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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________________ to __________________
Commission file number 0-24639
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RailWorks Corporation
(Exact name of registrant as specified in its governing instrument)
Delaware 58-2382378
(State of Organization) (IRS Employer Identification No.)
1104 Kenilworth Drive, Suite 301, Baltimore, Maryland 21204
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (410) 512-0500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
15,073,530 shares of Common Stock were outstanding as of November 9, 1998.
- -------------------------------------------------------------------------------
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RailWorks Corporation
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997
Consolidated Statements of Income for the three months ended
September 30, 1998 (unaudited) and 1997 (unaudited) and for
the nine months ended September 30, 1998 (unaudited) and
1997 (unaudited)
Consolidated Statements of Cash Flows for nine months ended
September 30, 1998 (unaudited) and 1997 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Introduction
Historical Results of Operations
Pro Forma Results of Operations
Liquidity and Capital Resources
Year 2000
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Items 1 through 6
Signatures
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RailWorks Corporation
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .......................................... $ 3,205 $ 1,120
Accounts receivable ........................... 68,780 46,436
Costs and estimated earnings in excess of
billings on uncompleted contracts ........... 21,341 17,149
Inventories:
Raw materials .............................. 8,242 1,240
Finished goods ............................. 1,713 --
Deferred tax asset ............................ -- 1,020
Other current assets .......................... 2,989 977
--------- --------
Total current assets ........... 106,270 67,942
--------- --------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 13,603 448
LESS -- ACCUMULATED DEPRECIATION AND
AMORTIZATION .................................. (506) (56)
--------- --------
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, Net ............................. 13,097 392
--------- --------
OTHER ASSETS:
Goodwill ...................................... 88,426 --
Deferred tax asset............................. 1,660 --
Other ......................................... 2,245 18
--------- --------
Total other assets ............. 92,331 18
--------- --------
Total assets ................... $ 211,698 $ 68,352
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .......... $ 884 $ 2,555
Accounts payable and accrued liabilities ...... 34,940 22,547
Accrued payroll and related withholdings ...... 4,507 4,711
Billings in excess of costs and estimated
earnings on uncompleted contracts ........... 5,922 8,510
Deferred tax liability......................... 542 --
Other current liabilities ..................... 3,567 3,119
--------- --------
Total current liabilities ..... 50,362 41,442
--------- --------
</TABLE>
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<TABLE>
<S> <C> <C>
LONG-TERM DEBT .................................... 39,678 12,449
EXCESS OF ACQUIRED NET ASSETS OVER COST ........... 8,744 10,210
OTHER LIABILITIES ................................. 7,950 2,813
--------- -------
Total long-term liabilities .............. 56,372 25,472
--------- -------
Total liabilities ........................ 106,734 66,914
--------- -------
COMMITMENTS AND CONTINGENCIES ..................... -- --
--------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized
10,000,000 shares, no shares issued ......... -- --
Common stock, $0.01 par value, authorized
100,000,000 shares, 15,073,530 shares
issued and outstanding at September 30 ...... 151 30
Additional paid-in capital .................... 121,321 --
Retained earnings (deficit) ................... (16,508) 1,408
--------- -------
Total stockholders' equity ............... 104,964 1,438
--------- -------
Total liabilities and stockholders' equity $ 211,698 $68,352
========= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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RailWorks Corporation
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues ....................................... $ 53,077 $ 41,197
Contract costs ................................. (44,755) (37,202)
------------ -----------
Gross profit ................................... 8,322 3,995
Selling, general and administrative expenses ... (4,677) (3,011)
Non-recurring expenses ......................... (19,965) --
Transaction fees ............................... (1,281) --
Depreciation and amortization expense .......... (803) 48
Interest expense ............................... (651) (382)
Interest and other income ...................... 269 128
------------ -----------
Income (loss) before income taxes .............. (18,786) 778
Provision for income taxes ..................... (250) (311)
------------ -----------
Net income (loss) .............................. $ (19,036) $ 467
============ ===========
Basic earnings (loss) per share ................ $ (1.72) $ .16
============ ===========
Weighted average shares used in computing
earnings (loss) per share .................... 11,035,687 2,960,000
============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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RailWorks Corporation
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues ......................................... $ 139,457 $ 108,337
Contract costs ................................... (121,898) (95,503)
----------- -----------
Gross profit ..................................... 17,559 12,834
Selling, general and administrative expenses ..... (11,563) (10,255)
Non-recurring expenses ........................... (19,965) --
Transaction fees ................................. (1,281) --
Depreciation and amortization expense ............ (745) 162
Interest expense ................................. (1,508) (1,370)
Interest and other income ........................ 556 837
----------- -----------
Income (loss) before income taxes ................ (16,947) 2,208
Provision for income taxes ....................... (967) (883)
----------- -----------
Net income (loss) ................................ $ (17,914) $ 1,325
=========== ===========
Basic earnings (loss) per share .................. $ (3.17) $ .45
=========== ===========
Weighted average shares used in computing
earnings (loss) per share ...................... 5,651,896 2,960,000
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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RailWorks Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................ $(17,914) $ 1,325
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization ................ 745 (162)
Non-cash compensation charge ................. 14,873 --
Deferred taxes ............................... -- 490
Gain on sale of equipment .................... (3) (99)
Change in assets and liabilities:
Increase in accounts receivable and costs
and estimated earnings in excess of
billings on uncompleted contracts ........ (6,679) (6,340)
Decrease in inventory ...................... 183 462
(Increase) decrease in other current assets (667) 18
Increase (decrease) in accounts payable
and accrued liabilities ................. 4,492 (2,054)
(Decrease) in accrued payroll and
related withholdings ..................... (343) (825)
(Decrease) increase in billings in excess of
costs and estimated earnings on
uncompleted contracts .................... (3,920) 6,076
(Decrease) increase in other current
liabilities .............................. (2,225) 42
(Increase) in other assets ................. (120) (28)
Increase (decrease) in other liabilities ... 5,073 (325)
-------- -------
Net cash used in operating activities .... (6,505) (1,420)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ................... 3 99
Purchase of equipment and leasehold
improvements .................................... (914) (353)
Acquisition of Founding Companies, net of cash
acquired ........................................ (51,139) --
-------- -------
Net cash used in investing activities ...... (52,050) (254)
-------- -------
</TABLE>
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<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan origination fee ................... (1,520) --
Proceeds from issuance of Common Stock, net ....... 52,487 --
Proceeds from contingent promissory notes ......... -- 14,608
Repayment of contingent promissory notes .......... -- (157)
Proceeds from note payable ........................ -- 4,000
Repayments of note payable ........................ -- (2,500)
Proceeds from long-term borrowing ................. 49,325 11,340
Repayment of long-term borrowings ................. (39,652) (23,505)
-------- -------
Net cash provided by financing activities .... 60,640 3,786
-------- -------
NET INCREASE IN CASH ................................ 2,085 2,112
CASH, beginning of period ........................... 1,120 10
-------- -------
CASH, end of period ................................. $ 3,205 $ 2,122
======== =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest .......... $ 1,269 $ 1,246
======== =======
Cash paid during the period for income taxes ...... $ 118 $ 188
======== =======
</TABLE>
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
The Company issued 8,867,648 shares of Common Stock in exchange for 100% of
outstanding Common Stock of the Founding Companies.
See Accompanying Notes to Consolidated Financial Statements.
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RailWorks Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulations S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included in the accompanying unaudited
consolidated financial statements . Operating results for the three and nine
months ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
NOTE 2 - ORGANIZATION
RailWorks Corporation ("RailWorks" or the "Company") was incorporated
in Delaware on March 20, 1998 and was initially capitalized on such date
through the sale of 10 shares of Common Stock for an aggregate purchase price
of $100. RailWorks seeks to become a leading nationwide provider of rail system
services, including construction and rehabilitation, repair and maintenance,
and related products. RailWorks' strategy is to provide a full range of rail
related services and products on a national basis and offer integrated rail
system solutions. To accomplish this objective, RailWorks acquired, effective
August 4, 1998, (the "Acquisitions") fourteen U.S. businesses (the "Founding
Companies"), completed an initial public offering (the "Offering") of its
Common Stock on the same date (taken together "the Consolidation") and,
subsequent to the Consolidation, intends to acquire, through merger or purchase
similar companies to expand its operations. RailWorks and its newly formed,
wholly-owned subsidiaries, the Founding Companies, have merged together upon
consummation of the Offering. The Founding Companies are: Annex Railroad
Builders, Inc. and Associated Companies, Comtrak Construction, Inc., Comstock
Holdings, Inc., Condon Brothers, Inc., CPI Concrete Products Inc., H.P.
McGinley, Inc., 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 Associated
Companies, Southern Indiana Wood Preserving Company, Inc., U.S. Trackworks,
Inc. and Associated Companies, and Wm. A. Smith Construction Co., Inc. and
Associated Companies.
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For accounting and financial statement purposes, Comstock Holdings,
Inc. (one of the Founding Companies) ("Comstock" or the "Accounting
Acquiror") has been identified as the accounting acquiror consistent with Staff
Accounting Bulletin ("SAB") No. 97 of the Securities and Exchange Commission.
The historical financial statements of RailWorks prior to August 4, 1998, are
those of Comstock restated to reflect the exchange of 2,960,000 RailWorks shares
for the shares of the Accounting Acquiror. The acquisitions of the remaining
Founding Companies have been accounted for as purchases in accordance with
Accounting Principles Board ("APB") Statement No. 16 "Business Combinations".
NOTE 3 - THE ACQUIRED COMPANIES
Concurrent with the consummation of the Company's initial public
offering, RailWorks Corporation acquired the fourteen companies as described in
the business combination. The aggregate consideration paid by RailWorks to
acquire the Founding companies was, subject to working capital and other
adjustments, approximately $51.1 million in cash, net of cash acquired and
8,867,648 shares of RailWorks Common Stock. The acquisitions were accounted for
as purchases as of August 4, 1998. The resulting goodwill of approximately $90
million, which is being amortized over 40 years, is the excess of the purchase
price over the net fair value of the assets acquired.
Several non-recurring expenses were incurred in conjunction with the
transaction. The most significant was a stock grant of 1,205,872 of RailWorks
shares valued at $14.5 million to the executive officers of the Company which
was recorded as compensation expense. Other items of non-recurring expenses
related to the consolidation included fees paid to service providers related to
the transaction and provision for corporate staff procurement and relocation.
The total of all other expenses amounted to $5.5 million, which includes charges
recorded by the Accounting Acquiror related to the reorganization of its
operations as a result of the Consolidation. The total non-recurring expenses
charged to operations during the third quarter was $20.0 million.
The accompanying financial statements include a preliminary allocation
of the purchase price related to the acquisition of the Founding Companies based
on information available at the time of the purchase. Adjustments to this
preliminary allocation may be necessary as additional information is made
available. Such adjustments include, but are not limited to, accounts
receivable, inventory, certain employee benefit accruals and other reserves.
These adjustments will be quantified and recorded in the fourth quarter of 1998.
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NOTE 4 - CAPITAL STOCK
On August 4, 1998, RailWorks consummated the Offering of 5,000,000
shares of its Common Stock at a price of $12.00 per share. Gross proceeds were
$60.0 million and net proceeds to RailWorks, after deducting underwriting
discounts, commissions, and other Offering expenses were $52.5 million.
Concurrent with the Offering, RailWorks issued an aggregate of
8,867,648 shares of Common Stock to the owners of the Founding Companies in
exchange for 100% of the outstanding stock of the Founding Companies.
Additionally, RailWorks issued 1,205,872 shares of Common Stock to its
executive management team. As a result of this stock grant, RailWorks
recognized approximately $14.5 million in compensation expense in the third
quarter of 1998 with an offsetting increase to additional paid in capital.
On August 13, 1998, the Compensation Committee of the Board of
Directors adopted its 1998 Stock Incentive Plan which reserves 2,000,000 shares
of Common Stock for issuance under the Plan. The shares are to be issued at the
discretion of the Board of Directors to incentivize management of RailWorks and
its subsidiaries.
On August 4, 1998, RailWorks' two independent directors were each
granted options to purchase 10,000 shares of Common Stock at the Offering
price.
NOTE 5 - CREDIT FACILITY
On August 4, 1998, RailWorks entered into a secured $75 million
revolving credit agreement with NationsBank, N.A. (the "Credit Facility"). The
Credit Facility expires on August 4, 2001, however, RailWorks may request the
bank to extend the agreement for two, one-year periods. The proceeds of the
Credit Facility are to be utilized for working capital, future acquisitions and
letters of credit. The aggregate amount of letter of credit obligations that
can be drawn against the Credit Facility shall not exceed $20 million.
Interest on loans, commitment fees, and letter of credit fees are
based upon consolidated leverage ratios in a pricing matrix. A facility fee of
2% was paid on the total Credit Facility.
As of November 9, 1998, RailWorks had total borrowings outstanding of
$44.9 million under the Credit Facility.
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NOTE 6 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128 ("Statement 128"), "Earning Per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Diluted earnings per share is not
presented for periods ended in 1998 because the effect of the Company's Common
Stock equivalents (stock options) is antidilutive. Earnings per share for
periods ended in 1997 have been presented on a pro forma basis as if the shares
issued to the Accounting Acquiror had been outstanding for the periods
presented.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 ("Statement 133"), "Accounting for Derivative Instruments and
Hedging Activities." Statement 133, which will be effective for the Company
beginning in the year 2000, establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or a liability measured at its fair value. Statement 133
requires that changes in each derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met.
The Company does not currently have any financial instruments which are
affected by Statement 133. However, the Company may enter into such instruments
in the near future.
NOTE 8 - EMPLOYMENT AGREEMENTS
RailWorks has entered into employment agreements with its Chief
Executive Officer, Chief Financial Officer, Chief Operating Officer and Chief
Accounting Officer (together, 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. 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 first bonus pool (the "First Bonus Pool") and 33.3%, 13.3%, 10.0% and
10.1%, respectively, of the second bonus pool (the "Second Bonus Pool"). The
First Bonus Pool will consist of 10% of pre-tax profits and the Second Bonus
Pool will consist of 15% of the amount by which net income exceeds certain
benchmarks. In addition, the agreements provide that each Executive Officer was
granted shares of restricted stock as set forth herein. At any time after the
Offering, the employee may request a loan from RailWorks in the amount of the
income taxes due on the stock granted to the employee under his
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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 contains non-competition, non-solicitation and confidential
information provisions.
Upon consummation of the Acquisitions, RailWorks entered into
employment agreements with certain employee-stockholders of each Founding
Company. The agreements expire on August 4, 2000. On and after such date, the
employees may give twelve months written notice of termination of the agreement
(the "Expiration Date"). Each agreement is terminable by RailWorks 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 provides for an annual
base salary and provides that the salary 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.
NOTE 9 - SUBSEQUENT EVENT
On September 29, 1998, RailWorks Corporation issued a press release
indicating that it had reached an agreement in principle to acquire three
companies, Gantrex Group, LTD., Sheldon Electric, Inc. and Armcore Railroad
Contractors, Inc. The Sheldon Electric, Inc. and Armcore Railroad Contractors,
Inc. transactions have been consummated in November, 1998. The transaction
regarding Gantrex Group, LTD. is expected to close before year end.
NOTE 10 - PRO FORMA SCHEDULES
The following unaudited Pro Forma Results of Operations for RailWorks
assume that the acquisitions or the Founding Companies were consummated on
January 1 of the periods presented. This information is not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results.
The pro forma combined financial statements were derived from the
historical financial statements of the Founding Companies. For the three and
nine months ended September 30, 1998, pro forma adjustments consist primarily of
the elimination of non-recurring expenses and transaction fees of $21.2 million,
excess owners compensation of $2.0 million and $2.8 million, respectively and a
provision for income taxes to reflect statutory rates. For the three and nine
months ended in September 30, 1997, pro forma adjustments consist primarily of
the elimination excess owners compensation of $.6 million and $2.0 million,
respectively and a provision for income taxes to reflect statutory rates.
Reference is made to pro forma information included in the Company's Prospectus
dated July 29, 1998.
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RailWorks Corporation
PRO FORMA COMBINED RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues ................................... $ 63,238 $ 72,371
Contract costs ............................. (51,646) (61,707)
------------ ------------
Gross profit ............................... 11,592 10,664
Selling, general and administrative expenses (3,606) (3,956)
Depreciation and amortization expense ...... (1,295) (1,711)
Interest expense ........................... (677) (570)
Interest and other income .................. 406 206
------------ ------------
Income before income taxes ................. 6,420 4,633
Provision for income taxes ................. (2,726) (1,997)
------------ ------------
Net income ................................. $ 3,694 $ 2,636
============ ============
Basic earnings per share ................... $ .25 $ .17
============ ============
Weighted average shares used in computing
pro forma net income per share .......... 15,073,530 15,073,530
============ ============
<CAPTION>
Nine Months Ended
September 30
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues ................................... $ 196,928 $ 185,608
Contract costs ............................. (167,593) (159,631)
------------ ------------
Gross profit ............................... 29,335 25,977
Selling, general and administrative expenses (12,827) (12,576)
Depreciation and amortization expense ...... (3,725) (4,979)
Interest expense ........................... (1,816) (1,709)
Interest and other income .................. 1,000 948
------------ ------------
Income before income taxes ................. 11,967 7,661
Provision for income taxes ................. (5,259) (3,558)
------------ ------------
Net income ................................. $ 6,708 $ 4,103
============ ============
Basic earnings per share ................... $ .45 $ .27
============ ============
Weighted average shares used in computing
pro forma net income per share .......... 15,073,530 15,073,530
============ ============
</TABLE>
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Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
RailWorks Corporation was incorporated on March 20, 1998. Concurrently
with the consummation of the Company's initial public offering (the "Offering")
on August 4, 1998, the Company acquired 14 companies (the "Founding Companies")
each of which has been operating as a separate independent entity providing
rail construction, rehabilitation, repair and maintenance and related products.
For accounting and financial statement purposes, Comstock Holdings,
Inc. ("Comstock" one of the Founding Companies) has been identified as the
accounting acquirer consistent with Staff Accounting Bulletin ("SAB") No. 97 of
the Securities and Exchange Commission because its owners received the largest
portion, 34.6%, of the shares of Common Stock issued to the owners of the
Founding Companies in the consolidation. The historical financial statements
prior to August 4, 1998 are those of Comstock. The Balance Sheet as of
September 30, 1998, includes RailWorks and Comstock consolidated with the
Founding Companies. The Results of Operations for the Three and Nine Months
Ended September 30, 1998 and the Statements of Cash Flows for the Nine Months
Ended September 30, 1998, includes the results of Comstock for the entire
period and the results of the acquired Founding Companies only since August 1,
1998. Consequently, management believes that individual Founding Companies
financial comparisons are no longer meaningful. Therefore, third quarter 1998
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented on a pro forma consolidated basis.
The Founding Companies were managed prior to their acquisition as
independent private companies, and their results of operations reflect
different tax structures (S corporations and C corporations for the Founding
Companies), which have influenced, among other things, their historical levels
of owners' compensation. In connection with the organization of the Company,
these owners and certain key employees have agreed to certain reductions in
their compensation commencing on the consummation of the Offering.
RailWorks Corporation, which conducted no operations prior to the
consummation of the Offering other than in connection with the acquisitions of
the Founding Companies (the "Acquisitions") and the financing activities
related thereto, including the Offering, intends to integrate these businesses
and their operations and administrative functions over a period of time. This
integration process may present opportunities to reduce costs through the
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elimination of duplicative functions and through economies of scale,
particularly in obtaining greater volume discounts from suppliers, but will
also necessitate additional costs and expenditures for corporate management and
administration (including costs related to the hiring of additional management
personnel), corporate expense related to being a public company, systems
integration and facilities expansion. These various costs and possible
cost-savings may make comparison of historical operating results not comparable
to, or indicative of, future performance.
For all the reasons set forth above and others, the following
discussions of Pro Forma Results of Operations should be read with the
foregoing caveats as to non-comparability in mind.
This Quarterly Report on Form 10-Q contains forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 ("Forward-Looking Statements"), which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the Forward-Looking Statements. Factors that
might cause such a difference include the risks described under the caption
"Risk Factors" in the Company's Prospectus dated July 29, 1998. Such factors
may also cause substantial volatility in the market price of the Company's
Common Stock.
HISTORICAL RESULTS OF OPERATIONS
Three Months Ended September 30, 1998
Revenues were $53.1 million for the three months ended September 30, 1998.
Contract costs related to that revenue were $44.8 million. Gross Profit for the
three months ended September 30, 1998 was $8.3 million. Selling, general and
administrative expenses were $4.7 million. Non-recurring expenses and
transaction fees recorded during the period related to the Offering were $20.0
million and $1.3 million, respectively. The net loss for the three months ended
September 30, 1998 was $19.0 million.
Nine Months Ended September 30, 1998
Revenues were $139.4 million for the nine months ended September 30, 1998.
Contract costs related to that revenue were $121.9 million. Gross Profit for
the nine months ended September 30, 1998 was $17.6 million. Selling, general
and administrative expenses were $11.6 million. Non-recurring expenses and
transaction fees recorded during the period related to the Offering were $20.0
million and $1.3 million, respectively. The net loss for the nine months ended
September 30, 1998 was $17.9 million.
16
<PAGE> 17
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenue. Revenue decreased $9.1 million, or 12.6%, from $72.4 million
for the three months ended September 30, 1997 to $63.2 million for the three
months ended September 30, 1998. The decrease was due to a slower than expected
start on certain backlog projects such as the 63rd Street and Conde Nast
projects. Additionally, certain projects were substantially completed such as
JFK International Airport Terminal One and Grand Central Terminal projects.
Gross Profit. Gross profit increased $928,000, or 8.7%, from $10.7
million for the three months ended September 30, 1997 to $11.6 million for the
three months ended September 30, 1998. This was the result of an increase in
repetitive work in the New York Commercial Operation and an increase in the
amount of change orders processed during the 3rd Quarter of 1998. Repetitive
work and change orders historically have provided higher margins than certain
lump sum and fixed price projects. The gross profit percentage increased 3.6%,
from 14.7% for the three months ended September 30, 1997 to 18.3% for the three
months ended September 30, 1998. This increase, as mentioned above, was the
result of higher profitability associated with the mix and type of work
performed during the 3rd quarter of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $350,000, or 8.8%, from $4.0 million for the
three months ended September 30, 1997 to $3.6 million for the three months
ended September 30, 1998. This decrease was primarily attributable to
reductions in executive and administrative staff and tighter cost controls by
management. As a percentage of revenue, selling, general and administrative
expenses increased from 5.5% for the three months ended September 30, 1997 to
5.7% for the three months ended September 30, 1998. This percentage increase
was a result of the decrease in revenues in the 3rd quarter of 1998 compared to
1997, as mentioned above.
Net Income. Net income increased $1.1 million, or 40.1%, from $2.6
million for the three months ended September 30, 1997 to $3.7 million for the
three months ended September 30, 1998, as a result of the items mentioned
above.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
17
<PAGE> 18
Revenue. Revenue increased $11.3 million, or 6.1%, from $185.6 million
for the nine months ended September 30, 1997 to $196.9 million for the nine
months ended September 30, 1998. This increase was due primarily to a $14.0
million increase in revenue from New York Commercial Operations, partly offset
by a $3.0 million decrease in revenue related to transit projects on the West
Coast. Included in the New York Commercial projects was work performed at JFK
International Airport and Two Penn Plaza.
Gross Profit. Gross profit increased $3.4 million or 12.9%, from $26.0
million for the nine months ended September 30, 1997 to $29.3 million for the
nine months ended September 30, 1998. This increase was a result of the
increased revenue mentioned above. The gross profit percentage increased .9%,
from 14.0% for the nine months ended September 30, 1997 to 14.9% for the nine
months ended September 30, 1998. This was the result of an increase in
repetitive work and change orders in 1998, as mentioned above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $251,000, or 2.0%, from $12.6 million for the
nine months ended September 30, 1997 to $12.8 million for the nine months ended
September 30, 1998. The increase in expenses was the result of higher
administrative expenses necessary to support the volume of business. As a
percentage of revenues, selling, general and administrative expenses decreased
from 6.8% for the nine months ended September 30, 1997 to 6.5% for the nine
months ended September 30, 1998. This decrease was the result of leveraging
general and administrative expenses over higher revenue.
Net Income. Net income increased $2.6 million, or 63.5% from $4.1
million for the nine months ended September 30, 1997 to $6.7 million for the
nine months ended September 30, 1998 as a result of the items mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
Cash for future acquisitions and working capital will be financed by
funds generated from operations, together with borrowings under a three-year,
$75 million senior revolving credit facility (the "Credit Facility") which
NationsBank, N.A. ("NationsBank") extended on August 4, 1998. The Credit
Facility expires on August 4, 2001, however RailWorks may request NationsBank
to extend the agreement for two, one-year periods. The proceeds of the Credit
Facility are to be utilized for working capital, future acquisitions and
letters of credit. The aggregate amount of letter of credit obligations that
can be drawn against the Credit Facility shall not exceed $20 million.
18
<PAGE> 19
Interest on loans, commitment fees, and letter of credit fees are based
upon consolidated leverage ratios in a pricing matrix. A facility fee of 2% was
paid on the total Credit Facility.
As of November 9, 1998, RailWorks had borrowings outstanding of $44.9
million pursuant to the Credit Facility, which borrowings were used to repay a
portion of the indebtedness of the Founding Companies, fund expenses related to
the Offering and acquisitions. Availability of borrowings will be subject to a
borrowing base formula. The Credit Facility is secured by a first lien on all
of the capital stock of RailWorks' subsidiaries and on all accounts receivable
of RailWorks and its subsidiaries. The credit agreement (the "Credit
Agreement") governing the Credit Facility contains a negative pledge on all
other assets of RailWorks and its Subsidiaries and other usual and customary
covenants and events of default for transactions of the type contemplated by
the Credit Facility. RailWorks may also finance future acquisitions with shares
of Common Stock.
YEAR 2000
The Company has developed a plan to address Year 2000 issues. The plan
addresses three main areas: (a) information systems; (b) embedded chips; and (c)
supply chain readiness (including customers as well as inventory and
non-inventory suppliers). To oversee the process, the Company has established a
Steering Committee comprised of accounting and information systems personnel who
will report regularly to the Board of Directors and the Audit Committee.
The Company has identified potential deficiencies related to Year 2000
in its information systems and is in the process of addressing them through
upgrades and other remediation. The Company expects to complete remediation and
testing of its internal systems in the Summer of 1999. In respect of other
equipment with date sensitive operating controls such as manufacturing
equipment, HVAC, security and other similar systems, the Company is in the
process of identifying those items which may require remediation or
replacement. The Company expects to complete remediation or replacement and
testing of these in the Summer of 1999. As for third parties, the Company is in
the process of identifying and contacting suppliers, both inventory and
non-inventory, as well as customers. The Company expects to have a better
understanding of the Year 2000 readiness of these third parties over the next
several months.
Based upon the Company's current estimates, incremental out-of-pocket
costs of its Year 2000 program are expected to be approximately $250,000. These
costs are expected to be incurred primarily in fiscal 1999 and include third
party consultants, remediation of existing computer software and
19
<PAGE> 20
replacement and remediation of embedded chips. Such costs do not include
internal management time and the deferral of other projects, the effects of
which are not expected to be material to the Company's results of operations or
financial condition.
At this stage of the process, the Company believes that it is
difficult to specifically identify the most reasonably likely worst case Year
2000 scenario. As with all manufacturers and service providers, a reasonably
likely worst case scenario would be the result of failures of third parties
(including, without limitation, governmental entities and entities with which
the Company has no direct involvement) that continue for more than several days
in various geographic areas where the Company provides services, its products
are produced or from which the Company's raw materials and components are
sourced. In connection with the production of products and supplies of raw
materials and components, the Company is considering various contingency plans.
Any such plans would necessarily be limited to matters over which the Company
can reasonably control.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and
the ability of third parties with whom the Company relies on directly or
indirectly, to be Year 2000 compliant. Readers are cautioned that
Forward-Looking Statements regarding Year 2000 issues should be read in
conjunction with the cautionary statement in the Introduction Section of Item 2
of this Part.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(i) Changes in Securities
20
<PAGE> 21
On October 8, 1998, the Registrant issued 13,700 shares of its
non-voting Series A Convertible Preferred Stock (the "Preferred Stock") to BT
Alex. Brown Incorporated ("BT Alex. Brown") in exchange for 1,370,000 shares of
its Common Stock (the "Exchange"). BT Alex. Brown had reported to the Securities
and Exchange Commission on August 31, 1998 that it owned 2,009,062 shares of
RailWorks Common Stock. The Exchange reduced BT Alex. Brown's Common Stock
holdings to satisfy the Bank Holding Company Act (the "Act"). The Act requires
that a bank holding company own less than 5% of the voting stock of a publicly
traded corporation. Each share of Preferred Stock is convertible into 100
shares of Common Stock upon five days prior written notice of conversion
provided by BT Alex. Brown. However, subject to certain exceptions allowed by
the Act, conversion is prohibited if, after the conversion, BT Alex. Brown would
own 5% or more of RailWorks Common Stock.
(ii) Use of Proceeds
In connection with the initial public offering of the Company's Common
Stock (the "Offering"), the Company's Registration Statement (the "Registration
Statement") on Form S-1 (Registration No. 333-53483) was declared effective by
the Securities and Exchange Commission on July 29, 1998. The managing
underwriters were BT Alex. Brown, Schroder & Co. Inc. and Piper Jaffray Inc.
The Offering commenced on July 29, 1998, all securities offered thereby were
sold and the Offering has been completed. The securities registered consisted
of 5,000,000 shares (the "Offered Shares") of Common Stock, all of which were
sold for the account of the Company.
The Offered Shares were sold at a price to the public of $12.00 per
share, for aggregate gross proceeds of $60.0 million. Underwriting discounts
and commissions totaled $4.2 million and other miscellaneous expenses incurred
in connection with the Offering amounted to approximately $3.3 million,
resulting in net offering proceeds of approximately $52.5 million. A portion of
the miscellaneous expenses incurred in connection with the Offering were
financed with borrowings under the Company's credit facility. The proceeds of
the Offering were received by the Company on August 4, 1998, the closing date
of the Offering.
(iii) Recent Sales of Unregistered Securities
On August 4, 1998, 8,867,648 shares of Common Stock were issued to the owners of
the Founding Companies for 100% of the outstanding stock of the Founding
Companies, and 1,205,872 shares of Common Stock were issued to the executive
officers of the Company. In addition, the Exchange discussed in Item 2 of this
Part occurred on October 8, 1998. On August 4, 1998 the Company granted to each
of its outside directors, Messrs. Matney and Drucker, non-qualified stock
options to purchase 10,000 shares of Common Stock at an exercise price of $12.00
per share, the fair market value of the Common Stock on the date of grant. These
options vest ratably over a four-year period. The foregoing issuances were made
in reliance on the exemption from registration under Section 4(2) of the
Securities Act of 1933.
21
<PAGE> 22
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit List:
3.1 Certificate of Designation of the Series A Convertible
Preferred Stock (incorporated by reference to Exhibit 99.1 of the
Registrant's Current Report on Form 8-K date October 14, 1998.
27.1 Financial Data Schedule (for SEC filing purposes only)
99.1 Stock Exchange Agreement dated October 8, 1998 between
the Registrant and BT Alex Brown Incorporated
(incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated October 14,
1998).
b) Reports on Form 8-K
In a Form 8-K dated October 8, 1998 and filed with the
Securities and Exchange Commission of October 14, 1998,
the Registrant described an exchange with a stockholder of
1,370,000 share of Common Stock for 13,700 shares of
non-voting Series A Convertible Preferred Stock.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RailWorks Corporation
/s/ Michael R. Azarela
-------------------------------------
By: Michael R. Azarela
Executive Vice President and
Chief Financial Officer
Date: November 12, 1998
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RAILWORKS CORPORATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,205,000
<SECURITIES> 0
<RECEIVABLES> 68,780,000
<ALLOWANCES> 0
<INVENTORY> 9,955,000
<CURRENT-ASSETS> 106,270,000
<PP&E> 13,603,000
<DEPRECIATION> 506,000
<TOTAL-ASSETS> 211,698,000
<CURRENT-LIABILITIES> 50,362,000
<BONDS> 0
0
0
<COMMON> 151,000
<OTHER-SE> 121,321,000
<TOTAL-LIABILITY-AND-EQUITY> 211,698,000
<SALES> 139,457,000
<TOTAL-REVENUES> 139,457,000
<CGS> (121,898,000)
<TOTAL-COSTS> (121,898,000)
<OTHER-EXPENSES> (33,554,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,508,000)
<INCOME-PRETAX> (16,947,000)
<INCOME-TAX> (967,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,914,000)
<EPS-PRIMARY> (3.17)
<EPS-DILUTED> (3.17)
</TABLE>
