-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kpz2+J0YR1Hv2+BpBR/zFZe0GxFzHoVC2kl8u5hphQWqZcf8ve7Z+FpbdTPWQdY9 O5VbD6xhYkjHBln9EAeTcg== 0000950109-97-006085.txt : 19970929 0000950109-97-006085.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950109-97-006085 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMONS TRANSPORTATION GROUP INC CENTRAL INDEX KEY: 0000032666 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 232441662 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05206 FILM NUMBER: 97686309 BUSINESS ADDRESS: STREET 1: 96 S GEORGE ST CITY: YORK STATE: PA ZIP: 17401 BUSINESS PHONE: 7177711700 MAIL ADDRESS: STREET 1: 96 SOUTH GEORGE STREET CITY: YORK STATE: PA ZIP: 17401 FORMER COMPANY: FORMER CONFORMED NAME: EMONS HOLDINGS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: EMONS INDUSTRIES INC DATE OF NAME CHANGE: 19870216 FORMER COMPANY: FORMER CONFORMED NAME: AMFRE GRANT INC DATE OF NAME CHANGE: 19721005 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K --------- (x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ____________________ Commission File No.: 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 number) 96 South George Street, York, PA 17401 ---------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 771-1700 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01 Par Value $.14 Series A Cumulative Convertible Preferred Stock, $.01 Par Value 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 12, 1997, 5,884,200 shares of voting Common Stock were outstanding including 1,400,510 shares held by an escrow agent. For information regarding the escrow agent, see "Industries' Reorganization" below. The aggregate market value of shares of voting Common Stock held by nonaffiliates of the registrant as of September 12, 1997 was $18,015,531. For this purpose the average of the closing bid and asked prices ($3.31 per share), as of September 12, 1997, has been used. Portions of the definitive proxy statement for the annual meeting of stockholders to be held on November 20, 1997 are incorporated by reference into Part III of this Form 10-K. 1 Part I Item 1. Business Emons Transportation Group, Inc. ("Emons Transportation Group"), a Delaware corporation headquartered in York, Pennsylvania, is a freight transportation and distribution services company serving the Mid-Atlantic and Northeast regions of the United States. The Company owns three short line railroads, operates rail/truck transload and warehouse facilities, operates a rail intermodal terminal in Auburn, Maine, and provides customers with logistics services for the movement and storage of freight. Emons Transportation Group was organized in December 1986 and is the owner of all of the outstanding capital stock of Emons Industries, Inc. ("Industries"), the Maryland and Pennsylvania Railroad Company ("MPA"), Emons Logistics Services, Inc. ("Logistics"), Maine Intermodal Transportation, Inc. ("MIT") and Emons Railroad Group, Inc. ("Railroad Group") which owns all of the outstanding capital stock of Yorkrail, Inc. ("YKR") and the St. Lawrence & Atlantic Railroad Company ("SLR"). Prior to the formation of Emons Transportation Group in December 1986, Industries, which was formed in 1955, was the parent company. For information regarding the formation of Emons Transportation Group, see "Industries' Reorganization" below. Unless the context otherwise requires, the terms "Emons" and the "Company" when used herein shall refer to Emons Transportation Group, Inc. and its consolidated subsidiaries. The Company's executive offices are located at 96 S. George Street, York, Pennsylvania 17401 (Telephone 717-771-1700). Description of Operations The Company owns and operates three short line railroads, MPA, YKR and SLR. The combined revenues from these three short line railroad operations accounted for 87%, 86% and 89% of the Company's total operating revenues in fiscal 1997, 1996 and 1995, respectively. The Company also owns and operates a logistics services business in York, Pennsylvania, and a rail intermodal terminal in Auburn, Maine. These operations are intended to supplement the Company's railroad operations by providing a wide variety of value added services including warehousing and other distribution services and options to businesses located both on and off of the Company's rail lines. The Company operates in two geographic regions, Pennsylvania and New England. Pennsylvania operations consist of MPA, YKR and Logistics, located in York, Pennsylvania. New England operations consist of SLR, which extends from Portland, Maine, through New Hampshire to Norton, Vermont, and MIT, which commenced rail intermodal operations on SLR in Auburn, Maine, in September 1994. Local management teams are responsible for the operations in each region. In October 1996, CSX Corporation ("CSX") and Consolidated Rail Corporation ("Conrail") announced plans to merge. In response to the merger announcement, Norfolk Southern Railway ("NS") announced a competing tender offer to acquire Conrail. Subsequently, CSX and NS agreed to divide Conrail, and filed for approval of the transaction with the Surface Transportation Board ("STB") in June 1997. Based upon management's review of publicly available information currently included in the filing regarding the division of Conrail, all of the Company's railroads will continue to maintain their dual connections with Class I railroads. While the impact of the proposed merger on future traffic patterns and the resultant effect on the Company's railroad operations are uncertain at this time, the Company does not anticipate any significant negative impact as a result of the merger, and believes that the merger may create additional business as a result of longer Class I single line service on competitive routes, which could result in additional rail business for the Company. Pennsylvania ------------ MPA, located in York, Pennsylvania, owns 26 miles of mainline track and related properties. There are approximately 30 active customers that utilize MPA's service for in-bound and/or out-bound shipments of freight, including approximately 20 customers located directly on line. MPA primarily serves customers in the paper, building products and distribution industries. MPA's largest customer, P. H. Glatfelter Company, a paper manufacturer, accounted for approximately 44% of MPA's operating revenues in fiscal 1997. MPA interchanges rail traffic with Conrail and YKR at York, Pennsylvania, and 2 CSX Transportation, Inc. ("CSXT") at Hanover, Pennsylvania. Based upon current publicly available information, MPA will interchange rail traffic with NS in York, Pennsylvania, and maintain its CSXT and YKR interchanges upon completion of the proposed acquisition of Conrail by CSX and NS. YKR operates 16 miles of mainline track and related properties in and around York, Pennsylvania. YKR serves approximately 30 active customers, including approximately 20 customers located directly on line. YKR primarily serves customers in the paper, agricultural, building products and distribution industries. YKR's largest customer, P. H. Glatfelter Company, accounted for 17% of YKR's fiscal 1997 operating revenues. YKR interchanges rail traffic with CSXT at Porters Sideling, Pennsylvania, MPA at York, Pennsylvania, and Conrail at West York, Pennsylvania. Based upon current publicly available information, YKR will interchange rail traffic with NS at West York, Pennsylvania, and maintain its CSXT and MPA interchanges upon completion of the proposed acquisition of Conrail by CSX and NS. Emons Logistics Services, Inc. offers logistics services for customers in the Mid-Atlantic region from its facilities in York, Pennsylvania. Logistics currently operates several facilities located either on MPA or YKR in York, Pennsylvania, and surrounding areas, which allow manufacturers and users of canned goods, lumber and other building products, packaged consumer products, steel, paper products, and dry/liquid bulk commodities to take advantage of favorable rail economics for the long-haul shipment of their products combined with truck delivery to companies that are not located on a rail line. Logistics provides both short and long-term storage and various value-added services, such as rail/truck transfer and truck brokering services for its customers. These operations generate revenues for the Company both for the logistics services performed and for the movement of freight by rail. The Company believes that these operations are important to the growth of the railroad operations in Pennsylvania since they enable customers who are not located directly on line to utilize rail transportation. A significant portion of the Company's logistics operations are located at "Lincoln Yard" on YKR in West York, Pennsylvania. The facilities at Lincoln Yard consist of approximately 25 acres, consisting of approximately two acres utilized for bulk transfer services, and an additional 23 acres recently purchased for outside transload and storage purposes and future expansion. Logistics performs various bulk transfer, storage and other services at this location which are described in detail in the following two paragraphs. In cooperation with CSXT, Logistics operates a bulk rail/truck transfer facility on YKR at Lincoln Yard to service manufacturers and users of dry and liquid bulk commodities. This facility operates under the trade name Food-Linc and handles bulk food grade and related products such as vegetable oils and plastic pellets. A second facility, which operates under the trade name Chem- Linc, handles bulk products such as industrial oils and chemicals. Collectively, these operations are referred to as Emons BIDS (Bulk Intermodal Distribution Services). Other transfer facilities at Lincoln Yard transload various bulk products primarily for the agricultural industry. In August 1995, the Company purchased 23 acres of land adjacent to existing rail and logistics operations on YKR at Lincoln Yard and developed approximately five acres for outside transload and storage purposes. Until March 1997, this facility was dedicated to a lumber transload and storage operation under an agreement with a major Canadian forest products company. In March 1997, the Canadian forest products company's primary customer developed its own facility located on one of the Company's Pennsylvania railroad operations, and now receives this product rail direct. This facility is currently utilized for the storage and transfer of aggregates, steel and other products. The Company expects to develop the remainder of the 23 acres of land for the expansion of the transload and distribution business in the York, Pennsylvania area. Logistics currently operates three on-line warehouses. Logistics operates a 15,000 square foot building located on MPA in central York that provides rail/truck transfer and storage for the distribution of canned goods and certain building products. In fiscal 1995, the Company made improvements to the facility to accommodate 65,000 square feet of outside storage of products. Logistics has arrangements with two major western rail carriers to provide short-term storage and rail/truck transfer services at this facility as their designated agent for the Mid-Atlantic and Northeast regions of the United States. Logistics also operates two other leased warehouse facilities. The first facility is located on YKR in central York, Pennsylvania, and consists of a 50,000 square foot facility which is utilized for storage of both finished paper and woodpulp. The second warehouse, also located on YKR in Thomasville, Pennsylvania, 3 consists of approximately 26,000 square feet, and is utilized for the handling and short-term storage of finished paper (newsprint, pulpboard and printing paper). The lease for this second warehouse is scheduled to terminate in November 1997, and business currently at this facility will be consolidated at the warehouse in central York. The products transferred and stored at these locations originate throughout North America for truck distribution to states within the Mid-Atlantic and Northeast regions of the United States. Logistics also operates another site located on MPA in downtown York which encompasses 70,000 square feet, including 25,000 square feet under roof for inside storage and an outside paved storage area. The facility is currently utilized for the transfer and storage of aggregates. New England ----------- SLR operates approximately 165 miles of mainline track and related properties between Portland, Maine and Norton, Vermont. SLR serves approximately 57 customers, including 20 customers located directly on line. SLR primarily serves customers in the paper, construction, agricultural, energy, warehousing and distribution industries. SLR's major customers, New England Public Warehouse, Crown Vantage (formerly James River Corporation), and Champion International Paper Corporation accounted for 16%, 13% and 9% of SLR's operating revenues in fiscal 1997, respectively. SLR interchanges rail traffic with the Canadian National Railway ("CN") at Island Pond, Vermont, Guilford Rail Systems at Danville Junction, Maine and Portland, Maine (via Danville Junction), the New Hampshire and Vermont Railroad at Groveton, New Hampshire, the Berlin Mills Railway at Berlin, New Hampshire, and the New Hampshire Central Railroad at North Stratford, New Hampshire. The MIT rail intermodal terminal located on SLR in Auburn, Maine, commenced operations in September 1994. The development and construction of this operation was a cooperative project between the Company, the State of Maine, the City of Auburn and CN. The $2.9 million cost of the terminal was funded 80% by the State of Maine with federal funds under the ISTEA legislation (Intermodal Surface Transportation Efficiency Act) and 20% by the City of Auburn. The City of Auburn owns the terminal and leases it to MIT under a long-term lease arrangement which includes an initial term of 20 years, three 10 year renewal options and a purchase option in year 50. The terminal includes 42 acres of land (16 acres currently developed in Phase I), three double-ended working tracks for loading, unloading and storage of intermodal railcars, lighted parking for trailers and containers, a gate house, a truck scale, a trailer/container maintenance facility and various other improvements. The Company believes that this operation will be an important factor in the growth and development of SLR by providing additional business volume to SLR's railroad operation. Through coordinated train service between CN and SLR, MIT offers premium rail intermodal service which includes third morning service between Auburn and Chicago on dedicated intermodal trains transporting truck trailers and containers. Service is also provided to and from points in Canada by CN and throughout North America by other connecting rail carriers at Chicago and Detroit. MIT operations are conducted by an independent contractor, In-Terminal Services (a subsidiary of Mi-Jack Products), who currently operates intermodal terminals throughout North America. Employees At June 30, 1997, the Company employed a total of 135 persons, 79 of which were represented by various labor organizations. The Company has labor agreements with unions which represent certain MPA and all SLR non-management employees. The Company is currently in the process of renegotiating agreements with various unions representing MPA and SLR employees which expired on December 31, 1995, May 18, 1996, and December 31, 1996, while other unions have signed agreements through May 2000. Currently, approximately 60% of all union employees are covered by agreements that expire in May 2000. Employees of the remainder of the Company's operations are not represented by labor organizations. The Company has not experienced any work stoppages and considers its employee relations to be satisfactory. 4 Regulation The Company's rail subsidiaries are subject to the regulatory jurisdiction of the Surface Transportation Board ("STB"), a federal agency that is the successor to the Interstate Commerce Commission. The STB has jurisdiction over, among other things, the rates charged, the issuance of securities and the extension or abandonment of rail lines, routes or service by common carriers, and the consolidation, merger and acquisition of control of and by such carriers. The Company's rail subsidiaries are also subject to regulation by the Federal Railroad Administration as to safety requirements and operating practices, and subject to regulations by governmental authorities of Pennsylvania, Maine, Vermont, and New Hampshire. Competition For customers located directly on line, which constitute the majority of the Company's freight business, the Company's railroads are the only rail carriers directly serving their respective customers. The Company's rail operations in New England also includes a significant portion of overhead traffic which is subject to competition from alternative rail routes. All of the Company's railroads experience significant competition from other modes of freight transportation, particularly highway motor carriers. Factors such as the nature of the commodity transported, freight rates, distance, transit time, and quality and reliability of service are considered in determining the mode of transportation utilized. The Company's ability to compete in these areas is, to a large extent, dependent upon the performance of its connecting rail carriers. Industries' Reorganization Prior to 1986, the Company provided management, leasing and brokerage services for rail transportation equipment. In response to a severe decline in the boxcar leasing business, in March 1984 Industries filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. In December 1986, the Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") confirmed Industries' Reorganization Plan (the "Plan") and Emons Transportation Group became the parent of Industries and MPA. Under the Plan, each unsecured creditor received an initial distribution of cash, Common Stock and Senior Preferred Stock for its claim. Since numerous disputed claims remained at the time of consummation of the Plan, an escrow agent, appointed in connection with the Plan, was instructed to distribute additional amounts of cash and securities to holders of allowed claims on a quarterly basis in each quarter that disputed claims are reduced by litigation or settlement. The Bankruptcy Court postponed the distribution of any cash and securities in 1989 until it could determine whether certain other potential unsecured claims should be included in the Bankruptcy proceeding. In July and August 1997, upon approval from the Bankruptcy Court for a partial distribution, the escrow agent distributed 1,434,922 shares of the Company's Common Stock and 589,461 shares of the Company's $.14 Series A Cumulative Convertible Preferred Stock. The escrow agent currently holds 1,400,510 shares of Common Stock and 615,429 shares of Preferred Stock. The escrow agent has the right to vote the shares held by it and has expressed its intention generally to vote such shares proportionally in accordance with the vote cast by unaffiliated stockholders. 5 Item 2. Properties With respect to material properties owned or leased by the Company, the following table sets forth the location of the property, the approximate square feet of space, miles of railroad track or acreage, and use made of such facilities. All properties are owned by the Company, except as otherwise noted, are in good condition, adequately fulfill the Company's requirements, and are being used to the fullest extent necessary for the Company's operations. The Company's primary lender has a security interest in all of the property owned by the Company.
Approximate Square Address Feet of Space Use - ------------------------ ----------------- ------------------------------------------- 96 South George Street 5,900 Executive and administrative offices and York, PA (1) Pennsylvania administrative offices Princess Street 15,000 Locomotive repair facility York, PA Queen and Hay Streets 80,000 Rail/truck transfer and 15,000 square foot York, PA warehouse facility for canned goods, packaged consumer products, and various building products Loucks Mill Road 50,000 Rail/truck transfer and warehouse facility York, PA (1) for paper products storage and distribution Commerce Drive 26,250 Rail/truck transfer and warehouse facility Thomasville, PA (1) for paper products storage and distribution East Princess Street 70,000 Rail/truck transfer and storage facility York, PA North George Street 85,000 Agricultural bulk products transfer facility York, PA Arch Street 7,500 Rail/truck transfer facility for aggregates York, PA and fertilizer Lewiston Junction Road 4,000 New England administrative offices Auburn, ME (1) Lewiston Junction Road 106,700 Locomotive repair facility Auburn, ME (3) Island Pond, VT (2) 295,000 Rail/truck transfer, storage and distribution facility for lumber
(1) Leased from a third party. (2) Leased to a third party. (3) Land portion leased from a third party. 6
Acreage or Approximate Address Distance Use - ------------------------ ----------------- ------------------------------------------- York, PA to Hanover, PA 26 miles Mainline railroad trackage plus rail yards and related facilities York, PA to Porters 16 miles Mainline railroad trackage plus rail yards Sideling, PA and related facilities Lincoln Yard 25 acres Rail/truck transfer and storage facility for West Market Street bulk food grade products, chemicals and West York, PA non-food bulk products, and steel, aggregates and other products Portland, ME to 165 miles Mainline railroad trackage plus rail yards Norton, VT and related facilities Auburn, ME (1) 4.0 miles Branch railroad trackage Lewiston Junction Road 42 acres Rail intermodal terminal Auburn, ME (1)
(1) Leased from a third party. (2) Leased to a third party. (3) Land portion leased from a third party. 7 Item 3. Legal Proceedings Emons Transportation Group is not a party to any legal proceedings. However, Emons Industries, a subsidiary of the Company, is currently a defendant in 888 product liability actions. The Company is in the process of cleaning up a fuel oil spill at its locomotive maintenance facility in York, Pennsylvania. Product Liability Actions ------------------------- Prior to March 1971, under previous management, 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 June 30, 1997, Industries was one of numerous defendants (including many of the largest pharmaceutical manufacturers) in 888 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, 883 were commenced after the confirmation of Industries' Reorganization Plan in December 1986 (the "Plan"), while the remaining five lawsuits are claims which will be treated under the Plan. In one action, Industries is allegedly identified as the sole defendant. These actions are currently in various stages of litigation. Industries has filed a motion in Bankruptcy Court seeking a judgment declaring that the 883 post-confirmation lawsuits represent claims which should be asserted against Industries' Chapter 11 estate and are not post- reorganization liabilities. Counsel has advised the Company that the Bankruptcy Court should grant Industries' application to classify all of these cases as bankruptcy claims. In addition, on February 14, 1995, the Bankruptcy Court advised Industries that it would sign an order which would stay execution of any judgment rendered against Industries pending determination of Industries' application. The order, which was submitted to the Court on March 23, 1995, has not yet been signed. 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 coverage in any policy year. During the period July 1, 1996 through June 30, 1997, 500 new actions were commenced in which Industries was named as a defendant. Of these actions, 365 were commenced in a single filing in the state court in Ohio shortly before the effective date of a revision to Ohio's product liability statute which, among other things, limits damages recoverable for pain and suffering. During the year ended June 30, 1997, 58 lawsuits were settled or dismissed at no material liability to Industries. Management intends to vigorously defend all of these actions. In the event that the post-reorganization lawsuits described above are not treated under the Plan, it is possible that Industries could ultimately have liability in these actions in excess of its product liability insurance coverage described above. However, based on Industries' experience in prior DES litigation and its current knowledge of pending cases, the Company believes that it is unlikely that Industries' ultimate liability, if any, in excess of insurance coverage and existing reserves in the pending cases will be in an amount sufficient to have a material adverse effect upon the Company's consolidated financial position or results of operations. 8 Environmental Liability ----------------------- During fiscal 1994, the Company discovered a diesel fuel oil spill at its locomotive maintenance facility in York, Pennsylvania, resulting from the fueling of its locomotives. The Company is currently performing additional testing and is working with the Pennsylvania Department of Environmental Protection to remediate the contaminated area. In January 1997, in the next phase of its testing procedures, the Company discovered free product in some of its monitoring wells. The Company estimates that the cost to remediate the free product will range from $100,000 to $200,000. The Company has provided sufficient reserves for the anticipated remediation costs. Item 4. Submission of Matters to a Vote of Security Holders NONE Part II Item 5. Market for Company's Common Equity and Related Stockholder Matters Emons Transportation Group's Common Stock is traded in the over-the-counter securities market and is listed on the Nasdaq/Small Cap Market under the symbol "EMON." The table below sets forth, for the periods indicated, the high and low bid for the Common Stock as reported on the Nasdaq/Small Cap Market.
COMMON STOCK PRICE RANGE ------------------------ Fiscal Year Fiscal Quarter High Bid Low Bid ----------- -------------- -------- ------- 1997 First $3.1875 $1.5625 Second 5.375 2.75 Third 3.5625 2.75 Fourth 2.75 1.875 1996 First $6.50 $1.00 Second 2.625 1.625 Third 2.00 1.50 Fourth 1.9375 1.0625
At September 12, 1997, the Company had 5,884,200 shares of Common Stock issued and outstanding which were held by approximately 1,976 stockholders of record. No cash dividends have been paid on the Common Stock and no cash dividends are expected to be paid on the Common Stock in the foreseeable future. The Company's Loan and Security Agreement with its primary lender prohibits the payment of cash dividends and certain other distributions without the prior consent of the lender. As of September 12, 1997, 1,550,025 shares of $.14 Series A Cumulative Convertible Preferred Stock were issued and outstanding which were held by approximately 894 stockholders of record. The holders of the $.14 Series A Cumulative Convertible Preferred Stock are entitled to a dividend of $.14 per share per annum which is to be paid semi-annually. The Board of Directors voted to omit the regular semi-annual dividend which would have been payable from the period January 2, 1991 through July 1, 1997. Dividends in arrears as of September 12, 1997 aggregated $1,519,025. These shares are traded in the over- the-counter securities market. 9 Item 6. Selected Financial Data EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES Selected Financial Data For the Five Years ended June 30, 1997 (Not Covered by Report of Independent Public Accountants)
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Operating revenues $ 16,058,252 $ 14,917,077 $ 13,996,608 $ 11,994,286 $ 11,551,839 ============ ============ ============ ============ ============ Income from operations $ 1,926,419 $ 1,627,339 $ 2,073,724 $ 811,164 $ 1,322,045 ============ ============ ============ ============ ============ Income (loss) before cumulative effect of change in accounting principle $ 773,793 $ 469,501 $ 766,077 $ (184,325) $ 135,688 Cumulative effect of change in accounting principle for income taxes - - - (750,000) - ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 773,793 $ 469,501 $ 766,077 $ (934,325) $ 135,688 ============ ============ ============ ============ ============ Earnings (loss) per common share and common share equivalent: Earnings (loss) before cumulative effect of change in accounting principle $ 0.09 $ 0.04 $ 0.09 $ (0.08) $ (0.02) Cumulative effect of change in accounting principle for income taxes - - - (0.13) - ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 0.09 $ 0.04 $ 0.09 $ (0.21) $ (0.02) ============ ============ ============ ============ ============ Total assets $ 24,301,875 $ 22,789,914 $ 20,745,575 $ 19,844,423 $ 20,575,690 ============ ============ ============ ============ ============ Debt $ 11,864,130 $ 11,086,009 $ 10,862,098 $ 11,047,433 $ 12,439,150 ============ ============ ============ ============ ============
10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The Company's primary sources of liquidity include its cash and accounts receivable, which aggregated $3,920,000 and $3,670,000 at June 30, 1997 and 1996, respectively, and up to $2 million available under a revolving working capital facility. On August 15, 1997, the Company entered into a Loan and Security Agreement with a new lender which provides a $7,775,000 seven year term loan and a $2 million revolving working capital facility. The proceeds of the $7,775,000 term loan have been utilized to retire existing bank indebtedness and for refinancing costs. The Company intends to utilize the $2 million working capital facility to help fund the Company's internal growth activities and acquisition program. The term loan is payable in increasing annual installments with a balloon payment at the end of the seventh year. The initial term of the working capital facility is two years, and borrowings under this facility are limited based upon the amount of eligible accounts receivable outstanding. Interest on both the term loan and working capital borrowings outstanding is based upon the bank's prime rate or the eurodollar rate, plus an applicable margin, at the option of the Company. The applicable margin ranges from prime to prime plus 0.5% for prime based borrowings, and from the eurodollar rate plus 1.75% to 3% for eurodollar based borrowings, depending upon the Company's financial performance. The Company's cash and cash equivalents increased $250,000 for the year ended June 30, 1997. The net increase includes $1,764,000 of cash provided by operations and $778,000 of additional net borrowings, partially offset by $2,311,000 of capital investments. The Company generated $1,764,000 of cash from operations for the year ended June 30, 1997 as compared to $2,430,000 for the prior year. Excluding changes in assets and liabilities, cash provided by operations increased $505,000 from $1,845,000 for the year ended June 30, 1996 to $2,350,000 for the current year, primarily as a result of a $412,000 increase in income before income taxes. Cash was reduced by $586,000 for changes in assets and liabilities for the year ended June 30, 1997, largely as a result of a $581,000 reduction in accounts payable and accrued expenses. The Company invested $2,311,000 in capital expenditures during the year ended June 30, 1997, including $1,930,000 of investments in railroad track structures (net of $1,367,000 of government grants) in connection with the Company's track rehabilitation program, which is in its final stages of completion, and in connection with the construction of track sidings for new customers. In addition, the Company invested $224,000 in four locomotives for the Pennsylvania rail operations. As of June 30, 1997, the Company has in excess of $500,000 of government grants for track rehabilitation projects and in excess of $300,000 of government funding under no and low interest loan programs available for future track rehabilitation projects. On September 5, 1997, the Company was awarded additional grants totaling $450,000 for its Pennsylvania railroad operations. The Company's long-term debt obligations increased $778,000 during fiscal 1997, including $1,117,000 of debt repayments offset by $1,895,000 of additional borrowings. Additional long-term obligations include $225,000 of borrowings to finance the acquisition of four locomotives for the Pennsylvania rail operations, $1,101,000 of borrowings under government funded no and low interest loan track rehabilitation programs, and $551,000 of borrowings to finance a favorable three year railroad liability insurance policy renewal. 11 Fiscal 1997 as compared to Fiscal 1996 Results of Operations The Company generated net income of $774,000 for the year ended June 30, 1997 as compared to net income of $470,000 for the year ended June 30, 1996. Income before income taxes increased $412,000, from $759,000 for fiscal 1996 to $1,171,000 for fiscal 1997. Operating revenues, interest and other non-operating income, and operating expenses increased $1,141,000, $96,000 and $842,000, respectively, over the prior year, while interest expense decreased $16,000 from the prior year. The provision for income taxes increased $107,000 over the prior year. Results for the year ended June 30, 1997 include the unfavorable impact of a sales tax assessment from the State of Maine in the amount of $107,000, consisting of an $84,000 charge for sales taxes relating to calendar years 1991 through 1996, and a $23,000 charge for related interest thereon, a portion of which the Company is contesting. Results for the prior year ended June 30, 1996 include the impact of a favorable settlement of disputed local business taxes to the City of York, Pennsylvania in the amount of $117,000 pertaining to fiscal years 1988 through 1995, consisting of $85,000 of taxes and $32,000 of accrued interest thereon. These items are hereafter referred to as the "state sales and local tax adjustments." In addition, the Company recorded $153,000 of non- operating income in the current year relating to the unanticipated proceeds from a former investment. In October 1996, CSX Corporation ("CSX") and Consolidated Rail Corporation ("Conrail") announced plans to merge. In response to the merger announcement, Norfolk Southern Railway ("NS") announced a competing tender offer to acquire Conrail. Subsequently, CSX and NS agreed to divide Conrail, and filed for approval of the transaction with the Surface Transportation Board ("STB") in June 1997. Based upon management's review of publicly available information currently included in the filing regarding the division of Conrail, all of the Company's railroads will continue to maintain their dual connections with Class I railroads. While the impact of the proposed merger on future traffic patterns and the resultant effect on the Company's railroad operations are uncertain at this time, the Company does not anticipate any significant negative impact as a result of the merger, and believes that the merger may create additional business as a result of longer Class I single line service on competitive routes, which could result in additional rail business for the Company. Revenues Operating revenues increased $1,141,000, or 7.7%, from $14,917,000 for year ended June 30, 1996 to $16,058,000 for the year ended June 30, 1997. This net increase includes $1,184,000 additional freight and haulage revenues (excluding intermodal freight) and $156,000 additional intermodal freight and handling revenues, partially offset by a $166,000 reduction in logistics revenues and a $33,000 reduction in other operating revenues. Freight and haulage revenues increased $1,184,000, or 11.6%, consisting of a 7.2% increase in the number of carloads handled and a 4.2% increase in average revenues per carload. The total traffic handled increased approximately 2,475 carloads from 34,550 for the year ended June 30, 1996 to 37,025 for the current year. The increase includes approximately 1,200 additional carloads on the Pennsylvania rail operations and 1,275 additional carloads on the SLR operations in New England. A 725 carload increase in low rated bridge moves accounts for the most significant portion of the 1,200 carload increase in traffic for the Pennsylvania rail operations. The remainder of the increase consists of a number of net increases and decreases in other business, including 325 additional carloads to the Company's largest customer in Pennsylvania, an on- line paper manufacturer, 380 additional mini-train limestone shuttle service carloads, 275 additional carloads to an on-line steel fabrication customer, 175 additional carloads generated by two new on-line customers, 185 additional carloads generated by the Company's logistics 12 operations, and a variety of less significant other increases in business. These increases were partially offset by a reduction of 525 carloads to an on-line warehouse and distribution services customer as the result of the relocation of product to an alternative storage location, a reduction of 360 agricultural carloads as a result of rate increases imposed by a connecting carrier for a period of time earlier in fiscal 1997, and a reduction of 365 coal carloads (four unit coal trains) due to timing of shipments and the use of higher capacity railcars. The 1,275 carload increase in business on SLR includes 500 carloads attributable to a new local oil move to an on-line paper manufacturer, 600 additional carloads to an on-line building products distributor as a result of the expansion of its operations, 260 additional carloads to four new customers, three of which are located on-line, and a variety of less significant increases. These increases were partially offset by a decrease of 375 paper-related carloads as a result of lost business due to competitive routes. The 4.2% increase in average revenues per carload is primarily attributable to rate increases on SLR and higher rates on the local oil move on SLR which encompass truck-to-rail transload services that are paid by SLR to an independent contractor. This increase was partially offset by lower average revenues per carload for the Company's Pennsylvania operations due to a higher percentage of low rated bridge traffic. Logistics revenues generated by the Company's operations in York, Pennsylvania, decreased $166,000, or 11.8%, for the year ended June 30, 1997 as compared to the prior year. The number of railcars handled increased approximately 250 cars, or 15%, and related railcar transfer and value added revenues increased $106,000, or 16%. This increase was offset by a decrease in low margin truck brokering and storage revenues of $115,000 and $157,000, respectively. Bulk transfer and value added revenues increased $229,000 as a result of the expansion of one feed broker's operations and the assumption of transfer operations previously performed by another feed broker in March 1997. The increase in bulk transfer and value added revenues was offset by decreases in canned goods, paper, and building products business. Canned goods transfer and related low margin truck brokering revenues decreased over $160,000 from the prior year as the movement of this product continues to shift to alternative modes of transportation. Paper handling and related storage revenues decreased almost $200,000 from the prior year, which included significant transfer and inventory storage revenues for an on-line paper manufacturer as a result of pulp and paper supply conditions that have improved in the current year. Building products transfer and storage revenues decreased $20,000 as a result of the relocation of the Company's primary lumber reload customer's operations to a facility located on one of the Company's Pennsylvania rail lines in March 1997, where it intends to expand into other building products. While this relocation will reduce the Company's logistics business, it will benefit the Company's Pennsylvania rail operations. The Company's rail intermodal terminal, which commenced operations on SLR in September 1994, generated an additional $156,000 of freight and intermodal handling revenues in fiscal 1997 as compared to the prior year. Intermodal volume increased approximately 4,300 trailers and containers, or 50%, from 8,600 trailers and containers in the prior year to 12,900 trailers and containers in the current year. Other operating revenues decreased $33,000 from the prior year. Easement income, which includes up front fees for a crossing agreement in the amount of $85,000, railcar storage income and third party track work revenues increased over the prior year, but were more than offset by a decrease in demurrage revenues of $222,000. Interest income increased $11,000 as a result of higher cash balances on hand for investment, and other non-operating income increased $85,000 from $82,000 for the prior year to $167,000 for the current year. The current year amount includes $153,000 for the unanticipated proceeds from a former investment, while the prior year amount consists of gains on sales of non- essential real estate. 13 Expenses Operating expenses increased $842,000, or 6.3%, from $13,290,000 for the year ended June 30, 1996 to $14,132,000 for the year ended June 30, 1997. The increase consists of $540,000 additional cost of operations and $302,000 additional selling and administrative expenses. Excluding the impact of the state sales and local tax adjustments, operating expenses increased $673,000, or 5%. Cost of operations increased $540,000, or 5.1%, from $10,521,000 for the year ended June 30, 1996 to $11,061,000 for the current year. Excluding the impact of the state sales and local tax adjustments, cost of operations increased $456,000, or 4.3%. This increase includes $576,000 additional railroad operating expenses, $90,000 additional intermodal operating expenses, and additional provisions under profit sharing and incentive compensation arrangements. These increases were partially offset by a $279,000 reduction in logistics operating expenses. The increase in railroad operating expenses of $576,000 is primarily attributable to a $602,000 increase in transportation expenses and, to a lesser extent, additional locomotive maintenance expenses, partially offset by a reduction in maintenance of way expenses. The increase in transportation expenses includes additional operating costs associated with the 7.2% increase in traffic handled. The new local oil move on SLR accounted for approximately $300,000 of the increase, including $241,000 of fees for truck-to-rail transload costs paid to an independent contractor. Locomotive fuel and lubricant costs increased $179,000 as a result of substantial price increases during the current year, which have recently been reduced to more normal levels. The increase in locomotive maintenance expenses is attributable to a higher level of locomotive repairs required in the current year for both the Pennsylvania and New England operations as compared to the prior year. Maintenance of way expenses decreased over $200,000 as a result of more favorable weather conditions in the current year as compared to the prior year, which also had a less significant favorable impact on transportation operating costs in the current year. The unusually heavy snowfall and cold temperatures in both the Mid-Atlantic and Northeast regions of the United States in the prior year had an unfavorable impact on all three of the Company's railroads. Additional labor costs, fuel usage and other operating expenses were required in order to keep the tracks clear and train operations running. SLR also incurred additional maintenance of way costs in the prior year to repair a washed out section of track after a flood in November 1995, and to clear a fire lane as a result of summer drought conditions. The $279,000 decrease in logistics operating expenses is primarily attributable to an $80,000 reduction in brokered freight expenses as a result of the decrease in canned goods business which utilizes these services, and a $48,000 reduction in warehouse rental expenses in conjunction with the decrease in paper storage requirements in the current year. In addition, the Company's logistics operations incurred approximately $40,000 of costs in the prior year in connection with the relocation of a portion of its warehousing operations. These decreases were partially offset by additional operating costs in connection with the 15% increase in railcars handled. Rail intermodal operating expenses increased $90,000 due to additional fees paid to the terminal's independent operator as a result of the 50% volume increase over the prior year and additional security costs. Selling and administrative expenses increased $302,000, or 10.9%, from $2,769,000 for the year ended June 30, 1996 to $3,071,000 for the year ended June 30, 1997. Excluding the impact of the state sales and local tax adjustments, selling and administrative expenses increased $217,000, or 7.6%. This net increase consists of additional professional fees and other expenses incurred to pursue potential business opportunities, normal wage and other cost increases, and additional provisions under profit sharing and incentive compensation arrangements. 14 Interest expense decreased $16,000 for the year ended June 30, 1997 as compared to the prior year. Interest expense decreased $71,000 excluding the impact of the state sales and local tax adjustments, despite an increase in the amount of long-term debt outstanding, due to the mix of debt which includes a greater amount of no and low interest government trackwork loans in the current year as compared to the prior year. The provision for income taxes increased $107,000, from $290,000 for the year ended June 30, 1996 to $397,000 for the current year, while the effective tax rate decreased from 38% for fiscal 1996 to 34% for fiscal 1997. The increase in income tax expense is primarily the result of a $412,000 increase in income before income taxes, while the decrease in the effective tax rate is attributable to the mix of state taxable income and deferred tax requirements. The Company currently utilizes computer software in the management of its operations and in accounting for its operating results that could be affected by the date change in the year 2000. All critical software utilized by the Company has been purchased from and is supported by third party vendors. The Company has investigated the potential impact of the year 2000, and has determined that all critical software either is year 2000 compliant, is in the process of being modified by third party vendors to accommodate the year 2000, or is replaceable by alternative software options available at a reasonable cost. Fiscal 1996 as compared to Fiscal 1995 Results of Operations The Company generated net income of $470,000 for the year ended June 30, 1996 as compared to net income of $766,000 for the year ended June 30, 1995. Income before income taxes decreased $315,000 from $1,074,000 for fiscal 1995 to $759,000 for fiscal 1996. The net decrease includes a $1,367,000 increase in operating expenses, partially offset by $920,000 additional operating revenues, $80,000 additional non-operating income, and a $39,000 decrease in interest expense. Operating results for the year ended June 30, 1996 include the favorable settlement of disputed local business taxes to the City of York, Pennsylvania in the amount of $117,000 pertaining to fiscal years 1988 through 1995, consisting of $85,000 of taxes and $32,000 of accrued interest thereon. Operating results for the year ended June 30, 1995 included two significant transactions. First, the Company recorded a $223,000 favorable retroactive pricing adjustment for SLR negotiated with CN for the period July 1, 1992 through September 30, 1994, $158,000 of which was attributable to periods prior to fiscal 1995. Second, the Company provided $84,000 for expenses associated with the relocation of SLR personnel and SLR's administrative offices located in Berlin, New Hampshire, to Auburn, Maine. The provision for income taxes decreased $18,000 from fiscal 1995 to fiscal 1996. Revenues Operating revenues increased $920,000, or 6.6%, from $13,997,000 for year ended June 30, 1995 to $14,917,000 for the year ended June 30, 1996. This net increase includes $343,000 additional freight and haulage revenues (excluding intermodal freight), $322,000 additional intermodal freight and handling revenues, and $268,000 additional logistics revenues, partially offset by $13,000 less other operating revenues. Freight and haulage revenues increased $343,000, or 3.5%, consisting of a 5% increase in the number of carloads handled offset by a 1.3% decrease in average revenues per carload. The total number of carloads handled increased approximately 1,650 carloads from 32,900 for the year ended June 30, 1995 to 34,550 for the year ended June 30, 1996. The net increase includes approximately 800 additional carloads generated by the Company's logistics operations, 600 additional coal carloads (six unit coal trains), 550 additional carloads to a warehouse customer, 450 additional agricultural carloads, and 400 additional bridge carloads all in York, Pennsylvania, and approximately 700 additional paper related carloads on SLR. The significant increase in business on SLR for fiscal 1996 is attributable to a strike on CN which 15 occurred in fiscal 1995, as well as the favorable impact of sales and marketing efforts despite unfavorable market conditions in the paper industry in the second half of fiscal 1996. These increases were partially offset by over 850 fewer carloads to a paper manufacturer in York, Pennsylvania, as a result of pulp and paper market conditions, 300 fewer mini-train limestone shuttle carloads in York, Pennsylvania, and a variety of other less significant decreases. The 1.3% decrease in average revenues per carload is attributable to the mix of business which includes a greater percentage of lower rated bridge carloads and reduced pricing on incremental SLR paper carloads in order to attract this business. The Company's rail intermodal terminal, which commenced operations on SLR in late September 1994, generated $322,000 additional freight and intermodal handling revenues in fiscal 1996 as compared to the prior year. The terminal handled approximately 8,600 trailers and containers during fiscal 1996 as compared to 3,650 trailers and containers during approximately nine months of operations in fiscal 1995. Total logistics revenues generated by the Company's operations in York, Pennsylvania, increased $268,000, or 23.6%, in fiscal 1996 over the prior year. This increase includes in excess of a 30% increase in the number of railcars handled and an additional $247,000 of storage revenues as a result of the expansion of warehousing services. These increases were partially offset by $140,000 less truck brokerage revenues and $60,000 less canned goods transfer services due to a reduction in cross dock transfer business. In addition, the Company's logistics operations accounted for approximately $530,000 of freight and haulage revenues for the railroad operations in York, Pennsylvania, during fiscal 1996 as compared to $365,000 in fiscal 1995. The $13,000 net decrease in other operating revenues from fiscal 1995 to fiscal 1996 includes an $82,000 increase in demurrage revenues and a $68,000 increase in car hire revenues generated under railcar leasing arrangements, offset by the $158,000 SLR pricing adjustment recorded in fiscal 1995. Non-operating income increased $80,000 over fiscal 1995 due to net gains on the sale of non-essential real estate, including miscellaneous parcels of land and a railroad station in Berlin, New Hampshire. Expenses Operating expenses increased $1,367,000, or 11.5%, from $11,923,000 for the year ended June 30, 1995 to $13,290,000 for the year ended June 30, 1996. The net increase consists of $1,226,000 additional cost of operations and $141,000 additional selling and administrative expenses. Cost of operations increased $1,226,000, or 13%, from $9,295,000 for the year ended June 30, 1995 to $10,521,000 for the year ended June 30, 1996. The net increase includes $821,000 additional railroad operating expenses, $226,000 additional logistics operating expenses, and $179,000 additional intermodal operating expenses. The increase in railroad operating expenses includes additional transportation costs to operate the dedicated intermodal train on SLR for a full year in fiscal 1996 as compared to approximately nine months in the prior year, additional costs to operate six additional unit coal trains on the railroad operations in York, Pennsylvania, in fiscal 1996, and additional costs to handle the remainder of the increase in carload volume. Maintenance of way expenses also increased over fiscal 1995, including additional costs incurred by SLR to repair the washout of a section of track resulting from a heavy downpour in November 1995, and costs incurred to clear a fire lane in Maine. Maintenance of way and transportation expenses, and to a lesser extent, locomotive maintenance expenses, were also unfavorably impacted on all three of the Company's railroad operations by the early snowfall and cold weather in the Mid-Atlantic and Northeast regions during November and December 1995 as compared to the prior year, and more significantly, by the continued impact of unfavorable winter weather conditions in these 16 regions during the third quarter of fiscal 1996 as compared to mild winter weather conditions in the third quarter of the prior year. The unusually heavy snowfall and cold temperatures required additional labor costs, fuel usage and other operating expenses in order to keep the railroad tracks clear and train operations running. In addition, expenses in the third quarter of fiscal 1995 were lower as a result of efforts to reduce expenses on SLR in anticipation of and during the CN labor strike which took place in March 1995. The increases in logistics and rail intermodal operating expenses are attributable to the corresponding increases in the level of business in each of these operations, including a full twelve months of intermodal operations in fiscal 1996 as compared to approximately nine months of operations in fiscal 1995. The increase in logistics operating expenses were partially offset by a $129,000 reduction in brokered freight expense due to a reduction in cross dock transfer business. Selling and administrative expenses increased $141,000, or 5.4%, from $2,628,000 for the year ended June 30, 1995 to $2,769,000 for the year ended June 30, 1996. The net increase includes approximately $192,000 additional wages and benefits as a result of wage adjustments effective January 1, 1996 and staff additions to accommodate increased business levels, $93,000 additional intermodal sales and administrative expenses as a result of twelve months of operations in fiscal 1996 versus nine months of operations in fiscal 1995, and $100,000 additional professional fees and travel expenses to pursue potential business opportunities. These increases were partially offset by the favorable settlement of disputed local business taxes to the City of York, Pennsylvania in the amount of $85,000 pertaining to fiscal years 1988 through 1995, which was recorded as a reduction of expense in fiscal 1996, and a net decrease in a variety of other expense categories. Interest expense decreased $39,000 in fiscal 1996 as compared to the prior year due to a $32,000 reduction of interest expense recorded in fiscal 1996 as a result of the favorable settlement of disputed local business taxes to the City of York, Pennsylvania pertaining to fiscal years 1988 through 1995. The provision for income taxes decreased $18,000 from $308,000 for the year ended June 30, 1995 to $290,000 for the year ended June 30, 1996 as a result of a reduction in pre-tax income. The effective tax rate increased from 29% in fiscal 1995 to 38% in fiscal 1996 due to deferred tax liabilities associated with depreciation of the Company's railroad track structures and the significant amount of capital trackwork performed in fiscal 1996, partially offset by limited tax assets recognized for net operating loss carryforwards in fiscal 1996. Item 8. Financial Statements and Supplementary Data Financial Statements and the notes and schedules thereto are listed under Item 14 hereof. Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure NONE 17 Part III Items 10 through 12 have been omitted. A definitive proxy statement will be filed by the Company not later than 120 days after the close of its fiscal year which is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions NONE 18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES The Board of Directors Emons Transportation Group, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Emons Transportation Group, Inc. and Subsidiaries included in this Form 10-K, and have issued our report thereon dated September 5, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedules referred to in Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Lancaster, PA September 5, 1997 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Emons Transportation Group, Inc.: We have audited the accompanying consolidated balance sheets of Emons Transportation Group, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emons Transportation Group, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Lancaster, PA September 5, 1997 20 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (Index to Financial Statements and Schedules)
Page ---- (a) (1) Financial Statements of Emons Transportation Group, Inc. and Subsidiaries: Consolidated Balance Sheets as of June 30, 1997 and 1996 22 Consolidated Statements of Operations for the years ended June 30, 1997, 1996 and 1995 23 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995 24 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 25 Notes to Consolidated Financial Statements 26 (2) Schedules Applicable to Consolidated Financial Statements: Schedule III - Financial Statements of Emons Transportation Group, Inc. (Parent Company Only) Balance Sheets as of June 30, 1997 and 1996 37 Statements of Operations for the years ended June 30, 1997, 1996 and 1995 38 Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 39 All other schedules are omitted as the required information is not applicable or information is presented in the financial statements or related notes. (b) No reports on Form 8-K were filed during the quarter ended June 30, 1997. (c) A list of exhibits can be found on page 41 hereof.
21 EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of June 30, 1997 and 1996
- ------------------------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 1,515,188 $ 1,265,373 Accounts receivable, less allowance of $102,898 in 1997 and $76,899 in 1996 2,405,304 2,404,730 Materials and supplies 87,154 204,656 Prepaid expenses 338,512 339,523 Deferred income taxes (Note 5) 70,000 79,000 ------------ ------------ Total current assets 4,416,158 4,293,282 ------------ ------------ Property, plant and equipment, net (Note 1) 19,392,709 18,252,452 Deferred expenses and other assets 493,008 244,180 ------------ ------------ TOTAL ASSETS $ 24,301,875 $ 22,789,914 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 887,791 $ 967,837 Accounts payable 1,045,742 1,806,969 Accrued payroll and related expenses 995,880 876,472 Income taxes payable 81,569 84,108 Other accrued expenses 1,267,343 1,203,876 ------------ ------------ Total current liabilities 4,278,325 4,939,262 ------------ ------------ Long-term debt (Note 2) 10,976,339 10,118,172 Other liabilities 814,040 600,861 Deferred income taxes (Note 5) 1,794,000 1,513,000 ------------ ------------ Total Liabilities 17,862,704 17,171,295 ------------ ------------ Commitments and contingencies (Notes 3 and 8) - - Stockholders' Equity: Preferred stock, authorized 3,000,000 shares $0.14 Series A Cumulative Convertible Preferred Stock, $0.01 par value, issued and outstanding 1,650,857 and 1,680,230 shares at June 30, 1997 and 1996, respectively (redeemable at Company's option, involuntary liquidation value of $2.00 per share) (Note 4) 16,509 16,802 Common stock, $0.01 par value, authorized 15,000,000 and 11,000,000 shares at June 30, 1997 and 1996, respectively, issued and outstanding 5,800,624 and 5,703,689 shares at June 30, 1997 and 1996, respectively 58,006 57,037 Additional paid-in capital 23,503,442 23,281,993 Deficit (16,789,121) (17,562,914) ------------ ------------ 6,788,836 5,792,918 Unearned compensation - restricted stock awards (349,665) (174,299) ------------ ------------ Total Stockholders' Equity 6,439,171 5,618,619 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,301,875 $ 22,789,914 ============ ============
See accompanying notes to consolidated financial statements. 22 EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended June 30, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Operating revenues $ 16,058,252 $ 14,917,077 $ 13,996,608 Operating expenses: Cost of operations 11,061,247 10,521,232 9,295,039 Selling and administrative 3,070,586 2,768,506 2,627,845 --------------- --------------- --------------- Total operating expenses 14,131,833 13,289,738 11,922,884 --------------- --------------- --------------- Income from operations 1,926,419 1,627,339 2,073,724 Other income (expense): Interest income 86,080 74,827 62,123 Interest expense (1,008,945) (1,025,175) (1,063,939) Other, net 167,239 82,010 2,469 --------------- --------------- --------------- Total other income (expense) (755,626) (868,338) (999,347) --------------- --------------- --------------- Income before income taxes 1,170,793 759,001 1,074,377 Provision for income taxes (Note 5) 397,000 289,500 308,300 --------------- --------------- --------------- Net income 773,793 469,501 766,077 Preferred dividend requirements (Note 7) 233,135 237,757 241,773 --------------- --------------- --------------- Income applicable to common shareholders $ 540,658 $ 231,744 $ 524,304 =============== =============== =============== Average common shares and common share equivalents (Note 1) 6,281,225 6,072,221 5,805,373 =============== =============== =============== Earnings per common share and common share equivalent (Note 1) $ 0.09 $ 0.04 $ 0.09 =============== =============== ===============
See accompanying notes to consolidated financial statements. 23 EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended June 30, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------------- Cumulative Convertible Preferred Stock Common Stock Additional Retained -------------------------- ------------------------ Paid-in Earnings Shares Amount Shares Amount Capital (Deficit) - ------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 1,727,006 $ 17,270 5,690,093 $ 56,901 $ 23,295,036 $ (18,798,492) Conversion of preferred stock (56) - 50 - - - Stock issued under restricted stock plan - - 17,000 170 17,893 - Cancellation of restricted stock issued - - (37,500) (375) (23,063) - Amortization of unearned compensation - - - - - - Net income - - - - - 766,077 ------------ ------------ ------------- ------------ --------------- --------------- Balance at June 30, 1995 1,726,950 17,270 5,669,643 56,696 23,289,866 (18,032,415) Conversion of preferred stock (46,720) (468) 42,046 421 47 - Cancellation of restricted stock issued - - (8,000) (80) (7,920) - Amortization of unearned compensation - - - - - - Net income - - - - - 469,501 ------------ ------------ ------------- ------------ --------------- --------------- Balance at June 30, 1996 1,680,230 16,802 5,703,689 57,037 23,281,993 (17,562,914) Conversion of preferred stock (29,373) (293) 26,435 264 29 - Shares issued pursuant to 1986 Stock Option Plan - - 4,000 40 4,085 - Stock issued under restricted stock plan - - 69,000 690 219,185 - Cancellation of restricted stock issued - - (2,500) (25) (1,850) - Amortization of unearned compensation - - - - - - Net income - - - - - 773,793 ------------ ------------ ------------- ------------ --------------- --------------- Balance at June 30, 1997 1,650,857 $ 16,509 5,800,624 $ 58,006 $ 23,503,442 $ (16,789,121) ============ ============ ============= ============ =============== =============== - --------------------------------------------------------------------------- Unearned Compensation Restricted Stockholders' Stock Awards Equity - --------------------------------------------------------------------------- Balance at June 30, 1994 $ (251,389) $ 4,319,326 Conversion of preferred stock - - Stock issued under restricted stock plan (18,063) - Cancellation of restricted stock issued 23,438 - Amortization of unearned compensation 30,913 30,913 Net income - 766,077 -------------- -------------- Balance at June 30, 1995 (215,101) 5,116,316 Conversion of preferred stock - - Cancellation of restricted stock issued 8,000 - Amortization of unearned compensation 32,802 32,802 Net income - 469,501 -------------- -------------- Balance at June 30, 1996 (174,299) 5,618,619 Conversion of preferred stock - - Shares issued pursuant to 1986 Stock Option Plan - 4,125 Stock issued under restricted stock plan (219,875) - Cancellation of restricted stock issued 1,875 - Amortization of unearned compensation 42,634 42,634 Net income - 773,793 -------------- -------------- Balance at June 30, 1997 $ (349,665) $ 6,439,171 ============== ==============
See accompanying notes to consolidated financial statements. 24 EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income $ 773,793 $ 469,501 $ 766,077 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,170,720 1,136,301 1,022,467 Amortization 130,146 127,201 120,078 Gain on sale of assets (14,273) (82,010) (3,638) Increase in deferred income taxes 290,000 194,000 203,000 Changes in assets and liabilities: Accounts receivable, materials and supplies and prepaid expenses 117,939 (533,407) (265,712) Accounts payable and accrued expenses (580,891) 1,095,986 (79,675) Other assets and liabilities, net (123,161) 22,827 134,067 -------------- -------------- -------------- Net cash provided by operating activities 1,764,273 2,430,399 1,896,664 -------------- -------------- -------------- Cash flow from investing activities: Proceeds from sale of assets 14,273 179,586 9,762 Additions to property, plant and equipment (2,310,977) (2,801,382) (2,053,395) -------------- -------------- -------------- Net cash used in investing activities (2,296,704) (2,621,796) (2,043,633) -------------- -------------- -------------- Cash flow from financing activities: Proceeds from issuance of long-term debt 1,894,853 1,025,775 472,647 Reduction in long-term debt (1,116,732) (801,864) (657,982) Proceeds from issuance of common stock 4,125 - - -------------- -------------- -------------- Net cash provided by (used in) financing activities 782,246 223,911 (185,335) -------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents 249,815 32,514 (332,304) Cash and cash equivalents at beginning of year 1,265,373 1,232,859 1,565,163 -------------- -------------- -------------- Cash and cash equivalents at end of year $ 1,515,188 $ 1,265,373 $ 1,232,859 ============== ============== ==============
See accompanying notes to consolidated financial statements. 25 Notes to Consolidated Financial Statements For the Years Ended June 30, 1997, 1996 and 1995 Note 1. The Company and Summary of Significant Accounting Policies a. The Company and Operations -------------------------- Emons Transportation Group, Inc. ("Emons Transportation Group") is a freight transportation and distribution services company serving the Mid- Atlantic and Northeast regions of the United States. Emons Transportation Group and its subsidiaries (collectively the "Company") own and operate two short line railroads and rail/truck transload and warehouse facilities in South-Central Pennsylvania, and a short line railroad and a rail intermodal operation in New England, which provide customers with logistics services for the movement and storage of freight. b. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Emons Transportation Group, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. c. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. d. Cash and Cash Equivalents ------------------------- Cash and cash equivalents include cash on hand and highly liquid short- term investments, including bank repurchase agreements and money market funds, with a maturity of three months or less. Short-term instruments are carried at cost which approximates market value. e. Materials and Supplies ---------------------- Materials and supplies are stated at the lower of cost or market. f. Properties ---------- Property, plant and equipment are carried at cost less accumulated depreciation. The Company uses the Depreciation Accounting method for its three railroad operations, the Maryland and Pennsylvania Railroad ("MPA"), Yorkrail ("YKR") and the St. Lawrence & Atlantic Railroad ("SLR"). Under Depreciation Accounting, the initial cost or purchase price of railroad track structures is depreciated over the estimated useful life of the track structures, and the cost of replacing railroad track structures is capitalized and depreciated over the estimated useful life of the replacements. Government grants received for track rehabilitation programs relating to the replacement of railroad track structures are accounted for as a reduction of the related capitalized cost of the track structures. Depreciation expense is computed on a straight-line basis over the estimated useful lives of the respective assets which range from 25 to 35 years for railroad track structures and from 3 to 20 years for all other assets. 26 Property, plant and equipment at June 30, 1997 and 1996 consists of the following:
1997 1996 ------ ------ Land and railroad track structures $ 22,347,581 $ 20,418,033 Equipment 4,473,853 4,116,825 Buildings 2,160,155 2,147,450 Other 60,560 60,560 ------------- ------------- 29,042,149 26,742,868 Less accumulated depreciation 9,649,440 8,490,416 ------------- ------------- $ 19,392,709 $ 18,252,452 ============= =============
g. Deferred Expenses ----------------- Deferred expenses consist of deferred financing costs, deferred costs incurred in connection with operating contracts, and deferred costs incurred in connection with the design and lease of the Company's rail intermodal terminal. Deferred financing costs are amortized over the terms of the related agreements, deferred costs incurred in connection with operating contracts are amortized over the terms of the related contracts, and deferred costs associated with the design and lease of the Company's rail intermodal terminal are amortized over a five year period, in each case using the straight-line method of amortization. h. Earnings Per Common Share ------------------------- Earnings per common share is computed by dividing net earnings by the weighted average number of common shares and common share equivalents for the period. Earnings per common share for the years ended June 30, 1997, 1996 and 1995 does not include shares of convertible preferred stock, because the effect of such inclusion would be anti-dilutive. Fully diluted earnings per common share amounts are not presented because the effect on earnings per share is not material or is anti-dilutive. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings per Share." SFAS No. 128 supersedes APB Opinion No. 15 to conform earnings per share with international standards, as well as to simplify the complexity of the computation under APB Opinion No. 15. SFAS No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997, and requires restatement of earnings per share data for all prior periods presented. Earlier application of this statement is not permitted. As a result, earnings per share information for the fiscal years ended June 30, 1997, 1996 and 1995 is presented under APB Opinion No. 15. The impact of SFAS No. 128 for these periods is not material. i. Stock-Based Compensation ------------------------ In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123") "Accounting for Stock-Based Compensation" which is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 encourages, but does not require, accounting for stock based compensation awards on the basis of fair value at the date the awards are granted. Under the fair value based method of accounting, the fair value of awards is included as expense in the statement of operations. Companies that do not recognize compensation based upon fair value can continue to account for awards under APB Opinion No. 25, "Accounting for Stock Issued to Employees," but are required to disclose on a pro forma basis what net income and earnings per share would have been under the fair value method. The Company has adopted the disclosure requirements of SFAS No. 123 only and, accordingly, there has been no impact on the consolidated financial statements other than the pro forma disclosures provided in Note 9, "Stock-Based Compensation and Warrants." 27 Note 2. Long-Term Debt Long-term debt at June 30, 1997 and 1996 consists of the following:
1997 1996 -------- -------- SLR Revolver Commitment, interest at prime $ 3,500,000 $ 3,700,000 SLR Term Note, interest at 11% 3,756,744 4,261,811 SLR Promissory Note, interest at 8.5% 1,500,000 1,500,000 SLR Deferred Interest Note, interest at prime 97,768 137,599 SLR 1994 Track Rehabilitation Assistance Loan from the State of Maine, non-interest bearing 603,710 646,832 SLR 1995 Track Rehabilitation Assistance Loan from the State of Maine, non-interest bearing 102,274 4,302 SLR 1995 Track Rehabilitation Assistance Loan from the State of New Hampshire, interest at 4.95% 1,170,715 190,944 YKR Senior Secured Term Loan, interest at 8.94% 164,005 193,335 YKR Senior Secured Term Loan, interest at prime plus 2% 225,000 - YKR Seller Land Financing, interest at 10% 113,333 170,000 Railroad Liability Insurance Financing, interest at 8.16% 485,091 - Equipment Loans, interest ranging from 9.5% to 12% 145,490 281,186 ------------- ------------- 11,864,130 11,086,009 Less current portion 887,791 967,837 ------------- ------------- $ 10,976,339 $ 10,118,172 ============= =============
The prime rate as of June 30, 1997 was 8.5%. On August 15, 1997, the Company entered into a Loan and Security Agreement (the "Agreement") with a new lender which provides a $7,775,000 seven year term loan and a $2 million working capital facility. The $7,775,000 proceeds from the term loan were utilized to retire the SLR Revolver Commitment, the SLR Term Note, the two outstanding YKR Senior Secured Term Loans, and to pay a portion of the refinancing costs. The term loan is payable in increasing quarterly installments with a final balloon payment at the end of the seventh year. The initial term of the working capital facility is two years, and borrowings under this facility are limited based upon the balance of eligible accounts receivable outstanding, as defined in the Agreement. Interest on both the term loan and working capital borrowings outstanding is based upon the bank's prime rate or the eurodollar rate, plus an applicable margin, at the option of the Company. The applicable margin ranges from prime to prime plus 0.5% for prime based borrowings, and from the eurodollar rate plus 1.75% to 3% for eurodollar based borrowings, depending upon the Company's financial performance. The non-use fee on the working capital facility ranges from 0.25% to 0.5%, also based upon the Company's financial performance. The term loan and working capital facility borrowings are secured by all of the assets of the Company, and the 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 also restrict additional borrowings, capital expenditures and lease commitments, and dividends. The Agreement also requires that the Company enter into an interest rate contract by September 30, 1997, including an interest rate cap or similar interest expense hedging arrangement, with respect to a notional principal amount of at least one-half of the available term loan balance. The SLR $1,500,000 Promissory Note is subordinated to the $7,775,000 term loan and $2 million working capital facility. In conjunction with the aforementioned refinancing transaction, the Company renegotiated the terms of SLR's Operating and Marketing Agreement with its primary connecting carrier, the Canadian National Railway, including the terms of the $1,500,000 Promissory Note. In accordance with the revised agreements, the $1,500,000 Promissory Note will be amortized over a seven year period commencing October 1, 1997 at an interest rate of 8.5%, without any principal or interest payment requirements, provided the Company continues to 28 own and operate SLR. The SLR Deferred Interest Note is payable in monthly installments of $3,621, plus interest at prime, until paid in full. In fiscal 1994, the State of Maine awarded SLR a $646,832 non-interest bearing term loan in connection with the State's track rehabilitation assistance program. The term loan is payable in thirty semi-annual installments of $21,561 commencing December 31, 1996. In September 1995, the State of Maine awarded SLR an additional $463,158 non-interest bearing term loan under the State's track rehabilitation assistance program, $102,274 of which had been drawn as of June 30, 1997. This term loan is payable in 20 semi-annual installments of $23,158 commencing June 30, 1997. In fiscal 1995, the State of New Hampshire awarded SLR a $1,150,000, 4.95% track rehabilitation assistance term loan, $1,130,298 of which had been drawn as of June 30, 1997 for track work completed under this program. This term loan, plus accrued interest through completion of the project, is payable in quarterly installments of approximately $23,000 over a twenty year period commencing March 1, 1998. The YKR seller land financing is payable in three equal annual installments through August 1998. In February 1997, the Company purchased a three year railroad liability insurance policy which was financed over a 30 month period with monthly payments of $20,419. The Equipment Loans are payable in various amounts ranging up to $2,357 per month, including interest, and mature at various dates through November 2000. Maturities of debt over the next five years are as follows:
Amount ------ Fiscal Year Due ----------- --- 1998 $ 887,791 1999 1,280,591 2000 1,170,276 2001 1,098,241 2002 1,360,527
For the fiscal years ended June 30, 1997, 1996 and 1995, the Company made interest payments of $1,013,733, $1,044,323 and $1,063,779, respectively. Note 3. Lease Commitments The Company leases land, rail facilities, its rail intermodal terminal, locomotives and other equipment, automobiles and office space under non- cancelable operating lease arrangements. The Company leases its rail intermodal terminal from the City of Auburn, Maine under a lease agreement which includes an initial term of 20 years, three optional 10 year renewal periods, and a purchase option in year 50. As of June 30, 1997, future minimum lease commitments under non-cancelable operating leases are as follows:
Fiscal Year ----------- 1998 $ 698,520 1999 579,718 2000 427,335 2001 388,163 2002 330,277 2003 and thereafter 2,716,330 ------------- $ 5,140,343 =============
29 Rent expense totaled $1,190,601, $1,116,477 and $722,253 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. Note 4. Preferred Stock As of June 30, 1997, a total of 1,650,857 shares of $.14 Series A Cumulative Convertible Preferred Stock were issued and outstanding. The principal terms of the Preferred Stock are as follows: a. Liquidation value is $2.00 per share. b. Dividends, when and as declared by the Board of Directors, are cumulative and payable semi-annually on January 1 and July 1 each year at a rate of $.14 per share per annum. c. Commencing on the second anniversary of the date of issuance, September 27, 1989, and continuing thereafter, the $.14 Series A Cumulative Convertible Preferred Stock may be redeemed, in whole or in part, at the option of the Company at the following redemption prices: September 27, 1996 2.05 after September 27, 1997 2.00
d. Holders of the $.14 Series A Cumulative Convertible Preferred Stock have the right to vote (on a one vote per share basis) as a class together with the holders of Common Stock on all matters. e. Each share of $.14 Series A Cumulative Convertible Preferred Stock is convertible, at any time, into nine-tenths shares of Common Stock. Note 5. Income Taxes The provision for income taxes for the years ended June 30, 1997, 1996 and 1995 is comprised of the following:
1997 1996 1995 ---- ---- ---- Current: Federal $ 17,000 $ 7,000 $ 25,000 State 90,000 88,500 80,300 ------------ ------------ ------------ Total current 107,000 95,500 105,300 Deferred: Federal 232,000 122,000 205,000 State 58,000 72,000 (2,000) ------------ ------------ ------------ Total deferred 290,000 194,000 203,000 Total $ 397,000 $ 289,500 $ 308,300 ============ ============ ============
The Company utilized approximately $1,800,000 of federal and $750,000 of state net operating loss carryforwards in computing the fiscal 1997 provision for income taxes. 30 Deferred tax assets and liabilities are comprised of the following at June 30, 1997 and 1996:
1997 1996 ---- ---- Deferred tax assets: Accrued expenses $ 712,000 $ 566,000 Net operating loss carryforwards 21,345,000 22,130,000 ------------- ------------- 22,057,000 22,696,000 Valuation allowance (21,539,000) (21,778,000) ------------- ------------- 518,000 918,000 ------------- ------------- Deferred tax liabilities: Property, plant and equipment 2,242,000 2,352,000 ------------- ------------- Net deferred tax liability $ 1,724,000 $ 1,434,000 ============= =============
The valuation allowance has been provided to reduce the deferred tax asset, which relates principally to the significant net operating loss carryforwards, to the estimated recoverable amount based upon the estimated utilization of the net operating loss carryforwards. At June 30, 1997, the Company had approximately $50,000,000 of net operating loss ("NOL") carryforwards available, which expire in various years from fiscal 1998 through fiscal 2008, a significant portion of which expire in fiscal 2002. Due to the interaction between the Company's large net operating loss carryforwards and significant deferred taxes resulting from the book versus tax depreciation of the Company's railroad track structures, an effective tax rate reconciliation for the years ended June 30, 1997, 1996 and 1995 would not be meaningful. During fiscal 1997, 1996 and 1995, the Company made income tax payments of $85,940, $99,965 and $182,172, respectively. Note 6. Customer Concentrations The majority of the Company's revenues are generated from freight transportation services provided to customers in the Northeast and Mid-Atlantic regions of the United States, many of whom are involved in the pulp and paper industry. During fiscal 1997, the Company's two largest customers accounted for 10% and 9% of the Company's operating revenues. These two customers accounted for 10% and 12% of fiscal 1996 revenues, respectively, and each accounted for 10% of fiscal 1995 revenues. The Company collects the majority of its revenues from its Class I connecting carriers to whom the Company regularly grants credit. The Company considers its credit risk with these carriers to be minimal. Note 7. Dividends On November 20, 1996, and June 19, 1997, the Board of Directors voted to omit the regular semi-annual dividend of $.07 per share on its $.14 Cumulative Convertible Preferred Stock which would have been payable on January 2, 1997 and July 1, 1997, respectively. Dividends in arrears as of June 30, 1997 aggregated $1,617,840 as compared to $1,411,393 for the prior year. 31 Note 8. Contingent Liabilities Emons Transportation Group is not a party to any legal proceedings. However, Emons Industries, Inc. ("Industries"), a subsidiary of Emons Transportation Group, is currently a defendant in 888 product liability actions. The Company is in the process of cleaning up a fuel oil spill at its locomotive maintenance facility in York, Pennsylvania. Product Liability Actions ------------------------- Prior to March 1971, under previous management, 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 June 30, 1997, Industries was one of numerous defendants (including many of the largest pharmaceutical manufacturers) in 888 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, 883 were commenced after the confirmation of Industries' Reorganization Plan in December 1986 (the "Plan"), while the remaining five lawsuits are claims which will be treated under the Plan. In one action, Industries is allegedly identified as the sole defendant. These actions are currently in various stages of litigation. Industries has filed a motion in Bankruptcy Court seeking a judgment declaring that the 883 post-confirmation lawsuits represent claims which should be asserted against Industries' Chapter 11 estate and are not post- reorganization liabilities. Counsel has advised the Company that the Bankruptcy Court should grant Industries' application to classify all of these cases as bankruptcy claims. In addition, on February 14, 1995, the Bankruptcy Court advised Industries that it would sign an order which would stay execution of any judgment rendered against Industries pending determination of Industries' application. The order, which was submitted to the Court on March 23, 1995, has not yet been signed. 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 coverage in any policy year. During the period July 1, 1996 through June 30, 1997, 500 new actions were commenced in which Industries was named as a defendant. Of these actions, 365 were commenced in a single filing in the state court in Ohio shortly before the effective date of a revision to Ohio's product liability statute which, among other things, limits damages recoverable for pain and suffering. During the year ended June 30, 1997, 58 lawsuits were settled or dismissed at no material liability to Industries. Management intends to vigorously defend all of these actions. In the event that the post-reorganization lawsuits described above are not treated under the Plan, it is possible that Industries could ultimately have liability in these actions in excess of its product liability insurance coverage described above. However, based on Industries' experience in prior DES litigation and its current knowledge of pending cases, the Company believes that it is unlikely that Industries' ultimate liability, if any, in excess of insurance coverage and existing reserves in the pending cases will be in an amount sufficient to have a material adverse effect upon the Company's consolidated financial position or results of operations. 32 Environmental Liability ----------------------- During fiscal 1994, the Company discovered a diesel fuel oil spill at its locomotive maintenance facility in York, Pennsylvania, resulting from the fueling of its locomotives. The Company is currently performing additional testing and is working with the Pennsylvania Department of Environmental Protection to remediate the contaminated area. In January 1997, in the next phase of its testing procedures, the Company discovered free product in some of its monitoring wells. The Company estimates that the cost to remediate the free product will range from $100,000 to $200,000. The Company has provided sufficient reserves for the anticipated remediation costs. Note 9. Stock-Based Compensation and Warrants a. Stock Option Plans ------------------ In November 1996, the Board of Directors and shareholders adopted the 1996 Stock Option Plan (the "Plan"), which replaced the Company's expiring 1986 Stock Option Plan. The terms of the new Plan are substantially the same as the terms of the 1986 Stock Option Plan. The Plan provides for the issuance of a maximum of 500,000 shares of the Company's Common Stock to key employees. Under the Plan, the Company may grant either non-qualified or incentive stock options at an exercise price not less than 100% of the fair market value at the date of grant. Options may be exercised in accordance with time periods established by the Compensation Committee of the Board of Directors, and expire ten years after the date of grant. During fiscal 1997, the Company issued options to purchase 183,000 shares of the Company's Common Stock under the Plan at prices ranging from $2.5625 to $3.25, which vest over a five year period. As of June 30, 1997, 317,000 options were available for issuance under the Plan. Separate from the above plans, the Company has granted stock options to its non-employee directors on various dates from fiscal 1988 through fiscal 1997 to purchase shares of the Company's Common Stock at exercise prices equal to the fair market value of the stock on the date of grant. The vesting period for these options ranges from three to four years, and these options expire ten years from the date of grant. 33 A summary of stock option activity under the stock option plans described above is as follows:
Option Price per Share Stock ---------------------- Options Range Weighted Average ------- ----- ---------------- Balance at June 30, 1994 605,000 $ 0.81 - $ 2.56 $ 1.01 Options granted 525,000 1.06 1.06 Options forfeited (415,000) 0.84 - 2.50 1.02 ---------- Balance at June 30, 1995 715,000 0.81 - 2.56 1.05 Options granted 60,000 1.25 - 2.44 1.69 Options forfeited (32,500) 0.91 - 2.56 1.51 ---------- Balance at June 30, 1996 742,500 0.81 - 2.44 1.08 Options granted 220,500 2.28 - 3.25 3.16 Options exercised (4,000) 1.00 - 1.06 1.03 Options forfeited (36,000) 0.91 - 1.06 1.01 ---------- Balance at June 30, 1997 923,000 0.81 - 3.25 1.58 ==========
June 30, June 30, June 30, 1997 1996 1995 ---- ---- ---- Options exercisable 377,333 223,750 88,000 Weighted average exercise price $ 1.04 $ 0.99 $ 1.12
A summary of stock option information regarding options outstanding at June 30, 1997 is as follows:
Range of Unexercised Weighted Weighted Stock Weighted Exercise Stock Average Average Options Average Prices Options Remaining Exercise Currently Exercise ------ ------- Life (Years) Price Exercisable Price ------------ ----- ------------ ----- $0.75 - $1.25 657,500 7.5 $1.03 363,000 $1.01 1.26 - 2.25 30,000 8.8 1.53 9,333 1.54 2.26 - 3.25 235,500 9.6 3.12 5,000 2.44 --------- --------- Total 923,000 8.1 $1.58 377,333 $1.04 ========= =========
34 The Company accounts for stock options issued under its stock option plans in accordance with APB Opinion No. 25 and, accordingly, no compensation expense has been recognized in the Company's financial statements. The Company's pro forma net income and earnings per share under the provisions of SFAS No. 123 for the years ended June 30, 1997 and 1996 would have been as follows:
1997 1996 ---- ---- Net income: As reported $773,793 $469,501 Pro forma 721,741 460,668 Earnings per share: As reported $ 0.09 $ 0.04 Pro forma 0.08 0.04 Weighted average fair value of options granted $ 2.38 $ 1.26
The pro forma information provided above does not include the impact of stock options granted prior to July 1, 1995. As a result, compensation cost under SFAS No. 123 included in the determination of the pro forma information may not be representative of what compensation cost would have been had the provisions of SFAS No. 123 been applied to prior years, and may not be indicative of compensation cost under SFAS No. 123 in future years. The fair value of options granted on the date of grant included in the pro forma information for the years ended June 30, 1997 and 1996 has been estimated using the Black-Scholes option pricing model using the following assumptions:
1997 1996 ---- ---- Weighted average: Risk free interest rate 6.8% 6.7% Expected life 10 years 10 years Expected volatility 58.4% 57.7% Expected dividend yield 0.0% 0.0%
35 b. Restricted Stock Plan --------------------- The Company has a Restricted Stock Plan under which the Company can award up to 800,000 shares of Common Stock to employees. Shares awarded under the Restricted Stock Plan may not be sold or transferred until they vest. The Management Compensation Committee of the Board of Directors determines the vesting schedule for each of the recipients of the Restricted Stock Awards. Compensation under the Restricted Stock Plan is charged to earnings over the respective vesting periods ranging from five to ten years. At June 30, 1997 and 1996, 269,950 and 336,450 shares were available for issuance, respectively. A summary of activity under the Company's Restricted Stock Plan is as follows:
1997 1996 1995 ---- ---- ---- Awards: Shares 69,000 - 17,000 Fair value at date of grant $219,875 $ - $18,063 Cancellations: Shares 2,500 8,000 37,500 Fair value at date of grant $ 1,875 $ 8,000 $23,438 Compensation expense $ 42,634 $32,802 $30,913
c. Common Stock Warrants --------------------- At June 30, 1997, the Company had warrants outstanding to purchase up to 160,000 shares of common stock at prices ranging from $1.00 to $2.625 per share. 36 Schedule III EMONS TRANSPORTATION GROUP, INC. (Parent Company Only) Balance Sheets as of June 30, 1997 and 1996
1997 1996 -------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 390,391 $ 491,259 Accounts receivable 10,957 5,431 Prepaid expenses and other current assets 24,264 76,285 Due from affiliates 3,901,542 2,036,348 Deferred income taxes 14,000 22,000 -------------- -------------- Total current assets 4,341,154 2,631,323 Investments in subsidiaries at equity 2,242,123 3,648,330 Property and equipment, net of accumulated depreciation of $472,982 and $448,004 as of June 30, 1997 and 1996, respectively 76,086 92,689 Due from affiliates 1,956,592 1,705,330 Other assets 21,515 32,990 -------------- -------------- TOTAL ASSETS $ 8,637,470 $ 8,110,662 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 13,121 $ 11,807 Accounts payable 63,405 107,246 Accrued payroll and related expenses 155,175 90,587 Income taxes payable 30,720 8,244 Other accrued expenses 121,534 163,593 Due to affiliates - 505,970 -------------- -------------- Total current liabilities 383,955 887,447 Long-term debt 41,344 55,596 Note payable to affiliate 450,000 450,000 Deferred income taxes 1,323,000 1,099,000 -------------- -------------- Total liabilities 2,198,299 2,492,043 -------------- -------------- Stockholders' Equity: Preferred stock, authorized 3,000,000 shares $0.14 Series A Cumulative Convertible Preferred Stock, $0.01 par value, issued and outstanding 1,650,857 and 1,680,230 shares at June 30, 1997 and 1996, respectively 16,509 16,802 Common stock, $0.01 par value, authorized 15,000,000 and 11,000,000 shares at June 30, 1997 and 1996, respectively, issued and outstanding 5,800,624 and 5,703,689 shares at June 30, 1997 and 1996, respectively 58,006 57,037 Additional paid-in capital 23,503,442 23,281,993 Deficit (16,789,121) (17,562,914) -------------- -------------- 6,788,836 5,792,918 Unearned compensation - restricted stock awards (349,665) (174,299) -------------- -------------- Total Stockholders' Equity 6,439,171 5,618,619 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,637,470 $ 8,110,662 ============== ==============
37 Schedule III EMONS TRANSPORTATION GROUP, INC. (Parent Company Only) Statements of Operations for the years ended June 30, 1997, 1996 and 1995
1997 1996 1995 -------------- --------------- --------------- Operating revenues: Intercompany management fees $ 1,762,846 $ 1,471,555 $ 1,375,939 -------------- --------------- --------------- Operating expenses: General and administrative expenses 1,727,671 1,451,705 1,342,731 Depreciation 24,978 21,733 14,151 -------------- --------------- --------------- Total operating expenses 1,752,649 1,473,438 1,356,882 -------------- --------------- --------------- Income (loss) from operations 10,197 (1,883) 19,057 Other income (expense): Interest and other income 35,359 35,670 23,456 Interest expense (45,556) (33,787) (42,513) -------------- --------------- --------------- Total other income (expense) (10,197) 1,883 (19,057) -------------- --------------- --------------- Income (loss) before income taxes and equity in undistributed net earnings of subsidiaries - - - Provision for income taxes 20,000 10,000 (156,500) -------------- --------------- --------------- Income (loss) before equity in undistributed net earnings of subsidiaries (20,000) (10,000) 156,500 Equity in undistributed net earnings of subsidiaries 793,793 479,501 609,577 -------------- --------------- --------------- Net income $ 773,793 $ 469,501 $ 766,077 ============== =============== ===============
38 Schedule III EMONS TRANSPORTATION GROUP, INC. (Parent Company Only) Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995
1997 1996 1995 -------------- ------------- -------------- Cash flow from operating activities: Net income $ 773,793 $ 469,501 $ 766,077 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 24,978 21,733 14,151 Amortization of deferred compensation 42,634 32,802 30,913 Equity in net earnings of subsidiaries (793,793) (479,501) (609,577) Provision for deferred income taxes 2,000 1,000 (184,000) Changes in assets and liabilities: Accounts receivable, prepaid expenses and other current assets 46,495 (6,233) 9,748 Accounts payable and accrued expenses 1,164 (14,139) (10,781) Other assets 11,475 (5,079) 86,066 -------------- ------------- -------------- Net cash provided by operating activities 108,746 20,084 102,597 -------------- ------------- -------------- Cash flow from investing activities: Additions to property and equipment (8,375) (68,347) (23,354) Investments in subsidiaries - - (118,671) (Increase) decrease in due to/from affiliates, net (2,392,426) 53,467 (63,051) Dividends received from subsidiaries 2,200,000 - - Proceeds from issuance of common stock 4,125 - - -------------- ------------- -------------- Net cash used in investing activities (196,676) (14,880) (205,076) -------------- ------------- -------------- Cash flow from financing activities: Proceeds from issuance of long-term debt - 75,300 - Reduction in long-term debt (12,938) (7,897) - -------------- ------------- -------------- Net cash provided by (used in) financing activities (12,938) 67,403 - -------------- ------------- -------------- Net increase (decrease) in cash and cash equivalents (100,868) 72,607 (102,479) Cash and cash equivalents at beginning of year 491,259 418,652 521,131 -------------- ------------- -------------- Cash and cash equivalents at end of year $ 390,391 $ 491,259 $ 418,652 ============== ============= ==============
39 Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. EMONS TRANSPORTATION GROUP, INC. By: /s/ Robert Grossman Date: September 18, 1997 --------------------------------------- ---------------------- Robert Grossman, Chairman of the Board of Directors, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Robert Grossman Date: September 18, 1997 ------------------------------------------- ---------------------- Robert Grossman, Chairman of the Board of Directors, President and Chief Executive Officer /s/ Scott F. Ziegler Date: September 18, 1997 ------------------------------------------- ---------------------- Scott F. Ziegler, Vice President - Finance, Controller and Secretary, signing on behalf of the registrant as its principal accounting officer /s/ Robert J. Smallacombe Date: September 18, 1997 ------------------------------------------- ---------------------- Robert J. Smallacombe, Director /s/ Dean H. Wise Date: September 18, 1997 ------------------------------------------- ---------------------- Dean H. Wise, Director /s/ Alfred P. Smith Date: September 18, 1997 ------------------------------------------- ---------------------- Alfred P. Smith, Director /s/ Kimberly A. Madigan Date: September 18, 1997 ------------------------------------------- ---------------------- Kimberly A. Madigan, Director 40 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.
Page in Exhibit Sequentially Number Exhibit Numbered Copy 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 of 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 July 19, 1994 by and between the City of Auburn, Maine and Maine Intermodal Transportation, Inc. (incorporated by reference from Emons Transportation Group, Inc. Report on Form 10-K for the year ended June 30, 1995, Exhibit Number 10 (a)) -- 10 (b) Amended and Restated Employment Agreement with Robert Grossman dated December 31, 1989 -- 10 (c) Amendment to the Amended and Restated Employment Agreement with Robert Grossman dated May 26, 1994 -- 10 (d) Employment Agreement with Alfred P. Smith dated December 31, 1989 -- 10 (e) Amendment to the Employment Agreement with Alfred P. Smith dated May 26, 1994 --
41
Page in Exhibit Sequentially Number Exhibit Numbered Copy 10 (f) Loan and Security Agreement dated August 15, 1997 among Emons Transportation Group, Inc., Emons Industries, Inc., Emons Finance Corp., Maryland and Pennsylvania Railroad, Emons Logistics Services, Inc., Maine Intermodal Transportation, Inc., Emons Railroad Group, Inc., Yorkrail, Inc., and St. Lawrence & Atlantic Railroad, as the Borrowers, and LaSalle National Bank, as the Lender -- 11 (a) Earnings per share calculation -- 21 (a) Listing of subsidiaries -- 23 (a) Consent of Arthur Andersen LLP -- 27 (a) Financial Data Schedule --
42 EX-10.B 2 AMENDED AND RESTATED EMPLOY. AGREEMENT Exhibit 10(b) AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of December 31, 1989, between EMONS HOLDINGS, INC., a Delaware corporation with offices at 96 South George Street, York, Pennsylvania 17401 (together with any and all present and future affiliates and subsidiaries thereof, the "Company"), and ROBERT GROSSMAN, residing at 57 Deer Ford Drive, Lancaster, Pennsylvania 17601 (the "Employee"). Employee presently serves as the Chairman of the Board and Chief Executive Officer of the Company and performs services for the Company pursuant to the terms and conditions of that certain Employment Agreement dated as of December 31, 1986 (the "1986 Employment Agreement") between Employee and the Company (as assignee of Emons Industries, Inc.). The Company desires to continue to engage Employee to serve in such capacity and to perform such services for the Company and Employee desires to so serve and perform such services on the terms and conditions of the 1986 Employment Agreement, as amended and restated hereby and hereinafter set forth. 1. Term. The Company agrees to employ Employee, and Employee agrees to ---- serve, on the terms and conditions of this Agreement for a period commencing as of the date hereof and ending five years from the starting date, and thereafter the term of this Agreement shall be extended for additional one-year terms unless either party delivers to the other party written notice of termination within 60 days of the end of the preceding term, or such shorter period as may be provided for herein. The period during which Employee is employed hereunder is hereafter referred to as the "Employment Period." 2. Duties and Services. During the Employment Period, Employee shall be ------------------- employed in the business of the Company as the Chairman of the Board and Chief Executive Officer. In performance of his duties, Employee shall be subject to the direction of the Board of Directors of the Company. Employee agrees to his employment as described in this Section 2 and agrees to devote substantially all of his professional time and efforts to the performance of his duties under this Agreement. Employee shall be available to travel as the needs of the business require. 3. Compensation. As full compensation for his services hereunder, the ------------ Company shall pay Employee, during the Employment Period, a salary payable in equal weekly installments at the annual rate of $200,000. Employee shall also be entitled to participate in the Company's Incentive Compensation Plan and Incentive and Non- Qualified Stock Option Plans during such time as he continues to be eligible therefor. Employee shall be entitled to participate in all other present or future employee benefit plans of the Company if he meets the eligibility requirements therefor. Employee's salary shall be reviewed from time to time, but not less than once during any twelve consecutive month period, by the Board of Directors of the Company and, upon such review, Employee's salary may be increased to such rate as shall be considered appropriate and fixed by the Board of Directors. 4. Automobile Allowance; Expenses; and Vacation. The Company shall pay -------------------------------------------- Employee an automobile allowance of $400 per month, payable on the first day of each month, for the purpose of enabling Employee to obtain the use of an automobile in the performance of his duties hereunder and shall reimburse Employee for all out-of-pocket expenses incurred in connection with the use of such automobile, including without limitation expenses for gasoline, repairs, tolls, and automobile insurance. Employee shall also be entitled to reimbursement for reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties hereunder, in accordance with the then regular procedures of the Company. Employee shall further be entitled to reasonable vacations of not less than four weeks annually or as otherwise may be in accordance with the then regular procedures of the Company governing officers. 5. Life Insurance; Disability. (a) If requested by the Company, Employee -------------------------- shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain life insurance on the life of Employee. (b) The Company shall obtain and maintain a long-term disability insurance policy insuring the health of the Employee, from a reputable nationally recognized insurance carrier, payment pursuant thereto to commence upon the earlier of any termination pursuant to Section 6(b) or pursuant to the terms and conditions of such policy; provided that the Company shall be obligated to pay policy premiums therefor of approximately $6,000 per policy year. (c) The Company shall obtain and maintain a term life insurance policy or policies from a reputable nationally recognized insurance carrier or carriers, in an amount of not less than three times the salary of Employee, insuring the life 2 of Employee for the benefit of a beneficiary (or beneficiaries) to be designated by Employee. 6. Consequences of Termination of Employment. ----------------------------------------- (a) Death. In the event of the death of Employee during the term of ----- this Agreement, the estate or other legal representative of Employee shall be entitled to the salary provided for in Section 3, which, if Employee had not died, would have accrued to the end of the sixth month next succeeding the month in which death takes place, in addition to the proceeds of any life insurance policy insuring the life of Employee obtained pursuant to Section 5(c). Other rights and benefits of Employee under employee benefit plans and programs of the Company, generally, will be determined in accordance with the terms and provisions of such plans and programs. (b) Disability. If Employee shall become incapacitated by reason of ---------- sickness, accident or other physical or mental disability and shall be unable to perform his normal duties hereunder for a cumulative period of six (6) months in any period of twelve (12) consecutive months, the employment of Employee hereunder may be terminated by Employee or the Company upon thirty (30) days' notice to the other party. Within thirty (30) days after such termination, the Company shall pay to Employee any salary provided for in Section 3 accrued to the date of such termination and not theretofore paid and, in addition thereto, cause the commencement of the payments to Employee under the disability insurance policy obtained pursuant to Section 5(b) to be paid to Employee; provided, however, that any payments of salary hereunder shall be reduced by the amount of any payments received by Employee under such disability insurance policy. The Company shall continue to carry the life, health, hospitalization, surgical and major medical insurance coverage for Employee for the twenty-four- month period of disability following termination, unless prohibited by the insurer or by law, in which case the Company shall provide the economic equivalent (as hereinafter defined) to Employee. If coverage is continued, the Company shall, at the end of such twenty-four-month period, give Employee the right to assume the life, disability, health, hospitalization, surgical and major medical insurance coverage or to reimburse the Company for its continuing payments under such policies, unless prohibited by the insurer or by law. Other rights and benefits of Employee under employee benefit plans and programs of the Company, generally, will be determined in accordance with the terms and provisions of such plans and programs. 3 (c) Termination by the Company for Due Cause. Nothing herein shall ---------------------------------------- prevent the Company from terminating Employee for Due Cause. Employee shall continue to receive salary payments provided for in this Agreement only through the period ending with the date of such termination as provided in this Section. Any rights and benefits he may have under employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and provisions of such plans and programs. The term "Due Cause" as used herein, shall mean that (i) Employee has committed a serious criminal act, such as embezzlement, against the Company or a felony involving moral turpitude or (ii) Employee, in carrying out his duties hereunder, has been guilty of willful misconduct, resulting in either case in material harm to the Company; provided, in any event, Employee shall be given written notice by a majority of the Board of Directors of the Company that it intends to terminate Employee's employment for Due Cause under this Section, which written notice shall specify the act or acts upon the basis of which the majority of the Board of Directors of the Company intends so to terminate Employee's employment, and Employee shall then be given the opportunity, within fifteen (15) days of his receipt of such notice, to have a meeting with the Board of Directors of the Company to discuss such act or acts. (d) Termination By the Company Other Than for Due Cause. The --------------------------------------------------- foregoing notwithstanding, the Company may terminate Employee's employment prior to the expiration of the term of this Agreement for whatever reason it deems appropriate; provided, however, that in the event such termination is not due to Disability as provided in Section 6(b) or based on Due Cause as provided in Section 6(c) Employee shall be entitled to a lump sum payment, payable within thirty (30) days after his termination of employment, of an amount equal to 24 months' base salary at a rate equal to the highest annualized rate in effect, pursuant to Section 3, during the six-month period immediately prior to his termination; provided, however, that, except in the case of termination under section 6(f), if the Board of Directors determines that the payment of such lump sum amount would have a materially adverse effect on the financial condition of the Company, the Company may elect to pay such amount to Employee in 24 equal consecutive monthly installments payable on the first day of each month commencing with 30 days after such termination. Employee shall be under no obligation to seek subsequent employment and upon obtaining subsequent employment shall be under no obligation to offset any amounts earned from such subsequent employment (whether as an employee, a consultant or otherwise) against the aforesaid salary payment due under this Section. The Company shall continue to pay the automobile allowance pursuant to Section 4 and shall continue to carry the 4 life, disability, health, hospitalization, surgical and major medical insurance coverage for Employee for a 24-month period following termination of employment, unless prohibited by the insurer or by law, in which case the Company shall provide the economic equivalent. If coverage is continued, the Company shall give the Employee the right to assume the life, disability, health, hospitalization, surgical and major medical insurance coverage or to reimburse the Company for its continuing payments under such policies, unless prohibited by the insurer or by law. For purposes of this Agreement, "economic equivalent" shall mean the cost of the premiums paid by the Company for the insurance coverage provided to Employee by the Company during the 12 consecutive month period prior to such termination. Any such continuing insurance coverage, or economic equivalent thereof, will be offset by comparable coverage to Employee in connection with subsequent employment, if any. Other rights and benefits of Employee under employee benefit plans and programs of the Company, generally, will be determined in accordance with the terms and provisions of such plans and programs. (e) Constructive Termination of Employment by the Company Without Due ----------------------------------------------------------------- Cause. Anything herein to the contrary notwithstanding, if the Company: - ----- (A) demotes Employee to a lesser position than provided in Section 2; (B) causes a material change in the nature or scope of the authorities, powers, functions, duties, or responsibilities attached to Employee's position as described in Section 2; (C) decreases Employee's salary (other than a decrease that affects all senior executive employees on a pro rata basis) below the level provided for by the terms of Section 3 (taking into account increases made from time to time); (D) materially reduces Employee's benefits under any employee benefit plan, program or arrangement of the Company (other than a change that affects all senior executive employees) from the level in effect upon Employee's commencement of participation; or (E) fails to obtain the agreement of a successor company to assume the obligations of the Company under this Agreement as required by Section 7, then such action (or inaction) by the Company, unless consented to in writing by Employee, shall constitute a termination of 5 Employee's employment by the Company other than for Due Cause pursuant to Section 6(d). Notwithstanding the preceding sentence, within sixty (60) days after learning of the action (or inaction) described herein as the basis for a Constructive Termination of Employment, Employee shall (unless he gives written consent thereto) advise the Company in writing, that the action (or inaction) constitutes a termination of his employment other than for Due Cause pursuant to Section 6(d) in which event the Company shall have thirty (30) days in which to correct such action (or inaction) and if the Company does so correct such action (or inaction) Employee shall not be entitled to terminate his employment under this Section as a result of such action (or inaction). (f) Termination of Employment Following a Change in Control. Employee ------------------------------------------------------- may terminate his employment with the Company within one (1) year after a change in control of the Company, as defined below, and such termination of employment shall be treated as a termination of employment by the Company other than for Due Cause as provided in Section 6(d). For purposes of this Section, a Change in Control of the Company shall be deemed to have occurred if: (A) a "person" (meaning an individual, a partnership, or other group or association as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, other than Employee, or a group including the Employee) acquires, directly or indirectly, twenty-five percent (25%) or more of the combined voting power of the outstanding securities of the Company having a right to vote in elections of directors; or (B) the individuals who as of the date of this Agreement constitute the Board of Directors of the Company cease for any reason to constitute a majority thereof unless the election, or nomination for election, of each new director was approved by the current Chairman of the Board and the current Board of Directors of the Company; or (C) the business of the Company is disposed of by the Company to a party or parties other than a subsidiary or other affiliate of the Company, in which the Company owns less than a majority of the equity, pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary of the company) or otherwise. (g) Voluntary Termination. In the event the Employee terminates his --------------------- employment of his own volition prior to the expiration of the term of this Agreement (other than as provided 6 in Section 6(e) or Section 6(f) such termination shall constitute a voluntary termination and in such event the Employee shall be limited to the same rights and benefits as provided in connection with termination for Due Cause. 7. Merger, etc. In the event of a future disposition of (or including) ------------ the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, or otherwise, then the Company shall assign this Agreement, subject to the consent of Employee, and subject further to Employee's rights under Section 6(f) and all of its rights and obligations hereunder, to the acquiring or surviving corporation or entity; provided that such corporation or entity shall assume in writing all of the obligations of the Company. 8. Survival. The covenants, agreements, representations, and warranties -------- contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 9. Modification. This Agreement sets forth the entire understanding of ------------ the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 10. Notices. Any notice or other communication required or permitted to ------- be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 10). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 10. Any notice or other communications given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 11. Waiver. Any waiver by either party of a breach of any provision of ------ this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement shall not operate as or be construed to be a waiver of any such provision or any other provision under this Agreement. Any waiver must be in writing. 7 12. Binding Effect; Assignment to Parent. Employee's rights and ------------------------------------ obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the company and its successors and those who are its assigns under Section 7. 13. No Third Party Beneficiaries. This agreement does not create, and ---------------------------- shall not be construed as creating, any rights enforceable by any person to a party to this Agreement (except as provided in Section 12). 14. Headings; Governing Law. The headings in this Agreement are solely ----------------------- for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. EMONS HOLDINGS, INC. By: /s/ Alfred P. Smith ----------------------- Title: Vice President /s/ Robert Grossman ------------------------ Robert Grossman 8 EX-10.C 3 AMEND. TO THE AMEND AND RESTATED EMPLOY. AGREE. Exhibit 10(c) AMENDMENT TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT ---------------------------------------------------------- This Agreement, dated as of May 26, 1994, is made between EMONS TRANSPORTATION GROUP, INC. (formerly known as Emons Holdings, Inc.), a Delaware corporation with offices at 96 South George Street, York, Pennsylvania 17401 (together with any and all present and future affiliates and subsidiaries thereof, the "Company"), and ROBERT GROSSMAN, residing at 57 Deer Ford Drive, Lancaster, Pennsylvania 17601 (the "Employee"). All capitalized terms contained in this Agreement not otherwise defined herein have the meanings defined in the Amended and Restated Employment Agreement, dated as of December 31, 1989, between the Company and Employee (the "Amended and Restated Employment Agreement"). RECITALS -------- The Company and Employee previously entered into an Employment Agreement, dated as of December 31, 1986 (the "1986 Employment Agreement"), between the Company and Employee, pursuant to which the Company engaged Employee to serve as Chairman of the Board and Chief Executive Officer of the Company and perform services for the Company pursuant to the terms and condition of the 1986 Employment Agreement. The Company and Employee amended and restated the 1986 Employment Agreement in the Amended and Restated Employment Agreement, dated as of December 31, 1989 (the "Amended and Restated Employment Agreement"), between the Company and Employee, to read in full as set forth in the Amended and Restated Employment Agreement. The Company and Employee desire to amend the Amended and Restated Employment Agreement in certain respects as provided herein. =========================== In consideration of the promises herein contained and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree to amend the Amended and Restated Employment Agreement as set forth herein: 1. Amendment to Section 1. Section 1 is hereby amended by substituting ---------------------- "December 31, 1994" for "the starting date." 2. Amendment to Section 3. Section 3 is hereby amended by substituting ---------------------- "$212,000" for "$200,000." 3. Amendment to Section 4. Section 4 is hereby amended by ---------------------- substituting "five weeks" for "four weeks." 4. Except as herein specifically amended, all terms, covenants and provisions of the Amended and Restated Employment Agreement shall remain in full force and effect and shall be performed by the parties thereto according to its terms and provisions. IN WITNESS WHEREOF, the undersigned have executed and delivered this Amendment to the Amended and Restated Employment Agreement as of the date first above stated. EMONS TRANSPORTATION GROUP, INC. By: /s/ Alfred P. Smith ---------------------------------- Name: Alfred P. Smith Title: Executive Vice-President /s/Robert Grossman ---------------------------------- Robert Grossman 2 EX-10.D 4 AGREEMENT EXHIBIT 10(d) AGREEMENT AGREEMENT, dated as of December 31, 1989, between EMONS HOLDINGS, INC., a Delaware corporation with offices at 96 South George Street, York, Pennsylvania 17401 (together with any and all present and future affiliates and subsidiaries thereof, the "Company"), and ALFRED P. SMITH, residing at 2650 Primrose Lane, York, Pennsylvania 17404 (the "Employee"). In consideration of Employee's continuing employment hereunder, the Company desires to provide for certain severance benefits to Employee in the event of a termination of Employee's employment under certain circumstances and Employee desires to agree to such arrangement, on the terms and conditions hereinafter set forth. 1. Term. This Agreement shall commence as of the date hereof and shall ---- end five years from the starting date, and thereafter the term of this Agreement shall be extended for additional one-year terms unless either party delivers to the other party written notice of termination within 60 days of the end of the preceding term, or such shorter period as may be provided for herein. 2. Termination by the Company for Due Cause. The Company may terminate ---------------------------------------- Employee for Due Cause, in which case Employee shall continue to receive his then current salary payments only through the period ending with the date of such termination as provided in this Section. Any rights and benefits he may have under employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and provisions of such plans and programs. The term "Due Cause" as used herein, shall mean that (i) Employee has committed a serious criminal act, such as embezzlement, against the company or a felony involving moral turpitude or (ii) Employee, in carrying out his duties hereunder, has been guilty of willful misconduct, resulting in either case in material harm to the Company. 3. Termination of Employment Following a Change in Control. (a) In the ------------------------------------------------------- event that: (i) the Company terminates Employee after a change in control of the Company, as defined in Section 3(b) or (ii) (x) Employee terminates his employment with the Company within one (1) year after a change in control of the Company and (y) a constructive demotion has occurred, as defined in Section 3(c), within thirty (30) days after such termination, the Company shall pay to Employee any salary accrued to the date of such termination and not theretofore paid, in addition to a lump sum payment of an amount equal to 12 months' base salary at a rate equal to the highest annualized rate in effect during the six consecutive month period immediately prior to such termination. The Company shall continue to carry the life, disability, health, hospitalization, surgical and major medical insurance coverage for such 12-month period following termination of employment, unless prohibited by the insurer or by law, in which case the Company shall provide the economic equivalent (as defined below). If coverage is continued, the Company shall give the Employee the right to assume the life, disability, health, hospitalization, surgical and major medical insurance coverage or to reimburse the Company for its continuing payments under such policies, unless prohibited by the insurer or by law. For purposes of this Section, "economic equivalent" shall mean the cost of the premiums paid by the Company for the insurance coverage provided to Employee by the Company during the 12 consecutive month period prior to such termination. Any such continuing insurance coverage, or economic equivalent thereof, will be offset by comparable coverage to Employee in connection with subsequent employment, if any. Other rights and benefits of Employee under employee benefit plans and programs of the Company, generally, will be determined in accordance with the terms and provisions of such plans and programs. (b) For purposes of this Section 3, a change in control of the company shall be deemed to have occurred if: (A) a "person" (meaning an individual, a partnership, or other group or association as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, other than Employee, or a group including the Employee) acquires, directly or indirectly, twenty-five percent (25%) or more of the combined voting power of the outstanding securities of the Company having a right to vote in elections of directors; or (B) the individuals who as of the date of this Agreement constitute the Board of Directors of the Company cease for any reason to constitute a majority thereof unless the election, or nomination for election, of each new director was approved by the current Chairman of the Board and the current Board of Directors of the Company; or (C) the business of the Company is disposed of by the Company to a party or parties other than a subsidiary or other affiliate of the Company, in which the Company owns less than a majority of the equity, pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary of the Company) or otherwise. (c) For purposes of this Section 3, a constructive demotion shall be deemed to have occurred if: 2 (A) The Company demotes Employee to a materially lesser position than the position held immediately preceding any change in control of the Company; (B) the Company causes a material change in the nature or scope of the authorities, powers, functions, duties, or responsibilities attached to Employee's position held immediately preceding any change in control of the Company; (C) the Company decreases Employee's base salary (exclusive of any bonuses and benefits) below the highest annualized rate paid to Employee during the six consecutive month period immediately preceding any change in control (taking into account increases made from time to time); (D) the Company materially reduces Employee's benefits under any employee benefit plan, program or arrangement of the company (other than a change that affects all senior executive employees) from the level in effect during the 12 consecutive month period prior to any such reduction; provided, however, that any such reduction is not due to employee's, employee's working units, or the Company's failure to meet certain goals upon which any such benefits or bonuses are based; or (E) the Company fails to obtain the agreement of a successor company to assume the obligations of the Company under this Agreement as required by Section 6. 4. Termination by the Company Other Than for Due Cause. The Company may --------------------------------------------------- terminate Employee's employment at any time for whatever reason it deems appropriate, in which event the Company shall pay to Employee, within thirty (30) days of such termination, a lump sum payment of an amount equal to 12 months' base salary (exclusive of any bonuses and benefits) at a rate equal to the highest annualized rate in effect during the six consecutive month period immediately prior to such termination; provided, however, that if the Board of Directors of the Company determines that the payment of such lump sum amount would have a materially adverse effect on the financial condition of the Company, the Company may elect to pay such amount to Employee in 12 equal consecutive monthly installments payable on the first day of each month commencing within 30 days after such termination. The Company shall continue to carry the life, disability, health, hospitalization, surgical and major medical insurance coverage for such 12-month period following termination of employment, unless prohibited by the insurer or by law, in which case the company shall provide the economic equivalent (as defined above). If coverage is continued, the Company shall give the Employee the right to assume the life, disability, health, hospitalization, surgical and major medical insurance coverage or 3 to reimburse the company for its continuing payments under such policies, unless prohibited by the insurer or by law. Any such continuing insurance coverage, or economic equivalent thereof, will be offset by comparable coverage to Employee in connection with subsequent employment, if any. Other rights and benefits of Employee under employee benefit plans and programs of the Company, generally, will be determined in accordance with the terms and provisions of such plans and programs. 5. Voluntary Termination. In the event the Employee terminates his --------------------- employment of his own volition prior to the expiration of the term of this Agreement (other than as provided in Section 3) such termination shall constitute a voluntary termination and in such event the Employee shall be limited to the same rights and benefits as provided in connection with termination for Due Cause. 6. Merger, etc. In the event of a future disposition of (or including) ------------ the properties and business of the company, substantially as an entirety, by merger, consolidation, sale of assets, or otherwise, then the Company shall assign this Agreement, subject to Employee's rights under Section 3(a) and all of its rights and obligations hereunder, to the acquiring or surviving corporation or entity; provided that such corporation or entity shall assume in writing all of the obligations of the Company. 7. Survival. The covenants, agreements, representations, and warranties -------- contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 8. Modification. This Agreement sets forth the entire understanding of ------------ the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. The Agreement dated as of December 31, 1986 between Employee and the Company is hereby terminated in all respects and shall be of no further force and effect and is superseded in all respects by this Agreement. 9. Notices. Any notice or other communication required or permitted to be ------- give hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 9). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 9. Any notice or other 4 communications given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 10. Waiver. Any waiver by either party of a breach of any provision of ------ this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement shall not operate as or be construed to be a waiver of any such provision or any other provision of this Agreement. Any waiver must be in writing. 11. Binding Effect; Assignment to Parent. Employee's rights and ------------------------------------ obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 6. 12. No Third Party Beneficiaries. This Agreement does not create, and ---------------------------- shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Section 11). 13. Headings; Governing Law. The headings in this Agreement are solely ----------------------- for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. EMONS HOLDINGS, INC. By: /s/ Robert Grossman ---------------------------- Title: President /s/Alfred P. Smith --------------------------------- Alfred P. Smith 5 EX-10.E 5 AMENDMENT Exhibit 10(e) AMENDMENT --------- This Amendment to the Agreement, dated as of May 26, 1994, is made between EMONS TRANSPORTATION GROUP, INC. (formerly known as Emons Holdings, Inc.), a Delaware corporation with offices at 96 South George Street, York, Pennsylvania 17401 (together with any and all present and future affiliates and subsidiaries thereof, the "Company"), and ALFRED P. SMITH, residing at 2555 Hepplewhite Drive, York, Pennsylvania 17404 (the "Employee"). All capitalized terms contained in this Agreement not otherwise defined herein have the meanings defined in the Agreement, dated as of December 31, 1989, between the Company and Employee (the "Agreement"). RECITALS -------- The Company and Employee previously entered into the Agreement pursuant to which the Company engaged Employee to continue employment with the Company and the Company provided certain severance benefits to Employee in the event of a termination of Employee's employment under certain circumstances. The Company and Employee desire to amend the Agreement in certain respects as provided herein. ============================= In consideration of the premises herein contained and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree to amend the Agreement as set forth herein: 1. Amendment to Preamble. The preamble is hereby amended by substituting --------------------- "2555 Hepplewhite Drive" for "2650 Primrose Lane." 2. Amendment to Section 1. Section 1 is hereby amended by substituting ---------------------- "December 31, 1994" for "the starting date." 3. Except as herein specifically amended, all terms, covenants and provisions of the Agreement shall remain in full force and effect and shall be performed by the parties thereto according to its terms and provisions. IN WITNESS WHEREOF, the undersigned have executed ad delivered this Amendment to the Agreement as of the date first above stated. EMONS TRANSPORTATION GROUP, INC. By: /s/ Robert Grossman ----------------------------- Name: Robert Grossman Title: President /s/ Alfred P. Smith -------------------------------- Alfred P. Smith 2 EX-10.F 6 LOAN AND SECURITY AGREEMENT Exhibit 10(f) LOAN AND SECURITY AGREEMENT Dated as of August 15, 1997 Among EMONS TRANSPORTATION GROUP, INC., EMONS INDUSTRIES, INC. EMONS FINANCE CORP. MARYLAND AND PENNSYLVANIA RAILROAD COMPANY, EMONS LOGISTICS SERVICES, INC., MAINE INTERMODAL TRANSPORTATION, INC., EMONS RAILROAD GROUP, INC., YORKRAIL, INC. and ST. LAWRENCE & ATLANTIC RAILROAD COMPANY as the Borrowers and LASALLE NATIONAL BANK as the Lender This LOAN AND SECURITY AGREEMENT (the "Agreement") is dated as of August --------- 15, 1997 among LASALLE NATIONAL BANK (the "Lender") and EMONS TRANSPORTATION ------ GROUP, INC. ("Emons"), EMONS FINANCE CORP. ("Finance") EMONS INDUSTRIES, INC. ----- ------- ("Industries"), MARYLAND AND PENNSYLVANIA RAILROAD COMPANY ("MPA"), EMONS ---------- --- LOGISTICS SERVICES, INC. ("Logistics"), MAINE INTERMODAL TRANSPORTATION, INC. --------- ("MIT"), EMONS RAILROAD GROUP, INC. ("Railroad Group"), YORKRAIL, INC. ("YKR"), --- -------------- --- and ST. LAWRENCE & ATLANTIC RAILROAD COMPANY ("SLR"), (collectively referred to --- herein as the "Borrowers"). In consideration of the mutual conditions and --------- agreements set forth in this Agreement, and for good and valuable consideration, the receipt of which is hereby acknowledged, the Borrowers and the Lender hereby agree as follows. I. INTERPRETATION OF THIS AGREEMENT I.1 Definitions. As used herein: ----------- "AAR" shall mean the Association of American Railroads. --- "Account Debtor" means each Person obligated in any way on or in -------------- connection with an Account. "Accounts" means, with respect to each Borrower, all of such Borrower's -------- now owned or hereafter acquired or arising accounts, contract rights, and any other rights to payment for the sale or lease of goods or rendition of services, whether billed or accrued, whether or not they have been earned by performance. "Affiliate" means with respect to any Person: (i) any Person which, --------- directly or indirectly, controls, is controlled by or is under common control with such first Person; (ii) any Person which beneficially owns or holds, directly or indirectly, ten percent (10.0%) or more of any class of Voting Stock of such first Person; or (iii) any Person, ten percent (10.0%) or more of any class of the Voting Stock (or if such Person is not a corporation, ten percent (10.0%) or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by such first Person. Control (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used herein, means the possession, directly or indirectly, of the power in any form to direct or cause the direction of the management and policies of the Person in question. "Applicable Margin" shall mean, at any time of determination, with ----------------- respect to the interest rate payable on the Loans, L/C Fees and the amount of Non-Use Fee payable hereunder, the percentage set forth below for such Loan or fee, as the case may be, opposite the applicable Debt to Cash Flow Ratio as at the most recently ended quarter:
- ------------------------------------------------------------------------------- Debt to Cash Flow Ratio Eurodollar Rate Base Rate Non-Use Fee L/C Fee ----------------------- --------------- --------- ----------- -------- - ------------------------------------------------------------------------------- (less than)2.0 1.75% 0% .25% 1.75% - ------------------------------------------------------------------------------- 2.0 - 3.0 2.25% 0% .375% 2.25% - ------------------------------------------------------------------------------- 3.01 - 3.5 2.50% 0% .50% 2.50% - ------------------------------------------------------------------------------- 3.51 - 4.0 2.75% .25% .50% 2.75% - ------------------------------------------------------------------------------- (greater than)4.0 3.00% .50% .50% 3.00% - -------------------------------------------------------------------------------
The Applicable Margin shall be initially determined by Lender based upon Borrowers unaudited financial statements furnished to Lender pursuant to Section 6.6 for the twelve months ended March 31, 1997 and shall be ----------- determined by Lender from time to time thereafter based upon the information set forth in subsequent audited annual financial statements delivered pursuant to Section 5.2(a) and unaudited financial statements -------------- delivered pursuant to Section 5.2(b) for each fiscal quarter ended -------------- March 31, September 30 and December 31 (each a "Determining Financial Statement"), in each case, together with a certificate of the chief financial officer of the Borrowers setting forth the calculation of the Debt to Cash Flow Ratio as at the end of such quarter or year, as the case may be. Except as 1 hereinafter provided, any change in the Applicable Margin shall take effect on the Business Day following the Business Day of delivery to Agent of the applicable Determining Financial Statement, and the Applicable Margin, as so determined, shall remain in effect until the earlier of (i) the Business Day next following the Business Day of delivery to the Lender of a subsequent Determining Financial Statement evidencing a Debt to Cash Flow Ratio requiring either a higher or lower Applicable Margin from that then in effect or (ii) the day on which Borrowers fail to deliver to the Lender the applicable Determining Financial Statement within the time provided by Section 5.2(a) or Section 5.2(b), as the case may be, the Applicable Margin -------------- -------------- shall be deemed to be based upon an assumed Debt to Cash Flow Ratio of greater than 4.0 and such Applicable Margin shall be effective on the date such Determining Financial Statement was required to have been delivered and shall remain in effect until the Business Day following the Business Day of delivery to the Lender of a Determining Financial Statement reflecting a Debt to Cash Flow Ratio for which a lower Applicable Margin would be applicable. Notwithstanding any other provision of this Agreement, no reduction to the Applicable Margin shall be effective during any period that an Event of Default exists. "Available Term Loan Amount" means $7,775,000 as reduced from time to -------------------------- time as provided in Section 2.4(b) hereof. -------------- "Bankruptcy Code" shall mean Title 11 of the United States Code (11 --------------- U.S.C. (S) 101 et seq.), as amended from time to time and any successor statute. "Base Rate" means the rate announced from time to time by the Lender --------- at its principal office in Chicago, Illinois as its prime rate. The "prime rate" is one of several base rates that serve as a basis upon which effective rates of interest are calculated for loans making reference thereto and may not be the lowest of the Lender's rates. Each interest rate based on the Base Rate shall be adjusted simultaneously with any change in the Base Rate. "Base Rate Loan" means a Loan which bears interest as provided in -------------- Section 2.5(a). -------------- "Benefit Plan" shall mean a defined benefit plan as defined in Section ------------ 3(35) of ERISA (other than a Multiemployer Plan) in respect of which any Borrower or any ERISA Affiliate is or within the immediately preceding six (6) years was an "employer" as defined in Section 3(5) of ERISA. "Borrowing" means a borrowing consisting of Loans of the same type --------- made on the same day by the Lender. "Borrowing Base" shall mean, at any time of determination, an amount -------------- equal to eighty percent (80%) of the actual amount (after deduction of such Eligibility Reserves as the Lender deems proper and necessary) of Eligible Receivables of the Borrowers. "Borrowing Base Certificate" means, with respect to any date, a -------------------------- certificate of the chief financial officer or treasurer of each Borrower substantially in the form of Exhibit A attached hereto and made a part --------- hereof setting forth a schedule of the net realizable value of all accounts receivable of the Borrowers, as at the close of business on the last day of the preceding month, all in such detail as shall be reasonably satisfactory to the Lender. "Business Day" shall mean any day, excluding Saturday, Sunday and any ------------ day that is a legal holiday under the laws of each of the States of Pennsylvania and Illinois, or is a day on which banking institutions in any of such states are required or authorized by law or other governmental action to close. "Canadian National Note" means that certain Subordinated Non- ---------------------- Negotiable Promissory Note dated as of May 19, 1989 in the original principal amount of $1,500,000 executed by SLR and payable to and for the benefit of Canadian National to be amended and restated by Third Amended Promissory Note in accordance that certain letter agreement from Canadian National to SLR to be dated August 19, 1997. -- 2 "Capital Expenditures" shall mean with respect to any Person, for any -------------------- period, the aggregate of all expenditures, whether paid in cash or accrued as liabilities during that period and including that portion of Capital Leases that is capitalized on the balance sheet of such Person during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant or equipment or similar fixed asset accounts reflected in the combined and consolidated balance sheet of such Person (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by such Person to the extent of the gross amount of such purchase price less the book value of the equipment being traded in at such time), but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation of eminent domain of such assets being replaced. "Capital Lease" shall mean, as applied to any Person, any lease of any ------------- property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person. "Cash Flow Period" shall mean each full Fiscal Year of the Borrowers ---------------- commencing after the Closing Date, and, as a separate period, the period from September 1, 1997 through June 30, 1998. "Cash Interest Expense" means, with respect to any Person, for any --------------------- period, total interest expense, whether paid or accrued (including the interest component of Capital Leases), of such Person, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and net costs under Interest Rate Contracts, but excluding, however, interest expense not payable in cash (including amortization of discount), all as determined in conformity with GAAP. "Closing Date" shall mean the date all of the conditions precedent set ------------ forth in Article VIII hereof are fulfilled with respect to the Term Loan ------------ and any Working Capital Loan or Letters of Credit initially requested by Borrowers. "Closing Fee" has the meaning specified in Section 2.11. ----------- ------------ "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Collateral" shall have the meaning ascribed to it in Section 4.1. ---------- ----------- "Collection Account" shall mean each depository account maintained by ------------------ any Borrower for the collection of Accounts and other proceeds of Collateral and Third Party Collateral. "Collection Account Agreements" shall have the meaning ascribed to it ----------------------------- in Section 4.8. ----------- "Concentration Account" shall mean the account maintained at the --------------------- Lender's office in Chicago, into which collections of Accounts of the Borrowers and other cash proceeds of Collateral and Third Party Collateral may be deposited or transferred on a daily basis pursuant to the terms of the applicable Collection Account Agreements or otherwise as described in Section 4.8. ----------- "Contaminant" shall mean any waste, pollutant, hazardous substance, ----------- toxic substance, hazardous waste, special waste, petroleum or petroleum- derived substance or waste, or any constituent of any such substance or waste. "Contract Rights" means, with respect to each Borrower, all of such --------------- Borrower's right, title and interest in, to and under any and all contracts and all other agreements relating to such Borrower's business or its Property, whether such contracts or agreements are currently in effect or executed by such Borrower after the date hereof, together with any and all extensions, modifications, amendments and renewals thereof, any and all payments or rents 3 to be paid to such Borrower under any such contracts and agreements, and all benefits and advantages to be derived therefrom. Contract Rights shall, include, without limitation, any and all rights of such Borrower under any leases or subleases (whether as a lessor/sublessor or lessee/sublessee) to which such Borrower is a party and all rents payable by any lessees/sublessees under such leases or subleases and all claims for money due or to become due to such Borrower under agreements and bills pursuant to which such Borrower purchased any Property and all rights and claims of such Borrower now or hereafter existing: (i) under any insurance, indemnities, warranties, and guarantees provided for or arising out of or in connection with any of the foregoing agreements; (ii) for any damages arising out of or for breach or default under or in connection with any of the foregoing agreements; (iii) to all other amounts from time to time paid or payable under or in connection with any of the foregoing agreements; or (iv) to exercise or enforce any and all covenants, remedies, powers and privileges thereunder. "Conversion Date" shall have the meaning ascribed to it in Section --------------- ------- 2.11(a). ------- "Credit Facility" means either the Term Loan Facility or the Working --------------- Capital Facility. "Debt" means, with respect to any Borrower, all liabilities, ---- obligations and indebtedness of such Borrower and its Subsidiaries on a consolidated basis to any Person, of any kind or nature, now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise, without duplication and without regard to intercompany accounts, and including, without in any way limiting the generality of the foregoing: (i) such Borrower's or any Subsidiary's liabilities and obligations to trade creditors; (ii) all of the Obligations; (iii) all of such Borrower's obligations for borrowed money; (iv) all obligations and liabilities of any Person (other than obligations to repay grant funding which are not due and payable and obligations under operating leases) secured by any Lien on such Borrower's or any Subsidiary's Property, even though such Borrower or such Subsidiary shall not have assumed or become liable for the payment thereof; provided, however, that all such obligations and liabilities which are -------- ------- limited in recourse to such Property shall be included in Debt only to the extent of the value of such Property as shown on a consolidated balance sheet of such Borrower and its Subsidiaries prepared in accordance with GAAP; (v) all obligations or liabilities created or arising under any Capital Lease or conditional sale or other title retention agreement with respect to Property used or acquired by such Borrower or any Subsidiary, even if the rights and remedies of the lessor, seller or lender thereunder are limited to repossession of such Property; provided, however, that all -------- ------- such obligations and liabilities which are limited in recourse to such Property shall be included in Debt only to the extent of the value of such Property as shown on a consolidated balance sheet of such Borrower and its Subsidiaries prepared in accordance with GAAP; (vi) all accrued Plan liabilities; (vii) all obligations and liabilities under Guaranties; and (viii) deferred taxes. Notwithstanding the foregoing, for purposes of calculating or determining Debt, if one or more of any Borrower or any Subsidiary are jointly and severally liable for the entire amount of any liability, obligation or indebtedness or any Borrower or any Subsidiary is a guarantor of any liability, obligation or indebtedness of any other Borrower or Subsidiary, such liability, obligation or indebtedness shall only be included in determining Debt for the Borrowers on a consolidated basis as the Debt of the Borrower or Subsidiary, as the case may be, that is primarily liable therefor. "Debt to Cash Flow Ratio" means with respect to the Borrowers at any ----------------------- time of determination, the ratio of (a) Funded Indebtedness of the Borrowers at such time on a consolidated basis to (b) EBITDA of the Borrowers on a consolidated basis for the 12 consecutive month period ended at such time. "Default" means any event or condition which, with notice, the passage ------- of time or both, would constitute an Event of Default. "Default Rate" means a per annum interest rate equal to the sum of (a) ------------ the Base Rate in effect from time to time plus (b) two percent (2.00%). ---- Each Default Rate shall be adjusted simultaneously with any change in the applicable interest rate. "Demand Deposit Account" shall have the meaning ascribed to it in ---------------------- Section 2.3(e). -------------- 4 "DOL" shall mean the United States Department of Labor and any --- successor department or agency. "Dollars" and "$" shall mean the lawful money of the United States of ------- - America. "EBITDA" shall mean with respect to any Person, for any period, the ------ sum of the amounts for such period, of (i) Net Income, plus (ii) ---- depreciation and amortization expense, plus (iii) Cash Interest Expense, ---- plus (iv) federal and state income taxes, plus (v) extraordinary losses as ---- ---- determined in accordance with GAAP which have been included in the determination of Net Income, minus (vi) extraordinary gains as determined ----- in accordance with GAAP which have been included in the determination of Net Income. "Eligibility Reserves" shall mean, as of any date of determination, -------------------- such amounts as the Lender, in its reasonable credit judgment, may from time to time establish against the gross amounts of Eligible Receivables of any of the Borrowers to reflect contingencies or risks which may affect the Collateral or Third Party Collateral, the business or financial condition of any of the Borrowers, or the security of the Loans made hereunder. "Eligible Receivables" shall mean, with respect to each Borrower, -------------------- those Accounts that when scheduled to the Lender, and at all times thereafter, do not violate the negative covenants and other provisions of this Agreement and do satisfy the affirmative covenants and other provisions of this Agreement and that the Lender, in its reasonable credit judgment, deems to be Eligible Receivables. No Account shall be an Eligible Receivable if: (i) it is due or unpaid, more than ninety (90) days, after the date that the original invoice was issued or such account otherwise became due with respect to the sale or services giving rise thereto; or (ii) it arises out of a transaction not in the ordinary course of such Borrower's business or to a Person which is an Affiliate of such Borrower or controlled by an Affiliate of such Borrower; or (iii) any warranty contained in this Agreement with respect to such Eligible Receivable or any warranty contained in this Agreement with respect to such Account has been breached; or (iv) the Account Debtor is also a supplier or creditor of such Borrower and the Account is or may become subject to any right of setoff by the Account Debtor, and that Account Debtor has not entered into an agreement with the Lender with respect to the waiver of rights of setoff which is acceptable to the Lender; or the Account Debtor has disputed liability with respect to it, or made any claim with respect to any other Account due from such Account Debtor to any of the Borrowers, in each case, the Account shall be ineligible to the extent of such dispute, claim, and/or setoff as and when it arises; or (v) the Account Debtor has filed a petition for bankruptcy or any other petition for relief under the Bankruptcy Code, made an assignment for the benefit of creditors, or if any petition or other application for relief under the Bankruptcy Code has been filed against the Account Debtor, or if the Account Debtor has failed, suspended its business operations, become insolvent, or suffered a receiver or a trustee to be appointed for any of its assets or affairs; or (vi) the Account is owed by an Account Debtor outside the continental United States or Canada, unless the payment of the Account is secured by a letter of credit or an acceptance on terms acceptable to the Lender; or (vii) the Lender believes, in its reasonable credit judgment exercised in Good Faith, that collection of such Account is insecure or that such Account may not be paid by reason of the Account Debtor's financial inability to pay; or 5 (viii) the Account Debtor is the United States of America or any other Governmental Authority, unless such Borrower assigns its right to payment of such Account to the Lender, pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. (S) 3727) or similar procedure if required in the applicable jurisdiction; or (ix) the services, the performance of which has given rise to such Account, have not been performed by such Borrower and accepted by the Account Debtor; or (x) the Account is owing from an Account Debtor where 25% or more of all Accounts owing from such Account Debtor are ineligible as a result of the criteria in clause (i) above. ---------- "Emons Pledge Agreement" shall mean that certain Pledge Agreement of ---------------------- even date herewith executed by Emons in favor of the Lender pursuant to which Emons has pledged the shares of the capital stock of Industries, MPA, Finance, Logistics, MIT and Railroad Group. "Environmental Laws" means all federal, state and local laws, rules, ------------------ regulations, ordinances, programs, permits, guidance, orders and consent decrees relating to health, safety, hazardous substances, and environmental matters applicable to the Borrowers and/or their business and Property (whether or not owned by it). Such laws and regulations include but are not limited to the Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq., as amended; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S) 6901 et seq., as amended; the Toxic Substances Control Act, 15 U.S.C. (S) 2601 et seq., as amended; the Clean Water Act, 42 U.S.C. (S) 466 et seq., as amended; the Clean Air Act, 46 U.S.C. (S) 7401 et seq., as amended; state and federal lien and environmental cleanup programs; and U.S. Department of Transportation regulations. "Environmental Lien" shall mean a Lien in favor of any Governmental ------------------ Authority for (i) any liability under federal or state environmental laws or regulations, or (ii) damages arising from, or costs incurred by such Governmental Authority in response to, a Release or threatened Release of a Contaminant into the environment. "Equipment" means, with respect to each Borrower, all of such --------- Borrower's now owned and hereafter acquired machinery, equipment, furniture, furnishings, fixtures, and other tangible personal property (except Inventory), including, without limitation, Rolling Stock, motor vehicles, aircraft, railroad ties, rail track, ballast, bridges, tools, switches, main switches, branch switches, spur switches, industrial switches, terminals, superstructures, road beds, trestles, culverts, viaducts, depots, stations, stockyards, warehouses, elevators, car houses, engine houses, freight houses, machine shops, other shops, turntables, fuel stations, water stations, signals, communication test instruments and other communication equipment, interlocking plants, telegraph lines, telephone lines, cable wires, wireless facilities, fences, docks and trade fixtures, and office equipment, as well as all of such types of property leased by such Borrower and all of such Borrower's rights and interests with respect thereto under such leases (including, without limitation, options to purchase); together with all present and future additions and accessions thereto, replacements therefor, component and auxiliary parts and supplies used or to be used in connection therewith, and all substitutes for any of the foregoing, and all manuals, drawings, instructions, warranties and rights with respect thereto; wherever any of the foregoing is located. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" shall mean any (i) corporation which is a member of --------------- the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Borrowers, or (ii) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Borrowers, or (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Borrowers, any corporation described in clause (i) ---------- above or any partnership or trade or business described in clause (ii) ----------- above. 6 "Eurocurrency Liabilities" has the meaning assigned to that term in ------------------------ Regulation D. "Eurodollar Rate" means, for the Interest Period for each Eurodollar --------------- Rate Loan, an interest rate per annum equal to the rate per annum obtained by dividing (i) the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rates per annum at which deposits in Dollars are offered by the principal office of ABN Amro Holdings, Inc. in London, England to prime banks in the London interbank market at 11:00 a.m. (London time) three Business Days before the first day of such Interest Period in an amount substantially equal to Lender's Eurodollar Rate Loan comprising part of such Borrowing and for a period equal to such Interest Period by (ii) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Loan comprising part of the same Borrowing shall be determined by the Lender two Business Days before the first day of such Interest Period. "Eurodollar Rate Loan" means a Loan or portion thereof which bears -------------------- interest as provided in Section 2.5(b). -------------- "Eurodollar Rate Reserve Percentage" for the Interest Period for any ---------------------------------- Eurodollar Rate Loan means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for the Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Excess Cash Flow" shall mean, for any Cash Flow Period, an amount ---------------- equal to (i) Net Income of the Borrowers on a continued and consolidated basis for such period, plus (ii) depreciation, amortization of intangibles, ---- non-cash interest, non-cash amortization of discount and other non-cash charges (including deferred taxes) included in the determination of Net Income of the Borrowers on a combined and consolidated basis for such period, minus (iii) non-cash credits to Net Income of the Borrowers on a ----- combined and consolidated basis for such period, minus (iv) Capital ----- Expenditures of the Borrowers on a combined and consolidated basis net of purchase money and Capital Lease obligations with respect thereto, to the extent permitted hereunder and made during such period, minus (v) all ----- mandatory reductions of the Available Term Loan Amount under the Term Loan Facility made during such period pursuant to Section 2.4 hereof, minus (vi) ----------- ----- all payments permitted hereunder and made during such period in respect of other Debt, minus (vii) gains included in the determination of Net Income ----- of the Borrowers on a combined and consolidated basis for such period, representing transactions in which any of the Borrowers received Net Cash Proceeds of Sale. "Event of Default" shall mean any of the events listed in Section 9.1. ---------------- ----------- "Federal Reserve Board" shall mean the Board of Governors of the --------------------- Federal Reserve System and any successor thereto. "Fiscal Year" shall mean the fiscal year of the Borrowers, which shall ----------- be the twelve-month period ending on the last day of June, or such other period as the Borrowers may designate and the Lender shall approve in writing. "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of --------------------------- (i) EBITDA minus federal and state income taxes actually payable during ----- such period, minus Capital Expenditures of the Borrowers on a combined and ----- consolidated basis net of purchase money obligations including, without limitation, low interest rate or no interest rate loans from Governmental Authorities, grant funding and Capital Lease obligations with respect thereto, to the extent permitted hereunder and made during the period for which the Fixed Charge Coverage Ratio is to be calculated, to (ii) Fixed Charges during the period for which the Fixed Charge Coverage Ratio is to be calculated. 7 "Fixed Charges" shall mean with respect to any Person, for any period, ------------- the amounts for such period of (i) Cash Interest Expense, plus (ii) ---- permanent reductions of the Available Term Loan Amount (other than mandatory reductions attributable to Excess Cash Flow) and other Funded Indebtedness other than the Canadian National Note (including the principal component of Capital Lease obligations). "FRA" shall mean the United States Department of Transportation, the --- Federal Railroad Administration and every other state, federal or provincial agency having jurisdiction over the condition, maintenance, repair or safety of the Equipment or of any item of Equipment. "Funded Indebtedness" shall mean, at any time of determination, ------------------- without duplication, all Debt and Guaranties of Debt by the Borrowers at such time except for Debt described in clauses (i), (ii), (vi) and (viii) of the Definition of Debt. "Funding Date" means the date the Term Loan or any Working Capital ------------ Loan is to be made hereunder. "GAAP" shall mean generally accepted accounting principles set forth ---- in the rules, regulations, statements, opinions and pronouncements of the American Institute of Certified Public Accountants and of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession), which, subject to Section 5.1, are applicable to the circumstances as of the date ----------- of determination. "General Intangibles" shall, with respect to each Borrower, mean and ------------------- include all of such Borrower's now owned and hereafter acquired choses in action, causes of action and all other intangible personal property of every kind and nature (other than Accounts), including, without limitation, corporate and other business records, inventions, designs, patents, patent applications, service marks, trademarks, trademark applications, trade names, trade secrets, goodwill, registrations, copyrights, licenses, franchises, customer lists, reversions from any Benefit Plan, tax refunds, tax refund claims, rights and claims against carriers, shippers, franchisees, lessors and lessees, and rights to indemnification, business interruption insurance and proceeds thereof, property, casualty or any similar type of insurance and any proceeds thereof, proceeds of insurance covering the lives of key employees on which such Borrower is beneficiary, and any letter of credit, guarantee, claim, security interest or other security held by or granted to such Borrower to secure payment by an Account Debtor of any of the Accounts. "Good Faith" shall mean honesty in fact in the conduct or transaction ---------- concerned, without regard to whether standards which might be deemed commercially reasonable have been observed. "Government Acts" shall have the meaning ascribed to it in Section --------------- ------- 3.8(a). ------ "Governmental Authority" shall mean any nation or government, any ---------------------- federal, state, city, town, municipality, county, local or other political subdivision thereof or thereto and any department, commission, board, bureau, instrumentality, agency or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranty" means, with respect to any Person, all obligations of such -------- Person which in any manner directly or indirectly guarantee or assure, or in effect guarantee or assure, the payment or performance of any indebtedness, dividend or other obligation of any other Person (the "guaranteed obligations"), or to assure or in effect assure the holder of the guaranteed obligations against loss in respect thereof, including, without limitation, any such obligations incurred through an agreement, contingent or otherwise: (a) to purchase the guaranteed obligations or any property constituting security thereof; (b) to advance or supply funds for the purchase or payment of the guaranteed obligations or to maintain a working capital or other balance sheet condition; (c) to lease property or to purchase any debt or equity securities or other property or services. 8 "Indemnitees" shall have the meaning ascribed to it in Section 12.9. ----------- ------------ "Interest Period" means, for each Eurodollar Rate Loan, the period --------------- commencing on the date of such Loan or the conversion thereof and ending on the last day of the period selected by the Borrowers pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months as the Borrowers may select, upon notice received by the Lender in accordance with Section 2.3(b) or Section 2.11, as the -------------- ------------ case may be; provided, however, that: -------- ------- (i) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided, however, that if such extension would cause -------- ------- the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (ii) the Borrowers shall not select an Interest Period for any Loan that ends after the applicable Termination Date for the Credit Facility under which such Loan is made. "Interest Rate Contracts" shall mean interest rate insurance product ----------------------- agreements providing interest rate protection. "Inventory" shall mean and include with respect to each Borrower, such --------- Person's now owned and hereafter acquired goods, materials, supplies, merchandise and other personal property furnished under any contract of service or intended for sale or lease, including, without limitation, rail, ties, fuel, oil, grease, wheels, brake shoes and other locomotive and railcar replacement parts and all raw materials, work in process, finished goods and materials, parts and supplies of any kind, nature or description which are used or consumed in such Borrower's business or are or might be used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise and other personal property, or are used in connection with the provision of services in such Borrower's business, all returned or repossessed goods now, or at any time or times hereafter, in the possession or under the control of such Borrower or Lender, and all documents of title or documents representing the same. "IRS" shall mean the Internal Revenue Service, or any successor --- thereto. "L/C Fees" shall have the meaning set forth in Section 3.7. -------- ----------- "Letter of Credit" shall mean a letter of credit issued by the Lender ---------------- for the account of any Borrower pursuant to Article III. ----------- "Letter of Credit Obligations" shall mean, at any particular time, the ---------------------------- sum of (i) the Reimbursement Obligations at such time, plus (ii) the ---- aggregate maximum amount available for drawing under the Letters of Credit at such time, plus (iii) the aggregate maximum amount available for drawing ---- under Letters of Credit which have been requested but not yet been issued, in each case, as determined by the Lender. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, ---- assignment, deposit arrangement, security interest, encumbrance for the payment of money, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financial lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement (other than a financing statement filed by a "true" lessor pursuant to (S) 9-408 of the Code or other comparable law of any jurisdiction) naming the owner of the asset to which such Lien relates as debtor under the Code or other comparable law of any jurisdiction. 9 "Loan" shall mean a Term Loan or a Working Capital Loan. ---- "Loan Account" shall have the meaning ascribed to it in Section ------------ ------- 2.3(e). ------ "Loan Documents" shall mean this Agreement and all other agreements, -------------- instruments and documents, including, without limitation, any other security agreements, notes, warrants, guaranties, mortgages, deeds of trust, subordination agreements, pledges, powers of attorney, consents, assignments, collateral assignments, letter agreements, contracts, notices, leases, amendments, financing statements, letter of credit applications and reimbursement agreements, and all other writings heretofore, now, or hereafter executed by or on behalf of any of the Borrowers or any of their Affiliates and delivered to the Lender in connection with or relating to this Agreement (including, without limitation, any Interest Rate Contract entered into by any Borrower with Lender or any Affiliate of Lender), together with all agreements, instruments and documents referred to therein or contemplated thereby, in each case, as amended from time to time. "Mandatory Prepayment" shall have the meaning ascribed to it in -------------------- Section 2.4(b). -------------- "Multiemployer Plan" shall mean a "multiemployer plan" as defined in ------------------ Section 4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years was, contributed to by either Borrower or an ERISA Affiliate. "Net Cash Proceeds of Sale" shall mean Net Proceeds of Sale received ------------------------- by any Borrower or any of its Subsidiaries in cash or equivalents readily convertible into cash. "Net Income" shall mean with respect to any Person, for any period, ---------- the net earnings (or loss) after taxes of such Person for such period taken as a single accounting period determined in conformity with GAAP. "Net Proceeds of Sale" shall mean proceeds (including insurance -------------------- proceeds and any notes received as consideration and any other non cash consideration) received by any Borrower or its Subsidiaries from the sale, lease, assignment, casualty, condemnation or other disposition outside of the ordinary course of business of any Property of such Person net of the costs of sale, lease, assignment or other disposition, taxes paid or payable as a result thereof, amounts applied to the repayment of other Debt secured by a Lien on the asset disposed of and amounts permitted to be used under this Agreement, and in fact used, in the case of casualty or condemnation, within 180 days of receipt, to purchase or lease a replacement asset. "Net Worth" shall mean with respect to any Person, as at any date of --------- determination, the amount by which total assets of such Person exceed total liabilities of such Person. "Notes" shall mean each and every Term Note and Working Capital Note ----- and any other note or notes executed by a Borrower pursuant to this Agreement. "Notice of Borrowing" shall mean a notice substantially in the form of ------------------- Exhibit B attached hereto and made a part hereof. --------- "Non-Use Fee" shall have the meaning set forth in Section 2.12. ----------- ------------- "Notice of Conversion" shall have the meaning provided in Section -------------------- ------- 2.11(a). ------- "Obligations" shall mean and include all loans, advances, debts, ----------- liabilities, obligations, covenants and duties owing to the Lender, any Affiliate of the Lender, any Indemnitee or any of their respective successors and assigns, from or assumed by any Borrower of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under this Agreement, any Interest Rate Contract entered into with the Lender or any Affiliate of Lender, or under any other Loan Document, whether or not for the payment of money, 10 whether arising by reason of an extension of credit, opening or amendment of a letter of credit (or payment of any draft drawn thereunder), loan, guaranty, indemnification, foreign exchange or interest rate swap transactions or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements and paralegals' fees, any other sums chargeable to Borrowers under this Agreement or any other Loan Document. "Other Taxes" shall have the meaning ascribed to it in Section 2.9(b). ----------- -------------- "Participating Lender" means any Person who shall have been granted -------------------- the right by Lender to participate in the financing provided pursuant to this Agreement and who shall have entered into a participation agreement with Lender. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any ---- Person succeeding to the functions thereof. "Pending Loans" shall mean, at any time, the aggregate principal ------------- amount of all Working Capital Loans requested in any Notice(s) of Borrowing previously received by the Lender but not yet advanced at such time. "Permitted Liens" means the Liens reflected on Schedule 1.1 attached --------------- ------------ hereto and incorporated herein by this reference and any of the following Liens created after the date hereof: (i) Liens for taxes not yet payable; (ii) statutory Liens for taxes in an amount not to exceed $100,000 provided that the payment of such taxes which are due and payable is being contested in Good Faith and by proper proceedings diligently pursued, and that reserves or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor and that a stay of enforcement of any such Lien is in effect; (iii) Liens in favor of the Lender; (iv) Liens upon Equipment granted or assumed in connection with the acquisition of such Equipment by a Borrower after the date hereof (including, without limitation, pursuant to Capital Leases), provided, -------- that (a) the cost of each such acquisition constitutes a Capital Expenditure permitted by Section 7.21 (including Capital Expenditures ------------ made with grant funding and Debt permitted by Section 7.13(d), (b) the Debt incurred to finance each such acquisition is permitted by Section ------- 7.13, and (c) each such Lien attaches only to the Equipment acquired ---- with the Debt secured thereby; (v) deposits under workmen's compensation, unemployment insurance, social security and other similar laws, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure indemnity, performance or other similar bonds for the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business; (vi) Liens which arise by operation of law under Article 2 of the UCC in favor of unpaid sellers of goods or prepaying buyers of goods, or liens in items of any accompanying documents or proceeds of either arising by operation of law under Article 4 of the UCC in favor of a collecting bank; and 11 (vii) Liens arising by operation of law securing the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons, provided that the payment thereof is not at -------- the time required by Section 7.1. ----------- "Person" shall mean and include any person, employee, individual, sole ------ proprietorship, partnership, joint venture, trust, limited liability company, unincorporated organization, association, corporation, institution, entity, party or Governmental Authority. "Plan" shall mean an employee benefit plan defined in Section 3(3) of ---- ERISA in respect of which any Borrower or an ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Property" shall mean, with respect to any Borrower or any Subsidiary, -------- any real or personal property, plant, building, facility, structure, equipment or unit, or other asset owned, leased or operated by such Person and any of its Subsidiaries, including, without limitation, such Person's Equipment and Inventory. "Proprietary Rights" means, with respect to each Borrower, all of such ------------------ Borrower's now owned and hereafter arising or acquired: licenses, franchises, permits, patents, patent rights, copyrights, works which are the subject matter of copyrights, trademarks, service marks, trade secrets, trade names, trade styles, patent, trademark and service mark applications, and all licenses and rights related to any of the foregoing, including, without limitation, those patents, trademarks, service marks and copyrights set forth on Schedule 6.10 attached hereto and incorporated herein by this ------------- reference, and all other rights under any of the foregoing, all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing, and all rights to sue for past, present and future infringement of any of the foregoing. "Railroad Pledge Agreement" shall mean that certain Pledge Agreement ------------------------- of even date herewith executed by Railroad Group in favor of Lender pursuant to which Railroad Group has pledged the shares of the capital stock of YKR and SLR. "Real Property" shall have the meaning provided in Section 4.2. ------------- ----------- "Real Property Security Documents" shall have the meaning provided in -------------------------------- Section 4.2. ----------- "Regulation D" shall mean Regulation D of the Federal Reserve Board as ------------ in effect from time to time. "Regulation G" shall mean Regulation G of the Federal Reserve Board as ------------ in effect from time to time. "Regulation T" shall mean Regulation T of the Federal Reserve Board as ------------ in effect from time to time. "Regulation U" shall mean Regulation U of the Federal Reserve Board as ------------ in effect from time to time. "Regulation X" shall mean Regulation X of the Federal Reserve Board as ------------ in effect from time to time. "Reimbursement Obligations" shall mean the reimbursement or repayment ------------------------- obligations of the Borrowers to the Lender pursuant to Section 3.5 or ----------- pursuant to Letter of Credit Reimbursement Agreements with respect to Letters of Credit. "Release" shall mean any release, spill, emission, leaking, pumping, ------- injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any Property, including the movement of Contaminants through or in the air, soil, surface water, groundwater or Property. 12 "Remedial Action" shall mean actions required to (i) clean up, remove, --------------- treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Reportable Event" shall mean any of the events described in Section ---------------- 4043 of ERISA. "Restricted Investment" means, with respect to any Borrower, any --------------------- acquisition of property by such Borrower or any of its Subsidiaries in exchange for cash or other property, whether in the form of an acquisition of stock, debt security, or other indebtedness or obligation, or the purchase or acquisition of any other property, or by loan, advance, capital contribution, or subscription, except acquisitions of the following: (i) fixed assets to be used in the business of such Borrower or a Subsidiary, so long as the acquisition costs thereof constitute Capital Expenditures permitted hereunder; (ii) goods held for use in the provision of services by such Borrower or a Subsidiary in the ordinary course of business; (iii) current assets arising from the rendition of services in the ordinary course of business of such Borrower or a Subsidiary; (iv) direct obligations of the United States of America, or any agency thereof, or obligations guaranteed by the United States of America, provided that such -------- obligations mature within one year from the date of acquisition thereof; (v) certificates of deposit maturing within one year from the date of acquisition, bankers' acceptances, Eurodollar bank deposits, or overnight bank deposits, in each case issued by, created by, or with a bank or trust company organized under the laws of the United States or any state thereof having capital and surplus aggregating at least $100,000,000; and (vi) commercial paper given the highest rating by a national credit rating agency and maturing not more than 90 days from the date of creation thereof. "Restricted Junior Payment" shall mean (i) any dividend or other ------------------------- distribution, direct or indirect, on account of any shares of any class of capital stock of the Borrowers now or hereafter outstanding, except a dividend payable solely in shares of the issuer, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of the Borrowers now or hereafter outstanding, and (iii) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of or any outstanding warrants, options or other rights to acquire shares of any class of capital stock of the Borrowers now or hereafter outstanding (other than the issuance of common stock) upon the exercise of any such warrants, options or rights to acquire such stock. "Rolling Stock" shall mean any gondola, boxcar, tanker, locomotive or ------------- railcar of any type. "SEC" shall mean the Securities and Exchange Commission and any --- successor agency. "Securities" shall mean any stock, shares, voting trust certificates, ---------- partnership interests (whether general or limited), bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities", whether certificated or uncertificated, or any certificates of interest, shares, or participation in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire any of the foregoing, but shall not include the Notes or any other evidence of the Obligations. "Solvent" means when used with respect to any Borrower that (i) the ------- fair saleable value of all its Property as a going concern, is in excess of the total amount of its debts (including contingent liabilities); (ii) it is able to pay its debts as they mature; (iii) it does not have unreasonably small capital for the business in which it is engaged or for any business or transaction in which it is about to engage; and (iv) it is not "insolvent" as such term is defined in Section 101(31) of the Bankruptcy Code. "Subordinated Indebtedness" shall mean (i) the indebtedness due under ------------------------- the Canadian National Note, and (ii) with respect to any Borrower that portion of any unsecured Funded Indebtedness of such Borrower that is incurred 13 on terms and conditions approved in writing by the Lender and is subordinated, in a manner approved in writing by the Lender, as to right and time of payment of principal and interest thereon to any and all of the Obligations. "Subsidiary" means any corporation or other entity of which more than ---------- fifty percent (50.0%) of the voting power of the outstanding securities or interests of any class or classes, is at the time, directly or indirectly through one or more intermediaries, owned by one or more of the Borrowers and/or one or more of their Subsidiaries. "Taxes" shall have the meaning ascribed to it in Section 2.9(a). ----- -------------- "Term Loan" means the Loan described in Section 2.1(a). --------- -------------- "Termination Date" shall mean June 30, 2004. ---------------- "Term Loan Facility" shall mean the credit facility provided under ------------------ Section 2.1. ----------- "Term Note" shall have the meaning ascribed to it in Section 2.1(b). --------- -------------- "Termination Event" shall mean (i) a Reportable Event with respect to ----------------- any Benefit Plan; (ii) the withdrawal of any Borrower or any ERISA Affiliate from a Benefit Plan during a plan year in which such Borrower or such ERISA Affiliate was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the imposition of an obligation on such Borrower or any ERISA Affiliate under Section 4041 of ERISA to provide affected parties written notice of intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit Plan; (v) any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan; or (vi) the partial or complete withdrawal of such Borrower or any ERISA Affiliate from a Multiemployer Plan. "Third Party Collateral" shall mean any property of any Person, other ---------------------- than a Borrower, which, pursuant to the terms of any of the Loan Documents, secures the payment and performance of any portion of the Obligations. "UCC" means the Uniform Commercial Code (or any successor statute) of --- the State of Pennsylvania or Illinois or of any other state the laws of which are required by Section 9-103 thereof to be applied in connection with the issue of perfection of security interests. "Voting Stock" means securities of any class or classes of a ------------ corporation, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). "Working Capital Amount" shall mean at any time of determination an ---------------------- amount equal to the lesser of (i) the Working Capital Commitment at such time or (ii) the amount of the Borrowing Base at such time. "Working Capital Commitment" shall mean $2,000,000, as such amount may -------------------------- be reduced from time to time pursuant to Section 2.4 or Section 9.2 of this ----------- ----------- Agreement. "Working Capital Facility" shall mean the credit facility provided ------------------------ under Section 2.2. ----------- "Working Capital Loans" shall have the meaning ascribed to it in --------------------- Section 2.2(a). -------------- "Working Capital Note" shall have the meaning ascribed to it in -------------------- Section 2.2(b). -------------- "Working Capital Termination Date" shall mean August 15, 1999. -------------------------------- 14 I.2 Accounting Terms. Any accounting terms used in this Agreement ---------------- which are not specifically defined shall have the meanings customarily given them in accordance with GAAP. I.3 Other Terms. All other terms contained in this Agreement shall, ----------- unless the context indicates otherwise, have the meanings provided for by the UCC to the extent the same are defined therein. I.4 Computation of Time Periods. For purposes of this Agreement, --------------------------- in the computation of periods of time from a specified date to a later specified date, unless otherwise specified, the word "from" means "from and including" and the words "to" and "until" each means "to and including." II. LOANS AND OTHER FINANCIAL ACCOMMODATIONS II.1 The Term Loan Facility. ---------------------- (a) Amount of Term Loan. Subject to the terms and conditions ------------------- of this Agreement and in reliance upon the representations and warranties of the Borrowers herein set forth, the Lender hereby agrees to make to Borrowers on the Closing Date a term loan (the "Term Loan") --------- in an amount equal to $7,775,000. Upon satisfaction of the applicable conditions set forth in Article VIII hereof, the Lender shall make the ------------ proceeds of the Term Loan available to the Borrowers by transferring same day funds equal to the Term Loan to an account designated in writing by Emons, on behalf of the Borrowers. Initially, the Term Loan shall be made as a Base Rate Loan. The amount of any voluntary reductions of the outstanding Term Loan as described in Section 2.4(a) -------------- may be reborrowed, subject to the satisfaction of the other terms and conditions hereof, provided that at no time will the Lender be obligated to make any Term Loan if after giving effect to such Loan, the aggregate outstanding amount of the Term Loan shall exceed the Available Term Loan Amount at such time; and provided, further, that at any time the Term Loan has been repaid in full, no further amounts may be reborrowed under the Term Loan Facility. (b) Term Note. Borrowers shall execute and deliver to Lender --------- a promissory note, substantially in the form of Exhibit D attached --------- hereto and made a part hereof (the "Term Note"), to evidence the Term ----------- Loan. II.2 Working Capital Loans. --------------------- (a) Availability. ------------ (i) Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of the Borrowers herein set forth, the Lender hereby agrees to make revolving credit loans ("Working Capital Loans") to the --------------------- Borrowers from time to time during the period from the Closing Date to the Working Capital Termination Date, in an amount which shall not exceed, in the aggregate at any time outstanding, the amount, if any, by which the Working Capital Amount at such time exceeds the sum of (A) the aggregate Letter of Credit Obligations at such time plus (B) the aggregate amount of the Pending Loans ---- at such time. (ii) From the Closing Date to the Working Capital Termination Date and subject to all of the terms and conditions of this Agreement, Working Capital Loans may be voluntarily prepaid pursuant to Section 2.4(a), and any amounts so prepaid, -------------- together with the amount of mandatory prepayments made pursuant to Section 2.4(c), may be reborrowed, up to the amount available -------------- under this Section 2.2(a) at the time of such Borrowing. -------------- 15 (iii) Working Capital Loans made on any Funding Date which constitute Eurodollar Rate Loans shall be in the aggregate minimum amount of $100,000.00 and integral multiples of $10,000 in excess of that amount. Working Capital Loans made on any Funding Date which constitute Base Rate Loans shall be in the aggregate minimum amount of $25,000.00 and integral multiples of $5,000 in excess of that amount. (b) Working Capital Note. The Borrowers shall execute and -------------------- deliver to the Lender a promissory note (a "Working Capital Note") -------------------- substantially in the form of Exhibit E attached hereto and made a part --------- hereof to evidence the aggregate amount of the Working Capital Loans from time to time outstanding in the original principal amount of $2,000,000 and with other appropriate insertions. The Working Capital Note shall be dated as of the Funding Date for the Term Loan and shall mature on the Working Capital Termination Date. II.3 Notice of Borrowing; Making the Loans; Loan Accounts. ---------------------------------------------------- (a) Each Loan shall be made on notice, given by Emons on behalf of the Borrowers to the Lender in writing, including, by telecopy, not later than 11:00 a.m. (Chicago time) on (A) the third Business Day prior to the date of the proposed Borrowing, in the case of a request for a Eurodollar Rate Loan, and (B) the Business Day of the proposed Borrowing, in the case of a request for a Base Rate Loan. Each such notice of a borrowing (a "Notice of Borrowing") shall be substantially ------------------- in the form of Exhibit B attached hereto. Any Notice of Borrowing must --------- specify the requested (i) date of such Loan, (ii) type of Loan, (iii) aggregate amount of such Loan, (iv) applicable Interest Period for each such Loan if such Loan is a Eurodollar Rate Loan, and (v) the account or accounts to which the proceeds of such Loan are to be disbursed. The original of each Notice of Borrowing given by telecopy shall be sent to the Lender by mail for receipt within five (5) days after the applicable Funding Date. Upon fulfillment of the applicable conditions set forth in Article VIII, the Lender will make such funds available to the Borrowers ------------ in such deposit account maintained with the Lender as Emons, on behalf of the Borrowers, shall designate. (b) Anything in paragraph (a) above to the contrary ------------- notwithstanding, (i) if the Lender shall, at least one Business Day before the date of any requested Borrowing, notify the Borrowers that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority makes it unlawful, for the Lender to perform its obligations hereunder to make Eurodollar Rate Loans; or (ii) if the Lender is unable, after reasonable efforts, due to prevailing market conditions, to provide timely information for the determination of the Eurodollar Rate, or is otherwise unable to determine the Eurodollar Rate at any time, or (iii) if the Lender has reasonably determined that the Eurodollar Rate is inadequate to compensate the Lender, then, in either such event, the right of the Borrowers to select Eurodollar Rate Loans shall be suspended until the Lender shall notify the Borrowers that the circumstances causing such suspension no longer exist, and each Loan shall be a Base Rate Loan. (c) Each Notice of Borrowing shall be irrevocable and binding on the Borrowers. In the case of any requested Eurodollar Rate Loans, the Borrowers shall indemnify the Lender against any loss, reasonable cost or expense incurred by the Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Loan the applicable conditions set forth in Article VIII, ------------ including, without limitation, any loss (including loss of anticipated profits of which the Lender shall supply to Borrowers 16 reasonable calculations), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund the requested Loan, as a result of such failure, is not made on such date. (d) The Borrowers shall notify the Lender in writing of the names of the officers and employees authorized to request any Loans on behalf of Borrowers, and shall provide the Lender with a specimen signature of each such officer or employee. The Lender shall be entitled to rely conclusively on such officer's or employee's authority to request a Loan on behalf of the Borrowers, until the Lender receives written notice to the contrary. The Lender shall have no duty to verify the authenticity of the signature appearing on any written Notice of Borrowing. (e) The Lender shall establish or cause to be established on its books in the Borrowers' name an account (each, a "Loan Account") to ------------ evidence Loans made to Borrowers. The Lender will credit or cause to be credited to a commercial account ("Demand Deposit Account") maintained ---------------------- by Emons at Lender's Chicago, Illinois office, the amount of any sums advanced as Loans hereunder. Any amounts credited to such Demand Deposit Account and advanced to Borrowers as a Loan pursuant to this Agreement, will be debited to the Borrowers' Loan Account and result in an increase in the principal balance outstanding in the Loan Account in the amount thereof. The Lender is hereby authorized, at its option, either (i) to endorse the date and amount of each Loan made by it and each repayment or prepayment of principal of Loans made with respect to the applicable Note on the schedule annexed to and constituting a part of the Note or (ii) to record such Loans, repayments and prepayments in its books and records, such schedule or such books and records, as the case may be, constituting prima facie evidence, absent manifest error, of the accuracy of the information contained therein. II.4 Prepayments; Reserves. --------------------- (a) Voluntary Prepayments. The Borrowers may (i) at any time --------------------- prepay the Working Capital Loans in whole or in part, subject to Section ------- 2.6, and (ii) upon not less than two (2) Business Days' prior written or --- telephonic notice confirmed promptly in writing to the Lender, at any time and from time to time, prepay the Term Loan in whole or in part, without premium or penalty (except as provided in Section 2.6), in an ----------- aggregate minimum amount of $50,000 and integral multiples of $10,000 in excess of that amount; provided, however, that the Borrowers may prepay -------- ------- the Term Loan in full without regard to such minimum amount. Any notice of prepayment given to the Lender under this Section 2.4(a) shall -------------- specify the date of prepayment, the aggregate principal amount of the prepayment and which Loans such prepayment is to be applied against. To the extent that any voluntary prepayment is made against the Term Note, such voluntary prepayments shall be applied to the installments due under the Term Note in the order of maturity until paid in full and, subject to the other terms and conditions of this Agreement may be reborrowed pursuant to Section 2.3 hereof. Notice of prepayment having ----------- been delivered as provided herein, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date. (b) Reductions of the Available Term Loan Amount and ------------------------------------------------ Prepayments of Loans. The Available Term Loan Amount shall be reduced -------------------- on each of the dates set forth below by the dollar amount set forth opposite such date and to the extent that the outstanding principal amount of the Term Loan on such date shall exceed the Available Term Loan Amount on such date, the Borrowers shall immediately pay the amount of such excess:
=================================================================== Date Amount of Reduction ---- ------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- 9/30/97, 12/31/97, 3/31/98, 6/30/98 $ 62,500 ------------------------------------------------------------------- 9/30/98, 12/31/98, 3/31/99, 6/30/99 $ 150,000 ------------------------------------------------------------------- 9/30/99, 12/31/99, 3/31/00, 6/30/00 $ 200,000
17
=================================================================== Date Amount of Reduction ---- ------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- 9/30/00, 12/31/00, 3/31/01, 6/30/01 $ 200,000 ------------------------------------------------------------------- 9/30/01, 12/31/01, 3/31/02, 6/30/02 $ 262,500 ------------------------------------------------------------------- 9/30/02, 12/31/02, 3/31/03, 6/30/03 $ 300,000 ------------------------------------------------------------------- 9/30/03, 12/31/03, 3/31/04 $ 325,000 ------------------------------------------------------------------- 6/30/04 $2,100,000 ===================================================================
18 In addition to the reductions described above, within two (2) Business Days after the receipt by any Borrower or any of its Subsidiaries of any Net Cash Proceeds of Sale, such Borrower shall make a mandatory prepayment of the Term Loan, without premium or penalty except as provided in Section 2.6, in an amount equal to the amount by ----------- which such Net Cash Proceeds of Sale and all other amounts, Net Cash Proceeds of Sale received by the Borrowers and their Subsidiaries during the applicable Fiscal Year exceeds $100,000, such to be set forth in an officers' certificate delivered by the Borrowers to the Lender concurrently with such payment and to be made as of the date of such officers' certificate (each such payment, a "Net Proceeds Prepayment"). ----------------------- In addition, within one hundred and twenty (120) days after the end of each Cash Flow Period, the Borrowers shall make a mandatory prepayment, without premium or penalty except as provided in Section 2.6, of the ----------- Term Loan in an amount equal to 50% of any Excess Cash Flow for such Cash Flow Period (each such payment, an "Excess Cash Prepayment," which ---------------------- together with all other Excess Cash Prepayments and Net Proceeds Prepayments shall be referred to collectively as "Mandatory --------- Prepayments"). The Borrower shall give the Lender not less than two (2) ----------- Business Days' prior written notice of the date on which each such Mandatory Prepayment will be made (which date shall be no later than the date on which such Mandatory Prepayment becomes due and payable pursuant to this Section 2.4(b)) and, with respect to Excess Cash Prepayments, -------------- such notice shall be accompanied by the audited or preliminary audited annual financial statements of the Borrowers for such Cash Flow Period (except for the Cash Flow Period commencing September 1, 1997 which shall be accompanied by internally prepared financial statements), together with a computation of Excess Cash Flow for such Cash Flow Period. Each Mandatory Prepayment shall be applied first to the installments on the Term Loan in the inverse order of maturity until paid in full and next, to the Working Capital Loans outstanding. The Available Term Loan Amount shall be immediately reduced by the amount of each Mandatory Prepayment. In addition, at the Lender's option the Working Capital Commitment shall be permanently reduced on a dollar for dollar basis by the amount of such Mandatory Prepayments in excess of those applied to the Term Loan. (c) Mandatory Prepayment of Working Capital Loans. The --------------------------------------------- Borrower shall make prepayments of Working Capital Loans to the extent necessary such that the sum of (i) the aggregate principal amount of the Working Capital Loans outstanding at any time, plus (ii) the aggregate Letter of Credit Obligations at such time, plus (iii) the aggregate ---- Pending Loans at such time, does not exceed the Working Capital Amount at such time. (d) Modification of Advance Rates and Eligibility Reserves. ------------------------------------------------------ Borrowers agree that the Lender shall have the right, at any time and from time to time, at the discretion of the Lender, exercised in its reasonable credit judgment and in Good Faith, (i) to reduce or otherwise modify the advance rates applied to Eligible Receivables as specified in the definitions of "Borrowing Base," (ii) to add additional restrictions which exclude particular types of Accounts from Eligible Receivables, and (iii) to establish Eligibility Reserves, increase the amount thereof and add additional types of Eligibility Reserves. The Borrowers expressly acknowledge that the above referenced reductions, restrictions and additions may have the effect of reducing the credit available under this Agreement. II.5 Interest. The Borrowers shall pay interest on the unpaid -------- principal amount of each Loan from the date of such Loan until such principal amount shall be paid in full, at the following intervals and at the following rates per annum: (a) Base Rate Loans. If such Loan is a Base Rate Loan, a rate --------------- per annum equal to the Applicable Margin at the time of determination plus the Base Rate in effect from time to time, payable, in arrears, on ---- the last day of each calendar quarter and on the date such Base Rate Loan shall be paid in full; and 19 (b) Eurodollar Rate Loans. If such Loan is a Eurodollar Rate Loan, a rate per annum equal at all times during the Interest Period for such Loan to the Eurodollar Rate for such Interest Period plus the Applicable Margin at the time of determination, payable, in either such event, in arrears, on the last day of each Interest Period (provided that if such Interest Period exceeds three months, on the last day of the third month and on the last day of such Interest Period), or, if earlier, on the date such Eurodollar Rate Loan shall be paid in full; provided, however, that, from and after the occurrence of an Event of Default - -------- ------- and unless and until such Event of Default is cured or waived, (i) the Borrowers shall not be entitled to elect that any portion of any Loan be a Eurodollar Rate Loan; and (ii) the Borrowers shall pay interest on the unpaid principal amount of all Loans at the Default Rate, such interest being payable on demand. II.6 Prepayment Provisions; Breakage Costs. The Borrowers shall have no ------------------------------------- right to voluntarily prepay any principal amount of any Loans other than Base Rate Loans. If the Borrowers repay any Eurodollar Rate Loan prior to the last day of the applicable Interest Period for any reason, the Borrowers shall pay to the Lender the amount of any cost, loss (including loss of anticipated profits) or expense incurred by the Lender as a result of the repayment of a Eurodollar Rate Loan prior to the last day of the Interest Period applicable to such Loan including, without limitation, any cost or expense incurred by Lender by reason of the liquidation and reemployment of deposits or other funds acquired by the Lender to fund the Eurodollar Rate Loan being prepaid. II.7 Increased Costs; Increased Capital. In the event that the Lender ---------------------------------- determines that compliance with any United States (including any state, political subdivision, territory or possession thereof) or foreign law, regulation, treaty, directive or guideline, currently or hereafter in effect, or the interpretation or application thereof, or the compliance with any request, guideline or directive (whether or not having the force of law) from any United States or foreign central bank or any other Governmental Authority: (a) imposes, modifies or holds applicable any reserve, special deposit, compulsory loan or similar requirement against, or imposes any other conditions with respect to assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit or commitment therefor extended by, or any other acquisition of funds by, any office of the Lender which is not otherwise included or accounted for in any determination of the Eurodollar Rate or any interest payable hereunder; or (b) affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and the Lender determines that the amount of such capital is increased by or based upon the existence of the Lender's obligations to make, maintain or fund the Eurodollar Loans; and the result is to increase (as reasonably determined by the Lender) the cost to the Lender of (i) agreeing to make, making, funding, renewing or maintaining the Eurodollar Loans hereunder, or (ii) agreeing to maintain, or its maintenance of, the Working Capital Commitment hereunder, or to reduce any amount receivable in respect of any of the foregoing, or to reduce (as determined by the Lender) the rate of return on the Lender's or such controlling corporation's capital (taking into account the policies of the Lender or corporation with regard to capital), then, in any such case, the Borrowers agree to pay to the Lender upon the Lender's demand any additional amount as may be necessary to compensate fully the Lender for such additional cost, reduced amount receivable, or reduced rate of return as reasonably determined by the Lender to place the Lender in the same economic position as if such compliance had not occurred. The Lender will promptly notify the Borrowers, in writing, of the occurrence of any of the events described in this Section 2.7. ----------- II.8 Payments and Computations. ------------------------- 20 (a) All payments of principal, interest, Reimbursement Obligations and fees hereunder and under the Notes payable to the Lender shall be made without condition or reservation of right and in same day funds and delivered to the Lender not later than 1:00 p.m. (Chicago time) on the date due to such account of the Lender as the Lender may designate; and funds received by the Lender after that time shall be deemed to have been paid on the next succeeding Business Day. (b) The Borrowers hereby authorize the Lender and, unless the Borrowers have arranged for another means of payment satisfactory to the Lender, the Lender shall, if and to the extent any payment is due hereunder, to charge from time to time against any or all of the Borrowers' accounts with the Lender any amount so due. The Lender shall notify the Borrowers of any such charge; provided, however, that the failure to give such notice shall not limit or - -------- ------- otherwise affect the obligation of the Borrowers to make any payment when due hereunder. (c) All computations of interest calculated on the basis of the Base Rate shall be made by the Lender on the basis of a year of 365 or 366 days as applicable, and all calculations of all other interest and fees shall be calculated on the basis of a year of 360 days, in each case, for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Lender of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or the Non-Use Fee, as the case may be; provided, however, if such extension would cause payment of interest on or - -------- ------- principal of Eurodollar Rate Loans to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. 21 (e) Prior to the occurrence of an Event of Default, except as otherwise directed by the Borrowers (and notwithstanding any other application thereof by the Lender on its books, which application may be made in the Lender's discretion), any payments received by the Lender from the Borrowers shall be applied as follows: first, to pay interest due in respect of Working Capital ----- Loans; second, to pay interest due in respect of the Term Loan; third, to pay ------ ----- the outstanding principal of the Working Capital Loans which constitute Base Rate Loans; fourth, to pay the outstanding principal of the Working Capital ------ Loans which constitute Eurodollar Rate Loans (in the order of their maturity); fifth, to pay the outstanding principal of any portion of the Term Loan which - ----- constitutes Base Rate Loans; sixth, to pay the outstanding principal of any ----- portion of the Term Loan which constitutes Eurodollar Rate Loans (in the order of their maturity); seventh, to provide cash collateral in respect of Letter of ------- Credit Obligations; and eighth, to the payment of any other Obligation due to ------ the Lender. During the existence of an Event of Default, the Lender may apply any payments received by the Borrowers to the Obligations in any manner determined by the Lender in its discretion. No checks, drafts or other instruments received by the Lender shall constitute final payment to the Lender for the accounts of the Lender unless and until such item or payment has actually been collected. All items or amounts which are delivered to the Lender by or on behalf of any Borrower or any Account Debtor on account of partial or full payment or otherwise as proceeds of any of the Collateral or Third Party Collateral (including any items or amounts which may have been deposited to the Concentration Account) may, during the existence of an Event of Default, from time to time in the Lender's discretion, be released to the Borrowers or may be applied by the Lender towards payment of the Obligations, whether or not then due as provided in the foregoing terms of this subsection. Notwithstanding anything to the contrary herein, (i) solely for purposes of determining the occurrence of an Event of Default, all cash, checks, instruments and other items of payment shall be deemed received upon actual receipt by the Lender, unless the same is subsequently dishonored for any reason whatsoever, (ii) for purposes of determining whether, under Sections 2.2 and 3.2, there is availability for ------------ --- Working Capital Loans or Letters of Credit and for purposes of interest calculation hereunder, (A) all cash and collected funds shall be deemed to have been applied against the Obligations on the Business Day which Lender shall have received, prior to 1:00 p.m. (Chicago time), such funds, and (B) all checks, instruments and other items of payment shall be deemed to have been applied against the Obligations on the second (2nd) Business Day after the Business Day on which the Lender shall have received, prior to 1:00 p.m. (Chicago time), such items of payment. The foregoing apportionment of payments is solely for the purpose of determining the obligations of the Borrowers hereunder and, notwithstanding such apportionment, Lender may on its books and records allocate payments received by it in a manner different from that contemplated hereby. No such different allocation shall alter the rights and obligations of the Borrowers under this Agreement determined in accordance with the apportionments contemplated by this subsection (e). To the extent that the Borrowers make a -------------- payment or payments to the Lender, including, without limitation, proceeds of the Accounts, other Collateral or Third Party Collateral for the Borrowers' benefit, which payment(s) or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause then, to the extent of such payment or proceeds received, the Obligations or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by the Lender. (f) Each Borrower hereby authorizes the Lender, and the Lender may, in its discretion, charge to each Borrower at any time when due all or any portion of any of the Obligations (and interest, if any, thereon), including but not limited to any costs and expenses of the Lender for which the Borrowers are liable pursuant to the terms of this Agreement or any other Loan Document, by charging Emon's Demand Deposit Account or any other bank account of any Borrower maintained with the Lender; provided, however, that the provisions of this -------- ------- subsection (f) shall not affect the Borrowers' obligation to pay when due all - -------------- amounts payable by Borrowers under this Agreement, or any other Loan Document, whether or not there are sufficient funds therefor in the Demand Deposit Account or any such other bank account of a Borrower. 22 II.9 Taxes. ----- (a) Any and all payments by the Borrowers hereunder shall be made, in accordance with Section 2.8, free and clear of and without deduction for any and ----------- all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed --------- on the Lender's income, and franchise taxes imposed on the Lender, by the jurisdiction under the laws of which the Lender is organized or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). ----- If the Borrowers shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lender, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section ------- 2.9) the Lender receives an amount equal to the sum it would have received had - --- no such deductions been made, (ii) the Borrowers shall make such deductions and (iii) the Borrowers shall pay the full amount deducted to the relevant taxing authority or other appropriate authority in accordance with applicable law. (b) In addition, the Borrowers agree to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the Notes (but specifically excluding, any taxes due as a result of any assignment or participation made by the Lender as permitted by the terms of Section 11.2 hereof) (hereinafter referred to as "Other Taxes"). - ------------ ----------- (c) The Borrowers agree to indemnify the Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.9) paid by ----------- the Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Any amounts due from the Borrowers in accordance with the foregoing indemnification shall be paid to the Lender within thirty (30) days from the date the Lender makes written demand therefor. Notwithstanding the foregoing, however, the Lender agrees that it shall not pay any Taxes or Other Taxes if it has received written notice from the Borrowers that the Borrowers are contesting the same and for so long as the Borrowers continue to contest the same in accordance with the terms of Section 7.1 ----------- provided that such failure to pay does not adversely affect the Lender's ability - -------- to obtain or maintain a perfected security interest in any of the Borrowers' Property or any of the Lender's rights and remedies hereunder. (d) Within 30 days after the date of any payment of Taxes, the Borrowers will furnish to the Lender, at its address referred to on the signature page hereto, the original or a certified copy of a receipt evidencing payment thereof. In respect of any payment hereunder or under the Notes, the Borrowers will furnish to the Lender, upon the Lender's request therefor, and as to such Taxes and taxing authorities specifically designated in such request and respecting which no receipt is delivered by the Borrowers, a certificate from each appropriate taxing authority or an opinion of counsel acceptable to the Lender, in either case, stating that such payment is exempt from or not subject to such Taxes. (e) Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrower contained in this Section 2.9 shall survive the payment in full of principal and interest ----------- hereunder and under the Notes. 23 II.10 Borrowing Base. The Borrowing Base shall be calculated by the -------------- Borrowers, giving effect to reserves historically provided by the Borrowers, and such calculations shall be set forth in a Borrowing Base Certificate delivered to the Lender by the Borrowers in accordance with Section 5.2(i) and Article -------------- ------- VIII. The Lender shall have the right to review, confirm and adjust, from time - ---- to time, in its reasonable credit judgment, the values ascribed by the Borrowers to Eligible Receivables, and the reserves therefor, in any Borrowing Base Certificate, such adjustments to include, without limitation, reductions for such reserves as the Lender deems proper and reasonable. II.11 Conversions. ----------- (a) On the terms and subject to the conditions of this Agreement and provided that no Event of Default shall have occurred and be continuing, upon written notice, including by telecopy, given by Emons on behalf of the Borrowers to the Lender in substantially the form of Exhibit ------- F attached hereto and made a part hereof (the "Notice of Conversion"), the - -------------------- Borrowers may (i) convert all or any portion of the Term Loan or any Working Capital Loan which is a Eurodollar Rate Loan to a Base Rate Loan upon expiration of the applicable Interest Period, (ii) continue any Eurodollar Rate Loan as a Eurodollar Rate Loan upon the expiration of the applicable Interest Period, or (iii) convert any Base Rate Loan to a Eurodollar Rate Loan at any time (any such date on which any Loan is to be converted being referred to herein as a "Conversion Date"). The original of --------------- each Notice of Conversion given to the Lender, by telecopy, shall be sent to the Lender by regular mail within five (5) days of the applicable Conversion Date. Such Notice of Conversion shall be delivered to the Lender prior to 1:00 p.m. (Chicago time) three (3) Business Days prior to the proposed Conversion Date if conversion to, or continuation of, a Eurodollar Rate Loan is requested, and prior to 11:00 a.m. (Chicago time) on the proposed Conversion Date if conversion to a Base Rate Loan is requested. Each proposed Conversion Date shall be a Business Day. (b) If the Borrowers shall fail to give notice of the duration of the proposed Interest Period with respect to a proposed conversion of an outstanding Base Rate Loan or a continuation of a Eurodollar Rate Loan, the Borrowers shall be deemed not to have elected to convert the Base Rate Loan or continue the Eurodollar Rate Loan. If the Borrowers shall fail to give a timely and complete Notice of Conversion with respect to an outstanding Eurodollar Rate Loan in accordance with this Section 2.11, the Borrowers ------------ shall be deemed to have elected to convert such outstanding Eurodollar Rate Loan to a Base Rate Loan on the last day of the applicable Interest Period. (c) Any Notice of Conversion given or deemed to have been given pursuant to this Section 2.11 shall be irrevocable. ------------ (d) Each Eurodollar Rate Loan shall be converted to a Base Rate Loan at the end of the then applicable Interest Period if (i) an Event of Default has occurred and is continuing, or (ii) the Lender shall be unable to determine the Eurodollar Rate or shall have deemed the Eurodollar Rate to be inadequate or unfair (as provided in Section 2.3(b)). If the making -------------- or maintaining of Eurodollar Rate Loans shall be unlawful, impossible, inadequate or unfair (as provided in Section 2.3(b)), all Eurodollar Rate -------------- Loans then outstanding shall be converted into Base Rate Loans on either (i) the last day of the Interest Period or Interest Periods applicable to such Loans if the Lender may lawfully continue to maintain and fund such Loans until such day, or (ii) immediately, if the Lender may not lawfully continue to fund and maintain such Loans. (e) Notwithstanding any provision in this Agreement to the contrary, Borrowers shall have no more than five (5) different Interest Periods outstanding for Eurodollar Rate Loans at any time. II.12 Fees. ---- 24 (a) The Borrowers shall pay to the Lender a closing fee in the amount of Sixty-One Thousand Ninety-Four Dollars ($61,094) (the "Closing ------- Fee") which shall be fully earned and non-refundable and payable on the --- Closing Date. (b) As additional compensation for Lender's costs and risks in making the Working Capital Loans available to Borrowers, Borrowers agree to pay to Lender in arrears, on the first Business Day of each calendar quarter prior to the Working Capital Termination Date and on the Working Capital Termination Date, a fee for Borrowers' non-use of available funds under the Working Capital Facility (the "Non-Use Fee") in an ----------- amount equal to the per anum rate shown in the definition of Applicable Margin (calculated on the basis of a 360 day year for actual days elapsed) on the difference between (i) $2,000,000 and (ii) the respective daily averages of the amount of the Working Capital Loans outstanding during the period for which the Non-Use Fee is due. III. THE LETTER OF CREDIT SUBFACILITY III.1 Obligation to Issue. Subject to the terms and conditions of this ------------------- Agreement, and in reliance upon the representations and warranties of the Borrowers herein set forth, the Lender hereby agrees to issue for the account of any Borrower through such of the Lender's branches as it and the Borrowers may jointly agree, one or more Letters of Credit in accordance with this Article ------- III, from time to time during the period commencing on the Closing Date and - --- ending at least thirty (30) days prior to the Working Capital Termination Date. III.2 Types and Amounts. The Lender shall not have any obligation to ----------------- issue any Letter of Credit at any time: (a) if the aggregate maximum amount then available for drawing under Letters of Credit, after giving effect to the issuance of the requested Letter of Credit, shall exceed any limit imposed by law or regulation upon the Lender; (b) if, after giving effect to the issuance of the requested Letter of Credit, the sum of the aggregate Letter of Credit Obligations, plus the aggregate principal amount of the Working Capital Loans ---- outstanding, plus the aggregate Pending Loans, would exceed the Working ---- Capital Amount at such time; or (c) which has an expiration date (A) more than one year after the date of issuance or (B) after the thirtieth (30th) day preceding the date specified in the definition of "Working Capital Termination Date." III.3 Conditions. In addition to being subject to the satisfaction of ---------- the conditions contained in Article VIII, the obligation of the Lender to issue ------------ any Letter of Credit is subject to the satisfaction in full of the following conditions: (a) the Borrowers shall have delivered to the Lender at such times and in such manner as the Lender may prescribe a Letter of Credit application and such other documents and materials as may be required pursuant to the terms thereof and the terms of the proposed Letter of Credit shall be satisfactory to the Lender; and (b) as of the date of issuance no order, judgment or decree of any court, arbitrator or Governmental Authority shall purport by its terms to enjoin or restrain the Lender from issuing the Letter of Credit and no law, rule or regulation applicable to the Lender and no request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Lender shall prohibit or request that the Lender refrain from the issuance of letters of credit generally or the issuance of the requested Letter of Credit. 25 III.4 Issuance of Letters of Credit. ----------------------------- (a) Request for Issuance. The Borrowers shall give the Lender -------------------- at least five (5) Business Days' prior written notice of any requested issuance of a Letter of Credit under this Agreement; such notice shall be irrevocable and shall specify the stated amount of the Letter of Credit requested, the effective date (which day shall be a Business Day) of issuance of such requested Letter of Credit, the date on which such requested Letter of Credit is to expire (which date shall be a Business Day), the purpose for which such Letter of Credit is to be issued, and the Person for whose benefit the requested Letter of Credit is to be issued. (b) Issuance. Subject to the terms and conditions of this -------- Article III, and provided that the applicable conditions set forth in ----------- Article VIII hereof have been satisfied, the Lender shall, on the ------------ requested date, issue a Letter of Credit on behalf of any Borrower in accordance with the Lender's usual and customary business practices. (c) No Extension or Amendment. The Lender shall not extend or ------------------------- amend any Letter of Credit unless the requirements of Section 3.3 and ----------- this Section 3.4 are met as though a new Letter of Credit was being ----------- requested and issued and any amounts due under Section 3.7 are paid. ----------- III.5 Reimbursement Obligations; Duties of the Lender. ----------------------------------------------- (a) Reimbursement. Notwithstanding any provisions to the ------------- contrary in any Letter of Credit Reimbursement Agreement: (i) the Borrowers shall reimburse the Lender for any drawings under a Letter of Credit issued by it no later than 1:00 p.m. (Chicago time) on the date of such drawing; and (ii) any Reimbursement Obligation with respect to any Letter of Credit shall bear interest from the date of the relevant drawing under the pertinent Letter of Credit until the date paid in full at the interest rate applicable to Base Rate Loans at the time an Event of Default exists. (b) Duties of the Lender. Any action taken or omitted to be -------------------- taken by the Lender under or in connection with any Letter of Credit, if taken or omitted in the absence of willful misconduct or recklessness, shall not put the Lender under any resulting liability to any Borrower. In determining whether to pay under any Letter of Credit, the Lender shall have no obligation relative to the Borrowers other than to confirm that any documents required to have been delivered under such Letter of Credit appear to comply on their face, with the requirements of such Letter of Credit. The Lender shall notify the Borrower upon the occurrence of a draw under any Letter of Credit. III.6 Payment of Reimbursement Obligations. The Borrowers agree to pay ------------------------------------ to the Lender the amount of all Reimbursement Obligations, interest and other amounts payable to the Lender under or in connection with any Letter of Credit immediately when due, irrespective of any claim, set-off, defense or other right which the Borrowers or any of their Subsidiaries may have at any time against the Lender or any other Person. III.7 Compensation for Letters of Credit. ---------------------------------- 26 (a) Letter of Credit Fees. As a condition precedent to --------------------- issuing or extending any Letter of Credit, the Borrowers shall pay to the Lender a fee (the "L/C Fee") in an amount equal to the Applicable ------- Margin for Letters of Credit multiplied by the face amount of the Letter of Credit to be issued or extended and then multiplied by a fraction, the numerator of which is the number of days from the issue date (or extension date) of such Letter of Credit through but not including the expiry date (or new expiry date) of such Letter of Credit and the denominator of which shall be 365. In addition, if any Letter of Credit has a period longer than one (1) year or if any Letter of Credit is renewed so that it does not expire until after the first anniversary of its issuance, the Borrowers shall pay to the Lender on each anniversary of the date such Letter of Credit is issued until such Letter of Credit expires or is terminated, an amount equal to (i) the Applicable Margin for Letters of Credit multiplied by (ii) the face amount of such Letter ---------- -- of Credit then outstanding, multiplied by (ii) a fraction, the numerator ---------- -- of which shall be the number of days in the succeeding twelve (12) month period prior to the stated expiration date of such Letter of Credit, and the denominator of which shall be 365. (b) Increased Capital. If either (i) the introduction of or ----------------- any change in or in the interpretation of any law or regulation or (ii) compliance by the Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by it or any corporation controlling it and the Lender determines, on the basis of reasonable allocations, that the amount of such capital is increased by or is based upon its issuance or maintenance of, or commitment to issue, the Letters of Credit then, upon demand by the Lender, the Borrowers shall immediately pay to Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender therefor. A certificate as to such amounts submitted to the Borrowers by the Lender shall, in the absence of manifest error, be conclusive and binding for all purposes. III.8 Indemnification; Exoneration. ---------------------------- (a) Indemnification. In addition to amounts payable as --------------- elsewhere provided in this Article III, the Borrowers hereby agree to ----------- protect, indemnify, pay and save the Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which the Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit other than as a result of the Lender's recklessness or willful misconduct, as determined by a court of competent jurisdiction or (ii) the failure of the Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Authority (all such acts or omissions herein called "Government Acts"). --------------- 27 (b) Assumption of Risk by Borrowers. As between the Borrowers ------------------------------- and the Lender, the Borrowers assume all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit applications, the Lender shall not be responsible absent gross negligence or willful misconduct of the Lender: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (viii) for any consequences arising from causes beyond the control of the Lender including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of any of the Lender's rights or powers under this Section 3.8. ----------- (c) Exoneration. In furtherance and extension and not in ----------- limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Lender under or in connection with the Letters of Credit or any related certificates, if taken or omitted in Good Faith, shall not put the Lender under any resulting liability to the Borrowers or relieve the Borrowers of any of their obligations hereunder to any such Person. IV. COLLATERAL IV.1 Grant of Security Interest. -------------------------- (a) To secure the prompt, complete, payment and performance of all Obligations, each Borrower hereby grants to the Lender a continuing security interest in, lien on, assignment of, and right of set off against all of such Borrower's right, title and interest in any of the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located: (i) all Accounts, Contract Rights, letters of credit, chattel paper, instruments, notes, documents, and documents of title; (ii) General Intangibles; (iii) Inventory; (iv) Equipment; (v) all moneys, investment property, Securities and other property of any kind of such Borrower (including, without limitation, any sums at any time on deposit in any Collection Account or the Concentration Account); 28 (vi) all of such Borrower's deposit accounts, credits, and balances with and other claims against the Lender or any of its affiliates or any other financial institution with which such Borrower maintains deposits (including, without limitation, the Concentration Account and the Collection Accounts); (vii) all books, records and other property relating to or referring to any of the foregoing, including, without limitation, all books, records, ledger cards, data processing records, computer software and other property and general intangibles at any time evidencing or relating to any of the foregoing; and (viii) all accessions to, substitutions for and replacements, products and proceeds of any of the foregoing, including, but not limited to, proceeds of any insurance policies, claims against third parties, and condemnation or requisition payments with respect to all or any of the foregoing. All of the foregoing, together with all other property in which the Lender may at any time be granted a Lien to secure the Obligations, is herein collectively referred to as the "Collateral." ---------- (b) All of the Obligations shall be secured by all of the Collateral. IV.2 Real Property Matters. As additional security for the --------------------- Obligations, each Borrower agrees from time to time hereafter to execute, deliver and/or cause to be recorded such mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust and other security documents reasonably requested by the Lender (collectively, the "Real Property Security Documents") -------------------------------- relating to all of such Borrower's right, title and interest in all of those easements, rights-of-way, plots, pieces or parcels of land now or hereafter owned, leased or otherwise acquired by such Borrower, the improvements situated thereon and other rights relating thereto (collectively, the "Real Property"). ------------- The Real Property Security Documents shall be in form and substance reasonably satisfactory to the Lender and grant valid and perfected Liens on the Real Property to the Lender. IV.3 Perfection and Protection of Security Interest. ---------------------------------------------- (a) The Borrowers shall, at their expense, perform all steps reasonably requested by the Lender at any time to perfect, maintain, protect, and enforce its Liens in the Collateral including, without limitation: (i) executing and filing financing or continuation statements, and amendments thereof, in form and substance satisfactory to the Lender; (ii) delivering to the Lender the original certificates of title for all motor vehicles of the Borrowers with the Lender's security interest properly endorsed thereon; (iii) delivering to the Lender the originals of all instruments, documents, and chattel paper, and all other Collateral of which the Lender determines it should have physical possession in order to perfect and protect the Lender's security interest therein, duly endorsed or assigned to the Lender without restriction; (iv) delivering to the Lender warehouse receipts covering any portion of the Collateral located in warehouses and for which warehouse receipts are issued; (v) delivering to the Lender all letters of credit on which any Borrower is named beneficiary; (vi) the filing and recordation with the U.S. Surface Transportation Board of this Agreement and any other agreement under which any Person other than the Borrowers shall use any Equipment; and (vii) taking such other steps as are deemed necessary by the Lender to maintain and protect its Liens. To the extent permitted by applicable law, the Lender may file, without any Borrower's signature, one or more financing statements disclosing its Liens. The Borrower agrees that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. 29 (b) If any Collateral is at any time in the possession or control of any warehouseman, bailee or any agent of any of the Borrowers, then such Borrower shall notify the Lender thereof and shall notify such Person of the Lender's security interest in such Collateral and, upon the Lender's request, instruct such Person to hold all such Collateral for the Lender's account subject to the Lender's instructions. If at any time significant operations of the Borrowers' business are operated on or any significant Collateral is located on any premises that are not owned by a Borrower, then the Borrowers shall use Good Faith efforts to obtain, at the request of the Lender, attornment agreements in form and substance satisfactory to the Lender with the owner or lessor of such premises. (c) From time to time, each Borrower shall, upon the Lender's request, execute and deliver confirmatory written instruments pledging to the Lender the Collateral, but any Borrower's failure to do so shall not affect or limit the Lender's security interest or the Lender's other rights in and to the Collateral. So long as the Working Capital Commitment is in effect or any of the Obligations remain outstanding, the Lender's Liens shall continue in full force and effect in all Collateral. IV.4 Location of Collateral. Each Borrower represents and warrants to ---------------------- Lender that as of the date hereof: (a) Schedule 4.4 attached hereto and ------------ incorporated herein by this reference is a correct and complete list of such Borrower's chief executive office, the location of its books and records, the locations of its Collateral, and the locations of all of its other places of business; and (b) Schedule 4.4 attached hereto correctly identifies any of such ------------ facilities and locations that are not owned by such Borrower and to the best of such Borrower's knowledge, sets forth the names of the owners and lessors or sublessors of such facilities and locations. Such Borrower covenants and agrees that it will not maintain any Collateral at any location other than those listed for it on Schedule 4.4 attached hereto, and it will not otherwise change or add ------------ to any of such locations, unless it gives the Lender at least five (5) days' prior written notice thereof and executes any and all financing statements and other documents that the Lender requests in connection therewith. IV.5 Title to, Liens on, and Sale and Use of Collateral. Each -------------------------------------------------- Borrower represents and warrants to the Lender and agrees with the Lender that: (a) all Collateral of such Borrower is and will continue to be owned by such Borrower (whether by fee, leasehold, easement, right-of-way or otherwise) free and clear of all Liens whatsoever, except for Permitted Liens; (b) the Lender's Liens in the Collateral will not be subject to any Lien which is prior in right of prepayment, other than the obligations to pay taxes with respect to real property (which taxes shall be paid when due); (c) the Borrower will use, store, and maintain the Collateral with all reasonable care and will use the Collateral for lawful purposes only; (d) upon the Lender's request, Accounts for any material amounts (as determined by the Lender) due from any Governmental Authority shall be duly assigned to the Lender in full compliance with the Federal Assignment of Claims Act (31 U.S.C.A. (S) 3727 et seq.) or similar statute, if applicable, and (e) such Borrower will not, without the Lender's prior written approval, sell, or dispose of or permit the sale or disposition of any Collateral, except for sales of Inventory in the ordinary course of business, and Equipment as permitted by Section 4.9; provided, however, that ----------- Lender's approval of the sale of non-essential real estate Collateral shall not be unreasonably withheld or delayed, and provided that the Net Cash Proceeds thereof are prepaid, if required under Section 2.4(b). The inclusion of proceeds in the Collateral shall not be deemed to constitute the Lender's consent to any sale or other disposition of the Collateral except as expressly permitted herein. IV.6 Access and Examination; Appraisals. The Lender may at all ---------------------------------- reasonable times (and at any time when a Default or Event of Default exists) have access to, examine, audit, make extracts from, copy and inspect each Borrower's records, files, and books of account and the Collateral, and discuss such Borrower's affairs with such Borrower's officers and management. Each Borrower will deliver to the Lender any instrument necessary for the Lender to obtain records from any service bureau maintaining records for such Borrower. Whenever a Default or Event of Default exists, the Borrower shall, at its expense and upon the Lender's request, provide the Lender with appraisals or updates thereof of any or all of the Collateral from an appraiser, and prepared on a basis satisfactory to the Lender. 30 IV.7 Intentionally Omitted. --------------------- IV.8 Collections and Concentration Account Arrangements. All -------------------------------------------------- collections of Accounts of the Borrowers and other proceeds of Collateral of the Borrowers shall be deposited directly into or maintained in one of the Collection Accounts described on Schedule 4.8 under arrangements established by ------------ the Borrowers and acceptable to the Lender. The Collection Accounts shall be maintained on terms acceptable to the Lender, subject to agreements in substantially the form attached hereto and made a part hereof as Exhibit G --------- ("Collection Account Agreements") among the applicable Borrower, the Lender and ----------------------------- the applicable financial institution at which such account is maintained, to the effect that such financial institution shall remit all amounts deposited in the applicable Collection Account on a daily basis to the Concentration Account with the Lender or as the Lender may direct. At all times during the term of this Agreement and notwithstanding the termination of this Agreement, until all of the Obligations shall have been fully paid and satisfied, each Borrower shall continue to deposit, or cause to be deposited, directly into a Collection Account or the Concentration Account all collections of Accounts and other proceeds of Collateral; provided, however that Finance may maintain an operating -------- ------- account with Corestates Bank in Wilmington, Delaware provided that the amount on -------- deposit in such account at no time exceeds $15,000. IV.9 Equipment. Each Borrower represents and warrants to the Lender and --------- agrees with the Lender that all of the Equipment owned or leased by such Borrower is and will be used or held for use in such Borrower's business (which includes the lease of such equipment to third parties from time to time), and is and will be fit for such purposes. Each Borrower will use the Equipment in a careful and proper manner and will comply with and conform to all governmental laws, rules and regulations relating thereto. Without limitation to the foregoing, the Borrowers will (i) cause all Equipment to be used in compliance with all rules of AAR and FRA and (ii) will not permit any items of Equipment to be used outside the continental United States or Canada. Each Borrower shall keep and maintain its Equipment in good operating condition and repair (ordinary wear and tear excepted) and shall make all necessary replacements thereof so that the condition and operating efficiency thereof will at all times be maintained and preserved, reasonable wear and tear excepted. Each Borrower will cause such item of Equipment which constitutes Rolling Stock to be maintained in conformance with all rules and regulations of AAR and FRA, to the extent applicable and, if mandated, modified so that it will qualify for unrestricted interchange in the United States and remain suitable for its intended use. Each Borrower shall promptly inform the Lender of any material additions to or deletions from the Equipment. No Borrower shall permit any Equipment to become a fixture to real property or an accession to other personal property, unless the Lender has a valid and perfected Lien in such real or personal property. Each Borrower will cause each item of Rolling Stock owned by such Borrower to be kept marked and numbered with the identifying mark and number set forth in Schedule -------- 4.9 hereto. Such Borrower will not place or permit any such item of Rolling - --- Stock to be placed in operation or exercise any control or dominion over the same until such number shall have been so marked on both sides thereof and will replace or cause to be replaced promptly any such name and words which may be removed, defaced, obliterated or destroyed. Such Borrower will not change or permit to be changed the identifying mark or number of any item of Rolling Stock unless and until a statement of new mark and/or number or numbers to be substituted therefor shall have been filed, recorded and deposited by such Borrower in all public offices where this Agreement shall have been filed, recorded and deposited. Except for occasional sales of Equipment, the proceeds of which represent the fair market value therefor and do not exceed in the aggregate for any Fiscal Year $100,000, no Borrower shall, without the Lender's prior written consent, sell, lease as a lessor, or otherwise dispose of any of the Equipment. 31 IV.10 Contract Rights. Each Borrower shall fully perform all of its --------------- material obligations under each material contract to which it is a party and shall enforce all of its rights and remedies thereunder as it deems appropriate in its business judgment; provided, however, that such Borrower shall not take -------- ------- any action or fail to take any action with respect to the Contract Rights which, in such Borrower's business judgment, exercised in Good Faith, would result in a waiver or other loss of any material right or remedy of such Borrower thereunder. Without limiting the generality of the foregoing, such Borrower shall take all action necessary or appropriate to permit, and shall not take any action which would have any material adverse effect upon, the full enforcement of all indemnification rights under the Contract Rights. Except in the ordinary course of business and consistent with past practices, the Borrowers shall not, without the Lender's prior written consent, modify, amend, supplement, compromise, satisfy, release, or discharge any of the Contract Rights, any collateral securing the same, any Person liable directly or indirectly with respect thereto, or any agreement relating to any of the Contract Rights or the collateral therefor. Each Borrower shall notify the Lender in writing, promptly after such Borrower becomes aware thereof, of any event or fact which could give rise to a claim by it for indemnification under any of the Contract Rights, and shall diligently pursue such right and report to the Lender on all further developments with respect thereto. If an Event of Default exists and the Borrower has not cured or is unable to cure such Event of Default, then the Lender may directly enforce any material right in the Contract Rights in its own or such Borrower's name and may enter into such settlements or other agreements with respect thereto as the Lender determines. In any suit, proceeding or action brought by the Lender under any Contract Rights for any sum owing thereunder or to enforce any provision thereof, each Borrower shall indemnify and hold the Lender harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaims, recoupment, or reduction of liability whatsoever of the obligor thereunder arising out of a breach by any Borrower of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing from any Borrower to or in favor of such obligor or its successors. All such obligations of any Borrower shall be and remain enforceable only against such Borrower and shall not be enforceable against the Lender. Notwithstanding any provision hereof to the contrary, any Borrower shall at all times remain liable to observe and perform all of its duties and obligations under the Contract Rights, and the Lender's exercise of any of its rights with respect to the Collateral shall not release any Borrower from any of such duties and obligations. The Lender shall not be obligated to perform or fulfill any of a Borrower's duties or obligations under the Contract Rights or to make any payment thereunder, or to make any inquiry as to the nature or sufficiency of any payment or property received by it thereunder or the sufficiency of performance by any party thereunder, or to present or file any claim, or to take any action to collect or enforce any performance, any payment of any amounts, or any delivery of any property. Notwithstanding any provision in this Section 4.10 to the contrary, provided no Event of Default has occurred ------------ and is continuing, the Lender shall not be permitted to waive or release on behalf of any Borrower any rights that any Borrower may have (whether at law or in equity) against any other party to the Contract Rights. IV.11 Right to Cure. The Lender may, in its discretion and at any time ------------- after at least ten (10) days prior written notice, for any Borrower's account and at such Borrower's expense, pay any amount not being disputed by such Borrower in Good Faith or do any act required of such Borrower hereunder or reasonably requested by the Lender to preserve, protect, maintain or enforce the Obligations, the Collateral or the Lender's Liens therein, and which such Borrower fails to pay or do, including, without limitation, payment of any judgment against such Borrower, any insurance premium, any warehouse charge, any landlord's claim, and any other Lien upon or with respect to the Collateral. All payments that the Lender makes under this Section 4.11 and all out-of-pocket ------------ costs and expenses that the Lender pays or incurs in connection with any action taken by it hereunder shall be payable on demand. Any payment made or other action taken by the Lender under this Section 4.11 shall be without prejudice to ------------ any right to assert an Event of Default hereunder and to proceed thereafter as herein provided. 32 IV.12 Power of Attorney. Each Borrower hereby appoints the Lender and ----------------- the Lender's designees as such Borrower's attorney, with power to send requests for verification of accounts to customers or account debtors and after an Event of Default has occurred and as long as such Event of Default is continuing: (a) to endorse such Borrower's name on any checks, notes, acceptances, money orders, or other forms of payment or security that come into the Lender's possession; (b) to sign such Borrower's name on any invoice, bill of lading, or other document of title relating to any Collateral, on drafts against customers, on assignments of Accounts, on notices of assignment, financing statements and other public records; (c) to notify the post office authorities to change the address for delivery of such Borrower's mail to an address designated by the Lender and to receive, open and dispose of all mail addressed to such Borrower; and (d) to do all things necessary to carry out this Agreement. Each Borrower ratifies and approves all acts of such attorney. Neither the Lender nor the attorney will be liable for any acts or omissions or for any error of judgment or mistake of fact or law except to the extent of the Lender's gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable until this Agreement has been terminated and the Obligations have been fully satisfied. IV.13 The Lender's Rights, Duties and Liabilities. Each Borrower assumes ------------------------------------------- all responsibility and liability arising from or relating to the use, sale or other disposition of the Collateral except for liability resulting from the Lender's or any of its respective attorney's gross negligence or willful misconduct. The Lender and its officers, directors, employees, and agents shall not be liable or responsible in any way for the safekeeping of any of the Collateral except to the extent of the Lender's gross negligence or willful misconduct with respect thereto, or for any loss or damage thereto, or for any diminution in the value thereof, or for any act of default of any warehouseman, carrier, forwarding agency or other person whomsoever, all of which shall be at the Borrowers' sole risk. The Obligations shall not be affected by any failure of the Lender to take any steps to perfect its Liens or to collect or realize upon the Collateral, nor shall loss of or damage to the Collateral release any Borrower from any of the Obligations. After the occurrence of and during the continuance of a Default or Event of Default, the Lender may (but shall not be required to), without notice to or consent from the Borrowers, sue upon or otherwise collect, extend the time for payment of, modify or amend the terms of, compromise or settle for cash, credit, or otherwise upon any terms, grant other indulgences, extensions, renewals, compositions, or releases, and take or omit to take any other action with respect to the Collateral, any security therefor, any agreement relating thereto, any insurance applicable thereto, or any Person liable directly or indirectly in connection with any of the foregoing, without discharging or otherwise affecting the liability of any Borrower for the Obligations or under this Agreement or any other agreement now or hereafter existing between the Lender and each Borrower. V. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES V.1 Books and Records. Each Borrower shall maintain, at all times, ----------------- correct and complete books, records and accounts in which complete, correct and timely entries are made of its transactions in a manner necessary to insure that the audited financial statements required to be delivered pursuant to Section ------- 5.2(a) shall be prepared in accordance with GAAP, consistently applied and in - ------ accordance with the accounting rules of the AAR as they relate to the settlement of interline accounts. Each Borrower shall, by means of appropriate entries, reflect in such accounts and in all financial statements proper liabilities and reserves for all taxes and proper provision for depreciation and amortization of its Property and bad debts, all in accordance with GAAP. Each Borrower shall maintain at all times books and records pertaining to the Collateral in such detail, form and scope as the Lender shall reasonably require, including, but not limited to, records of (a) all payments received and all credits and extensions granted with respect to the Accounts; and (b) all other dealings affecting the Collateral. 33 V.2 Financial Information. Each Borrower shall promptly furnish to the --------------------- Lender all such financial information as the Lender shall reasonably request, and notify its auditors and accountants that the Lender is authorized to obtain such information directly from them. Without limiting the foregoing, the Borrowers will furnish to the Lender, in such detail as the Lender shall request, the following: (a) As soon as available, but in any event not later than ninety (90) days after the close of each Fiscal Year, a copy of the unaudited consolidating and the audited consolidated balance sheets, related statements of income and operations, shareholders' equity (only for consolidated statements) and cash flows for Emons and its consolidated Subsidiaries for such Fiscal Year, and the accompanying notes thereto, setting forth in each case in comparative form figures for the previous Fiscal Year and the budgeted figures for the current Fiscal Year, all in reasonable detail, fairly presenting the financial position and the results of operations of Emons and its consolidated Subsidiaries as at the date thereof and for the Fiscal Year then ended, and prepared in accordance with GAAP. Such statements shall be examined in accordance with generally accepted auditing standards by and accompanied by a report thereon unqualified as to scope of independent certified public accountants selected by Emons and reasonably satisfactory to the Lender. (b) As soon as available, but in any event not later than forty- five (45) days after the close of each fiscal quarter other than the fourth quarter of a Fiscal Year, a copy of the unaudited consolidating and consolidated balance sheets of Emons and its consolidated Subsidiaries as at the end of such quarter, and the related consolidating and consolidated statements of income and operations, and cash flows for Emons and its consolidated Subsidiaries for the last month of such quarter and for the period from the beginning of the Fiscal Year to the end of such quarter, together with the accompanying notes thereto, all in reasonable detail, setting forth in each case in comparative form the budgeted figures for the current Fiscal Year, fairly presenting the financial position and results of operation of Emons and its consolidated Subsidiaries as at the date thereof and for such periods, prepared in accordance with GAAP. Such statements shall be certified to be correct by the chief financial or accounting officer of each Borrower, subject to normal year-end adjustments. (c) As soon as available, but in any event not later than thirty (30) days after the end of each month except the last month of each fiscal quarter, consolidated and consolidating unaudited balance sheets of Emons and its consolidated Subsidiaries as at the end of such month, and consolidated and consolidating unaudited statements of income and expenses for Emons and its consolidated Subsidiaries for such month and for the period from the beginning of the Fiscal Year to the end of such month, all in reasonable detail, setting forth in each case in comparative form figures the budgeted figures for the current Fiscal Year, fairly presenting the financial position and results of operation of Emons and its consolidated Subsidiaries as at the date thereof and for such periods, and prepared in accordance with GAAP. Such statements shall be certified to be correct by the chief financial or accounting officer of each Borrower, subject to normal year-end adjustments. (d) With each of the audited financial statements delivered pursuant to Section 5.2(a), a certificate of the independent certified -------------- public accountants that examined such statement to the effect that they have reviewed and are familiar with this Agreement and that, in examining such financial statements, they did not become aware of any fact or condition which then constituted a Default or Event of Default, except for those, if any, described in reasonable detail in such certificate. 34 (e) With each of the audited financial statements delivered pursuant to 5.2(a) and the unaudited financial statements delivered pursuant to Section 5.2(b), a certificate of the chief executive or chief -------------- financial officer of each Borrower (i) setting forth in reasonable detail the calculations required to establish that such Borrower was in compliance with its covenants set forth in Sections 7.21, Section 7.23, Section 7.24, ------------- ------------ ------------ Section 7.25 and Section 7.28 during the period covered in such financial ------------ ------------ statements and as at the end thereof, and (ii) stating that, except as explained in reasonable detail in such certificate, (A) all of the representations and warranties of such Borrower contained in this Agreement and the other Loan Documents are correct and complete as at the date of such certificate as if made at such time, (B) such Borrower is, at the date of such certificate, in compliance with all of its covenants and agreements in this Agreement and the other Loan Documents, and (C) no Default or Event of Default then exists or existed during the period covered by such financial statements. If such certificate discloses that a representation or warranty is not correct or complete, or that a covenant has not been complied with, or that a Default or Event of Default existed or exists, such certificate shall set forth what action such Borrower has taken or proposes to take with respect thereto. (f) No sooner than sixty (60) days prior to the beginning of each Fiscal Year and no later than thirty (30) days after the commencement of such Fiscal Year, consolidated and consolidating projected balance sheets, statements of income and expense, and statements of cash flow for each Borrower as at the end of and for each month of such Fiscal Year. (g) Within forty-five (45) days after the end of each fiscal quarter, a report of the Capital Expenditures of each Borrower for the Fiscal Year to date ending with such quarter. (h) Promptly after the filing thereof, copies of any all proxy statements, financial statements, materials or reports (including, without limitation, Forms 10K, 10Q and 8K) which any Borrower files with the SEC or makes available to its stockholders. (i) Within thirty (30) days after the end of each month, a Borrowing Base Certificate and an accounts receivable aging report as of the end of such month. (j) Such additional information as the Lender may from time to time reasonably request regarding the financial and business affairs of any Borrower or any Subsidiary, including, without limitation, projections of future operations on both a consolidated and consolidating basis. V.3 Notices to the Lender. The Borrowers shall notify the Lender in --------------------- writing of the following matters at the following times: (a) Immediately after becoming aware thereof, any Default or Event of Default. (b) Immediately after becoming aware thereof, the assertion by a holder or holders of Debt in an outstanding principal amount in excess of $100,000 in the aggregate at any one time that a default exists with respect thereto or that any Borrower is not in compliance with the terms thereof, or the threat or commencement by such holder of any enforcement action because of such asserted default or non-compliance. (c) Immediately after becoming aware thereof, any material adverse change in any Borrower's Property, business, operations, or condition (financial or otherwise) or any material and continuing decrease in the Borrowers' Accounts. 35 (d) Immediately after becoming aware thereof, any pending or threatened action, suit, proceeding, or counterclaim by any Person, or any pending or threatened investigation by a Governmental Authority, which may materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or any Borrower's Property, business, operations, or condition (financial or otherwise); provided, however, the Borrowers shall not be required to -------- ------- notify the Lender of actions or proceedings filed against Industries involving damages from the ingestion of diethylstilbestrol ("DES"), but will deliver a status report with each statement delivered pursuant to Section 5.2(a) and Section 5.2(b) setting forth the number of pending DES claims at such time and the availability of insurance coverage for such claims. (e) Immediately after becoming aware thereof, any pending or threatened strike, work stoppage, material unfair labor practice claim, or other material labor dispute affecting any Borrower or any Subsidiary. (f) Immediately after becoming aware thereof, any violation of any law, statute, regulation, or ordinance of Governmental Authority applicable to any Borrower, any Subsidiary, or their respective properties which may materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or any Borrower's Property, business, operations, or condition (financial or otherwise). (g) Immediately after becoming aware thereof, any violation by any Borrower or any Subsidiary of any Environmental Law or, immediately upon its receipt thereof, any notice that any Borrower or any Subsidiary receives asserting that such Borrower or any Subsidiary is or may be (i) liable to any Person as a result of the Release or threatened Release of any Contaminant into the environment; (ii) subject to investigation by a Governmental Authority evaluating whether any Remedial Action is needed to respond to the Release or threatened Release of any Contaminant into the environment; (iii) subject to any judicial or administrative proceeding alleging a violation of any Environmental Law; (iv) subject to any new or proposed changes to any health or safety law or any Environmental Law that could have a material adverse effect on the operations of such Borrower; (v) in violation of any Environmental Law or health and safety law; or (vi) that its compliance with any health or safety law or Environmental Law is being investigated. (h) Any change in any Borrower's name, state of incorporation, or form of organization, at least ten (10) days prior thereto. 36 (i) Any Termination Event with respect to a Plan within fifteen (15) days after any Borrower knows or has reason to know thereof, and any other Reportable Event, within forty (40) days after any Borrower knows or has reason to know thereof, in each case accompanied by any materials required to be filed with the PBGC with respect thereto; immediately after the receipt by any Borrower or any ERISA Affiliate of any notice concerning the imposition of any withdrawal liability under Title IV of ERISA with respect to a Benefit Plan or a Multiemployer Plan; within ten (10) days after any Borrower or any ERISA Affiliate fails to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or payment, a notification of such failure; the establishment of any Plan not existing at the Closing Date, or any increase in the benefits of any existing Plan or the commencement of contributions by any Borrower to any Plan to which such Borrower was not contributing at the Closing Date, within fifty-five (55) days after the end of the fiscal quarter in which such event occurs; within fifteen (15) days after any Borrower or an ERISA Affiliate knows or has reason to know (i) a Multiemployer Plan has been terminated, (ii) the administration or plan sponsor of a Multiemployer Plan intends to terminate a Multiemployer Plan or (iii) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate a Multiemployer Plan; within forty-five (45) days after any Borrower or an ERISA Affiliate knows or has reason to know that a prohibited transaction (defined in Section 406 of ERISA and Section 4975 of the Code) has occurred; immediately after filing with the IRS a funding waiver request for any Plan, in each case accompanied by a copy of such request and, subsequent thereto, copies of all communications received by any Borrower or an ERISA Affiliate with respect to such request; or immediately after becoming aware thereof, any other event or condition regarding a Plan or any Borrower's or an ERISA Affiliate's compliance with ERISA which may materially and adversely affect any Borrower's Property, business, operation, or condition (financial or otherwise). (j) Any derailment or accident involving any of the Borrowers' Property resulting in property damage or liability in excess of $100,000. Each notice given under this Section shall describe the subject matter thereof in reasonable detail, and shall set forth the action that the Borrowers have taken or propose to take with respect thereto. VI. GENERAL WARRANTIES AND REPRESENTATIONS Each Borrower warrants and represents to Lender that all of such Borrower's representations and warranties contained in this Agreement and the other Loan Documents are true at the time of the Borrowers' execution of this Agreement, and shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto. Each request for a Loan or a Letter of Credit hereunder shall constitute a representation and warranty by each Borrower, with the same effect as a certificate delivered by such Borrower in writing, that all of the representations and warranties made herein (other than representations and warranties which expressly speak as of a certain date), are true and correct in all respects. Each Borrower warrants and represents to Lender that: 37 VI.1 Authorization, Validity, and Enforceability of this Agreement and the --------------------------------------------------------------------- Loan Documents. Such Borrower has the corporate power and authority to execute, - -------------- deliver and perform this Agreement and the other Loan Documents, to incur the Obligations, and to grant to the Lender, Liens upon, and security interests in, the Collateral. Such Borrower has taken all necessary corporate action (including, without limitation, obtaining approval of its stockholders, if necessary) to authorize its execution, delivery, and performance of this Agreement and the other Loan Documents. No consent, approval, or authorization of, or declaration or filing with, any Governmental Authority, and no consent of any other Person, is required in connection with such Borrower's execution, delivery, and performance of this Agreement and the other Loan Documents, except for those already duly obtained. Each of this Agreement and the other Loan Documents has been duly executed and delivered by such Borrower, and constitutes the legal, valid and binding obligation of such Borrower, enforceable against it in accordance with its terms. Such Borrower's execution, delivery, and performance of this Agreement and the other Loan Documents do not and will not conflict with, or constitute a violation or breach of, or constitute a default under, or result in the creation or imposition of any Lien upon the Property of such Borrower or any of its Subsidiaries by reason of the terms of (a) any contract, mortgage, Lien, lease, agreement, indenture, or instrument to which such Borrower or any of its Subsidiaries is a party or which is binding upon it or its Property, (b) any judgment, law, statute, rule or governmental regulation applicable to such Borrower or any of its Subsidiaries, or (c) the Certificate of Incorporation or By-laws of such Borrower or any of its Subsidiaries. VI.2 Validity and Priority of Security Interest. To the best of such ------------------------------------------ Borrower's knowledge, the provisions of this Agreement and the other Loan Documents create legal and valid Liens on all the Collateral in the Lender's favor, and upon filing of the financing statements referenced on the closing list with the appropriate filing offices and the delivery of the "Pledged Shares" to the Lender as contemplated by the Pledge Agreements, such Liens constitute perfected and continuing Liens on all the Collateral, having priority over all other Liens on the Collateral except for Permitted Liens, and enforceable against such Borrower and all third parties. VI.3 Organization and Qualification. As of the date hereof, except as set ------------------------------ forth on Schedule 6.5, such Borrower (a) is duly incorporated and organized and validly existing in good standing under the laws of the State of its incorporation, (b) is qualified to do business as a foreign corporation and is in good standing in all states where the failure of such Borrower to qualify to do business would have a material adverse effect on such Borrower's ability to collect its Accounts or otherwise conduct its business or own or lease Property in such state, and (c) has all requisite power and authority to conduct its business and to own its Property. VI.4 Corporate Name; Prior Transactions. None of the Borrowers have, ---------------------------------- during the past five (5) years prior to the Closing Date, been known by or used any other corporate or fictitious name, or been a party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any of its property outside of the ordinary course of business, except as set forth on Schedule 6.4 attached hereto and incorporated herein by ------------ this reference. VI.5 Subsidiaries and Affiliates. Schedule 6.5 attached hereto and --------------------------- ------------ incorporated herein by this reference is as of the date hereof, a correct and complete list of the name and relationship to such Borrower of each and all of such Borrower's Subsidiaries and other Affiliates. VI.6 Financial Statements. The Borrowers have delivered to the Lender -------------------- audited balance sheets and the related statements of income and operations, shareholders equity and cash flow for the Fiscal Year ended June 30, 1996 and the unaudited balance sheets and the related statements of income and operations, shareholders equity and cash flow for the Fiscal Year to date period ended March 31, 1997 for Emons and its consolidated Subsidiaries. All such financial statements have been prepared in accordance with GAAP and present accurately and fairly in all material respects each of such entities' financial position as at the dates thereof and its results of operations for the periods then ended. Since June 30, 1996, there has been no event or circumstance which is likely to have a material adverse affect on the financial condition or operations of the businesses of such entities. 38 VI.7 Capitalization. As of the date hereof, to the best of such -------------- Borrower's knowledge, based solely on a review of copies of reports on Schedule 13D which have been delivered to Emons, no shareholder of Emons owns more than five percent (5%) of the issued and outstanding shares of stock in Emons except as set forth on Schedule 6.7 attached hereto and incorporated herein by this ------------ reference. As of the date hereof, each of the Borrower's authorized capital stock and the number of shares validly issued and outstanding are set forth on Schedule 6.7 attached hereto and such issued shares are all fully paid and non- - ------------ assessable, and all of the outstanding stock of Industries, MPA, Finance, Logistics, MIT and Railroad Group are owned beneficially and of record by Emons and all of the outstanding capital stock of YKR and SLR is owned beneficially and of record by Railroad Group. VI.8 Debt. After giving effect to the making of the Term Loan and the ---- Working Capital Loans to be made on the Closing Date, the Borrowers have no Debt, except (a) the Obligations, (b) Debt set forth on Schedule 6.8 attached ------------ hereto, (c) trade payables and other contractual obligations arising in the ordinary course of business and (d) Debt permitted under Section 7.13. VI.9 Real Property; Leases. As of the date hereof, Schedule 6.9 attached --------------------- ------------ hereto and incorporated herein by this reference sets forth a correct and complete list of all real property owned by such Borrower (whether by fee, leasehold easement, right-of-way or otherwise), all leases and subleases of real or personal property by such Borrower as lessee or sublessee, and all leases and subleases of real or personal property by such Borrower as lessor or sublessor, in each case where such property is necessary or useful in any material respect in the conduct of such Borrower's business. To the best of Borrower's knowledge, each of such leases and subleases is valid and enforceable in accordance with its terms and is in full force and effect, and no default by any party to any such lease or sublease which is material to the business or operations of such Borrower exists. VI.10 Proprietary Rights. As of the date hereof, Schedule 6.10 attached ------------------ ------------- hereto and incorporated herein by this reference sets forth a correct and complete list of all of the Proprietary Rights. None of such Proprietary Rights is subject to any licensing agreement or similar arrangement except as set forth on Schedule 6.10 attached hereto. To the best of such Borrower's knowledge, ------------- none of the Proprietary Rights infringes on or conflicts with any other Person's property, and no other Person's property infringes on or conflicts with the Proprietary Rights. VI.11 Trade Names and Terms of Sale. As of the date hereof, all trade ----------------------------- names or styles under which the Borrowers will create Accounts, or to which instruments in payment of Accounts may be made payable, are listed on Schedule -------- 6.11 attached hereto and incorporated herein by this reference. - ---- VI.12 Litigation. Except as set forth on Schedule 6.12 attached hereto and ---------- ------------- incorporated herein by this reference, there is no pending or (to the best of such Borrower's knowledge) threatened, action, suit, proceeding, or counterclaim by any Person, or investigation by any Governmental Authority, or any basis for any of the foregoing, which may materially and adversely affect any material portion of the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or the Borrowers' Property, business, operations, or condition (financial or otherwise), taken as a whole. VI.13 Restrictive Agreements. Such Borrower is not a party to any contract ---------------------- or agreement, and is not subject to any charter or other corporate restriction, which affects its ability to execute, deliver, and perform its obligations under the Loan Documents and repay the Obligations or which materially and adversely affects or, insofar as such Borrower can reasonably foresee, could materially and adversely affect, such Borrower's Property, business, operations, or condition (financial or otherwise), or would in any respect materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or such Borrower's Property, business, operations, or condition (financial or otherwise), taken as a whole. 39 VI.14 Labor Disputes. As of the date hereof, except as set forth on -------------- Schedule 6.14, there is no collective bargaining agreement or other labor contract covering employees of such Borrower or any of its Subsidiaries; no such collective bargaining agreement or other labor contract is scheduled to expire during the term of this Agreement and, to the best of such Borrower's knowledge, no union or other labor organization is seeking to organize, or to be recognized as, a collective bargaining unit of employees of such Borrower or any of its Subsidiaries or for any similar purpose. There is no pending or (to the best of such Borrower's knowledge) threatened, strike, work stoppage, material unfair labor practice claim, or other material labor dispute against or affecting such Borrower, or any of its Subsidiaries or their respective employees. VI.15 Environmental, Health and Safety Laws. Except as disclosed on ------------------------------------- Schedule 6.15 attached hereto and incorporated herein by this reference, (a) the - ------------- operations of such Borrower comply in all material respects with all applicable Environmental Laws and health and safety requirements of law; (b) such Borrower has obtained all environmental, health and safety permits necessary for its operation, and all such permits are in good standing and such Borrower is in compliance with all terms and conditions of such permits; (c) neither such Borrower nor any of its present Property or operations, or to the best of such Borrower's knowledge, its past Property or operations, are subject to any order from or agreement with any Governmental Authority or private party respecting (i) any Environmental Laws or any health or safety requirements of law, (ii) any Remedial Action or (iii) liabilities and costs arising from the Release or threatened Release of a Contaminant into the environment; (d) none of the operations of such Borrower is subject to any judicial or administrative proceeding alleging a violation of any Environmental Laws or any health or safety requirement of law; (e) none of the present or, to the best of the Borrower's knowledge, past operations of such Borrower's predecessor in interest is the subject of any investigation by any Governmental Authority evaluating whether any Remedial Action is needed to respond to a Release or threatened Release of a Contaminant into the environment; (f) such Borrower has not filed any notice under any requirement of law indicating past or present treatment, storage or disposal of a hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent; (g) such Borrower has not filed any notice under any applicable requirement of law reporting a Release of a Contaminant into the environment; (h) to the best of such Borrower's knowledge, there is not now, nor has there ever been on or in such Borrower's Property (i) any generation, treatment, recycling, storage or disposal of any hazardous waste, as that term is defined under 40 CFR Part 281 or any State equivalent, (ii) any underground storage tanks or surface impoundments, (iii) any asbestos-containing material, (iv) any polychlorinated biphenyls (PCB) used in hydraulic oils, electrical transformers or other equipment; (i) such Borrower has not entered into any negotiations or agreements with any Person (including, without limitation, the prior owner of such Borrower's Property) relating to any Remedial Action or environmentally related claim; (j) such Borrower has not received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant into the environment; (k) such Borrower has no material contingent liability in connection with any Release or threatened Release of any Contaminants into the environment; (l) to the best of such Borrower's knowledge, no Environmental Lien has attached to any Property of such Borrower; (m) to the best of such Borrower's knowledge, such Property does not contain any asbestos-containing material; and (n) none of the products that such Borrower manufactures, distributes or sells, or, to the best of its knowledge, has ever had manufactured, distributed or sold, contains asbestos-containing material. VI.16 No Violation of Law. Such Borrower is not in violation of any law, ------------------- statute, regulation, ordinance, judgment, order, or decree applicable to it which violation would in any respect materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or such Borrower's Property, business, operations, or condition (financial or otherwise), taken as a whole. VI.17 No Default. No Borrower is in default with respect to any note, ---------- indenture, loan agreement, mortgage, lease, deed, or other agreement to which such Borrower is a party or by which it is bound, which default would materially and adversely affect the Collateral, the repayment of the Obligations, any Lender's rights under the Loan Documents, or such Borrower's Property, business, operations, or condition (financial or otherwise), taken as a whole. 40 VI.18 ERISA. ----- (a) Neither any Borrower nor any ERISA Affiliate has or contributes to any Plan other than those listed on Schedule 6.18 attached hereto and ------------- incorporated herein by this reference. (b) Except as provided on Schedule 6.18 attached hereto, no Benefit ------------- Plan has been terminated or partially terminated or is insolvent or in reorganization, nor have any proceedings been instituted to terminate or reorganize any Plan. (c) Neither any Borrower nor any ERISA Affiliate has withdrawn from any Multiemployer Plan in a complete or partial withdrawal, nor has a condition occurred which if continued would result in a complete or partial withdrawal. (d) Neither any Borrower nor any ERISA Affiliate has incurred any withdrawal liability, including contingent withdrawal liability, to any Benefit Plan pursuant to Title IV of ERISA as of December 31, 1995. (e) Neither any Borrower nor any ERISA Affiliate has any liability to the PBGC other than for required insurance premiums which have been paid when due. (f) No Reportable Event has occurred with respect to a Benefit Plan. (g) No Benefit Plan has an "accumulated funding deficiency" (whether or not waived) as defined in Section 302 of ERISA or in Section 412 of the Code. (h) Except as provided on Schedule 6.18 attached hereto, to the best ------------- of Borrower's knowledge each Plan is in substantial compliance with ERISA, and neither any Borrower nor any ERISA Affiliate has received any notice asserting that a Plan is not in compliance with ERISA. (i) Except as provided on Schedule 6.18 attached hereto, each Plan ------------- which is intended to be a qualified Plan has been determined by the IRS to be qualified under Section 401(a) of the Code as currently in effect and neither any Borrower nor any ERISA Affiliate knows or has reason to know why each such plan should not continue to be so qualified, and each trust related to such Plan has been determined to be exempt from federal income tax under Section 501(a) of the Code. (j) Except as provided on Schedule 6.18 attached hereto, neither any ------------- Borrower nor any ERISA Affiliate maintains or contributes to any employer welfare benefit plan within the meaning of Section 3(1) of ERISA which provides lifetime benefits to retirees. (k) Neither any Borrower nor any ERISA Affiliate has failed to make a required installment under subsection (m) of Section 412 of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment. (l) Neither any Borrower nor any ERISA Affiliate is required to provide security to a Benefit Plan under Section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the plan year. 41 (m) To the best of Borrower's knowledge, neither any Borrower, nor any ERISA Affiliate, nor any other "party-in-interest" or "disqualified person" has engaged in a "prohibited transaction," as such terms are defined in Section 4975 of the Code and Section 406 of ERISA, in connection with any Plan or any other employee benefit plan to which the Borrower or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA or has taken or failed to take any action which would constitute or result in a Termination Event. (n) To the best of Borrower's knowledge, neither any Borrower nor any ERISA Affiliate has failed to comply with the health care continuation coverage requirements of Section 4980B of the Code in respect of employees and former employees of such Borrower or such ERISA Affiliate and their dependant and beneficiaries which alone or in the aggregate would subject such Borrower or such ERISA Affiliate to any material liability. (o) To the best knowledge of such Borrower or any ERISA Affiliate after due inquiry, the consummation of the transactions contemplated by the Acquisition shall not result in any liability to any Borrower or any ERISA Affiliate under any employment-related agreement, contract or arrangement, whether written or oral, including without limitation, any severance pay agreement. The liability of any Borrower or any ERISA Affiliate to make payments to any employee on account of termination of employment under individual employment or severance agreements does not in the aggregate give rise to any material liability to the Borrower or such ERISA Affiliate. VI.19 Taxes. Except as set forth on Schedule 6.19, such Borrower has filed ----- all tax returns and other reports which it was required by law to file on or prior to the date hereof and has paid all taxes assessments, fees, and other governmental charges, and penalties and interest, if any, against it or its Property, income, or franchise, that are due and payable except where the failure to do so could not, individually or in the aggregate, have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of such Borrower. VI.20 Investment Act. Such Borrower is not an "investment company" nor an -------------- "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. (S) 80(a)(l), et seq.). The making of the Working Capital Loans, the Term Loan, and other financial accommodations hereunder by the Lender, the application of the proceeds and repayment thereof by the Borrowers and the consummation of the other transactions contemplated by this Agreement and the Loan Documents do not violate any provisions of such Act or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. VI.21 Margin Securities. Such Borrower does not own any "margin security" ----------------- (as that term is defined in Regulations G and U) and the proceeds of the Working Capital Loans, the Term Loan, and the other financial accommodations made pursuant to this Agreement will be used only for the purposes contemplated hereunder. None of the transactions contemplated by this Agreement, or the Loan Documents will violate Regulations G, T, U or X. None of the Working Capital Loans, the Term Loan, or the other financial accommodations hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any Debt or other Person's indebtedness which was originally incurred to purchase or carry any margin security, or for any other purpose which might cause any such loan or other financial accommodation to be considered a "purpose credit" within the meaning of Regulation G, U or X. Such Borrower will neither take nor permit any agent acting on its behalf to take any action which might cause any transaction, obligation or right created by this Agreement, or any document or instrument delivered pursuant hereto, to violate any regulation of the Federal Reserve Board. VI.22 Benefit. Each of the Borrowers will benefit, directly or indirectly, ------- from the Credit Facilities as a result of the synergistic operations of their respective businesses. 42 VI.23 Industries Corporate Separateness. Since August 1, 1992, and to the --------------------------------- best knowledge of the Borrowers prior to that date, there have been no transfers of property or property rights (including money) by Industries to, or to Industries by, any of the other Borrowers without adequate consideration and the observance of "corporate formalities" other than the distribution by Industries of dividends to Emons in accordance with applicable corporate law and, after giving effect thereto, Industries retained sufficient capital for its operations and to pay known liabilities. "Corporate formalities" as used herein, with respect to any transaction, includes the adoption of appropriate authorizing resolutions, evidencing such transaction by customary documentation, executed and delivered by duly authorized officers, and compliance with the terms and conditions set forth in such documentation. Industries has not and does not commingle its assets, liabilities or business functions with those of the other Borrowers. Industries has at all times maintained separate accounting and corporate records and has had regular board of director meetings and shareholder meetings as contemplated by its Articles of Incorporation and By-laws. Industries now holds (and has held at all times) itself out as a separate corporation and not as a division of any other Borrower, nor has Industries represented or conducted its affairs at any time in a manner which would cause other Persons to believe that any other Borrower is part of or a division of Industries. Industries maintains bank accounts separate and apart from the other Borrowers and is billed for and pays its own expenses or pays its pro rata share of common expenses on a fair and equitable allocation basis. To the extent Industries is included in the consolidated financial statements of Emons and the other Borrowers, the existence and ownership of Industries has been adequately disclosed in footnotes. VI.24 Disclosure. Neither this Agreement nor any document or statement ---------- furnished to the Lender by or on behalf of any Borrower or in contemplation of this Agreement or in connection herewith contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein or therein not materially misleading. VII. AFFIRMATIVE AND NEGATIVE COVENANTS Each Borrower covenants that, so long as any of the Obligations remain outstanding or the Working Capital Commitment is in effect unless the Lender shall otherwise consent in writing: VII.1 Taxes and Other Obligations. Such Borrower shall, and shall cause --------------------------- each of its Subsidiaries to (a) file when due all tax returns and other reports which it is required to file (taking into account any allowed extensions), (b) pay, or provide for the payment, when due, of all taxes, fees, assessments and other governmental charges against it or upon its Property, income and franchises, make all required withholding and other tax deposits, and establish adequate reserves for the payment of all such items, and provide to the Lender, upon request, satisfactory evidence of its timely compliance with the foregoing and (c) pay when due all claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons, and all other indebtedness owed by it and perform and discharge in a timely manner all other obligations undertaken by it; provided, however, that such Borrower and its Subsidiaries -------- ------- need not pay any tax, fee, assessment, governmental charge, or Debt, or discharge any other obligation, that any of them is contesting in Good Faith by appropriate proceedings diligently pursued, and for which adequate reserves are maintained, so long as no Lien, other than a Permitted Lien, results from such non-payment. VII.2 Corporate Existence and Good Standing. Such Borrower shall, and ------------------------------------- shall cause each of its Subsidiaries to, maintain its corporate existence and its qualification and good standing in all states necessary to conduct its business and own its Property, and shall obtain and maintain all licenses, permits, franchises and governmental authorizations necessary to conduct its business and own its Property. 43 VII.3 Compliance with Law and Agreements. Such Borrower shall, and shall ---------------------------------- cause each of its Subsidiaries to, comply with the terms and provisions of each judgment, law, statute, rule, and governmental regulation applicable to it and each contract, mortgage, lien, lease, indenture, order, instrument, agreement, or document to which it is a party or by which it is bound, the failure to comply with which, whether considered individually or when aggregated with all other failures, is likely to have a material adverse effect on the ability of such Borrower to perform its obligations under this Agreement, or on the business, operations, properties or condition (financial or otherwise) of such Borrower, taken as a whole; provided, however, that such Borrower shall have the -------- ------- right to contest the imposition of such laws, rules, regulations, court orders, decrees and governmental agency orders if such contest is made in Good Faith and diligently pursued by proper proceedings, adequate reserves with respect thereto have been established in accordance with GAAP, and such contest could not reasonably be expected to have a material adverse affect on the ability of such Borrower to perform its obligations under this Agreement, or the business, operations, properties or condition (financial or otherwise) of such Borrower, taken as a whole. VII.4 Maintenance of Property. Such Borrower shall, and shall cause each ----------------------- of its Subsidiaries to, maintain all of its Property necessary and useful in its business in good operating condition and repair, ordinary wear and tear excepted. VII.5 Insurance. --------- (a) Such Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance against loss or damage by fire with extended coverage; public liability and third party property damage; and such other hazards or of such other types as is customary for Persons engaged in the same or similar business, as the Lender shall reasonably specify, in amounts, and under policies reasonably acceptable to the Lender. (b) Such Borrower shall cause the Lender to be named in each such policy as secured party or mortgagee and lender's loss payee or additional insured, as appropriate, in a manner acceptable to the Lender. Each policy of insurance shall contain a clause or endorsement requiring the insurer to give not less than thirty (30) days' prior written notice to the Lender in the event of cancellation of the policy for any reason whatsoever and a clause or endorsement stating that the interest of the Lender shall not be impaired or invalidated by any act or neglect of such Borrower, any of its Subsidiaries, or the owner of any premises for purposes more hazardous than are permitted by such policy. All premiums for such insurance shall be paid by the Borrowers or their Subsidiaries when due, and certificates of insurance and, if requested, photocopies of the policies shall be delivered to the Lender. If such Borrower fails to procure (or cause to be procured) such insurance or to pay (or cause to be paid) the premiums therefor when due, the Lender may (but shall not be required to) do so and such amounts shall be due and payable on demand. (c) Such Borrower shall promptly notify the Lender of any material loss, damage, or destruction to the Collateral or arising from its use, whether or not covered by insurance. In the absence of any Default or Events of Default, such Borrower shall have the right to determine, whether and to what extent such proceeds shall be used for repair or replacement. If, however, any Default or Event of Default shall be continuing, the Lender may determine, in its sole discretion, whether the proceeds shall be used for repair or replacement. If neither an Event of Default nor a Default exists, such Borrower or its Subsidiary, as the case may be, may negotiate a settlement regarding such proceeds with the applicable insurance company and the Lender shall forward such proceeds to the applicable Borrower. If, however, an Event of Default or a Default exists, the Lender shall collect the insurance proceeds directly and neither such Borrower nor its Subsidiary, as the case may be, shall enter into any settlement agreement with the applicable insurance company without the prior written consent of Lender, which consent shall not be unreasonably withheld. Any insurance proceeds paid to any Borrower not used to replace the property which suffered the casualty giving rise to the payment of such insurance proceeds within 180 days of receipt of such proceeds by such Borrower, shall be required to be paid to the Lender as a Mandatory Prepayment in accordance with Section 2.4(b). -------------- 44 (d) If an Event of Default shall exist, Lender may, and if a decision to not rebuild or replace is made, the Lender shall, apply the proceeds of insurance to the payment of the Obligations as set forth in Section 2.8(e). -------------- VII.6 Condemnation. Such Borrower shall, immediately upon learning of the ------------ institution of any proceeding for the condemnation or other taking of any of its Property or the Property of any of its Subsidiaries, which has a material and adverse effect on the operations of such Borrower, notify the Lender of the pendency of such proceeding. Any condemnation proceeds paid to any Borrower which have not been used to replace the property which was condemned within 180 days of receipt of such proceeds by such Borrower, shall be paid to the Lender and treated as a Mandatory Prepayment in accordance with Section 2.4(b). If an -------------- Event of Default shall exist at the time such Borrower receives any condemnation proceeds, Lender may require that all such condemnation proceeds be applied to the payment of the Obligations as set forth in Section 2.8(e). VII.7 Environmental, Health and Safety Laws. Such Borrower shall, and ------------------------------------- shall cause each of its Subsidiaries to, conduct its business in compliance in all material respects with all health and safety laws and Environmental Laws applicable to it, including, without limitation, those relating to the generation, handling, use, storage, and disposal of hazardous and toxic wastes and substances. Such Borrower shall, and shall cause each of its Subsidiaries to, take prompt and appropriate action to respond to any non-compliance with health and safety laws and Environmental Laws and shall regularly report to the Lenders on such response. Without limiting the generality of the foregoing, whenever such Borrower gives notice to the Lender pursuant to Section 5.3(g), -------------- such Borrower shall, at the Lender's request and such Borrower's expense (a) cause an independent environmental engineer acceptable to the Lender to conduct such tests of the site where the noncompliance or alleged non-compliance with Environmental Laws has occurred and prepare and deliver to the Lender a report setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof, and (b) provide to the Lender a supplemental report of such engineer whenever the scope of the environmental problems, or the response thereto or the estimated costs thereof, shall change. VII.8 ERISA. ----- (a) For each Plan adopted by such Borrower or any ERISA Affiliate, such Borrower or such ERISA Affiliate shall (i) use its best efforts to seek and receive a determination letter from the IRS that such Plan is qualified under Section 401(a) of the Code (unless such Plan is a master or prototype plan), and (ii) from and after the adoption of any such Plan, use its best efforts to cause such Plan to be qualified under Section 401(a) of the Code and to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code, and (iii) not take any action which would cause such Plan not to be qualified under Section 401(a) of the Code or not to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code. (b) Such Borrower shall not, and shall not permit any ERISA Affiliate, to: (i) Engage in any transaction for which an exemption is not available or has not been previously obtained from the DOL in connection with which such Borrower or any ERISA Affiliate could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or tax imposed by Section 4975 of the Code; (ii) Permit to exist any accumulated funding deficiency (whether or not waived), as defined in Section 302 of ERISA and Section 412 of the Code; (iii) Fail to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; 45 (iv) Fail to make any payments to any Multiemployer Plan which such Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; (v) Terminate or permit an ERISA Affiliate to terminate a Benefit Plan or withdraw or partially withdraw from, or permit an ERISA Affiliate to withdraw or partially withdraw from, any Multiemployer Plan and fail to pay any liability of such Borrower or an ERISA Affiliate under Title IV of ERISA; (vi) Fail to pay any required installment under subsection (m) of Section 412 of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment; or (vii) Amend a Benefit Plan resulting in an increase in current liability for the plan year such that such Borrower or an ERISA Affiliate is required to provide security to such Benefit Plan under Section 401(a)(29) of the Code. VII.9 Mergers, Consolidations or Sales. None of the Borrowers or any of -------------------------------- their Subsidiaries shall enter into any transaction of merger, reorganization, or consolidation, or transfer, sell, assign, lease, or otherwise dispose of all or any material part of its Property, or wind up, liquidate or dissolve, or agree to do any of the foregoing, except for sales of Equipment as otherwise permitted hereunder. VII.10 Restricted Junior Payments; Capital Change. None of the Borrowers ------------------------------------------ nor any of their Subsidiaries shall (a) directly or indirectly declare or make, or incur any liability to make, any Restricted Junior Payment, except dividends to a Borrower by a Subsidiary wholly owned by such Borrower or by one or more other Subsidiaries that are wholly owned by the Borrowers or (b) make any change in its capital structure which could adversely affect the repayment of the Obligations. VII.11 Transactions Affecting Collateral or Obligations. Neither such ------------------------------------------------ Borrower nor any of its Subsidiaries shall enter into any transaction which materially and adversely affects the Collateral or such Borrower's ability to repay the Obligations. VII.12 Guaranties. Neither such Borrower nor any of its Subsidiaries shall ---------- make, issue, or become liable on any Guaranty, except (a) Guaranties in favor of the Lender, (b) Guaranties by one Borrower of the obligations of another Borrower provided the incurrence of such obligations are otherwise permitted under this Agreement, and (c) a guaranty of the Canadian National Note given by Emons. VII.13 Debt. Neither such Borrower nor any Subsidiary shall incur or ---- maintain any Debt, other than: (a) the Obligations; (b) trade payables and contractual obligations to suppliers, customers and others incurred in the ordinary course of business; (c) Debt incurred to finance the purchase of Equipment constituting Capital Expenditures permitted by Section 7.21, so long ------------ as (i) the aggregate principal amount of such Debt incurred in any Fiscal Year (regardless of when the same becomes due and payable) shall be included in the determination of Capital Expenditures for such Fiscal Year for purposes of Section 7.21, (ii) the rate at which interest accrues on such Debt does not - ------------ exceed the market rate of interest for similar transactions at such time, and (iii) such Debt would not, after giving effect to such Debt on a pro forma basis, cause any Default or Event of Default; (d) with the Lender's prior written consent, not to be unreasonably withheld, no interest or low interest Debt incurred to any Governmental Authority to rehabilitate or construct railroad structures and related facilities and (e) other Debt existing on the Closing Date and reflected on Schedule 6.8 hereof. ------------ 46 VII.14 Prepayment. None of the Borrowers shall voluntarily prepay any ---------- Funded Indebtedness, except the Obligations in accordance with the terms hereof. VII.15 Transactions with Affiliates. Except as set forth below, neither ---------------------------- such Borrower nor any of its Subsidiaries shall sell, transfer, distribute, or pay any money or its Property, including, but not limited to, any fees or expenses of any nature (including, but not limited to, any fees or expenses for management services), to any Affiliate of any Borrower, or lend or advance money or its Property to any Affiliate of any Borrower, or invest in (by capital contribution or otherwise) or purchase or repurchase any stock or indebtedness, or any of its Property, of any Affiliate of any Borrower, or become liable on any Guaranty of the indebtedness, dividends, or other obligations of any Affiliate of any Borrower except (a) actual expenses incurred and approved in advance in writing by the Lender; (b) reimbursement of actual and reasonable out-of-pocket expenses incurred by employees or directors of the Borrowers in the ordinary course of the Borrowers' business; (c) Guaranties in favor of the Lender; (d) Guaranties with respect to any wholly owned Subsidiary of any Borrower or its Subsidiaries; (e) any transactions, consistent with past practices and intercompany indebtedness, among Emons, Finance, MPA, Logistics, MIT, Railroad Group, SLR, YKR or any other entity which becomes a subsidiary of a Borrower, provided that the capital stock of such entity is pledged to the Lender as collateral security for the performance of the Obligations and such subsidiary becomes a borrower under this Agreement, and (f) any payments due from any Borrower to another Borrower in accordance with the terms of any tax sharing agreement by and among the Borrowers as in effect on the date hereof. VII.16 Business Conducted. Such Borrower and its Subsidiaries shall not ------------------ engage, directly or indirectly, in any line of business other than the businesses in which such Borrower is engaged on the Closing Date. VII.17 Liens. Neither such Borrower nor any of its Subsidiaries shall ----- create, incur, assume, or permit to exist any Lien on any Property now owned or hereafter acquired by any of them, except Permitted Liens. VII.18 Sale and Leaseback Transactions. Neither such Borrower nor any ------------------------------- of its Subsidiaries shall directly or indirectly, enter into any arrangement with any Person providing for such Borrower or a Subsidiary to lease or rent Property that such Borrower or a Subsidiary has or will sell or otherwise transfer to such Person. VII.19 New Subsidiaries. Such Borrower shall not, directly or ---------------- indirectly, organize or acquire any Subsidiary unless such Subsidiary becomes a Borrower under this Agreement and such Borrower shall have pledged the stock of such Subsidiary as collateral to secure the Obligations. VII.20 Restricted Investments. Neither the Borrower nor any of its ---------------------- Subsidiaries shall make any Restricted Investment other than (a) acquisitions of assets and operations of similar businesses provided the aggregate purchase price for such acquisitions does not exceed $2,500,000 in the aggregate during the term of this Agreement, provided that after giving effect to such acquisitions no Default or Event of Default exists, (b) intercompany transactions permitted under Section 7.15(e) and (c) capital contributions by Emons to Finance from time to time. VII.21 Capital Expenditures. Neither such Borrower nor any of its -------------------- Subsidiaries shall make or incur any Capital Expenditure if, after giving effect thereto, the aggregate amount of all Capital Expenditures by all Borrowers and their Subsidiaries on a consolidated basis would exceed $1,600,000 during each Fiscal Year through June 30, 2001, $1,700,000 for the Fiscal Year ending June 30, 2002, $1,800,000 for the Fiscal Year ending June 30, 2003, and $1,900,000 for the Fiscal Year ending June 30, 2004; in each case, net of any Capital Expenditures funded with grants provided by a Governmental Authority or Debt permitted under Section 7.13(d). 47 VII.22 Change of Deposit Accounts. Such Borrower shall not establish -------------------------- any deposit account, other than those deposit accounts described on Schedule 4.8 ------------ attached hereto and incorporated herein by this reference, with any bank or other financial institution, unless such Borrower shall have (i) notified the Lender thereof in writing at least ten (10) days prior thereto and (ii) delivered a Collection Account Agreement or similar agreement to the Lender covering such account; provided, however, that Finance may maintain an operating -------- ------- account with Corestates Bank in Wilmington, Delaware provided that the amount on deposit at any time does not exceed $15,000. VII.23 Minimum Fixed Charge Coverage Ratio. The Borrowers and their ----------------------------------- consolidated Subsidiaries on a combined and consolidated basis shall at all times maintain a Fixed Charge Coverage Ratio, as determined as of the last day of each fiscal quarter during the applicable Fiscal Year set forth below for the twelve month period ending on such day, of at least the ratio set forth opposite the applicable period below:
Fiscal Year Minimum Ratio ----------- ------------- 1998 1.00 to 1.00 1999 1.05 to 1.00 2000 1.20 to 1.00 2001 and thereafter 1.25 to 1.00
VII.24 Maximum Debt to Cash Flow Ratio. The Borrowers and their ------------------------------- Subsidiaries on a combined and consolidated basis shall at all times maintain a Debt to Cash Flow Ratio of at least the ratio set out below opposite the Fiscal Year in which the applicable determination date falls:
Determination Date Occurring in the Fiscal Year Maximum Ratio ---------------------------- ------------- 1998 4.25 to 1.00 1999 3.50 to 1.00 2000 3.00 to 1.00 2001 2.25 to 1.00 Thereafter 2.00 to 1.00
VII.25 Minimum Tangible Net Worth. The Borrowers and their -------------------------- Subsidiaries on a combined and consolidating basis shall at all times maintain Tangible Net Worth as determined as of the last day of each calendar quarter, of at least $5,113,033 plus 50% of positive net income of the Borrowers accrued after the Closing Date until such date of determination. VII.26 Interest Expense Hedging Arrangements. Not later than ------------------------------------- September 30, 1997, the Borrowers shall enter into and cause to be maintained an Interest Rate Contract, including an interest rate cap or similar interest expense hedging arrangement with a financial institution having assets of at least One Hundred Million Dollars ($100,000,000) and otherwise acceptable to the Lender with respect to a notional principal amount of at least one half of the Available Term Loan Amount at such time which effectively caps the Eurodollar Rate applicable to the Term Loan at a rate not greater than 8% per annum, and promptly provide the Lender with written notification that such arrangement is in place, including the details of such arrangement and the name of the counter-parties. Upon Lender's request, Borrower shall promptly provide Lender with a true copy of such Interest Rate Contract. Nothing in this Section 7.26 shall require the Borrowers to purchase an Interest Rate ------------ Contract from the Lender or one of its Affiliates or require the Lender or any of its Affiliates to provide such an Interest Rate Contract. VII.27 Corporate Governance. Each of Industries and Finance shall: -------------------- 48 (a) Maintain its own corporate books, records and accounts separate and apart from the corporate books, records and accounts of any other Borrower; (b) Act solely in its corporate name and solely through its board of directors and its duly authorized officers and agents; (c) Refrain from holding out to creditors that it is a division of any other Borrower; (d) Refrain from using the letterhead of any other Borrower in the conduct of its business; (e) Prepare its own budgets and financial statements, separate and apart from any other Borrower provided, however, that if any such -------- ------- financial statements are prepared on a consolidated basis, such financial statements shall clearly disclose that none of the assets of a Borrower will be available to satisfy or pay the obligations of any other Borrower except as expressly provided by contract; (f) Maintain its own bank accounts, separate and distinct from the bank accounts of any other Borrower or any Affiliate, and refrain from commingling its funds and/or other property with the funds and/or other property of any other Borrower or any Affiliate; (g) Cause all corporate formalities to be observed, including, without limitation, (i) the preparation of appropriate corporate resolutions authorizing each material transaction in which it engages, if such resolutions are appropriate, (ii) the holding of separate and distinct Board of Directors meetings from meetings of the Board of Directors of any other Borrower and the meetings of the board of directors of any Affiliate, and (iii) the holding of separate and distinct annual shareholders' meetings from the annual shareholders' meetings of any other Borrower and the annual shareholders' meetings of any Affiliate; (h) Be at all times adequately capitalized so as to be able to conduct its business; and (i) Refrain from paying its expenses using funds or other property of any other Borrower or any Affiliate other than its pro rata share of common expenses allocated on a fair and equitable basis. VII.28 Operating Leases. Neither such Borrower nor any Subsidiary shall ---------------- incur or continue obligations for operating leases which, when aggregated with the obligations for operating leases of all of the Borrowers and their Subsidiaries, exceeds at any time outstanding $10,000,000 calculated as at the end of each Fiscal Year on a present value basis for the term of such obligations remaining in excess of one year from the date of determination, discounted at a rate of 8.5%. The calculation of operating lease obligations shall be net of obligations under operating leases which are subject to subleases where the applicable sublessee has a credit profile satisfactory to Lender and assumes all obligations of the applicable Borrower under such operating leases. VIII. CONDITIONS OF LENDING AND ISSUING LETTERS OF CREDIT VIII.1 Conditions Precedent to Making of Loans and the Issuance of ----------------------------------------------------------- Letters of Credit. The obligation of the Lender to make the initial Loans and - ----------------- issue the initial Letters of Credit is subject to the following conditions precedent having been satisfied in a manner satisfactory to the Lender: (a) The Borrowers shall have performed and complied with all covenants, agreements and conditions contained herein which are required to be performed or complied with by the Borrowers before or on the Funding Date for the Term Loan and any Working Capital Loans initially requested by Borrowers or the issuance of any Letters of Credit initially requested by Borrowers (including, without limitation, the execution and deliver of the Term Note and the Working Capital Note). 49 (b) The Lender shall have received a certificate dated the Closing Date and signed by the president or a vice president and the chief financial officer or treasurer of each Borrower certifying that the conditions specified in this Section 8.1 have been fulfilled. ----------- (c) The Borrower shall have caused all items on the List of Closing Documents attached hereto and made a part hereof as Exhibit H which --------- are not elsewhere identified in this Article VIII, to be delivered to the ------------ Lender, all such items to be in form and substance satisfactory to the Lender, and to be executed by all parties thereto when the nature of such items so requires. (d) All proceedings taken in connection with the execution of this Agreement, the Notes, all other Loan Documents and all documents and papers relating thereto shall be satisfactory to the Lender. The Lender shall have received copies of such documents and papers as the Lender may reasonably request in connection therewith, all in form and substance satisfactory to the Lender. (e) The Borrowers shall have paid to the Lender the Closing Fee as well as all costs and expenses incurred as of the Closing Date which the Borrowers are obligated to pay pursuant to the terms of Section 12.7 ------------ hereof. The acceptance by any Borrower of any Loan made on the Closing Date shall be deemed to be a representation and warranty made by such Borrower to the effect that all of the conditions to the making of such Loan set forth in this Section ------- 8.1 have been satisfied, with the same effect as delivery to the Lender of a - --- certificate signed by the president and chief financial officer of such Borrower, dated the Closing Date, to such effect. VIII.2 Conditions Precedent to Each Loan and the Issuance of Each ---------------------------------------------------------- Letter of Credit. The obligation of the Lender to make each Loan including the - ---------------- initial Loans on the Closing Date or issue any Letter of Credit, shall be subject to the satisfaction of further conditions precedent that on the date of any such extension of credit: (a) With respect to a request for Working Capital Loans, the Borrower shall be in compliance with Section 5.2(i) (and for the initial funding, Lender shall have received a Borrowing Base Certificate as of July 31, 1997) and a duly executed Notice of Borrowing, or telecopy or telex notice in lieu thereof, as and when required pursuant to Section 2.3(a); -------------- and (b) the following statements shall be true, and the acceptance by any Borrower of any extension of credit shall be deemed to be a statement to the effect set forth in clauses (i) and (ii), with the same ----------- ---- effect as the delivery to the Lender of a certificate signed by the president and chief financial officer of each Borrower, dated the date of such extension of credit, stating that: (i) The representations and warranties contained in this Agreement and the other Loan Documents are correct in all material respects on and as of the date of such extension of credit as though made on and as of such date, subject only to such exceptions as are not material and adverse to Lender, except to the extent that the Lender has been notified by a Borrower that any representation or warranty is not current or correct and has explicitly waived such representation or warranty; and (ii) No event has occurred and is continuing, or would result from such extension of credit, which constitutes a Default or an Event of Default; and (c) the Lender shall have received such other approvals, opinions or documents as it may reasonably request in Good Faith. 50 IX. DEFAULT; REMEDIES IX.1 Events of Default. It shall constitute an event of default ----------------- ("Event of Default") if any one or more of the following shall occur for any ---------------- reason: (a) any failure to pay the principal of or interest or premium on any of the Obligations (including, without limitation, the Reimbursement Obligations) when due, whether upon demand or otherwise; (b) any representation or warranty made by any Borrower in this Agreement, any of the other Loan Documents, any financial statement, or any certificate furnished by such Borrower or any Subsidiary at any time to the Lender shall prove to be untrue in any material respect as of the date on which made; (c) any failure by any of the Borrowers to comply with any of the covenants set forth in Article VII of this Agreement except for the ----------- covenants set forth in Sections 7.1, 7.2, 7.3, 7.4, 7.7 and 7.8; ------------ --- --- --- --- --- (d) any failure by any Borrower to comply with any of the other covenants and agreements contained in this Agreement (including, without limitation, Sections 7.1, 7.2, 7.3, 7.4, 7.7 and 7.8), the other Loan ------------ --- --- --- --- --- Documents, or any other agreement entered into at any time to which any Borrower or any Subsidiary and the Lender are party, for more than twenty (20) days after notice of such failure by the Lender to such Borrower; provided, however, that no such grace period shall apply, and an Event -------- ------- of Default shall exist promptly upon such failure to comply, if such failure to comply may not, in the Lender's reasonable determination, be cured by such Borrower during such grace period; or if any such agreement, instrument or document shall terminate (other than in accordance with its terms or the terms hereof or with the written consent of the Lender) or become void or unenforceable without the written consent of the Lender; (e) default shall occur with respect to any Debt for borrowed money or any indebtedness for borrowed money of any Subsidiary (other than the Obligations) in an outstanding principal amount in excess of $100,000 or under any agreement or instrument under or pursuant to which any such Debt or indebtedness may have been issued, created, assumed, or guaranteed by any Borrower or any Subsidiary, and such default shall continue for more than the period of grace, if any, therein specified, if the effect thereof (with or without the giving of notice or further lapse of time or both) is to accelerate, or to permit the holders of any such Debt or indebtedness to accelerate, the maturity of any such Debt; or any such Debt or indebtedness shall be declared due and payable or be required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; (f) any Borrower or any Subsidiary shall (i) file a voluntary petition in bankruptcy or file a voluntary petition or an answer or otherwise commence any action or proceeding seeking reorganization, arrangement or readjustment of its debts or for any other relief under the federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency act or law, state or federal, now or hereafter existing, or consent to, approve of, or acquiesce in, any such petition, action or proceeding; (ii) apply for or acquiesce in the appointment of a receiver, assignee, liquidator, sequestrator, custodian, trustee or similar officer for it or for all or any part of its Property; (iii) make an assignment for the benefit of creditors; (iv) take any corporate action in furtherance of any of the foregoing or (v) be unable generally to pay its debts as they become due; (g) an involuntary petition shall be filed or an action or proceeding otherwise commenced seeking reorganization, arrangement or readjustment of any Borrower's or any Subsidiary's debts or for any other relief under the federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency act or law, state or federal, now or hereafter existing and such petition, action or proceeding is not dismissed within sixty (60) days thereafter; 51 (h) a receiver, assignee, liquidator, sequestrator, custodian, trustee or similar officer for any Borrower or any Subsidiary or for all or any part of their Property shall be appointed; or a warrant of attachment, execution or similar process shall be issued against any part of the Property of any Borrower or any Subsidiary; (i) any Borrower or any Subsidiary shall file a certificate of dissolution under applicable state law or shall be liquidated, dissolved or wound-up or shall commence or have commenced against it any action or proceeding for dissolution, winding-up or liquidation, or shall take any corporate action in furtherance thereof; (j) all or any material part of the Property of any Borrower or any Subsidiary shall be nationalized, expropriated or condemned, seized or otherwise appropriated, or custody or control of such Property or of any Borrower or any Subsidiary shall be assumed by any Governmental Authority or any court of competent jurisdiction at the instance of any Governmental Authority, except where contested in Good Faith by proper proceedings diligently pursued where a stay of enforcement is in effect; (k) any guaranty of, subordination to, or security for, the Obligations shall be terminated, revoked or declared void or invalid; (l) one or more final judgments for the payment of money aggregating in excess of $100,000 shall be rendered against any Borrower which is not discharged in full or stayed within thirty (30) days from the date of entry thereof unless such judgments are (i) covered by such Borrower's liability insurance as confirmed in writing by the insurance company carrying such insurance, or (ii) the subject of an obligation of any Person (other than a Borrower or any Affiliate of any Borrower) to indemnify such Borrower against whom such judgment is rendered provided the -------- terms of such indemnification and the creditworthiness of the indemnitor are satisfactory to the Lender in its sole discretion; (m) any event occurs which materially and adversely affects the operations and financial condition of the Borrowers taken as a whole; or (n) any Environmental Lien shall attach to any Property of any Borrower or any Borrower or any Subsidiary becomes subject to any liabilities, costs, expenses, damages, fines or penalties, which is likely to have a material adverse effect on the financial condition of the Borrowers taken as a whole, arising out of or relating to (i) the release at any location of any Contaminant into the environment, or the incurrence of remediation costs in response thereto, or (ii) any violation of any Environmental Laws. IX.2 Remedies. -------- (a) If an Event of Default exists, the Lender may without notice to or demand on any Borrower, do one or more of the following at any time or times and in any order: (i) reduce the amount of the Working Capital Commitment, and (ii) restrict the amount of or refuse to make Working Capital Loans. If an Event of Default exists, the Lender may, without notice to or demand on any Borrower, do one or more of the following, in addition to the actions described in the preceding sentence, at any time or times and in any order: (i) terminate the Working Capital Commitment and (ii) declare any or all Obligations to be immediately due and payable (provided, however that upon the occurrence of any Event of Default -------- ------- described in Sections 9.1(f), 9.1(g), 9.1(h), or 9.1(i), all Obligations --------------- ------ ------ ------ shall automatically become immediately due and payable without notice or demand of any kind); and (iii) pursue its other rights and remedies under the Loan Documents and applicable law. 52 (b) If an Event of Default exists: (i) the Lender shall have, in addition to all other rights, the rights and remedies of a secured party under the UCC; (ii) the Lender may, at any time, take possession of the Collateral and keep it on one of the Borrowers' premises, at no cost to the Lender, or remove any part of it to such other place or places as the Lender may desire, or each Borrower shall, upon the Lender's demand, at the Borrowers' cost, assemble the Collateral and make it available to the Lender at a place reasonably convenient to the Lender; and (iii) the Lender may sell and deliver any Collateral at public or private sales, for cash, upon credit or otherwise, at such prices and upon such terms as the Lender deems advisable, in its sole discretion, and may, if the Lender deems it reasonable, postpone or adjourn any sale of the Collateral by an announcement at the time and place of sale or of such postponed or adjourned sale without giving a new notice of sale. Without in any way requiring notice to be given in the following manner, each Borrower agrees that any notice by the Lender of sale, disposition or other intended action hereunder or in connection herewith, whether required by the UCC or otherwise, shall constitute reasonable notice to each Borrower if such notice is mailed by registered or certified mail, return receipt requested, postage prepaid, or is delivered personally against receipt, at least five (5) days prior to such action to each Borrower's address specified in or pursuant to Section 12.8. If any Collateral is sold on terms other than ------------ payment in full at the time of sale, no credit shall be given against the Obligations until the Lender receives payment, and if the buyer defaults in payment, the Lender may resell the Collateral without further notice to any Borrower. In the event the Lender seeks to take possession of all or any portion of the Collateral by judicial process, each Borrower irrevocably waives: (i) the posting of any bond, surety or security with respect thereto which might otherwise be required; (ii) any demand for possession prior to the commencement of any suit or action to recover the Collateral; and (iii) any requirement that the Lender retain possession and not dispose of any Collateral until after trial or final judgment. Each Borrower agrees that the Lender has no obligation to preserve rights to the Collateral or marshall any Collateral for the benefit of any Person. The Lender is hereby granted a license or other right to use, without charge, each Borrower's labels, patents, copyrights, name, trade secrets, trade names, trademarks, and advertising matter, or any similar property, in completing production of, advertising or selling any Collateral, and each Borrower's rights under all licenses and all franchise agreements shall inure to the Lender's benefit. The proceeds of sale shall be applied by Lender against the principal and/or interest of any Loans and/or any other Obligations, whether or not then due, in such order of application as the Lender may determine. The Lender will return any excess to the Borrowers or such other Person as shall be legally entitled thereto and the Borrowers shall remain liable for any deficiency. (c) After the occurrence and during the continuance of an Event of Default, the Borrowers hereby waive all rights to notice and hearing prior to the exercise by the Lender of the Lender's rights to repossess the Collateral without judicial process or to replevy, attach or levy upon the Collateral without notice or hearing. X. TERMINATION This Agreement shall terminate at such time as all of the Obligations have been indefeasibly paid and satisfied in full and the Working Capital Commitment shall have been terminated, unless earlier terminated as provided herein. XI. AMENDMENTS; ASSIGNMENTS; SUCCESSORS 53 XI.1 Amendments and Waivers. No amendment or modification of any ---------------------- provision of this Agreement shall be effective without the written agreement of the Lender and the Borrowers, and no termination or waiver of any provision of this Agreement, or consent to any departure by any Borrower therefrom, shall in any event be effective without the written concurrence of the Lender, which the Lender shall have the right to grant or withhold at its sole discretion. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any Borrower in any case shall entitle such Borrower to any other or further notice or demand in similar or other circumstances. XI.2 Assignments; Participations. --------------------------- (a) With the consent of the Borrowers which will not be unreasonably withheld or delayed, the Lender shall have the right at any time to assign to one or more commercial banks or other financial institutions all or a portion of its Working Capital Commitment, the Loans owing to it and Term Note held by it. The Lender may also grant participations in all or any part of its rights and obligations under this Agreement (including, without limitation, all or any part of the Working Capital Commitment and the Loans, as applicable) to one or more other Persons; provided, however, that (i) any such disposition shall not, -------- ------- without the consent of the Borrower, require the Borrower to file a registration statement with the Securities and Exchange Commission or apply to qualify the Loans under the blue sky law of any state; and (ii) Lender shall make and receive all payments for the account of its participant and shall retain exclusively, and shall continue to exercise exclusively, all rights of approval and administration available hereunder with respect to the Working Capital Commitment and the Loans even after giving effect to the sale of any such participation, and Lender shall make such arrangements with its participants as may be necessary to accomplish the foregoing. No holder of a participation in all or any part of the Loans shall be a "lender" for any purpose under this Agreement; provided, however, that each -------- ------- holder of a participation shall have the rights of increased capital as the Lender (including any right to receive payment) under Sections 2.7, 3.7 and -------- --- --- 12.7; provided, further, that all requests for any such payments shall be ---- -------- ------- made by a participant through the Lender. The right of each holder of a participation to receive payment under Sections 2.7, 3.7 and 12.7 and shall ------------ --- ---- be limited to the lesser of (i) the amounts actually incurred by such holder for which payment is provided under such Sections and (ii) the amounts that would have been payable under such Sections by the Borrowers to the Lender granting the participation to such holder had such participation not been granted. (b) It is expressly agreed that, in connection with prospective offers for the sale and transfer of any assignment or any participation pursuant to this Section 11.2, Lender may provide to such prospective ------------ assignees and participants such information pertaining to any Borrower as Lender may deem appropriate provided that, prior to any such disclosure of -------- non-public information, such proposed assignee or participant shall agree in writing (under the same terms and conditions outlined in Section 12.15 ------------- hereof) to preserve the confidentiality of any confidential information relating to the Borrowers received by it from the Lender. (c) Notwithstanding the foregoing provisions of this Section 11.2, Lender may at any time sell, assign, transfer, or negotiate ------------ all or any part of its rights and obligations under this Agreement to any Affiliate of Lender. (d) This Agreement and the other Loan Documents shall be binding upon the parties hereto and their respective successors and assigns (including, without limitation, a receiver, trustee or debtor-in-possession of any Borrower) and shall inure to the benefit of the parties hereto and the successors and permitted assigns of the Lender. In the event of any such transfer or assignment, the rights and privileges conferred upon the Lender shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. Neither the Borrowers' rights nor any interest therein hereunder may be assigned without the written consent of the Lender. 54 XII. MISCELLANEOUS XII.1 Cumulative Remedies; No Prior Recourse to Collateral. The ---------------------------------------------------- enumeration herein of the Lender's rights and remedies is not intended to be exclusive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies that the Lender may have under the UCC or other applicable law. The Lender shall have the right, in its sole discretion, to determine which rights and remedies are to be exercised and in which order. The exercise of one right or remedy shall not preclude the exercise of any others, all of which shall be cumulative. The Lender may, without limitation, proceed directly against any Borrower to collect the Obligations without any prior recourse to the Collateral. XII.2 No Implied Waivers. No act, failure or delay by the Lender shall ------------------ constitute a waiver of any of its rights and remedies. No single or partial waiver by the Lender of any provision of this Agreement or any other Loan Document, or of breach or default hereunder or thereunder, or of any right or remedy which the Lender may have, shall operate as a waiver of any other provision, breach, default, right or remedy or of the same provisions, breach, default, right or remedy on a future occasion. No waiver by the Lender shall affect its rights to require strict performance of this Agreement. XII.3 Severability. If any provision of this Agreement shall be ------------ prohibited or invalid, under applicable law, it shall be ineffective only to such extent, without invalidating the remainder of this Agreement. XII.4 Governing Law; Choice of Forum; Service of Process; Jury Trial -------------------------------------------------------------- Waiver. - ------ (a) THIS AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS. (b) SUBJECT ONLY TO THE EXCEPTION IN THE NEXT SENTENCE, EACH BORROWER AND THE LENDER HEREBY AGREE TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL COURT OF THE NORTHERN DISTRICT OF ILLINOIS AND WAIVE ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN, AND AGREE THAT ANY DISPUTE CONCERNING THE RELATIONSHIP BETWEEN THE LENDER AND ANY BORROWER OR THE CONDUCT OF ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR OTHERWISE SHALL BE HEARD ONLY IN THE COURTS DESCRIBED ABOVE. NOTWITHSTANDING THE FOREGOING THE LENDER SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION THE LENDER DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR OTHER SECURITY FOR THE OBLIGATIONS. (c) EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO SUCH BORROWER AT ITS ADDRESS SET FORTH IN SECTION 12.8 AND SERVICE SO MADE SHALL BE DEEMED ------------ TO BE COMPLETED FIVE (5) DAYS AFTER THE SAME SHALL HAVE BEEN SO DEPOSITED IN THE U.S. MAILS. EACH BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID. 55 (d) EACH OF THE BORROWERS AND THE LENDER HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (I) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR (II) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM IN RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED, IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. THE LENDER AND EACH BORROWER HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) NOTHING IN THIS SECTION 12.4 SHALL AFFECT THE RIGHT OF THE ------------ LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. XII.5 Survival of Representations and Warranties. All of the ------------------------------------------ Borrowers' representations, and warranties contained in this Agreement shall survive the execution, delivery, and acceptance thereof by the parties, notwithstanding any investigation by the Lender or any of its respective agents. XII.6 Other Security and Guaranties. The Lender, may, without notice ----------------------------- or demand and without affecting any Borrower's obligations hereunder, from time to time: (a) take from any Person and hold collateral (other than the Collateral) for the payment of all or any part of the Obligations and exchange, enforce or release such collateral or any part thereof; and (b) accept and hold any endorsement or guaranty of payment of all or any part of the Obligations and release or substitute any Borrower or any such endorser or guarantor, or any Person who has given any Lien in any other collateral as security for the payment of all or any part of the Obligations, or any other Person in any way obligated to pay all or any part of the Obligations. 56 XII.7 Fees and Expenses. The Borrowers shall pay to the Lender on demand ----------------- all costs and expenses that Lender pays or incurs in connection with the negotiation, preparation, consummation, administration, enforcement, and termination of this Agreement and the other Loan Documents, including, without limitation: (a) reasonable attorneys' and paralegals' fees and disbursements of counsel to the Lender and any Participating Lender; (b) reasonable costs and expenses (including reasonable attorneys' and paralegals' fees and disbursements) for any amendment, supplement, waiver, consent, or subsequent closing in connection with the Loan Documents and the transactions contemplated thereby; (c) costs and expenses of lien and title searches; (d) taxes, fees and other charges for recording any mortgages, filing financing statements and continuations, and other actions to perfect, protect, and continue the Lender's Liens; (e) sums paid or incurred to pay any amount or take any action required of any Borrower under the Loan Documents that any Borrower fails to pay or take; (f) reasonable costs of inspections, and verifications of the Collateral, including, without limitation, due diligence appraisals, travel, lodging, and meals for inspections of the Collateral and any Borrower's operations by the Lender's agents up to one (1) time during any Fiscal Year and whenever an Event of Default exists; (g) costs and expenses (which shall not exceed the Lender's costs and expenses customarily charged to other customers) of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Concentration Account; (h) costs and expenses of preserving and protecting the Collateral; and (i) costs and expenses (including attorneys' and paralegals' fees and disbursements) paid or incurred to obtain payment of the Obligations, enforce the Lender's Liens, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents, or to defend any claims made or threatened against the Lender arising out of the transactions contemplated hereby (including without limitation, preparations for and consultations concerning any such matters). The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid by the Borrowers. All of the foregoing costs and expenses may be paid as described in Section 2.8(b). -------------- XII.8 Notices. Except as otherwise provided herein, all notices, demands ------- and requests that any party is required or elects to give to any other party shall be in writing, or by a telecommunications device capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, (b) on the Business Day following the Business Day on which it was delivered to an overnight mail or courier service with charges prepaid, (c) five (5) days after it shall have been mailed by United States mail, first class, certified or registered, with postage prepaid, or (d) in the case of notice by such a telecommunications device upon acknowledgement of receipt when properly transmitted, in each case addressed with respect to each party as set forth below: If to the Lender: LaSalle National Bank 135 South LaSalle Street Chicago, Illinois 60603 Attn: Terri Maurer Telephone: 312-904-5482 Telecopy: 312-606-8423 with a copy to: Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606-6404 Attention: Victoria A. Gilbert, Esq. Telephone: 312-876-8000 Telecopy: 312-876-7934 If to any Borrower: c/o Emons Transportation Group, Inc. 96 South George Street York, Pennsylvania 17401 Attention: Scott F. Ziegler Telephone: 717-771-1718 Telecopy: 717-854-6275 57 with a copy to: Anderson Kill & Olick 1251 Avenue of the Americas New York, N.Y. 10020-1182 Attention: Michael W. Stamm, Esq. Telephone: 212-278-1000 Telecopy: 212-278-1733 or to such other address as each party may designate for itself by like notice. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall not adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. Any notices, demands or consents required or permitted to be given to or by the Borrowers will be valid and binding on all Borrowers if given to or by, as the case may be, Emons. XII.9 Indemnity. The Borrowers agree to (a) reimburse the Lender for any --------- costs and expenses (including, without limitation, reasonable attorneys' and paralegals' fees and expenses) incurred by the Lender in defending any suit brought against it by any Borrower or any other Person in connection with the transactions contemplated by this Agreement or the Loan Documents, and (b) indemnify and hold the Lender, and its officers, directors, employees, attorneys and agents (collectively, the "Indemnitees") harmless from and against any and ----------- all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever incurred by the Indemnitees, whether direct, indirect or consequential, as a result of or arising from or relating to any proceeding by any Person, whether threatened or initiated, asserting any claim for legal or equitable remedy against any Person under any statute or regulation (including, without limitation, any federal or state securities or commercial laws or under any common law or equitable cause or otherwise, including any liability and costs under Environmental Laws or common law principles arising from or in connection with the past, present or future operations of the Borrowers or their predecessors in interest, or the past, present or future environmental condition of the Borrowers' Property, the presence of asbestos-containing materials at or on such Property, or the release or threatened release of any contaminant into the environment from such Property), in any way arising from or in connection with the negotiation, preparation, execution, delivery, enforcement, performance and administration of this Agreement or any other document executed in connection herewith, provided that the Borrowers shall have no obligation -------- hereunder with respect to indemnified liabilities arising from the gross negligence or willful misconduct of any Indemnitee seeking such indemnification. To the extent that the indemnity set forth in this Section 12.9 may be ------------ unenforceable because it is violative of any law or public policy, Borrowers shall pay the maximum portion which it is permitted to pay under applicable law. Any Indemnitee will promptly notify the Borrowers of the commencement of any legal proceeding which may give rise to any indemnified liability under the foregoing indemnity and shall permit the Borrowers to participate in the defense of such Indemnitee in any such proceeding. The foregoing indemnity shall survive the payment of the Obligations and the termination of this Agreement. All of the foregoing fees, costs and expenses shall be part of the Obligations, payable upon demand, and secured by the Collateral. XII.10 Waiver of Notices. Unless otherwise expressly provided herein, ----------------- each Borrower waives presentment, protest and notice of demand or dishonor and protest as to any instrument, as well as any and all other notices to which it might otherwise be entitled. No notice to or demand on any Borrower which the Lender may elect to give shall entitle such Borrower to any or further notice or demand in the same, similar or other circumstances. XII.11 Counterparts. This Agreement may be executed in any number of ------------ counterparts, and by the Lender and each of the Borrowers in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. XII.12 Captions. The captions contained in this Agreement are for -------- convenience only, are without substantive meaning and should not be construed to modify, enlarge, or restrict any provision. 58 XII.13 Contribution. To the extent that any Borrower shall, under the ------------ terms of this Agreement or any Note or any other Loan Document, make a payment of a portion of the Obligations which, taking into account all other concurrent payments of the Obligations by the Borrowers collectively, shall exceed the amount which such Borrower has actually received under the Credit Facilities or would have otherwise paid if each Borrower had paid the aggregate Obligations satisfied by such payments in the same proportion as such Borrower's Net Worth immediately prior to such payments bore to the aggregate amount of all the Borrowers' Net Worth immediately prior to such payment; then such Borrower shall be entitled to contribution from, and be reimbursed by, the other Borrowers for the amount of such excess, prorata based on their respective Net Worth immediately prior to such payment. This agreement regarding contribution is intended to define the relative rights of the Borrowers, and nothing set forth in this Section 12.13 is intended to or shall impair the obligations of the ------------- Borrowers, jointly and severally, to pay the Obligations as and when the same shall become due and payable in accordance with this Agreement and the Notes. XII.14 Joint and Several Liability. All obligations of the Borrowers under --------------------------- this Agreement and under the Notes shall be joint and several obligations of the Borrowers. Each Borrower shall be liable for the full amount of the Obligations with the rights of contribution and reimbursement against the other Borrowers under Section 12.13. ------------- XII.15 Confidentiality. The Lender hereby agrees that it will use --------------- reasonable efforts to keep confidential any information from time to time supplied to it by any Borrower under this Agreement unless such information was already known to the Lender on a nonconfidential basis at the time it was received or was obtained from a third party on a nonconfidential basis, or was, is or becomes publicly available; provided, however, that nothing herein shall -------- ------- affect the disclosure of any such information to: (a) the extent required by statute, rule, regulation or judicial process; (b) provided that all such persons agree to keep such information confidential in accordance with this Section 12.15 (i) counsel for the Lender or to its accountants; (ii) bank examiners and auditors; and (iii) any transferee or prospective transferee of any Note; or (c) any other Person in connection with any litigation to which the Lender is a party; provided, further, that the Lender hereby agrees that it will -------- ------- notify the Borrowers in writing of any request for information under clauses (a) and (c) above or with respect to any other request for information not enumerated in this Section 12.15 at least five (5) Business Days before ------------- complying with any such request, unless such notice is specifically prohibited by applicable law, court order or governmental authority. If the terms of any request for information subject to the last proviso of the preceding sentence do not provide a reasonably sufficient time to give the Borrowers five (5) Business Days' notice, the Lender will use its best efforts to seek additional time for compliance in order to permit such notice and in any event will notify the Borrowers of such request as soon as practicable. 59 IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. EMONS TRANSPORTATION GROUP, INC. By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ EMONS INDUSTRIES, INC. By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ MARYLAND AND PENNSYLVANIA RAILROAD COMPANY By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ EMONS LOGISTICS SERVICES, INC. By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ MAINE INTERMODAL TRANSPORTATION, INC. By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ EMONS RAILROAD GROUP, INC. By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ YORKRAIL, INC. By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ 60 ST. LAWRENCE & ATLANTIC RAILROAD COMPANY By: /s/ Scott F. Ziegler -------------------------------------------- Title: VP - Finance, Controller & Secretary ------------------------------------ EMONS FINANCE CORP. By: /s/ Amy S. Weaver -------------------------------------------- Title: President ------------------------------------ LASALLE NATIONAL BANK By: /s/ Terri A. Maurer -------------------------------------------- Title: Vice President ------------------------------------ 61
EXHIBITS -------- EXHIBIT A - Form of Borrowing Base Certificate EXHIBIT B - Form of Notice of Borrowing EXHIBIT C - INTENTIONALLY OMITTED EXHIBIT D - Form of Term Note EXHIBIT E - Form of Working Capital Note EXHIBIT F - Form of Notice of Conversion EXHIBIT G - Form of Collection Account Agreement EXHIBIT H - List of Closing Documents SCHEDULES --------- 1.1 - Permitted Liens 4.4 - List of Collateral Locations 4.8 - List of Collection Accounts 4.9 - List of Rolling Stock 6.4 - List of Prior Names 6.5 - Subsidiaries and Affiliates 6.7 - Capitalization 6.8 - Debt 6.9 - Leases; Real Property 6.10 - Proprietary Rights 6.11 - List of Trade Names 6.12 - Litigation 6.14 - Labor Matters 6.15 - Environmental Matters 6.18 - Employee Benefit Plans 6.19 - Tax Matters
62 EX-11.A 7 EARNINGS PER SHARE CALCULATION Exhibit 11(a) EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES EARNINGS PER SHARE CALCULATION
Fully Primary Diluted EPS EPS Year Ended June 30, 1997 ------------- ------------ ------------------------ A. Average number of common shares outstanding 5,757,238 5,757,238 B. Average number of common share equivalents assuming conversion of options (calculated using the treasury method) 523,987 557,645 ------------- ------------- C. Subtotal 6,281,225 6,314,883 D. Average number of common share equivalents assuming conversion of convertible preferred stock 1,498,728 1,498,728 ------------- ------------- E. Total average common share and common share equivalents 7,779,953 7,813,611 F. Net income $ 773,793 $ 773,793 G. Preferred dividend requirements 233,135 233,135 ------------- ------------- H. Earnings applicable to common stock $ 540,658 $ 540,658 ============= ============= I. Earnings per share - no conversion of preferred stock (H/C) $ 0.09 $ 0.09 (1) J. Earnings per share - assuming conversion of preferred stock (F/E) 0.10 (1) 0.10 (1) Year Ended June 30, 1996 ------------------------ A. Average number of common shares outstanding 5,695,259 5,695,259 B. Average number of common share equivalents assuming conversion of options (calculated using the treasury method) 376,962 438,143 ------------- ------------- C. Subtotal 6,072,221 6,133,402 D. Average number of common share equivalents assuming conversion of convertible preferred stock 1,528,440 1,528,440 ------------- ------------- E. Total average common share and common share equivalents 7,600,661 7,661,842 F. Net income $ 469,501 $ 469,501 G. Preferred dividend requirements 237,757 237,757 ------------- ------------- H. Earnings applicable to common stock $ 231,744 $ 231,744 ============= ============= I. Earnings per share - no conversion of preferred stock (H/C) $ 0.04 $ 0.04 (1) J. Earnings per share - assuming conversion of preferred stock (F/E) 0.06 (1) 0.06 (1) Year Ended June 30, 1995 ------------------------ A. Average number of common shares outstanding 5,679,501 5,679,501 B. Average number of common share equivalents assuming conversion of options (calculated using the treasury method) 125,872 142,293 ------------- ------------- C. Subtotal 5,805,373 5,821,794 D. Average number of common share equivalents assuming conversion of convertible preferred stock 1,554,295 1,554,295 ------------- ------------- E. Total average common share and common share equivalents 7,359,668 7,376,089 F. Net income $ 766,077 $ 766,077 G. Preferred dividend requirements 241,773 241,773 ------------- ------------- H. Earnings applicable to common stock $ 524,304 $ 524,304 ============= ============= I. Earnings per share - no conversion of preferred stock (H/C) $ 0.09 $ 0.09 (1) J. Earnings per share - assuming conversion of preferred stock (F/E) 0.10 (1) 0.10 (1)
(1) Not material or anti-dilutive. EX-21.A 8 LISTING OF SUBSIDIARIES Exhibit 21 (a) EMONS TRANSPORTATION GROUP, INC. Listing of Subsidiaries
State of Subsidiary Incorporation ------------------------------------------------ ------------------ Emons Finance Corp. Delaware Emons Industries, Inc. New York Emons Logistics Services, Inc. Delaware Emons Railroad Group, Inc. Delaware St. Lawrence & Atlantic Railroad Company Delaware Yorkrail, Inc. Delaware Maine Intermodal Transportation, Inc. Delaware Maryland and Pennsylvania Railroad Company Pennsylvania
EX-23.A 9 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23(a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated September 5, 1997 included in this annual report on Form 10-K into the Company's previously filed: Form S-8 Registration Statement File No. 33-22485 and Form S-3 Registration Statement File No. 33-22485. /s/ Arthur Andersen LLP Lancaster, PA September 24, 1997 EX-27.A 10 ARTICLE 5 FINANCIAL DATA SHEET
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMONS TRANSPORTATION GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 1,515,188 0 2,508,202 102,898 87,154 4,416,158 29,042,149 9,649,440 24,301,875 4,278,325 10,976,339 0 16,509 58,006 6,364,656 24,301,875 0 16,058,252 0 11,061,247 0 0 1,008,945 1,170,793 397,000 773,793 0 0 0 773,793 0.09 0.10
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