<PAGE> 1
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 March 31, 1999
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
RailWorks Corporation
(Exact name of registrant as specified in its governing instrument)
<TABLE>
<S> <C>
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)
</TABLE>
(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
--- ---
13,897,372 shares of Common Stock were outstanding as of May 6, 1999.
- --------------------------------------------------------------------------------
<PAGE> 2
RailWorks Corporation
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998
Consolidated Statements of Income for the three months ended
March 31, 1999 (unaudited) and 1998 (unaudited)
Consolidated Statements of Cash Flows for three months ended
March 31, 1999 (unaudited) and 1998 (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
Liquidity and Capital Resources
Year 2000
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Items 1 through 6
Signatures
<PAGE> 3
Item 1 - Consolidated Financial Statements
RailWorks Corporation
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................ $ 3,073 $ 2,846
Accounts receivable, net of allowance for doubtful accounts of
$451 and $442 at March 31, 1999 and December 31, 1998,
respectively .................................................. 88,432 77,181
Costs and estimated earnings in excess of
billings on uncompleted contracts ............................. 31,328 24,792
Inventories:
Raw materials ................................................. 9,998 7,535
Finished goods ................................................ 3,576 1,550
Deferred tax asset .............................................. 951 870
Other current assets ............................................ 6,055 3,401
--------- ---------
Total current assets ............................. 143,413 118,175
--------- ---------
PROPERTY, PLANT AND EQUIPMENT ...................................... 29,880 14,514
LESS - ACCUMULATED DEPRECIATION AND AMORTIZATION ................... 2,190 1,122
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, Net ................................. 27,690 13,392
--------- ---------
OTHER ASSETS:
Excess of cost over acquired net assets, net of amortization .... 131,842 93,845
Deferred tax asset .............................................. 85 85
Loans to officers................................................ 959 959
Other ........................................................... 1,758 2,180
--------- ---------
Total other assets ............................... 134,644 97,069
--------- ---------
Total ..... $ 305,747 $ 228,636
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ............................ $ 39,131 $ 931
Accounts payable and accrued liabilities ........................ 38,309 35,436
Accrued payroll and related withholdings ........................ 5,162 3,777
Billings in excess of costs and estimated
earnings on uncompleted contracts ............................. 14,158 5,958
Other current liabilities ....................................... 4,936 4,682
--------- ---------
Total current liabilities ....................... 101,696 50,784
--------- ---------
LONG-TERM DEBT ..................................................... 71,650 50,573
EXCESS OF ACQUIRED NET ASSETS OVER COST, net of amortization ....... 8,605 8,662
OTHER LIABILITIES .................................................. 11,138 8,609
--------- ---------
Total long-term liabilities ..................... 91,393 67,844
--------- ---------
Total liabilities ...................... 193,089 118,628
--------- ---------
STOCKHOLDERS' EQUITY:
Series A, convertible preferred stock, $1.00 par value,
authorized 10,000,000 shares, 13,700 shares issued
and outstanding .............................................. 14 14
Common stock, $0.01 par value, authorized 100,000,000 shares,
13,803,530 issued and outstanding at March 31, 1999,
13,703,530 issued and outstanding at December 31, 1998 ....... 138 137
Additional paid-in capital ..................................... 122,309 121,296
Retained earnings (deficit) .................................... (9,803) (11,439)
--------- ---------
Total stockholders' equity ............. 112,658 110,008
--------- ---------
Total ...... $ 305,747 $ 228,636
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> 4
RailWorks Corporation
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Revenues ................................................... $ 72,673 $ 41,628
Contract costs ............................................. 60,074 37,205
----------- ----------
Gross profit ............................................... 12,599 4,423
Selling, general and administrative expenses ............... 7,773 3,224
Depreciation and amortization expense ...................... 991 (39)
Interest expense ........................................... 1,613 420
Interest and other income .................................. (400) (292)
----------- ----------
Income before income taxes ................................. 2,622 1,110
Provision for income taxes ................................. 986 444
----------- ----------
Net income ................................................. $ 1,636 $ 666
=========== ==========
Basic earnings per share ................................... $ .12 $ .23
=========== ==========
Diluted earnings per share ................................. $ .11 $ .23
=========== ==========
Weighted average shares used in computing basic earnings
per share ............................................... 13,775,752 2,959,291
=========== ==========
Weighted average shares used in computing diluted
earnings per share ...................................... 15,149,047 2,959,291
=========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> 5
RailWorks Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
1999 1998
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 1,636 $ 666
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................ 1,954 (39)
Deferred taxes ........................................... (81) 424
Gain on sale of equipment ................................ (32) (8)
Change in assets and liabilities:
Accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts 10,048 (105)
Inventory ............................................... (164) 990
Other current assets .................................... 366 70
Accounts payable and accrued liabilities ................ (9,174) 1,722
Accrued payroll and related withholdings ................ 1,157 469
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................. (2,228) (3,107)
Other current liabilities ............................... (1,813) 418
Other assets ............................................ 2,751 (21)
Other liabilities ....................................... (2,380) (11)
-------- -------
Net cash provided by operating activities ............... 2,040 1,468
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ......................... 1,416 8
Purchase of equipment and leasehold improvements ........ (1,031) (65)
Acquisition of subsidiaries, net of cash acquired ....... (34,130) --
-------- -------
Net cash used in investing activities ................... (33,745) (57)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ...................... 63,519 2,019
Repayment of long-term borrowings ....................... (31,587) (3,605)
-------- -------
Net cash provided by (used in) financing activities ..... 31,932 (1,586)
-------- -------
NET INCREASE (DECREASE) IN CASH ................................. 227 (175)
CASH, beginning of period ....................................... 2,846 1,120
-------- -------
CASH, end of period ............................................. $ 3,073 $ 945
======== =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ...................... $ 1,350 $ 355
======== =======
Cash paid during the period for income taxes .................. $ 564 $ 66
======== =======
</TABLE>
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
In January 1999, the Company issued 100,000 shares of common stock as
partial consideration for 100% of the outstanding common stock in the FCM Rail,
Ltd. acquisition.
The Company also issued an aggregate amount of $9,000,000 in promissory
notes as partial consideration for the Midwest Railroad Construction &
Maintenance Corporation of Wyoming, FCM Rail, Ltd., F&V Metro Contracting Corp.
and Affiliates and Gantrex Group acquisitions.
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> 6
RailWorks Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
Regulation 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 months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
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 five million shares of
its Common Stock on the same date (taken together "the Consolidation") and,
subsequent to the Consolidation, acquired, through merger or purchase similar
companies to expand its operations. RailWorks and the Founding Companies merged
together upon consummation of the Offering.
On November 4, 1998, the Company acquired substantially all of the net
assets of Sheldon Electric, Inc. ("Sheldon"). Also, on November 4, 1998, the
Company acquired the stock of Armcore Railroad Contractors, Inc.
("Armcore"), an Indiana corporation, located in Frankfort, Indiana.
On January 7, 1999, the company acquired all the stock of MidWest Railroad
Construction & Maintenance Corporation of Wyoming ("MidWest") which specializes
in construction repair and maintenance of railroad tracks in various western
states. On January 26, 1999, the Company acquired all the stock of Gantrex Group
(Gantrex) which manufactures and supplies crane rail fastening systems including
pad manufacturing, extrusion and continuous vulcanizing capabilities. On January
29, 1999, the Company acquired all the stock of FCM Rail, Ltd. ("FCM") which
provides customized leasing services to users of on track rail equipment. In
March 1999, the Company acquired all of the stock of F&V Metro Contracting Corp.
and Affiliates ("F&V") which performs electrical and mechanical installations
for transit and transportation agencies in the metropolitan New York City area.
The combined purchase price for these first quarter 1999 acquisitions was
$33,649,000 in cash, $9,000,000 of promissory notes payable and 100,000 shares
of RailWorks Common Stock at an aggregate value of $1,000,000, plus the
potential to receive earnouts if targeted revenue and profit goals are achieved
over the next five years. The fair market value of assets purchased was
$9,704,000 and the preliminary goodwill was approximately $33,945,000. The
estimated fair market values are based upon preliminary estimates and
assumptions and are subject to revision. Any additional purchase price paid will
increase the goodwill reported.
For accounting and financial statement purposes, Comstock Holdings, Inc.
(one of the Founding Companies) ("Comstock" or the "Accounting Acquirer") has
been identified as the accounting acquirer 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. The acquisitions of the remaining Founding Companies and subsequent
acquired companies have been accounted for as purchases in accordance with
Accounting Principles Board ("APB") Statement No. 16 "Business Combinations".
Each purchase price has been allocated to the assets and the liabilities assumed
based upon the fair values at the date of acquisition.
<PAGE> 7
NOTE 3 - CREDIT FACILITIES
In the first quarter of 1999, RailWorks Corporation obtained two new credit
facilities; a Bridge Term Facility and a Swingline Revolving Facility.
The Bridge Term Facility (the "Bridge") is a non-revolving, $25,000,000
term commitment, issued on February 2, 1999, with a June 30, 1999 maturity date.
The facility was an amendment to the Company's Revolving Credit Facility issued
on August 4, 1998, including consistent pricing, terms and conditions. The
Company borrowed $25,000,000 on the Bridge during the first quarter of 1999. The
interest rate during the quarter was 9.00% and 8.5% for the remainder of the
term. The full principal amount of $25,000,000 was repaid on April 8, 1999, see
Note 8. A 1.7% facility fee was paid on the Bridge.
The Swingline Revolving Facility (the "Swingline") is a revolving
commitment of $2,000,000 issued on January 5, 1999. The Swingline, which expires
on August 4, 2001, was executed as an amendment to the Company's existing
Revolving Credit Facility. The Swingline allows for borrowings and repayments
within the Company's Revolving Credit Facility in increments of $1 directly with
NationsBank, the agent under the Revolving Credit Facility. Interest is based
upon consolidated leverage ratios in a pricing matrix which may be based upon
prime or LIBOR. RailWorks borrowed against the Swingline during the first
quarter and the balance outstanding as of March 31, 1999 was 583,387. The
monthly fee for the facility is $250.
A $2,150,000 letter of credit on the Company's Revolving Credit Facility
was issued on February 26, 1999, related to the acquisition of Gantrex Group.
NOTE 4 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". This statement supersedes APB Opinion No. 15,
"Earnings per Share" and simplifies the computation of earnings per share
("EPS"). Primary EPS is replaced with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Fully diluted EPS is replaced with diluted EPS. Diluted EPS reflects the
potential dilution if certain securities are converted and also includes certain
shares that are contingently issuable. The following is the computation of
earnings per share as of March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Net income ............................ $ 1,636,000 $ 666,000
=========== ==========
Shares used for calculating basic EPS . 13,775,752 2,959,291
Dilutive effect of:
Stock options .................... 3,295 *
Convertible preferred shares ..... 1,370,000 *
---------- ---------
Shares used for calculating diluted EPS 15,149,047 2,959,291
=========== ==========
Basic EPS ............................. $ .12 $ .23
=========== ==========
Diluted EPS ........................... $ .11 $ .23
=========== ==========
</TABLE>
* There were no stock options and convertible preferred shares issued and
outstanding during the three months ended March 31, 1998.
NOTE 5 - FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 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. SFAS No. 133 requires that changes in each
derivative's fair value be recognized into earnings unless specific hedge
accounting criteria are met. The Company does not anticipate that SFAS No. 133
will have a material impact upon its operations.
<PAGE> 8
INTEREST RATE SWAPS
The Company has entered into an interest rate swap agreement to manage
exposure to interest rate fluctuations. The outstanding agreement involves the
exchange of floating rate interest payments for fixed rate interest payments
over a specified time period without the exchange of any underlying principal
amounts. The Company's credit exposure is limited to the fair value of the
agreements, and the Company only enters into agreements with highly rated
counterparties. The Company does not enter into interest rate swap agreements
for trading or speculative purposes and matches the terms and contract notional
amounts to existing debt. The net amounts paid or received under interest rate
swap agreements are recognized as an adjustment to interest expense. The fair
value of interest rate swap agreements is based upon the estimated cost to
terminate the agreements, taking into account current interest rates and
creditworthiness of the counterparties. The fair value at March 31, 1999, of the
Company's $10,000,000 notional value interest rate swap was approximately
$46,000.
RailWorks entered into an interest rate collar on March 11, 1999, to hedge
against significant interest rate changes. The transaction was comprised of two
offsetting $50,000,000 interest rate swap options, which expired on March 31,
1999. In effect, the transactions provided RailWorks with a collar on the rate
of the 10-year Treasury Swap at a floor of 5.73% and a ceiling of 6.23%. The
rate did not vary outside of the collar and the options were not executed. There
was no fee for this transaction.
On April 4, 1999, RailWorks negotiated the termination of the previously
disclosed $10,000,000 interest rate swap with First Union Bank. The bank agreed
to pay a Termination Fee of $32,100 to RailWorks Corporation, to be recorded as
a reduction in interest expense and which nullified the swap transaction.
NOTE 6 - SEGMENT REPORTING
During 1998, the Company adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). In accordance with
SFAS No. 131, the Company has three reportable segments: (1) transit services,
(2) rail construction, rehabilitation, repair and maintenance services and (3)
rail products and supplies. The transit services segment provides transit
construction and rehabilitation services, as well as installation of signaling,
communications and electrical systems. The rail construction services segment
provides design, engineering, construction, rehabilitation and repair and
maintenance of track systems. The rail products and supplies segment provides a
broad range of rail related products, including treated wood ties. RailWorks
evaluates performance based on profit or loss from operations before income
taxes, interest income and expense, and non-recurring gains and losses. Each of
the segments follow a uniform set of accounting policies.
The following matrix presents operational and financial condition data as
of and for the three months ended March 31, 1999 for analysis by reportable
segment (in thousands). For the three months ended March 31, 1998, Comstock
operated in one reportable segment: Transit Services. Accordingly, no additional
disclosures are required under SFAS No. 131.
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<CAPTION>
TRANSIT RAIL PRODUCTS RAIL OTHER/
SERVICES AND SUPPLIES CONSTRUCTION CORPORATE TOTAL
-------- ------------ ------------ --------- -----
<S> <C> <C> <C> <C> <C>
Revenues from external
Customers ............................ $48,758 $ 8,241 $16,326 $ -- $ 73,325
Intersegmental revenue ................. -- 334 318 -- 652
Depreciation/amortization .............. 32 429 565 928 1,954
Segment operating profit (loss) ........ 1,806 1,508 1,187 (666) 3,835
Costs and estimated earnings in
Excess of billings on
Uncompleted contracts ................ 28,673 -- 2,655 -- 31,328
Segment assets ......................... 75,554 27,916 27,097 210,249 340,816
Capital expenditures ................... 73 234 692 32 1,031
</TABLE>
<PAGE> 9
The Company's reconciliation of segment totals to enterprise values are as
follows (in thousands):
<TABLE>
<S> <C>
REVENUES:
Total revenues for reportable segments ......... $ 73,325
Elimination of intersegment revenues ........... (652)
--------
Consolidated revenues .......................... $ 72,673
========
OPERATING PROFIT OR LOSS:
Total profit or loss for reportable segments ... $ 3,835
========
ASSETS:
Total assets for reportable segments ........... $340,816
Elimination of intercompany receivables/payables (551)
Elimination of investments in subsidiaries ..... (34,518)
--------
Consolidated assets ............................ $305,747
========
</TABLE>
NOTE 7 - CAPITAL STOCK AND STOCK OPTIONS
The Company issued 100,000 shares of common stock as partial consideration
for the acquisition of the outstanding stock of FCM Rail, Ltd.
On August 13, 1998, the Company approved the 1998 Stock Incentive Plan (the
"Plan") which provides for the granting or awarding of stock options and stock
appreciation rights to non-employee directors, officers and other key employees
(including officers of the Subsidiaries) and consultants. The Plan reserves for
issuance 2,000,000 shares of common stock. In general, the terms of the option
awards (including vesting schedules) will be established by the Compensation
Committee of the Company's board of directors.
Under the terms of the Plan, the Company issued options to purchase 200,000
shares of common stock to a president and certain employees at one of the
companies that RailWorks acquired during the first quarter of 1999. The exercise
price of the options was the market price of the stock on the date of grant. The
options expire ten years after the date of grant. Also under the Plan, the
Company issued options to purchase 50,000 shares of common stock to an employee
of RailWorks. The exercise price of the options was the market price of the
stock on the date of grant. The options expire five years after the date of
grant.
In connection with acquisition of a subsidiary, the Company granted 10,000
options to purchase common stock to a non-employee as a finders fee. The value
of the options has been included in the cost of the acquisition.
<PAGE> 10
NOTE 8 - SUBSEQUENT EVENTS
DEBT ISSUANCE
On April 1, 1999, the Company sold $125 million of Senior Subordinated
Notes. The notes were sold in a private placement under Rule 144A under the
Securities Act of 1933. The net proceeds from the offering were used to repay
approximately $100 million of indebtedness with the remaining proceeds available
for general corporate purposes including future acquisitions. The notes have an
interest rate of 11.50%, payable semi-annually and are due in 2009 with no
interim amortization requirements.
ACQUISITIONS
On April 12, 1999, the Company acquired all the stock of McCord Treated
Wood, Inc. and Birmingham Wood, Inc. ("McCord") which supply creosote treated
wooden cross ties throughout the Southeastern United States. On April 30, 1999,
the Company acquired all the stock of M-Track Enterprises ("M-Track") which
specializes in rail transit construction, repair and maintenance of track in the
metropolitan New York City area.
The acquisitions were accounted for using the purchase method of accounting
and accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based upon the fair values at the date of
acquisition. The combined purchase price was $18,345,000 in cash and 93,842
shares of common stock, plus the potential to receive earnouts if targeted
revenue and profit goals are achieved. The estimated fair market value of assets
purchased was approximately $9,000,000 and the estimated goodwill recorded was
$10,345,000. The estimated fair market values reflected above are based on
preliminary estimates and assumptions and are subject to revision.
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 March 31,
1999, includes all companies acquired through that date. The Results of
Operations for the three months ended March 31, 1999 and the Statement of Cash
Flows for the three months ended March 31, 1999, include the results of Comstock
for the entire period plus all other acquired companies from their date of
acquisition.
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the year ended December 31, 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 March 31, 1999 Compared to Three Months Ended March 31, 1998.
Revenue. Revenue increased $31.1 million, or 74.8%, from $41.6 million for
the three months ended March 31, 1998 to $72.7 million for the three months
ended March 31, 1999. The increase was due to the fact that the 1998 data is
that of Comstock alone. The 1999 data includes Comstock as well as the other
nineteen companies that now comprise RailWorks Corporation.
<PAGE> 11
Gross Profit. Gross profit increased $8.2 million or 186.4%, from $4.4
million for the three months ended March 31, 1998 to $12.6 million for the three
months ended March 31, 1999. The increase was due to the fact that the 1998 data
is that of Comstock alone. The 1999 data includes Comstock as well as the other
nineteen companies that now comprise RailWorks. The gross profit percentage
increased 6.7%, from 10.6% for the three months ended March 31, 1998 to 17.3%
for the three months ended March 31, 1999. This increase was the result of
higher profitability associated with the mix and type of work performed during
the first quarter of 1999 by the consolidated group as compared to historical
Comstock margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.5 million or 141.1%, from $3.2 million for
the three months ended March 31, 1998 to $7.8 million for the three months ended
March 31, 1999. The increase is due to the fact that the 1998 data is that of
Comstock alone. The 1999 data includes Comstock as well as the nineteen other
companies that now comprise RailWorks Corporation. As a percentage of revenue,
selling, general and administrative expenses increased from 7.7% for the three
months ended March 31, 1998 to 10.7% for the three months ended March 31, 1999.
This percentage increase was a result of acquired companies having higher
overhead selling, general and administrative cost structures than Comstock.
Net Income. Net income increased $1.0 million, or 145.6%, from $666,000 for
the three months ended March 31, 1998 to $1.6 million for the three months ended
March 31, 1999, as a result of the items mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 RailWorks had working capital of approximately $41.7
million, a $25.7 million decrease from December 31, 1998 when working capital
was $67.4 million. A majority of this decrease is attributable to the issuance
of a $25 million short-term Bridge Term Facility, see Note 3. Net cash provided
by operating activities was approximately $2.0 million for the three months
ended March 31, 1999. Net cash used in investing activities was approximately
$33.7 million for the three months ended March 31, 1999, which consisted of
$34.1 million of cash for acquisitions. Net cash provided by financing
activities for the three months ended March 31, 1999 was approximately $31.9
million, which included $63.5 million from the issuance of long-term borrowings,
offset by debt repayment of approximately $31.6 million.
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. Included in the
Credit Facility is a $2 million Swingline Revolving Facility (the "Swingline").
The Swingline allows for borrowings and repayments within the Company's existing
Credit Facility in increments of $1 with NationsBank directly. The Credit
Facility and the Swingline expire on August 4, 2001, however RailWorks may
request NationsBank to extend the agreement for two, one-year periods. The
proceeds of the Credit Facility, including the Swingline 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 and a $250 monthly fee is charged on the
Swingline.
In the first quarter of 1999, The Company obtained a Bridge Term Facility
(the "Bridge"), a non-revolving, $25,000,000 term commitment, issued on February
2, 1999, with a June 30, 1999 maturity date. The facility was an amendment to
the Company's Revolving Credit Facility issued on August 4, 1998, including
consistent pricing, terms and conditions. The Company borrowed $25,000,000 on
the Bridge during the first quarter of 1999. The interest rate during the
quarter was 9.00% and 8.5% for the remainder of the term. The full principal
amount of $25,000,000 was repaid on April 8, 1999, see Note 8. A 1.7% facility
fee was paid on the Bridge.
On April 1, 1999, the Company sold $125 million of Senior Subordinated
Notes. The notes were sold in a private placement under Rule 144A under the
Securities Act of 1933. The net proceeds from the offering were used to repay
approximately $100 million of indebtedness, including the Bridge Term Facility
and a substantial portion of the Credit Facility, with the remaining proceeds
available for general corporate purposes including future acquisitions. The
notes have an interest rate of 11.50%, payable semi-annually and are due in 2009
with no interim amortization requirements.
As of May 6, 1999, RailWorks had borrowings outstanding of $8.0 million
pursuant to the Credit Facility and $831,000 on the Swingline. 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
<PAGE> 12
(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.
The Company believes that funds generated from operations, together with
existing cash and borrowings under the $75 million Credit Facility, will be
sufficient to finance its current operations, planned capital expenditures,
pending acquisitions and internal growth for at least the next several years. If
the Company were to make a significant acquisition for cash, it may be necessary
for the Company to obtain additional debt or equity financing.
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
committee comprised of accounting and information systems personnel who are
reporting 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. With respect to 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
internal systems in the summer of 1999. The Company is in the process of
identifying and contacting suppliers, both inventory and non-inventory and
customers to determine the state of their Year 2000 readiness.
Based upon the Company's current estimates, incremental out-of-pocket costs
of its Year 2000 program are expected to be approximately $250,000. As of March
31, 1999, none of these funds had been spent. These costs are expected to
include third party consultants, remediation of existing computer software and
replacement and remediation of embedded chips. These 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 its manufacturing and supply 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 upon whom the Company relies on directly or indirectly,
to be Year 2000 compliant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated principally with changes
in interest rates. Interest rate exposure has been principally limited to the
$61.8 million of long-term debt under the Company's revolving credit agreement
outstanding at March 31, 1999. Approximately 84% of that debt is priced at
interest rates that float with the market. A 50 basis point movement in the
interest rate on the floating rate debt would have resulted in an approximate
$260,000 annualized increase or decrease in interest expense and cash flows. The
remaining debt is either fixed rate debt or debt that has been essentially fixed
through the use of interest rate swaps. The Company will from time to time enter
into interest rate swaps on its debt, when it believes there is a clear
financial advantage for doing so. The Company does not use derivative financial
or commodity instruments for trading purposes and the use of such instrument is
subject to strict approval levels by senior officers. Typically, the use of such
derivative instruments is, in the aggregate, not material to the company's
financial position, results of operations and cash flows.
<PAGE> 13
In March 1999, RailWorks entered into a hedge instrument with First Union
National Bank known as a "swaption," or a collared swap for a notional amount of
$50.0 million. This agreement, which carries no premium, allows the Company to
"swap" into a fixed interest rate beginning March 31, 1999, at no lower than
5.73% and no higher than 6.23% against the current swap rate, which was 5.93% at
the time of trade. This instrument protects the Company against dramatic swings
in interest rates.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(i) Changes in Securities
None.
(ii) Use of Proceeds
None.
(iii) Recent Sales of Unregistered Securities
On January 26, 1999, 100,000 shares of unregistered Common Stock were
issued to the owners of FCM Rail, Ltd., as partial consideration for 100% of the
outstanding stock of FCM Rail, Ltd. in that acquisition. The stock was issued in
reliance on the exemption from registration under Section 4(2) of the Securities
Act of 1933.
Under the terms of the Plan, the Company issued options to purchase 200,000
shares of common stock to a president and certain employees at one of the
companies that RailWorks acquired during the first quarter of 1999. The exercise
price of the options was the market price of the stock on the date of grant. The
options expire ten years after the date of grant. Also under the Plan, the
Company issued options to purchase 50,000 shares of common stock to an employee
of RailWorks. The exercise price of the options was the market price of the
stock on the date of grant. The options expire five years after the date of
grant.
In connection with acquisition of a subsidiary, the Company granted 10,000
options to purchase common stock to a non-employee as a finders fee. The value
of the options has been included in the cost of the acquisition.
<PAGE> 14
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:
10.1 Employment Agreement between RailWorks Corporation and
Kenneth R. Burk dated as of May 10, 1999.
27.1 Financial Data Schedule (for SEC filing purposes only)
b) Reports on Form 8-K
In a Form 8-K dated March 17, 1999 and filed with the Securities
and Exchange Commission on March 17, 1999, the Registrant filed
the Company's December 31, 1998 consolidated financial
statements as well as pro forma financial statements as of and
for the year ended December 31, 1998, which included Gantrex
Group, Midwest Railroad Construction & Maintenance Corporation
of Wyoming, FCM Rail, Ltd. and F&V Metro Contracting Corp and
affiliates.
<PAGE> 15
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: May 12, 1999
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of this 10th day of
May, 1999, by and between Kenneth R. Burk, an individual resident of the State
of Pennsylvania ("Employee"), and RailWorks Corporation, a Delaware corporation
("Employer").
WITNESSETH
WHEREAS, the Employer desires to employ the Employee on the terms and
conditions as contained herein; and
WHEREAS, the Employee desires to be so employed by the Employer, on
the terms and conditions as contained herein.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
the parties hereto, the parties hereto, intending to be legally bound, hereby
agree as follows:
Section 1. Employment.
Subject to the terms hereof, Employer will employ Employee and
Employee hereby accepts such employment. The Employee shall serve as the
Executive Vice President and Chief Operating Officer of the transit, small
scale track construction and maintenance, large scale construction, and supply
and manufacturing divisions of the Employer. Employee's duties shall include,
but not limited to, full profit and loss responsibilities for such operations
and such other duties assigned to Employee during the Term (as defined herein).
Subject to the approval of the Shareholders of Employer, Employee shall be
elected to the Board of Directors of the Employer. The Employee shall also be
appointed to and serve upon Employer's Executive Committee, if same exists.
Employee shall continue to serve on the Board of Directors and Executive
Committee, at the pleasure of the Shareholders and/or Chief Executive Officer,
as applicable.
Subject to the terms and conditions of this Agreement, from the date
hereof, Employee agrees to devote substantially all of his business time and
best efforts to the performance of his job with Employer, subject to direction
of the Chief Executive Officer of Employer.
Section 2. Term of Employment. The term of the Employee's employment
hereunder (the "Initial Term") shall be from the date of this Agreement until
the earlier of (a) the three year an-
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<PAGE> 2
niversary date of this Agreement (May 10, 2002),or (b) the occurrence of any of
the following events:
(i) The death or total disability of Employee (total disability
meaning the failure to fully perform his normal required services
hereunder for a period of six (6) consecutive months during any
consecutive twelve (12) month period during the Term (as defined)
hereof, as determined by an independent medical doctor jointly
chosen by the Employee and the Employer) by reason of mental or
physical disability;
(ii) The termination by Employer of Employee's employment hereunder,
upon thirty (30) days prior written notice to Employee, for "good
cause", as reasonably determined by the Board of Directors. For
purposes of this Agreement, "good cause" for termination of
Employee's employment shall exist: (A) if Employee is convicted
of, pleads guilty to or confesses to any felony or any act of
fraud, misappropriation or embezzlement, (B) if Employee has
engaged in a dishonest act to the material damage or prejudice of
Employer or an affiliate of Employer, or in conduct or activities
materially damaging to the property, business, or reputation of
Employer or an affiliate of Employer, or (C) if Employee violates
any of the provisions contained in Section 5 of this Agreement,
after receiving written notice from the Employer specifically
outlining the alleged violations by the Employee of Section 5
hereof and either (1) the Employee fails to stop the alleged
behavior which is claimed to be such a breach within thirty (30)
days of receipt by the Employee of such written notice, or (2)
the Employer prevails in mediation or binding arbitration
pursuant to the commercial arbitration rules of the American
Arbitration Association which arbitration is commenced by the
Employee within thirty (30) days of receipt by the Employer of
such notice in accordance with the provisions of Section 5.6
hereof; or
(iii) The termination by either the Employee or the Employer, upon
thirty (30) days writ- ten notice to the other party, in the
event of a Change of Control of the Employer (as defined herein
below).
For purposes of this Agreement, a "Change of Control" shall
deemed to have occurred if (A) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Employer, a
corporation owned directly or indirectly by the stockholders of the
Employer or any of their respective affiliates, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Employer representing 50%
or more of the total voting power represented by the Employer's then
outstanding securities that vote generally in the election of
directors (referred to herein as "Voting Securities"); (B) during any
period of two consecutive years, individuals who at the beginning of
such
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<PAGE> 3
period constitute the Board of Directors and any new directors whose
election by the Board of Directors or nomination for election by the
Employer's stockholders was approved by a vote or a majority of the
directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority of the Board of Directors; (C) the stockholders of the
Employer approve a merger or consolidation of the Employer with any
other corporation, other than a merger or consolidation (i) which
would result in the Voting Securities of the Employer outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the
surviving entity) at least 50% of the total voting power represented
by the Voting Securities of the Employer or such surviving entity
outstanding immediately after such merger or consolidation, or (ii) in
which 50% or more of the board of directors of the surviving entity is
composed of members from the Board of Directors of the Employer; (D)
the stockholders of the Employer approve a plan of complete
liquidation of the Employer or an agreement for the sale or
disposition by the Employer of (in one transaction or a series of
transactions) all or substantially all of the Employer's assets; or
(E) the executive offices of the Employer are relocated from the
Greater Baltimore Metropolitan Area.
2.1 After May 10, 2002 (Initial Term) and subject to Sections 2(b) and
2.2, this Agreement shall continue upon a year-to-year basis (each year a
"Successive Term", which together with the Initial Term shall constitute the
"Term") unless terminated by either the Employer or the Employee upon written
notice to the other before the January 31 immediately preceding the end of
the Initial Term or particular Successive Term, as applicable.
2.2 Notwithstanding anything to the contrary herein and subject to
Section 3.2.1 at any time during the Initial Term or a Successive Term, as
applicable:
(i) Employee shall have the right to terminate this Agreement
in the event his duties and responsibilities are materially and substantially
reduced. The failure of Employer to assign responsibility to Employee for any
new operation of Employer shall constitute a material and substantial
reduction in Employee's duties and responsibilities; and
(ii) Employer shall have the right to terminate the Agreement
for any reason, including, but not limited to, without "good cause".
Section 3. Compensation.
3.1 Terms of Employment. Employer will provide Employee with the
following salary, expense reimbursement and additional employee benefits during
the Term of employment hereunder.
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<PAGE> 4
(a) Salary. From the date Employee commences working and performing
his duties hereunder in the Employer's Baltimore, Maryland office, Employee
will be paid a salary (the "Base Salary") calculated based on the amount of Two
Hundred Seventy-Five Thousand Dollars ($275,000.00) per annum, less deductions
and withholdings required by applicable law. Subject to the foregoing, the Base
Salary shall be paid to Employee in equal monthly installments (or on such more
frequent basis as other executives of Employer are compensated).
(b) Performance Bonus. In addition to the Base Salary, the Employee
shall have the right to receive from the Employer, and the Employer shall be
obligated to pay to the Employee, a performance bonus (the "Performance Bonus")
for each fiscal year ("Annual Period") during the Term of this Agreement, equal
to the aggregate amount determined by the bonus formula delineated herein
below. Any amount of a Performance Bonus required to be paid to the Employee
for an Annual Period during the Term of this Agreement shall be paid by the
Employer in the first pay period of the Employer immediately following the
finalization of the accounting audit for financial accounting purposes of the
Employer for the Annual Period, but in all events by March 31 of the fiscal
year immediately following the end of the Annual Period for which such
Performance Bonus is attributable.
The formula to determine a Performance Bonus for any Annual Period
during the Term of this Agreement shall be as follows:
(i) For each Annual Period of Employer during the Term
hereof, three-tenths of one percent (.003) of net income before income taxes
and bonuses ("Profits") of the Employer for said Annual Period.
(ii) The Profits of the Employer for the Annual Period shall
be calculated in accordance with GAAP as consistently applied by Employer.
(iii) Subject to Section 3.2, in the event Employee is
employed hereunder during a particular Annual Period of the Term for less than
twelve (12) full calendar months, the Performance Bonus for such Annual Period
shall be calculated only based on the Profits for the number of full calendar
months that Employee is employed hereunder during such Annual Period.
(iv) Notwithstanding anything to the contrary herein, unless
the Agreement is terminated as provided under Sections 2(b) or 2.2 prior to
December 31, 1999, the Performance Bonus paid by Employer to Employee for the
1999 Annual Period shall equal the greater of (i) $100,000, or (ii) the amount
of the Performance Bonus calculated under Sections 3.1(b)(i),(ii) and (iii).
This subsection 3.1(b)(iv) shall only be applicable to the Annual Period for
1999.
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<PAGE> 5
(c) Discretionary Bonus. The Board of Directors may, from time to
time, award the Employee an additional discretionary bonus based upon such
factors as the Board of Directors deems appropriate. The Employee shall have no
entitlement to such a discretionary bonus until and unless so awarded by the
Board of Directors.
(d) Vacation. Employee shall receive four (4) weeks vacation time per
calendar year during the Term of this Agreement in addition to customary
holidays afforded other employees of Employer. Any unused vacation days in any
calendar year may not be carried over to subsequent years.
(e) Expenses. Employer shall reimburse Employee, within thirty (30)
days of its receipt of a reimbursement report from the Employee, for all
reasonable and necessary expenses incurred by Employee on behalf of Employer.
(f) Benefit Plans. Employee shall have the option of participating in
such medical, dental, disability, hospitalization, life insurance, and other
benefit plans (such as pension and profit sharing plans) as Employer maintains
from time to time for the benefit of all other employees of Employer, on the
terms and subject to the conditions set forth in such plans.
(g) Relocation. In addition to other compensation and reimbursement of
expenses required to be paid under this Agreement, Employer shall reimburse
Employee within ten (10) days of submission of a reimbursement report:
(A) Out-of-pocket expenses, incurred by Employee relating to
the relocation ("Relocation") of Employee and his family from the Pittsburgh,
Pennsylvania ("Pittsburgh") area to the Baltimore, Maryland Metropolitan
("Baltimore") area as follows:
I. Packing, storage and professional mover costs
relating to the furniture, clothing, household belongings and other personal
property of Employee and his family;
II. Travel expenses incurred by Employee and his
family in connection with commuting to and from Pittsburgh and Baltimore
relating to searching for a new residence ("Baltimore Home") in Baltimore and
the sale of Employee's existing home ("Pittsburgh Home") in Pittsburgh;
III. Real estate commissions and Pennsylvania real
property transfer taxes (currently calculated at 1.25 percent of the sales
price) paid relating to the sale of the Pittsburgh Home;
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<PAGE> 6
IV. Mortgage application, points, fees, charges,
appraisal, attorney fees of the mortgage lender, title insurance, survey, and
all other costs and expenses associated with obtaining a loan and mortgage and
the purchase of the Baltimore Home; and
V. Attorney fees incurred by Employee relating to the
sale of the Pittsburgh Home and purchase of the Baltimore Home.
(B) An additional Fifty Thousand ($50,000.00) dollars to
cover any other incidental expenses incurred by Employee in connection with the
Relocation; which shall be paid to the Employee ten (10) days after Employee
commences working and performing his duties hereunder in the Employer's
Baltimore, Maryland office.
(C) Temporary housing costs in Baltimore for Employee and/or
his family pending completion of the Relocation for a period not exceeding six
(6) months from the date of this Agreement.
(D) Upon the execution of this Agreement, Employee shall
undertake his best efforts to sell the Pittsburgh Home. Employer agrees to
purchase ("Purchase") the Pittsburgh Home from Employee in the event : (i)
Employee is not able to sell the Pittsburgh Home within six (6) months from the
date of this Agreement, or (ii) prior to said sixth month anniversary Employee
enters a contract to buy ("Baltimore Contract") a Baltimore Home. If Employee
enters into a Baltimore Contract, Employer shall Purchase the Pittsburgh Home
at least thirty (30) days prior to the scheduled closing date for the
acquisition of the Baltimore Home. Under either circumstance, the Purchase
shall be completed within eight (8) months from the date of this Agreement. The
Purchase by Employer shall be subject to the issuance of title insurance and
compliance with other customary conditions to the satisfaction of Employer's
counsel. The purchase price ("Price") paid by Employer to Employee shall be the
fair market value of the Pittsburgh Home as determined based on the average of
separate appraisals conducted by three (3) independent appraisers. Pending the
sale of the Pittsburgh Home to a third party or Purchase of same by Employer,
as applicable, Employee shall undertake his best efforts to maintain the
Pittsburgh Home in good condition.
(E) In addition to the amounts outlined in Sections 3.1(g)(A)
through (D) (collectively called "Moving Expenses"), Employer shall pay
Employee the sum ("Additional Sum") equal to the Federal and applicable state
income taxes Employee is required to pay attributable to Moving Expenses he
receives which are not deductible by the Employer and deemed income to
Employee. The Additional Sum shall be paid by Employer to Employee to result in
a tax equalization in connection with Employee's receipt of the Moving
Expenses.
3.2 Effect of Termination. Except as hereinafter provided, upon the
termination of the employment of Employee hereunder for any reason, Employee
shall be entitled to all compensa-
6
<PAGE> 7
tion and benefits earned or accrued under Section 3.1 as of the effective date
of termination (the "Termination Date"), but from and after the Termination
Date no additional compensation or benefits shall be earned by Employee
hereunder. Except upon termination by the Employer of the employment of the
Employee pursuant to the provisions of Section 2(b)(ii) hereof, Employee shall
be deemed to have earned any Performance Bonus payable with respect to the
fiscal year in which the Termination Date occurs in accordance with Sections
3.1(b)(iii) or (iv), as applicable. Any such Performance Bonus shall be payable
on the date on which the Performance Bonus would have been paid had Employee
continued his employment hereunder. In addition, the Employee and his eligible
dependents shall be entitled to receive at the sole cost of the Employer: (A)
the health insurance benefits specified hereunder for a period of twelve (12)
months following the Termination Date (the "Continuation Period") and following
such time period, the Employee shall be entitled to all rights afforded to him
under the Federal Omnibus Reconciliation Act ("COBRA") to purchase continuation
coverage of such health insurance benefits for himself and his dependents for
the maximum period permitted by law, and the Employee shall be deemed to have
elected to exercise his rights under COBRA as of the first day of the
Continuation Period, and (B) the life insurance benefits specified hereinabove
for the period of the Continuation Period.
(i) Upon termination of this Agreement, pursuant to the provisions of
Sections 2(b)(i), 2(b)(iii) or 2.2 hereof, any stock grants previously awarded
to the Employee, either by this Agreement or otherwise, shall fully and
completely vest and the Employee shall be able to retain or obtain as the case
may be, such stock, as though there was no vesting period or criteria of any
kind or nature, with respect to such stock.
(ii) Upon termination of the Agreement pursuant to the terms of
Sections 2(b)(ii) or 2.1 hereof, all granted but unvested stock grants as of
the Termination Date shall be forfeited upon such termination; provided that
the Employee shall be able to retain or exercise any rights for a period of one
(1) month after the Termination Date, notwithstanding the terms and provisions
of such stock plan under which they were awarded, with respect to any shares of
stock granted that have fully vested as of the Termination Date.
(iii) Upon termination of this Agreement pursuant to the provisions of
Sections 2(b)(i), (ii) or (iii), 2.1, or 2.2, any stock options previously
awarded to the Employee pursuant to Section 4.1 or otherwise, shall vest in
accordance with the terms and conditions of such award or any plan pursuant to
which such stock options were awarded.
3.2.1 Employee shall be entitled to a severance payment
("Severance Payment") under the following limited circumstances:
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<PAGE> 8
(i) In the event this Agreement is terminated by Employer or Employee
under Section 2(b)(iii) due to and within two (2) months from a Change in
Control, the Severance Payment shall be equal to one (1) year of the annual
Base Salary under Section 3.1(a);
(ii) In the event this Agreement is terminated by Employee under
Section 2.2(i) or Employer under Section 2.2(ii), the Severance Payment shall
be the lesser of (x) one (1) year of the annual Base Salary under Section
3.1(a), or (y) the remaining amount of annual Base Salary Employee would have
earned from the Termination Date through the end of the particular Initial Term
or Successive Term, as applicable.
3.2.1.1 Subject to the foregoing, the Severance
Payment shall be paid by Employer to Employee within thirty (30) days of the
Termination Date by Employer under Sections 2(b)(iii) or 2.2(ii),or Employee
under Sections 2(b)(iii) or 2.2(i), as applicable.
Section 4. Common Stock.
4.1 Stock Options. So that Employee can share in the increase in value
of the business of Employer over time, as of the effective date of this
Agreement Employee will be granted stock options ("Options") to purchase
200,000 shares of common stock of Employer. The Options shall be issued
pursuant to Employer's 1998 Incentive Stock Plan ("ISO Plan"). The Options to
acquire the underlying shares shall vest and be exercisable as follows: (i)
fifty thousand (50,000) shares as of the date of this Agreement, (ii) fifty
thousand (50,000) shares as of the first anniversary of this Agreement if
Employee remains a Key Employee (as defined under the ISO Plan) until said date
as provided under the ISO Plan, (iii) fifty thousand (50,000) shares as of the
second anniversary of this Agreement if Employee remains a Key Employee until
said date as provided under the ISO Plan, and (iv) fifty thousand (50,000)
shares (the balance of shares) as of the third anniversary of this Agreement if
Employee remains a Key Employee until said date as provided under the ISO Plan.
4.2 The price of the Options shall be calculated as of the date of
this Agreement in accordance with the ISO Plan.
4.3 The Options granted pursuant to this Section 4 shall be subject to
all of the terms and conditions of the ISO Plan. In the event of any conflict
between the terms of this Agreement and the ISO Plan (including, but not
limited to an Option Certificate issued thereunder), the terms of the ISO Plan
shall govern.
Section 5. Partial Restraint on Competition.
5.1 Definitions. For the purposes of this Section 5, the following
definitions shall apply:
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<PAGE> 9
(a) "Company Activities" means the business of construction and
maintenance of railway beds and tracks; construction and maintenance of elevated
rail systems and structures; construction and maintenance of railway switching
and signaling equipment, distributorships and supply in the field of rail and
railway construction materials; distributorships and supply in the field of
electromechanical controls for use in the railroad industry, namely, railway
switching equipment and railway signaling equipment; and design for others in
the field of railroad industry, namely, engineering design of rail and railway
related structures and equipment, transit, commercial, industrial and electrical
contracting, or any other business of the Employer and its consolidated (for
financial accounting purposes) subsidiaries (the "Consolidated Group") which
said entities are engaged in on the Termination Date as long as such business
generated gross sales of at least 10% or more of the total gross sales of the
Consolidated Group for the most recent fiscal year of the Employer before or on
the Termination Date.
(b) "Competitor" means any business, individual, partnership, joint
venture, association, firm, corporation or other entity, other than the
Employer or its affiliates or subsidiaries, engaged, wholly or partly, in
Company Activities.
(c) "Competitive Position" means (i) having any financial interest in
a Competitor, including but not limited to, the direct or indirect ownership or
control of all or any portion of a Competitor, or acting as a partner, officer,
director, principal, agent or trustee of any Competitor, or (ii) engaging in
any employment or independent contractor arrangement, business or other
activity with any Competitor whereby Employee will serve such Competitor in any
senior managerial capacity.
(d) "Confidential Information" means any confidential, proprietary
business information or data belonging to or pertaining to Employer that does
not constitute a "Trade Secret" (as hereinafter defined) and that is not
generally known by or available through legal means to the public, including,
but not limited to, information regarding Employer's customers or actively
sought prospective customers, acquisition targets, suppliers, manufacturers and
distributors gained by Employee as a result of his employment with Employer.
Information shall be excluded from this definition if: (i) it, at the time of
disclosure, is generally known to the trade or public, (ii) it becomes at a
later date generally known to the trade or public through no fault of the
Employee, (iii) it is known or possessed by the Employee prior to the
effectiveness of this Agreement, (iv) it is disclosed to the Employee in good
faith by a third party who has a right to such information, (v) it is disclosed
in compliance with a subpoena or court order, or (vi) it is possessed by the
recipient of the information prior to receipt of same from the Employee.
(e) "Customer" means actual customers or actively sought prospective
customers of Employer during the Term.
9
<PAGE> 10
(f) "Noncompete Period" or "Nonsolicitation Period" means the period
beginning the date hereof and ending on the first anniversary of the
termination of Employee's employment with Employer; provided that such
Noncompete Period or Nonsolicitation Period shall end on the Termination Date
in the event this Agreement is terminated pursuant to the provisions of Section
2(b)(iii) hereof.
(g) "Territory" means the area within a one hundred (100) mile radius
of any corporate office or job site of Employer or any of its subsidiaries,
affiliates or divisions.
(h) "Trade Secrets" means information or data of or about Employer,
including but not limited to technical or non-technical data, formulas,
patterns, compilations, programs, devices, methods, techniques, drawings,
processes, financial data, financial plans, products plans, or lists of actual
or potential customers, clients, distributees or licensees, information
concerning Employer's finances, services, staff, contemplated acquisitions,
marketing investigations and surveys, that are not generally known to, and/or
are not readily ascertainable by legal means by, other persons. Information
and/or data shall be excluded from this definition if (i) it, at the time of
disclosure, is generally known to the trade or public or (ii) it becomes at a
later date generally known to the trade or public through no fault of the
Employee.
(i) "Work Product" means any and all work product property, data
documentation or information of any kind prepared, conceived, discovered,
developed or created by Employee for Employer or its affiliates or
subsidiaries, or any of Employer's or its affiliates' or subsidiaries' clients
or customers for utilization in Company Activities, not generally known by
and/or not readily ascertainable by proper means by other persons who can
obtain economic value from their disclosure or use.
5.2 Trade Name and Confidential Information.
(a) Employee hereby agrees that (i) with regard to each item
constituting all or any portion of the Trade Secrets and Confidential
Information, at all times during the Term and all times during which such item
continues to constitute a Trade Secret or Confidential Information,
respectively:
(i) Employee shall not, directly or by assisting others own,
manage, operate, join, control or participate in the ownership, management,
operation or control of, or be connected in any manner with, any business
conducted under any corporate or trade name of Employer or name confusingly
similar thereto, without the prior written consent of Employer;
(ii) Employee shall hold in confidence all Trade Secrets and
all Confidential Information and will not, either directly or indirectly, use,
sell, lend, lease, distribute, license, give, transfer, assign, show, disclose,
disseminate, reproduce, copy, appropriate or otherwise commun-
10
<PAGE> 11
icate any Trade Secrets or Confidential Information, without the prior written
consent of Employer; and
(iii) Employee shall immediately notify Employer of any
unauthorized disclosure or use of any Trade Secrets or Confidential Information
of which Employee becomes aware. Employee shall assist Employer, to the extent
necessary, in the procurement or any protection of Employer's rights to or in
any of the Trade Secrets or Confidential Information.
(b) Upon the request of Employer and, in any event, upon the
termination of Employee's employment with Employer, Employee shall deliver to
Employer all memoranda, notes, records, manuals and other documents, including
all copies of such materials and all documentation prepared or produced in
connection therewith, pertaining to the performance of Employee's services
hereunder or Employer's business or containing Trade Secrets or Confidential
Information, whether made or complied by Employee or furnished to Employee from
another source by virtue of Employee's employment with Employer.
(c) To the greatest extent possible, all Work Product shall be deemed
to be "work made for hire" (as defined in the Copyright Act, 17 U.S.C.A. ss.ss.
101 et seq., as amended) and owned exclusively by Employer. Employee hereby
unconditionally and irrevocably transfers and assigns to Employer all rights,
title and interest Employee may have in or to any and all Work Product,
including, without limitation, all patents, copyrights, trademarks, service
marks and other intellectual property rights. Employee agrees to execute and
deliver to Employer any transfers, assignments, documents or other instruments
which Employer may deem necessary or appropriate to vest complete title and
ownership of any and all such Work Product, and all rights therein, exclusively
in Employer.
5.3 Noncompetition.
(a) The parties hereto acknowledge that Employee is conducting Company
Activities throughout the Territory. Employee acknowledges that to protect
adequately the interest of Employer in the business of Employer it is essential
that any noncompete covenant with respect thereto cover all Company Activities
and the entire Territory.
(b) Employee hereby agrees that, during the Term and the Noncompete
Period, Employee will not, in the Territory, either directly or indirectly,
alone or in conjunction with any other party, accept, enter into or take any
action in conjunction with or in furtherance of a Competitive Position with
Employer. Employee shall notify Employer promptly in writing if Employee
receives a formal written offer of a Competitive Position during the Noncompete
Term, and such notice shall describe all material terms of such offer.
11
<PAGE> 12
Nothing contained in this Section 5 shall prohibit Employee from
acquiring not more than five percent (5%) of any Competitor, or from acquiring
any percentage of any company which is non-competitive with Employer, whose
common stock is publicly traded on a national securities exchange or in the
over-the-counter market.
5.4 Nonsolicitation During Employment Term. Employee hereby agrees
that Employee will not, during the Term, either directly or indirectly, alone
or in conjunction with any other party:
(a) solicit, divert or appropriate or attempt to solicit, divert or
appropriate, any Customer for the purpose of providing the Customer with
services or products competitive with those offered by Employer during the
Term, or
(b) solicit or attempt to solicit any officer, director, employee,
consultant, contractor, agent, lessor, lessee, licensor, licensee, supplier or
any shareholder or other personnel of Employer or any of its affiliates or
subsidiaries to terminate, alter or lessen that party's affiliation with
Employer or such affiliate or subsidiary or to violate the terms of any
agreement or understanding between such employee, consultant, contractor or
other person and Employer.
5.5 Nonsolicitation During Nonsolicitation Period. Employee hereby
agrees that Employee will not, during the Nonsolicitation Period, either
directly or indirectly, alone or in conjunction with any other party:
(a) solicit, divert or appropriate or attempt to solicit, divert or
appropriate, any Customer for the purpose of providing the Customer with
services or products that qualify as Company Activities during the Term;
provided, however, that the covenant in this clause shall limit Employee's
conduct only with respect to those Customers with whom Employee had substantial
contact (through direct or supervisory interaction with the Customer or the
Customer's account) during a period of time up to but no greater than two (2)
years prior to the last day of the Term; or
(b) solicit or attempt to solicit any officer, director, employee,
consultant, contractor, agent, lessor, lessee, licensor, licensee, supplier or
any shareholder or other personnel of Employer or any of its affiliates or
subsidiaries residing at the time of the solicitation in the Territory to
terminate, alter or lessen that party's affiliation with Employer or such
affiliate or subsidiary or to violate the terms of any agreement or
understanding between such employee, consultant, contractor or other person and
Employer. For purposes of this clause (b), employees, consultants, contractors,
or other personnel are those with knowledge of or access to Trade Secrets and
Confidential Information of the Employer.
12
<PAGE> 13
5.6 Binding Arbitration. Except as otherwise provided under Sections
6.1 and 6.8,the parties shall refer any dispute as to whether or not the
Employee has violated the provisions of this Section 5 to a mediator and, in
the event that mediation is unsuccessful, such dispute shall be resolved by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitrator shall be selected by the
mediator. The cost of the mediator and, if necessary, the arbitrator and all
other costs of the mediation and, if necessary, the arbitration shall be split
equally between the Employee and the Employer, except for attorneys fees which
shall be paid by the party employing such attorney. Such mediation and
arbitration, if necessary, shall be convened at Employer's option in either (i)
Baltimore, Maryland or (ii) New York, New York.
Section 6. Miscellaneous.
6.1 Severability. The covenants in this Agreement shall be construed
as covenants independent of one another and as obligations distinct from any
other contract between Employee and Employer. Any claim that Employee may have
against Employer shall not constitute a defense to enforcement by Employer of
this Agreement. It is the desire and intent of the parties that the terms and
conditions of this Agreement be enforced to the fullest extent permissible.
Accordingly, if any particular term or condition of this Agreement shall be
adjudicated or become by operation of law invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom such term or condition
and the remainder of the Agreement shall remain in full force and effect. With
particular reference to the covenants set forth in Section 5, if any court
pursuant to Section 6.8 concludes such clause is unenforceable it shall reform
it to set forth the maximum scope, duration and geographic area over which it
shall be enforceable.
6.2 Survival of Obligations. The covenants in Section 5 of this
Agreement shall survive termination of Employee's employment, except in the
case of termination of this Agreement pursuant to the provisions of Section
2(b)(iii) hereof, in which case they shall terminate also and have no further
force or legal effect as of the Termination Date.
6.3 Notices. Any notice or other document to be given hereunder by any
party hereto to any other party hereto shall be in writing and delivered in
person or by courier, by telecopy transmission or sent by any express mail
service, postage or fees prepaid at the following addresses:
EMPLOYER
RailWorks Corporation
1104 Kenilworth Drive
Suite 301
Baltimore, MD 21204
Attention: John G. Larkin, Chief Executive Officer
Telecopy No. (410) 825-6920
13
<PAGE> 14
EMPLOYEE
Kenneth R. Burk
157 Bittersweet Circle
Venetia, PA 15367
or at such other address or number for a party as shall be specified by like
notice. Any notice which is delivered in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party or its agent.
6.4 Binding Effect. This Agreement ensures to the benefit of, and is
binding upon, Employer and its respective successors and assigns, and Employee,
together with Employee's executor, administrator, personal representative,
heirs, and legatees.
6.5 Entire Agreement. This Agreement is intended by the parties hereto
to be the final expression of their agreement with respect to the subject
matter hereof and is the complete and exclusive statement of the terms thereof,
notwithstanding any representations, statements or agreements to the contrary
heretofore made. This Agreement supersedes and terminates all prior employment
and compensation agreements, arrangements and understandings between or among
Employer and Employee. This Agreement may be modified only by a written
instrument signed by all of the parties hereto.
6.6 Governing Law. This Agreement shall be deemed to be made in, and
in all respects shall be interpreted, construed, and governed by and in
accordance with, the laws of the State of Maryland exclusive of reference to
choice of law or conflicts of law. No provision of this Agreement shall be
construed against or interpreted to the disadvantage of any party hereto by any
court of other governmental or judicial authority or by any board of
arbitrators by reasons of such party or its counsel having or being deemed to
have structured or drafted such provision.
6.7 Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
6.8 Specific Performance. Notwithstanding Section 5.6, each party
hereby agrees that any remedy at law for any breach of provisions contained in
this Agreement, including, but not limited to Section 5, shall be inadequate
and that the other parties hereto shall be entitled to specific performance and
any other appropriate injunctive relief in addition to any other remedy such
party might have under this Agreement or at law or in equity. The waiver of a
breach of any term or condition of this Agreement shall not be deemed to
constitute a waiver of any other or subsequent breach of the same or any other
term or condition hereof.
14
<PAGE> 15
6.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
RAILWORKS CORPORATION
By: /S/ John G. Larkin
---------------------------------------
John G. Larkin, Chief Executive Officer
EMPLOYEE
/S/ Kenneth R. Burk
------------------------------------------
Kenneth R. Burk
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RAILWORKS CORPORATION FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,073,000
<SECURITIES> 0
<RECEIVABLES> 88,883,000
<ALLOWANCES> 451,000
<INVENTORY> 13,574,000
<CURRENT-ASSETS> 143,413,000
<PP&E> 29,880,000
<DEPRECIATION> 2,190,000
<TOTAL-ASSETS> 305,747,000
<CURRENT-LIABILITIES> 101,696,000
<BONDS> 0
0
14,000
<COMMON> 138,000
<OTHER-SE> 122,309,000
<TOTAL-LIABILITY-AND-EQUITY> 305,747,000
<SALES> 72,673,000
<TOTAL-REVENUES> 72,673,000
<CGS> (60,074,000)
<TOTAL-COSTS> (60,074,000)
<OTHER-EXPENSES> (8,764,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,613,000)
<INCOME-PRETAX> 2,622,000
<INCOME-TAX> (986,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,636,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
