<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 September 30, 1999 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 September 30, 1999 is as follows:
Voting Common Stock 7,848,774
---------
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EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,514,361 $ 2,028,278
Accounts receivable, net 2,475,292 2,967,742
Materials and supplies 343,996 149,815
Prepaid expenses 449,832 430,743
Deferred income taxes 812,000 812,000
--------------- ---------------
Total current assets 6,595,481 6,388,578
--------------- ---------------
Property, plant and equipment 40,073,714 39,201,960
Less accumulated depreciation (12,820,154) (12,364,909)
--------------- ---------------
Property, plant and equipment, net 27,253,560 26,837,051
--------------- ---------------
Deferred expenses and other assets 426,010 557,235
Deferred income taxes 931,000 1,243,000
--------------- ---------------
TOTAL ASSETS $ 35,206,051 $ 35,025,864
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 645,774 $ 651,460
Accounts payable 1,551,653 1,089,133
Accrued payroll and related expenses 1,525,032 1,998,594
Other accrued expenses 1,735,848 2,000,715
--------------- ---------------
Total current liabilities 5,458,307 5,739,902
Long-term debt 14,170,207 14,212,926
Other liabilities 831,136 824,886
--------------- ---------------
Total Liabilities 20,459,650 20,777,714
--------------- ---------------
Stockholders' Equity:
Common stock 78,488 78,603
Additional paid-in capital 23,580,039 23,625,471
Deficit (8,653,166) (9,164,191)
--------------- ---------------
15,005,361 14,539,883
Comprehensive income 23,550 33,615
Unearned compensation - restricted stock awards (282,510) (325,348)
--------------- ---------------
Total Stockholders' Equity 14,746,401 14,248,150
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,206,051 $ 35,025,864
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Operating revenues $ 6,184,935 $ 5,150,791
Operating expenses:
Cost of operations 4,135,903 3,369,638
Selling and administrative 913,433 868,455
-------------- ---------------
Total operating expenses 5,049,336 4,238,093
-------------- ---------------
Income from operations 1,135,599 912,698
Other income (expense):
Interest income 28,106 28,654
Interest expense (292,901) (223,349)
Other, net 9,221 -
-------------- ---------------
Total other income (expense) (255,574) (194,695)
-------------- ---------------
Income before income taxes 880,025 718,003
Provision for income taxes 369,000 264,000
-------------- ---------------
Net income 511,025 454,003
Preferred dividend requirements - 53,002
-------------- ---------------
Income applicable to common shareholders $ 511,025 $ 401,001
============== ===============
Weighted average number of common shares (Note 4):
Basic 7,854,655 6,051,977
============== ===============
Diluted 8,120,270 7,862,420
============== ===============
Earnings per common share (Note 4):
Basic $ 0.07 $ 0.07
============== ===============
Diluted $ 0.06 $ 0.06
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 511,025 $ 454,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 454,170 330,452
Amortization 39,099 36,217
Gain on forgiveness of debt (46,060) (42,345)
Change in deferred income taxes 312,000 222,000
Changes in assets and liabilities:
Accounts receivable, materials and
supplies and prepaid expenses 278,674 (75,448)
Accounts payable and accrued expenses (289,521) (51,589)
Other assets and liabilities, net 114,699 104,662
--------------- ---------------
Net cash provided by operating activities 1,374,086 977,952
--------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (848,466) (785,667)
Increase in deferred expenses - (124,442)
--------------- ---------------
Net cash used in investing activities (848,466) (910,109)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 12,077 -
Borrowings from long-term debt 500,000 -
Reduction in long-term debt (529,645) (993,976)
Preferred stock conversion costs (18,529) -
--------------- ---------------
Net cash used in financing activities (36,097) (993,976)
--------------- ---------------
Effect of exchange rate changes on cash (3,440) -
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 486,083 (926,133)
Cash and cash equivalents at beginning of period 2,028,278 2,677,004
--------------- ---------------
Cash and cash equivalents at end of period $ 2,514,361 $ 1,750,871
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 1999
(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
$4,575,000, plus $248,000 of capitalized acquisition costs. The acquisition was
completed on December 21, 1998. The Sherbrooke Line connects with CN's
Halifax-to-Montreal main line at Ste. Rosalie, Quebec, and the Company's St.
Lawrence & Atlantic Railroad ("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. The Company also
acquired 11 locomotives, maintenance of way and other equipment, and materials
and supplies, and leased two locomotives 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 $4,469,450 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.
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.
At a Special Meeting of the Stockholders of the Company held on June
29, 1999, the shareholders voted to approve the merger of ETG Merger Corporation
into Emons Transportation Group, Inc. (the "Merger"), resulting in the exchange
of each share of the Company's outstanding $0.14 Series A Cumulative Convertible
Preferred Stock into 1.1 shares of the Company's Common Stock. As a result of
the Merger, the Company converted all 1,485,543 of its outstanding shares of
Convertible Preferred Stock into 1,633,788 shares of Common Stock effective June
29, 1999.
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Earnings per share amounts are computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
-------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 511,025 $ 454,003
Less: Preferred dividend
requirements - (53,002)
---------- ---------
Basic EPS
Income applicable to
common shareholders $ 511,025 7,854,655 $0.07 $ 401,001 6,051,977 $0.07
===== =====
Effect of Dilutive Securities
Stock options and warrants - 265,615 - 447,538
Convertible preferred stock - - 53,002 1,362,905
--------- --------- ---------- ---------
Diluted EPS
Income applicable to common
shareholders plus assumed
conversions $ 511,025 8,120,270 $0.06 $ 454,003 7,862,420 $0.06
========== ========= ===== ========== ========= =====
</TABLE>
Note 5. Comprehensive Income
Comprehensive income for the three-month periods ended September 30,
1999 and 1998 is as follows:
For the Three Months Ended
September 30,
--------------------------------
1999 1998
---- ----
Net income $ 511,025 $ 454,003
Other comprehensive income, net of tax
Foreign currency translation adjustment (10,065) -
-------- -------
Total comprehensive income $ 500,960 $ 454,003
======== =======
Note 6. 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 result from the ultimate outcome of these
claims, and that such claims will not have a material impact on the Company's
consolidated financial position or results of operations.
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 September 30, 1999, Industries was one of numerous defendants
(including many of the largest pharmaceutical manufacturers) in 567 lawsuits in
which the plaintiffs allege that DES caused adenosis, infertility, cancer or
birth defects in the offspring or grandchildren of
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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, 562 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.
This appeal is currently pending.
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, 1999 to September 30, 1999, seven new actions were commenced in
which Industries was named as a defendant and nine lawsuits were settled or
dismissed at no liability to Industries. As of September 30, 1999, there were
194 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 194 Ohio DES cases against the Company are subject
to dismissal. Counsel for these plaintiffs have brought appeals regarding such
dismissals and, as a result, these cases have not yet been finally adjudicated.
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 September 30, 1999:
Number of
State Court Cases
----- ----- -----
California Los Angeles County 1
San Francisco County 4
New York New York County 356
Ohio Cuyahoga County 114
Summit County 80
Pennsylvania Philadelphia County 11
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.
7
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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 $130,000 to $225,000, 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.
Railroad Industry Consolidation
-------------------------------
The consolidations involving certain Class I Railroads that routinely
interchange traffic with the Company's railroads have recently been completed.
Consolidated Rail Corporation, which previously interchanged traffic with the
Company's Pennsylvania rail operations, was divided and acquired by the Norfolk
Southern Railroad ("NS") and CSX Corporation ("CSX") effective June 1, 1999. The
Company has experienced a reduction in business levels as a result of service
disruptions caused by CSX's and NS's implementation of the merger. The Company
cannot currently predict how long such service disruptions will persist or what
the total impact of such service disruptions may have on its results of
operations. In addition, CN, which inter-changes traffic with SLR, completed the
acquisition of the Illinois Central Railroad on July 1, 1999. While the Company
does not anticipate any significant long-term negative impact as a result of
these consolidations, and believes that they will 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 7. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
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. In
June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" ("FAS 137"). FAS 137 deferred the effective date of FAS 133 one year, to
all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS 133
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 8. Reclassifications
Certain prior period amounts have been reclassified to conform with the
current year presentation.
8
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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, service of connecting Class I rail
carriers, 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.
General
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 ("CN"). The
acquisition was completed on December 21, 1998. The Sherbrooke Line connects
with CN's Halifax-to-Montreal main line at Ste. Rosalie, Quebec, and the
Company's St. Lawrence & Atlantic Railroad ("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. The
Company also acquired 11 locomotives, maintenance of way and other equipment,
and materials and supplies in connection with the acquisition.
On June 1, 1999, the Norfolk Southern Railroad ("NS") and CSX
Corporation ("CSX") completed the split-up of Consolidated Rail Corporation
("Conrail") and commenced operations of their respective portions of Conrail.
NS's and CSX's implementation of the merger has caused congestion, a lack of car
supply for customers and service disruptions, which has resulted in a loss of
business to trucking and alternative routes for all of the Company's rail
operations. While the Company cannot predict how long such problems will persist
or what the total impact of such problems may have on its results of operations,
the Company believes that, on a long-term basis, the merger will create
additional rail business for its Pennsylvania rail operations as a result of
longer Class I single-line rail service on competitive routes.
Liquidity and Capital Resources
The Company's primary sources of liquidity include its cash and
accounts receivable, which aggregated $4,990,000 and $4,996,000 at September 30,
1999 and June 30, 1999, respectively, the balance available under the Company's
$2 million working capital facility, and the amount prepaid on the $7,775,000
seven-year revolving term loan (the "Revolving Term Loan"), which is available
for future borrowings. As of September 30, 1999, the Company had no borrowings
under the working capital facility and had approximately $1.5 million available
in accordance with the facility's eligibility criteria. As of September 30,
1999, the Company prepaid $2 million of its Revolving Term Loan, which is also
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. The Company intends to utilize the $2
million working capital facility and balance available under the Revolving Term
Loan 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 acquisitions.
The Company's cash and cash equivalents increased $486,000 for the
quarter ended September 30, 1999, including a $500,000 draw on the prepaid
portion of the Revolving Term Loan. The net increase includes $1,374,000 of cash
provided by operations, partially offset by $848,000 of capital investments, an
$18,000 net reduction in long-term debt, $19,000 of additional costs incurred in
conjunction with the exchange of the Company's Convertible Preferred Stock into
Common Stock which took place in June 1999, and a $3,000 exchange rate impact
relating to SLQ operations.
9
<PAGE>
The Company generated $1,374,000 of cash from operations for the
quarter ended September 30, 1999, as compared to $978,000 for the corresponding
quarter in the prior year. Excluding changes in assets and liabilities, cash
provided by operations increased $270,000 from $1,000,000 for the three months
ended September 30, 1998 to $1,270,000 for the three months ended September 30,
1999, as a result of improved operating performance in the current year.
The Company invested $848,000 in capital expenditures during the first
three months of fiscal 2000, including $706,000 of investments in railroad track
structures (net of $148,000 of government grants), and $142,000 of other capital
investments. Approximately $400,000 of the investment in railroad track
structures relates to improvements to SLQ's track infrastructure, which was
contemplated in connection with the acquisition of SLQ. As of September 30,
1999, the Company had approximately $300,000 of government grants and
approximately $200,000 of government funding under no interest loan programs
available for future track rehabilitation projects 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 commenced construction of this $1.5 million facility in October 1999,
and anticipates that the project will be substantially completed by December 31,
1999. The Company has no other material commitments for capital expenditures.
The Company's net long-term debt obligations decreased $18,000 during
the three-month period ended September 30, 1999, including $530,000 of scheduled
debt repayments, partially offset by a $500,000 draw on the prepaid portion of
the Revolving Term Loan and $12,000 of borrowings under government no interest
loan track rehabilitation programs. The Company reduced the amount prepaid under
the Revolving Term Loan to fund the improvements to SLQ's track infrastructure.
Analysis of operations for the three months ended September 30, 1999
compared to the three months ended September 30, 1998
Results of Operations
---------------------
The Company generated net income of $511,000 for the three-month period
ended September 30, 1999, as compared to net income of $454,000 for the
three-month period ended September 30, 1998. Income before income taxes
increased $162,000, or 22.5%, from $718,000 for the quarter ended September 30,
1998, to $880,000 for the corresponding quarter in the current year. Operating
revenues increased $1,034,000, while operating expenses increased $811,000 over
the prior year's quarter. Interest and other non-operating income increased
$9,000, interest expense increased $70,000, and the provision for income taxes
increased $105,000 over the prior year's quarter.
Revenues
--------
Operating revenues increased $1,034,000, or 20%, from $5,151,000 for
the three-month period ended September 30, 1998 to $6,185,000 for the
three-month period ended September 30, 1999. SLQ, which commenced operations on
December 1, 1998, generated $1,279,000 of operating revenues in the first
quarter of fiscal 2000. Excluding SLQ, operating revenues decreased $245,000, or
4.8%, consisting of a $70,000 decrease in freight and haulage revenues
(excluding intermodal freight), a $3,000 decrease in intermodal freight and
handling revenues, a $12,000 decrease in logistics revenues, and a $160,000
decrease in other operating revenues.
Freight and haulage revenues (excluding intermodal freight) increased
$873,000, or 23%, consisting of a 49% increase in the number of carloads
handled, partially offset by a 17.5% decrease in average revenues per carload.
Total traffic handled increased approximately 5,700 carloads from 11,700 for the
quarter ended September 30, 1998 to 17,400 for the quarter ended September 30,
1999. Traffic for the quarter ended September 30, 1999 includes approximately
4,700 overhead carloads on SLQ delivered to SLR that are counted as revenue
carloads for both SLR and SLQ. Excluding SLQ, which accounted for $943,000 of
freight and haulage revenues in the first quarter of fiscal 2000, freight and
haulage revenues decreased $70,000, or 2%, while
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traffic decreased approximately 700 carloads, or 6%. Freight and haulage
revenues on SLR operations in New England decreased $181,000 and traffic
decreased approximately 500 carloads, while freight and haulage revenues on
Pennsylvania operations increased $111,000 although traffic decreased 200
carloads.
The 500 carload decrease in SLR traffic is attributable to
approximately 400 carloads of one-time shipments of pipe and cement last year
that did not recur this year, a decrease of over 250 overhead agricultural
carloads as a result of a late harvest and car supply problems, and a decrease
of 100 oil carloads for a customer that converted from oil to natural gas. In
addition, the congestion and service disruptions caused by NS's and CSX's
implementation of the Conrail merger adversely affected SLR's overall business
as a result of service and car supply problems. These decreases were partially
offset by 150 additional carloads attributable to two new on-line paper
warehouses added over the past year.
Freight and haulage revenues for Pennsylvania rail operations increased
$111,000, despite being adversely impacted by the congestion and service
disruptions caused by NS's and CSX's implementation of the Conrail merger. The
increase in freight and haulage revenues is attributable to 350 additional
agricultural carloads due to local drought conditions last year, over 100
carloads for a new customer, Goodyear Tire & Rubber Company, which completed
construction of an on-line regional distribution center and commenced operations
in June 1999, and other less significant increases in business. These increases
were offset by a number of decreases attributable to problems caused by the
Conrail merger, including business lost to truck during the first quarter of the
current year. The number of carloads handled decreased despite the increase in
revenues as a result of a 350 carload decrease in low-rated bridge traffic
between the Company's two railroads in York, Pennsylvania due to changes in
traffic patterns as a result of problems caused by the Conrail merger. 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 17.5% decrease in average revenues per carload is attributable to
SLQ, which has an average freight rate that 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 since pricing for this business reflects the operating
synergies between SLR and SLQ. Excluding SLQ, average revenues per carload
increased 4.3% primarily as a result of the mix of business on Pennsylvania
operations, which includes a lower number of low-rated bridge moves.
Intermodal freight and handling revenues generated by the Company's
rail intermodal terminal in Auburn, Maine, excluding SLQ, decreased slightly
from $248,000 for the three months ended September 30, 1998 to $245,000 for the
corresponding period in the current year. Intermodal volume also decreased
slightly from 2,900 trailers and containers for the first quarter of the prior
year to 2,850 trailers and containers for the first quarter of the current year.
In October 1999, the Company's intermodal terminal handled its first
international steamship container, and is cautiously optimistic that this
business will result in an increase in future intermodal volume. SLR and SLQ, in
conjunction with the Canadian National Railway ("CN"), offer the only hi-cube,
double stack, cleared route in northern New England for intermodal trains, and
provide the Company's intermodal terminal with access to CN's Vancouver,
Montreal and Halifax ports.
Logistics revenues generated by the Company's operations in York,
Pennsylvania, decreased $12,000, or 9%, from $127,000 for the three-month period
ended September 30, 1998 to $115,000 for the three-month period ended September
30, 1999. The number of railcars handled decreased 21%, primarily as a result of
a reduction in business from an agricultural bulk transfer customer due to
unfavorable commodity pricing for one of the products handled by this customer.
Excluding SLQ, other operating revenues decreased $160,000 from the
prior year, primarily as a result of a $213,000 decrease in demurrage revenues,
partially offset by $42,000 of one-time easement revenues. The decrease in
demurrage revenues is partly attributable to demurrage associated with a
one-time
11
<PAGE>
pipe move for a gas line project in New England in the prior year, and partly to
a reduction in business for a printing customer in Pennsylvania which normally
generates substantial demurrage revenues. SLQ generated $248,000 of other
operating revenues, including blocking fees and trackage rights revenues.
Expenses
--------
Operating expenses increased $811,000, or 19%, from $4,238,000 for the
three-month period ended September 30, 1998 to $5,049,000 for the three-month
period ended September 30, 1999. The increase consists of $766,000 additional
cost of operations and $45,000 additional selling and administrative expenses.
Excluding SLQ, operating expenses increased $78,000, or 2%. This $78,000
increase also includes additional expenses incurred by SLR in conjunction with
the operations of SLQ as a result of the centralization of operations
management, dispatching and locomotive maintenance functions at SLR's facilities
in Auburn, Maine.
Cost of operations increased $766,000, or 23%, from $3,370,000 for the
three-month period ended September 30, 1998 to $4,136,000 for the corresponding
three-month period in the current year. Cost of operations for the current
quarter includes $679,000 of SLQ operating expenses. Excluding SLQ, cost of
operations increased $87,000, including $115,000 additional railroad operating
expenses and $6,000 additional logistics operating expenses, partially offset by
a $27,000 decrease in intermodal operating expenses, and a $7,000 decrease in
other operating expenses.
Railroad operating expenses increased $784,000 for the quarter ended
September 30, 1999 as compared to the corresponding quarter in the prior year.
Excluding SLQ, railroad operating expenses increased $115,000, consisting of a
$223,000 increase in SLR expenses in New England partially offset by a $108,000
decrease in expenses for Pennsylvania rail operations.
The $223,000 increase in railroad operating costs for SLR is primarily
attributable to additional expenses incurred by SLR in conjunction with the
operations of SLQ as a result of the centralization of operations management,
dispatching and locomotive maintenance functions at SLR's facilities in Auburn,
Maine. Locomotive maintenance expenses increased $190,000 as a result of the
addition of locomotive maintenance personnel and additional repair and
maintenance expenses incurred to maintain the 11 locomotives acquired in
conjunction with the acquisition of SLQ. 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 SLR's railroad operating costs were partially
offset by reductions in switching expenses associated with a one-time pipe move
for a gas line project in the prior year, a decrease in oil transload fees as a
result of the loss of a local oil move due to the customer converting from oil
to natural gas, and a reduction in derailment and accident expenses as a result
of more favorable experience in the current year as compared to the prior year.
The $108,000 net decrease in railroad operating costs for Pennsylvania
rail operations includes a reduction in car hire expense of approximately
$100,000 in conjunction with a corresponding decrease in demurrage revenues, and
a $90,000 decrease in the provision for derailments and accidents as a result of
more favorable experience in the current year as compared to the prior year.
These decreases were partially offset by an increase in other operating expenses
in conjunction with the increase in freight revenues.
Rail intermodal operating expenses decreased $27,000, from $122,000 for
the prior year's quarter to $95,000 for the current year's quarter. This
difference is primarily attributable to the favorable settlement in the current
quarter of a previously accrued loss and damage claim. Excluding the impact of
this settlement, intermodal operating expenses were consistent with the prior
year.
Logistics operating expenses increased $6,000, from $154,000 for the
first quarter of fiscal 1999 to $160,000 for the first quarter of the current
year consisting of a number of minor increases and decreases in a variety of
expenses.
12
<PAGE>
Selling and administrative expenses increased $45,000, or 5%, from
$868,000 for the quarter ended September 30, 1998 to $913,000 for the quarter
ended September 30, 1999. Excluding SLQ, selling and administrative expenses
decreased $9,000, or 1%. Selling and administrative expenses include general
increases in a number of expense categories, including higher salaries and wages
as a result of additional personnel and wage adjustments, higher employee
benefits as a result of increased health benefit costs, and additional public
relations expenses. These increases were more than offset by a reduction in the
provision for profit sharing and incentive compensation plans as a result of the
extraordinary improvement in results in the first quarter of fiscal 1999 as
compared to the first quarter of fiscal 1998. SLQ selling and administrative
expenses aggregated $54,000 in the first quarter of the current year, including
the addition of a sales person at the beginning of the year.
Interest expense increased $70,000 for the three-month period ended
September 30, 1999 as compared to the corresponding period in the prior year.
The increase is attributable to additional borrowings incurred to finance the
acquisition of SLQ and an increase in interest rates on variable rate debt,
partially offset by scheduled principal payments and additional temporary
prepayments of the Revolving Term Loan.
The provision for income taxes increased $105,000, from $264,000 for
the quarter ended September 30, 1998 to $369,000 for the quarter ended September
30, 1999. The effective tax rate increased from 36.8% for the first quarter of
fiscal 1999 to 41.9% for the first quarter of the current year as a result of
the mix between United States and foreign taxable income. The provision for
income taxes for the first quarters of both fiscal 2000 and fiscal 1999 includes
$312,000 and $222,000, respectively, 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.
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
compliant. 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 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
13
<PAGE>
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 compliant
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 detailed listing of all
non-compliant hardware. The Company has completed upgrading and testing all
significant hardware for year 2000 compliance.
The Company has completed the installation of all year 2000 compliant
upgrades for all significant third-party software and intends to perform
any remaining testing of third-party software as considered necessary by
the end of the year.
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 has installed the
year 2000 compliant upgrades for its railcar accounting system and for
its PC-based interline settlement system. The Company's general ledger
accounting software vendor has indicated that its general ledger system
is year 2000 compliant. The Company is currently in the process of
completing the testing of these systems for year 2000 compliance.
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 and has completed
testing to verify year 2000 compliance.
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
December 15, 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 all significant systems have been
upgraded and tested for year 2000 compliance.
14
<PAGE>
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.
Contingency Plans
-----------------
The Company's contingency plans are segregated into two groups of
software, 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 is
closely monitoring 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 has received year
2000 compliant upgrades for most software and believes that it will receive year
2000 compliance upgrades for most, if not all, remaining other software. Should
upgrades not be available, the Company will acquire year 2000 compliant software
with sufficient lead-time for implementation.
15
<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, 1999, in
which reference is hereby made, Emons Industries, Inc. is currently a defendant
in approximately 567 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
No default upon senior securities occurred during the three-month
period ended September 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
three-month period ended September 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) No reports on Form 8-K were filed during the three-month period
ended September 30, 1999.
16
<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: November 12, 1999 By: /s/ Scott F. Ziegler
----------------- --------------------
Scott F. Ziegler
Senior Vice President and
Chief Financial Officer
(signing on behalf of the
registrant as its duly
authorized officer and its
principal financial and
accounting officer)
17
<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
- ------ ------- -------------
<S> <C> <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)) ---
3 (e) Certificate of Amendment of Certificate of Incorporation for Emons Transportation
Group, Inc. dated June 29, 1999 (incorporated by reference from Emons
Transportation Group, Inc. Report on Form 10-K for the year ended June 30, 1999,
Exhibit Number 3 (e)) ---
10 (a) 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)) ---
10 (b) Agreement of Merger dated as of April 25, 1999 between Emons Transportation Group,
Inc. and NEWCO (incorporated by reference from Emons Transportation Group, Inc.
Report on Form 10-K for the year ended June 30, 1999, Exhibit Number 10 (l)) ---
27 Financial Data Schedules ---
</TABLE>
18
<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 THREE
MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000032666
<NAME> EMONS TRANSPORTATION GROUP INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,514,361
<SECURITIES> 0
<RECEIVABLES> 2,658,991
<ALLOWANCES> 183,699
<INVENTORY> 343,996
<CURRENT-ASSETS> 6,595,481
<PP&E> 40,073,714
<DEPRECIATION> 12,820,154
<TOTAL-ASSETS> 35,206,051
<CURRENT-LIABILITIES> 5,458,307
<BONDS> 14,170,207
0
0
<COMMON> 78,488
<OTHER-SE> 14,667,913
<TOTAL-LIABILITY-AND-EQUITY> 35,206,051
<SALES> 0
<TOTAL-REVENUES> 6,184,935
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<TOTAL-COSTS> 4,135,903
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