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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998
REGISTRATION NO. 333-53483
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RAILWORKS CORPORATION
(Exact Name of Registrant as Specified in Charter)
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<S> <C> <C>
DELAWARE 4789 58-2382378
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification Number)
Organization)
</TABLE>
RAILWORKS CORPORATION
C/O COMSTOCK HOLDINGS INC.
ONE NORTH LEXINGTON AVENUE
WHITE PLAINS, NEW YORK 10601
ATTN: JOHN G. LARKIN
(410) 467-9504
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN G. LARKIN
CHIEF EXECUTIVE OFFICER
RAILWORKS CORPORATION
C/O COMSTOCK HOLDINGS INC.
ONE NORTH LEXINGTON AVENUE
WHITE PLAINS, NEW YORK 10601
(410) 467-9504
(Name, address, including zip code, and telephone number, including area code of
agent for service)
Copies to:
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<S> <C>
JEFFREY M. STEIN JOEL S. KLAPERMAN
KING & SPALDING SHEARMAN & STERLING
191 PEACHTREE STREET 599 LEXINGTON AVENUE
ATLANTA, GEORGIA 30303 NEW YORK, NEW YORK 10022
(404) 572-4600 (212) 848-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share............. 5,750,000 shares $13.00 $74,750,000 $22,052
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(1) Includes 750,000 shares which the Underwriters have the option to purchase
from the Selling Stockholders solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457.
(3) A filing fee of $39,218 has previously been paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JULY 29, 1998
5,000,000 Shares
(RAILWORKS LOGO)
COMMON STOCK
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All of the shares of Common Stock offered hereby are being sold by
RailWorks Corporation (the "Company"). In addition, certain stockholders of the
Company (the "Selling Stockholders") have granted the Underwriters a 30-day
option to purchase up to 750,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." Simultaneously with and as a
condition to the consummation of the Offering, the Company will acquire all of
the outstanding stock of the Founding Companies (as defined herein). See
"Formation of the Company." Prior to the Offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price per share will be between $12.00 and $13.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on The Nasdaq National Market under the symbol "RWKS."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREOF.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...................... $ $ $
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Total(3)....................... $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting expenses of the Offering payable by the Company estimated
at $2.2 million.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to 750,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares of Common Stock at the Price
to Public shown above. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $ , $ and $ ,
respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about August ,
1998.
BT AlexS Brown
Schroder & Co. Inc.
Piper Jaffray Inc.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
COLLAGE OF PHOTOGRAPHS DEPICTING THE TYPES OF SERVICES TO BE PROVIDED BY
RAILWORKS, SUBTITLED "RAILWORKS, TIES IT TOGETHER, INTEGRATED RAIL SYSTEM
SOLUTIONS."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
Simultaneously with the closing of the offering made by this Prospectus
(the "Offering"), RailWorks Corporation will acquire, in separate transactions
(the "Combination"), 22 companies (collectively, the "Founding Companies") that
will become wholly-owned subsidiaries of RailWorks Corporation. See "Formation
of the Company." Unless otherwise indicated or the context otherwise requires,
(i) all references to the "Company" and "RailWorks" include RailWorks
Corporation and the Founding Companies after giving effect to the Combination,
(ii) "rail systems" means transit systems, regional and shortline railroads,
Class I railroads and commercial and industrial companies with on-site rail
infrastructure and (iii) "Common Stock" means the common stock, par value $0.01
per share, of RailWorks Corporation. The following summary is qualified in its
entirety by, and should be read in conjunction with, the more detailed
information and the financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share, per share
and financial information set forth herein (i) gives effect to the Combination
and (ii) assumes no exercise of the Underwriters' over-allotment option. Unless
otherwise indicated, "pro forma combined" information gives effect to the
Combination and certain pro forma adjustments to the historical financial
statements based on an assumed initial public offering price of $12.00 per share
as described in the Unaudited Pro Forma As Adjusted Financial Statements, and
"pro forma as adjusted" information gives further effect to the sale of the
shares of Common Stock offered hereby at an assumed initial public offering
price of $12.00 per share and the application of the net proceeds therefrom as
set forth herein under "Use of Proceeds."
THE COMPANY
RailWorks Corporation was formed in March 1998 to become a leading
nationwide provider of rail system services, including construction and
rehabilitation, repair and maintenance, and related products. Management
selected the Founding Companies, which will be acquired by RailWorks Corporation
concurrently with the closing of the Offering, based on their regional or local
market leadership, diverse and long-standing customer relationships,
profitability and geographic diversity. The Combination will establish a
significant operating enterprise which management believes will serve as the
foundation for a consolidation of the highly-fragmented rail system services and
products industry. The Company's strategy is based on providing a full range of
rail-related services and products on a national basis and offering integrated
rail system solutions under the "RailWorks" brand. For the year ended December
31, 1997, on a pro forma as adjusted basis, the Company had revenue of $256.5
million, operating income of $11.2 million and net income of $5.4 million. For
the three months ended March 31, 1998, on a pro forma as adjusted basis, the
Company had revenue of $61.8 million, operating income of $1.5 million and net
income of $655,000. Based on estimates of the Founding Companies, management
estimates that approximately 68.4% of the Company's pro forma as adjusted
revenue for the year ended December 31, 1997 was derived from rail-related
operations and 31.6% was derived from non-rail related operations.
The rail passenger and freight industries have undergone significant
changes in recent years. As a result, management believes that the rail system
services and products industry presents a significant growth opportunity for the
Company due to (i) increased governmental and private investment in new
construction projects and rehabilitation of rail systems, (ii) ongoing
reconfiguration and rationalization of rail infrastructure primarily due to
industry consolidation, (iii) the use of fewer vendors by rail system operators
and (iv) the fragmented nature of the rail system services and products
industry. Based on information from the American Association of Railroads
("AAR") and the American Public Transit Association ("APTA"), management
believes that expenditures by rail system operators for new construction,
rehabilitation, repair and maintenance were approximately $14 billion in 1997.
Shortline railroads, industrial companies and transit authorities generally
outsource rail-related work because they lack the know-how, specialized
equipment and resources to cost-effectively install signal systems or build and
maintain their own tracks. Management believes that as Class I railroads
continue to seek to reduce costs they will increasingly outsource rail-related
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work to companies that can offer integrated rail system services and products in
multiple locations. Finally, the rail system services and products industry is
highly fragmented, presenting a consolidation opportunity for the Company.
Management believes that an integrated rail system services and products
provider would have a competitive advantage over smaller competitors. While
there are competitors that have the bonding capacity required to undertake large
projects, many competitors do not have such capacity and are unable to provide
the integration of design, construction, rehabilitation, repair and maintenance
services increasingly sought by rail system operators.
COMPETITIVE STRENGTHS
Breadth of Services and Products. Management believes that rail system
operators are increasingly seeking to purchase services and supplies on an
integrated basis from fewer vendors. Management further believes that the
Company will offer a broader range of services and products than most industry
participants. The Company's service and product offerings include (i)
construction and rehabilitation of track, signaling, communications, electrical
and other track-related systems, (ii) repair and maintenance of these systems,
(iii) a broad range of rail-related products, including rail, ties, spikes,
frogs (rail intersections), tie plates and ballast and (iv) for non-rail
customers, electrical installation services and concrete products. Based on
estimates of the Founding Companies, management estimates that revenue from
rail-related (i) construction and rehabilitation, (ii) repair and maintenance
and (iii) other track materials ("OTM") and products accounted for 46.5%, 15.4%
and 6.5%, respectively, of the Company's pro forma as adjusted revenue for the
year ended December 31, 1997 and non-rail services and products accounted for
31.6% of this revenue.
Diverse Customer Base. The Founding Companies have long-standing
relationships with a wide variety of customers, including: (i) commercial and
industrial companies such as Commonwealth Edison, United States Steel, and
Terminal One at JFK International Airport, which have contracted with the
Company for track construction and maintenance or non-rail electrical
contracting work; (ii) transit authorities such as the New York Metropolitan
Transit Authority, the Los Angeles Metropolitan Transit Authority and the
Baltimore Metropolitan Transit Authority, which have contracted with the Company
for electrical installations, signaling, communications or station projects;
(iii) shortline railroads such as Indiana Southern Railroad Company, Branford
Steam Railroad and I&M Rail Link, which have contracted with the Company for
track construction and maintenance work or product supply; and (iv) Class I
railroads such as Illinois Central Railroad, Union Pacific Railroad and CSX
Transportation, which have utilized the Company for repair, maintenance,
construction or engineering.
Expansive Geographic Coverage. The Company has offices in 17 states and
has provided services and products to customers throughout the United States.
The Company's 33 facilities provide it with a geographically diverse mix of
established operating bases which enable it to undertake projects in a more cost
effective manner than would be possible absent a local facility. The Company
also has the ability to mobilize equipment and technical specialists throughout
the United States to maximize asset utilization and to complete projects in
remote locations.
STRATEGY
The Company's goal is to become a leading provider of integrated rail
system solutions, offering a full range of rail-related services and products to
a diverse base of customers throughout the United States. In addition, the
Company expects to continue to provide non-rail services and products in
response to market opportunities. Key elements of the Company's strategy include
the following:
- Provide Integrated Solutions for Rail Systems. Management believes that
rail system operators are increasingly seeking to outsource their
construction, rehabilitation, repair and maintenance requirements and to
utilize fewer vendors to provide a full range of these services and
related products. As a result of the Combination, the Company will be
able to
2
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provide its customers with integrated rail system solutions that
management believes can be efficiently designed, constructed, maintained,
operated and supplied, resulting in lower costs over the life cycle of
customers' rail assets.
- Capitalize on Scale and Geographic Coverage. The Company believes that
the increased scale that will be achieved through the Combination will
position it to undertake larger rail-related projects that were beyond
the scope of those previously undertaken by the individual Founding
Companies. Each of the Founding Companies was previously constrained by
applicable bonding limits and the limited size of its workforce. The
Company also intends to utilize its geographic scope to develop a
national accounts program to serve rail customers with multiple sites and
"cross-sell" its broad range of rail-related services and products. The
Company currently has very limited international operations but over time
it may increase its activity in international markets, where
privatizations of railroads and large transit projects are creating
increased demand for sophisticated design and construction management
services.
- Reduce Operating Costs. The Company believes that the scale of its
operations and administrative integration of the Founding Companies
following the Combination will provide it with a better cost structure
than its regional and smaller competitors. Key areas in which the Company
expects to achieve cost savings include (i) purchasing of equipment and
supplies, (ii) insurance expenses, (iii) financing costs and (iv)
utilization of equipment and the Company's workforce. The Company also
expects to reduce administrative expenses through the integration of
certain accounting, financing, human resources and other functions.
- Expand Through Acquisitions. The rail system services and products
industry is highly fragmented, and the Company believes that it is
well-positioned to pursue the consolidation of these segments on a
nationwide basis. Following the Offering, the Company expects to pursue
an acquisition program that will include (i) strategic acquisitions
intended to expand the Company's geographic coverage throughout the
United States and broaden its lines of services and products, (ii)
acquisitions intended to position the Company to offer its customers
complementary services and products and (iii) smaller "tuck-in"
acquisitions intended to add density and operating leverage within the
Company's current markets. The Company believes that the experience and
industry reputations of the senior managers of the Founding Companies and
senior corporate management of the Company will provide it with a
competitive advantage in identifying, completing and integrating these
acquisitions. The Company does not intend to expand its non-rail business
through acquisitions.
- Leverage Management Expertise. The senior managers of each of the
Founding Companies have an average of 14 years of experience in the rail
system services and products industry. The Company will utilize a
management structure which will enable these individuals to focus on
operations rather than administrative tasks. In addition, the Company's
Chief Executive Officer, Chief Financial Officer and Chief Operating
Officer each have in excess of 15 years of experience in the
transportation industry, including, in the case of John Larkin (the
Company's Chief Executive Officer), approximately 11 years of experience
as an equity research analyst focusing on the transportation industry.
Senior management of the Company will coordinate the operations of the
Founding Companies, provide strategic guidance for the Company, implement
the Company's acquisition program and promote the development of national
accounts. As part of this strategy, the Company intends to foster a
culture of cooperation and teamwork among the Founding Companies that
emphasizes dissemination of "best practices" among its regional and local
management teams and joint bidding on larger projects. For example,
management believes it can successfully implement best practices in the
areas of 24-hour emergency rerailment services, annual maintenance
contracts and efficient inventory management.
3
<PAGE> 7
THE OFFERING
Common Stock offered hereby............... 5,000,000 shares(1)
Common Stock to be outstanding after the
Offering.................................. 15,073,530 shares(2)
Use of proceeds........................... The net proceeds of the Offering
to the Company will be used to pay
the cash portion of the aggregate
purchase price for the Founding
Companies in the Combination and
to repay a portion of indebtedness
of certain of the Founding
Companies. The Company will not
receive any proceeds from the sale
of shares of Common Stock to be
sold by the Selling Stockholders.
See "Use of Proceeds."
Nasdaq National Market Symbol............. RWKS
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(1) Does not include up to an aggregate of 750,000 shares of Common Stock that
may be sold by the Selling Stockholders upon exercise of the Underwriters'
over-allotment option, if any. See "Principal and Selling Stockholders" and
"Underwriting."
(2) Includes (i) 1,130,504 shares of Common Stock to be granted to executive
officers of the Company, (ii) 75,368 shares of Common Stock to be granted to
corporate-level employees of the Company upon consummation of the Offering
and (iii) 10 shares of Common Stock issued upon formation of the Company.
Does not include 2,000,000 shares of Common Stock that are reserved for
issuance under the Company's 1998 Incentive Stock Plan (the "Incentive
Plan"), of which options to purchase 20,000 shares will be granted to the
Company's non-employee directors upon consummation of the Offering. See
"Formation of the Company -- The Combination," "Management -- 1998 Incentive
Stock Plan" and "Principal and Selling Stockholders."
RISK FACTORS
See "Risk Factors" beginning on page 8 for a discussion of certain risks
that should be considered in connection with an investment in the Common Stock
offered hereby, including, without limitation, risks related to: (i) the absence
of a combined operating history; (ii) the valuation of the Founding Companies;
(iii) the Company's acquisition strategy and the financing of acquisitions; (iv)
internal growth and operating strategies; (v) the cyclicality of demand for rail
system services and products; (vi) exposure to downturns in commercial
construction; (vii) previous losses of certain Founding Companies and
fluctuations in quarterly operating results; (viii) the amortization of
intangible assets; (ix) competition; (x) public sector contracts and funding;
(xi) competitive bidding and fixed price contracts; (xii) reliance on
subcontractors and suppliers; (xiii) bid and performance bonds; (xiv) the
availability of raw materials; (xv) labor relations; (xvi) risks related to
decentralized operations; (xvii) environmental compliance and government
regulation; (xviii) dependence on key personnel; (xix) the difference in
compensation paid to executive officers of Founding Companies after the
Combination; (xx) the substantial proceeds of the Offering benefitting
affiliates; (xxi) potential conflicts of interest; (xxii) potential influence of
existing stockholders; (xxiii) shares eligible for future sale; (xxiv) the lack
of a prior market for the Common Stock and the possible volatility of stock
price; (xxv) dilution to new investors; and (xxvi) certain antitakeover
provisions in the Company's governing instruments and under Delaware law.
4
<PAGE> 8
THE COMBINATION
Simultaneously with and as a condition to the closing of the Offering,
RailWorks Corporation will consummate the Combination pursuant to agreements
that it has entered into with the Founding Companies and their stockholders
(each an "Acquisition Agreement" and together the "Acquisition Agreements").
Assuming an initial public offering price of $12.00 per share, the aggregate
consideration to be paid by RailWorks Corporation in the Combination will be
$158.3 million (subject to adjustment), which consists of (i) $51.9 million in
cash to be paid from the proceeds of the Offering (representing 93.6% of the
estimated net proceeds of the Offering) and (ii) the $106.4 million estimated
fair value of 8,367,648 shares of Common Stock to be issued to the stockholders
of the Founding Companies. In addition, in connection with the Combination, the
Company will assume $36.5 million of indebtedness of certain of the Founding
Companies (including approximately $1.6 million of indebtedness incurred to
partially finance the redemption of shares of common stock of a Founding Company
held by an employee stock ownership plan (an "ESOP")). Such indebtedness will be
repaid with a portion of the proceeds of the Offering (representing 7.1% of the
estimated net proceeds of the Offering and with borrowings under the Company's
Credit Facility). The purchase price for each Founding Company was determined
based on negotiations between RailWorks Corporation and the Founding Companies.
The factors considered by the parties in determining the purchase price were
historical operating results, growth rates and assets and liabilities of the
Founding Companies, and such factors were applied consistently to each Founding
Company. For additional information regarding the consideration to be paid to
the owners of each Founding Company, see "Formation of the Company -- The
Combination."
As a result of the Combination, all 22 Founding Companies will become
wholly-owned subsidiaries of RailWorks Corporation. The consummation of each
acquisition that is a part of the Combination (each an "Acquisition" and
together the "Acquisitions") is contingent upon the consummation of the Offering
and customary closing conditions. The Acquisition Agreements require certain
executive officers of each of the Founding Companies to enter into employment
agreements with their respective Founding Companies effective upon consummation
of the Combination. In addition, executive officers of certain of the Founding
Companies will be elected to the Board of Directors of the Company following the
consummation of the Offering. After the Offering, the stockholders of the
Founding Companies, management of the Company and IPO Development Company L.L.P.
("IPODC") will own in the aggregate 66.8% of the outstanding Common Stock,
assuming the Underwriters' over-allotment option is not exercised. The Selling
Stockholders will sell shares of Common Stock received by them in the
Combination if the Underwriters exercise their over-allotment option and,
therefore, the Selling Stockholders may be deemed to be "statutory underwriters"
for purposes of the Securities Act of 1933 (the "Securities Act"). As such, the
Selling Stockholders may be liable under the securities laws for material
misstatements or omissions made in connection with the Offering. See "Formation
of the Company," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Management -- Employment
Agreements," "Certain Relationships and Related Party Transactions," "Shares
Eligible for Future Sale," and the Unaudited Pro Forma As Adjusted Financial
Statements and the notes thereto appearing elsewhere in this Prospectus.
---------------------
The address of the Company is c/o Comstock Holdings, Inc., One North
Lexington Avenue, White Plains, New York 10601 and its telephone number is (410)
467-9504.
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SUMMARY PRO FORMA AS ADJUSTED FINANCIAL DATA
RailWorks Corporation was formed in March 1998 to acquire the Founding
Companies simultaneously with and as a condition to the consummation of the
Offering. For accounting and financial statement purposes, Comstock has been
identified as the "accounting acquiror" consistent with the accounting
requirements of Staff Accounting Bulletin ("SAB") No. 97 of the Securities and
Exchange Commission (the "Commission") because its owners will receive the
largest portion (32.8%) of the shares of Common Stock issued to the Founding
Companies in the Combination. The acquisitions of the remaining Founding
Companies will be accounted for as purchases in accordance with Accounting
Principles Board ("APB") No. 16. The summary pro forma as adjusted data are not
necessarily indicative of the operating results or financial position that would
have been achieved had the Combination and Offering been consummated and should
not be construed as representative of the Company's future operating results or
financial position. The summary pro forma as adjusted financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Unaudited Pro Forma As Adjusted
Financial Statements and the notes thereto and the historical financial
statements of the Founding Companies and the notes thereto included elsewhere in
this Prospectus. The Company anticipates that following the Combination it will
realize savings from: (i) more efficient utilization of equipment and the
Company's workforce; (ii) the combination of administrative functions such as
accounting, finance and human resources and certain other functions at the
corporate level; (iii) better pricing on purchases of equipment and supplies;
and, to a lesser extent, (iv) joint bidding on larger rail projects. Those
savings, which cannot be quantified or reasonably estimated, have not been
reflected in the Unaudited Pro Forma As Adjusted Financial Statement or in the
summary data presented below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
TWELVE MONTHS MARCH 31,
ENDED -----------------
DECEMBER 31, 1997 1997 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA(1):
Revenue................................................. $256,508 $52,810 $61,810
Gross profit............................................ 35,035 7,097 7,192
General and administrative expenses(2).................. 21,366 5,526 5,030
Intangibles amortization(3)............................. 2,447 612 612
Income from operations.................................. 11,222 959 1,550
Interest and other income (expense), net................ (1,063) 134 (165)
Income before income taxes.............................. 10,159 1,093 1,385
Net income(4)........................................... 5,438 477 655
Net income per share.................................... .36 .03 .04
Shares used in computing net income per share(5)........ 15,074 15,074 15,074
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
--------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED(8)
--------- --------------
(IN THOUSANDS)
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BALANCE SHEET DATA(6):
Working capital(7).......................................... $ 28,761 $ 41,084
Total assets................................................ 198,060 195,860
Long-term debt and capital leases, net...................... 16,113 26,699
Stockholders' equity........................................ 60,241 113,841
</TABLE>
(footnotes appear on following page)
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(footnotes from previous page)
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(1) The pro forma as adjusted income statement data assume that the Combination
and the Offering were consummated on January 1, 1997 for the twelve months
ended December 31, 1997 and the three months ended March 31, 1997, and on
January 1, 1998 for the three months ended March 31, 1998.
(2) The pro forma as adjusted general and administrative expenses reflect (i)
$4.7 million, $1.1 million and $1.1 million for the twelve months ended
December 31, 1997 and the three months ended March 31, 1997 and 1998,
respectively, in pro forma reductions in salaries, bonuses and benefits to
the stockholders of the Founding Companies and other management personnel
(the "Compensation Differential"), (ii) a net reduction in lease-related
expenses of $1.2 million, $366,000 and $239,000 for the twelve months ended
December 31, 1997 and the three months ended March 31, 1997 and 1998,
respectively, in connection with a lease renewal by a Founding Company,
(iii) elimination of compensation expense of $400,000 in the three months
ended March 31, 1998, incurred in connection with the transfer of stock
between stockholders of a Founding Company and (iv) an increase of $1.5
million, $375,000 and $375,000 for the twelve months ended December 31, 1997
and the three months ended March 31, 1997 and 1998, respectively, for
estimated expenses of the Company's corporate office, including compensation
for its executive officers.
(3) As a result of the Combination (at an assumed initial public offering price
of $12.00 per share), the Company will have $78.5 million of goodwill and
$5.0 million of other intangible assets which will be amortized over a
40-year period and 10-year period, respectively.
(4) Assumes that all income is subject to a corporate income tax rate of 39% and
that all goodwill amortization is non-deductible for income tax purposes.
(5) Includes (i) 8,867,648 shares to be issued to stockholders of the Founding
Companies, (ii) 5,000,000 shares to be sold by the Company in the Offering
and (iii) 1,205,882 shares to be issued to management.
(6) The pro forma combined and pro forma as adjusted balance sheet data assume
that the Combination and Offering were consummated on March 31, 1998.
(7) Excludes $52.1 million payable to the Founding Companies which will be paid
immediately upon consummation of the Offering.
(8) Adjusted to reflect the sale of the 5,000,000 million shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom (at an assumed initial public offering price of $12.00
per share) as set forth herein under "Use of Proceeds."
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this Prospectus,
in evaluating an investment in the shares of Common Stock offered hereby.
Absence of Combined Operating History. RailWorks Corporation was formed in
March 1998 and has conducted no operations to date. RailWorks Corporation has
entered into agreements to acquire the Founding Companies simultaneously with
the closing of the Offering. The Founding Companies have been operating
independently and the Company may not be able to integrate these businesses
successfully on an economic basis. The Company's management group has been
assembled only recently and the management control structure is still in its
formative stages. The pro forma as adjusted results of operations of RailWorks
and the Founding Companies cover periods when RailWorks and the Founding
Companies were not under common control or management and may not be indicative
of the Company's future results of operations. Most of the senior managers of
the individual Founding Companies will remain at the Founding Company level, in
accordance with the Company's decentralized management philosophy. Currently,
the executive officers of RailWorks consist of John G. Larkin, its Chairman of
the Board and Chief Executive Officer, Michael R. Azarela, its Executive Vice
President and Chief Financial Officer, John Kennedy, its Vice President and
Chief Operating Officer, and Harold C. Kropp, Jr., its Vice President and Chief
Accounting Officer. Upon consummation of the Combination, these officers will be
responsible for the Company's day-to-day management as a combined entity.
Management may not be able to oversee the combined entity effectively or to
implement effectively the Company's operating strategies. Any failure by the
Company to implement its strategies, integrate the Founding Companies without
substantial costs, delays or other operational or financial difficulties, or
oversee effectively the combined entity could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Formation of the Company," "Business -- The Founding Companies" and
"Management."
Valuations of the Founding Companies Unrelated to Appraisals or Asset
Values. Valuations of the Founding Companies have not been established by
independent appraisals, but have been determined through negotiations between
RailWorks and representatives of each of the Founding Companies. The
consideration being paid for each of the Founding Companies, including Founding
Companies whose stockholders will become affiliates of the Company upon
consummation of the Offering, is based exclusively on these private negotiations
between RailWorks and the representatives of each Founding Company. The factors
considered by the parties in determining the purchase prices for the Founding
Companies were historical operating results, growth rates and the assets and
liabilities of the Founding Companies. Such factors were applied consistently to
each Founding Company. The consideration to be paid does not necessarily bear
any relationship to the net book value of the acquired assets or to any other
recognized indicia of value. For example, valuations of the Founding Companies
determined solely by appraisals of the acquired assets would be less than the
consideration being paid by RailWorks for the Founding Companies. In particular,
the aggregate purchase price to be paid in the Combination is $124.7 million
greater than the estimated fair value of the net assets acquired. Since Comstock
is deemed the "accounting acquiror," no goodwill is being recorded with respect
to the Acquisition of Comstock. As a result, only $78.5 million of this excess
is reflected as goodwill in the Unaudited Pro Forma As Adjusted Financial
Statements as a result of the Combination. The future performance of the
Founding Companies may not be commensurate with the consideration being paid to
acquire the Founding Companies or the price of the Common Stock offered hereby.
See "-- Amortization of Intangible Assets" and "Formation of the Company -- The
Combination."
Risks Associated with Acquisition Strategy and Financing. The Company
intends to grow significantly through the acquisition of additional businesses
in the rail system services and products industry. See "Business -- Strategy."
This strategy will entail reviewing and potentially reorganizing
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acquired business operations, corporate infrastructure and systems and financial
controls. Unforeseen expenses, difficulties, complications and delays frequently
encountered in connection with the rapid expansion of operations could inhibit
the Company's growth.
There can be no assurance that the Company will maintain or accelerate its
growth or anticipate all of the changing demands that expanding operations will
impose on its management personnel, operational and management information
systems and financial systems. The Company may not be able to identify, acquire
or manage profitably additional businesses or to integrate successfully any
acquired businesses into the Company without substantial costs, delays or other
operational or financial difficulties. Any failure by the Company to do so could
have a material adverse effect on its business, financial condition and results
of operations.
The timing, size and success of the Company's acquisition efforts and any
associated capital commitments cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its Common
Stock, cash or a combination of Common Stock and cash. If the Common Stock does
not maintain a sufficient market value, or if potential acquisition candidates
are otherwise unwilling to accept Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to utilize more of its
cash resources, if available, in order to initiate and maintain its acquisition
program. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity financings. There can be no assurance that the Company will be able to
obtain additional financing for its acquisition program on terms that the
Company considers acceptable. To the extent the Company uses Common Stock for
future acquisitions, dilution may be experienced by existing stockholders,
including the purchasers of Common Stock in the Offering. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Pro Forma As Adjusted Liquidity and Capital Resources."
Risks Related to Internal Growth and Operating Strategies. Key elements of
the Company's strategy are to increase the revenue of the Founding Companies and
any subsequently acquired businesses and to reduce their operating expenses. The
Company's ability to increase revenue will be affected by various factors,
including demand for rail system services and products, the success of
cross-selling and the Company's ability to develop a national accounts program.
The growth of the Company may also be dependent on increased outsourcing by rail
system operators. Many of these factors are beyond the control of the Company,
and the Company's strategies may not be successful or the Company may be unable
to generate cash flow adequate for its operations and to support internal
growth. A key component of the Company's strategy is to operate on a
decentralized basis, with management of the Founding Companies retaining
responsibility for day-to-day operations. If proper business controls are not
implemented, this decentralized operating strategy could result in inconsistent
operating and financial practices at the Founding Companies and subsequently
acquired businesses, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Strategy."
Rail System Cyclicality. Demand for rail system services and products
could fluctuate in conjunction with overall economic conditions. In economic
downturns, rail system operators may defer certain construction, rehabilitation,
repair and maintenance projects and purchases of related products to conserve
cash in the short term. Also, reductions in freight traffic due to economic
downturns or other factors may reduce demand for the Company's construction,
rehabilitation, repair and maintenance services and related products. In
economic upturns, railroads, particularly Class I railroads, experience heavier
traffic demands that can cause problems associated with congestion. The
operational problems related to congestion have an unpredictable impact on
railroad expenditures for construction, rehabilitation, repair and maintenance
services and related products, including those provided by the Company. During
periods of peak usage, rail system owners may defer certain expenditures due to
their need to address the operational challenges caused by these conditions.
Such uncertainties may be exacerbated by certain other issues, such as
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the possibility of heightened government regulation during periods of congestion
and the internal challenges of managing railroad operations as the Class I
railroads continue to consolidate.
Exposure to Downturns in Commercial Construction. Approximately 26.2% of
the Company's pro forma as adjusted revenue for the twelve months ended December
31, 1997 was derived from installation of electrical systems in newly
constructed or renovated commercial buildings and power and industrial plants.
The demand for electrical installation services is affected by fluctuations in
the level of new construction and renovation of commercial buildings, which
reflect the cyclical nature of the construction industry and depend upon general
economic conditions, changes in interest rates and other related factors.
Downturns in levels of commercial construction and renovation would have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, the Company's electrical installation business
is focused in the Northeastern United States and is therefore particularly
susceptible to economic downturns in that region. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations of the Founding Companies -- Comstock Holdings, Inc."
History of Losses; Fluctuations in Quarterly Operating Results. From time
to time, primarily due to industry cyclicality and uncertainties inherent in the
competitive bidding process, certain of the Founding Companies have experienced
net losses. See "-- Competitive Bidding; Risks of Fixed Price Contracts." For
the year ended December 31, 1995, Comstock incurred a net loss of approximately
$20 million, primarily as a result of a one-time accounting charge for the
impairment of certain long-lived assets. In addition, Comtrak Construction, Inc.
and Merit Railroad Contractors, Inc. incurred net losses in 1997 and U.S.
Trackworks, Inc. incurred a net loss in 1996 primarily due to insufficient
revenues to support fixed overhead. There can be no assurance that these
Founding Companies, other Founding Companies or the Company will be profitable
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
In addition, the Founding Companies have in the past experienced quarterly
variations in revenue, operating income (including operating losses), net income
(including net losses) and cash flows (including cash flow deficits) as a result
of projects commenced and completed during a quarter, the number of business
days in a quarter and the size and scope of projects. A variation in the number
of projects, progress on projects or the timing of the initiation or completion
of projects can cause periods in which certain operating resources are not
generating revenue and can cause significant variations in operating results
between reporting periods. Negative fluctuations have been particularly
pronounced, and net losses have been incurred, in the first and fourth calendar
quarters, generally due to adverse weather conditions. For example, over the
last two years each of Comtrak Construction, Inc., H.P. McGinley, Incorporated,
Kennedy Railroad Builders, Inc., Merit Railroad Contractors, Inc., New England
Railroad Construction Company, Inc., Railroad Service, Inc., and U.S.
Trackworks, Inc. have experienced losses in the first quarters of certain fiscal
years. The Company expects to continue to experience such quarterly fluctuations
in operating results (including possible net losses) and may also experience
quarterly fluctuations as a result of other factors, including the loss of a
major customer and additional general and administrative expenses to acquire and
support new business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Amortization of Intangible Assets. Approximately $83.5 million, or 42.6%,
of the Company's pro forma as adjusted total assets as of March 31, 1998,
consists of goodwill and other intangibles arising from the Combination
(assuming an initial public offering price of $12.00 per share). Goodwill is an
intangible asset that represents the difference between the aggregate purchase
price for the assets acquired and the amount of such purchase price allocated to
such assets for purposes of the Company's pro forma as adjusted balance sheet.
The Company is required to amortize the goodwill and other intangibles from the
Combination over a period of time, with the amount amortized in a particular
period constituting an expense that reduces the Company's net income for that
period. The amount of goodwill amortization, however, will not give rise to a
deduction for tax purposes. In addition, the Company will be required to
amortize the goodwill and other intangibles,
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if any, from any future acquisitions. A reduction in net income resulting from
the amortization of goodwill and other intangibles may have an adverse impact
upon the market price of the Company's Common Stock. The Company plans to
amortize goodwill associated with the Combination over a period of 40 years and
amortize other intangibles associated with the Combination over a period of 10
years, and will continue to evaluate whether events or circumstances have
occurred that indicate that the remaining useful life of goodwill and other
intangibles may warrant revision. Additionally, in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company will evaluate any potential goodwill for
impairments by reviewing the future cash flows of the operations of the acquired
entities and comparing these amounts with the carrying value of the associated
goodwill and other intangibles.
Competition. The rail system services and products industry is highly
competitive. The Company competes with other companies that provide rail system
construction and rehabilitation, repair and maintenance, electrical signaling,
communication and installation services and related products, some of which have
significantly greater resources than the Company. An inability of the Company to
compete successfully against its existing and future competitors would have a
material adverse effect on its business, financial condition and results of
operations. Management believes that the Founding Companies compete effectively
in their industries. There are no substantial barriers to entry and additional
competitors with greater resources than the Company may enter the industry and
compete effectively against the Company. Certain competitors may also provide a
broad range of services and products and may have sufficient bonding capacity to
undertake large projects. The Company also provides electrical contracting
services to non-rail industrial and commercial customers. While management
believes that the Company will be able to compete effectively in the non-rail
electrical contracting business, this industry is highly competitive and is
served by small, owner-operated private companies, public companies and several
large regional companies. Additionally, the Company could face competition in
the future from other competitors entering this market. See
"Business -- Competition."
Public Sector Contracts and Funding. The rail system services and products
business involves contracts that are supported by funding from federal, state
and local governmental agencies, as well as contracts with such agencies
("public sector contracts"). Public sector contracts are subject to detailed
regulatory requirements and public policies, as well as funding priorities.
These contracts may be conditioned upon the continuing availability of public
funds, which in turn depends upon lengthy and complex budgetary procedures, and
may be subject to significant pricing constraints. Moreover, public sector
contracts may generally be terminated for reasons beyond the control of the
contractor, including when such termination is in the best interests of the
governmental agency. There can be no assurance that these factors or others
unique to public sector contracts will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Based on estimates of the Founding Companies, management estimates that the
Company derived approximately 55% of its pro forma as adjusted revenue for the
year ended December 31, 1997 from public sector contracts and funding. See
"Business -- Government Regulation."
Competitive Bidding; Risks of Fixed Price Contracts. Fixed price contracts
are typically awarded in the rail system services and products industry pursuant
to a competitive bidding process. In compiling its bid on a particular project,
each Founding Company must estimate the time it will take to complete the
project, along with the project's labor and supply costs. These costs may be
affected by a variety of factors, some of which may be beyond the Company's
control. If the Company is unable to predict accurately the costs of fixed price
contracts, certain projects could have lower margins than anticipated or the
Company could suffer a loss on a project, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Reliance on Subcontractors and Suppliers. The Company generally performs
its electrical contracting services for signaling and communication systems as a
subcontractor to companies which design the systems and manufacture or purchase
the necessary equipment. In other instances,
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the Company acts as the prime contractor and subcontracts the design of the
signal or communication system and necessary equipment. When the Company is a
prime contractor for such projects, it generally requires subcontractors to post
performance bonds. The Company may not require a subcontractor to post a
performance bond in situations where (i) the subcontractor has strong experience
with a specific type of project and demonstrates financial stability and (ii)
the customer does not require bonds from the Company as prime contractor.
However, the Company is dependent upon the subcontractor to perform design and
other services and provide equipment. For certain projects there are a limited
number of companies which can perform the subcontract should the initial
subcontractor default. As a result, the Company is dependent upon its
subcontractors to perform under the subcontracts. Further, the major components
of electrical signaling and communication systems for transit authorities are
manufactured to specifications and require long lead times for production.
Should a subcontractor or supplier default, or should a supplier refuse to do
business with the Company, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
Bid and Performance Bonds. Institutional and public works projects are
frequently long-term, complex projects requiring significant technical and
managerial skills and financial strength to, among other things, obtain bid and
performance bonds, which are often a condition to bidding for, and the awarding
of, contracts for such projects. There can be no assurance that the Company will
be able to obtain bid and performance bonds in the future, and the inability to
procure such bonds could have a material adverse effect on the Company's
business, financial condition and results of operations.
Availability of Raw Materials. Historically, the cost of both the lumber
used to produce wooden ties and steel has fluctuated significantly due to market
and industry conditions. Increasing demand for these raw materials may result in
cost increases, and there can be no assurance that the Company will be able to
recoup any such increases through price increases for its products. Further, a
reduction in supply of lumber or steel due to increased demand or other factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Labor Relations. On a pro forma combined basis, as of March 31, 1998
approximately 67% of the Company's employees were covered under various
collective bargaining agreements. In June 1994, one of the Founding Companies
was affected by a strike by the United Brotherhood of Teamsters. There can be no
assurance that future work stoppages will not affect the Founding Companies. In
addition, labor agreements are generally negotiated on an industry-wide basis
and the determination of the terms and conditions of future labor agreements
could be beyond the Company's control. There can be no assurance that the
Company will not be subject to terms and conditions in future labor agreements
that could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Employees."
Risks Related to Decentralized Operations. The Company intends to conduct
business operations on a decentralized basis. In accordance with this
decentralized operating strategy, most of the senior managers of the individual
founding companies will remain at the Founding Company level. However, without
proper overall business controls, the Company's decentralized operating strategy
may result in inconsistent operating and financial practices at the Founding
Companies and subsequently acquired businesses. In such event, the Company's
business, financial condition and results of operations could be adversely
affected.
Environmental Compliance and Government Regulation. The Founding
Companies' operations are subject to extensive federal, state and local
regulation under environmental laws and regulations concerning, among other
things, emissions to the air, discharges to waters and the generation, handling,
storage, transportation, treatment and disposal of waste, hazardous substances,
underground and aboveground storage tanks and soil and groundwater
contamination. Environmental liability can extend to previously owned
properties, leased properties and properties owned by third parties, as well as
to properties currently owned and used by the Founding Companies.
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Environmental liabilities can also arise from claims asserted by adjacent
landowners or other third parties in toxic tort litigation. The Company could
incur significant ongoing costs associated with environmental regulatory
compliance. Furthermore, certain of the Founding Companies use hazardous
materials in their own operations. Although the Company believes that the
Founding Companies are in material compliance with all of the various
regulations applicable to their businesses, there can be no assurance that
requirements will not change in the future or that the Company will not incur
significant costs to comply with such requirements.
In addition to safety, health and other regulations of general
applicability, the operations of the Company may be significantly affected by
regulations of the Surface Transportation Board ("STB"), the Federal Railroad
Administration ("FRA"), the Occupational Safety and Health Administration
("OSHA"), state departments of transportation and other state and local
regulatory agencies. Changes in regulation of the rail and transit industries
through legislative, administrative, judicial or other action could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
Dependence on Key Personnel. The Company believes that its success will
depend to a significant extent upon the efforts and abilities of John G. Larkin,
its Chairman of the Board and Chief Executive Officer, Michael R. Azarela, its
Executive Vice President and Chief Financial Officer, John Kennedy, its Vice
President and Chief Operating Officer, and Harold C. Kropp, Jr., its Vice
President and Chief Accounting Officer and, due to the Company's decentralized
operating strategy, senior management of the Founding Companies. While the
Company has entered into employment agreements with Messrs. Larkin, Azarela,
Kennedy, and Kropp and certain executive officers of each of the Founding
Companies will enter into employment agreements with their respective Founding
Companies in connection with the Combination, there can be no assurance that
such individuals will remain with the Company throughout the terms of their
agreements, or thereafter. The Company likely will depend on the senior
management of any significant business it acquires in the future. The loss of
the services of one or more of these key employees before the Company is able to
attract and retain qualified replacement personnel could have a material adverse
effect on the Company's business, financial condition and results of operation.
The Company does not maintain any life insurance policies on its executive
officers or senior management personnel. See "Management."
Compensation Differential. In connection with the Combination, certain
executive officers of each of the Founding Companies will enter into employment
agreements with their respective Founding Companies. The total compensation
packages to be paid under such agreements are considerably lower than those
historically received by certain owners of the Founding Companies in profitable
years. However, approximately 45% of the historical compensation of the owners
of the Founding Companies in 1997 was comprised of bonus compensation, often
tied to profitability. Following the initial two-year term of the employment
agreements, the Company will reevaluate its compensation structure after
examining operating results and the value of the services such individuals are
providing to the Company. To the extent that salaries following the initial term
are materially higher than those currently contemplated, the Company's business,
financial condition and results of operations could be adversely affected. See
"Management -- Employment Agreements."
Substantial Proceeds of Offering to Benefit Affiliates. At an assumed
initial public offering price of $12.00 per share, net proceeds of $55.8 million
from the Offering will be used to pay the cash portion of the purchase price for
the Founding Companies in the Combination and $3.9 million will be used to repay
outstanding indebtedness of certain of the Founding Companies (including
approximately $1.6 million of indebtedness incurred to partially finance the
redemption of shares of common stock of a Founding Company held by an ESOP). An
additional $32.5 million of indebtedness will be repaid with borrowings under
the Company's Credit Facility. Approximately $10.8 million of this indebtedness
has been guaranteed by, or is payable to, stockholders or affiliates of Founding
Companies. See "Formation of the Company -- The Combination."
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Potential Conflicts of Interest. The Company is subject to risks
associated with potential conflicts of interest that may arise out of the
interrelationships among certain of the officers of the Founding Companies and
related third party entities with which the Founding Companies conduct business
transactions. For a detailed description of these and certain other related
party transactions, see "Certain Relationships and Related Party Transactions."
While the Company intends to conduct all related party transactions on terms no
less favorable than those the Company could negotiate with an unrelated third
party, the interests of officers of the Founding Companies in their capacities
with related third party entities may come into conflict with the interests of
such persons in their capacities with the Company.
Potential Influence of Existing Stockholders. After the Offering, the
Company's executive officers and directors will beneficially own an aggregate of
18.2% of the outstanding shares of Common Stock (16.9% if the Underwriters'
over-allotment option is exercised in full). The Company's executive officers
and directors if acting together may be able to substantially influence the
election of directors and matters requiring the approval of the stockholders of
the Company. This concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company. See "Principal and
Selling Stockholders."
Shares Eligible for Future Sale. Upon completion of the Offering, the
Company will have 15,073,530 shares of Common Stock outstanding. The 5,000,000
shares sold in the Offering will be freely tradeable without restriction or
further registration under the Securities Act, unless acquired by an "affiliate"
of the Company, as that term is defined in Rule 144 promulgated under the
Securities Act ("Rule 144"). Shares held by affiliates will be subject to resale
limitations of Rule 144 described below. All of the remaining 10,073,530 shares
of Common Stock will be available for resale at various dates beginning 180 days
after the date of this Prospectus, upon expiration of applicable lock-up
agreements described below and subject to compliance with Rule 144 as the
holding provisions of Rule 144 are satisfied. In addition, 2,000,000 shares of
Common Stock are reserved for issuance pursuant to the Incentive Plan. The
Company intends to file a registration statement on Form S-8 as soon as
practicable after the consummation of the Offering with respect to the shares of
Common Stock issuable pursuant to the Incentive Plan. In addition, within (i) 90
days after the consummation of the Offering the Company intends to register
shares of Common Stock under the Securities Act for its use in connection with
future acquisitions and (ii) 180 days after the Offering the Company intends to
file a shelf registration statement to register up to 1.4 million shares of
Common Stock to permit sales of such shares by the Selling Stockholders and
IPODC.
Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock or the ability of the
Company to raise capital through sales of its equity securities. The Company has
agreed that it will not offer, sell or issue any shares of Common Stock or
options, rights or warrants to acquire any Common Stock for a period of 180 days
after the date of this Prospectus without the prior written consent of BT Alex.
Brown Incorporated, except for grants of options under the Incentive Plan and
shares issued (i) in connection with acquisitions and (ii) pursuant to the
exercise of options granted under the Incentive Plan. In addition, the Company's
directors and executive officers and the Selling Stockholders have agreed not to
directly or indirectly offer for sale, sell or otherwise dispose of any Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of BT Alex. Brown Incorporated, except for sales of Common
Stock by the Selling Stockholders upon the exercise of the Underwriters'
over-allotment option, if any. See "Underwriting." Further, the stockholders of
each of the Founding Companies have agreed with the Company that they will not
sell, pledge, transfer or otherwise dispose of any shares of Common Stock for a
period of one year from the date of the closing of the Combination.
From the first anniversary of the consummation of the Offering to the
fourth anniversary of the consummation of the Offering the Company will make
available selling opportunities for the recipients of Common Stock in the
Combination to sell at various dates a certain number of shares of
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Common Stock owned by them. Every quarter during the foregoing period, these
owners of Common Stock will be permitted to sell up to 8% of the Common Stock
received by them. If such owner does not sell such shares in a given quarter,
such owner may sell such shares in any later quarter, provided that in no event
may an owner sell more than 20% of the shares of Common Stock received by such
owner in any one quarter. The Company may elect to make available (i) additional
opportunities to sell shares of Common Stock and/or (ii) the opportunity to sell
an amount in excess of such amount in any particular quarter. Such sales will
take place either through block trades or registered offerings.
No Prior Market for the Common Stock; Possible Volatility of Stock
Price. Prior to the Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active public market for the
Common Stock will develop or be sustained after the Offering or that purchasers
of Common Stock will be able to resell their Common Stock at prices equal to or
greater than the initial public offering price. The initial public offering
price of the Common Stock will be determined by negotiation between the Company
and the representatives of the Underwriters based on the factors described under
"Underwriting" and may not be indicative of the market price for the Common
Stock after the Offering.
The trading price of the Common Stock could fluctuate in response to
various factors related to the Company, its competitors, the transportation
industry or the financial markets in general. Such factors include, but are not
limited to, quarterly operating results, changes in financial analysts'
recommendations or earnings estimates and changes in general or regional
economic conditions. Moreover, the stock market has experienced extreme price
and volume fluctuations in recent periods, which have not necessarily been
related to corporate operating performance. The volatility of the market could
adversely affect the market price of the Common Stock and the ability of the
Company to raise equity in the public markets. See "Underwriting."
Dilution to New Investors. After giving effect to the Combination,
purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the pro forma as adjusted net tangible book value of
their shares in the amount of $9.99 per share, or 83.3% assuming an initial
public offering price of $12.00 per share. See "Dilution." Within 90 days after
consummation of the Offering the Company intends to register additional shares
of Common Stock for issuance in future acquisitions. If the Company issues
additional shares of Common Stock in the future, including shares which may be
issued pursuant to the exercise of stock options and future acquisitions,
purchasers of Common Stock in the Offering may experience further dilution in
the net tangible book value per share of the Common Stock.
Certain Antitakeover Provisions. Certain provisions of the Company's
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
Bylaws and Delaware law may make a change in the control of the Company more
difficult to effect, even if a change in control were in the stockholders'
interest. The Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law (the "DGCL"), which prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless the business combination is approved
in a prescribed manner. In addition, the Company's Certificate of Incorporation
and Bylaws provide for a nine member Board of Directors to be elected to
staggered one-, two- and three- year terms and, thereafter, for successive
three-year terms. Additionally, the Certificate of Incorporation provides that
the Company may issue up to 10,000,000 shares of preferred stock with rights and
preferences determined by the Board of Directors. Such issuance may make it more
difficult for a third party to obtain a majority of the Company's outstanding
stock. See "Description of Capital Stock -- Certain Provisions of Delaware Law
and the Company's Certificate of Incorporation and Bylaws."
15
<PAGE> 19
FORMATION OF THE COMPANY
INCORPORATION
RailWorks Corporation was incorporated in Delaware in March 1998 as a
holding company to acquire companies that provide rail system services,
including construction and rehabilitation, repair and maintenance, and related
products. Prior to the Combination and the Offering, RailWorks Corporation
issued shares of Common Stock for cash to John G. Larkin, the Chairman of the
Board and Chief Executive Officer of the Company, in connection with its
incorporation. See "Certain Relationships and Related Party
Transactions -- Organization of RailWorks Corporation."
THE COMBINATION
Simultaneously with and as a condition to the closing of the Offering,
RailWorks Corporation will acquire in separate transactions all of the issued
and outstanding capital stock of each of the Founding Companies for an aggregate
consideration (assuming an initial public offering price of $12.00 per share) of
$158.3 million (subject to adjustment), which consists of (i) $51.9 million in
cash, which will be paid from the proceeds of the Offering (representing 92.9%
of the estimated net proceeds of the Offering) and (ii) the $106.4 million fair
value of 8,867,648 shares of Common Stock to be issued to the stockholders of
the Founding Companies. In addition, in connection with the Combination, the
Company will assume $35.0 million of indebtedness of certain of the Founding
Companies (including approximately $1.6 million of indebtedness incurred to
partially finance the redemption of shares of common stock of a Founding Company
held by an ESOP). Such indebtedness will be repaid with a portion of the
proceeds of the Offering (representing 7.1% of the estimated net proceeds of the
Offering) and with borrowings under the Company's Credit Facility. The purchase
price for each Founding Company was determined based on negotiations between
RailWorks Corporation and the Founding Companies. The factors considered by the
parties in determining the purchase price were historical operating results,
growth rates and assets and liabilities of the Founding Companies, and such
factors were applied consistently to each Founding Company. The following table
contains information concerning the aggregate cash to be paid and Common Stock
expected to be issued (at an assumed initial public offering price of $12.00 per
share) in connection with the Combination (subject to adjustment):
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES OF SHARES OF
COMMON COMMON ASSUMED TOTAL
CASH(1) STOCK(1) STOCK INDEBTEDNESS CONSIDERATION(2)
------- ---------- --------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Comstock Holdings, Inc., the accounting
acquiror............................. $13,093 2,803,555 $ 33,643 $18,256 $ 46,736
Annex Railroad Builders, Inc.(3)....... 5,704 758,897 9,107 1,082 14,811
Comtrak Construction, Inc.............. 886 238,377 2,861 -- 3,747
Condon Brothers, Inc................... 2,833 493,370 5,920 2,103 8,753
CPI Concrete Products Incorporated..... 3,549 440,104 5,281 2,295 8,830
H.P. McGinley, Incorporated............ 4,291 660,071 7,921 594 12,212
Kennedy Railroad Builders, Inc.(5)..... 2,790 365,984 4,392 2,543 7,182
Merit Railroad Contractors, Inc........ 1,981 303,782 3,646 629 5,627
Midwest Construction Services, Inc..... 2,603 424,528 5,094 687 7,697
New England Railroad Construction
Company, Inc......................... 3,169 454,862 5,458 610 8,627
Railroad Service, Inc.(6).............. 3,463 509,017 6,108 1,310 9,571
Southern Indiana Wood Preserving
Company, Inc......................... 3,176 433,859 5,206 4,081 8,382
U.S. Trackworks, Inc.(7)............... 1,317 304,450 3,653 474 4,970
Wm. A. Smith Construction Co.,
Inc.(8).............................. 1,690 366,424 4,397 386 6,087
------- ---------- -------- ------- --------
Subtotal.......................... $50,545 8,557,280 $102,687 $35,050 $153,232
------- ---------- -------- ------- --------
IPODC(9)............................... 1,319 310,368 3,724 -- 5,043
------- ---------- -------- ------- --------
Total........................ $51,864 8,867,648 $106,411 $35,050 $158,275
======= ========== ======== ======= ========
</TABLE>
(footnotes appear on following page)
16
<PAGE> 20
(footnotes from previous page)
- ---------------
(1) Fees to be paid to IPODC on behalf of the Founding Companies are set forth
separately in the table and are excluded from the amounts set forth for the
Founding Companies.
(2) Excludes assumed indebtedness.
(3) Includes Mize Construction Company, Railroad Specialities, Inc. and U.S.
Railway Supply Inc., all of which are under common control.
(4) Includes approximately $1.6 million of indebtedness incurred to partially
finance the redemption of shares of common stock of a Founding Company held
by an ESOP.
(5) Includes Alpha-Keystone Engineering, Inc. and Railcorp, Inc., all of which
are under common control.
(6) Includes Minnesota Railroad Service, Inc., which is under common control.
(7) Includes Northern Rail Service and Supply Co., which is under common
control.
(8) Includes Wm. A. Smith Rerailing Service, Inc., which is under common
control.
(9) In exchange for services provided by IPODC, the Founding Companies have
agreed to pay IPODC a fee equal to 3 1/2% of the total consideration paid to
the Founding Companies (excluding the cash portion of Comstock's
consideration) in the Combination. Such fee will be paid in cash and shares
of Common Stock in the amounts reflected in the table. See "-- Organizer."
The consummation of each Acquisition is contingent upon the consummation of
the Offering and the satisfaction of customary closing conditions, including the
absence of any material adverse change in the business, operations and financial
condition of the Founding Companies and certification by the parties to each
Acquisition Agreement that the representations and warranties made by such party
in the Acquisition Agreement are true and correct as of the consummation of the
Acquisition and that such party has performed its obligations under the
Acquisition Agreement. Each Acquisition is subject to substantially the same
terms and conditions. The Acquisition Agreements provide that the stockholders
of the Founding Companies will indemnify RailWorks from certain liabilities that
may arise in connection with the Combination. The Acquisition Agreements require
certain executive officers of each of the Founding Companies to enter into
employment agreements with their respective Founding Companies effective upon
consummation of the Combination. In addition, executive officers of certain of
the Founding Companies will be elected to the Board of Directors of the Company
following the consummation of the Offering. After the Offering, the stockholders
of the Founding Companies, management of the Company and IPODC will in the
aggregate own 66.8% of the outstanding Common Stock, assuming the Underwriters'
over-allotment option is not exercised.
ORGANIZER
The Company was organized by IPODC, which was not previously affiliated
with any of the Founding Companies. IPODC identified the Founding Companies,
arranged for the Company's retention of its executive officers and managed the
initial organizational stages of the Combination and the Offering. In exchange
for the services provided by IPODC, the Founding Companies have agreed to pay
IPODC or its designees upon the completion of the Combination and the Offering,
a fee equal to 3 1/2% of the total consideration paid to the Founding Companies
in the Combination (excluding Comstock's cash consideration). Such fee will be
paid out of the cash and shares of Common Stock to be received by the Founding
Companies.
17
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by it hereby (at an assumed initial public offering price of $12.00 per
share), after deducting estimated underwriting discounts and commissions payable
by the Company, are $55.8 million. Of such net proceeds, the Company intends to
use (i) $51.9 million to pay the cash portion of the aggregate purchase price
for the Founding Companies in the Combination and (ii) $3.9 million to repay a
portion of the indebtedness of certain of the Founding Companies (including $1.6
million of indebtedness incurred to partially finance the redemption of shares
of common stock of a Founding Company held by an ESOP). The expenses of the
Offering incurred by the Company and the remaining indebtedness of the Founding
Companies will be paid from the Credit Facility and cash on hand. See "Formation
of the Company -- The Combination" and "Certain Relationships and Related Party
Transactions -- The Combination."
The Company will not receive any proceeds from the sale of shares of Common
Stock to be sold by the Selling Stockholders.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future because it intends to retain any earnings to
finance the expansion of its business and for general corporate purposes. Any
payment of future dividends will be at the discretion of the Board of Directors
of the Company and will depend upon, among other factors, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
considerations that the Company's Board of Directors deems relevant.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of Comstock, as the
accounting acquiror, as of March 31, 1998 and of the Company at March 31, 1998
(i) on a pro forma combined basis to reflect the Combination and (ii) on a pro
forma as adjusted basis to reflect the Combination and the Offering. This table
should be read in conjunction with the Unaudited Pro Forma As Adjusted Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY
------------------------
COMSTOCK AS OF
-------------- MARCH 31, 1998
AS OF ------------------------
MARCH 31, PRO FORMA PRO FORMA
1998 COMBINED AS ADJUSTED
-------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 945 $ 2,363 $ 163
Short-term debt and current portion of long-term
obligations......................................... 1,066 66,386(1) --
Long-term debt and capital lease obligations, less
current portion..................................... 12,352 16,113 26,699
Stockholders' equity:
Preferred Stock: $0.01 par value per share;
10,000,000 shares of the Company authorized; no
shares outstanding............................... -- -- --
Common Stock: $0.01 par value per share;
100,000,000 shares of the Company authorized;
150,000 shares of Comstock outstanding
historically; 10,073,530 shares outstanding pro
forma combined; and 15,073,530 shares outstanding
pro forma as adjusted(2)......................... 1 101 151
Additional paid-in capital.......................... 9 72,517 126,067
Retained earnings................................... 2,094 (12,377) (12,377)
------- -------- --------
Total stockholders' equity....................... 2,104 60,241 113,841
------- -------- --------
Total capitalization........................ $16,467 $145,103 $140,703
======= ======== ========
</TABLE>
- ---------------
(1) Consists of (i) $51,862,696 to be paid to the owners of the Founding
Companies and IPODC in the Combination and (ii) $14,523,000 of existing
short-term and current portion of long-term debt of the Founding Companies.
(2) Includes (i) 1,130,504 shares of Common Stock to be granted to executive
officers of the Company, (ii) 75,368 shares of Common Stock to be granted to
corporate-level employees of the Company upon consummation of the Offering
and (iii) 10 shares of Common Stock issued upon formation of the Company.
Does not include 2,000,000 shares of Common Stock that are reserved for
issuance under the Incentive Plan, of which options to purchase 20,000
restricted shares will be granted to the Company's non-employee directors
upon consummation of the Offering. See "Formation of the Company -- The
Combination," "Management -- 1998 Incentive Stock Plan" and "Principal and
Selling Stockholders."
19
<PAGE> 23
DILUTION
At March 31, 1998, the Company had a deficit in pro forma combined net
tangible book value of $23.3 million, or $2.31 per share of Common Stock. Pro
forma combined net tangible book value per share is determined by dividing the
pro forma combined net tangible book value of the Company (tangible assets less
liabilities) by the number of shares of Common Stock outstanding prior to the
Offering. Adjusting for the sale by the Company of 5,000,000 shares of Common
Stock offered hereby (at an assumed initial public offering price of $12.00 per
share) and the application of the estimated net proceeds therefrom as described
under "Use of Proceeds," the pro forma as adjusted net tangible book value of
the Company at March 31, 1998 would have been $30.3 million, or $2.01 per share.
This represents an immediate dilution in pro forma as adjusted net tangible book
value to new investors of $9.99 per share, or 83.3%, and an immediate increase
in pro forma as adjusted net tangible book value to existing stockholders of
$4.32 per share. The following table illustrates this per share dilution to new
investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
------
Pro forma combined net tangible book value (deficit)...... $(2.31)
Increase in pro forma combined net tangible book value
resulting from the Offering............................ $ 4.32
------
Pro forma as adjusted net tangible book value after the
Offering.................................................. 2.01
------
Dilution per share to new investors......................... $ 9.99
======
</TABLE>
The following table sets forth, as of March 31, 1998, the number of shares
of Common Stock of the Company purchased, the total cash consideration paid and
the average price per share paid by the existing stockholder, the owners of the
Founding Companies, executive management and new investors purchasing shares of
Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER(1) PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 10 --% $ 100 --% $10.00
Owners of Founding Companies(2)... 8,867,648 58.8 106,411,776 63.9 $12.00
Executive management.............. 1,205,872 8.0 -- --
New investors..................... 5,000,000 33.2 60,000,000 36.1 $12.00
---------- ----- ------------
15,073,530 100.0% $166,411,876 100.0%
========== ===== ============
</TABLE>
- ---------------
(1) Excludes 2,000,000 shares of Common Stock that are reserved for issuance
under the Incentive Plan, of which options to purchase 20,000 shares of
Common Stock will be granted to the Company's non-employee directors upon
consummation of the Offering.
(2) Represents shares to be issued to the stockholders of the Founding Companies
in the Combination (including 310,368 shares to be held by IPODC upon
consummation of the Offering). The total consideration reflects an assumed
initial public offering price of $12.00 per share.
20
<PAGE> 24
SELECTED PRO FORMA AS ADJUSTED FINANCIAL DATA
RailWorks Corporation was formed in March 1998 to acquire the Founding
Companies simultaneously with and as a condition to the consummation of the
Offering. For accounting and financial statement purposes, Comstock has been
identified as the accounting acquiror consistent with SAB No. 97 of the
Commission because its owners will receive the largest portion (32.8%) of the
shares of Common Stock issued to the owners of the Founding Companies in the
Combination. The acquisitions of the remaining Founding Companies will be
accounted for as purchases in accordance with APB No. 16. The selected pro forma
as adjusted data are not necessarily indicative of the operating results or
financial position that would have been achieved had the Combination and
Offering been consummated and should not be construed as representative of the
Company's future operating results or financial position. The selected pro forma
as adjusted financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Unaudited Pro Forma As Adjusted Financial Statements and the notes thereto and
the historical financial statements of the Founding Companies and the notes
thereto included elsewhere in this Prospectus. The Company anticipates that
following the Combination it will realize savings from: (i) more efficient
utilization of equipment and the Company's workforce; (ii) the combination of
administrative functions such as accounting, finance and human resources and
certain other functions at the corporate level; (iii) better pricing on
purchases of equipment and supplies; and, to a lesser extent, (iv) joint bidding
on larger rail projects. Those savings, which cannot be quantified or reasonably
estimated, have not been reflected in the Unaudited Pro Forma As Adjusted
Financial Statements or in the selected data presented below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
TWELVE MONTHS MARCH 31,
ENDED -----------------
DECEMBER 31, 1997 1997 1998
----------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA(1):
Revenue................................................. $256,508 $52,810 $61,810
Gross profit............................................ 35,035 7,097 7,192
General and administrative expenses(2).................. 21,366 5,526 5,030
Intangibles amortization(3)............................. 2,447 612 612
Income from operations.................................. 11,222 959 1,550
Interest and other income (expense), net................ (1,063) 134 (165)
Income before income taxes.............................. 10,159 1,093 1,385
Net income(4)........................................... 5,438 477 655
Net income per share.................................... .36 .03 .04
Shares used in computing net income per share(5)........ 15,074 15,074 15,074
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
--------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED(8)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA(6):
Working capital(7).......................................... $ 25,761 $ 41,084
Total assets................................................ 198,060 195,860
Long-term debt and capital leases, net...................... 16,113 26,699
Stockholders' equity........................................ 60,241 113,841
</TABLE>
- ---------------
(1) The pro forma as adjusted income statement data assume that the Combination
and the Offering were consummated on January 1, 1997 for the twelve months
ended December 31, 1997 and the three months ended March 31, 1997, and on
January 1, 1998 for the three months ended March 31, 1998.
21
<PAGE> 25
(2) The pro forma as adjusted general and administrative expenses data reflect
(i) $4.7 million, $1.1 million and $1.1 million for the twelve months ended
December 31, 1997 and the three months ended March 31, 1997 and 1998,
respectively, in pro forma reductions in salaries, bonuses and benefits to
the stockholders of the Founding Companies and other management personnel
(the "Compensation Differential"), (ii) a net reduction in lease-related
expenses of $1.2 million, $366,000 and $239,000 for the twelve months ended
December 31, 1997 and the three months ended March 31, 1997 and 1998,
respectively, in connection with a lease renewal by a Founding Company,
(iii) elimination of compensation expense of $400,000 in the three months
ended March 31, 1998, incurred in connection with the transfer of stock
between stockholders of a Founding Company and (iv) an increase of $1.5
million, $375,000 and $375,000 for the twelve months ended December 31, 1997
and the three months ended March 31, 1997 and 1998, respectively, for
estimated expenses of the Company's corporate office, including compensation
for its executive officers.
(3) As a result of the Combination (at an assumed initial public offering price
of $12.00 per share) the Company will have $78.5 million of goodwill and
$5.0 million of other intangible assets which will be amortized over a
40-year period and 10-year period, respectively.
(4) Assumes that all income is subject to a corporate income tax rate of 39% and
that all goodwill amortization is non-deductible for income tax purposes.
(5) Includes (i) 8,867,648 shares to be issued to stockholders of the Founding
Companies, (ii) 5,000,000 shares to be sold by the Company in the Offering
and (iii) 1,205,882 shares to be issued to management.
(6) The pro forma combined and pro forma as adjusted balance sheet data assume
that the Combination and Offering were consummated on March 31, 1998.
(7) Excludes $52.1 million payable to the Founding Companies which will be paid
immediately upon consummation of the Offering.
(8) Adjusted to reflect the sale of the 5,000,000 shares of Common Stock offered
by the Company hereby and the application of the net proceeds therefrom at
an assumed initial public offering price of $12.00 per share. See "Use of
Proceeds."
22
<PAGE> 26
SELECTED FINANCIAL DATA OF THE FOUNDING COMPANIES
The following selected historical financial data of the Founding Companies
have been derived from financial statements of each Founding Company for the
respective periods, and should be read in conjunction with the related audited
financial statements (if applicable), "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (if applicable), and other
information included elsewhere in this Prospectus. The selected financial data
for the three months ended March 31, 1997 and 1998 were derived from unaudited
financial statements prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation.
However, financial data for any interim period are not necessarily indicative of
results which can be expected for a full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMSTOCK HOLDINGS, INC., THE
ACCOUNTING ACQUIROR:
Income Statement Data:
Revenue........................ $170,665 $157,749 $181,616 $188,767 $153,610 $32,401 $41,628
Contract costs................. 148,728 137,607 164,777 169,303 136,678 27,997 37,205
Gross profit................... 21,937 20,142 16,839 19,464 16,932 4,404 4,423
General and administrative
expenses..................... 16,954 16,963 15,624 15,053 13,733 3,895 3,224
Depreciation and
amortization................. 1,934 1,447 1,263 1,365 (213) (61) (39)
Impairment of long-lived
assets....................... -- -- 20,105 -- -- -- --
Management fees................ 1,677 961 913 941 -- -- --
Net income (loss).............. 2,594 2,782 (19,972) 58 1,428 440 666
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
---------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................... $ 97,004 $ 89,168 $ 86,108 $ 84,344 $ 68,352 $84,609 $64,417
Long-term debt................. -- -- 17,041 2,404 12,449 29,634 12,352
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED,
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMTRAK CONSTRUCTION, INC.:
Revenue............................................. $ 2,976 $ 2,633 $ 1,009 $ 267 $ 175
Contract costs...................................... 2,576 1,984 857 228 138
Gross profit........................................ 400 649 152 39 37
General and administrative expenses................. 431 438 454 102 132
Net income (loss)................................... 44 160 (160) (53) (56)
CONDON BROTHERS, INC.:
Revenue............................................. $ 2,983 $ 5,517 $ 4,487 $ 944 $ 1,238
Contract costs...................................... 1,912 4,115 3,371 661 956
Gross profit........................................ 1,071 1,402 1,116 283 282
General and administrative expenses................. 757 839 983 208 260
Net income.......................................... 348 648 119 58 9
</TABLE>
23
<PAGE> 27
<TABLE>
<CAPTION>
THREE MONTHS
ENDED,
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MERIT RAILROAD CONTRACTORS, INC.:
Revenue............................................. $ 7,320 $ 9,931 $ 6,950 $ 986 $ 1,181
Contract costs...................................... 5,994 8,160 6,203 872 1,112
Gross profit........................................ 1,326 1,771 747 114 69
General and administrative expenses................. 858 1,126 971 179 265
Net income (loss)................................... 457 653 (386) (68) (174)
MIDWEST CONSTRUCTION SERVICES, INC.:
Revenue............................................. $ 9,316 $ 10,842 $ 9,676 $ 2,281 $ 2,456
Contract costs...................................... 7,950 9,339 8,637 1,951 2,106
Gross profit........................................ 1,366 1,503 1,039 330 350
General and administrative expenses................. 644 649 645 149 189
Net income.......................................... 804 893 433 184 163
RAILROAD SERVICE, INC. AND AFFILIATE:
Revenue............................................. $ 9,044 $ 10,709 $ 9,363 $ 238 $ 1,268
Contract costs...................................... 7,330 8,199 7,065 455 1,290
Gross profit (loss)................................. 1,714 2,510 2,298 (217) (22)
General and administrative expenses................. 1,289 1,418 1,450 268 721
Net income (loss)................................... 357 1,006 977 (332) (750)
U.S. TRACKWORKS, INC. AND AFFILIATE:
Revenue............................................. $ 4,363 $ 4,819 $ 4,814 $ 279 $ 651
Contract costs...................................... 3,041 4,466 3,740 269 522
Gross profit........................................ 1,322 353 1,074 10 129
General and administrative expenses................. 1,115 443 736 161 156
Net income (loss)................................... 192 (128) 297 (159) (37)
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.:
Revenue............................................. $ 10,049 $ 8,149 $ 8,901 $ 1,750 $ 2,342
Costs of sales...................................... 8,437 6,727 7,539 1,511 1,847
Gross profit........................................ 1,612 1,422 1,362 239 495
General and administrative expenses................. 580 570 529 90 197
Net income.......................................... 1,042 889 841 158 283
WM. A. SMITH CONSTRUCTION CO., INC. AND AFFILIATE:
Revenue............................................. $ 4,117 $ 5,797 $ 5,086 $ 1,028 $ 1,810
Contract costs...................................... 3,387 4,973 4,238 883 1,600
Gross profit........................................ 730 864 848 145 210
General and administrative expenses................. 494 497 635 115 152
Net income.......................................... 156 262 154 25 48
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED MARCH 31,
--------------------------- DECEMBER 31, ---------------
1996 1997 1997 1997 1998
------------ ------------ ------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES:
Revenue...................................... $13,308 $15,467 $15,099 $5,286 $2,923
Contract costs............................... 11,137 12,948 12,406 4,512 2,280
Gross profit................................. 2,171 2,519 2,693 774 643
General and administrative expenses.......... 1,235 1,674 1,326 453 370
Net income................................... 707 599 970 206 218
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED MARCH 31,
--------------------------- DECEMBER 31, ---------------
1996 1997 1997 1997 1998
------------ ------------ ------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
KENNEDY RAILROAD BUILDERS, INC. AND
ASSOCIATED COMPANIES:
Revenue...................................... $ 6,652 $ 9,704 $ 8,296 $2,245 $2,384
Contract costs............................... 5,120 7,968 6,605 1,958 2,079
Gross profit................................. 1,532 1,736 1,691 287 305
General and administrative expenses.......... 1,348 1,498 1,163 396 417
Net income (loss)............................ 123 78 246 (79) (89)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
--------------------------- TEN MONTHS ENDED
ENDED MARCH 31,
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, ---------------
1996 1997 1997 1997 1998
------------ ------------ ------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
H.P. MCGINLEY, INCORPORATED:
Revenue...................................... $4,822 $4,425 $5,910 $ 743 $1,365
Cost of goods sold........................... 3,691 3,017 3,357 500 887
Gross profit................................. 1,131 1,408 2,553 243 478
General and administrative expenses.......... 1,113 1,294 1,835 317 352
Net income (loss)............................ 12 72 431 (43) 80
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY,
INC.:
Revenue...................................... $5,039 $7,462 $4,001 $2,222 $ 341
Contract costs............................... 4,712 5,866 3,321 1,705 537
Gross profit (loss).......................... 327 1,596 680 517 (196)
General and administrative expenses.......... 396 779 652 162 122
Net income (loss)............................ (59) 547 18 195 (195)
</TABLE>
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
YEAR ENDED JANUARY 31, MARCH 31,
--------------------------------- ---------------
1996 1997 1998 1997 1998
------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CPI CONCRETE PRODUCTS INCORPORATED:
Revenue........................................ $11,016 $10,098 $10,986 $1,792 $1,669
Cost of goods sold............................. 8,717 8,192 9,156 1,611 1,447
Gross profit................................... 2,299 1,906 1,830 181 222
General and administrative expenses............ 1,442 1,317 1,248 192 126
Net income..................................... 563 417 445 34 67
</TABLE>
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
RailWorks Corporation was formed in March 1998 to become a leading
nationwide provider of rail system services, including construction and
rehabilitation, repair and maintenance, and related products. The Company
primarily performs services pursuant to contracts for the completion of specific
projects, some of which take up to five years to complete. On most projects, the
Company contracts directly with rail system operators, while on other projects
the Company acts as a subcontractor. RailWorks Corporation, which has conducted
no operations to date, has entered into agreements to acquire the Founding
Companies simultaneously with the consummation of the Offering. In 1997, on a
pro forma as adjusted basis, the Company had revenue of $256.5 million,
operating income of $11.2 million and net income of $5.4 million. For the three
months ended March 31, 1998, on a pro forma as adjusted basis, the Company had
revenue of $61.8 million, operating income of $1.5 million and net income of
$655,000.
While the Company intends to conduct the operations of the Founding
Companies on a decentralized basis, the Company will integrate certain aspects
of its operations, such as administrative functions, in order to achieve
potential cost savings through the elimination of duplicative functions. Such
integration may also necessitate additional costs and expenditures for corporate
management and administration, systems integration, employee relocation and
severance and facilities expansion. The Company does not anticipate any material
reduction in its workforce to result from this integration. As a result of these
various additional costs and potential cost savings, comparison of future
operating results with historical operating results may not be meaningful.
In addition, the Founding Companies have operated historically under
varying tax structures, including both S and C Corporations, which have
influenced the historical level of owners' compensation. As a result of varying
practices regarding employee-stockholder compensation among the Founding
Companies, comparison of operating results among the Founding Companies and from
period to period in respect of a particular Founding Company may not be
meaningful. Upon consummation of the Combination, certain executive officers of
each of the Founding Companies will enter into employment agreements with their
respective Founding Companies. The aggregate compensation to be paid to such
executive officers will be reduced as reflected in the Unaudited Pro Forma As
Adjusted Statements of Income included elsewhere in this Prospectus. Following
the initial two-year term of the employment agreements, the Company will
reevaluate its compensation structure after examining operating results and the
value of the services such individuals are providing the Company. See "Risk
Factors -- Compensation Differential."
REVENUE AND COSTS
The Company recognizes revenues from fixed price contracts using the
percentage-of-completion method, measured by the percentage of costs incurred to
date to management's estimated total cost for each contract. Changes in job
performance, job conditions and estimated profitability may result in revisions
to cost and income, which are recognized in the period in which the revisions
are determined. Revenues from time-and-material contracts are recognized
currently as the work is performed.
Contract costs consist principally of wages and benefits of employees,
subcontracted services, materials, parts and supplies, depreciation, fuel and
other vehicle expenses and equipment rental, as well as indirect costs related
to contract performance. Contract costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
26
<PAGE> 30
In the case of product sales, the Company recognizes revenue when products
are delivered to customers pursuant to shipping agreements. Cost of goods sold
includes raw materials cost and production cost.
The Company's gross margin for a project depends on the relative proportion
of costs related to labor and materials and on whether the Company functions as
a prime contractor or as a subcontractor. The Company generally realizes higher
gross margins on projects in which it functions as a prime contractor. A
significant portion of the Company's revenue is attributable to materials and
supplies installed in connection with its contracting activities. Costs of
materials and supplies are typically passed through to the customer and revenue
from these items has a significantly lower profit margin than revenue related to
other activities. For projects in which a higher percentage of the contract
costs consists of labor, the Company's bid price includes a higher gross margin
than for projects in which materials represent more of the contract costs due to
the greater difficulty in estimating the required labor. Material costs can be
estimated with greater accuracy and prices often can be fixed by placing orders
at the time a project is bid or commenced.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Founding Companies have in the past experienced quarterly variations in
revenue, operating income (including operating losses), net income (including
net losses) and cash flows (including cash flow deficits) as a result of various
factors, including projects commenced and completed during a quarter, the number
of business days in a quarter and the size and scope of projects. A variation in
the number of projects, progress on projects or the timing of the initiation or
completion of projects can cause periods in which certain operating resources
are not generating revenue and can cause significant variations in operating
results between reporting periods. Negative fluctuations have been particularly
pronounced, and net losses have been incurred, in the first and fourth calendar
quarters, generally due to adverse weather conditions. The Company expects to
continue to experience such quarterly fluctuations in operating results,
including possible net losses. See "Risk Factors -- Rail System Cyclicality" and
"-- History of Losses; Fluctuations in Quarterly Operating Results."
PRO FORMA AS ADJUSTED RESULTS OF OPERATIONS
The pro forma as adjusted results of operations of the Company for the
periods presented may not be comparable to, and may not be indicative of, the
Company's post-Combination results of operations because (i) the Founding
Companies were not under common control or management during the periods
presented and (ii) the pro forma as adjusted data do not reflect all of the
potential benefits and cost savings the Company expects to realize as a result
of operating as a combined entity. The following discussion should be read in
conjunction with the Unaudited Pro Forma As Adjusted Financial Statements and
the related notes thereto and the historical financial statements of the
Founding Companies and the related notes appearing elsewhere in this Prospectus.
27
<PAGE> 31
The following table sets forth selected pro forma as adjusted financial
data for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenue..................................................... $52,810 $61,810
Contract costs and cost of goods sold....................... 45,713 54,618
Gross profit................................................ 7,097 7,192
General and administrative expenses......................... 5,526 5,030
Intangibles amortization.................................... 612 612
Net income.................................................. 477 655
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenue. Revenue increased to $61.8 million for the three months ended
March 31, 1998 from $52.8 million for the three months ended March 31, 1997, an
increase of $9.0 million, or 17.0%. Revenue increased primarily as a result of
higher revenue at Comstock. See "-- Comstock Holdings, Inc."
Gross Profit. Gross profit increased to $7.2 million for the three months
ended March 31, 1998 from $7.1 million for the three months ended March 31,
1997, an increase of $95,000 or 1.3%. As a percentage of revenue, gross profit
decreased to 11.6% for the three months ended March 31, 1998 from 13.4% for the
three months ended March 31, 1997. The decline in gross profit as a percentage
of revenue was the result of the completion of several large contracts with
unusually high margins which were in process during the three months ended March
31, 1997. See "-- Quarterly Fluctuations in Results of Operations."
General and Administrative Expenses. General and administrative expenses
decreased to $5.1 million for the three months ended March 31, 1998 from $5.5
million for the three months ended March 31, 1997, a decrease of $447,000 or
8.1%. This decrease was the result of improved workers' compensation claims
experience and reduced costs at Comstock due to cost reductions implemented
following its acquisition from Spie (as described below). As a percentage of
revenue, general and administrative expenses decreased to 8.2% for the three
months ended March 31, 1998 from 10.4% for the three months ended March 31,
1997. The decline in general and administrative expenses as a percentage of
revenue was principally the result of leveraging general and administrative
expenses over a higher sales volume.
Net Income. Net income increased to $749,000 for the three months ended
March 31, 1998 from $600,000 for the three months ended March 31, 1997, an
increase of $149,000 or 24.8%. As a percentage of revenue, net income increased
to 1.2% for the three months ended March 31, 1998 from 1.1% for the three months
ended March 31, 1997.
PRO FORMA AS ADJUSTED LIQUIDITY AND CAPITAL RESOURCES
The Company expects capital expenditures of approximately $1.0 million and
$3.0 million in 1998 and 1999, respectively, primarily to support expansion of
its management information systems.
Cash for future acquisitions and working capital will be financed by funds
generated from operations, together with borrowings under a three-year, $75.0
million senior revolving credit facility (the "Credit Facility") which
NationsBank, N.A. ("NationsBank") has committed to extend upon consummation of
the Offering and the satisfaction of certain customary closing conditions. Upon
consummation of the Offering the Company intends to draw down the Credit
Facility by $31.0 million to repay the indebtedness of the Founding Companies
that is not repaid with the proceeds of the Offering. Availability of borrowings
will be subject to a borrowing base formula that initially will limit borrowings
to approximately $35 million. The Credit Facility will be secured by a first
lien on all of the capital stock of the Company's subsidiaries and on all
accounts receivable of the Company and its subsidiaries. The credit agreement
(the "Credit Agreement") governing the Credit Facility
28
<PAGE> 32
will contain a negative pledge on all other assets of the Company and its
subsidiaries and other usual and customary covenants and events of default for
transactions of the type contemplated by the Credit Facility. Borrowings under
the Credit Facility will bear interest, at the option of the Company, at an
interest rate equal to (i) LIBOR plus the applicable margin for LIBOR loans,
which ranges from 125 basis points to 250 basis points based on the ratio of
Funded Debt to EBITDA (as such terms will be defined in the Credit Agreement) or
(ii) the Alternate Base Rate (defined as the higher of (a) the NationsBank prime
rate and (b) the Federal Funds rate plus 50 basis points) plus up to 125 basis
points based on the ratio of Funded Debt to EBITDA. The Company may also finance
future acquisitions with shares of Common Stock.
RESULTS OF OPERATIONS OF THE FOUNDING COMPANIES
Prior to the Combination, the Founding Companies (other than affiliates of
Annex Railroad Builders, Inc., Comstock Holdings, Inc., CPI Concrete Products
Incorporated, H.P. McGinley, Incorporated, Kennedy Railroad Builders, Inc., New
England Railroad Construction Company, Inc., and Wm. A. Smith Construction Co.,
Inc.) elected to be treated as S Corporations for federal income tax purposes.
As a result, these S Corporations were not subject to federal income taxes. The
selling, general and administrative expenses of the Founding Companies include
compensation to employee-stockholders of the Founding Companies for the years
ended December 31, 1996 and 1997 and the three months ended March 31, 1998. Upon
consummation of the Combination, certain executive officers of each of the
Founding Companies will enter into employment agreements with their respective
Founding Companies. The aggregate compensation to be paid to such executive
officers will be reduced as reflected in the Unaudited Pro Forma As Adjusted
Statements of Income included elsewhere in this Prospectus. Following the
initial two-year term of the employment agreements, the Company will reevaluate
its compensation structure after examining operating results and the value of
the services such individuals are providing the Company. See "Risk
Factors -- Compensation Differential." As a result of varying practices
regarding compensation to employee-stockholders among the Founding Companies,
the comparison of operating margins among the Founding Companies and from period
to period in respect of a particular Founding Company may not be meaningful.
The following information describes the results of operations for certain
of the Founding Companies.
COMSTOCK HOLDINGS, INC.
Founded in 1904, L.K. Comstock & Co., Inc. ("L.K. Comstock"), a
wholly-owned subsidiary of Comstock, is one of the largest electrical
contractors in the United States based on revenue. L.K. Comstock specializes in
power, communication and signaling installations for rail-based transit systems
and also provides electrical contracting services for commercial buildings,
heavy industrial and manufacturing plants and power plants. Through incremental
investments from 1986 through 1989, L.K. Comstock's former parent company,
Comstock Group, Inc. ("CGI"), was acquired by Spie Enertrans S.A. ("Spie"), a
multinational electrical engineering firm headquartered in Paris, France. During
Spie's ownership, L.K. Comstock sought to increase revenue by expanding its non-
transit operations in California and entering into joint ventures to design and
build large power and industrial projects in other locations. Effective January
1, 1997, L.K. Comstock was acquired (the "Comstock Acquisition") from Spie by
Comstock, a corporation owned by certain employees of L.K. Comstock. Comstock's
revenue in fiscal 1997 was $153.6 million, representing 59.9% of the Company's
pro forma as adjusted revenue for 1997.
Following the Comstock Acquisition, Comstock's management instituted a plan
to reduce Comstock's costs and improve profitability. As a result of this plan,
Comstock has reduced general and administrative expenses by eliminating certain
management positions, including those of
29
<PAGE> 33
several French expatriates, and reducing its Los Angeles-based staff. Comstock
has also been improving gross profit margins through (i) improved control over
contract costs by consolidating transit project estimating and bidding functions
and (ii) exiting unprofitable, risky operations which had been expanded under
Spie's ownership (such as electrical projects for traffic systems, non-rail
projects in California and large joint ventures for the design and construction
of power and industrial plants). Under joint ventures with general construction
contractors, as preferred by Spie, Comstock had limited management control and
was subject to increased costs due to general contract conditions. Following the
Comstock Acquisition, management has focused the business to benefit from its
core competencies, including rail-based transit projects. However, Comstock's
electricians and supervisors are capable of performing services on rail and
non-rail projects, thus enabling the efficient use of experienced labor on
projects in response to demand. Additionally, its accounting and management
systems are designed to provide necessary information for both rail and non-rail
projects. In 1997, Comstock derived 56.7% of its revenue and 58.6% of its gross
profit from rail-related projects as compared to 48.1% and 48.5%, respectively,
in 1996.
The following table sets forth certain selected financial data and data as
a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------ ---------------------------------
1995 1996 1997 1997 1998
---------------- ---------------- ---------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $181,616 100.0% $188,767 100.0% $153,610 100.0% $32,401 100.0% $41,628 100.0%
Contract costs....... 164,777 90.7 169,303 89.7 136,678 89.0 27,997 86.4 37,205 89.4
Gross profit......... 16,839 9.3 19,464 10.3 16,932 11.0 4,404 13.6 4,423 10.6
General and
administrative
expenses........... 15,624 8.6 15,053 8.0 13,733 8.9 3,895 12.0 3,224 7.7
Net income
(loss)............. (19,972) (11.0) 58 -- 1,428 0.9 440 1.4 666 1.6
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenue. Revenue increased to $41.6 million for the three months ended
March 31, 1998 from $32.4 million for the three months ended March 31, 1997, an
increase of $9.2 million, or 28.5%. This increase was a result of a $12.3
million increase in revenue from commercial and other operations due to the
commencement of work on certain large projects, including those at John F.
Kennedy International Airport in New York ("JFK").
Gross Profit. Gross profit remained stable at $4.4 million for the three
months ended March 31, 1998 and 1997. As a percentage of revenue, gross profit
decreased to 10.6% for the three months ended March 31, 1998 from 13.6% for the
three months ended March 31, 1997. This decrease was the result of costs
associated with the JFK projects.
General and Administrative Expenses. General and administrative expenses
decreased to $3.2 million for the three months ended March 31, 1998 from $3.9
million for the three months ended March 31, 1997, a decrease of $671,000, or
17.2%. As a percentage of revenue, general and administrative expenses decreased
to 7.7% for the three months ended March 31, 1998 from 12.0% for the three
months ended March 31, 1997. This decline was a result of reductions in
executive and administrative staff and tighter cost controls by management.
Net Income. Net income increased to $666,000 for the three months ended
March 31, 1998 from $440,000 for the three months ended March 31, 1997, an
increase of $226,000, or 51.4%. As a percentage of revenue, net income increased
to 1.6% for the three months ended March 31, 1998 from 1.4% for the three months
ended March 31, 1997. The increase in net income was primarily due to the
reduction in general and administrative expenses described above and a decrease
in interest expense due to lower average borrowings.
30
<PAGE> 34
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue decreased to $153.6 million for the year ended December
31, 1997 from $188.8 million for the year ended December 31, 1996, a decrease of
$35.2 million, or 18.6%. This decrease was due to a decrease in revenue from
Comstock's power and industrial operations attributable to the completion of
certain large projects in 1996 and early 1997 that were not immediately
replaced, as well as a decrease in revenue from Comstock's traffic operations,
offset in part by an increase in revenue from Comstock's commercial operations.
The decrease in revenue from traffic operations, as well as a portion of the
decrease in revenue from power and industrial operations, were due to the change
in strategic focus discussed above and it is unlikely that such projects will be
replaced. Rail-related revenue did not change significantly from 1996 to 1997
due to limited bonding capacity.
Gross Profit. Gross profit decreased to $16.9 million for the year ended
December 31, 1997 from $19.5 million for the year ended December 31, 1996, a
decrease of $2.5 million, or 13.0%. As a percentage of revenue, gross profit
increased to 11.0% for the year ended December 31, 1997 from 10.3% for the year
ended December 31, 1996. Gross profit decreased as a result of the decline in
revenue, offset in part by tighter cost controls implemented by management and a
reduction in the amount of activity in traffic and Los Angeles-based non-rail
projects which had significantly lower margins. Additionally, 1996 gross profit
benefitted from a reduction in contract reserves of approximately $3 million
related to the settlement of outstanding project contingencies. See "Certain
Transactions and Related Party Transactions -- Other Transactions."
General and Administrative Expenses. General and administrative expenses
decreased to $13.7 million for the year ended December 31, 1997 from $15.1
million for the year ended December 31, 1996, a decrease of $1.3 million, or
8.8%. This decrease was a result of the tighter cost controls implemented by
management, including reductions in executive and administrative staff in the
power, industrial and Los Angeles-based non-rail operations. As a percentage of
revenue, general and administrative expenses increased to 8.9% for the year
ended December 31, 1997 from 8.0% for the year ended December 31, 1996. This
increase was the result of the decrease in revenue.
Net Income. Net income increased to $1.4 million for the year ended
December 31, 1997 from $58,000 for the year ended December 31, 1996, an increase
of $1.4 million. For each period, net income as a percentage of revenue was less
than 1%. The increase in net income was partially due to the reduction of
general and administrative expenses discussed above and the elimination of
management expenses of $941,000 paid to Spie and related entities in 1996. In
addition, as a result of the Comstock Acquisition and the related purchase
accounting, approximately $1.5 million of depreciation and amortization were
eliminated in 1997 as compared to 1996. These factors which increased net income
were partially offset by the decrease in gross profit due to the factors
discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased to $188.8 million for the year ended December
31, 1996 from $181.6 million for the year ended December 31, 1995, an increase
of $7.2 million, or 3.9%. This increase was due to a $22.1 million increase in
revenue from Comstock's rail-related operations, resulting from the commencement
of several projects in the metropolitan New York area, partially offset by a
reduction of approximately $13 million in revenue from Comstock's commercial and
other operations due to the completion of several projects in 1995 or early 1996
that were not immediately replaced.
Gross Profit. Gross profit increased to $19.5 million for the year ended
December 31, 1996 from $16.8 million for the year ended December 31, 1995, an
increase of $2.6 million, or 15.6%. As a percentage of revenue, gross profit
increased to 10.3% for the year ended December 31, 1996 from 9.3% for the year
ended December 31, 1995. Gross profit increased principally as a result of a
reduction in contract reserves of approximately $3 million related to the
settlement of outstanding
31
<PAGE> 35
project contingencies (see "Certain Transactions and Related Party
Transactions -- Other Transactions") and, to a lesser extent, increased revenue.
General and Administrative Expenses. General and administrative expenses
decreased to $15.1 million for the year ended December 31, 1996 from $15.6
million for the year ended December 31, 1995, a decrease of $571,000, or 3.7%.
As a percentage of revenue, general and administrative expenses decreased to
8.0% for the year ended December 31, 1996 from 8.6% for the year ended December
31, 1995. This decrease was primarily the result of a reduction in
administrative staff and expenses at Comstock's Los Angeles office.
Net Income (Loss). Net income increased to $58,000 from a net loss of
$20.0 million for the year ended December 31, 1995, an improvement of $20.0
million. The improvement in net income was primarily due to a charge of $20.1
million incurred in 1995 for the impairment of long-lived assets and the
increase in gross profit due to the factors discussed above. These factors were
partially offset by an increase in interest expense of $1.2 million due to
higher average borrowings.
LIQUIDITY AND CAPITAL RESOURCES OF COMSTOCK HOLDINGS, INC.
At March 31, 1998, Comstock had cash and cash equivalents of $945,000 and
working capital of $25.6 million. For the three months ended March 31, 1998,
cash flow from operations was $1.5 million which was principally used to reduce
the outstanding balance on Comstock's credit line described below.
At December 31, 1997, Comstock had cash and cash equivalents of $1.1
million and working capital of $26.5 million. For the year ended December 31,
1997, Comstock had a cash flow deficit from operations of $3.2 million primarily
due to the commencement of certain new rail-related projects which increased the
unbilled accounts receivable. In connection with the Comstock Acquisition, L.K.
Comstock received $14.9 million in cash from Spie and issued a contingent
promissory note for such amount. See "Certain Transactions and Related Party
Transactions -- Other Transactions." The proceeds of the contingent promissory
note were used primarily to reduce long-term borrowings.
L.K. Comstock has a $17.0 million revolving credit line pursuant to two
separate agreements with Harris Trust and Savings Bank. Borrowings bear interest
at either 1% over the prime rate or 3.25% over LIBOR. These borrowings are
secured by substantially all of the assets of L.K. Comstock and are subject to
various financial covenants. Comstock, and to a limited extent, certain members
of Comstock's management, have guaranteed a portion of the borrowings. The total
amount of borrowings including letters of credit outstanding under these credit
lines was $15.0 million at March 31, 1998. After the closing of the Offering,
RailWorks will assume the obligations under the credit line and repay all
outstanding borrowings. See "Use of Proceeds."
During the remainder of 1998, Comstock is obligated to make aggregate
payments of $750,000, together with interest accruing at 8.5% per annum, in full
satisfaction of a note to BW Capital. RailWorks will assume this obligation and
repay the amount outstanding. In the first quarter of 1998, Comstock made
payments of $950,000 on such note.
The contracts under which Comstock performs services generally require
retainage ranging from 2% to 10% of the total contract price until the project
is complete. At March 31, 1998, $14.6 million of Comstock's accounts receivable
consisted of retainage. In some instances, the terms of the contract allow
Comstock to replace the amount withheld with certain marketable securities, such
as treasury bonds, and retain the yield on such investments. At March 31, 1998,
$4.9 million of Comstock's retainage was invested in marketable securities.
Comstock estimates that $7.3 million of this retainage will be collected by
March 31, 1999.
Prior to the Comstock Acquisition, Comstock maintained a deductible of
$250,000 per incident on its auto and general liability insurance policies. At
December 31, 1997, Comstock carried a $3.6 million liability on its balance
sheet as a reserve against these liabilities. Currently, Comstock
32
<PAGE> 36
maintains considerably lower deductibles on its insurance policies to provide
greater predictability and consistency in insurance and liability costs.
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
Founded in 1961, Annex Railroad Builders, Inc. and its affiliates ("Annex")
provide construction, rehabilitation, repair and maintenance services for
railroad track in the Midwestern and Southern United States. In calender year
1997, Annex estimates that it derived approximately 69% of its revenue from
maintenance and repair and 31% of its revenue from new construction and
rehabilitation. Annex's revenue in calendar year 1997 was $19.1 million,
representing 7.4% of the Company's pro forma as adjusted revenue for 1997.
The following table sets forth certain selected combined financial data and
data as a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED THREE MONTHS ENDED MARCH 31,
MARCH 31, DECEMBER 31, -------------------------------
1997 1997 1997 1998
--------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................ $15,467 100.0% $15,099 100.0% $5,286 100.0% $2,923 100.0%
Contract costs..................... 12,948 83.7 12,406 82.2 4,512 85.4 2,280 78.0
Gross profit....................... 2,519 16.3 2,693 17.8 774 14.6 643 22.0
General and administrative
expenses......................... 1,674 10.8 1,326 8.8 453 8.6 370 12.7
Net income......................... 599 3.9 970 6.4 206 3.9 218 7.5
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenue. Revenue decreased to $2.9 million for the three months ended
March 31, 1998 from $5.3 million for the three months ended March 31, 1997, a
decrease of $2.4 million, or 44.7%, primarily as a result of two large
government projects that were completed in 1997.
Gross Profit. Gross profit decreased to $643,000 for the three months
ended March 31, 1998 from $774,000 for the three months ended March 31, 1997, a
decrease of $131,000, or 16.9%. As a percentage of revenue, gross profit
increased to 22.0% for the three months ended March 31, 1998 from 14.6% for the
three months ended March 31, 1997. Gross profit decreased as a result of the
decline in revenue. Despite the decrease in gross profit, gross profit as a
percentage of revenue increased due to an improvement in the types of jobs
performed.
General and Administrative Expenses. General and administrative expenses
decreased to $370,000 for the three months ended March 31, 1998 from $453,000
for the three months ended March 31, 1997, a decrease of $82,000, or 18.3%. As a
percentage of revenue, general and administrative expenses increased to 12.7%
for the three months ended March 31, 1998 from 8.6% for the three months ended
March 31, 1997. Despite the decrease in salaries and wages that caused the
decline in general and administrative expenses, general and administrative
expenses as a percentage of revenue increased due to significant fixed general
and administrative expenses that did not decrease with the lower revenue.
Net Income. Net income remained relatively stable at $218,000 for the
three months ended March 31, 1998 and $206,000 for the three months ended March
31, 1997. As a percentage of revenue, net income increased to 7.5% for the three
months ended March 31, 1998 from 3.9% for the three months ended March 31, 1997.
The increase in net income as a percentage of revenue resulted from the decrease
in revenue, offset in part by the decrease in general and administrative
expenses, as described above.
33
<PAGE> 37
Nine Months Ended December 31, 1997 Compared to Year Ended March 31, 1997
Because Annex changed its fiscal year end in 1997 from March 31 to December
31, the period ended December 31, 1997 is a nine-month period as compared to a
twelve-month period for the year ended March 31, 1997.
Revenue. Revenue was $15.1 million for the nine months ended December 31,
1997 and $15.5 million for the year ended March 31, 1997. Revenue increased to
$18.0 million for the twelve-month period ended March 31, 1998 from $15.5
million in the year ended March 31, 1997, an increase of $2.5 million, or 16.5%.
This increase was attributable to an increase in the number of contracts in
process due to strong demand for government projects.
Gross Profit. Gross profit was $2.7 million for the nine months ended
December 31, 1997 and $2.5 million for the year ended March 31, 1997. Gross
profit increased to $3.3 million for the twelve-month period ended March 31,
1998 from $2.5 million for the year ended March 31, 1997, an increase of
$817,000, or 32.4%. As a percentage of revenue, gross profit increased to 18.5%
for the twelve-month period ended March 31, 1998 from 16.3% for the year ended
March 31, 1997. Gross profit increased principally as a result of higher margin
contracts which generated higher revenue with a less than proportional increase
in cost.
General and Administrative Expenses. General and administrative expenses
were $1.3 million for the nine months ended December 31, 1997 and $1.7 million
for the year ended March 31, 1997. General and administrative expenses remained
relatively stable at $1.7 million for the twelve-month period ended March 31,
1998 and for the year ended March 31, 1997. As a percentage of revenue, general
and administrative expenses decreased to 9.4% for the twelve-month period ended
March 31, 1998 from 10.8% for the year ended March 31, 1997. This decrease was
the result of relatively stable expenses despite the increase in revenue.
Net Income. Net income was $970,000 for the nine months ended December 31,
1997 and $599,000 for the year ended March 31, 1997. Net income increased to
$1.2 million for the twelve-month period ended March 31, 1998 from $599,000 for
the year ended March 31, 1997, an increase of $589,000, or 98.3%. As a
percentage of revenue, net income increased to 6.6% for the twelve-month period
ended March 31, 1998 from 3.9% for the year ended March 31, 1997. The increase
in net income was the result of the increase in gross profit discussed above.
CPI CONCRETE PRODUCTS INCORPORATED
Founded in 1974, CPI Concrete Products Incorporated ("CPI Concrete")
provides pre-stressed and pre-cast concrete products to rail systems, highways,
bridges, airports, power plants and dams throughout the United States. CPI
Concrete's revenue in 1997 was approximately $10.9 million, representing 4.3% of
the Company's pro forma as adjusted revenue for 1997.
The following table sets forth certain selected financial data and data as
a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, TWO MONTHS ENDED MARCH 31,
----------------------------------------------------- --------------------------------
1996 1997 1998 1997 1998
--------------- --------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $11,016 100.0% $10,098 100.0% $10,986 100.0% $1,792 100.0% $1,669 100.0%
Cost of goods sold
(includes
depreciation)...... 8,717 79.1 8,192 81.1 9,156 83.3 1,611 89.9 1,447 86.7
Gross profit......... 2,299 20.9 1,906 18.9 1,830 16.7 181 10.1 222 13.3
General and
administrative
expenses........... 1,442 13.1 1,317 13.1 1,248 11.3 192 10.7 126 7.5
Net income........... 563 5.1 417 4.1 445 4.1 34 1.9 67 4.0
</TABLE>
34
<PAGE> 38
Two Months Ended March 31, 1998 Compared to Two Months Ended March 31, 1997
Revenue. Revenue decreased to $1.7 million for the two months ended March
31, 1998 from $1.8 million for the two months ended March 31, 1997, a decrease
of $123,000, or 6.9%. This decrease was the result of a marginal decrease in the
number of units sold.
Gross Profit. Gross profit increased to $222,000 for the two months ended
March 31, 1998 from $181,000 for the two months ended March 31, 1997, an
increase of $41,000, or 22.7%. As a percentage of revenue, gross profit
increased to 13.3% for the two months ended March 31, 1998 from 10.1% for the
two months ended March 31, 1997. Gross profit increased due to a more favorable
product mix that resulted in lower costs of goods sold.
General and Administrative Expenses. General and administrative expenses
decreased to $126,000 for the two months ended March 31, 1998 from $192,000 for
the two months ended March 31, 1997, a decrease of $66,000, or 34.4%. As a
percentage of revenue, general and administrative expenses decreased to 7.5% for
the two months ended March 31, 1998 from 10.7% for the two months ended March
31, 1997. This decrease was a result of a reduction in performance bonuses.
Net Income. Net income increased to $67,000 for the two months ended March
31, 1998 from $34,000 for the two months ended March 31, 1997. As a percentage
of revenue, net income increased to 4.0% for the two months ended March 31, 1998
from 1.9% for the two months ended March 31, 1997. This increase was the result
of the factors discussed above.
Year Ended January 31, 1998 Compared to Year Ended January 31, 1997
Revenue. Revenue increased to $11.0 million for the year ended January 31,
1998 from $10.1 million for the year ended January 31, 1997, an increase of
$888,000, or 8.8%. This increase was due to an increase in the number of units
sold.
Gross Profit. Gross profit decreased to $1.8 million for the year ended
January 31, 1998 from $1.9 million for the year ended January 31, 1997, a
decrease of $76,000, or 4.0%. As a percentage of revenue, gross profit decreased
to 16.7% for the year ended January 31, 1998 from 18.9% for the year ended
January 31, 1997. Gross profit decreased as a result of increased cost of goods
sold, offset in part by increased revenues.
General and Administrative Expenses. General and administrative expenses
remained relatively constant at $1.2 million for the year ended January 31, 1998
and $1.3 million for the year ended January 31, 1997. As a percentage of
revenue, general and administrative expenses decreased to 11.3% for the year
ended January 31, 1998 from 13.1% for the year ended January 31, 1997. This
decrease was the result of leveraging general and administrative expenses over
higher revenue.
Net Income. Net income remained relatively stable at $445,000 for the year
ended January 31, 1998 compared to $417,000 for the year ended January 31, 1997.
As a percentage of revenue, net income remained stable at 4.1%.
Year Ended January 31, 1997 Compared to Year Ended January 31, 1996
Revenue. Revenue decreased to $10.1 million for the year ended January 31,
1997 from $11.0 million for the year ended January 31, 1996, a decrease of
$918,000, or 8.3%. This decrease was the result of a decline in the number of
units sold.
Gross Profit. Gross profit decreased to $1.9 million for the year ended
January 31, 1997 from $2.3 million for the year ended January 31, 1996, a
decrease of $393,000, or 17.1%. As a percentage of revenue, gross profit
decreased to 18.9% for the year ended January 31, 1997 from 20.9% for the year
ended January 31, 1996. The decline in gross profit was due to an increase in
wages combined with lower revenue.
35
<PAGE> 39
General and Administrative Expenses. General and administrative expenses
decreased to $1.3 million for the year ended January 31, 1997 from $1.4 million
for the year ended January 31, 1996, a decrease of $125,000 or 8.7%. As a
percentage of revenue, general and administrative expenses remained relatively
stable at 13.1% and 13.0% for the years ended January 31, 1997 and 1996,
respectively.
Net Income. Net income decreased to $417,000 for the year ended January
31, 1997 from $563,000 for the year ended January 31, 1996, a decrease of
$146,000 or 25.9%. As a percentage of revenue, net income decreased to 4.1% of
revenue for the year ended January 31, 1997 compared to 5.1% for the year ended
January 31, 1996. The decrease was the result of the increase in wages discussed
above.
KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES
Founded in 1965, Kennedy Railroad Builders, Inc. ("Kennedy") provides
construction, rehabilitation and maintenance services primarily for industrial
companies in the Northeastern and mid-Southern United States. Alpha-Keystone
Engineering, Inc. ("Alpha-Keystone"), an affiliate of Kennedy, also provides
design and engineering services for railroad construction projects. Railcorp,
Inc. ("Railcorp"), an affiliate of Kennedy, provides construction,
rehabilitation and maintenance services. In 1997, Kennedy, Alpha-Keystone and
Railcorp estimate that, collectively, they derived approximately 70% of their
revenue from new construction and rehabilitation and 30% from maintenance and
repair. Collectively, Kennedy's, Alpha-Keystone's and Railcorp's revenue in
calendar year 1997 was $10.5 million, representing 4.1% of the Company's pro
forma as adjusted revenue for 1997.
The following table sets forth certain selected combined financial data and
data as a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED THREE MONTHS ENDED MARCH 31,
------------------------------- DECEMBER 31, -------------------------------
1996 1997 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............... $6,652 100.0% $9,704 100.0% $8,296 100.0% $2,245 100.0% $2,384 100.0%
Contract costs........ 5,120 77.0 7,968 82.1 6,605 79.6 1,958 87.2 2,079 87.2
Gross profit.......... 1,532 23.0 1,736 17.9 1,691 20.4 287 12.8 305 12.8
General and
administrative
expenses............ 1,347 20.2 1,498 15.4 1,163 14.0 396 17.6 417 17.5
Net income (loss)..... 123 1.8 78 0.8 246 3.0 (79) (3.5) (89) (3.7)
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenue. Revenue increased to $2.4 million for the three months ended
March 31, 1998 from $2.2 million for the three months ended March 31, 1997, an
increase of $139,000, or 6.2%, primarily as a result of an increase in the
number of construction projects in process.
Gross Profit. Gross profit remained relatively constant at $305,000 and
$287,000 for the three months ended March 31, 1998 and 1997, respectively. As a
percentage of revenue, gross profit remained at 12.8% for the three months ended
March 31, 1998 and 1997.
General and Administrative Expenses. General and administrative expenses
remained relatively constant at $417,000 and $396,000 for the three months ended
March 31, 1998 and 1997, respectively. As a percentage of revenue, general and
administrative expenses remained relatively stable at 17.5% and 17.6% for the
three months ended March 31, 1998 and 1997, respectively.
Net Loss. Kennedy, Alpha-Keystone and Railcorp experienced a combined net
loss of $89,000 for the three months ended March 31, 1998 compared to $79,000
for the three months ended
36
<PAGE> 40
March 31, 1997. As a percentage of revenue, the combined net loss increased to
3.7% for the three months ended March 31, 1998 compared to 3.5% for the three
months ended March 31, 1997.
Nine Months Ended December 31, 1997 Compared to Year Ended March 31, 1997
Because Kennedy, Alpha-Keystone and Railcorp changed their fiscal year ends
from March 31 to December 31 in 1997, the period ended December 31, 1997 is a
nine-month period as compared to a twelve-month period for the year ended March
31, 1997.
Revenue. Revenue was $8.3 million for the nine months ended December 31,
1997 and $9.7 million for the year ended March 31, 1997. Revenue increased to
$10.7 million for the twelve-month period ended March 31, 1998 from $9.7 million
for the year ended March 31, 1997, an increase of $1.0 million, or 10.1%. This
increase was the result of an increase in the number of construction projects in
process during the twelve months ended March 31, 1998.
Gross Profit. Gross profit was $1.7 million for the nine months ended
December 31, 1997 and for the year ended March 31, 1997. Gross profit increased
to $2.0 million for the twelve-month period ended March 31, 1998 from $1.7
million for the year ended March 31, 1997, an increase of $260,000, or 15.0%. As
a percentage of revenue, gross profit increased to 18.7% for the twelve-month
period ended March 31, 1998 from 17.9% for the twelve-month period ended March
31, 1997. Gross profit increased primarily due to higher revenue with a less
than proportional increase in contract costs.
General and Administrative Expenses. General and administrative expenses
were $1.2 million for the nine months ended December 31, 1997 and $1.5 million
for the year ended March 31, 1997. General and administrative expenses increased
to $1.6 million for the twelve-month period ended March 31, 1998 from $1.5
million for the year ended March 31, 1997, an increase of $82,000, or 5.5%. This
increase in general and administrative expenses was due to higher salaries and
wages. As a percentage of revenue, general and administrative expenses decreased
to 14.8% for the twelve-month period ended March 31, 1998 from 15.4% for the
twelve-month period ended March 31, 1997.
Net Income. Net income was $246,000 for the nine months ended December 31,
1997 and $78,000 for the year ended March 31, 1997. Net income increased to
$157,000 for the twelve-month period ended March 31, 1998 from $78,000 for the
year ended March 31, 1997. As a percentage of revenue, net income increased to
1.5% for the twelve-month period ended March 31, 1998 from 0.8% for the year
ended March 31, 1997. The increase was the result of the increase in gross
profit discussed above.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Revenue. Revenue increased to $9.7 million for the year ended March 31,
1997 from $6.7 million for the year ended March 31, 1996, an increase of $3.1
million, or 45.9%. This increase was the result of expanding into new markets
and the commencement of operations by Alpha-Keystone, which added revenue from
engineering services and facilitated the award of additional construction
contracts.
Gross Profit. Gross profit increased to $1.7 million for the year ended
March 31, 1997 from $1.5 million for the year ended March 31, 1996, an increase
of $204,000, or 13.3%. Despite the increase in gross profit, gross profit as a
percentage of revenue decreased to 17.9% for the year ended March 31, 1997 from
23.0% for the year ended March 31, 1996 due to lower profit margins on certain
contracts.
General and Administrative Expenses. General and administrative expenses
increased to $1.5 million for the year ended March 31, 1997 from $1.3 million
for the year ended March 31, 1996, an increase of $151,000, or 11.2%. As a
percentage of revenue, general and administrative expenses decreased to 15.4%
for the year ended March 31, 1997 from 20.2% for the year ended March 31,
37
<PAGE> 41
1996. The decline in general and administrative expenses as a percentage of
revenue was a result of leveraging general and administrative expenses over a
higher sales volume despite an increase in salaries and wages.
Net Income. Net income decreased to $78,000 for the year ended March 31,
1997 from $123,000 for the year ended March 31, 1996, a decrease of $45,000, or
36.6%. As a percentage of revenue, net income decreased to 0.8% for the year
ended March 31, 1997 from 1.8% for the year ended March 31, 1996. The decrease
was the result of the lower margins on certain contracts discussed above.
MIDWEST CONSTRUCTION SERVICES, INC.
Founded in 1982, Midwest Construction Services, Inc. ("Midwest") provides
construction, rehabilitation, repair and maintenance services primarily to
companies in the steel industry throughout the Midwestern United States. Unlike
the other Founding Companies, most of Midwest's customers have long-term
contracts with Midwest. In 1997, Midwest estimates that it derived approximately
67% of its revenue from maintenance and repair, approximately 18% from new
construction and rehabilitation and approximately 15% from other services.
Midwest's revenue in 1997 was $9.7 million, representing 3.8% of the Company's
pro forma as adjusted revenue for 1997.
The following table sets forth certain selected financial data and data as
a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------- -------------------------------
1995 1996 1997 1997 1998
-------------- --------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $9,316 100.0% $10,842 100.0% $9,676 100.0% $2,281 100.0% $2,456 100.0%
Contract costs....... 7,950 85.3 9,339 86.1 8,637 89.3 1,951 85.5 2,106 85.7
Gross profit......... 1,366 14.7 1,503 13.9 1,039 10.7 330 14.5 350 14.3
General and
administrative
expenses........... 644 6.9 649 6.0 645 6.7 149 6.5 189 7.7
Net income........... 804 8.6 893 8.2 433 4.5 184 8.1 163 6.6
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenue. Revenue increased to $2.5 million for the three months ended
March 31, 1998 from $2.3 million for the three months ended March 31, 1997, an
increase of $175,000, or 7.7%, primarily as a result of an increase in the
number of projects in process.
Gross Profit. Gross profit remained relatively constant at $350,000 and
$330,000 for the three months ended March 31, 1998 and 1997, respectively. As a
percentage of revenue, gross profit remained relatively stable at 14.3% for the
three months ended March 31, 1998 and 14.5% for the three months ended March 31,
1997.
General and Administrative Expenses. General and administrative expenses
increased to $189,000 for the three months ended March 31, 1998 from $149,000
for the three months ended March 31, 1997, an increase of $40,000, or 26.8%. As
a percentage of revenue, general and administrative expenses increased to 7.7%
for the three months ended March 31, 1998 from 6.5% for the three months ended
March 31, 1997. The increase was a result of increased professional fees.
Net Income. Net income remained relatively constant at $163,000 for the
three months ended March 31, 1998 compared to $184,000 for the three months
ended March 31, 1997. As a percentage of revenue, net income decreased to 6.6%
for the three months ended March 31, 1998 from 8.1% for the three months ended
March 31, 1997. The decrease as a percentage of revenues was due to the increase
in professional fees discussed above.
38
<PAGE> 42
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue decreased to $9.7 million for the year ended December 31,
1997 from $10.8 million for the year ended December 31, 1996, a decrease of $1.2
million, or 10.8%. This decrease was due to fewer contracts awarded through
competitive bidding.
Gross Profit. Gross profit decreased to $1.0 million for the year ended
December 31, 1997 from $1.5 million for the year ended December 31, 1996, a
decrease of $464,000, or 30.9%. As a percentage of revenue, gross profit
decreased to 10.7% for the year ended December 31, 1997 from 13.9% for the year
ended December 31, 1996. The decrease in gross profit was due to higher material
costs as a percentage of revenue.
General and Administrative Expenses. General and administrative expenses
remained constant at approximately $645,000 for the year ended December 31, 1997
and 1996. As a percentage of revenue, general and administrative expenses
increased to 6.7% for the year ended December 31, 1997 from 6.0% for the year
ended December 31, 1996. Although general and administrative expenses remained
stable, they increased as a percentage of revenue because a significant portion
of these expenses were fixed and did not decrease with revenue.
Net Income. Net income decreased to $433,000 for the year ended December
31, 1997 from $893,000 for the year ended December 31, 1996, a decrease of
$460,000, or 51.5%. As a percentage of revenue, net income decreased to 4.5% for
the year ended December 31, 1997 from 8.2% for the year ended December 31, 1996.
The decrease was the result of the decrease in revenues discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased to $10.8 million for the year ended December
31, 1996 from $9.3 million for the year ended December 31, 1995, an increase of
$1.5 million, or 16.4%. This increase was the result of incremental maintenance
projects in process during 1996.
Gross Profit. Gross profit increased to $1.5 million for the year ended
December 31, 1996 from $1.4 million for the year ended December 31, 1995, an
increase of $137,000, or 10.0%. As a percentage of revenue, gross profit
decreased to 13.9% for the year ended December 31, 1996 from 14.7% for the year
ended December 31, 1995 as a result of an increase in revenue from lower margin
contracts.
General and Administrative Expenses. General and administrative expenses
remained relatively constant for the years ended December 31, 1996 and 1995. As
a percentage of revenue, general and administrative expenses decreased to 6.0%
for the year ended December 31, 1996 from 6.9% for the year ended December 31,
1995 as result of leveraging general and administrative expenses over a higher
sales volume.
Net Income. Net income increased to $893,000 for the year ended December
31, 1996 from $804,000 for the year ended December 31, 1995, an increase of
$89,000, or 11.1%. As a percentage of revenue, net income decreased to 8.2% for
the year ended December 31, 1996 from 8.6% for the year ended December 31, 1995.
The decrease in net income as a percentage of revenue resulted from the increase
in revenue from lower margin contracts as discussed above.
RAILROAD SERVICE, INC. AND AFFILIATE
Founded in 1972, Railroad Service, Inc. ("Railroad Service") provides
construction, maintenance and rehabilitation services primarily to industrial
companies located in the Northern and Midwestern United States. Minnesota
Railroad Service, Inc. ("Minnesota Railroad"), an affiliate of Railroad Service,
provides the same services as Railroad Service but utilizes unionized laborers.
For 1997, Railroad Service and Minnesota Railroad estimate that, collectively,
they derived approximately 64% of revenue from new construction, approximately
32% from maintenance and repair and
39
<PAGE> 43
approximately 4% from other services. Collectively, Railroad Service's and
Minnesota Railroad's revenue for 1997 was $9.4 million, representing 3.7% of the
Company's pro forma as adjusted revenue for 1997.
The following table sets forth certain selected combined financial data and
data as a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
-------------- --------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $9,044 100.0% $10,709 100.0% $9,363 100.0% $ 238 100.0% $1,268 100.0%
Contract costs....... 7,330 81.0 8,199 76.6 7,065 75.5 455 191.2 1,290 101.7
Gross profit
(loss)............. 1,714 19.0 2,510 23.4 2,298 24.5 (217) (91.2) (22) (1.7)
General and
administrative
expenses........... 1,289 14.3 1,418 13.2 1,450 15.5 268 112.6 721 56.9
Net income (loss).... 357 3.9 1,006 9.4 977 10.4 (332) (139.5) (750) (59.1)
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenue. Revenue increased to $1.3 million for the three months ended
March 31, 1998 from $238,000 for the three months ended March 31, 1997, an
increase of $1.0 million. This increase was the result of the commencement of a
large contract pursuant to which most materials were installed initially, as
well as unseasonably good weather which increased the available working days
during the period.
Gross Loss. Gross loss decreased by $195,000 to $22,000 for the three
months ended March 31, 1998 from a gross loss of $217,000 for the three months
ended March 31, 1997. Contract costs exceeded revenue for the three-month
periods ended March 31, 1997 and 1998. The improvement in gross loss was due to
the increased absorption of fixed costs as revenue increased.
General and Administrative Expenses. General and administrative expenses
increased to $721,000 for the three months ended March 31, 1998 from $268,000
for the three months ended March 31, 1997, an increase of $453,000 due to a
transfer of stock between the owners of Railroad Service in 1998, which resulted
in a $400,000 charge to executive compensation. As a percentage of revenue,
general and administrative expenses decreased to 56.9% for the three months
ended March 31, 1998 from 112.6% for the three months ended March 31, 1997. The
decline in general and administrative expenses as a percentage of revenue was a
result of higher sales volume.
Net Loss. Net loss increased to $750,000 for the three months ended March
31, 1998 from $332,000 for the three months ended March 31, 1997, an increase of
$418,000, or 125.9%. As a percentage of revenue, net loss improved to 59.1% for
the three months ended March 31, 1998 compared to 139.5% for the three months
ended March 31, 1997. The increase in net loss and decrease in loss as a
percentage of revenue was the result of items discussed above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue decreased to $9.4 million for the year ended December 31,
1997 from $10.7 million for the year ended December 31, 1996, a decrease of $1.3
million, or 12.6%, due to the sale of a division of Railroad Service and, as a
result, fewer construction projects in process during the period.
Gross Profit. Gross profit decreased to $2.3 million for the year ended
December 31, 1997 from $2.5 million for the year ended December 31, 1996, a
decrease of $212,000, or 8.4%. As a percentage of revenue, gross profit
increased to 24.5% for the year ended December 31, 1997 from 23.4% for the year
ended December 31, 1996. The decrease in gross profit was a result of lower
revenue, offset in part by the higher profitability of remaining contracts.
40
<PAGE> 44
General and Administrative Expenses. General and administrative expenses
increased to $1.5 million for the year ended December 31, 1997 from $1.4 million
for the year ended December 31, 1996, an increase of $32,000, or 2.3%. As a
percentage of revenue, general and administrative expenses increased to 15.5%
for the year ended December 31, 1997 from 13.2% for the year ended December 31,
1996. The slight increase in general and administrative expenses as a percentage
of revenue was a result of the fixed nature of a significant portion of general
and administrative expenses.
Net Income. Net income remained relatively stable at $977,000 for the year
ended December 31, 1997 compared to $1.0 million for the year ended December 31,
1996. Net income as a percentage of revenue increased to 10.4% from 9.4%. The
increase as a percentage of revenue was the result of the higher profitability
on contracts discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased to $10.7 million for the year ended December
31, 1996 from $9.0 million for the year ended December 31, 1995, an increase of
$1.7 million, or 18.4%, due to several incremental contracts in process.
Gross Profit. Gross profit increased to $2.5 million for the year ended
December 31, 1996 from $1.7 million for the year ended December 31, 1995, an
increase of $796,000, or 46.4%. As a percentage of revenue, gross profit
increased to 23.4% for the year ended December 31, 1996 from 19.0% for the year
ended December 31, 1995. The increase in gross profit as a percentage of revenue
was due to improved contract performance and a more favorable competitive
environment.
General and Administrative Expenses. General and administrative expenses
increased to $1.4 million for the year ended December 31, 1996 from $1.3 million
for the year ended December 31, 1995, an increase of $129,000, or 10.0%. As a
percentage of revenue, general and administrative expenses decreased to 13.2%
for the year ended December 31, 1996 from 14.3% for the year ended December 31,
1995. This decrease was a result of leveraging general and administrative
expenses over a higher sales volume, despite an increase in administrative
expense and wages.
Net Income. Net income increased to $1.0 million for the year ended
December 31, 1996 from $357,000 for the year ended December 31, 1995, an
increase of $649,000, or 181.8%. As a percentage of revenue, net income
increased to 9.4% for the year ended December 31, 1996 from 3.9% for the year
ended December 31, 1995. The increase was a result of the improved contract
performance discussed above
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
YEAR 2000
The Company intends to replace all of the Founding Companies' computer
systems with a new integrated management information system during 1999. The new
system will be Year 2000 compatible. The Company believes that the effects, if
any, that Year 2000 issues may have on its business will not be material to the
Company's business, financial condition or results of operations.
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<PAGE> 45
BUSINESS
OVERVIEW
RailWorks Corporation was formed in March 1998 to become a leading
nationwide provider of rail system services, including construction and
rehabilitation, repair and maintenance, and related products. Management
selected the Founding Companies, which will be acquired by RailWorks Corporation
concurrently with the closing of the Offering, based on their regional or local
market leadership, diverse and long-standing customer relationships,
profitability and geographic diversity. The Combination will establish a
significant operating enterprise which management believes will serve as the
foundation for a consolidation of the highly-fragmented rail system services and
products industry. Based on their experience in the rail system services and
products industry, management believes that there is a trend among rail system
operators toward increased outsourcing of services and the use of fewer vendors,
although management is not aware of any independent corroborating data that
objectively confirms their belief. Management believes that the Combination and
future acquisitions will enable it to capitalize on this trend. The Company's
strategy is based on providing a full range of rail-related services and
products on a national basis and offering integrated rail system solutions under
the "RailWorks" brand. In 1997, on a pro forma as adjusted basis, the Company
had revenue of $256.5 million, operating income of $11.2 million and net income
of $5.4 million. For the three months ended March 31, 1998, on a pro forma as
adjusted basis, the Company had revenue of $61.8 million, operating income of
$1.5 million and net income of $655,000. Based on estimates of the Founding
Companies, management estimates that approximately 68.4% of the Company's pro
forma as adjusted revenue for the year ended December 31, 1997 was derived from
rail-related operations and 31.6% was derived from non-rail related operations.
INDUSTRY OVERVIEW
The rail passenger and freight industries have undergone significant
changes in recent years. Changes in the industry have affected transit systems,
passenger railroads, regional and shortline railroads and Class I railroads. In
addition, industrial and other commercial companies that own and maintain their
own rail systems have become more focused on transportation logistics and
achieving cost efficiencies. These changes have resulted in an ongoing
reconfiguration of the country's rail infrastructure, significant new
construction projects and emerging demand for outsourced construction,
rehabilitation, repair and maintenance services.
Companies install trackwork in their plants to transport raw materials,
equipment and finished goods. This trackwork consists of connector lines that
provide access to Class I or shortline railroads and railyards to coordinate the
shipment and delivery of cargo to and from their plants. Companies are
responsible for maintaining their own track and typically construct and
reconfigure trackage as part of plant construction and expansion. In addition,
many large companies that have previously relied on a single railroad for the
delivery of large quantities of raw materials or for the shipment of their
finished products have constructed rail lines to connect to alternate railroads.
Industrial companies build these "customer-owned" lines to improve the service
that they receive and to lower freight expenses, and typically use independent
contractors to design, construct and maintain these rail lines.
The growth of major metropolitan areas and the aging of existing rail
systems have resulted in significant developments in passenger rail transit
services over the last 20 years. Heavy rail, commuter rail (service between
metropolitan and suburban areas) and light rail (typically, short trains
operating on rights-of-way that are not separated from other traffic) have
emerged as attractive alternatives to bus or automobile transit and older
commuter rail systems have been rehabilitated and extended to handle increased
ridership. Many older urban systems (such as the New York City subway system)
are undergoing significant rehabilitation and/or modernization, while major
heavy rail systems built in the 1970s (such as the systems in San Francisco and
Atlanta) are being extended and upgraded. Additionally, there have been several
recent initiatives to develop high-speed rail
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<PAGE> 46
transit networks between major urban areas (for example, in Florida and the
Northeast corridor). According to APTA, there are now 16 commuter rail agencies
in 13 urban areas and 22 light rail agencies nationwide. According to APTA,
commuter and light rail ridership has increased 28% and 56%, respectively, from
1985 to 1995. Since 1979, approximately 15 cities have constructed new light
rail-based transit systems and other cities have either extended or refurbished
their existing systems, with ridership increasing by approximately 150% over the
period from 1978 through 1996. On June 9, 1998, the President signed the
Transportation Equity Act for the 21st Century ("TEA 21"), which provides $42
billion of funds for transit projects during the next six fiscal years. See
"Government Regulation -- TEA 21." This represents more than a 40% increase of
funding from the previous six-year period. Accordingly, opportunities to provide
rail-related signaling, communication, electrical and track system construction,
rehabilitation, repair and maintenance services for transit systems have
increased and are expected to continue to increase significantly.
As a result of industry consolidation there are only eight Class I
railroads (as defined by the STB) operating primarily in the United States
today, compared to 27 in 1980. These railroads are Burlington Northern Sante Fe
Railway, CSX Transportation, Kansas City Southern Lines, Norfolk Southern
Railway Company, Union Pacific, Consolidated Rail Corporation, Canadian National
and Canadian Pacific. According to the AAR, these railroads accounted for 73% of
the rail mileage operated in the United States and 91% of railroad revenue in
1996. In recent years, the Class I railroads have sought to rationalize their
systems, for example by "double-tracking" certain high traffic main lines and
abandoning portions of their systems that generate lower volumes of traffic.
Mergers of Class I systems have also created significant construction projects
as the systems are reconfigured and integrated. Historically, the major
railroads have been vertical organizations that sought to perform their own
construction and maintenance by utilizing specialized workforces and equipment
for these functions. Management believes that as Class I railroads seek to
continue to improve their cost structures, they will increasingly outsource
certain construction and maintenance functions to independent contractors.
In recent years, the number and coverage of shortline and regional
railroads (i.e., those railroads which are not Class I railroads) have increased
significantly. The Staggers Rail Act of 1980 provided for partial deregulation
of the railroad industry and created mechanisms by which larger railroads could
more easily dispose of portions of rail line. Since that time, the larger
railroad systems in the United States have streamlined their operations by
disposing of portions of their systems that generate lower volumes of traffic
and other companies have acquired portfolios of shortline railroads. According
to the AAR, there are approximately 550 shortline and regional railroads, which
in the aggregate generated approximately 9% of all railroad revenue in 1997. The
percentage of total track miles operated by shortline and regional railroads in
the United States increased to 27% in 1995 from approximately 17% in 1986.
Shortline and regional railroads spend a relatively large portion of their
capital and operating budgets on maintenance of their track assets, because
these assets are often in poor condition when they are acquired. These railroads
typically utilize independent contractors for their maintenance and construction
programs, since they do not have systems large enough to support the purchases
of equipment and development of workforces that would be required for these
functions.
Based on information published by the AAR and APTA, the Company estimates
that in 1997, expenditures by rail-based transit systems, railroads and
industrial companies on domestic rail system construction and maintenance
services of the types offered by the Founding Companies were approximately $14
billion, consisting of approximately $6 billion by passenger rail authorities
and transit authorities (including Amtrak), approximately $6 billion by Class I
railroads, approximately $1 billion by regional and shortline railroads and
approximately $1 billion by industrial companies. Additionally, the Company
believes that expenditures for these services outside the United States have
increased significantly in recent years as a result of infrastucture
construction and modernization programs, as well as privatization of large rail
systems. In many instances, foreign governments
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<PAGE> 47
and companies have sought the expertise of American designers, engineers and
construction managers.
The Company believes that larger customers are seeking to establish
relationships with contractors that specialize in rail system services and
products and that can provide efficient, integrated solutions over the entire
life cycle of their assets. While there are numerous smaller rail system
construction, rehabilitation, repair and maintenance companies working in local
or regional markets, they are unable to compete with the larger companies
because their limited financial resources make it difficult for them to bid on
larger jobs and because they are unable to utilize their equipment and
workforces beyond their local and regional markets. Additionally, management
believes that larger rail systems and industrial companies are increasingly
seeking to enter into arrangements with a smaller number of contractors that can
provide services on a national or regional basis, in order to ensure centralized
management of their rail assets, adherence to uniform quality standards and more
cost-effective procurement practices.
COMPETITIVE STRENGTHS
Breadth of Services and Products. Management believes that rail system
operators are increasingly seeking to purchase services and supplies on an
integrated basis from fewer vendors. Management further believes that the
Company will offer a broader range of services and products than most industry
participants. The Company's service and product offerings include (i)
construction and rehabilitation of track, signaling, communications, electrical
and other track-related systems, (ii) repair and maintenance of these systems,
(iii) a broad range of rail-related products, including rail, ties, spikes,
frogs (rail intersections), tie plates and ballast and (iv) for its non-rail
customers, electrical installation services and concrete products. Based on
estimates of the Founding Companies, management estimates that revenue from
rail-related (i) construction and rehabilitation, (ii) repair and maintenance
and (iii) OTM and products accounted for 46.5%, 15.4% and 6.5%, respectively, of
the Company's pro forma as adjusted revenue for the year ended December 31, 1997
and non-rail services and products accounted for 31.6% of this revenue.
Diverse Customer Base. The Founding Companies' have long-standing
relationships with a wide variety of customers, including: (i) commercial and
industrial companies such as Commonwealth Edison, United States Steel and
Terminal One at JFK International (Airport), which have contracted with the
Company for track construction and maintenance or non-rail electrical
contracting work; (ii) transit authorities such as the New York Metropolitan
Transit Authority, the Los Angeles Metropolitan Transit Authority and the
Baltimore Metropolitan Transit Authority, which have contracted with the Company
for electrical installations, signaling, communications or station projects;
(iii) shortline railroads such as Indiana Southern Railroad Company, Branford
Steam Railroad and I&M Rail Link, which have contracted with the Company for
track construction and maintenance work or product supply; and (iv) Class I
railroads such as Illinois Central Railroad, Union Pacific Railroad and CSX
Transportation, which have utilized the Company for repair and maintenance,
construction or engineering.
Expansive Geographic Coverage. The Company has offices in 17 states and
has provided services and products to customers throughout the United States.
The Company's 33 facilities provide it with a geographically diverse mix of
established operating bases which enable it to undertake projects in a more cost
effective manner than would be possible absent a local facility. The Company
also has the ability to mobilize equipment and technical specialists throughout
the United States to maximize asset utilization and to complete projects in
remote locations.
STRATEGY
The Company's goal is to become the leading provider of integrated rail
system solutions, offering a full range of rail-related services and products to
a diverse base of customers throughout the United States. In addition, the
Company expects to continue to provide non-rail services and products in
response to market opportunities. Key elements of the Company's strategy include
the following:
Provide Integrated Solutions for Rail Systems. Management believes that
rail system owners are increasingly seeking to outsource their construction,
rehabilitation, repair and maintenance requirements and to utilize fewer vendors
to provide a full range of these services and related products. As a result of
the Combination, the Company will be able to provide its customers with
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<PAGE> 48
integrated rail system solutions which management believes can be efficiently
designed, constructed, maintained, operated and supplied, resulting in lower
costs over the life cycle of customers' rail assets.
Capitalize on Scale and Geographic Coverage. The Company believes that the
increased scale that will be achieved through the Combination will position it
to undertake larger rail-related projects that are beyond the scope of those
previously undertaken by the individual Founding Companies. Each of the Founding
Companies was constrained by applicable bonding limits and the limited size of
its workforce. The Company also intends to utilize its geographic scope to
develop a national accounts program to serve rail customers with multiple sites
and "cross-sell" its broad range of rail-related services and products. The
Company currently has very limited international operations but over time the
Company may increase its activity in international markets, where privatizations
of railroads and large transit projects are creating increased demand for
sophisticated design and construction management services.
Reduce Operating Costs. The Company believes that the scale of its
operations and administrative integration of the Founding Companies following
the Combination will provide it with a better cost structure than its regional
and smaller competitors. Key areas in which the Company expects to achieve cost
savings include (i) purchasing of equipment and supplies, (ii) insurance
expenses, (iii) financing costs and (iv) utilization of equipment and the
Company's workforce. The Company also expects to reduce administrative expenses
through the integration of certain accounting, financing, human resources and
other functions.
Expand Through Acquisitions. The rail system services and products
industry is highly fragmented, and the Company believes that it is
well-positioned to pursue the consolidation of these segments on a nationwide
basis. Following the Offering, the Company expects to pursue an acquisition
program that will include (i) strategic acquisitions intended to expand the
Company's geographic coverage throughout the United States and broaden its lines
of services and products, (ii) acquisitions intended to position the Company to
offer its customers complementary services and products and (iii) smaller
"tuck-in" acquisitions intended to add density and operating leverage within the
Company's current markets. The Company believes that the experience and industry
reputations of the senior managers of the Founding Companies and senior
corporate management of the Company will provide it with a competitive advantage
in identifying, completing and integrating these acquisitions. The Company does
not intend to expand its non-rail business through acquisitions. The key
elements of the Company's acquisition strategy include the following:
Enter New Geographic Markets. The Company intends to expand into
geographic markets it does not currently serve by acquiring
well-established contractors and related supply companies that, similar to
the Founding Companies, are leaders in their regional or local markets. In
addition, the Company believes that after an initial emphasis on
acquisitions within the United States, it may pursue international
acquisition opportunities for further expansion.
Enter Complementary Services and Product Markets. The Company intends
to acquire companies offering complementary services and products to those
currently offered by the Founding Companies. Specifically, the Company
believes that there will be attractive acquisition opportunities with
respect to design and engineering firms, designers and manufacturers of
signaling and communication systems and suppliers of electrical equipment,
rail, switches and panels and concrete and steel ties.
Expand Within Existing Geographic Markets. The Company also plans to
acquire additional companies in many of the regions in which it currently
operates in order to expand the volume and scope of its operations in a
particular market. The Company will pursue "tuck-in" acquisitions of
smaller companies to increase utilization of its existing fixed assets and
equipment or to gain access to new customers, thereby improving operating
efficiencies and more effectively using its capital resources without a
proportionate increase in administrative costs.
Leverage Management Expertise. The senior managers of each of the Founding
Companies have an average of 14 years of experience in the rail system services
and products industry. The Company will utilize a management structure which
will enable these individuals to focus on operations rather than administrative
tasks. In addition, the Company's Chief Executive Officer, Chief Financial
Officer and Chief Operating Officer each have in excess of 15 years of
experience in
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<PAGE> 49
the transportation industry, including, in the case of John Larkin (the
Company's Chief Executive Officer) approximately 11 years of experience as an
equity research analyst focusing on the transportation industry. Senior
management of the Company will coordinate the operations of the Founding
Companies, provide strategic guidance for the Company, implement the Company's
acquisition program and promote the development of national accounts. As part of
this strategy, the Company intends to foster a culture of cooperation and
teamwork among the Founding Companies that emphasizes dissemination of best
practices among its regional and local management teams and joint bidding on
larger projects. For example, management believes it can successfully implement
best practices in the areas of 24-hour emergency rerailment services, annual
maintenance contracts and efficient inventory management.
The Company's non-rail related business consists primarily of commercial
and industrial electrical contracting provided by Comstock and the manufacture
and sale of concrete products by CPI Concrete. The Company intends to continue
to focus Comstock's business to benefit from its core competencies, including
rail-based transit projects, and to utilize Comstock's market position in its
non-rail business to exploit opportunities as they arise, but not to expand such
business significantly. The Company intends to expand both CPI Concrete's rail
and non-rail businesses by leveraging its customer base and geographic coverage.
The Company expects that its non-rail business, as a percentage of revenue, will
decrease over time.
SERVICES AND PRODUCTS
The following is a summary of the primary services and products offered by
the Company.
Rail-Related New Construction and Rehabilitation. New construction
projects undertaken by the Company consist primarily of the installation of
traction, power, signalling and communication systems for rail-based transit
authorities and the construction of trackwork for commercial and industrial
companies and, to a lesser extent, transit authorities. Trackwork projects may
involve adding turnouts (i.e., connections between main lines and sidings),
expanding rail infrastructure or rebuilding outdated systems. In connection with
new track construction, the Company will assist with permits governing railroad
approvals, other regulatory requirements and subcontractor direction. Based on
estimates of the Founding Companies, management estimates that the Company
derived 46.5% of its pro forma as adjusted revenue for the year ended December
31, 1997 from new rail construction and rehabilitation.
Rail-Related Repair and Maintenance. The Company's repair services include
moving turnouts, adding rail car storage, and replacing ties, rail and/or
surfacing. The Company assists its customers with the design and implementation
of preventive maintenance programs that lengthen the life and provide for the
safer operation of the track components of their rail systems. Such maintenance
projects include tightening bolts, checking gauges, checking the track for
deviations in gauge, line and surface, surfacing the track, and lining the
track. The Company intends to focus on establishing regular maintenance programs
for its customers and believes that the industry is moving toward more
sophisticated maintenance programs. The Company also provides site services to
its customers, including excavation of the railbed, cutting, filling and
preparing the railbed, grading and subgrading, drainage and paving. Based on
estimates of the Founding Companies, management estimates that the Company
derived 15.4% of its pro forma as adjusted revenue for the year ended December
31, 1997 from rail-related repair and maintenance services.
Rail-Related Products. The Company believes its ability to offer materials
and supplies in conjunction with its construction, rehabilitation and
maintenance services will provide it with a competitive advantage in bidding on
rail system projects. Additionally, the Company's network of contractors
throughout the country will strive to provide leads for the Company's sales of
materials and supply. The Company seeks to provide its customers with a broad
range of products and materials required for the construction, rehabilitation
and maintenance of rail systems. Based on estimates of the Founding Companies,
management estimates that the Company derived 6.5% of its pro forma as adjusted
revenue for the year ended December 31, 1997 from the sale of products. Major
categories of products supplied by the Company include the following:
- Rail. The Company provides "relay" rail (previously used rail that
remains suitable for use in yard, branch and secondary tracks). The
Company offers products in a broad range of weights, including all major
types of heavy and light rail.
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<PAGE> 50
- Ties and Wood Products. The Company provides creosote-treated wooden
ties, switch and bridge timbers and treated timber grade crossing
materials. The Company also sells specialized wood products, including
blocking supply lumber.
- Concrete Products. The Company provides pre-stressed and pre-cast
concrete products, including poles, columns, beams and other structural
support elements used to construct rail systems.
- Other Track Materials. The Company provides rail product accessories,
including spikes, tie plates, joint bars, anchors, gage drives and bolts.
Most of the products are offered in both new and "relay" forms.
Non-Rail System Services and Products. Through Comstock, the Company
provides a complete range of electrical and instrumentation installation
services, with a special emphasis on commercial buildings, heavy industrial and
manufacturing plants and power plants. Through CPI Concrete, the Company
provides a range of pre-stressed and pre-cast concrete products used in airport,
highway and bridge construction. Based on estimates of the Founding Companies,
management estimates that the Company derived 31.6% of its pro forma as adjusted
revenue for the year ended December 31, 1997 from these services and products.
- Commercial. Comstock provides electrical power and lighting installation
services for commercial buildings primarily in the New York City
metropolitan area. In recent years, Comstock has worked with commercial
builders and developers on installations in office buildings, financial
institutions, airport facilities, broadcast studios and retail complexes.
Financial institution installations have included data/communications
systems for brokerage firms, insurance companies and banks, with a
specialization in large trading floors. Comstock provides electrical
services for new construction, as well as on-site maintenance service for
existing buildings.
- Industrial and Manufacturing. Comstock provides electrical and
instrumentation installation services for heavy industrial and
manufacturing plants throughout the United States. Services include both
new construction and maintenance/modification, with recent projects
including pulp and paper facilities, steel mills, chemical and
petrochemical plants, oil refineries and automotive assembly plants.
- Power. Comstock provides electrical installation services for power
plant construction and renovation projects throughout the United States.
In addition to new plant construction, services provided by Comstock
include life extensions, control upgrades, substations/switch yards and
emissions control projects. Facilities services include coal-fired,
hydroelectric, waste-to-energy and cogeneration plants.
- Concrete Products. CPI Concrete provides pre-stressed and pre-cast
concrete products for highways and bridges, locks and dams, airports,
power and light companies and buildings. Specifically, CPI Concrete
offers its customers an assortment of decorative and utility poles and
bridge girders along with wall panels, floors and roofs, columns, beams
and other structural support elements.
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<PAGE> 51
THE FOUNDING COMPANIES
The Founding Companies were selected based on their regional or local
market leadership, diverse and long-standing customer relationships,
profitability and geographic diversity. Furthermore, except for Comstock (which
accounts for 59.9% of the Company's pro forma as adjusted revenue for the year
ended December 31, 1997), no Founding Company accounts for more than 10.0% of
the Company's pro forma as adjusted revenue for that year. See "Risk
Factors -- History of Losses; Fluctuations in Quarterly Operating Results."
Following the Combination, the Company will offer a variety of services and
products throughout the United States to a variety of customer types. The
following charts represent the estimated breakdown of service/product revenue
mix, geographic region and customer type as a percentage of the Company's pro
forma as adjusted revenue for the year ended December 31, 1997:
BY SERVICE/PRODUCT(1)
<TABLE>
<S> <C>
Rail-related new construction and rehabilitation 46.5%
Non-rail services and products 31.6%
Rail-related maintenance and repair 15.4%
Rail-related products 6.5%
</TABLE>
BY GEOGRAPHIC REGION(1)
<TABLE>
<S> <C>
Northeast 48.3%
Midwest 27.0%
West 16.1%
South 8.5%
</TABLE>
BY CUSTOMER TYPE(1)
<TABLE>
<S> <C>
Industrial corporations and non-transit
governmental entities 61.6%
Transit authorities 30.9%
Shortline and commuter railroads 6.0%
Class I railroads 1.5%
</TABLE>
- ---------------
(1) The information contained in these charts was compiled by the Company on the
basis of an estimate by each Founding Company of the breakdown of its
revenue for the 12 months ended December 31, 1997 by service/product,
geographic region and customer type. During 1997, each Founding Company was
independently owned and operated and, as a result, the methods for
determining the revenue breakdown by service/product may not be uniform. For
example, a Founding Company may have historically classified one type of
project as rail-related maintenance and repair and another Founding Company
may have historically classified the same type of project as rail-related
rehabilitation. The Company aggregated these estimates to present the
information contained above and elsewhere in this Prospectus.
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<PAGE> 52
The following table summarizes certain information relating to the Founding
Companies. The 1997 revenue column below contains data for the 12-month period
ended December 31, 1997. Consequently, revenue data presented below for Founding
Companies that have fiscal year ends other than December 31 do not agree with
the selected financial data and other historical data contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEAR LOCATION OF PRINCIPAL PRINCIPAL PRINCIPAL 1997
NAME FOUNDED HEADQUARTERS BUSINESS REGION CUSTOMERS EMPLOYEES REVENUE
- ---- ------- ----------------- ---------------- --------- ---------------- ------------- ----------
(APPROXIMATE) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Comstock............. 1904 White Plains, NY Electrical Northeast Transit 985 $153.6
authorities,
commercial,
industrial and
power companies
Annex(1)............. 1961 Indianapolis, IN Construction, Midwest Governmental 144 19.1
rehabilitation, South entities and
maintenance and shortline
repair railroads
CPI Concrete......... 1974 Memphis, TN Concrete South Industrial 75 10.9
products companies
Kennedy(2)........... 1965 Shiremanstown, PA Construction, Northeast Industrial 84 10.5
rehabilitation, South companies
maintenance,
repair, design
and engineering
Midwest.............. 1982 Merrillville, IN Construction, Midwest Industrial 94 9.7
rehabilitation, companies
maintenance and
repair
Railroad
Service(3).......... 1972 Lakeville, MN Construction, Midwest Industrial 22 9.4
maintenance and companies
repair
Southern Indiana..... 1981 Winslow, IN Creosote-treated United Class I 29 8.9
ties States railroads,
industrial
companies,
railroad
contractors
Merit................ 1986 Bridgeton, MO Construction, Midwest Industrial 188 7.0
maintenance and companies
repair
H.P. McGinley . 1974 McAllisterville, Creosote-treated United Class I 31 6.4
PA ties and States railroads,
specialty wood railroad
products contractors
New England.......... 1979 Bridgeport, CT Construction, Northeast Class I 25 5.6
maintenance and railroads,
repair transit
authorities,
industrial
companies
Wm. A. Smith(4)...... 1924 Houston, TX Construction, South Industrial 79 5.1
maintenance and companies
repair
U.S. Trackworks(5)... 1983 Wayland, MI Construction, Midwest Shortline 45 4.8
maintenance and railroads,
repair industrial
companies
Condon............... 1974 Spokane, WA Construction and West Industrial 59 4.5
maintenance companies
Comtrak.............. 1984 Alpharetta, GA Construction, South Transit 19 1.0
maintenance and authorities
repair
</TABLE>
- ---------------
(1) Includes Mize Construction, Railroad Specialties and US. Railway Supply, all
of which are under common control.
(2) Includes Alpha-Keystone and Railcorp, all of which are under common control.
(3) Includes Minnesota Railroad, which is under common control.
(4) Includes Smith Rerailing, which is under common control.
(5) Includes Northern Rail, which is under common control.
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<PAGE> 53
ONGOING ACQUISITION PROGRAM
The Company believes that it will be regarded by acquisition candidates as
an attractive acquiror based on: (i) the Company's strategy for creating a
professionally managed, integrated rail system construction, rehabilitation and
maintenance company that will operate throughout the United States and in
selected international markets; (ii) the Company's decentralized operating
strategy, which emphasizes an ongoing role for owners, management and key
personnel of acquired businesses, as well as meaningful equity positions for
these individuals, enabling them to participate in the Company's growth; (iii)
the Company's increased visibility and access to financial resources as a public
company; and (iv) the potential for increased profitability of the acquired
company due to savings in workforce and equipment utilization, improvements in
the purchasing and financing of equipment, centralization of administrative
functions and improved information systems capabilities.
The Company believes that management of the Founding Companies will be
instrumental in identifying future acquisitions. Several of the principals of
the Founding Companies have leadership roles in industry trade associations,
which have enabled these individuals to become personally acquainted with the
owners of numerous acquisition targets across the country. See
"Management -- Executive Officers, Directors and Key Employees." The Company
expects that the visibility of these individuals and the Company within the rail
system industry will increase the awareness and interest of acquisition
candidates in the Company and its acquisition program. In addition, the Company
intends to utilize an internal acquisition team that will devote substantial
time to pursuing the Company's acquisition strategy. The Company currently has
no agreements, arrangements or understandings to effect any acquisitions other
than the Combination. There can be no assurance that the Company will identify,
acquire or manage profitably additional businesses or that financing will be
available for future acquisitions. See "Risk Factors -- Risks Associated with
Acquisition Strategy and Financing."
The Company's acquisition program is expected to (i) expand its geographic
coverage throughout the United States, (ii) add density and operating leverage
within its current markets through smaller "tuck-in" acquisitions and (iii)
position the Company to offer its customers complementary services and products.
The Company intends initially to focus on acquisition opportunities within the
United States. However, the Company believes that after its initial domestic
emphasis it may look to international acquisition opportunities for further
expansion.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case basis, with the major
factors in establishing the purchase price being historical operating results,
future prospects of the target and the ability of the target to complement the
services and products offered by the Company. Within 90 days following the
completion of this Offering, the Company intends to register additional shares
of Common Stock under the Securities Act for its use in connection with future
acquisitions. The Company believes that it can structure acquisitions as
tax-free reorganizations by using its Common Stock as consideration.
SOURCES OF SUPPLY
The Company purchases new rail from a limited number of suppliers. New rail
is generally installed only on main lines, where the track may carry high
volumes of heavy traffic at high speeds. Over time, rail is removed, inspected
and, if in appropriate condition, refurbished for sale as "relay" rail. Relay
rail is typically installed on secondary (non-main line) tracks, as well as yard
or branch tracks. Total rail life before scrapping may be as long as 60 years.
The Company also purchases a large volume of relay rail that is refurbished by
third parties and resold.
Similarly, the Company regularly purchases entire sections of track that
are removed and subsequently disassembled at the Company's facilities. The
Company inspects the various track components -- rail, ties, and
accessories -- and items are placed into the Company's inventory
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(either in their "as removed" condition or after being refurbished by third
parties) or sold by the Company for scrap. Additionally, in connection with
certain repair and rehabilitation projects, the Company acquires trackwork that
is removed.
The Company believes that upon completion of the Combination, it will be
able to purchase materials in sufficient quantities to permit it to realize
purchasing economies and discounts from its suppliers. Additionally, the
Company's network of contractors is expected to position the Company to acquire
previously-used track on comparatively advantageous terms.
In its installation of electrical signaling and communication systems for
transit authorities, the Company purchases equipment from a limited number of
suppliers. See "Risk Factors -- Reliance on Subcontractors and Suppliers."
Two of the Founding Companies process creosote-treated wooden ties. Their
operations include the purchase of raw lumber, trimming the lumber to specified
sizes, pressurized impregnation of the lumber with creosote preservative and
finishing of the ties (which would include the pre-drilling of spike holes and
the attachment of plates, as specified by the customer). The service life of
pressure treated ties has been extended to a range of 25 to 40 years.
SALES AND MARKETING
Upon completion of the Combination, the Company intends to implement a
targeted national sales program to further develop the business of each of the
Founding Companies. The focus of this initiative will be on the Class I
railroads and other large industrial companies with facilities in multiple
areas, which the individual Founding Companies have previously been unable to
serve on a comprehensive, nationwide basis. In addition, the Company's ability
to offer electrical installation services together with rail-related
construction, rehabilitation, repair and maintenance services and related
products is expected to result in opportunities for the Company to cross-sell
its services to large industrial companies. The Company believes that it will
have an advantage over its competitors since it will be able to offer
consistent, high-quality service and products in most regions of the United
States, thereby enabling customers to use the Company's services and products in
multiple locations rather than dealing with numerous regional or local
companies.
The Combination will significantly broaden the respective offerings of
services and products of the Founding Companies, and management believes that
the Company will be positioned to achieve significant synergies in its marketing
programs. Management also believes that it will be able to develop cross-selling
programs under which (i) its design and engineering groups will provide timely
leads to its construction, product supply and electrical installation
subsidiaries, (ii) its electrical signaling and communications groups, which
have previously utilized third parties for track engineering and construction,
will be able to utilize the other Founding Companies for these projects, and
(iii) its track construction subsidiaries will be able to contract with Comstock
for signaling, communication and electrical installation services. Similarly,
the Company's product supply subsidiaries have, over the years, developed
long-term relationships with the Class I railroads and large industrial
companies, and the Company believes that these relationships will provide a
basis for marketing its construction and maintenance services.
A majority of the Company's pro forma as adjusted revenue for the year
ended December 31, 1997 was derived from contracts entered into through a
competitive bidding process. Many projects that are competitively bid require
the company that is awarded the project to post a bond, which varies according
to the size of the project. Each company has a bonding limit, which is based on
the company's working capital and work in progress. The bond provides the
customer with insurance in the event that the company is unable to complete the
project. Accordingly, the ability of each of the Founding Companies to bid on
larger projects has been limited by its ability to obtain the required bonding.
The increased size of the Company following the Combination compared to the size
of each individual Founding Company will increase the bonding limits for each
Founding Company. Therefore, upon completion of the Combination and the
Offering, the Company believes that each
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of the Founding Companies, as a subsidiary of the Company, will be positioned to
bid on and undertake significantly larger construction and maintenance projects.
Similarly, the Company also expects that the increased bonding capacity will
permit it to bid on and undertake more projects than could smaller companies.
CUSTOMERS
Based on estimates of the Founding Companies, management estimates that the
Company derived 61.6% of its pro forma as adjusted revenue for the year ended
December 31, 1997 from industrial companies, commercial enterprises and
governmental entities (excluding transit authorities), 30.9% from rail-based
transit authorities, 6.0% from shortline and commuter railroads, and 1.5% from
Class I railroads. No single customer accounted for more than 6.0% of the
Company's pro forma as adjusted revenue for the year ended December 31, 1997.
The following table lists the top four customers of the Company in each category
on a pro forma as adjusted basis:
<TABLE>
<S> <C> <C>
INDUSTRIAL COMPANIES/ TRANSIT AUTHORITIES AND SHORTLINE AND REGIONAL RAILROADS
COMMERCIAL ENTERPRISES/ COMMUTER RAILROADS Indiana Southern Railroad
GOVERNMENT Metropolitan Transit Company
Commonwealth Edison Authority (New York) Branford Steam Railroad
U.S. Army Corps of Engineers LAMTA (Los Angeles) I&M Rail Link
United States Steel MTA (Baltimore) Norfolk & Western Railway
Terminal One Group Associates SEPTA (Pennsylvania)
CLASS I RAILROADS
Illinois Central Railroad
Union Pacific Railroad
Conrail
CSX Transportation
</TABLE>
Many of the customers that purchase products and supplies from the Founding
Companies, such as Class I railroads, have not historically used external
providers for their rail system construction, rehabilitation and maintenance
services. Following the Combination, the Company expects to leverage its
relationships with these customers into an additional source of customers for
its service businesses.
A majority of the Company's business is generated through competitive
bidding, and the Company's track construction and repair suppliers generally do
not enter into long-term contracts with its customers. To a limited extent, the
Founding Companies have historically been suppliers to and customers of each
other. The Company expects that these relationships will continue following the
Combination, and that the Company's strategy of fostering cooperation and
teamwork will yield new opportunities for the Founding Companies and
subsequently acquired companies.
COMPETITION
The rail system services and products industry is highly competitive, and
projects are often awarded through competitive bidding. The Company competes
with other rail system construction, rehabilitation and maintenance companies,
electrical contractors and suppliers of products, some of which have
significantly greater resources than the Company. An inability of the Company to
compete successfully against its existing and future competitors would have a
material adverse effect on its business, results of operations and financial
condition. Management believes the Founding Companies compete effectively in
their industries. Further, the Company believes that each Founding Company that
competes in the non-rail industry, competes effectively within its industry.
There are no substantial barriers to entry and additional competitors with
greater resources than the Company may enter the industry and compete
effectively against the Company. Certain competitors may also provide a broad
range of services and products and may have sufficient bonding capacity to
undertake large projects. Moreover, the Company may depend in part upon
opportunities for
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consolidation in the rail system industry in order to execute effectively its
acquisition and vertical integration strategy. If the Company's customers do not
receive the Company's vertical integration strategy favorably, such customers
have numerous alternative sources of services and supply.
RISK MANAGEMENT AND SAFETY
Because the Founding Company's businesses are labor intensive, workers'
compensation will be a significant operating expense for the Company. In
addition, the Company could be exposed to possible claims by its customers
alleging discrimination or harassment by the Company's employees. The Company
could also be exposed to liability for the acts or negligence of its employees
who cause personal injury or damage while on assignment, as well as claims of
misuse of client proprietary information or theft of client property. The
Company has adopted policies and procedures intended to reduce its exposure to
these risks.
The Founding Companies maintain insurance against these risks with policy
limits they consider sufficient which they believe are consistent with industry
standards. The Company intends to retain a risk management professional who,
with the assistance of the Founding Company presidents, would be responsible for
claims management and the establishment of appropriate reserves for the
deductible portion of claims. The Company also expects to implement quarterly
safety committee meetings with the Founding Company presidents and conduct
routine safety inspections of local work sites.
EQUIPMENT AND FACILITIES
The Founding Companies operate specialized equipment used in rail
construction, rehabilitation, repair and maintenance. This equipment is portable
and, consequently, the Company intends to share equipment where it is
appropriate and cost effective. For example, during the winter months, the
Founding Companies located in the Northern United States could relocate their
equipment to the Founding Companies located in the south. Each of the Founding
Companies generally performs its own equipment maintenance.
The Company's corporate offices are in approximately 3,000 square feet of
leased space in a suburb of Baltimore, Maryland. In addition to its corporate
offices, upon consummation of the Combination, the Company will maintain the
following facilities:
<TABLE>
<CAPTION>
FOUNDING COMPANY PRINCIPAL USE OWNED OR LEASED
- ---------------- LOCATION ------------- ---------------
<S> <C> <C> <C>
Annex.................. Indianapolis, IN Office and Yard Owned
Comstock............... White Plains, NY Office Leased
Maspeth, NY Office/warehouse Leased
Atlanta, GA Office/warehouse Leased
San Francisco, CA Office Leased
Cincinnati, OH Office Leased
Longview, WA Office/warehouse Leased
Los Angeles, CA Office/warehouse Leased
Woodside, NY Office/warehouse Leased
Glendale, NY Office/warehouse Leased
Comtrak................ Alpharetta, GA Office and Yard Leased
Sewell, NJ Regional Office Leased
Condon................. Spokane, WA Office and Yard Leased
CPI Concrete........... Memphis, TN Office and Yard Leased
H.P. McGinley.......... McAlisterville, PA Wood Processing Owned
Plant
</TABLE>
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<TABLE>
<CAPTION>
FOUNDING COMPANY PRINCIPAL USE OWNED OR LEASED
- ---------------- LOCATION ------------- ---------------
<S> <C> <C> <C>
Kennedy................ Shiremanstown, PA Office and Yard Leased
North Jackson, OH Sales, Maintenance, Leased
Yard
Mechanicsburg, PA(2 loc.) Design and Leased
Engineering
Washington, DC Sales Leased
Merit.................. Bridgeton, MO Office Leased
Midwest................ Merrillville, IN Office Leased
Burns Harbor, IN Yard Owned
New England............ Bridgeport, CT Office Leased
Monroe, CT Storage, Yard Leased
Railroad Service....... Lakeville, MN Office and Yard Leased
Fargo, ND Yard Leased
Southern Indiana....... Winslow, IN Office Owned
Winslow, IN Wood Processing Leased
Plant
U.S. Trackworks........ Wayland, MI Office Leased
Miamitown, OH Storage Leased
Wm. A. Smith........... Houston, TX(2 loc.) Office and Yard Owned
</TABLE>
GOVERNMENT REGULATION
Overview. In addition to the environmental, safety and other regulations
generally applicable to all businesses, the Company's business is impacted by
regulations that are administered by the STB, the successor to the Interstate
Commerce Commission ("ICC"), and the FRA and by regulatory agencies in the
various states in which the Company and its customers do business. Since 1980,
there has been a significant relaxation in regulations governing the sale,
leasing or other transfer of railroad properties, and this change has favorably
affected the operations of many of the Company's customers. Various interests in
the United States have sought and continue to seek reimposition of government
controls on the railroad industry in areas deregulated in whole or in part since
1980, including stricter rate regulation and more onerous labor protection
conditions for rail line transfers.
Railroad Regulations. The ICC Termination Act, which was enacted on
December 29, 1995, eliminated the ICC as an independent agency and created the
STB, a new agency within the Department of Transportation which began
functioning on January 1, 1996. The ICC Termination Act changed the procedure
and timing for federal approval of rail projects, including abandonments, line
sales, mergers, rates and tariffs, simplifying and streamlining the abandonment
process. The FRA regulates railroad safety and equipment standards, including
track maintenance and train speed standards, special procedures for handling
hazardous shipments, locomotive and railcar inspection and repair requirements,
operating practices and crew qualifications. The Roadway Worker Protection
Rules, which were promulgated by the FRA, apply to rail contractors and
establish certain safety criteria that must be complied with on rail projects.
TEA 21. On June 9, 1998, the President signed TEA 21, the six-year surface
transportation program that represents a significant development in the federal
transit program. TEA 21, the largest infrastructure funding bill in U.S.
history, authorizes funding for transit in the amount of $42 billion over six
years. TEA 21 authorizes over 40 percent more than the 1991 Intermodal Surface
Transportation Efficiency Act, whose funding has expired.
State Regulatory Agencies. State regulatory agencies no longer have
authority to engage in economic regulation of railroads that are part of the
intrastate network. State and local governments generally retain jurisdiction
over local rail safety matters, such as the installation of grade crossings and
grade crossing warnings devices.
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ENVIRONMENTAL MATTERS
The principal environmental regulatory requirements applicable to the
Company's operations relate to the use of creosote to treat lumber, and the
generation, storage, transportation and off-site treatment or disposal of solid
and hazardous wastes. The Company intends to implement environmental compliance
programs designed to maintain compliance with applicable technical and
operations requirements. The Founding Companies believe that their operations
have all required environmental permits and currently are in compliance, in all
material respects, with such regulatory requirements, except where the failure
to comply, either individually or in the aggregate, would not have a material
adverse effect on the Company's business, results of operations or financial
condition.
The historical and current uses of the Company's facilities may have
resulted in spills or releases of various solid or hazardous wastes that may
contain hazardous substances ("Hazardous Substances"), which now, or in the
future, could require remediation. The Company also may be subject to
requirements related to remediation of Hazardous Substances that have been
released into the environment at properties that it owns or operates, or owned
or operated in the past or at properties to which it sends, or may have sent,
Hazardous Substances for treatment or disposal. Such remediation requirements
generally are imposed without regard to fault, and liability for any required
environmental remediation can be substantial. There are currently no claims,
either threatened or pending, against the Company for environmental remediation
of Hazardous Substances which individually or in the aggregate would have a
material adverse effect on the Company's business, results of operations or
financial condition.
EMPLOYEES
On a pro forma combined basis as of March 31, 1998, the Company employed
approximately 1,748 employees, all of whom were full-time employees.
Approximately 1,533 of the Company's employees were engaged in operations, and
215 were engaged in a variety of sales, administrative and managerial functions.
The Company believes that its relations with all of its employees are good.
An aggregate of approximately 1,175 people employed by Annex, Comstock,
Kennedy, Merit, Midwest, New England and U.S. Trackworks are members of certain
labor unions and are employed pursuant to a collective bargaining agreement.
Certain of the Founding Companies are parties to collective bargaining
agreements with the International Brotherhood of Electrical Workers, Laborers'
International Union of North America, the International Union of Operating
Engineers, United Brotherhood of Carpenters and Joiners of America and the
United Brotherhood of Teamsters. Certain of the Founding Companies' customers
only hire unionized labor. Furthermore, except for a one-week work stoppage in
Connecticut by the United Brotherhood of Teamsters in June 1994, the Founding
Companies have experienced no work stoppages in the past five years.
INFORMATION TECHNOLOGY SYSTEMS
The Company will require integrated information technology systems in order
to effectively integrate, manage and optimize its operations, particularly as it
executes its growth strategy. The Company is in the process of selecting and
implementing the required systems and plans to complete the process following
the Combination. The Company believes that these information technology systems
will be used for a variety of purposes, including monitoring inventory levels,
tracking the progress of construction projects and integrating of the Company's
financial, general ledger, payables and receivables function. In addition, the
Company will network its corporate offices to the offices of the Founding
Companies and will have e-mail capability to all offices. The Company expects
that the required systems will be purchased and installed in 1999 and that its
expenditures for these systems will not be material to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Pro Forma As Adjusted Liquidity and Capital Resources." All of the
new systems will be Year 2000 compatible. Until these new systems are fully
operational, each of the Founding Companies will continue using the information
systems that are currently being utilized.
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LEGAL PROCEEDINGS
From time to time, the Company may be involved in routine legal proceedings
incidental to the conduct of its business. In the opinion of management, the
litigation, individually or in the aggregate, to which the Company is currently
a party, is not likely to have a material adverse effect on the Company's
business, financial condition and results of operations.
ORGANIZER
The Company was organized by IPODC, which was not previously affiliated
with any of the Founding Companies. IPODC identified the Founding Companies,
arranged for the Company's retention of its executive officers and managed the
initial organizational stages of the Combination and the Offering. In exchange
for the services provided by IPODC, the Founding Companies have agreed to pay
IPODC or its designees upon the completion of the Combination and the Offering,
a fee equal to 3 1/2% of the total consideration paid to the Founding Companies
in the Combination excluding the cash portion of the consideration paid to
Comstock. Such fee will be paid out of the cash and shares of Common Stock to be
received by the Founding Companies.
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<PAGE> 60
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of the
executive officers, directors and key employees of the Company following the
consummation of this Offering:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS: AGE POSITION
- --------------------------------- --- --------
<S> <C> <C>
John G. Larkin....................... 42 Chairman of the Board, Chief Executive Officer
and Director
Michael R. Azarela................... 40 Executive Vice President, Chief Financial
Officer and Director
John Kennedy......................... 59 Vice President, Chief Operating Officer and
Director
Harold C. Kropp, Jr.................. 41 Vice President and Chief Accounting Officer
Ronald W. Drucker.................... 57 Director
R.C. Matney.......................... 60 Director
Scott D. Brace....................... 42 President of Railroad Service and named to be a
Director
Steve C. Goggin...................... 51 President of Merit and named to be a Director
Peter Alan Pasch..................... 48 President of Comstock and named to be a Director
Lambertus L. Tameling................ 62 President of U.S. Trackworks and named to be a
Director
KEY EMPLOYEES:
- ---------------
John D. Baker........................ 44 President of CPI Concrete
Ronald E. Brown...................... 63 President of Annex
Mark Condon.......................... 37 President of Condon
Sean G. Gough........................ 41 President of Southern Indiana
Anthony Julian....................... 44 President of New England
Fulton Kennedy....................... 43 President of Kennedy
John H. Lapp......................... 55 President of Comtrak
William Lucaitis..................... 37 President of Midwest
David McGinley....................... 43 President of H.P. McGinley
Jack I. Wilt......................... 51 President of Wm. A. Smith
</TABLE>
John G. Larkin has been the Chairman of the Board and Chief Executive
Officer and a director of RailWorks since its inception in March 1998. For the
past 20 years, Mr. Larkin has worked in the transportation industry. From
December 1994 to February 1998, Mr. Larkin was a managing director of BT Alex.
Brown Incorporated, where he focused on the transportation industry. Prior
thereto, he served in various capacities at BT Alex. Brown Incorporated since
1987, including as an equity research analyst, focused exclusively on the
transportation industry. From 1986 to 1987, Mr. Larkin was Assistant Vice
President of CSX Transportation, Inc., where he was responsible for strategic
planning and analysis. From 1985 to 1986, Mr. Larkin was Director of Strategic
Planning of Seaboard System Railroad, Inc. From January 1979 through July of
1982, Mr. Larkin served as an engineering project coordinator for Day &
Zimmerman, Inc., an engineering and construction management firm. During this
period, Mr. Larkin was focused exclusively on railroad and rail transit design
and valuation projects. Mr. Larkin has a Master of Business Administration from
Harvard University, Master of Science in Civil Engineering from the University
of Texas and a Bachelor of Science in Civil Engineering from the University of
Vermont.
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Michael R. Azarela has served as the Executive Vice President, Chief
Financial Officer and a director of RailWorks since May 1998. Mr. Azarela has
served as Chief Executive Officer of L.K. Comstock since February 1998, Senior
Vice President and Chief Financial Officer of CGI and Spie from May 1994 to
February 1998, Chairman of the Board of Comstock since December 1996 and Vice
President and Treasurer of L.K. Comstock from September 1992 to April 1994 and
in various other positions at Comstock since June 1983. Mr. Azarela is a
certified public accountant and has a Master of Business Administration from
Iona College.
John Kennedy has served as the Vice President, Chief Operating Officer and
a director of RailWorks since its inception in March 1998. Mr. Kennedy has
served as President of Kennedy Railroad from March 1966 to February 1998, as
President of Railcorp, Inc. from April 1986 to February 1998 and as Principal of
Alpha-Keystone from January 1996 to February 1998. Mr. Kennedy is the brother of
Fulton Kennedy. From 1980 to 1988, Mr. Kennedy served as an Elected Member of
the Pennsylvania House of Representatives.
Harold C. Kropp, Jr. has served as the Vice President and Chief Accounting
Officer of RailWorks since its inception in March 1998. Prior thereto, Mr. Kropp
was a valuation specialist at Larson, Kellett & Associates, P.C. from May 1996
to March 1998. Prior thereto, he was the Controller of Eck Realty Co. from
September 1994 to May 1996 and the Chief Financial Officer of Dame Media, Inc.
from April 1993 to September 1994. Mr. Kropp was employed by a large regional
certified public accounting firm from January 1983 to April 1993 where he
achieved the level of partner. Mr. Kropp is a certified public accountant
accredited in business valuation, a certified valuation analyst and a certified
management accountant.
Ronald W. Drucker has been a director of RailWorks since June 1998. Mr.
Drucker has been an independent consultant on transportation and technology
issues since May 1992. From September 1966 to April 1992, Mr. Drucker served in
various capacities for CSX Corporation and certain of its subsidiaries,
including Chief Engineer, Senior Vice President for Transportation and President
and Chief Executive Officer of CSX Rail Transport. Additionally, from December
1989 to October 1997, he was the Chairman of the Board of Encompass, a global
logistics information partnership. Mr. Drucker also serves on the Board of
Directors of Landstar System, Inc., Jacksonville University, the National
Defense Transportation Association and the New World Symphony Orchestra.
R.C. Matney has been a director of RailWorks since June 1998. Mr. Matney
has been President, Chairman of the Board of Directors and Chief Executive
Officer of Mark VII Transportation Company, Inc., since he founded the Company
in January 1989. From March 1985 to December 1988, he served as President of
American President Distribution Services, Inc. Prior thereto, Mr. Matney was the
President of the Surface Transportation Group of Brae Corporation from October
1980 to March 1985. Mr. Matney is a former member of the Intermodal Freight
Committee of the National Transportation Research Board.
Scott D. Brace will serve as President of Railroad Service and a director
of RailWorks after the Combination. Mr. Brace has served as Vice President of
Railroad Service since May 1989 and as President of Minnesota Railroad Service,
Inc. since May 1989. Mr. Brace is President-elect of the National Railroad
Construction and Maintenance Association, Inc. (the "NRCMA").
Steve C. Goggin will serve as President of Merit after the Combination. Mr.
Goggin has served as President of Merit since October 1986. Mr. Goggin is a past
President of the NRCMA.
Peter Alan Pasch will serve as President of Comstock and a director of the
Company after the Combination. Mr. Pasch has served as President and Chief
Operating Officer of Comstock since April 1997. From October 1995 to April 1997,
Mr. Pasch served as Executive Vice President of Comstock in charge of operations
outside the New York Metropolitan area. Mr. Pasch served as Executive Vice
President of Comstock from September 1987 to September 1995. Mr. Pasch joined
Comstock in 1973 after receiving his Bachelor of Science and Master of
Engineering Degrees from Rensselaer
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Polytechnic Institute. Mr. Pasch is a Registered Professional Engineer in 45
states, a Master Electrician in 18 states and is a member of the International
Brotherhood of Electrical Workers.
Lambertus L. Tameling will serve as President of U.S. Trackworks and a
director of RailWorks after the Combination. Mr. Tameling has served as
President of U.S. Trackworks since April 1986 and as President of Northern Rail
since February 1992. Mr. Tameling is a past President of the NRCMA.
John D. Baker will serve as President of CPI Concrete after the
Combination. Mr. Baker has served as President of CPI Concrete since December
1989.
Ronald E. Brown will serve as President of Annex after the Combination. Mr.
Brown has served as President of Annex since 1965. Mr. Brown is a past officer
of the NRCMA.
Mark Condon will serve as President of Condon after the Combination. Mr.
Condon has served as President of Condon since January 1984.
Sean G. Gough will serve as President of Southern Indiana after the
Combination. Mr. Gough has served as President of Southern Indiana since
December 1986. From October 1994 to December 1996, Mr. Gough was a director and
Secretary of AAA Railway Supply.
Anthony Julian will serve as President of New England Railroad after the
Combination. Mr. Julian has served as President of New England Railroad since
1979.
Fulton Kennedy will serve as President of Kennedy Railroad after the
Combination. Mr. Kennedy has served as Vice President of Kennedy Railroad since
April 1994 and served as Treasurer and General Manger of Kennedy Railroad from
January 1980 to April 1994. Mr. Kennedy is the brother of John Kennedy.
John H. Lapp will serve as President of Comtrak after the Combination. Mr.
Lapp has served as President of Comtrak since May 1990.
William Lucaitis will serve as President of Midwest after the Combination.
Mr. Lucaitis has served as President of Midwest since April 1998. Prior thereto,
he served as Vice President of Midwest from December 1989 to April 1998.
David McGinley will serve as President of H.P. McGinley after the
Combination. Mr. McGinley has served as President of H.P. McGinley since January
1994 and has President of Appalachian Stone, Inc. since October 1985. Mr.
McGinley is a director of the First National Bank of Newport.
Jack I. Wilt will serve as President of Wm. A. Smith after the Combination.
Mr. Wilt has served as President of Wm. A. Smith since May 1990 and as President
of Smith Rerailing since November 1993.
The Company intends to elect two independent directors promptly following
consummation of this Offering, which will bring the size of the Board of
Directors to nine. The Company does not currently intend to increase the size of
the Board of Directors beyond nine members. The members of the Company's Board
of Directors serve staggered terms as follows: the terms of Messrs. Kennedy and
Pasch expire at the 1999 Annual Meeting of Stockholders; the terms of Messrs.
Azarela, Goggin and Tameling expire at the 2000 Annual Meeting of Stockholders;
and the terms of Messrs. Larkin and Brace expire at the 2001 Annual Meeting of
Stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Offering, the Company's Board of Directors will
establish an Audit Committee and a Compensation Committee.
The responsibilities of the Audit Committee will include recommending to
the Board of Directors the independent certified public accountants to be
selected to conduct the annual audit of the books and records of the Company,
reviewing the proposed scope of such audit and approving the audit fees to be
paid, reviewing accounting and financial controls of the Company with the
independent public accountants and the Company's financial and accounting staff
and reviewing
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and approving transactions between the Company and its directors, officers and
affiliates. The Company's two independent directors will be the members of the
Audit Committee.
The Compensation Committee will provide a general review of the Company's
compensation plans and policies to ensure that they meet corporate objectives.
As described below, the Company's existing plans with respect to executive
compensation are largely based upon contractual commitments set forth in
employment agreements that are either in effect or are to be entered into upon
consummation of the Combination. See "-- Executive Compensation." The
responsibilities of the Compensation Committee also include administering the
Incentive Plan, including selecting the officers and salaried employees to whom
awards will be granted. The Company's two independent directors will be the
members of the Compensation Committee.
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers,
employees or consultants of the Company are entitled to receive fees of $2,000
per Board meeting attended and $1,000 per committee meeting attended, plus
reimbursement of expenses for each meeting of the Board of Directors and each
committee meeting that they attend in person. In addition, each non-employee
director will be granted options to purchase 10,000 shares of Common Stock upon
consummation of the Offering. See "-- 1998 Incentive Stock Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Following consummation of the Offering the members of the Compensation
Committee will be Messrs. Drucker and Matney, the Company's two independent
directors.
EXECUTIVE COMPENSATION
RailWorks was incorporated in March 1998. Effective upon consummation of
the Combination and for the balance of 1998, the Company will, pursuant to
employment agreements, pay compensation based on the following annual salaries
to its Chief Executive Officer, Chief Financial Officer, Chief Operating Officer
and Chief Accounting Officer named below who will be executive officers of the
Company and whom the Company believes will be its only executive officers in
1998 (together, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
------------------ RESTRICTED
NAME POSITION SALARY BONUS STOCK AWARDS
- ---- ------------------------ -------- ------- ------------
<S> <C> <C> <C> <C>
John G. Larkin................. Chief Executive Officer $275,000 (1) 678,299
Michael R. Azarela............. Chief Financial Officer 200,000 (2) 150,735
John Kennedy................... Chief Operating Officer 100,000 (3) 150,735
Harold C. Kropp, Jr............ Chief Accounting Officer 135,000 (3) 150,735
</TABLE>
- ---------------
(1) 5% of the First Bonus Pool (as hereinafter defined) and 33.3% of the Second
Bonus Pool (as hereinafter defined).
(2) 2% of the First Bonus Pool and 13.3% of the Second Bonus Pool.
(3) 1.5% of the Bonus Pool and 10.0% of the Second Bonus Pool.
EMPLOYMENT AGREEMENTS
The Company has conducted limited operations and generated no revenue to
date and did not pay any of its executive officers compensation during 1997. The
Company anticipates that during 1998 its most highly compensated executive
officers will be Messrs. Larkin, Azarela, Kennedy and Kropp.
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<PAGE> 64
The Company has entered into employment agreements with each of the Named
Executive Officers. The agreements expire on December 31, 2001 (the "Expiration
Date") and will continue on a year-to-year basis, unless terminated by either
party. Each agreement is terminable by the Company with or without cause or upon
the employee's death or inability to perform his duties on account of a
disability for a period of six months during any consecutive twelve month period
or by the employee. The agreements provide for annual base salaries of $275,000,
$200,000, $100,000 and $135,000 for Messrs. Larkin, Azarela, Kennedy and Kropp,
respectively, and provide that these executive officers will receive 5%, 2%,
1.5% and 1.5% respectively, of the Company's first bonus pool (the "First Bonus
Pool") and 33.3%, 13.3%, 10.0% and 10.1%, respectively, of the Company's second
bonus pool (the "Second Bonus Pool"). The First Bonus Pool will consist of 10%
of the Company's pre-tax profits and the Second Bonus Pool will consist of 15%
of the amount by which the Company's net income exceeds certain benchmarks. In
addition, the agreements provide that each Executive Officer of the Company will
be granted shares of restricted stock and options to purchase Common Stock, as
set forth herein. At any time after the Offering, the employee may request a
loan from the Company in the amount of the income taxes due on stock granted to
the employee under his employment agreement. The loan will be collateralized
only by the stock granted and the employee otherwise will not be personally
obligated to repay the loan. The term of the loan will be five years, requiring
annual interest payments; however, the term will be accelerated following
termination of employment. Each agreement will also contain noncompetition,
nonsolicitation and confidential information provisions.
Upon consummation of the Combination, the Company will enter into
employment agreements with certain employee-stockholders of each Founding
Company. The agreements will expire on the second anniversary of the closing
date of the Offering. On and after such date, the employees may give twelve
months written notice of termination of the agreement (the "Expiration Date").
Each agreement will be terminable by the Company with or without cause or upon
the employee's death or inability to perform his duties on account of a
disability for a period of six months during any consecutive twelve-month period
or by the employee. Each agreement will provide for an annual base salary and
will provide that the salary will be adjusted after the initial term of the
agreement to reflect the employee's duties and responsibilities. Furthermore,
each employee will be entitled to a portion of the First Bonus Pool and the
Second Bonus Pool. As a group, the owners of the Founding Companies will be
entitled to an aggregate of 40% of the First Bonus Pool and 33.3% of the Second
Bonus Pool.
EXECUTIVE COUNCIL
Upon consummation of the Combination, each Founding Company President will
be appointed to the Company's Executive Council, which will be chaired by John
Kennedy, the Company's Vice President and Chief Operating Officer. The Executive
Council will meet weekly to participate in short- and long-term planning
sessions, coordinate the Company's marketing efforts, discuss new jobs that are
out for bid and establish best practices. In addition, the Executive Council
will present its views regularly to the Board of Directors.
1998 STOCK INCENTIVE PLAN
The Company's Board of Directors has adopted, and the Company's
stockholders have approved, the Company's Incentive Plan. There are 2,000,000
shares of Common Stock reserved for issuance under the Incentive Plan. The
purpose of the Incentive Plan is to provide executive officers, directors and
key employees with additional incentives by enabling such persons to increase
their ownership interests in the Company. Individual awards under the Incentive
Plan may take the form of one or more of: (i) either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs," and together with ISOs,
"Options"); (ii) stock appreciation rights ("SARs"); (iii) restricted or
deferred stock; (iv) dividend equivalents; (v) bonus shares and awards in lieu
of Company obligations to pay cash compensation; and (vi) other awards the value
of which is based in
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<PAGE> 65
whole or in part upon the value of the Common Stock. Upon a change of control of
the Company (as defined in the Incentive Plan), certain conditions and
restrictions relating to an award with respect to the exercisability or
settlement of such award will lapse.
The Compensation Committee will administer the Incentive Plan and generally
select the individuals who will receive awards. In addition, the Compensation
Committee will determine the type and number of awards and the terms and
conditions of those awards (including exercise prices, vesting and forfeiture
conditions, performance conditions and periods during which awards will remain
outstanding). The Incentive Plan also provides that no participant may be
granted in any calendar year awards which may be settled by delivery of more
than 100,000 shares and limits payments under cash-settled awards in any
calendar year to an amount equal to the fair market value of that number of
shares.
The Company generally will be entitled to a tax deduction equal to the
amount of compensation realized by a participant through awards under the
Incentive Plan, except that (i) no deduction is permitted in connection with
ISOs if the participant holds the shares acquired upon exercise for the required
holding periods, and (ii) deductions for some awards could be limited under the
$1.0 million deductibility cap of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). This limitation, however, should not apply to
awards granted under a plan during a grace period of up to three years following
the Offering, and should not apply to certain options, SARs and
performance-based awards granted thereafter if the Company complies with certain
requirements under Section 162(m) of the Code.
The Incentive Plan will remain in effect until terminated by the Board of
Directors. The Incentive Plan may be amended by the Board of Directors without
the consent of the stockholders of the Company, except that any amendment,
although effective when made, will be subject to stockholder approval if
required by any federal or state law or regulation or by the rules of any stock
exchange or automated quotation system on which the Common Stock may then be
listed or quoted.
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<PAGE> 66
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Set forth below is a description of certain transactions and relationships
between RailWorks Corporation and certain persons who will become officers,
directors and principal stockholders of the Company following the Combination
and the Offering. In addition, set forth below is certain information regarding
transactions and relationships prior to the Combination between certain of the
Founding Companies and their respective officers, directors and principal
stockholders.
ORGANIZATION OF RAILWORKS CORPORATION
RailWorks Corporation was formed in March 1998 as a holding company to
acquire businesses in the rail service and supply industry. Prior to the
Combination and the Offering, RailWorks Corporation issued 10 shares of Common
Stock for cash to Mr. Larkin, the Company's Chairman and Chief Executive
Officer. For information regarding certain employment arrangements between the
Company and certain directors, officers and key employees, see
"Management -- Employment Agreements."
THE COMBINATION
Simultaneously with and as a condition to the closing of the Offering,
RailWorks Corporation will consummate the Combination pursuant to the
Acquisition Agreements pursuant to which it will acquire each Founding Company
in a reverse subsidiary merger. Assuming an initial public offering price of
$12.00 per share, the aggregate consideration to be paid by RailWorks
Corporation in the Combination will be approximately $158.3 million (subject to
adjustment), which consists of (i) $51.9 million in cash, which will be paid
from the proceeds of the Offering (representing 92.9% of the estimated net
proceeds of the Offering) and (ii) the $106.4 million estimated fair value of
8,867,648 shares of Common Stock to be issued to the stockholders of the
Founding Companies. For information regarding the consideration paid to each
Founding Company, see "Formation of the Company -- the Combination." In
addition, in connection with the Combination, the Company will assume $35.0
million of indebtedness of certain of the Founding Companies (including $1.6
million of indebtedness incurred to partially finance the redemption of shares
of Common Stock of a Founding Company held by an ESOP). Such indebtedness will
be repaid with a portion of the proceeds (representing 7.1% of the estimated net
proceeds of the Offering) of the Offering and with borrowings under the
Company's Credit Facility.
As a result of the Combination, all 22 Founding Companies will become
wholly-owned subsidiaries of RailWorks Corporation. The consummation of each
Acquisition Agreement is contingent upon the consummation of the Offering and
customary closing conditions. The Acquisition Agreements require certain of the
executive officers of each of the Founding Companies to enter into employment
agreements with their respective Founding Companies effective upon consummation
of the Combination. In addition, one or more executives of certain of the
Founding Companies will be elected to the Board of Directors of the Company
following the consummation of the Offering. After the Offering, the stockholders
of the Founding Companies, management of the Company and IPODC will own in the
aggregate 63.5% of the outstanding Common Stock, assuming the over-allotment
option is not exercised. The recipients of shares of Common Stock in the
Combination are Selling Stockholders and, therefore, they may be deemed to be
"statutory underwriters" for purposes of the Securities Act. See "Formation of
the Company," "Management -- Employment Agreements," "Shares Eligible for Future
Sale," and the Unaudited Pro Forma As Adjusted Financial Statements and the
notes thereto appearing elsewhere in this Prospectus.
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<PAGE> 67
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES OF SHARES OF
COMMON COMMON ASSUMED TOTAL
CASH(1) STOCK(1) STOCK INDEBTEDNESS CONSIDERATION(2)
------- ---------- --------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Comstock Holdings, Inc., the accounting
acquiror............................. $13,093 2,803,555 $ 33,643 $18,256 $ 46,736
Annex Railroad Builders, Inc.(3)....... 5,704 758,897 9,107 1,082 14,811
Comtrak Construction, Inc.............. 886 238,377 2,861 -- 3,747
Condon Brothers, Inc................... 2,833 493,370 5,920 2,103 8,753
CPI Concrete Products Incorporated..... 3,549 440,104 5,281 2,295 8,830
H.P. McGinley, Incorporated............ 4,291 660,071 7,921 594 12,212
Kennedy Railroad Builders, Inc.(5)..... 2,790 365,984 4,392 2,543 7,182
Merit Railroad Contractors, Inc........ 1,981 303,782 3,646 629 5,627
Midwest Construction Services, Inc..... 2,603 424,528 5,094 687 7,697
New England Railroad Construction
Company, Inc......................... 3,169 454,862 5,458 610 8,627
Railroad Service, Inc.(6).............. 3,463 509,017 6,108 1,310 9,571
Southern Indiana Wood Preserving
Company, Inc......................... 3,176 433,859 5,206 4,081 8,382
U.S. Trackworks, Inc.(7)............... 1,317 304,450 3,653 474 4,970
Wm. A. Smith Construction Co.,
Inc.(8).............................. 1,690 366,424 4,397 386 6,087
------- ---------- -------- ------- --------
Subtotal.......................... $50,545 8,557,280 $102,687 $35,050 $153,232
------- ---------- -------- ------- --------
IPODC(9)............................... 1,319 310,368 3,724 -- 5,043
------- ---------- -------- ------- --------
Total........................ $51,864 8,867,648 $106,411 $35,050 $158,275
======= ========== ======== ======= ========
</TABLE>
- ---------------
(1) Fees to be paid to IPODC on behalf of the Founding Companies are set forth
separately in the table and are excluded from the amounts set forth for the
Founding Companies.
(2) Excludes assumed indebtedness.
(3) Includes Mize Construction Company, Railroad Specialities, Inc. and U.S.
Railway Supply Inc., all of which are under common control.
(4) Includes approximately $1.6 million of indebtedness incurred to partially
finance the redemption of shares of common stock of a Founding Company held
by an ESOP.
(5) Includes Alpha-Keystone Engineering, Inc. and Railcorp, Inc., all of which
are under common control.
(6) Includes Minnesota Railroad Service, Inc., which is under common control.
(7) Includes Northern Rail Service and Supply Co., which is under common
control.
(8) Includes Wm. A. Smith Rerailing Service, Inc., which is under common
control.
(9) In exchange for services provided by IPODC, the Founding Companies have
agreed to pay IPODC a fee equal to 3 1/2% of the total consideration paid to
the Founding Companies (excluding the cash portion of Comstock's
consideration) in the Combination. Such fee will be paid in cash and shares
of Common Stock in the amounts reflected in the table. See "-- Organizer."
OTHER TRANSACTIONS
Certain of the Founding Companies have engaged in transactions with
companies that are under common ownership, which transactions are described
below. Any future transactions between the Company and its officers, directors
or principal stockholders will be approved by a majority of the disinterested
members of the Board of Directors.
Comstock
RailWorks will acquire all of the outstanding stock of Comstock in a
reverse subsidiary merger for (i) $13.1 million in cash and (ii) 2,803,555
shares of Common Stock. In connection with the acquisition, Peter Alan Pasch,
the President and Chief Operating Officer of Comstock, will become a
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<PAGE> 68
director of the Company. Mr. Pasch will enter into a two-year employment
agreement with Comstock after the acquisition.
Effective January 1, 1997, Comstock acquired all of the outstanding stock
of L. K. Comstock from Spie for $5.0 million plus a contingent payment of up to
$5.0 million based on 1997, 1998 and 1999 pre-tax income. In May 1998, Comstock
agreed to pay Spie $1.6 million in lieu of such contingent payment. Such
payment, which will be paid by the Company, is due on September 9, 1998, subject
to the completion of the Combination.
In connection with the Comstock Acquisition, Comstock, L. K. Comstock, Spie
and CGI entered into an Indemnity and Cooperation Agreement pursuant to which
L.K. Comstock issued a contingent promissory note to Spie in the amount of
approximately $14.9 million (the "Contingent Note") collateralized by any
proceeds derived from three projects (the "Spie Projects") for which Comstock
had not been fully paid. Each of these projects is the subject of a lawsuit in
which L.K. Comstock is suing for payment of a portion of the contract price. In
each proceeding, the defendant has filed a counterclaim against L.K. Comstock
for breach of contract. Spie is obligated to indemnify L.K. Comstock for all
losses and expenses incurred with respect to these lawsuits. The Contingent Note
is payable only from amounts collected by L.K. Comstock with respect to the Spie
Projects prior to April 3, 2007, at which time the Contingent Note will be
canceled. As such, Spie and any successor or creditor may not look to any other
assets of L.K. Comstock or the Company to satisfy the Contingent Note. Because
there is a right of offset for any gains or losses incurred in connection with
the Spie Projects, neither the Contingent Note nor the right to receive proceeds
from the Spie Projects is reflected in Comstock's financial statements or the
Company's Unaudited Pro Forma As Adjusted Financial Statements.
Kennedy
RailWorks will acquire all of the outstanding stock of Kennedy,
Alpha-Keystone and Railcorp in reverse subsidiary mergers for an aggregate of
(i) $2.8 million in cash and (ii) 365,984 shares of Common Stock. Mr. Fulton
Kennedy, the President of Kennedy, is the brother of John Kennedy, the Vice
President and Chief Operating Officer and a director of the Company. Fulton
Kennedy will enter into a two-year employment agreement with Kennedy after the
Acquisition.
Merit
RailWorks will acquire all of the outstanding stock of Merit in a reverse
subsidiary merger for (i) $2.0 million in cash and (ii) 303,782 shares of Common
Stock. In connection with the acquisition, Mr. Steve C. Goggin, the President of
Merit, will become a director of the Company. Mr. Goggin will enter into a
two-year employment agreement with Merit after the Acquisition.
Mr. Goggin is the sole shareholder of Shelter Rail Leasing. Annex leases
certain equipment from Shelter Rail Leasing and lease payments to Shelter Rail
Leasing totaled $181,500 in 1997. All payments to Shelter Rail Leasing will be
terminated upon consummation of the Combination.
Railroad Service
RailWorks will acquire all of the outstanding stock of Railroad Service and
Minnesota Railroad in reverse subsidiary mergers for an aggregate of (i) $3.5
million in cash and (ii) 509,017 shares of Common Stock. Mr. Scott D. Brace, the
President of Railroad Service, will become a director of the Company. Mr. Brace
will enter into a two-year employment agreement with Railroad Service after the
Acquisition.
Mr. Brace is a 44% shareholder of Railroad Services and Minnesota Railroad.
Railroad Services and Minnesota Railroad periodically make payments for
subcontracting and administrative services to each other throughout the year.
U.S. Trackworks
RailWorks will acquire all of the outstanding stock of U.S. Trackworks and
Northern Rail in reverse subsidiary mergers for an aggregate of (i) $1.3 million
in cash and (ii) 304,450 shares of Common Stock. In connection with the
acquisition, Mr. Lambertus L. Tameling, the President of U.S. Trackworks, will
become a director of the Company. Mr. Tameling will enter into a two-year
employment agreement with U.S. Trackworks after the Acquisition.
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<PAGE> 69
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by: (i) each person (or group of affiliated
persons) known by the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock; (ii) each Named Executive Officer of
the Company; (iii) each director of the Company and each person named to become
a director; (iv) all of the Company's directors, persons named to become
directors and executive officers, as a group and (v) the Selling Stockholders.
Each stockholder possesses sole voting and investment power with respect to the
shares listed, unless otherwise noted.
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE COMMON
OF COMMON STOCK
STOCK BENEFICIALLY
BENEFICIALLY OWNED
NUMBER OF SHARES OWNED ASSUMING
OF COMMON STOCK AFTER THE NUMBER EXERCISE OF
IMMEDIATELY AFTER THE OFFERING OF SHARES OVER-
OFFERING AND THE AND THE SUBJECT TO OVER- ALLOTMENT
COMBINATION COMBINATION ALLOTMENT OPTION OPTION IN FULL
--------------------- ------------ ----------------- --------------
<S> <C> <C> <C> <C>
BENEFICIAL OWNER
- ----------------------------------------
EXECUTIVE OFFICERS, DIRECTORS AND
NOMINEES FOR DIRECTOR:
John G. Larkin(1)....................... 678,309 4.5% -- 4.5%
John Kennedy(2)......................... 391,592 2.6 -- 2.6
Michael R. Azarela(2)................... 540,118 3.6 104,167 1.9
Harold C. Kropp, Jr.(2)................. 150,735 1.0 -- 1.0
Ronald W. Drucker....................... -- -- -- --
R. C. Matney............................ -- -- -- --
Scott D. Brace.......................... 224,003 1.5 -- 1.5
Steve C. Goggin......................... 303,782 2.0 -- 2.0
Peter Alan Pasch(3)..................... 389,383 2.6 104,167 1.9
Lambertus L. Tameling................... 72,312 * -- *
All executive officers, directors and
persons named to be directors as a
group (10 persons).................... 2,750,234 18.2 208,334 16.9
SELLING STOCKHOLDERS:
John Barra(3)........................... 12,979 * 3,472 *
Michael A. Cahn(3)...................... 363,424 2.4 97,222 1.8
Gene Cellini(3)......................... 25,959 * 6,944 *
Keith C. George(3)...................... 363,424 2.4 97,222 1.8
Gary Guild(3)........................... 25,959 * 6,944 *
Robert Herschenfeld(3).................. 25,959 * 6,944 *
Frank Leonhartsberger(3)................ 25,959 * 6,944 *
John P. Nuzzo(3)........................ 25,959 * 6,944 *
Doug Orcutt(3).......................... 25,959 * 6,944 *
Nicholas Pantelides(3).................. 363,424 2.4 97,222 1.8
Nat A. Pappagallo(3).................... 25,959 * 6,944 *
Lex A. Passman(3)....................... 363,424 2.4 97,222 1.8
Michael L. Rothschild(3)................ 363,424 2.4 97,922 1.8
Daniel Zury(3).......................... 12,979 * 3,472 *
</TABLE>
- ---------------
* less than one percent
(1) Prior to consummation of the Offering and the Combination, Mr. Larkin owned
ten shares of Common Stock, representing all the outstanding shares of
Common Stock of the Company.
(2) Includes 150,735 shares of Common Stock issued to the executive officer upon
consummation of the Combination and the Offering.
(3) The Selling Stockholders have granted to the Underwriters a 30-day option to
purchase up to 750,000 additional shares of Common Stock solely to cover
over-allotments, if any. The Selling Stockholders may be deemed to be
"statutory underwriters" for purposes of the Securities Act. The address of
the Selling Stockholders is c/o RailWorks Corporation, c/o Comstock Holdings
Inc., One North Lexington Avenue, White Plains, New York 10601.
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<PAGE> 70
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $0.01 per share. The following summary description of the
capital stock of the Company does not purport to be complete and is subject to
the detailed provisions of, and qualified in its entirety by reference to, the
Company's Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the registration statement of which this Prospectus forms a
part, and to the applicable provisions of the DGCL.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to the
rights of any holders of Preferred Stock, holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in the distribution of all assets remaining
after payment of liabilities, subject to the rights of any holders of preferred
stock of the Company. The holders of Common Stock have no preemptive rights to
subscribe for additional shares of the Company and no right to convert their
Common Stock into any other securities. In addition, there are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, fully paid and nonassessable.
PREFERRED STOCK
The Company has 10,000,000 shares of authorized but undesignated preferred
stock. The Board of Directors is authorized to provide for the issuance of
additional classes and series of preferred stock out of these undesignated
shares, and the Board of Directors may establish the voting powers,
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions of any such additional
class or series of preferred stock, including the dividend rights, dividend
rate, terms of redemption, redemption price or prices, conversion rights and
liquidation preferences of the shares constituting any series, without any
further vote or action by the stockholders of the Company. The issuance of
preferred stock by the Board of Directors could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, thereby delaying, deferring or preventing a change in
control of the Company.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the DGCL.
Section 203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the proposed
business combination has owned 15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation provides that liability of
directors of the Company is eliminated to the fullest extent permitted under
Section 102(b)(7) of the DGCL. As a result, no director of the Company will be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for any willful or negligent
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<PAGE> 71
payment of an unlawful dividend, stock purchase or redemption; or (iv) for any
transaction from which the director derived an improper personal benefit.
The Company's Bylaws provides that the Board of Directors be elected to
staggered one-, two-and three-year terms and, thereafter, for successive
three-year terms. In addition, directors may only be removed from office for
cause. These provisions of the Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 15,073,530 shares of
Common Stock outstanding, assuming consummation of the Combination. The
5,000,000 shares sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act, unless acquired by
an "affiliate" of the Company, as that term is defined in Rule 144. Shares held
by affiliates will be subject to resale limitations of Rule 144 described below.
All of the remaining 10,073,530 outstanding shares of Common Stock will be
available for resale at various dates beginning 180 days after the date of this
Prospectus, upon expiration of applicable lock-up agreements described below and
subject to compliance with Rule 144 as the holding provisions of Rule 144 are
satisfied. In addition, 2,000,000 shares of Common Stock are reserved for
issuance pursuant to the Company's Incentive Plan. Upon consummation of the
Offering, options to purchase 20,000 shares of Common Stock will be granted
pursuant to the Incentive Plan to non-employee directors of the Company. Such
options will vest and become exercisable 25% per year commencing on the date of
grant. The Company intends to file a registration statement on Form S-8 as soon
as practicable after the consummation of the Offering with respect to the
restricted shares and the shares of Common Stock issuable upon exercise of all
such options. In addition, within (i) 90 days following the completion of the
Offering, the Company intends to register shares of Common Stock under the
Securities Act for its use in connection with future acquisitions and (ii) 180
days after the Offering the Company intends to file a shelf registration
statement to register up to 1.4 million shares of Common Stock to permit sales
of such shares of Common Stock by the Selling Stockholders and IPODC.
In general, under Rule 144 as currently in effect, a stockholder who has
beneficially owned for at least one year shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company who have acquired the shares in registered
transactions, will be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the outstanding
shares of Common Stock (approximately 150,735 shares immediately after
completion of the Offering); or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain requirements relating to the manner and
notice of sale and the availability of current public information about the
Company.
The Company has agreed with the Underwriters that it will not offer, sell
or issue any shares of Common Stock or options, rights or warrants to acquire
any Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of BT Alex. Brown Incorporated, except for
grants of options under the Incentive Plan and shares issued (i) in connection
with acquisitions and (ii) pursuant to the exercise of options granted under the
Incentive Plan. In addition, the Company's directors and executive officers and
the Selling Stockholders have agreed with the Underwriters not to directly or
indirectly offer for sale, sell or otherwise dispose of any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated, except for sales of Common Stock by the
Selling Stockholders upon the exercise of the Underwriters' over-allotment
option, if any. Further, the stockholders of each of the Founding Companies have
agreed with the Company that they will not
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<PAGE> 72
sell, pledge, transfer or otherwise dispose of any shares of Common Stock for a
period of one year from the date of the closing of the Combination.
From the first anniversary of the consummation of the Offering to the
fourth anniversary of the consummation of the Offering the Company will make
available selling opportunities for the recipients of Common Stock in the
Combination to sell at various dates a certain number of shares of Common Stock
owned by them. Every quarter during the foregoing period, these owners of Common
Stock will be permitted to sell up to 8% of the Common Stock received by them.
If such owner does not sell such shares in a given quarter, such owner may sell
such shares in any later quarter, provided that in no event may an owner sell
more than 20% of the shares of Common Stock received by such owner in any one
quarter. The Company may elect to make available (i) additional opportunities to
sell shares of Common Stock and/or (ii) the opportunity to sell an amount in
excess of such amount in any particular quarter. Such sales will take place
either through block trades or registered offerings.
Prior to this Offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales of
shares of the Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after the completion of the Offering. Sales
of substantial amounts of Common Stock in the public market following the
Offering, or the perception that such sales may occur, could adversely affect
the market price of the Common Stock or the ability of the Company to raise
capital through sales of its equity securities. See "Risk Factors -- No Prior
Market for the Common Stock; Possible Volatility of Stock Price."
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<PAGE> 73
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated the date of this Prospectus (the "Underwriting Agreement"), the
Underwriters named below, through their representatives, BT Alex. Brown
Incorporated, Schroder & Co. Inc. and Piper Jaffray Inc. (together, the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BT Alex. Brown Incorporated.................................
Schroder & Co. Inc..........................................
Piper Jaffray Inc...........................................
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus and to certain dealers at such prices less a concession
not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After commencement of the initial public offering, the
offering price and certain other terms may be changed by the Representatives.
The Selling Stockholders have granted to the Underwriters an option,
exercisable not later than 30 days from the date of this Prospectus, to purchase
up to 750,000 additional shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it in the above table bears to 5,000,000 and the
Selling Stockholders will be obligated, pursuant to the option, to sell such
shares to the Underwriters. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of the Common Stock
offered hereby. If purchased, the Underwriters will offer such additional shares
on the same terms as those on which the 5,000,000 shares are being offered.
The Common Stock has been approved for quotation on The Nasdaq National
Market under the symbol "RWKS."
At the request of the Company, the Underwriters have reserved up to 250,000
shares of Common Stock offered hereby for sale at the initial public offering
price to certain employees of the Company and to certain other persons. The
number of shares available for sale to the general public will be reduced to the
extent that such persons purchase such reserved shares. Any reserved shares not
so purchased will be offered by the Underwriters to the general public on the
same basis as the other shares of Common Stock offered hereby.
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<PAGE> 74
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters, the Company and the Selling Stockholders regarding
certain liabilities, including liabilities under the Securities Act.
To facilitate the Offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with this Offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such over-
allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.
The Company has agreed that it will not offer, sell or issue any shares of
Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated, except for grants of options under the
Incentive Plan and shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Incentive Plan. In
addition, the Company's directors and executive officers and the Selling
Stockholders have agreed not to directly or indirectly offer for sale, sell or
otherwise dispose of any Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of BT Alex. Brown
Incorporated, except for sales of Common Stock by the Selling Stockholders upon
the exercise of the Underwriters' over-allotment option, if any.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
From time to time, each of the Underwriters and their respective affiliates
may provide investment banking services to the Company.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiations between the Company and the Representatives. Among the factors
to be considered in determining the initial public offering price will be
prevailing market conditions, the future prospects of the Company and its
industry in general, revenue, earnings and certain other financial and operating
information of the Founding Companies in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities and certain financial
and operating information of companies engaged in activities similar to those of
the Company.
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<PAGE> 75
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock
applicable to a beneficial owner thereof that is a "Non-U.S. Holder." A
"Non-U.S. Holder" is a person or entity other than (i) a citizen or resident of
the United States, (ii) a corporation or partnership created or organized in or
under the laws of the United States or of any state, (iii) an estate the income
of which is subject to U.S. federal income tax, regardless of its source or (iv)
a trust if (a) a court within the United States is able to exercise primary
supervision over the administration of the trust and (b) one or more United
States persons have the authority to control all substantial decisions of the
trust.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period that includes the current
calendar year (counting for such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year). Resident aliens are
subject to U.S. federal tax as if they were U.S. citizens and, thus, are not
Non-U.S. Holders for purposes of this discussion.
This discussion is based on the Code existing and proposed regulations
promulgated thereunder and administrative and judicial interpretations thereof
as of the date hereof, all of which are subject to change, including changes
with retroactive effect. This discussion does not address all aspects of U.S.
federal income and estate taxation that may be important to Non-U.S. Holders in
light of their particular circumstances (including tax consequences applicable
to Non-U.S. Holders that are, or hold interests in Common Stock through,
partnerships or other fiscally transparent entities) and does not address United
States state and local or non-United States tax consequences. Prospective
Non-U.S. Holders should consult their own tax advisors with respect to the
particular U.S. federal income and estate tax consequences to them of owning and
disposing of Common Stock, as well as the tax consequences arising under the
laws of any other taxing jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends, if any, paid to a Non-U.S.
Holder of Common Stock generally will be subject to United States withholding
tax at a rate of 30% of the gross amount of the dividend or such lower rate as
may be specified by an applicable income tax treaty. Non-U.S. Holders (and in
the case of Non-U.S. Holders that are treated as partnerships or other fiscally
transparent entities, partners, shareholders or other beneficiaries of such
Non-U.S. Holders) may be required to satisfy certain certification requirements
and provide certain information in order to claim treaty benefits. Special rules
regarding the availability of treaty benefits apply with respect to entities
that are treated as partnerships or other fiscally transparent entities for U.S.
federal income tax purposes but treated as corporations for purposes of the tax
laws of an applicable treaty country (or, conversely, treated as corporations
for U.S. federal income tax purposes but treated as partnerships or other
fiscally transparent entities for purposes of the tax laws of an applicable
treaty country). Any such entities that hold Common Stock, and partners,
beneficiaries and shareholders of such entities, should consult their tax
advisors as to the applicability of such rules to their particular
circumstances.
Dividends paid to a Non-U.S. Holder that are (i) effectively connected with
the Non-U.S. Holder's conduct of a trade or business within the United States
and (ii) if a tax treaty applies, attributable to a permanent establishment
maintained by the Non-U.S. Holder, will not be subject to the withholding tax
(provided in either case the Non-U.S. Holder files the appropriate documentation
with the Company or its Paying Agent), but, instead, will be subject to regular
U.S. federal income tax at the graduated rates in the same manner as if the
Non-U.S. Holder were a U.S. resident. In addition to such graduated tax in the
case of a Non-U.S. Holder that is a corporation, effectively
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<PAGE> 76
connected dividends or, if a tax treaty applies, dividends attributable to a
U.S. permanent establishment of the corporate Non-U.S. Holder, may be subject to
a "branch profits tax" which is imposed, under certain circumstances, at a rate
of 30% (or such lower rate as may be specified by an applicable tax treaty) of
the non-U.S. corporation's effectively connected earnings and profits, subject
to certain adjustments.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and no tax will generally be withheld) with respect to gain realized on a sale
or other disposition of Common Stock unless (i) the gain is effectively
connected with a trade or business of such Non-U.S. Holder in the United States
or, if a tax treaty applies, attributable to a United States permanent
establishment of the Non-U.S. Holder, (ii) in the case of certain Non-U.S.
Holders who are nonresident alien individuals and hold the Common Stock as a
capital asset, such individuals are present in the United States for 183 or more
days in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code regarding the taxation of U.S. expatriates or (iv) the
Company is or has been a "U.S. real property holding corporation" within the
meaning of the Code and the Non-U.S. Holder owned directly or pursuant to
certain attribution rules more than 5% of the Company's Common Stock (assuming
the Common Stock is regularly traded on an established securities market within
the meaning of the Code) at any time within the shorter of the five-year period
preceding such disposition or such Non-U.S. Holder's holding period. The Company
is not, and does not anticipate becoming, a U.S. real property holding
corporation.
If a Non-U.S. Holder who is an individual falls under clause (i) of the
preceding paragraph, he or she will, unless an applicable treaty provides
otherwise, be taxed on the net gain derived from the sale at regular graduated
U.S. federal income tax rates. If an individual Non-U.S. Holder falls under
clause (ii) of the preceding paragraph, he or she will be subject to a flat 30%
tax on the gain derived from the sale, which may be offset by certain United
States-source capital losses. If a Non-U.S. Holder that is a corporation falls
under clause (i) in the preceding paragraph, it will be taxed on the net gain
from the sale at regular graduated U.S. federal income tax rates and may be
subject to an additional branch profits tax at a rate of 30% (or such lower rate
as may be specified by an applicable tax treaty) on the non-U.S. corporation's
effectively connected earnings and profits, subject to certain adjustments.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Generally, the Company must report annually to the Internal Revenue Service
(the "IRS") the amount of dividends paid to a Non-U.S. Holder and the amount, if
any, of tax withheld with respect to, such Non-U.S. Holder. A similar report is
sent to the Non-U.S. Holder. Pursuant to tax treaties or certain other
agreements, the Internal Revenue Service may make its reports available to tax
authorities in the recipient's country of residence.
Currently, United States backup withholding tax (which generally is a
withholding tax imposed at a rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting requirements) will generally not apply to dividends paid on Common
Stock to a Non-U.S. Holder at an address outside the United States, unless the
payor has actual knowledge that the payee is a U.S. Holder. Backup withholding
tax generally will apply to dividends paid on Common Stock at addresses inside
the United States to Non-U.S. Holders who fail to provide certain identifying
information in the manner required.
In addition, information reporting and backup withholding imposed at a rate
of 31% will apply to the proceeds of a disposition of Common Stock paid to or
through a U.S. office of a broker unless the disposing holder, under penalties
of perjury, certifies as to its non-U.S. status or otherwise establishes an
exemption. Generally, U.S. information reporting and backup withholding will not
73
<PAGE> 77
apply to a payment of disposition proceeds if the payment is made outside the
United States through a non-U.S. office of a non-U.S. broker. However, U.S.
information reporting requirements (but not backup withholding) will apply to a
payment of disposition proceeds outside the United States if the payment is made
through an office outside the United States of a broker that is (i) a U.S.
person, (ii) a foreign person which derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States or
(iii) a "controlled foreign corporation" for U.S. federal income tax purposes,
unless the broker maintains documentary evidence that the holder is a Non-U.S.
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Recently adopted United States Treasury regulations, (the "New Withholding
Regulations") alter the foregoing rules in certain respects. The New Withholding
Regulations generally are effective for payments made after December 31, 1998,
subject to certain transition rules. The IRS recently issued a notice announcing
the intent of the Treasury Department and the IRS to amend the New Withholding
Regulations so that they generally will not apply to payments made before
January 1, 2000. Among other things, the New Withholding Regulations provide
certain presumptions under which a Non-U.S. Holder is subject to backup
withholding at the rate of 31% and information reporting unless the Company
receives certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided (i) directly by the
Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder that is treated as a
partnership or other fiscally transparent entity, by the partners, shareholders
or other beneficiaries of such entity, or (iii) by certain qualified financial
institutions or other qualified entities on behalf of the Non-U.S. Holder.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
FEDERAL ESTATE TAX
An individual holder who is not a citizen or resident (as defined for U.S.
federal estate tax purposes) of the United States and at the time of death is
treated as the owner of, or has made certain lifetime transfers of, an interest
in the Common Stock will be required to include the value thereof in his gross
estate for U.S. federal estate tax purposes, and may be subject to U.S. federal
estate tax unless an applicable estate tax treaty provides otherwise.
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<PAGE> 78
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by King & Spalding, Atlanta, Georgia. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by
Shearman & Sterling, New York, New York.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement (as defined below), of which this Prospectus forms
a part, for Railworks Corporation, Annex Railroad Builders, Inc. and Affiliates,
Comstock Holdings, Inc., Condon Brothers, Inc., H.P. McGinley, Inc., Kennedy
Railroad Builders, Inc. and Associated Companies, Merit Railroad Contractors,
Inc., Midwest Construction Services, Inc., Railroad Service Inc. and Minnesota
Railroad Service, Inc., Southern Indiana Wood Preserving Company, Inc., U.S.
Trackworks, Inc. and Northern Rail Service and Supply Co. have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The audited financial statements included in this Prospectus for CPI
Concrete Products Incorporated and elsewhere in the Registration Statement, of
which this Prospectus forms a part, have been audited by Cannon and Company,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The audited financial statements included in this Prospectus for New
England Railroad Construction Company, Inc. and elsewhere in the Registration
Statement, of which this Prospectus forms a part, have been audited by Dworken,
Hillman, LaMorte & Sterczala, P.C., independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all Amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement.
The Registration Statement may be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its regional offices located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
Washington, D.C. at prescribed rates. The Registration Statement may also be
obtained through the Commission's Internet address at "http://www.sec.gov."
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
RAILWORKS CORPORATION UNAUDITED PRO FORMA AS ADJUSTED
FINANCIAL STATEMENTS
Unaudited Pro Forma As Adjusted Financial
Statements -- Basis of Presentation.................... F-4
Unaudited Pro Forma As Adjusted Balance Sheet as of March
31, 1998............................................... F-5
Unaudited Pro Forma As Adjusted Statements of Income for
the Twelve Months Ended December 31, 1997 and for the
Three Months Ended March 31, 1998...................... F-6
Notes to Unaudited Pro Forma Financial Statements......... F-7
RAILWORKS CORPORATION
Report of Independent Public Accountants.................. F-10
Balance Sheet as of March 31, 1998........................ F-11
Statement of Income for the Period from Inception to March
31, 1998............................................... F-12
Statement of Changes in Stockholder's Equity for the
Period from Inception through March 31, 1998........... F-13
Notes to Financial Statements............................. F-14
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
Report of Independent Public Accountants.................. F-15
Combined Balance Sheets as of March 31, 1997, December 31,
1997 and March 31, 1998................................ F-16
Combined Statements of Operations for the Year Ended March
31, 1997, the Nine Months Ended December 31, 1997 and
the Three Months Ended March 31, 1997 and 1998......... F-17
Combined Statements of Stockholders' Equity for the Year
Ended March 31, 1997 and the Nine Months Ended December
31, 1997............................................... F-18
Combined Statements of Cash Flows for the Year Ended March
31, 1997, the Nine Months Ended December 31, 1997 and
the Three Months Ended March 31, 1997 and 1998......... F-19
Notes to Combined Financial Statements.................... F-20
COMSTOCK HOLDINGS, INC.
Report of Independent Public Accountants.................. F-26
Consolidated Balance Sheets as of December 31, 1996 and
1997 and March 31, 1998................................ F-27
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months
Ended March 31, 1997 and 1998.......................... F-28
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997........... F-29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months
Ended March 31, 1997 and 1998.......................... F-30
Notes to Financial Statements............................. F-31
CONDON BROTHERS, INC.
Report of Independent Public Accountants.................. F-40
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998............................................... F-41
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and for the Three Months Ended
March 31, 1997 and 1998................................ F-42
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997....................... F-43
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and for the Three Months Ended
March 31, 1997 and 1998................................ F-44
Notes to the Financial Statements......................... F-45
</TABLE>
F-1
<PAGE> 80
<TABLE>
<CAPTION>
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<S> <C>
CPI CONCRETE PRODUCTS INCORPORATED
Independent Auditor's Report.............................. F-51
Balance Sheets as of January 31, 1997 and 1998............ F-52
Statements of Earnings and Retained Earnings for the Years
Ended January 31, 1996, 1997 and 1998 and the Two
Months Ended March 31, 1997 and 1998................... F-53
Statements of Cash Flows for the Years Ended January 31,
1996, 1997 and 1998 and the Two Months Ended March 31,
1997 and 1998.......................................... F-54
Notes to Financial Statements............................. F-55
H.P. McGINLEY, INCORPORATED
Report of Independent Public Accountants.................. F-60
Balance Sheets as of February 28, 1997, December 31, 1997
and March 31, 1998..................................... F-61
Statements of Operations for the Years Ended February 29,
1996 and February 28, 1997, the Ten Months Ended
December 31, 1997 and the Three Months Ended February
28, 1997 and March 31, 1998............................ F-62
Statements of Stockholder's Equity for the Years Ended
February 29, 1996 and February 28, 1997 and the Ten
Months Ended December 31, 1997......................... F-63
Statements of Cash Flows for the Years Ended February 29,
1996 and February 28, 1997, the Ten Months Ended
December 31, 1997 and the Three Months Ended February
28, 1997 and March 31, 1998............................ F-64
Notes to Financial Statements............................. F-65
KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES
Report of Independent Public Accountants.................. F-69
Combined Balance Sheets as of March 31, 1997, December 31,
1997 and March 31, 1998................................ F-70
Combined Statements of Operations for the Years Ended
March 31, 1996 and 1997, the Nine Months Ended December
31, 1997 and the Three Months Ended March 31, 1997 and
1998................................................... F-71
Combined Statements of Stockholders' Equity for the Years
Ended March 31, 1996 and 1997 and the Nine Months Ended
December 31, 1997...................................... F-72
Combined Statements of Cash Flows for the Years Ended
March 31, 1996 and 1997, the Nine Months Ended December
31, 1997 and the Three Months Ended March 31, 1997 and
1998................................................... F-73
Notes to Combined Financial Statements.................... F-74
MERIT RAILROAD CONTRACTORS, INC.
Report of Independent Public Accountants.................. F-81
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998............................................... F-82
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and for the Three Months Ended
March 31, 1997 and 1998................................ F-83
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997....................... F-84
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and for the Three Months Ended
March 31, 1997 and 1998................................ F-85
Notes to Financial Statements............................. F-86
</TABLE>
F-2
<PAGE> 81
<TABLE>
<CAPTION>
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<S> <C>
MIDWEST CONSTRUCTION SERVICES, INC.
Report of Independent Public Accountants.................. F-91
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998............................................... F-92
Statements of Operations and Retained Earnings for the
Years Ended December 31, 1995, 1996 and 1997 and the
Three Months Ended March 31, 1997 and 1998............. F-93
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March
31, 1997 and 1998...................................... F-94
Notes to the Financial Statements......................... F-95
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
Independent Auditors' Report.............................. F-102
Balance Sheets as of February 28, 1997, December 31, 1997
and March 31, 1998..................................... F-103
Statements of Operations for the Years Ended February 29,
1996 and February 28, 1997, and the Ten Months Ended
December 31, 1997 and Three Months Ended March 31, 1997
and 1998............................................... F-104
Statements of Shareholders' Equity for the Years Ended
February 29, 1996 and February 28, 1997 and the Ten
Months Ended December 31, 1997 and the Three Months
Ended March 31, 1998................................... F-105
Statements of Cash Flows for the Years Ended February 29,
1996 and February 28, 1997, the Ten Months Ended
December 31, 1997 and Three Months Ended March 31, 1997
and 1998............................................... F-106
Notes to Financial Statements............................. F-107
RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC.
Report of Independent Public Accountants.................. F-114
Combined Balance Sheets as of December 31, 1996 and 1997
and March 31, 1998..................................... F-115
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months
Ended March 31, 1997 and 1998.......................... F-116
Combined Statements of Stockholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997................. F-117
Combined Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months
Ended March 31, 1997 and 1998.......................... F-118
Notes to Combined Financial Statements.................... F-119
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
Report of Independent Public Accountants.................. F-125
Balance Sheets as of December 31, 1997 and March 31,
1998................................................... F-126
Statements of Operations for the Year Ended December 31,
1997 and for the Three Months Ended March 31, 1997 and
1998................................................... F-127
Statement of Stockholder's Equity for the Year Ended
December 31, 1997...................................... F-128
Statements of Cash Flows for the Year Ended December 31,
1997 and for the Three Months Ended March 31, 1997 and
1998................................................... F-129
Notes to Financial Statements............................. F-130
U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY
CO.
Report of Independent Public Accountants.................. F-133
Combined Balance Sheets as of December 31, 1996 and 1997
and March 31, 1998..................................... F-134
Combined Statements of Operations for the Years Ended
December 31, 1996 and 1997 and the Three Months Ended
March 31, 1997 and 1998................................ F-135
Combined Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996 and 1997............. F-136
Combined Statements of Cash Flows for the Years Ended
December 31, 1996 and 1997 and the Three Months Ended
March 31, 1997 and 1998................................ F-137
Notes to Combined Financial Statements.................... F-138
</TABLE>
F-3
<PAGE> 82
RAILWORKS CORPORATION
UNAUDITED PRO FORMA AS ADJUSTED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma as adjusted financial statements give
effect to the acquisitions by RailWorks Corporation (the "Company") of Annex
Railroad Builders, Inc. and Affiliates ("Annex"), Comstock Holdings, Inc.
("Comstock"), Comtrak Construction, Inc. ("Comtrak"), Condon Brothers,
Inc.("Condon"), CPI Concrete Products Incorporated ("CPI"), H.P. McGinley,
Incorporated ("McGinley"), Kennedy Railroad Builders, Inc. and Affiliates
("Kennedy"), Merit Railroad Contractors, Inc. ("Merit"), Midwest Construction
Services, Inc. ("Mid-West"), New England Railroad Construction Company, Inc.
("New England"), Railroad Service, Inc. and Affiliate ("Railroad Service"),
Southern Indiana Wood Preserving Company, Inc. ("Southern Indiana"), U.S.
Trackworks, Inc. and Affiliate ("Trackworks"), and Wm. A. Smith Construction
Co., Inc. and Affiliate ("Smith"), (together, the "Founding Companies"). These
acquisitions (the "Combination") will occur simultaneously with the closing of
the Company's initial public offering (the "Offering") and will be accounted for
using the purchase method of accounting. Pursuant to the requirements of SAB 97,
Comstock has been identified as the accounting acquiror for accounting and
financial statement purposes as its owners will receive the largest portion
(32.8%) of the shares of Common Stock issued to the Founding Companies in the
Combination.
The unaudited pro forma as adjusted balance sheet gives effect to the
Combination and the Offering as if they had occurred on March 31, 1998. The
unaudited pro forma as adjusted statement of income for the year ending December
31, 1997, gives effect to these transactions as if they had occurred on January
1, 1997, while the unaudited pro forma as adjusted statement of income for the
three months ended March 31, 1998, gives effect to these transactions as if they
had occurred on January 1, 1998.
The Company has identified certain savings which are expected to occur as a
result of the Combination. These savings have been reflected in the unaudited
pro forma as adjusted statements of income. The Company has analyzed certain
additional savings that it expects to realize by consolidating certain
operational and general and administrative functions. The Company has not and
cannot quantify these savings until completion of the Combination of the
Founding Companies. These anticipated additional savings have not been included
in the pro forma as adjusted financial information of the Company.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma as adjusted financial data does not purport to
represent what the Company's financial position or results of operations would
actually have been if such transactions in fact had occurred on those dates or
to project the Company's financial position or results of operations for any
future period. Since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma as adjusted financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. See "Risk Factors" included
elsewhere herein.
F-4
<PAGE> 83
RAILWORKS CORPORATION
UNAUDITED PRO FORMA AS ADJUSTED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------------------------------------------
COMBINED
HISTORICAL PRO FORMA POST
FINANCIAL PRO FORMA FOR THE COMBINATION PRO FORMA
STATEMENTS ADJUSTMENTS COMBINATION ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 4,613,000 $ (1,600,000)(f) $ 2,363,000 $ (55,800,000)(s) $ 163,000
(650,000)(g) 53,600,000(r)
Accounts receivable................ 58,829,000 58,829,000 58,829,000
Officer and affiliate notes
receivable....................... 218,000 218,000 218,000
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................ 8,608,000 8,608,000 8,608,000
Inventory.......................... 19,633,000 19,633,000 19,633,000
Prepaid expenses................... 1,443,000 1,443,000 1,443,000
Deferred income taxes.............. 110,000 110,000 110,000
------------ ------------ ------------ ------------- ------------
Total current assets......... 93,454,000 (2,250,000) 91,204,000 (2,200,000) 89,004,000
------------ ------------ ------------ ------------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET... 11,694,000 9,680,000(b) 21,374,000 21,374,000
------------ ------------ ------------ ------------- ------------
OTHER ASSETS:
Goodwill........................... -- 78,520,000(c) 78,520,000 78,520,000
Other intangible assets............ -- 5,000,000(c) 5,000,000 5,000,000
Cash surrender value of officer's
life insurance................... 950,000 950,000 950,000
Other.............................. 1,012,000 1,012,000 1,012,000
------------ ------------ ------------ ------------- ------------
Total other assets........... 1,962,000 83,520,000 85,482,000 85,482,000
------------ ------------ ------------ ------------- ------------
$107,110,000 $ 90,950,000 $198,060,000 $ (2,200,000) $195,860,000
============ ============ ============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 30,862,000 $ $ 30,862,000 $ $ 30,862,000
Notes payable...................... 3,835,000 7,078,000(g) 10,913,000 (10,913,000)(s) --
Current maturities of long-term
debt and capital leases.......... 2,948,000 2,948,000 (2,948,000)(s) --
Officer notes payable.............. 662,000 51,863,000(c) 52,525,000 (52,525,000)(s) --
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................ 5,588,000 5,588,000 5,588,000
Accrued expenses................... 10,955,000 10,955,000 10,955,000
Income taxes payable............... 515,000 515,000 515,000
------------ ------------ ------------ ------------- ------------
Total current liabilities.... 55,365,000 58,941,000 114,306,000 (66,386,000) 47,920,000
------------ ------------ ------------ ------------- ------------
LONG-TERM DEBT AND CAPITAL LEASES,
net of current maturities.......... 16,113,000 16,113,000 10,586,000(s) 26,699,000
DEFERRED INCOME TAXES................ 106,000 3,775,000(b) 5,831,000 5,831,000
1,950,000(c)
NEGATIVE GOODWILL.................... 10,143,000 (8,543,000)(c) -- --
(1,600,000)(f)
OTHER................................ 1,569,000 1,569,000 1,569,000
------------ ------------ ------------ ------------- ------------
Total noncurrent
liabilities................ 27,931,000 (4,418,000) 23,513,000 10,586,000 34,099,000
------------ ------------ ------------ ------------- ------------
STOCKHOLDERS' EQUITY:
Contributed capital................ 4,281,000 (4,271,000)(a) 72,618,000 53,600,000(r) 126,218,000
58,137,000(c)
14,471,000(h)
Retained earnings.................. 19,533,000 (9,711,000)(a) (12,377,000) (12,377,000)
(7,728,000)(g)
(14,471,000)(h)
------------ ------------ ------------ ------------- ------------
Total stockholders' equity... 23,814,000 30,439,000 60,241,000 53,600,000 113,841,000
------------ ------------ ------------ ------------- ------------
$107,110,000 $ 83,112,000 $198,060,000 $ (2,200,000) $195,860,000
============ ============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 84
RAILWORKS CORPORATION
UNAUDITED PRO FORMA AS ADJUSTED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
-------------------------------------------- ------------------------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
FINANCIAL PRO FORMA PRO FORMA FINANCIAL PRO FORMA PRO FORMA
STATEMENTS ADJUSTMENTS AS ADJUSTED STATEMENTS ADJUSTMENTS AS ADJUSTED
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE...................... $256,508,000 $ $256,508,000 $61,810,000 $ $61,810,000
CONTRACT COSTS AND COST OF
SALES...................... 220,090,000 1,383,000(e) 221,473,000 54,272,000 346,000(e) 54,618,000
------------ ----------- ------------ ----------- ----------- -----------
Gross profit............... 36,418,000 (1,383,000) 35,035,000 7,538,000 (346,000) 7,192,000
GENERAL AND ADMINISTRATIVE
EXPENSES................... 27,298,000 (4,704,000)(i)(d) 21,366,000 6,858,000 (1,103,000)(i) 5,030,000
1,500,000(j) 375,000(j)
(668,000)(m) (242,000)(m)
(850,000)(l) (219,000)(l)
(1,210,000)(k) (239,000)(k)
(400,000)(n)
INTANGIBLES AMORTIZATION..... (269,000) 2,716,000(d) 2,447,000 (67,000) 679,000(d) 612,000
------------ ----------- ------------ ----------- ----------- -----------
INCOME FROM OPERATIONS....... 9,389,000 1,833,000 11,222,000 747,000 803,000 1,550,000
OTHER INCOME (EXPENSE)
Interest income............ 1,296,000 (295,000)(o) 1,001,000 355,000 355,000
Interest expense........... (2,397,000) 119,000(t) (2,278,000) (579,000) 9,000(t) (570,000)
Other...................... 214,000 214,000 50,000 50,000
------------ ----------- ------------ ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES............... 8,502,000 1,657,000 10,159,000 573,000 812,000 1,385,000
PROVISION FOR INCOME TAXES... 2,439,000 2,282,000(p) 4,721,000 366,000 364,000(p) 730,000
------------ ----------- ------------ ----------- ----------- -----------
NET INCOME................... $ 6,063,000 $ (625,000) $ 5,438,000 $ 207,000 $ 448,000 $ 655,000
============ =========== ============ =========== =========== ===========
Net income per share....... $ .36 $ .04
============ ===========
Shares used in computing
net income per share(q).. 15,074,000 15,074,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 85
RAILWORKS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. GENERAL
RailWorks Corporation, a Delaware corporation was formed to become a
leading nationwide provider of rail services, including system construction and
rehabilitation, repair and maintenance and related products.
2. COMBINED HISTORICAL FINANCIAL STATEMENTS
The combined historical financial statements represent the financial
position and results of operations of the Founding Companies and were derived
from the respective historical financial statements. All Founding Companies have
a December 31 year-end, or their historical financial results have been recast
to a December 31 year-end for purposes of the unaudited pro forma as adjusted
statement of income for the year ended December 31, 1997. Historical financial
information for the three months ended March 31, 1998 has been used for purposes
of the unaudited pro forma as adjusted statement of income for the three months
ended March 31, 1998.
Amounts (in thousands) by company for selected categories are as follows:
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 ENDED MARCH 31, 1998 AT MARCH 31,
----------------------------------- ---------------------------------- 1998
INCOME NET INCOME NET ------------
REVENUE FROM OPERATIONS INCOME REVENUE FROM OPERATIONS INCOME TOTAL ASSETS
-------- --------------- ------ ------- --------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Annex................ $ 19,090 $1,652 $1,132 $ 2,922 $ 272 $219 $ 4,869
Comstock............. 153,610 3,412 1,428 41,628 1,238 666 64,417
Comtrak.............. 1,009 (303) (160) 175 (95) (56) 565
Condon............... 4,487 134 119 1,237 22 9 3,181
CPI.................. 10,928 772 518 2,050 64 40 5,026
Kennedy.............. 10,540 418 167 2,384 (112) (89) 5,493
McGinley............. 6,420 659 399 1,365 126 80 2,878
Merit................ 6,950 (223) (386) 1,181 (196) (174) 2,363
Mid-West............. 9,676 394 433 2,456 161 163 2,846
New England.......... 5,634 265 145 341 (318) (195) 2,483
Railroad Service..... 9,363 848 977 1,268 (744) (750) 3,577
Southern Indiana..... 8,901 833 841 2,342 298 283 4,942
Trackworks........... 4,814 338 296 651 (27) (37) 1,605
Smith................ 5,086 190 154 1,810 58 48 2,865
-------- ------ ------ ------- ------ ---- --------
$256,508 $9,389 $6,063 $61,810 $ 747 $207 $107,110
======== ====== ====== ======= ====== ==== ========
</TABLE>
3. ACQUISITION OF FOUNDING COMPANIES
Concurrent with the closing of the Offering, the Company will acquire all
of the outstanding stock of the Founding Companies.
The purchase price to be paid for the Founding Companies, including
Comstock, consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
8,867,648 shares of the Company at an estimated price of
$12.00.................................................... $106,412
Cash paid................................................... 51,863
--------
$158,275
========
</TABLE>
F-7
<PAGE> 86
RAILWORKS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price will be allocated to the assets purchased and
liabilities assumed based on their estimated fair values. As Comstock has been
determined to be the accounting acquiror, the excess of the amount paid for
Comstock over its net book value, $46.2 million, is not included in the purchase
price allocation. The estimated fair values of the assets purchased and
liabilities assumed are as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 91,204
Property, plant and equipment............................... 21,374
Goodwill.................................................... 78,520
Other intangible assets..................................... 5,000
Other non-current assets.................................... 1,962
Current liabilities......................................... (62,443)
Non-current liabilities..................................... (23,513)
--------
$112,104
========
</TABLE>
Management is currently evaluating the assets purchased and liabilities
assumed. Any change in the estimated fair values will result in a corresponding
change in goodwill. Additionally, any difference between the estimated price of
$12.00 per share of the Company common stock issued to the owners of the
Founding Companies in connection with the Combination and the actual price per
share will result in a corresponding change to goodwill.
4. PRO FORMA BALANCE SHEET AND STATEMENT OF INCOME ADJUSTMENTS
a. Records the elimination of the historical stockholders' equity of the
Founding Companies (excluding Comstock).
b. Adjusts the carrying value of property, plant and equipment purchased
from the Founding Companies (excluding Comstock) to estimated fair market value
and records the related deferred income taxes.
c. Records an estimate of the goodwill and other intangible assets and the
related deferred income taxes to be recorded in connection with the Combination
as the result of the related issuance of shares and notes payable to the
stockholders of the Founding Companies and expenses associated with the
Combination. The total purchase price related to the shares issued is based upon
an estimated fair value of $12.00 per share which represents the estimated
initial public offering price.
d. Records the pro forma goodwill amortization expense using a 40-year
estimated life and the pro forma other intangible assets amortization using a
10-year estimated life.
e. Records the pro forma depreciation of the increased carrying value of
property, plant and equipment.
f. Records contingent purchase price due to the former owner of a Founding
Company.
g. Records the (1) planned purchase of a minority shareholder and (2)
planned distributions to owners of Founding Companies prior to the Combination.
The purchase price of the minority shareholder is estimated based on the value
assigned to the Founding Company in the Combination.
h. Records the granting of 1,205,872 shares to management at an estimated
price of $12.00 per share. This amount will be charged to expense in the period
in which the grant occurs, but has not been reflected in the unaudited pro forma
as adjusted statements of income herein.
F-8
<PAGE> 87
RAILWORKS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
i. Reduces compensation expense to the level that the owners of the
Founding Companies have contractually agreed to receive subsequent to the
Combination. In 1997, the owners of the Founding Companies received total
compensation of $6,914,000, consisting of salary of $3,826,000 and bonuses of
$3,088,000. Subsequent to the Combination, they will receive total estimated
compensation of $3,141,000. The change in compensation structure reflects the
conversion from the compensation arrangements normally paid to owners of
closely-held companies to those found in a publicly-held company and the change
in responsibilities of the individuals. Additionally, this adjustment reduces
compensation expense for personnel which have been terminated in conjunction
with Comstock's cost reduction initiatives.
j. Records estimated expenses for the Company's new corporate office,
including compensation for the executive officers.
k. Reflects the savings to be realized on a lease renewal by a Founding
Company.
l. Reflects the reduction of insurance costs to be realized by the Company
as a group as opposed to the combined historical cost to the Founding Companies.
m. To eliminate identifiable, incremental costs incurred by the Founding
Companies in conjunction with the Combination which are not expected to be
recurring.
n. To eliminate the compensation expense recorded by a Founding Company in
connection with transfers of stock between existing stockholders.
o. To eliminate a $295,000 nonrecurring fee earned by a Founding Company in
connection with services provided for its former owner.
p. Records the incremental provision for federal and state income taxes
assuming a 39% statutory tax rate increased by goodwill amortization which is
not deductible for income tax purposes.
q. Includes: (i) 8,867,648 shares issued to the stockholders of the
Founding Companies in connection with the Combination, (ii) 5,000,000 shares
issued by the Company in connection with this Offering, and (iii) 1,205,882
shares to be issued to management.
POST COMBINATION ADJUSTMENTS
r. The proceeds from the issuance of 5,000,000 shares of the Company's
Common Stock, net of estimated offering costs will be as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Gross proceeds of the Offering.............................. $ 60,000
Underwriting discount....................................... 4,200
Estimated expenses.......................................... (2,200)
--------
$ 53,600
</TABLE>
Offering costs primarily consist of underwriting discounts and commissions,
accounting fees, legal fees, and printing expenses.
s. Reflects the payment of debt from the proceeds of the Offering and the
Company's Credit Facility.
t. Reflects the elimination of interest expense for the amount of Founding
Company debt which will be repaid with a portion of the proceeds from the
Offering.
F-9
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RailWorks Corporation:
We have audited the accompanying balance sheet of RAILWORKS CORPORATION (a
Delaware corporation), as of March 31, 1998, and the related statements of
income and changes in stockholder's equity for the period from inception (March
20, 1998) to March 31, 1998. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RailWorks Corporation as of
March 31, 1998, and the results of its operations for the period from inception
(March 20, 1998) to March 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
May 20, 1998
F-10
<PAGE> 89
RAILWORKS CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
ASSETS
CASH........................................................ $100
----
Total assets...................................... $100
====
STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued........................... $ --
Common stock, $.01 par value, 100,000,000 shares
authorized, 10 shares issued and outstanding........... --
Additional paid-in capital................................ 100
Retained earnings......................................... --
----
Total stockholder's equity........................ $100
====
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-11
<PAGE> 90
RAILWORKS CORPORATION
STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998) TO MARCH 31, 1998
<TABLE>
<S> <C>
REVENUES.................................................... $ --
SELLING, GENERAL AND ADMINISTRATION EXPENSES................ --
--------
INCOME BEFORE INCOME TAXES.................................. --
PROVISION FOR INCOME TAXES.................................. --
--------
NET INCOME.................................................. $ --
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-12
<PAGE> 91
RAILWORKS CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998)
THROUGH MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Issuance of common stock.......................... 10 $-- $100 $-- $100
Net income........................................ -- -- -- -- --
-- -- ---- -- ----
BALANCE, March 31, 1998........................... 10 $-- $100 $-- $100
== === ==== === ====
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-13
<PAGE> 92
RAILWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
RailWorks Corporation ("RailWorks" or the "Company"), was formed in March
1998 to become a leading nationwide provider of rail services, including system
construction and rehabilitation, repair and maintenance services and related
products. RailWorks intends to acquire fourteen U.S. businesses (the
"Acquisitions"), complete an initial public offering (the "Offering") of its
common stock and, subsequent to the Offering, continue to acquire, through
merger or purchase, similar companies to expand its national operations.
RailWorks has not conducted any operations, and all activities to date have
related to the Acquisitions and the Offering. Cash of $100 was generated from
the initial capitalization of the Company (see Note 2). Accordingly, cash flows
would not provide meaningful information and have been omitted. There is no
assurance that the pending acquisitions discussed below will be completed and
that RailWorks will be able to generate future operating revenues.
2. STOCKHOLDER'S EQUITY
In connection with the organization and initial capitalization of
RailWorks, the Company issued 10 shares of common stock for $100.
3. SUBSEQUENT EVENTS (UNAUDITED)
RailWorks and its newly formed, wholly owned subsidiaries have signed
definitive agreements to acquire by merger the Founding Companies to be
effective with the Offering. The companies to be acquired are: Annex Railroad
Builders, Inc. and Affiliates, Comtrack Construction, Inc., Comstock Holdings,
Inc., Condon Brothers, Inc., CPI Concrete Products Incorporated, H.P. McGinley,
Incorporated, Kennedy Railroad Builders, Inc. and Associated Companies, Merit
Railroad Contractors, Inc., Midwest Construction Services, Inc., New England
Railroad Construction Company, Inc., Railroad Service, Inc. and Minnesota
Railroad Service, Inc., Southern Indiana Wood Preserving Company, Inc., U.S.
Trackworks, Inc. and Northern Rail Service and Supply Co., and Wm.A. Smith
Construction Co., Inc. and Wm.A. Smith Rerailing Service, Inc. Consideration
that will be paid by RailWorks to acquire the Founding Companies will consist of
a combination of cash and common stock. The amount of such consideration will be
determined on the closing date; however, it is expected to approximate $187.8
million.
Additionally RailWorks intends to grant 1,205,872 shares of its common
stock to its executive management team. The Company estimates the expense it
will recognize upon granting the shares will approximate $19.3 million.
In June 1998 RailWorks Board of Directors adopted the Company's 1998 Stock
Incentive Plan which reserves 2,000,000 shares of common stock for issuance
under the plan.
F-14
<PAGE> 93
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Annex Railroad Builders, Inc. and Affiliates:
We have audited the accompanying combined balance sheets of ANNEX RAILROAD
BUILDERS, INC. (an Indiana corporation) AND AFFILIATES (collectively, the
"Company") as of March 31, 1997 and December 31, 1997, and the related combined
statements of operations, stockholders' equity and cash flows for the year ended
March 31, 1997 and the nine months ended December 31, 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Annex Railroad Builders,
Inc. and Affiliates as of March 31, 1997 and December 31, 1997, and the results
of their operations and their cash flows for the year ended March 31, 1997 and
the nine months ended December 31, 1997 in conformity with generally accepted
accounting principles.
Nashville, Tennessee
May 15, 1998
F-15
<PAGE> 94
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 397,324 $ 201,016 $ 183,461
Accounts receivable, net of allowance of $16,600,
$20,000 and $20,000, respectively.............. 2,540,878 2,775,817 1,891,805
Employee loans and advances....................... 22,280 16,360 17,291
Costs and estimated earnings in excess of billings
on uncompleted contracts....................... 801,078 1,162,368 1,411,522
Inventory......................................... 84,085 166,718 190,643
Prepaid expenses.................................. 132,019 27,663 7,118
Deferred tax assets............................... 28,759 48,683 48,683
----------- ----------- -----------
Total current assets...................... 4,006,423 4,398,625 3,750,523
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings................................ 279,607 279,853 279,853
Machinery and equipment........................... 2,242,568 2,269,335 2,258,752
Office furniture and equipment.................... 50,405 56,343 71,659
----------- ----------- -----------
2,572,580 2,605,531 2,610,264
Less accumulated depreciation..................... (1,680,097) (1,779,337) (1,817,624)
----------- ----------- -----------
Property, plant and equipment, net........ 892,483 826,194 792,640
----------- ----------- -----------
OTHER ASSETS:
Cash value of life insurance, face value of
$1,810,000..................................... 306,466 295,448 326,005
----------- ----------- -----------
Total other assets........................ 306,466 295,448 326,005
----------- ----------- -----------
$ 5,205,372 $ 5,520,267 $ 4,869,168
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 1,507,884 $ 1,337,542 $ 942,096
Line of credit.................................... 325,000 50,000 125,000
Current obligations under capital leases.......... 120,464 99,604 117,119
Billings in excess of costs and estimated earnings
on uncompleted contracts....................... 126,698 213,703 144,951
Accrued expenses.................................. 342,993 595,954 299,260
Current maturities of long-term debt.............. 81,876 93,763 45,303
----------- ----------- -----------
Total current liabilities................. 2,504,915 2,390,566 1,673,729
----------- ----------- -----------
LONG-TERM DEBT, net of current maturities........... 120,007 105,102 86,269
----------- ----------- -----------
CAPITAL LEASE OBLIGATIONS, net of current
obligations....................................... 119,219 42,935 --
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 8,000 shares
authorized, 5,750 outstanding.................. 56,769 56,769 56,769
Retained earnings................................. 2,513,736 2,924,895 3,052,401
Treasury stock.................................... (109,274) -- --
----------- ----------- -----------
Total stockholders' equity................ 2,461,231 2,981,664 3,109,170
----------- ----------- -----------
$ 5,205,372 $ 5,520,267 $ 4,869,168
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-16
<PAGE> 95
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR NINE MONTHS THREE MONTHS ENDED
ENDED ENDED -------------------------
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1997 1998
----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE.................................. $15,467,498 $15,098,726 $5,285,691 $2,922,658
CONTRACT COSTS........................... 12,948,083 12,405,910 4,511,953 2,279,505
----------- ----------- ---------- ----------
Gross profit........................ 2,519,415 2,692,816 773,738 643,153
GENERAL AND ADMINISTRATIVE EXPENSES...... 1,674,321 1,326,435 452,609 370,319
----------- ----------- ---------- ----------
INCOME FROM OPERATIONS................... 845,094 1,366,381 321,129 272,834
OTHER INCOME (EXPENSE):
Interest income........................ 31,216 15,065 5,319 3,092
Interest expense....................... (47,956) (42,530) (16,478) (6,298)
----------- ----------- ---------- ----------
(16,740) (27,465) (11,159) (3,206)
INCOME BEFORE PROVISION FOR INCOME
TAXES.................................. 828,354 1,338,916 309,970 269,628
PROVISION FOR INCOME TAXES............... 228,946 369,011 103,916 51,947
----------- ----------- ---------- ----------
NET INCOME............................... $ 599,408 $ 969,905 $ 206,054 $ 217,681
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-17
<PAGE> 96
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER
OF
COMMON COMMON TREASURY RETAINED
SHARES STOCK STOCK EARNINGS TOTAL
------ ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996.............. 5,750 $56,769 $(109,274) $2,300,628 $2,248,123
----- ------- --------- ---------- ----------
Net income......................... -- -- -- 599,408 599,408
Dividends.......................... -- -- -- (386,300) (386,300)
----- ------- --------- ---------- ----------
BALANCE, March 31, 1997.............. 5,750 56,769 (109,274) 2,513,736 2,461,231
----- ------- --------- ---------- ----------
Net income......................... -- -- -- 969,905 969,905
Dividends.......................... -- -- -- (449,472) (449,472)
Retirement of treasury stock....... -- -- 109,274 (109,274) --
----- ------- --------- ---------- ----------
BALANCE, December 31, 1997........... 5,750 $56,769 $ -- $2,924,895 $2,981,664
===== ======= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-18
<PAGE> 97
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR NINE MONTHS THREE MONTHS ENDED
ENDED ENDED -------------------------
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1997 1998
--------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 599,408 $ 969,905 $ 206,054 $ 217,681
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income tax benefit................... -- (19,924) -- --
Depreciation and amortization................. 250,215 192,773 64,137 68,051
(Gain)/loss from sale of equipment............ 1,117 145 -- --
Change in operating assets:
Accounts receivable......................... (677,293) (234,939) 290,522 884,012
Costs and estimated earnings in excess of
billings on uncompleted contracts........ (287,483) (361,290) (409,227) (249,154)
Inventory................................... (25,290) (82,633) 56,500 (23,925)
Prepaid expenses............................ (106,458) 104,356 4,164 20,545
Accounts payable............................ 577,961 (170,342) 118,766 (395,446)
Accrued expenses............................ (107,036) 252,961 (208,494) (296,694)
Billings in excess of costs and estimated
earnings on uncompleted contracts........ (59,381) 87,005 89,765 (68,752)
--------- --------- --------- ---------
Net cash provided by operating
activities........................... 165,760 738,017 212,187 156,318
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net employee advances (payments)................ (728) 5,920 (392) (931)
Increase in cash value of life insurance........ (53,796) (45,145) (29,396) (30,557)
Proceeds from life insurance policies........... -- 56,163 -- --
Decrease in notes receivable.................... 43,574 -- 43,574 --
Purchases of property, plant, and equipment..... (110,932) (146,640) (24,343) (34,497)
Proceeds from sale of equipment................. -- 20,011 -- --
--------- --------- --------- ---------
Net cash used in investing
activities........................... (121,882) (109,691) (10,557) (65,985)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of
credit........................................ 75,000 (275,000) (175,000) 75,000
Principal payments under capital lease
obligations................................... (17,712) (97,144) (17,712) (25,420)
Principal payments on long-term debt............ (131,138) (73,290) (21,784) (67,293)
Borrowings under long-term debt................. 19,752 70,272 -- --
Dividends paid.................................. (386,300) (449,472) (86,330) (90,175)
--------- --------- --------- ---------
Net cash used in financing
activities........................... (440,398) (824,634) (300,826) (107,888)
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents..................... (396,520) (196,308) (99,196) (17,555)
CASH AND CASH EQUIVALENTS, beginning of period.... 793,844 397,324 333,980 201,016
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.......... $ 397,324 $ 201,016 $ 234,784 $ 183,461
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................... $ 55,023 $ 52,894 $ 14,608 $ 3,459
========= ========= ========= =========
Income taxes.................................. $ 235,131 $ 218,799 $ -- $ 146,989
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-19
<PAGE> 98
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
The accompanying combined financial statements of Annex Railroad Builders,
Inc. and Affiliates (collectively the "Company") include the accounts of Annex
Railroad Builders, Inc. ("Annex") (an Indiana corporation), R. & M. B. Rail Co.,
d/b/a Mize Construction Company ("Mize") (an Indiana corporation), Railroad
Specialties, Inc., ("RSI") (an Indiana corporation) and U.S. Railway Supply,
Inc. ("US Rail") (an Indiana corporation). These entities are included in the
combined financial statements due to certain shareholder's majority ownership in
each. The majority of the Company operates as a construction contractor
constructing, repairing, and maintaining railroad tracks for private and
government customers located throughout the Midwest. This work is performed
under various forms of contracts, including fixed-fee and time-and-material
contracts. One entity operates a supply company that provides railroad
construction supplies to certain railroad construction contractors.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The above companies have been included in the combined financial
statements. All material intercompany transactions and balances have been
eliminated. Although the fiscal year of Annex ends March 31, the affiliates are
included in the combined financial statements on the basis of fiscal years
ending December 31. In 1997, Annex changed its financial reporting year-end to
December 31.
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 vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
F-20
<PAGE> 99
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the Midwest. As such, the Company's
accounts receivable are from the same geographic region. The terms of the sales
give rise to unsecured accounts receivable, as is common industry practice.
Contract revenue earned from three customers comprised approximately 29% of
total contract revenue for the nine months ended December 31, 1997.
INVENTORY
Inventory, consisting principally of stored materials and parts to be used
for contracts, is stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful life of the asset as follows:
<TABLE>
<S> <C>
Buildings............................................... 27.5 - 39 years
Machinery and equipment................................. 5 years
Office furniture and equipment.......................... 7 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income.
INCOME TAXES
Mize, RSI and U.S. Rail operate as Sub-Chapter S Corporations. Accordingly,
the taxable income of Mize, RSI, and US Rail included in the combined financial
statements of the Company is reported by the owners in their respective
individual tax returns; therefore, the combined financial statements of the
Company do not reflect an income tax provision for these entities.
The provision for income taxes is based on earnings reported by Annex. In
accordance with Statement of Financial Accounting Standards No. 109, a deferred
income tax asset or liability is determined by applying currently enacted tax
laws and rates to the expected reversal of the cumulative temporary differences
between the carrying value of assets and liabilities for financial statement and
income tax purposes.
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1997 and 1998.
F-21
<PAGE> 100
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
At March 31, 1997 and December 31, 1997, accounts receivable consisted of
the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
Contract receivables....................................... $1,299,651 $1,633,139
Contract retainages........................................ 1,172,772 1,162,678
Other...................................................... 85,055 --
---------- ----------
2,557,478 2,795,817
Less allowance for doubtful accounts....................... 16,600 20,000
---------- ----------
$2,540,878 $2,775,817
========== ==========
</TABLE>
Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainages are expected to
be collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at March 31, 1997 and
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts................... $5,426,971 $ 9,508,537
Estimated earnings........................................ 1,824,146 3,477,468
---------- -----------
7,251,117 12,986,005
Less billings to date..................................... 6,576,737 12,037,340
---------- -----------
$ 674,380 $ 948,665
========== ===========
</TABLE>
Contracts in process are included in the accompanying combined balance
sheets under the following captions:
<TABLE>
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 801,078 $1,162,368
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (126,698) (213,703)
--------- ----------
$ 674,380 $ 948,665
========= ==========
</TABLE>
5. LINE OF CREDIT
The Company maintains a revolving line of credit with maximum borrowings of
$1,200,000 which matures on July 31, 1998. The line of credit bears interest at
prime plus .75% (9.25% at December 31, 1997) which is payable monthly. The
collateral for the line of credit includes the Company's accounts receivable,
inventory, machinery and equipment. In addition, it is personally guaranteed up
to $500,000 by one of the principal stockholders. During the year ended March
31, 1997 and the nine months ended December 31, 1997, the weighted average
amount outstanding on the line of credit was approximately $356,000 and
$221,000, respectively, and the maximum amount outstanding was approximately
$575,000 and $500,000, respectively. The outstanding balance of the revolving
credit facility at March 31, 1997 and December 31, 1997 was $325,000 and
$50,000, respectively.
F-22
<PAGE> 101
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL LEASES
The Company's capital leases relate to machinery and equipment which have
net book values of $239,683 and $205,916 at March 31, 1997 and December 31,
1997, respectively. The terms of these leases range from 15 to 24 months. The
effective interest rates on these leases range from 5% to 11%.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 99,604
1999........................................................ 42,935
--------
$142,539
========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Note payable to bank, interest at 8.90%, payable in monthly
installments of $3,811, maturing September 1998, secured
by equipment.............................................. $ 63,993 $ 32,927
Mortgage note payable to bank, interest at 7.125%, payable
in monthly installments of $996, maturing January 2009,
secured by property....................................... 96,509 90,802
Note payable to bank, interest at 8.42%, payable in monthly
installments of $1,367, maturing March 1998, secured by
equipment................................................. 15,654 4,009
Note payable to bank, interest at 7.90%, payable in monthly
installments of $892, maturing October 1998, secured by
equipment................................................. 15,890 8,675
Note payable to bank, interest at 8.50%, payable in monthly
installments of $738, maturing February 2000, secured by
equipment................................................. -- 17,359
Other notes payable......................................... 9,837 45,093
-------- --------
201,883 198,865
Less current maturities..................................... 81,876 93,763
-------- --------
$120,007 $105,102
======== ========
</TABLE>
The future maturities of long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 93,763
1999........................................................ 23,455
2000........................................................ 7,413
2001........................................................ 6,518
2002........................................................ 6,998
Thereafter.................................................. 60,718
--------
$198,865
========
</TABLE>
Both the long-term debt and the line of credit contain certain restrictive
covenants which place some requirements and restrictions on the Company
regarding disposition of assets, financial ratios,
F-23
<PAGE> 102
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
capital expenditures, acquisitions and operations. The Company was in compliance
with these covenants at December 31, 1997.
8. PROFIT SHARING PLAN
During the fiscal year ended March 31, 1996, the Company established a
profit sharing plan for full-time, non-union employees. To be eligible, an
employee must be employed with the Company for two years. All contributions,
which are at management's discretion, are vested after six years. Company
contributions to the plan were $117,717 and $121,421 for the year ended March
31, 1997 and the nine months ended December 31, 1997, respectively.
9. INCOME TAXES
The income tax provision for Annex for the year ended March 31, 1997 and
the nine months ended December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Current provision:
Federal................................................... $186,675 $309,722
State..................................................... 42,271 79,213
-------- --------
228,946 388,935
Deferred benefit............................................ -- (19,924)
-------- --------
$228,946 $369,011
======== ========
</TABLE>
The income tax provision as reported in the combined statements of
operations differs from the amounts computed by applying federal statutory rates
due to the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Federal income tax at statutory rate........................ $179,709 $322,899
State income taxes, net of federal income tax benefit....... 27,899 52,281
Other....................................................... 21,338 (6,169)
-------- --------
Provision for income taxes.................................. $228,946 $369,011
======== ========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets at March 31, 1997 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 6,474 $ 7,856
Accrued management bonus.................................. 22,285 40,827
------- -------
Total deferred tax assets......................... $28,759 $48,683
======= =======
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company has sales and purchases of supplies and services with a related
party under common ownership. Sales to this company were $105,840, and $58,752
for the year ended March 31, 1997 and for the nine months ended December 31,
1997, respectively. The Company had
F-24
<PAGE> 103
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
receivables from this company totaling $11,762 and $17,771 at March 31, 1997 and
December 31, 1997, respectively.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material impact on the
Company's financial statements.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair values of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt and capital lease obligations based on borrowing rates
currently available to the Company is a reasonable estimation of fair value.
13. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-25
<PAGE> 104
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comstock Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Comstock
Holdings, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. We have also audited the accompanying balance sheet of L.K.
Comstock & Company, Inc. ("Predecessor Company") as of December 31, 1996 and the
related statements of income, shareholder's equity and cash flows for each of
the two years in the period ended December 31, 1996. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Comstock Holdings, Inc. and
subsidiary as of December 31, 1997, and the results of their operations and
their cash flows for the year ended December 31, 1997 and of the financial
position of the Predecessor Company as of December 31, 1996 and the results of
its operations and cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
February 26, 1998
F-26
<PAGE> 105
COMSTOCK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
----------- ------- -----------
($ IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 4,171 $ 1,120 $ 945
Accounts receivable.................................. 49,266 46,436 44,062
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. 18,754 17,149 17,189
Inventory............................................ 1,536 1,240 250
Investment in joint venture.......................... 5,693 -- --
Deferred tax asset................................... -- 1,020 596
Other current assets................................. 706 977 907
------- ------- -------
Total current assets......................... 80,126 67,942 63,949
EQUIPMENT AND LEASEHOLD IMPROVEMENTS................... 10,985 448 513
LESS -- ACCUMULATED DEPRECIATION AND AMORTIZATION...... 7,184 56 84
------- ------- -------
3,801 392 429
OTHER ASSETS........................................... 417 18 39
------- ------- -------
$84,344 $68,352 $64,417
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................. $22,486 $ 2,555 $ 1,066
Accounts payable and accrued liabilities............. 23,706 22,547 24,269
Accrued payroll and related withholdings............. 6,447 4,711 5,180
Billings in excess of costs and estimated earnings on
uncompleted contracts............................. 6,314 8,510 4,285
Other current liabilities............................ 1,916 3,119 3,537
------- ------- -------
Total current liabilities.................... 60,869 41,442 38,337
LONG-TERM DEBT......................................... 2,404 12,449 12,352
EXCESS OF ACQUIRED NET ASSETS OVER COST................ -- 10,210 10,143
OTHER LIABILITIES...................................... 4,081 2,813 1,481
COMMITMENTS AND CONTINGENCIES (Notes 1, 8 and 9)
SHAREHOLDERS' EQUITY:
Predecessor Company:
Common stock, $.25 par value, 1,500 shares
authorized, 1,200 shares issued and
outstanding..................................... -- -- --
Comstock Holdings, Inc.:
Common stock, $.01 par value, 150,000 shares
authorized 111,500 shares issued and
outstanding..................................... -- 1 1
Additional paid-in capital........................ 18,479 9 9
Retained earnings................................. (1,489) 1,428 2,094
------- ------- -------
SHAREHOLDERS' EQUITY................................... 16,990 1,438 2,104
------- ------- -------
$84,344 $68,352 $64,417
======= ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-27
<PAGE> 106
COMSTOCK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------- THREE MONTHS
PREDECESSOR COMPANY ENDED MARCH 31,
------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $181,616 $188,767 $153,610 $32,401 $41,628
CONTRACT COSTS.......................... 164,777 169,303 136,678 27,997 37,205
-------- -------- -------- ------- -------
Gross profit on contracts..... 16,839 19,464 16,932 4,404 4,423
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 15,624 15,053 13,733 3,895 3,224
DEPRECIATION AND AMORTIZATION........... 1,263 1,365 (213) (61) (39)
INTEREST EXPENSE........................ 871 2,023 1,761 564 420
INTEREST AND OTHER INCOME............... (2,115) (476) (975) (726) (292)
IMPAIRMENT OF LONG-LIVED ASSETS (NOTE
1).................................... 20,105 -- -- -- --
-------- -------- -------- ------- -------
Income (loss) before
management fees and income
taxes....................... (18,909) 1,499 2,626 732 1,110
MANAGEMENT FEES CHARGED BY FORMER
PARENT................................ 913 941 -- -- --
-------- -------- -------- ------- -------
Income (loss) before income
taxes....................... (19,822) 558 2,626 732 1,110
PROVISION FOR INCOME TAXES.... 150 500 1,198 292 444
-------- -------- -------- ------- -------
Net income (loss)............. $(19,972) $ 58 $ 1,428 $ 440 $ 666
======== ======== ======== ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-28
<PAGE> 107
COMSTOCK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN RETAINED
PAR VALUE CAPITAL EARNINGS TOTAL
--------- ---------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994........................... $-- $37,904 $18,425 $56,329
Assumption of certain net liabilities of Comstock
Group, Inc...................................... -- (15,790) -- (15,790)
Net loss........................................... -- -- (19,972) (19,972)
--- ------- ------- -------
BALANCE, December 31, 1995........................... -- 22,114 (1,547) 20,567
Capital contribution............................... -- 1,110 -- 1,110
Transfer of note receivable........................ -- (4,745) -- (4,745)
Net income......................................... -- -- 58 58
--- ------- ------- -------
BALANCE, December 31, 1996........................... $-- $18,479 $(1,489) $16,990
=== ======= ======= =======
- --------------------------------------------------------------------------------------------------
Capital contribution............................... $ 1 $ 9 $ -- $ 10
Net income......................................... -- -- 1,428 1,428
--- ------- ------- -------
BALANCE, December 31, 1997........................... $ 1 $ 9 $ 1,428 $ 1,438
=== ======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
F-29
<PAGE> 108
COMSTOCK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
PREDECESSOR THREE MONTHS
COMPANY ENDED MARCH 31,
--------------------- -----------------
1995 1996 1997 1997 1998
--------- --------- --------- ------- -------
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(19,972) $ 58 $ 1,428 $ 440 $ 666
Adjustments to reconcile net income to net cash
used in operating activities--
Depreciation and amortization................. 1,263 1,365 (213) (61) (39)
Impairment of Long-Lived Assets............... 20,105 -- --
Deferred taxes................................ -- -- 664 110 424
Gain on sale of equipment..................... (10) (39) (194) (74) (8)
Change in contract reserves................... -- (3,000) -- -- --
Change in assets and liabilities:
Increase in accounts receivable and costs
and estimated earnings in excess of
billings on uncompleted contracts........ (18,263) (6,231) (8,176) (18,391) (105)
Decrease (increase) in inventory............ 621 (947) 296 207 990
Increase (decrease) in other current
assets................................... (975) (4,209) (271) (469) 70
Decrease (increase) in accounts payable and
accrued liabilities...................... 11,420 (1,772) (1,159) (3,866) 1,722
Increase in accrued payroll and related
withholdings............................. 530 365 549 2,675 469
Increase (decrease) in billings in excess of
costs and estimated earnings on
uncompleted contracts.................... 747 2,307 3,320 3,259 (3,107)
Increase (decrease) in other current
liabilities.............................. (2,447) (103) 909 187 418
Increase (decrease) in other assets......... 59 (3) (18) (14) (21)
Decrease (increase) in other liabilities.... 587 257 (336) 31 (11)
-------- -------- -------- ------- -------
Net cash (used in) provided by operating
activities............................. (6,335) (11,952) (3,201) (15,966) 1,468
-------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equipment................ 27 130 194 74 8
Purchase of equipment and leasehold
improvements.................................. (1,607) (690) (448) (119) (65)
-------- -------- -------- ------- -------
Net cash used in investing activities.... (1,580) (560) (254) (45) (57)
-------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from contingent promissory notes....... -- -- 14,608 14,608 --
Repayment of contingent promissory notes........ -- -- (157) (157) --
Proceeds from note payable...................... -- -- 4,000 9,096 --
Repayments of note payable...................... -- -- (4,000) -- --
Proceeds from long-term borrowings.............. 15,641 7,961 16,937 -- 2,019
Repayment of long-term borrowings............... (5,000) (2,312) (26,823) (4,361) (3,605)
Decrease in due to affiliates................... (6,766) -- -- -- --
Capital contribution............................ -- 1,110 -- -- --
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities............................. 3,875 6,759 4,565 19,186 (1,586)
-------- -------- -------- ------- -------
Net (decrease) increase in cash.......... (4,040) (5,753) 1,110 3,175 (175)
CASH, beginning of period......................... 13,964 9,924 10 10 1,120
-------- -------- -------- ------- -------
CASH, end of period............................... $ 9,924 $ 4,171 $ 1,120 $ 3,185 $ 945
======== ======== ======== ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest........ $ 781 $ 1,305 $ 1,478 $ 612 $ 355
Cash paid during the period for income taxes.... $ 116 $ 57 $ 188 $ 92 $ 66
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-30
<PAGE> 109
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
Comstock Holdings, Inc. (formerly LKC Acquisition Corp.) (together with its
predecessor company, "Holdings" or the "Company"), was incorporated on November
20, 1996 as a Delaware corporation for the purpose of acquiring L.K. Comstock &
Company, Inc. (the "Predecessor Company"). Holdings had no operations from
incorporation through January 1, 1997.
Effective January 1, 1997, the Company purchased the stock of the
Predecessor Company. The accompanying financial statements, including those of
the Predecessor Company prior to the acquisition date, have been prepared by
Holdings management and present the financial position and results of operations
of Holdings from the acquisition date and of the Predecessor Company for the
periods prior to the acquisition date. Accordingly, the financial information
for periods prior to the acquisition date does not reflect the significant
impact of the acquisition or of the purchase accounting adjustments on the
financial position and results of operations of Holdings.
The Predecessor Company was acquired by Holdings through various agreements
(the "Agreements") entered into by Comstock Group, Inc. ("Group", the
Predecessor Company's former parent), Spie Group Inc. ("Spie", the parent of
Group), Spie Enertrans SA ("Enertrans", the former parent of Spie) and Schneider
Electric Holdings Inc. ("Schneider", the parent of Spie). The Agreements
principally called for: (1) the sale of the common stock of the Predecessor
Company to Holdings (the "Sale"), (2) the issuance of various contingent
promissory notes by the Company to Enertrans and Group in exchange for
approximately $18,903,000, (3) the transfer of various intangible assets of Spie
to the Company, (4) the provision for various income tax elections and
indemnifications, and (5) certain other indemnifications and cooperative
understandings, all as described below. Also in connection with Agreements, the
Company entered into certain borrowing arrangements with its lenders (see Note
6). The effects of the Agreements have been accounted for as a purchase in the
accompanying financial statements as of January 1, 1997.
The principal terms of the Agreements are as follows:
(1) The payment at closing of $5,105,000 to Group by Holdings. Such
payment was substantially funded by the Predecessor Company.
(2) Contingent payments by Holdings to Group of 30% of the Company's
annual pre-tax income, as defined, through 1999 up to an aggregate of
$2,500,000.
(3) Additional contingent payments by Holdings to Group of 40% of the
Company's annual pre-tax income through 1999, after subtracting the payment
in (1) above and contingent payments in (2) above, up to an aggregate of
$2,500,000.
Accordingly, a distribution of $294,000 has been accrued to fund the
estimated 1997 contingent purchase price payment with a corresponding reduction
of excess of acquired net assets over cost.
Also under the terms of the Agreement, under certain conditions, Enertrans
has the right of first refusal for a period of three years for the subsequent
resale of the Predecessor Company's common shares by Holdings.
As part of the Agreements, certain intangible assets (recorded at no value)
were assigned to the Company. In addition, the Company issued a promissory note
(the "Contingent Promissory Note"), collateralized by certain investments
related to customer contracts involving claims and an investment in a joint
venture (the "Investments"). The remaining balance of the Contingent Promissory
Note of $14,451,000 at December 31, 1997 is payable only from amounts collected
by the Company relating to the Investments until April 3, 2007, at which time
the note is cancelled. As such, Enertrans and any successor to it or creditor
may not look to any other Company assets to satisfy this
F-31
<PAGE> 110
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
indebtedness. Accordingly, management believes a right of offset exists for
financial reporting purposes and the Investments and the Contingent Promissory
Note have been offset in the accompanying balance sheet at December 31, 1997 in
accordance with SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
In connection with the sale, $5,095,000 of cash from the Predecessor
Company was used by Holdings to fund its acquisition of the Predecessor Company.
Accordingly, and as a result of the purchase price adjustments, the fair value
of the net assets acquired exceeds the purchase price funded solely by Holdings.
In accordance with Accounting Principles Board Opinion 16 "Business
Combinations", the excess of the cost of net assets acquired first reduced the
non current assets to zero with the remainder allocated to "Excess of Acquired
Net Assets Over Cost", (negative goodwill) which amount will be amortized over
40 years.
Group was acquired by Spie through a series of incremental investments
completed in 1989 and accounted for as a purchase. The principal accounting
effect on the Predecessor Company of this purchase was the push down of the
excess of the purchase price over net assets acquired (goodwill), which amount
was amortized over 40 years. In March 1995, the Financial Accounting Standards
Board issued, and the Predecessor Company adopted, Statement No. 121 "Accounting
for the Impairment of Long-Lived Assets", (SFAS No. 121). Management of the
Predecessor Company reviewed its long-lived assets, including goodwill, in
connection with adopting SFAS No. 121 and concluded, after considering the
Predecessor Company's projected levels of profitability based on the then
current expected market conditions, that certain long-lived assets (consisting
primarily of goodwill) were impaired and, accordingly, recorded a charge to
reflect this impairment.
(2) DESCRIPTION OF BUSINESS
The Company provides electrical contracting services directly to end users
and, indirectly, by acting as a subcontractor for construction managers, general
contractors and other subcontractors. Services are provided to a broad range of
customers including corporations, municipalities and other governmental
entities, primarily in the Northeast and, to a lesser extent, in the Midwestern
and West Coast regions of the United States.
(3) ACCOUNTING POLICIES
PRINCIPLES OF PREPARATION
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 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.
ACCOUNTING FOR CONTRACTS
Earned revenues and cost of earned revenues represent the portion of the
contract price and the related cost recognized under the Company's accounting
policies for construction contracts.
The Company recognizes earned revenues and costs using the percentage of
completion method based on the ratio of costs incurred to total estimated costs.
Contract losses are provided for when they become known. In forecasting
ultimate profitability on certain contracts, estimated recoveries may be
included for work performed under customer change orders to contracts for which
firm prices have not yet been negotiated. Due to uncertainties inherent in the
estimation and performance processes, it is possible that completion costs,
including
F-32
<PAGE> 111
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
those arising from contract penalty provisions and final contract settlements,
will be revised in the near-term. Such revisions to costs and income are
recognized in the period in which the revisions are determined.
DEPRECIATION AND AMORTIZATION
Equipment is depreciated principally on the straight-line method over the
estimated useful life. Leasehold improvements are amortized using the
straight-line method over the life of the lease.
INVENTORY
Inventory is recorded at cost.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1997 and 1998.
(4) INCOME TAXES
In accordance with the terms of the Agreements, the Company and Group
elected to treat the sale of the Company under Section 338(h)(10) of the
Internal Revenue Code. The effect of this election eliminated the Company's
ability to use net operating loss carryforwards and certain other related tax
attributes generated prior to the Sale.
Also as a result of this election and the terms of the Agreements, the
financial reporting basis of Holding's investment in the Predecessor Company is
less than its income tax reporting basis. Such difference may result in future
deductions for income tax purposes and, under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", is treated as a temporary
difference. The effect of this difference was recorded as a deferred tax asset
at the time of the Sale. Such temporary differences primarily relate to
long-term contracts and other reserves. The net deferred tax asset of
approximately $1,684,000 resulting from these differences increased the excess
of acquired net assets over cost by the same amount. Also, under the Agreements,
Group has indemnified the Company for all liabilities for income taxes and any
related litigation imposed on the Predecessor Company for any period prior to
the Sale.
The Predecessor Company's results were included in the consolidated federal
income tax return of Spie. During 1996, the Company utilized a portion of its
net operating loss carryforwards ("NOLs") to eliminate its statutory federal
income tax provision. State and local returns were filed and the related
provisions recorded on a separate company basis.
F-33
<PAGE> 112
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for 1997 included in the statement of
operations consists of (in thousands):
<TABLE>
<CAPTION>
1997
------------------
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal................................................... $ -- $ 941 $ 941
State..................................................... 132 125 257
---- ------ ------
$132 $1,066 $1,198
==== ====== ======
</TABLE>
The Company's effective tax rate differs from the U.S. Statutory rate of
34% as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
---------------
1995 1996 1997
------- ----- ------
<S> <C> <C> <C>
U.S. Statutory Rate........................................ $(6,739) $ 189 $ 893
Benefit of NOL............................................. -- (189) --
State and local taxes...................................... 43 242 206
Federal alternative minimum tax............................ -- 150 --
Goodwill impairment and other permanent items.............. 6,846 108 99
------- ----- ------
$ 150 $ 500 $1,198
======= ===== ======
</TABLE>
(5) ACCOUNTS RECEIVABLE AND CONTRACTS IN PROGRESS
Accounts receivable consists of (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
DECEMBER 31,
---------------------
1996 1997
----------- -------
<S> <C> <C>
Billed...................................................... $34,284 $31,400
Retainages.................................................. 14,982 15,036
------- -------
$49,266 $46,436
======= =======
</TABLE>
Retainages of approximately $4,045,000 and $4,388,000 at December 31, 1996
and 1997 are invested in U.S. government obligations and municipal bonds. These
securities are classified as held to maturity and are valued at cost which
approximates market value. The Company anticipates that 53% of all retainages at
December 31, 1997 will be collected within one year.
Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues have been recorded but the amounts cannot be billed under
the terms of the contracts. Such amounts are recoverable from customers upon
various measures of performance, including achievement of certain milestones,
completion of specified units or completion of the contract. The Company
anticipates that substantially all amounts, other than unanticipated additional
contract costs (see below), will be billed and collected within one year.
The Company has recorded as costs and estimated earnings in excess of
billings on uncompleted contracts amounts that it seeks or will seek to collect
from customers or others for errors or changes in contract specifications or
design, contract change orders in dispute or unapproved as to both scope and
price, or other customer-related causes of unanticipated additional contract
costs (pending change orders and claims). These amounts are recorded at their
estimated net realizable value when realization is probable and can be
reasonably estimated. No profit is recognized on the
F-34
<PAGE> 113
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
construction costs incurred in connection with these amounts. Pending change
orders and claims involve the use of estimates and it is reasonably possible
that revisions to the estimated recoverable amounts of recorded pending change
orders and claims may be made in the near-term. Claims made by the Company
involve negotiation and, in certain cases, litigation. The Company expenses such
costs as incurred, although it may seek to recover these costs as part of the
claim. The Company believes that it has established legal bases for pursuing
recovery of recorded claims and it is management's intention to pursue and
litigate these claims, if necessary, until a decision or settlement is reached.
The Company is pursuing unanticipated additional contract costs on certain
completed contracts. Costs and estimated earnings in excess of billings on
uncompleted contracts includes unbilled revenues of approximately $2,200,000 and
$3,915,000 at December 31, 1996 and 1997, respectively, related to these
contracts. In addition, billed accounts receivable and retainages include
contractually billed amounts related to these contracts of approximately
$1,600,000 and $2,257,000 at December 31, 1996 and 1997, respectively. Certain
contractually billed amounts related to these contracts may not be paid by the
customer to the Company until final resolution of the contract. The Company has
established reserves of approximately $2,200,000 and $2,285,000 related to
unbilled revenues at December 31, 1996 and 1997, respectively.
Costs and estimated earnings on uncompleted contracts and related amounts
billed are as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
DECEMBER 31,
----------------------
1996 1997
----------- --------
<S> <C> <C>
Billings.................................................... $363,010 $400,949
Costs and estimated earnings................................ 375,450 409,588
-------- --------
$ 12,440 $ 8,639
======== ========
</TABLE>
Such amounts are included in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
DECEMBER 31,
---------------------
1996 1997
----------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $18,754 $17,149
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (6,314) (8,510)
------- -------
$12,440 $ 8,639
======= =======
</TABLE>
At December 31, 1995, 1996 and 1997, earned revenues from government
related funding sources were 50%, 61% and 66%, respectively, of total earned
revenues. Approximately 23%, 27% and 30% of total earned revenues for 1995, 1996
and 1997, respectively, were from a single government customer.
F-35
<PAGE> 114
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) DEBT
Long term debt consists of (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving Credit Agreement(a)...................... $19,500 $12,057 $12,057
Temporary Revolver(b).............................. 4,400 550 --
Promissory Note(c)................................. -- 1,700 750
Fixed Asset Notes.................................. 990 697 611
------- ------- -------
24,890 15,004 13,418
Less -- Current portion............................ 22,486 2,555 1,066
------- ------- -------
$ 2,404 $12,449 $12,352
======= ======= =======
</TABLE>
- ---------------
(a) On April 4, 1997, the Company entered into a secured revolving credit
agreement (the "Revolver") with a maximum aggregate principal amount of
$15,000,000 (the "Commitment"). The Revolver expires December 31, 1999.
Loans under the Revolver may be Base Rate or Eurodollar loans. Interest on
Base Rate loans is at a rate of 1% plus the Base Rate, as defined,
(approximately the prime rate); interest on Eurodollar loans is at 3.25%
plus the Eurodollar Rate, as defined, (approximately LIBOR). An annual
facility fee of 1% and a commitment fee of 1/2 of 1% is payable on the
total Commitment and the total unused Commitment, respectively. Up to
$10,000,000 of letters of credit may be drawn against the Commitment,
$2,911,655 of which was drawn at December 31, 1997.
(b) On December 11, 1997, the Company entered into a short-term secured
revolving credit agreement (the "Temporary Revolver") with a maximum
principal amount of $2,000,000. The Temporary Revolver expires on April 30,
1998. Interest on the unpaid principal is at a rate of 2% plus the Base
Rate (approximately prime rate).
(c) Interest on this agreement is payable semi-annually at the rate of 8.5% and
the principal is due in 1998.
The Revolver and the Temporary Revolver are secured by substantially all
the assets of the Company and are guaranteed by Holdings and certain of its
shareholders. The Revolver and Temporary Revolver contain restrictive covenants
that, among other things, impose limitations on the Company with respect to its
ability to incur additional indebtedness, make certain investments, sell assets
or pay dividends. The Revolver and the Temporary Revolver also contain various
financial covenants which require the Company to meet certain targets including,
but not limited to, the maintenance of tangible net worth, a current ratio, a
debt to equity ratio and quarterly earnings before interest, taxes and
depreciation (EBITDA). The most restrictive of these convenants is the
requirement of a minimum of $750,000 of EBITDA per quarter.
(7) EMPLOYEE BENEFIT PLANS
Group sponsored a qualified employee incentive savings plan which was
assumed by Holdings. Under the plan, nonunion employees who have completed one
year of service could elect to contribute to the plan from 1% to 15% of their
compensation. The Company makes a base contribution to the plan equal to 2% of
covered payroll and a partial matching contribution (as defined) not to exceed
4% of a participant's covered payroll. The Company's expense for contribu-
F-36
<PAGE> 115
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tions under the plan was approximately $342,000, $337,000, and $321,000 during
1995, 1996, and 1997, respectively.
Prior to the Sale, the Company was generally self-insured for its
automobile and general liability insurance and, to a lesser extent, for workers'
compensation. Included primarily in accrued payroll and related withholdings at
December 31, 1996 and 1997 are reserves of $5,419,000 and $3,574,000,
respectively, relating to these insurance liabilities. The Company currently
participates in a paid indemnity plan for these insurance coverages.
The Company sponsored an unfunded, fully insured postretirement medical
plan covering eligible retirees and their dependents which it elected to
terminate effective December 31, 1997. In 1995 and 1996 the Company offered, at
group rates, comprehensive medical care benefits to retirees and their covered
dependents. The Company contributed approximately one-half of the total premium
medical cost. Under the plan, employees were eligible to enroll on the first day
of the month following retirement from the Company after age 55 and ten years of
service. Upon adoption of Financial Accounting Standard No. 106, "Employers'
Accounting for Postretirement Benefits other than Pensions" the accumulated
postretirement benefit obligation was $943,000. This amount was amortized over
20 years.
The postretirement benefit cost for 1995 and 1996 included the following
items (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1995 1996
---- ----
<S> <C> <C>
Service cost................................................ $ 49 $ 42
Interest cost............................................... 79 81
Transition amortization..................................... 47 47
---- ----
$175 $170
==== ====
</TABLE>
The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31 (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-------------
1995 1996
------ ----
<S> <C> <C>
Accumulated benefit obligations attributable to:
Retirees and their spouses.................................. $ 659 $583
Eligible active employees and their spouses................. 266 207
Ineligible active employees and their spouses............... 213 172
------ ----
$1,138 $962
====== ====
</TABLE>
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was of 7.25% in 1995 and 1996. The assumed health care cost
trend rate was 10% and 9.5% in December 31, 1995 and 1996, respectively
gradually decreasing to an ultimate rate of 5% in 2004 for participants under
age 65. For those above age 65, 8% was used in 1995 and 7.5% in 1996, gradually
decreasing to an ultimate rate of 5% in 2004. A one percent increase in the
assumed health care cost trend rate would increase costs by $24,000 and $25,000
in 1995 and 1996 respectively. The accumulated postretirement benefit obligation
would increase by approximately $194,000 and $158,000 in 1995 and 1996,
respectively. This plan was discontinued in 1997.
The Company has nonqualified defined benefit plans covering certain current
and former employees which provide benefits based on years of service and
compensation. In aggregate, at
F-37
<PAGE> 116
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997 approximately $1,486,000 and $1,518,000, respectively
relating to these programs is included in the accompanying balance sheets.
The Company's self-insurance programs and certain employee benefit plan
liabilities are estimated using actuarial estimates and management assumptions.
These estimates are based on historical information, along with certain
assumptions about future events. Changes in assumptions, as well as changes in
actual experience could cause these estimates to change.
(8) COMMITMENTS AND CONTINGENCIES
The Company has leases for warehouse and office facilities, a majority of
which contain renewal options and require minimum rental payments by the
Company, plus maintenance, insurance and similar expenses. The future minimum
payments under all leases were as follows at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998........................................................ $2,167
1999........................................................ 1,164
2000........................................................ 823
2001........................................................ 751
2002 and thereafter......................................... 2,947
------
$7,852
======
</TABLE>
As inducement for entering into a new lease agreement for office space in
1994, the Predecessor Company was granted a tenant work allowance of
approximately $1,138,000. Such allowance was included in other liabilities and
was amortized on a straight-line basis over the term of the lease. The
unamortized balance at December 31, 1996 was $930,000. Such balance was written
off in 1997 as part of the purchase accounting adjustments in the acquisition of
the Predecessor Company. Rental expense for 1995, 1996, and 1997, including
amounts charged to cost of earned revenues, was approximately $3,710,000,
$3,527,000, and $2,685,000.
The Company's performance under certain construction contracts is secured
by performance bonds for which the Company pays a separate fee.
(9) LEGAL MATTERS
The Company is party to various legal actions, arising in the normal course
of business and including matters related to construction contract claims, some
of which involve substantial sums. The Company believes that the disposition of
all such actions, individually or in the aggregate, will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company taken as a whole.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
F-38
<PAGE> 117
COMSTOCK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVOLVING CREDIT AND LONG-TERM DEBT
The carrying value of the Company's debt approximates fair value. The fair
value of fixed rate long-term debt is based upon quoted market prices for these
or similar issues or rates currently available to the Company for debt with
similar terms and maturities.
(11) SUBSEQUENT EVENTS (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Reorganization") with RailWorks Corporation.
Under the terms of the Reorganization, the stockholders will exchange their
stock of the Company for cash and stock of RailWorks Corporation. The
transaction is expected to be completed in August 1998.
Also in connection with the planned Initial Public Offering of RailWorks
Corporation following the Reorganization, and subject to completion of such
offering, Group agreed to accept a one-time payment of $1,600,000 to satisfy all
contingent payments owed in connection with the Agreements.
F-39
<PAGE> 118
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Condon Brothers, Inc.:
We have audited the accompanying balance sheets of Condon Brothers, Inc. (a
Washington corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1995, 1996 and 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 financial statements referred to above present fairly,
in all material respects, the financial position of Condon Brothers, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boise, Idaho
February 20, 1998
F-40
<PAGE> 119
CONDON BROTHERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 649 $ 1,096 $ 918
Accounts receivable, net of allowance of $15,600,
$30,060 and $8,650, respectively.................. 1,278,055 445,677 1,040,739
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. 205,236 75,987 53,386
Inventory............................................ 932,917 1,172,193 1,070,960
Prepaid expenses..................................... 47,065 40,839 34,436
Loan to shareholder.................................. -- -- 50,000
---------- ---------- ----------
Total current assets......................... 2,463,922 1,735,792 2,250,439
---------- ---------- ----------
PLANT AND EQUIPMENT:
Machinery and equipment.............................. 917,559 1,072,916 1,162,841
Vehicles............................................. 356,188 473,128 473,128
Office furniture and equipment....................... 14,923 30,021 31,420
---------- ---------- ----------
1,288,670 1,576,065 1,667,389
Less accumulated depreciation........................ (584,738) (720,374) 789,810
---------- ---------- ----------
Plant and equipment, net..................... 703,932 855,691 877,579
---------- ---------- ----------
OTHER ASSETS:
Cash surrender value of life insurance............... 20,411 28,338 32,417
Investments -- land.................................. 20,800 20,800 20,800
---------- ---------- ----------
Total other assets........................... 41,211 49,138 53,217
---------- ---------- ----------
$3,209,065 $2,640,621 $3,181,235
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 885,456 $ 847,919 $ 966,915
Deferred compensation................................ 85,410 82,910 90,410
Due to related party................................. 12,788 10,000 5,000
Lines of credit...................................... 650,000 -- 400,000
Current maturities of long-term debt................. 105,862 214,718 229,491
Billings in excess of costs and estimated earnings on
uncompleted contracts............................. 70,821 7,949 79,416
Reserve for losses on uncompleted contracts.......... 167,107 -- --
---------- ---------- ----------
Total current liabilities.................... 1,977,444 1,163,496 1,771,232
---------- ---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES.............. 256,025 491,307 415,162
---------- ---------- ----------
Total liabilities............................ 2,233,469 1,654,803 2,186,394
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value; authorized shares,
1,000,000; issued and outstanding shares,
580,000........................................... 29,000 29,000 29,000
Additional paid-in capital........................... 24,155 24,155 24,155
Retained earnings.................................... 922,441 932,663 941,686
---------- ---------- ----------
Total stockholders' equity................... 975,596 985,818 994,841
---------- ---------- ----------
$3,209,065 $2,640,621 $3,181,235
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 120
CONDON BROTHERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE.......................... $2,983,492 $5,516,610 $4,487,098 $943,971 $1,237,458
CONTRACT COSTS................... 1,912,362 4,115,260 3,370,548 661,316 955,981
---------- ---------- ---------- -------- ----------
Gross profit................... 1,071,130 1,401,350 1,116,550 282,655 281,477
GENERAL AND ADMINISTRATIVE
EXPENSES....................... 757,185 838,725 983,116 207,450 259,600
---------- ---------- ---------- -------- ----------
INCOME FROM OPERATIONS........... 313,945 562,625 133,434 75,205 21,877
OTHER INCOME (EXPENSE):
Other revenue, net............. 92,158 141,342 59,729 3,041 12,505
Interest income................ 2,295 -- 1,608 153 177
Interest expense............... (60,426) (55,834) (75,625) (20,823) (25,536)
---------- ---------- ---------- -------- ----------
NET INCOME............. $ 347,972 $ 648,133 $ 119,146 $ 57,576 $ 9,023
========== ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 121
CONDON BROTHERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER
OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 580,000 $29,000 $24,155 $ 1,010 $ 54,165
Net income............................ -- -- -- 347,972 347,972
Dividends............................. -- -- -- (31,196) (31,196)
------- ------- ------- --------- ---------
BALANCE, December 31, 1995.............. 580,000 29,000 24,155 317,786 370,941
Net income............................ -- -- -- 648,133 648,133
Dividends............................. -- -- -- (43,478) (43,478)
------- ------- ------- --------- ---------
BALANCE, December 31, 1996.............. 580,000 29,000 24,155 922,441 975,596
Net income............................ -- -- -- 119,146 119,146
Dividends............................. -- -- -- (108,924) (108,924)
------- ------- ------- --------- ---------
BALANCE, December 31, 1997.............. 580,000 $29,000 $24,155 $ 932,663 $ 985,818
======= ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 122
CONDON BROTHERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 347,972 $ 648,133 $ 119,146 $ 57,576 $ 9,023
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation........................... 108,093 139,772 184,479 42,495 69,842
Gain from sale of equipment............ (92,226) (120,468) (60,858) (3,000) (12,500)
Reserve for losses on uncompleted
contracts............................ (115,049) 167,107 (167,107) (114,311) --
Other.................................. 4,957 (20,411) (7,944) 9,364 3,431
Change in working capital items:
Accounts receivable.................... (2,576) (954,769) 832,378 759,243 (595,062)
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................ 216,113 (86,695) 129,249 (59,710) 22,601
Inventory.............................. (150,559) (502,304) (239,276) 4,150 101,233
Prepaid expenses....................... (4,451) 2,065 6,226 10,286 6,403
Accounts payable and accrued expenses.. (38,645) 528,659 (37,537) (428,025) 118,996
Deferred compensation.................. 27,705 -- (2,500) -- --
Due to related party................... 5,637 (7,961) (2,788) (2,542) (5,000)
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ 1,675 66,783 (62,872) (35,667) 71,467
---------- ---------- ---------- --------- ---------
Net cash provided by (used in)
operating activities............ 308,646 (140,089) 690,596 239,859 (209,566)
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................... (276,750) (432,024) (372,987) (58,635) (106,366)
Proceeds from sale of plant and
equipment.............................. 104,240 126,943 97,624 3,000 27,126
---------- ---------- ---------- --------- ---------
Net cash used in investing
activities...................... (172,510) (305,081) (275,363) (55,635) (79,240)
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit............ 255,000 1,173,106 428,425 150,000 400,000
Payments on lines of credit.............. (375,000) (593,521) (628,425) (300,000) --
Proceeds from long-term debt............. 84,172 -- -- -- --
Payments on long-term debt............... (94,867) (90,730) (105,862) (34,221) (61,372)
Dividends paid........................... (31,196) (43,478) (108,924)
Loan to shareholder...................... -- -- -- -- (50,000)
---------- ---------- ---------- --------- ---------
Net cash provided by (used in)
financing activities............ (161,891) 445,377 (414,786) (184,221) 288,628
---------- ---------- ---------- --------- ---------
Net increase (decrease) in cash
and cash equivalents............ (25,755) 207 447 3 (178)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................... 26,197 442 649 649 1,096
---------- ---------- ---------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD... $ 442 $ 649 $ 1,096 $ 652 $ 918
========== ========== ========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest............................... $ 60,426 $ 55,834 $ 75,625 $ 20,823 $ 25,536
========== ========== ========== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Refinance of lines of credit and
long-term debt......................... $ 449,668 $ -- $ 450,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 123
CONDON BROTHERS, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Condon Brothers, Inc. (the "Company"), a Washington corporation, is in the
business of railroad track construction, maintenance, salvage and related sales
primarily in the Pacific Northwest. The majority of construction and maintenance
work is performed under fixed price contracts. The duration of the Company's
contracts is typically less than one year.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND CONTRACT COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of contract cost
incurred to date to management's estimated total cost for each contract.
Management considers comparison of costs incurred to date to total cost to be
the best available measure of progress on the contracts. Changes in job
performance, job conditions and estimated profitability may result in revisions
to total expected project costs and the anticipated gross profit and are
recognized in the period in which determined.
Revenues from time-and-material contracts are recognized as the work
progresses.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the Pacific Northwest. As such, the
Company's revenues and related accounts receivable are principally from the same
geographic region. The terms of the sales give rise to unsecured accounts
receivable, as is common industry practice.
INVENTORY
Inventory consists principally of stored rails, ties and other track
materials ("OTM") and parts to be used for contracts or resale and are stated at
the lower of cost or market. Market is based on estimated proceeds expected to
be obtained upon ultimate sale.
The Company's principal method of acquiring inventory items is through
salvage operations. Items acquired through salvage operations are valued based
on costs incurred to acquire the items, including payments to third parties,
direct labor and other direct contract costs, and those indirect costs related
to contract performance. These costs are netted with any third party payments
received for the salvage operations. The Company compares total cost of salvaged
materials to market for rails, ties and OTM recovered and adjustments are made
if the calculated market value is less than the total salvage cost. In addition,
the Company evaluates amounts held in inventory and adjusts for rails, ties and
OTM quantities that exceed anticipated usage.
F-45
<PAGE> 124
CONDON BROTHERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Inventory consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Rails....................................................... $443,299 $ 536,825
Ties........................................................ 255,486 210,932
Other track material........................................ 234,132 229,005
-------- ----------
Total Rail Inventory.............................. 932,917 976,762
Mining equipment and other items............................ -- 195,431
-------- ----------
Total Inventory................................... $932,917 $1,172,193
======== ==========
</TABLE>
The Company has salvaged and recorded at cost $195,431 of inventory which
is comprised of various mine equipment, small locomotives and other items. The
Company believes it will realize amounts recorded upon disposition.
PLANT AND EQUIPMENT
The Company records plant and equipment at cost. Depreciation is computed
using the straight-line method over the estimated useful life of the asset as
follows:
<TABLE>
<S> <C>
Machinery and equipment.................................... 5 - 10 years
Vehicles................................................... 5 - 7 years
Office furniture and equipment............................. 5 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from their respective accounts and any gain or loss
is reflected in net income.
Maintenance, repairs and minor replacements are expensed as incurred and
were $179,343 in 1995, $256,727 in 1996, and $353,428 in 1997.
INVESTMENTS -- LAND
The Company has recorded $114,700 in accounts payable and accrued expenses
in the Balance Sheets related to amounts owed for materials recovered during a
1993 salvage operation. Included in this salvage operation was land acquired for
$20,800. Upon satisfaction of the obligation for the salvaged materials, clear
title will be presented to the Company by the seller for the land.
INCOME TAXES
The Company operates as a sub-chapter S corporation. Accordingly, the
income taxes for the earnings of the Company are the responsibility of the
owners; therefore, these financial statements do not reflect any current or
deferred federal or state income taxes for the Company.
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 vary from the estimates that were assumed
in preparing the financial statements.
F-46
<PAGE> 125
CONDON BROTHERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financials statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1997 and 1998.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Contract receivables........................................ $1,074,663 $401,698
Contract retainages......................................... 218,577 53,186
Other....................................................... 415 20,853
Less allowance for doubtful accounts........................ (15,600) (30,060)
---------- --------
$1,278,055 $445,677
========== ========
</TABLE>
Contract retainages have been billed but are not considered due until
contract completion. Such contract retainage is expected to be collected within
the following year. Other accounts receivable consist primarily of amounts due
from current and former employees.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process was as follows at December
31:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $1,871,741 $626,543
Estimated earnings.......................................... 103,055 129,903
---------- --------
1,974,796 756,446
Less: Billings to date...................................... 1,840,381 688,408
---------- --------
$ 134,415 $ 68,038
========== ========
</TABLE>
Contracts in process at December 31 are included in the accompanying
Balance Sheets under the following captions:
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $205,236 $75,987
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (70,821) (7,949)
-------- -------
$134,415 $68,038
======== =======
</TABLE>
Provisions for losses on uncompleted contracts are recognized when it is
determined that total costs will exceed the allowable contract revenue.
F-47
<PAGE> 126
CONDON BROTHERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Company leases from C. B. Enterprises, a related party, the Spokane,
Washington yard, which includes a maintenance shop and office building under an
agreement expiring on November 1, 1999. Minimum rental commitments under the
noncancellable lease agreement are:
<TABLE>
<S> <C>
1998........................................................ $ 60,000
1999........................................................ 55,000
--------
$115,000
========
</TABLE>
Total rental expense for 1995, 1996 and 1997 for all operating leases
amounted to $72,157, $77,086 and $109,989, respectively.
6. LINES OF CREDIT
At December 31, 1997, the Company had a $300,000 operating line of credit
with Washington Trust Bank. Interest was payable monthly at the Bank's prime
rate plus .75%. Advances on the operating line were $300,000 and zero, as of
December 31, 1996 and 1997, respectively. The operating line expires May 1,
1998. Security for the line is accounts receivable, inventory and equipment.
Effective January 6, 1998, the Company has renegotiated its operating line
of credit, reducing line capacity to $200,000. All other terms have remained the
same. Effective in February of 1998, the Company established an additional line
of credit of $200,000. The line matures on May 18, 1998. All other terms are
consistent with the existing line. Draws on these lines totaled $300,000 as of
February 20, 1998.
In addition to the above operating lines of credit with Washington Trust
Bank, two additional lines of credit were issued during the year ended December
31, 1996, for operations. These additional lines allow draws up to $350,000.
Advances on the lines were $350,000 as of December 31, 1996. Interest accrues
monthly at the Bank's prime rate plus .75%. Security for the lines is accounts
receivable, inventory and equipment. These operating lines were repaid during
1997.
7. LONG-TERM DEBT
Long-term debt and related current maturities consist of the following at
December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Note payable to Washington Trust Bank, payable in monthly
installments of $11,226 including interest at 9% with the
balance due January 30, 1999. Secured by accounts
receivable, inventory and equipment....................... $ -- $ 450,000
Note payable to Washington Trust Bank, payable in monthly
installments of $11,305 including interest at 9.50% and
matures January 1, 2000. Secured by accounts receivable,
inventory and equipment................................... 361,887 256,025
--------- ---------
361,887 706,025
Less current maturities..................................... (105,862) (214,718)
--------- ---------
$ 256,025 $ 491,307
========= =========
</TABLE>
F-48
<PAGE> 127
CONDON BROTHERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities on principal under long-term debt obligations are as
follows:
<TABLE>
<S> <C>
1998........................................................ $214,718
1999........................................................ 480,056
2000........................................................ 11,251
--------
$706,025
========
</TABLE>
8. RELATED PARTY TRANSACTIONS
Payments were made to C. B. Enterprises (a partnership), a related party,
under an operating lease for the Spokane, Washington yard and buildings. Such
payments totaled $57,600 for the year ended December 31, 1995 and $60,000 for
the years ended December 31, 1996 and 1997. The Company also leases certain
equipment to C. B. Enterprises, which is recognized as revenue. Revenue
recognized totaled $9,000, $8,085 and $12,683 for the years ended December 31,
1995, 1996 and 1997. Amounts due to C. B. Enterprises are classified as Due to
related party in the Balance Sheets and are $12,788 and $10,000 as of December
31, 1996 and 1997, respectively.
In 1995, the Company transferred a building and related leasehold
improvements to C. B. Enterprises, a related party, in exchange for a reduction
in amounts owed by the Company to C. B. Enterprises. No gain or loss was
recognized on this transaction. For purposes of the Statements of Cash Flows,
this transfer of approximately $120,000, net, has been treated as a noncash
transaction.
No other material related party transactions have occurred.
9. PROFIT SHARING PLAN
The Company has adopted a profit-sharing plan (the Plan) covering all full
time employees with one year of service. Participants become fully vested after
six years of service. Contributions made to the Plan for the years ended
December 31, 1995, 1996 and 1997, were $5,000, $50,000 and $100,000,
respectively.
10. DEFERRED COMPENSATION PAYABLE
In 1993, the Company and one of its officers entered into a discretionary
deferred compensation agreement. The deferred compensation was to be payable to
the officer 90 days following the date on which he gives written notification to
Condon Brothers, Inc. of his retirement from the Company. During 1995, the
Company made the decision to suspend the agreement. At December 31, 1996 and
1997, the Company has an $85,410 and an $82,910 deferred compensation liability,
respectively, to the officer which will be paid to him upon his retirement. The
amount charged to operations was $30,000 for 1995 and zero for 1996 and 1997.
11. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company maintains life insurance policies on two officers. The face
value of these policies was $300,000 each at December 31, 1996 and 1997. The
cash surrender value on these policies was $20,411 and $28,338 as of December
31, 1996 and 1997, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments are provided
pursuant to the requirements of Statement of Financial Accounting Standards No.
107, "Disclosures about Fair
F-49
<PAGE> 128
CONDON BROTHERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items at December 31, 1996 and 1997, are a
reasonable estimate of their fair value due to their short-term and liquid
nature.
LONG-TERM DEBT
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. It is
estimated that the fair value of the long-term debt is approximately market.
Management estimated the fair value of the long-term debt based on the remaining
term to maturity and a comparison of their current interest rates to market
rates for similar obligations.
13. CONTINGENCIES
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material adverse impact on
the Company's financial position, operations or liquidity.
The Company has accrued $120,000 in accounts payable and accrued expenses
in the Balance Sheets associated with a 1997 railroad salvage contract. The
total amount of the salvage contract was originally $174,000. Due to a reduction
in the amount of rail, ties and OTM allowed to be salvaged, the Company is
presently in negotiations to have the contract obligation reduced. If the
Company is unsuccessful in obtaining a change-order for the contract, an
additional cost of $54,000 will be recognized in the financial statements as
inventory to the extent the value is supported by comparison to the Company's
expected market value.
14. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-50
<PAGE> 129
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
CPI Concrete Products Incorporated
Memphis, Tennessee
We have audited the accompanying balance sheets of CPI Concrete Products
Incorporated, as of January 31, 1997 and 1998, and the related statements of
earnings and retained earnings and cash flows for the years ended January 31,
1996, 1997 and 1998. 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of CPI Concrete Products
Incorporated, as of January 31, 1997 and 1998, and the results of its operations
and its cash flows for the years ended January 31, 1996, 1997 and 1998, in
conformity with generally accepted accounting principles.
Cannon & Co.
Memphis, Tennessee
March 11, 1998
F-51
<PAGE> 130
CPI CONCRETE PRODUCTS INCORPORATED
BALANCE SHEETS
JANUARY 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 594,964 $ 656,574
Accounts Receivable....................................... 1,132,841 1,129,047
Inventory................................................. 1,792,047 1,723,197
Prepaid Expenses.......................................... 23,058 57,843
Prepaid Taxes............................................. 123,251
Deferred Tax Assets....................................... 25,920 21,376
---------- ----------
Total Current Assets.............................. 3,692,081 3,588,037
PROPERTY, PLANT AND EQUIPMENT
Land, Buildings and Equipment............................. 3,417,251 3,754,126
Less Accumulated Depreciation............................. 1,968,933 2,284,215
---------- ----------
1,448,318 1,469,911
OTHER ASSETS
Loan Costs, Net of Accumulated Amortization of $7,218, and
$9,842, Respectively................................... 19,028 16,404
Refundable Deposits....................................... 550 550
---------- ----------
19,578 16,954
---------- ----------
$5,159,977 $5,074,902
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable.......................................... $ 813,815 $ 498,855
Customer Deposits......................................... 27,133 93,096
Accrued Wages............................................. 37,516 42,696
Taxes Withheld and Accrued................................ 80,142 89,354
Accrued Expenses.......................................... 365,734 134,957
Accrued Income Taxes...................................... 13,750 58,763
Current Portion of Long-Term Debt......................... 270,650 247,706
---------- ----------
Total Current Liabilities......................... 1,608,740 1,165,427
LONG-TERM DEBT, Less Current Portion........................ 680,634 593,952
DEFERRED INCOME TAXES....................................... 25,920 26,000
STOCKHOLDERS' EQUITY
Common Stock, No Par Value; Shares Authorized 3,000;
Shares Issued 2,161 (8 in Treasury, 253 in ESOP)....... 428,700 428,700
Retained Earnings......................................... 2,419,199 2,864,039
---------- ----------
2,847,899 3,292,739
Less Treasury Stock, 8 Shares at Cost..................... 3,216 3,216
---------- ----------
2,844,683 3,289,523
---------- ----------
$5,159,977 $5,074,902
========== ==========
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-52
<PAGE> 131
CPI CONCRETE PRODUCTS INCORPORATED
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
UNAUDITED
-----------------------
TWO MONTHS ENDED
YEARS ENDED JANUARY 31, MARCH 31,
--------------------------------------- -----------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Gross Sales............... $12,315,284 $11,189,406 $12,077,672 $1,795,089 $1,669,187
Less: Delivery Expense.... 1,297,443 1,090,668 1,088,323 3,047 252
Cash Discounts...... 1,996 1,238 3,758 67 269
----------- ----------- ----------- ---------- ----------
NET SALES................... 11,015,845 10,097,500 10,985,591 1,791,975 1,668,666
Rental Income............. 55,016 67,483 133,906 50,638 6,321
Gain on Sale of
Equipment.............. 10,739 3,467
Interest Income........... 8,653 14,224 15,919 2,540 3,709
Miscellaneous Income...... 14,727 14,434 4,678 251 4,743
----------- ----------- ----------- ---------- ----------
Total Revenue..... 11,104,980 10,197,108 11,140,094 1,845,404 1,683,439
COST AND EXPENSES
Cost of Goods Sold........ 8,418,189 7,886,659 8,840,881 1,558,385 1,397,060
Depreciation.............. 299,798 305,133 315,280 52,626 50,107
Operating Expenses........ 1,306,450 1,220,449 1,157,917 179,580 115,237
Interest.................. 135,727 97,527 90,266 12,636 11,147
Loss on Sale of
Equipment.............. 14,403 2,637 1,340
----------- ----------- ----------- ---------- ----------
10,174,567 9,512,405 10,405,684 1,803,227 1,573,551
----------- ----------- ----------- ---------- ----------
EARNINGS BEFORE INCOME
TAXES..................... 930,413 684,703 734,410 42,177 109,888
FEDERAL AND STATE INCOME
TAXES..................... 366,984 267,558 289,570 7,808 42,940
----------- ----------- ----------- ---------- ----------
NET EARNINGS................ 563,429 417,145 444,840 34,369 66,948
RETAINED EARNINGS AT
BEGINNING OF YEAR......... 1,438,625 2,002,054 2,419,199 2,419,199 2,864,039
----------- ----------- ----------- ---------- ----------
RETAINED EARNINGS AT END OF
YEAR...................... $ 2,002,054 $ 2,419,199 $ 2,864,039 $2,453,568 $2,930,987
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-53
<PAGE> 132
CPI CONCRETE PRODUCTS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
-------------------------
TWO MONTHS ENDED
YEARS ENDED JANUARY 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received From Customers.................. $10,290,908 $10,852,300 $12,210,899 $ 1,694,139 $ 1,603,726
Cash Paid to Suppliers and Employees.......... (9,195,808) (9,767,453) (11,503,170) (1,730,793) (1,224,431)
Interest Received............................. 8,653 14,224 15,919 2,540 3,709
Interest Paid................................. (126,297) (98,923) (90,266) (12,636) (11,147)
Income Tax Refund Received.................... 74,974
Income Taxes Paid............................. (280,853) (382,083) (200,245) (12,750) (10,322)
----------- ----------- ----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ 696,603 618,065 508,111 (59,500) 361,535
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment......................... (453,759) (96,199) (336,875) (17,031) (20,464)
Proceeds From Sale of Equipment............... 62,000 12,750
----------- ----------- ----------- ----------- -----------
Net Cash Used in Investing Activities... (391,759) (83,449) (336,875) (17,031) (20,464)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings.................................... 110,466 61,307 241,151
Payouts -- Long-Term Debt..................... (118,669) (335,252) (350,777) (56,583) (59,570)
Payouts -- Capital Lease Obligation........... (2,656)
----------- ----------- ----------- ----------- -----------
Net Cash (Used in) Financing
Activities............................ (10,859) (273,945) (109,626) (56,583) (59,570)
----------- ----------- ----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS....... 293,985 260,671 61,610 (133,114) 281,501
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR.......................................... 40,308 334,293 594,964 594,964 656,574
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 334,293 $ 594,964 $ 656,574 $ 461,850 $ 938,075
=========== =========== =========== =========== ===========
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Earnings.................................... $ 563,429 $ 417,145 $ 444,840 $ 34,369 $ 66,948
Adjustments to Reconcile Net Earnings to Net
Cash Provided by Operating Activities
Amortization.................................. 2,625 2,625 2,625 343 343
Depreciation.................................. 299,798 305,133 315,280 52,626 50,107
Gain on Sale of Equipment..................... (10,739) (3,467)
Loss on Sale of Equipment..................... 14,403 2,637
Officer Compensation -- Issuance of Common
Stock....................................... 52,700
Change in Assets and Liabilities
Decrease (Increase) in Accounts Receivable.... (792,469) 770,089 3,794 (148,725) (76,003)
Decrease (Increase) in Inventory.............. 151,251 (271,783) 68,850 (34,736) 370,200
Decrease (Increase) in Prepaid Expenses....... 4,218 (10,391) (34,785) (56,096) 518
Decrease (Increase) in Prepaid Taxes.......... (123,251) 123,251
Decrease (Increase) in Deferred Tax Assets.... (25,920) 4,544 (185) 5,489
Increase (Decrease) in Accounts Payable....... 172,470 (176,565) (314,960) 99,993 (44,668)
Increase (Decrease) in Customer Deposits...... 17,789 (88,183) 65,963 (22,435)
Increase (Decrease) in Accrued Wages.......... (53,212) 15,364 5,180 56,788 51,068
Increase (Decrease) in Taxes Withheld and
Accrued..................................... (25,043) (30,100) 9,212 20,252 (33,828)
Increase (Decrease) in Accrued Expenses....... 203,484 (86,529) (230,776) (80,757) (34,795)
Increase (Decrease) in Accrued Income Taxes... 64,699 (104,659) 45,013 (537) 31,429
Increase (Decrease) in Deferred Income
Taxes....................................... 31,200 25,920 80 (2,835) (2,838)
----------- ----------- ----------- ----------- -----------
Total Adjustments....................... 133,174 200,920 63,271 (93,869) 294,587
----------- ----------- ----------- ----------- -----------
Net Cash Provided by Operating Activities....... $ 696,603 $ 618,065 $ 508,111 $ (59,500) $ 361,535
=========== =========== =========== =========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
The Company issued 100 shares of common stock valued at $52,700 as
additional officer compensation for the year ended January 31, 1996.
The accompanying notes form an integral part of these financial statements.
F-54
<PAGE> 133
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of CPI Concrete
Products Incorporated as of January 31, 1996, 1997 and 1998. The Company is
located in Memphis, Tennessee and is in the business of processing and selling
concrete poles and concrete products in the Mid-South geographical region. The
Company extends credit to their customers, with the majority of customers
located in Tennessee, Mississippi and Arkansas. No collateral is required for
trade accounts receivable.
Inventory is valued at the lower of cost (first-in, first-out method) or
market. At January 31, 1997 and 1998 the inventory consisted of the following
items:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Raw Materials.............................................. $ 441,440 $ 325,406
Finished Goods............................................. 1,350,607 1,397,791
---------- ----------
$1,792,047 $1,723,197
========== ==========
</TABLE>
These statements reflect the accrual basis of accounting which requires
recognition of revenues when earned and expenses when incurred without regard to
the exchange of each.
Property, plant and equipment are stated at cost. Depreciation is provided
on the straight-line and declining balance methods over the estimated useful
lives of the various assets. Lives used for calculating depreciation are:
buildings 15-20 years and machinery and equipment 3-10 years. Amortization of
loan costs is made over a 120 month period.
Expenditures for maintenance, repairs and minor renewals are expenses as
incurred; expenditures for improvements, replacements and major renewals are
capitalized. Assets retired, or otherwise disposed of, are eliminated from the
asset accounts along with related amounts of accumulated depreciation. Any gains
or losses from disposals are included in income.
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse (see Note 5).
As of January 31, 1997, and 1998 the Company has deposits in a financial
institution which exceed the FDIC insured limit by $82,372, and $421,898,
respectively.
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Amortizable assets are recorded at cost. Amortization is calculated by the
straight-line method over a 5 year life. Amortization expense for the years
ended, January 31, 1996, 1997 and 1998 was $2,625, $2,625 and $2,625,
respectively.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
F-55
<PAGE> 134
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 financial statement presentation.
NOTE 2. -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of January 31, 1997 is comprised as
follows:
<TABLE>
<CAPTION>
ACCUMULATED METHOD OF USEFUL LIVES
COST DEPRECIATION DEPRECIATION (YEARS)
---------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Land........................ $ 201,505 $ N/A N/A
Buildings................... 902,825 505,166 Straight-Line 15-20
Straight-Line and
Machinery and Equipment..... 2,312,921 1,463,767 Declining Balance 3-10
---------- ----------
$3,417,251 $1,968,933
========== ==========
</TABLE>
Property, plant and equipment as of January 31, 1998 is comprised as
follows:
<TABLE>
<CAPTION>
ACCUMULATED METHOD OF USEFUL LIVES
COST DEPRECIATION DEPRECIATION (YEARS)
---------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Land........................ $ 201,505 $ N/A N/A
Buildings................... 921,100 535,048 Straight-Line 15-20
Straight-Line and
Machinery and Equipment..... 2,631,521 1,749,167 Declining Balance 3-10
---------- ----------
$3,754,126 $2,284,215
========== ==========
</TABLE>
Depreciation expense for the years ended January 31, 1996, 1997 and 1998
was $299,798, $305,133 and $315,280 respectively.
NOTE 3. -- LONG-TERM DEBT
Long-term debt consisted of the following as of January 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Union Planters National Bank SBA loan payable in monthly
installments of $11,453 through April, 2004, including
interest at a variable rate adjustable to 1% above prime,
currently at 8.5%; secured by equipment, mortgage on
property and a personal guarantee by stockholders......... $646,371 $514,608
Union Planters Bank note payable for loan consolidation
payable in monthly installments of $6,207 through April,
1998, plus interest currently at 8.5%, variable rate
adjusted to 1% above prime; secured by the realty at 1365
Harbor and machinery, fixtures and equipment.............. 92,865 18,382
Boatmen's note payable for equipment in monthly installments
of $5,212 through November, 1997, including interest at
8.25%; collateralized by two forklifts, a concrete
transporter, and an overhead crane........................ 50,093
</TABLE>
F-56
<PAGE> 135
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Pitney Bowes Credit Corporation note payable in monthly
installments of $289 through April, 1997, non-interest
bearing; secured by equipment............................. 938 313
Tennessee Small Business Energy Loan Program note payable
for purchasing boiler; payable in monthly installments of
$1,808 through April, 2000, including interest at 5%;
collateralized by boiler and associated equipment......... 64,916 46,086
Union Planters Bank note payable for conversion of two
operating leases to term debt; payable in monthly
installments of $5,914 through April, 2001, including
interest at 8.15%; secured by equipment................... 197,453
Union Planters Bank note payable for purchasing travel lift;
payable in monthly installments of $4,861 through April,
1999, including interest at 8.15%; collateralized by
travel lift............................................... 96,101 64,816
-------- --------
951,284 841,658
Less portion due within one year............................ 270,650 247,706
-------- --------
$680,634 $593,952
======== ========
</TABLE>
The following is a summary of anticipated future payments of notes at
January 31, 1998.
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
- ------------------------------------------------------------
<S> <C>
1999.............................................. $247,706
2000.............................................. 198,802
2001.............................................. 187,779
2002.............................................. 137,255
2003.............................................. 70,116
--------
$841,658
========
</TABLE>
NOTE 4. -- LEASES
The Company leases certain autos and trucks under the classification of
operating leases. The following is a schedule of future minimum lease payments
for operating leases as of January 31, 1998:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
- ------------------------------------------------------------
<S> <C>
1999.............................................. $20,088
2000.............................................. 15,803
2001.............................................. 3,135
-------
Total Minimum Lease Payments...................... $39,026
=======
</TABLE>
Rent expense under operating leases totaled $219,600, $241,723 and $65,433
for the years ended January 31, 1996, 1997 and 1998.
F-57
<PAGE> 136
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. -- FEDERAL AND STATE INCOME TAXES
The provision for income taxes at January 31, 1996, 1997 and 1998 is
comprised of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CURRENTLY PAYABLE
Federal........................................... $286,631 $226,067 $241,671
State............................................. 49,153 41,491 43,275
-------- -------- --------
335,784 267,558 284,946
DEFERRED TAXES
Federal........................................... 26,500 3,893
State............................................. 4,700 731
-------- -------- --------
31,200 4,624
-------- -------- --------
Federal and State Income Taxes...................... $366,984 $267,558 $289,570
======== ======== ========
</TABLE>
The items which give rise to temporary differences are listed below as
follows at January 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Allowance for Back Charges -- Federal............. $ 4,880 $ 4,260 $ 984
Allowance for Back Charges -- State............... 900 800 180
Uniform Capitalization of Inventory -- Federal.... 16,640 17,540 17,018
Uniform Capitalization of Inventory -- State...... 3,120 3,320 3,194
------- ------- -------
$25,540 $25,920 $21,376
======= ======= =======
DEFERRED TAX LIABILITIES
Excess Tax Depreciation -- Federal................ $21,510 $21,830 $21,895
Excess Tax Depreciation -- State.................. 4,030 4,090 4,105
------- ------- -------
$25,540 $25,920 $26,000
======= ======= =======
</TABLE>
NOTE 6. -- EMPLOYEE BENEFIT PLANS
In 1986, the Company established an Employee Stock Ownership Plan (ESOP) to
provide additional retirement benefits to employees. The vesting provisions of
the ESOP trust instrument are based on vesting years of service. A participant
will always be 100% vested at normal retirement age. At January 31, 1996, 1997
and 1998 the ESOP owned 253 shares of the Company's common stock at a cost of
$212,995. Contributions by the Company to the ESOP for the years ended January
31, 1996, 1997 and 1998 totaled $40,000, $10,000 and $1,000, respectively.
In June 1996, the Company adopted a 401(k) plan covering substantially all
employees who have met the minimum age requirements and who have completed one
year of continuous service. The Company's contribution is equal to 50% of each
participant's contribution of up to 3% of salary. Contributions totaled $0,
$29,509, and $41,460 for the years ended January 31, 1996, 1997 and 1998,
respectively.
F-58
<PAGE> 137
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. -- TREASURY STOCK
The Company purchased common stock from employees who had been participants
in the ESOP as follows:
<TABLE>
<S> <C>
September 9, 1988........................................... 2.22 Shares
September 1, 1989........................................... 4.41 Shares
December 27, 1989........................................... 1.85 Shares
-----------
Total............................................. 8.48 Shares
===========
</TABLE>
No activity from December 28, 1989 to January 31, 1998.
NOTE 8. -- CONTINGENCIES AND COMMITMENTS
The Company and its two principal shareholders are parties to a stock
retirement agreement which requires the Company, upon the death of any of these
shareholders, to purchase his holdings of the Company's common stock at a price
of $514 per share. The Company has life insurance policies on the lives of the
aforementioned shareholders to fund substantially all of such obligation in the
event of their death.
At January 31, 1998, the Company had an unused line of credit with a bank.
The line totals $800,000, has an interest rate of prime plus 1.0%, and the
principal and interest are due on the first day of each month.
NOTE 9. -- SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-59
<PAGE> 138
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To H.P. McGinley, Incorporated:
We have audited the accompanying balance sheets of H.P. MCGINLEY,
INCORPORATED (the "Company") (a Pennsylvania corporation) as of February 28,
1997 and December 31, 1997, and the related statements of operations,
stockholder's equity and cash flows for the years ended February 29, 1996 and
February 28, 1997 and the ten months ended December 31, 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of H.P. McGinley, Incorporated
as of February 28, 1997 and December 31, 1997, and the results of its operations
and its cash flows for the years ending February 29, 1996 and February 28, 1997
and the ten months ended December 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
February 26, 1998
F-60
<PAGE> 139
H.P. MCGINLEY, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 9,466 $ 575,514 $ 614,392
Accounts receivable............................... 338,029 975,707 716,924
Inventory......................................... 688,580 893,783 965,210
Prepaid expenses.................................. 15,635 8,083 6,684
----------- ----------- -----------
Total current assets...................... 1,051,710 2,453,087 2,303,210
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements............................. 98,982 98,982 98,982
Buildings and improvements........................ 231,891 231,891 231,891
Machinery and equipment........................... 1,433,821 1,433,821 1,433,821
Office furniture and equipment.................... 76,805 76,805 76,805
Transportation equipment.......................... 574,578 574,578 574,578
----------- ----------- -----------
2,416,077 2,416,077 2,416,077
Less accumulated depreciation..................... (1,770,932) (1,836,255) (1,840,807)
----------- ----------- -----------
Property, plant and equipment, net........ 645,145 579,822 575,270
----------- ----------- -----------
OTHER ASSETS:
Deferred income taxes............................. 6,000 6,500 --
----------- ----------- -----------
Total other assets........................ 6,000 6,500 --
----------- ----------- -----------
$ 1,702,855 $ 3,039,409 $ 2,878,480
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 100,825 $ 79,668 $ 21,550
Demand note payable to stockholder................ 257,139 946,375 618,922
Accrued expenses.................................. 58,342 10,186 81,427
Income taxes payable.............................. 50,000 336,100 401,960
----------- ----------- -----------
Total current liabilities................. 466,306 1,372,329 1,123,859
----------- ----------- -----------
DEFERRED INCOME TAXES............................... -- -- 7,653
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; authorized shares,
10,000; issued and outstanding shares, 1,000... 1,000 1,000 1,000
Retained earnings................................. 1,235,549 1,666,080 1,745,968
----------- ----------- -----------
Total stockholder's equity................ 1,236,549 1,667,080 1,746,968
----------- ----------- -----------
$ 1,702,855 $ 3,039,409 $ 2,878,480
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 140
H.P. MCGINLEY, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS THREE MONTHS ENDED
--------------------------- ENDED ---------------------------
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, FEBRUARY 28, MARCH 31,
1996 1997 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE..................... $4,821,862 $4,425,187 $5,909,679 $ 743,408 $1,364,748
COST OF GOODS SOLD.......... 3,690,780 3,016,827 3,356,518 500,564 886,685
---------- ---------- ---------- ---------- ----------
Gross profit...... 1,131,082 1,408,360 2,553,161 242,844 478,063
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES.................. 1,113,062 1,294,731 1,834,752 316,795 351,872
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS................ 18,020 113,629 718,409 (73,951) 126,191
OTHER INCOME (EXPENSE)
Interest income........... 4,329 4,697 23,054 714 8,597
Interest expense.......... -- -- (24,832) -- --
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES..................... 22,349 118,326 716,631 (73,237) 134,788
PROVISION (BENEFIT) FOR
INCOME TAXES.............. 10,200 46,790 286,100 (30,000) 54,900
---------- ---------- ---------- ---------- ----------
NET INCOME
(LOSS).......... $ 12,149 $ 71,536 $ 430,531 $ (43,237) $ 79,888
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 141
H.P. MCGINLEY, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NUMBER OF
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
--------- ------ ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, February 28, 1995...................... 1,000 $1,000 $1,151,864 $1,152,864
Net income.................................... -- -- 12,149 12,149
----- ------ ---------- ----------
BALANCE, February 29, 1996...................... 1,000 1,000 1,164,013 1,165,013
Net income.................................... -- -- 71,536 71,536
----- ------ ---------- ----------
BALANCE, February 28, 1997...................... 1,000 1,000 1,235,549 1,236,549
Net income.................................... -- -- 430,531 430,531
----- ------ ---------- ----------
BALANCE, December 31, 1997...................... 1,000 $1,000 $1,666,080 $1,667,080
===== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 142
H.P. MCGINLEY, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS THREE MONTHS ENDED
--------------------------- ENDED ---------------------------
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, FEBRUARY 28, MARCH 31,
1996 1997 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........ $ 12,149 $ 71,536 $ 430,531 $(43,237) $ 79,888
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation.......... 46,033 68,359 65,323 23,359 4,552
Change in operating
assets:
Accounts
receivable....... (79,189) (19,476) (637,678) (4,250) 258,783
Inventory........... (4,731) (277,170) (205,203) (45,293) (71,427)
Prepaid expenses.... 16,656 31,927 7,552 1,995 1,399
Accounts payable.... 13,546 19,225 (21,157) 4,658 (58,118)
Accrued expenses.... 4,640 (39,262) (48,156) 11,485 71,241
Deferred taxes...... 10,200 (3,210) (500) -- 14,153
Income taxes
payable.......... -- 50,000 286,100 (30,000) 65,860
-------- --------- --------- -------- ---------
Net cash provided
by (used in)
operating
activities..... 19,304 (98,071) (123,188) (81,283) 366,331
-------- --------- --------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures..... (33,950) (174,921) -- (38,500) --
-------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings from
shareholder........... 208,413 858 689,236 (31,706) (327,453)
-------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN
CASH..................... 193,767 (272,134) 566,048 (151,489) 38,878
CASH AND CASH EQUIVALENTS,
beginning of period...... 87,833 281,600 9,466 160,955 575,514
-------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS,
end of period............ $281,600 $ 9,466 $ 575,514 $ 9,466 $ 614,392
======== ========= ========= ======== =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the
period for
interest............ $ -- $ -- $ 24,832 $ -- $ --
======== ========= ========= ======== =========
Cash paid during the
period for income
taxes............... $ -- $ -- $ -- $ -- $ --
======== ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 143
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
H.P. McGinley, Inc. (the "Company"), a Pennsylvania corporation, operates
as a manufacturer of specialty hardwood products, including railroad ties and
shipping materials. The Company services customers in Pennsylvania and
surrounding states.
2. SIGNIFICANT ACCOUNTING POLICIES
YEAR-END
In 1997, the Company changed its financial reporting year-end to December
31. These financial statements reflect the results of operations for the years
ended February 29, 1996 and February 28, 1997 and the ten months ended December
31, 1997.
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 vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenue when products are delivered to customers
pursuant to shipping agreements. Cost of goods sold includes the raw materials
cost and costs of producing the product, including milling and preservative
treatment.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the northeast United States. As such, the
Company's accounts receivable are from the same geographic region. In addition,
the Company's customers are primarily in the railroad/railroad construction
business or the transportation business. The terms of the sales give rise to
unsecured accounts receivable, as is common industry practice.
INVENTORY
Inventory, consisting principally of raw materials and finished goods, is
stated at the lower of cost (first-in, first-out (FIFO)) or market.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements................................ 15 to 30 years
Machinery and equipment................................... 5 to 7 years
Office furniture and equipment............................ 5 to 7 years
Transportation equipment.................................. 5 to 7 years
</TABLE>
F-65
<PAGE> 144
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income. Normal maintenance and repairs are charged to expense as
incurred; major renewals or betterments which extend the life or increase the
value of assets are capitalized.
INCOME TAXES
The provision for income taxes is based on earnings reported by the
Company. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, a deferred income tax asset or liability is determined by applying
currently enacted tax laws and rates to the expected reversal of the cumulative
temporary differences between the carrying value of assets and liabilities for
financial statement and income tax purposes.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended February 28, 1997 and March 31, 1998.
3. INVENTORIES
The principal components of inventories are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
Raw materials.............................................. $317,403 $378,814
Finished goods............................................. 371,177 514,969
-------- --------
$688,580 $893,783
======== ========
</TABLE>
4. EMPLOYEE BENEFIT PLANS
The Company had a defined benefit pension plan (the "Plan") for all
employees meeting certain age and length of service requirements. Benefits were
based primarily on years of service and average annual compensation during the
highest five consecutive years. In fiscal 1997, the Company terminated the Plan
and distributed vested benefits in accordance with ERISA requirements. The
Company made a contribution of $25,000 during the year ended February 29, 1996
and a final contribution to the Plan of $26,377 during the year ended February
28, 1997.
The Company maintains a defined contribution benefit plan which covers
substantially all eligible employees. Contributions to the defined contribution
benefit plan during the years ended February 29, 1996 and February 28, 1997 and
the ten months ended December 31, 1997 amounted to $8,865, $40,922 and $0,
respectively.
5. INCOME TAXES
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS
F-66
<PAGE> 145
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
A reconciliation of the United States statutory corporate rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
--------------------------- ENDED
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax charge at standard U.S. rate of 34%....... $ 7,599 $40,231 $243,655
State taxes, net of Federal benefit........... 1,340 6,334 43,194
Other......................................... 1,261 225 (749)
------- ------- --------
$10,200 $46,790 $286,100
======= ======= ========
</TABLE>
The components of the net deferred income tax asset (liability) at February
28, 1997 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
Non-current asset (liability):
Inventory................................................ $5,031 $10,125
Property, plant and equipment............................ (1,381) (3,645)
Other.................................................... 2,350 20
------ -------
Total non-current asset.......................... $6,000 $ 6,500
====== =======
</TABLE>
State income taxes totaling approximately $1,530, $7,019 and $42,915 have
been provided for the years ended February 28, 1996 and 1997 and the ten months
ended December 31, 1997, respectively.
6. RELATED PARTY TRANSACTIONS
The Company's stockholder periodically advances funds to the Company. Such
advances were noninterest bearing through February 28, 1997. Subsequent to March
1, 1997, the advances bear interest at 9% per annum. The advances are due on
demand and repayment is expected as funds become available. Amounts advanced
from the stockholder totaled $257,139 and $946,375 as of February 28, 1997 and
December 31, 1997, respectively.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to various claims and legal actions incidental to
the Company's business. Management is not aware of any claims against the
Company which might have a material impact on the Company's results of
operations or financial position.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Company using available market information and appropriate valuation
methodologies.
F-67
<PAGE> 146
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
9. SIGNIFICANT CUSTOMERS
A significant portion of the Company's sales were to one unaffiliated
customer. Amounts due from this customer represented 25% of the total accounts
receivable at December 31, 1997 and 14% of sales for the period then ended. The
loss of this customer would have a material effect on the Company's business if
this loss was not offset by additional business from other sources.
10. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-68
<PAGE> 147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kennedy Railroad Builders, Inc.:
We have audited the accompanying combined balance sheets of KENNEDY
RAILROAD BUILDERS, INC. (a Pennsylvania corporation) AND ASSOCIATED COMPANIES
(collectively, the "Company") as of March 31, 1997 and December 31, 1997, and
the related combined statements of operations, stockholders' equity and cash
flows for the years ended March 31, 1996 and 1997 and the nine month period
ended December 31, 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 audits 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Kennedy
Railroad Builders, Inc. and Associated Companies as of March 31, 1997 and
December 31, 1997, and the results of their operations and their cash flows for
the years ended March 31, 1996 and 1997 and the nine months ended December 31,
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
February 27, 1998
F-69
<PAGE> 148
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 68,143 $ 170,289 $ 235,514
Accounts receivable, net of allowance of $25,000 each
period.................................................. 1,549,947 1,543,062 1,426,948
Officer and affiliate notes receivable.................... 59,445 102,431 168,127
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 360,386 292,611 425,488
Inventory................................................. 525,626 855,723 831,545
Prepaid expenses.......................................... 33,022 106,115 62,953
Deferred income taxes..................................... 10,125 10,125 10,125
----------- ----------- -----------
Total current assets............................... 2,606,694 3,080,356 3,160,700
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Buildings................................................. 153,910 153,910 153,910
Machinery and equipment................................... 1,790,725 2,228,879 2,846,326
Office furniture and equipment............................ 96,337 96,194 94,378
Transportation equipment.................................. 1,077,000 1,182,299 1,206,646
Leasehold improvements.................................... 59,342 63,325 92,716
----------- ----------- -----------
3,177,314 3,724,607 4,393,976
Less accumulated depreciation............................. (1,571,497) (1,952,101) (2,081,459)
----------- ----------- -----------
Property, plant and equipment, net................. 1,605,817 1,772,506 2,312,517
----------- ----------- -----------
OTHER ASSETS:
Cash surrender value of officer's life insurance.......... 19,330 19,330 19,377
Officer note receivable................................... 16,661 -- --
----------- ----------- -----------
Total other assets................................. 35,991 19,330 19,377
----------- ----------- -----------
$ 4,248,502 $ 4,872,192 $ 5,492,594
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,143,284 $ 1,208,485 $ 1,331,831
Line of credit............................................ 250,000 562,705 978,170
Current maturities of long-term debt and capital leases... 312,505 315,324 380,339
Officer notes payable..................................... 92,088 80,000 80,000
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 228,344 280,569 139,806
Accrued expenses.......................................... 322,364 136,767 182,620
Income taxes payable...................................... 12,003 123,828 36,610
----------- ----------- -----------
Total current liabilities.......................... 2,360,588 2,707,678 3,129,376
----------- ----------- -----------
LONG-TERM DEBT AND CAPITAL LEASES, net of current
maturities................................................ 771,705 806,466 1,124,582
DEFERRED INCOME TAXES....................................... 8,526 14,580 14,580
----------- ----------- -----------
Total noncurrent liabilities....................... 780,231 821,046 1,139,162
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Contributed capital....................................... 20,000 20,000 20,000
Retained earnings......................................... 1,087,683 1,323,468 1,204,056
----------- ----------- -----------
Total stockholders' equity......................... 1,107,683 1,343,468 1,224,056
----------- ----------- -----------
$ 4,248,502 $ 4,872,192 $ 5,492,594
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE> 149
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED MARCH 31,
----------------------- DECEMBER 31, -------------------------
1996 1997 1997 1997 1998
---------- ---------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE.............................. $6,652,473 $9,703,996 $8,295,814 $2,244,554 2,384,129
CONTRACT COSTS....................... 5,119,614 7,967,579 6,605,074 1,957,561 2,078,971
---------- ---------- ---------- ---------- ----------
Gross profit................ 1,532,859 1,736,417 1,690,740 286,993 305,158
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,347,595 1,497,998 1,163,290 396,310 417,035
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS........ 185,264 238,419 527,450 (109,317) (111,877)
OTHER INCOME (EXPENSE)
Interest income.................... 11,746 13,566 10,408 3,103 8,682
Interest expense................... (104,963) (108,736) (113,486) (25,422) (41,557)
Real estate venture, net........... 127,364 -- -- -- --
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES....................... 219,411 143,249 424,372 (131,636) (144,752)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 96,273 65,206 178,587 (52,654) (55,340)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)........... $ 123,138 $ 78,043 $ 245,785 $ (78,982) $ (89,412)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE> 150
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONTRIBUTED RETAINED
CAPITAL EARNINGS TOTAL
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE, March 31, 1995................................. $19,000 $ 901,502 $ 920,502
Net income............................................ -- 123,138 123,138
------- ---------- ----------
BALANCE, March 31, 1996................................. 19,000 1,024,640 1,043,640
Net income............................................ -- 78,043 78,043
Issuance of equity.................................... 1,000 -- 1,000
Dividends............................................. -- (15,000) (15,000)
------- ---------- ----------
BALANCE, March 31, 1997................................. 20,000 1,087,683 1,107,683
Net income............................................ -- 245,785 245,785
Dividends............................................. -- (10,000) (10,000)
------- ---------- ----------
BALANCE, December 31, 1997.............................. $20,000 $1,323,468 $1,343,468
======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE> 151
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED MARCH 31,
---------------------- DECEMBER 31, -------------------------
1996 1997 1997 1997 1998
--------- --------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 123,138 $ 78,043 $ 245,785 $ (78,982) $ (89,412)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 323,401 460,577 397,230 146,345 132,564
Deferred income taxes................... 5,863 (1,599) 6,054 -- --
Gain from sale of real estate........... (547,364) -- -- -- --
Change in operating assets:
Accounts receivable................... (118,451) (759,843) 6,885 (92,836) 116,114
Costs and estimated earnings in excess
of billings on uncompleted
contracts........................... (32,863) (261,195) 67,775 (102,152) (132,877)
Inventory............................. (262,030) 163,460 (330,097) 42,405 24,178
Prepaid expenses...................... 13,008 14,092 (73,093) 5,052 43,162
Cash value of life insurance.......... (4,838) (9,937) -- -- (47)
Accounts payable and accrued
expenses............................ 155,073 712,030 (120,396) 157,857 169,199
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................... (208,098) 202,873 52,225 74,145 (140,763)
Income taxes payable.................. (1,650) (24,793) 111,825 (6,782) (87,218)
Other................................. (583) (49,413) (42,986) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities.............. (555,394) 524,295 321,207 145,052 34,900
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate......... 547,364 -- -- -- --
Proceeds from officer notes receivable.... 251,184 10,651 16,661 2,510 --
Capital expenditures...................... (309,732) (237,369) (240,058) (62,502) (22,325)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities.............. 488,816 (226,718) (223,397) (59,992) (22,325)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt...... (497,905) (241,567) (286,281) (65,285) (267,119)
Long-term borrowings...................... 301,142 -- -- -- --
Line of credit, net....................... 97,500 (133,000) 312,705 (37,500) 415,465
Notes payable to officers, net............ 203,642 (150,234) (12,088) (42,512) (65,696)
Payment of dividends...................... -- (15,000) (10,000) -- (30,000)
Proceeds from equity issuance............. -- 1,000 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities.............. 104,379 (538,801) 4,336 (145,297) 52,650
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents.................. 37,801 (241,224) 102,146 (60,237) 65,225
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 271,566 309,367 68,143 128,380 170,289
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.... $ 309,367 $ 68,143 $ 170,289 $ 68,143 $ 235,514
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.................................. $ 104,848 $ 109,075 $ 113,486 $ 26,758 $ 40,895
========= ========= ========= ========= =========
Income taxes.............................. $ 82,961 $ 85,766 $ 66,869 $ -- $ --
========= ========= ========= ========= =========
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
The Company incurred long-term liabilities
for the purchase of equipment totaling
$385,680, $527,744 and $323,861 for the
years ended March 31, 1996 and 1997 and
the nine months ended December 31, 1997,
respectively.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE> 152
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
The accompanying combined financial statements include the accounts of
Kennedy Railroad Builders, Inc. ("Kennedy"), Railcorp, Inc. ("Railcorp") and
Alpha-Keystone Engineering, Inc. ("Alpha") (collectively, referred to as the
"Company"). Each of these companies are subject to common control and are
presented on a combined basis.
The Company operates as a contractor, constructing, repairing and
maintaining railroad tracks for private and government customers located
throughout the northeastern region of the United States. The work is performed
under various forms of contracts, including fixed-fee and time-and-material
contracts.
2. SIGNIFICANT ACCOUNTING POLICIES
YEAR-END
In 1997, the Company changed its financial reporting year-end to December
31. These combined financial statements reflect the results of operations for
the years ended March 31, 1996 and 1997 and the nine months ended December 31,
1997.
COMBINATION POLICIES
The Company includes the combined accounts of three companies subject to
common control. All significant transactions between the three companies are
eliminated in combination. Alpha was incorporated in February 1996. The results
for Alpha for the period from inception to March 31, 1997 are included in the
Company's financial statements for the year ended March 31, 1997.
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 vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of
F-74
<PAGE> 153
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
costs and estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the northeastern region of the United
States. As such, the Company's accounts receivable are from the same geographic
region. The terms of the sales give rise to unsecured accounts receivable, as is
common industry practice.
INVENTORIES
Inventories, consisting principally of stored materials and parts to be
used for contracts, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and the accelerated methods over the estimated
useful life of the asset as follows:
<TABLE>
<S> <C>
Buildings............................................... 39 years
Machinery and equipment................................. 3 - 7 years
Office furniture and equipment.......................... 5 - 8 years
Leasehold improvements.................................. 31 - 39 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income. The cost of maintenance and repair is charged to income as
incurred. Significant renewals and betterments are capitalized and depreciated
over the assets remaining useful life.
INCOME TAXES
The provision for income taxes is based on earnings reported by the
Company. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, a deferred income tax asset or liability is determined by applying
currently enacted tax laws and rates to the expected reversal of the cumulative
temporary differences between the carrying value of assets and liabilities for
financial statement and income tax purposes.
Kennedy and Railcorp are both C corporations for Federal income tax
purposes. Alpha is a S corporation. As a result, the income of the Alpha is not
taxed at the corporate level. For purposes of the accompanying financial
statements, Alpha has been treated as a C corporation and income taxes have been
provided at the statutory rate and recorded using the provisions of SFAS No.
109.
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments
F-75
<PAGE> 154
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
necessary to present fairly the financial position as of March 31, 1998 and the
results of operations and cash flows for the three months ended March 31, 1997
and 1998.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
Contract receivables...................................... $1,554,728 $1,415,973
Contract retainages....................................... 20,219 152,089
Other..................................................... 59,445 102,431
---------- ----------
1,634,392 1,670,493
Less allowance for doubtful accounts...................... (25,000) (25,000)
---------- ----------
$1,609,392 $1,645,493
========== ==========
</TABLE>
Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
----------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts.................. $ 2,668,688 $ 2,997,477
Estimated earnings....................................... 1,318,562 1,267,960
----------- -----------
3,987,250 4,265,437
Less billings, plus retainage............................ (3,855,208) (4,253,395)
----------- -----------
$ 132,042 $ 12,042
=========== ===========
Contracts in process are included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $ 360,386 $ 292,611
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (228,344) (280,569)
----------- -----------
$ 132,042 $ 12,042
=========== ===========
</TABLE>
5. REAL ESTATE VENTURE
During the year ended March 31, 1996, the Company was involved in a real
estate transaction located in Lemoyne, Pennsylvania whereby the Company entered
into a purchase agreement. Prior to settlement, the Company identified a buyer
for the property at a price higher than their purchase price. The Company was
paid $497,364 in fiscal 1996 and an additional $50,000 (based on the
satisfactory settlement of certain contingencies) in fiscal 1997. The total
proceeds of $547,364 were reduced by expenses of the transaction totaling
approximately $420,000, including commissions and bonuses to certain
shareholders and employees of the Company that were primarily responsible for
this transaction.
F-76
<PAGE> 155
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank. The line
of credit includes maximum borrowings totaling $1,300,000. Borrowing under the
line of credit shall not exceed 80% of qualified accounts receivable and 50% of
inventory. It bears interest at the bank's prime rate (8.50% at December 31,
1997) which is payable due monthly and expires on July 31, 1998. The line of
credit is secured by all of the Kennedy's assets and is guaranteed by the
officers of Kennedy. The outstanding principal totals $250,000 and $562,705 as
of March 31, 1997 and December 31, 1997, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
Note payable to a bank, interest at 8.25%, payable in
monthly installments of $418, maturing August 2007,
secured by real property................................. $ 35,046 $ 33,449
Mortgage note payable to Alliance Benefit Group, interest
at 9.00%, payable in monthly installments of $885 with a
balloon payment due on April 2, 2002, secured by real
property. Refinanced in May 1997......................... 98,891 --
Mortgage note payable to Alliance Benefit Group, interest
at 9.00%, payable in monthly installments of $878 with a
balloon payment due July 1999, secured by real
property................................................. -- 108,605
Equipment notes payable, principal and interest at rates
from 4.8% to 15.48%, payable monthly, maturing from
January 1998 to October 2003, secured by equipment....... 950,273 979,736
---------- ----------
1,084,210 1,121,790
Less current maturities.................................... (312,505) (315,324)
---------- ----------
$ 771,705 $ 806,466
========== ==========
</TABLE>
Aggregate principal payments as of December 31, 1997 on long-term debt
(excluding the line of credit) are scheduled as follows:
<TABLE>
<S> <C>
1998........................................................ $ 315,324
1999........................................................ 358,379
2000........................................................ 202,046
2001........................................................ 137,984
2002........................................................ 83,595
Thereafter.................................................. 24,462
----------
$1,121,790
==========
</TABLE>
8. PROFIT SHARING PLAN
The Company maintains a 401(k) plan that allows eligible employees to defer
a portion of their income through contributions to the plan. Under the
provisions of the plan, employees may
F-77
<PAGE> 156
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
contribute a portion of their compensation, and the Company matches up to 2.00%
percent of the employees qualified wages. In addition, the Company can make
additional discretionary contributions. Company contributions to the plan were
$36,737, $52,420 and $27,788, for the years ended March 31, 1996 and 1997 and
the nine months ended December 31, 1997, respectively.
9. INCOME TAXES
In accordance with SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
A reconciliation of the United States statutory corporate rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Tax charge at standard U.S. rate of 34%................ $74,600 $48,705 $144,286
State taxes............................................ 14,481 9,454 27,852
Life insurance premiums................................ 7,209 6,485 6,075
Other.................................................. (17) 562 374
------- ------- --------
$96,273 $65,206 $178,587
======= ======= ========
</TABLE>
The components of the net deferred income tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Current Asset:
Accounts receivable valuation............................. $ 10,125 $ 10,125
-------- --------
Total current asset............................... 10,125 10,125
-------- --------
Non-current Asset (Liability):
Tax over book depreciation................................ (12,555) (14,580)
Alternative minimum tax credit............................ 4,029 --
-------- --------
Total non-current liability....................... (8,526) (14,580)
-------- --------
Net deferred tax asset...................................... $ 1,599 $ (4,455)
======== ========
</TABLE>
The Company has provided state income taxes totaling approximately $15,451,
$10,465, and $29,421 for the years ended March 31, 1996 and 1997 and the nine
months ended December 31, 1997, respectively.
10. RELATED PARTY TRANSACTIONS
Payments were made to certain shareholders of the Company under operating
leases for office facilities and a storage area. Such payments totaled $30,192,
$36,552 and $29,128 for the years ended March 31, 1996 and 1997 and the nine
months ended December 31, 1997, respectively.
The Company has notes receivable from officers of Kennedy. Monthly payments
of $500 and $508 include principal and interest at 6%. The notes receivable are
unsecured.
F-78
<PAGE> 157
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has notes payable in the amounts of $12,088, and $0 as of March
31, 1997 and December 31, 1997, respectively, to shareholders of Kennedy. The
notes are unsecured and noninterest bearing. Additionally, the Company has a
note payable to a shareholder in the amount of $80,000, as of March 31, 1997 and
December 31, 1997. The note is unsecured and bears interest at 9%.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under agreements expiring at
various dates through the year 1999, including leases with certain shareholders
of the Company. Remaining minimum rental commitments under these noncancellable
lease agreements in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SHAREHOLDERS THIRD PARTIES
------------ -------------
<S> <C> <C>
1998...................................................... $31,537 $17,662
1999...................................................... 6,556 10,749
</TABLE>
Rental expense including leases with certain shareholders of the Company
and cancelable leases totaled $289,128, $344,277 and $416,012, for the years
ended March 31, 1996 and 1997 and the nine months ended December 31, 1997,
respectively.
LITIGATION
The Company is subject to various claims and legal actions incidental to
the Company's business. Management is not aware of any claims against the
Company which might have a material impact on the Company's results of
operations or financial position.
12. SHAREHOLDERS' EQUITY
The combined contributed capital of the Company is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Kennedy -- Common stock, par value $1 per share; authorized
1,000,000 shares, issued and outstanding 18,000 shares.... $18,000 $18,000
Railcorp -- Common stock, par value $1 per share; authorized
10,000 shares, issued and outstanding 1,000 shares........ 1,000 1,000
Alpha -- Common stock, par value $.02 per share; authorized
100,000 shares, issued and outstanding 50,000 shares...... 1,000 1,000
------- -------
$20,000 $20,000
======= =======
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Company using available market information and appropriate valuation
methodologies.
F-79
<PAGE> 158
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
value of other loans relating to real estate, vehicles and equipment approximate
fair value as the interest rates are comparable to market rates today.
14. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-80
<PAGE> 159
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Merit Railroad Contractors, Inc.:
We have audited the accompanying balance sheets of Merit Railroad
Contractors, Inc. (a Missouri corporation) as of December 31, 1996 and 1997, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 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 financial statements referred to above present fairly,
in all material respects, the financial position of Merit Railroad Contractors,
Inc. as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
St. Louis, Missouri,
February 6, 1998
F-81
<PAGE> 160
MERIT RAILROAD CONTRACTORS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 121,274 $ 35,313 $ --
Accounts receivable, net of allowance of $75,317
for both 1996 and 1997.......................... 1,410,674 930,307 1,214,295
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ 280,850 38,638 67,797
Other receivables.................................. 97,500 -- 25,000
Inventories........................................ 200,000 312,392 290,730
Prepaid expenses................................... 19,000 17,130 35,130
----------- ----------- ----------
Total current assets....................... 2,129,298 1,333,780 1,632,952
----------- ----------- ----------
PROPERTY AND EQUIPMENT:
Machinery and equipment............................ 948,272 985,419 976,645
Automobiles and trucks............................. 512,133 619,928 627,923
Office furniture and equipment..................... 121,073 126,446 128,412
Leasehold improvements............................. -- 54,244 54,244
----------- ----------- ----------
1,581,478 1,786,037 1,787,224
Less accumulated depreciation...................... (1,014,814) (1,064,361) (1,057,557)
----------- ----------- ----------
Property and equipment, net................ 566,664 721,676 729,667
----------- ----------- ----------
$ 2,695,962 $ 2,055,456 $2,362,619
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 618,696 $ 210,222 $ 420,995
Current maturities of long-term debt............... 96,602 78,125 78,125
Revolving line of credit........................... -- 300,000 350,000
Billings in excess of costs and estimated earnings
on uncompleted contracts........................ 130,110 162,559 424,711
Accrued expenses................................... 262,940 165,057 146,290
Payable to affiliate............................... 58,169 58,169 58,169
----------- ----------- ----------
Total current liabilities.................. 1,166,517 974,132 1,478,290
----------- ----------- ----------
LONG-TERM DEBT, net of current maturities............ 94,908 138,373 115,349
----------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized shares,
30,000; issued and outstanding shares, 1,000.... 1,000 1,000 1,000
Additional paid-in capital......................... 99,000 99,000 99,000
Retained earnings.................................. 1,334,537 842,951 668,980
----------- ----------- ----------
Total stockholders' equity................. 1,434,537 942,951 768,980
----------- ----------- ----------
$ 2,695,962 $ 2,055,456 $2,362,619
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE> 161
MERIT RAILROAD CONTRACTORS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE........................ $7,319,655 $9,931,173 $6,949,859 $ 986,360 $1,180,924
CONTRACT COSTS................. 5,994,090 8,160,424 6,202,588 872,222 1,112,480
---------- ---------- ---------- ---------- ----------
Gross profit................. 1,325,565 1,770,749 747,271 114,138 68,444
GENERAL AND ADMINISTRATIVE
EXPENSES..................... 857,926 1,126,280 970,941 179,024 264,891
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS................... 467,639 644,469 (223,670) (64,886) (196,447)
OTHER INCOME (EXPENSE)
Interest income.............. 1,429 8,806 416 212 --
Interest expense............. (31,494) (17,371) (40,972) (3,820) (12,062)
Other, net................... 19,034 17,264 (121,865) 589 34,538
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).............. $ 456,608 $ 653,168 $ (386,091) $ (67,905) $ (173,971)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE> 162
MERIT RAILROAD CONTRACTORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER
OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............ 1,000 $1,000 $99,000 $ 703,763 $ 803,763
Dividends paid...................... -- -- -- (215,700) (215,700)
Net income.......................... -- -- -- 456,608 456,608
----- ------ ------- ---------- ----------
BALANCE, December 31, 1995............ 1,000 1,000 99,000 944,671 1,044,671
Dividends paid...................... -- -- -- (263,302) (263,302)
Net income.......................... -- -- -- 653,168 653,168
----- ------ ------- ---------- ----------
BALANCE, December 31, 1996............ 1,000 1,000 99,000 1,334,537 1,434,537
Dividends paid...................... -- -- -- (105,495) (105,495)
Net loss............................ -- -- -- (386,091) (386,091)
----- ------ ------- ---------- ----------
BALANCE, December 31, 1997............ 1,000 $1,000 $99,000 $ 842,951 $ 942,951
===== ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE> 163
MERIT RAILROAD CONTRACTORS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 456,608 $ 653,168 $(386,091) $ (67,905) $(173,971)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 194,902 199,096 194,915 41,456 49,030
(Gain) loss from sale of
equipment........................ (18,762) (12,181) 14,865 -- (34,140)
Change in operating assets:
Accounts receivable, net......... (749,991) 247,728 480,367 436,970 (283,988)
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... (72,707) (263,696) 242,212 (261,284) (29,159)
Other receivables................ (19,899) 5,000 97,500 97,500 (25,000)
Inventory........................ (25,000) 132,455 (112,392) -- 21,662
Prepaid expenses................. (12,679) 31,130 1,870 (94,606) (18,000)
Accounts payable................. 434,946 (215,773) (408,474) (404,446) 210,773
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 669,920 (578,630) 32,449 266,387 262,152
Accrued expenses................. 143,177 49,549 (97,883) (116,649) (18,767)
---------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities........ 1,000,515 247,846 59,338 (102,577) (39,408)
---------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment.......................... 38,705 3,300 10,052 -- --
Capital expenditures................. (120,524) (234,413) (244,459) (78,080) (5,373)
Proceeds from repayment of affiliate
loans.............................. -- 39,327 -- -- --
---------- --------- --------- --------- ---------
Net cash used in investing
activities.................. (81,819) (191,786) (234,407) (78,080) (5,373)
---------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
debt............................... (82,647) (126,725) (105,397) (88,479) (40,532)
(Payments of) borrowings under line
of credit.......................... (250,000) -- 300,000 150,000 50,000
Payable to affiliate................. -- 58,169 -- -- --
Dividends paid....................... (215,700) (263,302) (105,495) -- --
---------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities........ (548,347) (331,858) 89,108 61,521 9,468
---------- --------- --------- --------- ---------
Net increase (decrease) in
cash and cash equivalents... 370,349 (275,798) (35,313) (119,136) (35,313)
CASH AND CASH EQUIVALENTS, beginning of
period............................... 26,723 397,072 35,313 121,274 35,313
---------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................... $ 397,072 $ 121,274 $ -- $ 2,138 $ --
========== ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest........................... $ 31,494 $ 17,371 $ 40,972 $ 3,820 $ 12,062
========== ========= ========= ========= =========
Noncash transactions:
Purchase of property and equipment
under long-term debt............. $ 170,857 $ 87,093 $ 130,385 -- --
========== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE> 164
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Merit Railroad Contractors, Inc. (the "Company"), a Missouri corporation
operates as a construction contractor, constructing, repairing and maintaining
railroad tracks for private and government customers located throughout
Illinois, Kentucky, Missouri, Tennessee and Wisconsin. The work is performed
under various forms of contracts, including fixed-fee, unit-price and time-
and-material contracts. The length of the contracts vary, but is typically less
than one year.
2. SIGNIFICANT ACCOUNTING POLICIES
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 vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized as the work is
performed.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in Illinois, Kentucky, Missouri, Tennessee
and Wisconsin. As such, the Company's accounts receivable are from the same
geographic region. The Company's customers are not concentrated in any specific
industry group. Although the Company limits its credit risk by exercising lien
rights when available, terms of the majority of sales give rise to unsecured
accounts receivable, as is common industry practice.
During the years ended December 31, 1995, 1996 and 1997, one customer
accounted for 11% of revenue, one customer accounted for 37% of revenue and one
customer accounted for 11% of revenue, respectively.
F-86
<PAGE> 165
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories, consisting principally of stored materials and parts to be
used for contracts, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. Depreciation is
computed using the straight-line and the declining-balance method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Machinery and equipment................... 5-7 years
Automobiles and trucks.................... 5 years
Office furniture and equipment............ 5-7 years
Leasehold improvements.................... Lesser of 5 years or lease terms
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in other income.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
OTHER INCOME (EXPENSE)
Other income (expense) includes gain and loss on disposition of property
and equipment, sale of scrap and other miscellaneous income and expense, all of
which are not directly related to the Company's primary business. During 1997,
the Company incurred $107,000 of costs related to the movement of inventory and
equipment from an old location to a new location.
INCOME TAXES
The Company operates as a sub-chapter S corporation. Accordingly, the
income taxes are the responsibility of the owners; and the accompanying
financial statements do not reflect any federal or state income taxes for the
Company.
The Company uses different methods of accounting for tax and financial
reporting. The primary difference relates to the use of the accrual basis for
financial reporting and the cash basis for tax reporting.
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1997 and 1998.
F-87
<PAGE> 166
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Contract receivables........................................ $1,335,792 $ 919,270
Contract retainage.......................................... 150,199 86,354
---------- ----------
1,485,991 1,005,624
Less allowance for doubtful accounts........................ (75,317) (75,317)
---------- ----------
$1,410,674 $ 930,307
========== ==========
</TABLE>
Contract retainage have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at December 31, 1996 and
1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts.................. $ 3,228,970 $ 1,383,021
Estimated earnings....................................... 642,668 203,021
----------- -----------
3,871,638 1,586,042
Less billings to date.................................... (3,720,898) (1,709,963)
----------- -----------
$ 150,740 $ (123,921)
=========== ===========
</TABLE>
Contracts in process are included in the accompanying balance sheets under
the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 280,850 $ 38,638
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (130,110) (162,559)
--------- ---------
$ 150,740 $(123,921)
========= =========
</TABLE>
5. OPERATING LEASES
The Company leases office space and a storage yard in St. Louis under an
agreement expiring in June 2001. Minimum rental commitments under this
noncancelable lease agreement in effect at December 31, 1997, are:
<TABLE>
<S> <C>
1998........................................................ $ 49,200
1999........................................................ 49,200
2000........................................................ 49,200
2001........................................................ 20,500
2002 and thereafter......................................... --
--------
$168,100
========
</TABLE>
F-88
<PAGE> 167
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Total rental expense for 1995, 1996 and 1997 for all operating leases
amounted to $13,800, $60,700 and $68,000, respectively.
6. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank. The line
of credit has a maximum borrowing limit of $450,000 and is payable on demand. It
bears interest at prime plus 1% (9.5% at December 31, 1997) which is due
monthly. The outstanding principle was $0 and $300,000 at December 31, 1996 and
1997, respectively. The line is collateralized by accounts receivable, property
and equipment, and personal guarantees of certain stockholders.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Notes payable to banks and equipment company; interest
varying from 7.5% to 11.75%, per annum; payable in monthly
installments, maturities ranging from July 1997 through
August 2002............................................... $191,510 $216,498
Less current maturities..................................... (96,602) (78,125)
-------- --------
$ 94,908 $138,373
======== ========
</TABLE>
Several of the notes payable bear interest at prime plus 1%.
The notes payable are collateralized by accounts receivable and property
and equipment.
Aggregate principal payments as of December 31, 1997 on long-term debt are
scheduled as follows:
<TABLE>
<S> <C>
1998........................................................ $ 78,125
1999........................................................ 85,580
2000........................................................ 41,468
2001........................................................ 8,889
2002........................................................ 2,436
--------
$216,498
========
</TABLE>
8. PROFIT SHARING PLAN
The Company maintains a 401(k) Salary Deferral Plan (the "401(k) Plan")
that allows eligible employees to defer a portion of their income through
contributions to the plan. Under the provisions of the plan, employees may
contribute up to a maximum of 15 percent of employee compensation or limitations
established pursuant to the Internal Revenue Code. The Company's contribution to
the 401(k) Plan is discretionary and determined annually by the Board of
Directors. The Company contributed $30,000, $-0-and $-0- to the 401(k) Plan for
the years ended December 31, 1995, 1996 and 1997, respectively.
The Company also maintains a Money Purchase Plan whereby mandatory
contributions are made by the Company. The Company makes contributions to this
plan based on 5% of employee eligible compensation. The Company contributed
$28,300, $33,700 and $32,500 to the Money Purchase Plan for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-89
<PAGE> 168
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company's office and storage yard in St. Louis are leased from an
affiliated company under a five year lease that expires in June 2001, with
monthly payments of $4,100. In addition to the minimum rent, the Company is
required to pay a percentage rent amount equal to 1% of gross receipts in excess
of $6,100,000. The amount of rent charged to operations was $58,700 and $57,200
for the years ended December 31, 1996 and 1997, respectively. There was no such
lease agreement in 1995. The Company also leases certain equipment from another
affiliated entity on a month-to-month basis and was charged $71,200, $89,800 and
$181,500 during 1995, 1996 and 1997, respectively.
The payable to affiliate arose in 1996 and is payable on demand. No
interest is due on the note.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of legal
counsel, the ultimate outcome of these lawsuits will not have a material adverse
impact on the Company's financial position or results of operations.
CONTINGENCY
The Company completed a contract during 1995 on which a dispute arose with
a subcontractor to the job. The subcontractor has indicated additional charges
are due as a result of work performed over the amounts due under its original
contract with the Company. Specifically, the subcontractor alleges the
engineering firm contracted by the Company's customer grossly underestimated the
amount of excavation work required at the job site. Although no evaluation of
the threatened litigation can be determined at this time, management believes
the Company's exposure for monetary damages should be minimal due to the fact
that the subcontractor's claims are essentially against the Company's customer
and the customer's engineering firm. At December 31, 1996 and 1997, the Company
was owed $81,000 from its customer that is being withheld pending resolution of
the dispute and owed its subcontractor $38,053 in connection with the original
contract terms. An allowance of $40,000 has been specifically provided for the
potential uncollectibility of amounts due from the customer.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable and accounts payable are
a reasonable estimate of their fair value due to their short-term nature.
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt approximates fair value.
12. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-90
<PAGE> 169
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Midwest Construction Services, Inc.:
We have audited the accompanying balance sheets of MIDWEST CONSTRUCTION
SERVICES, INC. ("the Company") (an Indiana corporation), as of December 31, 1996
and 1997, and the related statements of operations and retained earnings and
cash flows for each of the three years ended December 31, 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Midwest Construction
Services, Inc. as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 19, 1998
F-91
<PAGE> 170
MIDWEST CONSTRUCTION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 373,904 $ 260,631 $ 321,684
Accounts receivable -- net......................... 1,015,729 999,168 1,224,055
Other receivables.................................. -- 896 --
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ -- 17,571 18,660
Inventory.......................................... 626,564 637,367 562,929
Prepaid expenses................................... 60,412 45,486 30,275
---------- ---------- ----------
Total current assets....................... 2,076,609 1,961,119 2,157,603
---------- ---------- ----------
PROPERTY AND EQUIPMENT:
Autos and trucks................................... 797,581 723,803 723,803
Construction equipment............................. 1,574,778 1,650,838 1,650,838
Office equipment................................... 90,407 101,712 102,547
Leasehold improvements............................. 26,131 26,131 26,131
---------- ---------- ----------
2,488,897 2,502,484 2,503,319
Less -- Accumulated depreciation................... 1,521,906 1,738,885 1,815,127
---------- ---------- ----------
Total property and equipment, net.......... 966,991 763,599 688,192
---------- ---------- ----------
Total assets............................... $3,043,600 $2,724,718 $2,845,795
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable...................................... $ 157,330 $ 354,066 $ 496,389
Notes payable -- stockholders...................... 111,171 3,389 3,389
Accounts payable................................... 191,574 248,069 326,753
Other accrued expenses............................. 109,668 208,051 273,342
Accrued salaries................................... 66,553 35,531 29,320
Billings in excess of costs and estimated earnings
on uncompleted contracts........................ -- 81,957 41,820
---------- ---------- ----------
Total current liabilities.................. 636,296 931,063 1,171,013
---------- ---------- ----------
LONG-TERM LIABILITIES:
Notes payable...................................... 45,639 24,665 19,147
Notes payable -- stockholders...................... 367,813 37,436 37,436
---------- ---------- ----------
Total long-term liabilities................ 413,452 62,101 56,583
---------- ---------- ----------
Total liabilities.......................... 1,049,748 993,164 1,227,596
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,000 shares
authorized, issued and outstanding.............. 10,000 10,000 10,000
Retained earnings.................................. 1,983,852 1,721,554 1,608,199
---------- ---------- ----------
Total stockholders' equity................. 1,993,852 1,731,554 1,618,199
---------- ---------- ----------
Total liabilities and stockholders'
equity................................... $3,043,600 $2,724,718 $2,845,795
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-92
<PAGE> 171
MIDWEST CONSTRUCTION SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE....................... $9,316,391 $10,842,457 $9,675,673 $2,281,294 $2,456,436
COST OF REVENUE............... 7,949,761 9,338,686 8,636,800 1,951,021 2,106,551
---------- ----------- ---------- ---------- ----------
Gross profit........ 1,366,630 1,503,771 1,038,873 330,273 349,885
GENERAL AND ADMINISTRATIVE
EXPENSES.................... 644,590 649,368 644,871 149,362 188,946
---------- ----------- ---------- ---------- ----------
Income from
operations........ 722,040 854,403 394,002 180,911 160,939
OTHER INCOME.................. 82,356 38,909 38,801 3,514 1,622
---------- ----------- ---------- ---------- ----------
Net income.......... 804,396 893,312 432,803 184,425 162,561
RETAINED EARNINGS:
Beginning of period......... 2,431,176 1,090,540 1,983,852 1,983,852 1,721,556
Less -- Dividend
distributions............ 2,145,032 -- 695,101 -- 275,918
---------- ----------- ---------- ---------- ----------
End of period............... $1,090,540 $ 1,983,852 $1,721,554 $2,168,277 $1,608,199
========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE> 172
MIDWEST CONSTRUCTION SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
----------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 804,396 $ 893,312 $ 432,803 $ 184,425 $ 162,561
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation.......................... 258,251 316,434 317,538 80,377 76,242
Gain on sale of assets................ (35,081) (20,230) (15,235) -- --
Gain on sale of marketable
securities.......................... (21,280) -- -- -- --
(Increase) decrease in --
Accounts receivable, net............ 26,938 390,776 16,561 (143,707) (224,887)
Other receivables................... 489 -- (896) -- 896
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... (303,051) 303,051 (17,571) (42,857) (1,089)
Inventory........................... 29,825 (83,786) (10,803) (5,866) 74,438
Prepaid expenses.................... 60,360 19,257 14,926 32,674 11,157
Increase (decrease) in --
Accounts payable.................... 316,627 (268,563) 56,495 61,146 78,684
Other accrued expenses.............. 10,874 (34,554) 98,383 31,412 69,345
Accrued salaries.................... (5,945) 15,922 (31,022) (57,601) (6,211)
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... -- -- 81,957 -- (40,137)
----------- ---------- ---------- --------- ---------
Net cash provided by operating
activities...................... 1,142,403 1,531,619 943,136 140,003 200,999
----------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment................... (385,825) (385,683) (117,161) (70,629) (834)
Proceeds from sale of assets............ 35,967 27,790 18,250 -- --
Decrease in notes receivables........... 60,000 -- -- -- --
Investments redeemed, gross............. 416,423 -- -- -- --
Investments purchased................... (255,888) -- -- -- --
----------- ---------- ---------- --------- ---------
Net cash used in investing
activities...................... (129,323) (357,893) (98,911) (70,629) (834)
----------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowing from notes
payable............................... 457,007 797,311 1,301,390 -- 150,000
Reduction of principal of notes
payable............................... (576,375) (880,483) (1,125,628) (72,708) (13,194)
Dividend distribution................... (2,145,032) -- (695,101) -- (275,918)
Additional borrowing from notes
payable -- stockholder................ 1,227,312 16,368 -- -- --
Reduction of principal of notes
payable -- stockholder................ -- (764,696) (438,159) (195,571) --
----------- ---------- ---------- --------- ---------
Net cash used in financing
activities...................... (1,037,088) (831,500) (957,498) (268,279) (139,112)
----------- ---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH........... (24,008) 342,226 (113,273) (198,905) 61,053
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 55,686 31,678 373,904 373,904 260,631
----------- ---------- ---------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 31,678 $ 373,904 $ 260,631 $ 174,999 $ 321,684
=========== ========== ========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid for interest.................. $ 38,357 $ 88,344 $ 23,733 $ 2,907 $ 9,963
=========== ========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE> 173
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Midwest Construction Services, Inc. (the "Company") operates as a
construction contractor, constructing, repairing and maintaining railroad tracks
primarily to steel processors throughout Northwest Indiana. The work is
performed under various forms of contracts, including fixed-fee and
time-and-material contracts.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-price construction contracts
using the percentage-of-completion method, measured by the percentage of cost
incurred to date to management's estimated total cost for each contract. That
method is used because management considers total cost to be the best available
measure of progress on the contracts. Changes in job performance, job conditions
and estimated profitability may result in revisions to cost and income, which
are recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized as the work is
performed.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, as reported on the accompanying balance sheets
and statements of cash flows, includes all amounts in non-interest-bearing
checking accounts and interest-bearing money market accounts.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in Northwest Indiana and primarily serves
the steel industry. As such, the Company's accounts receivable are from the same
geographic region. The terms of the sales give rise to unsecured accounts
receivable, as is common industry practice. The Company is dependent on the
steel industry and the economic trends that affect the steel industry.
F-95
<PAGE> 174
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS
Management determines the appropriate classifications of securities at the
time of purchase. If management has the intent and the Company has the ability
at the time of purchase to hold securities until maturities or on a long-term
basis, they are classified as held to maturity securities and carried at
amortized historical cost. Securities to be held for indefinite periods of time
and not intended to be held to maturity or on a long-term basis are classified
as available for sale and carried at fair value.
Realized gains and losses on dispositions are based on the net proceeds and
the amortized historical cost of the securities sold, using the specific
identification method. Unrealized gains and losses on available for sale
securities are based on the difference between book value and fair value of each
security. These gains and losses are credited or charged to stockholders'
equity, whereas realized gains and losses are reported on the Company's
statements of income.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO") method. Market is based on estimated net
realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line and the accelerated method over the estimated useful life of
the asset as follows:
<TABLE>
<S> <C>
Autos and trucks............................................ 5 years
Construction equipment...................................... 5-7 years
Office equipment............................................ 3-10 years
Leasehold improvements...................................... 39 years
</TABLE>
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in net income. Maintenance and repairs are charged to income as
incurred; significant renewals and betterments are capitalized.
INCOME TAXES
Effective April 1, 1991, the Company has elected to be taxed as an "S"
Corporation under the provision of Subchapter "S" of the Internal Revenue Code.
As such, the Corporation pays no income tax, and revenue and expenses pass
through to the shareholders who pay income taxes on the earnings at their
respective tax rates. Therefore, these financial statements do not reflect any
federal or state income taxes for the Company.
F-96
<PAGE> 175
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments (consisting of only
normally recurring accruals) necessary to present fairly the financial position
as of March 31, 1998 and the results of operations and cash flows for the three
months ended March 31, 1997 and 1998.
2. ACCOUNTS RECEIVABLE
The Company has the following receivables at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Billed receivables.......................................... $ 927,808 $ 834,840
Unbilled receivables........................................ 100,544 176,951
---------- ----------
1,028,352 1,011,791
Less -- Allowance for uncollectible accounts................ 12,623 12,623
---------- ----------
Total accounts receivable, net.................... $1,015,729 $ 999,168
========== ==========
</TABLE>
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at December 31, 1996 and
1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---- --------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $-- $262,907
Estimated earnings.......................................... -- 32,619
-- --------
-- 295,526
Less -- Billings to date.................................... -- 359,912
-- --------
$-- $(64,386)
=== ========
</TABLE>
Contracts in process are included in accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
1996 1997
---- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts.................................. $-- $ 17,571
Billings in excess of costs and estimated earnings
on uncompleted contracts.................................. -- (81,957)
-- --------
$-- $(64,386)
=== ========
</TABLE>
4. INVESTMENTS
During 1995, the Company sold available for sale securities. The proceeds
and gross gains and losses on these sales are as follows:
<TABLE>
<CAPTION>
GROSS GROSS GROSS
AMORTIZED PROCEEDS REALIZED REALIZED
COST FROM SALE GAIN LOSS
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Equity securities common stock............. $395,143 $416,423 $41,196 $(19,916)
======== ======== ======= ========
</TABLE>
F-97
<PAGE> 176
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The change in the stockholders' equity component, net unrealized holding
gains and losses on available for sale securities is as follows:
<TABLE>
<CAPTION>
1995 NET
UNREALIZED
HOLDING
GAIN (LOSS)
-----------
<S> <C>
Balance at beginning of year................................ $ (4,130)
Valuation of securities to fair value....................... (17,150)
Net realized gain on sale of investments.................... 21,280
--------
Balance at end of year...................................... $ --
========
</TABLE>
5. NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
National City Bank, $750,000 revolving line of credit,
interest at bank's base rate, due August, 1998, secured by
accounts receivable, inventory and general intangibles and
stockholders' guarantee................................... $ -- $325,000
Associates Commercial Corp., 7.5%, monthly payments of
$6,542 including interest, due November 1997, secured by
equipment................................................. 69,337 --
National City Bank, 7.9%, monthly payments of $1,986
including interest, due January 2000, secured by four
vehicles.................................................. 65,021 45,636
CIT Group/Equipment Financing, 0%, monthly payments of
$9,538, due June 1997, secured by equipment............... 47,688 --
A.I. Credit Corp., 7.3%, monthly payments of $5,310
including interest, due April 1997........................ 20,923 --
A.I. Credit Corp., 7.59%, monthly payments of $2,732
including interest, due March, 1998....................... -- 8,095
-------- --------
Total notes payable............................... 202,969 378,731
Less -- Current portion..................................... 157,330 354,066
-------- --------
Total long-term notes payable..................... $ 45,639 $ 24,665
======== ========
</TABLE>
Aggregate principal payments as of December 31, 1997, on the notes payable
are scheduled as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
- ---------- --------
<S> <C>
December 31 --
1998...................................................... $354,066
1999...................................................... 22,689
2000...................................................... 1,976
</TABLE>
F-98
<PAGE> 177
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE -- STOCKHOLDERS
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Stockholder, 8%, monthly payments of $11,578, including
interest, balloon payment due January 2001, secured by
inventory, chattel paper, accounts receivable, equipment
and general intangibles................................... $436,321 $ --
Stockholder, 8%, monthly payments of $385 including
interest, balloon payment due January 2001, secured by
inventory, chattel paper, accounts receivable, equipment
and general intangibles................................... 42,663 40,825
-------- -------
Total............................................. 478,984 40,825
Less -- Current portion..................................... 111,171 3,389
-------- -------
Total long term notes payable..................... $367,813 $37,436
======== =======
</TABLE>
Aggregate principal payments as of December 31, 1997, on the notes payable
to shareholders are scheduled as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
- ---------- -------
<S> <C>
December 31 --
1998...................................................... $ 3,389
1999...................................................... 3,670
2000...................................................... 3,975
2001...................................................... 4,305
2002...................................................... 4,662
Thereafter................................................ 20,824
</TABLE>
7. OPERATING LEASES
The Company leases its office facility on a month-to-month basis. Monthly
rent is currently $1,200. Rent expense for the year ended December 31, 1997, was
$14,400. Management expects the future minimum lease obligation for the lease
for its office facility to be $14,400 for the year ending December 31, 1998.
The Company leases two vehicles under an operating lease. Total monthly
lease payments are $1,197. The down payment of $12,600 for both vehicles is
being amortized over the terms of the leases. The leases are for two years and
expire in May, 1999. The vehicle lease payments for the year ended December 31,
1997, were $15,506. The prepaid lease expense for the year ended December 31,
1997, was $9,100. The expected minimum lease payments and amortization of the
down payment for the remainder of the leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
- ---------- -------
<S> <C>
1998..................... $20,664
1999..................... 8,610
</TABLE>
F-99
<PAGE> 178
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8. MAJOR CUSTOMERS
The Company had two major customers for the years ended December 31, 1996
and 1997, each having sales exceeding 10% of total sales. Sales to these
customers as a percentage of total revenues for the years ended December 31,
1996 and 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
USX Corp.................................................... 44.9% 46.4%
Bethlehem Steel............................................. 35.0 37.9
All other customers......................................... 20.1 15.7
----- -----
Total............................................. 100.0% 100.0%
===== =====
</TABLE>
9. MAINTENANCE LEASES
The Company is currently operating under the following open purchase orders
or maintenance contracts:
<TABLE>
<CAPTION>
EXPIRATION
CUSTOMER DATE DESCRIPTION
- -------- ---------- -----------
<S> <C> <C>
NIPSCO -- Schafer Generating 12-31-99 Cost-plus; supervision, labor and
Station........................... equipment for railroad track
maintenance
NIPSCO -- Michigan City Generating 12-31-99 Cost-plus; labor, material and
Station........................... equipment to perform repairs to
railroad tracks and switches
NIPSCO -- Mitchell Generating 12-31-99 Cost-plus; supervision and labor to
Station........................... replace rails, ties and ballast as
needed on plant railroad tracks
NIPSCO -- Bailey Generating 12-31-99 Cost-plus; supervision, material,
Station........................... labor and equipment to make
emergency repairs to plant track
system
Luria Brothers/Philip Metals Inc.... 12-31-98 Cost-plus; supervision, labor,
tools, equipment and material to
maintain entire track system
Bethlehem Steel Corp. -- Burns 12-31-00 Time and materials; supervision,
Harbor Plant labor, material, insurance and
equipment to perform general track
maintenance and snow removal
USX Corporation..................... 09-22-02 Time and materials; supervision,
labor, material, insurance and
equipment to perform general track
maintenance and snow removal
</TABLE>
10. RETIREMENT PLAN
As of January 1, 1996, the Company implemented a salary reduction
simplified employee pension plan covering all eligible employees over the age of
21, who have completed a specific period of service, and are not covered by a
collective bargaining agreement. Employer contributions are 5% of employees'
gross income. The pension expense for the years ended December 31, 1996 and
1997, were $25,556 and $23,038, respectively.
F-100
<PAGE> 179
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
In the ordinary course of business, the Company enters into contracts that
require the Company to provide general liability insurance coverage which names
their customer as the co-insured policyholder. In addition, some contracts
require that the Company indemnify their customers against certain legal claims
related to the contracted work the Company will perform. As a result, the
Company from time to time is involved in their customer's lawsuits and is
contingently liable for the outcome of such legal cases.
In 1994, an accident occurred on a customer's property that resulted in the
death of two Company employees and the injury of two other Company employees.
Settlements have been achieved in the fatality cases which were funded by the
Company's insurance carriers and the customer. The two injured employees have
sued the customer. Though the Company is not party to these personal injury
suits, the customer has indicated that they may seek a contribution from the
Company toward any settlement.
The Company is direct party to an uninsured personal injury suit resultant
from a 1994 accident at a customer location that occurred in proximity to where
the Company was working. The Company is vigorously defending this case and
believes that it has both adequate reserves and good defenses to any claim of
liability that may be asserted against it related to this personal injury case.
The Company is involved in three other personal injury suits (one in which
the Company is direct party and two in which the Company is indirectly involved)
that are all covered by the Company's insurance policies.
In the case of all known contingencies, the Company accrues a charge for a
loss when it is probable and the amount is reasonably estimable. Based on the
current available information, the Company believes that the established
reserves are adequate to cover all known contingencies and that future costs
related to these contingent liabilities will not have a material adverse effect
on the Company's financial statements.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosure about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LINE-OF-CREDIT FACILITY
The carrying amount of the line-of-credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions.
13. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-101
<PAGE> 180
INDEPENDENT AUDITORS' REPORT
Board of Directors
New England Railroad Construction Company, Inc.
Bridgeport, Connecticut
We have audited the accompanying balance sheets of New England Railroad
Construction Company, Inc. as of December 31, 1997 and February 28, 1997, and
the related statements of operations and shareholders' equity and cash flows for
the ten months ended December 31, 1997 and each of the two years in the period
ended February 28, 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 financial statements referred to above present fairly,
in all material respects, the financial position of New England Railroad
Construction Company, Inc. as of December 31, 1997 and February 28, 1997, and
the results of its operations and its cash flows for the ten months ended
December 31, 1997 and each of the two years in the period ended February 28,
1997, in conformity with generally accepted accounting principles.
DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C.
February 24, 1998
Bridgeport, Connecticut
F-102
<PAGE> 181
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTES 7 AND 8)
CURRENT ASSETS:
Cash and cash equivalents............................. $ 29,066 $ 250,678 $ 275,207
Contract and retainage receivables (Notes 2, 3 and
6).................................................. 3,122,929 1,491,925 952,648
Accounts receivable, related parties (Note 6)......... 32,050 39,544 39,544
Inventory............................................. 88,308 143,531 142,391
Deferred income taxes (Note 12)....................... 10,350
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 5)...................... 10,868 32,045
Prepaid expenses and other (Note 6)................... 66,183 100,937 158,630
---------- ---------- ----------
Total current assets........................ 3,349,404 2,026,615 1,610,815
Property, plant and equipment (Note 4)................ 588,305 863,751 872,148
---------- ---------- ----------
$3,937,709 $2,890,366 $2,482,963
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Notes 6 and 8)..... $ 239,033 $ 356,201 $ 298,658
Accounts payable...................................... 900,335 215,644 237,681
Accrued expenses (Note 9)............................. 173,814 180,717 74,578
Deferred income taxes (Note 12)....................... 333,900 27,200
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5)...................... 639,258 284,679 274,556
---------- ---------- ----------
Total current liabilities................... 2,286,340 1,064,441 885,473
---------- ---------- ----------
Long-term debt, net of current portion (Note 8)....... 227,570 397,422 359,025
---------- ---------- ----------
Deferred income taxes (Note 12)....................... 56,400 43,200 48,050
---------- ---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, no par value; authorized 5,000 shares;
issued and outstanding 1,320 shares................. 114,000 114,000 114,000
Retained earnings..................................... 1,253,399 1,271,303 1,076,415
---------- ---------- ----------
1,367,399 1,385,303 1,190,415
---------- ---------- ----------
$3,937,709 $2,890,366 $2,482,963
========== ========== ==========
</TABLE>
See notes to financial statements.
F-103
<PAGE> 182
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED TEN MONTHS THREE MONTHS ENDED
--------------------------- ENDED ----------------------
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1997 1998
------------ ------------ ------------ ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Earned revenue (Notes 3, 6 and
10).......................... $5,039,151 $7,462,151 $4,000,543 $2,222,187 $ 340,990
Cost of earned revenue (Note
6)........................... 4,712,320 5,866,220 3,320,362 1,704,868 537,137
---------- ---------- ---------- ---------- ---------
Gross profit (loss)............ 326,831 1,595,931 680,181 517,319 (196,147)
General and administrative
expenses..................... 395,362 779,202 652,197 162,291 122,185
---------- ---------- ---------- ---------- ---------
Income (loss) from operations.. (68,531) 816,729 27,984 355,028 (318,332)
---------- ---------- ---------- ---------- ---------
Other charges (credits):
(Gain) loss on disposition of
equipment................. (186,027) (19,000) 500 (500)
Other income................. (6,338) (3,096) (14,996) (660) (3,514)
Interest expense............. 48,890 41,282 40,976 11,986 13,170
---------- ---------- ---------- ---------- ---------
42,552 (147,841) 6,980 11,826 9,156
---------- ---------- ---------- ---------- ---------
Income (loss) before income
taxes........................ (111,083) 964,570 21,004 343,202 (327,488)
---------- ---------- ---------- ---------- ---------
Income taxes (benefit) (Note
12):
Current...................... (200) 248,800 323,000 88,400 (99,900)
Deferred..................... (51,800) 168,800 (319,900) 59,900 (32,700)
---------- ---------- ---------- ---------- ---------
(52,000) 417,600 3,100 148,300 (132,600)
---------- ---------- ---------- ---------- ---------
Net income (loss).............. $ (59,083) $ 546,970 $ 17,904 $ 194,902 $(194,888)
========== ========== ========== ========== =========
Earnings (loss) per share...... $ (44.76) $ 414.37 $ 13.56 $ 147.65 $ (147.64)
========== ========== ========== ========== =========
Shares outstanding............. 1,320 1,320 1,320 1,320 1,320
</TABLE>
See notes to financial statements.
F-104
<PAGE> 183
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON RETAINED
COMMON SHARES STOCK EARNINGS TOTAL
------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, March 1, 1995.............. 1,320 $114,000 $ 765,512 $ 879,512
Net loss.......................... (59,083) (59,083)
----- -------- ---------- ----------
Balance, February 29, 1996.......... 1,320 114,000 706,429 820,429
Net income........................ 546,970 546,970
----- -------- ---------- ----------
Balance, February 28, 1997.......... 1,320 114,000 1,253,399 1,367,399
Net income........................ 17,904 17,904
----- -------- ---------- ----------
Balance, December 31, 1997.......... 1,320 114,000 1,271,303 1,385,303
Net loss (unaudited).............. (194,888) (194,888)
----- -------- ---------- ----------
Balance, March 31, 1998
(unaudited)....................... 1,320 $114,000 $1,076,415 $1,190,415
===== ======== ========== ==========
</TABLE>
See notes to financial statements.
F-105
<PAGE> 184
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED TEN MONTHS THREE MONTHS ENDED
--------------------------- ENDED ---------------------
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1997 1998
------------ ------------ ------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ (59,083) $ 546,970 $ 17,904 $ 194,902 $(194,888)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.... 191,782 144,302 131,978 40,752 36,594
(Gain) loss on disposition of
equipment...................... (186,027) (19,000) 500 (500)
Deferred income taxes............ (51,800) 168,800 (319,900) 59,900 (32,700)
(Increase) decrease in assets:
Contract and retainage
receivables................. 1,021,987 (1,924,109) 1,631,004 (416,542) 539,277
Accounts receivable, related
parties..................... (68,404) 80,000 (7,494) 28,635
Inventory...................... (10,938) 72,359 (55,223) 85,578 1,140
Costs and estimated earnings in
excess of billings on
uncompleted contracts....... 78,734 87,538 10,868 27,377 (32,045)
Prepaid expenses and other..... (38,222) 30,142 (56,762) 59,790 (57,693)
Increase (decrease) in
liabilities:
Accounts payable............... (460,219) 354,390 (684,691) (267,867) 22,037
Accrued expenses............... (12,971) 140,398 6,903 80,185 (106,139)
Billings in excess of costs and
estimated earnings on
uncompleted contracts....... (549,345) 282,932 (354,579) 268,540 (10,123)
----------- ----------- ----------- --------- ---------
Net cash provided by (used in)
operating activities............... 41,521 (202,305) 301,008 161,750 164,960
----------- ----------- ----------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment.... 253,000 23,200 500
Purchases of equipment............. (29,702) (90,947) (149,616) (27,000) (44,991)
Proceeds from sale of bonds........ 25,000
----------- ----------- ----------- --------- ---------
Net cash provided by (used in)
investing activities............... (29,702) 187,053 (126,416) (27,000) (44,491)
----------- ----------- ----------- --------- ---------
Cash from financing activities:
Proceeds from issuance of debt..... 150,000 290,000 50,000
Principal payments on long-term
debt............................. (137,506) (173,079) (242,980) (52,909) (95,940)
----------- ----------- ----------- --------- ---------
Net cash provided by (used in)
financing activities............... (137,506) (23,079) 47,020 (2,909) (95,940)
----------- ----------- ----------- --------- ---------
Net increase (decrease) in cash...... (125,687) (38,331) 221,612 131,841 24,529
Cash and cash equivalents at
beginning of period................ 193,084 67,397 29,066 91,182 250,678
----------- ----------- ----------- --------- ---------
Cash and cash equivalents at end of
period............................. $ 67,397 $ 29,066 $ 250,678 $ 223,023 $ 275,207
=========== =========== =========== ========= =========
</TABLE>
See notes to financial statements.
F-106
<PAGE> 185
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1997,
TEN MONTHS ENDED DECEMBER 31, 1997 AND
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
The Company performs railroad repair and construction projects primarily
for state and city governments located in the Northeastern United States.
ESTIMATES AND ASSUMPTIONS:
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities and the
reported revenue and expenses. Actual results could vary from the estimates that
were used.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, contract and retainage
receivable and accounts payable approximate fair value because of their
short-term nature. The carrying amount of long-term debt approximates fair value
based on the borrowing rates currently available to the Company for bank loans
with similar terms and maturities.
REVENUE AND COST RECOGNITION:
Earnings on long-term construction contracts are recognized on the
percentage-of-completion method in the ratio of costs incurred to total
estimated costs. Earnings and costs on contracts are subject to revision
throughout the terms of the contracts; required adjustments are made in the
period revisions become known. Because of inherent uncertainties in estimating
costs, it is at least reasonably possible that the Company's estimates of costs
and revenues will change in the near term. Provisions are made for the full
amounts of anticipated losses when first determinable. Claims for additional
contract revenues are recognized at the point it is probable that the claim will
result in additional revenue and the amount can be estimated reliably.
Balances billed but not paid according to retainage provisions under
construction contracts generally become due upon contract completion and
acceptance by the owners. Construction contracts normally are completed within
one to two years.
INVENTORY:
Inventory, principally materials and supplies, is stated at the lower of
cost or net realizable value. Cost is determined by the first-in, first-out
(FIFO) method.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost. Depreciation is provided
principally by use of the straight-line method over the estimated useful life of
the related asset. Accelerated methods are used for income tax reporting
purposes.
F-107
<PAGE> 186
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES:
Deferred income taxes are determined based on the difference between the
financial statement and income tax basis of assets and liabilities using tax
rates expected to be in effect in the years in which the differences are
expected to reverse. The temporary differences relate primarily to the reporting
of revenue recognition on long-term contracts, depreciation and net operating
loss carryforwards.
CASH AND CASH EQUIVALENTS:
From time to time, the Company's cash balance with financial institutions
exceeds the maximum FDIC insured balance of $100,000. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
For the reporting of cash flows, the Company considers savings accounts and
certificate of deposits with original maturities of three months or less to be
cash and cash equivalents.
YEAR-END:
In 1997, the Company changed its financial reporting year-end to December
31. These financial statements reflect the results of operations for the years
ended February 29, 1996 and February 28, 1997 and the ten months ended December
31, 1997.
2. CONTRACT AND RETAINAGE RECEIVABLES:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Completed contracts........................... $ 285,144 $1,199,475 $708,300
Uncompleted contracts......................... 2,208,445
Retainage..................................... 659,340 322,450 274,348
---------- ---------- --------
3,152,929 1,521,925 982,648
Less allowance for doubtful accounts.......... 30,000 30,000 30,000
---------- ---------- --------
$3,122,929 $1,491,925 $952,648
========== ========== ========
</TABLE>
3. CLAIMS:
During the year ended February 28, 1997, the Company settled two claims for
$230,000. These claims represent additional costs incurred and profits lost by
the Company due to performing work out of sequence, drawing revisions and
specification changes by the project owners. The settlements are included in
contract and retainage receivables and earned revenue as of and for the year
ended February 28, 1997.
F-108
<PAGE> 187
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.................................................. $ 70,334 $ 70,334 $ 70,334
Building and improvements............................. 212,765 212,765 212,765
Vehicles and equipment................................ 2,269,364 2,410,882 2,455,873
Tools................................................. 49,487 49,487 49,487
Office equipment...................................... 67,481 67,481 67,481
---------- ---------- ----------
2,669,431 2,810,949 2,855,940
Less accumulated depreciation......................... 2,081,126 1,947,198 1,983,792
---------- ---------- ----------
$ 588,305 $ 863,751 $ 872,148
========== ========== ==========
</TABLE>
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts............... $6,537,599 $ 799,465 $ 528,415
Estimated earnings.................................... 1,825,521 197,933 95,498
---------- ---------- ---------
8,363,120 997,398 623,913
Less billings to date................................. 8,991,510 1,282,077 866,424
---------- ---------- ---------
$ (628,390) $ (284,679) $(242,511)
========== ========== =========
</TABLE>
Included in the balance sheets under the following captions:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $ 10,868 $ 32,045
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (639,258) $ (284,679) (274,556)
---------- ---------- ---------
$ (628,390) $ (284,679) $(242,511)
========== ========== =========
</TABLE>
6. RELATED PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with various
related parties. Balances with related parties are included in the balance
sheets under the following captions:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Contract and retainage receivables............ $133,576 $203,329
Accounts receivable, related parties.......... $ 32,050 39,544 39,544
Prepaid expenses and other.................... 55,000 28,500 13,500
Current portion of long-term debt............. 150,000 210,000 150,000
</TABLE>
F-109
<PAGE> 188
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Transactions with related parties are included in the statements of
operations under the following captions:
<TABLE>
<CAPTION>
TEN MONTHS
YEARS ENDED ENDED THREE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1997 1998
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Earned revenue............ $23,300 $ 9,664 $271,056 $ 1,410 $69,752
Cost of earned revenue.... 11,736 7,724 260,260 1,410 69,752
Rent expense.............. 60,000 60,000 50,000 15,000 15,000
</TABLE>
The Company rents a storage yard on a month to month basis, from a related
party for $5,000 per month.
7. LINE OF CREDIT:
The Company has a $475,000 line of credit to be used for working capital
needs expiring in June 1998. Interest is due monthly on advances at the bank's
prime rate plus 1 1/2%. Substantially all assets are pledged as collateral and
repayment is guaranteed by the shareholders. There were no outstanding
borrowings on the line of credit at March 31, 1998, December 31, 1997 and
February 28, 1997.
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, bank, payable in monthly installments of
$5,000 plus interest at prime plus 1.5% through
October 2000. Substantially all assets are pledged
as collateral and repayment is guaranteed by the
shareholders........................................ $160,000 $110,000 $ 95,000
Notes payable, shareholders, due on demand plus
interest at prime plus 1%........................... 150,000 210,000 150,000
Notes payable, equipment, due in aggregate monthly
installments of $8,942 including interest ranging
from 7.9% to 9.3% maturing at various dates through
October 2002. Collateralized by equipment........... 94,461 382,040 363,288
Note payable, mortgage, payable in monthly
installments of $1,190 including interest at prime
plus 1.5% through September 2002.................... 58,148 51,583 49,395
Note payable, mortgage, payable in monthly
installments of $419 including interest at prime
plus 1%. This note was paid in full as of December
31, 1997............................................ 3,994
-------- -------- --------
466,603 753,623 657,683
Less current portion.................................. 239,033 356,201 298,658
-------- -------- --------
$227,570 $397,422 $359,025
======== ======== ========
</TABLE>
F-110
<PAGE> 189
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of long-term debt follow:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1998.............................................. $356,201
1999.............................................. 144,200
2000.............................................. 102,950
2001.............................................. 102,322
2002.............................................. 47,950
--------
$753,623
========
</TABLE>
Both the long-term debt and the line of credit contain certain restrictive
covenants which place some requirements and restrictions on the Company
regarding the maintenance of certain financial ratios measured on an annual
basis.
9. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Income taxes...................................... $ 25,212 $110,191
Payroll and benefits.............................. 43,130 33,248 $30,702
Profit sharing.................................... 78,897 43,876
Insurance......................................... 26,575 28,152
Other............................................. 9,126
-------- -------- -------
$173,814 $180,717 $74,578
======== ======== =======
</TABLE>
10. MAJOR CUSTOMERS:
Approximately 62%, 63% and 48% of earned revenue was derived from four
customers in each of the ten months ended December 31, 1997 and the years ended
February 28, 1997 and February 29, 1996, respectively. Only one customer
accounted for more than 10% of earned revenue in both the ten months ended
December 31, 1997 and the year ended February 28, 1997.
11. PROFIT SHARING PLAN:
The Company sponsors a noncontributory trusteed profit sharing plan
covering substantially all of its employees not covered by a collective
bargaining agreement meeting certain minimum requirements. The plan provides for
contributions by the Company in such amounts as the Board of Directors may
annually determine. Profit sharing expense was $20,823, $90,810 and $25,906 for
the ten months ended December 31, 1997 and the years ended February 28, 1997 and
February 29, 1996, respectively.
F-111
<PAGE> 190
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES:
Components of income taxes follow:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------------- ---------------------
CURRENT DEFERRED CURRENT DEFERRED
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tax expense (benefit) before application
of operating loss carryforwards........ $(200) $ 210,700 $ 556,900 $(139,300)
Tax expense (benefit) of operating loss
carry forwards......................... (262,500) (308,100) 308,100
----- --------- --------- ---------
Tax expense (benefit).................... $(200) $ (51,800) $ 248,800 $ 168,800
===== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
TEN MONTHS ENDED -------------------------------------------
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
-------------------- --------------------- -------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
-------- --------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit)
before application
of operating loss
carryforwards...... $323,000 $(319,900) $ 198,000 $ (49,700) $(99,900) $(32,700)
Tax expense (benefit)
of operating loss
carryforwards...... $(109,600) $ 109,600
-------- --------- --------- --------- -------- --------
Tax expense
(benefit).......... $323,000 $(319,900) $ 88,400 $ 59,900 $(99,900) $(32,700)
======== ========= ========= ========= ======== ========
</TABLE>
A reconciliation of the United States statutory corporate rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED TEN MONTHS THREE MONTHS ENDED
--------------------------- ENDED ---------------------
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1997 1998
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax charge at standard
U.S. rate of 34%...... $(37,768) $327,954 $ 7,141 $116,689 $(111,346)
Non-deductible
expenses.............. 195 666 751 90 1,520
Alternative minimum
tax................... 23,366 5,412
Tax rate differences and
adjustment of prior
years' taxes.......... (6,546) (1,231) (6,247)
State taxes, net of
federal benefit....... (7,881) 66,845 1,455 26,109 (22,774)
-------- -------- ------- -------- ---------
$(52,000) $417,600 $ 3,100 $148,300 $(132,600)
======== ======== ======= ======== =========
</TABLE>
F-112
<PAGE> 191
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred income tax asset (liability) at December
31, 1997, February 28, 1997 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, MARCH 31,
1997 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current asset (liability):
Deferred gross profit on contracts in
progress................................. $(344,250) $(37,550)
Accounts receivable valuation............... 10,350 10,350 $ 10,350
--------- -------- --------
(333,900) (27,200) 10,350
Non-current liability:
Tax depreciation in excess of book
depreciation............................. (56,400) (43,200) (48,050)
--------- -------- --------
Net deferred tax liability.................... $(390,300) $(70,400) $(37,700)
========= ======== ========
</TABLE>
13. CONCENTRATION OF LABOR:
Approximately 72% of the Company's labor force is subject to a union
contract expiring in March 1999.
14. SUPPLEMENTAL CASH FLOW INFORMATION AND SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Cash paid for interest was $39,314, $42,216 and $48,890 for the ten months
ended December 31, 1997 and the years ended February 28, 1997 and February 29,
1996, respectively.
Cash paid for income taxes was $238,021, $204,670 and $11,726 for the ten
months ended December 31, 1997 and the years ended February 28, 1997 and
February 29, 1996, respectively.
The Company acquired equipment in exchange for installment note obligations
of $240,000 and $99,771 for the ten months ended December 31, 1997 and the year
ended February 28, 1997, respectively.
15. SUBSEQUENT EVENT (UNAUDITED):
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-113
<PAGE> 192
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Railroad Service, Inc. and Minnesota Railroad Service, Inc.:
We have audited the accompanying combined balance sheets of RAILROAD
SERVICE, INC. (a Nevada corporation) and MINNESOTA RAILROAD SERVICE, INC. (a
Tennessee corporation) as of December 31, 1996 and 1997, and the related
combined statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Railroad
Service, Inc. and Minnesota Railroad Service, Inc. as of December 31, 1996 and
1997, and the results of their combined operations and their combined cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Columbus, Ohio,
February 23, 1998
F-114
<PAGE> 193
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 21,796 $ 839,210 $ 595,279
Accounts receivable....................................... 1,657,019 918,794 711,493
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 62,842 155,140 224,470
Notes receivable, current portion......................... -- 66,666 70,499
Due from related parties.................................. 9,558 -- --
Material on hand.......................................... 302,867 240,131 273,297
Prepaid expenses.......................................... -- -- 2,689
---------- ---------- ----------
Total current assets............................... 2,054,082 2,219,941 1,877,727
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Tools and equipment....................................... 3,041,036 2,803,466 2,806,125
Vehicles and trailers..................................... 946,744 881,053 880,553
Office equipment.......................................... 129,600 129,612 130,880
Leasehold improvements.................................... 125,119 125,119 125,119
Less accumulated depreciation and amortization............ (3,200,703) (2,991,931) (3,059,089)
---------- ---------- ----------
Property, plant and equipment, net................. 1,041,796 947,319 883,588
---------- ---------- ----------
OTHER ASSETS:
Notes receivable, long-term portion....................... -- 66,668 66,668
Notes receivable, related parties......................... 170,577 170,577 174,416
Cash value of life insurance.............................. 527,699 571,629 571,629
Loan origination costs, net............................... 9,498 2,794 2,794
---------- ---------- ----------
Total other assets................................. 707,774 811,668 815,507
---------- ---------- ----------
TOTAL ASSETS....................................... $3,803,652 $3,978,928 $3,576,822
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 434,566 $ 445,800 $ 623,293
Accrued expenses.......................................... 145,695 149,141 326,724
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 84,841 79,733 70,471
Current maturities of long-term debt...................... 358,621 278,246 278,247
---------- ---------- ----------
Total current liabilities.......................... 1,023,723 952,920 1,298,735
---------- ---------- ----------
NOTES PAYABLE -- RELATED PARTIES............................ 207,365 246,798 246,798
LONG-TERM DEBT, net of current maturities................... 741,763 594,075 591,324
---------- ---------- ----------
Total noncurrent liabilities....................... 949,128 840,873 838,122
---------- ---------- ----------
TOTAL LIABILITIES.................................. 1,972,851 1,793,793 2,136,857
---------- ---------- ----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock.............................................. 172,700 172,700 172,700
Additional paid-in capital................................ 838,731 838,731 1,238,382
Retained earnings......................................... 819,370 1,173,704 28,883
---------- ---------- ----------
Total stockholders' equity......................... 1,830,801 2,185,135 1,439,965
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $3,803,652 $3,978,928 $3,576,822
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-115
<PAGE> 194
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSTRUCTION INCOME EARNED.... $9,043,959 $10,708,870 $9,363,191 $ 238,294 $1,267,901
CONTRACT COSTS INCURRED....... 7,330,086 8,199,458 7,065,419 455,455 1,290,407
---------- ----------- ---------- --------- ----------
Gross profit................ 1,713,873 2,509,412 2,297,772 (217,161) (22,506)
GENERAL AND ADMINISTRATIVE
EXPENSES.................... 1,288,688 1,417,546 1,449,737 268,162 721,052
---------- ----------- ---------- --------- ----------
OPERATING INCOME (LOSS)....... 425,185 1,091,866 848,035 (485,323) (743,558)
---------- ----------- ---------- --------- ----------
OTHER INCOME (EXPENSE)
Interest income............. 14,911 15,352 38,464 3,838 14,672
Interest expense............ (174,724) (137,763) (116,345) (11,348) (20,685)
Gain on disposal of
equipment................ 73,910 31,763 207,160 160,603 --
Other income, net........... 17,659 5,106 -- -- --
---------- ----------- ---------- --------- ----------
TOTAL OTHER INCOME
(EXPENSE)................... (68,244) (85,542) 129,279 153,093 (6,013)
---------- ----------- ---------- --------- ----------
NET INCOME (LOSS)............. $ 356,941 $ 1,006,324 $ 977,314 $(332,230) $ (749,571)
========== =========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-116
<PAGE> 195
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... $172,700 $838,731 $ (187,675) $ 823,756
Net income................................... -- -- 356,941 356,941
-------- -------- ---------- ----------
BALANCE, December 31, 1995..................... 172,700 838,731 169,266 1,180,697
Net income................................... -- -- 1,006,324 1,006,324
Distributions to shareholders................ -- -- (356,220) (356,220)
-------- -------- ---------- ----------
BALANCE, December 31, 1996..................... 172,700 838,731 819,370 1,830,801
Net income................................... -- -- 977,314 977,314
Distributions to shareholders................ -- -- (622,980) (622,980)
-------- -------- ---------- ----------
BALANCE, December 31, 1997..................... $172,700 $838,731 $1,173,704 $2,185,135
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-117
<PAGE> 196
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -------------------------
1995 1996 1997 1997 1998
--------- ---------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 356,941 $1,006,324 $ 977,314 $ (332,230) $(749,571)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 294,624 295,660 305,730 4,425 67,161
Gain on sale of equipment................................ (73,910) (31,763) (207,160) (160,603) --
Compensation in exchange for paid-in capital............. -- -- -- -- 399,651
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable.................................... (545,662) (400,191) 738,225 1,383,162 207,301
Due from related parties............................... 65,003 1,442 9,558 (7,001) --
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ (56,348) 23,450 (92,298) 29,126 (69,330)
Material on hand....................................... 158,361 93,611 62,736 22,298 (33,166)
Prepaid expenses....................................... 10,236 65,574 -- -- (2,689)
Increase (decrease) in:
Accounts payable....................................... 179,816 (149,087) 11,234 (287,175) 177,493
Accrued expenses....................................... 71,985 53,068 3,446 (105,717) (117,667)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ 103,727 (56,648) (5,108) (9,954) (9,262)
--------- ---------- --------- ---------- ---------
Net cash provided by operating activities............ 564,773 901,440 1,803,677 536,331 (130,079)
--------- ---------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment............... 79,875 42,500 122,634 -- --
Capital expenditures....................................... (161,481) (532,158) (320,023) (72,797) (3,430)
Issuance of notes receivable............................... (30,178) -- -- (3,838) (7,672)
Receipts on notes receivable............................... -- -- 66,666 -- --
Cash value of life insurance............................... (30,321) (37,577) (43,930) -- --
--------- ---------- --------- ---------- ---------
Net cash used in investing activities................ (142,105) (527,235) (174,653) (76,635) (11,102)
--------- ---------- --------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt....................... (334,448) (370,360) (414,523) (4,146) (2,750)
Net borrowings under revolving line of credit agreement.... (600,000) -- -- -- --
Long-term borrowings....................................... 405,206 354,130 186,460 43,690 --
Proceeds from issuance of notes payable -- related
parties.................................................. 15,000 39,865 119,433 -- --
Principal payments on notes payable -- related parties..... (35,166) (130,114) (80,000) (80,000) --
Distribution paid.......................................... -- (356,220) (622,980) (75,000) (100,000)
--------- ---------- --------- ---------- ---------
Net cash used in financing activities................ (549,408) (462,699) (811,610) (115,456) (102,750)
--------- ---------- --------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (126,740) (88,494) 817,414 344,240 (243,931)
CASH AND CASH EQUIVALENTS, beginning of period.............. 237,030 110,290 21,796 21,796 839,210
--------- ---------- --------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 110,290 $ 21,796 $ 839,210 $ 366,036 $ 595,279
========= ========== ========= ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................. $ 173,009 $ 135,940 $ 113,647 $ 10,454 $ 15,597
========= ========== ========= ========== =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During 1997 a note receivable in the amount of $200,000 was issued in
exchange for fixed assets, see Note. 9.
The accompanying notes are an integral part of these combined financial
statements.
F-118
<PAGE> 197
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Railroad Service, Inc. (RSI) and Minnesota Railroad Service, Inc. (MRSI)
(together the "Companies") operate as a construction contractor, constructing,
repairing and maintaining railroad tracks for private and government customers
located throughout the United States with concentrations of work primarily in
the upper midwest. The work is performed under various forms of contracts,
including fixed-fee and time-and-material contracts. The time period of the
contracts vary, but they are generally less than one year.
The Companies have common ownership and share management personnel and
facilities. The combined statements of financial position, income and cash flows
are presented in these financial statements. All intercompany transactions and
balances have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
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 vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Companies recognize revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and revenue, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor, equipment costs and
those indirect costs related to contract performance which are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
CASH AND CASH EQUIVALENTS
The Companies consider cash and cash equivalents to include cash on hand
and temporary cash investments purchased with an original maturity of three
months or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Companies operate primarily in the upper midwestern region of the
United States. The Companies' accounts receivable are from the same geographic
region. The terms of the sales give rise to unsecured accounts receivable, as is
common industry practice. The Companies periodically assess collection of its
receivables and provide allowance for doubtful accounts as appropriate. No such
allowances were deemed necessary as of December 31, 1996 and 1997.
F-119
<PAGE> 198
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CUSTOMERS
Approximately 55% of accounts receivable at December 31, 1997 were with
four customers. In 1995 approximately 27% of revenues were earned from two
customers. In 1997 three customers accounted for approximately 40% of revenues.
MATERIAL ON HAND
Material on hand principally consists of stored materials and parts to be
used for contracts and have been stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
The Companies record property, plant and equipment at cost. Depreciation
and amortization is computed using the straight-line method over the estimated
useful life of the asset as follows:
<TABLE>
<S> <C>
Tools and equipment......................................... 4 - 7 years
Vehicles and trailers....................................... 4 - 7 years
Office equipment............................................ 4 - 10 years
Leasehold improvements...................................... 7 - 18 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation and amortization are eliminated from the accounts, and any gain or
loss is reflected in net income.
INCOME TAXES
The Companies operate as sub-chapter S corporations for Federal and certain
state income tax reporting purposes. Accordingly, the income taxes for the
earnings of the Companies are the responsibility of the owners. Therefore, these
financial statements do not reflect any Federal income taxes for the Companies.
COMMON STOCK
Common stock of the Companies consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Railroad Service, Inc.
Authorized shares, no par value........................... 2,500 2,500
-------- --------
Issued and outstanding.................................... 1,577 1,577
-------- --------
Stated at................................................. $157,700 $157,700
-------- --------
Minnesota Railroad Service, Inc.
Authorized shares, no par value........................... 2,500 2,500
-------- --------
Issued and outstanding.................................... 150 150
-------- --------
Stated at................................................. 15,000 15,000
-------- --------
Total common stock.......................................... $172,700 $172,700
======== ========
</TABLE>
F-120
<PAGE> 199
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1997 and 1998.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- --------
<S> <C> <C>
Contract receivables........................................ $1,622,557 $887,194
Contract retainages......................................... 34,462 31,600
---------- --------
$1,657,019 $918,794
========== ========
</TABLE>
Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $2,053,687 $1,150,665
Estimated earnings.......................................... 514,242 400,247
---------- ----------
2,567,929 1,550,912
Less billings to date....................................... 2,589,928 1,475,505
---------- ----------
$ (21,999) $ 75,407
========== ==========
</TABLE>
Contracts in process are included in the accompanying combined balance
sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 62,842 $155,140
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 84,841 79,733
-------- --------
$(21,999) $ 75,407
======== ========
</TABLE>
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
F-121
<PAGE> 200
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Companies lease office space and equipment under agreements expiring at
various dates through the year 1999. Minimum rental commitments under these
noncancelable lease agreements in effect at December 31, 1997, are:
<TABLE>
<S> <C>
1998........................................................ $51,630
1999........................................................ 20,750
2000........................................................ --
2001........................................................ --
2002........................................................ --
Thereafter.................................................. --
-------
$72,380
=======
</TABLE>
Total rental expense for 1995, 1996 and 1997 for all operating leases
amounted to $62,000, $67,000 and $60,000, respectively.
6. LINE OF CREDIT
RSI has a $300,000 line of credit, with an additional seasonal limit of
$100,000 from a bank. Interest is payable monthly at 2.5% over the bank's
reference rate of interest for the years ended December 31, 1995 and 1996 and at
1% over the bank's reference rate of interest for the year ended December 31,
1997. The line is secured by accounts receivable, material on hand, equipment
and assignment of certain life insurance policies. The line is also personally
guaranteed by certain shareholders of the Companies. At December 31, 1997, there
were no borrowings against the line.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Note payable to insurance company (RSI), interest at 8%,
with no monthly principal installments or maturity date,
secured by the life insurance policy...................... $ 379,758 $ 410,140
Note payable to bank (RSI), interest at 9.5%, payable in six
monthly installments of $42,222 each year (May-October),
maturing December 1999, secured by all of RSI's assets.... -- 399,642
Note payable to shareholder (RSI), interest at 9.5%, with no
monthly installments, maturing April 2000, unsecured...... -- 246,799
Note payable to bank (RSI), interest at 9.5%, payable in six
monthly installments of $33,333 each year (May-October),
paid in full in 1997, secured by machinery and
equipment................................................. 154,516 --
Note payable to bank (RSI), interest at 11%, payable in
monthly installments of $12,500, paid in full in 1997,
secured by machinery and equipment........................ 225,000 --
</TABLE>
F-122
<PAGE> 201
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Note payable to bank (RSI), interest at 8.7%, payable in
monthly installments of $8,722, paid in full in 1997,
secured by all company assets............................. $ 261,365 $ --
Note payable to bank (RSI), interest at 9.5%, with monthly
installments of $1,637, paid in full in 1997, secured by
all company assets........................................ 38,064 --
Various notes payable to related parties and Companies'
shareholders (RSI and MRSI), interest at 9.5%, with no
monthly installments, paid in full in 1997, unsecured..... 207,365 --
Various notes payable to banks and finance companies (RSI
and MRSI), interest rates from 2.9% to 11.75%, due in even
monthly principal and interest payments, secured by
vehicles and equipment.................................... 41,681 62,538
---------- ----------
Total debt.................................................. 1,307,749 1,119,119
Less current maturities..................................... 358,621 278,246
---------- ----------
Long-term portion........................................... $ 949,128 $ 840,873
========== ==========
</TABLE>
Aggregate principal payments, as of December 31, 1997, on long-term debt
are scheduled as follows:
<TABLE>
<S> <C>
1998........................................................ $ 278,246
1999........................................................ 195,863
2000........................................................ 234,870
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 410,140
----------
$1,119,119
==========
</TABLE>
Certain of the long-term debt instruments and the line of credit agreement
contain restrictive covenants which places requirements and restrictions on the
Companies regarding disposition of assets, financial ratios, capital
expenditures, acquisitions and operations. The Companies were not in compliance
with certain covenants at December 31, 1997; however, waivers for the covenants
were obtained from the bank.
8. PROFIT SHARING PLAN
The Companies have 401(k) profit sharing plans covering substantially all
employees not covered under collective bargaining agreements. The Companies may
contribute a discretionary amount as determined each year by the Companies. The
discretionary contribution is subject to a six-year vesting schedule. The
discretionary contribution expense for the Companies was $33,384, $101,683 and
$80,485, for the years ended December 31, 1995, 1996 and 1997, respectively.
9. SALE OF BRANCH
Effective March 1997 RSI sold all assets relating to the Milwaukee branch
operations. RSI received an initial $75,000 payment and a note receivable for
$200,000 with an interest rate of 2% over the base rate paid by RSI to a certain
bank. RSI realized a gain of $160,603 on the sale. For the
F-123
<PAGE> 202
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
year ended December 31, 1997, the note had a remaining balance of $133,334 which
is included in other income in the combined 1997 statement of income. This
receivable is secured by the equipment involved in the sale and is personally
guaranteed by the owners of the acquiring company.
In connection with the sale, the Companies and their shareholders have
entered into a covenant not to compete for a period of five years from the date
of the agreement, subject to certain geographical and size limitations. The
Companies may bid new work in the circumscribed area if certain restrictions are
met.
10. RELATED PARTY TRANSACTIONS
Related parties of the Companies include the shareholders of the Companies
and various entities related through common ownership and management. The
Companies and related parties provide products and services to each other.
Transactions with related parties included in the combined financial statements
resulted in the recognition of approximately $14,900, $26,900 and $15,300 of
income and approximately $91,700, $86,400 and $72,400 of expense for the years
ended December 31, 1995, 1996 and 1997, respectively.
Due from related parties consists of charges from the Companies to
affiliated companies for labor, equipment and administrative services.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Companies using available market information and appropriate valuation
methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The line of credit facility approximates fair value as the interest rate
fluctuates with changes in market conditions. It is estimated that the carrying
amount of the long-term debt approximates market. Management estimated the fair
value of the long-term debt based on the remaining term to maturity and the
current interest rate environment as a market does not exist for the debt or
similar debt of the Companies.
12. SUBSEQUENT EVENTS (UNAUDITED)
Effective January 2, 1998, the majority stockholder gifted 55 shares of
Railroad Service, Inc. stock and 5 shares of Minnesota Railroad Service, Inc.
stock to another shareholder. Accordingly, $399,651 was recorded as a charge to
compensation expense and a contribution of paid-in capital in the three months
ended March 31, 1998.
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-124
<PAGE> 203
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Indiana Wood Preserving Company, Inc.:
We have audited the accompanying balance sheet of SOUTHERN INDIANA WOOD
PRESERVING COMPANY, INC. (the "Company") (an Indiana corporation) as of December
31, 1997, and the related statements of operations, stockholder's equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Indiana Wood
Preserving Company, Inc. as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Indianapolis, Indiana
April 13, 1998
F-125
<PAGE> 204
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ --
Receivables, net of allowance of $78,119.................. 1,510,605 1,885,190
Inventory................................................. 2,171,870 2,332,663
Prepaid expenses and other................................ 16,870 20,605
----------- -----------
Total current assets.............................. 3,699,345 4,238,458
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements..................................... 7,372 7,372
Buildings and improvements................................ 84,697 84,697
Leasehold improvements.................................... 128,328 128,328
Machinery and equipment................................... 1,309,439 1,364,528
Transportation equipment.................................. 258,074 258,074
Office furniture and equipment............................ 34,578 34,578
----------- -----------
1,822,488 1,877,577
Less -- Accumulated depreciation.......................... (1,143,341) (1,175,896)
----------- -----------
Property, plant and equipment, net................ 679,147 701,681
----------- -----------
OTHER ASSETS................................................ 1,802 1,802
----------- -----------
$ 4,380,294 $ 4,941,941
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Book cash overdraft....................................... $ 70,680 $ 89,233
Accounts payable.......................................... 186,685 138,235
Line of credit............................................ 680,000 1,205,000
Accrued expenses.......................................... 134,160 168,023
Taxes payable............................................. 11,570 8,757
----------- -----------
Total current liabilities......................... 1,083,095 1,609,248
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value; authorized shares, 1,000;
issued and outstanding shares, 100..................... 1,000 1,000
Additional paid-in capital................................ 194,100 194,099
Retained earnings......................................... 3,102,099 3,137,594
----------- -----------
Total stockholder's equity........................ 3,297,199 3,332,693
----------- -----------
$ 4,380,294 $ 4,941,941
=========== ===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-126
<PAGE> 205
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE MONTHS
ENDED ENDED MARCH 31,
DECEMBER 31, -------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
SALES................................................. $8,900,635 $1,749,594 $2,341,610
COST OF SALES......................................... 7,538,546 1,510,526 1,846,539
---------- ---------- ----------
Gross profit........................................ 1,362,089 239,068 495,071
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 529,106 90,180 196,838
---------- ---------- ----------
INCOME FROM OPERATIONS................................ 832,983 148,888 298,233
OTHER INCOME (EXPENSE):
Interest income..................................... 10,966 2,860 948
Interest expense.................................... (5,132) -- (16,579)
Gain on sale of equipment........................... 5,000 5,000 550
Miscellaneous expense............................... (2,807) 1,732 278
---------- ---------- ----------
8,027 9,592 (14,803)
---------- ---------- ----------
NET INCOME............................................ $ 841,010 $ 158,480 $ 283,430
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-127
<PAGE> 206
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996......... 100 $1,000 $194,100 $ 3,346,357 $ 3,541,457
Net income....................... -- -- -- 841,010 841,010
Distributions.................... -- -- -- (1,085,268) (1,085,268)
--- ------ -------- ----------- -----------
BALANCE, December 31, 1997......... 100 $1,000 $194,100 $ 3,102,099 $ 3,297,199
=== ====== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-128
<PAGE> 207
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE MONTHS
ENDED ENDED MARCH 31,
DECEMBER 31, -------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 841,010 $ 158,480 $ 283,430
Adjustments to reconcile net income to net cash used
by operating activities --
Depreciation and amortization.................... 121,416 22,717 32,554
Gain on sale of equipment........................ (5,000) (5,000) (550)
Change in operating assets --
Receivables.................................... (659,924) (491,683) (374,585)
Inventory...................................... (708,084) 66,564 (160,793)
Prepaid expenses and other..................... 11,577 (2,472) (3,735)
Book cash overdraft............................ 70,680 -- 18,553
Accounts payable............................... 159,321 194,550 (48,450)
Accrued expenses............................... 3,175 (109,040) 33,863
Taxes payable.................................. 8,603 4,525 (2,813)
----------- --------- ---------
Net cash used in operating activities....... (157,226) (161,359) (222,526)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (260,417) (15,116) (55,089)
Proceeds from sale of equipment..................... 5,000 5,000 550
----------- --------- ---------
Net cash used in investing activities....... (255,417) (10,116) (54,539)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings............................... 680,000 -- 525,000
Payments of distributions........................... (1,085,268) (579,816) (247,935)
----------- --------- ---------
Net cash provided by (used in) financing
activities................................ (405,268) (579,816) 277,065
----------- --------- ---------
Net decrease in cash and cash equivalents... (817,911) (751,291) --
----------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of period........ 817,911 817,911 --
----------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.............. $ -- $ 66,620 $ --
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest............ $ 5,132 $ -- $ 16,579
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-129
<PAGE> 208
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Southern Indiana Wood Preserving Company, Inc. (the "Company") (an Indiana
corporation) operates as a wood preserving company specializing in producing
pressure, creosote treated wood products for private and government customers
located throughout the United States, primarily in the Midwest.
2. SIGNIFICANT ACCOUNTING POLICIES
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 vary from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues at the time of shipment of goods.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates in Indiana. However, the Company's accounts receivable
include other geographic regions of the United States. The terms of the sales
give rise to unsecured accounts receivable, as is common industry practice.
During 1997, no single customer provided for greater than 10% of sales.
INVENTORY
Inventory, consisting principally of trimmed and graded railroad ties, is
stated at the lower of cost or market. Cost is determined by the average cost
method.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Buildings.................................................. 25 Years
Machinery and equipment.................................... 7 - 10 Years
Office furniture and equipment............................. 5 - 10 Years
Leasehold improvements..................................... 10 Years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in the statement of income.
INCOME TAXES
The Company operates as an S corporation. Accordingly, the income taxes for
the earnings of the Company are the responsibility of the owner; therefore,
these financial statements do not reflect any Federal or state income taxes.
F-130
<PAGE> 209
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1997 and 1998.
3. RECEIVABLES
Receivables consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Trade receivables........................................... $1,545,035
Supplier receivables........................................ 43,259
Other receivables........................................... 430
----------
1,588,724
Less -- Allowance for doubtful accounts..................... 78,119
----------
$1,510,605
==========
</TABLE>
4. INVENTORY
Inventory consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Raw materials............................................... $ 143,140
Work in process............................................. 1,743,072
Finished goods.............................................. 285,658
----------
$2,171,870
==========
</TABLE>
5. OPERATING LEASES
The Company leases production space under an agreement expiring May 1,
1999. Minimum future lease payments under the current lease agreement in effect
at December 31, 1997 are:
<TABLE>
<S> <C>
1998........................................................ $10,031
1999........................................................ 11,034
-------
$21,065
=======
</TABLE>
Total rental expense for 1997 was $9,119.
6. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank. The line
of credit has a limit of $2,000,000 and is secured by the Company's trade
receivables and inventories. The maturity date of the line of credit agreement
is June 30, 1998. Interest is at prime (8.5% at December 31, 1997) which is
payable monthly. The outstanding principle at December 31, 1997 is $680,000.
7. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company has adopted a noncontributory cash employees' stock ownership
plan (ESOP) covering all full-time employees who have met certain service
requirements. It provides for discretionary contributions by the corporation up
to the maximum amount permitted under the
F-131
<PAGE> 210
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Internal Revenue Code. The plan has received IRS approval under Sec. 401(A) and
501(A) of the Internal Revenue Code.
Total contributions made to the plan in 1997 were $157,480.
8. CONTINGENCIES
The Company is currently not engaged in any lawsuits arising in the
ordinary course of business.
The Company is subject to certain Federal, state and local environmental
laws and regulations relating to the use of creosote. Creosote is used in the
Company's manufacturing process to treat the ties so that they can withstand
exposure to outside elements. Creosote, a coal tar treated derivative, has been
recognized by environmental regulating agencies as a hazardous material. The
Company currently believes that it is in compliance with the environmental laws
and regulations surrounding creosote. The Company has not been notified of any
violations of the regulations by regulatory agencies.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments is determined in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments." The carrying
value of receivables, accounts payable and the line of credit have been
determined by the Company to approximate their fair value using available market
information and appropriate valuation methodologies.
10. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-132
<PAGE> 211
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Trackworks, Inc. and
Northern Rail Service and Supply Co.:
We have audited the accompanying combined balance sheets of U.S.
TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. (Michigan
corporations) as of December 31, 1996 and 1997, and the related combined
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Companies' 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 audits 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Trackworks,
Inc. and Northern Rail Service and Supply Co. as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
February 20, 1998
F-133
<PAGE> 212
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 21,286 $ 124,522 $ 23,344
Accounts receivable.................................. 821,204 992,277 721,995
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. 20,577 259,388 24,855
Inventory............................................ 217,345 259,427 260,626
Prepaid expenses..................................... 33,813 30,418 8,548
---------- ---------- ----------
Total current assets.............................. 1,114,225 1,666,032 1,039,368
---------- ---------- ----------
PROPERTY AND EQUIPMENT:
Construction equipment............................... 904,287 1,012,099 1,023,640
Transportation equipment............................. 466,030 468,783 468,783
Office equipment..................................... 24,051 10,101 10,101
---------- ---------- ----------
1,394,368 1,490,983 1,502,524
Less accumulated depreciation........................ (956,688) (995,245) (1,031,143)
---------- ---------- ----------
Property and equipment, net.................. 437,680 495,738 471,381
---------- ---------- ----------
OTHER ASSETS, net...................................... 81,489 89,468 94,331
---------- ---------- ----------
Total assets................................. $1,633,394 $2,251,238 $1,605,080
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 163,754 $ 611,430 $ 235,130
Distributions payable to stockholders................ -- -- 100,000
Current maturities of long-term debt................. 59,967 68,015 30,368
Billings in excess of costs and estimated earnings on
uncompleted contracts............................. -- 21,303 21,303
Accrued expenses..................................... 94,427 113,447 50,193
Line of credit....................................... 490,000 465,000 330,000
Note payable -- related party........................ 100,000 -- --
---------- ---------- ----------
Total current liabilities.................... 908,148 1,279,195 766,994
---------- ---------- ----------
DEFERRED COMPENSATION.................................. 73,156 83,135 88,498
LONG-TERM DEBT, net of current maturities.............. 24,416 13,123 10,404
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock......................................... 431,550 431,550 431,550
Additional paid-in capital........................... 45,291 45,291 45,291
Retained earnings.................................... 150,833 398,944 262,343
---------- ---------- ----------
Total stockholders' equity................... 627,674 875,785 739,184
---------- ---------- ----------
Total liabilities and stockholders' equity... $1,633,394 $2,251,238 $1,605,080
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-134
<PAGE> 213
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -------------------------
1996 1997 1997 1998
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES.................................... $4,819,123 $4,814,005 $ 278,870 $ 650,540
COST OF REVENUES............................ 4,466,547 3,740,346 269,235 521,593
---------- ---------- --------- ---------
GROSS PROFIT................................ 352,576 1,073,659 9,635 128,947
GENERAL AND ADMINISTRATIVE EXPENSES......... 442,754 736,138 160,758 155,442
---------- ---------- --------- ---------
INCOME (LOSS) FROM OPERATIONS............... (90,178) 337,521 (151,123) (26,495)
---------- ---------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income........................... 509 179 23 61
Interest expense.......................... (38,555) (40,841) (8,087) (10,167)
---------- ---------- --------- ---------
Total other expense............... (38,046) (40,662) (8,064) (10,106)
---------- ---------- --------- ---------
NET INCOME (LOSS)........................... $ (128,224) $ 296,859 $(159,187) $ (36,601)
========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-135
<PAGE> 214
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF PAR VALUE OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995......... 43,155 $431,550 $45,291 $ 503,785 $ 980,626
Distributions to stockholders.... -- -- -- (224,728) (224,728)
Net loss......................... -- -- -- (128,224) (128,224)
------ -------- ------- --------- ---------
BALANCE, December 31, 1996......... 43,155 431,550 45,291 150,833 627,674
Distributions to stockholders.... -- -- -- (48,748) (48,748)
Net income....................... -- -- -- 296,859 296,859
------ -------- ------- --------- ---------
BALANCE, December 31, 1997......... 43,155 $431,550 $45,291 $ 398,944 $ 875,785
====== ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-136
<PAGE> 215
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------- -------------------------
1996 1997 1997 1998
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $(128,224) $ 296,859 $(159,187) $ (36,601)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Depreciation................................ 136,968 133,904 24,155 35,898
Amortization................................ 2,124 2,000 500 500
Gain from sales of property and equipment... (615) (2,051) -- --
Changes in operating assets and liabilities:
Accounts receivable...................... (129,595) (171,073) 535,377 270,282
Costs and estimated earnings in excess of
billings on uncompleted contracts...... (20,577) (238,811) 20,577 234,533
Inventory................................ (57,410) (42,082) (1,206) (1,199)
Prepaid expenses......................... (40,494) 3,395 25,206 21,870
Accounts payable......................... (49,843) 447,676 (60,428) (376,300)
Billings in excess of costs and estimated
earnings on uncompleted contracts...... -- 21,303 -- --
Accrued expenses......................... (116,927) 19,020 (73,601) (63,254)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities................. (404,593) 470,140 311,393 85,729
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment................................... 7,100 25,600 -- --
Purchases of property and equipment........... (64,995) (215,511) -- (11,541)
--------- --------- --------- ---------
Net cash used in investing
activities........................... (57,895) (189,911) -- (11,541)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt.......... (33,917) (136,464) (29,996) (40,366)
Proceeds from long-term debt.................. 26,634 133,219 -- --
Line of credit borrowings (repayments), net... 440,000 (25,000) (285,000) (135,000)
Note payable -- related party borrowings
(repayments), net........................... 100,000 (100,000) -- --
Distributions to stockholders................. (224,728) (48,748) -- --
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities................. 307,989 (176,993) (314,996) (175,366)
--------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents..................... (154,499) 103,236 (3,603) (101,178)
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 175,785 21,286 21,286 124,522
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period........ $ 21,286 $ 124,522 $ 17,683 $ 23,344
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.................................... $ 33,283 $ 20,878 $ 14,110 $ 12,108
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING INFORMATION:
Distributions payable to stockholders......... $ -- $ -- -- $ 100,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-137
<PAGE> 216
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
U.S. Trackworks, Inc. (a Michigan corporation) operates as a construction
contractor, constructing, repairing and maintaining railroad tracks for private
and government customers located primarily in the Midwest United States. The
work is performed under various forms of contracts, including fixed-fee and
time-and-material contracts. Northern Rail Service and Supply Co. (a Michigan
corporation) operates in Michigan and provides maintenance services on railroad
tracks primarily under time-and-material contracts.
BASIS OF PRESENTATION
These combined financial statements include the accounts and results of
operations of both U.S. Trackworks, Inc. and Northern Rail Service and Supply
Co., which are commonly owned. U.S. Trackworks, Inc. and Northern Rail Service
and Supply Co. are collectively referred to as the "Company." All significant
intercompany transactions and balances have been eliminated in combination.
CASH AND CASH EQUIVALENTS
For purposes of the combined balance sheets and the combined statements of
cash flows, the Company considers cash and cash equivalents to include cash on
hand and highly liquid debt instruments with an original maturity of three
months or less.
INVENTORY
Inventory, consisting principally of stored materials and parts to be used
for contracts, is stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful life of the
asset. Newly purchased equipment is depreciated over eight years and used
equipment is depreciated over five years. Repairs to existing equipment that
lengthen the asset's useful life are depreciated over three years.
When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
the combined statements of operations.
CONCENTRATION OF CREDIT RISKS
The Company's credit risks primarily relate to cash and accounts
receivable. Cash is primarily held in bank accounts. Accounts receivable
represent amounts due from the Company's customers. The Company performs
continual credit evaluations of its customers and, from time to time, an
individual customer's accounts receivable balance may represent a significant
portion of the Company's total accounts receivable balance. At December 31,
1997, one customer accounted for approximately 36% of the accounts receivable
balance.
F-138
<PAGE> 217
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor and equipment costs
related to contract performance. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
INCOME TAXES
The Company operates as an S Corporation. Accordingly, the income taxes
related to the earnings of the Company are the responsibility of the owners;
therefore, these combined financial statements do not reflect any federal or
state income taxes for the Company.
SINGLE BUSINESS TAX
The Company is subject to a single business tax in its incorporated state
of Michigan. The tax is calculated on the apportioned activity of the Company in
Michigan and is included in general and administrative expenses in the
accompanying combined statements of income.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing the financial statements.
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments necessary to present
fairly the financial position as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1997 and 1998.
F-139
<PAGE> 218
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Contract receivables........................................ $652,513 $966,668
Retainage................................................... 132,689 25,609
Other....................................................... 36,002 --
-------- --------
$821,204 $992,277
======== ========
</TABLE>
Retained accounts receivable represents amounts retained by customers from
contract billings and are payable to the Company upon satisfactory completion of
contract terms. At December 31, 1997, all retainage was expected to be collected
within one year.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 82,308 $ 730,843
Estimated earnings.......................................... -- 352,761
-------- ----------
82,308 1,083,604
Less billings to date....................................... (61,731) (845,519)
-------- ----------
$ 20,577 $ 238,085
======== ==========
</TABLE>
Contracts in process are included in the accompanying combined balance
sheets under the following captions:
<TABLE>
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $20,577 $259,388
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... -- (21,303)
------- --------
$20,577 $238,085
======= ========
</TABLE>
4. LINE OF CREDIT
The Company has a revolving line of credit agreement collateralized by the
assets of the Company with a credit limit of $550,000. The line of credit bears
interest at the prime rate plus 1/2% (9% at December 31, 1997) which is payable
monthly. The Company is subject to ongoing compliance with financial and other
covenants under the line of credit, all of which the Company is in compliance or
has obtained appropriate waivers at December 31, 1997. During 1996 and 1997, the
weighted average amount outstanding on the line of credit was approximately
$270,000 and $360,000, respectively, and the maximum amount outstanding was
approximately $570,000 and $590,000, respectively. At December 31, 1996 and
1997, the balance outstanding under the line of credit is $490,000 and $465,000,
respectively, and is due on demand.
F-140
<PAGE> 219
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Long-term note, interest based on prime rate plus 3/4%
(9.25% at December 31, 1997), payable in monthly
installments of $2,778 plus interest through 1998, secured
by equipment.............................................. $ 57,749 $ 24,416
Long-term note, interest at a fixed rate of 8.95%, payable
in monthly principal and interest payments of $692 through
2000, secured by a vehicle................................ -- 19,096
Long-term note, interest at a fixed rate of 9.4%, payable in
monthly principal and interest payments of $3,252 through
1998, secured by equipment................................ -- 15,886
Unsecured long-term note, interest at a fixed rate of 7.3%,
payable in monthly principal and interest payments of
$7,247 through 1998....................................... 26,634 21,740
-------- --------
84,383 81,138
Less current maturities..................................... (59,967) (68,015)
-------- --------
$ 24,416 $ 13,123
======== ========
</TABLE>
Aggregate principal payments as of December 31, 1997 on long-term debt are
scheduled as follows:
<TABLE>
<S> <C>
1998........................................................ $68,015
1999........................................................ 7,516
2000........................................................ 5,607
-------
$81,138
=======
</TABLE>
6. BENEFIT PLANS
The Company participates in a defined contribution pension plan for certain
union employees. The plan provides benefits to all employees covered under the
union's collective bargaining agreement. The benefits are based upon the number
of hours worked. The Company's practice is to fund amounts that are tax
deductible and that are required by statute and applicable regulations. The
Company contributed $31,118 and $33,167 related to the 1996 and 1997 plan years,
respectively.
The Company participates in a discretionary contribution pension plan for
certain union employees. The plan provides for annual contributions at the
discretion of management during years when the Company generates a profit. The
Company contributed approximately $12,000 for both the 1996 and 1997 plan years.
The Company maintains a non-contributory profit sharing plan for all
non-union employees. The plan provides for annual contributions of up to 15% of
wages earned during years when the Company generates a profit. No plan
contributions were made in 1996. The Company contributed $20,952 for the 1997
plan year.
The Company maintains a 401(k) plan for certain employees of the Company
that is funded by these employees through payroll deductions. The Company does
not make any contributions to this plan.
F-141
<PAGE> 220
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also maintains life insurance policies on certain management
personnel. These policies will transfer to the insured personnel upon retirement
and are included in deferred compensation in the accompanying combined balance
sheets.
7. COMMON STOCK
Common stock consists of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
U.S. Trackworks, Inc. -- $10 par value; 45,000 shares
authorized, 26,314 shares issued and outstanding.......... $263,140 $263,140
Northern Rail Service and Supply Co. -- $10 par value;
16,841 shares authorized, issued and outstanding.......... 168,410 168,410
-------- --------
$431,550 $431,550
======== ========
</TABLE>
8. RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company had a non-interest bearing note payable
to a related party under common ownership with the Company. All amounts
outstanding were repaid in 1997.
Two management companies that are owned by a member of management provide
certain management services to the Company, as well as lease office space and
equipment to the Company. The Company incurred management fees to these
management companies of approximately $225,000 and $450,000 in 1996 and 1997,
respectively.
The Company maintains a relationship with a subcontracting company that is
owned by a stockholder of the Company. Fees paid to the subcontractor in 1997
were approximately $80,000. No fees were paid in 1996.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under a noncancellable operating lease
that expires in 1998. The remaining commitment under this operating lease was
$14,550 at December 31, 1997.
Rent expense for the years ended December 31, 1996 and 1997 amounted to
$130,777 and $70,134, respectively.
LITIGATION
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material impact on the
Company's financial statements.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair
F-142
<PAGE> 221
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
Cash, accounts receivable and accounts payable
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
Line of credit and long-term debt
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt, based on borrowing rates currently available to the
Company, is a reasonable estimation of fair value.
11. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders will exchange their stock of the
Company for cash and stock of RailWorks Corporation. The transaction is expected
to be completed in August 1998.
F-143
<PAGE> 222
Map of the United States entitled "Railworks' National Network," showing the
locations of track contractors, L.K. Comstock, and suppliers.
<PAGE> 223
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
The Company........................... 1
The Offering.......................... 4
The Combination....................... 5
Summary Pro Forma As Adjusted
Financial Data...................... 6
Risk Factors.......................... 8
Formation of the Company.............. 16
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Pro Forma As Adjusted
Financial Data...................... 21
Selected Financial Data of the
Founding Companies.................. 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 42
Management............................ 57
Certain Relationships and Related
Party Transactions.................. 63
Principal and Selling Stockholders.... 66
Description of Capital Stock.......... 67
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Certain U.S. Federal Tax
Considerations for Non-U.S. Holders
of Common Stock..................... 72
Legal Matters......................... 75
Experts............................... 75
Additional Information................ 75
Index to Financial Statements......... F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,000,000 Shares
(RAILWORKS LOGO)
Common Stock
-------------------
PROSPECTUS
-------------------
BT Alex. Brown
Schroder & Co. Inc.
Piper Jaffray Inc.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 224
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and NASD filing fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 39,218
NASD filing fee............................................. 13,794
Nasdaq National Market listing fee.......................... 100,000
Accounting fees and expenses................................ 1,200,000
Legal fees and expenses..................................... 450,000
Blue Sky fees and expenses (including counsel fees)......... 3,000
Printing and Engraving expenses............................. 380,000
Transfer Agent and Registrar fees and expenses.............. 5,000
Miscellaneous expenses...................................... 8,988
----------
Total............................................. $2,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of directors
to the corporation or its stockholders for monetary damages for breaches of
fiduciary duty, except for liability (a) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit. Article 10 of the
registrant's restated Certificate of Incorporation provides that the personal
liability of directors of the registrant is eliminated to the fullest extent
permitted by Section 102(b)(7) of the DGCL.
Under Section 145 of the DGCL, a corporation has the power to indemnify
directors and officers under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorneys'
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of being a director or officer of the
corporation if it is determined that the director or officer acted in accordance
with the applicable standard of conduct set forth in such statutory provision.
Article 7 of the registrant's Bylaws provides that the registrant will indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was a director, officer, employee or agent of the registrant,
or is or was serving at the request of the registrant as a director, officer,
employee or agent of another entity, against certain liabilities, costs and
expenses. Article 7 further permits the registrant to maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
registrant, or is or was serving at the request of the registrant as a director,
officer, employee or agent of another entity, against any liability asserted
against such person and incurred by such person in any such capacity or arising
out of his status as such, whether or not the registrant would have the power to
indemnify such person against such liability under the DGCL. The registrant
expects to maintain directors' and officers' liability insurance.
Under the Underwriting Agreement, the Underwriters are obligated, under
certain circumstances, to indemnify directors and officers of the registrant
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.
II-1
<PAGE> 225
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On March 13, 1998, the Company issued ten shares of common stock to John G.
Larkin for $10 per share. This issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
Concurrently with the Consummation of the Offering, the Company will issue
an aggregate of 1,205,872 shares of Common Stock to executive officers and
corporate-level employees of the Company. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
Concurrently with the consummation of the Offering, the Company will issue
an aggregate of 7,208,583 shares of Common Stock to (i) certain owners of the
Founding Companies as partial consideration for the acquisitions of such
Founding Companies and (ii) to IPODC on behalf of the Founding Companies. All of
the purchasers of such Common Stock are "accredited investors," as defined in
the Securities Act of 1933. This issuance was exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement
3.1* -- Restated Certificate of Incorporation of the Company
3.2* -- Bylaws of the Company
4.1* -- Specimen Common Stock Certificate
5.1* -- Opinion of King and Spalding as to the legality of the
Common Stock being registered
10.1* -- Uniform Provisions for the Acquisition of Founding Companies
10.2* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Wildcats
Alpha-Keystone Company, Alpha-Keystone Engineering, Inc. and
the stockholders named therein
10.3* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Bulldog Comtrak
Company, Comtrak Construction, Inc. and the stockholders
named therein
10.4* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Cardinal Annex
Railroad Builders Company, Annex Railroad Builders, Inc. and
the stockholders named therein
10.5* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Huskies Condon
Brothers Company, Condon Brothers Inc. and the stockholders
named therein
10.6* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Commodores
Concrete Company, CPI Concrete Products, Inc. and the
stockholders named therein
10.7* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Nittany Lions
McGinley Company, HP McGinley Inc. and the stockholders
named therein
10.8* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Owls Kennedy
Railroad Builders Company, Kennedy Railroad Builders, Inc.
and the stockholders named therein
10.9* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Red Storm
Comstock Company, Inc., L.K. Comstock & Company, Inc. and
the stockholders named therein
</TABLE>
II-2
<PAGE> 226
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <C> <S>
10.10* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Sycamores Midwest
Construction Company, Midwest Construction Services, Inc.
and the stockholders named therein
10.11* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Bears Merit
Company, Merit Railroad Contractors, Inc. and the
stockholders named therein
10.12* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Hoosier Mize
Company, Mize Construction Company and the stockholders
named therein
10.13* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Husky New England
Railroad Construction Company, New England Railroad
Construction Company Inc. and the stockholders named therein
10.14* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Wolverines
Northern Rail Services Company, Northern Rail Service and
Supply Company, Inc. and the stockholders named therein.
10.15* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Big Orange
Minnesota Company, Minnesota Railroad Service Company and
the stockholders named therein
10.16* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Buckeye Railcorp,
Inc., Railcorp Inc. and the stockholders named therein
10.17* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Runnin' Rebels
Railroad Service Company, Railroad Service, Inc. and the
stockholders named therein
10.18* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Crusader Railroad
Specialties Company, Railroad Specialties, Inc. and the
stockholders named therein
10.19* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Screaming Eagle
Wood Preserving Company, Southern Indiana Wood Preserving
Company, Inc. and the stockholders named therein
10.20* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Fighting
Irish-U.S. Railway Supply Company, U.S. Railway Supply, Inc.
and the stockholders named therein
10.21* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Spartans
Trackworks Company, U.S. Trackworks, Inc. and the
stockholders named therein
10.22* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Mustang Smith
Construction Company, Wm. A. Smith Construction Co., Inc.
and the stockholders named therein
10.23* -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Longhorn Smith
Rerailing Company, Wm. A. Smith Rerailing Services, Inc. and
the stockholders named therein
10.24* -- Employment Agreement dated as of May 21, 1998 between
Michael R. Azarela, the Founding Companies and the Company
10.25* -- Employment Agreement dated as of May 21, 1998 between John
G. Larkin, the Founding Companies and the Company
10.26* -- Employment Agreement dated as of May 21, 1998 between Harold
C. Kropp, Jr., the Founding Companies and the Company
10.27* -- Employment Agreement dated as of May 21, 1998 between John
Kennedy, the Founding Companies and the Company
</TABLE>
II-3
<PAGE> 227
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <C> <S>
10.28* -- Form of Employment Agreement between each Founding Company
and Founding Company Officer
10.29* -- 1998 Incentive Stock Plan
10.30* -- Indemnity and Cooperation Agreement dated as of April 3,
1997 between Spie Enertrans S.A., Comstock Group, Inc., L.K.
Comstock & Company and LKC Acquisition Corp., together with
Memorandum of Understanding dated August 20, 1997 between
Spie Enertrans S.A., Comstock Group, Inc., L.K. Comstock &
Company and LKC Acquisition Corp.
10.31* -- Stock Purchase Agreement dated April 3, 1997 between
Comstock Group, Inc. and LKC Acquisition Corp., as amended
10.32* -- Contingent Promissory Note dated April 3, 1997 made by L.K.
Comstock & Company, Inc. to the order of Spie Enertrans S.A.
23.1 -- Consent of King and Spalding (contained in Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Dworken, Hillman, LaMorte & Sterczala, P.C.
23.4 -- Consent of Cannon and Company
24.1* -- Powers of Attorney (contained on signature page)
24.2* -- Powers of Attorney of new directors
27.1* -- Financial data schedule (for SEC filing purposes only)
99.1* -- Consent of persons named to be directors
</TABLE>
- ---------------
* Previously filed.
(b) Financial Statement Schedules.
Not Applicable
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to
II-4
<PAGE> 228
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 229
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Atlanta, State of Georgia, on July 29,
1998.
RAILWORKS CORPORATION
By: /s/ MICHAEL R. AZARELA
------------------------------------
Michael R. Azarela
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities indicated on July 29,
1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board, Chief Executive Officer
- ----------------------------------------------------- and Director (Principal Executive Officer)
John G. Larkin
/s/ MICHAEL R. AZARELA Executive Vice President, Chief Financial
- ----------------------------------------------------- Officer and Director (Principal Financial
Michael R. Azarela Officer)
* Vice President, Chief Operating Officer and
- ----------------------------------------------------- Director
John Kennedy
* Vice President and Chief Accounting Officer
- ----------------------------------------------------- (Principal Accounting Officer)
Harold C. Kropp, Jr.
* Director
- -----------------------------------------------------
Ronald W. Drucker
* Director
- -----------------------------------------------------
R.C. Matney
*By: /s/ MICHAEL R. AZARELA
------------------------------------------------
Michael R. Azarela
Attorney-in-fact
</TABLE>
II-6
<PAGE> 1
EXHIBIT 23.2
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Nashville, Tennessee
July 24, 1998
<PAGE> 1
EXHIBIT 23.3
[LETTERHEAD DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C.]
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement and Prospectus of Railworks
Corporation, relating to the offering of 5,000,000 shares of common stock, of
our reports dated February 24, 1998 on the financial statements and the
financial statement schedules of New England Railroad Construction Company, Inc.
contained in this Registration Statement, and to the use of our name, and the
statements with respect to us, under the heading "Experts" in the Prospectus.
/s/ Dworken, Hillman, LaMorte & Sterczala, P.C.
DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C.
July 24, 1998
Bridgeport, Connecticut
<PAGE> 1
EXHIBIT 23.4
[CANNON & COMPANY LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use of our audit report dated March 11, 1998 on the
financial statements of CPI CONCRETE PRODUCTS, INCORPORATED for the years ended
January 31, 1998, 1997 and 1996 included in the Registration Statement for
Railworks on Form S-1 and to the reference to our Firm under the caption
"Experts" in the Prospectus.
/s/ Cannon & Company
--------------------
CANNON & COMPANY
Memphis, Tennessee
July 24, 1998
