<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1998 Commission File Number 0-5206
----------------- ------
EMONS TRANSPORTATION GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2441662
-----------------------------------------------------------------
(State of Incorporation) (I. R. S. Employer Identification No.)
96 South George Street, York, Pennsylvania 17401 (717-771-1700)
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code) (Telephone No.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
The number of shares of each class of common stock of the registrant issued
and outstanding as of December 31, 1998 is as follows:
Voting Common Stock 6,095,786
---------
1
<PAGE>
EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,845,351 $ 2,677,004
Accounts receivable, net 2,601,722 2,210,900
Materials and supplies 261,495 191,845
Prepaid expenses 380,709 375,004
Deferred income taxes 476,000 476,000
--------------- ---------------
Total current assets 5,565,277 5,930,753
--------------- ---------------
Property, plant and equipment 37,899,852 31,548,588
Less accumulated depreciation (11,565,569) (10,888,838)
--------------- ---------------
Property, plant and equipment, net 26,334,283 20,659,750
--------------- ---------------
Deferred expenses and other assets 771,798 737,774
Deferred income taxes 911,000 1,345,000
--------------- ---------------
TOTAL ASSETS $ 33,582,358 $ 28,673,277
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 661,520 $ 1,335,408
Accounts payable 1,342,232 964,453
Accrued payroll and related expenses 1,361,137 1,665,185
Other accrued expenses 1,604,914 1,309,266
--------------- ---------------
Total current liabilities 4,969,803 5,274,312
Long-term debt 15,443,480 11,006,767
Other liabilities 781,990 758,238
--------------- ---------------
Total Liabilities 21,195,273 17,039,317
--------------- ---------------
Stockholders' Equity:
Cumulative convertible preferred stock 14,855 15,282
Common stock 60,958 60,398
Additional paid-in capital 23,790,800 23,733,554
Deficit (11,149,613) (11,871,499)
--------------- ---------------
12,717,000 11,937,735
Comprehensive income (1,000) -
Unearned compensation - restricted stock awards (328,915) (303,775)
--------------- ---------------
Total Stockholders' Equity 12,387,085 11,633,960
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,582,358 $ 28,673,277
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- -------------------------------------
1998 1997 1998 1997
------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues $ 5,176,975 $ 4,070,869 $ 10,256,135 $ 8,173,826
Operating expenses:
Cost of operations 3,602,608 2,721,454 6,972,246 5,495,592
Selling and administrative 916,410 786,225 1,784,865 1,550,384
------------- -------------- --------------- ----------------
Total operating expenses 4,519,018 3,507,679 8,757,111 7,045,976
------------- -------------- --------------- ----------------
Income from operations 657,957 563,190 1,499,024 1,127,850
Other income (expense):
Interest income 16,829 23,839 45,483 49,250
Interest expense (227,547) (201,340) (450,896) (549,434)
Other, net 77,644 65,992 149,275 65,992
------------- -------------- --------------- ----------------
Total other income (expense) (133,074) (111,509) (256,138) (434,192)
------------- -------------- --------------- ----------------
Income before income taxes 524,883 451,681 1,242,886 693,658
Provision for income taxes 257,000 22,000 521,000 43,000
------------- -------------- --------------- ----------------
Net income 267,883 429,681 721,886 650,658
Preferred dividend requirements 52,039 53,962 105,041 110,849
------------- -------------- --------------- ----------------
Income applicable to common shareholders $ 215,844 $ 375,719 $ 616,845 $ 539,809
============= ============== =============== ================
Weighted average number of common
shares (Note 4):
Basic 6,089,652 5,924,296 6,072,374 5,873,694
============= ============== =============== ================
Diluted 6,499,067 7,788,474 7,833,000 7,801,699
============= ============== =============== ================
Earnings per common share (Note 4):
Basic $ 0.04 $ 0.06 $ 0.10 $ 0.09
============= ============== =============== ================
Diluted $ 0.03 $ 0.06 $ 0.09 $ 0.08
============= ============== =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 721,886 $ 650,658
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 676,622 603,153
Amortization 72,492 59,665
Gain on sale of assets - (26,236)
Gain on forgiveness of debt (85,590) (39,756)
Change in deferred income taxes 434,000 -
Changes in assets and liabilities:
Accounts receivable, materials and
supplies and prepaid expenses (466,177) 450,353
Accounts payable and accrued expenses 369,379 (138,283)
Other assets and liabilities, net 153,103 138,293
--------------- ----------------
Net cash provided by operating activities 1,875,715 1,697,847
--------------- ----------------
Cash flows from investing activities:
Proceeds from sale of assets - 574,125
Additions to property, plant and equipment (1,548,555) (732,842)
Investment in acquired rail properties (4,802,709) (904,699)
Increase in deferred expenses - (19,688)
--------------- ----------------
Net cash used in investing activities (6,351,264) (1,083,104)
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of note payable - 250,000
Proceeds from issuance of long-term debt 6,302,098 8,109,092
Reduction in long-term debt (2,453,683) (7,977,666)
Debt issuance costs (203,628) (206,335)
Proceeds from issuance of common stock - 26,375
--------------- ----------------
Net cash provided by financing activities 3,644,787 201,466
--------------- ----------------
Effect of exchange rate changes on cash (891) -
--------------- ----------------
Net increase (decrease) in cash and cash equivalents (831,653) 816,209
Cash and cash equivalents at beginning of period 2,677,004 1,515,188
--------------- ----------------
Cash and cash equivalents at end of period $ 1,845,351 $ 2,331,397
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended December 31, 1998
(unaudited)
Note 1. Quarterly Financial Statements
The information furnished herein has been prepared in accordance with
generally accepted accounting principles. In the opinion of the management of
Emons Transportation Group, Inc. (the "Company" or "Emons Transportation
Group"), all adjustments, which include only normal recurring adjustments,
considered necessary to present a fair statement of the results for the periods
covered by this report have been made. Results for the interim periods are not
necessarily indicative of annual results.
Note 2. Acquisition of Railroad Operations
On November 25, 1998, the Company's newly created wholly-owned
subsidiary, St. Lawrence & Atlantic Railroad (Quebec) Inc. ("SLQ"), entered into
an Asset Purchase Agreement to acquire a 94 mile rail line in Quebec, Canada
(the "Sherbrooke Line") from the Canadian National Railway Company ("CN") for
Can$7 million. The acquisition was completed on December 21, 1998. The
Sherbrooke Line connects with CN's Halifax to Montreal main line at St. Rosalie,
Quebec, and the Company's St. Lawrence & Atlantic Railroad at the Quebec/Vermont
international border. SLQ commenced operations on December 1, 1998 under an
interim operating arrangement provided for in the Asset Purchase Agreement. The
Company also acquired ten locomotives, maintenance of way and other equipment,
and materials and supplies in conjunction with the acquisition.
Note 3. Amended and Restated Loan and Security Agreement
On December 21, 1998, the Company entered into an Amended and Restated
Loan and Security Agreement (the "Amended Loan Agreement") with its current
lender which provided an additional Can$6,583,500 seven year term loan and a $2
million three year term loan to finance the acquisition of the Sherbrooke Line
and related expenditures, including acquisition costs, the purchase of
locomotives and other equipment, working capital, and financing costs.
Under the Amended Loan Agreement, the payment terms of the original
seven year term loan were modified. The payment terms for each of the loans
under the Amended Loan Agreement are as follows:
<TABLE>
<CAPTION>
Quarterly Payment
------------------------------------------------------------------
Original Canadian $2 million
Term Loan Term Loan Term Loan
Quarter Ending (US $'s) (Can $'s) (US $'s)
-------------- -------- --------- --------
<S> <C> <C> <C>
December 31, 1998 - June 30, 1999 $ 150,000 $ - $ -
September 30, 1999 - June 30, 2000 275,000 - -
September 30, 2000 - June 30, 2001 300,000 - -
September 30, 2001 387,500 - -
December 31, 2001 387,500 - 2,000,000
March 31, 2002 - June 30, 2002 387,500 - -
September 30, 2002 - June 30, 2003 425,000 - -
September 30, 2003 - December 31, 2003 475,000 - -
March 31, 2004 246,956 135,520 -
June 30, 2004 - 731,500 -
September 30, 2004 - June 30, 2005 - 938,245 -
September 30, 2005 - December 31, 2005 - 981,750 -
</TABLE>
5
<PAGE>
Interest on the Canadian term loan is based upon the rate applicable to the
Canadian Dollars bankers' acceptance ("CDOR"), plus an applicable margin. The
applicable margin ranges from 1.75% to 3%, depending upon the Company's
financial performance. Interest on the $2 million term loan is based upon the
bank's prime rate or the eurodollar rate, at the option of the Company, plus an
applicable margin. The applicable margin ranges from 0% to 0.5% for prime based
borrowings, and from 1.75% to 3% for eurodollar based borrowings. In addition,
the Company is required to pay an additional loan fee every six months that
increases from .25% for the six months ending June 30, 1999 to 1% for the six
months ending December 31, 2001. The applicable margin for the original term
loan, the Canadian term loan and the $2 million term loan is fixed at prime plus
.25%, the eurodollar rate plus 2.75% or the CDOR rate plus 2.75%, as applicable,
for approximately nine months.
All borrowings under the Amended Loan Agreement are secured by all of the
assets of the Company. The Amended Loan Agreement includes certain restrictive
covenants, the more significant of which require that the Company meet
prescribed financial ratios and maintain specified levels of insurance, and
which restrict additional borrowings, capital expenditures, lease commitments
and the payment of dividends. The Amended Loan Agreement also requires the
Company to make mandatory prepayments consisting of excess cash flow, as defined
in the Amended Loan Agreement, 50% of the net cash proceeds from the sale of the
Company's capital stock in excess of $3 million, and the net cash proceeds from
the sale of property of the Company in excess of a minimum amount. In addition,
the Amended Loan Agreement requires the Company to enter into an interest rate
contract by January 31, 1999, with respect to the principal amount of at least
one-half of the Canadian term loan balance. On January 21, 1999, the Company
entered into an interest rate swap agreement under which the Company fixed its
CDOR interest rate at 5.33% on one-half of the Canadian term loan balance
through December 31, 2003.
Note 4. Earnings Per Share
Basic earnings per common share is computed by dividing income applicable to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share is computed by
dividing income applicable to common shareholders by the weighted average number
of common shares and dilutive potential common shares outstanding during the
period. Diluted earnings per share for the three month period ended December
31, 1998 does not include the conversion of preferred stock because the effect
of such inclusion would be anti-dilutive.
Earnings per share amounts are computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended December 31,
--------------------------------------------------------------
1998 1997
------------------------------- ----------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 267,883 $ 429,681
Less: Preferred dividend
requirements (52,039) (53,962)
--------- ---------
Basic EPS
Income applicable to
common shareholders $ 215,844 6,089,652 $0.04 $ 375,719 5,924,296 $0.06
===== =====
Effect of Dilutive Securities
Stock options and warrants - 409,415 - 476,579
Convertible preferred stock - - 53,962 1,387,599
--------- --------- --------- ---------
Diluted EPS
Income applicable to common
shareholders plus assumed
conversions $ 215,844 6,499,067 $0.03 $ 429,681 7,788,474 $0.06
========= ========= ===== ========= ========= =====
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended December 31,
--------------------------------------------------------------
1998 1997
------------------------------- -----------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 721,886 $ 650,658
Less: Preferred dividend
requirements (105,041) (110,849)
--------- ---------
Basic EPS
Income applicable to
common shareholders $ 616,845 6,072,374 $0.10 $ 539,809 5,873,694 $0.09
===== =====
Effect of Dilutive Securities
Stock options and warrants - 410,101 - 502,805
Convertible preferred stock 105,041 1,350,525 110,849 1,425,200
--------- --------- --------- ---------
Diluted EPS
Income applicable to common
shareholders plus assumed
conversions $ 721,886 7,833,000 $0.09 $ 650,658 7,801,699 $0.08
========= ========= ===== ========= ========= =====
</TABLE>
Note 5. Non-cash Investing and Financing Activities
In December 1998, the Company repurchased and retired 3,093 shares of
restricted common stock and issued 7,250 shares of common stock pursuant to the
1986 and 1996 Stock Option Plans.
In December 1997, the Company issued 85,000 shares of common stock
valued at $171,000 in connection with the acquisition of Penn Eastern Rail
Lines, Inc.
In December 1997, the Company entered into sale-leaseback transactions
for ten locomotives in the amount of $557,000 in connection with the lease of
Berlin Mills Railway Company and the acquisition of Penn Eastern Rail Lines,
Inc.
Note 6. Translation of Foreign Currencies
The financial statements of the St. Lawrence & Atlantic Railroad
(Quebec) Inc. ("SLQ"), the Company's Canadian subsidiary, are measured in
Canadian dollars, SLQ's functional currency. The assets and liabilities of SLQ
have been translated into US dollars using the current exchange rate in effect
as of the balance sheet date, while results of operations have been translated
into US dollars at the average exchange rate in effect during the applicable
period. Foreign currency translation adjustments are recorded in Stockholders'
Equity. Gains and losses resulting from foreign currency transactions have been
included currently in income.
Note 7. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. FAS 130 is
effective for fiscal years beginning after December 15, 1997, and requires
reclassification of financial statements for earlier periods provided for
comparative purposes.
7
<PAGE>
Comprehensive income for the three and six month periods ended
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------------------------- ----------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 267,883 $ 429,681 $ 721,886 $ 650,658
Other comprehensive
income, net of tax
Foreign currency
translation adjustment (1,000) - (1,000) -
------------- ------------- ------------- ------------
Total comprehensive income $ 266,883 $ 429,681 $ 720,886 $ 650,658
======= ======= ======= =======
</TABLE>
Note 8. Contingencies
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 December 31, 1998, Industries was one of numerous defendants (including
many of the largest pharmaceutical manufacturers) in 674 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, 669 were commenced after 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.
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
October 1, 1998 to December 31, 1998, 6 new actions were commenced in which
Industries was named as a defendant and 11 lawsuits were settled or dismissed at
no liability to Industries. Included in the cases outstanding as of December
31, 1998, 365 were commenced in the prior year in a single filing in a state
court in Ohio shortly before the effective date of a revision to Ohio's product
liability statute which, among other things, limits
8
<PAGE>
damages recoverable for pain and suffering. 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, 289 Ohio DES cases against the Company are subject to
dismissal. Counsel for these plaintiffs filed motions 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 December 31, 1998:
Number of
State Court Cases
----- ----- -----
California Los Angeles County 1
San Francisco County 4
New York New York County 369
Ohio Cuyahoga County 114
Summit County 80
Federal Court, Northern
District of Ohio 95
Pennsylvania Philadelphia County 10
Texas Travis County 1
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.
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.
9
<PAGE>
Railroad Industry Consolidation
-------------------------------
The Company routinely interchanges traffic with certain Class I railroads
that are currently undergoing consolidations. Consolidated Rail Corporation,
which interchanges traffic with the Company's Pennsylvania rail operations, is
being divided and acquired by the Norfolk Southern Railroad and CSX Corporation.
The Canadian National Railway Company, which interchanges traffic with the
Company's St. Lawrence & Atlantic Railroad (Quebec), announced that it will
acquire the Illinois Central Railroad, pending approval from the Surface
Transportation Board. While the Company does not anticipate any significant
negative impact as a result of these consolidations, and believes that they may
create additional long-term opportunities for its railroad operations, there can
be no assurance that these consolidations will not have an unfavorable impact on
the Company's railroad operations.
Note 9. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Deriviative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that companies recognize all derivatives as either assets or
liabilities in the statement of financial position and measure the derivatives
at fair value. FAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, and shall not be applied retroactively to
financial statements of prior periods. The Company's interest rate hedging
transactions constitute cash flow hedges under FAS 133. The Company has not yet
quantified the impact of and has not determined the timing of or method of
adoption of the provisions of FAS 133. However, FAS 133 could increase
volatility in earnings and/or other comprehensive income.
Note 10. Subsequent Event
On February 5, 1999, a railcar on one of the Company's St. Lawrence &
Atlantic Railroad's ("SLR") trains derailed as a result of a faulty wheel.
Damage to the railcar and SLR's railroad track structure is currently estimated
to range from $250,000 to $375,000, approximately $125,000 of which is estimated
to be recoverable under the Company's existing insurance coverage. A more
accurate assessment of the damage will be made once the snow in the area melts
and the track is more visible.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
This Form 10-Q contains certain "forward-looking" statements regarding
future events and the future performance of Emons Transportation Group, Inc.
that involve risks and uncertainties that could cause actual results to differ
materially. Those risks and uncertainties include, but are not limited to,
economic conditions, customer demand, increased competition in the relevant
market, government regulation, and other factors described herein and in other
filings with the Securities and Exchange Commission that could cause the
Company's results to differ from its current expectations.
Results for the three and six month periods ended December 31, 1998 and
1997 are impacted by several acquisitions completed by the Company during the
second quarters of fiscal 1999 and 1998. In addition, the Company renegotiated
the Operating and Marketing Agreement between the Company's St. Lawrence &
Atlantic Railroad ("SLR") and the Canadian National Railway Company ("CN"),
SLR's primary connecting carrier, which became effective October 1, 1997. The
renegotiated agreement amends the revenue structure for business transacted with
CN, resulting in a reduction of SLR's operating revenues from CN. In return, CN
provided SLR with additional car hire expense relief, agreed to forego interest
on the $1.5 million promissory note due from SLR, and agreed to forgive
repayment of the $1.5 million promissory note over a
10
<PAGE>
seven year period. The renegotiated agreement impacts operating revenues,
operating expenses, interest expense and non-operating income.
During the second quarter of fiscal 1998, the Company entered into
agreements to lease and operate one rail line and completed two rail
acquisitions (the "1998 Acquired Operations"). In November 1997, SLR entered
into an agreement to lease all of the track and property owned by the Berlin
Mills Railway Company ("BMS") located in Berlin and Gorham, New Hampshire, and
on November 4, 1997 commenced operations. In December 1997, SLR entered into an
Asset Purchase Agreement to acquire approximately one mile of track from the New
Hampshire and Vermont Railroad Company ("NHVT") in Groveton, New Hampshire, and
commenced operations on this section of track on December 30, 1997. In November
1997, the Company's newly created wholly-owned subsidiary, Penn Eastern Rail
Lines, Inc. ("PRL"), entered into an Asset Purchase Agreement to acquire
substantially all of the assets and leases of four railroad operations from an
individual owner and operator, and commenced operations on December 31, 1997.
As described further under Liquidity and Capital Resources, on December 1,
1998, the Company's newly created wholly-owned subsidiary, the St. Lawrence &
Atlantic Railroad (Quebec) Inc., commenced operations on the Sherbrooke Line
(the "1999 SLQ Acquired Operations") acquired from CN.
The 1998 Acquired Operations and the 1999 SLQ Acquired Operations are
collectively referred to herein as the "Acquired Operations." All amounts are
in United States dollars unless otherwise indicated.
Liquidity and Capital Resources
The Company's primary sources of liquidity include its cash and accounts
receivable, which aggregated $4,447,000 and $4,888,000 at December 31, 1998 and
June 30, 1998, respectively, the balance available under the Company's $2
million working capital facility, and the amount prepaid on the $7,775,000 seven
year term loan, which is available for future borrowings. The Company intends to
utilize the $2 million working capital facility to help fund the Company's
internal growth activities and future acquisitions. The Company does not
currently have any commitments nor is the Company involved in substantive
negotiations for any other acquisition. As of December 31, 1998, the Company
had approximately $1,490,000 available under the working capital facility,
computed in accordance with the facility's eligibility criteria. As of December
31, 1998, the Company prepaid $1.5 million of its $7,775,000 seven year term
loan, which is available for future borrowings. The Company believes that it
will be able to generate sufficient cash flow from operations to meet its
current and future capital requirements and debt obligations.
On November 25, 1998, the Company's newly created wholly-owned subsidiary,
St. Lawrence & Atlantic Railroad (Quebec) Inc. ("SLQ"), entered into an Asset
Purchase Agreement to acquire a 94 mile rail line (the "Sherbrooke Line") from
CN. The acquisition was completed on December 21, 1998. The rail line connects
with CN's Halifax to Montreal main line at St. Rosalie, Quebec, and SLR at the
Quebec/Vermont international border. SLQ commenced operations on December 1,
1998 under an interim operating arrangement provided for in the Asset Purchase
Agreement.
In July 1998, the Company made a Can$100,000 deposit towards the purchase
price upon execution of an agreement in principle relating to the acquisition,
and a Can$1 million deposit upon execution of the Asset Purchase Agreement. The
remaining Can$5,900,000 was paid on December 21, 1998, upon completion of the
financing for the purchase. As of December 31, 1998, the Company had invested
an additional $228,000 in acquisition costs for a total acquisition investment
of $4,803,000 in United States dollars. The Company also invested $697,000 in
ten locomotives and improvements thereon, and $224,000 in maintenance of way and
other equipment in connection with the acquisition of SLQ.
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On December 21, 1998, the Company entered into an Amended and Restated Loan
and Security Agreement (the "Amended Loan Agreement") with its current lender
which provided an additional Can$6,583,500 seven year term loan and a $2 million
three year term loan to finance the aquisition of the Sherbrooke Line and
related expenditures. In addition, the Amended Loan Agreement modified the
principal payments under the original seven year term loan.
The Company's cash and cash equivalents decreased $832,000 for the six
month period ended December 31, 1998, after a $1.5 million prepayment of the
$7,775,000 seven year term loan. The net decrease includes $1,876,000 of cash
provided by operations and a $3,848,000 net increase in long-term debt, offset
by a $4,803,000 investment in acquired rail properties, $1,549,000 of capital
investments, and $204,000 of debt issuance costs.
The Company generated $1,876,000 of cash from operations for the six month
period ended December 31, 1998, as compared to $1,698,000 for the corresponding
period in the prior year. Excluding changes in assets and liabilities, cash
provided by operations increased $572,000 from $1,247,000 for the six months
ended December 31, 1997 to $1,819,000 for the six months ended December 31,
1998, as a result of improved operating performance in the current year.
The Company invested $1,549,000 in capital expenditures during the first
six months of fiscal 1999, including an investment of $697,000 in ten
locomotives and $224,000 in other equipment in connection with the acquisition
of the Sherbrooke Line. The remaining $628,000 of capital expenditures includes
$460,000 of investments in railroad track structures (net of $354,000 of
government grants) and $168,000 of other capital investments. The Company
currently has approximately $600,000 of government grants and approximately
$300,000 of government funding under no interest loan programs available for
future track rehabilitation projects, customer sidings and other track
improvement projects. In addition, the Company was awarded a $763,000, 50%
matching grant from the State of Pennsylvania for the construction of a bulk
intermodal facility for the Company's logistics operations in York,
Pennsylvania. The Company has no other material commitments for capital
expenditures.
The Company's net long-term debt obligations increased $3,848,000 during
the six month period ended December 31, 1998, including $6,302,000 of borrowings
in connection with the acquisition of SLQ, partially offset by a $1.5 million
prepayment of the term loan, which is available for future borrowings, a
$250,000 repayment of working capital borrowings, and $704,000 of scheduled debt
repayments.
Analysis of operations for the three months ended December 31, 1998
compared to the three months ended December 31, 1997
Results of Operations
The Company generated net income of $268,000 for the three month period
ended December 31, 1998, as compared to net income of $430,000 for the three
month period ended December 31, 1997. Income before income taxes increased
$73,000, or 16%, from $452,000 for the quarter ended December 31, 1997, to
$525,000 for the corresponding quarter in the current year. The current year
quarter includes $156,000 of start-up expenses associated with the acquisition
and first month of operations of SLQ. Excluding these start-up expenses, income
before income taxes increased $229,000, or over 50%. Operating revenues
increased $1,106,000, while operating expenses increased $1,011,000 over the
prior year. Interest and other non-operating income increased $4,000, interest
expense increased $26,000, and the provision for income taxes increased $235,000
over the prior year.
Revenues
Operating revenues increased $1,106,000, or 27%, from $4,071,000 for the
three month period ended December 31, 1997 to $5,177,000 for the three month
period ended December 31,
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<PAGE>
1998. Acquired Operations accounted for $722,000 of this increase, including
$378,000 of operating revenues generated by the 1999 SLQ Acquired Operations and
$344,000 additional operating revenues generated by the 1998 Acquired
Operations. Excluding Acquired Operations, operating revenues increased
$384,000, or 10%, consisting of a $329,000 increase in freight and haulage
revenues and a $185,000 increase in other operating revenues, partially offset
by a $65,000 decrease in logistics revenues and a $65,000 decrease in intermodal
freight and handling revenues.
Freight and haulage revenues increased $792,000, or 25%, consisting of a
33% increase in the number of carloads handled and a 5.8% decrease in average
revenues per carload. Total traffic handled increased approximately 3,300
carloads from 10,050 for the quarter ended December 31, 1997 to 13,350 for the
quarter ended December 31, 1998. Traffic for the quarter ended December 31,
1998 includes approximately 1,650 overhead carloads on SLQ delivered to SLR that
are counted as revenue carloads for both SLR and SLQ. Excluding Acquired
Operations, which accounted for $463,000 of the increase, freight and haulage
revenues increased $329,000, or 10.5%, and traffic increased approximately 600
carloads, or 6%. This net increase includes a decrease of approximately 300
carloads on Pennsylvania rail operations offset by an increase of approximately
900 carloads on SLR operations in New England.
The 300 carload net decrease in business for Pennsylvania rail operations,
excluding Acquired Operations, includes a reduction of 150 coal carloads due to
timing of shipments, a reduction of 200 carloads to the Company's primary paper
customer in Pennsylvania due to a reduction in its business levels, a reduction
of 120 agricultural carloads as a result of favorable local supply conditions,
and a reduction of 180 logistics carloads, discussed further below. These
decreases were partially offset by 70 additional carloads to three new
customers, 60 additional carloads to a building products distributor due to the
addition of new product lines transported by rail, and 300 additional low rated
bridge carloads. Bridge moves represent traffic that is received from one
connecting rail carrier and delivered to another connecting rail carrier, as
opposed to being received from or delivered to a customer located directly on
line. Revenues for such moves are generally less (rated lower) than revenues
received for traffic delivered to or received from customers located on line
since there is substantially less work involved with such moves.
The 900 carload increase in traffic for SLR, excluding Acquired Operations,
is primarily attributable to new business added over the past year.
Approximately 275 additional carloads were generated by a new on line liquid
propane gas distributor that commenced operations in April 1998, which is
expected to generate significant additional business, approximately 250 carloads
were generated by a new overhead move attributable to a special construction
project in New England, and approximately 150 additional carloads were generated
by a new local oil move to an on line paper customer that commenced operations
in the fourth quarter of the prior year, which is similar to the oil move that
was established for another paper customer in fiscal 1997. In addition to other
less significant new business, paper related traffic increased over 180 carloads
as a result of the addition of new moves and additional business with existing
customers.
The 5.8% decrease in average revenues per carload is attributable to the
addition of the 1999 SLQ Acquired Operations. SLQ's average freight rate is
lower than the Company's other rail operations since a large percentage of SLQ's
business is overhead traffic from CN to SLR, and because pricing for this
business reflects the operating synergies between SLR and SLQ. Excluding
Acquired Operations, average revenues per carload increased 4.3% primarily as a
result of price adjustments on Pennsylvania operations, partially offset by mix
of business on Pennsylvania rail operations which included a higher percentage
of low rated bridge moves.
Logistics revenues generated by the Company's operations in York,
Pennsylvania, decreased $65,000, or 37%, from $174,000 for the three month
period ended December 31, 1997 to $109,000 for the three month period ended
December 31, 1998. The number of railcars handled decreased 230 carloads, or
57%. The decrease in volume is attributable to the elimination of bulk transfer
business for an on line feed broker, which was resumed by the customer, a
decrease in business to another feed broker lost to competition, a decrease in
paper transload and storage business as a result of the Company's decision in
the second quarter of
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fiscal 1998 to exit paper warehousing operations and to direct this business to
an independent warehouse operator located on line, and a variety of less
significant decreases.
Intermodal freight and handling revenues generated by the Company's rail
intermodal terminal in Auburn, Maine, excluding the 1999 SLQ Acquired
Operations, decreased $65,000 from $262,000 for the three months ended December
31, 1997 to $197,000 for the corresponding period in the current year.
Intermodal volume decreased approximately 1,350 trailers and containers, or 45%,
from 3,050 trailers and containers for the second quarter of the prior year to
1,700 trailers and containers for the second quarter of the current year. The
decrease in intermodal volume is attributable to competition from a nearby
intermodal terminal that opened in December 1996, the conversion of certain
intermodal business to rail boxcars, and generally lower levels of intermodal
shipments.
Excluding Acquired Operations, other operating revenues increased $185,000
from the prior year, including $78,000 of blocking revenues from CN in the
current year in conjunction with the closing of a major CN classification yard
in Montreal, an additional $67,000 of revenues for track work performed for
customers, and less significant increases in a variety of other revenues. These
increases were partially offset by a $31,000 decrease in railcar brokering
commissions as a result of the termination of two contracts. The 1999 SLQ
Acquired Operations generated $79,000 of other operating revenues including
blocking fees and trackage rights revenues. The 1998 Acquired Operations
generated an additional $163,000 of other operating revenues, consisting
principally of additional railcar storage and demurrage revenues and additional
switching service fees for operating BMS.
Expenses
Operating expenses increased $1,011,000, or 29%, from $3,508,000 for the
three month period ended December 31, 1997 to $4,519,000 for the three month
period ended December 31, 1998. The increase consists of $881,000 additional
cost of operations and $130,000 additional selling and administrative expenses.
Excluding Acquired Operations, operating expenses increased $350,000, or 10%.
Cost of operations increased $881,000, or 32%, from $2,722,000 for the
three month period ended December 31, 1997 to $3,603,000 for the corresponding
three month period in the current year. Cost of operations for the current
quarter includes $714,000 of railroad operating expenses associated with the
Acquired Operations as compared to $92,000 of expenses in the corresponding
period in the prior year. Excluding Acquired Operations, cost of operations
increased $259,000, including $359,000 additional railroad operating expenses
and $4,000 additional other operating expenses, partially offset by a $92,000
decrease in logistics operating expenses and a $12,000 decrease in intermodal
operating expenses.
Railroad operating expenses increased $981,000 for the quarter ended
December 31, 1998 as compared to the corresponding quarter in the prior year.
Excluding Acquired Operations, railroad operating expenses increased $359,000,
consisting of a $51,000 decrease in expenses for Pennsylvania rail operations
offset by a $410,000 increase in SLR expenses in New England. The net decrease
in railroad operating costs for Pennsylvania rail operations, excluding Acquired
Operations, is primarily attributable to two unfilled management/supervisory
positions and, to a lesser extent, the lower level of business handled during
the quarter.
The $410,000 increase in railroad operating costs for SLR, excluding
Acquired Operations, is comprised of $70,000 additional maintenance of way
expenses, $263,000 additional transportation expenses, $66,000 additional
locomotive maintenance expenses, and $11,000 additional other expenses. The
increase in maintenance of way expenses is primarily attributable to track
projects performed on the behalf of customers for which SLR received revenues,
and a track surfacing project. The increase in transportation expenses is
attributable to a number of factors. SLR added a local switching job in the
current year as a result of the significant increase in traffic handled, and
also added a job to perform blocking services for CN from September through
December 1998, at which time these services were taken over by SLQ,
14
<PAGE>
as a result of CN's decision to close a major classification yard in Montreal.
The addition of these jobs increased labor and benefits, fuel and a variety of
other operating expenses. SLR incurred approximately $85,000 additional
transload fees and railcar lease expense in conjunction with a new local oil
move. SLR's agency and dispatching costs also increased as a result of
additional personnel hired to perform these services on behalf of SLQ. These
increases in transportation operating expenses were partially offset by a
$55,000 reduction in switching fees as a result of the acquisition of one mile
of track from NHVT in December 1997. The increase in locomotive maintenance
expenses is primarily attributable to additional repair and maintenance expenses
incurred due to the additional use of locomotives as a result of the increase in
business levels, and to the addition of locomotive maintenance personnel to
maintain the ten locomotives acquired in conjunction with the acquisition of
SLQ.
Logistics operating expenses decreased $92,000, from $239,000 for the
second quarter of fiscal 1998 to $147,000 for the second quarter of the current
year. This decrease includes reductions in property rent and brokered freight
expenses as a result of the Company's decision to exit paper warehousing
operations, and a general reduction in other operating expenses as a result of a
57% reduction in the number of railcars handled.
Rail intermodal operating expenses decreased $12,000, from $126,000 for the
prior year to $114,000 for the current year, as a result of the 45% decrease in
the number of trailers and containers handled from the prior year.
Selling and administrative expenses increased $130,000, or 17%, from
$786,000 for the quarter ended December 31, 1997 to $916,000 for the quarter
ended December 31, 1998. Selling and administrative expenses for the current
quarter include an additional $39,000 of expenses associated with the Acquired
Operations. Excluding Acquired Operations, selling and administrative expenses
increased $91,000, or 11.5%. Additional selling and administrative expenses
include general increases in a number of expense categories, including
additional salaries and wages as a result of wage adjustments, additional legal
fees incurred in connection with a number of matters, and additional travel
expenses incurred in the pursuit of business opportunities.
Interest expense increased $26,000 for the three month period ended
December 31, 1998 as compared to the prior year. The increase is attributable
to additional borrowings incurred to finance the acquisition of the Acquired
Operations, partially offset by scheduled principal payments and prepayments of
the Company's term loan.
The provision for income taxes increased $235,000, from $22,000 for the
quarter ended December 31, 1997 to $257,000 for the quarter ended December 31,
1998. This increase is due to the amortization of the deferred tax assets that
were recognized in the prior year as a result of a reduction in the valuation
allowance recorded in the fourth quarter of the prior year, and the significant
increase in income before income taxes. The current year provision includes
$220,000 of deferred federal tax expense relating to the amortization of
deferred tax assets which will not require any tax payments by the Company
currently or in the future.
Analysis of operations for the six months ended December 31, 1998
compared to the six months ended December 31, 1997
Results of Operations
The Company generated net income of $722,000 for the six month period ended
December 31, 1998, as compared to net income of $651,000 for the six month
period ended December 31, 1997. Income before income taxes increased $549,000,
or 79%, from $694,000 for the six months ended December 31, 1997, to $1,243,000
for the corresponding period in the current year. The current year includes
$156,000 of start-up expenses associated with the acquisition and first month of
operations of SLQ. Excluding these start-up expenses, income before income
taxes increased $705,000, or over 100%. Operating revenues increased
15
<PAGE>
$2,082,000, while operating expenses increased $1,711,000 over the prior year.
Interest and other non-operating income increased $79,000, interest expense
decreased $99,000, and the provision for income taxes increased $478,000 over
the prior year.
Revenues
Operating revenues increased $2,082,000, or 25.5%, from $8,174,000 for the
six month period ended December 31, 1997 to $10,256,000 for the six month period
ended December 31, 1998. Acquired Operations accounted for $1,290,000 of this
increase, including $378,000 of operating revenues generated by the 1999 SLQ
Acquired Operations and $912,000 additional operating revenues generated by the
1998 Acquired Operations. Excluding Acquired Operations, operating revenues
increased $792,000, or 10%, consisting of a $938,000 increase in freight and
haulage revenues and a $157,000 increase in other operating revenues, partially
offset by a $178,000 decrease in logistics revenues and a $125,000 decrease in
intermodal freight and handling revenues.
Freight and haulage revenues increased $1,612,000, or 26%, consisting of a
30% increase in the number of carloads handled and a 2.8% decrease in average
revenues per carload. Total traffic handled increased approximately 5,700
carloads from 19,300 for the six months ended December 31, 1997 to 25,000 for
the six months ended December 31, 1998. Traffic for the six months ended
December 31, 1998 includes approximately 1,650 overhead carloads on SLQ
delivered to SLR that are counted as revenue carloads for both SLR and SLQ.
Excluding Acquired Operations, which accounted for $674,000 of the increase,
freight and haulage revenues increased $938,000, or 15%, and traffic increased
approximately 2,350 carloads, or 12%. This net increase includes an increase of
approximately 425 carloads on Pennsylvania rail operations and an increase of
approximately 1,925 carloads on SLR operations in New England.
The 425 carload net increase in business for Pennsylvania rail operations,
excluding Acquired Operations, includes approximately 180 additional carloads to
three new customers, 200 additional carloads to a building products distributor
due to the addition of new product lines transported by rail, 170 additional
carloads to an on line warehouse distributor due to an increase in paper
business, approximately 750 additional low rated bridge carloads, and a variety
of less significant increases. These increases were partially offset by a
reduction of approximately 300 carloads to the Company's primary paper customer
in Pennsylvania due to a reduction in its business levels, a reduction of 400
carloads to the Company's logistics operations, discussed further below, and 120
fewer carloads for a refractory plant due to a reduction in export business and
a change in traffic patterns. Bridge moves represent traffic that is received
from one connecting rail carrier and delivered to another connecting rail
carrier, as opposed to being received from or delivered to a customer located
directly on line. Revenues for such moves are generally less (rated lower) than
revenues received for traffic delivered to or received from customers located on
line since there is substantially less work involved with such moves.
The 1,925 carload increase in traffic for SLR is primarily attributable to
new business added over the past year. Approximately 425 additional carloads
were generated by a new on line liquid propane gas distributor that commenced
operations in April 1998, which is expected to generate significant additional
business, approximately 700 carloads were generated by a new overhead move
attributable to a special construction project in New England, and
approximately 300 additional carloads were generated by a new local oil move to
an on line paper customer that commenced operations in the fourth quarter of the
prior year, which is similar to the oil move that was established for another
paper customer in fiscal 1997. SLR also handled a one time move of 225 carloads
of pipe for the installation of a gas pipe line in the states of Maine and New
Hampshire in the current year. In addition to other less significant new
business, paper related traffic increased 170 carloads as a result of the
addition of new moves and additional business with existing customers. These
increases were partially offset by 180 less salt carloads to an on line customer
due to the timing of scheduled deliveries.
16
<PAGE>
Logistics revenues generated by the Company's operations in York,
Pennsylvania, decreased $178,000, or 43%, from $414,000 for the six month period
ended December 31, 1997 to $236,000 for the six month period ended December 31,
1998. The number of railcars handled decreased 420 carloads, or 49%. The
decrease in volume is attributable to the elimination of bulk transfer business
for an on line feed broker, which was resumed by the customer, a decrease in
business to another feed broker lost to competition, a decrease in paper
transload and storage business as a result of the Company's decision in the
second quarter of fiscal 1998 to exit paper warehousing operations and to direct
this business to an independent warehouse operator located on line, and a
variety of less significant decreases.
Intermodal freight and handling revenues generated by the Company's rail
intermodal terminal in Auburn, Maine, excluding the 1999 SLQ Acquisition,
decreased $125,000 from $571,000 for the six months ended December 31, 1997 to
$446,000 for the corresponding period in the current year. Intermodal volume
decreased approximately 2,075 trailers and containers, or 31%, from 6,625
trailers and containers for the first six months of the prior year to 4,550
trailers and containers for the first six months of the current year. The
decrease in intermodal volume is attributable to competition from a nearby
intermodal terminal that opened in December 1996, the conversion of certain
intermodal business to rail boxcars, and generally lower levels of intermodal
shipments.
Excluding Acquired Operations, other operating revenues increased $157,000
from the prior year, including $175,000 of additional railcar storage and
demurrage revenues, $108,000 of blocking revenues from CN in the current year in
conjunction with the closing of a major CN classification yard in Montreal, an
additional $50,000 of revenues for track work performed for customers, and less
significant increases in a variety of other revenues. These increases were
partially offset by a $172,000 reduction in fees from CN in connection with the
renegotiation of the Operating and Marketing Agreement between SLR and CN, and a
$53,000 decrease in railcar brokering commissions as a result of the termination
of two contracts. The 1999 SLQ Acquired Operations generated $79,000 of other
operating revenues including blocking fees and trackage rights revenues. The
1998 Acquired Operations generated an additional $520,000 of other operating
revenues consisting of additional railcar storage and demurrage revenues and
additional switching service fees for operating BMS.
Interest and non-operating income increased $79,000 over the prior year as
a result of six months of principal and interest forgiven on the $1.5 million
promissory note due CN in the current year as compared to three months in the
prior year, partially offset by the gain on the sale of unutilized equipment in
the prior year.
Expenses
Operating expenses increased $1,711,000, or 24%, from $7,046,000 for the
six month period ended December 31, 1997 to $8,757,000 for the six month period
ended December 31, 1998. The increase consists of $1,476,000 additional cost of
operations and $235,000 additional selling and administrative expenses.
Excluding Acquired Operations, operating expenses increased $625,000, or 9%.
Cost of operations increased $1,476,000, or 30%, from $5,496,000 for the
six month period ended December 31, 1997 to $6,972,000 for the corresponding six
month period in the current year. Cost of operations for the current year
includes $1,136,000 of railroad operating expenses associated with the Acquired
Operations as compared to $92,000 of expenses in the prior year. Excluding
Acquired Operations, cost of operations increased $432,000, including $685,000
additional railroad operating expenses and $18,000 additional other operating
expenses, partially offset by a $259,000 decrease in logistics operating
expenses and a $12,000 decrease in intermodal operating expenses.
Railroad operating expenses increased $1,729,000 for the six months ended
December 31, 1998 as compared to the corresponding period in the prior year.
Excluding Acquired Operations, railroad operating expenses increased $685,000,
consisting of $91,000 additional
17
<PAGE>
expenses for Pennsylvania rail operations and $594,000 additional SLR expenses
in New England. The net increase in railroad operating costs for Pennsylvania
rail operations, excluding Acquired Operations, includes an increase in car hire
expense which is partially offset by an increase in demurrage revenues,
additional costs incurred in connection with minor derailments and accidents,
and a provision for severance costs incurred in connection with the termination
of an operations manager. These increases were partially offset by reduced
salaries and wages as a result of two unfilled management/supervisory positions
and lower locomotive fuel costs as a result of lower fuel rates in the current
year.
The $594,000 increase in railroad operating costs for SLR, excluding
Acquired Operations, is comprised of $166,000 additional maintenance of way
expenses, $320,000 additional transportation expenses, $92,000 additional
locomotive maintenance expenses, and $16,000 additional other expenses. The
increase in maintenance of way expenses is primarily attributable to track
projects performed on the behalf of customers for which SLR received revenues,
and a track surfacing project. The increase in transportation expenses is
attributable to a number of factors. SLR added a local switching job in the
current year as a result of the significant increase in traffic handled, and
also added a job to perform blocking services for CN from September through
December 1998, at which time these services were taken over by SLQ, as a result
of CN's decision to close a major classification yard in Montreal. The addition
of these jobs increased labor and benefits, fuel and a variety of other
operating expenses. SLR incurred approximately $175,000 additional transload
fees and railcar lease expense in conjunction with a new local oil move. SLR's
agency and dispatching costs also increased as a result of additional personnel
hired to perform these services on behalf of SLQ. These increases in
transportation operating expenses were partially offset by a $153,000 decrease
in car hire expense in conjunction with the renegotiation of the CN Operating
and Marketing Agreement and a $67,000 decrease in switching fees as a result of
the acquisition of one mile of track from NHVT in December 1997. The increase
in locomotive maintenance expenses is primarily attributable to additional
repair and maintenance expenses incurred due to the additional use of
locomotives as a result of the increase in business levels, and to the addition
of locomotive maintenance personnel to maintain the ten locomotives acquired in
conjunction with the acquisition of SLQ.
Logistics operating expenses decreased $259,000, from $560,000 for the
first six months of fiscal 1998 to $301,000 for the first six months of the
current year, including reductions in property rent and brokered freight
expenses as a result of the Company's decision to exit paper warehousing
operations, and a reduction in labor and benefits and other operating expenses
as a result of a 49% reduction in the number of railcars handled.
Rail intermodal operating expenses decreased $12,000, from $248,000 for the
prior year to $236,000 for the current year, as a result of the 31% decrease in
the number of trailers and containers handled from the prior year.
Selling and administrative expenses increased $235,000, or 15%, from
$1,550,000 for the six months ended December 31, 1997 to $1,785,000 for the six
months ended December 31, 1998. Selling and administrative expenses for the
current year includes an additional $42,000 of expenses associated with the
Acquired Operations. Excluding Acquired Operations, selling and administrative
expenses increased $193,000, or 12.5%. Additional selling and administrative
expenses include general increases in a number of expense categories, including
additional salaries and wages as a result of wage adjustments, additional
provisions under profit sharing and incentive compensation plans as a result of
the significant improvement in results of operations over the prior year,
additional legal fees incurred in connection with a number of matters, and
additional travel expenses incurred in the pursuit of business opportunities.
Interest expense decreased $99,000 for the six month period ended December
31, 1998 as compared to the prior year. The prior year amount includes a
$108,000 charge incurred in connection with the refinancing of the Company's
bank debt in August 1997. Excluding this charge, interest expense increased
$9,000 as a result of additional borrowings incurred to finance the acquisition
of the Acquired Operations, partially offset by scheduled principal payments and
prepayments of the Company's term loan.
18
<PAGE>
The provision for income taxes increased $478,000, from $43,000 for the six
months ended December 31, 1997 to $521,000 for the six months ended December 31,
1998. This increase is due to the amortization of the deferred tax assets that
were recognized in the prior year as a result of a reduction in the valuation
allowance recorded in the fourth quarter of the prior year, and the significant
increase in income before income taxes. The current year provision includes
$442,000 of deferred federal tax expense relating to the amortization of
deferred tax assets which will not require any tax payments by the Company
currently or in the future.
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.
Risk of the Company's Year 2000 Issues
The Company's key 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 to be released by March 31, 1999. The Company's
general ledger accounting software vendor has indicated that its general
ledger system is year 2000 compliant. The Company plans to test each
system for year 2000 compliance as a part of its year 2000 compliance plan.
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. The Company plans to test this
system for year 2000 compliance as a part of its year 2000 compliance plan.
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. The
Company plans to test this system for year 2000 compliance as a part of its
year 2000 compliance plan. Railinc provides a variety of central system
services for the North American rail industry, including railroads, rail
equipment own-
19
<PAGE>
ers, 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
the end of the second quarter of 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.
The Company plans to test these systems for year 2000 compliance when they
are completed as a part of its year 2000 compliance plan.
Company's State of Readiness
As noted above, the Company has completed its evaluation of its significant
risk areas with respect to the year 2000, and 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 compliant, which is largely outside the Company's control.
The Company engaged the services of an outside consultant to prepare a year 2000
compliance plan, and received the consultant's report in December 1998. The
Company is currently in the preliminary stages of implementing those portions of
its compliance plan which it can control and is carefully monitoring the status
of those systems it cannot control.
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.
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 compliant 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 to implement such software.
20
<PAGE>
PART II.
Item 1. Legal Proceedings
As previously reported in Item 3 of the Emons Transportation Group, Inc.
Annual Report on Form 10-K for the fiscal year ended June 30, 1998, in which
reference is hereby made, Emons Industries, Inc. is currently a defendant in
approximately 674 product liability actions, and one of the Company's railroads
is in the process of remediating a fuel oil spill at its locomotive maintenance
facility in York, Pennsylvania.
Item 3. Default Upon Senior Securities
On June 18, 1998 and November 19, 1998, the Board of Directors voted to
omit the regular semi-annual dividend of $0.07 per share on its $0.14 Cumulative
Convertible Preferred Stock which would have been payable on July 1, 1998 and
January 4, 1999, respectively. Dividends in arrears as of December 31, 1998
aggregated $1,767,796.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of stockholders of Emons Transportation Group, Inc.
held on November 19, 1998, the stockholders:
(a) elected Messrs. Michael J. Blake, Robert Grossman, Robert J.
Smallacombe, Alfred P. Smith, Dean H. Wise and Scott F. Ziegler, and
Ms. Kimberly A. Madigan as directors of the Company to serve in such
capacity until their successors are elected and qualified, and
(b) ratified the appointment of Arthur Andersen LLP as independent
accountants to audit the financial statements of the Company for the
year ended June 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) An index to exhibits appears following the signature page to this
report.
(b) A report on Form 8-K dated December 23, 1998 was filed by the Company
on January 7, 1999 reporting the Company's acquisition of the
Sherbrooke Line from the Canadian National Railway for Can$7 million
pursuant to the terms of an Asset Purchase Agreement dated November 25,
1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMONS TRANSPORTATION GROUP, INC.
Date: February 12, 1999 By: /s/Scott F. Ziegler
----------------- -------------------
Scott F. Ziegler
Senior Vice President and Chief
Financial Officer
(signing on behalf of the registrant
as both its duly authorized officer
and its principal financial officer)
22
<PAGE>
EXHIBITS
The following exhibits are filed as a part of this report. For
convenience of reference, exhibits are listed according to numbers assigned in
the Exhibit Table of Item 601 of Regulation S-K under the Securities Exchange
Act of 1934.
<TABLE>
<CAPTION>
Page in
Exhibit Sequentially
Number Exhibit Numbered Copy
<C> <S> <C>
3 (a) Certificate of Incorporation for Emons Holdings, Inc. dated December
19, 1986 (incorporated by reference from Emons Holdings, Inc. Report on
Form 10-K for the year ended June 30, 1987, Exhibit Number 3 (a)) ---
3 (b) Certificate of Amendment of Certificate of Incorporation for Emons
Holdings, Inc. dated September 26, 1989 (incorporated by reference from
Emons Holdings, Inc. Report on Form 10-Q for the quarter ended
September 30, 1989, Exhibit Number 3 (b)) ---
3 (c) Amended and Restated By-Laws for Emons Holdings, Inc. (incorporated by
reference from Emons Holdings, Inc. Report on Form 10-Q for the quarter
ended September 30, 1989, Exhibit Number 3 (c)) ---
3 (d) Certificate of Amendment of Certificate of Incorporation for Emons
Holdings, Inc. dated November 18, 1993 (incorporated by reference from
Emons Transportation Group, Inc. Report on Form 10-Q for the quarter
ended December 31, 1993, Exhibit Number 3 (d)) ---
10 (a) Lease Agreement dated as of November 1, 1997 between St. Lawrence &
Atlantic Railroad Company and Berlin Mills Railway, Inc. (incorporated
by reference from Emons Transportation Group, Inc. Report on Form 10-Q
for the quarter ended September 30, 1997, Exhibit Number 10 (b)) ---
10 (b) Asset Purchase Agreement between John C. Nolan, Lancaster Northern
Railway, Inc., Chester Valley Railway, Inc., East Penn Railways, Inc.,
and Bristol Industrial Terminal Railway, Inc. and Penn Eastern Rail
Lines, Inc. dated November 7, 1997 (incorporated by reference from
Emons Transportation Group, Inc. Report on Form 10-Q for the quarter
ended December 31, 1997, Exhibit Number 10 (c)) ---
10 (c) Asset Purchase Agreement between New Hampshire and Vermont Railroad
Company, Inc. and St. Lawrence & Atlantic Railroad Company dated
December 12, 1997 (incorporated by reference from Emons Transportation
Group, Inc. Report on Form 10-Q for the quarter ended December 31,
1997, Exhibit Number 10 (d)) ---
10 (d) Asset Purchase Agreement dated November 25, 1998 between St. Lawrence &
Atlantic Railroad (Quebec) Inc. and Canadian National Railway Company
(incorporated by reference from Emons Transportation Group, Inc. Report
on Form 8-K dated December 23, 1998 Exhibit Number 10 (a)) ---
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Page in
Exhibit Sequentially
Number Exhibit Numbered Copy
<C> <S> <C>
10 (e) Amended and Restated Loan and Security Agreement dated as of December
21, 1998 among Emons Transportation Group, Inc., Emons Industries,
Inc., Emons Finance Corp., Maryland and Pennsylvania Railroad Company,
Emons Logistics Services, Inc., Maine Intermodal Transportation, Inc.,
Yorkrail, Inc., St. Lawrence & Atlantic Railroad Company, Penn Eastern
Rail Lines, Inc., St. Lawrence & Atlantic Railroad (Quebec) Inc., and
SLR Leasing Corp., as the Borrowers, and LaSalle National Bank, as the
Lender (incorporated by reference from Emons Transportation Group, Inc.
Report on Form 8-K dated December 23, 1998 Exhibit Number 10 (b)) ---
10 (f) Letter Agreement dated August 21, 1997 regarding renegotiation of the
Canadian National Railway Promissory Note and Operating and Marketing
Agreement ---
27 (a) Financial Data Schedules ---
</TABLE>
24
<PAGE>
CONFIDENTIAL TREATMENT
The confidential portion has been so omitted and filed separately with the
Securities and Exchange Commission.
August 21, 1997
Mr. Robert Grossman
Chairman and Chief Executive Officer
St. Lawrence & Atlantic Railroad Company
96 South George Street
York, Pennsylvania 17401
Subject: Renegotiation of Note and Operating & Marketing Agreement
---------------------------------------------------------
Dear Robert:
This is in reference to the recent discussions that have taken place between
St. Lawrence & Atlantic Railroad Company ("SLR") and Canadian National Railway
Company ("CN"), regarding the renegotiation of the existing note of $1,500,000
made by SLR to CN (the "Note") and the Operating and Marketing Agreement.
As per our discussions, CN and SLR have agreed to the following terms (U.S.
Dollars):
1. A reduction in the yearly subsidy from the current amount of $___ to $___
for the first twelve-month period commencing on October 1, 1997; $___ in
the second twelve-month period; $___ in the third twelve-month period;
and $0 thereafter.
2. The elimination of the supplemental trackage fees effective on October 1,
2001.
3. The elimination of all volume adjustment payments effective on October 1,
1997.
4. The extension of car hire relief from CN owned cars to all cars effective
on October 1, 1997, providing for mileage relief and car hire relief for
a maximum of ___ days per car.
5. Emons Transportation Group, Inc. will execute a Guaranty Agreement
agreeing to guaranty the full payment of the CN Note and further agreeing
not to encumber any of its assets, or to permit the encumbrance of any of
the assets of its subsidiaries or affiliated entities, other than in
accordance with the LaSalle Loan Agreement, without CN's prior written
consent except as may be provided otherwise in the Intercreditor
Agreement between CN and LaSalle National Bank.
<PAGE>
Mr. Robert Grossman August 21, 1997
Chairman & Chief Executive Officer
St. Lawrence & Atlantic Railroad Company
6. As consideration for the terms reflected in numbers 2, 3 and 5 above, CN
will forgive the payment of all outstanding principal, and all associated
interest, due under the Note based on a seven-year amortization of equal
payments of principal and interest. Periodic forgiveness of the Note will
be made at the end of each quarter, with the first quarter commencing on
October 1, 1997 and continuing quarterly thereafter in accordance with
the attached schedule. Notwithstanding the above, however, in the event
that (i) SLR sells substantially all of its assets, (ii) if SLR
liquidates, either as part of a bankruptcy proceeding or otherwise, then
SLR shall pay CN all outstanding amounts of principal and interest that
have not then been forgiven.
CN and SLR will amend or restate the Operating & Marketing Agreement and all
other applicable agreements, including the Note, to reflect the provisions set
forth herein. The term of these new agreements, and the term of these new
provisions, shall be for a period of 7 years commencing as of October 1, 1997.
If the above is consistent with your understanding of our discussions and
with your intentions with respect to this matter, we would ask that you
acknowledge your agreement in the space provided below. Upon the signing of
this letter agreement by SLR, the provisions herein shall become binding on both
parties.
Yours sincerely,
/s/Jean Pierre Ouellet
Jean Pierre Ouellet
Chief Legal Officer and Corporate Secretary
We agree, on behalf of the St. Lawrence & Atlantic Railroad Company, to the
agreements contained herein.
ST. LAWRENCE & ATLANTIC RAILROAD COMPANY
By: /s/Robert Grossman By: /s/Scott F. Ziegler
------------------ -------------------
Robert Grossman Scott F. Ziegler
Chairman and Chief Executive Vice President - Finance,
Officer Controller and Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMONS
TRANSPORTATION GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,845,351
<SECURITIES> 0
<RECEIVABLES> 2,784,549
<ALLOWANCES> 182,827
<INVENTORY> 261,495
<CURRENT-ASSETS> 5,565,277
<PP&E> 37,899,852
<DEPRECIATION> 11,565,569
<TOTAL-ASSETS> 33,582,358
<CURRENT-LIABILITIES> 4,969,803
<BONDS> 15,443,480
0
14,855
<COMMON> 60,958
<OTHER-SE> 12,311,272
<TOTAL-LIABILITY-AND-EQUITY> 33,582,358
<SALES> 0
<TOTAL-REVENUES> 10,256,135
<CGS> 0
<TOTAL-COSTS> 6,972,246
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 450,896
<INCOME-PRETAX> 1,242,886
<INCOME-TAX> 521,000
<INCOME-CONTINUING> 721,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 721,886
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
