 5,000 shares of Common Stock at a price of
$3.2188 per share which are currently exercisable. Does not include unvested
options to purchase 10,000 shares of Common Stock at a price of $3.2188 per
share and 10,000 shares of Common Stock at a price of $2.5005 per share.
/8/ Includes options to purchase 15,000 shares of Common Stock at a price of
$1.6875 per share and 6,666 shares of Common Stock at a price of $3.25 per share
which are currently exercisable. Does not include unvested options to purchase
3,334 shares of Common Stock at a price of $3.25 per share and 7,500 shares of
Common Stock at a price of $2.5005 per share.
/9/ Includes options to purchase 15,000 shares of Common Stock at a price of
$2.4375 per share and 10,000 shares of Common Stock at a price of $1.375 per
share which are currently exercisable or will become exercisable within 60 days.
Does not include unvested options to purchase 7,500 shares of Common Stock at a
price of $2.5005 per share.
/10/ See notes 1 through 9 above.
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<PAGE>
PRINCIPAL STOCKHOLDERS
----------------------
The following table sets forth certain information regarding ownership
of (i) the Company's equity securities as of April 9, 1999 by each person who is
known to the Company to own beneficially more than 5% of its equity securities
and (ii) equity securities of the surviving corporation projected to be owned
beneficially assuming consummation of the Merger:
<TABLE>
<CAPTION>
Pre-Merger Post-Merger
--------------------- ---------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- ------------------ ---------------------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Common Stock IBJ Whitehall Bank & 1,295,484/1/ 20.83% 1,924,902 24.51%
Trust Company
One State Street
New York, New York
10004
Convertible IBJ Whitehall Bank & 572,199/1/ 38.52% - -
Preferred Stock Trust Company
One State Street
New York, New York
10004
Common Stock Robert Grossman 596,814 9.06% 596,814 7.26%
96 South George Street
York, Pennsylvania 17401
Common Stock Chase Manhattan Bank 382,063 6.14% 554,868 7.07%
One Chase Manhattan Plaza
10th Floor
New York, New York
10051
Convertible Chase Manhattan Bank 157,096 10.57% - -
Preferred Stock One Chase Manhattan Plaza
10th Floor
New York, New York
10051
Common Stock First Union National Bank 270,312 4.35% 358,697 4.57%
123 Broad Street
Philadelphia, PA 19109
Convertible First Union National Bank 80,350 5.41% -- --
Preferred Stock 123 Broad Street
Philadelphia, PA 19109
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Pre-Merger Post-Merger
--------------------- ---------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- ------------------ ---------------------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Common Stock Michael J. Blake 416,100 6.69% 416,100 5.30%
412 South Fourth Street
Suite 1200
Minneapolis, Minnesota
55415
Common Stock Reliance Insurance Company 255,567 4.11% 371,321 4.73%
55 East 52nd Street
Park Avenue Plaza
New York, New York
10055
Convertible Reliance Insurance Company 105,231 7.08% - -
Preferred Stock 55 East 52nd Street
Park Avenue Plaza
New York, New York
10055
Common Stock State of Michigan 235,954 3.79% 385,448 4.91%
Retirement Systems
P.O. Box 30117
Treasury Building
Lansing, Michigan 48909
Convertible State of Michigan 135,904 9.15% - -
Preferred Stock Retirement Systems
P.O. Box 30117
Treasury Building
Lansing, Michigan 48909
</TABLE>
______________
/1/ The Shares owned of record by IBJ Whitehall Bank & Trust Company are owned
by it in its capacity as escrow agent (the "Escrow Agent") acting for and on
behalf of certain holders of claims and interests in Emons Industries, Inc., a
direct wholly-owned subsidiary of the Company ("Industries") pursuant to the
Second Amended and Restated Joint Plan of Reorganization of Industries and ET
Railcar Corporation dated November 10, 1986, which shares shall be distributed
from time to time pro rata to holders of certain allowed claims under the Plan.
The Escrow Agent, as record owner of those shares, has the power to vote those
shares and has expressed its intention to vote such shares, in person or by
proxy, proportionally in accordance with the votes cast on each matter by the
other holders of the outstanding Common Stock and Convertible Preferred Stock.
The number of shares of Common Stock or Convertible Preferred Stock to be
distributed to any one holder of claims depends upon the resolution of certain
contingent liabilities of Industries. It is not possible to determine at this
time either the manner in which those contingent liabilities will be resolved or
the resulting disposition of the shares of Common Stock or Convertible Preferred
Stock currently held by the Escrow Agent. The Company knows of no individual
holder, other than the Escrow Agent, Robert Grossman, Chase Manhattan Bank,
First Union National Bank, Michael J. Blake, Reliance Insurance Company and
State of Michigan Retirement Systems who beneficially owns more than 5% of the
Common Stock or Convertible Preferred Stock.
To the knowledge of the Company, none of the beneficial owners of more than 10%
of the Company's equity securities engaged in securities transactions for which
they have failed to file, or failed to file on a timely basis, Forms 4 or 5 with
the Securities and Exchange Commission.
MERGER PROPOSAL
The following discussion summarizes the material aspects of the Merger
Proposal. Stockholders should carefully read the Merger Agreement which is
attached hereto as Annex A.
-27-
<PAGE>
The Company's Board of Directors has unanimously approved, and
recommends that the Stockholders approve, the Merger Proposal. For information
regarding the basis for the Board's approval of the Merger Proposal and the
reasons why the Board believes the Merger Proposal to be in the best interests
of the Stockholders, see "SPECIAL FACTORS".
The Merger Proposal
- -------------------
The Merger Agreement provides for the merger of Newco into the
Company, with the Company being the surviving corporation in the Merger. As a
result of the Merger, each share of the Common Stock outstanding immediately
prior to the Merger will remain outstanding, unaffected by the Merger, and each
share of the Convertible Preferred Stock (other than Convertible Preferred Stock
as to which dissenters' rights of appraisal have been perfected under the DGCL),
will be exchanged for 1.1 fully-paid and nonassessable shares of Common Stock
(except that cash will be paid in lieu of any fractional shares). On the Record
Date, there were 6,218,986 shares of Common Stock outstanding and 1,485,543
shares of Convertible Preferred Stock outstanding. If the Merger Proposal is
approved, the Company shall issue approximately 1,634,097 shares of Common Stock
to holders of Convertible Preferred Stock, assuming no holders of Convertible
Preferred Stock exercise appraisal rights.
Consummation of the Merger is subject to certain conditions, including
approval by (i) the holders of at least a majority of the outstanding Common
Stock and Convertible Preferred Stock voting together as a single class and (ii)
the holders of at least a majority of the outstanding Convertible Preferred
Stock, voting as a separate class. As a further condition to the consummation
of the Merger, the Company will require that Stockholders holding more than 5%
of the outstanding Convertible Preferred Stock shall not have exercised
appraisal rights granted under applicable Delaware law. See "MERGER PROPOSAL -
Conditions".
The Merger Agreement
- --------------------
The Merger Agreement provides that as soon as practicable following
the satisfaction or waiver of certain conditions to closing under the Merger
Agreement, Newco will be merged into the Company, with the Company being the
surviving corporation. In the Merger, among other things, each share of Common
Stock outstanding immediately prior to the Merger will remain outstanding, and
each share of Convertible Preferred Stock outstanding immediately prior to the
Merger (other than Convertible Preferred Stock as to which dissenters' rights of
appraisal have been perfected under the DGCL) will be exchanged for 1.1 fully-
paid and nonassessable shares of Common Stock (except that cash will be paid in
lieu of any fractional shares).
-28-
<PAGE>
Material Differences Between Old and New Securities
- ---------------------------------------------------
If the Merger Proposal is approved, approximately 7,853,083 shares of
Common Stock will be outstanding after the 1-for-1.1 exchange to be effected
pursuant to the Merger. The material differences between the Convertible
Preferred Stock and the Common Stock are set forth below. References to section
numbers in this paragraph are to the relevant sections in the terms of the
Convertible Preferred Stock. The brief summaries set forth in this paragraph do
not purport to be complete and are qualified in their entirety by reference to
the full text of the Convertible Preferred Stock Terms (which is attached hereto
as Annex C).
-29-
<PAGE>
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------------ -----------------------------------------------
<S> <C> <C>
a. Liquidation: Liquidation value is $2.00 in the event of liquidation of the Company,
----------- per share (Section (c)) holders of Common Stock will share
equally in the balance of the corporate
assets available for distribution to them
after the payment in full of all creditors and
the payment of any liquidation preferences
to the holders of any preferred stock issued
after the date hereof, if any
b. Dividends: cumulative at a rate of $.14 holders of Common Stock are entitled to
--------- per share, per annum, receive dividends as and when declared by
payable semi-annually the Board out of funds legally available
(Section (b)) therefor
c. Redemption: may be redeemed, in whole not redeemable
---------- or in part, at the option of
the Company for a
redemption price per share
equal to $2.00 plus the value
of all undeclared
accumulated dividends
(Section (e))
d. Voting: right to vote (on a one vote one vote per share; no cumulative voting
------ per share basis) as a class rights
with holders of Common
Stock on all matters,
including elections to the
Board of Directors of the
Company (Section (d))
e. Conversation Rate: each share will be no conversion rights
----------------- convertible into .9 shares of
Common Stock at any time
after issuance (Section (f))
f. Transferability: shares are freely tradeable shares are freely tradeable and are listed on
--------------- and quoted on the OTC the Nasdaq/SmallCap Market under the
Bulletin Board under the symbol "EMON"
symbol "EMONP"
</TABLE>
See "SPECIAL FACTORS - Possible Detrimental Effects of the Merger
Proposal" for a discussion of potential detrimental effects of the proposed
Merger.
-30-
<PAGE>
Dividends on Convertible Preferred Stock. As of May 10, 1999 the
----------------------------------------
amount of accumulated undeclared dividends on the Convertible Preferred Stock
was $1.19 per share or $1,767,796 in the aggregate.
Effective Time
- --------------
The Merger Agreement will become effective at the time of filing of a
certificate of merger by the Company with the Secretary of State of the State of
Delaware (the "Effective Time"). It is currently anticipated that the filing of
a certificate of merger will be made as promptly as practicable after the
Special Meeting. Such filing will be made, however, only upon satisfaction or,
where permissible, the waiver of all conditions contained in the Merger
Agreement and provided that the Merger Agreement has not been terminated. See
"MERGER PROPOSAL-Conditions".
Exchange of Certificates Representing Convertible Preferred Stock
- -----------------------------------------------------------------
As soon as practicable after the Effective Time, an exchange agent
which will be selected by the Company (the "Exchange Agent") will mail a notice
and letter of transmittal to each record holder of Convertible Preferred Stock
as of the Effective Time to be used to transmit certificates that immediately
prior to the Effective Time represented Convertible Preferred Stock (the
"Convertible Preferred Certificates") to the Exchange Agent. It is also
expected that letters of transmittal will be available at the office of the
Exchange Agent no later than the first business day following the Effective
Time. Holders of Convertible Preferred Stock should surrender Convertible
Preferred Certificates only with a letter of transmittal. HOLDERS OF
CONVERTIBLE PREFERRED STOCK SHOULD NOT SEND ANY CONVERTIBLE PREFERRED
CERTIFICATES WITH THE PROXY CARD.
Upon receipt of such a Convertible Preferred Certificate or
Certificates with a duly executed and completed letter of transmittal and any
other required documents, the Exchange Agent will, as soon as practicable after
the Effective Time, arrange for issuance and delivery of a certificate or
certificates representing Common Stock to the persons entitled thereto.
Accounting Treatment of Merger
- ------------------------------
The Merger is between a wholly-owned subsidiary and its parent and is
therefore not accounted for as a business combination under generally accepted
accounting principles. The assets and liabilities of Newco will be transferred
at historical cost in a manner similar to that in pooling of interest
accounting. The existing conversion terms of the Convertible Preferred Stock
are .9 shares of Common Stock for each share of Convertible Preferred Stock
converted. The consideration for the Merger Proposal of 1.1 shares of Common
Stock for each share of Convertible Preferred Stock represents an inducement of
.2 shares of Common Stock. Accordingly, if the Merger Proposal is approved, at
the time of the Merger, an amount equal to .2 multiplied by the fair market
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<PAGE>
value of the Common Stock will be charged to Convertible Preferred Stock
dividend requirements in the calculation of earnings per share available to
Stockholders of Common Stock.
Conditions
- ----------
The consummation of the Merger is dependent upon the satisfaction of
certain conditions in the Merger Agreement, including approval of the Merger
Proposal by the affirmative vote of (i) holders of a majority of Common Stock
and Convertible Preferred Stock, voting together as single class and (ii)
holders of a majority of the outstanding Convertible Preferred Stock, voting as
a separate class. As a further condition to the consummation of the Merger, the
Company will require that Stockholders holding more than 5% of the outstanding
Convertible Preferred Stock shall not have exercised appraisal rights granted
under applicable Delaware law.
THE BOARD OF DIRECTORS HAS APPROVED THE MERGER PROPOSAL AND RECOMMENDS THAT YOU
VOTE "FOR" THE PROPOSAL. PROXIES RECEIVED BY THE BOARD OF DIRECTORS WILL BE
VOTED "FOR" THE PROPOSAL IF NO VOTE IS INDICATED. A VOTE TO "ABSTAIN" OR
FAILURE TO SUBMIT A PROXY WILL HAVE THE EFFECT OF VOTING "AGAINST" THE PROPOSAL.
PROPOSED CHARTER AMENDMENTS
---------------------------
The following discussion summarizes the material aspects of the
Proposed Charter Amendments. The Board of Directors has approved, and for the
reasons described below, recommends that the Stockholders approve, each of the
Proposed Charter Amendments. Each Proposed Charter Amendment is being proposed
independently of one another and independently of the Merger Proposal. Neither
approval of one or both the Proposed Charter Amendments is a condition to
completion of the Merger.
The Common Stock Charter Amendment
- ----------------------------------
The Board of Directors has unanimously adopted a resolution approving
and recommending to the Stockholders for their adoption an amendment to Section
I ARTICLE FOURTH of the Company's Certificate of Incorporation, which amendment
would increase the number of the Company's authorized Common Stock from
15,000,000 shares to 30,000,000 shares. The additional shares of Common Stock
for which authorization is sought would be a part of the existing class of
Common Stock, and, if and when issued by the Board of Directors in its
discretion for any proper corporate purpose, would have the same rights and
privileges as the shares of Common Stock currently outstanding. These
additional shares could be issued without further action by Stockholders, unless
required by applicable law or NASDAQ rules. Holders of shares of Common Stock
do not have any preemptive rights.
The Board of Directors believes that the increase in the number of
shares of authorized Common Stock will be advantageous to the Company and its
stockholders because
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<PAGE>
it will provide the Company with added flexibility in executing financings,
acquisitions, stock dividends and distributions, issuances under employee stock
plans and other transactions involving the use of stock, including, without
limitation, any issuances which may be required under the Company's Shareholder
Rights Plan, without the expense and delay of a special stockholders' meeting
for each such issuance. The Board of Directors has no present intention or
commitment to issue any of the proposed additional shares of Common Stock.
As of the Record Date, 6,218,986 of the 15,000,000 shares of Common
Stock currently authorized were issued and outstanding, and 2,829,838 shares of
Common Stock were reserved for issuance (including shares reserved for issuance
upon conversion of the Convertible Preferred Stock, shares reserved for issuance
pursuant to the Company's Restricted Stock Plan, shares reserved for issuance
pursuant to the Company's 1986 and 1996 Stock Option Plans, shares reserved for
issuance pursuant to certain stock options granted to certain directors of the
Company and shares reserved for issuance pursuant to certain outstanding
warrants). Following the consummation of the Merger, approximately 7,853,083 of
the 15,000,000 shares of Common Stock currently authorized would be issued and
outstanding and 1,492,850 shares of Common Stock would be reserved for issuance.
Although the Board has no present intention of doing so, the Company's
authorized but unissued Common Stock could be issued in one or more
transactions, including, without limitation, pursuant to the Company's
Shareholder Rights Plan, that would make more difficult or costly, and less
likely, a takeover of the Company. The Company is not aware of any pending
effort to obtain control of the Company.
Vote Required
-------------
The vote of the holders of a majority of the Common Stock and
Convertible Preferred Stock, voting together as a single class, will be required
to approve the Common Stock Charter Amendment. There is no requirement for the
Common Stock Charter Amendment to be adopted in order to enable the Company to
consummate the Merger or to adopt the Preferred Stock Charter Amendment.
Accordingly, neither the consummation of the Merger nor the adoption of the
Common Stock Charter Amendment is conditioned upon the approval of the Common
Stock Charter Amendment, and the Common Stock Charter Amendment is being
submitted for Stockholder approval separately from the submission of the Merger
Proposal and the Preferred Stock Charter Amendment. This means that, assuming
the necessary approvals are obtained, the Merger Proposal or the Preferred Stock
Charter Amendment could be approved and consummated even though the Common Stock
Charter Amendment is not approved. Conversely, the Common Stock Charter
Amendment could be approved and adopted even though Stockholders fail to approve
either or both of the Merger Proposal or the Preferred Stock Charter Amendment.
THE BOARD OF DIRECTORS HAS APPROVED THE COMMON STOCK CHARTER AMENDMENT AND
RECOMMENDS THAT YOU VOTE "FOR" THE COMMON STOCK CHARTER AMENDMENT. PROXIES
RECEIVED BY THE BOARD OF DIRECTORS WILL BE VOTED "FOR" THE COMMON STOCK CHARTER
AMENDMENT IF NO VOTE IS INDICATED. A VOTE TO "ABSTAIN" OR FAILURE
-33-
<PAGE>
TO SUBMIT A PROXY WILL HAVE THE EFFECT OF VOTING "AGAINST" THE AMENDMENT.
The Preferred Stock Charter Amendment
- -------------------------------------
The Board of Directors has also unanimously adopted a resolution
approving and recommending to the Stockholders for their adoption and approval
an amendment to Section I ARTICLE FOURTH of the Company's Certificate of
Incorporation, which amendment would increase the number of the Company's
authorized Preferred Stock from 3,000,000 shares to 10,000,000 shares. The
additional shares of Preferred Stock for which authorization is sought would be
part of the existing class of Preferred Stock and would be issuable upon the
authorization of the Board of Directors in one or more series, each having such
designations, powers, preferences and rights, including, without limitation,
dividend rates, conversion prices, voting rights, redemption prices and maturity
dates and such qualifications, restrictions and limitations as may be fixed by
the Board of Directors in accordance with the provisions of the Company's
Certificate of Incorporation and as permitted by Delaware law. These additional
shares could be issued without further action by Stockholders unless required by
applicable law or the rules of any stock exchange on which such shares may be
listed.
The Board of Directors believes that the increase in the number of
shares of authorized Preferred Stock will be advantageous to the Company and its
stockholders because it will provide the Company with added flexibility in
executing financings, acquisitions, stock dividends and distributions and other
transactions involving the use of stock, including, without limitation, any
issuances which may be required under the Company's Shareholder Rights Plan,
without the expense and delay of a special Stockholders' meeting for each such
issuance. The Board of Directors has no present intention or commitment to
issue any of the proposed additional shares of Preferred Stock.
As of the Record Date, 1,485,543 of the 3,000,000 shares of Preferred
Stock (the Convertible Preferred Stock) currently authorized were issued and
outstanding and no shares were reserved for issuance. Following the
consummation of the Merger, none of the 3,000,000 shares of Preferred Stock
currently authorized would be issued and outstanding and no shares would be
reserved for issuance. Although the Board of Directors has no present intention
of doing so, the Company's authorized but unissued Preferred Stock could be
issued in one or more transactions, including, without limitation, pursuant to
the Company's Shareholder Rights Plan, that would make more difficult or costly,
and less likely, a takeover of the Company. The Company is not aware of any
pending effort to obtain control of the Company.
Vote Required
-------------
The vote of the holders of a majority of the Convertible Preferred
Stock and Common Stock, voting together as a single class, will be required to
approve the Preferred Stock Charter Amendment. There is no requirement for the
Preferred Stock Charter Amendment to be adopted in order to enable the Company
to consummate the Merger or to
-34-
<PAGE>
adopt the Common Stock Charter Amendment. Accordingly, neither the consummation
of the Merger nor the adoption of the Common Stock Charter Amendment is
conditioned upon the approval of the Preferred Stock Charter Amendment, and the
Preferred Stock Charter Amendment is being submitted for Stockholder approval
separately from the submission of the Merger Proposal and the Common Stock
Charter Amendment. This means that, assuming the necessary approvals are
obtained, the Merger Proposal or the Common Stock Charter Amendment could be
approved and consummated even though the Preferred Stock Charter Amendment is
not approved. Conversely, the Preferred Stock Charter Amendment could be
approved and adopted even though Stockholders fail to approve either or both the
Merger Proposal or the Common Stock Charter Amendment.
THE BOARD OF DIRECTORS HAS APPROVED THE PREFERRED STOCK CHARTER AMENDMENT AND
RECOMMENDS THAT YOU VOTE "FOR" THE PREFERRED STOCK CHARTER AMENDMENT. PROXIES
RECEIVED BY THE BOARD OF DIRECTORS WILL BE VOTED "FOR" THE PREFERRED STOCK
CHARTER AMENDMENT IF NO VOTE IS INDICATED. A VOTE TO "ABSTAIN" OR FAILURE TO
SUBMIT A PROXY WILL HAVE THE EFFECT OF VOTING "AGAINST" THE AMENDMENT.
DESCRIPTION OF SECURITIES
-------------------------
Common Stock
- ------------
The Company is currently authorized to issue 15,000,000 shares of
Common Stock, of which 6,218,986 were outstanding as of the Record Date. The
holders of Common Stock are entitled to one vote per share. There are no
cumulative voting rights. Shares of Common Stock are not redeemable, have no
conversion or preemptive rights and are not subject to further calls or
assessments by the Company. There are no redemption or sinking fund provisions
applicable to the Common Stock. In the event of a liquidation of the Company,
the holders of Common Stock will share equally in the balance of the corporate
assets available for distribution to them after the payment in full of all
creditors, if any. The holders of Common Stock are entitled to receive
dividends as and when declared by the Board of Directors out of funds legally
available therefor.
Shareholder Rights Plan. On April 23, 1999, the Company adopted a
-----------------------
Shareholder Rights Plan under the terms of which each holder of Common Stock of
record at the close of business on May 10, 1999, will receive a dividend
distribution of one right ("Right") for each share of Common Stock held. If the
Merger Proposal is adopted, current holders of Convertible Preferred Stock will
receive one Right with each share of Common Stock they receive upon consummation
of the Merger.
Each Right will entitle holders thereof to purchase from the Company
one or more shares of Common Stock in accordance with the terms of the
Shareholder's Rights Plan. The Rights will become exercisable only if a person
or group (other than the Company, any subsidiary or employee benefit plan of the
Company or IBJ Whitehall Bank & Trust Company as escrow agent acting for and on
behalf of certain holders of claims and
-35-
<PAGE>
interests in Industries) acquires 15% or more of the Company's Common Stock, or
commences a tender or exchange offer which, if consummated, would result in that
person or group owning at least 15% of the Common Stock. Prior to that time,
the Rights will not trade separately from the Common Stock.
If a person or group (other than those described above) acquires 15%
or more of the Company's Common Stock, all other holders of Rights will then be
entitled to purchase, by payment of the $10 exercise price, upon the exercise of
a Right, the Company's Common Stock (or a "common stock equivalent" which may,
at the option of the Board of Directors be a share or fractional share of
Preferred Stock) with a value of twice the exercise price. In addition, at any
time after a 15% position is acquired, the Company's Board of Directors may, at
its option, require each outstanding Right (other than Rights held by the
acquiring person or group) to be exchanged for one share of Common Stock (or one
"common stock equivalent").
If, following an acquisition of 15% or more of the Company's Common
Stock, the Company is acquired by any person in a merger or other business
combination transaction or sells more than 50% of its assets or earning power to
any person, all other holders of Rights will then be entitled to purchase, by
payment of the $10 exercise price upon the exercise of a Right, common stock of
the acquiring company with a value of twice the exercise price.
The Company may redeem the Rights at $.001 per Right at any time prior
to the time that a person or group has acquired 15% or more of its Common Stock.
The Rights, which expire on May 10, 2009, do not have voting or dividend rights
and, until they become exercisable, have no dilutive effect on the earnings per
share of the Company.
Convertible Preferred Stock
- ---------------------------
The Company is authorized to issue 3,000,000 shares of Convertible
Preferred Stock, of which 1,485,543 shares were outstanding as of the Record
Date. The principal terms of the Convertible Preferred Stock are as follows:
a. Liquidation value is $2.00 per share.
b. Dividends, when and as declared by the Board of Directors, are
cumulative and payable semi-annually on January 1 and July 1 each year at a rate
of $.14 per share per annum.
c. The Convertible Preferred Stock may be redeemed, in whole or in
part, at the option of the Company at any time for $2.00 per share plus the
amount of undeclared accrued dividends.
-36-
<PAGE>
d. Holders of the Convertible Preferred Stock have the right to vote
(on a one vote per share basis) as a class together with the holders of Common
Stock on all matters.
e. Each share of Convertible Preferred Stock is convertible, at any
time, into .9 shares of Common Stock.
Warrants/Options
- ----------------
As of May 10, 1999, the Company had options outstanding to purchase up
to 1,041,500 shares of Common Stock at prices ranging from $.8125 to $3.9063 per
share, and had warrants outstanding to purchase up to 110,000 shares of Common
Stock at prices ranging from $1.125 to $2.75 per share.
-37-
<PAGE>
CERTAIN INFORMATION REGARDING NEWCO
-----------------------------------
Newco is a newly-formed Delaware corporation and a wholly-owned
subsidiary of the Company organized for the purpose of effecting the Merger. It
is anticipated that Newco will not have any significant assets or liabilities
(other than its rights and obligations under the Merger Agreement) or engage in
any activities other than those incidental to its formation and the Merger.
Because Newco is newly incorporated and has minimal assets, no meaningful
financial information is available.
As of the date hereof, the authorized capital stock of Newco consists
of 1,000 shares of common stock, par value $.01 per share, 100 shares of which
have been issued to the Company.
Robert Grossman and Scott F. Ziegler are the directors of Newco and
serve as President, and Vice President, Secretary and Treasurer, respectively.
None of the directors and officers owns any equity securities of Newco.
The principal executive offices of Newco are located at 96 South
George Street, York, Pennsylvania 17401.
The Board of Directors of Newco has unanimously approved and adopted
the Merger Agreement, and the Company as the sole Stockholder of Newco has
approved and adopted the Merger Agreement.
DISSENTERS' RIGHTS OF APPRAISAL
-------------------------------
If the Merger is consummated, holders of shares of Convertible
Preferred Stock are entitled to dissenters' rights of appraisal under Section
262 of the Delaware General Corporation Law ("Section 262"), provided that they
comply with the conditions established by Section 262. If the holders of more
than 5% of the outstanding shares of Convertible Preferred Stock have properly
exercised dissenters' rights of appraisal in accordance with Section 262 of the
DGCL, then the Company may withdraw the Merger Proposal.
Section 262 is reprinted in its entirety as Annex E to this
Solicitation Statement. The following discussion is not a complete statement of
the law relating to dissenters' rights of appraisal and is qualified in its
entirety by reference to Annex E. This discussion and Annex E should be
reviewed carefully by any holder who wishes to exercise statutory dissenters'
rights of appraisal or who wishes to preserve the right to do so, as failure to
comply with the procedures set forth herein or therein will result in the loss
of dissenters' rights of appraisal.
A record holder of shares of Convertible Preferred Stock who makes the
demand described below with respect to such shares, who continuously is the
record holder of such shares through the effective time of the Merger (the
"Effective Time"), who
-38-
<PAGE>
otherwise complies with the statutory requirements of Section 262 and who
neither votes in favor of the Merger nor consents thereto in writing will be
entitled to an appraisal by the Delaware Court of Chancery (the "Delaware
Court") of the fair value of his or her shares of Convertible Preferred Stock.
All references in this summary of appraisal rights to a "Stockholder" or
"holders of shares of Convertible Preferred Stock" are to the record holder or
holders of shares of Convertible Preferred Stock. Except as set forth herein,
Stockholders of the Company will not be entitled to appraisal rights in
connection with the Merger.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, such as the Special Meeting, not less than 20 days
prior to the meeting a constituent corporation must notify each of the holders
of its stock for whom appraisal rights are available that such appraisal rights
are available and include in each such notice a copy of Section 262. This
Solicitation Statement shall constitute such notice to the record holders of
Convertible Preferred Stock.
Holders of shares of Convertible Preferred Stock who desire to
exercise their appraisal rights must not vote in favor the Merger and must
deliver a separate written demand for appraisal to the Company prior to the vote
by the Stockholders of the Company on the Merger. A demand for appraisal must
be executed by or on behalf of the Stockholder of record and must reasonably
inform the Company of the identity of the Stockholder of record and that such
Stockholder intends thereby to demand appraisal of the Convertible Preferred
Stock. A proxy or vote against the Merger will not by itself constitute such a
demand. Within ten days after the Effective Time the Company must provide
notice of the Effective Time to all Stockholders who have complied with Section
262.
A Stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to:
Emons Transportation Group, Inc.
96 South George Street
York, PA 17401
Attn: Scott F. Ziegler
A person having a beneficial interest in shares of Convertible
Preferred Stock that are held of record in the name of another person, such as a
broker, fiduciary, depositary or other nominee, must act promptly to cause the
record holder to follow the steps summarized herein properly and in a timely
manner to perfect appraisal rights. If the shares of Convertible Preferred
Stock are owned of record by a person other than the beneficial owner, including
a broker, fiduciary (such as a trustee, guardian or custodian), depositary or
other nominee, such demand must be executed by or for the record owner. If the
shares of Convertible Preferred Stock are owned of record by more than one
person, as in a joint tenancy or tenancy in common, such demand must be executed
by or for all joint owners. An authorized agent, including an agent for two or
more joint owners, may execute the demand for appraisal for a Stockholder of
record; however, the agent must identify the record owner and expressly disclose
the fact that, in exercising the demand, such person is acting as agent for the
record owner. If a Stockholder holds shares of Convertible Preferred
-39-
<PAGE>
Stock through a broker who in turn holds the shares through a central securities
depository nominee such as Cede & Co., a demand for appraisal of such shares
must be made by or on behalf of the depository nominee and must identify the
depository nominee as record holder.
A record holder, such as a broker, fiduciary, depository or other
nominee, who holds shares of Convertible Preferred Stock as a nominee for
others, may exercise appraisal rights with respect to the shares held for all or
less than all beneficial owners of shares as to which such person is the record
owner. In such case, the written demand must set forth the number of shares
covered by such demand. Where the number of shares is not expressly stated, the
demand will be presumed to cover all shares of Convertible Preferred Stock
outstanding in the name of such record owner.
Within 120 days after the Effective Time, either the Company or any
Stockholder who has complied with the required conditions of Section 262 may
file a petition in the Delaware Court, with a copy served on the Company in the
case of a petition filed by a Stockholder, demanding a determination of the fair
value of the shares of all dissenting Stockholders. There is no present intent
on the part of the Company to file an appraisal petition and Stockholders
seeking to exercise appraisal rights should not assume that the Company will
file such a petition or that the Company will initiate any negotiations with
respect to the fair value of such shares. Accordingly, holders of Convertible
Preferred Stock who desire to have their shares appraised should initiate any
petitions necessary for the perfection of their appraisal rights within the time
periods and in the manner prescribed in Section 262. Within 120 days after the
Effective Time, any Stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the Company a statement setting forth the aggregate number of shares of
Convertible Preferred Stock not voting in favor of the Merger and with respect
to which demands for appraisal were received by the Company and the number of
holders of such shares. Such statement must be mailed within 10 days after the
written request therefor has been received by the Company.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which Stockholders are entitled to
appraisal rights. The Delaware Court may require the Stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
Stockholder fails to comply with such direction, the Delaware Court may dismiss
the proceedings as to such Stockholder. Where proceedings are not dismissed,
the Delaware Court will appraise the shares of Convertible Preferred Stock owned
by such Stockholders, determining the fair value of such shares exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value.
Although the Company believes that the consideration to be paid
pursuant to the terms of the Merger (the "Merger Consideration") is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the Court and Stockholders should recognize that such an appraisal
could result in a determination of a value higher or
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<PAGE>
lower than, or the same as, such Merger Consideration. Moreover, the Company
does not anticipate offering more than the Merger Consideration to any
Stockholder exercising appraisal rights and reserves the right to assert, in any
appraisal proceeding, that, for purposes of Section 262, the "fair value" of a
share of Convertible Preferred Stock is less than the Merger Consideration. In
determining "fair value", the Delaware Court is required to take into account
all relevant factors. In Weinberger v. UOP, Inc. the Delaware Supreme Court
-----------------------
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and that "[f]air price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts
which could be ascertained as of the date of the merger which throw any light on
future prospects of the merged corporation. Section 262 provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In Cede & Co. v. Technicolor,
--------------------------
Inc., the Delaware Supreme Court stated that such exclusion is a "narrow
- ----
exclusion [that] does not encompass known elements of value," but which rather
applies only to the speculative elements of value arising from such
accomplishment or expectation. In Weinberger, the Delaware Supreme Court
----------
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered." In
addition, Delaware courts have decided that the statutory appraisal remedy,
depending on the factual circumstances, may or may not be a stockholder's
exclusive remedy in connection with transactions such as the merger.
Holders of shares of Convertible Preferred Stock considering seeking
appraisal should recognize that the fair value of their shares determined under
Section 262 could be more than, the same as or less than the consideration they
are entitled to receive pursuant to the Merger Agreement if they do not seek
appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. However, costs do not include
attorneys' and expert witness fees. Each dissenting Stockholder is responsible
for his or her attorneys' and expert witness expenses, although, upon
application of a dissenting Stockholder of the Company, the Delaware Court may
order that all or a portion of the expenses incurred by any dissenting
Stockholder in connection with the appraisal proceeding, including without
limitation, reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all shares of stock entitled to appraisal.
Any holder of shares of Convertible Preferred Stock who has duly
demanded appraisal in compliance with Section 262 will not, after the Effective
Time, be entitled to vote for any purpose any shares subject to such demand or
to receive payment of dividends or other distributions on such shares, except
for dividends or distributions payable to Stockholders of record at a date prior
to the Effective Time.
-41-
<PAGE>
At any time within 60 days after the Effective Time, any Stockholder
will have the right to withdraw such demand for appraisal and to accept the
terms offered in the Merger; after this period, the Stockholder may withdraw
such demand for appraisal only with the consent of the Company. If no petition
for appraisal is filed with the Delaware Court within 120 days after the
Effective Time, Stockholders' rights to appraisal shall cease, and all holders
of shares of Convertible Preferred Stock will be entitled to receive the
consideration offered pursuant to the Merger Agreement. Inasmuch as the Company
has no obligation to file such a petition, and the Company has no present
intention to do so, any holder of shares of Convertible Preferred Stock who
desires such a petition to be filed is advised to file it on a timely basis.
Any Stockholder may withdraw such Stockholder's demand for appraisal by
delivering to the Company a written withdrawal of his or her demand for
appraisal and acceptance of the Merger Consideration, except (i) that any such
attempt to withdraw made more than 60 days after the Effective Time will require
written approval of the Company and (ii) that no appraisal proceeding in the
Delaware Court shall be dismissed as to any Stockholder without the approval of
the Delaware Court, and such approval may be conditioned upon such terms as the
Delaware Court deems just.
BUSINESS OF THE COMPANY
-----------------------
The Company is a rail freight transportation and distribution services
company serving the Mid-Atlantic and Northeast regions of the United States and
Quebec, Canada. The Company owns five short line railroads, operates rail/truck
transload facilities and a rail intermodal terminal, and provides customers with
logistics services for the movement and storage of freight. Emons
Transportation Group, Inc. was organized in December 1986, and is the owner of
all of the outstanding capital stock of Emons Industries, Inc. ("Industries"),
Emons Finance Corp. ("EFC"), the Maryland and Pennsylvania Railroad Company
("MPA"), Emons Logistics Services, Inc. ("Logistics"), Maine Intermodal
Transportation, Inc. ("MIT") and Emons Railroad Group, Inc. ("Railroad Group"),
which owns all of the outstanding capital stock of Yorkrail, Inc. ("YKR"), Penn
Eastern Rail Lines, Inc. ("PRL"), the St. Lawrence & Atlantic Railroad Company
("SLR") and the St. Lawrence & Atlantic Railroad (Quebec) Inc. ("SLQ"). SLR
owns all of the outstanding capital stock of SLR Leasing Corp. ("SLRL"). Prior
to the formation of Emons Transportation Group, Inc. in December 1986,
Industries, which was formed in 1955, was the parent company. For information
regarding the formation of Emons Transportation Group, see "Industries'
Reorganization" below.
Description of Operations
- -------------------------
The Company owns and operates five short line railroads, MPA, YKR,
PRL, SLR and SLQ. The combined revenues from these railroad operations,
excluding SLQ which was acquired in the second quarter of fiscal 1999, accounted
for 91%, 87% and 86% of the Company's total operating revenues in fiscal 1998,
1997 and 1996, respectively. The Company also owns and operates a logistics
services business in York, Pennsylvania and operates a rail intermodal terminal
in Auburn, Maine. These operations are intended to increase the Company's rail
traffic by providing a wide variety of value added services,
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<PAGE>
including rail/truck transfer, warehousing and other distribution services, and
options to businesses located both on and off of the Company's rail lines.
The Company operates in two geographic regions, Pennsylvania, and New
England/Quebec. Pennsylvania operations consist of MPA, YKR, PRL and Logistics,
located in south-central and south-eastern Pennsylvania. New England/Quebec
operations consist of SLR and SLQ, which extend from Portland, Maine, through
New Hampshire and Vermont to Ste. Rosalie, Quebec, and MIT, which commenced rail
intermodal operations on SLR in Auburn, Maine, in September 1994. Local
management teams are responsible for the operations in each region.
The Company's four largest rail operations, MPA, YKR, SLR and SLQ, all
have connections, directly or indirectly, with multiple Class I railroads, which
are classified by the U.S. Code of Federal Regulations as railroad carriers
having annual revenues of approximately $250 million or more ("Class I
railroads"). The Company's right to interchange rail traffic with Class I
railroads is based upon applicable federal regulations. Multiple Class I
railroad connections make these railroads ideal places for industry to locate
and build new facilities because of competitive service and pricing from the
competing Class I railroad connecting carriers. In addition, as discussed
further below, two Class I railroad mergers that are currently in progress, the
split up and acquisition of Consolidated Rail Corporation ("Conrail") by the
Norfolk Southern Railroad ("NS") and CSX Corporation ("CSX"), and the
acquisition of Illinois Central Railroad ("IC") by the Canadian National Railway
("CN"), provide the Company's railroad operations with additional long term
opportunities. The merger of these railroads will open up new markets for the
Company's customers as a result of single line rail service to more regions by
these merged Class I railroads.
In July 1998, CSX and NS received formal written approval from the
Surface Transportation Board ("STB") to divide Conrail's assets between the two
Class I railroads. Based upon management's review of publicly available
information regarding the division of Conrail, all of the Company's railroads
that have dual connections with Class I railroads will continue to maintain
their dual connections. In addition, YKR and MPA will obtain access to a third
Class I railroad carrier, Canadian Pacific Railway. Furthermore, one of PRL's
rail lines in Bristol, Pennsylvania will obtain dual access, which it does not
currently have, with CSX and NS. NS and CSX intend to commence operating their
respective portions of Conrail on June 1, 1999, but NS and CSX may change such
commencement date. While the impact of the merger on future traffic patterns
and the resultant effect on the Company's railroad operations are uncertain at
this time, the Company does not anticipate any significant negative impact as a
result of the merger, and believes that the merger may create additional rail
business for the Company's Pennsylvania rail operations as a result of longer
Class I railroad single line rail service on competitive routes.
In February 1998, CN announced plans to acquire IC, and in July 1998
filed a formal application with the STB seeking regulatory approval for the
acquisition and integration of rail operations, and on March 25, 1999 the STB
provided verbal approval of the transaction. The STB is scheduled to issue its
written merger decision on May 25, 1999,
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<PAGE>
and the merger is expected to become effective June 24, 1999, after which time
CN will be permitted to consummate the acquisition. The merger would provide CN
with a single "Y" shaped network connecting the Pacific and Atlantic Coasts in
Canada, and the U.S. Gulf coast in New Orleans, with the joining of the
railroads in Chicago. Prior to the merger, SLR could only access most markets
in the midwest and south through multiple carriers. Single line access is
generally more competitive than access through multiple carriers for two primary
reasons. First, single line access generally provides for shorter transit times
since railcars do not have to be interchanged with other rail carriers. Second,
single line access is generally more cost effective since only one railroad
handles the traffic and receives revenues for providing rail services. In
addition, in April 1998, CN and IC entered into a 15 year marketing agreement
with the Kansas City Southern Railway ("KCSR") which provides access to key
southern and southwestern markets, and access to Mexico's largest rail system
through KCSR's affiliate, the Texas Mexican Railway. While the impact of the
proposed merger on future traffic patterns and the resultant effect on the
Company's railroad operations are uncertain at this time, the Company believes
that CN's acquisition of IC will provide SLR with single line access to many
points in the midwest and south, and that the combination of single line access
to KCSR (and its affiliates) and the marketing agreement between CN and IC, and
KCSR may provide SLR with more cost competitive and shorter transit time access
to Mexico which may open up commercial opportunities for SLR in Mexico.
Significant Customers
- ---------------------
Crown Paper Co. and New England Public Warehouse each accounted for
approximately 10% of the Company's fiscal 1998 consolidated operating revenues.
Employees
- ---------
At March 31, 1999 the Company employed a total of 164 active persons,
112 of which were represented by various labor organizations. The Company has
labor agreements with unions which represent certain MPA and all SLR and SLQ
non-management employees. Currently, all MPA, SLR and SLQ unionized employees
are covered by collective bargaining agreements which expire in December 2000,
May 2000, and November and December 2002, respectively. Additionally, on March
2, 1999, nine employees of YKR elected to join with the International
Brotherhood of Teamsters. The Company is currently in the process of
negotiating an agreement with these YKR employees and the union. Employees of
the remainder of the Company's operations are not represented by labor
organizations. The Company has not experienced any work stoppages and considers
its employee relations to be satisfactory.
Regulation
- ----------
The Company's U.S. rail subsidiaries are subject to the regulatory
jurisdiction of the Surface Transportation Board ("STB"), a federal agency that
is the successor to the Interstate Commerce Commission. The STB has
jurisdiction over, among other things, the rates charged, the issuance of
securities and the extension or abandonment of rail lines,
-44-
<PAGE>
routes or service by common carriers, and the consolidation, merger and
acquisition of control of and by such carriers. The Company's U.S. rail
subsidiaries are also subject to regulation by the United States Federal
Railroad Administration as to safety requirements and operating practices, and
are subject to regulations by the governmental authorities of the United States,
Pennsylvania, Maine, New Hampshire and Vermont.
The Company's Canadian rail subsidiary is subject to the regulatory
jurisdiction of the Canadian Transportation Agency ("CTA"), a Canadian federal
agency. The CTA is responsible for the economic regulation of transportation
under federal jurisdiction and for the protection of consumers and carriers
through the administration of, among other things, rail certificates of fitness.
The Company's Canadian rail subsidiary is also subject to regulation by
Transport Canada as to safety requirements.
The Company does not believe that compliance with U.S. or Canadian,
federal, state, provincial and local environmental regulations has or will have
a material effect upon capital expenditures, competitive position, or earnings
of the Company. The Company did not make any material investment in capital
expenditures for environmental control facilities during fiscal 1998 and does
not anticipate making any such expenditures in fiscal 1999.
Competition
- -----------
For customers located directly on line, which constitute the majority
of the Company's freight business, the Company's railroads are the only rail
carriers directly serving their respective customers. The Company's rail
operations in New England and Quebec also include a significant portion of
overhead traffic which is subject to competition from alternative rail routes.
All of the Company's railroads experience significant competition from other
modes of freight transportation, particularly highway motor carriers. Factors
such as the nature of the commodity transported, freight rates, distance,
transit time, quality and reliability of service, and market conditions are
considered in determining the mode of transportation utilized. The Company's
ability to compete in these areas is, to a large extent, dependent upon the
performance of its connecting rail carriers.
Industries' Reorganization
- --------------------------
Prior to 1986, the Company provided management, leasing and brokerage
services for rail transportation equipment. In response to a severe decline in
the boxcar leasing business, in March 1984 Industries filed a petition for
reorganization under chapter 11 of the United States Bankruptcy Code. In
December 1986, the Bankruptcy Court of the Southern District of New York (the
"Bankruptcy Court") confirmed Industries' Reorganization Plan (the "Plan") and
Emons Transportation Group became the parent of Industries and MPA.
Under the Plan, each unsecured creditor received an initial
distribution of cash, Common Stock and Senior Preferred Stock, par value $.01
per share ("Senior Preferred Stock") for its claim. In 1989, the Company's
Senior Preferred Stock was
-45-
<PAGE>
exchanged for the Convertible Preferred Stock in connection with the merger into
the Company of its wholly-owned subsidiary, Emons Merger Corporation. Since
numerous disputed claims remained at the time of consummation of the Plan, an
escrow agent, appointed in connection with the Plan, was instructed to
distribute additional amounts of cash and securities to holders of allowed
claims on a quarterly basis in each quarter that disputed claims are reduced by
litigation or settlement. The Bankruptcy Court postponed the distribution of
any cash and securities in 1989 until it could determine whether certain other
potential unsecured claims should be included in the bankruptcy proceeding. In
July and August 1997, upon approval from the Bankruptcy Court for a partial
distribution, the escrow agent distributed 1,434,922 shares of the Company's
Common Stock and 589,461 shares of the Company's Convertible Preferred Stock.
In November 1997, the Bankruptcy Court also approved a motion to allow
distributions to be made to new claimants. The escrow agent currently holds
1,295,484 shares of Common Stock and 572,199 shares of Convertible Preferred
Stock. The escrow agent has the right to vote the shares held by it and has
expressed its intention generally to vote such shares proportionally in
accordance with the vote cast by the other holders of the outstanding Common
Stock and Convertible Preferred Stock.
-46-
<PAGE>
Selected Financial Data
- -----------------------
EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FOR THE FIVE YEARS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $17,445,037 $16,058,252 $14,917,077 $13,996,608 $11,994,286
=========== =========== =========== =========== ===========
Income from operations $ 2,197,070 $ 1,926,419 $ 1,627,339 $ 2,073,724 $ 811,164
=========== =========== =========== =========== ===========
Income (loss) before cumulative effect
of change in accounting principle $ 4,917,622 $ 733,793 $ 469,501 $ 766,077 $ (184,325)
Cumulative effect of change in
- ----------- ----------- ----------- (750,000)
accounting principle for income taxes ----------- - - - -----------
----------- ----------- -----------
Net income (loss) $ 4,917,622 $ 773,793 $ 469,501 $ 766,077 $ (934,325)
=========== =========== =========== =========== ===========
Earnings (loss) per common share (1):
Earnings before cumulative effect of
change in accounting principle:
Basic $ 0.79 $ 0.09 $ 0.04 $ 0.09 $ (0.08)
Diluted $ 0.63 $ 0.09 $ 0.04 $ 0.09 $ (0.03)
Cumulative effect of change in
accounting principle for income taxes:
Basic - - - - (0.13)
----------- ----------- ----------- ----------- -----------
Diluted - - - - (0.10)
----------- ----------- ----------- ----------- -----------
Net income (loss):
Basic $ 0.79 $ 0.09 $ 0.04 $ 0.09 $ (0.21)
=========== =========== =========== =========== ===========
Diluted $ 0.63 $ 0.09 $ 0.04 $ 0.09 $ (0.13)
=========== =========== =========== =========== ===========
Total assets $28,673,277 $24,301,875 $22,789,914 $20,745,575 $19,844,423
=========== =========== =========== =========== ===========
Debt $12,342,175 $11,864,130 $11,086,009 $10,862,098 $11,047,433
=========== =========== =========== =========== ===========
</TABLE>
(1) In fiscal 1998, the Company adopted Statement of Financial Accounting
Standard No. 128, "Earnings Per Share." The adoption of this statement did
not have an impact on previously reported earnings per share for the fiscal
years ended June 30, 1997, 1996, 1995 and 1994.
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<PAGE>
PROPERTY OF THE COMPANY
-----------------------
<TABLE>
<CAPTION>
Approximate
Square Feet
Address of Space Use
- ---------------------- ------------- -----------------------------------
<S> <C> <C>
96 South George Street 5,900 Executive and administrative
York, PA (1) offices and Pennsylvania
administrative offices
Princess Street 15,000 Locomotive repair facility
York, PA
Queen and Hay Streets 80,000 Rail/truck transfer and 15,000
York, PA square foot warehouse facility for
canned goods and various building
products
East Princess Street 70,000 Rail/truck transfer and storage
York, PA facility
North George Street 85,000 Agricultural bulk products
York, PA (2) transfer facility
Arch Street 7,500 Rail/truck transfer facility for
York, PA aggregates and fertilizer
Lewiston Junction Road 4,000 New England administrative
Auburn, ME (1) offices
Lewiston Junction Road 106,700 Locomotive repair facility
Auburn, ME (3)
Island Pond, VT (2) 295,000 Rail/truck transfer, storage and
distribution facility for lumber
Richmond, Quebec 2,500 Operating headquarters
</TABLE>
(1) Leased from a third party.
(2) Leased to a third party.
(3) Land portion leased from a third party.
-48-
<PAGE>
<TABLE>
<CAPTION>
Acreage or
Approximate
Address Distance Use
- ------------------------ --------------- ---------------------------------
<S> <C> <C>
York, PA to Hanover, PA 26 miles Main line railroad track plus rail
yards and related facilities
York, PA to Porters 16 miles Main line railroad track plus rail
Sideling, PA yards and related facilities
Emmaus, PA to East 15.8 miles Main line railroad track plus rail
Greenville, PA (1) yards
Boyertown, PA to 8.5 miles Main line railroad track plus rail
Pottstown, PA (1) yards
Kutztown, PA to Topton, 4.4 miles Main line railroad track
PA (1)
Manheim, PA (1) .6 miles Main line railroad track
Denver, PA to Sinking 12 miles Main line railroad track plus rail
Springs, PA yards
Bridgeport, PA 2.1 miles Main line railroad track
Bristol, PA (1) 1 mile Main line railroad track
Lincoln Yard 25 acres Rail/truck transfer and storage
West Market Street facility for bulk food grade
West York, PA products, chemicals and non-food bulk
products, and steel, aggregates and
other products
Portland, ME to 165 miles Main line railroad track plus
Stanhope, Quebec rail yards and related facilities
Norway to South Paris, .5 miles Branch railroad track
ME (1)
Auburn, ME (1) 4 miles Branch railroad track
Berlin, NH (1) 11 miles Branch railroad track and
customer sidings
Lewiston Junction Road 42 acres Rail intermodal terminal
Auburn, ME (1)
Stanhope, Quebec to Ste. 94 miles Main line railroad track plus
Rosalie, Quebec rail yards and related facilities
</TABLE>
(1) Leased from a third party.
(2) Leased to a third party.
(3) Land portion leased from a third party.
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<PAGE>
The Company's primary lender, LaSalle National Bank, holds a security
interest in all of the Company's assets, including, without limitation, all of
the owned properties identified above.
LEGAL PROCEEDINGS
-----------------
Certain subsidiaries of the Company are currently subject to a number
of claims and legal actions that arise in the ordinary course of business,
including claims under the Federal Employers' Liability Act, a fault based
system under which injuries to and deaths of railroad employees are settled by
negotiations or litigation based upon comparative negligence. The Company
believes that it has adequate insurance coverage and has provided adequate
reserves for any liabilities which may arise as a result of these claims, and
that such claims will not have a material impact on the Company's results of
operations or financial position.
Product Liability Actions
- -------------------------
Prior to March 1971, under previous management, Emons Industries, Inc.
("Industries") (then known as Amfre-Grant, Inc.) was engaged in the business of
distributing (but not manufacturing) various generic and prescription drugs.
Industries sold and discontinued these business activities in March 1971 and
commenced its railcar leasing and railroad operations in October 1971. One of
the drugs which had been distributed was diethylstilbestrol ("DES"), which was
taken by women during pregnancy to prevent miscarriage.
As of March 31, 1999, Industries was one of numerous defendants
(including many of the largest pharmaceutical manufacturers) in 665 lawsuits in
which the plaintiffs allege that DES caused adenosis, infertility, cancer or
birth defects in the offspring or grandchildren of women who ingested DES during
pregnancy. In these actions, liability is premised on the defendant's
participation in the market for DES, and liability is several and limited to the
defendant's share of the market. Of these lawsuits, 660 were commenced after
the confirmation by the United States Bankruptcy Court for the Southern District
of New York (the "Bankruptcy Court") of Industries' Reorganization Plan in
December 1986 (the "Plan"), while the remaining five lawsuits are claims which
will be treated under the Plan. These actions are currently in various stages
of litigation.
On April 16, 1998, the Bankruptcy Court granted Industries' motion for
summary judgment declaring that the post-confirmation lawsuits represent claims
which should be asserted against Industries' Chapter 11 estate and are not post-
reorganization liabilities. A formal judgment was entered by the court on May
6, 1998. In September 1998, one counsel representing multiple DES claimants
appealed the Bankruptcy Court's judgment to the United States District Court.
This appeal is currently pending.
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<PAGE>
Industries has product liability insurance and defense coverage for
nearly all the claims which fall within the policy period 1948 to 1970 up to
varying limits by individual and in the aggregate for each policy year. To
date, Industries has not exhausted insurance coverage in any policy year.
During the period July 1, 1998 to March 31, 1999, 13 new actions were commenced
in which Industries was named as a defendant and 28 lawsuits were settled or
dismissed at no liability to Industries. As of March 31, 1999 there were 289
cases pending in the state court in Ohio. On June 29, 1998, the Ohio Supreme
Court ruled that Ohio law would not permit DES cases in which the plaintiff
could not identify the manufacturer of DES allegedly ingested by mothers of DES
plaintiffs. As a result, all 289 Ohio DES cases against the Company are subject
to dismissal. Counsel for these plaintiffs filed motions, which remain pending,
for reargument and to stay implementation of the decision.
The following table sets forth the states and courts in which DES
cases were pending, and the number of DES cases pending against the Company in
each jurisdiction as of March 31, 1999:
<TABLE>
<CAPTION>
========================================================
State Court Number of Cases
- -------------- ----------------------- ---------------
- --------------------------------------------------------
<S> <C> <C>
California Los Angeles County 1
San Francisco County 4
- --------------------------------------------------------
New York New York County 360
- --------------------------------------------------------
Ohio Cuyahoga County 114
Summit County 80
Federal Court, Northern
District of Ohio 95
- --------------------------------------------------------
Pennsylvania Philadelphia County 10
- --------------------------------------------------------
Texas Travis County 1
========================================================
</TABLE>
These cases seek, as relief, compensation for injuries that plaintiffs
allegedly have sustained as a result of in utero DES exposure, and punitive
damages. The amounts sought are not specified.
Management intends to vigorously defend all of these actions. In the
event that the Bankruptcy Court's decision referred to above is reversed by the
appellate court, it is possible that Industries could ultimately have liability
in these actions in excess of its product liability insurance coverage described
above. However, based upon Industries' experience in prior DES litigation,
including the proceedings before the Bankruptcy Court, and its current knowledge
of pending cases, the Company believes that it is unlikely that Industries'
ultimate liability in the pending cases, if any, in excess of insurance coverage
and existing reserves, will be in an amount sufficient to have a material
adverse effect upon the Company's consolidated financial position or results of
operations.
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<PAGE>
Environmental Liability
- -----------------------
During fiscal 1994, the Company's Maryland and Pennsylvania Railroad
("MPA") discovered a diesel fuel oil spill at its locomotive maintenance
facility in York, Pennsylvania, resulting from the fueling of its locomotives.
MPA is currently performing additional testing and is working with the
Pennsylvania Department of Environmental Protection ("PADEP") to investigate
and, to the extent necessary, remediate the contaminated area. In January 1997,
as a result of these testing activities, MPA discovered free product in some of
its monitoring wells. The Company estimates that the cost to remediate the free
product could potentially range from $100,000 to $200,000, although the final
costs have not yet been determined. The Company has provided sufficient
reserves for the anticipated remediation costs. PADEP could also potentially
require further investigation and, to the extent necessary, remediation of
ground water and/or soils at this facility at some point in the future.
However, the Company cannot determine at this time whether PADEP will require
further investigation and remediation, or what the ultimate costs of addressing
this matter may be or what effect, if any, they could have upon the Company's
consolidated financial position or results of operations.
YEAR 2000 COMPLIANCE ISSUES
---------------------------
The Company has evaluated its risks with respect to year 2000
compliance issues and the impact on its information systems and operations. The
significant risk areas identified include third party software utilized in house
by the Company on its own information systems, value added networks, outside
service providers and information systems utilized by the Company's primary
connecting rail carriers. The Company does not utilize any internally developed
software that is significant to its operations. The Company has investigated
the potential impact of the year 2000 with respect to each significant risk area
identified, and has determined that all significant software either is year
2000 compliant, is in the process of being modified by the respective parties to
accommodate the year 2000, or is replaceable by alternative software options at
a reasonable cost.
Company's State of Readiness
----------------------------
As discussed in the "Risk of the Company's Year 2000 Issues" section
below, the Company has determined that its successful transition into the year
2000 is heavily dependent upon its third party vendors, value added networks,
outside service providers and connecting rail carriers becoming year 2000
complaint. Since this portion of the Company's year 2000 compliance plan is
largely outside of the Company's control, the Company has been and will continue
to closely monitor the year 2000 compliance status of these parties. Based upon
the Company's review of information publicly disseminated and direct discussions
with such parties to date, all applicable third party vendors, value added
networks, outside service providers and connecting rail carriers have
represented that all software significant to the Company's operations either is
or will be year 2000 compliant by the year 2000. However, there can be no
assurance that these parties will be successful in
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<PAGE>
meeting their year 2000 commitments. The remaining portion of the Company's
year 2000 compliance plan is summarized below.
Phase I - Development of a Year 2000 Compliance Plan
----------------------------------------------------
The Company engaged the services of a year 2000 compliance consultant
to assist in the preparation of a year 2000 compliance plan, to
identify all hardware and third party software that is significant to
the operations of the Company, to test hardware identified for year
2000 compliance, and to research the year 2000 compliance status of
third party software identified. The Company received the completed
report from its year 2000 compliance consultant in December 1998 and
has completed the planning phase of its year 2000 compliance plan.
Phase II - Identification of hardware and third party software
--------------------------------------------------------------
applications significant to the operations of the Company and
-------------------------------------------------------------
preliminary identification of hardware and third party software
---------------------------------------------------------------
that is not year 2000 complaint.
-------------------------------
In December 1998, the Company received a report from its year 2000
compliance consultant which included an inventory and year 2000
compliance status report of significant hardware and third party
software utilized by the Company. The Company has completed the
identification phase of its year 2000 compliance plan.
Phase III - Upgrade/replacement and testing of significant hardware
-------------------------------------------------------------------
and third party software.
------------------------
The Company's year 2000 compliance consultant performed year 2000
compliance testing of significant hardware and delivered a report to
the Company in December 1998 which included a detail listing of all
non-compliant hardware. The Company has identified upgrades for all
significant hardware and plans to install and test such upgrades by
September 30, 1999.
Where applicable, the Company is in the process of replacing or
installing year 2000 compliant upgrades for third party software, and
will install similar upgrades for other third party software as they
become available. The Company intends to complete the replacement or
installation of such upgrades and perform testing of third party
software for year 2000 compliance by September 30, 1999. In addition,
the Company will perform year 2000 compliance testing of software
utilized by value added networks, outside service providers and
connecting rail carriers as such software is made year 2000 complaint
by these parties.
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<PAGE>
Risk of the Company's Year 2000 Issues
--------------------------------------
The Company's most significant risk with respect to the year 2000 is
its reliance upon third party vendors, value added networks, outside service
providers and connecting rail carriers to become year 2000 compliant. Since
year 2000 compliance by these parties is outside of the Company's control, there
can be no assurance that the systems critical to the Company's operations will
be compliant by the year 2000. If any of these parties do not successfully
achieve year 2000 compliance, the Company's operations may be adversely
affected. The status of the Company's significant risk areas is as follows:
1. Third Party Software - The Company's critical third party software
--------------------
utilized in house consists of its railcar accounting, interline
settlement and general ledger systems. The Company's vendor for its
railcar accounting system has indicated that the year 2000 compliant
version is currently scheduled for release during the spring of 1999.
The vendor contracted by the Association of American Railroads to
develop and maintain the PC-based interline settlement system utilized
by the Company has indicated that the year 2000 compliant version has
been substantially completed and is scheduled for release during the
spring of 1999. The Company's general ledger accounting software
vendor has indicated that its general ledger system is year 2000
compliant.
2. Value Added Networks - The Company's primary value added network
--------------------
utilized in EDI communications with other rail carriers has indicated
that its software is already year 2000 compliant.
3. Outside Service Providers - The Company utilizes outside service
-------------------------
providers for certain critical railroad accounting functions including
car hire accounting and rail communications through Railinc. The
provider of car hire accounting services has indicated that it is in
the process of modifying its system to be year 2000 compliant and that
the year 2000 compliant version is scheduled to be completed by early
summer 1999. Railinc provides a variety of central system services
for the North American rail industry, including railroads, rail
equipment owners, other rail suppliers, rail customers and others, and
has indicated that some of its system services are already year 2000
compliant and that all remaining system services are scheduled to be
year 2000 compliant by June 30, 1999.
4. Connecting Rail Carriers - Each of the Company's primary connecting
------------------------
rail carriers has indicated that it is in the process of modifying its
systems to be year 2000 compliant, and will be completed in time for
the year 2000.
Costs to Address Year 2000 Issues
---------------------------------
The Company does not anticipate that the cost of becoming year 2000
compliant will be material to its results of operations.
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<PAGE>
Contingency Plans
-----------------
The Company's contingency plans are segregated into two groups of
software, including industry specific software and all other software. With
respect to industry specific software, which includes third party software
utilized in house by the Company, software provided by outside service
providers, and software utilized by the Company's primary connecting rail
carriers, the Company does not have a variety of alternatives available. As a
result, the Company is heavily reliant upon these vendors, service providers and
connecting rail carriers to meet their year 2000 compliance commitments. The
Company does not currently have any contingency plans with respect to this
software, and will closely monitor the progress of these vendors, service
providers and connecting rail carriers. With respect to all other software, the
Company believes there are sufficient alternatives available at a reasonable
cost should existing software not be made year 2000 compliant. The Company
believes that it will receive year 2000 compliance upgrades for most, if not
all, other software. Should upgrades not be available, the Company will acquire
year 2000 compliant software with sufficient lead time for implementation.
-55-
<PAGE>
MARKET FOR COMPANY'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
-------------------------------
The Company's Common Stock is traded on the Nasdaq/SmallCap Market
under the symbol "EMON". The table below sets forth, for the periods indicated,
the high and low bids for the Common Stock as reported on the Nasdaq/SmallCap
Market. As of April 23, 1999, the first business date preceding the date that
the Merger Agreement was executed, the high and low sales prices of the Common
Stock were each $2.125. As of May 10, 1999, the high bid, low bid and closing
bid for the Common Stock was $2.25, $2.00 and $2.125, respectively.
<TABLE>
<CAPTION>
COMMON STOCK PRICE RANGE
Fiscal Year Fiscal Quarter High Bid Low Bid Total Volume
- ----------- ---------------- ------------ --------- ----------------
<S> <C> <C> <C> <C>
1999 First $3.4375 $ 2.125 618,303
Second 2.8125 2.25 240,040
Third 2.5625 1.5625 317,172
1998 First $ 3.875 $ 1.375 402,647
Second 3.625 2.375 235,488
Third 4.0625 2.625 449,658
Fourth 3.25 2.625 228,857
1997 First $3.1875 $1.5625 1,292,871
Second 5.375 2.75 980,965
Third 3.5625 2.75 210,989
Fourth 2.75 1.875 118,870
</TABLE>
As of May 10, 1999, the Company had 6,218,986 shares of Common Stock
issued and outstanding which were held by approximately 1,737 Stockholders of
record. No cash dividends have been paid on the Common Stock and no cash
dividends are expected to be paid on the Common Stock in the foreseeable future.
The Company's Loan and Security Agreement with its primary lender prohibits the
payment of cash dividends and certain other distributions without the prior
consent of the lender.
The Convertible Preferred Stock is quoted on the OTC Bulletin Board.
The table below sets forth, for the periods indicated, the high and low bids for
the Convertible Preferred Stock as quoted on the OTC Bulletin Board. As of
April 19, 1999, the last date of trading preceding the date that the Merger
Agreement was executed, the high and low sales prices of the Convertible
Preferred Stock were each $2.375. As of April 30, 1999, the last date on which
bid prices were quoted prior to May 10, 1999, the high bid, low bid and closing
bid for the Convertible Preferred Stock were each $2.125.
-56-
<PAGE>
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK PRICE RANGE
Fiscal Year Fiscal Quarter High Bid Low Bid Total Volume
- ----------- ---------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
1999 First $2.875 $2.25 8,500
Second 2.625 2.625 17,100
Third 2.625 2.375 12,400
1998 First $1.75 $1.50 33,952
Second * * 27,683
Third 2.875 2.75 22,700
Fourth 2.875 2.3125 44,700
1997 First $1.75 $1.75 3,936
Second * * 20,164
Third * * 69
Fourth * 210
</TABLE>
- -------------
/*/ No responsive bid reported for such quarter.
As of May 10, 1999, 1,485,543 shares of Convertible Preferred Stock
were issued and outstanding which were held by approximately 641 Stockholders of
record, none of which are affiliates of the Company. The holders of the
Convertible Preferred Stock are entitled to a dividend of $.14 per share per
annum, when declared, which is to be paid semi-annually. The Board of Directors
voted to omit the regular semi-annual dividend which would have been payable
from the period January 2, 1991 through January 4, 1999. Dividends in arrears
as of May 10, 1999 aggregated $1,767,796. These shares are quoted on the OTC
Bulletin Board.
VOTE OF STOCKHOLDERS
--------------------
Approval of the Merger Proposal requires the affirmative vote of the (i)
holders of at least a majority of the outstanding Common Stock and the
Convertible Preferred Stock, voting together as a single class and (ii) holders
of at least a majority of the outstanding Convertible Preferred Stock, voting as
a separate class. Approval of each of the Proposed Charter Amendments requires
the affirmative vote of the holders of at least a majority of the outstanding
Common Stock and Convertible Preferred Stock, voting together as a single class.
DISCRETIONARY AUTHORITY
-----------------------
It is not intended to bring before the Special Meeting any matters except
the Merger Proposal or any possible adjournment of the Special Meeting.
Management is not aware at this time that any other matters are to be presented
for action, If, however, any other matters properly come before the Special
Meeting, the persons named as proxies in the
-57-
<PAGE>
enclosed form of proxy intend to vote in accordance with their judgment on the
matters presented.
STOCKHOLDER PROPOSALS FOR ANNUAL MEETING
----------------------------------------
Stockholder proposals intended to be presented at the 1999 Annual
Meeting of Stockholders of the Company must be received by the Company for
inclusion in the Company's Proxy Statement and form(s) of proxy relating to such
meeting no later than June 12, 1999. Proposals may be mailed to the Company, to
the attention of the Secretary, 96 South George Street, York, PA 17401. In
order to curtail controversy as to the date on which a proposal was received by
the Company, proponents should submit their proposals by Certified Mail-Return
Receipt Requested. Timely receipt of a Stockholder's proposal, however, will
satisfy only one of various requirements for inclusion in the Company's proxy
materials.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
-----------------------------------------------
The Financial Statements of the Company and Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
following documents, are incorporated herein by this reference and made a part
hereof:
(a) The Company's annual report on Form 10-K for the fiscal year ended
June 30, 1998.
(b) The Company's quarterly reports on Form 10-Q for the fiscal quarters
ended September 30, 1998, December 31, 1998 and March 31, 1999.
(c) The Company's current report on Form 8-K dated December 23, 1998.
The following additional documents, are incorporated herein by this
reference and made a part hereof:
(d) The Company's current report on Form 8-K dated April 30, 1999.
(e) The Company's Registration Statement on Form 8-A dated April 30, 1999
with respect to the Rights.
Additionally, all documents filed by the Company pursuant to sections
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date hereof but prior
to the Special Meeting, shall be deemed to be incorporated herein by reference.
INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------
The consolidated financial statements of the Company incorporated in
this Proxy Statement by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998, have been audited by Arthur Andersen LLP,
independent public
-58-
<PAGE>
accountants, as stated in their report. The Company anticipates that the
representatives of Arthur Andersen LLP will attend the Special Meeting, may make
a statement if they desire to do so and also will be available to respond to
appropriate questions.
-59-
<PAGE>
OTHER MATTERS
-------------
On written request, the Company will provide without charge to each record
or beneficial holder of the Company's Common Stock and Convertible Preferred
Stock as of May 10, 1999, a copy of (i) the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, (ii) the Company's quarterly reports on
Form 10-Q for the fiscal quarters ended September 30, 1998, December 31, 1998
and March 31, 1999, and (iii) the Company's current report on Form 8-K dated
December 23, 1998, (iv) the Company's current report on Form 8-K dated April 30,
1999, and (v) the Company's Registration Statement on Form 8-A dated April 30,
1999, in each case as filed with the Securities and Exchange Commission.
Requests should be addressed to Ms. Kimberly B. Smith, Assistant Secretary,
Emons Transportation Group, Inc., 96 South George Street, York, PA 17401.
By Order of the Board of Directors
Scott F. Ziegler
Secretary
Date: May 13, 1999
-60-
<PAGE>
ANNEX A
-------
AGREEMENT OF MERGER
AGREEMENT OF MERGER dated as of April 25, 1999 (the "Agreement"),
between EMONS TRANSPORTATION GROUP, INC., a Delaware corporation ("ETG"), with
---
its principal place of business located at 96 South George Street, York, PA
17401 and ETG Merger Corporation, a Delaware corporation ("NEWCO"), with its
-----
principal place of business located at 96 South George Street, York, PA 17401.
NEWCO is a corporation duly organized and existing under the laws of
the State of Delaware, and has an authorized capital stock consisting solely of
1,000 shares of common stock, par value $.01 per share (the "NEWCO Common
------------
Stock"), of which 100 shares are issued and outstanding. NEWCO is a wholly-
- -----
owned subsidiary of ETG.
The Boards of Directors of NEWCO and ETG, deeming is desirable that
NEWCO be merged with and into ETG as permitted by the Delaware General
Corporation Law, as amended (the "DGCL"), under and pursuant to the terms and
----
conditions hereinafter set forth, have by resolutions duly approved and adopted
this Agreement and have directed that this Agreement be submitted to their
respective stockholders for approval and adoption.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereto do agree as
follows:
ARTICLE I
THE MERGER, THE SURVIVING CORPORATION
AND THE EFFECTIVE DATE
1.1 The Merger. In accordance with the provisions of the DGCL, on
----------
the Effective Date (as hereinafter defined), NEWCO shall be merged with and into
ETG (the "Merger"), which shall be, and is herein sometimes referred to as, the
------
"Surviving Corporation." Upon the Effective Date, the name of the Surviving
---------------------
Corporation shall be "Emons Transportation Group, Inc." NEWCO and ETG are
herein sometimes referred to as the "Constituent Corporations."
------------------------
1.2 The Surviving Corporation. From and after the Effective Date,
-------------------------
the corporate existence of ETG, with all its rights, privileges, immunities,
powers and purposes, shall continue unaffected and unimpaired by the Merger, and
the corporate existence of NEWCO, with all its rights, privileges and
immunities, shall be merged into ETG and ETG shall, as the Surviving
Corporation, be fully vested therewith in accordance with the applicable laws of
the State of Delaware. The separate existence and corporate organization of
NEWCO, except insofar as they may be continued by statute, shall cease on the
Effective Date.
1.3 Closing and Effective Date. The closing of the transactions
--------------------------
contemplated by this Agreement shall take place at the offices of ETG, 96 South
George Street, York, Pennsylvania 17401 on June 23, 1999 or on such later date
as is agreed to by the parties (except as otherwise provided herein). The
Merger shall become effective at the close of business on the date of the filing
of a Certificate of Merger in accordance with the DGCL. The date on which the
Merger shall become effective is herein called the "Effective Date."
--------------
ARTICLE II
CERTIFICATE OF INCORPORATION
BY-LAWS, BOARD OF DIRECTORS AND
OFFICERS OF SURVIVING CORPORATION
2.1 Certificate of Incorporation. From and after the Effective Date,
----------------------------
the Certificate of Incorporation of ETG shall be the certificate of
incorporation of the Surviving Corporation, until altered, amended or repealed
in accordance with the provisions thereof and of applicable law.
1
<PAGE>
2.2 By-Laws. The by-laws of ETG, in effect at the Effective Date,
-------
shall be the by-laws of the Surviving Corporation, until altered, amended or
repealed in accordance with the provisions thereof, of the certificate of
incorporation and of applicable law.
2.3 Board of Directors and Officers. The directors and officers of
-------------------------------
ETG on the Effective Date shall be the directors and officers of the Surviving
Corporation as of the Effective Date. Such directors and officers shall serve
until their respective successors are duly elected and qualified.
ARTICLE III
TREATMENT OF SHARES OF EACH
CONSTITUENT CORPORATION
3.1 Common Stock of NEWCO. On the Effective Date, each share of
---------------------
NEWCO Common Stock outstanding immediately prior to the Merger shall be
canceled.
3.2 Common Stock of ETG. On the Effective Date, each share of ETG
-------------------
common stock, par value $.01 per share, outstanding immediately prior to the
Merger ("ETG Common Stock") shall remain outstanding and each Share of $.14
----------------
Series A Cumulative Convertible Preferred Stock, par value $.01 per share
("Convertible Preferred Stock") (other than Convertible Preferred Stock as to
---------------------------
which dissenters' rights of appraisal have been perfected under the DGCL) will
be exchanged for 1.1 fully-paid and nonassessable shares of ETG Common Stock.
3.3 Sole Rights. From and after the Effective Date, the holders of
-----------
certificates evidencing ownership of shares of NEWCO Common Stock outstanding
immediately prior thereto shall cease to have any rights with respect to such
stock except as otherwise provided herein or by law.
ARTICLE IV
TRANSFER OF ASSETS AND LIABILITIES
4.1 Certain Effects of Merger. At the Effective Date, all rights,
-------------------------
privileges, powers and franchises, of a public as well as of a private nature,
of each of the Constituent Corporations shall be possessed by the Surviving
Corporation, subject to all the restrictions, disabilities and duties of each of
the Constituent Corporations; and all the rights, privileges, powers and
franchises of each of the Constituent Corporations, and all property, real,
personal and mixed, and all debts due to either of the Constituent Corporations
on whatever account, as well for stock subscriptions as all other things in
action or belonging to each of the Constituent Corporations, shall be vested in
the Surviving Corporation, and all property, rights, privileges, powers and
franchises and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the respective
Constituent Corporations, and the title to any real estate vested by deed or
otherwise under the laws of the State of Delaware or otherwise in either of the
Constituent Corporations shall not revert or be in any way impaired by reason of
the Merger; but all rights of creditors and all liens upon any property of
either of the Constituent Corporations shall be preserved unimpaired, and all
debts, liabilities and duties of the respective Constituent Corporations shall
at the Effective Date attach to the Surviving Corporation, and may be enforced
against it to the same extent as if such debts, liabilities and duties had been
incurred or contracted by it.
4.2 Supplementary Action. If at any time after the Effective Date
--------------------
any further assignments or assurances in law or any other things are necessary
or desirable to vest or to perfect or confirm or record in the Surviving
Corporation the title to any property or rights of either of the Constituent
Corporations, or otherwise to carry out the provisions of the Agreement, the
proper officers and directors of the respective Constituent Corporations as of
the Effective Date shall execute and deliver any and all proper deeds,
assignments and assurances in law, and do all things necessary or proper to vest
or to perfect or confirm title to such property or rights in the Surviving
Corporation, and otherwise to carry out the purposes and provisions of this
Agreement.
-2-
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF NEWCO
NEWCO represents and warrants to ETG as follows:
5.1 Organization and Existence. NEWCO is a corporation duly
--------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
5.2 Capitalization. The authorized capital stock of NEWCO consists
--------------
of 1,000 shares of NEWCO Common Stock, of which 100 shares are issued and
outstanding on the date hereof. Each outstanding share of NEWCO Common Stock is
duly and validly issued, fully paid and nonassessable, and has not been issued
in violation of any preemptive right of stockholders.
5.3 Subsidiaries and Affiliates. NEWCO does not directly or
---------------------------
indirectly own more than 50% of the outstanding capital stock of any other
corporation.
5.4 Stock Options and Conversion Rights. NEWCO does not have
-----------------------------------
outstanding any stock, other security, option or warrant, nor does there exist
any other legal or contractual right, which entitles the holder thereof to
purchase or otherwise acquire any capital stock or other security of or other
interest in NEWCO or to convert the same into any capital stock or other
security of or other interest in NEWCO.
5.5 Authority and Approval. NEWCO has full corporate power and
----------------------
authority to execute, deliver and perform this Agreement, and, upon the
requisite approval thereof by ETG, its sole stockholder, all corporate action of
NEWCO necessary for such execution, delivery and performance will have been duly
taken. Such execution, delivery and performance do not require any action or
consent of, or any registration with, any governmental regulatory body or other
authority or of any other party under any contract, agreement or other
undertaking, or under any order or decree to which NEWCO or any subsidiary or
affiliate is a party to which any of their properties or assets are subject and
will not conflict with or entitle any party to terminate or call a default
under, any such contract, agreement, undertaking, order or decree.
5.6 Litigation. There is no action, suit or other litigation or
----------
proceeding or governmental investigation pending, or to the knowledge of the
officers of NEWCO, threatened or in prospect with respect to its businesses,
properties or assets, which, if adversely determined, would have a material
adverse effect upon the assets or business of NEWCO.
5.7 Material Contracts. NEWCO is not a party to any material
------------------
contract, instrument or undertaking.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ETG
ETG represents and warrants to NEWCO as follows:
6.1 Organization and Existence. ETG is a corporation duly organized,
--------------------------
validly existing and in good standing under the laws of the State of Delaware.
All the issued and outstanding shares of capital stock of ETG have been duly
authorized by all necessary corporate action, and are validly issued, fully paid
and nonassessable.
6.2 Authority and Approvals. ETG has full corporate power and
-----------------------
authority to execute, deliver and perform this Agreement and, upon the requisite
approval thereof by its stockholders, all corporate action of ETG necessary for
such execution, delivery and performance does not require any action or consent
of, or any registration with, any governmental regulatory body or other
authority or of any other party under any contract, agreement or other
undertaking or under any order or decree to which ETG is a party or to which
-3-
<PAGE>
any of its properties or assets are subject and will not conflict with, or
entitle any party to terminate or call a default under, any such contract,
agreement undertaking, order or decree.
ARTICLE VII
COVENANTS OF ETG
7.1 Stockholders' Meeting. ETG will call a special meeting of its
---------------------
stockholders (the "ETG Special Stockholders Meeting") to be held on June 23,
--------------------------------
1999 (or such later date upon which the parties shall agree) to submit this
Agreement and the transaction contemplated hereby for their approval.
7.2 ETG Proxy Statement. ETG will prepare and send to its
-------------------
stockholders, for purposes of considering and voting upon this Agreement at the
ETG Special Stockholders' Meeting, a proxy statement satisfying the applicable
requirements of Delaware law and complying as to form in all material respects
with all applicable state and federal law and the rules and regulations
thereunder (such proxy statement in the form mailed by ETG to its stockholders,
together with any and all amendments and supplements thereto, herein referred to
as the "ETG Proxy Statement").
-------------------
ARTICLE VIII
COVENANTS OF NEWCO AND ETG
8.1 Certain other Covenants. Prior to the Effective Date, NEWCO and
-----------------------
ETG will make every reasonable effort to obtain such written consents,
approvals, authorizations, modifications, rulings and opinions from third
parties or take such measures and actions as may be necessary or appropriate to
allow the consummation of the transactions contemplated hereby.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF ETG
The obligations of ETG to effect the transactions contemplated hereby
are subject to the satisfaction of the condition set forth in Section 8.1 and,
at its option, the satisfaction or waiver of the following other conditions:
9.1 ETG Stockholders' Approval. The requisite approval of this
--------------------------
Agreement shall have been given by the stockholders of ETG.
9.2 Consents, Approvals, Authorizations, Modifications and Rulings.
--------------------------------------------------------------
All consents, approvals, authorizations, modifications and rulings required or,
in the opinion of ETG, necessary in connection with the execution, delivery and
performance of this Agreement and the consummation of the Merger and related
transactions shall have been obtained (whether from government authorities or
other persons) and shall be in form and substance satisfactory to ETG.
9.3 Representations, Warranties and Agreements of NEWCO. All
---------------------------------------------------
representations and warranties made herein by NEWCO shall be true in all
material respects as of the date made and as of the Effective Date; NEWCO shall
have performed in all material respects the obligations and agreements
undertaken by NEWCO herein to be performed at or prior to the Effective Date;
and NEWCO shall have delivered to ETG a certificate to such effect, dated the
Effective Date, signed by the President and the Treasurer or Secretary of NEWCO.
9.4 Absence of Litigation. No claim, action, suit or proceeding
---------------------
shall be pending or threatened against any of the parties hereto or any of their
affiliates which, if adversely determined, would prevent or hinder consummation
of the Merger contemplated by this Agreement, result in the payment of
-4-
<PAGE>
substantial damages as a result of such Merger and the transactions contemplated
hereby or otherwise impair the benefits contemplated hereby.
ARTICLE X
CONDITIONS TO OBLIGATIONS OF NEWCO
The obligation of NEWCO to effect the transactions contemplated hereby
are subject to the satisfaction of the condition set forth in Section 8.1 and,
at its option, the satisfaction or waiver of the following other conditions.
10.1 NEWCO Stockholders' Approval. The requisite approval of this
----------------------------
Agreement shall have been given by the stockholder of NEWCO.
10.2 Consents, Approvals, Authorizations, Modifications and Rulings.
--------------------------------------------------------------
All consents, approvals, authorizations, modifications and rulings required or,
in the opinion of NEWCO, necessary in connection with the execution, delivery
and performance of this Agreement and the consummation of the Merger and related
transactions shall have been obtained (whether from governmental authorities or
other persons) and shall be in form and substance satisfactory to NEWCO.
10.3 Representations, Warranties and Agreements of ETG. All
-------------------------------------------------
representations and warranties made herein by ETG shall be true in all material
respects as of the date made and as of the Effective Date; ETG shall have
performed in all material respects the obligations and agreements undertaken by
ETG herein to be performed at or prior to the Effective Date; and ETG shall have
delivered to NEWCO a certificate to such effect, dated the Effective Date,
signed by an executive officer thereof.
10.4 Absence of Litigation. No claim, action, suit or proceeding
---------------------
shall be pending or threatened against any of the parties hereto or any of their
affiliates which, if adversely determined, might prevent or hinder consummation
of the Merger contemplated by this Agreement, result in the payment of
substantial damages as a result of such Merger and the transactions contemplated
hereby or otherwise impair the benefits contemplated hereby.
ARTICLE XI
CONDITIONS TO OBLIGATIONS OF ETG AND NEWCO
The obligations of ETG and NEWCO to effect the transactions
contemplated hereby are subject to the satisfaction or waiver of the conditions
set forth as follows:
11.1 Stockholder Approval. This Agreement shall have been approved
--------------------
and adopted by the stockholders of both of the Constituent Corporations in
accordance with Delaware Law.
11.2 No Prohibition. No provision of any applicable law or
--------------
regulation and no judgment, injunction, order or decree shall prohibit the
consummation of the Merger.
ARTICLE XII
TERMINATION
12.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Effective Date, notwithstanding approval of the Agreement by the NEWCO
Stockholder, by mutual written consent of the Boards of Directors of NEWCO and
ETG; or
-5-
<PAGE>
12.2 Effect of Termination. In the event that this Agreement is
---------------------
terminated, this Agreement shall forthwith become void and of no further force
or effect and there shall be no obligation on the part of NEWCO, ETG or their
respective officers, directors or stockholders.
ARTICLE XIII
MISCELLANEOUS
13.1 Non-Survival of Representations and Warranties. The
----------------------------------------------
representation and warranties contained herein shall expire at the Effective
Date.
13.2 Tax Treatment. It is expressly understood and agreed that ETG
-------------
and NEWCO and their respective officers and agents have not made any warranty or
agreement express or implied as to the tax consequences of this transaction.
13.3 Notices. Any notice hereunder to a party shall be deemed to be
-------
properly served if in writing and delivered or mailed to (with a contemporaneous
copy by telex or facsimile transmission), in the case of ETG:
Emons Transportation Group, Inc.
96 South George Street
York, PA 17401
Attn: Mr. Scott Ziegler
and, in the case of NEWCO:
ETG Merger Corporation
96 South George Street
York, PA 17401
Attn: Mr. Scott Ziegler
or to such other address as may have been furnished in writing by such party to
the other party to this Agreement, and shall be deemed to have been given as of
the time delivered or mailed registered or certified mail, postage paid, except
that notice of termination pursuant hereto shall be effective only upon receipt.
13.4 Prior Agreements; Modifications; Waivers. This Agreement shall
----------------------------------------
supersede all other prior agreements, documents or other instruments with
respect to the matters covered hereby. This Agreement may be amended or
modified at any time prior to the Effective Date by written agreement of the
Board of Directors of the parties hereto, or officers authorized by such Boards,
at any time before or after approval thereof by the stockholders of either or
both Constituent Corporations.
13.5 Captions. The captions in this Agreement are for convenience
--------
only and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.
13.6 Governing Law. The terms of this Agreement shall be governed
-------------
by, and interpreted and construed in accordance with the provisions of, the laws
of the State of Delaware.
13.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall constitute an original copy
hereof.
[SIGNATURE PAGE TO FOLLOW]
-6-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be signed by its duly authorized officers as of the date first
above written.
Attest: EMONS TRANSPORTATION GROUP, INC.
By: /s/ Scott Ziegler By: /s/ Robert Grossman
--------------------------- ---------------------------------
Scott Ziegler Robert Grossman
Secretary President
Attest: ETG MERGER CORPORATION
By: /s/ Scott Ziegler By: /s/ Robert Grossman
--------------------------- ---------------------------------
Scott Ziegler Robert Grossman
Secretary President
-7-
<PAGE>
ANNEX B-1
---------
February 22, 1999
Board of Directors
Emons Transportation Group, Inc.
96 South George Street
York, PA 17401
Ladies and Gentlemen:
Emons Transportation Group, Inc. ("Emons" or the "Company") has requested
an opinion as to the fairness, from a financial point of view, that the exchange
of one (1.0) share of $0.14 Series A Cumulative Convertible Preferred Stock
("Convertible Preferred Stock") for one and one-tenth (1.1) shares of common
stock ("Common Stock") is fair to the holders of Convertible Preferred Stock and
the holders of Common Stock. The terms of the transaction are provided in the
Agreement of Merger (the "Merger Agreement") between the Company and Newco, a
Delaware corporation ("Newco"), which is a newly-formed, wholly-owned subsidiary
of the Company (the "Merger Proposal"). We were retained by the Company and
commenced our investigation on December 11, 1998.
The Merger Agreement provides for the merger of Newco into the Company,
with the Company being the surviving corporation in the merger (the "Merger").
As a result of the Merger (i) each outstanding share of Convertible Preferred
Stock will be exchanged for 1.1 shares of Common Stock and (ii) all current
shares of Common Stock will remain outstanding, unaffected by the Merger.
Approval of (i) the holders of a majority of the outstanding Common Stock and
Convertible Preferred Stock, voting together as a single class and (ii) the
holders of a majority of the Convertible Preferred Stock, voting as a separate
class, is required to approve the Merger Proposal. The Company may withdraw the
Merger Proposal if the holders of more than 5% of the outstanding Convertible
Preferred Stock have properly exercised appraisal rights in accordance with
Section 262 of the Delaware General Corporation Law.
In connection with the opinion, we have reviewed, among other things, (i)
the proposed Merger Agreement, (ii) Draft Proxy Statement of Emons
Transportation Group, Inc. for the Special Meeting of Stockholders, dated
February 18, 1999, (iii) Annual Reports and Form 10-K's for fiscal years ended
June 30, 1996, 1997 and 1998, (iv) Quarterly Reports on Form 10-Q for the
periods ended September 30, 1998 and December 31, 1998, (v) internal, non-public
budgets and projections for fiscal years 1999, 2000 and 2001, (vi) publicly
available financial data of regional railroad companies which FBW deemed
comparable to the Company, and (vii) Notice of Special Meeting of Stockholders
and Proxy Statement, dated August 23, 1989. FBW also held various discussions
with management of the Company regarding its past and current business
operations, financial condition and future prospects. FBW also held discussions
with the Company's accountants and counsel and performed such other
investigations as it deemed necessary.
Ferris, Baker Watts, Inc. is providing the Company with a valuation of the
Convertible Preferred Stock as of September 27, 1989 (the "Valuation"). Ferris,
Baker Watts, Inc. has no current investment banking
-1-
<PAGE>
relationship with the Company except for the Valuation and our review of the
fairness to the holders of Convertible Preferred Stock and holders of Common
Stock of the Company of the consideration to be provided to the holders of
Convertible Preferred Stock in the proposed Merger.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information reviewed by us for the
purposes of this opinion whether publicly available or provided to us by the
Company, and we have not assumed any responsibility for independent verification
of such information. FBW has further assumed that the financial budgets and
projections provided to FBW by the Company have been reasonably determined
reflecting the best currently available estimates and judgements of the
management of the Company as to the future financial performance of the Company.
FBW expressed no view as to such budgets or projections or the assumptions on
which they were based. We express no opinion as to the consideration to be
received by holders of Convertible Preferred Stock who may perfect dissenters'
statutory fair appraisal rights. Based upon the foregoing and based upon other
such matters that we consider relevant, it is our opinion that, as of the date
of this letter, the consideration to be received by the holders of Convertible
Preferred Stock in the proposed Merger is fair to the holders of Convertible
Preferred Stock and holders of Common Stock from a financial point of view as of
the date hereof.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date of
this letter. Our opinion was prepared at the request of the Board of Directors
and does not constitute a recommendation as to how a shareholder should vote on
matters associated with the proposed Merger. Subsequent events may affect the
conclusions reached in this opinion, and we neither have nor do we assume any
obligation to update, revise or reaffirm this opinion which speaks solely as of
this date and with respect to matters contained herein.
Very truly yours,
/s/ Ferris, Baker Watts, Inc.
FERRIS, BAKER WATTS, INC.
-2-
<PAGE>
ANNEX B-2
---------
May__, 1999
Board of Directors
Emons Transportation Group, Inc.
96 South George Street
York, PA 17401
Ladies and Gentlemen:
You have requested that we confirm our opinion, set forth in our letter, dated
February 22, 1999 (the "Prior Letter"), as to the fairness, from a financial
point of view, that the exchange of one (1.0) share of $0.14 Series A Cumulative
Convertible Preferred Stock ("Convertible Preferred Stock") for one and one-
tenth (1.1) shares of Common Stock is fair to the holders of Convertible
Preferred Stock and the holders of Common Stock. All capitalized terms used
herein and not otherwise defined herein have the meanings set forth in the Prior
Letter.
It is understood that this letter is subject to the same qualifications and
limitations set forth in the Prior Letter (except as to the date on which the
Prior Letter speaks and the date through which we reviewed information made
available to us, both of which shall be as of the date hereof).
Based upon the foregoing and based upon other such matters that we consider
relevant, it is our opinion that, as of the date of this letter, the
consideration to be received by the holders of Convertible Preferred Stock in
the exchange of shares as set forth in the Prior Letter continues to be fair to
the holders of Convertible Preferred Stock and the holders of Common Stock from
a financial point of view. Subsequent events may affect the conclusions reached
in this letter, and we neither have nor do we assume any obligation to update,
revise or reaffirm this opinion which speaks solely as of this date and with
respect to matters contained herein.
Very truly yours,
FERRIS, BAKER WATTS, INC.
-1-
<PAGE>
ANNEX B-3
---------
EMONS TRANSPORTATION GROUP, INC.
Supplemental Information for
Emons Transportation Group, Inc. Board Members
Ferris, Baker Watts, Incorporated
Investment Banking
100 Light Street
Baltimore, Maryland 21202
May 10, 1999
-1-
<PAGE>
EMONS TRANSPORTATION GROUP, INC.
This document is based on information provided by Emons Transportation Group,
Inc. as well as other sources deemed to be reliable. The information set forth
in this document is intended solely for the use by the Board of Directors of
Emons Transportation Group, Inc. (the "Client"). Possession of this document,
or a copy thereof, does not carry with it the right of publication of all or a
part of it, nor may it be used for any purpose by any party but the Client
without the previous written consent of Ferris, Baker Watts, Inc. ("FBW") or the
Client, and in any event only with proper attribution. The compensation
received by FBW from this engagement is not dependent on the findings of this
opinion. FBW has no other financial interest in Emons Transportation Group,
Inc., or any related party.
Charles W. Place
Vice President
(410) 659-4657
-2-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------------------------------------------------------- ----
<S> <C>
Executive Summary 1
$0.14 Series A Cumulative Convertible Preferred Stock 2
Due Diligence Review 3
Valuation Methodology 3
Summary Valuation 5
Summary and Conclusion 6
EXHIBITS
Emons Transportation Projected Financial Statements and Free Cash Flow Analysis
Publicly Traded Comparable Company Analysis
Information Reviewed
</TABLE>
-3-
<PAGE>
EXECUTIVE SUMMARY
Ferris, Baker Watts, Incorporated ("FBW") has been retained by the Board of
Directors of Emons Transportation Group, Inc. ("Emons" or the "Company") to
provide a fairness opinion that the exchange of one (1.0) share of $0.14 Series
A Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") for
one and one-tenth (1.1) shares of common stock ("Common Stock") is fair, from a
financial point of view, to the holders of Common Stock and the holders of
Convertible Preferred Stock. The terms of the transaction are provided in the
Agreement of Merger (the "Merger Agreement") between the Company and Newco, a
Delaware corporation, which is a newly-formed, wholly-owned subsidiary of the
Company ("Newco") (the "Merger Proposal"). The Merger Agreement provides for
the merger of Newco into the Company, with the Company being the surviving
corporation in the merger (the "Merger"). As a result of the Merger (i) each
outstanding share of Convertible Preferred Stock will be exchanged for 1.1
shares of Common Stock and (ii) all shares of current Common Stock will remain
outstanding, unaffected by the Merger. As of May 10, 1999, there were 1,485,543
shares of Convertible Preferred Stock outstanding. FBW has reviewed selected
public and internal information of Emons as well as public information relating
to other companies in the railroad industry. FBW has also held several
discussions with the senior management of the Company.
The face value of the Convertible Preferred Stock plus accumulated
undeclared dividends totaled $4,738,882 on May 10, 1999, or $3.19 per share. To
realize this value, the holders of Convertible Preferred Stock would either (1)
have to be redeemed by the Company, (2) sell shares of Convertible Preferred
Stock on the OTC Bulletin Board at a price greater than $3.19, or (3) convert to
Common Stock and sell the shares when the market bid price is greater than $3.54
per share. The Convertible Preferred Stock has no mandatory redemption
provision and the holders have no right to elect a majority of the Board of
Directors to force a redemption. The trading market for the Convertible
Preferred Stock is highly illiquid, with average annual volumes of less than
100,000 shares for the last three years. The Company's cash flow cannot support
additional debt to finance a cash redemption and Emon's ability to raise
additional equity capital, that is not at a significant discount to its current
market price, is minimal given the current public market environment for micro
cap stocks. The only practical course of action for the holders of Convertible
Preferred Stock to realize value from their investment is to convert to Common
Stock and sell their shares in the market.
To induce the holders of Convertible Preferred Stock to convert their
shares to Common Stock, and thereby eliminate the class of Convertible Preferred
Stock from its capital structure, the Company is proposing to exchange each
share of Convertible Preferred Stock for 1.1 shares of Common Stock. The
increase in consideration received by the holders of Convertible Preferred Stock
(0.2 shares of Common Stock) in the proposed Merger reduces their current break-
even selling price from $3.54 to $2.90 per share. In addition, as holders of
Common Stock, they should benefit from the Company's ability to raise equity
capital in the future to fund growth opportunities, including potential
strategic acquisitions, which result in an increase in profitability and the
overall value of the Company.
By inducing the holders of Preferred Stock to convert at the proposed
exchange ratio, the Company simplifies its capital structure and eliminates a
claim senior to the holders of Common
-4-
<PAGE>
Stock at a value less than the present value of that claim. By using Common
Stock to remove the Convertible Preferred Stock from its capital structure, the
Company preserves cash in the short-term that can be used to fund current
operations and pay down debt. Additionally, with the elimination of the
Convertible Preferred Stock from its capital structure, the Company will be
positioned to raise equity capital in the future to fund future growth
opportunities, including potential strategic acquisitions, which result in an
increase in profitability and the overall value of the Company.
Based on our analysis, the aggregate consideration given to the holders of
Convertible Preferred Stock in the proposed Merger is greater than the
consideration they would receive under the current convertible terms and less
than the present value of their claim of approximately $4.9 million. While the
additional shares of consideration results in short-term dilution to the
existing holders of Common Stock, the Company is preserving cash that can be
invested in growing the business and improving its capital structure.
Therefore, in FBW's opinion, the exchange ratio in the proposed Merger is fair
to the holders of Preferred Stock and the holders of Common Stock from a
financial point of view.
$0.14 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock was issued in September 1989 as a result of
a merger between Emons Holdings, Inc. and Emons Merger Corporation. As a result
of the merger, holders of the then existing Senior Preferred Stock received
shares of the Convertible Preferred Stock in a one share for one share exchange.
The significant terms of the Convertible Preferred Stock are as follows: (i)
liquidation preference of $2.00 per share plus all accumulated undeclared
dividends; (ii) dividends of $0.14 per share, per annum, payable semi-annually;
(iii) redemption price of $2.00 per share (after September 27, 1997) plus all
accumulated undeclared dividends; (iv) right to vote as a class (one vote per
share) with holders of Common Stock on all matters; (v) convertible into 0.9
shares of Common Stock; and (vi) both Convertible Preferred Stock and Common
Stock issuable upon conversion are freely tradeable.
The Company has not declared or paid a dividend on the Convertible
Preferred Stock since July 1990. As of May 10, 1999, there were 1,485,543
shares of Convertible Preferred Stock outstanding. The current redemption price
of the Convertible Preferred Stock equals $2.00 per share plus $1.19 per share
of accumulated undeclared dividends for a total of $4,738,882.
The Convertible Preferred Stock has no mandatory redemption provision and
the holders do not have the right to elect a majority of the Board of Directors
to force a redemption. To realize the value of their investment, the holders of
Convertible Preferred Stock have to either (1) be redeemed by the Company, (2)
sell shares of Convertible Preferred Stock on the OTC Bulletin Board at a price
greater than $3.19, or (3) convert each share of Convertible Preferred Stock for
0.9 shares of Common Stock and sell the shares when the market bid price is
greater than $3.54 per share.
DUE DILIGENCE REVIEW
-5-
<PAGE>
As an integral part of the effort to determine the fairness of the proposed
Merger, FBW conducted an extensive review of the information provided by the
Company. Please refer to Exhibit C for a listing of information reviewed by
FBW. Charles W. Place, Vice President of FBW, also conducted several interviews
with management of Emons and participated in conversations with the Company's
counsel and accountants with respect to the proposed Merger. In general, FBW's
discussions centered on the following areas:
. The historical operating results and the outlook for growing Emons'
business.
. The qualitative benefits of the proposed Merger to the holders of
Convertible Preferred Stock and holders of Common Stock.
. The quantitative benefits of the proposed Merger to the holders of
Convertible Preferred Stock and holders of Common Stock.
VALUATION METHODOLOGY
FBW considered several methods in evaluating the effect of the Merger on
the holders of Convertible Preferred Stock and the holders of Common Stock. In
the proposed Merger, the holders of Convertible Preferred Stock will receive
additional consideration of 0.2 shares of Common Stock in exchange for each
share of Convertible Preferred Stock. FBW's analysis focused on determining the
Company's intrinsic value. From the Company's intrinsic value we subtracted
debt obligations and other senior claims to arrive at the Company's intrinsic
equity value. Multiplying the number of shares of Common Stock received by the
holders of Convertible Preferred Stock in the proposed Merger by the Company's
intrinsic equity value per share equals the aggregate value received by the
holders of Convertible Preferred Stock in the Merger. As long as this value is
greater than the value they would receive under the current convertible
provisions, the Merger is attractive to holders of Convertible Preferred Stock.
As long as this value is less than the present value claim of $4.9 million, the
Merger is attractive to the holders of Common Stock. To determine the Company's
intrinsic value, FBW employed the following valuation methods: (i) a discounted
future free cash flow analysis; and (ii) a comparable public company multiple
analysis.
Discounted Future Free Cash Flows
This methodology is premised on the assumption that a buyer purchases a
series of free cash flows that are generated by the assets of a business. This
analysis separates and ascribes value only to the cash flows that can ultimately
be taken out of the business. Cash that is generated but used to sustain the
business (such as increases in working capital and capital expenditures) creates
no incremental value to the buyer in and of itself. These free cash flows are
then discounted to the present at the Company's weighted-average cost of
capital. The weighted average cost of capital can be described as the average
price a company must pay to attract both debt and equity to properly capitalize
the firm's growth. It is this series or free cash flows that, when discounted
to the present, and after subtracting claims by debt holders and others,
represents the economic value of a firm to its shareholders.
-6-
<PAGE>
FBW used 8,202,523 shares outstanding for the purposes of determining the
Company's intrinsic equity value per share, which consists of 6,218,986 current
shares outstanding, 1,634,097 shares issued in the proposed Merger and 349,440
options and warrants. In addition, we considered discount rates of between
9.80% and 10.73%. The accuracy of this method of valuation depends largely on
the integrity of the projections provided by management, which are outlined in
Exhibit A.
Publicly Traded Comparable Companies
FBW compared the value of the Company to the relative value of publicly
traded companies that can be considered comparable to Emons. The purpose of
this analysis is to apply industry multiples to the Company's recent financial
results to derive a market-based estimate of the Company's intrinsic equity
value per share. For this analysis, FBW also used 8,202,523 shares outstanding
for the purposes of determining the Company's intrinsic equity value per share.
The Comparable companies used in this analysis include Providence & Worcester
Railroad Company, RailTex, Inc., Genesee & Wyoming, Inc., RailAmerica, Inc. and
Pioneer Railcorp. See Exhibit B for the detailed comparable public company
analysis. The pertinent performance measures are as follows:
. The Net Market Capital to Revenue ratio measures the enterprise value the
market is willing to pay per dollar of revenue. Among comparable
companies, this ratio can reflect and assign value to each company's
relative market position. In addition, for companies that are experiencing
rapid growth, either internally or through acquisition, the price to
revenue ratio can also be interpreted as a means to value this growth.
This ratio is far less consistent among comparable companies than ratios
that measure value in relation to some measure of earnings.
. The Net Market Capital to Earnings Before Interest and Taxes (EBIT) ratio
measures the enterprise value of the net operating assets as a multiple of
the company's operating income before interest and taxes. By focusing on
EBIT instead of net income, it is possible to decrease distortions among
comparable companies that are due to different levels of debt in the
capital structures, extraordinary items, varying tax rates, and other line
items that occur below the operating profit line. EBIT is calculated to
represent the pre-tax cash flow that would have resulted had the company
been financed on a total equity basis.
. The Price/Earnings (P/E) ratio is the most commonly utilized valuation
ratio. It can be understood as representative of what price the investor
will pay for a given amount of earnings that is available to the common
equity holder. The counter to this line of reasoning is that net income is
often a poor approximation of an actual cash flow theoretically available
to common shareholders. Before arriving at net income, companies in the
same industry may have numerous idiosyncratic accounting differences that
make their net income numbers less comparable.
. The Forward P/E ratio is similar to the P/E ratio mentioned above, however,
the Forward P/E ratio uses estimates of earnings for future fiscal years
versus the trailing twelve month
-7-
<PAGE>
earnings results and therefore provides an indication of how the company is
expected to perform in the future.
-8-
<PAGE>
SUMMARY VALUATION
The following table summarizes, for each relevant valuation methodology,
the intrinsic equity value per share and the aggregate consideration the
holders of Convertible Preferred Stock would receive in the proposed Merger
relative to the present value of their current claim of approximately $4.9
million. All data is in thousands except for per share data.
<TABLE>
<CAPTION>
EQUITY AGGREGATE
VALUE EXCHANGED VALUE OF CURRENT
VALUATION METHODOLOGY PER SHARE SHARES CONSIDERATION CLAIM DISCOUNT
- --------------------- --------- --------- -------------- ------- --------
<S> <C> <C> <C> <C> <C>
Current Stock Price $2.25 1,634 $3,677 $4,947 ($1,271)
Discounted Cash Flow:
WACC of 10.73% $2.35 1,634 $3,840 $4,947 ($1,107)
WACC of 9.80% $2.78 1,634 $4,543 $4,947 ($404)
Comparable Public Average
Multiples:
Revenue $1.87 1,634 $3,056 $4,947 ($1,891)
EBIT $1.51 1,634 $2,467 $4,947 ($2,480)
Earnings $1.73 1,634 $2,827 $4,947 ($2,120)
Forward Earnings $1.67 1,634 $2,729 $4,947 ($2,218)
Comparable Public Median
Multiples:
Revenue $1.92 1,634 $3,137 $4,947 ($1,810)
EBIT $1.10 1,634 $1,797 $4,947 ($3,150)
Earnings $1.75 1,634 $2,860 $4,947 ($2,088)
Forward Earnings $1.82 1,634 $2,974 $4,947 ($1,973)
</TABLE>
The following table summarizes, for each relevant valuation methodology,
the intrinsic equity value per share and the aggregate consideration the holders
of Convertible Preferred Stock would receive under the current convertible
provisions compared to the aggregate consideration received through the proposed
Merger. All data is in thousands except for per share data.
-9-
<PAGE>
<TABLE>
<CAPTION>
EQUITY CURRENT POST MERGER
VALUE EXCHANGED AGGREGATE AGGREGATE ADDITIONAL
VALUATION METHODOLOGY PER SHARE SHARES CONSIDERATION CONSIDERATION CONSIDERATION
- --------------------- --------- --------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current Stock Price $2.25 1,337 $3,008 $3,677 $668
Discounted Cash Flow:
WACC of 10.73% $2.44 1,337 $3,262 $3,840 $578
WACC of 9.80% $2.88 1,337 $3,851 $4,543 $692
Comparable Public Average
Multiples:
Revenue $1.94 1,337 $2,594 $3,056 $462
EBIT $1.57 1,337 $2,099 $2,467 $368
Earnings $1.80 1,337 $2,407 $2,827 $420
Forward Earnings $1.73 1,337 $2,313 $2,729 $416
Comparable Public Median
Multiples:
Revenue $1.99 1,337 $2,661 $3,137 $477
EBIT $1.15 1,337 $1,538 $1,797 $260
Earnings $1.81 1,337 $2,420 $2,860 $440
Forward Earnings $1.89 1,337 $2,527 $2,974 $447
</TABLE>
SUMMARY AND CONCLUSION
. The only practical course of action the holders of Convertible Preferred
Stock can take to realize the value of their investment is to convert to
Common Stock and sell shares in the market.
. The Company is fully leveraged and cannot pursue attractive investment
opportunities without the ability to raise equity capital.
. The proposed Merger is fair to the holders of Convertible Preferred Stock,
in that they are receiving additional consideration that lowers their
current break-even point from $3.54 to $2.90.
. The proposed Merger is fair to the holders of Common Stock, in that a
senior claim is being removed from the Company's capital structure at a
cost that is less than the present value of the claim.
-10-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS -- INCOME STATEMENT
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
-------------------------------------------------------------------
FORECAST FORECAST FORECAST
1995 1996 1997 1998 1999 2000 2001
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue 13,997 14,917 16,058 17,445 20,890 24,177 25,264
Operating Expenses 11,923 13,290 14,132 15,248 17,857 20,273 21,155
------- ------- ------- ------- ------- ------- -------
NET OPERATING PROFIT 2,074 1,627 1,926 2,197 3,033 3,904 4,109
Interest Expense, net 1,000 868 755 710 770 934 815
------- ------- ------- ------- ------- ------- -------
INCOME BEFORE TAXES 1,074 759 1,171 1,487 2,263 2,970 3,294
Income Tax Provision 308 289 397 (3,430) 705 954 1,075
------- ------- ------- ------- ------- ------- -------
Net Income $ 766 $ 470 $ 774 $ 4,917 $ 1,558 $ 2,016 $ 2,219
=====================================================================================================
Fully diluted EPS $ 0.20 $ 0.26 $ 0.28
Fully diluted EPS - Pro forma $ 0.19 $ 0.25 $ 0.27
Fully diluted shares 7,906 7,906 7,906
Fully diluted shares - Pro forma 8,203 8,203 8,203
</TABLE>
-11-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS -- BALANCE SHEET - ASSETS
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
------------------------------------------------------------------
FORECAST FORECAST FORECAST
1995 1996 1997 1998 1999 2000 2001
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash & Marketable Securities 1,233 1,265 1,515 1,315 3,566 4,594 5,984
Accounts Receivable 1,771 2,405 2,405 2,211 2,589 2,709 2,831
Prepaid Expenses 285 340 339 375 425 430 437
Other Current Assets 409 284 157 668 854 862 872
------- ------- ------- ------- ------- ------- -------
TOTAL CURRENT ASSETS 3,698 4,294 4,416 4,569 7,434 8,595 10,124
Property & Equipment 24,235 26,743 29,042 37,951 39,550 41,436 43,330
Accum Depreciation 7,550 8,491 9,649 11,566 12,434 14,261 16,184
------- ------- ------- ------- ------- ------- -------
NET PROP PLANT & EQUIP 16,685 18,252 19,393 26,385 27,116 27,175 27,146
Intangible and Other Assets 362 244 493 737 525 273 220
Deferred Taxes 0 0 0 945 703 0 0
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $20,745 $22,790 $24,302 $32,636 $35,778 $36,043 $37,490
================================================================================================
</TABLE>
-12-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS - BALANCE SHEET - LIABILITIES AND STOCKHOLDERS'
EQUITY
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
------------------------------------------------------------------
FORECAST FORECAST FORECAST
1995 1996 1997 1998 1999 2000 2001
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Portion LTD 819 968 888 662 1,859 1,826 2,074
Accounts Payable and Accrued Expenses 2,875 3,971 3,390 4,139 4,098 4,110 4,277
------- ------- ------- ------- ------- ------- -------
TOTAL CURRENT LIABS 3,694 4,939 4,278 4,801 5,957 5,936 6,351
Senior Long-Term Debt 10,043 10,118 10,976 15,443 15,807 13,960 11,886
Other Senior Liabs 602 601 814 758 758 758 758
------- ------- ------- ------- ------- ------- -------
TOTAL SENIOR LIABS 10,645 10,719 11,790 16,201 16,565 14,718 12,644
TOTAL LIABILITIES 14,339 15,658 16,068 21,002 22,522 20,654 18,995
Deferred Income Taxes 1,290 1,513 1,794 0 0 53 877
Convertible Preferred 4,663 4,771 4,920 0 0 0 0
Common Equity 453 858 1,520 11,634 13,256 15,336 17,618
------- ------- ------- ------- ------- ------- -------
NET WORTH 5,116 5,629 6,440 11,634 13,256 15,336 17,618
- ---------------------------------------------------------------------------------------------------------
TOTAL LIAB & NET WORTH $20,745 $22,800 $24,302 $32,636 $35,778 $36,043 $37,490
=========================================================================================================
</TABLE>
-13-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS - NOPAT
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------------------------------------------------------
FORECAST FORECAST FORECAST
1995 1996 1997 1998 1999 2000 2001
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues 13,997 14,917 16,058 17,445 20,890 24,177 25,264
Operating Expenses 11,923 13,290 14,132 15,248 17,857 20,273 21,155
Amortization (120) (127) (130) (154) (144) (123) (116)
------ ------ ------ ------ ------ ------ ------
Total Operating Expenses 11,803 13,163 14,002 15,094 17,713 20,150 21,039
------ ------ ------ ------ ------ ------
ADJUSTED EBIT 2,194 1,754 2,056 2,351 3,177 4,027 4,225
CASH OPERATING TAX 105 96 107 115 119 183 199
- ----------------------------------------------------------------------------------------------
NOPAT 2,089 1,658 1,949 2,236 3,058 3,844 4,026
==============================================================================================
</TABLE>
-14-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS - CAPITAL
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------------------------------------------------
FORECAST FORECAST FORECAST
1995 1996 1997 1998 1999 2000 2001
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Operating Assets 3,648 4,215 4,346 4,093 5,481 5,943 6,190
NIBCLs 2,875 3,971 3,390 4,139 4,098 4,110 4,277
------ ------ ------ ------ ------ ------ ------
NET WORKING CAPITAL 773 244 956 (46) 1,383 1,833 1,913
Net Prop Plant & Equip 16,685 18,252 19,393 26,385 27,116 27,175 27,146
Accumulated Goodwill 120 247 377 531 675 798 914
Intangible and Other Assets 362 244 493 737 525 273 220
- -------------------------------------------------------------------------------------------
CAPITAL 17,940 18,987 21,219 27,607 29,699 30,079 30,193
===========================================================================================
</TABLE>
-15-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS - WEIGHTED AVERAGE COST OF CAPITAL
<TABLE>
<CAPTION>
<S> <C> <C>
= Weighted Average + Weighted Average
Cost of Debt Cost of Equity
= Incremental Borrowing + Risk Free Rate + Equity Risk Premium + Small Cap. Premium
Cost X (1-Tax Rate) + (7.8% x .88)
= (8.00% X (1-36.0%)) + 5.36% + 5.36%
= 5.12% X % of Debt + 17.58% X % of Equity
Debt Equity Weighting = 45.0%
Weighting = 55.0%
= 2.82% + 7.91%
= 10.73%
</TABLE>
-16-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS - INTRINSIC VALUE PER SHARE
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
NOPAT-INV PV FACTOR X
(1) FCF
YEAR NOPAT INVESTMENT FCF PV FACTOR PRESENT VALUE
OF FCF
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 3,058 2,092 966 0.9503 918
2000 3,844 379 3,464 0.8582 2,973
2001 4,026 115 3,911 0.7751 3,032
2002 & Beyond 4,041(3) 0 4,041 7.2246(2) 29,196
------
INTRINSIC TOTAL VALUE 36,119
ASSUMING NO CONVERSION
Total Debt 16,105
Other Liabilities 758
INTRINSIC COMMON EQUITY VALUE ------ Intrinsic Equity Value 19,256
19,256
Less PV of Convertible
Preferred Stock 4,947
Number of Shares Outstanding - Pro forma 8,203
INTRINSIC SHARE VALUE - PRO FORMA $2.35 Intrinsic Common
Equity Value 14,309
Number of Shares Outstanding - Current 7,906 Number of Shares
Outstanding 6,568
INTRINSIC SHARE VALUE - CURRENT $2.44
INTRINSIC VALUE $2.18
PER SHARE
- ---------------------------
</TABLE>
(1) Cash flows discounted from mid-year
(2) Present Value of $1 in perpetuity beginning in 2002
(3) NOPAT increases by $15.3 based on a return of 13.38% on 2001 investment of
$114.6
-17-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS - WEIGHTED AVERAGE COST OF CAPITAL
<TABLE>
<CAPTION>
<S> <C> <C>
= Weighted Average + Weighted Average
Cost of Debt Cost of Equity
= Incremental Borrowing + Risk Free Rate + Equity Risk Premium + Small Cap. Premium
Cost X (1-Tax Rate) + (7.8% x .88)
= (8.00% X (1-36.0%)) + 5.36% + 3.30%
= 5.12% X % of Debt + 15.52% X % of Equity
Debt Equity Weighting = 45.0%
Weighting = 55.0%
= 2.82% + 6.98%
= 9.80%
</TABLE>
-18-
<PAGE>
FAIRNESS OPINION OF FBW
DISCOUNTED CASH FLOW ANALYSIS - INTRINSIC VALUE PER SHARE
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
NOPAT-INV PV FACTOR X
(1) FCF
YEAR NOPAT INVESTMENT FCF PV FACTOR PRESENT VALUE
OF FCF
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 3,058 2,092 966 0.9543 922
2000 3,844 379 3,464 0.8691 3,011
2001 4,026 115 3,911 0.7915 3,096
2002 & Beyond 4,041(3) 0 4,041 8.0755(2) 32,635
------
INTRINSIC TOTAL VALUE 39,664
ASSUMING NO CONVERSION
Total Debt 16,105
Other Liabilities 758
INTRINSIC COMMON EQUITY VALUE ------ Intrinsic Equity Value 22,801
22,801 Less PV of Convertible
Preferred Stock 4,947
Number of Shares Outstanding - Pro forma 8,203
INTRINSIC SHARE VALUE - PRO FORMA $2.78 Intrinsic Common
Equity Value 17,854
Number of Shares Outstanding - Current 7,906 Number of Shares
Outstanding 6,568
INTRINSIC SHARE VALUE - CURRENT $2.88 INTRINSIC VALUE
PER SHARE $2.72
- ---------------------------
</TABLE>
(1) Cash flows discounted from mid-year
(2) Present Value of $1 in perpetuity beginning in 2002
(3) NOPAT increases by $15.3 based on a return of 13.38% on 2001 investment of
$114.6
-19-
<PAGE>
<TABLE>
<CAPTION>
EMONS TRANSPORTATION GROUP
Comparable Company Analysis
MARKET
DATA
Fiscal Four Stock Share Market
Year Quarters Price Out. Value
Ticker End Ended 5/10/99 (000's) ($000's)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Genesee & Wyoming, Inc. GNWR Dec 12/31/98 $ 10.94 5,229 57,195
Pioneer Railcorp PRRR Dec 12/31/98 $ 1.50 4,610 6,915
Providence & Worcester RR PWX Dec 12/31/98 $ 12.50 4,240 53,000
RailAmerica, Inc. RAIL Dec 12/31/98 $ 9.56 10,306 98,525
RailTex, Inc. RTEX Dec 12/31/98 $ 14.25 9,251 131,827
- ------------------------------------------------------------------------------------
EMONS TRANSPORTATION EMON JUNE 12/31/98 $ 2.25 8,203 18,457
GROUP(4)
- ------------------------------------------------------------------------------------
FINANCIAL DATA
(TRAILING FOUR QUARTERS, IN $ THOUSANDS)
Net Earnings Total Total Common Total
Revenues EBIT Income Per Assets Debt(2) Equity Capital
(1) Share (3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Genesee & Wyoming, Inc. 147,472 19,568 11,434 2.19 216,760 63,690 74,537 174,608
Pioneer Railcorp 13,514 2,010 425 0.09 24,504 13,199 3,981 19,725
Providence & Worcester RR 22,738 2,702 3,784 0.89 84,594 0 63,709 79,446
RailAmerica, Inc. 77,143 12,642 4,401 0.43 145,229 72,721 34,760 130,541
RailTex, Inc. 161,020 27,652 11,075 1.20 362,345 131,765 144,148 313,042
- ------------------------------------------------------------------------------------------------------------------
EMONS TRANSPORTATION 19,527 2,568 1,023 0.12 33,582 16,105 12,387 29,274
GROUP(4)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings Before Interest and Taxes.
(2) Total Debt includes Current Portion of Long Term Debt.
(3) Includes Total Debt, Common and Preferred Equity, Other Liabilities and
Deferred Taxes.
(4) Net income has been adjusted to eliminate tax benefit of $3.4 million and
applying an effective tax rate of 36% to pre-tax earnings.
-20-
<PAGE>
<TABLE>
<CAPTION>
EMONS TRANSPORTATION GROUP
Comparable Company Analysis
MARGIN ANALYSIS PROFITABILITY LIQUIDITY & LEVERAGE VALUATION RATIOS Mkt. Val
RATIOS to
Return Return Total Total Mkt. Val. Forward
on on Debt/ Debt/ Net Mkt. to Earnings
EBIT Net Common Total Current Common Total Capital(1) Earnings (Forward
Company Margin Margin Equity Assets Ratio Equity Capital to EBIT (P/E) P/E)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Genesee & Wyoming, Inc. 13.3% 7.8% 15.3% 5.3% 1.3 85.4% 36.5% 5.4 5.0 5.9
Pioneer Railcorp 14.9% 3.1% 10.7% 1.7% 0.7 331.6% 66.9% 9.8 16.3 N/A
Providence & Worcester RR 11.9% 16.6% 5.9% 4.5% 2.6 0.0% 0.0% 16.9 14.0 10.0
RailAmerica, Inc. 16.4% 5.7% 12.7% 3.0% 1.8 209.2% 55.7% 13.6 22.4 9.7
RailTex, Inc. 17.2% 6.9% 7.7% 3.1% 0.9 91.4% 42.1% 9.5 11.9 9.5
- ------------------------------------------------------------------------------------------------------------------------------
Average 14.7% 8.0% 10.5% 3.5% 1.5 143.5% 40.2% 11.1 13.9 8.8
Median 14.9% 6.9% 10.7% 3.1% 1.3 128.3% 91.4% 9.8 14.0 9.6
- ------------------------------------------------------------------------------------------------------------------------------
Emons Transportation Group 13.2% 5.2% 8.3% 3.0% 1.1 130.0% 55.0% 12.7 18.0 11.8
- ------------------------------------------------------------------------------------------------------------------------------
Valuation Ratio
-------------------
Mkt.
Val. Net Mkt.
to Book Cap.(1)
Value to
(Equity) Revenue
- ---------------------------------------------------------------------------
<C> <C>
0.8 0.72
1.7 1.45
0.8 2.01
2.8 2.23
0.9 1.63
- ---------------------------------------------------------------------------
1.4 1.61
0.9 1.63
- ---------------------------------------------------------------------------
1.5 1.68
- ---------------------------------------------------------------------------
</TABLE>
(1) Market Value Common and Preferred Equity plus Debt less Cash.
-21-
<PAGE>
COMPARABLE MULTIPLE ANALYSIS - AVERAGE
<TABLE>
<CAPTION>
LTM Average Implied Less Implied Shares Per
Company Industry Intrinsic Less Convertible Equity Outstanding Share
Revenues Mutiple Value Debt Pref Stock Value (`000) Value
------- ------- ------- ---- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current Shares - no conversion $19,527 1.61 $31,438 $16,105 $4,739 $10,594 6,568 $1.61
Current Shares - w/conversion $19,527 1.61 $31,438 $16,105 $ 0 $15,333 7,906 $1.94
Pro Forma Shares - w/conversion $19,527 1.61 $31,438 $16,105 $ 0 $15,333 8,203 $1.87
LTM Average Implied Less Implied Shares Per
Company Industry Intrinsic Less Convertible Equity Outstanding Share
EBIT Mutiple Value Debt Pref Stock Value (`000) Value
------- ------- ------- ---- ------ ------- ----- -----
Current Shares - no conversion $ 2,568 11.1 $28,505 $16,105 $4,739 $ 7,661 6,568 $1.17
Current Shares - w/conversion $ 2,568 11.1 $28,505 $16,105 $ 0 $12,400 7,906 $1.57
Pro Forma Shares - w/conversion $ 2,568 11.1 $28,505 $16,105 $ 0 $12,400 8,203 $1.51
LTM Average Implied Shares Per
Company Industry Equity Outstanding Share
Earnings (1) Mutiple Value (`000) Value
----------- -------- ------- ----- ------
Current Shares - no conversion $ 805 13.9 $11,190 $ 6,568 $ 1.70
Current Shares - w/conversion $ 1,023 13.9 $14,220 $ 7,906 $ 1.80
Pro Forma Shares - w/conversion $ 1,023 13.9 $14,220 $ 8,203 $ 1.73
(1) Earnings have been adjusted to eliminate tax benefit of $3.4 million
and an effective tax rate of 36% has been applied to pre-tax earnings.
Forward Average Implied Shares Per
Company Industry Equity Outstanding Share
Earnings Mutiple Value (`000) Value
------- ------- ------- ------- ------
Current Shares - no conversion $ 1,350 8.8 $11,880 $ 6,568 $ 1.81
Current Shares - w/conversion $ 1,558 8.8 $13,710 $ 7,906 $ 1.73
Pro Forma Shares - w/conversion $ 1,558 8.8 $13,710 $ 8,203 $ 1.67
</TABLE>
-22-
<PAGE>
COMPARABLE MULTIPLE ANALYSIS - MEDIAN
<TABLE>
<CAPTION>
LTM Median Implied Less Implied Shares Per
Company Industry Intrinsic Less Convertible Equity Outstanding Share
Revenues Mutiple Value Debt Pref Stock Value (`000) Value
-------- ------- ------- ---- ---------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current Shares - no conversion $19,527 1.63 $31,829 $16,105 $4,739 $10,985 6,568 $1.67
Current Shares - w/conversion $19,527 1.63 $31,829 $16,105 $ 0 $15,724 7,906 $1.99
Pro Forma Shares - w/conversion $19,527 1.63 $31,829 $16,105 $ 0 $15,724 8,203 $1.92
LTM Median Implied Less Implied Shares Per
Company Industry Intrinsic Less Convertible Equity Outstanding Share
EBIT Mutiple Value Debt Pref Stock Value (`000) Value
------- ------- ------- ---- ---------- ------- ----- -----
Current Shares - no conversion $ 2,568 9.8 $25,166 $16,105 $4,739 $ 4,322 6,568 $0.66
Current Shares - w/conversion $ 2,568 9.8 $25,166 $16,105 $ 0 $ 9,061 7,906 $1.15
Pro Forma Shares - w/conversion $ 2,568 9.8 $25,166 $16,105 $ 0 $ 9,061 8,203 $1.10
LTM Median Implied Shares Per
Company Industry Equity Outstanding Share
Earnings (1) Mutiple Value (`000) Value
----------- ------- ------- ------- ------
Current Shares - no conversion $ 805 14.0 $11,270 $ 6,568 $ 1.72
Current Shares - w/conversion $ 1,023 14.0 $14,322 $ 7,906 $ 1.81
Pro Forma Shares - w/conversion $ 1,023 14.0 $14,322 $ 8,203 $ 1.75
(1) Earnings have been adjusted to eliminate tax benefit of $3.4 million
and an effective tax rate of 36% has been applied to pre-tax earnings.
Forward Median Implied Shares Per
Company Industry Equity Outstanding Share
Earnings Mutiple Value (`000) Value
------- ---- ------- ------- ------
Current Shares - no conversion $ 1,350 9.6 $12,960 $ 6,568 $ 1.97
Current Shares - w/conversion $ 1,558 9.6 $14,957 $ 7,906 $ 1.89
Pro Forma Shares - w/conversion $ 1,558 9.6 $14,957 $ 8,203 $ 1.82
</TABLE>
-23-
<PAGE>
LIST OF INFORMATION REVIEWED
. Annual Reports and 10-K's for the fiscal years ended June 30, 1996, 1997 and
1998.
. Quarterly Reports on Form 10-Q for the periods ended September 30, 1998,
December 31, 1998 and March 31, 1999.
. Internal, non-public budgets and projections for fiscal years 1999, 2000 and
2001.
. Publicly available financial data of regional railroad companies which FBW
deemed to be comparable to the Company.
. Notice of Special Meeting of Stockholders and Proxy Statement, dated August
23, 1989.
. Draft Proxy Statement for the Special Meeting of Stockholders, dated April
28, 1999.
. Historical stock price for the Company.
. Company press releases for last twelve months.
. The 1998 yearbook for Stocks Bonds Bills and Inflation, authored by Ibbotson
Associates.
-24-
<PAGE>
LIST OF INFORMATION REVIEWED
. Annual Reports and 10-K's for the fiscal years ended June 30, 1996, 1997
and 1998.
. Quarterly Reports on Form 10-Q for the periods ended September 30, 1998 and
December 31, 1998.
. Internal, non-public budgets and projections for fiscal years 1999, 2000
and 2001.
. Publicly available financial data of regional railroad companies which FBW
deemed to be comparable to the Company.
. Notice of Special Meeting of Stockholders and Proxy Statement, dated August
23, 1989.
. Draft Proxy Statement for the Special Meeting of Stockholders, dated
February 11, 1999.
. Historical stock price for the Company
. Company press releases for last twelve months
. The 1998 yearbook for Stocks Bonds Bills and Inflation, authored by
Ibbotson Associates.
-22-
<PAGE>
ANNEX C
-------
TERMS OF $.14 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
(ARTICLE FOURTH, SECTION 4, OF THE CERTIFICATE OF INCORPORATION OF
EMONS TRANSPORTATION GROUP, INC.)
(a) Designation of Series. 2,300,000 shares of the series of Preferred
---------------------
Stock authorized by this Article FOURTH are hereby designated as $.14
Series A Cumulative Convertible Preferred Stock (hereinafter called the
"Series A Preferred Stock"), having the voting powers, designations,
preferences and rights and qualifications, limitations and restrictions set
forth herein. The shares of the Series A Preferred Stock shall be fully-
paid and non-assessable. All shares of Series A Preferred Stock redeemed,
and all shares of Series A Preferred Stock otherwise purchased or acquired
by the Corporation (including shares of Series A Preferred Stock that shall
be converted) shall have the status of authorized but unissued shares of
preferred stock and any such shares may be reissued as shares of the Series
A Preferred Stock or of any other series.
The number of shares of Series A Preferred Stock may be decreased (but
not below the number of such shares then outstanding) but not increased by
a certificate executed, acknowledged, filed, and recorded in accordance
with Section 103 of the General Corporation Law of the State of Delaware
setting forth a statement that a specified decrease therein had been
authorized and directed by a resolution or resolutions adopted by the Board
of Directors pursuant to authority expressly vested in it by the provisions
of the Certificate of Incorporation.
(b) Dividends. The holders of Series A Preferred Stock shall be
---------
entitled to receive, when and as declared by the Board of Directors out of
funds legally available for the purpose, dividends in cash at the rate of
$.14 per share per annum, and no more, payable semi-annually at the rate of
$.07 per share (except for the initial dividend, which shall be payable at
a rate per share (rounded to the nearest cent) equal to the amount accrued
per share at the annual rate for the number of days in the period between
the date of original issuance of the Series A Preferred Stock and the date
the first semi-annual dividend is payable) on the first day of January and
July in each year for the semi-annual (except for the initial dividend)
dividend periods ending respectively on the dates immediately preceding
such dates, commencing on the first of such dates occurring after 45 days
after the date of original issuance of the Series A Preferred Stock.
Dividends on the Series A Preferred Stock shall be cumulative from and
after the date of original issuance, whether or not earned or declared and
whether or not there shall be funds of the Corporation legally available
for the payment of such dividends. Accruals and accumulations of dividends
shall not bear interest. The date of original issuance of the shares of
Series A Preferred Stock issued upon the effectiveness of the Merger
between the Corporation and Emons Merger Corporation (the "Merger") shall
be the effective date of the Merger.
So long as any shares of Series A Preferred Stock shall be
outstanding, the Corporation shall not declare or pay, or set apart for
payment, any dividends or make any distribution in cash or other property
(other than dividends or distributions in shares of any class or series of
stock of the Corporation ranking junior to Series A Preferred Stock with
respect to dividends) on any class or series of stock of the Corporation
ranking junior to Series A Preferred Stock with respect
-1-
<PAGE>
to dividends and shall not redeem, purchase, or otherwise acquire, directly
or indirectly (other than (x) through exchange for, or out of net cash
proceeds received by the Corporation or any of its subsidiaries after the
original date of issuance of the Series A Preferred Stock from the sale of
shares of, any class or series of stock of the Corporation ranking junior
to Series A Preferred Stock with respect to liquidation preference or (y)
upon the conversion of shares of stock of the Corporation), any shares of
any class or series of stock of the Corporation ranking junior to Series A
Preferred Stock with respect to liquidation preference, if at the time of
making such declaration, payment, setting apart, distribution, redemption,
purchase, or acquisition, full cumulative dividends upon all outstanding
shares of Series A Preferred Stock to the end of the last completed
dividend period shall not have been paid or declared and set apart for
payment. So long as any shares of Series A Preferred Stock shall be
outstanding, the Corporation shall not declare, with respect to any
dividend period, any dividends on any class or series of stock of the
Corporation ranking on a parity with the Series A Preferred Stock with
respect to dividends, unless the Corporation shall have likewise declared
dividends on the Series A Preferred Stock for all dividend periods
coinciding with or ending before such dividend period, ratably in
proportion to the respective annual dividend rates for Series A Preferred
Stock and for such other class or series.
(c) Liquidation Rights. In the event of any liquidation, dissolution,
------------------
or winding up of the Corporation, whether voluntary or involuntary, the
holders of Series A Preferred Stock shall be entitled to receive or to have
set apart for them, before any payment or distribution of the assets of the
Corporation shall be made to or set apart for any class or series of stock
of the Corporation ranking junior to the Series A Preferred Stock with
respect to liquidation preference, an amount equal to $2.00 per share, plus
an amount equal to all dividends accrued, accumulated, and unpaid thereon
to the date of final distribution to such holders; but they shall be
entitled to no further payment. If the assets of the Corporation
distributable to shares of the Series A Preferred Stock and to shares of
any class or series of stock of the Corporation ranking on a parity with
the Series A Preferred Stock with respect to liquidation preference shall
be insufficient to provide for full payment of the preferential amounts to
which the holders thereof are respectively entitled, the Corporation shall
make payments on shares of the Series A Preferred Stock and on shares of
any such class or series ratably in accordance with the preferential
amounts to which such shares are respectively entitled.
For the purposes of this section (c), no sale, conveyance, exchange,
or transfer (for cash, shares of stock, securities, or other consideration)
of all or substantially all of the property or assets of the Corporation,
no reorganization of the Corporation, and no consolidation or merger of the
Corporation with one or more corporations shall be deemed to be a
liquidation, dissolution, or winding up, voluntary or involuntary.
(d) Voting. The holders of Series A Preferred Stock shall be entitled to
------
vote, together with holders of Common Stock, par value $.01 per share
("Common Stock") as a single class (on the basis of one vote per share), at
any election of directors or on any other matter submitted to stockholders
of the Corporation.
-2-
<PAGE>
So long as any shares of Series A Preferred Stock shall be
outstanding, the Corporation shall not create any class or series of stock
ranking, either as to payment of dividends or as to liquidation preference,
prior to the Series A Preferred Stock.
(e) Redemption and Purchase of Series A Preferred Stock. The Series A
---------------------------------------------------
Preferred Stock may be redeemed at the option of the Corporation, in whole
at any time or in part from time to time, out of funds legally available
therefor, on or after the second anniversary of the date of original
issuance of the Series A Preferred Stock, upon the notice hereinafter
provided for, by the payment therefor in cash of an amount per share
(rounded, in the case of any fraction of a cent, to the next highest cent)
equal to the following redemption prices, plus an amount per share (rounded
to the nearest cent) equal to the amount accrued per share at the annual
dividend rate for the number of days in the period between (i) the end of
the last completed dividend period as to which dividends have been or are
paid on the shares to be redeemed, and (ii) the date of the notice
hereinafter provided for:
<TABLE>
<CAPTION>
If Redeemed During the 12
Months Beginning October 1 Per Share Redemption Price
-------------------------- --------------------------
<S> <C>
1991 $2.25 per share
1992 2.20
1993 2.15
1994 2.10
1995 2.05
1996 and thereafter 2.00
</TABLE>
Notwithstanding the foregoing, no shares of Series A Preferred Stock
or of any other series of Preferred Stock shall be redeemed unless, on the
date fixed for redemption, full cumulative dividends upon all outstanding
shares of Series A Preferred Stock and all other series of Preferred Stock
of the Corporation to the end of their respective last completed dividend
period shall have been paid or declared and set apart for payment.
If at any time less than all of the shares of Series A Preferred Stock
then outstanding shall be called for redemption, the shares to be redeemed
shall be selected by lot in a manner determined by the Board of Directors
of the Corporation.
Notice of any proposed redemption of Series A Preferred Stock shall be
given by the Corporation by first class mail, postage prepaid, not more
than 60 nor less than 15 days prior to the date of redemption, to the
holders of record of the shares to be redeemed at their respective
addresses then appearing on the records of the Corporation. Such notice
shall set forth the date of redemption, the place for surrender of
certificates for shares to be redeemed; and a statement of or reference to
the conversion right set forth in section (f) below, including the period
within which the conversion right may be exercised and the applicable
conversion rate.
On or before the redemption date, the Corporation shall deposit in
trust with any transfer agent or other agent, or set aside in trust, out of
funds legally available therefor, separate and
-3-
<PAGE>
apart from the other funds of the Corporation, for the account of the
holders of the shares of Series A Preferred Stock to be redeemed, the
moneys necessary for such redemption. Upon (i) the depositing or setting
aside of such moneys (whether on or before the date of redemption) and (ii)
the mailing, as hereinabove provided, of the notice of such redemption, all
shares of Series A Preferred Stock with respect to the redemption of which
such deposit or setting aside shall have been made and such mailing
effected shall, whether or not the certificates for such shares shall have
been surrendered for cancellation, be deemed to be no longer outstanding
and all rights with respect to such shares shall thereupon cease and
terminate, except for the right of the holders of the certificates for such
shares to receive out of the moneys so deposited or set aside in trust,
from and after the redemption date and upon actual surrender of the
Corporation, or, in the event of such deposit, to the transfer agent or
other agent with which such deposit shall be made, of such certificates,
duly endorsed or assigned for transfer (unless such endorsement or
assignment be waived by the Corporation), the amount payable upon the
redemption thereof, without interest, and except for the right of the
holders of certificates for such shares to convert such shares as provided
in the third paragraph of section (f). Notwithstanding anything to the
contrary contained in this section (e), moneys deposited or set aside in
trust for the redemption of shares of Series A Preferred Stock converted
subsequent to the making of such deposit or such setting aside shall be
repaid to the Corporation, or shall become unrestricted moneys by the
Corporation, as the case may be, forthwith upon the conversion of such
shares. At the expiration of two years after the redemption date (or prior
to any earlier date on which such moneys would otherwise escheat to or
become the property of any governmental unit or agency thereof), any such
moneys then remaining on deposit with such transfer agent or other agent
shall be paid over to the Corporation, free of trust and any such moneys
then set apart by the Corporation shall become unrestricted moneys of the
Corporation, free of trust, and thereafter the holders of the certificates
for such shares of Series A Preferred Stock shall have no claims against
such transfer agent or other agent, but only claims as unsecured creditors
against the Corporation for amounts equal to their pro rata portions of the
moneys so paid over, without interest. Interest, if any, accrued on moneys
deposited or set aside pursuant to the foregoing provisions shall belong to
the Corporation.
The Corporation may also from time to time purchase or otherwise
acquire shares of Series A Preferred Stock or of any other series of
Preferred Stock theretofore issued and at the time outstanding, except that
whenever full cumulative dividends upon all outstanding shares of Series A
Preferred Stock and all other series of Preferred Stock to the end of their
respective last completed dividend periods shall not have been paid or
declared and set aside for payment, then until full cumulative dividends
upon all outstanding shares of Series A Preferred Stock and all other
series of Preferred Stock to the end of their respective last completed
dividend periods shall have been paid or declared and set aside for
payment, the Corporation shall not purchase or otherwise acquire any shares
of Series A Preferred Stock or of any other series of Preferred Stock other
than (x) in accordance with a tender offer or purchase offer made by the
Corporation to all holders of record of all series of Preferred Stock
providing for the purchase of shares at a stated price or prices and upon
stated terms or (y) upon the conversion of the shares of Series A Preferred
Stock or of any other series of Preferred Stock.
In case less than all the shares of Series A Preferred Stock
represented by any certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
-4-
<PAGE>
The shares of the Series A Preferred Stock shall not be entitled to
the benefit of any sinking fund or purchase fund.
(f) Conversion. The shares of the Series A Preferred Stock shall be
----------
convertible at the option of the holders thereof into fully paid and non-
assessable shares of the Common Stock, par value $.01 per share, of the
Corporation (the "Common Stock") at the rate of .9 shares of the Common
Stock for each share of the Series A Preferred Stock.
Each holder of Series A Preferred Stock desiring to exercise his right
of conversion shall deliver written notice of his election to convert
Series A Preferred Stock, stating the names and addresses of the persons to
whom the Common Stock is to be issued, and shall surrender the certificate
for such shares of Series A Preferred Stock, duly endorsed or assigned for
transfer (unless such endorsement or assignment be waived by the
Corporation), to the Corporation at the office of the transfer agent for
the Series A Preferred Stock. In case less than all the shares of Series A
Preferred Stock represented by any certificate are converted, such notice
shall also state the number of shares to be converted, and a new
certificate shall be issued representing the unconverted shares. Upon
receipt by the Corporation of any notice of election to convert Series A
Preferred Stock and upon surrender of the certificate therefor, the
Corporation shall execute and deliver, as soon as practicable, to the
converting holder of Series A Preferred Stock, a certificate or
certificates for the number of shares of Common Stock resulting from such
conversion, together with any cash adjustment in lieu of fractional shares.
For all purposes, the rights of a converting holder of Series A Preferred
Stock as such shall cease as to the shares converted, and the person or
persons in whose name or names the certificates for Common Stock issuable
upon such conversion are to be issued shall be deemed to have become the
record holder or holders of such Common Stock, at the close of business on
the day on which delivery of such notice or the surrender of the
certificate for such shares (whichever shall last occur) shall be made.
The Corporation shall pay all issue and transfer taxes, if any, incurred in
respect of the Common Stock delivered on the conversion; provided, however,
that the Corporation shall not be required to pay any transfer or other
taxes, if any, incurred by reason of the issuance or delivery of such
Common Stock in names other than those in which the Series A Preferred
Stock surrendered for conversion is registered, and no such issuance or
delivery shall be made unless and until there has been paid to the
Corporation the amount of any such taxes, or there shall have been
established to the satisfaction of the Corporation that such taxes have
been paid.
In case of the Corporation's redemption of any shares of the Series A
Preferred Stock, such right of conversion shall end, as to the shares
called for redemption, at the later of (i) the close of business on the
fifth business day prior to the date fixed for redemption and (ii) the
close of business fifteen days after the day notice of redemption shall be
given by the Corporation to the holders of record of the shares to be
redeemed, unless default shall be made in the payment of the redemption
price, in which case the right of conversion shall be deemed to continue
until such default is cured. In the event of the liquidation, dissolution,
or winding up of the Corporation, such right of conversion shall end at the
close of business on the tenth business day prior to the date fixed for the
first distribution of the assets of the Corporation to the holders of
Series A Preferred Stock. Upon conversion, the Corporation shall make no
payment or adjustment on account of dividends accrued, accumulated, and
unpaid (other than dividends
-5-
<PAGE>
payable to holders of Series A Preferred Stock
as of a record date prior to such conversion) on the shares of Series A
Preferred Stock surrendered for conversion.
The number of shares of the Common Stock into which each share of the
Series A Preferred Stock is convertible shall be subject to the following
adjustments from time to time and after the happening of each of the
following events only as follows:
(A) In case the Corporation shall (1) pay a dividend or make a
distribution on the outstanding shares of the Common Stock payable in
shares of the Common Stock, (2) subdivide the outstanding shares of
the Common Stock into a larger number of shares, (3) combine the
outstanding shares of the Common Stock into a smaller number of
shares, or (4) issue by reclassification of the Common Stock any
shares of the Corporation, each holder shall thereafter be entitled
upon a conversion to receive for each share of the Series A Preferred
Stock held by him the number of shares of the Corporation which he
would have owned or have been entitled to receive after the happening
of any of the events described above in this subsection (A) which
shall have happened had such share of the Series A Preferred Stock
been converted immediately prior to the happening of such event. Such
adjustment shall become effective on the day next following (x) the
record date of such dividend or distribution or (y) the day upon which
subdivision, combination or reclassification shall become effective.
(B) In case the Corporation shall consolidate or merge into or
with another corporation, or in case the Corporation shall sell or
convey to any other person or persons all or substantially all the
property of the Corporation, each holder of the Series A Preferred
Stock then outstanding shall have the right thereafter to convert each
share of Series A Preferred Stock held by him into the kind and amount
of shares of stock, other securities, cash, and property receivable
upon such consolidation, merger, sale, or conveyance by a holder of
the number of shares of Common Stock into which such share might have
been converted immediately prior to such consolidation, merger, sale,
or conveyance, and shall have no other conversion rights. In any
event, effective provision shall be made, in the certificate or
articles of incorporation of the resulting or surviving corporation or
otherwise or in any contract of sale and conveyance so that, so far as
appropriate and as nearly as reasonably may be, the provisions set
forth herein for the protection of the conversion rights of the shares
of the Series A Preferred Stock shall thereafter be made applicable.
(C) In case the Corporation shall issue rights or warrants to the
holders of the Common Stock entitling them (for a period expiring
within 45 days after the record date mentioned in the next sentence)
to subscribe for or purchase shares of the Common Stock at a price per
share less than the current market price per share of the Common Stock
(as defined in subsection (E) below) at such record date, the number
of shares of the Common Stock into which each share of the Series A
Preferred Stock shall thereafter be convertible shall be determined by
multiplying the number of shares of the Common Stock into which such
share of
-6-
<PAGE>
the Series A Preferred Stock was theretofore convertible by a
fraction, of which the numerator shall be the number of shares of the
Common Stock outstanding at the opening of business on such record
date plus the number of additional shares of the Common Stock offered
for subscription or purchase, and of which the denominator shall be
the number of shares of the Common Stock outstanding at the opening of
business on such record date plus the number of shares of the Common
Stock which could be purchased at such current market price using the
aggregate exercise price of all such rights or warrants as the
purchase price for such shares. Such adjustment shall become effective
on the day next following the record date for the determination of
stockholders entitled to receive such rights or warrants.
(D) In case the Corporation shall distribute to all holders of
its Common Stock, and not to the holders of Series A Preferred Stock,
any assets or evidences of indebtedness of the Corporation of a value
per share in excess of 5% of the current market price per share of the
Common Stock (as defined in subsection (E) below) at the record date
mentioned below in any consecutive 12-month period (excluding
dividends paid in, or distributions of, cash), then the number of
shares of Common Stock into which each such share of Series A
Preferred Stock shall be convertible on the day next following the
record date for such distribution shall be determined by multiplying
the number of shares of Common Stock into which such share of Series A
Preferred Stock was theretofore convertible by a fraction, of which
the numerator shall be the current market price per share of the
Common Stock (as defined in subsection (E) below) at such record date
and of which the denominator shall be the current market price per
share of the Common Stock at such record date less the value at such
record date of the portion of the assets or evidences of indebtedness
so distributed applicable to one of the outstanding shares of Common
Stock. Such value shall be determined by the Board of Directors of the
Corporation, whose determination shall be conclusive and shall be
described in a statement filed with the transfer agent or transfer
agents for the Series A Preferred Stock and for the Common Stock. Such
adjustment shall become effective on the day next following such
record date.
(E) For the purpose of any computation under subsections (C) and
(D) above, the current market price per share of the Common Stock at
any record date shall be deemed to be the average of the daily closing
prices for thirty consecutive business days commencing not more than
forty-five business days before such record date, such consecutive day
period to be determined by the Board of Directors, and if not
determined by the Board of Directors, such consecutive day period
shall be deemed to have commenced on the fortieth business day before
the record date. The closing price for each day shall be the mean of
the closing dealer "bid" and "ask" prices for a share of Common Stock
in the over-the-counter market as reported by the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") or if the
Common Stock is listed on a recognized stock exchange, the last
reported sales price regular way of such stock on such exchange (or,
if the Common Stock is listed on more than one recognized stock
-7-
<PAGE>
exchange, the average of the last reported sales price regular way of
the Common Stock on all such exchanges) or such other method of
determining current market price as the Board of Directors shall from
time to time deem to be fair (and such other method shall be
conclusive). The term "business day" as used in this subsection (E)
and subsection (F) means any day on which the applicable exchange or
NASDAQ shall be open for trading.
(F) No fractional share of the Common Stock shall be issued upon
any conversion but, in lieu thereof, there shall be paid to each
holder of shares of the Series A Preferred Stock surrendered for
conversion who but for the provisions of this subsection (F) would be
entitled to receive a fraction of a share on such conversion, as soon
as practicable after the date such shares are surrendered for
conversion, an amount in cash equal to the same fraction of the market
value of a full share of the Common Stock. For the purpose of this
subsection (F), the market value of a share of the Common Stock shall
be the closing price (determined in accordance with subsection (E)
above) on the business day (as defined in subsection (E) above)
immediately preceding the date upon which shares are surrendered for
conversion, or such other method of determining market value as the
Board of Directors shall from time to time deem to be fair (and such
other method shall be conclusive).
(G) No adjustment in the number of shares of the Common Stock
into which each share of the Series A Preferred Stock is convertible
shall be required unless such adjustment would require an increase or
decrease of more than 1/34 of a share in the number of shares of the
Common Stock into which such share is then convertible, provided,
however, that any adjustments which by reason of this subsection (G)
are not required to be made shall be carried forward cumulatively and
taken into account in any subsequent calculation.
(H) Whenever any adjustment is required in the shares into which
each share of the Series A Preferred Stock is convertible, the
Corporation shall keep available at its principal office and the
principal office of each of the transfer agent or transfer agents for
the Series A Preferred Stock and the Common Stock a statement
describing in reasonable detail the adjustment and the method of
calculation used.
Shares of the Common Stock held in the treasury of the Corporation may
in its discretion be delivered upon any conversion of shares of the Series
A Preferred Stock.
In case cash, property, or securities other than Common Stock shall be
payable, deliverable, or issuable by the Corporation upon conversion as
aforesaid, then references to Common Stock in this section (f) shall be
deemed to apply, so far as appropriate and as nearly as may be, to such
cash, property, or other securities.
-8-
<PAGE>
ANNEX D
-------
VALUATION OF
$0.14 SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK
FOR
EMONS TRANSPORTATION GROUP, INC.
Ferris, Baker Watts, Incorporated
100 Light Street
Baltimore, Maryland 21202
(410) 659-4657
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
SECTION PAGE
----
<S> <C>
Executive Summary 1
Due Diligence Review 1
Business 1
History of the Company 2
Operations in September 1989 3
Financial Review 4
Valuation of the Fair market Value of the
Convertible Preferred Stock 5
Valuation Summary 5
Summary and Conclusion 6
</TABLE>
Exhibits
History of Common Stock Price A
<PAGE>
Executive Summary
Ferris, Baker Watts, Incorporated ("FBW") has been retained by Emons
Transportation Group, Inc. (together with its predecessor companies, "Emons" or
the "Company") to establish the fair market value of the $0.14 Series A
Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock) as of
the original issue date of September 27, 1989 (the "Valuation"). The Company
requires an independent Valuation of the Convertible Preferred Stock as of
September 27, 1989 for the purpose of determining the tax implications, if any,
resulting from the proposed exchange of Convertible Preferred Stock for Common
Stock currently being contemplated.
The term "fair market value", as used herein, is the price at which a
hypothetical willing buyer and a hypothetical willing seller would conclude a
transaction, neither being under the compulsion to conclude a transaction, and
both parties having reasonable knowledge of the relevant facts.
DUE DILIGENCE REVIEW
As an integral part of determining the fair market value of the Convertible
Preferred Stock at the issue date of September 27, 1989, FBW conducted an
extensive review of the material provided by the Company, including its
historical stock price and financial results. In addition, FBW conducted
interviews with management. In general, our discussions centered on the
following issues:
. The history of the business.
. The historical common stock price of the Company.
. The terms of the Convertible Preferred Stock.
. The financial condition of the Company as of the September 27, 1989
Valuation date.
. The financial outlook and prospects of Emons as of the September 27, 1989
Valuation date.
BUSINESS
In September 1989, Emons Holdings, Inc., the predecessor company, was a
transportation management and services company headquartered in York,
Pennsylvania, that had two primary business groups: the Transportation Equipment
Services Group which managed, leased, brokered and repaired transportation
equipment; and the Railroad Group which operated three short-line railroads.
The Company's objective was to be an integrated, full service provider of
transportation and distribution services to the North American market. The
Company's strategy to achieve this objective was to pursue selective acquisition
opportunities and/or develop new businesses which would complement its existing
operations.
HISTORY OF THE COMPANY
The Company's origins date to May 1971 when Gromar Planning and Development
Corp. acquired 50% ownership in Amfre-Grant, Inc., formerly a pharmaceutical
marketing company. In October 1971, Amfre-Grant acquired the Maryland and
Pennsylvania Railroad ("MPA"), a short-line railroad headquartered in York
Pennsylvania, along with a fleet of 300 boxcars. Shortly thereafter, the
company changed its name to Emons Industries, Inc.
-1-
<PAGE>
Throughout the 1970's, the Company concentrated on providing rail
transportation equipment (primarily boxcars) to the railroad industry. In its
capacity as the owner/lessor of railcars financed by third parties, the Company
generally supplied this equipment to railroads under short-term operating leases
which included daily utilization charges. Between 1972 and 1980, the Company's
operating revenues grew from $1.4 million to over $16.5 million. During this
same period assets under management grew from $600,000 to over $80 million and
included a fleet of 3,560 railcars.
In 1981, the Company began experiencing severe financial difficulties due
to significant oversupply of boxcars in the railroad market. The oversupply
problem was primarily a result of three factors: (i) the overbuilding of boxcars
due to the generous tax benefits available to the owners of such cars; (ii) the
sharp downturn in general business activity in the early 1980's; and (iii) the
tendency for traditional rail shippers to utilize alternative modes of
transportation, such as trucks and intermodal containers, for their shipping
needs which caused a major reduction in annual boxcar loadings from 1973 to
1983. Consequently, the values of boxcars and their rental rates declined
significantly while the Company's fixed charges remained constant. In March
1984, the Company filed a voluntary petition for reorganization under Chapter 11
of the Federal bankruptcy Code.
Under the terms of its Chapter 11 reorganization in December 1986, the
secured creditors of the Company became the owners of the railcars which they
had previously financed, subject to agreements under which the Company retained
management control over these cars. Consequently, all revenues and expenses
generated by the railcars flowed through the secured creditors and the Company
received a fee for its car management services. Furthermore, the former
creditors of the Company (including product liability claimants associated with
the operations of Amfre-Grant) became effective owners of approximately 97% of
Emons Common Stock and 100% owners of a new issue of Emons Senior Preferred
Stock ("Senior Preferred Stock").
In July 1988, the Company's Board of Directors retained Prescott, Ball &
Turben, Inc. ("PBT") as the Company's financial advisor to assist the Company in
evaluating ways to enhance shareholders value and improve the Company's ability
to pursue strategic acquisitions. After analyzing the Company's financial
structure and reviewing the terms of the Senior Preferred Stock, PBT concluded
that the Senior Preferred Stock seriously limited the Company's ability to raise
new debt and equity capital. In addition, the Company concluded that various
provisions of the Senior Preferred Stock have a significant, and often negative
influence upon the Company's decisions on how the Company conducts its existing
business and how it pursues future business opportunities. The Company and PBT
explored ways in which the Company could redeem the Senior Preferred Stock
according to the existing terms and at a significant discount, and how it would
finance such a redemption. They concluded that under the existing terms, the
Company could not raise sufficient capital to fund a redemption and that a
redemption at a significant discount would be unattractive to the holders of
Senior Preferred Stock.
In April 1989, the Company's management developed the general terms for a
merger in which one share of Senior Preferred Stock would be exchanged for one
share of Convertible Preferred Stock (the "1989 Merger"). The Convertible
Preferred Stock would pay annual dividends of $0.14 per share, have an initial
redemption price of $2.25 per share, full voting rights equal to rights of
Common Stock and each share would be convertible into 0.9 shares of Common
Stock. On May 1, 1989, the specific terms of the Convertible Preferred Stock
and terms of the Merger were unanimously approved by the Company's Board of
Directors. On August 23, 1989, a proxy statement that included the terms of the
Merger was sent to all holders of Common
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<PAGE>
Stock and Senior Preferred Stock. On September 26, 1989, the Merger was approved
by written consent of at least 66.6% of the holders of Senior Preferred Stock,
voting as a single class, and a majority of the holders of Common Stock and
Senior Preferred Stock, voting together as a single class.
OPERATIONS IN SEPTEMBER 1989
During the fall of 1989, the Company was in the process of transitioning
from primarily being in the railcar management business to owning and operating
short-line railroads.
Transportation Equipment Services Group
Marketing and Management Services. The Company marketed and managed rail
----------------------------------
transportation equipment on behalf of financial institutions and other owners to
railroads and shippers. As of June 30, 1989, the Company managed approximately
3,800 railcars on behalf of sixteen railcar owners, of which 2,200 were owned by
a single financial services company, Chrysler Rail Transportation Corporation.
For the fiscal year ended June 1989, revenues from marketing and management
services were $3.9 million and represented approximately 42% of the Company's
total revenues.
Railcar Repair Operations. The Company had two railcar repair facilities,
--------------------------
that were both capable of light, medium and heavy repairs of general service
railcars. The facilities were located in York, Pennsylvania and Dyersburg,
Tennessee. The Dyersburg facility was opened in August 1988, and replaced the
Company's facility previously located in Greenville, Mississippi. The Company's
repair facilities serviced over 1,100 railcars in fiscal 1989. Revenues
generated by the railcar repair operations in fiscal 1989 were $746,000 or 8% of
the Company's total revenues.
RAILROAD GROUP
The Company owned and operated three short-line railroads, the MPA,
Yorkrail, Inc. ("YKR") and the St. Lawrence & Atlantic Railroad Company ("SLR").
At this time the Company was pursuing additional acquisitions of short-line and
regional railroad properties.
MPA. Located in York, Pennsylvania, MPA owned 26 miles of track. There
----
were approximately 30 shippers that utilized MPA's freight service for in-bound
and out-bound loadings. MPA interchanges with the Consolidated Rail Corporation
("Conrail"), CSX Transportation, Inc. ("CSX") and with YKR.
YKR. The Company acquired YKR from CSX on February 17, 1989. YKR consists
----
of 16 miles of track in and around York, Pennsylvania. YKR served 23 shippers
and had interchanges with CSX and the MPA.
SLR. The Company acquired SLR from Canadian National Railways on May 19,
----
1989. SLA consists of 163 miles of trackage between Portland, Maine and Norton,
Vermont. SLR has interchanges with Canadian National Railway, Maine Central
Railroad and the Boston and Maine Railroad. SLA served shippers in the paper,
agricultural and distribution service industries.
-3-
<PAGE>
The railroad group generated revenues in fiscal 1989 of $3.0 million or
approximately 32% of the Company's total revenues.
-4-
<PAGE>
FINANCIAL REVIEW
As of September 27, 1989, the Company had audited financial results for its
fiscal year ended June 30, 1989. The following table highlights selected
financial results for the fiscal year ended June 30, 1989.
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JUNE 30, 1989
<TABLE>
<CAPTION>
$ IN THOUSANDS % OF REVENUE
-------------- ------------
<S> <C> <C>
Revenues $7,965
Operating income 1,017 12.8
Gain on sale of assets 893
Interest income, net 215
Income before taxes 2,125 26.7
Income tax 71
Net income 2,054 25.8
Senior preferred dividend 46
Net income available to holders of Common 2,008 25.2
</TABLE>
During this period, the Company paid a dividend on the Senior Preferred
Stock of approximately $20,000. The Company's effective tax rate in 1989 was
3.4% due to the tax benefit of net operating loss carryforwards. Cash generated
from operations was retained to fund the working capital needs of the business.
The table below highlights selected balance sheet data as of June 30, 1989.
During the course of the year, the Company made three acquisitions that were
financed from existing operations, the sale of assets and the raising of capital
through bank borrowings.
SELECTED BALANCE SHEET DATA
AS OF JUNE 30, 1989
<TABLE>
<CAPTION>
$ IN THOUSANDS
--------------
<S> <C>
Cash $ 3,140
Current assets 5,405
Fixed assets, net 17,010
Total assets 23,528
Current liabilities 3,125
Total debt 13,501
Shareholders' equity 7,535
Working capital 2,280
</TABLE>
-5-
<PAGE>
VALUATION OF THE FAIR MARKET VALUE OF THE CONVERTIBLE PREFERRED STOCK
FBW has considered several methods to evaluate the fair market value of the
Company's Convertible Preferred Stock at its issuance on September 27, 1989.
Fair market value is the price at which a willing buyer and a willing seller
would conclude a transaction, neither being under the compulsion to conclude a
transaction, and both parties having reasonable knowledge of the relevant facts.
The holders of 100% of the Senior Preferred Stock also own the majority of
Common Stock. After reviewing the Company's proxy, which was mailed on August
23, 1989, at least 66.6% of the holders of Senior Preferred Stock provided
written consent approving the exchange of their existing shares of Senior
Preferred Stock for shares of Convertible Preferred Stock on a one for one
basis. Therefore, FBW determined that the 1989 Merger represented a willing
buyer and a willing seller transaction, and that both parties had reasonable
knowledge of the relevant facts. To determine fair market value we considered
the terms of the Convertible Preferred Stock, specifically the conversion terms,
and reviewed the Company's historical Common Stock price to calculate the fair
market value at issuance (see Exhibit A).
Recognizing that stock prices may fluctuate daily, FBW also considered the
valuation methodology of capitalizing the annual dividend and adding it to the
Convertible Preferred Stock redemption value, to support the above analysis.
VALUATION SUMMARY
The vote to approve the 1989 Merger occurred during the afternoon of
September 26, 1989. The closing share price of the Company's Common Stock on
September 26, 1989 was $4.5625. Since there was no trading restrictions placed
on the Convertible Preferred Stock or the underlying Common Stock issuable upon
conversion in the 1989 Merger, the holders of Convertible Preferred Stock could
have immediately converted to Common Stock and sold shares in the market the
following day. Using the conversion ratio of 0.9 shares of Common Stock for
each share of Convertible Preferred Stock, indicates that the market value at
issuance was $4.11.
In support of the above analysis, FBW also considered a valuation
methodology of capitalizing the annual dividend and adding it to the Convertible
Preferred Stock redemption value. According to the terms of the 1989 Merger,
there were 2,033,333 shares of Convertible Preferred Stock issued to the holders
of Senior Preferred Stock, with an annual dividend of $0.14 per share and an
initial redemption price of $2.25 per share that would decline by $0.05 per year
starting in year four and ending in year eight at a redemption price of $2.00
thereafter. Assuming that the agreed upon long-term dividend yield resulting
from the 1989 Merger was the market yield for this type of security, FBW
capitalized the annual dividend by 7.0%. By adding the long-term redemption
value of the Convertible Preferred Stock ($2.00 after September 27, 1997 or
approximately $4.1 million) to the value of the capitalized dividends
(approximately $4.1 million) and dividing this sum by the Convertible Preferred
Stock shares issued, results in a per share value of $4.00 on September 27,
1989.
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<PAGE>
SUMMARY AND CONCLUSION
. The 1989 Merger represented a transaction in which a willing buyer and a
willing seller entered into a transaction, with both parties having
reasonable knowledge of the relevant facts.
. There were no trading restrictions placed on the Convertible Preferred
Stock or the underlying Common Stock issuable upon conversion that would
warrant a market discount at issuance.
. The fair market value of a share of Convertible Preferred Stock at issuance
was equal to 0.9 shares of Common Stock times the closing Common Stock
share price on September 26, 1989 or $4.11 per share.
. This value is consistent with the Company's historical stock price thirty
days before and after the issue date and is supported by the capitalized
dividend valuation method.
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<PAGE>
<TABLE>
<CAPTION>
Exhibit A
Emons Historical Stock Price
Date Volume High Low Close
<S> <C> <C> <C> <C>
28-Aug-89 NA 4.1250 3.8750 4.0000
29-Aug-89 500 4.1250 3.8750 4.0000
30-Aug-89 200 4.1250 3.8750 4.0000
31-Aug-89 2200 4.2500 3.8750 4.0625
01-Sep-89 2000 4.3750 4.0000 4.1875
05-Sep-89 5100 4.5000 4.2500 4.3750
06-Sep-89 200 4.5000 4.2500 4.3750
07-Sep-89 100 4.5000 4.2500 4.3750
08-Sep-89 1 4.5000 4.2500 4.3750
11-Sep-89 200 4.5000 4.2500 4.3750
12-Sep-89 4500 4.5000 4.2500 4.3750
13-Sep-89 200 4.6250 4.2500 4.4375
14-Sep-89 300 4.6250 4.2500 4.4375
15-Sep-89 NA 4.6250 4.2500 4.4375
18-Sep-89 NA 4.6250 4.2500 4.4375
19-Sep-89 300 4.6250 4.2500 4.4375
20-Sep-89 21 4.6250 4.2500 4.4375
21-Sep-89 6000 4.6250 4.3750 4.5000
22-Sep-89 300 4.7500 4.3750 4.5625
25-Sep-89 600 4.7500 4.3750 4.5625
26-Sep-89 NA 4.7500 4.3750 4.5625
27-Sep-89 400 4.6250 4.3750 4.5000
28-Sep-89 1100 4.7500 4.3750 4.5625
29-Sep-89 200 4.7500 4.3750 4.5625
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <S> <S> <S>
02-Oct-89 NA 4.7500 4.3750 4.5625
03-Oct-89 NA 4.7500 4.3750 4.5625
04-Oct-89 300 4.7500 4.3750 4.5625
05-Oct-89 400 4.7500 4.3750 4.5625
06-Oct-89 NA 4.7500 4.3750 4.5625
09-Oct-89 NA 4.7500 4.3750 4.5625
10-Oct-89 400 4.7500 4.3750 4.5625
11-Oct-89 98 4.7500 4.3750 4.5625
12-Oct-89 NA 4.7500 4.3750 4.5625
13-Oct-89 NA 4.7500 4.3750 4.5625
16-Oct-89 3 4.7500 4.2500 4.5000
17-Oct-89 65 4.6250 4.2500 4.4375
18-Oct-89 200 4.6250 4.2500 4.4375
19-Oct-89 1100 4.6250 4.2500 4.4375
20-Oct-89 NA 4.6250 4.2500 4.4375
23-Oct-89 200 4.6250 4.2500 4.4375
24-Oct-89 NA 4.6250 4.2500 4.4375
25-Oct-89 NA 4.6250 4.2500 4.4375
26-Oct-89 1400 4.6250 4.2500 4.4375
27-Oct-89 NA 4.6250 4.2500 4.4375
=========================================================
</TABLE>
<PAGE>
ANNEX E
-------
DELAWARE GENERAL CORPORATION LAW (S)262 - APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to (S)228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to (S)251(g)
of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of this title:
(1)Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
stockholders; and further provided that no appraisal rights shall be available
for any shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to (S)251, (S)252, (S)254,
(S)257, (S)258, (S)263 and (S)264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from such merger
or consolidation or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in respect
thereof, which shares of stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a national
market system security on an
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<PAGE>
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in lieu
of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a. b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party to
a merger effected under (S)253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy
or vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or (2) If the merger or consolidation was approved pursuant to (S)228 or (S)253
of this title, each constituent corporation, either before the effective date of
the merger or consolidation or within 10 days thereafter, shall notify each of
the holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in such
notice a copy of this section; provided that, if the notice is given on or after
the effective date of the
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merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights. Such notice may,
and, if given on or after the effective date of the merger or consolidation,
shall, also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
this shares. If such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the effective
date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall not be more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights
may file a petition in the Court of Chancery demanding a determination of the
value of the stock of all such stockholders. Notwithstanding the foregoing, at
any time within 60 days after the effective date of the merger or consolidation,
any stockholder shall have the right to withdraw such stockholder's demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement
shall be mailed to the stockholder within 10 days after such stockholder's
written request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington,
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Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted such stockholder's certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings until
it is finally determined that such stockholder is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within
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60 days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
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<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF EMONS TRANSPORTATION GROUP, INC.
APPROVAL OF PROPOSALS - The Board of Directors recommends a vote "FOR" items 1
to 3.
1. Approval of the Agreement of Merger dated April 25, 1999 between the Company
and ETG Merger Corporation, as described more fully in the Statement Soliciting
Proxies dated May __, 1999.
<TABLE>
<S> <C> <C>
[ ] FOR the Agreement of Merger [ ] AGAINST the Agreement of Merger [ ] ABSTAIN from voting on the Agreement of Merger
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2. Approval of the Common Stock Charter Amendment to Section I of Article
FOURTH of the Certificate of Incorporation, as described more fully in the
Statement Soliciting Proxies dated May __, 1999.
<TABLE>
<S> <C> <C>
[ ] FOR the Common Stock Charter [ ] AGAINST the Common Stock Charter [ ] ABSTAIN from voting on the Common Stock
Amendment Amendment Charter Amendment
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3. Approval of the Preferred Stock Charter Amendment to Section I of Article
FOURTH of the Certificate of Incorporation, as described more fully in the
Statement Soliciting Proxies dated May __, 1999.
<TABLE>
<S> <C> <C>
[ ] FOR the Preferred Stock [ ] AGAINST the Preferred Stock Charter [ ] ABSTAIN from voting on the Preferred Stock
Charter Amendment Amendment Charter Amendment
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AUTHORIZATION FOR DISCRETIONARY VOTE BY APPOINTED PERSONS UPON ANY ADJOURNMENT
OF SPECIAL MEETING
4. Authorization to vote in their discretion upon any adjournment of the Special
Meeting.
<TABLE>
<S> <C> <C>
[ ] FOR authorization to vote in [ ] AGAINST authorization to vote in [ ] ABSTAIN from granting authorization to vote
their discretion upon any their discretion upon any adjournment in their discretion upon any adjournment of
adjournment of the Special of the Special Meeting the Special Meeting
Meeting
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
DISCRETIONARY VOTE UPON OTHER BUSINESS
5. In their discretion upon such other business that may properly come before
the Special Meeting (other than upon any adjournment of such Special
Meeting).
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND WILL BE VOTED IN
ACCORDANCE WITH THE SHAREHOLDER'S SPECIFICATIONS HEREON. IN THE ABSENCE OF SUCH
SPECIFICATION, THE PROXY WILL BE VOTED "FOR" EACH ITEM 1 TO 4 AND THE AUTHORITY
PROVIDED BY ITEM 5 WILL BE DEEMED GRANTED.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
EMONS TRANSPORTATION GROUP, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
June 23, 1999
The undersigned hereby appoints Robert Grossman and Scott F. Ziegler, or
either of them, with power of substitution, attorneys and proxies to
represent the undersigned at the Special Meeting of Stockholders of EMONS
TRANSPORTATION GROUP, INC., to be held on June 23, 1999, or at any
adjournment thereof, to vote all shares of Common Stock as designated below
and upon such other business that may properly come before the meeting.
Date:______________________________________, 1999
_________________________________________________
Signature
_________________________________________________
Signature if held jointly
Please sign exactly as your name appears herein.
When shares are held by joint tenants, both
should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by President or other
authorized officer. If a partnership, please sign
in the partnership name by authorized person.
