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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------------- TO
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COMMISSION FILE NUMBER: 0-24639
RAILWORKS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 58-2382378
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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1104 KENILWORTH DRIVE
SUITE 301
BALTIMORE, MARYLAND 21204
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (410) 512-0500
Securities registered pursuant to Section 12(b)of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 The Nasdaq Stock Market
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and nonvoting common equity held
by non-affiliates of the Registrant (assuming for these purposes, but without
conceding, that all executive officers and directors are "affiliates" of the
Registrant) as of March 1, 1999 (based on the closing sale price of the
Registrant's Common Stock, par value $.01, as reported on The Nasdaq Stock
Market on such date) was $106,460,325 and there were 13,796,038 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 27, 1999 are herein incorporated by reference in
Part III.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item X. Executive Officers of the Registrant........................ 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 28
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 29
Item 11. Executive Compensation...................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 29
Item 13. Certain Relationships and Related Transactions.............. 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 30
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PART I
ITEM 1. BUSINESS
OVERVIEW
RailWorks Corporation ("RailWorks" or the "Company"), a Delaware
corporation organized in 1998, is a leading provider of integrated rail system
services and products to a diverse base of customers throughout the United
States. Management believes RailWorks is positioned to grow significantly due to
its ability to comprehensively design, supply, construct and maintain rail
systems. The Company's strategy is based on providing a full range of
rail-related services and products on a "turnkey" basis throughout North America
and offering rail system solutions under the "RailWorks" brand. RailWorks
provides track construction, rehabilitation, repair, maintenance and operations;
rail electrification and installation of communication and signaling systems;
and related products and supplies. The Company provides these services to a wide
variety of customers, including Class I and shortline railroads, publicly funded
transit authorities and commercial and industrial companies. RailWorks also
provides non-rail products and services such as electrical contracting, bridge
and highway support structures and related concrete products.
INDUSTRY OVERVIEW
The rail passenger and freight industries have undergone significant
changes in recent years. Changes in the industry have affected Class I
railroads, shortline and regional railroads, passenger railroads and transit
systems. In addition, industrial and other commercial companies that own and
maintain their own rail systems have become more focused on transportation
logistics and achieving cost efficiencies. These changes have resulted in an
ongoing reconfiguration of the country's rail infrastructure, significant new
construction projects and emerging demand for outsourced construction,
rehabilitation, repair and maintenance services.
Total Expenditures. Based on information published by the American
Association of Railroads (the "AAR") and the American Public Transit Association
("APTA"), management estimates that expenditures by rail system operators for
domestic new construction, rehabilitation, repair and maintenance were
approximately $16 billion in 1998. Management estimates that the breakdown of
expenditures was as follows:
(EXPENDITURES PIE CHART)
The Company also believes that expenditures for these services outside the
United States have increased significantly in recent years as a result of
infrastructure construction and modernization programs, as well as privatization
of large rail systems. In many instances, foreign governments and companies have
sought the expertise of designers, engineers and construction managers in the
United States.
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Class I Railroads. According to the AAR, Class I track usage (defined as
tons shipped per track mile) has increased significantly from 4.7 million in
1988 to 7.8 million in 1997, representing a 5.9% compound annual growth rate. As
a result of industry consolidation, there are only eight Class I railroads (as
defined by the Surface Transportation Board ("STB")) operating in the United
States today, compared to 27 in 1980. These railroads are Burlington Northern
Sante Fe Railway, CSX Transportation, Kansas City Southern Lines, Norfolk
Southern Railway Company, Union Pacific Railroad, Canadian National, Canadian
Pacific and Consolidated Rail Corporation. According to the AAR, these railroads
accounted for 71% of the rail mileage operated in the United States and 91% of
railroad revenue in 1997. In recent years, the Class I railroads have sought to
rationalize their systems, for example by "double-tracking" certain high traffic
main lines and abandoning portions of their systems that generate lower volumes
of traffic. Mergers of Class I systems have also created significant
construction projects as the systems are reconfigured and integrated.
Historically, the major railroads have been vertical organizations that sought
to perform their own construction and maintenance by utilizing specialized
workforces and equipment for these functions. Management believes that as Class
I railroads seek to continue to improve their cost structures, they will
increasingly continue to outsource certain construction and maintenance
functions to independent contractors.
Shortline and Regional Railroads. In recent years, the number and coverage
of shortline and regional railroads (i.e., those railroads which are not Class I
railroads) have increased significantly. The Staggers Rail Act of 1980 provided
for partial deregulation of the railroad industry and created mechanisms by
which larger railroads could more easily dispose of portions of rail line. Since
that time, the larger railroad systems in the United States have streamlined
their operations by disposing of portions of their systems that generate lower
volumes of traffic and other companies have acquired portfolios of shortline
railroads. According to the AAR, there are approximately 550 shortline and
regional railroads, which in the aggregate generated approximately 9% of all
railroad revenue in 1997. The percentage of total track miles operated by
shortline and regional railroads in the United States increased to 29% in 1997
from approximately 17% in 1986. Shortline and regional railroads spend a
relatively large portion of their capital and operating budgets on maintenance
of their track assets, because these assets are often in poor condition when
they are acquired. These railroads typically utilize independent contractors for
their maintenance and construction programs, because they do not have systems
large enough to support the purchases of equipment and development of workforces
that would be required for these functions.
Passenger Rail Transit Services. The growth of major metropolitan areas
and the aging of existing rail systems have resulted in significant developments
in passenger rail transit services. Heavy rail, commuter rail (service between
metropolitan and suburban areas) and light rail (typically, short trains
operating on rights-of-way that are not separated from other traffic) have
emerged as attractive alternatives to bus or automobile transit and older
commuter rail systems have been rehabilitated and extended to handle increased
ridership. Many older urban systems (such as the New York City subway system)
are undergoing significant rehabilitation and/or modernization, while major
heavy rail systems built in the 1970s (such as the systems in San Francisco and
Atlanta) are being extended and upgraded. Additionally, there have been several
recent initiatives to develop high-speed rail transit networks between major
urban areas (for example, in Florida and the Northeast corridor). According to
APTA, there are now 18 commuter rail agencies in 14 urban areas, 14 heavy rail
agencies in 11 urban areas and 23 light rail agencies nationwide. According to
APTA, commuter and light rail ridership has increased 30% and 99%, respectively,
from 1985 to 1997. Since 1979, approximately 16 cities have constructed new
light rail-based transit systems and other cities have either extended or
refurbished their existing systems, with ridership increasing by approximately
150% over the period from 1978 through 1996. In June 1998, the President signed
the Transportation Equity Act for the 21st Century ("TEA 21"), which is expected
to provide $42 billion of funds for transit projects through 2003. See
"Government Regulation -- TEA 21." This represents more than a 50% increase of
funding from the previous six-year period. According to APTA, in 1997, 53.7% of
transit spending was derived from federal funding with the balance derived from
state and local sources. Accordingly, opportunities to provide rail-related
signaling, communication, electrical and track system construction,
rehabilitation, repair and maintenance services for transit systems have
increased and are expected to continue to increase significantly.
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Industrial Companies. Companies install trackwork in their plants to
transport raw materials, equipment and finished goods. This trackwork consists
of connector lines that provide access to Class I or shortline railroads and
railyards to coordinate the shipment and delivery of cargo to and from their
plants. Companies are responsible for maintaining their own track and typically
construct and reconfigure trackage as part of plant construction and expansion.
Companies seek to optimize their track infrastructure in order to (1) reduce the
risk of accidents that can cause delays, property damage, and environmental
spills, (2) gain access to competing railroads to drive down costs and (3)
reduce transportation costs by minimizing the switching of railcars which is
time consuming and expensive. Such companies generally do not have the internal
resources to perform these services and typically use independent contractors to
design, construct and maintain these rail lines.
COMPANY HISTORY
RailWorks was formed in March 1998 to become a leading nationwide provider
of rail system services, including construction and rehabilitation, repair and
maintenance, and related products. The Company currently has 20 operating
companies that have been in the rail systems business for an average of 29
years. The Company has acquired the operating companies through the following
transactions:
- In August 1998, RailWorks acquired in separate concurrent transactions 14
groups of companies engaged principally in the rail system services and
products business and RailWorks consummated its initial public offering
(the "IPO"). These groups of companies are referred to as the "Founding
Companies."
- In November 1998, RailWorks acquired two companies. These companies are
referred to as the "1998 Acquired Companies."
- In the first quarter of 1999, RailWorks acquired four companies. These
companies are referred to as the "1999 Acquired Companies." The 1998
Acquired Companies and the 1999 Acquired Companies are together referred
to as the "Acquired Companies." The Acquired Companies had combined
fiscal 1998 revenue of $83.1 million.
COMPETITIVE STRENGTHS
Breadth of Services and Products. Management believes that the Company
offers a broader range of services and products than most industry participants.
The Company believes that larger rail system operators are seeking to establish
relationships with contractors that specialize in rail system services and
products and that can provide efficient, integrated solutions over the entire
life cycle of their assets. The Company further believes that rail system
operators and industrial companies are increasingly seeking to enter into
arrangements with a smaller number of companies that can provide integrated
services on a national or regional basis, in order to ensure centralized
management of their rail assets, adherence to uniform quality standards and more
cost-effective procurement practices. The Company is able to cross-sell its
services and products as it combines the strengths of the operating companies to
provide its customers with integrated rail system solutions. For example, the
Company combines its design and engineering services with track construction to
offer a turnkey approach to track construction projects. The Company's ability
to bundle services, including construction, rehabilitation and maintenance,
under a single contract has allowed it to compete more effectively against
companies that provide a more limited range of services.
Expansive Geographic Coverage. The Company's 37 operating facilities
provide it with expansive geographic coverage that enables it to reach customers
throughout North America. These multiple facilities enable the Company to
undertake projects in a more cost effective manner than would be possible
without local facilities. RailWorks is able to perform projects at multiple
locations for its national account customers, enabling them to use a single
company for rail system projects throughout the United States and Canada. The
Company also can allocate equipment and technical specialists throughout the
United States and Canada to maximize asset utilization, satisfy regional demand
and complete projects in remote locations. Management believes its broad
geographic presence allows it to reduce the impact of local and regional
economic cycles, as well as weather-related or seasonal variations in its
business.
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Significant Market Presence. In an industry that has traditionally been
comprised of regional competitors, management believes that the Company's size
gives it a competitive advantage. The Company's substantial contract bonding
capacity allows it to bid on additional projects and more substantial projects
that may not be available to smaller companies. This has allowed the Company to
significantly increase its project backlog since August 1998. In addition, the
Company's size provides significant economies of scale in terms of materials
purchasing, capital expenditures and administrative costs.
Diverse Sources of Revenue. The Company derives a significant portion of
its revenue from public transit authorities whose funding is appropriated from
federal, state and local sources and is less sensitive to economic cycles. In
addition, a portion of the Company's work is related to government-mandated
safety standards and, therefore, cannot be postponed. The Company sells its
services through a large number of individual contracts. No contract accounted
for more than 5.2% of the Company's pro forma revenue for the year ended
December 31, 1998. More than half of the Company's contracts have a duration in
excess of one year, providing the Company with a significant source of future
revenue. The Company has strong relationships with a wide variety of customers,
including:
Class I railroads which have utilized RailWorks for repair and maintenance,
construction or engineering and supply:
- CSX Transportation
- Union Pacific Railroad
- Burlington Northern Santa Fe Railway
- Canadian National Railway
Shortline and regional railroads, which have contracted with RailWorks for
track construction and maintenance work or product supply:
- Alaska Railroad Corp.
- Louisville & Indiana Railroad
- Indiana Southern Railroad Company
- Indiana & Ohio Rail Systems
Publicly funded transit authorities, which have contracted with RailWorks
for electrical installations, signaling, communications and station projects:
- New York City Transit Authority
- New York Department of Transportation
- Los Angeles Metropolitan Transit Authority
- Connecticut Department of Transportation Rail Division
Commercial and industrial companies, which have contracted with RailWorks
for track construction and maintenance and non-rail electrical contracting work:
- United States Steel
- Bethlehem Steel
- Morse Diesel
- Babcock & Wilcox
Experienced Management. The Company's senior operating managers have an
average of 26 years of experience in the rail services and products industry,
and many of them are or have previously served as leaders of industry trade
groups. The Company uses a corporate management structure that allows these
senior managers to focus on marketing and growing their operations instead of
administrative responsibilities.
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Management has created a culture of cooperation and teamwork among the operating
companies that emphasizes dissemination of best practices among the Company's
regional and local management teams. For example, management believes that the
Company can successfully implement best practices in the areas of 24-hour
emergency rerailment services, annual maintenance contracts and efficient
inventory management. As of February 28, 1999, the Company's directors and
executive officers and senior managers of the operating companies beneficially
owned an aggregate of 36.9% of the Company's outstanding common stock.
STRATEGY
Key elements of the Company's strategy include the following:
Capitalize on Scale and Geographic Coverage. By combining the operations
of the Founding Companies and the Acquired Companies, the Company has achieved
greater size and scope than regional and local contractors. The Company believes
that it will be able to achieve continued internal growth by building its
national accounts program to serve rail customers with multiple sites and by
enhancing its sales and marketing programs. Management expects to leverage the
Company's geographic network and greater bonding capacity to increase its
business. The Company currently has very limited international operations but
over time it may increase its activity in international markets, where
privatizations of railroads and large transit projects are creating increased
demand for sophisticated design and construction management services. The
Company also shares equipment and labor while managing multiple worksites. The
Company believes that this process of sharing resources and its comprehensive
bidding capabilities enable it to compete more effectively.
Utilize Cross-Selling. The Founding Companies and the Acquired Companies
have provided RailWorks with a broad range of rail-related services and
products. The Company intends to leverage its existing customer base to
"cross-sell" these services and products. For example, we will seek to provide
additional track construction and maintenance services to Class I railroads who
are already significant buyers of our track supplies. We also intend to continue
to emphasize the marketing of rail maintenance programs which provide recurring
revenue and strengthen customer relationships. The Company has been successful
in leveraging its maintenance relationships to obtain new rail system
installation projects. In addition, by placing a stronger emphasis on our design
and engineering services we expect to gain access to more track construction
opportunities.
Expand Through Acquisitions. Management believes the Company is
well-positioned to capitalize on the consolidation of the rail system services
and products industry on a regional and nationwide basis. The Company has
created an efficient operating platform that management expects will facilitate
the integration of future acquisitions. The Company's acquisition program
includes expanding geographic coverage throughout North America, broadening the
Company's lines of services and products, and adding density and operating
leverage within the Company's current markets. Management believes that the
experience and industry reputations of the senior managers of the operating
companies and senior corporate management of the Company provide it with a
competitive advantage in identifying, completing and integrating acquisitions.
Since the Company completed its IPO in August 1998, it has acquired six
companies with aggregate revenue of $83.1 million for fiscal 1998. The Company
currently has letters of intent to acquire four companies. The Company expects
to execute definitive purchase agreements, which will have customary closing
conditions (including completion of due diligence), in the second quarter of
1999. However, there can be no assurance that the Company will acquire any or
all of these companies. The Company's acquisition strategy includes the
following elements:
- Enter New Geographic Markets. Management intends to expand into
geographic markets the Company does not currently serve by acquiring
well-established contractors and related supply companies that are
leaders in their regional or local markets. In addition, after an initial
emphasis on acquisitions within the United States and Canada, management
may pursue international acquisition opportunities.
- Enter Complementary Services and Product Markets. Management intends to
continue acquiring companies offering complementary services and products
to those currently offered by the operating companies. Specifically,
management believes that there will continue to be attractive acquisition
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opportunities with respect to design and engineering firms, designers and
manufacturers of signaling and communication systems and suppliers of electrical
equipment, rail, switches and panels, and concrete and steel ties.
- Expand Within Existing Geographic Markets. Management plans to acquire
additional companies in many of the regions in which the Company
currently operates in order to expand the volume and scope of the
Company's operations in a particular market. Management will continue to
pursue acquisitions of smaller companies to increase utilization of the
Company's existing fixed assets and equipment or to gain access to new
customers. Management believes these types of acquisitions will improve
operating efficiencies and more effectively use the Company's capital
resources without a proportionate increase in administrative costs.
Reduce Operating Costs. Key areas in which management has achieved and
expects to continue to achieve cost savings include (1) purchasing of equipment
and supplies, (2) insurance expenses and (3) financing costs. The Company also
has established an operating platform to achieve optimal utilization of
equipment, inventory and the Company's workforce. The Company expects to
continue to reduce administrative expenses through the integration of certain
accounting, financing, human resources and other functions.
SERVICES AND PRODUCTS
The Company operates in three business lines: (1) transit services; (2)
rail construction services; and (3) rail products and supplies. The following
chart sets forth the percentage of 1998 pro forma revenue that was represented
by each business line.
LOGO
Transit Services
The Company's transit services business includes all products and services
that it provides to rail-based public transit agencies and authorities in
various metropolitan markets. The Company typically contracts with these
agencies to install (1) electric train traction power systems (by means of third
rail or overhead catenary wiring), (2) train control signal systems, (3) train,
station and command station communications systems, (4) general electrical
installations for lighting and other applications and (5) tunnel and station
track. The Company can perform major new projects that involve track
installation including excavation, grading, paving and drainage improvements as
well as minor rehabilitation projects. Projects for new public transit lines
generally include the installation of all of these systems, giving the Company a
competitive advantage.
In addition, the Company leverages its knowledge of transit systems to
efficiently provide mechanical services, including installations of heating and
air conditioning systems, ventilating and pump rooms, fan chambers, elevators
and escalators. The Company has experience with rubber tired vehicular people
mover systems, installing concrete guided trackway, power guide beam, central
guidance rail, walkway and handrails.
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The duration and size of the Company's transit contracts vary greatly
depending on the scope of the project. Large scale transit projects have had a
term of up to four years and have a total contract size of up to $100 million.
The Company has performed installations for most of the country's transit
authorities, including those in Atlanta, Boston, Chicago, Los Angeles, New York,
Philadelphia, Portland, San Diego, San Francisco, St. Louis and Washington, D.C.
The Company generally performs its services as either a prime contractor
directly to the transit agencies or as a subcontractor to large civil
engineering contractors or equipment manufacturers. Contracts with transit
authorities are competitively bid and awarded on a fixed price basis generally
to the lowest bidder. As a result, the Company focuses its business to (1)
provide accurate bid estimating to both win contracts and ensure a profit and
(2) monitor construction costs to ensure that projects are completed on time and
within budget. The Company's bidding process is highly involved and draws on the
expertise of many individuals within the Company. The Company carefully
considers a variety of factors, including material prices, local labor rates and
practices, its knowledge of the work site and contracting practices of the
transit authorities. The Company has a rigorous project review process that
continually monitors the incurred labor and material costs against an initial
plan to avoid overruns. The Company believes that these methods provide it with
a competitive advantage.
As an outgrowth of its transit-related business, the Company also performs
commercial real estate electrical installations (primarily in the New York City
metropolitan area) and industrial electrical installations (throughout the
United States). The Company contracts for these projects on an opportunistic
basis, that is, when it has resources available and can realize attractive
returns. The Company does not intend to grow its non-rail-related businesses
beyond its current scope.
Rail Construction Services
The Company's rail construction services business consists of providing
rail design, construction and maintenance services to Class I and shortline
railroads and industrial companies with on-site rail infrastructure. Rail design
is a highly specialized discipline and there are a limited number of companies
that can provide these services. The Company utilizes its rail design
capabilities to facilitate access to rail construction projects. By having the
ability to provide integrated design-build services, the Company has been
successful in increasing its project flow. The Company's rail construction
efforts primarily involve the construction of main line segments, passing
sidings, rail yards, connector segments between railroads and industrial sites,
turnouts and track and road intersections. With respect to track maintenance,
the Company enters into multi-year contracts with several customers to provide
ongoing maintenance of on-site rail infrastructure. Maintenance contracts allow
the Company to obtain recurring revenues and gain access to additional new
construction projects from the same customer. Additional rail contracting
services also include the removal of tracks which are no longer in use.
Rail construction and maintenance are highly complex processes that usually
involve numerous separate parties that design, supply and construct the
different elements of the track. Following the design stage, construction
entails (1) site preparation and grading, (2) the laying of ballast (gravel) to
provide a solid track fixation medium, (3) the positioning of cross ties, (4)
securing rail with high precision using metal plates, spikes and clamps, (5)
installing complex track crossings and turnouts and (6) installing other track
related systems such as signal, communications and automatic train control and
safety devices. Management believes that the Company's ability to bundle these
services on a turnkey basis provides it with a significant competitive
advantage.
The Company provides its rail services on a nationwide basis. Since it is
generally not economical to work on contracts outside of a 300 mile radius of an
operating facility, this broad footprint facilitates servicing customers with
multiple sites across regions. Most of the Company's competitors in this market
are regionally focused. Management believes the Company has a competitive
advantage due to its ability to direct equipment and labor resources to regions
with higher demand due to economic or seasonal fluctuations. The Company also
maintains track and track material inventory at each location. By coordinating
information across its network the Company is able to maximize inventory
utilization and improve supply for projects in different regions.
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Rail Products and Supplies
The Company manufactures wooden and concrete products and rail fastening
systems out of four facilities. The Company's wooden products include cross ties
and switch and bridge timbers. The Company's wood treating operations consist of
pressure-treating pre-cut beams of hardwood to provide weather-proofing. These
treated cross ties are used for securing rail for tracks or assembled to
construct bridge support structures. Concrete products consist primarily of
pre-cast structural components for bridges and other support structures. The
Company's concrete operations consist of pouring mixed concrete into large molds
to create specialized structural support components. The Company also designs
and manufactures rail fastening systems which are primarily used in overhead and
portal crane rail applications.
The Company's rail construction operations source rail and other track
materials (primarily metal components such as plates and spikes) from (1) the
reclamation of existing track that is no longer in use, (2) track materials
brokers and (3) manufacturers. The Company sells its rail products and supplies
directly to contractors (including its own subsidiaries) and to Class I and
shortline railroads that perform their own track construction and maintenance.
Some of the Company's products are used in non-rail applications such as highway
construction and decorative landscaping.
The Company's product capabilities provide it with an advantage in
supplying its track construction and maintenance operations. This is
particularly important in the context of wooden cross ties as the market has
experienced shortages in the past. There are a limited number of cross tie
manufacturing facilities in North America due to stringent regulations. The
Company enhances its competitive advantage by having uninterrupted access to
cross ties and other track products. The Company has also developed strong
customer relationships through products sales, particularly with Class I and
shortline railroads. Additionally, the Company leases track construction and
maintenance equipment. By offering operating leases for such equipment, the
Company has formed additional industry relationships, created an additional
revenue source and established an avenue to fully utilize the operating life of
its equipment. As part of its growth strategy, the Company intends to leverage
these relationships to cross-sell other services, particularly design and
engineering as well as track construction and maintenance.
ACQUISITION PROGRAM
Management believes the combination of management's acquisition expertise
and the highly fragmented nature of the rail services and products industry
provides the Company with significant acquisition opportunities. RailWorks
identifies acquisition candidates by leveraging the relationships of its
experienced operational managers and utilizing its dedicated acquisitions team.
The Company focuses on acquiring companies that have a strategic fit, provide
RailWorks with cost synergies, complement its geographic presence, and
demonstrate a willingness to learn and share best practices through open
communications. After an initial screening, management evaluates each
acquisition candidate through its due diligence process, which includes detailed
financial and operational reviews. During the due diligence process, the Company
often identifies a number of areas in which it expects to realize efficiencies
during the integration process. The Company offers acquisition candidates
several benefits, including:
- expertise to expand in specialized markets;
- enhanced productivity through the reduction of administrative burdens;
- national name recognition;
- increased bonding capacity;
- access to public capital markets; and
- the opportunity for a continued role in management.
Other key elements of the Company's acquisition program include:
Retain and Provide Incentives to Existing Management. The Company seeks
acquisitions of successful companies whose senior managers will remain as
employees of the Company and continue to operate their respective businesses on
a local level. The Company motivates these managers and aligns their interests
with those of the Company through (1) employment agreements, (2) shares of
common stock as a portion of the
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acquisition consideration and (3) a structured earnout program which is tied to
the acquired entity meeting specific earnings targets.
Leverage Industry Reputation and Contacts. The Company utilizes existing
industry relationships established by the operating companies and Company
management to develop a broad base of potential acquisitions. The Company
intends to remain actively involved in industry organizations on local and
national levels, working with independent companies to support issues of
interest to the Company.
Acquisition Consideration. In the course of implementing its acquisition
strategy, the Company has typically used cash and performance-based earnouts as
consideration for the acquired businesses. In the future, the Company expects to
use a combination of cash, common stock, promissory notes and performance-based
earnouts as consideration for acquired businesses.
Since completion of the IPO, RailWorks has acquired the following
companies:
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ACQUISITION NAME OF FISCAL 1998
DATE ACQUIRED COMPANY REVENUE HEADQUARTERS BUSINESS LINE
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(in millions)
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November 1998 Armcore Railroad Contractors,
Inc........................... $ 3.8 Frankfort, IN Rail construction services
November 1998 Sheldon Electric Co., Inc..... 1.4(1) Long Island Transit services
City, NY
January 1999 Gantrex Group................. 13.8 Ajax, Ontario, Rail products and supplies
Canada
January 1999 Mid West Railroad Construction
and Maintenance Corporation of
Wyoming....................... 13.2 Salt Lake City, Rail construction services
UT
January 1999 FCM Rail, Ltd. ............... 4.9 Grand Blanc, MI Rail products and supplies
March 1999 F&V Metro Contracting Corp.
and Affiliates ............... 46.0 Farmingdale, NY Transit services
</TABLE>
- ---------------
(1) Railworks acquired certain assets and ongoing contracts of Sheldon Electric
Co., Inc. Therefore, only revenue since the date of acquisition ($1.4
million since November 4, 1998) has been included above.
SOURCES OF SUPPLY
The Company purchases new rail from a limited number of suppliers. New rail
is generally installed only on main lines, where the track may carry high
volumes of heavy traffic at high speeds. Over time, rail is removed, inspected
and, if in the appropriate condition, refurbished for sale as "relay" rail.
Relay rail is typically installed on secondary (non-main line) tracks, as well
as yard or branch tracks. Total rail life before scrapping may be as long as 60
years. The Company also purchases a large volume of relay rail that is
refurbished by third parties and resold.
Similarly, the Company regularly purchases entire sections of track that
are removed and subsequently disassembled at the Company's facilities. The
Company inspects the various track components -- rail, ties, and
accessories -- and items are placed into its inventory (either in their "as
removed" condition or after being refurbished by third parties) or sold for
scrap. Additionally, in connection with certain repair and rehabilitation
projects, the Company acquires trackwork that is removed. Management believes
the Company's network of contractors enables the Company to acquire
previously-used track on comparatively advantageous terms.
For installing electrical signaling and communication systems for transit
authorities, the Company purchases equipment from a limited number of suppliers.
Certain of the Company's operating companies process creosote-treated
wooden ties. Their operations include the purchase of raw lumber, trimming the
lumber to specified sizes, pressurized impregnation of the
9
<PAGE> 12
lumber with creosote preservative and finishing of the ties (which would include
the pre-drilling of spike holes and the attachment of plates, as specified by
the customer). The service life of pressure treated ties has been extended to a
range of 25 to 40 years.
Management believes the Company is able to purchase materials in sufficient
quantities to permit it to realize purchasing economies and discounts from its
suppliers. Historically, the cost of the lumber used to produce wooden ties,
steel used to produce rail and copper used to produce electrical wiring has
fluctuated significantly due to market and industry conditions. Increasing
demand for these raw materials may result in cost increases. There can be no
assurance that the Company will be able to recoup any such increases by
increasing the prices of its products. Further, a reduction in supply of lumber,
steel or copper due to increased demand or other factors could have an adverse
effect on the Company's business, financial condition and results of operations.
SALES AND MARKETING
The Company maintains a targeted national sales program to further develop
the business of each of the operating companies. The focus of this initiative is
on the Class I railroads and other large industrial companies with facilities in
multiple areas. Prior to their acquisition by the Company, the individual
operating companies had been unable to serve such customers on a comprehensive,
nationwide basis. In addition, the Company's ability to offer electrical
installation services together with rail construction, rehabilitation, repair
and maintenance services and related products provides the Company with
opportunities to cross-sell its services to large industrial companies.
Management believes that the Company has an advantage over its competitors since
it can offer consistent, high-quality service and products throughout the United
States. The Company's expansive geographic coverage enables customers to use its
services and products in multiple locations rather than dealing with numerous
regional or local companies.
The Company has achieved significant synergies in its marketing programs.
Management also believes that the Company has developed and will continue to
refine cross-selling programs under which:
(1) the Company's design and engineering groups provide timely leads
to its construction, product supply and electrical installation companies,
(2) the Company's electrical signaling and communications companies,
which have previously utilized third parties for track engineering and
construction, utilize other operating companies for these projects, and
(3) the Company's track construction companies contract with other
operating companies for signaling, communication and electrical
installation services.
Similarly, the Company's product supply companies have, over the years,
developed long-term relationships with the Class I railroads and large
industrial companies, and management believes that these relationships provide
an attractive basis for marketing the Company's construction and maintenance
services.
BIDDING AND CONTRACTS
A majority of the Company's pro forma revenue for the year ended December
31, 1998 was derived from contracts entered into through a competitive bidding
process. Public agencies, including the New York City Transit Authority
("NYCTA"), that solicit bids are generally required to accept the lowest cost
proposal. In some cases, the party that submitted the low bid must first pass a
technical qualification before being awarded a project. Following the acceptance
of a bid, the Company typically enters into a contract with the customer. The
Company's track construction and repair projects generally do not involve
long-term contracts.
Many projects that are competitively bid require the company that is
awarded the project to post a bond, which varies according to the size of the
project. Each company has a bonding limit, which is based on the company's
working capital and work in progress. The bond provides the customer with
insurance in the event that the company is unable to complete the project.
Accordingly, the ability of each of the operating companies to bid on larger
projects had, prior to their acquisition by the Company, been limited by their
10
<PAGE> 13
ability to obtain the required bonding. The size of the Company, as compared to
the size of the individual operating companies, facilitated increases in the
bonding limits for each operating company thereby better positioning them to bid
on and undertake significantly larger construction and maintenance projects.
Management believes that the increased bonding capacity permits the Company to
bid on and undertake more projects than could smaller companies.
CUSTOMERS
The following table lists the Company's top four customers in each category
on a pro forma basis giving effect to the acquisitions of the Founding Companies
and the Acquired Companies as if they had occurred on January 1, 1998:
<TABLE>
<CAPTION>
CLASS I RAILROADS SHORTLINE AND REGIONAL RAILROADS
- -------------------------------------------- --------------------------------------------
<S> <C>
CSX Transportation Alaska Railroad Corporation
Union Pacific Railroad Louisville & Indiana Railroad
Burlington Northern Santa Fe Indiana Southern Railroad Company
Canadian National Railway Indiana & Ohio Rail Systems
</TABLE>
<TABLE>
<CAPTION>
TRANSIT AUTHORITIES AND INDUSTRIAL COMPANIES AND
COMMUTER RAILROADS COMMERCIAL ENTERPRISES
- -------------------------------------------- --------------------------------------------
<S> <C>
NYCTA (New York) United States Steel
NYDOT (New York) Bethlehem Steel
LAMTA (Los Angeles) Morse Diesel
CDOT Rail Division (Connecticut) Babcock & Wilcox
</TABLE>
The Company derived approximately 43.7% of its pro forma revenue for the
year ended December 31, 1998 from its top ten customers. Approximately 21.1% of
the Company's 1998 pro forma revenue was derived from projects undertaken for
the NYCTA. These projects were undertaken under a number of separate contracts.
If the NYCTA were to significantly reduce the amount of business that it does
with us or determine not to do business with us in the future, it would have a
material adverse effect on our business, financial condition and results of
operations.
COMPETITION
The rail system services and products industry is competitive, and projects
are often awarded through competitive bidding. The Company competes with other
rail system construction, rehabilitation and maintenance companies, electrical
contractors and suppliers of products. Certain competitors have significantly
greater resources than the Company, may provide a broad range of services and
products and may have sufficient bonding capacity to undertake large projects.
The Company competes on the basis of its breadth of services and products,
ability to take on large projects and nationwide presence. Any inability of the
Company to compete successfully against existing and future competitors would
have a material adverse effect on the Company's business, results of operations
and financial condition. Moreover, the Company may depend in part upon
opportunities for consolidation in the rail system services and products
industry in order to execute effectively its acquisition and vertical
integration strategy. If the Company's customers do not receive the Company's
vertical integration strategy favorably, such customers have numerous
alternative sources of services and supply.
11
<PAGE> 14
RISK MANAGEMENT AND SAFETY
Because the Company's business is labor intensive, workers' compensation is
a significant operating expense for the Company. The Company could be exposed to
liability for the acts or negligence of its employees who cause personal injury
or damage while on assignment, as well as claims of misuse of customer
proprietary information or theft of client property. The Company has adopted
policies and procedures intended to reduce its exposure to these risks.
The Company maintains insurance against these risks with policy limits it
considers sufficient and consistent with industry standards. The Company has
retained a risk management professional who is responsible for claims management
and the establishment of appropriate reserves for the deductible portion of
claims. The Company holds regular meetings with the presidents of the operating
companies at which safety issues are discussed. The Company also conducts
routine safety inspections of local work sites.
EQUIPMENT
The Company owns and maintains specialized equipment used in rail
construction, rehabilitation, repair and maintenance. This equipment may be
moved between job sites and, consequently, the Company is seeking to increase
the sharing of equipment between the operating companies where it is appropriate
and cost effective. For example, during the winter months, the operating
companies located in the Northern United States could relocate their equipment
to the operating companies located in the South. Each of the operating companies
generally performs its own equipment maintenance. The Company intends to manage
its equipment through its equipment leasing subsidiary, which will maintain a
comprehensive database that tracks the use of all of the Company's equipment.
GOVERNMENT REGULATION
Overview. In addition to the environmental, safety and other regulations
generally applicable to all businesses, the Company's business is impacted by
regulations that are administered by the STB, the successor to the Interstate
Commerce Commission ("ICC"), and the FRA and by regulatory agencies in the
various states in which the Company and its customers do business. Since 1980,
there has been a significant relaxation in regulations governing the sale,
leasing or other transfer of railroad properties, and this change has favorably
affected the operations of many of the Company's customers. Various interests in
the United States have sought and continue to seek reimposition of government
controls on the railroad industry in areas deregulated in whole or in part since
1980, including stricter rate regulation and more onerous labor protection
conditions for rail line transfers.
Railroad Regulations. The ICC Termination Act, which was enacted on
December 29, 1995, eliminated the ICC as an independent agency and created the
STB, a new agency within the Department of Transportation which began
functioning on January 1, 1996. The ICC Termination Act changed the procedure
and timing for federal approval of rail projects, including abandonments, line
sales, mergers, rates and tariffs, simplifying and streamlining the abandonment
process. The FRA regulates railroad safety and equipment standards, including
track maintenance and train speed standards, special procedures for handling
hazardous shipments, locomotive and railcar inspection and repair requirements,
operating practices and crew qualifications. The Roadway Worker Protection
Rules, which were promulgated by the FRA, apply to rail contractors and
establish certain safety criteria that must be complied with on rail projects.
TEA 21. On June 9, 1998, the President signed TEA 21, the six-year surface
transportation program that represents a significant development in the federal
transit program. TEA 21, the largest infrastructure funding bill in U.S.
history, authorizes funding for transit in the amount of $42 billion through
2003. TEA 21 authorizes over 50 percent more than the 1991 Intermodal Surface
Transportation Efficiency Act, whose funding has expired.
State Regulatory Agencies. State regulatory agencies no longer have
authority to engage in economic regulation of railroads that are part of the
intrastate network. State and local governments generally retain
12
<PAGE> 15
jurisdiction over local rail safety matters, such as the installation of grade
crossings and grade crossing warnings devices.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to environmental laws
and regulations relating to pollution and protection of the environment and
public and employee health and safety. The principal environmental regulatory
requirements applicable to the Company's operations relate to the use of
creosote to treat lumber, and the generation, storage, transportation, treatment
and disposal of solid and hazardous wastes. The Company believes that its
operations have all required environmental permits and currently are in
compliance, in all material respects, with applicable regulatory requirements.
The Company has had environmental assessments performed for recent
acquisitions. Based on these reports and available information, the Company is
not aware of any significant environmental exposures or claims against it.
However, the historical and current uses of the Company's facilities may have
resulted in spills or releases of various hazardous materials, which now, or in
the future, could require remediation. The Company also may be subject to
requirements related to remediation of hazardous materials that have been
released into the environment at properties that it owns or operates, or owned
or operated in the past or at properties to which it sends, or may have sent,
hazardous materials for treatment or disposal. Such remediation requirements
generally are imposed without regard to fault, and liability for any required
environmental remediation can be substantial.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 2,000
employees. The Company believes that its relations with its employees are good.
Approximately 66.9% of the Company's employees are members of certain labor
unions and are employed pursuant to collective bargaining agreements. Certain of
the operating companies are parties to collective bargaining agreements with the
International Brotherhood of Electrical Workers, Laborers' International Union
of North America, the International Union of Operating Engineers, United
Brotherhood of Carpenters and Joiners of America and the United Brotherhood of
Teamsters. Certain of the Company's customers only hire unionized labor. The
Company's largest collective bargaining agreement, covering 1,054 employees,
expires in June 2001. Except for a one-week work stoppage in Connecticut by the
United Brotherhood of Teamsters in June 1994, the Company has not experienced
any work stoppages in the past five years.
INFORMATION TECHNOLOGY SYSTEMS
The Company is in the process of implementing integrated information
technology systems that will be utilized by each of the operating companies.
These information technology systems will be used for a variety of purposes,
including monitoring inventory levels, tracking the progress of construction
projects and integrating the Company's financial, general ledger, payables and
receivables functions. In addition, the Company will network its corporate
offices to the offices of its operating companies and will have e-mail
capability at all offices. The Company expects that the required systems will be
purchased and installed in 1999 and that its expenditures for these systems will
not be material to the Company. All of the new systems will be Year 2000
compatible. Until these new systems are fully operational, each of the operating
companies will continue using the information systems that are currently being
used.
13
<PAGE> 16
ITEM 2. PROPERTIES
The Company's corporate offices are in approximately 3,000 square feet of
leased space in a suburb of Baltimore, Maryland. In addition to its corporate
offices, the Company leases 27 facilities and owns 10 facilities. these
facilities consist of local offices, storage yards, distribution facilities,
warehouses and wood processing plants.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the Company's
executive officers:
<TABLE>
<CAPTION>
NAME: AGE POSITION
- ----- --- --------
<S> <C> <C>
John G. Larkin............................. 43 Chairman of the Board, Chief Executive
Officer and Director
Michael R. Azarela......................... 40 Executive Vice President, Chief Financial
Officer and Director
John Kennedy............................... 60 Vice President, Chief Operating
Officer -- Track Contractors and Director
Peter Alan Pasch........................... 48 Vice President, Chief Operating Officer --
Transit Operations and Director
Robert D. Wolff............................ 56 Vice President, Chief Operating Officer --
Western Track Construction & Maintenance
</TABLE>
John G. Larkin has been the Chairman of the Board and Chief Executive
Officer and a director of RailWorks since its inception in March 1998. For the
past 21 years, Mr. Larkin has worked in the transportation industry. From
December 1994 to February 1998, Mr. Larkin was a managing director of BT Alex.
Brown Incorporated, where he focused on the transportation industry. Prior
thereto, he served in various capacities at BT Alex. Brown Incorporated since
1987, including as an equity research analyst, focused exclusively on the
transportation industry. From 1986 to 1987, Mr. Larkin was Assistant Vice
President of CSX Transportation, Inc., where he was responsible for strategic
planning and analysis. From 1985 to 1986, Mr. Larkin was Director of Strategic
Planning of Seaboard System Railroad, Inc. From January 1979 through July of
1982, Mr. Larkin served as an engineering project coordinator for Day &
Zimmermann, Inc., an engineering and construction management firm. During this
period, Mr. Larkin was focused exclusively on railroad and rail transit design
and valuation projects. Mr. Larkin has a Master of Business Administration from
Harvard University and a Master of Science in Civil Engineering from the
University of Texas.
Michael R. Azarela has served as the Executive Vice President, Chief
Financial Officer and a director of RailWorks since May 1998. Mr. Azarela was
Chief Executive Officer of L.K. Comstock from February 1998 to August 1998 and
Senior Vice President and Chief Financial Officer of CGI and Spie from May 1994
to February 1998, Chairman of the Board of Comstock Holdings, Inc. since
November 1996 and Vice President and Treasurer of L.K. Comstock from September
1992 to April 1994 and in various other positions at Comstock since June 1983.
Mr. Azarela is a certified public accountant and has a Master of Business
Administration from Iona College.
John Kennedy has served as Vice President and a director of RailWorks since
its inception in March 1998, and Chief Operating Officer -- Track Contractors
since January 1999. From March 1998 to January 1999, he was Chief Operating
Officer of RailWorks. Mr. Kennedy has served as President of Kennedy
14
<PAGE> 17
Railroad, a Founding Company, from June 1965 to February 1998, as President of
Railcorp, Inc. from April 1986 to February 1998 and as Principal of
Alpha-Keystone from January 1996 to February 1998. From 1980 to 1988, Mr.
Kennedy served as an Elected Member of the Pennsylvania House of
Representatives.
Peter Alan Pasch has served as a director of RailWorks since the IPO and as
Vice President and Chief Operating Officer -- Transit Operations since January
1999. From August 1998 to January 1999, Mr. Pasch served as Chief Executive
Officer of Comstock and from April 1997 to August 1998 he served as President
and Chief Operating Officer of Comstock. From October 1995 to April 1997, Mr.
Pasch served as Executive Vice President of Comstock in charge of operations
outside the New York Metropolitan area. Mr. Pasch served as Executive Vice
President of Comstock from October 1987 to September 1995. Mr. Pasch joined
Comstock in 1973 after receiving his Master of Engineering Degrees from
Rensselaer Polytechnic Institute. Mr. Pasch is a Registered Professional
Engineer in 45 states, a Master Electrician in 18 states and is a member of the
International Brotherhood of Electrical Workers.
Robert D. Wolff has served as Vice President, Chief Operating
Officer -- Western Track Construction and Maintenance of RailWorks since January
1999. From 1977 to January 1999, Mr. Wolff was the Chief Executive Officer of
Mid West Railroad Construction & Maintenance Corp. Mr. Wolff is a past President
of the National Railroad Construction and Maintenance Association, Inc.
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
15
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RailWorks Corporation's Common Stock began trading on July 30, 1998 in the
Nasdaq National Market under the symbol "RWKS." The following table details the
high and low bid information for the Common Stock as reported by the Nasdaq
National Market for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Third Quarter 1998 (from July 30, 1998)................... $12.00 $5.69
Fourth Quarter 1998....................................... 9.50 4.56
</TABLE>
On March 23, 1999, (1) the last sale price of the Common Stock as reported
by the Nasdaq National Market was $11.50 per share and (2) there were 124
holders of record of the Common Stock.
The Company has never paid any cash dividends on its Common Stock, and the
Board of Directors currently intends to retain all earnings for use in the
Company's business for the foreseeable future. Any future payment of dividends
will depend upon the Company's results of operations, financial condition, cash
requirements, restrictions contained in credit and other agreements and other
factors deemed relevant by the Board of Directors.
Recent Sales of Unregistered Securities
On October 14, 1998 the Company issued 13,700 unregistered shares of its
non-voting Series A Convertible Preferred Stock to BT Alex. Brown Incorporated
in exchange for 1,370,000 shares of its Common Stock pursuant to the exemption
from registration under Section 4(2) of the Securities Act of 1933.
In 1998, the Company issued options to certain employees and non-employee
directors under its stock option plan to purchase an aggregate of 30,000 shares
of Common Stock at exercise prices equal to the fair market value of the Common
Stock on the date of grant. Such options were issued in reliance on the
exemption contained in Rule 701 under the Securities Act of 1933.
In 1998, the Company granted an aggregate of 1,200,393 shares of Common
Stock to an aggregate ten officers and key employees pursuant to the exemption
from registration under Section 4(2) of the Securities Act of 1933.
16
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
RailWorks acquired the Founding Companies concurrently with the
consummation of the IPO on August 4, 1998. For accounting and financial
statement purposes, Comstock Holdings, Inc. (one of the Founding Companies) was
identified as the "accounting acquirer" consistent with the requirements of SAB
No. 97 of the Securities and Exchange Commission. All other acquisitions have
been accounted for as purchases in accordance with APB No. 16.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY RAILWORKS
----------------------------------------- ---------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994(1) 1995(1) 1996(1) 1997(1) 1998(2)
-------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $157,749 $181,616 $188,767 $153,610 $212,533
Cost of revenue......................... 137,607 164,777 169,303 136,678 182,817
-------- -------- -------- -------- --------
Gross profit............................ 20,142 16,839 19,464 16,932 29,716
Selling, general and administrative
expenses.............................. 16,963 15,624 15,053 13,733 17,040
Non-recurring expenses.................. -- -- -- -- 19,965(3)
Transaction fees........................ -- -- -- -- 1,281(4)
Depreciation and amortization........... 1,447 1,263 1,365 (213) 2,105
-------- -------- -------- -------- --------
Operating income (loss)................. 1,732 (48) 3,046 3,412 (10,675)
Interest expense........................ (38) (871) (2,023) (1,761) (2,334)
Interest and other income............... 2,401 2,115 476 975 1,634
Income (loss) before income taxes....... 3,134 (19,822) 558 2,626 (11,375)
Net income (loss)....................... 2,782 (19,972) 58 1,428 (12,847)
Basic and diluted earnings (loss) per
share................................. .48 (1.67)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY RAILWORKS
--------------------------------------- ---------
AS OF DECEMBER 31,
---------------------------------------------------
1994(1) 1995(1) 1996(1) 1997(1) 1998(2)
-------- -------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(5)........................ $ 30,456 $ 31,915 $19,257 $26,500 $ 67,391
Total assets.............................. 89,168 86,108 84,344 68,352 228,636
Total debt................................ -- 19,241 24,890 15,004 51,504
Stockholders' equity...................... 56,329 20,567 16,990 1,438 110,008
</TABLE>
- ---------------
(1) The selected historical consolidated financial data as of and for the fiscal
years ended December 31, 1994, 1995, 1996 and 1997 are derived from the
financial statements of Comstock Holdings, Inc., the accounting acquirer,
and its predecessor, L.K. Comstock & Company, Inc., for the respective
periods.
(2) The selected historical consolidated financial data for the fiscal year
ended and as of December 31, 1998 are derived from the Company's
Consolidated Financial Statements, which are comprised of financial data of:
- Comstock Holdings, Inc., the accounting acquirer, for the year ended
December 31, 1998;
- the Founding Companies, other than Comstock Holdings, Inc., for the
period from August 1, 1998 through December 31, 1998; and
- the 1998 Acquired Companies for the period from November 4, 1998 through
December 31, 1998.
(3) Consists of $14.5 million in restricted common stock granted to the
Company's officers, $2.9 million related to the settlement of employee
benefit obligations of one of the operating companies and corporate
relocation costs, $2.2 million in estimated legal and settlement costs in
connection with former operations of one of the operating companies and
$400,000 in common stock gifts made by certain employees of an operating
company to other employees of that operating company.
17
<PAGE> 20
(4) Represents offering expenses incurred in connection with the IPO.
(5) Working capital is the sum of cash, accounts receivable, costs and estimated
earnings in excess of billings on uncompleted contracts, inventories,
deferred tax asset and other current assets, less the sum of current
maturities of long-term debt, accounts payable and accrued liabilities,
accrued payroll and related withholdings, billings in excess of costs and
estimated earnings on uncompleted contracts and other current liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto appearing
elsewhere herein.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this report, and other written or oral
statements made by or on behalf of the Company, may constitute "forward-looking
statements" within the meaning of the federal securities laws. Statements
regarding future events and developments and the Company's future performance,
as well as management's expectations, beliefs, plans, estimates or projections
relating to the future, are forward-looking statements within the meaning of
these laws. All forward-looking statements are subject to certain risks and
uncertainties that could cause actual events to differ materially from those
projected. Such risks and uncertainties include, among others, the lack of a
combined operating history of the Company's operating companies and the possible
failure to integrate their decentralized operations, the inability to complete
and finance acquisitions, the inability to grow internally, the Company's
dependence on a principal customer, a history of losses of certain of the
Company's operating companies, competitive factors, the Company's dependence on
public sector contracts and funding, the nature of fixed priced contracts
pursuant to which the Company provides services and products, the Company's
reliance on subcontractors and suppliers, the cyclical nature of the rail system
industry, the Company's exposure to downturns in commercial construction, the
unionization of the Company's workforce, the impact of various regulations on
the Company's business, the Company's dependence on key personnel, the Company's
ability to pay its indebtedness and the Company's ability to address Year 2000
problems. Management believes that these forward-looking statements are
reasonable; however, you should not place undue reliance on such statements.
These statements are based on current expectations and speak only as of the date
of such statements. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of future events, new
information or otherwise. Additional information concerning the risk and
uncertainties listed above, and other factors that you may wish to consider, is
contained below in this Item under the sections entitled "Year 2000" and "Risk
Factors."
GENERAL
RailWorks was formed in March 1998 to become a leading nationwide provider
of rail system services, including construction and rehabilitation, repair and
maintenance, and related products. The Company primarily performs services
pursuant to contracts for the completion of specific projects, some of which
take up to five years to complete. On most projects, the Company contracts
directly with rail system operators, while on other projects the Company acts as
a subcontractor.
In August 1998, RailWorks acquired in separate concurrent transactions 14
Founding Companies engaged principally in the rail system services and products
business and RailWorks consummated its IPO. In November 1998, RailWorks acquired
the two 1998 Acquired Companies and, in the first quarter of 1999, RailWorks
acquired the four 1999 Acquired Companies. Except for the acquisition of
Comstock Holdings, Inc., ("Comstock"), a Founding Company, all of the
acquisitions have been accounted for as purchases in accordance with APB No. 16.
For accounting and financial statement purposes, Comstock has been
identified as the accounting acquirer consistent with Staff Accounting Bulletin
("SAB") No. 97 of the Securities and Exchange
18
<PAGE> 21
Commission because its owners received the largest portion, 34.6%, of the shares
of Common Stock issued to the owners of the Founding Companies at the time of
their acquisition. The historical financial statements prior to August 4, 1998
are those of Comstock.
The Company's consolidated balance sheet as of December 31, 1998, includes
the Founding Companies and the 1998 Acquired Companies. The results of
operations for the year ended December 31, 1998, and the statement of cash flows
for the year ended December 31, 1998 include the results of operations and cash
flows of Comstock for the entire period, the results of operations and cash
flows of the Founding Companies from August 1, 1998 and the results of
operations and cash flows of the 1998 Acquired Companies from November 4, 1998.
RailWorks conducted no operations prior to the consummation of its IPO other
than the acquisitions of the Founding Companies and the financing activities
related thereto, including the IPO, and had no revenue or operating expenses
prior to August 1, 1998. Consequently, management believes that RailWorks, or
individual Founding Company and 1998 Acquired Company financial comparisons, are
not meaningful.
The Founding Companies and the Acquired Companies have operated
historically under varying tax structures, including both S and C corporations,
which have influenced the historical level of owners' compensation. Certain
executive officers of each of the Founding Companies and the Acquired Companies
have entered into employment agreements with the Company. The aggregate
compensation paid to such executive officers was reduced following the IPO.
Following the initial two-year term of the employment agreements, the Company
will reevaluate its compensation structure after examining operating results and
the value of the services such individuals are providing the Company.
Prior to their affiliation with RailWorks, the Founding Companies and the
Acquired Companies were privately owned and managed as separate entities.
Operating performance and management compensation depended on regional market
conditions and the priorities and strategies of individual owners. For example,
under private ownership these companies experienced limitations on project
bonding capacity, access to capital and human resources. In addition, many of
these companies operated under an S corporation tax structure. In many
instances, management and employee compensation was not necessarily directed
toward the achievement of growth in profitability. As part of RailWorks, these
businesses have access to significantly more resources, including higher bonding
capacity, lower input costs through greater purchasing power, access to lower
cost capital and cross-selling opportunities.
REVENUE AND COSTS
The Company recognizes revenue from fixed price contracts using the
percentage-of-completion method, measured by the percentage of costs incurred to
date to management's estimate of total cost for each contract. Changes in job
performance, job conditions and estimated profitability may result in revisions
to cost and income, which are recognized in the period in which the revisions
are determined. Revenue from time-and-material contracts are recognized
currently as the work is performed.
Contract costs consist principally of wages and benefits of employees,
subcontracted services, materials, parts and supplies, depreciation and other
vehicle expenses and equipment rental, as well as indirect costs related to
contract performance. Contract costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
In the case of product sales, the Company recognizes revenue when products
are delivered to customers pursuant to shipping agreements. Cost of goods sold
includes raw materials cost and production cost.
RESULTS OF OPERATIONS
Historical -- Year Ended December 31, 1998
Revenue was $212.5 million for the year ended December 31, 1998. Cost of
revenue was $182.8 million. Gross profit for the year ended December 31, 1998
was $29.7 million. Selling, general and administrative expenses were $38.3
million, including non-recurring expenses of $20.0 million and transaction fees
of $1.3 million recorded during the third quarter related to the IPO. The $20.0
million of non-recurring expenses
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consists of a non-cash compensation charge of $14.9 million for stock grants
issued to management resulting from the consummation of the IPO, $2.9 million
related to the settlement of certain employee benefit obligations and relocation
expenses and $2.2 million for estimated legal and settlement costs in connection
with certain claims and litigation associated with the Company's former west
coast operations. Included in other income in the fourth quarter was a gain of
$861,000 on the disposition of the Company's Longview, Washington industrial
electrical contracting division. This divestiture was in conjunction with
Comstock's change in strategic focus to rail-based transit projects. The net
loss for the year ended December 31, 1998 was $12.8 million.
Pro Forma Founding Companies -- Year Ended December 31, 1998 Compared to the
Year Ended December 31, 1997
The presentation below provides the pro forma results of operations of the
Founding Companies as if the Founding Companies had been acquired on January 1,
1997. The presentation only includes the results of the 1998 Acquired Companies
from November 4, 1998 to December 31, 1998. Acquired Companies are otherwise
excluded. The presentation includes pro forma results of the Founding Companies
and the Acquired Companies on a combined basis.
The pro forma results of operations of the Company for the periods
presented may not be comparable to, and may not be indicative of, the Company's
actual results of operations because (1) the Founding Companies and the Acquired
Companies were not under common control or management during the periods
presented and (2) the pro forma data do not reflect all of the potential
benefits and cost savings the Company expects to realize as a result of
operating as a combined entity.
The following table sets forth selected pro forma financial data for the
periods indicated.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
RESULTS OF OPERATIONS
------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue................................................... $256,508 100.0% $269,498 100.0%
Cost of revenue........................................... 219,400 85.5 227,052 84.2
-------- --------
Gross profit.............................................. 37,108 14.5 42,446 15.8
Selling, general and administrative expenses.............. 20,848 8.1 19,317 7.2
Depreciation and amortization............................. 5,038 2.0 5,389 2.0
-------- --------
Operating income.......................................... 11,222 4.4 17,740 6.6
Interest and other income (expenses), net................. (1,063) (0.4) (833) (0.3)
-------- --------
Income before income taxes................................ 10,159 4.0 16,907 6.3
Net income................................................ 5,438 2.1 8,812 3.3
</TABLE>
Revenue. Revenue increased $13.0 million, or 5.1%, from $256.5 million for
the year ended December 31, 1997 to $269.5 million for the year ended December
31, 1998. The increase was primarily due to growth of the Company's transit
services segment, which grew at 7.1% and represented $11.0 million in additional
revenue.
Gross Profit. Gross profit increased $5.3 million, or 14.4%, from $37.1
million for the year ended December 31, 1997 to $42.4 million for the year ended
December 31, 1998. As a percentage of revenue, gross profit increased to 15.8%
for the year ended December 31, 1998 from 14.5% for the year ended December 31,
1997. The increase in gross profit was due to the higher revenue base and
improved revenue mix as a result of higher margin contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.5 million, or 7.3%, from $20.8 million for
the year ended December 31, 1997 to $19.3 million for the year ended December
31, 1998. As a percentage of revenue, selling, general and administrative
expenses decreased
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from 8.1% for the year ended December 31, 1997 to 7.2% for the year ended
December 31, 1998. The decrease in selling, general and administrative expenses
was the result of decreased salaries and wages during 1998.
Net Income. Net income increased to $8.8 million for the year ended
December 31, 1998 from $5.4 million for the year ended December 31, 1997, an
increase of $3.4 million, or 62.0%. As a percentage of revenue, net income
increased to 3.3% for the year ended December 31, 1998 from 2.1% for the year
ended December 31, 1997. The increase was the result of the increase in revenue
and profitability discussed above.
Historical -- December 31, 1997 Compared to December 31, 1996 -- Comstock
Holdings, Inc.
Founded in 1904, L.K. Comstock & Co., Inc. ("L.K. Comstock"), a
wholly-owned subsidiary of Comstock, is one of the largest electrical
contractors in the United States based on revenue. L.K. Comstock specializes in
power, communication and signaling installations for rail-based transit systems
and also provides electrical contracting services for commercial buildings,
heavy industrial and manufacturing plants and power plants. Through incremental
investments from 1986 through 1989, L.K. Comstock's former parent company,
Comstock Group, Inc. ("CGI"), was acquired by Spie Enertrans S.A. ("Spie"), a
multinational electrical engineering firm headquartered in Paris, France. During
Spie's ownership, L.K. Comstock sought to increase revenue by expanding its
non-transit operations in California and entering into joint ventures to design
and build large power and industrial projects in other locations. Effective
January 1, 1997, L.K. Comstock was acquired (the "Comstock Acquisition") from
Spie by Comstock, a corporation owned by certain employees of L.K. Comstock.
Following the Comstock Acquisition, Comstock's management instituted a plan
to reduce Comstock's costs and improve profitability. As a result of this plan,
Comstock has reduced general and administrative expenses by eliminating certain
management positions, including those of several French expatriates, and
reducing its Los Angeles-based staff. Comstock also improved gross profit
margins through (1) improved control over contract costs by consolidating
transit project estimating and bidding functions and (2) exiting unprofitable,
risky operations which had been expanded under Spie's ownership (such as
electrical projects for traffic systems, non-rail projects in California and
large joint ventures for the design and construction of power and industrial
plants). Under joint ventures with general construction contractors, as
preferred by Spie, Comstock had limited management control and was subject to
increased costs due to general contract conditions. Following the Comstock
Acquisition, management focused the business to benefit from its core
competencies, including rail-based transit projects. However, Comstock's
electricians and supervisors are capable of performing services on rail and
non-rail projects, thus enabling the efficient use of experienced labor on
projects in response to demand. Additionally, its accounting and management
systems are designed to provide necessary information for both rail and non-rail
projects. In 1997, Comstock derived 56.7% of its revenue and 58.6% of its gross
profit from rail-related projects as compared to 48.1% and 48.5%, respectively,
in 1996.
Revenue. Revenue decreased to $153.6 million for the year ended December
31, 1997 from $188.8 million for the year ended December 31, 1996, a decrease of
$35.2 million, or 18.6%. This decrease was due to a decrease in revenue from
Comstock's power and industrial operations attributable to the completion of
certain large projects in 1996 and early 1997 that were not immediately
replaced, as well as a decrease in revenue from Comstock's traffic operations,
offset in part by an increase in revenue from Comstock's commercial operations.
The decrease in revenue from traffic operations, as well as a portion of the
decrease in revenue from power and industrial operations, were due to the change
in strategic focus discussed above and it is unlikely that such projects will be
replaced. Rail-related revenue did not change significantly from 1996 to 1997
due to limited bonding capacity.
Gross Profit. Gross profit decreased to $16.9 million for the year ended
December 31, 1997 from $19.5 million for the year ended December 31, 1996, a
decrease of $2.5 million, or 13.0%. As a percentage of revenue, gross profit
increased to 11.0% for the year ended December 31, 1997 from 10.3% for the year
ended December 31, 1996. Gross profit decreased as a result of the decline in
revenue, offset in part by tighter cost controls implemented by management and a
reduction in the amount of activity in traffic and Los Angeles-based non-rail
projects which had significantly lower margins. Additionally, 1996 gross profit
benefitted from a
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<PAGE> 24
reduction in contract reserves of approximately $3.0 million related to the
settlement of outstanding project contingencies.
General and Administrative Expenses. General and administrative expenses
decreased to $13.7 million for the year ended December 31, 1997 from $15.1
million for the year ended December 31, 1996, a decrease of $1.3 million, or
8.8%. This decrease was a result of the tighter cost controls implemented by
management, including reductions in executive and administrative staff in the
power, industrial and Los Angeles-based non-rail operations. As a percentage of
revenue, general and administrative expenses increased to 8.9% for the year
ended December 31, 1997 from 8.0% for the year ended December 31, 1996. This
increase was the result of the decrease in revenue.
Net Income. Net income increased to $1.4 million for the year ended
December 31, 1997 from $58,000 for the year ended December 31, 1996, an increase
of $1.3 million. For each period, net income as a percentage of revenue was less
than 1%. The increase in net income was partially due to the reduction of
general and administrative expenses discussed above and the elimination of
management expenses of $941,000 paid to Spie and related entities in 1996. In
addition, as a result of the Comstock Acquisition and the related purchase
accounting, approximately $1.6 million of depreciation and amortization were
eliminated in 1997 as compared to 1996. These factors were partially offset by
the decrease in gross profit due to the factors discussed above.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Founding Companies and the Acquired Companies have in the past
experienced quarterly variations in revenue, operating income (including
operating losses), net income (including net losses) and cash flows (including
operating cash flow deficits) as a result of various factors, including projects
commenced and completed during a quarter, the number of business days in a
quarter and the size and scope of projects. A variation in the number of
projects, progress on projects or the timing of the initiation or completion of
projects can cause periods in which certain operating resources are not
generating revenue and can cause significant variations in operating results
between reporting periods. Negative fluctuations have been particularly
pronounced, and net losses have been incurred, in the first and fourth calendar
quarters, generally due to adverse weather conditions. The Company expects to
continue to experience such quarterly fluctuations in operating results,
including possible net losses.
LIQUIDITY AND CAPITAL RESOURCES
On August 4, 1998, the Company completed the IPO of 5.0 million shares of
its Common Stock at a price of $12.00 per share. The capital raised by this
offering was approximately $52.5 million, net of underwriting discounts and
other offering expenses, of which approximately $51.1 million was used for the
cash portion of the Company's acquisitions of the Founding Companies and
approximately $1.4 million was used for the repayment of debt.
At December 31, 1998, RailWorks had working capital of approximately $67.4
million. Net cash used in operating activities for the year ended December 31,
1998, was approximately $13.9 million. Net cash used in investing activities for
the year ended December 31, 1998 was approximately $54.4 million which consisted
of $52.5 million of cash for acquisitions (including $49.9 million for the
Founding Companies) and $1.3 million for purchase of equipment and leasehold
improvements. Net cash provided by financing activities for the year ended
December 31, 1998 was approximately $70.0 million, which included $52.5 million
from the issuance of common stock relating to the IPO and borrowings of
approximately $61.3 million, offset by debt repayment of approximately $41.2
million.
Capital expenditures were $1.3 million, $448,000 and $690,000 in fiscal
1998, 1997 and 1996, respectively. Historically, capital expenditures have been,
and future expenditures are anticipated to be, primarily to support expansion of
the Company's operations, including its management information systems. The
Company's capital expenditures over the next several years, as a percentage of
its revenues, are expected to decrease compared to those of the past three
fiscal years.
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<PAGE> 25
Capital expenditures of approximately $5.0 million for equipment and
leasehold improvements are anticipated in 1999. This investment, which is
expected to be able to be financed primarily by working capital and vendor
financing, relates to the anticipated facility consolidations of the operating
companies, the installation of a comprehensive financial reporting computer
system and the purchase of supplemental machinery and equipment needed to meet
operational demands. There are no other significant commitments for future
capital expenditures, although it is likely that cash outflows for business
acquisitions and equipment leases will continue.
Cash for acquisitions and working capital are financed by funds generated
from operations, together with borrowings under the Company's credit facilities
with NationsBank, N.A. The Company has in place a three-year, $75 million senior
revolving credit facility. The Company also has a $25 million senior term credit
facility that matures upon the earlier of June 30, 1999 and consummation of a
debt or equity offering. The credit facilities are secured by a first lien on
all of the capital stock of the Company's subsidiaries and on all accounts
receivable of the Company and its subsidiaries. The credit facilities contain a
negative pledge on all other assets of the Company and its subsidiaries and
other usual and customary covenants and events of default for transactions of
the type contemplated by the credit facilities. Borrowings under the credit
facilities bear interest, at the option of the Company, at an interest rate
equal to (1) LIBOR plus the applicable margin for LIBOR loans, which ranges from
125 basis points to 250 basis points based on the ratio of Funded Debt to EBITDA
(as such terms are defined in the credit facility) or (2) the Alternate Base
Rate (defined as the higher of (a) the NationsBank prime rate and (b) the
Federal Funds rate plus 50 basis points) plus up to 125 basis points based on
the ratio of Funded Debt to EBITDA. The Company may also finance future
acquisitions with shares of common stock and contingent consideration.
In connection with certain acquisitions, the Company has agreed, and in the
future may agree, to pay additional consideration based on operating results of
the acquired entity. The payment of any such earnouts could result in an
increase in the purchase prices of such acquisitions and, as a result,
additional goodwill.
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.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
YEAR 2000
The Company 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.
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<PAGE> 26
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
December 31, 1998, 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 service providers and manufacturers, a reasonably likely worst case
scenario would be the result of failures of third parties (including, without
limitation, governmental entitles 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
manufactured 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 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 directly or indirectly, to
be Year 2000 compliant.
RISK FACTORS
The Operating Companies Do Not Have a Combined Operating History; The
Company May be Unsuccessful Integrating Their Decentralized
Operations. RailWorks was founded in March 1998 but conducted no operations and
generated no revenue until it completed its IPO in August 1998. The Company
acquired the Founding Companies concurrently with the completion of the IPO, has
acquired six additional operating companies since that time, and has entered
into letters of intent to acquire four additional operating companies. The
operating companies were separate independent entities before RailWorks acquired
them and to a certain extent they continue to operate as independent entities
because the Company conducts its operations on a decentralized basis. The
integration of the operating companies, while allowing them to retain
decentralized operations and management, is important to the Company's operating
and growth strategies and the achievement of efficiencies in the combined
operation. Management may not be able to integrate the operations or the
necessary systems and procedures, including accounting and financial reporting
systems and project management systems, to manage effectively the combined
enterprise. Certain members of the Company's management group have only recently
joined RailWorks and there can be no assurance that the management group will be
able to implement the Company's acquisition and operating strategies. There can
be no assurance that the Company will be able to establish, maintain or increase
the profitability of the operating companies. RailWorks' pro forma financial
statements include results of operations for certain operating companies when
they were not under common control or management. As a result, the pro forma
financial statements may not be indicative of the Company's future results of
operations. Any failure by management to implement the Company's strategies,
integrate the operating companies without substantial costs, delays or other
operational or financial difficulties, or oversee effectively the combined
entity could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company May be Unable to Complete and Finance Acquisitions. The
Company has completed six acquisitions since the IPO and intends to grow
significantly through the acquisition of additional businesses. The Company's
acquisition strategy entails reviewing acquired business operations, corporate
infrastructure and systems and financial controls. Unforeseen expenses,
difficulties, complications and delays frequently encountered in connection with
the rapid expansion of operations could inhibit RailWorks' growth or adversely
affect its financial performance.
In March 1999, the Company signed letters of intent to purchase four
operating companies. Management expects to execute definitive purchase
agreements, which will have customary closing conditions (including
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<PAGE> 27
completion of due diligence), in the second quarter of 1999. However, there can
be no assurance that the Company will acquire any or all of these companies.
There can be no assurance that the Company will maintain or accelerate its
growth or anticipate all of the changing demands that expanding operations will
impose on its management, personnel, operational and management information
systems and financial systems. Management may not be able to identify, acquire
or manage profitably additional businesses or to integrate successfully any
acquired businesses without substantial costs, delays or other operational or
financial difficulties. Any such occurrence could have a material adverse effect
on the Company's business, financial condition and results of operations.
Management cannot predict the timing, size and success of RailWorks'
acquisition efforts and any associated capital commitments. The Company
currently intends to finance future acquisitions by bank borrowings, shares of
RailWorks Common Stock, internally generated funds or a combination of Common
Stock and cash. If RailWorks Common Stock does not maintain a sufficient market
value, or if potential acquisition candidates are otherwise unwilling to accept
Common Stock as part of the consideration for the sale of their businesses, the
Company may be required to utilize more of its cash resources or borrowings to
maintain its acquisition program. In addition, the Company's acquisitions
typically provide for the sellers to receive contingent consideration, which is
only paid if the acquired companies achieve certain operating results. These
payments could be substantial.
The Company May be Unable to Generate Internal Growth. RailWorks' ability
to grow will be affected by various factors, including demand for rail system
services and products, the Company's success in bidding on new projects, the
success of cross-selling efforts and management's ability to develop a national
accounts program. The Company's growth may also depend on increased outsourcing
by rail system operators. Many of these factors are beyond the Company's
control. The Company's strategies may not be successful or the Company may be
unable to generate cash flow adequate for combined operations and to support
internal growth. The senior managers of the operating companies retain
responsibility for day-to-day operations. If proper business controls are not
implemented and maintained, this decentralized operating strategy could result
in inconsistent operating and financial practices of the operating companies,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company Has Been Dependent on Certain Customers. The Company derived
approximately 43.7% of its pro forma revenue for the year ended December 31,
1998 from its top ten customers. Approximately 21.1% of RailWorks' 1998 pro
forma revenue was derived from projects undertaken for the NYCTA. These projects
were undertaken under a number of separate contracts. If the NYCTA were to
significantly reduce the amount of business that it does with the Company or
determine not to do business with the Company in the future, it would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Certain Operating Companies Have a History of Losses. From time to time,
primarily due to industry cyclicality and uncertainties inherent in the
competitive bidding process, certain of the Company's operating companies have
experienced net losses. There can be no assurance that the Company or its
operating companies will be profitable in the future.
The Company May Face Intense Competition. The rail system services and
products industry is highly competitive. There are numerous companies that
provide services to transit authorities, construct and repair rail systems or
sell related products or supplies, and some of these companies operate in more
than one of these lines of business. Some of the Company's competitors have
greater resources than the Company has, may also provide a broad range of
services and products and may have sufficient bonding capacity and other
resources to undertake large projects. Any inability to compete successfully
against the Company's existing and future competitors would have a material
adverse effect on the Company's business, financial condition and results of
operations. Certain of the Company's operating companies also provide electrical
contracting services to non-rail industrial and commercial customers. While
management believes that the Company currently competes effectively in the
non-rail electrical contracting business, this industry is highly competitive
and is served by small, owner-operated private companies, public companies and
several large regional
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<PAGE> 28
companies. Additionally, the Company could face competition in the future from
other competitors entering the Company's markets.
The Company is Dependent on Public Sector Contracts and Funding. The rail
system services and products business involves contracts that are supported by
funding from federal, state and local governmental agencies, as well as
contracts with such agencies ("public sector contracts"). Public sector
contracts are subject to detailed regulatory requirements and public policies,
as well as funding priorities. These contracts may be conditioned upon the
continuing availability of public funds, which in turn depends upon lengthy and
complex budgetary procedures. These contracts may also be subject to significant
pricing constraints. Moreover, public sector contracts may generally be
terminated for reasons beyond the control of the contractor, including when such
termination is in the best interests of the governmental agency. There can be no
assurance that these factors or others unique to public sector contracts will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
Fixed Price Contracts Expose the Company to Significant Risks. Fixed price
contracts are typically awarded in the rail system services industry pursuant to
a competitive bidding process. In compiling the Company's bid on a particular
project, management must estimate the time it will take to complete the project,
along with the project's labor and supply costs. These costs may be affected by
a variety of factors, some of which may be beyond the Company's control. If
management is unable to predict accurately the costs of fixed price contracts,
certain projects could have lower margins than anticipated or the Company could
suffer losses on the projects. This could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company Relies on Subcontractors and Suppliers. The Company generally
performs electrical contracting services for transit signaling and communication
systems as a subcontractor to companies that design the systems and manufacture
or purchase the necessary equipment. In other instances, the Company acts as the
prime contractor and subcontracts the design of the signal or communication
system and necessary equipment. When the Company is a prime contractor for such
projects, management generally requires subcontractors to post performance
bonds. Management may not require a subcontractor to post a performance bond in
situations where (1) the subcontractor has strong experience with a specific
type of project and demonstrates financial stability and (2) the customer does
not require bonds from the Company as prime contractor. The Company is sometimes
dependent upon the subcontractor to perform design and other services and
provide equipment. For certain projects there are a limited number of companies
that can perform the subcontract if the initial subcontractor defaults. As a
result, the Company is dependent upon its subcontractors to perform under the
subcontracts. Further, the major components of signaling and communication
systems for transit authorities are manufactured to specifications and require
long lead times for production. If a subcontractor or supplier defaults, or if a
supplier refuses or is unable to do business with the Company, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Rail System Industry is Cyclical. A substantial portion of RailWorks'
revenue is derived from public contracts, which are expected to constitute a
relatively stable source of business due to funding provided by TEA 21. However,
demand for rail system services and products could fluctuate in conjunction with
overall economic conditions. In economic downturns, rail system operators may
defer certain construction and rehabilitation projects and purchases of related
products to conserve cash in the short term. Reductions in freight traffic due
to economic downturns or other factors may also reduce demand for our
construction and rehabilitation services and related products. In economic
upturns, railroads, particularly Class I railroads, experience heavier traffic
demands that can cause problems associated with congestion. The operational
problems related to congestion have an unpredictable impact on railroad
expenditures for construction and rehabilitation services and related products,
including those provided by the Company. During periods of peak usage, rail
system owners may defer certain expenditures because they may need to address
operational challenges caused by these conditions. Such uncertainties may be
exacerbated by certain other issues, such as the possibility of heightened
government regulation during periods of congestion and the internal challenges
of managing railroad operations as the Class I railroads continue to
consolidate.
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Exposure to Downturns in Commercial Construction. Approximately 16.2% of
RailWorks' pro forma revenue for the year ended December 31, 1998, was derived
from installation of electrical systems in newly constructed or renovated
commercial buildings and power and industrial plants. The demand for electrical
installation services is affected by fluctuations in the level of new
construction and renovation of commercial buildings. These fluctuations reflect
the cyclical nature of the construction industry and depend upon general
economic conditions, changes in interest rates and other related factors.
Downturns in levels of commercial construction and renovation could have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, the Company's electrical installation business
is focused in the northeastern United States and is therefore particularly
susceptible to economic downturns in that region.
The Company's Workforce is Unionized. As of December 31, 1998,
approximately 66.9% of RailWorks' employees were covered under collective
bargaining agreements. In June 1994, one of RailWorks' operating companies was
affected by a one-week work stoppage by the United Brotherhood of Teamsters.
There can be no assurance that future work stoppages will not affect the
Company. In addition, labor agreements are generally negotiated on an
industry-wide basis and the terms and conditions of future labor agreements
could be beyond the Company's control. The Company may be subject to terms and
conditions in future labor agreements that could have a material adverse effect
on its business, financial condition and results of operations.
The Company is Subject to Extensive Environmental and Government
Regulation. RailWorks' operations are subject to extensive federal, state and
local regulation under environmental laws and regulations. Among other things,
these laws and regulations cover emissions to the air, discharges to waters and
the generation, handling, storage, transportation, treatment and disposal of
waste, underground and aboveground storage tanks and remediation of soil and
groundwater contamination. Environmental liability can extend to previously
owned or operated properties, leased properties and properties owned by third
parties, as well as to properties currently owned and used by us. Environmental
liabilities may also arise from claims asserted by adjacent landowners or other
third parties in toxic tort litigation. The Company could incur significant
ongoing costs associated with environmental regulatory compliance. Further, the
Company sometimes uses hazardous materials in connection with its operations.
Although the Company believes it is in material compliance with all of the
various environmental regulations applicable to its business, there can be no
assurance that requirements will not change in the future or that the Company
will not incur significant costs to comply with such requirements.
In addition to safety, health and other regulations of general
applicability, the Company's operations may be significantly affected by
regulations of the Surface Transportation Board, the Federal Railroad
Administration, the Occupational Safety and Health Administration, state
departments of transportation and other state and local regulatory agencies.
Changes in regulation of the rail and transit industries through legislative,
administrative, judicial or other action could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is Dependent on Key Personnel. The Company's success depends
to a significant extent upon the efforts and abilities of John G. Larkin,
Chairman of the Board and Chief Executive Officer, and Michael R. Azarela,
Executive Vice President and Chief Financial Officer. The Company also relies on
senior management of its operating companies. While the Company has entered into
employment agreements with Messrs. Larkin and Azarela and certain senior
managers of the operating companies, the Company cannot be certain that such
individuals will remain with the Company throughout the terms of their
agreements, or thereafter. Further, the Company likely will depend on the senior
management of any significant businesses the Company acquires in the future. The
loss of the services of one or more of these key employees before the Company is
able to attract and retain qualified replacement personnel could have a material
adverse effect on the Company's business, financial condition and results of
operation.
The Company's Systems May Not be Year 2000 Compliant. Management
identified potential deficiencies related to the Year 2000 in the Company's
information systems, and the Company is in the process of addressing them
through upgrades and other remediation.
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
27
<PAGE> 30
ability of third parties upon whom it relies directly or indirectly, to be Year
2000 compliant. For a further discussion of the risks associated with the Year
2000, see the section above entitled "Year 2000" in this Item.
The Company May be Unable to Service Debt. To service the Company's
indebtedness, the Company will require a significant amount of cash. The
Company's ability to make payments on its debt, and to fund planned capital
expenditures and acquisitions will depend on its future operating performance
and on its ability to successfully implement its business strategy. Prevailing
general economic conditions and financial, business, regulatory and other
factors, many of which are beyond its control, will affect its ability to make
these payments.
ITEM 7A. 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
$49.3 million of long-term debt under the Company's revolving credit agreement
outstanding at December 31, 1998. Approximately 80% 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
$200,000 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 instruments is
subject to strict approval levels by senior officers. Typically, the use of such
derivative instruments is limited to interest rate swaps on the Company's
outstanding long-term debt. The Company's exposure related to such derivative
instruments is, in the aggregate, not material to the Company's financial
position, results of operations and cash flows.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are listed under Item 14(a) and are filed as part
of this report on the pages indicated. The supplementary data are included in
Note 17 of the Notes to the Consolidated Financial Statements of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
28
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G, is included under the heading "Election of Directors" of
the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27,
1999 and is incorporated herein by reference.
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is included under the
heading "16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement
for the Annual Meeting of Stockholders to be held May 27, 1999 and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
subsections entitled "Employment Agreements," "Executive Compensation Summary
Table," "Option Grants During 1998 and Year-End Option Values" and "Aggregate
Option Exercises During 1998 and Year-End Option Values" of the Proxy Statement
for the Annual Meeting of Stockholders to be held on May 27, 1999 is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the heading
"Beneficial Ownership of Common Stock" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 27, 1999 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the heading
"Certain Relationships and Related Party Transactions" of the Proxy Statement
for the Annual Meeting of Stockholders to be held on May 27, 1999 and is
incorporated herein by reference.
29
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
1. Financial Statements
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
RAILWORKS CORPORATION
Consolidated Financial Statements:
Report of Independent Public Accountants.................. F-1
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996....................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996........... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................... F-5
Notes to Consolidated Financial Statements................ F-6
Financial Statements:
Report of Independent Public Accountants.................. F-21
Balance Sheet as of July 31, 1998......................... F-22
Statement of Operations for the Period From April 1, 1998
to July 31, 1998....................................... F-23
Statement of Cash Flows for the Period From April 1, 1998
to July 31, 1998....................................... F-24
Notes to Financial Statements............................. F-25
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
Report of Independent Public Accountants.................. F-26
Combined Balance Sheets as of July 31, 1998 and December
31, 1997............................................... F-27
Combined Statements of Operations for the Seven Months
Ended July 31, 1998, Nine Months Ended December 31,
1997 and Year Ended March 31, 1997..................... F-28
Combined Statements of Stockholders' Equity for the
Periods Ended March 31, 1996, March 31, 1997, December
31, 1997 and July 31, 1998............................. F-29
Combined Statements of Cash Flows for the Seven Months
Ended July 31, 1998, Nine Months Ended December 31,
1997 and Year Ended March 31, 1997..................... F-30
Notes to Combined Financial Statements.................... F-31
CPI CONCRETE PRODUCTS INCORPORATED
Report of Independent Public Accountants.................. F-37
Balance Sheet as of July 31, 1998......................... F-38
Statement of Operations for the Six Months Ended July 31,
1998................................................... F-39
Statement of Stockholders' Equity for the Six Months Ended
July 31, 1998.......................................... F-40
Statement of Cash Flows for the Six Months Ended July 31,
1998................................................... F-41
Notes to Financial Statements............................. F-42
CONDON BROTHERS, INC.
Report of Independent Public Accountants.................. F-46
Balance Sheets as of July 31, 1998 and December 31,
1997................................................... F-47
Statements of Operations for the Seven Months Ended July
31, 1998 and the Years Ended December 31, 1997 and
1996................................................... F-48
Statements of Stockholders' Equity for the Periods Ended
December 31, 1995, 1996 and 1997 and July 31, 1998..... F-49
Statements of Cash Flows for the Seven Months Ended July
31, 1998 and the Years Ended December 31, 1997 and
1996................................................... F-50
Notes to Financial Statements............................. F-51
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
H.P. McGINLEY, INCORPORATED
Report of Independent Public Accountants.................. F-57
Balance Sheets as of July 31, 1998 and December 31,
1997................................................... F-58
Statements of Operations for the Seven Months Ended July
31, 1998, the Ten Months Ended December 31, 1997 and
the Year Ended February 28, 1997....................... F-59
Statements of Stockholder's Equity for the Periods Ended
February 29, 1996, February 28, 1997, December 31, 1997
and July 31, 1998...................................... F-60
Statements of Cash Flows for the Seven Months Ended July
31, 1998, the Ten Months Ended December 31, 1997 and
the Year Ended February 28, 1997....................... F-61
Notes to Financial Statements............................. F-62
KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES
Report of Independent Public Accountants.................. F-66
Combined Balance Sheets as of July 31, 1998 and December
31, 1997............................................... F-67
Combined Statements of Operations for the Seven Months
Ended July 31, 1998, the Nine Months Ended December 31,
1997 and the Year Ended March 31, 1997................. F-68
Combined Statements of Stockholders' Equity for the
Periods Ended March 31, 1996 and 1997, December 31,
1997 and July 31, 1998................................. F-69
Combined Statements of Cash Flows for the Seven Months
Ended July 31, 1998, the Nine Months Ended December 31,
1997 and the Year Ended March 31, 1997................. F-70
Notes to Combined Financial Statements.................... F-71
MERIT RAILROAD CONTRACTORS, INC.
Report of Independent Public Accountants.................. F-78
Balance Sheets as of July 31, 1998 and December 31,
1997................................................... F-79
Statements of Operations for the Seven Months Ended July
31, 1998 and the Years Ended December 31, 1997 and
1996................................................... F-80
Statements of Stockholders' Equity for the Periods Ended
December 31, 1995, 1996 and 1997 and July 31, 1998..... F-81
Statements of Cash Flows for the Seven Months Ended 1998
and the Years Ended 1997 and 1996...................... F-82
Notes to Financial Statements............................. F-83
MIDWEST CONSTRUCTION SERVICES, INC.
Report of Independent Public Accountants.................. F-89
Balance Sheets as of July 31, 1998 and December 31,
1997................................................... F-90
Statements of Operations and Retained Earnings for the
Seven Months Ended July 31, 1998 and the Years Ended
December 31, 1997 and 1996............................. F-91
Statements of Cash Flows for the Seven Months Ended July
31, 1998 and the Years Ended December 31, 1997 and
1996................................................... F-92
Notes to the Financial Statements......................... F-93
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
Report of Independent Public Accountants.................. F-99
Balance Sheet as of July 31, 1998......................... F-100
Statement of Operations for the Seven Months Ended July
31, 1998............................................... F-101
Statement of Stockholders' Equity for the Seven Months
Ended July 31, 1998.................................... F-102
Statement of Cash Flows for the Seven Months Ended July
31, 1998............................................... F-103
Notes to Financial Statements............................. F-104
RAILROAD SERVICES, INC. AND MINNESOTA RAILROAD SERVICES,
INC.
Report of Independent Public Accountants.................. F-108
Combined Balance Sheets as of July 31, 1998 and December
31, 1997............................................... F-109
Combined Statements of Operations for the Seven Months
Ended July 31, 1998 and the Years Ended December 31,
1997 and 1996.......................................... F-110
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Combined Statements of Stockholders' Equity as of December
31, 1995, 1996 and 1997 and July 31, 1998.............. F-111
Combined Statements of Cash Flows for the Seven Months
Ended July 31, 1998 and the Years Ended December 31,
1997 and 1996.......................................... F-112
Notes to Combined Financial Statements.................... F-113
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
Report of Independent Public Accountants.................. F-120
Balance Sheets as of July 31, 1998 and December 31,
1997................................................... F-121
Statements of Operations for the Seven Months Ended July
31, 1998 and the Year Ended December 31, 1997.......... F-122
Statements of Stockholder's Equity for the Periods Ended
December 31, 1996 and 1997 and July 31, 1998........... F-123
Statements of Cash Flows for the Seven Months Ended July
31, 1998 and the Year Ended December 31, 1997.......... F-124
Notes to Financial Statements............................. F-125
US. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY
CO.
Report of Independent Public Accountants.................. F-128
Combined Balance Sheets as of July 31, 1998 and December
31, 1997............................................... F-129
Combined Statements of Operations for the Seven Months
Ended July 31, 1998 and December 31, 1997 and 1996..... F-130
Combined Statements of Changes in Stockholders' Equity as
of December 31, 1995, 1996 and 1997 and July 31,
1998................................................... F-131
Combined Statements of Cash Flows for the Seven Months
Ended July 31, 1998 and the Years Ended December 31,
1997 and 1996.......................................... F-132
Notes to Combined Financial Statements.................... F-133
</TABLE>
2. Financial Statement Schedules
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGES TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS (1) OF YEAR
----------- ------------ --------- ---------- -------------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998......... 58 0 399 (15) 442
Year Ended December 31, 1997......... 363 0 185 (490) 58
Year Ended December 31, 1996......... 238 0 125 0 363
</TABLE>
(1) Deductions, represent uncollectible balances of accounts receivable written
off, net of recoveries.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Report as filed with the Securities and Exchange Commission and those
incorporated by reference to other filings:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <S> <C>
3.1 -- Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Registration
Statement on Form S-1, File No. 333-53483)
3.2 -- Bylaws of the Company (incorporated by reference to Exhibit
3.2 to Registration Statement on Form S-1, File No.
333-53483)
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <S> <C>
3.3 -- Certificate of Designation of the Series A Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1 to
the Registrant's Current Report on Form 8-K filed on October
14, 1998)
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-1, File
No. 333-53483)
10.1 -- Uniform Provisions for the Acquisition of Founding Companies
(incorporated by reference to Exhibit 10.1 to Registration
Statement on Form S-1, File No. 333-53483)
10.2 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Wildcats
Alpha-Keystone Company, Alpha-Keystone Engineering, Inc. and
the stockholders named therein (incorporated by reference to
Exhibit 10.2 to Registration Statement on Form S-1, File No.
333-53483)
10.3 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Bulldog Comtrak
Company, Comtrak Construction, Inc. and the stockholders
named therein (incorporated by reference to Exhibit 10.3 to
Registration Statement on Form S-1, File No. 333-53483)
10.4 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Cardinal Annex
Railroad Builders Company, Annex Railroad Builders, Inc. and
the stockholders named therein (incorporated by reference to
Exhibit 10.4 to Registration Statement on Form S-1, File No.
333-53483)
10.5 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Huskies Condon
Brothers Company, Condon Brothers Inc. and the stockholders
named therein (incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1, File No. 333-53483)
10.6 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Commodores
Concrete Company, CPI Concrete Products, Inc. and the
stockholders named therein (incorporated by reference to
Exhibit 10.6 to Registration Statement on Form S-1, File No.
333-53483)
10.7 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Nittany Lions
McGinley Company, HP McGinley Inc. and the stockholders
named therein (incorporated by reference to Exhibit 10.7 to
Registration Statement on Form S-1, File No. 333-53483)
10.8 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Owls Kennedy
Railroad Builders Company, Kennedy Railroad Builders, Inc.
and the stockholders named therein (incorporated by
reference to Exhibit 10.8 to Registration Statement on Form
S-1, File No. 333-53483)
10.9 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Red Storm
Comstock Company, Inc., L.K. Comstock & Company, Inc. and
the stockholders named therein (incorporated by reference to
Exhibit 10.9 to Registration Statement on Form S-1, File No.
333-53483)
10.10 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Sycamores Midwest
Construction Company, Midwest Construction Services, Inc.
and the stockholders named therein (incorporated by
reference to Exhibit 10.10 to Registration Statement on Form
S-1, File No. 333-53483)
10.11 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Bears Merit
Company, Merit Railroad Contractors, Inc. and the
stockholders named therein (incorporated by reference to
Exhibit 10.11 to Registration Statement on Form S-1, File
No. 333-53483)
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <S> <C>
10.12 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Hoosier Mize
Company, Mize Construction Company and the stockholders
named therein (incorporated by reference to Exhibit 10.12 to
Registration Statement on Form S-1, File No. 333-53483)
10.13 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Husky New England
Railroad Construction Company, New England Railroad
Construction Company Inc. and the stockholders named therein
(incorporated by reference to Exhibit 10.13 to Registration
Statement on Form S-1, File No. 333-53483)
10.14 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Wolverines
Northern Rail Services Company, Northern Rail Service and
Supply Company, Inc. and the stockholders named therein
(incorporated by reference to Exhibit 10.14 to Registration
Statement on Form S-1, File No. 333-53483)
10.15 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Big Orange
Minnesota Company, Minnesota Railroad Service Company and
the stockholders named therein (incorporated by reference to
Exhibit 10.15 to Registration Statement on Form S-1, File
No. 333-53483)
10.16 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Buckeye Railcorp,
Inc., Railcorp Inc. and the stockholders named therein
(incorporated by reference to Exhibit 10.16 to Registration
Statement on Form S-1, File No. 333-53483)
10.17 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Runnin' Rebels
Railroad Service Company, Railroad Service, Inc. and the
stockholders named therein (incorporated by reference to
Exhibit 10.17 to Registration Statement on Form S-1, File
No. 333-53483)
10.18 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Crusader Railroad
Specialties Company, Railroad Specialties, Inc. and the
stockholders named therein (incorporated by reference to
Exhibit 10.18 to Registration Statement on Form S-1, File
No. 333-53483)
10.19 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Screaming Eagle
Wood Preserving Company, Southern Indiana Wood Preserving
Company, Inc. and the stockholders named therein
(incorporated by reference to Exhibit 10.19 to Registration
Statement on Form S-1, File No. 333-53483)
10.20 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Fighting
Irish-U.S. Railway Supply Company, U.S. Railway Supply, Inc.
and the stockholders named therein (incorporated by
reference to Exhibit 10.20 to Registration Statement on Form
S-1, File No. 333-53483)
10.21 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Spartans
Trackworks Company, U.S. Trackworks, Inc. and the
stockholders named therein (incorporated by reference to
Exhibit 10.21 to Registration Statement on Form S-1, File
No. 333-53483)
10.22 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Mustang Smith
Construction Company, Wm. A. Smith Construction Co., Inc.
and the stockholders named therein (incorporated by
reference to Exhibit 10.22 to Registration Statement on Form
S-1, File No. 333-53483)
10.23 -- Agreement and Plan of Reorganization dated as of May 21,
1998 by and between RailWorks Corporation, Longhorn Smith
Rerailing Company, Wm. A. Smith Rerailing Services, Inc. and
the stockholders named therein (incorporated by reference to
Exhibit 10.23 to Registration Statement on Form S-1, File
No. 333-53483)
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <S> <C>
10.24 -- Amended and Restated Employment Agreement between RailWorks
Corporation and John G. Larkin dated as of August 4, 1998
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q filed on
September 11, 1998)
10.25 -- Amended and Restated Employment Agreement between RailWorks
Corporation and Michael R. Azarela dated as of August 4,
1998 (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q filed on
September 11, 1998)
10.26 -- Amended and Restated Employment Agreement between RailWorks
Corporation and John Kennedy dated as of August 4, 1998
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q filed on
September 11, 1998)
10.27 -- Amended and Restated Employment Agreement between RailWorks
Corporation and Harold C. Kropp, Jr. dated as of August 4,
1998 (incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q filed on
September 11, 1998)
10.28 -- Form of Employment Agreement between each Founding Company
and Founding Company Officer (incorporated by reference to
Exhibit 10.28 to Registration Statement on Form S-1, File
No. 333-53483)
10.29 -- 1998 Incentive Stock Plan (incorporated by reference to
Exhibit 10.29 to Registration Statement on Form S-1, File
No. 333-53483)
10.30 -- Indemnity and Cooperation Agreement dated as of April 3,
1997 between Spie Enertrans S.A., Comstock Group, Inc., L.K.
Comstock & Company and LKC Acquisition Corp., together with
Memorandum of Understanding dated August 20, 1997 between
Spie Enertrans S.A., Comstock Group, Inc., L.K. Comstock &
Company and LKC Acquisition Corp. (incorporated by reference
to Exhibit 10.30 to Registration Statement on Form S-1, File
No. 333-53483)
10.31 -- Stock Purchase Agreement dated April 3, 1997 between
Comstock Group, Inc. and LKC Acquisition Corp., as amended
(incorporated by reference to Exhibit 10.31 to Registration
Statement on Form S-1, File No. 333-53483)
10.32 -- Contingent Promissory Note dated April 3, 1997 made by L.K.
Comstock & Company, Inc. to the order of Spie Enertrans S.A.
(incorporated by reference to Exhibit 10.32 to Registration
Statement on Form S-1, File No. 333-53483)
10.33 -- Employment Agreement dated as of January 7, 1999 between
Robert D. Wolff and MidWest Railroad Construction and
Maintenance Corporation of Wyoming
10.34 -- Credit Agreement dated as of August 4, 1998 among RailWorks
Corporation, as Borrower, Certain Subsidiaries, as
Guarantors, the Lenders named therein, First Union National
Bank, as Documentation Agent and NationsBank, N.A., as
Administrative Agent
10.35 -- Amendment No. 1 to Credit Agreement dated December , 1998
among RailWorks Corporation, as Borrower, the Guarantors and
Lenders named therein and NationsBank, N.A., as
Administrative Agent
10.36 -- Amendment No. 2 to Credit Agreement dated February 2, 1999
among RailWorks Corporation, and as Borrower, the Guarantors
and Lenders named therein and NationsBank, N.A., as
Administrative Agent
10.37 -- Credit Agreement dated as of February 2, 1999 among
RailWorks Corporation, as Borrower, Certain Subsidiaries, as
Guarantors, the Lenders named therein and NationsBank, N.A.,
as Administrative Agent
21.1 -- List of Subsidiaries
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
<C> <S> <C>
27.1 -- Financial Data Schedule (for SEC use only) (incorporated by
reference to Exhibit 27.1 to the Registrant's Current Report
on Form 8-K filed on March 17, 1999)
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 filed on October 14, 1998)
</TABLE>
(B) REPORTS ON FORM 8-K
One report on Form 8-K was filed during the quarter ended December 31,
1998:
<TABLE>
<CAPTION>
ITEM REPORTED FINANCIAL STATEMENTS FILED DATE OF REPORT
- ------------- -------------------------- ---------------
<S> <C> <C>
On October 14, 1998, the Registrant filed a Form 8-K to
report the issuance on October 8, 1998 of 13,700
shares of its non-voting Series A Convertible
Preferred Stock to BT Alex. Brown Incorporated in
exchange for 1,370,000 shares of its Common Stock..... None October 8, 1998
</TABLE>
(C) EXHIBITS
Exhibits are listed in Item 14(a).
(D) FINANCIAL STATEMENT SCHEDULES
Schedules are listed in Item 14(a).
36
<PAGE> 39
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 29 day of
March, 1999.
RAILWORKS CORPORATION
(Registrant)
By: /s/ JOHN G. LARKIN
------------------------------------
John G. Larkin
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MICHAEL R. AZARELA Executive Vice President, Chief Financial
- ----------------------------------------------------- Officer and Director (Principal Financial
Michael R. Azarela Officer)
/s/ HAROLD C. KROPP, JR. Vice President and Chief Accounting Officer
- ----------------------------------------------------- (Principal Accounting Officer)
Harold C. Kropp, Jr.
/s/ JOHN KENNEDY Vice President, Chief Operating
- ----------------------------------------------------- Officer -- Track Contractors and Director
John Kennedy
/s/ PETER ALAN PASCH Vice President, Chief Operating
- ----------------------------------------------------- Officer -- Transit Operations and Director
Peter Alan Pasch
/s/ SCOTT D. BRACE Director
- -----------------------------------------------------
Scott D. Brace
/s/ LAMBERTUS L. TAMELING Director
- -----------------------------------------------------
Lambertus L. Tameling
/s/ RONALD W. DRUCKER Director
- -----------------------------------------------------
Ronald W. Drucker
/s/ R.C. MATNEY Director
- -----------------------------------------------------
R.C. Matney
</TABLE>
37
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RailWorks Corporation:
We have audited the accompanying consolidated balance sheets of RailWorks
Corporation (a Delaware corporation) and Subsidiaries and its predecessor entity
(the "Company"), as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1998 and 1997 and the results of its operations and its cash
flows for the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commissions rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Stamford, Connecticut
February 8, 1999
F-1
<PAGE> 41
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 2,846 $ 1,120
Accounts receivable, net of allowance for doubtful
accounts of $442 and $58................................ 77,181 46,436
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 24,792 17,149
Inventories:
Raw materials........................................... 7,535 1,240
Finished goods.......................................... 1,550 --
Deferred tax asset........................................ 870 1,020
Other current assets...................................... 3,401 977
-------- -------
Total current assets............................... 118,175 67,942
-------- -------
PROPERTY, PLANT AND EQUIPMENT............................... 14,514 448
LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION.............................................. 1,122 56
-------- -------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 13,392 392
-------- -------
OTHER ASSETS:
Excess of cost over net assets acquired, net of
amortization............................................ 93,845 --
Deferred tax asset........................................ 85 --
Loans to officers......................................... 959 --
Other..................................................... 2,180 18
-------- -------
Total other assets................................. 97,069 18
-------- -------
$228,636 $68,352
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 931 $ 2,555
Accounts payable and accrued liabilities.................. 35,436 22,547
Accrued payroll and related withholdings.................. 3,777 4,711
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 5,958 8,510
Other current liabilities................................. 4,682 3,119
-------- -------
Total current liabilities.......................... 50,784 41,442
-------- -------
Long-term debt............................................ 50,573 12,449
Excess of acquired net assets over cost, net of
amortization............................................ 8,662 10,210
Other liabilities......................................... 8,609 2,813
-------- -------
Total long-term liabilities........................ 67,844 25,472
-------- -------
Total liabilities.................................. 118,628 66,914
-------- -------
Stockholders' Equity:
Series A, convertible preferred stock, $1.00 par value,
authorized 10,000,000 shares, 13,700 shares issued and
outstanding............................................. 14 --
Common stock, $0.01 par value, authorized 100,000,000
shares, 13,703,530 shares issued and outstanding in
1998, 2,959,291 issued and outstanding in 1997.......... 137 30
Additional paid-in capital................................ 121,296 --
Retained earnings (deficit)............................... (11,439) 1,408
-------- -------
Total stockholders' equity......................... 110,008 1,438
-------- -------
$228,636 $68,352
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 42
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Revenue.................................................... $ 212,533 $ 153,610 $188,767
Cost of revenue............................................ 182,817 136,678 169,303
---------- ---------- --------
Gross profit............................................... 29,716 16,932 19,464
Selling, general and administrative expenses............... 17,040 13,733 15,053
Non-recurring expenses..................................... 19,965 -- --
Transaction fees........................................... 1,281 -- --
Depreciation and amortization expense...................... 2,105 (213) 1,365
---------- ---------- --------
Operating (loss) income.................................... (10,675) 3,412 3,046
---------- ---------- --------
Other income(expense):
Interest expense......................................... (2,334) (1,761) (2,023)
Interest and other income................................ 1,634 975 476
Management fee to former parent.......................... -- -- (941)
---------- ---------- --------
Other expense, net....................................... (700) (786) (2,488)
---------- ---------- --------
(Loss) income before income taxes.......................... (11,375) 2,626 558
Provision for income taxes................................. 1,472 1,198 500
---------- ---------- --------
Net (loss) income.......................................... $ (12,847) $ 1,428 $ 58
========== ========== ========
Basic and diluted (loss) earnings per share................ $ (1.67) $ .48
========== ==========
Weight average shares used in computing (loss) earnings per
share.................................................... 7,694,267 2,959,291
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 43
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------- --------------- PAID-IN RETAINED EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------ ------ --------------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
BALANCE, DECEMBER 31, 1995................. 1,200 $ -- -- $-- $ 22,114 $ (1,547) $ 20,567
Capital contribution..................... -- -- -- -- 1,110 -- 1,110
Transfer of note receivable.............. -- -- -- -- (4,745) -- (4,745)
Net income............................... -- -- -- -- -- 58 58
------ ---- -- --- -------- -------- --------
BALANCE DECEMBER 31, 1996.................. 1,200 $ -- -- $-- $ 18,479 $ (1,489) $ 16,990
====== ==== == === ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1997.................... -- $ -- -- $-- $ -- $ -- $ --
Capital contribution..................... 111 1 -- -- 9 -- 10
Recapitalization......................... 2,849 29 -- -- (9) (20) --
Net income............................... -- -- -- -- -- 1,428 1,428
------ ---- -- --- -------- -------- --------
BALANCE DECEMBER 31, 1997.................. 2,960 30 -- -- -- 1,408 1,438
Issuance of common stock................. 5,908 59 -- -- 54,023 -- 54,082
Non-cash compensation charge............. 1,206 12 -- -- 14,861 -- 14,873
Initial public offering, net of
underwriting discount and offering
expenses............................... 5,000 50 -- -- 52,412 -- 52,462
Issuance of preferred stock.............. (1,370) (14) 14 14 -- -- --
Net loss................................. -- -- -- -- -- (12,847) (12,847)
------ ---- -- --- -------- -------- --------
BALANCE, DECEMBER 31, 1998................. 13,704 $137 14 $14 $121,296 $(11,439) $110,008
====== ==== == === ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 44
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
1998 1997 1996
-------- -------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $(12,847) $ 1,428 $ 58
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization............................. 2,105 (213) 1,365
Non-cash compensation charge.............................. 14,873 -- --
Deferred taxes............................................ 65 664 --
Gain on sale of division.................................. (861) -- --
Gain on sale of equipment................................. (3) (194) (39)
Change in contract reserves............................... -- -- (3,000)
Change in operating assets and liabilities:
Accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts............ (15,236) (8,176) (6,231)
Inventory............................................... (274) 296 (947)
Other current assets.................................... (1,066) (271) (4,209)
Accounts payable and accrued liabilities................ 2,726 (1,159) (1,772)
Accrued payroll and related withholdings................ (1,269) 549 365
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (4,458) 3,320 2,307
Other current liabilities............................... (1,252) 909 (103)
Other assets............................................ (1,145) (18) (3)
Other liabilities....................................... 4,713 (336) 257
-------- -------- --------
Net cash used in operating activities............... (13,929) (3,201) (11,952)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of division............................ 1,000 -- --
Proceeds from sale of equipment........................... 32 194 130
Purchase of equipment and leasehold improvements.......... (1,280) (448) (690)
Acquisition of subsidiaries, net of cash acquired......... (52,535) -- --
Contingent earnout payment................................ (1,600) -- --
-------- -------- --------
Net cash used in investing activities............... (54,383) (254) (560)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan origination fee........................... (1,615) -- --
Proceeds from issuance of common stock, net............... 52,462 -- 1,110
Proceeds from contingent promissory notes................. -- 14,608 --
Repayment of contingent promissory notes.................. -- (157) --
Loans to officers......................................... (959) -- --
Proceeds from note payable................................ -- 4,000 --
Repayments of note payable................................ -- (4,000) --
Proceeds from long-term borrowing......................... 61,325 16,937 7,961
Repayment of long-term borrowing.......................... (41,175) (26,823) (2,312)
-------- -------- --------
Net cash provided by financing activities........... 70,038 4,565 6,759
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,726 1,110 (5,753)
CASH AND CASH EQUIVALENTS, beginning of year................ 1,120 10 9,924
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,846 $ 1,120 $ 4,171
======== ======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 2,107 $ 1,478 $ 1,305
======== ======== ========
Cash paid during the year for income taxes................ $ 392 $ 188 $ 57
======== ======== ========
</TABLE>
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES: The Company issued
8,867,648 shares of common stock in exchange for 100% of the outstanding common
stock of the Subsidiaries.
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 45
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
RailWorks Corporation, a Delaware corporation, ("RailWorks" or the
"Company"), was formed in March 1998 to acquire, integrate and facilitate the
growth of similar and complementary companies in the rail system services and
products industry.
On July 29, 1998, RailWorks announced the initial public offering ("IPO")
of 5,000,000 shares of its common stock at a price of $12.00 per share. The
initial public offering was consummated on August 4, 1998. The capital raised by
this offering was $55,800,000 net of underwriting discounts.
Concurrent with the consummation of the IPO, the Company acquired 14 groups
of companies (the "Founding Companies") in the rail system services and related
products industry. The aggregate consideration paid by the Company to acquire
these companies was approximately $51,100,000 in cash and 8,867,648 shares of
RailWorks common stock.
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
acquisitions of the remaining Founding Companies 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 acquisitions of the Founding Companies
resulted in the recording of goodwill of approximately $94,817,000, which is
being amortized over 40 years.
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 Frankfurt, Indiana. The aggregate price paid for
these acquisitions was approximately $3,100,000 in cash. The acquisitions of
Sheldon and Armcore were accounted for using the purchase method of accounting.
The estimated goodwill associated with these acquisitions aggregated
approximately $2,449,000.
Comstock was incorporated on November 20,1996 as a Delaware corporation for
the purpose of acquiring L.K. Comstock & Company, Inc. (the "Predecessor
Company"). Comstock had no operations from incorporation through January 1,
1997.
Effective January 1, 1997, Comstock purchased the stock of the Predecessor
Company. The financial statements, including those of the Predecessor Company
prior to its acquisition, have been prepared by Comstock management and present
the financial position and results of operations of Comstock as of and for the
year ended December 31, 1997 and of the Predecessor Company for the periods
prior to January 1, 1997. Accordingly, the financial information for periods
prior to 1997 do not reflect the significant impact of the Predecessor Company
acquisition or of the purchase accounting adjustments on the financial position
and results of operations of Comstock.
The Predecessor Company was acquired by Comstock through various agreements
(the "Agreements") entered into with Comstock Group, Inc. ("Group", the
Predecessor Company's former parent), Spie Group Inc. ("Spie", the parent of
Group), Spie Enertrans SA ("Enertrans", the former parent of Spie) and Schneider
Electric Comstock Inc. ("Schneider", parent of Spie). The Agreements principally
called for: (1) the sale of the common stock of the Predecessor Company to
Comstock (the "Sale"), (2) the issuance of various contingent promissory notes
by Comstock to Enertrans and Group in exchange for approximately $18,903,000,
(3) the transfer of various intangible assets of Spie to Comstock, (4) the
provision for various income tax elections and indemnifications, and (5) certain
other indemnifications and cooperative understandings. The effects of the
Agreements have been accounted for as a purchase in the accompanying financial
statements as of and for the year ended December 31, 1997. In connection with
the IPO of RailWorks, Group agreed to accept a one-time payment of $1,600,000 to
satisfy all potential contingent
F-6
<PAGE> 46
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments owed in connection with the Agreements. Such payment was made by
RailWorks on September 8, 1998.
As part of the Agreements, certain intangible assets (recorded at no value)
were assigned to Comstock. In addition, Comstock issued a promissory note (the
"Contingent Promissory Note"), collateralized by certain investments related to
customer contracts involving claims and an investment in a joint venture (the
"Investments"). The remaining balance of the Contingent Promissory Note of
$12,240,000 at December 31, 1998 is payable only from amounts collected by
Comstock relating to the Investments until April 3, 2007, at which time the note
is cancelled. As such, Enertrans and any successor to it or creditor may not
look to any other Comstock assets to satisfy this indebtedness. Accordingly,
management believes a right of offset exists for financial reporting purposes
and the Investments and the Contingent Promissory Note have been offset in the
accompanying balance sheets at December 31, 1998 and 1997 in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
In connection with the Sale, $5,095,000 of cash from the Predecessor
Company was used by Comstock to fund its acquisition of the Predecessor Company.
Accordingly, and as a result of the purchase price adjustments, the fair value
of the net assets acquired exceeds the purchase price funded solely by Comstock.
In accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations", the excess of the cost of net assets acquired first reduced the
non current assets to zero with the remainder allocated to "Excess of Acquired
Net Assets Over Cost", (negative goodwill) which amount is being amortized over
40 years.
2. NATURE OF BUSINESS
RailWorks was formed to become a leading nationwide provider of rail system
services, including construction and rehabilitation, repair and maintenance, and
related products. The Company provides contracting services and rail related
products to a broad range of customers including Class I railroads, transit
authorities and commuter railroads, municipalities, industrial companies and
commercial enterprises. RailWorks operates principally in the United States.
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. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. RailWorks evaluates performance
based on profit or loss from operations before income taxes, interest income and
expense, and non-recurring gains and losses.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
The Company accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, utilizing current market prices and arms
length terms and conditions.
F-7
<PAGE> 47
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined. Revenues from
time-and-material contracts are recognized currently as the work is performed.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to cost of
revenues as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
With regard to the rail products segment, the Company recognizes revenue
when products are delivered to customers pursuant to shipping agreements. Cost
of goods sold includes the raw materials cost, labor and overhead costs of
producing the product.
In accordance with industry practice, the Company classifies as current all
assets and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Inventory consists of stored materials
and parts to be used in long-term construction contracts and raw materials and
finished goods produced by the rail products segment companies.
F-8
<PAGE> 48
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Included in machinery
and equipment is specialty construction tools and other equipment which,
although purchased in connection with a particular contract, is expected to be
used in future contracts. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Building and improvements................................... 15 - 30 years
Machinery and equipment..................................... 3 - 7 years
Office furniture and equipment.............................. 5 - 7 years
Transportation equipment.................................... 5 - 7 years
</TABLE>
Leasehold improvements are capitalized and amortized over the shorter of
the estimated useful lives of the assets or the terms of the related leases.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are received or
settled. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
F-9
<PAGE> 49
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Net (loss) income........................................... $(12,847) $1,428
======== ======
Shares used for determining basic EPS....................... 7,694 2,960
Dilutive effect of:
Stock options............................................. * --
Convertible preferred shares.............................. * --
-------- ------
Shares used for determining diluted EPS..................... 7,694 2,960
======== ======
Basic EPS................................................... $ (1.67) $ .48
======== ======
Diluted EPS................................................. $ (1.67) $ .48
======== ======
</TABLE>
- ---------------
* Outstanding stock options and convertible preferred shares would be
antidilutive in 1998 and therefore were excluded.
No stock options or convertible preferred shares were outstanding in 1997.
INTANGIBLE ASSETS
Intangible assets consist primarily of excess purchase price over net
assets acquired (goodwill), which is being amortized over its estimated useful
life of 40 years. In conformance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company's management regularly evaluates whether events and circumstances
indicate that the remaining balance of intangibles or other long-lived assets
may not be recoverable.
The Excess of Acquired Net Assets Over Cost (negative goodwill) was
generated from the acquisition of the Predecessor Company. The amortization
period of the negative goodwill is 40 years. During 1998, the negative goodwill
was reduced by the additional $1,600,000 purchase price paid to Group.
Amortization expense, including negative amortization of $252,000 in 1998
and $269,000 in 1997, of the years ended December 31, 1998, 1997 and 1996
amounted to $965,000, $(269,000) and $16,000, respectively.
4. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROGRESS
Accounts receivable at December 31, 1998 and 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Billed...................................................... $58,702 $31,400
Retainages.................................................. 18,479 15,036
------- -------
$77,181 $46,436
======= =======
</TABLE>
F-10
<PAGE> 50
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Retainages of approximately $5,783,000 and $4,388,000 at December 31, 1998
and 1997 are invested in U.S. government obligations and municipal bonds. The
Company anticipates that 47% of all retainages at December 31, 1998 will be
collected within one year.
Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues have been recorded but the amounts cannot be billed
currently under the terms of the contracts. Such amounts are recoverable from
customers upon various measures of performance, including achievement of certain
milestones, completion of specified units or completion of the contract. The
Company anticipates that substantially all amounts, other than unanticipated
additional contract costs (see below), will be billed and collected within one
year.
The Company has recorded as costs and estimated earnings in excess in
billings on uncompleted contracts amounts that it seeks or will seek to collect
from customers or others for error or changes in contract specifications or
design, contract change orders in dispute or unapproved as to both scope and
price, or other customer-related causes of unanticipated additional contract
costs (pending change orders or claims). These amounts are recorded at their
estimated net realizable value when realization is probable and can be
reasonably estimated. No profit is recognized on the construction costs incurred
in connection with these amounts. Pending change orders and claims involve the
use of estimates and it is reasonably possible that revisions to the estimated
recoverable amounts of recorded pending change orders and claims may be made in
the near-term. Claims made by the Company involve negotiation and, in certain
cases litigation. The Company expenses such costs as incurred, although it may
seek to recover these costs as part of the claim. The Company believes that it
has established legal bases for pursuing recovery of recorded claims and it is
management's intention to pursue and litigate these claims, if necessary, until
a decision or settlement is reached.
The Company is pursuing unanticipated additional contract costs on certain
completed contracts. Costs and estimated earnings in excess of billings on
uncompleted contracts includes unbilled revenues of approximately $11,054,000
and $3,915,000 at December 31, 1998 and 1997, respectively, related to these
contracts. In addition, billed accounts receivable and retainages include
contractually billed amounts related to these contracts of approximately
$3,105,000 and $2,257,000 at December 31, 1998 and 1997, respectively. Certain
contractually billed amounts related to these contracts may not be paid by the
customer to the Company until final resolution of the contract. At December 31,
1998 and 1997, the Company had reserves of approximately $4,500,00 and
$2,285,000, respectively, related to unbilled revenue and estimated legal costs
to settle.
Costs and estimated earnings at December 31, 1998 and 1997, on uncompleted
contracts and related amounts billed are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Costs....................................................... $429,114 $363,561
Estimated earnings.......................................... 47,575 46,027
-------- --------
476,689 409,588
Billings.................................................... 457,855 400,949
-------- --------
$ 18,834 $ 8,639
======== ========
</TABLE>
F-11
<PAGE> 51
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such amounts are included in the accompanying consolidated balance sheets
under the following captions (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $24,792 $17,149
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (5,958) (8,510)
------- -------
$18,834 $ 8,639
======= =======
</TABLE>
At December 31, 1998, 1997 and 1996, earned revenues from government
related funding sources were 40%, 66% and 61%, respectively, of total earned
revenues. Approximately 27%, 30% and 27% of total earned revenues for 1998, 1997
and 1996, respectively, were from a single government customer.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ----
<S> <C> <C>
Land and buildings.......................................... $ 1,780 $ --
Transportation equipment.................................... 2,121 --
Machinery and equipment..................................... 10,038 448
Office furniture and equipment.............................. 326 --
Leasehold improvements...................................... 249 --
------- ----
14,514 448
Less accumulated depreciation and amortization.............. 1,122 56
------- ----
Property, plant and equipment, net.......................... $13,392 $392
======= ====
</TABLE>
Depreciation and amortization expense on property, plant and equipment
charged to operations for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,140,000, $56,000 and $1,349,000, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Revolving credit agreement(a)............................... $49,300 $ --
Revolving credit agreement(b)............................... -- 12,057
Temporary revolver(c)....................................... -- 550
Promissory note(d).......................................... -- 1,700
Fixed asset notes........................................... 2,204 697
------- -------
51,504 15,004
Less current portion........................................ 931 2,555
------- -------
$50,573 $12,449
======= =======
</TABLE>
- ---------------
(a) On August 4, 1998, the Company entered into a secured $75,000,000 revolving
credit agreement with NationsBank, N.A. (the "Credit Facility"). The Credit
Facility expires on August 4, 2001; however, the Company 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
F-12
<PAGE> 52
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exceed $20,000,000. There were no letters of credit outstanding at December
31, 1998. Interest on loans, commitment fees, and letter of credit fees are
based upon consolidated leverage ratios in a pricing matrix which may be
based on prime or LIBOR. The annual interest rates in effect at December
31, 1998, for prime and LIBOR borrowings were 8.5% and 7.26%, respectively.
A one time facility fee of 2% was paid on the total Credit Facility.
(b) On April 4, 1997, the Company entered into a secured revolving credit
agreement (the "Revolver") with a maximum aggregate principal amount of
$15,000,000 (the "Commitment"). Interest on Base Rate loans was at a rate
of 1% plus the Base Rate, as defined (approximately prime rate); interest
on Eurodollar loans was at 3.25% plus the Eurodollar Rate, as defined
(approximately LIBOR). An annual facility fee of 1% and a commitment fee of
1/2 of 1% were payable on the total Commitment and the total unused
Commitment, respectively. Up to $10,000,000 of letters of credit could be
drawn against the Commitment, $2,911,655 of which was drawn at December 31,
1997. This obligation was repaid in its entirety on August 4, 1998.
(c) On December 11, 1997, the Company entered into a short-term secured
revolving credit agreement (the "Temporary Revolver") with a maximum
principal amount of $2,000,000. Interest on the unpaid principal was at a
rate of 2% plus the Base Rate (approximately prime rate). The Temporary
Revolver was extended from its original maturity and was repaid in its
entirety on August 4, 1998.
(d) Interest on this agreement was payable semi-annually at a rate of 8.5%.
This obligation was repaid in its entirety on August 4, 1998.
The Credit Facility is secured by a first lien on all of the capital stock
of the Company's subsidiaries and on all accounts receivable of the Company and
its subsidiaries. In addition, the Credit Facility contains a negative pledge on
all other assets of the Company and its subsidiaries. The Credit Facility
contains restrictive covenants that, among other things impose limitations on
the Company with respect to its ability to incur additional indebtedness, make
certain investments, sell assets or pay dividends. The Credit Facility also
contains various financial covenants which require the Company to meet certain
targets including, but not limited to, the maintenance of net worth, earnings
before interest, taxes, depreciation and amortization (EBITDA) to debt ratio and
fixed charge coverage ratio.
7. INCOME TAXES
The Company files a consolidated federal income tax return. The Predecessor
Company's results were included in the consolidated federal income tax return of
Spie.
The income tax provision in the accompanying consolidated statements of
operations for the years ended December 31, 1998, 1997 and 1996 consists of (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
1998 1997 1996
------ ------ -----------
<S> <C> <C> <C>
Current:
Federal.................................................. $ -- $ -- $150
State.................................................... 895 132 268
------ ------ ----
895 132 418
------ ------ ----
Deferred:
Federal.................................................. 503 941 70
State.................................................... 74 125 12
------ ------ ----
577 1,066 82
------ ------ ----
$1,472 $1,198 $500
====== ====== ====
</TABLE>
F-13
<PAGE> 53
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Factors accounting for the variation from U.S. statutory income tax rates
relating to continuing operations for the years ended December 31, 1998, 1997
and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
1998 1997 1996
------- ------ -----------
<S> <C> <C> <C>
Federal income taxes at the statutory rate................ $(3,981) $ 893 $189
Benefit of NOL............................................ -- -- (189)
Federal alternative minimum tax........................... -- -- 150
State and local taxes..................................... (680) 206 242
Other..................................................... 229 99 108
Valuation allowance....................................... 5,904 -- --
------- ------ ----
$ 1,472 $1,198 $500
======= ====== ====
</TABLE>
The components of the net deferred income tax asset in the accompanying
consolidated balance sheets at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 3,005 $ 317
Excess of amounts expensed for financial statement
purposes over amounts deducted for income tax
purposes............................................... 4,097 1,451
State and local income taxes, net of federal tax
benefits............................................... 915 481
------- ------
Total deferred tax asset.................................... 8,017 2,249
------- ------
Deferred tax liability,
Costs capitalized for financial statement purposes and
deducted for income tax purposes....................... 1,158 1,229
------- ------
Total deferred tax liability................................ 1,158 1,229
------- ------
Net deferred tax asset before valuation allowance........... 6,859 1,020
Valuation allowance for net deferred tax asset.............. (5,904) --
------- ------
$ 955 $1,020
======= ======
</TABLE>
8. PREFERRED STOCK
The Company has authorized 10,000,000 shares of Series A convertible
preferred stock. The stock has no voting rights, shares dividends ratably with
the common stock, is non-cumulative and has a liquidation preference over shares
of common stock. Each share of preferred stock is convertible into 100 shares of
the Company's common stock.
On October 8, 1998, the Company issued 13,700 shares of its nonvoting
Series A convertible preferred stock in exchange for 1,370,000 shares of common
stock. Each share of Series A convertible preferred stock is convertible to 100
shares of common stock upon five days prior written notice from the holder,
subject to certain conditions.
9. STOCK OPTION PLAN
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
F-14
<PAGE> 54
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During 1998 options covering an aggregate of 30,000 shares of common stock
were issued under the Plan. Two non-employee directors were each issued options
to purchase 10,000 shares of common stock at the IPO price. Options to purchase
10,000 shares were also issued to a President of one of the Subsidiaries at the
price of the common stock on the date of the grant. The options expire ten years
after the date of grant.
At December 31, 1998, 30,000 options were outstanding:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Balance at inception........................................ -- $ --
Granted..................................................... 30,000 10.02
Exercised................................................... -- --
------ ------
Balance, December 31, 1998.................................. 30,000 $10.02
====== ======
Exercisable, December 31, 1998.............................. -- $ --
====== ======
</TABLE>
The weighted average fair value of options granted in 1998 at market value
was $4.79.
The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate at date of grants................... 5.25 - 5.79%
Expected lives.............................................. 3 to 6 years
Expected volatility......................................... 44.0%
Expected dividend yield..................................... 0%
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE REMAINING AVERAGE
EXERCISE PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE
- -------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
$6.06 to 12.00............................ 30,000 9.59 $10.02
====== ==== ======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized in the accompanying consolidated statements of operations for the
year ended December 31, 1998 for options granted during that year. Had
compensation expense for all stock options granted in 1998 been determined
consistent with SFAS No. 123, the Company's net income per share would have been
as follows:
<TABLE>
<S> <C>
Net loss:
As Reported............................................... $(12,847)
========
Pro Forma................................................. $(12,864)
========
Net loss per share:
As Reported -- basic and diluted.......................... $ (1.67)
========
Pro Forma -- basic and diluted............................ $ (1.67)
========
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts and additional awards in future years are
anticipated.
F-15
<PAGE> 55
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Certain of the acquired companies have qualified defined contribution
employee benefit plans (the "Plans"), the majority of which allowed for
voluntary pretax contributions by employees. The Subsidiaries paid all general
and administrative expenses of the Plans and in some cases, the Subsidiaries
made matching and discretionary contributions to the Plans. The Subsidiaries
currently offer no post-employment or post-retirement benefits. The expense
incurred related to the Plans by the Company was approximately $367,000,
$321,000 and $337,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Prior to 1997, Comstock was generally self insured for its automobile and
general liability insurance and, to a lesser extent, for workers' compensation.
Included primarily in accrued payroll and related withholdings, and other
liabilities at December 31, 1998 and 1997 are reserves of $2,348,000 and
$3,574,000, respectively, relating to these insurance liabilities. The Company,
including Comstock, currently participates in a paid indemnity plan for these
insurance coverages.
Comstock sponsored an unfunded, fully insured postretirement medical plan
covering eligible retirees and their dependents which it elected to terminate
effective December 31, 1997. In 1996 Comstock offered, at group rates,
comprehensive medical care benefits to retirees and their covered dependents.
Comstock contributed approximately one-half of the total premium medical cost.
Under the plan, employees were eligible to enroll on the first day of the month
following retirement from Comstock after age 55 and ten years of service. Upon
adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions" the accumulated postretirement benefit obligation was
$943,000. This amount was amortized over 20 years.
The postretirement benefit cost for 1996 included the following items (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
1996
-----------
<S> <C>
Service cost................................................ $ 42
Interest cost............................................... 81
Transition amortization..................................... 47
----
$170
====
</TABLE>
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.25% in 1996. The assumed health care cost trend rate
was 9.5% in December 31, 1996, gradually decreasing to an ultimate rate of 5% in
2004 for participants under age 65. For those above age 65, a rate of 7.5% was
used in 1996, gradually decreasing to an ultimate rate of 5% in 2004. A one
percent increase in the assumed health care cost trend rate would increase costs
by $25,000 in 1996. This plan was discontinued in 1997.
The Company also has nonqualified defined benefit plans covering certain
current and former employees of one of the Subsidiaries which provide benefits
based on years of service and compensation. In aggregate, at December 31, 1998
and 1997 approximately $3,007,000 and $1,518,000, respectively relating to these
programs is included in the accompanying balance sheets.
The Company's self-insurance programs and certain employee benefit plan
liabilities are estimated using actuarial estimates and management assumptions.
These estimates are based on historical information, along with certain
assumptions about future events. Changes in assumptions, as well as changes in
actual experience could cause these estimates to change.
The Company has established two bonus incentive plans (the "Plans")
covering certain employees. The first bonus pool consists of 10% of the
Company's pre-tax profits and the second bonus pool consists of 15% of
F-16
<PAGE> 56
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the amount by which the Company's net income exceeds certain benchmarks. No
benefits were earned or paid under either of the Plans during 1998.
11. LEASE COMMITMENTS
The Company and its subsidiaries lease various office buildings, machinery,
equipment, and vehicles under operating leases expiring at various dates through
2004. Most of the real property leases have escalation clauses related to
increases in real property taxes. Future minimum lease payments under operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
Years Ending December 31
1999...................................................... $2,163
2000...................................................... 1,252
2001...................................................... 1,070
2002...................................................... 1,046
2003...................................................... 930
</TABLE>
Rent expense for all operating leases, including amounts charged to cost of
revenues, for the year ended December 31, 1998, 1997 and 1996 was approximately
$3,047,000, $2,685,000 and $3,527,000, respectively.
12. RELATED-PARTY TRANSACTIONS
LEASING TRANSACTIONS
Certain of the subsidiaries lease their operating facilities from former
Founding Company owners who remained employees or directors of the Company.
Total rent paid to related parties for 1998 was $330,000. The Company believes
the rents to be the fair market rental value of the property.
13. COMMITMENTS AND CONTINGENCIES
PERFORMANCE BONDS
The Company's performance under certain construction contracts is secured
by performance bonds for which the Company pays a separate fee.
EMPLOYMENT CONTRACTS
Certain executives of the Company have entered into employment agreements
with the Company. In general, the employment agreements provide that, in the
event of a termination of employment by the Company without cause, such employee
will be entitled to receive from the Company an amount in cash equal to the
employee's then current annual base salary for the remainder of the term.
CONTINGENT PURCHASE PRICE FOR ACQUISITIONS
The sellers of Sheldon and Armcore are eligible to receive additional cash
amounts ("earnouts"), consisting of cash, as adjustments to the purchase prices
paid for those companies. Such cash payments are contingent upon the achievement
of earnings targets for 1999, 2000 and 2001.
ENVIRONMENTAL
The Company's operations are subject to extensive federal, state and local
regulations under environmental laws and regulations concerning, among other
things, emissions to the air, discharges to waters and the generation, handling,
storage, transportation, treatment and disposal of waste, hazardous substances,
underground and aboveground storage tanks and soil and groundwater
contamination. The Company is also subject to certain Federal, state and local
environmental laws and regulations relating to the use of creosote.
F-17
<PAGE> 57
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Creosote is used in certain of the Company's manufacturing processes to treat
wood railroad ties so that they can withstand exposure to outside elements.
Creosote, a coal tar treated derivative, has been recognized by the
environmental regulating agencies as a hazardous material. The Company believes
that it is in material compliance with all of the various regulations applicable
to their businesses and has not been notified of any violations by regulatory
agencies.
LITIGATION
The Company is involved in legal proceedings and claims, asserted by and
against the Company, which have arisen in the ordinary course of business. The
Company believes it has a number of valid defenses to these actions and the
Company intends to vigorously defend or assert these claims. Management
believes, upon advice of outside counsel, that none of these actions will have a
material adverse effect on the financial position or results of operations of
the Company.
14. LOANS TO OFFICERS
Pursuant to their employment agreements, certain officers of the Company
have been granted loans for the payment of income taxes related to stock grants.
These loans have a term of five years, are interest bearing and are
collateralized by the stock granted.
15. FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 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 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 133 will
have a material impact upon its operations.
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.
At December 31, 1998, the Company had an interest rate swap agreement with
a total notional value of $10,000,000, expiring December 7, 2001 or December 7,
2000 at the counterparties' option. The agreements effectively convert floating
rate obligations to a fixed rate of 4.85 percent. If the Company were to
terminate its existing interest rate swap agreements, any resulting gain or loss
would be deferred and recognized over the remaining life of the related debt.
RailWorks uses the following methods and assumptions in estimating the fair
value of its financial instruments:
Cash and Cash Equivalents -- The carrying amount is equal to fair
market value due to their short-term nature.
F-18
<PAGE> 58
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. Government and Municipal Bonds -- These securities are classified
as held to maturity and are valued at cost which approximates market value.
Debt -- The Company's bank loans and floating rate debt approximate
fair value. The fair value of fixed rate long-term debt is based upon
quoted market prices for these or similar issues, or rates currently
available to the Company for debt with similar terms and maturities.
Interest Rate Swap Agreements -- 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 December 31, 1998 was approximately
$10,500.
16. SEGMENT REPORTING
Comstock and the Predecessor Company operated in one reportable segment:
transit services. Accordingly, no additional disclosures are required under SFAS
No. 131. The following matrix presents operational and financial condition data
as of and for the year ended December 31, 1998 for analysis by reportable
segment (in thousands):
<TABLE>
<CAPTION>
TRANSIT RAIL PRODUCTS RAIL OTHER/
SERVICES AND SUPPLIES CONSTRUCTION CORPORATE TOTAL
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers...................... $165,989 $11,195 $37,184 $ -- $214,368
Intersegmental revenue........... -- 952 883 -- 1,835
Depreciation/amortization........ (17) 192 709 1,221 2,105
Segment operating profit
(loss)......................... 6,084 1,683 4,596 (23,038) (10,675)
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 22,897 -- 1,895 -- 24,792
Segment assets................... 58,224 8,299 26,676 159,677 252,876
Capital Expenditures............. 676 29 490 85 1,280
</TABLE>
The Company's reconciliation of segment totals to enterprise values are as
follows (in thousands):
<TABLE>
<S> <C>
REVENUES:
Total revenues for reportable segments.................... $214,368
Elimination of intersegment revenues...................... (1,835)
--------
Consolidated revenues..................................... $212,533
========
OPERATING PROFIT OR LOSS:
Total profit or loss for reportable segments.............. $(10,675)
========
ASSETS:
Total assets for reportable segments...................... $252,876
Elimination of intercompany receivables/payables.......... (826)
Elimination of investments in subsidiaries................ (23,414)
--------
Consolidated assets....................................... $228,636
========
</TABLE>
F-19
<PAGE> 59
RAILWORKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1998 and
1997 are summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues.......................................... $41,628 $44,752 $53,077 $73,076
Operating income (loss)........................... 1,237 1,172 (18,404) 5,320
Net income (loss)................................. 666 456 (19,036) 5,067
Basic EPS......................................... .23 .15 (1.72) .37
Diluted EPS....................................... .23 .15 (1.72) .34
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues.......................................... $32,401 $34,739 $41,197 $45,273
Operating income.................................. 604 1,105 992 711
Net income........................................ 440 418 467 103
Basic EPS......................................... .15 .14 .16 .03
Diluted EPS....................................... .15 .14 .16 .03
</TABLE>
18. SUBSEQUENT EVENTS (UNAUDITED)
On January 7, 1999, the Company acquired all the stock of Mid West Railroad
Construction Maintenance Corporation of Wyoming (Mid West) 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. On
February 1, 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 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 $26,000,000
in cash, $8,833,000 of promissory notes payable and 100,000 shares of Common
Stock, plus the potential to receive earnouts if targeted revenue and profit
goals are achieved over the next 5 years. The estimated fair market value of
assets purchased was approximately $6,300,000 and the estimated goodwill was
$29,500,000. Any additional purchase price paid will increase the goodwill
reported. The estimated fair market values reflected above are based on
preliminary estimates and assumptions and are subject to revision.
F-20
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RailWorks Corporation:
We have audited the accompanying balance sheet of RAILWORKS CORPORATION (a
Delaware Corporation), as of July 31, 1998, and the related statements of
operations and cash flows for the period from April 1 to July 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RAILWORKS CORPORATION as of
July 31, 1998, and the results of its operations and cash flows for the period
from April 1 to July 31, 1998 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Stamford, Connecticut
February 8, 1999
F-21
<PAGE> 61
RAILWORKS CORPORATION
BALANCE SHEET
JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $89
---
Total current assets.............................. 89
---
Total assets...................................... $89
===
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Advances from founding companies.......................... $89
---
Total current liabilities......................... 89
---
Total liabilities................................. 89
---
STOCKHOLDER'S EQUITY:
Preferred stock, $1.00 par value authorized 10,000,000
shares. No shares issued............................... --
Common stock, $0.01 par value authorized 100,000,000
shares, 10 shares issued and outstanding............... --
Paid-in capital........................................... --
---
Total stockholder's equity........................ --
---
Total liabilities and stockholder's equity........ $89
===
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE> 62
RAILWORKS CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 1, 1998 TO JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues.................................................... $--
Selling, general and administrative expenses................ --
---
Income before income taxes.................................. --
Provision for income taxes.................................. --
---
Net income.................................................. $--
===
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE> 63
RAILWORKS CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1998 TO JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................ $ --
CASH FLOWS FROM INVESTING ACTIVITIES........................ --
CASH FLOWS FROM FINANCING ACTIVITIES, 34
Advances from founding companies.....................
Net cash provided by financing activities......... 34
----
NET INCREASE IN CASH........................................ 34
CASH, beginning of period................................... 55
----
CASH, end of period......................................... $ 89
====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ --
====
Cash paid during the period for income taxes.............. $ --
====
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE> 64
RAILWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
RailWorks Corporation ("RailWorks" or the "Company"), was formed in March
1998 to become a leading nationwide provider of rail services, including system
construction and rehabilitation, repair and maintenance services and related
products. RailWorks acquired fourteen U.S. businesses (the "Acquisitions") and,
completed an initial public offering (the "Offering") of its common stock in
August, 1998. Subsequent to the Offering, the Company intends to continue to
acquire, through merger or purchase, similar companies to expand its national
operations.
RailWorks did not conduct any operations, and all activities to date have
related to the Acquisitions and the Offering. Cash of $100 was generated from
the initial capitalization of the Company (see Note 2).
2. STOCKHOLDER'S EQUITY
In connection with the organization and initial capitalization of
RailWorks, the Company issued 10 shares of common stock for $100.
3. SUBSEQUENT EVENTS
RailWorks and its newly formed, wholly owned subsidiaries have acquired by
merger, the Founding Companies as follows: Annex Railroad Builders, Inc. and
Affiliates, Comtrak Construction, Inc., Comstock Holdings, Inc., Condon
Brothers, Inc., CPI Concrete Products Incorporated, H.P. McGinley, Incorporated,
Kennedy Railroad Builders, Inc. and Associated Companies, Merit Railroad
Contractors, Inc., Midwest Construction Services, Inc., New England Railroad
Construction Company, Inc., Railroad Service, Inc. and Minnesota Railroad
Service, Inc., Southern Indiana Wood Preserving Company, Inc., U.S. Trackworks,
Inc. and Northern Rail Service and Supply Co., and Wm. A. Smith Construction Co.
and Wm. A. Smith Rerailing Service, Inc. Consideration paid by RailWorks to
acquire the Founding Companies consisted of a combination of cash and common
stock.
Additionally, RailWorks granted 1,205,872 shares of its common stock to its
executive management team. The Company recorded compensation expense upon
granting the shares of approximately $14,500,000.
F-25
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Annex Railroad Builders, Inc. and Affiliates:
We have audited the accompanying combined balance sheets of ANNEX RAILROAD
BUILDERS, INC. (an Indiana corporation) AND AFFILIATES (collectively, the
"Company") as of July 31, 1998 and December 31, 1997, and the related combined
statements of operations, stockholders' equity and cash flows for the seven
months ended July 31, 1998, the nine months ended December 31, 1997 and year
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ANNEX RAILROAD BUILDERS,
INC. AND AFFILIATES as of July 31, 1998, and December 31, 1997 and the results
of their operations and their cash flows for the seven months ended July 31,
1998, the nine months ended December 31, 1997 and the year ended March 31, 1997
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
September 18, 1998
F-26
<PAGE> 66
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 578,622 $ 201,016
Accounts receivable, net of allowance of $52,306 and
$20,000, respectively.................................. 2,731,322 2,775,817
Employee loans and advances............................... 14,075 16,360
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 701,652 1,162,368
Inventory................................................. 153,930 166,718
Prepaid expenses.......................................... 26,373 27,663
Income tax receivable..................................... 520,792 --
Deferred tax assets....................................... 7,856 48,683
---------- ----------
Total current assets.............................. 4,734,622 4,398,625
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings........................................ 137,314 279,853
Machinery and equipment................................... 2,219,467 2,269,335
Office furniture and equipment............................ 74,516 56,343
---------- ----------
2,431,297 2,605,531
Less accumulated depreciation.......................... 1,831,816 1,779,337
---------- ----------
Property, plant and equipment, net.......................... 599,481 826,194
---------- ----------
OTHER ASSET:
Cash value of life insurance, face value of $1,810,000.... -- 295,448
---------- ----------
$5,334,103 $5,520,267
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 969,510 $1,337,542
Line of credit............................................ 1,075,000 50,000
Current obligations under capital leases.................. 87,766 99,604
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 322,828 213,703
Accrued wages............................................. 653,086 142,839
Accrued expenses.......................................... 248,444 453,115
Current maturities of long-term debt...................... 29,489 93,763
---------- ----------
Total current liabilities......................... 3,386,123 2,390,566
---------- ----------
Long-term debt, net of current maturities................... 7,613 105,102
---------- ----------
Capital lease obligations, net of current obligations....... -- 42,935
---------- ----------
Commitments and contingencies............................... -- --
---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, no par value; 8,000 shares authorized, 5,750
outstanding............................................ 56,769 56,769
Retained earnings......................................... 1,883,598 2,924,895
---------- ----------
Total stockholders' equity........................ 1,940,367 2,981,664
---------- ----------
$5,334,103 $5,520,267
========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-27
<PAGE> 67
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenue................................................. $7,410,225 $15,098,726 $15,467,498
Contract costs.......................................... 7,211,829 12,405,910 12,948,083
---------- ----------- -----------
Gross profit.......................................... 198,396 2,692,816 2,519,415
General and administrative expenses..................... 932,604 1,326,435 1,674,321
---------- ----------- -----------
(Loss) income from operations........................... (734,208) 1,366,381 845,094
---------- ----------- -----------
Other income (expense):
Interest income....................................... 7,227 15,065 31,216
Interest expense...................................... (23,400) (42,530) (47,956)
---------- ----------- -----------
(16,173) (27,465) (16,740)
---------- ----------- -----------
(Loss) income before (benefit) provision for income
taxes................................................. (750,381) 1,338,916 828,354
(Benefit) provision for income taxes.................... (367,074) 369,011 228,946
---------- ----------- -----------
Net (loss) income....................................... $ (383,307) $ 969,905 $ 599,408
========== =========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-28
<PAGE> 68
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
COMMON COMMON TREASURY RETAINED
SHARES STOCK STOCK EARNINGS TOTAL
--------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996................. 5,750 $56,769 $(109,274) $2,300,628 $2,248,123
Net income............................ -- -- -- 599,408 599,408
Dividends............................. -- -- -- (386,300) (386,300)
----- ------- --------- ---------- ----------
BALANCE, MARCH 31, 1997................. 5,750 56,769 (109,274) 2,513,736 2,461,231
Net income............................ -- -- -- 969,905 969,905
Dividends............................. -- -- -- (449,472) (449,472)
Retirement of treasury stock.......... -- -- 109,274 (109,274) --
----- ------- --------- ---------- ----------
BALANCE, DECEMBER 31, 1997.............. 5,750 56,769 -- 2,924,895 2,981,664
Net loss.............................. -- -- -- (383,307) (383,307)
Dividends............................. -- -- -- (657,990) (657,990)
----- ------- --------- ---------- ----------
BALANCE, JULY 31, 1998.................. 5,750 $56,769 $ -- $1,883,598 $1,940,367
===== ======= ========= ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-29
<PAGE> 69
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(383,307) $969,905 $599,408
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Deferred income tax provision (benefit)................. 40,827 (19,924) --
Depreciation and amortization........................... 142,404 192,773 250,215
(Gain)/loss from sale of equipment...................... (706) 145 1,117
Non-cash compensation expense........................... 295,448 -- --
Change in operating assets and liabilities:
Accounts receivable.................................. 44,495 (234,939) (677,293)
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. 460,716 (361,290) (287,483)
Inventory............................................ 12,788 (82,633) (25,290)
Prepaid expenses..................................... 1,290 104,356 (106,458)
Income tax receivable................................ (520,792) -- --
Accounts payable..................................... (368,032) (170,342) 577,961
Accrued expenses..................................... 305,576 252,961 (107,036)
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................. 109,125 87,005 (59,381)
--------- -------- --------
Net cash provided by operating activities.......... 139,832 738,017 165,760
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net employee advances (payments).......................... 2,285 5,920 (728)
Increase in cash value of life insurance.................. -- (45,145) (53,796)
Proceeds from life insurance policies..................... -- 56,163 --
Decrease in notes receivable.............................. -- -- 43,574
Purchases of property, plant, and equipment............... (51,735) (146,640) (110,932)
Proceeds from sale of equipment........................... 14,995 20,011 --
--------- -------- --------
Net cash used in investing activities.............. (34,455) (109,691) (121,882)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit............ 1,025,000 (275,000) 75,000
Principal payments on capital lease obligations........... (54,773) (97,144) (17,712)
Principal payments on long-term debt...................... (73,747) (73,290) (131,138)
Borrowings under long-term debt........................... -- 70,272 19,752
Dividends paid............................................ (624,251) (449,472) (386,300)
--------- -------- --------
Net cash provided by (used in) financing
activities....................................... 272,229 (824,634) (440,398)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 377,606 (196,308) (396,520)
CASH AND CASH EQUIVALENTS, beginning of period.............. 201,016 397,324 793,844
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 578,622 $201,016 $397,324
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 14,910 $ 52,894 $ 55,023
========= ======== ========
Income taxes.............................................. $ 35,548 $218,799 $235,131
========= ======== ========
</TABLE>
See Notes to Combined Financial Statements.
F-30
<PAGE> 70
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
The accompanying combined financial statements of Annex Railroad Builders,
Inc. and Affiliates (collectively the "Company") include the accounts of Annex
Railroad Builders, Inc. ("Annex") (an Indiana corporation), R. & M. B. Rail Co.,
d/b/a Mize Construction Company ("Mize") (an Indiana corporation), Railroad
Specialties, Inc., ("RSI") (an Indiana corporation) and U.S. Railway Supply,
Inc. ("US Rail") (an Indiana corporation). These entities are included in the
combined financial statements due to certain shareholder's majority ownership in
each. The majority of the Company operates as a construction contractor
constructing, repairing, and maintaining railroad tracks for private and
government customers located throughout the Midwest. This work is performed
under various forms of contracts, including fixed-fee and time-and-material
contracts. One entity operates a supply company that provides railroad
construction supplies to certain railroad construction contractors.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The above companies have been included in the combined financial
statements. All material intercompany transactions and balances have been
eliminated. Although the fiscal year of Annex used to be March 31, the
affiliates are included in the combined financial statements on the basis of
fiscal years ending December 31. In 1997, Annex changed its financial reporting
year-end to December 31.
RECLASSIFICATIONS
Certain reclassifications have been made in the December 31, 1997 combined
financial statements to conform with the July 31, 1998 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
F-31
<PAGE> 71
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the Midwestern United States. As such,
the Company's accounts receivable are from the same geographic region. The terms
of sales give rise to unsecured accounts receivable, as is common industry
practice. Contract revenue earned from three customers comprised approximately
29%, 29% and 23% of total contract revenue for the seven months ended July 31,
1998, the nine months ended December 31, 1997 and the twelve months ended March
31, 1997, respectively.
INVENTORY
Inventory, consisting principally of stored materials and parts to be used
for contracts, is stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful life of the asset as follows:
<TABLE>
<S> <C>
Buildings................................................... 27.5 - 39 years
Machinery and equipment..................................... 5 years
Office furniture and equipment.............................. 7 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income.
INCOME TAXES
Mize, RSI and U.S. Rail operate as Sub-Chapter S Corporations. Accordingly,
the taxable income of Mize, RSI, and US Rail included in the combined financial
statements of the Company is reported by the owners in their respective
individual tax returns; therefore, the combined financial statements of the
Company do not reflect an income tax provision for these entities.
The provision for (benefit from) income taxes is based on earnings (losses)
reported by Annex. In accordance with Statement of Financial Accounting
Standards No. 109, a deferred income tax asset or liability is determined by
applying currently enacted tax laws and rates to the expected reversal of the
cumulative temporary differences between the carrying value of assets and
liabilities for financial statement and income tax purposes.
F-32
<PAGE> 72
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 1998 and December 31, 1997, consisted of
the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Contract receivables....................................... $1,347,155 $1,633,139
Contract retainages........................................ 1,436,473 1,162,678
---------- ----------
2,783,628 2,795,817
Less allowance for doubtful accounts....................... 52,306 20,000
---------- ----------
$2,731,322 $2,775,817
========== ==========
</TABLE>
Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainages are expected to
be collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at July 31, 1998 and
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts................... $13,921,261 $ 9,508,537
Estimated earnings........................................ 5,435,876 3,477,468
----------- -----------
19,357,137 12,986,005
Less billings to date..................................... 18,978,313 12,037,340
----------- -----------
$ 378,824 $ 948,665
=========== ===========
</TABLE>
Contracts in process are included in the accompanying combined balance
sheets under the following captions:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 701,652 $1,162,368
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (322,828) (213,703)
--------- ----------
$ 378,824 $ 948,665
========= ==========
</TABLE>
5. LINE OF CREDIT
The Company maintained a revolving line of credit with maximum borrowings
of $1,500,000. The line of credit bears interest at prime plus .75% (9% at July
31, 1998) which is payable monthly. The collateral for the line of credit
includes the Company's accounts receivable, inventory, machinery and equipment.
In addition, it is personally guaranteed up to $500,000 by one of the principal
stockholders. During the seven months ended July 31, 1998, nine months ended
December 31, 1997 and the year ended March 31, 1997, the weighted average amount
outstanding on the line of credit was approximately $327,000, $221,000, and
$356,000 respectively, and the maximum amount outstanding was approximately
$1,075,000, $500,000 and $575,000, respectively. The outstanding balance of the
revolving credit facility at July 31, 1998 and December 31, 1997 was $1,075,000,
and $50,000 respectively. In connection with the transaction discussed in Note
13, the line of credit was repaid subsequent to July 31, 1998.
F-33
<PAGE> 73
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL LEASES
The Company's capital leases relate to machinery and equipment which have
net book values of $174,142 and $205,916 at July 31, 1998 and December 31, 1997
respectively. The terms of these leases range from 15 to 24 months. The
effective interest rates on these leases range from 5% to 11%. Future minimum
lease payments under capital leases for the period ending July 31, 1999 are
$87,766.
7. LONG-TERM DEBT
At July 31, 1998 and December 31, 1997, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Note payable to bank, interest at 8.90%, payable in monthly
installments of $3,811, maturing September 1998, secured
by equipment.............................................. $ 7,407 $ 32,927
Mortgage note payable to bank, interest at 7.125%, payable
in monthly installments of $996, assumed by stockholder in
1998...................................................... -- 90,802
Note payable to bank, interest at 8.42%, payable in monthly
installments of $1,367, matured March 1998................ -- 4,009
Note payable to bank, interest at 7.90%, payable in monthly
installments of $892, maturing October 1998, secured by
equipment................................................. 2,707 8,675
Note payable to bank, interest at 8.50%, payable in monthly
installments of $738, maturing February 2000, secured by
equipment................................................. 12,964 17,359
Other notes payable......................................... 14,024 45,093
------- --------
37,102 198,865
Less current maturities..................................... 29,489 93,763
------- --------
$ 7,613 $105,102
======= ========
</TABLE>
The future maturities of long-term debt as of July 31, 1998 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
- ----------------------
<S> <C> <C>
1999...................................................... $29,489
2000...................................................... 7,613
-------
$37,102
=======
</TABLE>
Both long-term debt and the line of credit contain certain restrictive
covenants which place requirements and restrictions on the Company regarding
disposition of assets, financial ratios, capital expenditures, acquisitions and
operations. The Company was in compliance with these covenants at July 31, 1998.
8. PROFIT SHARING PLAN
The Company maintains a profit sharing plan for full-time, non-union
employees. To be eligible, an employee must be employed with the Company for two
years. All contributions, which are at management's discretion, are vested after
six years. Company contributions to the plan were $0, $121,421 and $117,717, for
the seven months ended July 31, 1998, the nine months ended December 31, 1997,
and the year ended March 31, 1997, respectively.
F-34
<PAGE> 74
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The income tax provision (benefit) for the seven months ended July 31,
1998, the nine months ended December 31, 1997, and the year ended March 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31, MARCH 31,
1998 1997 1997
--------- ------------ ---------
<S> <C> <C> <C>
Current provision (benefit):
Federal....................................... $(324,826) $309,722 $186,675
State......................................... (83,075) 79,213 42,271
--------- -------- --------
(407,901) 388,935 228,946
Deferred provision (benefit).................... 40,827 (19,924) --
--------- -------- --------
$(367,074) $369,011 $228,946
========= ======== ========
</TABLE>
The income tax provision (benefit) as reported in the combined statements
of operations differs from the amounts computed by applying federal statutory
rates due to the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31, MARCH 31,
1998 1997 1997
--------- ------------ ---------
<S> <C> <C> <C>
Federal income tax at statutory rate................ $(323,454) $322,899 $179,709
State income taxes, net of federal income tax
benefit........................................... (52,370) 52,281 27,899
Other............................................... 8,750 (6,169) 21,338
--------- -------- --------
Income tax (benefit) provision...................... $(367,074) $369,011 $228,946
========= ======== ========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets at July 31, 1998 and December 31, 1997 consisted
of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $7,856 $ 7,856
Accrued management bonus.................................. -- 40,827
------ -------
Total deferred tax assets......................... $7,856 $48,683
====== =======
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company has sales and purchases of supplies and services with related
parties under common ownership. Sales to these companies were $17,830, $58,752
and $105,840 for the seven months ended July 31, 1998, the nine months ended
December 31, 1997 and the year ended March 31, 1997, respectively. The Company
had receivables from these companies totaling $12,883 and $17,771 at July 31,
1998 and December 31, 1997, respectively.
During 1998, the Company distributed certain property with a net book value
of $121,745 to the principal stockholder along with the assumption of $88,016 of
outstanding debt by the stockholder. In addition, during 1998 the Company
transferred certain officer life insurance policies to the stockholders in the
form of compensation expense.
F-35
<PAGE> 75
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material impact on the
Company's financial statements.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair values of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt and capital lease obligations based on borrowing rates
currently available to the Company is a reasonable estimation of fair value.
13. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-36
<PAGE> 76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CPI Concrete Products Incorporated:
We have audited the accompanying balance sheet of CPI CONCRETE PRODUCTS
INCORPORATED, (a Tennessee Corporation), as of July 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for the six months
ended July 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CPI CONCRETE PRODUCTS
INCORPORATED, as of July 31, 1998, and the results of its operations and its
cash flows for the six months then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
September 18, 1998
F-37
<PAGE> 77
CPI CONCRETE PRODUCTS INCORPORATED
BALANCE SHEET
JULY 31, 1998
<TABLE>
<CAPTION>
JULY 31,
1998
----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 635,416
Accounts receivable....................................... 993,633
Inventory................................................. 1,434,823
Prepaid expenses.......................................... 41,255
Deferred tax assets....................................... 16,847
----------
Total current assets.............................. 3,121,974
----------
EQUIPMENT................................................... 2,752,519
LESS ACCUMULATED DEPRECIATION............................... 1,885,315
----------
EQUIPMENT, NET.............................................. 867,204
----------
OTHER ASSETS:
Loan costs, net of accumulated amortization of $11,154.... 15,092
Refundable deposits....................................... 550
----------
Other assets, net................................. 15,642
----------
$4,004,820
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 413,156
Customer deposits......................................... 41,731
Accrued wages............................................. 47,352
Taxes withheld and accrued................................ 51,789
Accrued expenses.......................................... 169,450
Accrued income taxes...................................... 235,712
Current portion of long-term debt......................... 212,089
----------
Total current liabilities......................... 1,171,279
LONG-TERM DEBT, less current portion........................ 473,188
DEFERRED INCOME TAXES....................................... 42,477
----------
Total liabilities................................. 1,686,944
----------
STOCKHOLDERS' EQUITY:
Common Stock, no par value; shares authorized 3,000;
shares issued 2,161 (8 in Treasury, 253 in ESOP)....... 428,700
Retained earnings......................................... 1,892,392
----------
2,321,092
Less treasury stock, 8 shares at cost..................... 3,216
----------
Stockholders' equity, net......................... 2,317,876
----------
$4,004,820
==========
</TABLE>
See Notes to Financial Statements.
F-38
<PAGE> 78
CPI CONCRETE PRODUCTS INCORPORATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31, 1998
----------------
<S> <C>
Revenue..................................................... $3,642,118
Cost of goods sold.......................................... 3,085,629
----------
Gross profit................................................ 556,489
Selling, general and administrative expenses................ 602,071
----------
Loss from operations........................................ (45,582)
----------
Other Income (expense):
Interest expense.......................................... (31,821)
Loss on sale of equipment................................. (2,975)
Rental income............................................. 9,571
Interest income........................................... 17,437
Miscellaneous income...................................... 28,673
----------
Other income, net........................................... 20,885
----------
Loss before provision for income taxes...................... (24,697)
Provision for income taxes.................................. 400,008
----------
Net loss.................................................... $ (424,705)
==========
</TABLE>
See Notes To Financial Statements.
F-39
<PAGE> 79
CPI CONCRETE PRODUCTS INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
COMMON COMMON TREASURY RETAINED
SHARES STOCK STOCK EARNINGS TOTAL
--------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 31, 1998................. 2,161 $428,700 $(3,216) $2,864,039 $3,289,523
Net loss................................ -- -- -- (424,705) (424,705)
Dividends............................... -- -- -- (546,942) (546,942)
----- -------- ------- ---------- ----------
BALANCE, July 31, 1998.................... 2,161 $428,700 $(3,216) $1,892,392 $2,317,876
===== ======== ======= ========== ==========
</TABLE>
See Notes to Financial Statements.
F-40
<PAGE> 80
CPI CONCRETE PRODUCTS INCORPORATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
1998
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash provided by
operating activities:
Net loss.................................................. $(424,705)
Amortization.............................................. 1,312
Depreciation.............................................. 147,809
Loss on sale of equipment................................. 2,975
Change in operating assets and liabilities:
Accounts receivable.................................... 135,415
Inventory.............................................. 296,698
Prepaid expenses....................................... 16,588
Deferred tax assets.................................... 4,529
Accounts payable....................................... (85,699)
Customer deposits...................................... (51,365)
Accrued wages.......................................... 4,656
Taxes withheld and accrued............................. 178,991
Accrued expenses....................................... 1,860
Accrued income taxes................................... (6,974)
Deferred income taxes.................................. 16,477
---------
Net cash provided by operating activities......... 238,567
---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of equipment..................................... (103,342)
---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of long-term debt............................... (156,380)
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (21,155)
CASH AND CASH EQUIVALENTS, beginning of period.............. 656,571
---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 635,416
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes.............................................. $ 206,985
=========
Interest.................................................. $ --
=========
</TABLE>
See Notes to Financial Statements.
F-41
<PAGE> 81
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The accompanying financial statements include the accounts of CPI Concrete
Products Incorporated (The "Company") as of July 31, 1998. The Company is
located in Memphis, Tennessee and is in the business of processing and selling
concrete poles and concrete products in the Mid-South geographical region. The
Company extends credit to their customers, with the majority of customers
located in Tennessee, Mississippi and Arkansas. No collateral is required for
trade accounts receivable.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from the
estimates that were assumed in preparing the financial statements.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out method) or
market. At July 31, 1998 inventory consisted of the following:
<TABLE>
<S> <C>
Raw Materials............................................... $ 375,150
Finished Goods.............................................. 1,059,673
----------
$1,434,823
==========
</TABLE>
REVENUE RECOGNITION
These statements reflect the accrual basis of accounting which requires
recognition of revenues when earned and expenses when incurred without regard to
the exchange of each.
EQUIPMENT
Equipment is stated at cost. Depreciation is provided on the straight-line
and declining balance methods over the estimated useful lives of the various
assets. Lives used for calculating depreciation are: machinery and equipment
3-10 years. Amortization of loan costs is made over a 120 month period.
Expenditures for maintenance, repairs and minor renewals are expenses as
incurred; expenditures for improvements, replacements and major renewals are
capitalized. Assets retired, or otherwise disposed of, are eliminated from the
asset accounts along with related amounts of accumulated depreciation. Any gains
or losses from disposals are included in income.
INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-42
<PAGE> 82
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS AND CREDIT RISK
As of July 31, 1998, the Company has deposits in a financial institution
which exceed the FDIC insured limit by $268,528.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INTANGIBLE ASSETS
Amortizable assets are recorded at cost. Amortization is calculated by the
straight-line method over a 5 year life. Amortization expense for the seven
months ended July 31, 1998 was $1,312.
3. LONG-TERM DEBT
Long-term debt as of July 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Union Planters National Bank SBA loan payable in monthly
installments of $11,453 through April, 2004, including
interest at a variable rate adjustable to 1% above prime,
currently at 8.5%; secured by equipment, mortgage on
property and a personal guarantee by stockholders......... $441,574
Tennessee Small Business Energy Loan Program note payable
for purchasing boiler; payable in monthly installments of
$1,808 through April, 2000, including interest at 5%;
collateralized by boiler and associated equipment......... 36,295
Union Planters Bank note payable for conversion of two
operating leases to term debt; payable in monthly
installments of $5,914 through April, 2001, including
interest at 8.15%; secured by equipment................... 169,571
Union Planters Bank note payable for purchasing travel lift;
payable in monthly installments of $4,861 through April,
1999, including interest at 8.15%; collateralized by
travel lift............................................... 37,837
--------
685,277
Less current maturities..................................... 212,089
--------
$473,188
========
</TABLE>
Aggregate maturities on principal under long-term obligations are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
- --------------------------
<S> <C>
1998...................................................... $118,130
1999...................................................... 201,004
2000...................................................... 198,672
2001...................................................... 149,190
2002...................................................... 18,281
--------
$685,277
========
</TABLE>
F-43
<PAGE> 83
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LEASE AGREEMENTS
The Company leases certain autos and trucks under the classification of
operating leases. The following is a schedule of future minimum lease payments
for operating leases as of July 31, 1998:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
- --------------------------
<S> <C>
1998...................................................... $39,468
1999...................................................... 30,174
2000...................................................... 3,661
-------
$73,303
=======
</TABLE>
Rent expense under operating leases totaled $56,889 for the seven months
ended July 31, 1998.
5. INCOME TAXES
The provision for income taxes for the seven months ended July 31, 1998
consisted of the following:
<TABLE>
<S> <C>
Currently payable:
Federal................................................... $339,361
State..................................................... 63,706
--------
403,067
--------
Deferred taxes:
Federal................................................... (2,576)
State..................................................... (483)
--------
(3,059)
--------
Provision for income taxes.................................. $400,008
========
</TABLE>
The Items which give rise to temporary differences at July 31, 1998 are as
follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Uniform capitalization of inventory -- federal............ $15,836
Uniform capitalization of inventory -- state.............. 1,011
-------
$16,847
=======
Deferred Tax Liabilities:
Excess tax depreciation -- federal........................ $39,929
Excess tax depreciation -- state.......................... 2,548
-------
$42,477
=======
</TABLE>
6. EMPLOYEE BENEFIT PLANS
In 1986, the Company established an Employee Stock Ownership Plan (ESOP) to
provide additional retirement benefits to employees. The vesting provisions of
the ESOP trust instrument are based on vesting years of service. A participant
will always be 100% vested at normal retirement age. At July 31,1998, the ESOP
owned 253 shares of the Company's Common Stock at a cost of $212,995. There were
no contributions by the Company to the ESOP for the seven months ended July 31,
1998. In connection with the Company's acquisition (see Note 10), the ESOP
shares were purchased by RailWorks and the plan was terminated.
In June 1996, the Company adopted a 401(k) plan covering substantially all
employees who have met the minimum age requirements and who have completed one
year of continuous service. The Company's
F-44
<PAGE> 84
CPI CONCRETE PRODUCTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contribution is equal to 50% of each participant's contribution of up to 3% of
salary. Contributions totaled $15,250 for the seven months ended July 31, 1998.
7. TREASURY STOCK
The Company purchased Common Stock from employees who had been participants
in the ESOP as follows:
<TABLE>
<S> <C>
September 9, 1988........................................... 2.22 Shares
September 1, 1989........................................... 4.41 Shares
December 27, 1989........................................... 1.85 Shares
-----------
Total............................................. 8.48 Shares
===========
</TABLE>
No activity from December 28, 1989 to July 31, 1998.
8. CONTINGENCIES AND COMMITMENTS
The Company and its two principal shareholders are parties to a stock
retirement agreement which requires the Company, upon the death of any of these
shareholders, to purchase his holdings of the Company's Common Stock at a price
of $514 per share. The Company has life insurance policies on the lives of the
aforementioned shareholders to fund substantially all of such obligation in the
event of their death.
At July 31, 1998, the Company had an unused line of credit with a bank. The
line totals $800,000, has an interest rate of prime plus 1.0%, and the principal
and interest are due on the first day of each month. No gains or losses were
recorded with respect to this transaction.
9. RELATED PARTY TRANSACTION
In July 1998, the Company redeemed the outstanding shares of one
shareholder in exchange for the Company's land and building. No gain or loss was
recorded with respect to this transaction.
10. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-45
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Condon Brothers, Inc.:
We have audited the accompanying balance sheets of CONDON BROTHERS, INC. (a
Washington corporation) as of July 31, 1998 and December 31, 1997, and the
related statements of operations, stockholders' equity and cash flows for the
seven months ended July 31, 1998 and the two years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CONDON BROTHERS, INC. as of
July 31, 1998 and December 31, 1997, and the results of its operations and its
cash flows for the seven months ended July 31, 1998 and for each of the two
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boise, Idaho
September 30, 1998
F-46
<PAGE> 86
CONDON BROTHERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 488 $ 1,096
Accounts receivable, net of allowance of $28,725 and
$30,060, respectively................................... 865,758 445,677
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 127,914 75,987
Inventory................................................. 1,517,372 1,172,193
Prepaid expenses.......................................... 38,632 40,839
Shareholder receivable.................................... 50,000 --
---------- ----------
Total current assets............................... 2,600,164 1,735,792
---------- ----------
PLANT AND EQUIPMENT:
Machinery and equipment................................... 1,301,153 1,072,916
Vehicles.................................................. 467,587 473,128
Office furniture and equipment............................ 32,933 30,021
---------- ----------
1,801,673 1,576,065
Less accumulated depreciation........................... 821,772 720,374
---------- ----------
Plant and equipment, net................................ 979,901 855,691
---------- ----------
OTHER ASSETS:
Cash surrender value of life insurance.................... 35,150 28,338
Investments -- land....................................... -- 20,800
---------- ----------
Total other assets................................. 35,150 49,138
---------- ----------
$3,615,215 $2,640,621
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $1,013,344 $ 847,919
Deferred compensation..................................... 83,989 82,910
Due to related party...................................... -- 10,000
Lines of credit........................................... 1,498,407 --
Current maturities of long-term debt...................... 539,385 214,718
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... -- 7,949
---------- ----------
Total current liabilities.......................... 3,135,125 1,163,496
LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 55,367 491,307
---------- ----------
Total liabilities.................................. 3,190,492 1,654,803
---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, $.05 par value; authorized shares,
1,000,000; issued and outstanding shares, 580,000....... 29,000 29,000
Additional paid-in capital................................ 118,055 24,155
Retained earnings......................................... 277,668 932,663
---------- ----------
Total stockholders' equity......................... 424,723 985,818
---------- ----------
$3,615,215 $2,640,621
========== ==========
</TABLE>
See Notes to Financial Statements.
F-47
<PAGE> 87
CONDON BROTHERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, -----------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Revenue................................................... $3,390,320 $4,487,098 $5,516,610
Contract costs............................................ 2,222,026 3,370,548 4,115,260
---------- ---------- ----------
Gross profit............................................ 1,168,294 1,116,550 1,401,350
General and administrative expenses....................... 699,534 983,116 838,725
---------- ---------- ----------
Income from operations.................................... 468,760 133,434 562,625
Other income (expense):
Other revenue, net...................................... 109,397 59,729 141,342
Interest income......................................... 432 1,608 --
Interest expense........................................ (67,984) (75,625) (55,834)
---------- ---------- ----------
Net income...................................... $ 510,605 $ 119,146 $ 648,133
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-48
<PAGE> 88
CONDON BROTHERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.............. 580,000 $29,000 $ 24,155 $ 317,786 $ 370,941
Net income............................ -- -- -- 648,133 648,133
Dividends............................. -- -- -- (43,478) (43,478)
------- ------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1996.............. 580,000 29,000 24,155 922,441 975,596
Net income............................ -- -- -- 119,146 119,146
Dividends............................. -- -- -- (108,924) (108,924)
------- ------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997.............. 580,000 29,000 24,155 932,663 985,818
Net income............................ -- -- -- 510,605 510,605
Dividends............................. -- -- -- (1,165,600) (1,165,600)
Obligation transferred to owners...... -- -- 93,900 -- 93,900
------- ------- -------- ----------- -----------
BALANCE, JULY 31, 1998.................. 580,000 $29,000 $118,055 $ 277,668 $ 424,723
======= ======= ======== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-49
<PAGE> 89
CONDON BROTHERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, ----------------------
1998 1997 1996
------------ --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 510,605 $ 119,146 $ 648,133
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................ 169,541 184,479 139,772
Gain from sale of equipment............................. (110,813) (60,858) (120,468)
Reserve for losses on uncompleted contracts............. -- (167,107) 167,107
Other................................................... 15,955 (7,944) (20,411)
Change in working capital Items:
Accounts receivable..................................... (420,081) 832,378 (954,769)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (51,927) 129,249 (86,695)
Inventory............................................... (345,179) (239,276) (502,304)
Prepaid expenses........................................ 2,207 6,226 2,065
Accounts payable and accrued expenses................... 280,125 (37,537) 528,659
Deferred compensation................................... 1,079 (2,500) --
Due to related party.................................... (10,000) (2,788) (7,961)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (7,949) (62,872) 66,783
----------- --------- ----------
Net cash provided by (used in) operating
activities....................................... 33,563 690,596 (140,089)
----------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (375,627) (372,987) (432,024)
Proceeds from sale of plant and equipment................. 169,922 97,624 126,943
----------- --------- ----------
Net cash used in investing activities.............. (205,705) (275,363) (305,081)
----------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit............................. 1,600,000 428,425 1,173,106
Payments on lines of credit............................... (101,593) (628,425) (593,521)
Payments on long-term debt................................ (111,273) (105,862) (90,730)
Dividends paid............................................ (1,165,600) (108,924) (43,478)
Loan to shareholder....................................... (50,000) -- --
----------- --------- ----------
Net cash provided by (used in) financing
activities....................................... 171,534 (414,786) 445,377
----------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (608) 447 207
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,096 649 442
----------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 488 $ 1,096 $ 649
=========== ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest.................. $ 67,984 $ 75,625 $ 55,834
=========== ========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Refinance of lines of credit and long-term debt........... $ -- $ 450,000 $ --
=========== ========= ==========
Transfer of accounts payable to related parties........... $ 114,700 $ -- $ --
=========== ========= ==========
Transfer of land to related party......................... $ 20,800 $ -- $ --
=========== ========= ==========
</TABLE>
See Notes to Financial Statements.
F-50
<PAGE> 90
CONDON BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Condon Brothers, Inc. (the "Company"), a Washington corporation, is in the
business of railroad track construction, maintenance, salvage and related sales
primarily in the Pacific Northwest. The majority of construction and maintenance
work is performed under fixed price contracts. The duration of the Company's
contracts is typically less than one year.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND CONTRACT COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of contract cost
incurred to date to management's estimated total cost for each contract.
Management considers comparison of costs incurred to date to total cost to be
the best available measure of progress on the contracts. Changes in job
performance, job conditions and estimated profitability may result in revisions
to total expected project costs and the anticipated gross profit and are
recognized in the period in which determined.
Revenues from time-and-material contracts are recognized as the work
progresses.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the Pacific Northwest. As such, the
Company's revenues and related accounts receivable are principally from the same
geographic region. The terms of the sales give rise to unsecured accounts
receivable, as is common industry practice.
INVENTORY
Inventory consists principally of stored rails, ties and other track
materials ("OTM") and parts to be used for contracts or resale and are stated at
the lower of cost or market. Market is based on estimated proceeds expected to
be obtained upon ultimate sale.
The Company's principal method of acquiring inventory items is through
salvage operations. Items acquired through salvage operations are valued based
on costs incurred to acquire the items, including payments to third parties,
direct labor and other direct contract costs, and those indirect costs related
to contract performance. These costs are netted with any third party payments
received for the salvage operations. The Company compares total cost of salvaged
materials to market for rails, ties and OTM recovered and adjustments are made
if the calculated market value is less than the total salvage cost. In addition,
the Company evaluates amounts held in inventory and adjusts for rails, ties and
OTM quantities that exceed anticipated usage.
F-51
<PAGE> 91
CONDON BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory at July 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Rails....................................................... $ 962,283 $ 536,825
Ties........................................................ 154,585 210,932
Other track material........................................ 233,938 229,005
---------- ----------
Total rail inventory.............................. 1,350,806 976,762
Mining equipment and other items............................ 166,566 195,431
---------- ----------
Total Inventory................................... $1,517,372 $1,172,193
========== ==========
</TABLE>
The Company has salvaged and recorded at cost $166,566 and $195,431 at July
31, 1998 and December 31, 1997, respectively, inventory which is comprised of
various mine equipment, small locomotives and other items. The Company believes
it will realize amounts recorded upon disposition.
PLANT AND EQUIPMENT
The Company records plant and equipment at cost. Depreciation is computed
using the straight-line method over the estimated useful life of the asset as
follows:
<TABLE>
<S> <C>
Machinery and equipment..................................... 5 - 10 years
Vehicles.................................................... 5 - 7 years
Office furniture and equipment.............................. 5 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from their respective accounts and any gain or loss
is reflected in net income.
Maintenance, repairs and minor replacements are expensed as incurred and
were $241,585 for the seven months ended July 31, 1998, $353,428 in 1997 and
$256,727 in 1996.
INCOME TAXES
The Company operates as a sub-chapter S corporation. Accordingly, the
income taxes for the earnings of the Company are the responsibility of the
owners; therefore, these financial statements do not reflect any current or
deferred federal or state income taxes for the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years'
information to the current year's presentation.
F-52
<PAGE> 92
CONDON BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Contract receivables........................................ $793,899 $401,698
Contract retainages......................................... 90,061 53,186
Other....................................................... 10,523 20,853
-------- --------
894,483 475,737
Less allowance for doubtful accounts........................ 28,725 30,060
-------- --------
$865,758 $445,677
======== ========
</TABLE>
Contract retainages have been billed but are not considered due until
contract completion. Such contract retainage is expected to be collected within
the following year. Other accounts receivable consist primarily of amounts due
from current and former employees.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at July 31, 1998 and
December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $729,944 $626,543
Estimated earnings.......................................... 231,880 129,903
-------- --------
961,824 756,446
Less billings to date....................................... 833,910 688,408
-------- --------
$127,914 $ 68,038
======== ========
</TABLE>
Contracts in process at July 31, 1998 and December 31, 1997 are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $127,914 $75,987
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... -- (7,949)
-------- -------
$127,914 $68,038
======== =======
</TABLE>
Provisions for losses on uncompleted contracts are recognized when it is
determined that total costs will exceed the allowable contract revenue.
F-53
<PAGE> 93
CONDON BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Company leases from C. B. Enterprises, a related party, the Spokane,
Washington yard, which includes a maintenance shop and office building under an
agreement expiring on November 1, 1999. Minimum rental commitments under the
noncancellable lease agreement are:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
- --------------------------
<S> <C>
1998...................................................... $25,000
1999...................................................... 55,000
-------
$80,000
=======
</TABLE>
Total rental expense for the seven months ended July 31, 1998 and the years
ended December 31, 1997 and 1996 for all operating leases amounted to $40,969,
$109,989 and $77,086, respectively.
6. LINES OF CREDIT
At July 31, 1998, the Company had a total of four operating lines of credit
with Washington Trust Bank. Interest was payable monthly at the Bank's prime
rate plus .75% - 1%. Advances on the operating line were $1,498,407, as of July
31, 1998. The operating lines expire on varying maturities in 1998. At December
31, 1997, the Company had a $300,000 operating line of credit at an interest
rate of prime plus .75%. No amounts were outstanding against this line at
December 31, 1997. Security for the line is accounts receivable, inventory and
equipment.
In addition to the above operating lines of credit with Washington Trust
Bank, two additional lines of credit were issued during the year ended December
31, 1996, for operations. These additional lines allow draws up to $350,000.
Advances on the lines were $350,000 as of December 31, 1996. Interest accrues
monthly at the Bank's prime rate plus .75%. Security for the lines is accounts
receivable, inventory and equipment. These operating lines were repaid during
1997.
7. LONG-TERM DEBT
Long-term debt at July 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Note payable to Washington Trust Bank, payable in monthly
installments of $11,226 including interest at 9% with the
balance due January 30, 1999. Secured by accounts
receivable, inventory and equipment....................... $402,482 $450,000
Note payable to Washington Trust Bank, payable in monthly
installments of $11,305 including interest at 9.50% and
matures January 1, 2000. Secured by accounts receivable,
inventory and equipment................................... 192,270 256,025
-------- --------
594,752 706,025
Less current maturities..................................... 539,385 214,718
-------- --------
$ 55,367 $491,307
======== ========
</TABLE>
F-54
<PAGE> 94
CONDON BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities on principal under long-term debt obligations are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
- ----------------------
<S> <C>
1999...................................................... $539,385
2000...................................................... 55,367
--------
$594,752
========
</TABLE>
8. RELATED PARTY TRANSACTIONS
Payments were made to C. B. Enterprises (a partnership), a related party,
under an operating lease for the Spokane, Washington yard and buildings. Such
payments totaled $35,000 for the seven months ended July 31, 1998 and $60,000
for the years ended December 31, 1997 and 1996. The Company also leases certain
equipment to C. B. Enterprises, which is recognized as revenue. Revenue
recognized totaled $0 for the seven months ended July 31, 1998 and $12,683 and
$8,085 for the years ended December 31, 1997 and 1996. Amounts due to C. B.
Enterprises are classified as Due to related party in the Balance Sheets and are
zero as of July 31, 1998 and $10,000 as of December 31, 1997, respectively.
The Company had recorded $114,700 in accounts payable and accrued expenses
in the Balance Sheets related to amounts owed for materials recovered during a
1993 salvage operation. Included in this salvage operation was land acquired for
$20,800. This asset and liability were transferred to C.B. Enterprises, with the
offsetting difference reflected as an increase in additional paid-in capital.
The Company's management and counsel have drafted all agreements related to the
transfer of the liability and asset. For purposes of the Statements of Cash
Flows, these transfers of $114,700 and $20,800, have been treated as a noncash
transaction.
In 1998, the Company loaned, on an interest free basis, $50,000 to a
principal stockholder of the Company. The loan is payable on demand and is
non-collateralized. It is reflected as Shareholder receivable in the
accompanying Balance Sheets.
9. PROFIT SHARING PLAN
The Company has adopted a profit-sharing plan (the Plan) covering all full
time employees with one year of service. Participants become fully vested after
six years of service. Contributions to the Plan amounted to $14,000 for the
seven months ended July 31, 1998. Contributions made to the Plan for the years
ended December 31, 1997 and 1996, were $100,000 and $50,000, respectively.
10. DEFERRED COMPENSATION PAYABLE
In 1993, the Company and one of its officers entered into a discretionary
deferred compensation agreement. The deferred compensation was to be payable to
the officer 90 days following the date on which he gives written notification to
Condon Brothers, Inc. of his retirement from the Company. During 1995, the
Company made the decision to suspend the agreement. During 1998, the Company
made the decision to re-initiate the agreement. At July 31, 1998 and December
31, 1997, the Company has a $83,989 and a $82,910 deferred compensation
liability, respectively, to the officer which will be paid to him upon his
retirement. The amount charged to operations was $10,000 for 1998 and zero for
1997 and 1996.
11. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company maintains life insurance policies on two officers. The face
value of these policies was $300,000 each at July 31, 1998 and December 31,
1997. The cash surrender value on these policies was $35,150 and $28,338 as of
July 31, 1998 and December 31, 1997, respectively.
F-55
<PAGE> 95
CONDON BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments are provided
pursuant to the requirements of Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items at July 31, 1998 and December 31, 1997,
are a reasonable estimate of their fair value due to their short-term and liquid
nature.
LONG-TERM DEBT
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. It is
estimated that the fair value of the long-term debt is approximately market.
Management estimated the fair value of the long-term debt based on the remaining
term to maturity and a comparison of their current interest rates to market
rates for similar obligations.
13. CONTINGENCIES
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material adverse impact on
the Company's financial position, operations or liquidity.
The Company has accrued $120,000 in accounts payable and accrued expenses
in the Balance Sheets associated with a 1997 railroad salvage contract. The
total amount of the salvage contract was originally $174,000. Due to a reduction
in the amount of rail, ties and OTM allowed to be salvaged, the Company is
presently in negotiations to have the contract obligation reduced. If the
Company is unsuccessful in obtaining a change-order for the contract, an
additional cost of $54,000 will be recognized in the financial statements as
inventory to the extent the value is supported by comparison to the Company's
expected market value.
14. EQUITY
In 1998, the original shareholders of the Company redistributed a limited
number of previously issued shares to various family members.
15. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-56
<PAGE> 96
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To H.P. McGinley, Incorporated:
We have audited the accompanying balance sheets of H.P. MCGINLEY,
INCORPORATED (the "Company") (a Pennsylvania corporation) as of July 31, 1998
and December 31, 1997, and the related statements of operations, stockholder's
equity and cash flows for the seven months ended July 31, 1998, the ten months
ended December 31, 1997 and the year ended February 28, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H.P. MCGINLEY, INCORPORATED
as of July 31, 1998 and December 31, 1997, and the results of its operations and
its cash flows for the seven months ended July 31, 1998, the ten months ended
December 31, 1997 and the year ended February 28, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
August 21, 1998
F-57
<PAGE> 97
H.P. MCGINLEY, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,390 $ 575,514
Accounts receivable....................................... 1,148,755 975,707
Inventory................................................. 1,002,344 893,783
Prepaid expenses.......................................... 4,441 8,083
---------- ----------
Total current assets.............................. 2,156,930 2,453,087
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements..................................... 98,982 98,982
Buildings and improvements................................ 231,891 231,891
Machinery and equipment................................... 1,433,821 1,433,821
Office furniture and equipment............................ 76,805 76,805
Transportation equipment.................................. 678,066 574,578
---------- ----------
2,519,565 2,416,077
Less accumulated depreciation............................. 1,860,652 1,836,255
---------- ----------
Property, plant and equipment, net................ 678,913 579,822
---------- ----------
OTHER ASSETS:
Deferred income taxes..................................... 5,815 6,500
---------- ----------
$2,841,658 $3,039,409
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 78,840 $ 79,668
Demand note payable to stockholder........................ 593,922 946,375
Accrued expenses.......................................... 50,783 10,186
Income taxes payable...................................... 169,037 336,100
---------- ----------
Total current liabilities......................... 892,582 1,372,329
---------- ----------
COMMITMENTS AND CONTINGENCIES............................... -- --
---------- ----------
STOCKHOLDER'S EQUITY:
Common Stock, $1 par value; authorized shares, 10,000;
issued and outstanding shares, 1,000................... 1,000 1,000
Retained earnings......................................... 1,948,076 1,666,080
---------- ----------
Total stockholder's equity........................ 1,949,076 1,667,080
---------- ----------
$2,841,658 $3,039,409
========== ==========
</TABLE>
See Notes to Financial Statements.
F-58
<PAGE> 98
H.P. MCGINLEY, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS
SEVEN MONTHS ENDED ENDED YEAR ENDED
JULY 31, 1998 DECEMBER 31, 1997 FEBRUARY 28, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Revenue....................................... $3,931,653 $5,909,679 $4,425,187
Cost of goods sold............................ 2,775,459 3,356,518 3,016,827
---------- ---------- ----------
Gross profit................................ 1,156,194 2,553,161 1,408,360
Selling, general and
administrative expenses..................... 650,059 1,834,752 1,294,731
---------- ---------- ----------
Income from operations........................ 506,135 718,409 113,629
Other income (expense):
Interest income............................. 7,761 23,054 4,697
Interest expense............................ (25,000) (24,832) --
---------- ---------- ----------
Income before provision for
income taxes................................ 488,896 716,631 118,326
Provision for income taxes.................... 206,900 286,100 46,790
---------- ---------- ----------
Net income.................................... $ 281,996 $ 430,531 $ 71,536
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-59
<PAGE> 99
H.P. MCGINLEY, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES COMMON STOCK RETAINED EARNINGS TOTAL
------------- ------------ ----------------- ----------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 29, 1996.............. 1,000 $1,000 $1,164,013 $1,165,013
Net income............................ -- -- 71,536 71,536
----- ------ ---------- ----------
BALANCE, FEBRUARY 28, 1997.............. 1,000 1,000 1,235,549 1,236,549
Net income............................ -- -- 430,531 430,531
----- ------ ---------- ----------
BALANCE, DECEMBER 31, 1997.............. 1,000 1,000 1,666,080 1,667,080
Net income............................ -- -- 281,996 281,996
----- ------ ---------- ----------
BALANCE, JULY 31, 1998.................. 1,000 $1,000 $1,948,076 $1,949,076
===== ====== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-60
<PAGE> 100
H.P. MCGINLEY, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS TEN MONTHS YEAR
ENDED ENDED ENDED
JULY 31, DECEMBER 31, FEBRUARY 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $281,996 $430,531 $ 71,536
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation......................................... 24,397 65,323 68,359
Deferred income taxes................................ 685 (500) (3,210)
Change in operating assets and liabilities:
Accounts receivable................................ (173,048) (637,678) (19,476)
Inventory.......................................... (108,561) (205,203) (277,170)
Prepaid expenses................................... 3,642 7,552 31,927
Accounts payable................................... (828) (21,157) 19,225
Accrued expenses................................... 40,597 (48,156) (39,262)
Income taxes payable............................... (167,063) 286,100 50,000
-------- -------- ---------
Net cash used in operating activities........... (98,183) (123,188) (98,071)
-------- -------- ---------
CASH USED IN INVESTING ACTIVITIES,
Capital expenditures.................................... (123,488) -- (174,921)
-------- -------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES,
Net (repayments) borrowings from stockholder............ (352,453) 689,236 858
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH........................... (574,124) 566,048 (272,134)
CASH AND CASH EQUIVALENTS,
beginning of period..................................... 575,514 9,466 281,600
-------- -------- ---------
CASH AND CASH EQUIVALENTS,
end of period........................................... $ 1,390 $575,514 $ 9,466
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................ $ 25,000 $ 24,832 $ --
======== ======== =========
Cash paid during the period for income taxes............ $373,278 $ -- $ --
======== ======== =========
</TABLE>
See Notes to Financial Statements.
F-61
<PAGE> 101
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
H.P. McGinley, Inc. (the "Company") (a Pennsylvania corporation) operates
as a manufacturer of specialty hardwood products, including railroad ties and
shipping materials. The Company services customers in Pennsylvania and
surrounding states.
2. SIGNIFICANT ACCOUNTING POLICIES
YEAR-END
In 1997, the Company changed its financial reporting year-end to December
31. These financial statements reflect the results of operations for the seven
months ended July 31, 1998, the ten months ended December 31, 1997 and the year
ended February 28, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenue when products are delivered to customers
pursuant to shipping agreements. Cost of goods sold includes the raw materials
cost and costs of producing the product, including milling and preservative
treatment.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the northeast United States. As such, the
Company's accounts receivable are from the same geographic region. In addition,
the Company's customers are primarily in the railroad/railroad construction
business or the transportation business. The terms of the sales give rise to
unsecured accounts receivable, as is common industry practice.
INVENTORY
Inventory, consisting principally of raw materials and finished goods, is
stated at the lower of cost (first-in, first-out) or market.
F-62
<PAGE> 102
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 15 to 30 years
Machinery and equipment..................................... 5 to 7 years
Office furniture and equipment.............................. 5 to 7 years
Transportation equipment.................................... 5 to 7 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income. Normal maintenance and repairs are charged to expense as
incurred; major renewals or betterments which extend the life or increase the
value of assets are capitalized.
INCOME TAXES
The provision for income taxes is based on earnings reported by the
Company. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, a deferred income tax asset or liability is determined by applying
currently enacted tax laws and rates to the expected reversal of the cumulative
temporary differences between the carrying value of assets and liabilities for
financial statement and income tax purposes.
3. INVENTORIES
The principal components of inventories at July 31, 1998 and December 31,
1997 are as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Raw materials............................................... $ 663,983 $378,814
Finished goods.............................................. 338,361 514,969
---------- --------
$1,002,344 $893,783
========== ========
</TABLE>
4. EMPLOYEE BENEFIT PLANS
The Company had a defined benefit pension plan (the "Plan") for all
employees meeting certain age and length of service requirements. Benefits were
based primarily on years of service and average annual compensation during the
highest five consecutive years. In fiscal 1997, the Company terminated the Plan
and distributed vested benefits in accordance with ERISA requirements. The
Company made a final contribution to the Plan of $26,377 during the year ended
February 28, 1997.
The Company maintains a defined contribution benefit plan which covers
substantially all eligible employees. Contributions to the defined contribution
benefit plan during the seven months ended July 31, 1998, the ten months ended
December 31, 1997 and the year ended February 28, 1997 amounted to $18,465, $0,
and $40,922, respectively.
5. INCOME TAXES
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
F-63
<PAGE> 103
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
are expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
A reconciliation of the United States income tax expense at the statutory
corporate rate to the reported income tax expense is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, FEBRUARY 28,
1998 1997 1997
------------- ------------ ------------
<S> <C> <C> <C>
Tax charge at standard U.S. rate of 34%........... $166,225 $243,655 $40,231
State taxes, net of Federal benefit............... 40,675 43,194 6,334
Other............................................. -- (749) 225
-------- -------- -------
$206,900 $286,100 $46,790
======== ======== =======
</TABLE>
The components of the net deferred income tax asset at July 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Non-current asset (liability):
Inventory................................................. $10,990 $10,125
Property, plant and equipment............................. (5,175) (3,645)
Other..................................................... -- 20
------- -------
Total non-current asset........................... $ 5,815 $ 6,500
======= =======
</TABLE>
State income taxes totaling approximately $40,675, $42,915 and $7,019 have
been provided for the seven months ended July 31, 1998, the ten months ended
December 31, 1997 and the year ended February 28, 1997, respectively.
6. RELATED PARTY TRANSACTIONS
The Company's stockholder periodically advances funds to the Company. Such
advances were noninterest bearing through February 28, 1997. Subsequent to March
1, 1997, the advances bear interest at 9% per annum. The advances are due on
demand and repayment is expected as funds become available. Amounts advanced
from the stockholder totaled $593,922 and $946,375 as of July 31, 1998 and
December 31, 1997, respectively.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to various claims and legal actions incidental to
the Company's business. Management is not aware of any claims against the
Company which might have a material impact on the Company's results of
operations or financial position.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Company using available market information and appropriate valuation
methodologies.
F-64
<PAGE> 104
H.P. MCGINLEY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
9. SIGNIFICANT CUSTOMERS
A significant portion of the Company's sales were to one unaffiliated
customer. Amounts due from this customer represented 42% and 25% of the total
accounts receivable at July 31, 1998 and December 31, 1997 and 19% and 14% of
sales for the periods then ended. The loss of this customer would have a
material effect on the Company's business if this loss was not offset by
additional business from other sources.
10. SUBSEQUENT EVENT
On May 21, 1998, the stockholder of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholder exchanged his stock of the Company
for cash and stock of RailWorks Corporation. The transaction was completed on
August 4, 1998.
F-65
<PAGE> 105
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kennedy Railroad Builders, Inc.:
We have audited the accompanying combined balance sheets of KENNEDY
RAILROAD BUILDERS, INC. (a Pennsylvania corporation) AND ASSOCIATED COMPANIES
(collectively, the "Company") as of July 31, 1998 and December 31, 1997 the
related combined statements of operations, stockholders' equity and cash flows
for the seven months ended July 31, 1998, the nine months ended December 31,
1997 and the year ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of KENNEDY
RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES as of July 31, 1998 and
December 31, 1997 and the results of their operations and their cash flows for
the seven months ended July 31, 1998, the nine months ended December 31, 1997
and the year ended March 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
October 16, 1998
F-66
<PAGE> 106
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 226,839 $ 170,289
Accounts receivable, net of allowance of $66,609 and
$25,000, respectively.................................. 1,154,987 1,543,062
Officer and affiliate notes receivable.................... 33,940 102,431
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 240,079 292,611
Inventory................................................. 853,015 855,723
Prepaid expenses.......................................... 73,308 106,115
Deferred income taxes..................................... 26,977 10,125
---------- ----------
Total current assets.............................. 2,609,145 3,080,356
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Buildings................................................. 51,085 153,910
Machinery and equipment................................... 2,926,109 2,228,879
Office furniture and equipment............................ 100,455 96,194
Transportation equipment.................................. 1,230,991 1,182,299
Leasehold improvements.................................... 92,717 63,325
---------- ----------
4,401,357 3,724,607
Less accumulated depreciation.......................... 2,238,047 1,952,101
---------- ----------
Property, plant and equipment, net.......................... 2,163,310 1,772,506
---------- ----------
OTHER ASSETS,
Cash surrender value of officer's life insurance.......... 36,871 19,330
---------- ----------
$4,809,326 $4,872,192
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $1,223,124 $1,208,485
Line of credit............................................ 1,078,170 562,705
Current maturities of long-term debt and capital leases... 369,169 315,324
Officer notes payable..................................... 22,860 80,000
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 24,217 280,569
Accrued expenses.......................................... 266,191 136,767
Income taxes payable...................................... -- 123,828
---------- ----------
Total current liabilities......................... 2,983,731 2,707,678
Long-term debt and capital leases, net of current
maturities................................................ 954,318 806,466
Deferred income taxes....................................... 24,647 14,580
---------- ----------
Total liabilities................................. 3,962,696 3,528,724
---------- ----------
Commitments and contingencies............................... -- --
---------- ----------
STOCKHOLDERS' EQUITY:
Contributed capital....................................... 20,000 20,000
Retained earnings......................................... 826,630 1,323,468
---------- ----------
Total stockholders' equity........................ 846,630 1,343,468
---------- ----------
$4,809,326 $4,872,192
========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-67
<PAGE> 107
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ----------
<S> <C> <C> <C>
Revenue.......................................... $5,240,278 $8,295,814 $9,703,996
Contract costs................................... 4,630,579 6,605,074 7,967,579
---------- ---------- ----------
Gross profit................................ 609,699 1,690,740 1,736,417
General and administrative expenses.............. 1,162,717 1,163,290 1,497,998
---------- ---------- ----------
(Loss) income from operations.................... (553,018) 527,450 238,419
Other income (expense):
Interest income................................ 38,374 10,408 13,566
Interest expense............................... (41,557) (113,486) (108,736)
Other income................................... 23,462 -- --
---------- ---------- ----------
(Loss) income before provision (benefit) for
income taxes................................... (532,739) 424,372 143,249
Provision (benefit) for income taxes............. (53,839) 178,587 65,206
---------- ---------- ----------
Net (loss) income................................ $ (478,900) $ 245,785 $ 78,043
========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-68
<PAGE> 108
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONTRIBUTED RETAINED
CAPITAL EARNINGS TOTAL
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE, MARCH 31, 1996................................. $19,000 $1,024,640 $1,043,640
Net income............................................ -- 78,043 78,043
Issuance of equity.................................... 1,000 -- 1,000
Dividends............................................. -- (15,000) (15,000)
------- ---------- ----------
BALANCE, MARCH 31, 1997................................. 20,000 1,087,683 1,107,683
Net income............................................ -- 245,785 245,785
Dividends............................................. -- (10,000) (10,000)
------- ---------- ----------
BALANCE, DECEMBER 31, 1997.............................. 20,000 1,323,468 1,343,468
Net loss.............................................. -- (478,900) (478,900)
Dividends............................................. -- (17,938) (17,938)
------- ---------- ----------
BALANCE, JULY 31, 1998.................................. $20,000 $ 826,630 $ 846,630
======= ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-69
<PAGE> 109
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(478,900) $245,785 $ 78,043
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation............................................ 294,427 397,230 460,577
Deferred income taxes................................... (6,785) 6,054 (1,599)
Loss from sale of equipment............................. 71 -- --
Allowance for doubtful accounts......................... 41,609 -- --
Change in operating assets and liabilities:
Accounts receivable................................... 346,466 6,885 (759,843)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 52,532 67,775 (261,195)
Inventory............................................. 2,708 (330,097) 163,460
Prepaid expenses...................................... 32,807 (73,093) 14,092
Cash value of life insurance.......................... (17,541) -- (9,937)
Accounts payable and accrued expenses................. 144,063 (120,396) 712,030
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (256,352) 52,225 202,873
Income taxes payable.................................. (123,828) 111,825 (24,793)
Other................................................. -- (42,986) (49,413)
--------- -------- ---------
Net cash provided by operating activities........... 31,277 321,207 524,295
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment........................... 1,460 -- --
Proceeds from officer notes receivable.................... 68,491 16,661 10,651
Capital expenditures...................................... (725,681) (240,058) (237,369)
--------- -------- ---------
Net cash used in investing activities............... (655,730) (223,397) (226,718)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt...................... (205,193) (286,281) (241,567)
Long-term borrowings...................................... 457,871 -- --
Line of credit, net....................................... 515,465 312,705 (133,000)
Notes payable to officers, net............................ (57,140) (12,088) (150,234)
Payment of dividends...................................... (30,000) (10,000) (15,000)
Proceeds from equity issuance............................. -- -- 1,000
--------- -------- ---------
Net cash provided by (used in) financing
activities........................................ 681,003 4,336 (538,801)
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 56,550 102,146 (241,224)
CASH AND CASH EQUIVALENTS, beginning of period.............. 170,289 68,143 309,367
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 226,839 $170,289 $ 68,143
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 51,817 $113,486 $ 109,075
========= ======== =========
Income taxes............................................ $ 17,592 $ 66,869 $ 85,766
========= ======== =========
</TABLE>
NONCASH INVESTING AND FINANCING TRANSACTIONS:
The Company incurred long-term liabilities for the purchase of equipment
totaling $57,170, $323,861 and $527,744 for the seven months ended July 31,
1998, the nine months ended December 31, 1997, and the year ended March 31,
1997, respectively.
See Notes to Combined Financial Statements.
F-70
<PAGE> 110
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
The accompanying combined financial statements include the accounts of
Kennedy Railroad Builders, Inc. ("Kennedy"), Railcorp, Inc. ("Railcorp") and
Alpha-Keystone Engineering, Inc. ("Alpha") (collectively, referred to as the
"Company"). Each of these companies are subject to common control and are
presented on a combined basis.
The Company operates as a contractor, constructing, repairing and
maintaining railroad tracks for private and government customers located
throughout the northeastern region of the United States. The work is performed
under various forms of contracts, including fixed-fee and time-and-material
contracts.
2. SIGNIFICANT ACCOUNTING POLICIES
YEAR-END
In 1997, the Company changed its financial reporting year-end to December
31. These combined financial statements reflect the results of operations for
the seven months ended July 31, 1998, the nine months ended December 31, 1997
and the year ended March 31, 1997.
COMBINATION POLICIES
The Company includes the combined accounts of three companies subject to
common control. All significant transactions between the three companies are
eliminated in combination. Alpha was incorporated in February 1996. The results
for Alpha for the period from inception to March 31, 1997 are included in the
Company's financial statements for the year ended March 31, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
F-71
<PAGE> 111
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in the northeastern region of the United
States. As such, the Company's accounts receivable are from the same geographic
region. The terms of the sales give rise to unsecured accounts receivable, as is
common industry practice.
INVENTORIES
Inventories, consisting principally of stored materials and parts to be
used for contracts, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and the accelerated methods over the estimated
useful life of the asset as follows:
<TABLE>
<S> <C>
Buildings................................................... 39 years
Machinery and equipment..................................... 3 - 7 years
Office furniture and equipment.............................. 5 - 8 years
Leasehold improvements...................................... 31 - 39 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income. The cost of maintenance and repair is charged to income as
incurred. Significant renewals and betterments are capitalized and depreciated
over the assets remaining useful life.
INCOME TAXES
The provision for income taxes is based on earnings reported by the
Company. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, a deferred income tax asset or liability is determined by applying
currently enacted tax laws and rates to the expected reversal of the cumulative
temporary differences between the carrying value of assets and liabilities for
financial statement and income tax purposes.
Kennedy and Railcorp are both C corporations for federal income tax
purposes. Alpha is a S corporation. As a result, the income of the Alpha is not
taxed at the corporate level. For purposes of the accompanying financial
statements, Alpha has been treated as a C corporation and income taxes have been
provided at the statutory rate and recorded using the provisions of SFAS No.
109.
F-72
<PAGE> 112
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 1998 and December 31,1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Contract receivables........................................ $1,180,568 $1,415,973
Contract retainages......................................... 41,028 152,089
Other....................................................... -- 102,431
---------- ----------
1,221,596 1,670,493
Less allowance for doubtful accounts........................ 66,609 25,000
---------- ----------
$1,154,987 $1,645,493
========== ==========
</TABLE>
Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at July 31, 1998 and
December 31,1997 are as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $2,798,847 $2,997,477
Estimated earnings.......................................... 835,938 1,267,960
---------- ----------
3,634,785 4,265,437
Less billings, plus retainage............................... 3,418,923 4,253,395
---------- ----------
$ 215,862 $ 12,042
========== ==========
</TABLE>
Contracts in process are included in the accompanying balance sheets under
the following captions:
<TABLE>
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $240,079 $292,611
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (24,217) (280,569)
-------- --------
$215,862 $ 12,042
======== ========
</TABLE>
5. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank. The line
of credit includes maximum borrowings totaling $1,300,000. Borrowing under the
line of credit shall not exceed 80% of qualified accounts receivable and 50% of
inventory. It bears interest at the bank's prime rate (8.5% at July 31, 1998)
which is payable due monthly and expires on April 30, 1999. The line of credit
is secured by all of Kennedy's assets and is guaranteed by the officers of
Kennedy. The outstanding principal totals $971,905 and $562,705 as of July 31,
1998 and December 31, 1997, respectively.
The company has an additional line of credit agreement with the bank. The
line of credit includes maximum borrowings totaling $106,265. It bears interest
at the bank's prime rate (8.5% at July 31, 1998) which is payable monthly and
expires four months after origination. The line of credit is secured by
Kennedy's inventory and accounts receivable. The outstanding principle totals
$106,265 as of July 31, 1998.
F-73
<PAGE> 113
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt at July 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Note payable to a bank, interest at 8.25%, payable in
monthly installments of $418, maturing August 2007,
secured by real property.................................. $ 31,944 $ 33,449
Mortgage note payable to Alliance Benefit Group, interest at
9.00%, payable in monthly installments of $878 with a
balloon payment due July 1999, secured by real property... -- 108,605
Equipment notes payable, principal and interest at rates
from 4.8% to 15.48%, payable monthly, maturing from
January 1998 to October 2003, secured by equipment........ 1,291,543 979,736
---------- ----------
1,323,487 1,121,790
Less current maturities..................................... 369,169 315,324
---------- ----------
$ 954,318 $ 806,466
========== ==========
</TABLE>
Aggregate principal payments as of July 31, 1998 on long-term debt
(excluding the line of credit) are scheduled as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
- --------------------------
<S> <C>
1998...................................................... $ 169,657
1999...................................................... 349,275
2000...................................................... 308,022
2001...................................................... 235,438
2002...................................................... 194,410
Thereafter................................................ 66,685
----------
$1,323,487
==========
</TABLE>
7. PROFIT SHARING PLAN
The Company maintains a 401(k) plan that allows eligible employees to defer
a portion of their income through contributions to the plan. Under the
provisions of the plan, employees may contribute a portion of their
compensation, and the Company matches up to 2.00% percent of the employees
qualified wages. In addition, the Company can make additional discretionary
contributions. Company contributions to the plan were $18,098, $27,788 and
$52,420, for the seven months ended July 31, 1998, the nine months ended
December 31, 1997 and the year ended March 31, 1997, respectively.
8. INCOME TAXES
In accordance with SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-74
<PAGE> 114
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the United States statutory corporate rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ----------
<S> <C> <C> <C>
Tax charge (benefit) at standard U.S. rate of
34%............................................. $(181,131) $144,286 $48,705
State taxes....................................... 5,886 27,852 9,454
Life insurance premiums........................... 3,712 6,075 6,485
Valuation allowance against deferred tax asset.... 117,694 -- --
Other............................................. -- 374 562
--------- -------- -------
$ (53,839) $178,587 $65,206
========= ======== =======
</TABLE>
The components of the net deferred income tax asset (liability) at July 31,
1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Current Asset:
Accounts receivable valuation............................. $26,977 $10,125
------- -------
Total current asset............................... 26,977 10,125
------- -------
Non-current liability:
Tax over book depreciation................................ (24,647) (14,580)
------- -------
Total non-current liability....................... (24,647) (14,580)
------- -------
Net deferred tax asset (liability).......................... $ 2,300 $(4,455)
======= =======
</TABLE>
The Company has provided state income taxes totaling $8,918, $29,421 and
$10,465 for the seven months ended July 31, 1998, the nine months ended December
31, 1997 and the year ended March 31, 1997, respectively.
9. RELATED PARTY TRANSACTIONS
Payments were made to certain shareholders of the Company under operating
leases for office facilities and a storage area. Such payments totaled $13,847,
$29,128 and $36,552 for the seven months ended July 31, 1998, the nine months
ended December 31, 1997 and the year ended March 31, 1997, respectively.
The Company has notes receivable from officers of Kennedy. Monthly payments
of $500 and $508 include principal and interest at 6%. The notes receivable are
unsecured.
The Company has a note payable to a shareholder in the amount of $22,860
and $80,000, as of July 31, 1998 and December 31, 1997. The note is unsecured
and bears interest at 9%.
F-75
<PAGE> 115
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under agreements expiring at
various dates through the year 1999, including leases with certain shareholders
of the Company. Remaining minimum rental commitments under these noncancellable
lease agreements in effect at July 31, 1998 are as follows:
<TABLE>
<CAPTION>
THIRD
PERIOD ENDING DECEMBER 31, SHAREHOLDERS PARTIES
-------------------------- ------------ -------
<S> <C> <C>
1998...................................................... $9,891 $3,270
1999...................................................... 5,934 3,270
</TABLE>
Rental expense including leases with certain shareholders of the Company
and cancelable leases totaled $80,714, $416,012 and $344,277 for the seven
months ended July 31, 1998, the nine months ended December 31, 1997 and the year
ended March 31, 1997, respectively.
LITIGATION
The Company is subject to various claims and legal actions incidental to
the Company's business. Management is not aware of any claims against the
Company which might have a material impact on the Company's results of
operations or financial position.
11. SHAREHOLDERS' EQUITY
The combined contributed capital of the Company at July 31, 1998 and
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Kennedy -- Common Stock, par value $1 per share; authorized
1,000,000 shares, issued and outstanding 18,000 shares.... $18,000 $18,000
Railcorp -- Common Stock, par value $1 per share; authorized
10,000 shares, issued and outstanding 1,000 shares........ 1,000 1,000
Alpha -- Common Stock, par value $.02 per share; authorized
100,000 shares, issued and outstanding 50,000 shares...... 1,000 1,000
------- -------
$20,000 $20,000
======= =======
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Company using available market information and appropriate valuation
methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
F-76
<PAGE> 116
KENNEDY RAILROAD BUILDERS, INC.
AND ASSOCIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
value of other loans relating to real estate, vehicles and equipment approximate
fair value as the interest rates are comparable to current market rates.
13. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-77
<PAGE> 117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Merit Railroad Contractors, Inc.:
We have audited the accompanying balance sheets of MERIT RAILROAD
CONTRACTORS, INC. (a Missouri corporation) as of July 31, 1998 and December 31,
1997 and the related statements of operations, stockholders' equity and cash
flows for the seven months ended July 31, 1998 and for each of the two years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MERIT RAILROAD CONTRACTORS,
INC. as of July 31, 1998 and December 31, 1997, the results of its operations
and its cash flows for the seven months ended July 31, 1998 and for each of the
two years in the period ended December 31, 1997 and in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
St. Louis, Missouri
September 22, 1998
F-78
<PAGE> 118
MERIT RAILROAD CONTRACTORS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,005 $ 35,313
Accounts receivable, net of allowance of $75,317.......... 1,890,468 930,307
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 308,749 38,638
Other receivables......................................... -- --
Inventories............................................... 428,284 312,392
Prepaid expenses.......................................... -- 17,130
Other assets.............................................. 15,393 --
---------- ----------
Total current assets.............................. 2,651,899 1,333,780
---------- ----------
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 1,003,092 985,419
Automobiles and trucks.................................... 705,934 619,928
Office furniture and equipment............................ 130,670 126,446
Leasehold improvements.................................... 54,244 54,244
---------- ----------
1,893,940 1,786,037
Less accumulated depreciation............................. 1,129,311 1,064,361
---------- ----------
Property and equipment, net....................... 764,629 721,676
---------- ----------
$3,416,528 $2,055,456
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 973,383 $ 210,222
Current maturities of long-term debt...................... 40,800 78,125
Revolving line of credit.................................. 450,000 300,000
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 308,749 162,559
Accrued expenses.......................................... 248,701 165,057
Payable to affiliate...................................... 58,169 58,169
---------- ----------
Total current liabilities......................... 2,079,802 974,132
---------- ----------
LONG-TERM DEBT, net of current maturities................... 183,667 138,373
---------- ----------
COMMITMENTS AND CONTINGENCIES............................... -- --
---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value; authorized shares, 30,000;
issued and outstanding shares, 1,000................... 1,000 1,000
Additional paid-in capital................................ 99,000 99,000
Retained earnings......................................... 1,053,059 842,951
---------- ----------
Total stockholders' equity........................ 1,153,059 942,951
---------- ----------
$3,416,528 $2,055,456
========== ==========
</TABLE>
See Notes to Financial Statements.
F-79
<PAGE> 119
MERIT RAILROAD CONTRACTORS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
SEVEN MONTHS DECEMBER 31,
ENDED JULY 31, -----------------------
1998 1997 1996
-------------- ---------- ----------
<S> <C> <C> <C>
Revenue.................................................. $5,279,397 $6,949,859 $9,931,173
Contract costs........................................... 4,239,726 6,202,588 8,160,424
---------- ---------- ----------
Gross profit............................................. 1,039,671 747,271 1,770,749
General and administrative expenses...................... 785,768 970,941 1,126,280
---------- ---------- ----------
Income (loss) from operations............................ 253,903 (223,670) 644,469
Other income (expense)
Interest income........................................ -- 416 8,806
Interest expense....................................... (31,334) (40,972) (17,371)
Other, net............................................. (12,461) (121,865) 17,264
---------- ---------- ----------
Net income (loss)........................................ $ 210,108 $ (386,091) $ 653,168
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-80
<PAGE> 120
MERIT RAILROAD CONTRACTORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER
OF
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------ ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.................. 1,000 $1,000 $99,000 $ 944,671 $1,044,671
Dividends paid............................ -- -- -- (263,302) (263,302)
Net income................................ -- -- -- 653,168 653,168
----- ------ ------- ---------- ----------
BALANCE, DECEMBER 31, 1996.................. 1,000 1,000 99,000 1,334,537 1,434,537
Dividends paid............................ -- -- -- (105,495) (105,495)
Net loss.................................. -- -- -- (386,091) (386,091)
----- ------ ------- ---------- ----------
BALANCE, DECEMBER 31, 1997.................. 1,000 1,000 99,000 842,951 942,951
Net income................................ -- -- -- 210,108 210,108
----- ------ ------- ---------- ----------
BALANCE, JULY 31, 1998...................... 1,000 $1,000 $99,000 $1,053,059 $1,153,059
===== ====== ======= ========== ==========
</TABLE>
See Notes to Financial Statements.
F-81
<PAGE> 121
MERIT RAILROAD CONTRACTORS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED ---------------------
1998 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 210,108 $(386,091) $ 653,168
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 124,812 194,915 199,096
Loss (gain) from sale of equipment.................... -- 14,865 (12,181)
Change in operating assets:
Accounts receivable, net............................ (960,161) 480,367 247,728
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (270,111) 242,212 (263,696)
Other receivables................................... -- 97,500 5,000
Inventory........................................... (115,892) (112,392) 132,455
Prepaid expenses.................................... 17,130 1,870 31,130
Accounts payable.................................... 763,161 (408,474) (215,773)
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 146,190 32,449 (578,630)
Accrued expenses.................................... 83,644 (97,883) 49,549
Other assets........................................ (15,393) -- --
--------- --------- ---------
Net cash (used in) provided by operating
activities..................................... (16,512) 59,338 247,846
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment............. -- 10,052 3,300
Capital expenditures..................................... (97,349) (244,459) (234,413)
Proceeds from repayment of affiliate loans............... -- -- 39,327
--------- --------- ---------
Net cash used in investing activities............ (97,349) (234,407) (191,786)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt..................... 87,553 (105,397) (126,725)
Borrowings under line of credit.......................... -- 300,000 --
Payable to affiliate..................................... -- -- 58,169
Dividends paid........................................... -- (105,495) (263,302)
--------- --------- ---------
Net cash provided by (used in) financing
activities..................................... 87,553 89,108 (331,858)
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (26,308) (85,961) (275,798)
CASH AND CASH EQUIVALENTS, beginning of period............. 35,313 121,274 397,072
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period................... $ 9,005 $ 35,313 $ 121,274
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. $ 27,695 $ 40,972 $ 17,371
========= ========= =========
Noncash transactions:
Purchase of property and equipment under long-term
debt................................................ $ 60,250 $ 130,385 $ 87,093
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-82
<PAGE> 122
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Merit Railroad Contractors, Inc. (the "Company"), a Missouri corporation
operates as a construction contractor, constructing, repairing and maintaining
railroad tracks for private and government customers located throughout
Illinois, Kentucky, Missouri, Tennessee and Wisconsin. The work is performed
under various forms of contracts, including fixed-fee, unit-price and
time-and-material contracts. The length of the contracts vary, but is typically
less than one year.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized as the work is
performed.
Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in Illinois, Kentucky, Missouri, Tennessee
and Wisconsin. As such, the Company's accounts receivable are from the same
geographic region. The Company's customers are not concentrated in any specific
industry group. Although the Company limits its credit risk by exercising lien
rights when available, terms of the majority of sales give rise to unsecured
accounts receivable, as is common industry practice.
During the periods ended July 31, 1998, December 31, 1997 and 1996, one
customer accounted for 13% of revenue, one customer accounted for 11% of revenue
and one customer accounted for 37% of revenue, respectively.
F-83
<PAGE> 123
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories, consisting principally of stored materials and parts to be
used for contracts, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Machinery and equipment................................ 5-7 years
Automobiles and trucks................................. 5 years
Office furniture and equipment......................... 5-7 years
Leasehold improvements................................. Lesser of 5 years or lease terms
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in other income.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
OTHER INCOME (EXPENSE)
Other income (expense) includes gain and loss on disposition of property
and equipment, sale of scrap and other miscellaneous income and expense, all of
which are not directly related to the Company's primary business. During 1997,
the Company incurred $107,000 of costs related to the movement of inventory and
equipment from an old location to a new location.
INCOME TAXES
The Company operates as a sub-chapter S corporation. Accordingly, the
income taxes are the responsibility of the owners; and the accompanying
financial statements do not reflect any federal or state income taxes for the
Company.
The Company uses different methods of accounting for tax and financial
reporting. The primary difference relates to the use of the accrual basis for
financial reporting and the cash basis for tax reporting.
F-84
<PAGE> 124
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Contract receivables........................................ $1,887,702 $ 919,270
Contract retainage.......................................... 78,083 86,354
---------- ----------
1,965,785 1,005,624
Less allowance for doubtful accounts........................ 75,317 75,317
---------- ----------
$1,890,468 $ 930,307
========== ==========
</TABLE>
Contract retainage have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at July 31, 1998 and
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $2,558,171 $1,383,021
Estimated earnings.......................................... 686,360 203,021
---------- ----------
3,244,531 1,586,042
Less billings to date....................................... 3,244,531 1,709,963
---------- ----------
$ -- $ (123,921)
========== ==========
</TABLE>
Contracts in process are included in the accompanying balance sheets under
the following captions:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $308,749 $ 38,638
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (308,749) (162,559)
-------- ---------
$ -- $(123,921)
======== =========
</TABLE>
F-85
<PAGE> 125
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Company leases office space and a storage yard under an agreement
expiring in June 2001. Minimum rental commitments under this noncancelable lease
agreement in effect at July 31, 1998, are:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
- --------------------------
<S> <C>
1998...................................................... $ 49,200
1999...................................................... 49,200
2000...................................................... 49,200
2001...................................................... 20,500
2002......................................................
Thereafter................................................
--------
$168,100
========
</TABLE>
Total rental expense for 1998, 1997 and 1996 for all operating leases
amounted to $39,600, $68,000 and $60,700, respectively.
6. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank. The line
of credit has a maximum borrowing limit of $450,000 and is payable on demand. It
bears interest at prime plus 1% which is due monthly. The outstanding principle
was $450,000 and $300,000 at July 31, 1998 and December 31, 1997, respectively.
The line is collateralized by accounts receivable, property and equipment, and
personal guarantees of certain stockholders.
7. LONG-TERM DEBT
Long-term debt at July 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Notes payable to banks and equipment
Company; interest varying from 7.5% to
11.75%, per annum; payable in monthly
installments, maturities ranging from July
1997 through August 2002.................................. $224,467 $216,498
Less current maturities..................................... 40,800 78,125
-------- --------
$183,667 $138,373
======== ========
</TABLE>
Several of the notes payable bear interest at prime plus 1%.
The notes payable are collateralized by accounts receivable and property
and equipment.
Aggregate principal payments as of July 31, 1998 on long-term debt are
scheduled as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
- --------------------------
<S> <C>
1998...................................................... $ 40,800
1999...................................................... 100,316
2000...................................................... 62,632
2001...................................................... 18,283
2002...................................................... 2,436
--------
$224,467
========
</TABLE>
F-86
<PAGE> 126
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. PROFIT SHARING PLAN
The Company maintains a 401(k) Salary Deferral Plan (the "401(k) Plan")
that allows eligible employees to defer a portion of their income through
contributions to the plan. Under the provisions of the plan, employees may
contribute up to a maximum of 15 percent of employee compensation or limitations
established pursuant to the Internal Revenue Code. The Company's contribution to
the 401(k) Plan is discretionary and determined annually by the Board of
Directors. The Company made no contributions to the 401(k) plan for the seven
months ended July 31, 1998 and for the years ended December 31, 1997 and 1996.
The Company also maintains a Money Purchase Plan whereby mandatory
contributions are made by the Company. The Company makes contributions to this
Plan based on 5% of employee eligible compensation. The Company contributed
$17,500 to the Money Purchase Plan for the seven months ended July 31, 1998. The
Company contributed $32,500 and $33,700 to the Money Purchase Plan for the years
ended December 31, 1997 and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
The Company's office and storage yard are leased from an affiliated Company
under a five year lease that expires in June 2001, with monthly payments of
$4,100. In addition to the minimum rent, the Company is required to pay a
percentage rent amount equal to 1% of gross receipts in excess of $6,100,000.
The amount of rent charged to operations was, $57,900 , $57,200 and $58,700 for
the seven months ended July 31, 1998 and the years ended December 31, 1997 and
1996 and, respectively. The Company also leases certain equipment from another
affiliated entity on a month-to-month basis and was charged $124,500, $181,500
and $89,800 during 1998, 1997 and 1996, respectively.
The payable to affiliate arose in 1996 and is payable on demand. No
interest is due on the note.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of legal
counsel, the ultimate outcome of these lawsuits will not have a material adverse
impact on the Company's financial position or results of operations.
CONTINGENCY
The Company completed a contract during 1995, on which a dispute arose with
a subcontractor to the job. The subcontractor has indicated additional charges
are due as a result of work performed over the amounts due under its original
contract with the Company. Specifically, the subcontractor alleges the
engineering firm contracted by the Company's customer grossly underestimated the
amount of excavation work required at the job site. Although no evaluation of
the threatened litigation can be determined at this time, management believes
the Company's exposure for monetary damages should be minimal due to the fact
that the subcontractor's claims are essentially against the Company's customer
and the customer's engineering firm. At December 31, 1997, the Company was owed
$81,000 from its customer that is being withheld pending resolution of the
dispute and owed its subcontractor $38,053 in connection with the original
contract terms. An allowance of $40,000 has been specifically provided for the
potential uncollectibility of amounts due from the customer.
F-87
<PAGE> 127
MERIT RAILROAD CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable and accounts payable are
a reasonable estimate of their fair value due to their short-term nature.
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt approximates fair value.
12. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-88
<PAGE> 128
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Midwest Construction Services, Inc.:
We have audited the accompanying balance sheets of MIDWEST CONSTRUCTION
SERVICES, INC. ("the Company") (an Indiana corporation), as of July 31, 1998 and
December 31, 1997, and the related statements of operations and retained
earnings and cash flows for the seven months ended July 31, 1998 and for the two
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIDWEST CONSTRUCTION
SERVICES, INC. as of July 31, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the seven months ended July 31, 1998 and each
of the two years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
September 29, 1998
F-89
<PAGE> 129
MIDWEST CONSTRUCTION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,575 $ 260,631
Accounts receivable -- net of allowance of $12,623 and
$12,623, respectively................................... 1,897,589 999,168
Other receivables......................................... -- 896
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 7,213 17,571
Inventory................................................. 628,450 637,367
Prepaid expenses.......................................... 147,782 45,486
---------- ----------
Total current assets............................... 2,693,609 1,961,119
---------- ----------
PROPERTY AND EQUIPMENT:
Autos and trucks.......................................... 680,003 723,803
Construction equipment.................................... 1,659,542 1,650,838
Office equipment.......................................... 102,547 101,712
Leasehold improvements.................................... 26,131 26,131
---------- ----------
2,468,223 2,502,484
Less accumulated depreciation............................. 1,850,577 1,738,885
---------- ----------
Property and equipment, net........................ 617,646 763,599
---------- ----------
$3,311,255 $2,724,718
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 722,259 $ 354,066
Notes payable -- stockholders............................. 4,213 3,389
Distribution payable...................................... 250,000 --
Accounts payable.......................................... 586,557 248,069
Other accrued expenses.................................... 104,230 208,051
Accrued salaries.......................................... 78,807 35,531
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 39,761 81,957
---------- ----------
Total current liabilities.......................... 1,785,827 931,063
---------- ----------
LONG-TERM LIABILITIES:
Notes payable............................................. -- 24,665
Notes payable -- stockholders............................. 26,688 37,436
---------- ----------
Total long-term liabilities........................ 26,688 62,101
---------- ----------
Total liabilities.................................. 1,812,515 993,164
---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, no par value, 1,000 shares authorized,
issued and outstanding.................................. 10,000 10,000
Retained earnings......................................... 1,488,740 1,721,554
---------- ----------
Total stockholders' equity......................... 1,498,740 1,731,554
---------- ----------
$3,311,255 $2,724,718
========== ==========
</TABLE>
See Notes to Financial Statements.
F-90
<PAGE> 130
MIDWEST CONSTRUCTION SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
SEVEN MONTHS DECEMBER 31,
ENDED JULY 31, ------------------------
1998 1997 1996
-------------- ---------- -----------
<S> <C> <C> <C>
Revenue................................................. $6,001,993 $9,675,673 $10,842,457
Cost of revenue......................................... 5,178,675 8,636,800 9,338,686
---------- ---------- -----------
Gross profit............................................ 823,318 1,038,873 1,503,771
General and administrative expenses..................... 356,470 644,871 649,368
---------- ---------- -----------
Income from operations.................................. 466,848 394,002 854,403
Other income............................................ 28,348 38,801 38,909
---------- ---------- -----------
Net income.............................................. 495,196 432,803 893,312
Retained earnings:
Beginning of period................................... 1,721,554 1,983,852 1,090,540
Less -- dividend distributions........................ 728,010 695,101 --
---------- ---------- -----------
End of period......................................... $1,488,740 $1,721,554 $ 1,983,852
========== ========== ===========
</TABLE>
See Notes to Financial Statements.
F-91
<PAGE> 131
MIDWEST CONSTRUCTION SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
SEVEN MONTHS DECEMBER 31,
ENDED JULY 31, ------------------------
1998 1997 1996
-------------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 495,196 $ 432,803 $ 893,312
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation....................................... 175,360 317,538 316,434
Gain on sale of assets............................. (25,323) (15,235) (20,230)
Change in operating assets and liabilities:
Accounts receivable, net......................... (898,421) 16,561 390,776
Other receivables................................ 896 (896) --
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 10,358 (17,571) 303,051
Inventory........................................ 8,917 (10,803) (83,786)
Prepaid expenses................................. (102,296) 14,926 19,257
Accounts payable................................. 338,488 56,495 (268,563)
Other accrued expenses........................... (103,821) 98,383 (34,554)
Accrued salaries................................. 43,276 (31,022) 15,922
Billings in excess of costs and estimated
earnings on uncompleted contracts............. (42,196) 81,957 --
---------- ----------- ----------
Net cash (used in) provided by operating
activities.................................. (99,566) 943,136 1,531,619
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment................................. (44,082) (117,161) (385,683)
Proceeds from sale of assets.......................... 40,000 18,250 27,790
---------- ----------- ----------
Net cash used in investing activities......... (4,082) (98,911) (357,893)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowing from notes payable............... 1,092,719 1,301,390 797,311
Reduction of principal of notes payable............... (749,191) (1,125,628) (880,483)
Dividend distribution................................. (478,012) (695,101) --
Additional borrowing from notes payable,
stockholder........................................ -- -- 16,368
Reduction of principal of notes payable,
stockholder........................................ (9,924) (438,159) (764,696)
---------- ----------- ----------
Net cash used in financing activities......... (144,408) (957,498) (831,500)
---------- ----------- ----------
NET (DECREASE) INCREASE IN CASH......................... (248,056) (113,273) 342,226
CASH AND CASH EQUIVALENTS, beginning of period.......... 260,631 373,904 31,678
---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period................ $ 12,575 $ 260,631 $ 373,904
========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest................................ $ 22,538 $ 23,733 $ 88,344
========== =========== ==========
</TABLE>
See Notes to Financial Statements.
F-92
<PAGE> 132
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Midwest Construction Services, Inc. (the "Company") operates as a
construction contractor, constructing, repairing and maintaining railroad tracks
primarily to steel processors throughout Northwest Indiana. The work is
performed under various forms of contracts, including fixed-fee and
time-and-material contracts.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-price construction contracts
using the percentage-of-completion method, measured by the percentage of cost
incurred to date to management's estimated total cost for each contract. That
method is used because management considers total cost to be the best available
measure of progress on the contracts. Changes in job performance, job conditions
and estimated profitability may result in revisions to cost and income, which
are recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized as the work is
performed.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, as reported on the accompanying balance sheets
and statements of cash flows, includes all amounts in non-interest-bearing
checking accounts and interest-bearing money market accounts.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates primarily in Northwest Indiana and primarily serves
the steel industry. As such, the Company's accounts receivable are from the same
geographic region. The terms of the sales give rise to unsecured accounts
receivable, as is common industry practice. The Company is dependent on the
steel industry and the economic trends that affect the steel industry.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO") method. Market is based on estimated net
realizable value.
F-93
<PAGE> 133
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line and the accelerated method over the estimated useful life of
the asset as follows:
<TABLE>
<S> <C>
Autos and trucks............................................ 5 years
Construction equipment...................................... 5-7 years
Office equipment............................................ 3-10 years
Leasehold improvements...................................... 39 years
</TABLE>
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in net income. Maintenance and repairs are charged to income as
incurred; significant renewals and betterments are capitalized.
INCOME TAXES
Effective April 1, 1991, the Company has elected to be taxed as an "S"
Corporation under the provision of Subchapter "S" of the Internal Revenue Code.
As such, the Corporation pays no income tax, and revenue and expenses pass
through to the shareholders who pay income taxes on the earnings at their
respective tax rates. Therefore, these financial statements do not reflect any
federal or state income taxes for the Company.
3. ACCOUNTS RECEIVABLE
Accounts receivable July 31, 1998 and December 31, 1997, consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Billed receivables.......................................... $1,813,861 $ 834,840
Unbilled receivables........................................ 96,351 176,951
---------- ----------
1,910,212 1,011,791
Less allowance for uncollectible accounts................... 12,623 12,623
---------- ----------
$1,897,589 $ 999,168
========== ==========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at July 31, 1998 and
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 73,161 $ 262,907
Estimated earnings.......................................... 10,124 32,619
--------- ---------
83,285 295,526
Less billings to date....................................... (115,833) (359,912)
--------- ---------
$ (32,548) $ (64,386)
========= =========
</TABLE>
F-94
<PAGE> 134
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Contracts in process are included in accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 7,213 $ 17,571
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (39,761) (81,957)
-------- --------
$(32,548) $(64,386)
======== ========
</TABLE>
5. NOTES PAYABLE
Notes payable at July 31, 1998 and December 31, 1997, consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
National City Bank, $750,000 revolving line of credit,
interest at bank's base rate, due August 1998, secured by
accounts receivable, inventory and general intangibles and
stockholders' guarantee................................... $535,000 $325,000
National City Bank, 7.9%, monthly payments of $1,986
including interest, due January 2000, secured by four
vehicles.................................................. -- 45,636
A.I. Credit Corp., 7.06%, monthly payments of $24,031
including interest, due April 1999........................ 187,259 8,095
-------- --------
Total notes payable............................... 722,259 378,731
Less current portion........................................ 722,259 354,066
-------- --------
$ -- $ 24,665
======== ========
</TABLE>
Aggregate principal payments as of July 31, 1998, on the notes payable are
scheduled as follows:
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
- ----------------------
<S> <C>
1998...................................................... $535,000
1999...................................................... 187,259
--------
$722,259
========
</TABLE>
6. NOTES PAYABLE, STOCKHOLDERS
Notes payable, stockholders at July 31, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Stockholder, 8%, monthly payments of $385 including
interest, balloon payment due January 2001, secured by
inventory, chattel paper, accounts receivable, equipment
and general intangibles................................... $30,901 $40,825
Less current portion........................................ 4,213 3,389
------- -------
$26,688 $37,436
======= =======
</TABLE>
F-95
<PAGE> 135
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate principal payments as of July 31, 1998, on the notes payable to
stockholders are scheduled as follows:
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
- ----------------------
<S> <C>
1999...................................................... $ 4,213
2000...................................................... 4,563
2001...................................................... 4,941
2002...................................................... 4,298
2003...................................................... 917
Thereafter................................................ 11,969
-------
$30,901
=======
</TABLE>
7. OPERATING LEASES
The Company leases its office facility on a month-to-month basis. Monthly
rent was $1,200 until June 30, 1998, thereafter the rent increased to $1,400
monthly. Rent expense for the seven months ended July 31, 1998 and the years
ended December 31, 1997 and 1996, amounted to $8,600, $14,400, and $14,400,
respectively. Management expects the future minimum lease obligation for the
lease for its office facility to be $20,640, annually.
The Company leases two vehicles under an operating lease. Total monthly
lease payments are $1,197. The down payment of $12,600 for both vehicles is
being amortized over the terms of the leases. The leases are for two years and
expire in May, 1999. The vehicle lease payments for the seven months ended July
31, 1998 and the year ended December 31, 1997 were $12,053 and $15,506. The
prepaid lease expense for the period ended July 31, 1998 and December 31, 1997
was $5,425 and $9,100, respectively. The expected minimum lease payments and
amortization of the down payment for the remainder of the leases are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
- --------------------------
<S> <C>
1998...................................................... $8,611
1999...................................................... 8,610
</TABLE>
8. MAJOR CUSTOMERS
The Company had two major customers for the seven months ended July 31,
1998 and the year ended December 31, 1997, each having sales exceeding 10% of
total sales. Sales to these customers as a percentage of total revenues for the
seven months ended July 31, 1998 and the year ended December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
USX Corp.................................................... 38.28% 46.4%
Bethlehem Steel............................................. 41.59 37.9
All other customers......................................... 20.13 15.7
------ -----
Total............................................. 100.0% 100.0%
====== =====
</TABLE>
F-96
<PAGE> 136
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
9. MAINTENANCE AGREEMENTS
The Company is currently operating under the following open purchase orders
or maintenance contracts:
<TABLE>
<CAPTION>
EXPIRATION
CUSTOMER DATE DESCRIPTION
- -------- ---------- -----------
<S> <C> <C>
NIPSCO -- Schafer Generating Station 12-31-99 Cost-plus; supervision, labor and
equipment for railroad track
maintenance
NIPSCO -- Michigan City Generating 12-31-99 Cost-plus; labor, material and
Station equipment to perform repairs to
railroad tracks and switches
NIPSCO -- Mitchell Generating 12-31-99 Cost-plus; supervision and labor to
Station replace rails, ties and ballast as
needed on plant railroad tracks
NIPSCO -- Bailey Generating Station 12-31-99 Cost-plus; supervision, material,
labor and equipment to make
emergency repairs to plant track
system
Philip Services Corp. 12-31-98 Cost-plus; supervision, labor,
tools, equipment and material to
maintain entire track system
Bethlehem Steel Corp. -- Burns 12-31-00 Time and materials; supervision,
Harbor Plant labor, material, insurance and
equipment to perform general track
maintenance and snow removal
USX Corporation 09-22-02 Time and materials; supervision,
labor, material, insurance and
equipment to perform general track
maintenance and snow removal
</TABLE>
10. RETIREMENT PLAN
As of January 1, 1996, the Company implemented a salary reduction
simplified employee pension plan covering all eligible employees over the age of
21, who have completed a specific period of service, and are not covered by a
collective bargaining agreement. Employer contributions are 5% of employees'
gross income. The pension expense for the seven months ended July 31, 1998 and
the year ended December 31, 1997, were $13,358 and $23,038, respectively.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
In the ordinary course of business, the Company enters into contracts that
require the Company to provide general liability insurance coverage which names
their customer as the co-insured policyholder. In addition, some contracts
require that the Company indemnify their customers against certain legal claims
related to the contracted work the Company will perform. As a result, the
Company from time to time is involved in their customer's lawsuits and is
contingently liable for the outcome of such legal cases.
In 1994, an accident occurred on a customer's property that resulted in the
death of two Company employees and the injury of two other Company employees.
Settlements have been achieved in the fatality and injury cases which were
funded by the Company's insurance carriers and the customer.
F-97
<PAGE> 137
MIDWEST CONSTRUCTION SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The Company is direct party to an uninsured personal injury suit resultant
from a 1994 accident at a customer location that occurred in proximity to where
the Company was working. The Company is vigorously defending this case and
believes that it has both adequate reserves and good defenses to any claim of
liability that may be asserted against it related to this personal injury case.
The Company is involved in three other personal injury suits (one in which
the Company is direct party and two in which the Company is indirectly involved)
that are all covered by the Company's insurance policies.
In the case of all known contingencies, the Company accrues a charge for a
loss when it is probable and the amount is reasonably estimable. Based on the
current available information, the Company believes that the established
reserves are adequate to cover all known contingencies and that future costs
related to these contingent liabilities will not have a material adverse effect
on the Company's financial statements.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosure about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
LINE-OF-CREDIT FACILITY
The carrying amount of the line-of-credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions.
13. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-98
<PAGE> 138
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New England Railroad Construction Company, Inc.:
We have audited the accompanying balance sheet of NEW ENGLAND RAILROAD
CONSTRUCTION COMPANY, INC. (a Connecticut corporation) as of July 31, 1998, and
the related statements of operations and stockholders' equity and cash flows for
the seven months ended July 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NEW ENGLAND RAILROAD
CONSTRUCTION COMPANY, INC. as of July 31, 1998, and the results of its
operations and its cash flows for the seven months then ended, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
October 16, 1998
F-99
<PAGE> 139
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31,
1998
----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 108,588
Contract and retainage receivables (net of allowance of
$30,000)............................................... 1,539,947
Accounts receivable, related parties...................... 30,000
Inventory................................................. 145,405
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 219,111
Prepaid expenses and other................................ 25,297
----------
Total current assets.............................. 2,068,348
----------
EQUIPMENT:
Vehicles and equipment.................................... 2,455,873
Tools..................................................... 49,487
Office equipment.......................................... 67,481
----------
2,572,841
Less accumulated depreciation............................. 1,951,882
----------
Equipment, net............................................ 620,959
----------
OTHER ASSET, Deferred tax asset............................. 32,166
----------
$2,721,473
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 350,267
Accounts payable.......................................... 724,937
Accrued expenses.......................................... 28,561
Deferred income taxes..................................... 52,940
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 273,917
----------
Total current liabilities......................... 1,430,622
----------
LONG-TERM DEBT, net of current portion...................... 256,146
----------
STOCKHOLDERS' EQUITY:
Common Stock, no par value; authorized 5,000 shares;
issued and outstanding 1,320 shares.................... 114,000
Retained earnings......................................... 920,705
----------
Total Stockholders' equity........................ 1,034,705
----------
$2,721,473
==========
</TABLE>
See Notes to Financial Statements.
F-100
<PAGE> 140
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1998
------------
<S> <C>
Earned revenue.............................................. $2,314,851
Cost of earned revenue...................................... 2,122,159
----------
Gross profit........................................... 192,692
General and administrative expenses......................... 407,915
----------
Loss from operations........................................ (215,223)
----------
Other income (expense):
Gain on disposition of equipment.......................... 448
Other income.............................................. 5,594
Interest expense.......................................... (36,533)
----------
Other expense, net.......................................... (30,491)
----------
Loss before income taxes.................................... (245,714)
----------
Income taxes (benefit):
Current................................................... (108,508)
Deferred.................................................. 27,300
----------
(81,208)
----------
Net loss.................................................... $ (164,506)
==========
</TABLE>
See Notes to Financial Statements.
F-101
<PAGE> 141
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON RETAINED
COMMON SHARES STOCK EARNINGS TOTAL
------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, DECEMBER 31, 1997..................... 1,320 $114,000 $1,271,303 $1,385,303
Net loss..................................... -- -- (164,506) (164,506)
Dividend..................................... -- -- (186,092) (186,092)
----- -------- ---------- ----------
Balance, JULY 31, 1998......................... 1,320 $114,000 $ 920,705 $1,034,705
===== ======== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-102
<PAGE> 142
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1998
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(164,506)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 101,691
Gain on disposition of equipment....................... (448)
Deferred income taxes.................................. (49,626)
Change in operating assets and liabilities:
Contract and retainage receivables................... (48,022)
Accounts receivable, related parties................. 9,544
Inventory............................................ (1,874)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... (219,111)
Prepaid expenses and other........................... 75,640
Accounts payable..................................... 509,293
Accrued expenses..................................... (152,156)
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (10,762)
---------
Net cash provided by operating activities......... 49,663
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment........................... 448
Purchases of equipment.................................... (44,991)
---------
Net cash used in investing activities............. (44,543)
---------
CASH FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ 146,625
Principal payments on long-term debt...................... (293,835)
---------
Net cash used in financing activities............. (147,210)
---------
NET DECREASE IN CASH........................................ (142,090)
CASH AND CASH EQUIVALENTS, beginning of period.............. 250,678
---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 108,588
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 37,128
=========
Income taxes........................................... $ 45,325
=========
</TABLE>
See Notes to Financial Statements.
F-103
<PAGE> 143
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Company performs railroad repair and construction projects primarily
for state and city governments located in the Northeastern United States.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, contract and retainage
receivable and accounts payable approximate fair value because of their
short-term nature. The carrying amount of long-term debt approximates fair value
based on the borrowing rates currently available to the Company for bank loans
with similar terms and maturities.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee construction contracts using
the percentage-of-completion method, measured by the percentage of cost incurred
to date to management's estimated total cost for each contract. That method is
used because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized as the work is
performed.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
INVENTORY
Inventory, principally materials and supplies, is stated at the lower of
cost or net realizable value. Cost is determined by the first-in, first-out
(FIFO) method.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost. Depreciation is provided
principally by use of the straight-line method over the estimated useful life of
the related asset. Accelerated methods are used for income tax reporting
purposes.
F-104
<PAGE> 144
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Deferred income taxes are determined based on the difference between the
financial statement and income tax basis of assets and liabilities using tax
rates expected to be in effect in the years in which the differences are
expected to reverse. The temporary differences related primarily to the
reporting of revenue recognition on long-term contracts, depreciation and net
operating loss carryforwards.
CASH AND CASH EQUIVALENTS
From time to time, the Company's cash balance with financial institutions
exceeds the maximum FDIC insured balance of $100,000. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
For the reporting of cash flows, the Company considers savings accounts and
certificate of deposits with original maturities of three months or less to be
cash and cash equivalents.
3. ACCOUNTS RECEIVABLE:
Contracts and retainage receivable at July 31, 1998, consisted of the
following:
<TABLE>
<S> <C>
Contract Receivables........................................ $1,353,948
Retainage................................................... 215,999
----------
1,569,947
Less allowance for doubtful accounts........................ 30,000
----------
$1,539,947
==========
</TABLE>
Contract retainage have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Information with respect to contracts in process at July 31, 1998, are as
follows:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts..................... $1,139,214
Estimated earnings.......................................... 272,862
----------
1,412,076
Less billings to date....................................... 1,466,882
----------
$ (54,806)
==========
</TABLE>
Included in the balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 219,111
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (273,917)
---------
$ (54,806)
=========
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company has transactions in the normal course of business with various
related parties. Balances with related parties are included in the balance
sheets under the following captions:
<TABLE>
<S> <C>
Contract and retainage receivables.......................... $310,014
Accounts receivable, related parties........................ 30,000
Due to affiliates........................................... 146,625
</TABLE>
F-105
<PAGE> 145
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Transactions with related parties are included in the statement of
operations under the following captions:
<TABLE>
<S> <C>
Cost of earned revenue...................................... $221,596
Rent expense................................................ 35,000
</TABLE>
The Company rents a storage yard on a month to month basis, from a related
party for $5,000 per month. In July 1998, the Company dividended the land and
building to the stockholders.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable, bank, payable in monthly installments of
$5,000 plus interest at prime plus 1.5% through October
2000. Substantially all assets are pledged as collateral
and repayment is guaranteed by the stockholders........... $ 75,000
Notes payable, stockholders, due on demand plus interest at
prime plus 1%............................................. 146,625
Notes payable, equipment, due in aggregate monthly
installments of $8,942 including interest ranging from
7.9% to 9.3% maturing at various dates through October
2002. Collateralized by equipment......................... 337,650
Note payable, mortgage, payable in monthly installments of
$1,190 including interest at prime plus 1.5% through
September 2002............................................ 47,138
--------
606,413
Less current maturities..................................... 350,267
--------
$256,146
========
</TABLE>
Aggregate principal payments as of July 31, 1998, on long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998...................................................... $350,267
1999...................................................... 88,859
2000...................................................... 96,883
2001...................................................... 59,682
2002...................................................... 10,722
--------
$606,413
========
</TABLE>
Both the long-term debt and the line of credit contain certain restrictive
covenants which place some requirements and restrictions on the Company
regarding the maintenance of certain financial ratios measured on an annual
basis.
7. MAJOR CUSTOMERS
Approximately 69% of earned revenue was derived from the customers for the
seven months ended July 31, 1998.
8. PROFIT SHARING PLAN
The Company sponsors a noncontributory trusteed profit sharing plan
covering substantially all of its employees not covered by a collective
bargaining agreement meeting certain minimum requirements. The plan provides for
contributions by the Company in such amounts as the Board of Directors may
annually determine. Profit sharing expense was $21,010 for the seven months
ended July 31, 1998.
F-106
<PAGE> 146
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The income tax benefit for the seven months ended July 31, 1998, consisted
of the following:
<TABLE>
<S> <C>
Current benefit:
Federal................................................... $(77,056)
State..................................................... (31,452)
--------
(108,508)
--------
Deferred provision:
Federal................................................... 19,409
State..................................................... 7,891
--------
27,300
--------
$(81,208)
========
</TABLE>
The income tax benefit as reported in the combined statements of operations
differs from the amounts computed by applying federal statutory rates due to the
following:
<TABLE>
<S> <C>
Federal income tax at statutory rate........................ $(83,543)
Non deductible expenses..................................... 2,335
--------
Benefit for income taxes.................................... $(81,208)
========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax liability at July 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Current asset (liability):
Deferred gross profit on contracts in progress............ $(63,290)
Accounts receivable....................................... 10,350
--------
(52,940)
Non-current asset (liability):
Tax depreciation in excess of book depreciation........... (49,119)
Net operating loss carryforward............................. 81,285
--------
Net deferred tax liability.................................. $(20,774)
========
</TABLE>
10. CONCENTRATION OF LABOR
Approximately 72% of the Company's labor force is subject to a union
contract expiring in March 1999.
11. SUBSEQUENT EVENT:
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-107
<PAGE> 147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Railroad Service, Inc. and Minnesota Railroad Service, Inc.:
We have audited the accompanying combined balance sheets of RAILROAD
SERVICE, INC. (a Nevada corporation) and MINNESOTA RAILROAD SERVICE, INC. (a
Tennessee corporation) as of July 31, 1998 and December 31, 1997, and the
related combined statements of operations, stockholders' equity and cash flows
for and the seven months ended July 31, 1998 and the two years in the period
ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of RAILROAD
SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. as of July 31, 1998 and
December 31, 1997, and the results of their combined operations and their
combined cash flows for the seven months ended July 31, 1998 and each of the two
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
September 4, 1998
F-108
<PAGE> 148
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 417,923 $ 839,210
Accounts receivable....................................... 1,812,942 918,794
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 621,766 155,140
Notes receivable, current portion......................... 78,387 66,666
Other receivables......................................... 16,806 --
Inventories............................................... 217,553 240,131
---------- ----------
Total current assets............................... 3,165,377 2,219,941
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Tools and equipment....................................... 2,993,114 2,803,466
Vehicles and trailers..................................... 891,343 881,053
Office equipment.......................................... 108,450 129,612
Leasehold improvements.................................... 91,041 125,119
---------- ----------
4,083,948 3,939,250
Less accumulated depreciation and amortization............ 3,032,759 2,991,931
---------- ----------
Property and equipment, net........................ 1,051,189 947,319
---------- ----------
OTHER ASSETS:
Notes receivable, long-term portion....................... 66,668 66,668
Notes receivable, related parties......................... -- 170,577
Cash value of life insurance.............................. -- 571,629
Loan origination costs, net............................... -- 2,794
---------- ----------
Total other assets................................. 66,668 811,668
---------- ----------
$4,283,234 $3,978,928
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $1,464,835 $ 445,800
Accrued expenses.......................................... 123,082 149,141
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 282,113 79,733
Current maturities of long-term debt...................... 378,246 278,246
---------- ----------
Total current liabilities.......................... 2,248,276 952,920
---------- ----------
NOTES PAYABLE -- RELATED PARTIES............................ -- 246,798
LONG-TERM DEBT, net of current maturities................... 927,596 594,075
---------- ----------
Total noncurrent liabilities....................... 927,596 840,873
---------- ----------
Total liabilities.................................. 3,175,872 1,793,793
---------- ----------
COMMITMENTS................................................. -- --
---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock.............................................. 172,700 172,700
Additional paid-in capital................................ 1,216,877 838,731
Retained earnings (deficit)............................... (282,215) 1,173,704
---------- ----------
Total stockholders' equity......................... 1,107,362 2,185,135
---------- ----------
$4,283,234 $3,978,928
========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-109
<PAGE> 149
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
SEVEN MONTHS ENDED DECEMBER 31,
JULY 31, ------------------------
1998 1997 1996
------------------ ---------- -----------
<S> <C> <C> <C>
Revenue............................................. $6,223,925 $9,363,191 $10,708,870
Contract costs incurred............................. 5,285,256 7,065,419 8,199,458
---------- ---------- -----------
Gross profit...................................... 938,669 2,297,772 2,509,412
General and administrative expenses................. 1,172,023 1,449,737 1,417,546
---------- ---------- -----------
Operating (loss) income............................. (233,354) 848,035 1,091,866
---------- ---------- -----------
Other income (expense):
Interest income................................... 26,600 38,464 15,352
Interest expense.................................. (50,445) (116,345) (137,763)
Gain on disposal of equipment..................... 464 207,160 31,763
Other income, net................................. 4,519 -- 5,106
---------- ---------- -----------
Other (expense) income, net......................... (18,862) 129,279 (85,542)
---------- ---------- -----------
Net (loss) income................................... $ (252,216) $ 977,314 $ 1,006,324
========== ========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-110
<PAGE> 150
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995..................... $172,700 $ 838,731 $ 169,266 $ 1,180,697
Net income................................... -- -- 1,006,324 1,006,324
Distributions to shareholders................ -- -- (356,220) (356,220)
-------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1996..................... 172,700 838,731 819,370 1,830,801
Net income................................... -- -- 977,314 977,314
Distributions to shareholders................ -- -- (622,980) (622,980)
-------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1997..................... 172,700 838,731 1,173,704 2,185,135
Net income................................... -- -- (252,216) (252,216)
Gifted stock................................. -- 378,146 -- 378,146
Distributions to stockholders................ -- -- (1,203,703) (1,203,703)
-------- ---------- ----------- -----------
BALANCE, JULY 31, 1998......................... $172,700 $1,216,877 $ (282,215) $ 1,107,362
======== ========== =========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-111
<PAGE> 151
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
SEVEN MONTHS DECEMBER 31,
ENDED JULY 31, -----------------------
1998 1997 1996
--------------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (252,216) $ 977,314 $1,006,324
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 172,357 305,730 295,660
Gain on sale of equipment............................... (464) (207,160) (31,763)
Compensation in exchange for paid-in capital............ 378,146 -- --
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable.................................. (894,148) 738,225 (400,191)
Other Receivables.................................... (16,806) 9,558 1,442
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. (466,626) (92,298) 23,450
Inventories.......................................... 22,578 62,736 93,611
Prepaid expenses..................................... -- -- 65,574
Loan origination costs............................... 2,794 -- --
Accounts payable..................................... 1,019,035 11,234 (149,087)
Accrued expenses..................................... (26,059) 3,446 53,068
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................. 202,380 (5,108) (56,648)
----------- ---------- ----------
Net cash provided by operating activities.......... 140,971 1,803,677 901,440
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 2,748 122,634 42,500
Capital expenditures...................................... (278,513) (320,023) (532,158)
Receipts on notes receivable.............................. 158,856 66,666 --
Cash value of life insurance.............................. 571,629 (43,930) (37,577)
----------- ---------- ----------
Net cash provided by (used in) investing
activities....................................... 454,720 (174,653) (527,235)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt...................... (523,943) (414,523) (370,360)
Long-term borrowings...................................... 957,466 186,460 354,130
Proceeds from issuance of notes payable -- related
parties................................................. -- 119,433 39,865
Principal payments on notes payable -- related parties.... (246,798) (80,000) (130,114)
Distribution to stockholders.............................. (1,203,703) (622,980) (356,220)
----------- ---------- ----------
Net cash used in financing activities.............. (1,016,978) (811,610) (462,699)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (421,287) 817,414 (88,494)
CASH AND CASH EQUIVALENTS, beginning of period.............. 839,210 21,796 110,290
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 417,923 $ 839,210 $ 21,796
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 47,842 $ 113,647 $ 135,940
=========== ========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During 1997 a note receivable in the amount of $200,000 was issued in exchange
for fixed assets.
See Notes to Combined Financial Statements.
F-112
<PAGE> 152
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Railroad Service, Inc. (RSI) and Minnesota Railroad Service, Inc. (MRSI)
(together the "Companies") operate as a construction contractor, constructing,
repairing and maintaining railroad tracks for private and government customers
located throughout the United States with concentrations of work primarily in
the upper midwest. The work is performed under various forms of contracts,
including fixed-fee and time-and-material contracts. The time period of the
contracts vary, but they are generally less than one year.
The Companies have common ownership and share management personnel and
facilities. The combined statements of financial position, income and cash flows
are presented in these financial statements. All intercompany transactions and
balances have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
REVENUE AND COST RECOGNITION
The Companies recognize revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and revenue, which are
recognized in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor, equipment costs and
those indirect costs related to contract performance which are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
CASH AND CASH EQUIVALENTS
The Companies consider cash and cash equivalents to include cash on hand
and temporary cash investments purchased with an original maturity of three
months or less.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Companies operate primarily in the upper midwestern region of the
United States. The Companies' accounts receivable are from the same geographic
region. The terms of the sales give rise to unsecured accounts receivable, as is
common industry practice. The Companies periodically assess collection of its
receivables and provide allowance for doubtful accounts as appropriate. No such
allowances were deemed necessary as of July 31, 1998 and December 31, 1997.
F-113
<PAGE> 153
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CUSTOMERS
Approximately 47% and 55% of accounts receivable at July 31, 1998 and
December 31, 1997 were with three and four customers, respectively. For the
seven months ended July 31, 1998 and the year ended December 31, 1997, two and
three customers, respectively, accounted for approximately 26% and 40% of
revenues.
INVENTORIES
Inventories principally consist of stored materials and parts to be used
for contracts and have been stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
The Companies record property, plant and equipment at cost. Depreciation
and amortization is computed using the straight-line method over the estimated
useful life of the asset as follows:
<TABLE>
<S> <C>
Tools and equipment......................................... 4 - 7 years
Vehicles and trailers....................................... 4 - 7 years
Office equipment............................................ 4 - 10 years
Leasehold improvements...................................... 7 - 18 years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation and amortization are eliminated from the accounts, and any gain or
loss is reflected in net income.
INCOME TAXES
The Companies operate as sub-chapter S corporations for Federal and certain
state income tax reporting purposes. Accordingly, the income taxes for the
earnings of the Companies are the responsibility of the owners. Therefore, these
financial statements do not reflect any Federal income taxes for the Companies.
COMMON STOCK
Common Stock of the Companies consists of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Railroad Service, Inc.
Authorized shares, no par value........................... $ 2,500 $ 2,500
-------- --------
Issued and outstanding.................................... 1,577 1,577
-------- --------
Stated at................................................. 157,700 157,700
-------- --------
Minnesota Railroad Service, Inc.
Authorized shares, no par value........................... 2,500 2,500
-------- --------
Issued and outstanding.................................... 150 150
-------- --------
Stated at................................................. 15,000 15,000
-------- --------
Total Common Stock................................ $172,700 $172,700
======== ========
</TABLE>
F-114
<PAGE> 154
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at July 31, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Contract receivables........................................ $1,628,877 $887,194
Contract retainages......................................... 184,065 31,600
---------- --------
$1,812,942 $918,794
========== ========
</TABLE>
Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at July 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $3,980,353 $1,150,665
Estimated earnings.......................................... 664,642 400,247
---------- ----------
4,644,995 1,550,912
Less billings to date....................................... 4,305,342 1,475,505
---------- ----------
$ 339,653 $ 75,407
========== ==========
</TABLE>
Contracts in process are included in the accompanying combined balance
sheets under the following captions:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $621,766 $155,140
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 282,113 79,733
-------- --------
$339,653 $ 75,407
======== ========
</TABLE>
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
F-115
<PAGE> 155
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Companies lease office space and equipment under agreements expiring at
various dates through the year 2000. Minimum rental commitments under these
noncancelable lease agreements in effect at July 31, 1998, are:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S> <C>
1998........................................................ $32,857
1999........................................................ 28,658
2000........................................................ 1,977
2001........................................................ --
2002........................................................ --
Thereafter.................................................. --
-------
$63,492
=======
</TABLE>
Total rental expense for the seven months ended July 31, 1998 and years
ended December 31, 1997 and 1996 for all operating leases amounted to $24,250,
$60,000 and $67,000, respectively.
6. LINE OF CREDIT
RSI has a $300,000 line of credit, with an additional seasonal limit of
$100,000 from a bank. Interest is payable monthly at 1% over the bank's
reference rate of interest for the seven months ended July 31, 1998, at 1% over
the bank's reference rate of interest for the year ended December 31, 1997 and
at 2.5% over the bank's reference rate of interest for the years ended December
31, 1996. The line is secured by accounts receivable, material on hand,
equipment and assignment of certain life insurance policies. The line is also
personally guaranteed by certain shareholders of the Companies. At July 31, 1998
and December 31, 1997, there were no borrowings against the line.
F-116
<PAGE> 156
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Note payable to insurance company (RSI), interest at 8%,
with no monthly principal installments or maturity date,
secured by the life insurance policy...................... $ -- $ 410,140
Note payable to bank (RSI), interest at 9.5%, payable in six
monthly installments of $42,222 each year (May-October),
maturing December 1999, secured by all of RSI's assets.... 357,420 399,642
Note payable to shareholder (RSI), interest at 9.5%, with no
monthly installments, maturing April 2000, unsecured...... -- 246,799
Various notes payable to banks and finance companies (RSI
and MRSI), interest rates from 2.9% to 11.75%, due in even
monthly principal and interest payments, secured by
vehicles and equipment.................................... 48,366 62,538
Note payable to bank (RSI), interest at 9.0%, with monthly
payments of $6,374, maturing May 2001, secured by all
Company assets............................................ 200,000 --
Note payable to bank (RSI), interest at 9.5%, maturing April
1999, secured by all Company assets....................... 50,000 --
Note payable to shareholder's (RSI/MRSI), no interest rate
with no monthly payments 7/28/98.......................... 650,056 --
---------- ----------
Total debt.................................................. 1,305,842 1,119,119
Less current maturities..................................... 378,246 278,246
---------- ----------
Long-term portion........................................... $ 927,596 $ 840,873
========== ==========
</TABLE>
Aggregate principal payments, as of July 31, 1998, on long-term debt are
scheduled as follows:
<TABLE>
<S> <C>
1998........................................................ $ --
1999........................................................ 1,282,389
2000........................................................ 23,453
2001........................................................ --
2002........................................................ --
----------
$1,305,842
==========
</TABLE>
Certain of the long-term debt instruments and the line of credit agreement
contain restrictive covenants which places requirements and restrictions on the
Companies regarding disposition of assets, financial ratios, capital
expenditures, acquisitions and operations. The Companies were not in compliance
with certain covenants at July 31, 1998; however, waivers for the covenants were
obtained from the bank.
8. PROFIT SHARING PLAN
The Companies have 401(k) profit sharing plans covering substantially all
employees not covered under collective bargaining agreements. The Companies may
contribute a discretionary amount as determined each year by the Companies. The
discretionary contribution is subject to a six-year vesting schedule. The
discretionary contribution expense for the Companies was $50,000, $80,485 and
$101,683 for the seven months ended July 31, 1998 and the years ended December
31, 1997 and 1996, respectively.
F-117
<PAGE> 157
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. SALE OF BRANCH
Effective March 1997, RSI sold all assets relating to the Milwaukee branch
operations. RSI received an initial $75,000 payment and a note receivable for
$200,000 with an interest rate of 2% over the base rate paid by RSI to a certain
bank. RSI realized a gain of $160,603 on the sale. For the year ended December
31, 1997, the note had a remaining balance of $133,334 which is included in
other income in the combined 1997 statement of income. The balance due on the
note receivable as of July 31, 1998 is $133,334. This amount is due on December
31, 1999. This receivable is secured by the equipment involved in the sale and
is personally guaranteed by the owners of the acquiring Company.
In connection with the sale, the Companies and their shareholders have
entered into a covenant not to compete for a period of five years from the date
of the agreement, subject to certain geographical and size limitations. The
Companies may bid new work in the circumscribed area if certain restrictions are
met.
10. RELATED PARTY TRANSACTIONS
Related parties of the Companies include the shareholders of the Companies
and various entities related through common ownership and management. The
Companies and related parties provide products and services to each other.
Transactions with related parties included in the combined financial statements
resulted in the recognition of approximately $92,902, $15,300 and $26,900 of
income and approximately $43,400, $72,400 and $86,400 of expense for the seven
months ended July 31, 1998 and the years ended December 31, 1997 and 1996,
respectively.
Due from related parties consists of charges from the Companies to
affiliated companies for labor, equipment and administrative services.
Effective January 2, 1998, the majority stockholder gifted 55 shares of
Railroad Service, Inc. stock and 5 shares of Minnesota Railroad Service, Inc.
stock to another shareholder. Accordingly, $378,146 was recorded as a charge to
compensation expense and a contribution of paid-in capital.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Companies using available market information and appropriate valuation
methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The line of credit facility approximates fair value as the interest rate
fluctuates with changes in market conditions. It is estimated that the carrying
amount of the long-term debt approximates market. Management estimated the fair
value of the long-term debt based on the remaining term to maturity and the
current interest rate environment as a market does not exist for the debt or
similar debt of the Companies.
F-118
<PAGE> 158
RAILROAD SERVICE, INC.
AND
MINNESOTA RAILROAD SERVICE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-119
<PAGE> 159
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Indiana Wood Preserving Company, Inc.:
We have audited the accompanying balance sheets of SOUTHERN INDIANA WOOD
PRESERVING COMPANY, INC. (the "Company") (an Indiana corporation) as of July 31,
1998 and December 31, 1997, and the related statements of operations,
stockholder's equity and cash flows for the seven months ended July 31, 1998 and
for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SOUTHERN INDIANA WOOD
PRESERVING COMPANY, INC. as of July 31, 1998 and December 31, 1997, and the
results of its operations and its cash flows for the seven months ended July 31,
1998 and the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
September 25, 1998
F-120
<PAGE> 160
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ --
Receivables, net of allowance of $94,347 and
$78,119, respectively.................................. 1,405,108 1,510,605
Inventory................................................. 2,098,122 2,171,870
Prepaid expenses and other................................ 48,308 16,870
---------- ----------
Total current assets.............................. 3,551,538 3,699,345
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements..................................... 7,372 7,372
Buildings and improvements................................ 84,697 84,697
Leasehold improvements.................................... 128,328 128,328
Machinery and equipment................................... 1,452,699 1,309,439
Transportation equipment.................................. 226,340 258,074
Office furniture and equipment............................ 34,578 34,578
---------- ----------
1,934,014 1,822,488
Less accumulated depreciation............................. 1,161,868 1,143,341
---------- ----------
Property, plant and equipment, net................ 772,146 679,147
---------- ----------
OTHER ASSETS................................................ 1,802 1,802
---------- ----------
$4,325,486 $4,380,294
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Cash overdraft............................................ $ 64,932 $ 70,680
Accounts payable.......................................... 131,438 186,685
Line of credit/note payable............................... 4,009,034 680,000
Accrued expenses.......................................... 87,940 134,160
Taxes payable............................................. 11,138 11,570
---------- ----------
Total current liabilities......................... 4,304,482 1,083,095
---------- ----------
COMMITMENTS AND CONTINGENCIES...............................
---------- ----------
STOCKHOLDER'S EQUITY:
Common Stock, no par value; authorized shares,
1,000; issued and outstanding shares, 100.............. 1,000 1,000
Additional paid-in capital................................ 194,100 194,100
Retained earnings (deficit)............................... (174,096) 3,102,099
---------- ----------
Total stockholder's equity........................ 21,004 3,297,199
---------- ----------
$4,325,486 $4,380,294
========== ==========
</TABLE>
See Notes to Financial Statements.
F-121
<PAGE> 161
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR
ENDED ENDED
JULY 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Sales....................................................... $6,567,727 $8,900,635
Cost of sales............................................... 5,071,098 7,538,546
---------- ----------
Gross profit.............................................. 1,496,629 1,362,089
Selling, general and administrative expenses................ 433,933 529,106
---------- ----------
Income from operations...................................... 1,062,696 832,983
---------- ----------
Other income (expense):
Interest income........................................... 947 10,966
Interest expense.......................................... (32,491) (5,132)
Gain on sale of equipment................................. -- 5,000
Miscellaneous income (expense)............................ 1,297 (2,807)
---------- ----------
Other (expense) income, net............................ (30,247) 8,027
---------- ----------
Net income.................................................. $1,032,449 $ 841,010
========== ==========
</TABLE>
See Notes to Financial Statements.
F-122
<PAGE> 162
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996................ 100 $1,000 $194,100 $3,346,357 $3,541,457
Net income.............................. -- -- -- 841,010 841,010
Distributions........................... -- -- -- (1,085,268) (1,085,268)
--- ------ -------- ---------- ----------
BALANCE, DECEMBER 31, 1997................ 100 1,000 194,100 3,102,099 3,297,199
Net income.............................. -- -- -- 1,032,449 1,032,449
Distributions........................... -- -- -- (4,308,644) (4,308,644)
--- ------ -------- ---------- ----------
BALANCE, JULY 31, 1998.................... 100 $1,000 $194,100 $ (174,096) $ 21,004
=== ====== ======== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-123
<PAGE> 163
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR
ENDED ENDED
JULY 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $1,032,449 $ 841,010
Adjustments to reconcile net income to net cash used in by
operating activities:
Depreciation and amortization.......................... 78,024 121,416
Gain on sale of equipment.............................. -- (5,000)
Change in operating assets and liabilities:
Receivables.......................................... 105,495 (659,924)
Inventory............................................ 73,748 (708,084)
Prepaid expenses and other........................... (31,438) 11,577
Cash overdraft....................................... (5,748) 70,680
Accounts payable..................................... (55,247) 159,321
Accrued expenses..................................... (46,650) 11,778
---------- -----------
Net cash provided by (used in) operating
activities...................................... 1,150,633 (157,226)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (171,023) (260,417)
Proceeds from sale of equipment........................... -- 5,000
---------- -----------
Net cash used in investing activities............. (171,023) (255,417)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings..................................... 3,329,034 680,000
Payments of distributions................................. (4,308,644) (1,085,268)
---------- -----------
Net cash used in financing activities............. (979,610) (405,268)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... -- (817,911)
---------- -----------
CASH AND CASH EQUIVALENTS, beginning of period.............. -- 817,911
---------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ -- $ --
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 32,491 $ 5,132
========== ===========
</TABLE>
See Notes to Financial Statements.
F-124
<PAGE> 164
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Southern Indiana Wood Preserving Company, Inc. (the "Company") (an Indiana
corporation) operates as a wood preserving Company specializing in producing
pressure, creosote treated wood products for private and government customers
located throughout the United States, primarily in the Midwest.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues at the time of shipment of goods.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company operates in Indiana. However, the Company's accounts receivable
include other geographic regions of the United States. The terms of the sales
give rise to unsecured accounts receivable, as is common industry practice.
During the seven months ended July 31, 1998, 17.97% of sales were to one
government entity.
INVENTORY
Inventory, consisting principally of trimmed and graded railroad ties, is
stated at the lower of cost or market. Cost is determined by the weighted
average cost method.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Buildings................................................... 25 Years
Machinery and equipment..................................... 7 - 10 Years
Office furniture and equipment.............................. 5 - 10 Years
Leasehold improvements...................................... 10 Years
</TABLE>
As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in the statement of income.
INCOME TAXES
The Company operates as an S corporation. Accordingly, the income taxes for
the earnings of the Company are the responsibility of the owner; therefore,
these financial statements do not reflect any Federal or state income taxes.
F-125
<PAGE> 165
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
NOTE TO FINANCIAL STATEMENTS -- (CONTINUED)
3. RECEIVABLES
Receivables consist of the following at July 31, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Trade receivables........................................... $1,484,005 $1,545,035
Supplier receivables........................................ 15,050 43,259
Other receivables........................................... 400 430
---------- ----------
1,499,455 1,588,724
Less allowance for doubtful accounts........................ 94,347 78,119
---------- ----------
$1,405,108 $1,510,605
========== ==========
</TABLE>
4. INVENTORY
Inventory consists of the following at July 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Raw materials............................................... $ 384,726 $ 143,140
Work in process............................................. 1,620,649 1,743,072
Finished goods.............................................. 92,747 285,658
---------- ----------
$2,098,122 $2,171,870
========== ==========
</TABLE>
5. OPERATING LEASES
The Company leases production space under an agreement expiring May 1,
1999. Minimum future lease payments under the current lease agreement in effect
at July 31, 1998 are:
<TABLE>
PERIOD ENDING DECEMBER 31,
- ------------------------------------------------------------
<S> <C>
1998...................................................... $10,031
1999...................................................... 11,034
-------
$21,065
=======
</TABLE>
Total rental expense for the seven months ended July 31, 1998 and for the
year ended December 31, 1997 was $5,851 and $9,119, respectively.
6. LINE OF CREDIT AND SHORT TERM NOTE PAYABLE
The Company has a revolving line of credit agreement with a bank. The line
of credit has a limit of $2,000,000 and is secured by the Company's trade
receivables and inventories. Interest is at prime (8.5% at July 31, 1998) which
is payable monthly. The outstanding principle at July 31, 1998 is $309,034.
In July of 1998, the Company obtained a note payable in the amount of
$3,700,000 with a bank with a maturity date of August 23, 1998. Interest is at
prime and the outstanding balance at July 31, 1998 is $3,700,000. Both the
revolving line of credit and the short-term note payable were repaid in
connection with the transaction discussed in Note 10.
7. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company has adopted a noncontributory cash employees' stock ownership
plan (ESOP) covering all full-time employees who have met certain service
requirements. The plan provides for discretionary
F-126
<PAGE> 166
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
NOTE TO FINANCIAL STATEMENTS -- (CONTINUED)
contributions by the corporation up to the maximum amount permitted under
Internal Revenue Code. The plan has received IRS approval under Sec. 401(A) and
501(A) of the Internal Revenue Code.
Total contributions made to the plan for the seven months ended July 31,
1998 and the year ended December 31, 1997 were $55,374 and $157,480,
respectively.
8. CONTINGENCIES
The Company is subject to certain Federal, state and local environmental
laws and regulations relating to the use of creosote. Creosote is used in the
Company's manufacturing process to treat the ties so that they can withstand
exposure to outside elements. Creosote, a coal tar treated derivative, has been
recognized by environmental regulating agencies as a hazardous material. The
Company currently believes that it is in compliance with the environmental laws
and regulations surrounding creosote. The Company has not been notified of any
violations of the regulations by regulatory agencies.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments is determined in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments." The carrying
value of receivables, accounts payable, the line of credit and the short-term
note payable have been determined by the Company to approximate their fair value
using available market information and appropriate valuation methodologies.
10. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-127
<PAGE> 167
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Trackworks, Inc. and
Northern Rail Service and Supply Co.:
We have audited the accompanying combined balance sheets of U.S.
TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. (Michigan
corporations) as of July 31, 1998 and December 31, 1997, and the related
combined statements of operations, changes in stockholders' equity and cash
flows for the seven months ended July 31, 1998 and the years ended December 31,
1997 and 1996. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of U.S. TRACKWORKS,
INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. as of July 31, 1998 and December
31, 1997, and the results of their operations and their cash flows for the seven
months ended July 31, 1998 and the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
October 2, 1998
F-128
<PAGE> 168
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 211,440 $ 124,522
Accounts receivable....................................... 540,113 992,277
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 92,495 259,388
Inventory................................................. 321,677 259,427
Prepaid expenses.......................................... 87,407 30,418
---------- ----------
Total current assets.............................. 1,253,132 1,666,032
---------- ----------
PROPERTY AND EQUIPMENT:
Construction equipment.................................... 1,095,748 1,012,099
Transportation equipment.................................. 471,957 468,783
Office equipment.......................................... 10,101 10,101
---------- ----------
1,577,806 1,490,983
Less accumulated depreciation............................. 1,083,252 995,245
---------- ----------
Property and equipment, net....................... 494,554 495,738
---------- ----------
OTHER ASSETS, net........................................... 5,144 89,468
---------- ----------
$1,752,830 $2,251,238
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 236,480 $ 611,430
Current maturities of long-term debt...................... -- 68,015
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 3,000 21,303
Accrued expenses.......................................... 139,882 113,447
Line of credit............................................ 500,000 465,000
Short-term note payable................................... 96,311 --
---------- ----------
Total current liabilities......................... 975,673 1,279,195
DEFERRED COMPENSATION....................................... -- 83,135
LONG-TERM DEBT, net of current maturities................... -- 13,123
COMMITMENTS AND CONTINGENCIES............................... -- --
---------- ----------
Total liabilities................................. 975,673 1,375,453
---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock.............................................. 431,550 431,550
Additional paid-in capital................................ 45,291 45,291
Retained earnings......................................... 300,316 398,944
---------- ----------
Total stockholders' equity........................ 777,157 875,785
---------- ----------
$1,752,830 $2,251,238
========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-129
<PAGE> 169
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
SEVEN MONTHS ENDED DECEMBER 31,
JULY 31, -----------------------
1998 1997 1996
------------------ ---------- ----------
<S> <C> <C> <C>
Revenues............................................. $2,108,331 $4,814,005 $4,819,123
Cost of revenues..................................... 1,806,110 3,740,346 4,466,547
---------- ---------- ----------
Gross profit......................................... 302,221 1,073,659 352,576
General and administrative expenses.................. 277,924 736,138 442,754
---------- ---------- ----------
Income (loss) from operations........................ 24,297 337,521 (90,178)
---------- ---------- ----------
Other income (expense):
Interest income.................................... 104 179 509
Interest expense................................... (23,029) (40,841) (38,555)
---------- ---------- ----------
Other expense, net................................... (22,925) (40,662) (38,046)
---------- ---------- ----------
Net income (loss).................................... $ 1,372 $ 296,859 $ (128,224)
========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-130
<PAGE> 170
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995................. 43,155 $431,550 $45,291 $ 503,785 $ 980,626
Distributions to stockholders............ -- -- -- (224,728) (224,728)
Net loss................................. -- -- -- (128,224) (128,224)
------ -------- ------- --------- ---------
BALANCE, DECEMBER 31, 1996................. 43,155 431,550 45,291 150,833 627,674
Distributions to stockholders............ -- -- -- (48,748) (48,748)
Net income............................... -- -- -- 296,859 296,859
------ -------- ------- --------- ---------
BALANCE, DECEMBER 31, 1997................. 43,155 431,550 45,291 398,944 875,785
Distributions to stockholders............ -- -- -- (100,000) (100,000)
Net income............................... -- -- -- 1,372 1,372
------ -------- ------- --------- ---------
BALANCE, JULY 31, 1998..................... 43,155 $431,550 $45,291 $ 300,316 $ 777,157
====== ======== ======= ========= =========
</TABLE>
See Notes to Combined Financial Statements.
F-131
<PAGE> 171
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, ---------------------
1998 1997 1996
----------------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 1,372 $ 296,859 $(128,224)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation...................................... 88,006 133,904 136,968
Amortization...................................... 1,189 2,000 2,124
Gain from sales of property and equipment......... -- (2,051) (615)
Changes in operating assets and liabilities:
Accounts receivable............................. 452,164 (171,073) (129,595)
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 166,893 (238,811) (20,577)
Inventory....................................... (62,250) (42,082) (57,410)
Prepaid expenses................................ (56,989) 3,395 (40,494)
Accounts payable................................ (374,950) 447,676 (49,843)
Billings in excess of costs and estimated
earnings on uncompleted contracts............ (18,303) 21,303 --
Accrued expenses................................ 26,435 19,020 (116,927)
--------- --------- ---------
Net cash (used in) provided by operating
activities................................. 223,567 470,140 (404,593)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment........ -- 25,600 7,100
Purchases of property and equipment.................. (86,822) (215,511) (64,995)
--------- --------- ---------
Net cash used in investing activities........ (86,822) (189,911) (57,895)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt................. (81,138) (136,464) (33,917)
Proceeds from long-term debt......................... -- 133,219 26,634
Line of credit borrowings (repayments), net.......... 35,000 (25,000) 440,000
Note payable -- related party borrowings
(repayments), net................................. -- (100,000) 100,000
Principal payments on short-term note payable........ (10,922) -- --
Proceeds from short-term note payable................ 107,233 -- --
Distributions to stockholders........................ (100,000) (48,748) (224,728)
--------- --------- ---------
Net cash (used in) provided by financing
activities................................. (49,827) (176,993) 307,989
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 86,918 103,236 (154,499)
CASH AND CASH EQUIVALENTS, beginning of period......... 124,522 21,286 175,785
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period............... $ 211,440 $ 124,522 $ 21,286
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................. $ 23,029 $ 20,878 $ 33,283
========= ========= =========
</TABLE>
See Notes to Combined Financial Statements.
F-132
<PAGE> 172
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
U.S. Trackworks, Inc. (a Michigan corporation) operates as a construction
contractor, constructing, repairing and maintaining railroad tracks for private
and government customers located primarily in the Midwest United States. The
work is performed under various forms of contracts, including fixed-fee and
time-and-material contracts. Northern Rail Service and Supply Co. (a Michigan
corporation) operates in Michigan and provides maintenance services on railroad
tracks primarily under time-and-material contracts.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
These combined financial statements include the accounts and results of
operations of both U.S. Trackworks, Inc. and Northern Rail Service and Supply
Co., which are commonly owned. U.S. Trackworks, Inc. and Northern Rail Service
and Supply Co. are collectively referred to as the "Company." All significant
intercompany transactions and balances have been eliminated in combination.
CASH AND CASH EQUIVALENTS
For purposes of the combined balance sheets and the combined statements of
cash flows, the Company considers cash and cash equivalents to include cash on
hand and highly liquid debt instruments with an original maturity of three
months or less.
INVENTORY
Inventory, consisting principally of stored materials and parts to be used
for contracts, is stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful life of the
asset. Newly purchased equipment is depreciated over eight years and used
equipment is depreciated over five years. Repairs to existing equipment that
lengthen the asset's useful life are depreciated over three years.
When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
the combined statements of operations.
CONCENTRATION OF CREDIT RISK
The Company's credit risk primarily relates to cash and accounts
receivable. Cash is primarily held in bank accounts. Accounts receivable
represent amounts due from the Company's customers. The Company performs
continual credit evaluations of its customers and, from time to time, an
individual customer's accounts receivable balance may represent a significant
portion of the Company's total accounts receivable balance. At July 31, 1998,
three customers individually accounted for 10% to 15% and in the aggregate
accounted for approximately 39% of the Company's total accounts receivable
balance. At December 31, 1997, one customer accounted for approximately 36% of
the accounts receivable balance.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on
F-133
<PAGE> 173
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the contracts. Changes in job performance, job conditions and estimated
profitability may result in revisions to cost and income, which are recognized
in the period in which the revisions are determined.
Revenues from time-and-material contracts are recognized currently as the
work is performed.
Contract costs include all direct material, labor and equipment costs
related to contract performance. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
INCOME TAXES
The Company operates as an S Corporation. Accordingly, the income taxes
related to the earnings of the Company are the responsibility of the owners;
therefore, these combined financial statements do not reflect any federal or
state income taxes for the Company.
SINGLE BUSINESS TAX
The Company is subject to a single business tax in its incorporated state
of Michigan. The tax is calculated on the apportioned activity of the Company in
Michigan and is included in general and administrative expenses in the
accompanying combined statements of operations.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing the financial statements.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at July 31, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Contract receivables........................................ $497,956 $966,668
Retainage................................................... 42,157 25,609
-------- --------
$540,113 $992,277
======== ========
</TABLE>
Retained accounts receivable represents amounts retained by customers from
contract billings and are payable to the Company upon satisfactory completion of
contract terms. At July 31, 1998, all retainage was expected to be collected
within one year.
F-134
<PAGE> 174
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to contracts in process at July 31, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $416,459 $ 730,843
Estimated earnings.......................................... 158,638 352,761
-------- ----------
575,097 1,083,604
Less billings to date....................................... 485,602 845,519
-------- ----------
$ 89,495 $ 238,085
======== ==========
</TABLE>
Contracts in process are included in the accompanying combined balance
sheets under the following captions at July 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $92,495 $259,388
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (3,000) (21,303)
------- --------
$89,495 $238,085
======= ========
</TABLE>
5. LINE OF CREDIT
The Company has a revolving line of credit agreement collateralized by the
assets of the Company with a credit limit of $550,000. The line of credit bears
interest at the prime rate plus 1/2% (9% at July 31, 1998) which is payable
monthly. The Company is subject to ongoing compliance with financial and other
covenants under the line of credit, all of which the Company is in compliance or
has obtained appropriate waivers at July 31, 1998. During the seven months ended
July 31, 1998 and the year ended December 31, 1997, the weighted average amount
outstanding on the line of credit was approximately $460,000 and $360,000,
respectively, and the maximum amount outstanding was approximately $645,000 and
$590,000, respectively. At July 31, 1998 and December 31, 1997, the balance
outstanding under the line of credit is $500,000 and $465,000, respectively, and
is due on demand. The line of credit was paid off in connection with the
subsequent event discussed in Note 12.
6. LONG-TERM DEBT
Long-term debt consists of the following at July 31, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Long-term note, paid off in 1998............................ $-- $24,416
Long-term note, paid off in 1998............................ -- 19,096
Long-term note, paid off in 1998............................ -- 15,886
Unsecured long-term note, paid off in 1998.................. -- 21,740
--- -------
-- 81,138
Less current maturities..................................... -- 68,015
--- -------
$-- $13,123
=== =======
</TABLE>
F-135
<PAGE> 175
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. BENEFIT PLANS
The Company participates in a defined contribution pension plan for certain
union employees. The plan provides benefits to all employees covered under the
union's collective bargaining agreement. The benefits are based upon the number
of hours worked. The Company's practice is to fund amounts that are tax
deductible and that are required by statute and applicable regulations. The
Company contributed $15,460 related to the seven months ended July 31, 1998 and
$33,167 and $31,118 related to the 1997 and 1996 plan years, respectively.
The Company participates in a discretionary contribution pension plan for
certain union employees. The plan provides for annual contributions at the
discretion of management during years when the Company generates a profit. The
Company contributed $7,000 related to the seven months ended July 31, 1998 and
approximately $12,000 for both the 1997 and 1996 plan years.
The Company maintains a non-contributory profit sharing plan for all
non-union employees. The plan provides for annual contributions of up to 15% of
wages earned during years when the Company generates a profit. The Company
contributed $13,320 for the seven months ended July 31, 1998 and $20,952 for the
1997 plan year. No plan contributions were made in 1996.
The Company maintains a 401(k) plan for certain employees of the Company
that is funded by these employees through payroll deductions. The Company does
not make any contributions to this plan.
The Company also maintained life insurance policies on certain management
personnel. These policies were designed to transfer to the insured personnel
upon retirement and were included in deferred compensation in the accompanying
combined balance sheet at December 31, 1997. During the seven months ended July
31, 1998, the Company transferred these policies to the insured personnel.
8. COMMON STOCK
Common Stock consists of the following at July 31, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
U.S. Trackworks, Inc. -- $10 par value; 45,000 shares
authorized, 26,314 shares issued and outstanding.......... $263,140 $263,140
Northern Rail Service and Supply Co. -- $10 par value;
16,841 shares authorized, issued and outstanding.......... 168,410 168,410
-------- --------
$431,550 $431,550
======== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
Two management companies that are owned by a member of management provide
certain management services to the Company, as well as lease office space and
equipment to the Company. The Company incurred management fees to these
management companies of approximately $48,000, $450,000 and $225,000 in the
seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996,
respectively.
The Company maintains a relationship with a subcontracting Company that is
owned by a stockholder of the Company. Fees paid to the subcontractor in the
seven months ended July 31, 1998 and December 31, 1997 were approximately $6,200
and $80,000, respectively. No fees were paid in 1996.
F-136
<PAGE> 176
U.S. TRACKWORKS, INC. AND
NORTHERN RAIL SERVICE AND SUPPLY CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under a noncancellable operating lease
that expires in 1998. The remaining commitment under this operating lease was
$4,365 and $14,550 at July 31, 1998 and December 31, 1997, respectively. Rent
expense for the seven months ended July 31, 1998 and for the years ended
December 31, 1997 and 1996 amounted to $24,232, $70,134 and $130,777,
respectively.
LITIGATION
The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material impact on the
Company's financial statements.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
LINE OF CREDIT AND LONG-TERM DEBT
The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt, based on borrowing rates currently available to the
Company, is a reasonable estimation of fair value.
12. SUBSEQUENT EVENT
On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
F-137
<PAGE> 1
EXHIBIT 10.33
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of
this 7th day of January 1999, by and between Robert D. Wolff, an individual
resident of the State of Utah ("Employee"), and MidWest Railroad Construction
and Maintenance Corporation of Wyoming ("Employer"), a wholly owned subsidiary
of RailWorks Corporation ("RailWorks"), a Delaware corporation, and RailWorks.
W I T N E S S E T H
WHEREAS, pursuant to an acquisition that became effective on
the date of this Agreement (the "Acquisition"), Employer became a wholly owned
subsidiary of RailWorks;
WHEREAS, as a condition to the Acquisition, Employee agreed
to enter into this Agreement; and
WHEREAS, Employer and RailWorks each desires to employ
Employee, and Employee desires to be employed by each of Employer and
RailWorks, on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
Section 1. Employment.
Subject to the terms hereof, Employer hereby employs
Employee, and Employee hereby accepts such employment as his primary
employment. Employee will serve as Chief Executive Officer of Employer or in
such other capacity as the Board of Directors of Employer and Employee shall
agree from time to time and will have duties and responsibilities customarily
assigned to a person with such title within Employer's industry. Although
Employee's primary employment responsibilities are with Employer, Employee will
also serve as Vice-President - Western Track Construction and Maintenance for
RailWorks and will coordinate, develop and expand RailWorks' track contracting
operations west of the Mississippi River and perform such other duties as the
Board of Directors of RailWorks may hereafter from time to time determine. From
time-to-time, Employee may, at the request of the Board of Directors of
RailWorks, perform services for certain other subsidiaries of RailWorks.
Employee agrees to devote his full business time and best efforts to the
performance of the duties that Employer or RailWorks may assign Employee from
time to time.
Section 2. Term of Employment.
2.1 The term of Employee's employment hereunder (the
"Initial Term") shall
<PAGE> 2
be from the date hereof until the earlier of (a) the third anniversary of the
date of this Agreement 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 hereof, as determined by
an independent medical doctor jointly chosen by the Employee and the Employer),
by reason of mental or physical disability; or
(ii) The termination by Employer of Employee's
employment hereunder, upon seven (7) days prior written notice to Employee,
which termination may be for (A) for "Cause", as determined by the Board of
Directors of Employer in accordance with the terms hereof or, (B) subject to
Section 2.4, for any reason other than Cause or no reason at all. For purposes
of this Agreement, "Cause" for termination of Employee's employment shall exist
(V) if Employee is convicted of, pleads guilty to, or confesses to any felony
or any act of fraud, misappropriation or embezzlement, (W) if Employee has
engaged in a dishonest act to the material damage or prejudice of Employer or
RailWorks or its subsidiaries, or in conduct or activities materially damaging
to the property, business, or reputation of Employer or RailWorks or its
subsidiaries, (X) if Employee violates any of the provisions contained in
Section 4 of this Agreement, after receiving written notice from Employer
specifically outlining the alleged violations by the Employee of Section 4
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 Employer
of such written notice or (2) the Employee prevails in 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 provision
of Section 4.5 hereof; or (Y) Employee willfully breaches or habitually
neglects the duties he is required to perform hereunder, or (Z) or Employee
performs such duties in a negligent manner, provided that Employee has received
written notice from Employer on at least one prior occasion detailing negligent
conduct by Employee and that negligent conduct (related to or similar to the
conduct contained in the written notice) occurs after the Employer's receipt of
written notice.
(iii) The termination of the employment by
Employee for Good Cause (as defined). "Good Cause" shall be defined as (A) any
material and adverse change in the position or duties of the Employee or (B)
relocation of the primary office of Employer to a location over 60 miles from
its current location (a "Relocation"). RailWorks agrees to reimburse Employee
for reasonable moving expenses incurred in connection with the relocation of
Employee following any Relocation of Employer.
2.2 Successive Terms. After the Initial Term, this
Agreement shall continue upon a year-to-year basis (the "Successive Terms";
together with the Initial Term, the "Term") unless terminated by either the
Employer or the Employee upon written notice to the other at least ninety (90)
days before the expiration of the then current Term.
<PAGE> 3
2.3 Retirement. Notwithstanding the provisions of
Sections 2.1 and 2.2, Employee may retire upon reaching age 65, or any time
thereafter, at his or her election, provided that Employee gives Employer and
RailWorks six (6) months advance written notice of such election and the date
of such retirement.
2.4 Termination During the Earn-Out. Capitalized terms
used in this section but not defined herein shall have the meaning ascribed to
them in the Stock Purchase Agreement dated January 7, 1999 between RailWorks,
Employer and Employee. During any Annual Period in which the Employee is
eligible to receive an Earn-Out Payment, Employee may be terminated pursuant to
Section 2.1(b)(ii)(B) hereof only if Employer's EBITDA for the full year
preceding the termination was below the amount necessary for the Stockholders
to receive an Earn-Out Payment of at least $450,000.
Section 3. Compensation.
3.1 Term of Employment. Employer will provide Employee
with the following salary, expense reimbursement and additional employee
benefits during the term of employment hereunder:
(a) Salary. During the Initial Term, Employee will be
paid a salary (the "Salary"), that shall be no less than $135,000 per annum,
less deductions and withholdings required by applicable law. Thereafter, and
during the Successive Terms, Employee will be paid a salary (the "Successive
Terms Salary") determined in good faith negotiations between Employer and
Employee. The Salary and Successive Terms Salary shall be paid to Employee in
equal monthly installments (or on such more frequent basis as other executives
of Employer are compensated). The Salary and Successive Terms Salary shall be
reviewed by the Board of Directors of RailWorks on at least an annual basis and
may be increased but not decreased as a result of such review.
(b) Performance Bonuses. In addition to the Salary and
the Successive Terms 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 during the
term of this Agreement after the year ended December 31, 1998, equal to the
aggregate amount determined by the bonus formulas delineated herein below. Any
amount of a Performance Bonus required to be paid to the Employee for a fiscal
year 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
preceding fiscal year but in all events by March 31 of the year immediately
following the end of the fiscal year for which such Performance Bonus is
attributable.
Employee shall have the option with regard to any amount due
to him as part of the Performance Bonus, to direct RailWorks to make
distribution of all or any part of such bonus to any employee or employees of
Employer, or any entity established solely for the benefit of such employee or
employees, as determined in the Employee's sole discretion. At least thirty
<PAGE> 4
(30) days prior to the intent to direct such bonus, RailWorks shall advise the
Employee in writing of the amount due the Employee under the bonus pool and the
Employee shall have ten (10) days from such date in which to advise RailWorks
in writing of his intent to distribute all or any portion of such bonus to any
such person. In the event of such written notification, RailWorks hereby agrees
to so distribute the bonus. Absent such written notification, the bonus shall
be payable in full to the Employee as described herein.
The formulas to determine a Performance Bonus for any fiscal
year during the term of this Agreement shall be as follows:
(i) For each fiscal year of RailWorks, a
portion of the bonus pool (the "First Bonus Pool") as determined by the Board
of Directors of RailWorks, as set forth in this section. The First Bonus Pool
will consist of ten percent (10%) of pre-tax income (computed before
performance or other periodic bonuses for any of the employees of RailWorks and
any of its consolidated subsidiaries) on a consolidated basis for financial
accounting basis based upon applying generally accepted principles and
generally accepted auditing standards on a consistent basis. This bonus shall
be calculated by the independent certified public accountant regularly employed
by RailWorks (the "CPA") applying such generally accepted accounting principles
and generally accepted auditing standards on a consistent basis. The Employer's
portion ("Employer First Bonus Pool") of the First Bonus Pool shall be equal to
the percentage of the Employer's contribution to the operating income of
RailWorks, as determined by the CPA. Ten percent (10%) of the Employer First
Bonus Pool (i.e., one percentage point of the First Bonus Pool) will be
allocated by the Board of Directors of RailWorks to employees of RailWorks'
corporate offices. Forty (40%) will be allocated to Employee. The remainder of
the Employer First Bonus Pool shall be allocated as designated by the Board of
Directors of Employer.
Plus
(ii) For each fiscal year of RailWorks, a
portion of the bonus pool (the "Second Bonus Pool") as determined by the Board
of Directors of RailWorks, as set forth in this section. The Second Bonus Pool
for each fiscal year of RailWorks will consist of five percent (5%) of the
excess of (a) the consolidated after tax net income of RailWorks and its
consolidated subsidiaries for a fiscal year, computed by the CPA applying
generally accepted accounting principles and generally accepted auditing
standards on a consistent basis over (b) the Wall Street Estimate (as
hereinafter defined) for such fiscal year. For purposes of this subsection
(ii)(b), Wall Street Estimate for a fiscal year shall mean the simple
arithmetical average of the consolidated earnings per share estimates for a
fiscal year of RailWorks and its consolidated subsidiaries in the possession of
First Call on the Determination Date (as hereinafter defined), translated by
the CPA into the equivalent consolidated after tax net income of RailWorks and
its consolidated subsidiaries for such fiscal year. For purposes of this
subsection (ii)(b), the Determination Date shall mean the date of this
Agreement and thereafter shall be the first day of the fiscal year for which
such computation applies. This bonus shall be calculated by the CPA applying
such generally accepted accounting principles and generally accepted auditing
standards on a consistent basis. The Employer's portion ("Employer Second Bonus
Pool") of the Second Bonus Pool shall be equal to the percentage of the
Employer's contribution to the
<PAGE> 5
operating income of RailWorks, as determined by the CPA. The Second Bonus Pool
shall be allocated as designated by the Board of Directors of Employer.
(c) RailWorks' Stock Options. For each of the calendar
years 1999, 2000 and 2001 RailWorks, shall grant Employee options to purchase
one (1) share of Common Stock $.01 par value (the "Common Stock") of RailWorks
for every $100 that the gross profit of RailWorks' track contracting operations
west of the Mississippi River (other than Merit Railroad) exceeds the Target
Gross Profit. Target Gross Profit shall mean gross profit of said territory
calculated by RailWorks in accordance with GAAP, consistently applied, of
$7,000,000 for 1999, $7,700,000 for 2000 and $8,470,000 for 2001. The exercise
price for the shares of Common Stock shall be the average closing price of the
Common Stock for the last ten (10) trading days of the year for which the
options are being awarded. The options shall vest on the first anniversary of
the date on which they are granted and shall expire on the tenth anniversary of
such date. The options shall be deemed granted on the last day of the year for
which the options are being awarded. The options are subject to the terms of
the RailWorks 1998 Employee Stock Option Plan.
(d) Discretionary Bonus. The Board of Directors of
Employer may, from time to time, award the Employee a discretionary bonus based
upon such factors as the Board of Directors of Employer deems appropriate. The
Employer shall have no entitlement to such a discretionary bonus until and
unless so awarded by the Board of Directors of Employer.
(e) Vacation. Employee shall receive four (4) weeks
vacation time per calendar year during the term of this Agreement in addition
to customary holidays afforded employees of RailWorks. Any unused vacation days
in any calendar year may not be carried over to subsequent years.
(f) 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 at the request
of and on behalf of Employer or RailWorks.
(g) Benefit Plans. Employee shall have the option of
participating in such medical, dental, disability, hospitalization, life
insurance, stock option and other benefit plans (such as pension and profit
sharing plans) as Employer maintains from time to time for the benefit of other
employees of RailWorks on the terms and subject to the conditions set forth in
such plans.
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 compensation 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. Notwithstanding
any of the foregoing, in the event that the employment of Employee is
terminated by Employer pursuant to Section 2.1(b)(ii)(B) or 2.1(b)(iii),
Employer shall pay as severance pay to Employee all remaining amounts due to
Employee for the remainder of the Initial Term or the then current
<PAGE> 6
Successive Term pursuant to Section 3.1(a), which payments shall be made when
due in accordance with such section. The Employee and his eligible dependents
shall be entitled to receive at the sole cost of the Employer the health
insurance benefits generally made available to persons in similar positions
within RailWorks for a period of six (6) 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.
(i) Upon termination of this Agreement pursuant
to the provisions of Sections 2.1(b)(i), 2.1(b)(ii)(B) or 2.1(b)(iii) hereof,
any stock grants or options 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. If stock options have previously been awarded to the Employee,
notwithstanding any terms and conditions of such award or any plan pursuant to
which such stock options were awarded, the Employee or his authorized
representative shall have (i) a period of three (3) months from the Termination
Date to exercise any or all stock options that, as of the date of their grant,
were intended to satisfy the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended, and acquire for his own benefit the shares of
stock covered by such stock options, and (ii) a period of one (1) year from the
Termination Date to exercise any or all other stock options and acquire for his
own benefit the shares of stock covered by such stock options.
(ii) Upon termination of the Agreement pursuant
to the terms of Section 2.1 (b)(ii)(A) hereof, all granted but unvested, at the
Termination Date, stock grants and/or options 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 options awarded or the
plan under which they were awarded, with respect to any shares of stock granted
or shares of stock covered by stock options that have fully vested as of the
Termination Date.
Section 4. Noncompetition and Nonsolicitation During
Employment.
4.1 Definitions. For the purposes of this Section 4, the
following definitions shall apply.
(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.
<PAGE> 7
(b) "Competitor" means any business, individual,
partnership, joint venture, association, firm, corporation or other entity,
other than the RailWorks or Employer or their 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
RailWorks or Employer or their subsidiaries 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 RailWorks' or the Employer's or their subsidiaries'
customers or actively sought prospective customers, acquisition targets,
suppliers, manufacturers and distributors gained by Employee as a result of his
employment with Employer.
(e) "Customer" means actual customers or actively sought
prospective customers of RailWorks or Employer or their affiliates or
subsidiaries.
(f) "Territory" means the United States of America west
of the Mississippi River.
(g) "Trade Secrets" means information or data of or
about RailWorks or Employer or their affiliates or subsidiaries, 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
RailWorks' or Employer's or their affiliates or subsidiaries' finances,
services, staff, contemplated acquisitions, marketing investigations and
surveys, that are not generally known to, and/or are not readily ascertainable
by proper means by, other persons.
(h) "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 RailWorks or its subsidiaries
or affiliates, or any of RailWorks' or its affiliates' clients or customers for
utilization in Company Activities, not generally known by or not readily
ascertainable by proper means by other persons who can obtain economic value
from their disclosure or use.
4.2 Trade Name and Confidential Information.
(a) Employee hereby agrees that, except as required in
the performance of his duties hereunder, with regard to each item constituting
all or any portion of the Trade Secrets and
<PAGE> 8
Confidential Information, at all times during the Term:
(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
RailWorks;
(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
communicate any Trade Secrets or Confidential Information, without the prior
written consent of RailWorks; and
(iii) Employee shall immediately notify RailWorks
of any unauthorized disclosure or use of any Trade Secrets or Confidential
Information of which Employee becomes aware, Employee shall assist RailWorks,
to the extent necessary, in the procurement or any protection of RailWorks' or
Employer's rights to or in any of the Trade Secrets or Confidential
Information.
(b) Upon the request of RailWorks or 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 RailWorks' 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. " 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.
4.3 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 for
period of one year thereafter, Employee will not, in the Territory, either
directly or indirectly, alone or in
<PAGE> 9
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 an
offer of a Competitive Position during the Term, and such notice shall describe
all material terms of such offer.
Nothing contained in this Section 4 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
RailWorks, whose common stock is publicly traded on a national securities
exchange or in the over-the-counter market.
4.4 Nonsolicitation. Employee hereby agrees that
Employee will not, during the Term and for a period of one year thereafter,
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 RailWorks
during the Term, or
(b) solicit or attempt to solicit any officer, director,
employee, consultant, contractor, agent, lessor, lessee, licensor, licensee or
supplier of RailWorks or Employer or other personnel of Employer or any of its
subsidiaries to terminate, alter or lessen that party's affiliation with
RailWorks, Employer or such subsidiary or to violate the terms of any agreement
or understanding between such employee, consultant, contractor or other person
and RailWorks or Employer.
4.5 Binding Arbitration. The parties shall refer any
dispute as to whether or not the Employee has violated the provisions of this
Section 4 to a mediator and, in the event that mediation is unsuccessful, such
dispute shall be resolved by binding arbitration before one arbitrator selected
by, and in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. 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.
Section 5. Miscellaneous.
5.1 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.
5.2 Survival of Obligations. The covenants in Section 4
of this Agreement shall survive termination of Employee's employment, except in
the case of termination of this Agreement pursuant to the provisions of
Sections 2.1 (iii) hereof, in which case they shall terminate also and have no
further force or legal effect as of the Termination Date.
<PAGE> 10
5.3 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
c/o RailWorks Corporation
1104 Kenilworth Drive, Suite 301
Baltimore, Maryland 21204
Attention: John G. Larkin
Telecopy No.: (410) 825-6920
Employee
Robert D. Wolff
1525 Beck Street
Salt Lake City, Utah
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.
5.4 Binding Effect. This Agreement inures to the benefit
of, and is binding upon, Employer and their respective successors and assigns,
and Employee, together with Employee's executor, administrator, personal
representative, heirs, and legatees.
5.5 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, except for the rights and obligations
of the parties under the Stock Purchase Agreement dated January 7, 1999, which
rights and obligations shall not be diminished by any portion of this
Agreement. In the case of any conflict between this Agreement and the Stock
Purchase Agreement, the latter agreement shall take precedence. This Agreement
may be modified only by a written instrument signed by all of the parties
hereto.
5.6 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 without regard to the
conflicts of law provisions thereof. No provision of this Agreement shall be
construed against or interpreted to the disadvantage of any party hereto by any
court or other governmental or judicial authority or by any board of
arbitrators by reason
<PAGE> 11
of such party or its counsel having or being deemed to have structured or
drafted such provision.
5.7 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.
5.8 Specific Performance. Each party hereto hereby
agrees that any remedy at law for any breach of the provisions contained in
this Agreement 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.
5.9 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.
[Signatures on following page]
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
MIDWEST RAILROAD CONSTRUCTION AND
MAINTENANCE CORPORATION OF WYOMING
By: /s/ Robert D. Wolff
--------------------------------------
Name: Robert D. Wolff
Title: Chief Executive Officer
RAILWORKS CORPORATION
By: /s/ Michael R. Azarela
--------------------------------------
Name: Michael R. Azarela
Title: Executive Vice-President
/s/ Robert D. Wolff
-----------------------------------------
ROBERT D. WOLFF
<PAGE> 1
Exhibit 10.34
CREDIT AGREEMENT
Dated as of August 4, 1998
among
RAILWORKS CORPORATION,
as Borrower,
Certain Subsidiaries,
as Guarantors,
THE LENDERS NAMED HEREIN,
FIRST UNION NATIONAL BANK,
as Documentation Agent
AND
NATIONSBANK, N.A.,
as Administrative Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1 DEFINITIONS
1.1 Definitions...........................................................................1
1.2 Computation of Time Periods..........................................................23
1.3 Accounting Terms; Certain Calculations...............................................23
SECTION 2 CREDIT FACILITIES........................................................................25
2.1 Revolving Loans......................................................................25
2.2 Letter of Credit Subfacility.........................................................28
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES...........................................33
3.1 Default Rate.........................................................................33
3.2 Extension and Conversion.............................................................33
3.3 Prepayments..........................................................................34
3.4 Termination and Reduction of Commitments.............................................35
3.5 Fees.................................................................................35
3.6 Capital Adequacy.....................................................................36
3.7 Inability To Determine Interest Rate.................................................36
3.8 Illegality...........................................................................36
3.9 Requirements of Law..................................................................37
3.10 Taxes...............................................................................38
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
3.11 Indemnity...........................................................................40
3.13 Pro Rata Treatment..................................................................41
3.14 Sharing of Payments.................................................................42
3.15 Payments, Computations, Etc.........................................................43
3.16 Evidence of Debt....................................................................45
SECTION 4 GUARANTY.................................................................................45
4.1 The Guarantee........................................................................45
4.2 Obligations Unconditional............................................................46
4.3 Reinstatement........................................................................47
4.4 Certain Additional Waivers...........................................................47
4.5 Remedies.............................................................................47
4.6 Rights of Contribution...............................................................48
4.7 Continuing Guarantee.................................................................48
SECTION 5 CONDITIONS...............................................................................49
5.1 Conditions to Closing................................................................49
5.2 Conditions to All Extensions of Credit...............................................50
SECTION 6 REPRESENTATIONS AND WARRANTIES...........................................................51
6.1 Financial Condition..................................................................51
6.2 No Changes or Restricted Payments....................................................52
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
6.3 Organization; Existence; Compliance with Law.........................................52
6.4 Power; Authorization; Enforceable Obligations........................................52
6.5 No Legal Bar.........................................................................53
6.6 No Material Litigation...............................................................53
6.7 No Default...........................................................................53
6.8 Ownership of Property; Liens.........................................................53
6.9 Intellectual Property................................................................54
6.10 No Burdensome Restrictions..........................................................54
6.11 Taxes...............................................................................54
6.12 ERISA...............................................................................54
6.13 Governmental Regulations, Etc.......................................................55
6.14 Subsidiaries........................................................................56
6.15 Purpose of Extensions of Credit.....................................................56
6.16 Environmental Matters...............................................................56
6.17 Year 2000 Compliance................................................................57
SECTION 7 AFFIRMATIVE COVENANTS....................................................................58
7.1 Financial Statements................................................................58
7.2 Certificates; Other Information.....................................................59
7.3 Notices.............................................................................60
7.4 Payment of Obligations..............................................................61
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
7.5 Conduct of Business and Maintenance of Existence.....................................62
7.6 Maintenance of Property; Insurance...................................................62
7.7 Inspection of Property; Books and Records; Discussions...............................62
7.8 Environmental Laws...................................................................63
7.9 Financial Covenants..................................................................63
7.10 Administrative Fees.................................................................64
7.11 Additional Guaranties and Stock Pledges.............................................64
7.12 Ownership of Subsidiaries...........................................................65
7.13 Use of Proceeds.....................................................................65
SECTION 8 NEGATIVE COVENANTS.......................................................................65
8.1 Indebtedness........................................................................65
8.2 Liens...............................................................................66
8.3 Consolidation, Merger, Divestiture, etc.............................................66
8.5 Investments.........................................................................68
8.6 Ownership of Equity Interests.......................................................68
8.7 Fiscal Year.........................................................................68
8.8 Restricted Payments.................................................................68
8.9 Sale Leasebacks.....................................................................68
8.10 No Further Negative Pledges.........................................................68
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C> <C>
SECTION 9 EVENTS OF DEFAULT........................................................................69
9.1 Events of Default...................................................................69
9.2 Acceleration; Remedies..............................................................71
SECTION 10 AGENCY PROVISIONS.......................................................................72
10.1 Appointment.........................................................................72
10.2 Delegation of Duties................................................................72
10.3 Exculpatory Provisions..............................................................73
10.4 Reliance on Communications..........................................................73
10.5 Notice of Default...................................................................74
10.6 Non-Reliance on Administrative Agent and Other Lenders..............................74
10.7 Indemnification.....................................................................74
10.8 Administrative Agent in its Individual Capacity.....................................75
10.9 Successor Administrative Agent......................................................75
SECTION 11 MISCELLANEOUS...........................................................................76
11.1 Notices.............................................................................76
11.2 Right of Set-Off....................................................................77
11.3 Benefit of Agreement................................................................77
11.4 No Waiver; Remedies Cumulative......................................................80
11.5 Payment of Expenses, etc............................................................80
</TABLE>
v
<PAGE> 7
<TABLE>
<S> <C> <C>
11.6 Amendments, Waivers and Consents....................................................81
11.7 Counterparts........................................................................82
11.8 Headings............................................................................82
11.9 Survival............................................................................82
11.10 Governing Law; Submission to Jurisdiction; Venue...................................82
11.11 Severability.......................................................................83
11.12 Entirety...........................................................................83
11.13 Binding Effect; Termination........................................................84
11.14 Confidentiality....................................................................84
11.15 Source of Funds....................................................................84
11.16 Conflict...........................................................................85
</TABLE>
vi
<PAGE> 8
SCHEDULES
Schedule 2.1(a) Lenders and Commitments
Schedule 2.1(b)(i) Form of Notice of Borrowing
Schedule 2.1(e) Form of Revolving Note
Schedule 2.2(b)-2 Form of Notice of Request for Letter of Credit
Schedule 3.2 Form of Notice of Extension/Conversion
Schedule 5.1(h)(v) Form of Officer's Certificate
Schedule 6.8 Existing Liens
Schedule 6.14 Subsidiaries
Schedule 7.2(b) Form of Officer's Compliance Certificate
Schedule 7.11 Form of Joinder Agreement
Schedule 8.1 Indebtedness
Schedule 11.1 Lenders and Addresses
Schedule 11.3(b) Form of Assignment and Acceptance
<PAGE> 9
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of August 4, 1998 (the "Credit
Agreement"), is by and among RAILWORKS CORPORATION, a Delaware corporation (the
"Borrower"), the Subsidiaries identified on the signature pages hereto and such
other Subsidiaries as may from time to time become Guarantors hereunder in
accordance with the provisions hereof (the "Guarantors"), the lenders named
herein and such other lenders as may become a party hereto (the "Lenders"), and
NATIONSBANK, N.A., as Administrative Agent (in such capacity, the
"Administrative Agent").
W I T N E S S E T H
WHEREAS, the Borrower has requested that the Lenders provide a $75
million credit facility for the purposes hereinafter set forth;
WHEREAS, the Lenders have agreed to make the requested credit facility
available to the Borrower on the terms and conditions hereinafter set forth;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions.
As used in this Credit Agreement, the following terms shall have the
meanings specified below unless the context otherwise requires:
"Acquisition" means any transaction in which the
Borrower or any of its Subsidiaries directly or indirectly (i) acquires
any Property with which an ongoing business is conducted or is to be
conducted, (ii) acquires all or substantially all of the assets of any
Person or division thereof, whether through a purchase of assets,
merger or otherwise, (iii) acquires (in one transaction or as the most
recent transaction in a series of transactions) control of at least a
majority of the Voting Stock of a corporation, other than the
acquisition of Voting Stock of a wholly-owned Subsidiary solely in
connection with the organization and capitalization of that Subsidiary
by the Borrower or another Credit Party, or (iv) acquires control of
more than 50% ownership interest in any partnership, joint venture or
limited liability company, but specifically excluding the Combination.
<PAGE> 10
"Additional Credit Party" means each Person that becomes a
Guarantor after the Closing Date by execution of a Joinder Agreement.
"Administrative Agent" shall have the meaning assigned to such
term in the heading hereof, together with any successors or assigns.
"Administrative Agent's Fee Letter" means that certain letter
agreement dated as of July 31, 1998, between the Administrative Agent
and the Borrower, as amended, modified, supplemented or replaced from
time to time.
"Administrative Agent's Fees" shall have the meaning assigned
to such term in Section 3.5(c).
"Affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling or controlled by or under
direct or indirect common control with such Person. For purposes of
this definition, "control" when used with respect to any Person means
the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agency Services Address" means NationsBank, N.A.,
NC1-001-15-04, 101 North Tryon Street, Charlotte, North Carolina 28255,
Attn: Agency Services, or such other address as may be identified by
written notice from the Administrative Agent to the Borrower.
"Aggregate Revolving Committed Amount" means the aggregate
amount of Revolving Commitments in effect from time to time, being
initially SEVENTY-FIVE MILLION DOLLARS ($75,000,000).
"Applicable Percentage" means for any day, the rate per annum
set forth below opposite the applicable Consolidated Leverage Ratio
then in effect, it being understood that the Applicable Percentage for
(i) Base Rate Loans shall be the percentage set forth under the column
"Base Rate Margin", (ii) Eurodollar Loans shall be the percentage set
forth under the column "Eurodollar Margin and Letter of Credit Fee",
(iii) the Letter of Credit Fee shall be the percentage set forth under
the column "Eurodollar Margin and Letter of Credit Fee" and (iv) the
Commitment Fee shall be the percentage set forth under the column
"Commitment Fee":
2
<PAGE> 11
<TABLE>
<CAPTION>
Eurodollar
Margin
Consolidated and
Pricing Leverage Base Rate Letter of Commitment
Level Ratio Margin Credit Fee Fee
----- ----- ------ ---------- ---
<S> <C> <C> <C> <C>
I >2.25 1.25% 2.50% .500%
-
II >2.0 but <2.25 .75% 2.00% .500%
-
III >1.5 but <2.0 .25% 1.75% .375%
-
IV >1.0 but <1.5 0% 1.50% .300%
-
V <1.0 0% 1.25% .250%
</TABLE>
The Applicable Percentage shall be determined and adjusted quarterly on
the date (each a "Rate Determination Date") five (5) Business Days
after the date by which the annual and quarterly compliance
certificates and related financial statements and information are
required in accordance with the provisions of Sections 7.1(a) and (b)
and Section 7.2(b), as appropriate; provided that:
(i) from the Closing Date until the Rate
Determination Date occurring in connection with delivery of
the financial statements for the fiscal quarter ending
September 30, 1998, the Applicable Percentages shall be based
on Pricing Level II;
(ii) from the Rate Determination Date occurring
in connection with delivery of the financial statements for
the fiscal quarter ending September 30, 1998 until the Rate
Determination Date occurring in connection with delivery of
the financial statements for the fiscal quarter ending
December 31, 1998, the Applicable Percentages shall be based
on Pricing Level II unless the Consolidated Leverage Ratio as
of September 30, 1998 equals or exceeds 2.25, in which case
the Applicable Percentages shall be based on Pricing Level I;
and
(iii) in the event an annual or quarterly
compliance certificate and related financial statements and
information are not delivered timely to the Agency Services
Address by the date required by Sections 7.1(a) and (b) and
Section 7.2(b), as appropriate, the Applicable Percentages
shall be based on Pricing Level I until such time as an
appropriate compliance certificate and related financial
statements and information are delivered, whereupon the
applicable Pricing Level shall be adjusted based on the
information contained in such compliance certificate and
related financial statements and information.
Each Applicable Percentage shall be effective from a Rate Determination
Date until the next such Rate Determination Date. The Administrative
Agent shall determine the appropriate Applicable Percentages in the
pricing matrix promptly upon receipt of the quarterly or annual
compliance certificate and related financial information and shall
promptly notify the Borrower and the Lenders of any change thereof.
Such determinations by the Administrative Agent shall be conclusive
absent manifest error. Adjustments in the Applicable Percentages shall
be effective as to existing Extensions of Credit as well as new
Extensions of Credit made thereafter.
3
<PAGE> 12
"Bankruptcy Code" means the Bankruptcy Code in Title 11 of the
United States Code, as amended, modified, succeeded or replaced from
time to time.
"Bankruptcy Event" means, with respect to any Person, the
occurrence of any of the following with respect to such Person: (i) a
court or governmental agency having jurisdiction in the premises shall
enter a decree or order for relief in respect of such Person in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of such Person or for any substantial part of its Property or
ordering the winding up or liquidation of its affairs; or (ii) there
shall be commenced against such Person an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or any case, proceeding or other action for the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of such Person or for any substantial part of its
Property or for the winding up or liquidation of its affairs, and such
involuntary case or other case, proceeding or other action shall remain
undismissed, undischarged or unbonded for a period of sixty (60)
consecutive days; or (iii) such Person shall commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in
an involuntary case under any such law, or consent to the appointment
or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of such Person or for any
substantial part of its Property or make any general assignment for the
benefit of creditors; or (iv) such Person shall be unable to, or shall
admit in writing its inability to, pay its debts generally as they
become due.
"Base Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest whole multiple of 1/100 of 1%)
equal to the greater of (a) the Federal Funds Rate in effect on such
day plus 1/2 of 1% or (b) the Prime Rate in effect on such day. If for
any reason the Administrative Agent shall have determined (which
determination shall be conclusive absent manifest error) that it is
unable after due inquiry to ascertain the Federal Funds Rate for any
reason, including the inability or failure of the Administrative Agent
to obtain sufficient quotations in accordance with the terms hereof,
the Base Rate shall be determined without regard to clause (a) of the
first sentence of this definition until the circumstances giving rise
to such inability no longer exist. Any change in the Base Rate due to a
change in the Prime Rate or the Federal Funds Rate shall be effective
on the effective date of such change in the Prime Rate or the Federal
Funds Rate, respectively.
"Base Rate Loan" means any Revolving Loan bearing interest at
a rate determined by reference to the Base Rate.
"Borrower" means RailWorks Corporation, a Delaware
corporation, as referenced in the opening paragraph, its successors and
permitted assigns.
4
<PAGE> 13
"Borrowing Base" means, as of any day, an amount equal to the
sum of (a) eighty percent (80%) of Eligible Receivables, (b) fifty
percent (50%) of Eligible Receivables Retainage and (c) fifty percent
(50%) of Eligible Inventory, in each case as set forth in the most
recent Borrowing Base Certificate delivered to the Administrative Agent
and the Lenders in accordance with the terms of Section 7.1(d), with
adjustments to give effect to Acquisitions and Divestitures since the
date of such Borrowing Base Certificate on a Pro Forma Basis.
"Borrowing Base Certificate" shall have the meaning assigned
to such term in Section 7.1(d).
"Business Day" means a day other than a Saturday, Sunday or
other day on which commercial banks in Charlotte, North Carolina,
Baltimore, Maryland or New York, New York are authorized or required by
law to close, except that, when used in connection with a Eurodollar
Loan, such day shall also be a day on which dealings between banks are
carried on in U.S. dollar deposits in London, England.
"Capital Lease" means, as applied to any Person, any lease of
any Property (whether real, personal or mixed) by that Person as lessee
which, in accordance with GAAP, is or should be accounted for as a
capital lease on the balance sheet of that Person.
"Capital Lease Obligation" means the capital lease obligations
relating to a Capital Lease determined in accordance with GAAP.
"Cash Equivalents" means (a) securities issued or directly and
fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (provided that the full faith and
credit of the United States of America is pledged in support thereof)
having maturities of not more than twelve months from the date of
acquisition, (b) U.S. dollar denominated time deposits and certificates
of deposit of (i) any Lender, or (ii) any domestic commercial bank of
recognized standing (y) having capital and surplus in excess of
$500,000,000 and (z) whose short-term commercial paper rating from S&P
is at least A-1 or the equivalent thereof or from Moody's is at least
P-1 or the equivalent thereof (any such bank being an "Approved Bank"),
in each case with maturities of not more than 270 days from the date of
acquisition, (c) commercial paper and variable or fixed rate notes
issued by any Approved Bank (or by the parent company thereof) or any
variable rate notes issued by, or guaranteed by, any domestic
corporation rated A-1 (or the equivalent thereof) or better by S&P or
P-1 (or the equivalent thereof) or better by Moody's and maturing
within six months of the date of acquisition, (d) repurchase agreements
entered into by a Person with a bank or trust company (including any of
the Lenders) or recognized securities dealer having capital and surplus
in excess of $500,000,000 for direct obligations issued by or fully
guaranteed by the United States of America in which such Person shall
have a perfected first priority security interest (subject to no other
Liens) and having, on the date of purchase thereof, a fair market value
of at least 100% of the amount of the repurchase obligations, (e)
obligations of
5
<PAGE> 14
any State of the United States or any political subdivision thereof,
the interest with respect to which is exempt from federal income
taxation under Section 103 of the Internal Revenue Code, having a long
term rating of at least AA- or Aa-3 by S&P or Moody's, respectively,
and maturing within three years from the date of acquisition thereof,
(f) Investments in municipal auction preferred stock (i) rated AAA (or
the equivalent thereof) or better by S&P or Aaa (or the equivalent
thereof) or better by Moody's and (ii) with dividends that reset at
least once every 365 days, (g) Investments, classified in accordance
with GAAP as current assets, in money market investment programs
registered under the Investment Company Act of 1940, as amended, which
are administered by reputable financial institutions having capital of
at least $100,000,000 and the portfolios of which are limited to
Investments of the character described in the foregoing subdivisions
(a) through (f), and (h) other Investments deemed to be cash
equivalents in accordance with GAAP.
"Change of Control" means the occurrence of either of the
following events: (i) 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 Borrower, a
corporation owned directly or indirectly by the stockholders of the
Borrower (immediately after the IPO) 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
Borrower representing 50% or more of the total voting power represented
by the Borrower's then outstanding securities that vote generally in
the election of directors; or (ii) during any period of two consecutive
years, individuals who at the beginning of such period constitute the
Borrower's Board of Directors and any new directors whose election by
the Borrower's Board of Directors or nomination for election by the
Borrower'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 Borrower's Board of Directors.
"Closing Date" means the date hereof.
"Combination" has the meaning assigned to such term in the
Registration Statement.
"Commitment" means the Revolving Commitment and the LOC
Commitment.
"Commitment Fee" shall have the meaning given such term in
Section 3.5(a).
"Commitment Percentage" means the Revolving Commitment
Percentage.
"Commitment Period" means the period from and including the
Closing Date to but not including the earlier of (i) the Termination
Date, or (ii) the date on which the Commitments terminate in accordance
with the provisions of this Credit Agreement.
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<PAGE> 15
"Comstock Holdings" means Comstock Holdings Inc., a Delaware
corporation.
"Consolidated Adjusted EBITDA" means for any period for the
Consolidated Group, the sum of Consolidated EBITDA minus capital
expenditures, in each case on a consolidated basis determined in
accordance with GAAP applied on an consistent basis.
"Consolidated Base EBITDA" means, for any period, Consolidated
EBITDA for those members of the Consolidated Group existing as of the
Closing Date (excluding for purposes hereof, Consolidated EBITDA
attributable to an Acquisition after the Closing Date) as determined in
accordance with GAAP.
"Consolidated EBITDA" means for any period for the
Consolidated Group, the sum of Consolidated Net Income plus
Consolidated Interest Expense plus all provisions for any Federal,
state or other domestic and foreign income taxes plus depreciation and
amortization, in each case on a consolidated basis determined in
accordance with GAAP applied on a consistent basis, but excluding for
purposes hereof extraordinary gains and losses and related tax effects
thereon.
"Consolidated Fixed Charge Coverage Ratio" means for the
period of four consecutive fiscal quarters ending as of the date of
determination, the ratio of Consolidated Adjusted EBITDA to
Consolidated Fixed Charges.
"Consolidated Fixed Charges" means for any period for the
Consolidated Group, the sum of the principal amount of Consolidated
Interest Expense (excluding the amortization of debt discount and
premium) plus the greater of (i) twenty percent (20%) of Obligations
outstanding hereunder on the date of determination or (ii) Two Million
Dollars ($2,000,000), in each case on a consolidated basis determined
in accordance with GAAP applied on an consistent basis. Except as
otherwise expressly provided, the applicable period shall be for the
four consecutive fiscal quarters ending as of the date of
determination.
"Consolidated Funded Debt" means Funded Debt of the
Consolidated Group determined on a consolidated basis in accordance
with GAAP applied on a consistent basis.
"Consolidated Group" means the Borrower and its consolidated
subsidiaries as determined in accordance with GAAP.
"Consolidated Interest Expense" means for any period for the
Consolidated Group, all interest expense, including the amortization of
debt discount and premium, the interest component under Capital Leases
and the implied interest component under Securitization Transactions,
in each case on a consolidated basis determined in accordance with GAAP
applied on a consolidated basis. Except as expressly provided
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<PAGE> 16
otherwise, the applicable period shall be for the four consecutive
quarters ending as of the date of determination.
"Consolidated Leverage Ratio" means, as of the last day of any
fiscal quarter, the ratio of Consolidated Funded Debt on such day to
Consolidated EBITDA for the period of four consecutive fiscal quarters
ending as of such day.
"Consolidated Net Income" means for any period for the
Consolidated Group, net income on a consolidated basis determined in
accordance with GAAP applied on a consistent basis plus the amount of
any deduction from such net income with respect to the fiscal quarter
ending September 30, 1998 attributable to (i) the Stock Incentive Plan
and (ii) other nonrecurring expenses related to the IPO, the
Combination and this Credit Agreement. Except as expressly provided
otherwise, the applicable period shall be for the four consecutive
quarters ending as of the date of determination.
"Consolidated Net Worth" means, as of any date for the
Consolidated Group, shareholders' equity or net worth as determined in
accordance with GAAP.
"Consolidated Rent Expense" means rental expense under
Operating Leases of the Consolidated Group on a consolidated basis for
the applicable period, as determined in accordance with GAAP. Except as
expressly provided otherwise, the applicable period shall be for the
four consecutive quarters ending as of the date of determination.
"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any material
agreement, instrument or undertaking to which such Person is a party or
by which it or any of its property is bound.
"Credit Documents" means a collective reference to this Credit
Agreement, the Notes, the LOC Documents, the Pledge Agreement, the
Security Agreement, each Joinder Agreement, the Administrative Agent's
Fee Letter, and all other related agreements and documents issued or
delivered hereunder or thereunder or pursuant hereto or thereto.
"Credit Party" means any of the Borrower and the Guarantors.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Defaulting Lender" means, at any time, any Lender that, at
such time, (i) has failed to make an Extension of Credit required
pursuant to the terms of this Credit Agreement, (ii) has failed to pay
to the Administrative Agent or any Lender an amount owed by such Lender
pursuant to the terms of the Credit Agreement or any other of the
Credit Documents, or (iii) has been deemed insolvent or has become
subject to a bankruptcy or insolvency proceeding or to a receiver,
trustee or similar proceeding.
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<PAGE> 17
"Divestiture" means any transaction by which the Borrower or
any Subsidiary sells, leases, transfers or otherwise disposes of (i)
any Property with which an ongoing business is conducted or to be
conducted; (ii) all or substantially all or any substantial portion of
its assets; or (iii) the capital stock of a Subsidiary, in each case
other than (x) the sale of Inventory in the ordinary course of
business, (y) the sale, lease, transfer or other disposition of plant,
property and equipment which is no longer used or useful in the
business of such Credit Party or as to which the proceeds thereof are
reinvested in plant, property or equipment within six months thereof,
or (z) sales, leases, transfers or other dispositions of Property or
capital stock of a Subsidiary by one Credit Party to another.
"Dollars" and "$" means dollars in lawful currency of the
United States of America.
"Domestic Credit Party" means any Credit Party which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Domestic Subsidiary" means any Subsidiary which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Eligible Inventory" means, as of any date of determination,
the aggregate book value (based on a FIFO valuation) of all inventory
owned by the Credit Parties on a consolidated basis after deducting
allowances or reserves relating thereto, as shown on the books and
records of the Credit Parties.
"Eligible Receivables" means, as of any date of determination,
the aggregate book value of all accounts, accounts receivable,
receivables, and obligations for payment created or arising from the
sale of inventory or the rendering of services in the ordinary course
of business (collectively, the "Receivables"), owned by or owing to the
Credit Parties on a consolidated basis after deducting retainage and
allowances or reserves relating thereto, as shown on the books and
records of the Credit Parties, but excluding in any event Receivables
owing by an account debtor which is not solvent or is subject to any
bankruptcy or insolvency proceeding of any kind.
"Eligible Receivables Retainage" means, as of any date of
determination, the aggregate book value of that portion of Receivables
owned by or owing to t he Credit Parties on a consolidated basis
consisting of retainage but excluding in any event such portion of
Receivables owing by an account debtor which is not solvent or is
subject to any bankruptcy or insolvency proceeding of any kind.
"Environmental Laws" means any and all lawful and applicable
Federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions,
grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges,
releases or threatened releases of
9
<PAGE> 18
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment including, without
limitation, ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances
or wastes.
"Equity Transaction" means, with respect to any member of the
Consolidated Group, any issuance of shares of its capital stock or
other equity interest, other than an issuance (i) to a member of the
Consolidated Group, (ii) in connection with a conversion of debt
securities to equity or (iii) in connection with exercise by a present
or former employee, officer or director under a stock incentive plan,
stock option plan or other equity-based compensation plan or
arrangement.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor statute thereto, as interpreted by
the rules and regulations thereunder, all as the same may be in effect
from time to time. References to sections of ERISA shall be construed
also to refer to any successor sections.
"ERISA Affiliate" means an entity which is under common
control with any Credit Party within the meaning of Section 4001(a)(14)
of ERISA, or is a member of a group which includes the Borrower and
which is treated as a single employer under Sections 414(b) or (c) of
the Internal Revenue Code.
"ERISA Event" means (i) with respect to any Plan, the
occurrence of a Reportable Event or the substantial cessation of
operations (within the meaning of Section 4062(e) of ERISA); (ii) the
withdrawal by the Borrower, any Subsidiary of the Borrower or any ERISA
Affiliate from a Multiple Employer Plan during a plan year in which it
was a substantial employer (as such term is defined in Section
4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan;
(iii) the distribution of a notice of intent to terminate or the actual
termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA;
(iv) the institution of proceedings to terminate or the actual
termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any
event or condition which would reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan; (vi) the complete or
partial withdrawal of the Borrower, any Subsidiary of the Borrower or
any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for
imposition of a lien under Section 302(f) of ERISA exist with respect
to any Plan; or (vii) the adoption of an amendment to any Plan
requiring the provision of security to such Plan pursuant to Section
307 of ERISA.
"Eurodollar Loan" means any Revolving Loan bearing interest at
a rate determined by reference to the Eurodollar Rate.
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<PAGE> 19
"Eurodollar Rate" means, for the Interest Period for each
Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
determined pursuant to the following formula:
Eurodollar Rate = Interbank Offered Rate
-------------------------------------------
1 - Eurodollar Reserve Percentage
"Eurodollar Reserve Percentage" means for any day, that
percentage (expressed as a decimal) which is in effect from time to
time under Regulation D of the Board of Governors of the Federal
Reserve System (or any successor), as such regulation may be amended
from time to time or any successor regulation, as the maximum reserve
requirement (including, without limitation, any basic, supplemental,
emergency, special, or marginal reserves) applicable with respect to
Eurocurrency liabilities as that term is defined in Regulation D (or
against any other category of liabilities that includes deposits by
reference to which the interest rate of Eurodollar Loans is
determined), whether or not Lender has any Eurocurrency liabilities
subject to such reserve requirement at that time. Eurodollar Loans
shall be deemed to constitute Eurocurrency liabilities and as such
shall be deemed subject to reserve requirements without benefits of
credits for proration, exceptions or offsets that may be available from
time to time to a Lender. The Eurodollar Rate shall be adjusted
automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage.
"Event of Default" means such term as defined in Section 9.1.
"Extension of Credit" means, as to any Lender, the making of,
or participation in, a Revolving Loan by such Lender or the issuance or
extension of, or participation in, a Letter of Credit.
"Fees" means all fees payable pursuant to Section 3.5.
"Federal Funds Rate" means, for any day, the rate of interest
per annum (rounded upwards, if necessary, to the nearest whole multiple
of 1/100 of 1%) equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding
such day, provided that (A) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions
on the next preceding Business Day and (B) if no such rate is so
published on such next preceding Business Day, the Federal Funds Rate
for such day shall be the average rate quoted to the Administrative
Agent on such day on such transactions as determined by the
Administrative Agent.
"Foreign Subsidiary" means a Subsidiary which is not a
Domestic Subsidiary.
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<PAGE> 20
"Founding Companies" means the Credit Parties (other than the
Borrower) party to this Credit Agreement on the Closing Date, as they
existed immediately prior to the Combination.
"Funded Debt" means, with respect to any Person, without
duplication, (i) all Indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds, debentures,
notes or similar instruments, or upon which interest payments are
customarily made, (iii) all purchase money Indebtedness (including for
purposes hereof, indebtedness and obligations described in clauses
(iii) and (iv) of the definition of "Indebtedness") of such Person,
including without limitation the principal portion of all obligations
of such Person under Capital Leases, (iv) all Support Obligations of
such Person with respect to Funded Indebtedness of another Person, (v)
the maximum available amount of all standby letters of credit or
acceptances issued or created for the account of such Person, (vi) all
Funded Debt of another Person secured by a Lien on any Property of such
Person, whether or not such Funded Indebtedness has been assumed,
provided that for purposes of this clause (vi) the amount of such
Funded Debt shall be limited to the greater of (A) the amount of such
Funded Debt as to which there is recourse to such Person and (B) the
fair market value of the property which is subject to the Lien, (vii)
the outstanding attributed principal amount under any Securitization
Transaction, and (viii) the principal balance outstanding under any
synthetic lease, tax retention operating lease, off-balance sheet loan
or similar off-balance sheet financing product to which such Person is
a party, where such transaction is considered borrowed money
indebtedness for tax purposes but is classified as an operating lease
in accordance with GAAP. The Funded Debt of any Person shall (i)
include the Funded Debt of any partnership or joint venture in which
such Person is a general partner or joint venturer, but only to the
extent to which there is recourse to such Person for the payment of
such Funded Debt, but (ii) exclude, in any event, amounts in respect of
financed insurance premium obligations permitted under Section 8.1(g).
"GAAP" means generally accepted accounting principles in the
United States applied on a consistent basis and subject to the terms of
Section 1.3 hereof.
"Governmental Authority" means any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or
regulatory body.
"Guarantor" means each of those other Persons identified as a
"Guarantor" on the signature pages hereto, and each other Person which
may hereafter become a Guarantor by execution of a Joinder Agreement,
together with their successors and permitted assigns.
"Guaranteed Obligations" means, as to each Guarantor, without
duplication, (i) all obligations of the Borrower (including interest
accruing after a Bankruptcy Event, regardless of whether such interest
is allowed as a claim under the Bankruptcy Code) to the Lenders and the
Administrative Agent, whenever arising, under this Credit Agreement,
the Notes or the other Credit Documents, and (ii) all liabilities and
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<PAGE> 21
obligations, whenever arising, owing from the Borrower to any Lender,
or any Affiliate of a Lender, arising under any Hedging Agreement
relating to Obligations hereunder.
"Hedging Agreement" means any interest rate protection
agreement or foreign currency exchange agreement between the Borrower
and any Lender, or any Affiliate of a Lender.
"Indebtedness" of any Person means (i) all obligations of such
Person for borrowed money, (ii) all obligations of such Person
evidenced by bonds, debentures, notes or similar instruments, or upon
which interest payments are customarily made, (iii) all obligations of
such Person under conditional sale or other title retention agreements
relating to Property purchased by such Person (other than customary
reservations or retentions of title under agreements with suppliers
entered into in the ordinary course of business), (iv) all obligations
of such Person issued or assumed as the deferred purchase price of
Property or services purchased by such Person (other than trade debt
incurred in the ordinary course of business and due within six months
of the incurrence thereof) which would appear as liabilities on a
balance sheet of such Person, (v) all obligations of such Person under
take-or-pay or similar arrangements or under commodities agreements,
(vi) all Indebtedness of others secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on, or payable out of the proceeds of production
from, Property owned or acquired by such Person, whether or not the
obligations secured thereby have been assumed, provided that for
purposes hereof the amount of such Indebtedness shall be limited to the
greater of (A) the amount of such Indebtedness as to which there is
recourse to such Person and (B) the fair market value of the property
which is subject to the Lien, (vii) all Support Obligations of such
Person, (viii) the principal portion of all obligations of such Person
under Capital Leases, (ix) all obligations of such Person in respect of
interest rate protection agreements, foreign currency exchange
agreements, commodity purchase or option agreements or other interest
or exchange rate or commodity price hedging agreements (including, but
not limited to, the Hedging Agreements), (x) the maximum amount of all
standby letters of credit issued or bankers' acceptances facilities
created for the account of such Person and, without duplication, all
drafts drawn thereunder (to the extent unreimbursed), (xi) all
preferred stock issued by such Person and required by the terms thereof
to be redeemed, or for which mandatory sinking fund payments are due,
by a fixed date, (xii) the outstanding attributed principal amount
under any Securitization Transaction and (xiii) the principal balance
outstanding under any synthetic lease, tax retention operating lease,
off-balance sheet loan or similar off-balance sheet financing product
to which such Person is a party, where such transaction is considered
borrowed money indebtedness for tax purposes but is classified as an
operating lease in accordance with GAAP. The Indebtedness of any Person
shall include the Indebtedness of any partnership or joint venture in
which such Person is a general partner or a joint venturer, but only to
the extent to which there is recourse to such Person for payment of
such Indebtedness.
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<PAGE> 22
"IPO" means the initial public offering of the Borrower's
common stock pursuant to the Registration Statement.
"Interbank Offered Rate" means, for the Interest Period for
each Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
(rounded upwards, if necessary, to the nearest whole multiple of 1/100
of 1%) equal to the rate of interest, determined by the Administrative
Agent on the basis of the offered rates for deposits in dollars for a
period of time corresponding to such Interest Period (and commencing on
the first day of such Interest Period), appearing on Telerate Page 3750
(or, if, for any reason, Telerate Page 3750 is not available, the
Reuters Screen LIBO Page) as of approximately 11:00 A.M. (London time)
two (2) Business Days before the first day of such Interest Period. As
used herein, "Telerate Page 3750" means the display designated as page
3750 by Dow Jones Markets, Inc. (or such other page as may replace such
page on that service for the purpose of displaying the British Bankers
Association London interbank offered rates) and "Reuters Screen LIBO
Page" means the display designated as page "LIBO" on the Reuters
Monitor Money Rates Service (or such other page as may replace the LIBO
page on that service for the purpose of displaying London interbank
offered rates of major banks).
"Interest Payment Date" means (i) as to any Base Rate Loan,
the last day of each March, June, September and December and the
Termination Date and (ii) as to any Eurodollar Loan, the last day of
each Interest Period for such Loan, the date of repayment of principal
of such Loan and on the Termination Date, and in addition where the
applicable Interest Period is more than three months, then also on the
date three months from the beginning of the Interest Period, and each
three months thereafter. If an Interest Payment Date falls on a date
which is not a Business Day, such Interest Payment Date shall be deemed
to be the next succeeding Business Day.
"Interest Period" means as to any Eurodollar Loan, a period of
one, two, three or six months' duration, as the Borrower may elect,
commencing in each case on the date of the borrowing (including
conversions, extensions and renewals); provided, however, (A) if any
Interest Period would end on a day which is not a Business Day, such
Interest Period shall be extended to the next succeeding Business Day
(where the next succeeding Business Day falls in the next succeeding
calendar month, then on the next preceding Business Day), (B) no
Interest Period shall extend beyond the Termination Date, and (C) where
an Interest Period begins on a day for which there is no numerically
corresponding day in the calendar month in which the Interest Period is
to end, such Interest Period shall end on the last day of such calendar
month.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, and any successor statute thereto, as interpreted by
the rules and regulations issued thereunder, in each case as in effect
from time to time. References to sections of the Internal Revenue Code
shall be construed also to refer to any successor sections.
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<PAGE> 23
"Investment", in any Person, means any loan or advance to such
Person, any purchase or other acquisition of any capital stock,
warrants, rights, options, obligations or other securities of, or
equity interest in, such Person, any capital contribution to such
Person or any other investment in such Person, including, without
limitation, any Support Obligation incurred for the benefit of such
Person.
"Issuing Lender" means NationsBank.
"Issuing Lender Fees" shall have the meaning assigned to such
term in Section 3.5(b)(ii).
"Joinder Agreement" means a Joinder Agreement substantially in
the form of Schedule 7.11 hereto, executed and delivered by an
Additional Credit Party in accordance with the provisions of Section
7.11.
"Joint Venture" means any corporation, partnership, limited
liability company or other entity in which the Borrower or any other
Credit Party owns or acquires fifty percent (50%) or less of the Voting
Stock or economic interests, and which conducts any business that the
Credit Parties would be permitted to conduct in accordance with Section
7.5.
"Lenders" means each of the Persons identified as a "Lender"
on the signature pages hereto, and their successors and assigns.
"Letter of Credit" means any letter of credit issued by the
Issuing Lender for the account of the Borrower in accordance with the
terms of Section 2.2.
"Letter of Credit Fee" shall have the meaning given such term
in Section 3.5(b)(i).
"Lien" means any mortgage, pledge, hypothecation, assignment,
deposit arrangement, security interest, encumbrance, lien (statutory or
otherwise), preference, priority or charge of any kind (including any
agreement to give any of the foregoing, any conditional sale or other
title retention agreement, and any lease in the nature thereof).
"Loan" or "Loans" means the Revolving Loans.
"LOC Commitment" means the commitment of the Issuing Lender to
issue, and to honor payment obligations under, Letters of Credit
hereunder and with respect to each Lender, the commitment of each
Lender to purchase participation interests in the Letters of Credit up
to such Lender's LOC Committed Amount as specified in Schedule 2.1(a),
as such amount may be reduced from time to time in accordance with the
provisions hereof.
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<PAGE> 24
"LOC Committed Amount" means, collectively, the aggregate
amount of all of the LOC Commitments of the Lenders to issue and
participate in Letters of Credit as referenced in Section 2.2(a) and,
individually, the amount of each Lender's LOC Commitment as specified
in Schedule 2.1(a).
"LOC Documents" means, with respect to any Letter of Credit,
such Letter of Credit, any amendments thereto, any documents delivered
in connection therewith, any application therefor, and any agreements,
instruments, guarantees or other documents (whether general in
application or applicable only to such Letter of Credit) governing or
providing for (i) the rights and obligations of the parties concerned
or at risk or (ii) any collateral security for such obligations.
"LOC Obligations" means, at any time, the sum of (i) the
maximum amount which is, or at any time thereafter may become,
available to be drawn under Letters of Credit then outstanding,
assuming compliance with all requirements for drawings referred to in
such Letters of Credit plus (ii) the aggregate amount of all drawings
under Letters of Credit honored by the Issuing Lender but not
theretofore reimbursed.
"Material Adverse Effect" means a material adverse effect on
(i) the condition (financial or otherwise), operations, business,
assets or liabilities of the Consolidated Group taken as a whole, (ii)
the ability of the Credit Parties taken as a whole to perform any
material obligation under the Credit Documents to which it is a party
or (iii) the rights and remedies of the Lenders under the Credit
Documents.
"Material Credit Party" means (i) the Borrower and (ii) any
other Credit Party at any time whose assets at the time of
determination constitute five percent (5%) or more of the assets of the
Consolidated Group or whose revenues at the time of determination
constitute five percent (5%) or more of the revenues of the
Consolidated Group.
"Materials of Environmental Concern" means any gasoline or
petroleum (including crude oil or any fraction thereof) or petroleum
products or any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Laws,
including, without limitation, asbestos, polychlorinated biphenyls and
urea-formaldehyde insulation.
"Moody's" means Moody's Investors Service, Inc., or any
successor or assignee of the business of such company in the business
of rating securities.
"Multiemployer Plan" means a Plan which is a multiemployer
plan as defined in Sections 3(37) or 4001(a)(3) of ERISA.
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<PAGE> 25
"Multiple Employer Plan" means a Plan which the Borrower, any
Subsidiary of the Borrower or any ERISA Affiliate and at least one
employer other than the Borrower, any Subsidiary of the Borrower or any
ERISA Affiliate are contributing sponsors.
"NationsBank" means NationsBank, N.A. and its successors.
"Non-Excluded Taxes" means such term as is defined in Section
3.10.
"Note" or "Notes" means any Revolving Note.
"Notice of Borrowing" means a written notice of borrowing in
substantially the form of Schedule 2.1(b)(i), as required by Section
2.1(b)(i).
"Notice of Extension/Conversion" means a written notice of
extension or conversion in substantially the form of Schedule 3.2, as
required by Section 3.2.
"Obligations" means, collectively, the Revolving Loans and the
LOC Obligations.
"Operating Lease" means, as applied to any Person, any lease
(including, without limitation, leases which may be terminated by the
lessee at any time) of any Property (whether real, personal or mixed)
which is not a Capital Lease other than any such lease in which that
Person is the lessor.
"Participation Interest" means the purchase by a Lender of a
participation in LOC Obligations as provided in Section 2.2(c) and in
Revolving Loans as provided in Section 3.14.
"PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and any
successor thereof.
"Permitted Investments" means Investments which are either (i)
cash and Cash Equivalents; (ii) accounts receivable created, acquired
or made in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; (iii) Investments consisting
of stock, obligations, securities or other property received in
settlement of accounts receivable (created in the ordinary course of
business) from obligors; (iv) Support Obligations permitted by Section
8.1; (v) Acquisitions permitted by Section 8.4; (vi) advances or loans
to employees, directors or officers to pay the tax liabilities
associated with participation in the Stock Incentive Plan and other
advances or loans to employees, directors, officers or agents not to
exceed $500,000 in the aggregate at any time outstanding; (vii)
advances or loans to customers or suppliers (other than advance payment
of sums due under contracts in the ordinary course of business) that do
not exceed $100,000 in the aggregate at any one time outstanding,
(viii) Investments by a member of the Consolidated Group or an
Affiliate of a member of the Consolidated Group in connection with a
Permitted Securitization Transaction, (ix) Investments by members of
the Consolidated Group in their
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Subsidiaries and Affiliates existing on the Closing Date, (x)
Investments by one Credit Party in and to a Domestic Credit Party, (x)
Investments in Joint Ventures not to exceed, on a cost basis,
$4,000,000 in any individual Joint Venture, and $10,000,000, in the
aggregate in all Joint Ventures at any one time outstanding, and (xii)
other loans, advances and investments of a nature not contemplated in
the foregoing subsections in an amount not to exceed $500,000 in the
aggregate at any time outstanding.
"Permitted Liens" means:
(i) Liens in favor of the Administrative Agent
on behalf of the Lenders;
(ii) Liens in favor of a Lender or an Affiliate
of a Lender pursuant to a Hedging Agreement permitted
hereunder, but only (A) to the extent such Liens secure
obligations under such agreements permitted under Section 8.1,
(B) to the extent such Liens are on the same collateral as to
which the Lenders also have a Lien and (C) if such provider
and the Lender shall share pari passu in the collateral
subject to such Liens;
(iii) Liens (other than Liens created or imposed
under ERISA) for taxes, assessments or governmental charges or
levies not yet due or Liens for taxes being contested in good
faith by appropriate proceedings for which adequate reserves
determined in accordance with GAAP have been established (and
as to which the Property subject to any such Lien is not yet
subject to foreclosure, sale or loss on account thereof);
(iv) statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics, materialmen and suppliers
and other Liens imposed by law or pursuant to customary
reservations or retentions of title arising in the ordinary
course of business, provided that such Liens secure only
amounts not yet due and payable or, if due and payable, are
unfiled and no other action has been taken to enforce the same
or are being contested in good faith by appropriate
proceedings for which adequate reserves determined in
accordance with GAAP have been established (and as to which
the Property subject to any such Lien is not yet subject to
foreclosure, sale or loss on account thereof);
(v) Liens (other than Liens created or imposed
under ERISA) incurred or deposits made by the Borrower and its
Subsidiaries in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of
tenders, statutory obligations, bids, leases, government
contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment
of borrowed money);
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(vi) Liens in connection with attachments or
judgments (including judgment or appeal bonds) provided that
the judgments secured shall, within 30 days after the entry
thereof, have been discharged or execution thereof stayed
pending appeal, or shall have been discharged within 30 days
after the expiration of any such stay;
(vii) easements, rights-of-way, restrictions
(including zoning restrictions), minor defects or
irregularities in title and other similar charges or
encumbrances not, in any material respect, impairing the use
of the encumbered Property for its intended purposes;
(viii) Liens securing purchase money and
sale/leaseback Indebtedness (including Capital Leases) to the
extent permitted under Sections 8.1(b) and 8.1(c) provided
that any such Lien attaches only to the Property financed or
leased and such Lien attaches thereto concurrently with or
within 90 days after the acquisition thereof in connection
with the purchase money transactions and within 30 days after
the closing of any sale/leaseback transaction;
(ix) leases or subleases granted to others not
interfering in any material respect with the business of any
member of the Consolidated Group;
(x) any interest of title of a lessor under, and
Liens arising from UCC financing statements (or equivalent
filings, registrations or agreements in foreign jurisdictions)
relating to, leases permitted by this Credit Agreement;
(xi) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods;
(xii) Liens created or deemed to exist in
connection with a Permitted Securitization Transaction
(including any related filings of any financing statements),
but only to the extent that any such Lien relates to the
applicable receivables and related property actually sold,
contributed or otherwise conveyed pursuant to such
transaction;
(xiii) Liens deemed to exist in connection with
Investments in repurchase agreements permitted under Section
8.5;
(xiv) normal and customary rights of setoff upon
deposits of cash in favor of banks or other depository
institutions;
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(xv) Liens in respect of Indebtedness permitted
under Section 8.1(g) hereof, limited solely to sums payable
under the policy or policies to which such Indebtedness
relates; and
(xvi) Liens existing as of the Closing Date and
set forth on Schedule 6.8; provided that no such Lien shall at
any time be extended to or cover any Property other than the
Property subject thereto on the Closing Date.
"Person" means any individual, partnership, joint venture,
firm, corporation, limited liability company, association, trust or
other enterprise (whether or not incorporated) or any Governmental
Authority.
"Plan" means any employee benefit plan (as defined in Section
3(3) of ERISA) which is covered by ERISA and with respect to which the
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate is (or,
if such plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be) an "employer" within the meaning of Section 3(5)
of ERISA.
"Pledge Agreement" means the Pledge Agreement dated as of the
Closing Date given by the Borrower and Comstock Holdings to
NationsBank, N.A., as Administrative Agent, to secure the obligations
hereunder, as amended and modified.
"Prime Rate" means the rate of interest per annum publicly
announced from time to time by NationsBank as its prime rate in effect
at its principal office in Charlotte, North Carolina, with each change
in the Prime Rate being effective on the date such change is publicly
announced as effective (it being understood and agreed that the Prime
Rate is a reference rate used by NationsBank in determining interest
rates on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit by NationsBank to any
debtor).
"Pro Forma Basis" means, with respect to any calculation of
financial covenants in connection with any proposed Acquisition or
Divestiture pursuant to Sections 8.4 or 8.3, respectively, that (i)
such financial covenants shall be calculated on a pro forma basis
giving effect to such Acquisition or Divestiture, (ii) such Acquisition
or Divestiture shall be deemed to have occurred as of the first day of
the four fiscal quarter period ending as of the most recent fiscal
quarter end preceding the date of such Acquisition or Divestiture with
respect to which the Administrative Agent and the Lenders have received
the Officer's Certificate required by Section 7.2(b), (iii) any
Indebtedness incurred in connection with any such Acquisition shall be
deemed to have been incurred as of the first day of such four fiscal
quarter period, (iv) any Indebtedness repaid in connection with any
such Divestiture shall be deemed to have been repaid as of the first
day of such four fiscal quarter period, and (v) if such Indebtedness
incurred or repaid for the purposes of clause (iv) has a floating or
formula rate, then the implied rate of interest for such Indebtedness
for the applicable four quarter
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period shall be determined by utilizing the rate which is or would be
in effect with respect to such Indebtedness as at the relevant date of
determination.
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Register" shall have the meaning given such term in Section
11.3(c).
"Registration Statement" means the Registration Statement of
the Borrower on Form S-1, initially filed with the SEC on May 22, 1998,
as amended and supplemented through Post-Effective Amendment No. 1
thereto, filed with the SEC on July 29, 1998 and declared effective by
the SEC on July 29, 1998.
"Regulation T, U or X" means Regulation T, U or X,
respectively, of the Board of Governors of the Federal Reserve System
as from time to time in effect and any successor to all or a portion
thereof.
"Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing into the environment (including the abandonment or
discarding of barrels, containers and other closed receptacles
containing any Materials of Environmental Concern).
"Reportable Event" means any of the events set forth in
Section 4043(c) of ERISA, other than those events as to which the
notice requirement has been waived by regulation.
"Required Lenders" means, at any time, Lenders having more
than fifty percent (50%) of the Commitments (as such Commitments may be
increased pursuant to Section 2.1(k)), or if the Commitments have been
terminated, Lenders having more than fifty percent (50%) of the
aggregate principal amount of the Obligations outstanding (taking into
account in each case Participation Interests or obligation to
participate therein); provided that the Commitments of, and outstanding
principal amount of Obligations (taking into account Participation
Interests therein) owing to, a Defaulting Lender shall be excluded for
purposes hereof in making a determination of Required Lenders.
"Requirement of Law" means any law, treaty, rule or regulation
or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or
any of its material property is subject.
"Responsible Officer" means the Chief Executive Officer, the
Chief Financial Officer, the Controller, the Chief Operating Officer,
the Chief Accounting Officer and the Treasurer of the Borrower.
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"Restricted Payment" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class
of stock now or hereafter outstanding, except (A) a dividend payable
solely in shares of that class to the holders of that class, (B)
dividends and other distributions payable to a Credit Party, (C)
dividends paid or payable to the shareholders of certain of the
Founding Companies in respect of tax liabilities incurred under
Subchapter S of the Internal Revenue Code on or before the Closing Date
(whether such dividends are paid on, before or after the Closing Date)
and (D) the repurchase of stock of a minority shareholder of one of the
Founding Companies referred to in note 4g(1) to the unaudited pro forma
as adjusted financial statements of the Borrower, as set forth on page
F-8 of the Registration Statement, (ii) any redemption, retirement,
sinking fund or similar payment, purchase or other acquisition for
value, direct or indirect, of any shares of any class of stock now or
hereafter outstanding, and (iii) any payment made to retire, or to
obtain the surrender of, any outstanding warrants, options or other
rights to acquire shares of any class of stock now or hereafter
outstanding.
"Revolving Commitment" means, with respect to each Lender, the
commitment of such Lender to make Revolving Loans in an aggregate
principal amount at any time outstanding of up to such Lender's
Commitment Percentage of the Aggregate Revolving Committed Amount as
specified in Schedule 2.1(a), as such amount may be reduced from time
to time in accordance with the provisions hereof.
"Revolving Commitment Percentage" means, for each Lender, a
fraction (expressed as a decimal) the numerator of which is the
Revolving Commitment of such Lender at such time and the denominator of
which is the Aggregate Revolving Committed Amount at such time. The
initial Revolving Commitment Percentages are set out on Schedule
2.1(a).
"Revolving Committed Amount" means, collectively, the
aggregate amount of all of the Revolving Commitments and, individually,
the amount of each Lender's Revolving Commitment as specified in
Schedule 2.1(a).
"Revolving Loans" shall have the meaning assigned to such term
in Section 2.1(a).
"Revolving Note" or "Revolving Notes" means the promissory
notes of the Borrower in favor of each of the Lenders evidencing the
Revolving Loans in substantially the form attached as Schedule 2.1(e),
individually or collectively, as appropriate, as such promissory notes
may be amended, modified, supplemented, extended, renewed or replaced
from time to time.
"SEC" means the Securities and Exchange Commission and any
successor Governmental Authority.
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"S&P" means Standard & Poor's Ratings Group, a division of
McGraw Hill, Inc., or any successor or assignee of the business of such
division in the business of rating securities.
"Securitization Transaction" means any financing transaction
or series of financing transactions that have been or may be entered
into by a member of the Consolidated Group pursuant to which such
member of the Consolidated Group may sell, convey or otherwise transfer
to (i) a Subsidiary or affiliate (a "Securitization Subsidiary"), or
(ii) any other Person, or may grant a security interest in, any
receivables or interests therein secured by merchandise or services
financed thereby (whether such receivables are then existing or arising
in the future) of such member of the Consolidated Group, and any assets
related thereto, including without limitation, all security interests
in merchandise or services financed thereby, the proceeds of such
receivables, and other assets which are customarily sold or in respect
of which security interests are customarily granted in connection with
securitization transactions involving such assets.
"Security Agreement" means the Security Agreement dated as of
the Closing Date given by the Borrower and the other grantors
identified therein to NationsBank, N.A., as Administrative Agent, to
secure the obligations hereunder, as amended and modified.
"Single Employer Plan" means any Plan which is covered by
Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple
Employer Plan.
"Stock Incentive Plan" means the Borrower's 1998 Stock
Incentive Plan described in the Registration Statement.
"Subordinated Debt" means any Indebtedness of a member of the
Consolidated Group which by its terms is expressly subordinated in
right of payment to the prior payment of the obligations under the
Credit Agreement and the other Credit Documents on terms and conditions
satisfactory to the Required Lenders.
"Subsidiary" means, as to any Person, (a) any corporation more
than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time, any class
or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by
such Person directly or indirectly through Subsidiaries, and (b) any
partnership, association, joint venture or other entity in which such
Person directly or indirectly through Subsidiaries has more than 50% of
the voting interests at any time. Unless otherwise identified,
"Subsidiary" or "Subsidiaries" shall mean Subsidiaries of the Borrower.
"Support Obligations" means, with respect to any Person,
without duplication, any obligations of such Person (other than
endorsements in the ordinary course of business of negotiable
instruments for deposit or collection) guaranteeing or intended to
guarantee any
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Indebtedness of any other Person in any manner, whether direct or
indirect, and including without limitation any obligation, whether or
not contingent, (i) to purchase any such Indebtedness or any Property
constituting security therefor, (ii) to advance or provide funds or
other support for the payment or purchase of any such Indebtedness or
to maintain working capital, solvency or other balance sheet condition
of such other Person (including without limitation keep well
agreements, maintenance agreements, comfort letters or similar
agreements or arrangements) for the benefit of any holder of
Indebtedness of such other Person, (iii) to lease or purchase Property,
securities or services primarily for the purpose of assuring the holder
of such Indebtedness, or (iv) to otherwise assure or hold harmless the
holder of such Indebtedness against loss in respect thereof, but
specifically excluding guaranties or other assurances with respect to
any Credit Party's performance obligations under bids or contracts made
or entered into in the ordinary course of business (including, without
limitation, guaranties in favor of sureties under performance bonds or
the like and guaranties issued by Credit Parties in substitution for or
in support of such guaranties issued prior to the Closing Date by the
Founding Companies or their respective stockholders and principals).
The amount of any Support Obligation hereunder shall (subject to any
limitations set forth therein) be deemed to be an amount equal to the
outstanding principal amount (or maximum principal amount, if larger)
of the Indebtedness in respect of which such Support Obligation is
made.
"Termination Date" means August 4, 2001, or if extended
pursuant to the provisions of Section 2.1(g), such later date as to
which the Termination Date may be extended.
"Voting Stock" means, with respect to any Person, capital
stock issued by such Person the holders of which are ordinarily, in the
absence of contingencies, entitled to vote for the election of
directors (or persons performing similar functions) of such Person,
even though the right so to vote has been suspended by the happening of
such a contingency.
1.2 Computation of Time Periods.
For purposes of computation of periods of time hereunder, the word
"from" means "from and including" and the words "to" and "until" each mean "to
but excluding."
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1.3 Accounting Terms; Certain Calculations
(a) Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to the
Lenders hereunder shall be prepared, in accordance with GAAP applied on a
consistent basis. All calculations made for the purposes of determining
compliance with this Credit Agreement shall (except as otherwise expressly
provided herein) be made by application of GAAP applied on a basis consistent
with the most recent annual or quarterly financial statements delivered pursuant
to Section 7.1 hereof (or, prior to the delivery of the first financial
statements pursuant to Section 7.1 hereof, consistent with the annual audited
financial statements of Comstock Holdings set forth beginning on page F-26 of
the Registration Statement, except to the extent that the Borrower intends to
capitalize the cost of tools, whereas Comstock Holdings historically has
expensed such costs); provided, however, if (a) the Borrower shall object to
determining such compliance on such basis at the time of delivery of such
financial statements due to any change in GAAP or the rules promulgated with
respect thereto or (b) the Administrative Agent or the Required Lenders shall so
object in writing within 30 days after delivery of such financial statements,
then such calculations shall be made on a basis consistent with the most recent
financial statements delivered by the Borrower to the Lenders as to which no
such objection shall have been made.
(b) Notwithstanding anything to the contrary contained in
subsection (a) above, the parties hereto agree that the financial covenants set
forth in Section 7.9 shall be calculated as follows (including, without
limitation, calculation of the Consolidated Leverage Ratio for the purpose of
the definition of "Applicable Percentage" set forth in Section 1.1 and
calculation of all such financial covenants for the purposes of Sections 8.3 and
8.4):
(i) all such calculations shall be performed on a Pro
Forma Basis with respect to any Acquisition or Divestiture occurring
within such four quarter period (or, solely for the purposes of
Sections 8.3 and 8.4 hereof, contemplated to occur within the fiscal
quarter following such period);
(ii) solely for the purpose of calculations to be
performed on a Pro Forma Basis for the purposes of Section 8.4, any
adjustments to pro forma consolidated income statement items
attributable to an Acquisition shall be performed in accordance with
Rule 11.02 of Regulation S-X promulgated by the SEC or otherwise
consented to by the Administrative Agent and the Required Lenders; and
(iii) all such calculations with respect to periods ending
on or before June 30, 1999 shall be performed utilizing, to the extent
applicable, the unaudited pro forma as adjusted financial statements
for the fiscal quarters ended December 31, 1997, March 31, 1998, June
30, 1998 and September 30, 1998 delivered pursuant to Sections 6.1(iii)
and (iv) and 7.1(c).
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SECTION 2
CREDIT FACILITIES
2.1 Revolving Loans.
(a) Revolving Commitment. During the Commitment Period, subject
to the terms and conditions hereof, each Lender severally agrees to make
revolving credit loans (the "Revolving Loans") to the Borrower from time to
time in the amount of such Lender's Revolving Commitment Percentage of such
Revolving Loans for the purposes hereinafter set forth; provided that (i) with
regard to the Lenders collectively, the aggregate principal amount of
Obligations outstanding at any time shall not exceed the lesser of (A) the
Aggregate Revolving Committed Amount or (B) the Borrowing Base, and (ii) with
regard to each Lender individually, such Lender's Revolving Commitment
Percentage of Obligations outstanding at any time shall not exceed the lesser
of (A) such Lender's Revolving Committed Amount or (B) such Lender's Revolving
Commitment Percentage of the Borrowing Base. Revolving Loans may consist of
Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower
may request, and may be repaid and reborrowed in accordance with the provisions
hereof.
(b) Revolving Loan Borrowings.
(i) Notice of Borrowing. The Borrower shall
request a Revolving Loan borrowing by written notice (or telephone
notice promptly confirmed in writing) to the Administrative Agent not
later than 11:00 A.M. (Charlotte, North Carolina time) on the date of
the requested borrowing in the case of Base Rate Loans, and on the
third Business Day prior to the date of the requested borrowing in the
case of Eurodollar Loans. Each such request for borrowing shall be
irrevocable and shall specify (A) that a Revolving Loan is requested,
(B) the date of the requested borrowing (which shall be a Business
Day), (C) the aggregate principal amount to be borrowed, and (D)
whether the borrowing shall be comprised of Base Rate Loans,
Eurodollar Loans or a combination thereof, and if Eurodollar Loans are
requested, the Interest Period(s) therefor. If the Borrower shall fail
to specify in any such Notice of Borrowing (I) an applicable Interest
Period in the case of a Eurodollar Loan, then such notice shall be
deemed to be a request for an Interest Period of one month, or (II)
the type of Revolving Loan requested, then such notice shall be deemed
to be a request for a Base Rate Loan hereunder. The Administrative
Agent shall give notice to each Lender promptly upon receipt of each
Notice of Borrowing pursuant to this Section 2.1(b)(i), the contents
thereof and each such Lender's share of any borrowing to be made
pursuant thereto.
(ii) Minimum Amounts. Each Revolving Loan shall
be, in the case of Eurodollar Loans, in a minimum aggregate principal
amount of $2,500,000 and integral multiples of $500,000 in excess
thereof, or, in the case of Base Rate Loans, in a minimum aggregate
principal amount of $1,000,000 (or the remaining Revolving Committed
Amount, if less) and integral multiples of $100,000 in excess thereof.
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(iii) Advances. Each Lender will make its
Revolving Commitment Percentage of each Revolving Loan borrowing
available to the Administrative Agent for the account of the Borrower,
or in such other manner as the Administrative Agent may specify in
writing, by 1:00 P.M. (Charlotte, North Carolina time) on the date
specified in the applicable Notice of Borrowing in Dollars and in
funds immediately available to the Administrative Agent. Such
borrowing will then be made available to the Borrower by the
Administrative Agent by crediting the account of the Borrower with the
aggregate of the amounts made available to the Administrative Agent by
the Lenders and in like funds as received by the Administrative Agent.
(c) Repayment. The principal amount of all Revolving Loans shall
be due and payable in full on the Termination Date.
(d) Interest. Subject to the provisions of Section 3.1,
(i) Base Rate Loans. During such periods as
Revolving Loans shall be comprised in whole or in part of Base Rate
Loans, such Base Rate Loans shall bear interest at a per annum rate
equal to the Base Rate plus the Applicable Percentage;
(ii) Eurodollar Loans. During such periods as
Revolving Loans shall be comprised in whole or in part of Eurodollar
Loans, such Eurodollar Loans shall bear interest at a per annum rate
equal to the Eurodollar Rate plus the Applicable Percentage.
Interest on Revolving Loans shall be payable in arrears on each applicable
Interest Payment Date (or at such other times as may be specified herein).
(e) Revolving Notes. The Revolving Loans shall be evidenced by a
duly executed Revolving Note in favor of each Lender.
(f) Maximum Number of Eurodollar Loans. The Borrower will be
limited to a maximum number of five (5) Eurodollar Loans outstanding at any
time. For purposes hereof, Eurodollar Loans with separate or different Interest
Periods will be considered as separate Eurodollar Loans even if their Interest
Periods expire on the same date.
(g) Extension of Termination Date
(i) First Extension Option. Not more than 15 months and
not less than 60 days prior to the Termination Date, the Borrower may, by
notice to the Administrative Agent, make written request of the Lenders to
extend the Termination Date for an additional one year period. The
Administrative Agent will give prompt notice to each of the Lenders of its
receipt of any such request for extension of the Termination Date. Each Lender
shall notify the Administrative Agent in writing not later than 30 days after
receipt of such notice as to whether or not it will agree to extend the
Termination Date as requested. Each decision by a Lender shall be in its sole
discretion; provided,
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however, that failure by any Lender to make a timely response to the Borrower's
request for extension of the Termination Date shall be deemed to constitute a
refusal by such Lender to extension of the Termination Date. If Lenders holding
more than 50% of the aggregate Commitments (as such Commitments may be
increased pursuant to Section 2.1(k) below) timely agree in writing to extend
the Termination Date for an additional one year period, then the Termination
Date shall be extended for an additional one year period.
(ii) Second Extension Option. If the Termination Date has
been extended pursuant to the terms and conditions of the preceding paragraph,
not more than 15 months and not less than 60 days prior to such extended
Termination Date, the Borrower may, by notice to the Administrative Agent, make
written request of the Lenders to extend such Termination Date for an
additional one year period. The Administrative Agent will give prompt notice to
each of the Lenders of its receipt of any such request for extension of such
Termination Date. Each Lender shall make notify the Administrative Agent in
writing not later than 30 days after receipt of such notice as to whether or
not it will agree to extend such Termination Date as requested. Each decision
by a Lender shall be in its sole discretion; provided, however, that failure by
any Lender to make a timely response to the Borrower's request for extension of
such Termination Date shall be deemed to constitute a refusal by such Lender to
extension of such Termination Date. If Lenders holding more than 50% of the
aggregate Commitments (as such Commitments may be increased pursuant to Section
2.1(k) below) timely agree in writing to extend such Termination Date for an
additional one year period, then such Termination Date shall be extended for an
additional one year period.
(h) Lender Not Consenting. If any Lender does not timely agree in
writing to extend the Termination Date, the Termination Date, as it relates to
such Lender, shall not be extended, the Commitment of such Lender shall
terminate on the Termination Date applicable to it and any Revolving Loans made
by such Lender and all accrued and unpaid interest thereon shall be due and
payable on the Termination Date applicable to it. Upon the termination of the
Commitment of any such Lender, unless this Agreement is amended as provided in
Subsections 2.1(k), the aggregate amount of the Commitments shall be reduced by
the amount of such terminated Commitment, and the Revolving Commitment
Percentage of each other Lender shall be adjusted to that percentage obtained
by dividing the Commitment of such Lender by the aggregate amount of the
Commitments after giving effect to such reduction as provided in the definition
of "Revolving Commitment Percentage".
(i) Other Lenders. No refusal by any Lender or Lenders to consent
to any extension of the Termination Date shall affect the extension of the
Termination Date as it may relate to the Commitment and Revolving Loans of any
Lender which consents to such extension pursuant to Section 2.1(g), and one or
more Lenders may consent to the extension of the Termination Date as it relates
to them notwithstanding any refusal by any other Lenders so to consent;
provided that even as to the consenting Lenders the Termination Date will be
extended only upon consent to such an extension by Lenders holding more than
50% of the aggregate Commitments (as such Commitments may be increased pursuant
to Section 2.1(k) below).
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(j) Termination of Commitment. If any Lender does not timely
consent to the extension of the Termination Date pursuant to Section 2.1(g) and
no Revolving Loans are then outstanding, the Borrower may upon at least three
(3) Business Days' prior notice to such Lender and to the Administrative Agent
terminate the Commitment of such Lender. Upon any such termination the
Revolving Commitment Percentage of each other Lender shall be adjusted, if
necessary, to that percentage obtained by dividing the Commitment of such
Lender by the aggregate amount of the Commitments after giving effect to such
termination and any increases in the aggregate amount of the Commitments under
the provisions of Section 2.1(k).
(k) Increase in Commitment of Other Lender or Lenders. If any
Lender does not timely consent to the extension of the Termination Date
pursuant to Section 2.1(g), upon the expiration of the Commitment of such
Lender, or upon its termination as provided in Section 2.1(j), the Borrower may
offer each Lender which has timely consented to the extension of the
Termination Date pursuant to Subsection 2.1(g) a reasonable opportunity to
increase its Commitment by an amount equal to its pro-rata share (based on its
Commitment before such increase) of the Commitment of the Lender which does not
timely consent to the extension of the Termination Date pursuant to Section
2.1(g). After giving such Lenders such an opportunity, the Borrower and the
Administrative Agent, acting on behalf of the Lenders, shall amend this
Agreement to increase the Commitment of any Lender or Lenders that consent to
an increase in their respective Commitments hereunder, and such amendment shall
be binding on all of the Lenders, provided that such increase does not increase
the aggregate amount of the Commitments to an amount greater than the aggregate
amount of Commitments in effect immediately before such expiration or
termination.
(l) Notice. The Administrative Agent shall promptly advise each
Lender of any change in Revolving Commitment Percentages made pursuant to
Section 2.1(j) and shall promptly provide each of the Lenders with a copy of
any amendment made pursuant to Section 2.1(k).
2.2 Letter of Credit Subfacility.
(a) Issuance. During the Commitment Period, subject to the terms
and conditions hereof and of the LOC Documents, if any, and such other terms
and conditions which the Issuing Lender may reasonably require, the Issuing
Lender shall issue, and the Lenders shall participate in, such Letters of
Credit as the Borrower may request for its own account or for the account of
another Credit Party as provided herein, in a form acceptable to the Issuing
Lender, for the purposes hereinafter set forth; provided that (i) the aggregate
amount of LOC Obligations shall not exceed TWENTY MILLION DOLLARS ($20,000,000)
at any time (the "LOC Committed Amount"), (ii) with regard to the Lenders
collectively, the aggregate principal amount of Obligations outstanding at any
time shall not exceed the lesser of (A) the Aggregate Revolving Committed
Amount or (B) the Borrowing Base, and (iii) with regard to each Lender
individually, such Lender's Revolving Commitment Percentage of Obligations
outstanding at any time shall not exceed the lesser of (A) such Lender's
Revolving Committed Amount or (B) such Lender's Revolving Commitment Percentage
of the Borrowing Base. Letters of Credit issued hereunder
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shall not have an original expiry date more than one year from the date of
issuance or extension. If any Letter of Credit issued hereunder shall have an
expiry date, whether as originally issued or by extension, extending beyond the
Termination Date, the Borrower shall, on the Termination Date, either (i) cause
such Letter of Credit to be surrendered to the Issuing Lender, (ii) provide to
the Issuing Lender a back-to-back letter of credit in respect thereof
reasonably satisfactory to the Issuing Lender or (iii) provide cash collateral
to the Issuing Lender in an amount equal to the maximum amount available to be
drawn under such Letter of Credit. Each Letter of Credit shall comply with the
related LOC Documents. The issuance date of each Letter of Credit shall be a
Business Day.
(b) Notice and Reports. Except for those Letters of Credit
described on Schedule 2.2(b)-1 which shall be issued on the Closing Date, the
request for the issuance of a Letter of Credit shall be submitted by the
Borrower to the Issuing Lender at least three (3) Business Days prior to the
requested date of issuance (or such shorter period as may be agreed by the
Issuing Lender). A form of Notice of Request for Letter of Credit is attached
as Schedule 2.2(b)-2. The Issuing Lender will provide to the Administrative
Agent at least monthly, and more frequently upon request, a detailed summary
report on its Letters of Credit and the activity thereon, in form and substance
acceptable to the Administrative Agent. In addition, the Issuing Lender will
provide to the Administrative Agent for dissemination to the Lenders at least
quarterly, and more frequently upon request, a detailed summary report on its
Letters of Credit and the activity thereon, including, among other things, the
Credit Party for whose account the Letter of Credit is issued, the beneficiary,
the face amount, and the expiry date. The Issuing Lender will provide copies of
the Letters of Credit to the Administrative Agent and the Lenders promptly upon
request.
(c) Participation. Each Lender, upon issuance of a Letter of
Credit, shall be deemed to have purchased without recourse a risk participation
from the applicable Issuing Lender in such Letter of Credit and the obligations
arising thereunder, in each case in an amount equal to its pro rata share of
the obligations under such Letter of Credit (based on the respective Commitment
Percentages of the Lenders) and shall absolutely, unconditionally and
irrevocably assume, as primary obligor and not as surety, and be obligated to
pay to the Issuing Lender therefor and discharge when due, its pro rata share
of the obligations arising under such Letter of Credit. Without limiting the
scope and nature of each Lender's participation in any Letter of Credit, to the
extent that the Issuing Lender has not been reimbursed as required hereunder or
under any such Letter of Credit, each such Lender shall pay to the Issuing
Lender its pro rata share of such unreimbursed drawing in same day funds on the
day of notification by the Issuing Lender of an unreimbursed drawing pursuant
to the provisions of subsection (d) hereof. The obligation of each Lender to so
reimburse the Issuing Lender shall be absolute and unconditional and shall not
be affected by the occurrence of a Default, an Event of Default or any other
occurrence or event. Any such reimbursement shall not relieve or otherwise
impair the obligation of the Borrower to reimburse the Issuing Lender under any
Letter of Credit, together with interest as hereinafter provided.
(d) Reimbursement. In the event of any drawing under any Letter
of Credit, the Issuing Lender will promptly notify the Borrower. Unless the
Borrower shall immediately notify the Issuing
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Lender that the Borrower intends to otherwise reimburse the Issuing Lender for
such drawing, the Borrower shall be deemed to have requested that the Lenders
make a Revolving Loan in the amount of the drawing as provided in subsection
(e) hereof on the related Letter of Credit, the proceeds of which will be used
to satisfy the related reimbursement obligations. The Borrower promises to
reimburse the Issuing Lender on the day of drawing under any Letter of Credit
(either with the proceeds of a Revolving Loan obtained hereunder or otherwise)
in same day funds. If the Borrower notifies the Issuing Lender that it intends
to reimburse the Issuing Lender other than through a Revolving Loan and
thereafter, shall fail to reimburse the Issuing Lender as provided hereinabove,
the unreimbursed amount of such drawing shall bear interest at a per annum rate
equal to the Base Rate plus the sum of (i) the Applicable Percentage and (ii)
two percent (2%). The Borrower's reimbursement obligations hereunder shall be
absolute and unconditional under all circumstances irrespective of any rights
of setoff, counterclaim or defense to payment the Borrower may claim or have
against the Issuing Lender, the Administrative Agent, the Lenders, the
beneficiary of the Letter of Credit drawn upon or any other Person, including
without limitation any defense based on any failure of the Borrower or any
other Credit Party to receive consideration or the legality, validity,
regularity or unenforceability of the Letter of Credit. The Issuing Lender will
promptly notify the other Lenders of the amount of any unreimbursed drawing and
each Lender shall promptly pay to the Administrative Agent for the account of
the Issuing Lender in Dollars and in immediately available funds, the amount of
such Lender's pro rata share of such unreimbursed drawing. Such payment shall
be made on the day such notice is received by such Lender from the Issuing
Lender if such notice is received at or before 2:00 P.M. (Charlotte, North
Carolina time) otherwise such payment shall be made at or before 12:00 Noon
(Charlotte, North Carolina time) on the Business Day next succeeding the day
such notice is received. If such Lender does not pay such amount to the Issuing
Lender in full upon such request, such Lender shall, on demand, pay to the
Administrative Agent for the account of the Issuing Lender interest on the
unpaid amount during the period from the date of such drawing until such Lender
pays such amount to the Issuing Lender in full at a rate per annum equal to, if
paid within two (2) Business Days of the date that such Lender is required to
make payments of such amount pursuant to the preceding sentence, the Federal
Funds Rate and thereafter at a rate equal to the Base Rate. Each Lender's
obligation to make such payment to the Issuing Lender, and the right of the
Issuing Lender to receive the same, shall be absolute and unconditional, shall
not be affected by any circumstance whatsoever and without regard to the
termination of this Credit Agreement or the Commitments hereunder, the
existence of a Default or Event of Default or the acceleration of the
obligations of the Borrower hereunder and shall be made without any offset,
abatement, withholding or reduction whatsoever. Simultaneously with the making
of each such payment by a Lender to the Issuing Lender, such Lender shall,
automatically and without any further action on the part of the Issuing Lender
or such Lender, acquire a participation in an amount equal to such payment
(excluding the portion of such payment constituting interest owing to the
Issuing Lender) in the related unreimbursed drawing portion of the LOC
Obligation and in the interest thereon and in the related LOC Documents, and
shall have a claim against the Borrower with respect thereto.
(e) Repayment with Revolving Loans. On any day on which the
Borrower shall have requested, or been deemed to have requested, a Revolving
Loan advance to reimburse a drawing under a Letter of Credit, the
Administrative Agent shall give notice to the Lenders that a Revolving
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Loan has been requested or deemed requested by the Borrower to be made in
connection with a drawing under a Letter of Credit, in which case a Revolving
Loan advance comprised of Base Rate Loans (or Eurodollar Loans to the extent
the Borrower has complied with the procedures of Section 2.1(b)(i) with respect
thereto) shall be immediately made to the Borrower by all Lenders
(notwithstanding any termination of the Commitments pursuant to Section 9.2)
pro rata based on the respective Commitment Percentages of the Lenders
(determined before giving effect to any termination of the Commitments pursuant
to Section 9.2) and the proceeds thereof shall be paid directly to the Issuing
Lender for application to the respective LOC Obligations. Each such Lender
hereby irrevocably agrees to make its pro rata share of each such Revolving
Loan immediately upon any such request or deemed request in the amount, in the
manner and on the date specified in the preceding sentence notwithstanding (i)
the amount of such borrowing may not comply with the minimum amount for
advances of Revolving Loans otherwise required hereunder, (ii) whether any
conditions specified in Section 5.2 are then satisfied, (iii) whether a Default
or an Event of Default then exists, (iv) failure for any such request or deemed
request for Revolving Loan to be made by the time otherwise required hereunder,
(v) whether the date of such borrowing is a date on which Revolving Loans are
otherwise permitted to be made hereunder or (vi) any termination of the
Commitments relating thereto immediately prior to or contemporaneously with
such borrowing. In the event that any Revolving Loan cannot for any reason be
made on the date otherwise required above (including, without limitation, as a
result of the commencement of a proceeding under the Bankruptcy Code with
respect to the Borrower or any Credit Party), then each such Lender hereby
agrees that it shall forthwith purchase (as of the date such borrowing would
otherwise have occurred, but adjusted for any payments received from the
Borrower on or after such date and prior to such purchase) from the Issuing
Lender such participation in the outstanding LOC Obligations as shall be
necessary to cause each such Lender to share in such LOC Obligations ratably
(based upon the respective Commitment Percentages of the Lenders (determined
before giving effect to any termination of the Commitments pursuant to Section
9.2)), provided that in the event such payment is not made on the day of
drawing, such Lender shall pay in addition to the Issuing Lender interest on
the amount of its unfunded Participation Interest at a rate equal to, if paid
within two (2) Business Days of the date of drawing, the Federal Funds Rate,
and thereafter at the Base Rate.
(f) Designation of other Credit Parties as Account Parties.
Notwithstanding anything to the contrary set forth in this Credit Agreement,
including without limitation Section 2.2(a) hereof, a Letter of Credit issued
hereunder may contain a statement to the effect that such Letter of Credit is
issued for the account of a member of the Consolidated Group other than the
Borrower, provided that notwithstanding such statement, the Borrower shall be
deemed to be the account party for all purposes of this Credit Agreement for
such Letter of Credit and such statement shall not affect the Borrower's
reimbursement obligations hereunder with respect to such Letter of Credit.
(g) Renewal, Extension. The renewal or extension of any Letter of
Credit shall, for purposes hereof, be treated in all respects the same as the
issuance of a new Letter of Credit hereunder.
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(h) Uniform Customs and Practices. The Issuing Lender may have
the Letters of Credit be subject to The Uniform Customs and Practice for
Documentary Credits, as published as of the date of issue by the International
Chamber of Commerce (the "UCP"), in which case the UCP may be incorporated
therein and deemed in all respects to be a part thereof.
(i) Indemnification; Nature of Issuing Lender's Duties.
(i) In addition to its other obligations under
this Section 2.2, the Borrower hereby agrees to protect, indemnify,
pay and save the Issuing Lender harmless from and against any and all
claims, demands, liabilities, damages, losses, costs, charges and
expenses (including reasonable attorneys' fees) that the Issuing
Lender may incur or be subject to as a consequence, direct or
indirect, of (A) the issuance of any Letter of Credit or (B) the
failure of the Issuing Lender to honor a drawing under a Letter of
Credit as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government or
Governmental Authority (all such acts or omissions, herein called
"Government Acts").
(ii) As between the Borrower and the Issuing
Lender, the Borrower shall assume all risks of the acts, omissions or
misuse of any Letter of Credit by the beneficiary thereof. The Issuing
Lender shall not be responsible: (A) for the form, validity,
sufficiency, accuracy, genuineness or legal effect of any document
submitted by any party in connection with the application for and
issuance of any Letter of Credit, even if it should in fact prove to
be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (B) for the validity or sufficiency of any
instrument transferring or assigning or purporting to transfer or
assign any Letter of Credit or the rights or benefits thereunder or
proceeds thereof, in whole or in part, that may prove to be invalid or
ineffective for any reason; (C) for errors, omissions, interruptions
or delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex or otherwise, whether or not they be in cipher; (D)
for any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under a Letter of Credit or of the
proceeds thereof; and (E) for any consequences arising from causes
beyond the control of the Issuing Lender, including, without
limitation, any Government Acts. None of the above shall affect,
impair, or prevent the vesting of the Issuing Lender's rights or
powers hereunder.
(iii) In furtherance and extension and not in
limitation of the specific provisions hereinabove set forth, any
action taken or omitted by the Issuing Lender, under or in connection
with any Letter of Credit or the related certificates, if taken or
omitted in good faith, shall not put such Issuing Lender under any
resulting liability to the Borrower or any other Credit Party. It is
the intention of the parties that this Credit Agreement shall be
construed and applied to protect and indemnify the Issuing Lender
against any and all risks involved in the issuance of the Letters of
Credit, all of which risks are hereby assumed by the Borrower (on
behalf of itself and each of the other Credit Parties), including,
without limitation, any and all Government Acts. The Issuing Lender
shall not, in any way, be liable
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for any failure by the Issuing Lender or anyone else to pay any
drawing under any Letter of Credit as a result of any Government Acts
or any other cause beyond the control of the Issuing Lender.
(iv) Nothing in this subsection (i) is intended
to limit the reimbursement obligations of the Borrower contained in
subsection (d) above. The obligations of the Borrower under this
subsection (i) shall survive the termination of this Credit Agreement.
No act or omissions of any current or prior beneficiary of a Letter of
Credit shall in any way affect or impair the rights of the Issuing
Lender to enforce any right, power or benefit under this Credit
Agreement.
(v) Notwithstanding anything to the contrary
contained in this subsection (i), the Borrower shall have no
obligation to indemnify the Issuing Lender in respect of any liability
incurred by the Issuing Lender (A) arising out of the gross negligence
or willful misconduct of the Issuing Lender, as determined by a court
of competent jurisdiction, or (B) caused by the Issuing Lender's
failure to pay under any Letter of Credit after presentation to it of
a request strictly complying with the terms and conditions of such
Letter of Credit, as determined by a court of competent jurisdiction,
unless such payment is prohibited by any law, regulation, court order
or decree.
(j) Responsibility of Issuing Lender. It is expressly understood
and agreed that the obligations of the Issuing Lender hereunder to the Lenders
are only those expressly set forth in this Credit Agreement and that the
Issuing Lender shall be entitled to assume that the conditions precedent set
forth in Section 5.2 have been satisfied unless it shall have acquired actual
knowledge that any such condition precedent has not been satisfied; provided,
however, that nothing set forth in this Section 2.2 shall be deemed to
prejudice the right of any Lender to recover from the Issuing Lender any
amounts made available by such Lender to the Issuing Lender pursuant to this
Section 2.2 in the event that it is determined by a court of competent
jurisdiction that the payment with respect to a Letter of Credit constituted
gross negligence or willful misconduct on the part of the Issuing Lender.
(k) Conflict with LOC Documents. In the event of any conflict
between this Credit Agreement and any LOC Document (including any letter of
credit application), this Credit Agreement shall control.
SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITIES
3.1 Default Rate.
Upon the occurrence, and during the continuance, of an Event
of Default, the principal of and, to the extent permitted by law, interest on
the Revolving Loans and any other amounts owing hereunder or under the other
Credit Documents shall bear interest, payable on demand, at a per
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annum rate 2% greater than the rate which would otherwise be applicable (or if
no rate is applicable, whether in respect of interest, fees or other amounts,
then 2% greater than the Base Rate).
3.2 Extension and Conversion.
Subject to the terms of Section 5.2, the Borrower shall have
the option, on any Business Day, to extend existing Eurodollar Loans into a
subsequent permissible Interest Period or to convert Base Rate Loans into
Eurodollar Loans; provided, however, that (i) except as provided in Section
3.8, Eurodollar Loans may be converted into Base Rate Loans only on the last
day of the Interest Period applicable thereto, (ii) Eurodollar Loans may be
extended, and Base Rate Loans may be converted into Eurodollar Loans, only if
no Default or Event of Default is in existence on the date of extension or
conversion, (iii) Revolving Loans extended as, or converted into, Eurodollar
Loans shall be subject to the terms of the definition of "Interest Period" set
forth in Section 1.1 and shall be in such minimum amounts as provided in
Section 2.1(b)(ii) , and (iv) any request for extension or conversion of a
Eurodollar Loan which shall fail to specify an Interest Period shall be deemed
to be a request for an Interest Period of one month. Each such extension or
conversion shall be effected by the Borrower by giving a Notice of
Extension/Conversion (or telephone notice promptly confirmed in writing) to the
Administrative Agent prior to 11:00 A.M. (Charlotte, North Carolina time) on
the Business Day of, in the case of the conversion of a Eurodollar Loan into a
Base Rate Loan, and on the third Business Day prior to, in the case of the
extension of a Eurodollar Loan as, or conversion of a Base Rate Loan into, a
Eurodollar Loan, the date of the proposed extension or conversion, specifying
the date of the proposed extension or conversion, the Revolving Loans to be so
extended or converted, the types of Revolving Loans into which such Revolving
Loans are to be converted and, if appropriate, the applicable Interest Periods
with respect thereto. Each request for extension of a Eurodollar Loan or
conversion of a Base Rate Loan into a Eurodollar Loan shall be irrevocable and
shall constitute a representation and warranty by the Borrower of the matters
specified in subsections (a) and (b) of Section 5.2. In the event the Borrower
fails to request extension or conversion of any Eurodollar Loan in accordance
with this Section, or any such conversion or extension is not permitted or
required by this Section, then such Eurodollar Loan shall be automatically
converted into a Base Rate Loan at the end of the Interest Period applicable
thereto. The Administrative Agent shall give each Lender notice as promptly as
practicable of any such proposed extension or conversion affecting any
Revolving Loan.
3.3 Prepayments.
(a) Voluntary Prepayments. Revolving Loans may be repaid in whole
or in part without premium or penalty; provided that (i) Eurodollar Loans may
be prepaid only upon three (3) Business Days' prior written notice to the
Administrative Agent and must be accompanied by payment of any amounts owing
under Section 3.11, and (ii) partial prepayments shall be, in the case of
Eurodollar Loans, in a minimum aggregate principal amount of $2,500,000 and
integral multiples of $500,000 in excess thereof, or, in the case of Base Rate
Loans, in a minimum aggregate principal amount of $1,000,000 (or the remaining
Revolving Committed Amount, if less) and integral multiples of $100,000 in
excess thereof.
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(b) Mandatory Prepayments. If at any time, (A) the
aggregate principal amount of Obligations shall exceed the lesser of (i) the
Aggregate Revolving Committed Amount or (ii) the Borrowing Base, or (B) the
aggregate amount of LOC Obligations shall exceed the LOC Committed Amount, the
Borrower shall immediately make payment on the Revolving Loans and/or to a cash
collateral account in respect of the LOC Obligations, in an amount sufficient
to eliminate the deficiency.
(c) Application. Unless otherwise specified by the
Borrower, prepayments made hereunder shall be applied first to Revolving Loans
which are Base Rate Loans, then to Revolving Loans which are Eurodollar Loans
in direct order of Interest Period maturities, and then to a cash collateral
account to secure LOC Obligations. Amounts prepaid hereunder may be reborrowed
in accordance with the provisions hereof.
3.4 Termination and Reduction of Commitments
(a) Voluntary Reductions. The Revolving Commitments may
be terminated or permanently reduced in whole or in part upon three (3)
Business Days' prior written notice to the Administrative Agent, provided that
(i) after giving effect to any voluntary reduction the aggregate amount of
Obligations shall not exceed the lesser of (A) the Aggregate Revolving
Committed Amount, as reduced, or (B) the Borrowing Base, and (ii) partial
reductions shall be in a minimum principal amount of $5,000,000, and in
integral multiples of $1,000,000 in excess thereof.
(b) Termination. The Commitments hereunder shall
terminate on the Termination Date.
3.5 Fees.
(a) Commitment Fee. In consideration of the Revolving
Commitments hereunder, the Borrower agrees to pay to the Administrative Agent
for the ratable benefit of the Lenders a commitment fee (the "Commitment Fee")
equal to the Applicable Percentage per annum on the average daily unused amount
of the Revolving Committed Amount for the applicable period. The Commitment Fee
shall be payable quarterly in arrears on the 15th day following the last day of
each calendar quarter for the immediately preceding quarter (or portion
thereof) beginning with the first such date to occur after the Closing Date.
For purposes of computation of the Commitment Fee, LOC Obligations shall be
counted toward or considered usage under the Revolving Loan facility.
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(b) Letter of Credit Fees.
(i) Letter of Credit Fee. In consideration of
the LOC Commitment hereunder, the Borrower agrees to pay to the
Administrative Agent for the ratable benefit of the Lenders a fee (the
"Letter of Credit Fee") equal to the Applicable Percentage per annum
on the average daily maximum amount available to be drawn under
Letters of Credit from the date of issuance to the date of expiration.
The Letter of Credit Fee shall be payable quarterly in arrears on the
15th day following the last day of each calendar quarter for the
immediately preceding quarter (or portion thereof) beginning with the
first such date to occur after the Closing Date.
(ii) Issuing Lender Fee. In addition to the
Letter of Credit Fee, the Borrower agrees to pay to the Issuing Lender
for its own account without sharing by the other Lenders a fronting
and negotiation fee of .125% per annum on the average daily maximum
amount available to be drawn under Letters of Credit issued by it from
the date of issuance to the date of expiration (collectively, the
"Issuing Lender Fees").
(c) Administrative Agent's Fees. The Borrower agrees to pay
to the Administrative Agent, for its own account, an annual administrative fee
and such other fees, if any, referred to in the Administrative Agent's Fee
Letter (collectively, the "Administrative Agent's Fees").
3.6 Capital Adequacy.
If any Lender has reasonably determined, after the date hereof,
that the adoption or the becoming effective of, or any change in, or any change
by any Governmental Authority, central bank or comparable agency charged with
the interpretation or administration thereof in the interpretation or
administration of, any applicable law, rule or regulation regarding capital
adequacy, or compliance by such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on such Lender's capital or assets as a consequence
of its commitments or obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, effectiveness, change or
compliance (taking into consideration such Lender's policies with respect to
capital adequacy), then, subject to the provisions of Section 3.12, the
Borrower shall be obligated to pay to such Lender such additional amount or
amounts as will compensate such Lender for such reduction.
3.7 Inability To Determine Interest Rate.
If prior to the first day of any Interest Period, the Administrative Agent
shall have determined (which determination shall be conclusive and binding upon
the Borrower) that, by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar Rate
for such Interest Period, the Administrative Agent shall give telecopy
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or telephonic notice thereof to the Borrower and the Lenders as soon as
practicable thereafter (which notice shall be withdrawn the Administrative
Agent whenever such circumstances no longer exist). If such notice is given (a)
any Eurodollar Loans requested to be made on the first day of such Interest
Period shall be made as Base Rate Loans and (b) any Revolving Loans that were
to have been converted on the first day of such Interest Period to or continued
as Eurodollar Loans shall be converted to or continued as Base Rate Loans.
Until such notice has been withdrawn by the Administrative Agent, no further
Eurodollar Loans shall be made or continued as such, nor shall the Borrower
have the right to convert Base Rate Loans to Eurodollar Loans.
3.8 Illegality.
Notwithstanding any other provision herein, if the adoption of or any
change in any Requirement of Law or in the interpretation or application
thereof occurring after the Closing Date shall make it unlawful for any Lender
to make or maintain Eurodollar Loans as contemplated by this Credit Agreement,
(a) such Lender shall promptly give written notice of such circumstances to the
Borrower and the Administrative Agent (which notice shall be withdrawn by such
Lender whenever such circumstances no longer exist), (b) the commitment of such
Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such
and convert a Base Rate Loan to Eurodollar Loans shall forthwith be canceled
and, until such time as it shall no longer be unlawful for such Lender to make
or maintain Eurodollar Loans, such Lender shall then have a commitment only to
make a Base Rate Loan when a Eurodollar Loan is requested and (c) such Lender's
Revolving Loans then outstanding as Eurodollar Loans, if any, shall be
converted automatically to Base Rate Loans on the respective last days of the
then current Interest Periods with respect to such Loans or within such earlier
period as required by law. If any such conversion of a Eurodollar Loan occurs
on a day which is not the last day of the then current Interest Period with
respect thereto, the Borrower shall pay to such Lender such amounts, if any, as
may be required pursuant to Section 3.11.
3.9 Requirements of Law.
If, after the date hereof, the adoption of or any change in any
Requirement of Law or in the interpretation or application thereof applicable
to any Lender, or compliance by any Lender with any request or directive
(whether or not having the force of law) from any central bank or other
Governmental Authority, in each case made subsequent to the Closing Date (or,
if later, the date on which such Lender becomes a Lender):
(a) shall subject such Lender to any tax of any
kind whatsoever with respect to any Letter of Credit, any Eurodollar
Loans made by it or its obligation to make Eurodollar Loans, or change
the basis of taxation of payments to such Lender in respect thereof
(except for (i) Non-Excluded Taxes covered by Section 3.10 (including
Non-Excluded Taxes imposed solely by reason of any failure of such
Lender to comply with its obligations under Section 3.10(b)) and (ii)
changes in taxes measured by or imposed upon the overall net income,
or franchise tax (imposed in lieu of such net income tax), of such
Lender or its applicable lending office, branch, or any affiliate
thereof));
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(b) shall impose, modify or hold applicable any
reserve, special deposit, compulsory loan or similar requirement
against assets held by, deposits or other liabilities in or for the
account of, advances, loans or other extensions of credit by, or any
other acquisition of funds by, any office of such Lender which is not
otherwise included in the determination of the Eurodollar Rate
hereunder; or
(c) shall impose on such Lender any other
condition (excluding any tax of any kind whatsoever);
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting
into, continuing or maintaining Eurodollar Loans or issuing or participating in
Letters of Credit or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, subject to the provisions of Section 3.12, the
Borrower shall be obligated to promptly pay such Lender, upon its demand, any
additional amounts necessary to compensate such Lender for such increased cost
or reduced amount receivable, provided that, in any such case, the Borrower may
elect to convert the Eurodollar Loans made by such Lender hereunder to Base
Rate Loans by giving the Administrative Agent at least one Business Day's
notice of such election, in which case the Borrower shall promptly pay to such
Lender, upon demand, without duplication, such amounts, if any, as may be
required pursuant to Section 3.11. Each Lender agrees that, as promptly as
practicable after it becomes aware of any circumstances of the type referred to
in paragraphs (a) through (c) above which would result in any such increased
cost or reduced amount receivable, the affected Lender shall, to the extent not
inconsistent with such Lender's internal policies of general application,
designate a different lending office for the making of Revolving Loans
hereunder or otherwise use reasonable commercial efforts to minimize the
amounts payable to it by the Borrower pursuant to this Section 3.9. This
covenant shall survive the termination of this Credit Agreement and the payment
of the Revolving Loans and all other amounts payable hereunder.
3.10 Taxes.
(a) Except as provided below in this subsection, all payments
made by the Borrower under this Credit Agreement and any Notes shall be made
free and clear of, and without deduction or withholding for or on account of,
any present or future income, stamp or other taxes, levies, imposts, duties,
charges, fees, deductions or withholdings, now or hereafter imposed, levied,
collected, withheld or assessed by any court, or governmental body, agency or
other official, excluding taxes measured by or imposed upon the overall net
income of any Lender or its applicable lending office, or any branch or
affiliate thereof, and all franchise taxes, branch taxes, taxes on doing
business or taxes on the overall capital or net worth of any Lender or its
applicable lending office, or any branch or affiliate thereof, in each case
imposed in lieu of net income taxes, imposed: (i) by the jurisdiction under the
laws of which such Lender, applicable lending office, branch or affiliate is
organized or is located, or in which its principal executive office is located,
or any nation within which such jurisdiction is located or any political
subdivision thereof; or (ii) by reason of any connection between
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the jurisdiction imposing such tax and such Lender, applicable lending office,
branch or affiliate other than a connection arising solely from such Lender
having executed, delivered or performed its obligations, or received payment
under or enforced, this Credit Agreement or any Notes. If any such non-excluded
taxes, levies, imposts, duties, charges, fees, deductions or withholdings
("Non- Excluded Taxes") are required to be withheld from any amounts payable to
the Administrative Agent or any Lender hereunder or under any Notes, (A) the
amounts so payable to the Administrative Agent or such Lender shall be
increased to the extent necessary to yield to the Administrative Agent or such
Lender (after payment of all Non-Excluded Taxes) interest or any such other
amounts payable hereunder at the rates or in the amounts specified in this
Credit Agreement and any Notes, provided, however, that the Borrower shall be
entitled to deduct and withhold any Non-Excluded Taxes and shall not be
required to increase any such amounts payable to any Lender that is not
organized under the laws of the United States of America or a state thereof if
such Lender fails to comply with the requirements of paragraph (b) of this
subsection whenever any Non-Excluded Taxes are payable by the Borrower, and (B)
as promptly as possible thereafter the Borrower shall send to the
Administrative Agent for its own account or for the account of such Lender, as
the case may be, a certified copy of an original official receipt received by
the Borrower showing payment thereof. If the Borrower fails to pay any
Non-Excluded Taxes when due to the appropriate taxing authority or fails to
remit to the Administrative Agent the required receipts or other required
documentary evidence, the Borrower shall indemnify the Administrative Agent and
the Lenders for any incremental taxes, interest or penalties that may become
payable by the Administrative Agent or any Lender as a result of any such
failure. The agreements in this subsection shall survive the termination of
this Credit Agreement and the payment of the Revolving Loans and all other
amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall:
(X)(i) on or before the date of any payment by the
Borrower under this Credit Agreement or Notes to such Lender, deliver
to the Borrower and the Administrative Agent (A) two (2) duly
completed copies of United States Internal Revenue Service Form 1001
or 4224, or successor applicable form, as the case may be, certifying
that it is entitled to receive payments under this Credit Agreement
and any Notes without deduction or withholding of any United States
federal income taxes and (B) an Internal Revenue Service Form W-8 or
W- 9, or successor applicable form, as the case may be, certifying
that it is entitled to an exemption from United States backup
withholding tax;
(ii) deliver to the Borrower and the
Administrative Agent two (2) further copies of any such form or
certification on or before the date that any such form or
certification expires or becomes obsolete and after the occurrence of
any event requiring a change in the most recent form previously
delivered by it to the Borrower; and
(iii) obtain such extensions of time for filing
and complete such forms or certifications as may reasonably be
requested by the Borrower or the Administrative Agent; or
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(Y) in the case of any such Lender that is not
a "bank" within the meaning of Section 881(c)(3)(A) of the Internal
Revenue Code, (i) represent to the Borrower (for the benefit of the
Borrower and the Administrative Agent) that it is not a bank within
the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (ii)
agree to furnish to the Borrower on or before the date of any payment
by the Borrower, with a copy to the Administrative Agent two (2)
accurate and complete original signed copies of Internal Revenue
Service Form W-8, or successor applicable form certifying to such
Lender's legal entitlement at the date of such certificate to an
exemption from U.S. withholding tax under the provisions of Section
881(c) of the Internal Revenue Code with respect to payments to be
made under this Credit Agreement and any Notes (and to deliver to the
Borrower and the Administrative Agent two (2) further copies of such
form on or before the date it expires or becomes obsolete and after
the occurrence of any event requiring a change in the most recently
provided form and, if necessary, obtain any extensions of time
reasonably requested by the Borrower or the Administrative Agent for
filing and completing such forms), and (iii) agree, to the extent
legally entitled to do so, upon reasonable request by the Borrower, to
provide to the Borrower (for the benefit of the Borrower and the
Administrative Agent) such other forms as may be reasonably required
in order to establish the legal entitlement of such Lender to an
exemption from withholding with respect to payments under this Credit
Agreement and any Notes;
unless in any such case any change in treaty, law or regulation has occurred
after the date such Person becomes a Lender hereunder which renders all such
forms inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender so advises the
Borrower and the Administrative Agent. Each Person that shall become a Lender
or a participant of a Lender pursuant to subsection 11.3 shall, upon the
effectiveness of the related transfer, be required to provide all of the forms,
certifications and statements required pursuant to this subsection, provided
that in the case of a participant of a Lender the obligations of such
participant of a Lender pursuant to this subsection (b) shall be determined as
if the participant of a Lender were a Lender except that such participant of a
Lender shall furnish all such required forms, certifications and statements to
the Lender from which the related participation shall have been purchased.
3.11 Indemnity.
The Borrower promises to indemnify each Lender and to hold each Lender
harmless from any loss or expense which such Lender may sustain or incur (other
than through such Lender's gross negligence or willful misconduct) as a
consequence of (a) default by the Borrower in making a borrowing of, conversion
into or continuation of Eurodollar Loans after the Borrower has given a notice
requesting the same in accordance with the provisions of this Credit Agreement,
(b) default by the Borrower in making any prepayment of a Eurodollar Loan after
the Borrower has given a notice thereof in accordance with the provisions of
this Credit Agreement or (c) the making of a prepayment of Eurodollar Loans on
a day which is not the last day of an Interest Period with respect thereto.
With respect to Eurodollar Loans, such indemnification may be calculated, in
lieu of any other method, based on an amount equal to the excess, if any, of
(i) the amount of interest which would have accrued on the amount so prepaid,
or not so borrowed, converted or continued, for the period from the
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date of such prepayment or of such failure to borrow, convert or continue to
the last day of the applicable Interest Period (or, in the case of a failure to
borrow, convert or continue, the Interest Period that would have commenced on
the date of such failure) in each case at the applicable rate of interest for
such Revolving Loans provided for herein (excluding, however, the Applicable
Percentage included therein, if any) over (ii) the amount of interest (as
reasonably determined by such Lender) which would have accrued to such Lender
on such amount by placing such amount on deposit for a comparable period with
leading banks in the interbank Eurodollar market. The covenants of the Borrower
set forth in this Section 3.11 shall survive the termination of this Credit
Agreement and the payment of the Revolving Loans and all other amounts payable
hereunder.
3.12 Certain Limitations.
The provisions of Sections 3.6, 3.9, 3.10 and 3.11 hereof shall be subject
to the following:
(a) Each Lender that desires compensation or indemnification
under Sections 3.6, 3.9 or 3.11 hereof shall notify the Borrower through the
Administrative Agent of any event occurring after the Closing Date entitling
such Lender to compensation or indemnification under any of such Sections as
promptly as practicable, but in any event within 90 days after the occurrence
of the event giving rise thereto; provided that (i) if any such Lender fails to
give such notice within 90 days after the occurrence of such an event, such
Lender shall only be entitled to compensation or indemnification in respect of
such event accruing under Sections 3.6, 3.9 or 3.11 hereof with respect to the
period from and after the date 90 days prior to the date that such Lender does
give notice.
(b) Any notice given by a Lender pursuant to subsection (a) above
shall certify (i) that one of the events described in Sections 3.6, 3.9 or 3.11
hereof has occurred, describing in reasonable detail the nature of such event,
(ii) as to the increased cost, reduced amount receivable or loss or expense
resulting from such event and (iii) as to the additional amount demanded by
such Lender, attaching a reasonably detailed explanation of the calculation
thereof. Such a certificate as to any compensation or indemnification payable
pursuant to Sections 3.6, 3.9 or 3.11, submitted by such Lender through the
Administrative Agent to the Borrower, shall be conclusive and binding on the
parties hereto in the absence of manifest error.
(c) If any Lender requests compensation or indemnification from
the Borrower under Sections 3.6, 3.9 or 3.10 hereof, the Borrower may, at its
option, within fifteen (15) days after receipt by the Borrower of written
demand from the affected Lender for payment of such compensation or
indemnification, notify the Administrative Agent and such affected Lender of
its intention to replace the affected Lender. So long as no Event of Default
shall have occurred and be continuing, the Borrower may obtain, at the
Borrower's expense, a replacement Lender for the affected Lender. If the
Borrower obtains a replacement Lender within ninety (90) days following notice
of its intention to do so, the affected Lender must sell and assign its Loans
and any Revolving Commitment to such replacement Lender pursuant to Section
11.3(b) hereof (without giving effect to any requirement therein that the
Administrative Agent consent thereto), for an amount equal to the principal
balance of all Revolving Loans held by the affected Lender
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and all accrued interest and Fees with respect thereto through the date of such
sale, provided that the Borrower shall have paid to such affected Lender the
compensation or indemnification that it is entitled to receive under Sections
3.6, 3.9 or 3.10 hereof, through the date of such sale and assignment.
Notwithstanding the foregoing, the Borrower shall not have the right to obtain
a replacement Lender if the affected Lender rescinds its demand for such
compensation or indemnification within fifteen (15) days following its receipt
of the Borrower's notice of intention to replace such affected Lender.
Additionally, if the Borrower gives a notice to the Administrative Agent and an
affected Lender of its intention to replace such affected Lender and does not
so replace such affected Lender within ninety (90) days thereafter, the
Borrower's rights under this Section 3.12(c) shall terminate and the Borrower
shall promptly pay all compensation or indemnification demanded by such
affected Lender pursuant to Sections 3.6, 3.9 or 3.10 hereof.
3.13 Pro Rata Treatment.
Except to the extent otherwise provided herein:
(a) Revolving Loans. Each Revolving Loan, each payment or
prepayment of principal of any Revolving Loan or reimbursement obligations
arising from drawings under Letters of Credit, each payment of interest on the
Revolving Loans or reimbursement obligations arising from drawings under
Letters of Credit, each payment of Commitment Fees, each payment of the Letter
of Credit Fee, each reduction of the Revolving Committed Amount and each
conversion or extension of any Revolving Loan, shall be allocated pro rata
among the Lenders in accordance with the respective principal amounts of their
outstanding Revolving Loans and Participation Interests.
(b) Advances. No Lender shall be responsible for the failure or
delay by any other Lender in its obligation to make its ratable share of a
borrowing hereunder; provided, however, that the failure of any Lender to
fulfill its obligations hereunder shall not relieve any other Lender of its
obligations hereunder. Unless the Administrative Agent shall have been notified
in writing by any Lender prior to a borrowing that such Lender will not make
the amount that would constitute its ratable share of such borrowing available
to the Administrative Agent, the Administrative Agent may assume that such
Lender is making such amount available to the Administrative Agent, and the
Administrative Agent may, in reliance upon such assumption, make available to
the Borrower a corresponding amount. If such amount is not made available to
the Administrative Agent by such Lender within the time period specified
therefor hereunder, such Lender shall pay to the Administrative Agent, on
demand, such amount with interest thereon at a rate equal to the Federal Funds
Rate for a period of two (2) Business Days, and thereafter at the Base Rate,
for the period until such Lender makes such amount immediately available to the
Administrative Agent. If such Lender does not pay such amounts to the
Administrative Agent forthwith upon demand, the Administrative Agent may notify
the Borrower and request the Borrower to immediately pay such amount to the
Administrative Agent with interest at the rate applicable thereto. A
certificate of the Administrative Agent submitted to any Lender with respect to
any amounts owing under this subsection shall be conclusive in the absence of
manifest error.
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3.14 Sharing of Payments.
The Lenders agree among themselves that, in the event that any Lender
shall obtain payment in respect of any Revolving Loan, LOC Obligations or any
other obligation owing to such Lender under this Credit Agreement through the
exercise of a right of setoff, banker's lien or counterclaim, or pursuant to a
secured claim under Section 506 of the Bankruptcy Code or other security or
interest arising from, or in lieu of, such secured claim, received by such
Lender under any applicable bankruptcy, insolvency or other similar law or
otherwise, or by any other means, in excess of its pro rata share of such
payment as provided for in this Credit Agreement, such Lender shall promptly
purchase from the other Lenders a participation in such Revolving Loans, LOC
Obligations and other obligations in such amounts, and make such other
adjustments from time to time, as shall be equitable to the end that all
Lenders share such payment in accordance with their respective ratable shares
as provided for in this Credit Agreement. The Lenders further agree among
themselves that if payment to a Lender obtained by such Lender through the
exercise of a right of setoff, banker's lien, counterclaim or other event as
aforesaid shall be rescinded or must otherwise be restored, each Lender which
shall have shared the benefit of such payment shall, by repurchase of a
participation theretofore sold, return its share of that benefit (together with
its share of any accrued interest payable with respect thereto) to each Lender
whose payment shall have been rescinded or otherwise restored. The Borrower
agrees that any Lender so purchasing such a participation may, to the fullest
extent permitted by law, exercise all rights of payment, including setoff,
banker's lien or counterclaim, with respect to such participation as fully as
if such Lender were a holder of such Revolving Loan, LOC Obligations or other
obligation in the amount of such participation. Except as otherwise expressly
provided in this Credit Agreement, if any Lender or the Administrative Agent
shall fail to remit to the Administrative Agent or any other Lender an amount
payable by such Lender or the Administrative Agent to the Administrative Agent
or such other Lender pursuant to this Credit Agreement on the date when such
amount is due, such payments shall be made together with interest thereon for
each date from the date such amount is due until the date such amount is paid
to the Administrative Agent or such other Lender at a rate per annum equal to
the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other
similar law, any Lender receives a secured claim in lieu of a setoff to which
this Section 3.14 applies, such Lender shall, to the extent practicable,
exercise its rights in respect of such secured claim in a manner consistent
with the rights of the Lenders under this Section 3.14 to share in the benefits
of any recovery on such secured claim.
3.15 Payments, Computations, Etc.
(a) Except as otherwise specifically provided herein, all
payments hereunder shall be made to the Administrative Agent in Dollars in
immediately available funds, without setoff, deduction, counterclaim or
withholding of any kind, at the Administrative Agent's office specified in
Section 11.1 not later than 2:00 P.M. (Charlotte, North Carolina time) on the
date when due. Payments received after such time shall be deemed to have been
received on the next succeeding Business Day. The Administrative Agent may (but
shall not be obligated to) debit the amount of any such payment which is not
made by such time to any ordinary deposit account of the Borrower maintained
with the Administrative Agent (with notice to the Borrower). The Borrower
shall, at the time it makes any
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payment under this Credit Agreement, specify to the Administrative Agent the
Revolving Loans, LOC Obligations, Fees, interest or other amounts payable by
the Borrower hereunder to which such payment is to be applied (and in the event
that it fails so to specify, or if such application would be inconsistent with
the terms hereof, the Administrative Agent shall distribute such payment to the
Lenders in such manner as the Administrative Agent may determine to be
appropriate in respect of obligations owing by the Borrower hereunder, subject
to the terms of Section 3.13(a)). The Administrative Agent will distribute such
payments to such Lenders, if any such payment is received prior to 12:00 Noon
(Charlotte, North Carolina time) on a Business Day in like funds as received
prior to the end of such Business Day and otherwise the Administrative Agent
will distribute such payment to such Lenders entitled thereto on the next
succeeding Business Day. Whenever any payment hereunder shall be stated to be
due on a day which is not a Business Day, the due date thereof shall be
extended to the next succeeding Business Day (subject to accrual of interest
and Fees for the period of such extension), except that in the case of
Eurodollar Loans, if the extension would cause the payment to be made in the
next following calendar month, then such payment shall instead be made on the
next preceding Business Day. Except as expressly provided otherwise herein, all
computations of interest and fees shall be made on the basis of the actual
number of days elapsed over a year of 360 days, except with respect to
computation of interest on Base Rate Loans which (unless the Base Rate is
determined by reference to the Federal Funds Rate) shall be calculated based on
a year of 365 or 366 days, as appropriate. Interest shall accrue from and
include the date of borrowing, but exclude the date of payment.
(b) Allocation of Payments After Event of Default.
Notwithstanding any other provisions of this Credit Agreement to the contrary,
after the occurrence and during the continuance of an Event of Default, all
amounts collected or received by the Administrative Agent or any Lender on
account of the Obligations or any other amounts outstanding under any of the
Credit Documents shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable
out-of-pocket costs and expenses (including without limitation
reasonable attorneys' fees) of the Administrative Agent in connection
with enforcing the rights of the Lenders under the Credit Documents;
SECOND, to payment of any Administrative Agent's
Fees then due and payable;
THIRD, to the payment of all reasonable
out-of-pocket costs and expenses (including without limitation,
reasonable attorneys' fees) of each of the Lenders in connection with
enforcing its rights under the Credit Documents or otherwise with
respect to the Obligations owing to such Lender;
FOURTH, to the payment of all accrued interest and
Fees on or in respect of the Obligations;
FIFTH, to the payment of the outstanding principal
amount of the Obligations (including the payment of all LOC
Obligations then reimbursable by the Borrower pursuant
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to Section 2.2(d), but excluding any LOC Obligations attributable to
issued but undrawn Letters of Credit);
SIXTH, to the cash collateralization of all LOC
Obligations attributable to issued but undrawn Letters of Credit;
SEVENTH, to all other Obligations and other
obligations which shall have become due and payable under the Credit
Documents or otherwise and not repaid pursuant to clauses "FIRST"
through "SIXTH" above; and
EIGHTH, to the payment of the surplus, if any, to
whoever may be lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be applied in the
numerical order provided until exhausted prior to application to the next
succeeding category; and (ii) each of the Lenders shall receive an amount equal
to its pro rata share (based on the proportion that the then outstanding
Obligations held by such Lender bears to the aggregate then outstanding
Obligations) of amounts available to be applied pursuant to clauses "THIRD",
"FOURTH", "FIFTH" and "SIXTH" above; and (iii) all amounts available to be
applied to pursuant to clause "SIXTH" above shall be held by the Administrative
Agent in a cash collateral account and applied (A) first, to reimburse the
Issuing Lender for any drawings under such Letters of Credit and (B) then,
following the expiration of all Letters of Credit, to all other obligations of
the types described in clauses "SIXTH" AND "SEVENTH" above in the manner
provided in this Section 3.15(b).
3.16 Evidence of Debt.
(a) Each Lender shall maintain an account or accounts evidencing
each Revolving Loan made by such Lender to the Borrower from time to time,
including the amounts of principal and interest payable and paid to such Lender
from time to time under this Credit Agreement. Each Lender will make reasonable
efforts to maintain the accuracy of its account or accounts and to promptly
update its account or accounts from time to time, as necessary.
(b) The Administrative Agent shall maintain the Register pursuant
to Section 11.3(c) hereof, and a subaccount for each Lender, in which Register
and subaccounts (taken together) shall be recorded (i) the amount, type and
Interest Period of each such Revolving Loan hereunder, (ii) the amount of any
principal or interest due and payable or to become due and payable to each
Lender hereunder and (iii) the amount of any sum received by the Administrative
Agent hereunder from or for the account of the Borrower and each Lender's share
thereof. The Administrative Agent will make reasonable efforts to maintain the
accuracy of the subaccounts referred to in the preceding sentence and to
promptly update such subaccounts from time to time, as necessary.
(c) The entries made in the accounts, Register and subaccounts
maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent
with the entries of the Administrative Agent,
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subsection (a)) shall be prima facie evidence of the existence and amounts of
the obligations of the Borrower therein recorded; provided, however, that the
failure of any Lender or the Administrative Agent to maintain any such account,
such Register or such subaccount, as applicable, or any error therein, shall
not in any manner affect the obligation of the Borrower to repay the Revolving
Loans made by such Lender in accordance with the terms hereof.
SECTION 4
GUARANTY
4.1 The Guarantee.
(a) Each of the Guarantors hereby jointly and severally
guarantees to each Lender, to each Affiliate of a Lender that enters into a
Hedging Agreement and to the Administrative Agent as hereinafter provided the
prompt payment of the Guaranteed Obligations in full when due (whether at
stated maturity, as a mandatory prepayment, by acceleration, a mandatory cash
collateralization or otherwise) strictly in accordance with the terms thereof.
The Guarantors hereby further agree that if any of the Guaranteed Obligations
are not paid in full when due (whether at stated maturity, as a mandatory
prepayment, by acceleration, as mandatory cash collateralization or otherwise),
the Guarantors will, jointly and severally, promptly pay the same, without any
demand or notice whatsoever, and that in the case of any extension of time of
payment or renewal of any of the Guaranteed Obligations, the same will be
promptly paid in full when due (whether at extended maturity, as a mandatory
prepayment, by acceleration or otherwise) in accordance with the terms of such
extension or renewal.
(b) Notwithstanding any provision to the contrary contained
herein or in any other of the Credit Documents or Hedging Agreements, to the
extent the obligations of a Guarantor shall be adjudicated to be invalid or
unenforceable for any reason (including, without limitation, because of any
applicable state or federal law relating to fraudulent conveyances or
transfers) then the obligations of each Guarantor hereunder shall be limited to
the maximum amount that is permissible under applicable law (whether federal or
state and including, without limitation, the Bankruptcy Code).
4.2 Obligations Unconditional.
The obligations of the Guarantors under Section 4.1 hereof are joint and
several, absolute and unconditional, irrespective of the value, genuineness,
validity, regularity or enforceability of any of the Credit Documents or
Hedging Agreements, or any other agreement or instrument referred to therein,
or any substitution, release or exchange of any other guarantee of or security
for any of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever which might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Section 4.2 that the obligations of the
Guarantors hereunder shall be absolute and unconditional under any and all
circumstances. Each Guarantor agrees that such Guarantor shall have no right of
subrogation, indemnity, reimbursement or
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contribution against the Borrower or any other Guarantor of the Guaranteed
Obligations for amounts paid under this Guaranty until such time as the Lenders
(and any Affiliates of Lenders entering into Hedging Agreements) have been paid
in full, all Commitments under the Credit Agreement have been terminated and no
Person or Governmental Authority shall have any right to request any return or
reimbursement of funds from the Lenders in connection with monies received
under the Credit Documents or Hedging Agreements. Without limiting the
generality of the foregoing, it is agreed that, to the fullest extent permitted
by law, the occurrence of any one or more of the following shall not alter or
impair the liability of any Guarantor hereunder which shall remain absolute and
unconditional as described above:
(i) at any time or from time to time, without notice to
any Guarantor, the time for any performance of or compliance with any
of the Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions
of any of the Credit Documents, any Hedging Agreement or any other
agreement or instrument referred to in the Credit Documents or Hedging
Agreements shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations
shall be accelerated, or any of the Guaranteed Obligations shall be
modified, supplemented or amended in any respect, or any right under
any of the Credit Documents, any Hedging Agreement or any other
agreement or instrument referred to in the Credit Documents or Hedging
Agreements shall be waived or any other guarantee of any of the
Guaranteed Obligations or any security therefor shall be released or
exchanged in whole or in part or otherwise dealt with;
(iv) any Lien granted to, or in favor of, the
Administrative Agent or any Lender or Lenders as security for any of
the Guaranteed Obligations shall fail to attach or be perfected; or
(v) any of the Guaranteed Obligations shall be
determined to be void or voidable (including, without limitation, for
the benefit of any creditor of any Guarantor) or shall be subordinated
to the claims of any Person (including, without limitation, any
creditor of any Guarantor).
With respect to its obligations hereunder, each Guarantor hereby expressly
waives diligence, presentment, demand of payment, protest and all notices
whatsoever, and any requirement that the Administrative Agent or any Lender
exhaust any right, power or remedy or proceed against any Person under any of
the Credit Documents, any Hedging Agreement or any other agreement or
instrument referred to in the Credit Documents or Hedging Agreements, or
against any other Person under any other guarantee of, or security for, any of
the Guaranteed Obligations.
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4.3 Reinstatement.
The obligations of the Guarantors under this Section 4 shall be
automatically reinstated if and to the extent that for any reason any payment
by or on behalf of any Person in respect of the Guaranteed Obligations is
rescinded or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify
the Administrative Agent and each Lender on demand for all reasonable costs and
expenses (including, without limitation, reasonable fees and expenses of
counsel) incurred by the Administrative Agent or such Lender in connection with
such rescission or restoration, including any such costs and expenses incurred
in defending against any claim alleging that such payment constituted a
preference, fraudulent transfer or similar payment under any bankruptcy,
insolvency or similar law.
4.4 Certain Additional Waivers.
Each Guarantor agrees that such Guarantor shall have no right of recourse
to security for the Guaranteed Obligations, except through the exercise of the
rights of subrogation pursuant to Section 4.2.
4.5 Remedies.
The Guarantors agree that, to the fullest extent permitted by law, as
between the Guarantors, on the one hand, and the Administrative Agent and the
Lenders, on the other hand, the Guaranteed Obligations may be declared to be
forthwith due and payable as provided in Section 9.2 hereof (and shall be
deemed to have become automatically due and payable in the circumstances
provided in said Section 9.2) for purposes of Section 4.1 hereof
notwithstanding any stay, injunction or other prohibition preventing such
declaration (or preventing the Guaranteed Obligations from becoming
automatically due and payable) as against any other Person and that, in the
event of such declaration (or the Guaranteed Obligations being deemed to have
become automatically due and payable), the Guaranteed Obligations (whether or
not due and payable by any other Person) shall forthwith become due and payable
by the Guarantors for purposes of said Section 4.1.
4.6 Rights of Contribution.
The Guarantors hereby agree, as among themselves, that if any Guarantor
shall become an Excess Funding Guarantor (as defined below), each other
Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the
succeeding provisions of this Section 4.6), pay to such Excess Funding
Guarantor an amount equal to such Guarantor's Pro Rata Share (as defined below
and determined, for this purpose, without reference to the properties, assets,
liabilities and debts of such Excess Funding Guarantor) of such Excess Payment
(as defined below). The payment obligation of any Guarantor to any Excess
Funding Guarantor under this Section 4.6 shall be subordinate and subject in
right of payment to the prior payment in full of the obligations of such
Guarantor under the other provisions of this Section 4, and such Excess Funding
Guarantor shall not exercise any right or remedy with respect to such excess
until payment and satisfaction in full of all of such obligations. For purposes
hereof, (i) "Excess Funding Guarantor" shall mean, in respect of any
obligations arising
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under the other provisions of this Section 4 (hereafter, the "Guarantied
Obligations"), a Guarantor that has paid an amount in excess of its Pro Rata
Share of the Guarantied Obligations; (ii) "Excess Payment" shall mean, in
respect of any Guarantied Obligations, the amount paid by an Excess Funding
Guarantor in excess of its Pro Rata Share of such Guarantied Obligations; and
(iii) "Pro Rata Share", for the purposes of this Section 4.6, shall mean, for
any Guarantor, the ratio (expressed as a percentage) of (a) the amount by which
the aggregate present fair saleable value of all of its assets and properties
exceeds the amount of all debts and liabilities of such Guarantor (including
contingent, subordinated, unmatured, and unliquidated liabilities, but
excluding the obligations of such Guarantor hereunder) to (b) the amount by
which the aggregate present fair saleable value of all assets and other
properties of the Borrower and all of the Guarantors exceeds the amount of all
of the debts and liabilities (including contingent, subordinated, unmatured,
and unliquidated liabilities, but excluding the obligations of the Borrower and
the Guarantors hereunder) of the Borrower and all of the Guarantors, all as of
the Closing Date (if any Guarantor becomes a party hereto subsequent to the
Closing Date, then for the purposes of this Section 4.6 such subsequent
Guarantor shall be deemed to have been a Guarantor as of the Closing Date and
the information pertaining to, and only pertaining to, such Guarantor as of the
date such Guarantor became a Guarantor shall be deemed true as of the Closing
Date).
4.7 Continuing Guarantee.
The guarantee in this Section 4 is a continuing guarantee, and shall apply
to all Guaranteed Obligations whenever arising.
SECTION 5
CONDITIONS
5.1 Conditions to Closing.
This Credit Agreement shall become effective, and the initial Extensions
of Credit may be made, upon the satisfaction of the following conditions
precedent:
(a) Execution of Credit Agreement and Credit Documents.
Receipt by the Administrative Agent of (i) multiple counterparts of this Credit
Agreement, (ii) a Revolving Note for each Lender, (iii) multiple counterparts
of the Pledge Agreement, (iv) multiple counterparts of the Security Agreement
and (v) UCC financing statements relating to the Pledge Agreement and the
Security Agreement, if any, in each case executed by a duly authorized officer
of each party thereto and in each case conforming to the requirements of this
Credit Agreement.
(b) Legal Opinions. Receipt of multiple counterparts of
opinions of counsel for the Credit Parties relating to the Credit Documents and
the transactions contemplated herein, in form and substance satisfactory to the
Administrative Agent and the Required Lenders.
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(c) Stock Certificates. Receipt of original stock
certificates evidencing the ownership interests of the Credit Parties pledged
pursuant to the Pledge Agreement, together in each case with original undated
stock powers executed in blank.
(d) Evidence of Insurance. Receipt of insurance
certificates or policies evidencing casualty insurance (including builders'
risk and all-risk permanent policies) and liability insurance conforming to the
requirements of this Credit Agreement and the other Credit Documents, together
with evidence of payment of premiums thereon.
(e) Absence of Legal Proceedings. The absence of any
action, suit, investigation or proceeding pending in any court or before any
arbitrator or governmental instrumentality which could reasonably be expected
to have a Material Adverse Effect.
(f) Public Offering. Evidence of completion of the IPO,
receipt by the Borrower of net cash proceeds therefrom in excess of $55 million
and the use of such proceeds by the Borrower to effect the Combination.
(g) Corporate Documents. Receipt of the following (or
their equivalent) for each of the Credit Parties:
(i) Articles of Incorporation. Copies of the
articles of incorporation or charter documents certified to be true
and complete as of a recent date by the appropriate Governmental
Authority of the state of its incorporation.
(ii) Resolutions. Copies of resolutions of the
Board of Directors approving and adopting the respective Credit
Documents, the transactions contemplated therein and authorizing
execution and delivery thereof, certified by a secretary or assistant
secretary as of the Closing Date to be true and correct and in force
and effect as of such date.
(iii) Bylaws. Copies of the bylaws certified by
a secretary or assistant secretary as of the Closing Date to be true
and correct and in force and effect as of such date.
(iv) Good Standing. Copies, where applicable,
of (A) certificates of good standing, existence or its equivalent
certified as of a recent date by the appropriate governmental
authorities of the state of incorporation and each other state in
which the failure to so qualify and be in good standing would have a
material adverse effect on the business or operations in such state
and (B) a certificate indicating payment of all corporate franchise
taxes certified as of a recent date by the appropriate governmental
taxing authorities.
(v) Officer's Certificate. An officer's
certificate for each of the Credit Parties dated as of the Closing
Date substantially in the form of Schedule 5.1(j)(v) with appropriate
insertions and attachments.
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(i) Fees. Receipt of all fees, if any, owing pursuant to
the Administrative Agent's Fee Letter, Section 3.5 or otherwise.
(j) Subsection 5.2 Conditions. The conditions specified
in Section 5.2 shall be satisfied.
5.2 Conditions to All Extensions of Credit.
The obligation of each Lender to make any Extension of Credit hereunder
(including the initial Extension of Credit to be made hereunder) is subject to
the satisfaction of the following conditions precedent on the date of making
such Extension of Credit:
(a) Representations and Warranties. The representations
and warranties made by the Credit Parties herein or in any other Credit
Documents or which are contained in any certificate furnished at any time under
or in connection herewith shall be true and correct in all material respects on
and as of the date of such Extension of Credit as if made on and as of such
date (except for those which expressly relate to an earlier date and those
which are untrue solely as a result of a change permitted by this Agreement).
(b) No Default or Event of Default. No Default or Event
of Default shall have occurred and be continuing on such date or after giving
effect to the Extension of Credit to be made on such date unless such Default
or Event of Default shall have been waived in accordance with this Credit
Agreement.
(c) Additional Conditions to Revolving Loans. If a
Revolving Loan is made pursuant to Section 2.1, all conditions set forth
therein shall have been satisfied.
(d) Additional Conditions to Letters of Credit. If such
Extension of Credit is made pursuant to Section 2.2, all conditions set forth
therein shall have been satisfied.
Each request for Extension of Credit (including extensions of Eurodollar
Loans and conversions of Base Rate Loans into Eurodollar Loans) and each
acceptance by the Borrower of an Extension of Credit (including extensions of
Eurodollar Loans and conversions of Base Rate Loans into Eurodollar Loans)
shall be deemed to constitute a representation and warranty by the Borrower as
of the date of such Extension of Credit that the applicable conditions in
paragraphs (a) and (b), and in (c) or (d) of this subsection have been
satisfied.
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SECTION 6
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Credit Agreement and to make
Extensions of Credit herein provided for, each of the Credit Parties hereby
represents and warrants to the Administrative Agent and to each Lender that,
after giving effect to the IPO and the Combination:
6.1 Financial Condition.
Each of the financial statements described below (copies of which have
heretofore been provided to the Administrative Agent for distribution to the
Lenders), have been prepared in accordance with GAAP consistently applied
throughout the periods covered thereby, are complete and correct in all material
respects and present fairly the financial condition and results from operations
of the entities and for the periods specified (subject in the case of interim
company-prepared statements to normal year-end adjustments and the absence of
footnotes and subject in the case of the financial statements prepared on a pro
forma as adjusted basis to the statement as to basis of presentation set forth
on page F-4 of the Registration Statement):
(i) the balance sheet of the Borrower as at March 31,
1998 and the related statements of income and changes in stockholders
equity for the period from inception (March 20, 1998) to March 31,
1998, accompanied by the audit report thereon of Arthur Andersen LLP;
(ii) the balance sheets of certain of the Credit Parties
(other than the Borrower) and the related statements of operations,
stockholders' equity and cash flows as at the dates set forth therein
and for the respective periods then ended, all as set forth as pages
F-15 through F-143 of the Registration Statement, accompanied by the
audit reports thereon of Arthur Andersen LLP or such other independent
public accountants as are identified therein;
(iii) the unaudited pro forma as adjusted balance sheets of
the Borrower as at December 31, 1997 and March 31, 1998 and the related
unaudited pro forma as adjusted statements of income for the respective
fiscal year and fiscal quarter then ended, as set forth as pages F-4
through F-9 of the Registration Statement; and
(iv) the unaudited pro forma as adjusted statement of
income of the Borrower for the fiscal quarter ended December 31, 1997
and the unaudited pro forma as adjusted balance sheet of the Borrower
as at June 30, 1998 and the related unaudited pro forma as adjusted
statement of income for the fiscal quarter then ended, prepared by the
Borrower on a basis consistent with the unaudited pro forma as adjusted
financial statements described in Section 6.1(iii).
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6.2 No Changes or Restricted Payments.
Since the date of the audited financial statements referenced in
Section 6.1(ii), (a) there has been no circumstance, development or event
relating to or affecting the members of the Consolidated Group which has had or
would be reasonably expected to have a Material Adverse Effect, and (b) except
as permitted herein, no Restricted Payments have been made or declared by any
members of the Consolidated Group.
6.3 Organization; Existence; Compliance with Law.
Each of the Credit Parties (a) is duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization, except to the extent that the failure to be in good standing would
not, in the aggregate, have a Material Adverse Effect, (b) has the corporate or
other necessary power and authority, and the legal right to own and operate its
property, to lease the property it operates as lessee and to conduct the
business in which it is currently engaged, (c) is duly qualified as a foreign
entity and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business
requires such qualification, other than in such jurisdictions where the failure
to be so qualified and in good standing would not, in the aggregate, have a
Material Adverse Effect, and (d) is in compliance with its certificate of
incorporation and bylaws (or other organizational or governing documents) and
all Requirements of Law, except to the extent that the failure to comply
therewith would not, in the aggregate, be reasonably expected to have a Material
Adverse Effect.
6.4 Power; Authorization; Enforceable Obligations.
Each of the Credit Parties has the corporate or other necessary power
and authority, and the legal right, to make, deliver and perform the Credit
Documents to which it is a party and has taken all necessary corporate or other
action to authorize the execution, delivery and performance by it of the Credit
Documents to which it is a party. No consent or authorization of, filing with,
notice to or other act by or in respect of, any Governmental Authority or any
other Person is required in connection with acceptance of extensions of credit
or the making of the guaranties hereunder or with the execution, delivery or
performance of any Credit Documents by the Credit Parties (other than those
which have been obtained, such filings as are required by the Securities and
Exchange Commission and to fulfill other reporting requirements with
Governmental Authorities) or with the validity or enforceability of any Credit
Document against the Credit Parties (except such filings as are necessary in
connection with the perfection of the Liens created by such Credit Documents).
Each Credit Document to which it is a party constitutes a legal, valid and
binding obligation of such Credit Party enforceable against such Credit Party in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).
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6.5 No Legal Bar.
The execution, delivery and performance of the Credit Documents, the
borrowings hereunder and the use of the Extensions of Credit will not violate
any Requirement of Law, the certificate of incorporation or bylaws (or other
organizational or governing documents) or any Contractual Obligation of any
Credit Party (except those as to which waivers or consents have been obtained),
and will not result in, or require, the creation or imposition of any Lien on
any of its respective properties or revenues pursuant to any Requirement of Law,
its certificate of incorporation or bylaws (or other organizational or governing
documents) or Contractual Obligation other than the Liens arising under or
contemplated in connection with the Credit Documents. No member of the
Consolidated Group is in default under or with respect to any of its Contractual
Obligations in any respect which would reasonably be expected to have a Material
Adverse Effect.
6.6 No Material Litigation.
No claim, litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the best knowledge of the
Credit Parties, threatened by or against, any members of the Consolidated Group
or against any of their respective properties or revenues which (a) purports to
affect the legality, validity or enforceability of any of the Credit Documents
and which is reasonably likely to be adversely determined, or (b) is reasonably
likely to have a Material Adverse Effect.
6.7 No Default.
No Default or Event of Default has occurred and is continuing.
6.8 Ownership of Property; Liens.
Each of the Credit Parties has good record and marketable title in fee
simple to, or (subject to the documentation of certain agreed-upon leases
between certain Credit Parties and certain of the shareholders or principals of
the corresponding Founding Companies) a valid leasehold interest in, all its
real property material to the Consolidated Group, and good title to, or a valid
leasehold interest in, all its other property material to the Consolidated
Group, and none of such property is subject to any Lien, except for Permitted
Liens.
6.9 Intellectual Property.
Each of the members of the Consolidated Group owns, or has the legal
right to use, all United States trademarks, tradenames, copyrights, technology,
know-how and processes, if any, necessary for each of them to conduct its
business as currently conducted (the "Intellectual Property") except for those
the failure to own or have such legal right to use would not be reasonably
expected to have a Material Adverse Effect. No claim has been asserted and is
pending by any Person challenging or questioning the use of any such
Intellectual Property or the validity or effectiveness of any such Intellectual
Property, nor does any Credit Party know of any such claim, and the use of such
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Intellectual Property by the members of the Consolidated Group does not infringe
on the rights of any Person, except for such claims and infringements that in
the aggregate, would not be reasonably expected to have a Material Adverse
Effect.
6.10 No Burdensome Restrictions.
Neither the certificate of incorporation or bylaws (or other
organizational or governing documents) nor any Requirement of Law or Contractual
Obligation of the members of the Consolidated Group would be reasonably expected
to have a Material Adverse Effect.
6.11 Taxes.
Each of the Credit Parties has filed or caused to be filed all United
States federal income tax returns and all other material tax returns which, to
the best knowledge of the Credit Parties, are required to be filed and has paid
(a) all taxes shown to be due and payable on said returns or (b) all taxes shown
to be due and payable on any assessments of which it has received notice made
against it or any of its property and all other taxes, fees or other charges
imposed on it or any of its property by any Governmental Authority (other than
any (i) taxes, fees or other charges with respect to which the failure to pay,
in the aggregate, would not have a Material Adverse Effect or (ii) taxes, fees
or other charges the amount or validity of which are currently being contested
and with respect to which reserves in conformity with GAAP have been provided on
the books of such Person), and no tax Lien has been filed (other than tax Liens
which, in the aggregate, would not have a Material Adverse Effect), and, to the
best knowledge of the Credit Parties, no claim is being asserted, with respect
to any such tax, fee or other charge (other than such claims which, in the
aggregate, would not have a Material Adverse Effect).
6.12 ERISA
Except as would not reasonably be expected to have a Material Adverse
Effect:
(a) During the five-year period prior to the date on which this
representation is made or deemed made: (i) no ERISA Event has occurred, and, to
the best knowledge of the Credit Parties, no event or condition has occurred or
exists as a result of which any ERISA Event could reasonably be expected to
occur, with respect to any Plan; (ii) no "accumulated funding deficiency," as
such term is defined in Section 302 of ERISA and Section 412 of the Internal
Revenue Code, whether or not waived, has occurred with respect to any Plan;
(iii) each Plan has been maintained, operated, and funded in compliance with its
own terms and in material compliance with the provisions of ERISA, the Internal
Revenue Code, and any other applicable federal or state laws; and (iv) no lien
in favor of the PBGC or a Plan has arisen or is reasonably likely to arise on
account of any Plan.
(b) The actuarial present value of all "benefit liabilities" (as
defined in Section 4001(a)(16) of ERISA), whether or not vested, under each
Single Employer Plan, as of the last annual
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valuation date prior to the date on which this representation is made or deemed
made (determined, in each case, in accordance with Financial Accounting
Standards Board Statement 87, utilizing the actuarial assumptions used in such
Plan's most recent actuarial valuation report), did not exceed as of such
valuation date the fair market value of the assets of such Plan.
(c) No member of the Consolidated Group nor any ERISA Affiliate
has incurred, or, to the best knowledge of the Credit Parties, could be
reasonably expected to incur, any withdrawal liability under ERISA to any
Multiemployer Plan or Multiple Employer Plan. No member of the Consolidated
Group nor any ERISA Affiliate would become subject to any withdrawal liability
under ERISA if any member of the Consolidated Group or any ERISA Affiliate were
to withdraw completely from all Multiemployer Plans and Multiple Employer Plans
as of the valuation date most closely preceding the date on which this
representation is made or deemed made. No member of the Consolidated Group nor
any ERISA Affiliate has received any notification that any Multiemployer Plan is
in reorganization (within the meaning of Section 4241 of ERISA), is insolvent
(within the meaning of Section 4245 of ERISA), or has been terminated (within
the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best
knowledge of the Credit Parties, reasonably expected to be in reorganization,
insolvent, or terminated.
(d) No prohibited transaction (within the meaning of Section 406
of ERISA or Section 4975 of the Internal Revenue Code) or breach of fiduciary
responsibility has occurred with respect to a Plan which has subjected or may
subject any member of the Consolidated Group or any ERISA Affiliate to any
liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of
the Internal Revenue Code, or under any agreement or other instrument pursuant
to which any member of the Consolidated Group or any ERISA Affiliate has agreed
or is required to indemnify any person against any such liability.
(e) No member of the Consolidated Group nor any ERISA Affiliates
has any material liability with respect to "expected post-retirement benefit
obligations" within the meaning of the Financial Accounting Standards Board
Statement 106. Each Plan which is a welfare plan (as defined in Section 3(1) of
ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Internal
Revenue Code apply has been administered in compliance in all material respects
of such sections.
6.13 Governmental Regulations, Etc.
(a) No part of the proceeds of the Extensions of Credit hereunder
will be used, directly or indirectly, for the purpose of purchasing or carrying
any "margin stock" within the meaning of Regulation U. If requested by any
Lender or the Administrative Agent, the Borrower will furnish to the
Administrative Agent and each Lender a statement to the foregoing effect in
conformity with the requirements of FR Form U-1 referred to in said Regulation
U. No indebtedness being reduced or retired out of the proceeds of the
Extensions of Credit hereunder was or will be incurred for the purpose of
purchasing or carrying any margin stock within the meaning of Regulation U or
any "margin security" within the meaning of Regulation T. "Margin stock" within
the meanings of Regulation U does not constitute more than 25% of the value of
the consolidated assets of the
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Borrower and its Subsidiaries. None of the transactions contemplated by this
Credit Agreement (including, without limitation, the direct or indirect use of
the proceeds of the Revolving Loans) will violate or result in a violation of
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, or regulations issued pursuant thereto, or Regulation T, U or X.
(b) None of the members of the Consolidated Group is subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act or the Investment Company Act of 1940, each as amended. In addition,
none of the members of the Consolidated Group is (i) an "investment company"
registered or required to be registered under the Investment Company Act of
1940, as amended, and is not controlled by such a company, or (ii) a "holding
company", or a "subsidiary company" of a "holding company", or an "affiliate" of
a "holding company" or of a "subsidiary" of a "holding company", within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
(c) No director, executive officer or principal shareholder of any
member of the Consolidated Group is a director, executive officer or principal
shareholder of any Lender. For the purposes hereof the terms "director",
"executive officer" and "principal shareholder" (when used with reference to any
Lender) have the respective meanings assigned thereto in Regulation O issued by
the Board of Governors of the Federal Reserve System.
6.14 Subsidiaries.
Set forth on Schedule 6.14 are all the Subsidiaries of the Borrower at
the Closing Date, the jurisdiction of their incorporation and the direct or
indirect ownership interest of the Borrower therein.
6.15 Purpose of Extensions of Credit.
The Extensions of Credit may be used (i) for working capital, capital
expenditures and other lawful corporate purposes, (ii) to the extent necessary,
to refinance certain indebtedness of the Borrower and its Subsidiaries and to
pay expenses of the transactions contemplated herein (including, without
limitation, the IPO and the Combination) and (iii) to finance Acquisitions
permitted hereunder.
6.16 Environmental Matters.
Except as would not reasonably be expected to have a Material Adverse
Effect:
(a) Each of the facilities and properties owned, leased or
operated by the members of the Consolidated Group (the "Properties") and all
operations at the Properties are in compliance with all applicable Environmental
Laws, and there is no violation of any Environmental Law with respect to the
Properties or the businesses operated by the members of the Consolidated Group
(the "Businesses"), and there are no conditions relating to the Businesses or
Properties that could give rise to liability under any applicable Environmental
Laws.
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(b) None of the Properties contains, or has previously contained,
any Materials of Environmental Concern at, on or under the Properties in amounts
or concentrations that constitute or constituted a violation of, or could give
rise to liability under, Environmental Laws.
(c) None of the members of the Consolidated Group has received any
written or verbal notice of, or inquiry from any Governmental Authority
regarding, any violation, alleged violation, non-compliance, liability or
potential liability regarding environmental matters or compliance with
Environmental Laws with regard to any of the Properties or the Businesses, nor
does any member of the Consolidated Group have knowledge or reason to believe
that any such notice will be received or is being threatened.
(d) Materials of Environmental Concern have not been transported
or disposed of from the Properties, or generated, treated, stored or disposed of
at, on or under any of the Properties or any other location, in each case by or
on behalf any members of the Consolidated Group in violation of, or in a manner
that would be reasonably likely to give rise to liability under, any applicable
Environmental Law.
(e) No judicial proceeding or governmental or administrative
action is pending or, to the best knowledge of any Credit Party, threatened,
under any Environmental Law to which any member of the Consolidated Group is or
will be named as a party, nor are there any consent decrees or other decrees,
consent orders, administrative orders or other orders, or other administrative
or judicial requirements outstanding under any Environmental Law with respect to
any member of the Consolidated Group, the Properties or the Businesses.
(f) There has been no release or, threat of release of Materials
of Environmental Concern at or from the Properties, or arising from or related
to the operations (including, without limitation, disposal) of any member of the
Consolidated Group in connection with the Properties or otherwise in connection
with the Businesses, in violation of or in amounts or in a manner that could
give rise to liability under Environmental Laws.
6.17 Year 2000 Compliance.
The Borrower has (i) developed a plan and timeline for addressing the
"Year 2000 Problem" (that is, the risk that computer applications used by such
Person may be unable to recognize and perform properly date-sensitive functions
involving certain dates prior to and any date after December 31, 1999) on a
timely basis, (ii) to date, implemented that plan in accordance with that
timetable and (iii) believes that all of its computer applications that are
material to its or any of its Subsidiaries' business and operations are
reasonably expected on a timely basis to be able to perform properly
date-sensitive functions for all dates before and after January 1, 2000 (that
is, be "Year 2000 Compliant"), except to the extent that a failure to do so
could not reasonably be expected to have a Material Adverse Effect.
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SECTION 7
AFFIRMATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing
Date, and so long as this Credit Agreement is in effect and until the
Commitments have been terminated, no Obligations remain outstanding and all
amounts owing hereunder or in connection herewith have been paid in full, unless
the Required Lenders otherwise consent in writing, the Borrower shall, and in
the case of Sections 7.4, 7.5, 7.6, 7.7 and 7.8 below, shall cause each of the
other Credit Parties to:
7.1 Financial Statements.
Furnish, or cause to be furnished, to the Administrative Agent and
Lenders:
(a) Audited Financial Statements. As soon as available,
but in any event within 95 days after the end of each fiscal year, an
audited consolidated balance sheet of the Borrower and its subsidiaries
as of the end of the fiscal year and the related consolidated
statements of operations, shareholders' equity and cash flows for the
year, audited by Arthur Andersen LLP, or other firm of independent
certified public accountants of nationally recognized standing
reasonably acceptable to the Required Lenders, setting forth in each
case in comparative form the figures for the previous year (except for
the period prior to the merger of a Subsidiary of the Borrower with
Comstock Holdings Inc. pursuant to the Combination, for which period
the financial statements presented will be those of Comstock Holdings
Inc.), reported without a "going concern" or like qualification or
exception, or qualification indicating that the scope of the audit was
inadequate to permit such independent certified public accountants to
certify such financial statements without such qualification.
(b) Company-Prepared Financial Statements. As soon as
available, but in any event
(i) within 50 days after the end of each of the first
three fiscal quarters, a company-prepared consolidated balance
sheet of the Borrower and its subsidiaries as of the end of
the quarter and related company-prepared consolidated
statements of operations, shareholders' equity and cash flows
for such quarterly period and for the fiscal year to date;
(ii) within 30 days prior to the end of each fiscal
year, an annual business plan and budget for the members of
the Consolidated Group, containing, among other things,
projected financial statements for the next fiscal year,
in each case setting forth in comparative form the consolidated figures
for the corresponding period or periods of the preceding fiscal year or
the portion of the fiscal
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year ending with such period, as applicable (except for the period
prior to the merger of a Subsidiary of the Borrower with Comstock
Holdings Inc. pursuant to the Combination, for which period the
financial statements presented will be those of Comstock Holdings
Inc.), in each case subject to normal year-end audit adjustments.
(c) Third Quarter 1998 Pro Forma. As soon as available,
but in any event within 50 days after the end of the Borrower's fiscal
quarter ending on September 30, 1998, a company-prepared unaudited pro
forma as adjusted consolidated statement of income of the Borrower for
the fiscal quarter ended September 30, 1998, prepared on a basis
consistent with the unaudited pro forma as adjusted financial
statements described in Section 6.1(iii).
(d) Borrowing Base Certificate. Concurrently with the
delivery of the financial statements referred to in Sections 7.1(a) and
7.1(b) above, a statement of the Borrowing Base and its components as
of the end of the immediately preceding fiscal quarter, in form and
content satisfactory to the Administrative Agent and certified by the
chief financial officer of the Borrower to be true and correct as of
the date thereof (the "Borrowing Base Certificate").
All such financial statements shall be complete and correct in all material
respects (subject, in the case of interim statements, to normal year-end audit
adjustments and subject in the case of the financial statements prepared on a
pro forma as adjusted basis to the statement as to basis of presentation set
forth on page F-4 of the Registration Statement) and shall be prepared in
reasonable detail and, in the case of the annual and quarterly financial
statements provided in accordance with subsections (a) and (b) above, in
accordance with GAAP applied consistently throughout the periods reflected
therein and further accompanied by a description of, and an estimation of the
effect on the financial statements on account of, any change in the application
of accounting principles as provided in Section 1.3(a).
7.2 Certificates; Other Information.
Furnish, or cause to be furnished, to the Administrative Agent for
distribution to the Lenders:
(a) Accountant's Certificate and Reports. Concurrently
with the delivery of the financial statements referred to in subsection
7.1(a) above, a certificate of the independent certified public
accountants reporting on such financial statements stating that in the
course of performing their audit, nothing came to their attention that
caused them to believe the Borrower was not in compliance with the
financial covenants contained in Section 7.9 below insofar as such
covenants relate to accounting matters, except as specified in such
certificate.
(b) Officer's Compliance Certificate. Concurrently with
the delivery of the financial statements referred to in Sections 7.1(a)
and 7.1(b) above, a certificate of a Responsible Officer stating that,
to the best of such Responsible Officer's knowledge and belief, (i) the
financial statements fairly present in all material respects the
financial condition
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of the parties covered by such financial statements, (ii) during such
period the Credit Parties have observed or performed in all material
respects the covenants and other agreements hereunder and under the
other Credit Documents relating to them, and satisfied in all material
respects the conditions contained in this Credit Agreement to be
observed, performed or satisfied by them, and (iii) such Responsible
Officer has obtained no knowledge of any Default or Event of Default
except as specified in such certificate. Such certificate shall include
the calculations required to indicate compliance with Section 7.9. A
form of Officer's Certificate is attached as Schedule 7.2(b).
(c) Accountants' Reports. Promptly upon receipt, a copy
of any final (as distinguished from a preliminary or discussion draft)
"management letter" or other similar report submitted by independent
accountants or financial consultants to the members of the Consolidated
Group in connection with any annual, interim or special audit.
(d) Public Information. Within thirty days after the same
are sent, copies of all reports (other than those otherwise provided
pursuant to subsection 7.1) and other financial information which the
Borrower sends to its public stockholders, and within thirty days after
the same are filed, copies of all financial statements and
non-confidential reports which the Borrower may make to, or file with,
the SEC.
(e) Other Information. Promptly, such additional
financial and other information as the Administrative Agent, at the
request of any Lender, may from time to time reasonably request.
7.3 Notices.
Give notice to the Administrative Agent (which shall promptly transmit
such notice to each Lender) of:
(a) Defaults. Immediately (and in any event within five
(5) Business Days) after any Responsible Officer knows or has reason to
know thereof, the occurrence of any Default or Event of Default.
(b) Contractual Obligations. Promptly (and in any event
within ten (10) Business Days) after any Responsible Officer knows or
has reason to know of the occurrence of any default or event of default
under any Contractual Obligation of any member of the Consolidated
Group which would reasonably be expected to have a Material Adverse
Effect.
(c) Legal Proceedings. Promptly (and in any event within
ten (10) Business Days) after any Responsible Officer knows or has
reason to know of any litigation, or any investigation or proceeding
(including without limitation, any environmental proceeding), or any
material development in respect thereof, affecting any member of the
Consolidated Group which, if adversely determined, would reasonably be
expected to have a Material Adverse Effect.
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(d) ERISA. Promptly (and in any event within thirty (30)
Business Days) after any Responsible Officer knows or has reason to
know of (i) any event or condition, including, but not limited to, any
Reportable Event, that constitutes, or might reasonably lead to, an
ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt
of notice as prescribed in ERISA or otherwise of any withdrawal
liability assessed against any of their ERISA Affiliates, or of a
determination that any Multiemployer Plan is in reorganization or
insolvent (both within the meaning of Title IV of ERISA); (iii) the
failure to make full payment on or before the due date (including
extensions) thereof of all amounts which the members of the
Consolidated Group or any ERISA Affiliate are required to contribute to
each Plan pursuant to its terms and as required to meet the minimum
funding standard set forth in ERISA and the Internal Revenue Code with
respect; or (iv) any change in the funding status of any Plan that
reasonably could be expected to have a Material Adverse Effect;
together with a description of any such event or condition or a copy of
any such notice and a statement by the chief financial officer of the
Borrower briefly setting forth the details regarding such event,
condition, or notice, and the action, if any, which has been or is
being taken or is proposed to be taken by the Credit Parties with
respect thereto. Promptly upon request, the members of the Consolidated
Group shall furnish the Administrative Agent and the Lenders with such
additional information concerning any Plan as may be reasonably
requested, including, but not limited to, copies of each annual
report/return (Form 5500 series), as well as all schedules and
attachments thereto required to be filed with the Department of Labor
and/or the Internal Revenue Service pursuant to ERISA and the Internal
Revenue Code, respectively, for each "plan year" (within the meaning of
Section 3(39) of ERISA).
(e) Other. Promptly (and in any event within ten (10)
Business Days), any other development or event which a Responsible
Officer determines could reasonably be expected to have a Material
Adverse Effect.
Each notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action the relevant Credit Parties propose to take with respect
thereto.
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7.4 Payment of Obligations.
Pay, discharge or otherwise satisfy at or before maturity or before
they become delinquent, as the case may be, in accordance with prudent business
practice (subject, where applicable, to specified grace periods) all material
obligations of each Credit Party of whatever nature and any additional costs
that are imposed as a result of any failure to so pay, discharge or otherwise
satisfy such obligations, except when the amount or validity of such obligations
and costs is currently being contested in good faith by appropriate proceedings
and reserves, if applicable, in conformity with GAAP with respect thereto have
been provided on the books of the Consolidated Group, as the case may be.
7.5 Conduct of Business and Maintenance of Existence.
Continue to engage in business of the same general type as conducted on
the Closing Date by the Borrower and the other Credit Parties, taken as a whole,
and similar or related businesses; preserve, renew and keep in full force and
effect its corporate existence except as otherwise permitted by this Credit
Agreement and take all reasonable action to maintain all rights, privileges,
licenses and franchises necessary or desirable in the normal conduct of its
business except to the extent that failure to comply therewith would not, in the
aggregate, have a Material Adverse Effect; and comply with all Contractual
Obligations, its certificate of incorporation or bylaws (or other organizational
or governing documents) and all Requirements of Law applicable to it except to
the extent that failure to comply therewith would not, in the aggregate, have a
Material Adverse Effect.
7.6 Maintenance of Property; Insurance.
Keep all material property useful and necessary in its business in
reasonably good working order and condition (ordinary wear and tear excepted)
except to the extent that failure to comply therewith would not, in the
aggregate, have a Material Adverse Effect; maintain with financially sound and
reputable insurance companies casualty, liability and such other insurance
(which may include plans of self-insurance) with such coverage and deductibles,
and in such amounts as may be consistent with prudent business practice and in
any event consistent with normal industry practice (except to any greater extent
as may be required by the terms of any of the other Credit Documents); and
furnish to the Administrative Agent, upon written request, full information as
to the insurance carried.
7.7 Inspection of Property; Books and Records; Discussions.
Keep proper books of records and account in which full, true and
correct entries in conformity with GAAP and all Requirements of Law shall be
made of all dealings and transactions in relation to its businesses and
activities; and permit, during regular business hours and upon reasonable notice
to a Responsible Officer by the Administrative Agent, the Administrative Agent
to visit and inspect any of its properties and examine and make abstracts
(including photocopies) from any of its books and records (other than materials
protected by the
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attorney-client privilege and materials which the Credit Parties may not
disclose without violation of a confidentiality obligation binding upon them)
and to discuss the business, operations, properties and financial and other
condition of the Credit Parties with officers and employees of the Borrower and,
so long as any discussion takes place in the presence of a Responsible Officer,
with officers and employees of the Credit Parties and with the Borrower's
independent certified public accountants. The cost of the inspection referred to
in the preceding sentence shall be for the account of the Lenders unless an
Event of Default has occurred and is continuing, in which case the cost of such
inspection shall be for the account of the Credit Parties. The Credit Parties
agree that the Administrative Agent, and its representatives, may conduct an
annual audit of the inventory and receivables of the Credit Parties, at the
expense of the Borrower.
7.8 Environmental Laws.
(a) Comply in all material respects with, and take reasonable
actions to ensure compliance in all material respects by all tenants and
subtenants, if any, with, all applicable Environmental Laws and obtain and
comply in all material respects with and maintain, and take reasonable actions
to ensure that all tenants and subtenants obtain and comply in all material
respects with and maintain, any and all licenses, approvals, notifications,
registrations or permits required by applicable Environmental Laws except to the
extent that failure to do so would not reasonably be expected to have a Material
Adverse Effect; and
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities regarding Environmental
Laws except to the extent that the same are being contested in good faith by
appropriate proceedings and the failure to do or the pendency of such
proceedings would not reasonably be expected to have a Material Adverse Effect.
7.9 Financial Covenants.
Comply with the following financial covenants (each of which shall be
computed in accordance with Section 1.3(b), to the extent applicable):
(a) Consolidated Leverage Ratio. As of the end of each fiscal
quarter ending during the respective periods set forth below, the Consolidated
Leverage Ratio shall be not greater than the ratio set forth opposite such
period:
Closing Date through June 30, 1999 3.0:1.0
July 1, 1999 and thereafter 2.5:1.0
(b) Minimum Consolidated Base EBITDA. For the period from the
Closing Date through the fiscal quarter ending June 30, 1999, as of the end of
each fiscal quarter for the period
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of four consecutive fiscal quarters then ending, Consolidated Base EBITDA shall
be not less than Fifteen Million Dollars ($15,000,000).
(c) Consolidated Net Worth. As of the end of each fiscal quarter,
Consolidated Net Worth shall be not less than the sum of $88,000,000 plus on the
last day of each fiscal quarter to occur after the Closing Date, seventy-five
percent (75%) of Consolidated Net Income for the fiscal quarter (but not less
than zero), such increases to be cumulative, plus one hundred percent (100%) of
any increases in Consolidated Net Worth resulting from Equity Transactions
occurring after the Closing Date.
(d) Consolidated Fixed Charge Coverage Ratio. As of the end of
each fiscal quarter, Consolidated Fixed Charge Coverage Ratio shall be not less
than 1.75:1.0.
(e) Consolidated Rent Expense. Consolidated Rent Expense for any
fiscal year, commencing with the fiscal year ending December 31, 1999, shall be
not more than $5,000,000.
7.10 Administrative Fees.
Pay to the Administrative Agent the Administrative Agent's Fees and
comply with the other agreements provided for in the Administrative Agent's Fee
Letter.
7.11 Additional Guaranties and Stock Pledges.
(a) Domestic Subsidiaries. Where Domestic Subsidiaries of the
Borrower which are not Credit Parties hereunder (the "Non-Guarantor
Subsidiaries") shall at any time constitute more than (the "Threshold
Requirement"):
(i) in any instance for any such Non-Guarantor Subsidiary,
five percent (5%) of consolidated assets for the Consolidated Group or
five percent (5%) of consolidated revenues for the Consolidated Group,
or
(ii) in the aggregate for all such Non-Guarantor Subsidiaries,
ten percent (10%) of consolidated assets for the Consolidated Group or
ten percent (10%) of consolidated revenues for the Consolidated Group,
then the Borrower shall (i) notify the Administrative Agent thereof within 10
days after a Responsible Officer has knowledge thereof, and, within 20 days
thereafter, (A) cause such Domestic Subsidiary or Subsidiaries to become a
Guarantor by execution of a Joinder Agreement, such that immediately after
joinder as a Guarantor, the remaining Non-Guarantor Subsidiaries shall not in
any instance, or collectively, exceed the Threshold Requirement, (B) deliver
with the Joinder Agreement, supporting resolutions, incumbency certificates,
corporate formation and organizational documentation and opinions of counsel as
the Administrative Agent may reasonably request, and (C) deliver stock
certificates and related pledge agreements
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or pledge joinder agreements evidencing the pledge of 100% of the Voting Stock
of all Domestic Subsidiaries (whether or not they are Guarantors) and 66% of the
Voting Stock of all Foreign Subsidiaries, together with undated stock transfer
powers executed in blank.
(b) Foreign Subsidiaries. At any time any Person becomes a Foreign
Subsidiary, the Borrower will notify the Administrative Agent thereof within 10
days after a Responsible Officer has knowledge thereof, and, within 45 days
thereafter, cause (A) delivery of supporting resolutions, incumbency
certificates, corporation formation and organizational documentation and
opinions of counsel as the Administrative Agent may reasonably request, and (B)
delivery of stock certificates (where required for perfection under local law)
and a related pledge agreement or pledge joinder agreement evidencing the pledge
of 66% of the Voting Stock of such Foreign Subsidiary and of 66% of the Voting
Stock of each of its Domestic Subsidiaries and 66% of the Voting Stock of each
of its Foreign Subsidiaries, together in each case with undated stock transfer
powers executed in blank.
7.12 Ownership of Subsidiaries.
Except to the extent otherwise permitted in Section 8.6, the Borrower
shall, directly or indirectly, own at all times 100% of the Voting Stock of each
of its Subsidiaries.
7.13 Use of Proceeds.
Extensions of Credit will be used solely for the purposes provided in
Section 6.15.
7.14 Year 2000 Compatibility.
Take all action reasonably necessary to assure that its computer based
systems are Year 2000 Compliant within the meaning of Section 6.17), except to
the extent that a failure to do so would not have a Material Adverse Effect,
and, at the reasonable request of the Administrative Agent or the Required
Lenders, provide evidence to the Lenders that it is taking such action.
SECTION 8
NEGATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing
Date, and so long as this Credit Agreement is in effect and until the
Commitments have been terminated, no Obligations remain outstanding and all
amounts owing hereunder or in connection herewith, have been paid in full, no
member of the Consolidated Group shall (without the prior written consent of the
Required Lenders):
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8.1 Indebtedness.
Contract, create, incur, assume or permit to exist any Indebtedness,
except:
(a) Indebtedness arising or existing under this Credit
Agreement and the other Credit Documents;
(b) Indebtedness set forth in Schedule 8.1, and renewals,
refinancings and extensions thereof on terms and conditions consistent
with then prevailing market standards for such existing Indebtedness;
(c) Capital Lease Obligations and Indebtedness incurred,
in each case, to provide all or a portion of the purchase price or
costs of construction of an asset or, in the case of a sale/leaseback
transaction as described in Section 8.9, to finance the value of such
asset owned by a member of the Consolidated Group, provided that (i)
such Indebtedness when incurred shall not exceed the purchase price or
cost of construction of such asset or, in the case of a sale/leaseback
transaction, the fair market value of such asset, (ii) no such
Indebtedness shall be refinanced for a principal amount in excess of
the principal balance outstanding thereon at the time of such
refinancing, and (iii) the total amount of all such Indebtedness shall
not exceed $1,500,000 at any time outstanding;
(d) Indebtedness and obligations owing under interest
rate protection agreements relating to the Obligations hereunder and
under interest rate, commodities and foreign currency exchange
protection agreements entered into in the ordinary course of business
to manage existing or anticipated risks and not for speculative
purposes;
(e) unsecured intercompany Indebtedness owing by a member
of the Consolidated Group to another member of the Consolidated Group
(subject, however, to the limitations of Section 8.5 in the case of the
member of the Consolidated Group extending the intercompany loan,
advance or credit);
(f) Subordinated Debt of the Borrower;
(g) Indebtedness in respect of financed insurance premium
obligations;
(h) other unsecured Indebtedness of any of the Credit
Parties of up to $1,000,000 in the aggregate at any time outstanding;
and
(i) Support Obligations of Indebtedness permitted under
this Section 8.1.
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8.2 Liens.
Contract, create, incur, assume or permit to exist any Lien with
respect to any of their respective property or assets of any kind (whether real
or personal, tangible or intangible), whether now owned or hereafter acquired,
except for Permitted Liens.
8.3 Consolidation, Merger, Divestiture, etc.
(a) Enter into a transaction of merger or consolidation,
except
(i) a member of the Consolidated Group may be a
party to a transaction of merger or consolidation with another member
of the Consolidated Group, provided that (A) if the Borrower is a party
thereto, it shall be the surviving corporation, (B) if a Guarantor is a
party thereto and the Borrower is not a party thereto, a Guarantor
shall be the surviving corporation or the surviving corporation shall
be a Domestic Subsidiary and shall become a Guarantor hereunder as an
Additional Credit Party pursuant to Section 7.11 concurrently
therewith, and (C) no Default or Event of Default shall exist either
immediately prior to or immediately after giving effect thereto; and
(ii) a member of the Consolidated Group (other
than the Borrower) may be a party to a transaction of merger or
consolidation with any other Person in connection with an Acquisition
permitted under Section 8.4 and a Divestiture permitted under Section
8.3(b), provided that, in connection with an Acquisition, the
provisions of Section 7.11 regarding joinder of certain Subsidiaries as
Additional Credit Parties hereunder shall be complied with.
(b) Make any Divestiture which:
(i) in any instance (including any series of
related transactions comprising a Divestiture) shall be of Property (or
of a Person owning Property) constituting more than five percent (5%)
of Consolidated Assets at the end of the immediately preceding fiscal
year or generating more than five percent (5%) of Consolidated Net
Income for the immediately preceding fiscal year, or
(ii) in the aggregate in any fiscal year shall be
of Property (or of a Person owning Property) constituting more than ten
percent (10%) of Consolidated Assets at the end of the immediately
preceding fiscal year or generating more than ten percent (10%)
Consolidated Net Income for the immediately preceding fiscal year;
provided in the case of any Divestiture permitted under subsections (i)
and (ii) above, that no Default of Event of Default would exist after
giving effect thereto, determined in the case of financial covenant
compliance on a Pro Forma Basis and as otherwise set forth in Section
1.3(b).
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(c) In the case of the Borrower, liquidate, wind-up or
dissolve, whether voluntarily or involuntarily (or suffer to permit any such
liquidation or dissolution).
Any consent of the Required Lenders requested by the Borrower under
this Section 8.3 shall not be arbitrarily withheld or unreasonably delayed.
8.4 Acquisitions.
Make any Acquisition, unless
(a) the cash consideration payable in respect of any such
Acquisition (or series of related transactions comprising an
Acquisition) shall not exceed $10,000,000 in any instance;
(b) the cash consideration payable in respect of all such
Acquisitions (excluding acquisitions consented to in writing by the
Required Lenders) in any period of four consecutive fiscal quarters
shall not exceed $20,000,000 in the aggregate;
(c) the Board of Directors of the Person which is, or
whose Property is, the subject of the Acquisition shall have approved
the Acquisition; and
(d) no Default or Event of Default would exist after
giving effect thereto, determined in the case of financial covenant
compliance on a Pro Forma Basis and as otherwise set forth in Section
1.3(b).
Any consent of the Required Lenders requested by the Borrower under
this Section 8.4 shall not be arbitrarily withheld or unreasonably delayed.
8.5 Investments.
Make any Investment in any Person except for Permitted Investments.
8.6 Ownership of Equity Interests.
Issue, sell, transfer, pledge or otherwise dispose of any partnership
interests, shares of capital stock or other equity or ownership interests
("Equity Interests") in any member of the Consolidated Group, except (i)
issuance, sale or transfer of Equity Interests to a Credit Party by a Subsidiary
of such Credit Party, (ii) in connection with a transaction permitted by
Sections 8.3, 8.4 or 8.5, (iii) as needed to qualify directors under applicable
law and (iv) dispositions of Permitted Investments (other than Investments by a
Credit Party in another Credit Party).
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8.7 Fiscal Year.
Change its fiscal year from a December 31 fiscal year end.
8.8 Restricted Payments.
Make or permit any Restricted Payments.
8.9 Sale Leasebacks.
Except as permitted pursuant to Section 8.1(c) hereof, directly or
indirectly, become or remain liable as lessee or as guarantor or other surety
with respect to any lease, whether an Operating Lease or a Capital Lease, of any
Property (whether real or personal or mixed), whether now owned or hereafter
acquired, (i) which such Person has sold or transferred or is to sell or
transfer to any other Person other than a Credit Party or (ii) which such Person
intends to use for substantially the same purpose as any other Property which
has been sold or is to be sold or transferred by such Person to any other Person
in connection with such lease.
8.10 No Further Negative Pledges.
Except with respect to prohibitions against other encumbrances on
specific Property encumbered to secure payment of particular Indebtedness (which
Indebtedness relates solely to such specific Property, and improvements and
accretions thereto, and is otherwise permitted hereby), no member of the
Consolidated Group will enter into, assume or become subject to any agreement
prohibiting or otherwise restricting the creation or assumption of any Lien upon
its properties or assets, whether now owned or hereafter acquired, or requiring
the grant of any security for such obligation if security is given for some
other obligation.
SECTION 9
EVENTS OF DEFAULT
9.1 Events of Default.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. Any Credit Party shall
(i) default in the payment on the Termination Date of any
principal of any of the Revolving Loans, or
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(ii) default, and such default shall continue for three
(3) or more Business Days, in the payment when due of any reimbursement
obligations arising from drawings under Letters of Credit, or of any
interest on the Revolving Loans or on any reimbursement obligations
arising from drawings under Letters of Credit, or of any Fees or other
amounts owing hereunder, under any of the other Credit Documents or in
connection herewith or therewith; or
(b) Representations. Any representation, warranty or statement
made or deemed to be made herein, in any of the other Credit Documents, or in
any statement or certificate delivered or required to be delivered pursuant
hereto or thereto shall prove untrue in any material respect on the date as of
which it was made or deemed to have been made (other than those which are untrue
solely as a result of changes permitted by this Agreement); or
(c) Covenants.
(i) Default in the due performance or observance of any
term, covenant or agreement contained in Section 7.3(a), 7.9, 7.11,
7.13 or 8.1 through 8.10, inclusive, or
(ii) Default in the due performance or observance by it of
any term, covenant or agreement (other than those referred to in
subsections (a), (b) or (c)(i) of this Section 9.1) contained in this
Credit Agreement and such default shall continue unremedied for a
period of at least 30 days after the earlier of a Responsible Officer
becoming aware of such default or notice thereof by the Administrative
Agent; or
(d) Other Credit Documents. (i) Any Credit Party shall default in
the due performance or observance of any material term, covenant or agreement in
any of the other Credit Documents (subject to applicable grace or cure periods,
if any), or (ii) except as to the Credit Party which is dissolved, released or
merged or consolidated out of existence as the result of or in connection with a
dissolution, merger or disposition permitted by Section 8.3 or Section 8.4, any
Credit Document shall fail to be in full force and effect or to give the
Administrative Agent and/or the Lenders any material part of the Liens, rights,
powers and privileges purported to be created thereby; or
(e) Guaranties. Except as to the Credit Party which is dissolved,
released or merged or consolidated out of existence as the result of or in
connection with a dissolution, merger or disposition permitted by Section 8.3 or
Section 8.4, the guaranty given by any Guarantor hereunder or any material
provision thereof shall cease to be in full force and effect, or any Guarantor
hereunder or any Person acting by or on behalf of such Guarantor shall deny or
disaffirm such Guarantor's obligations under such guaranty, or any Guarantor
shall default in the due performance or observance of any term, covenant or
agreement on its part to be performed or observed pursuant to any guaranty; or
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(f) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect
to any Material Credit Party; or
(g) Defaults under Other Agreements. With respect to any
Indebtedness (other than Indebtedness outstanding under this Credit Agreement)
in excess of $1,500,000 in the aggregate for the Consolidated Group taken as a
whole, (A) (1) any Material Credit Party shall default in any payment (beyond
the applicable grace period with respect thereto, if any) with respect to any
such Indebtedness, or (2) the occurrence and continuance of a default in the
observance or performance relating to such Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event or condition shall occur or condition exist, the effect of which default
or other event or condition is to cause, or permit, the holder or holders of
such Indebtedness (or trustee or agent on behalf of such holders) to cause
(determined without regard to whether any notice or lapse of time is required),
any such Indebtedness to become due prior to its stated maturity; or (B) any
such Indebtedness shall be declared due and payable, or required to be prepaid
other than by a regularly scheduled required prepayment, prior to the stated
maturity thereof; or
(h) Judgments. Any Material Credit Party shall fail within 30 days
of the date due and payable to pay, bond or otherwise discharge any judgment,
settlement or order for the payment of money which judgment, settlement or
order, when aggregated with all other such judgments, settlements or orders due
and unpaid at such time, exceeds $1,500,000, and which is not stayed on appeal
(or for which no motion for stay is pending) or is not otherwise being executed;
or
(i) ERISA. Any of the following events or conditions, if such
event or condition could reasonably be expected to have a Material Adverse
Effect: (1) any "accumulated funding deficiency," as such term is defined in
Section 302 of ERISA and Section 412 of the Internal Revenue Code, whether or
not waived, shall exist with respect to any Plan, or any lien shall arise on the
assets of a member of the Consolidated Group or any ERISA Affiliate in favor of
the PBGC or a Plan; (2) an ERISA Event shall occur with respect to a Single
Employer Plan, which is, in the reasonable opinion of the Administrative Agent,
likely to result in the termination of such Plan for purposes of Title IV of
ERISA; (3) an ERISA Event shall occur with respect to a Multiemployer Plan or
Multiple Employer Plan, which is, in the reasonable opinion of the
Administrative Agent, likely to result in (i) the termination of such Plan for
purposes of Title IV of ERISA, or (ii) a member of the Consolidated Group or any
ERISA Affiliate incurring any liability in connection with a withdrawal from,
reorganization of (within the meaning of Section 4241 of ERISA), or insolvency
of (within the meaning of Section 4245 of ERISA) such Plan; or (4) any
prohibited transaction (within the meaning of Section 406 of ERISA or Section
4975 of the Internal Revenue Code) or breach of fiduciary responsibility shall
occur which may subject a member of the Consolidated Group or any ERISA
Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA
or Section 4975 of the Internal Revenue Code, or under any agreement or other
instrument pursuant to which a member of the Consolidated Group or any ERISA
Affiliate has agreed or is required to indemnify any person against any such
liability; or
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(j) Ownership. There shall occur a Change of Control.
9.2 Acceleration; Remedies.
Upon the occurrence and during the continuation of an Event of Default,
the Administrative Agent shall, upon the request and direction of the Required
Lenders, by written notice to the Credit Parties take any of the following
actions:
(i) Termination of Commitments. Declare the Commitments
terminated whereupon the Commitments shall be immediately terminated.
(ii) Acceleration. Declare the unpaid principal of and any
accrued interest in respect of all Revolving Loans, any reimbursement
obligations arising from drawings under Letters of Credit and any and
all other indebtedness or obligations of any and every kind owing by
the Credit Parties to the Administrative Agent and/or any of the
Lenders hereunder to be due whereupon the same shall be immediately due
and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by each of the Credit Parties.
(iii) Cash Collateral. Direct the Borrower to pay (and the
Borrower agrees that upon receipt of such notice, or upon the
occurrence of an Event of Default under Section 9.1(f), it will
immediately pay) to the Administrative Agent additional cash, to be
held by the Administrative Agent, for the benefit of the Lenders, in a
cash collateral account as additional security for the LOC Obligations
in respect of subsequent drawings under all then outstanding Letters of
Credit in an amount equal to the maximum aggregate amount which may be
drawn under all Letters of Credits then outstanding.
(iv) Enforcement of Rights. Enforce any and all rights and
interests created and existing under the Credit Documents and all
rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section
9.1(f) shall occur, then the Commitments shall automatically terminate and all
Revolving Loans, all reimbursement obligations arising from drawings under
Letters of Credit, all accrued interest in respect thereof, all accrued and
unpaid Fees and other indebtedness or obligations owing to the Administrative
Agent and/or any of the Lenders hereunder automatically shall immediately become
due and payable without presentment, demand, protest or the giving of any notice
or other action by the Administrative Agent or the Lenders, all of which are
hereby waived by the Credit Parties.
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SECTION 10
AGENCY PROVISIONS
10.1 Appointment.
Each Lender hereby designates and appoints NationsBank, N.A. as
administrative agent (in such capacity, the "Administrative Agent") of such
Lender to act as specified herein and the other Credit Documents, and each such
Lender hereby authorizes the Administrative Agent as the Administrative Agent
for such Lender, to take such action on its behalf under the provisions of this
Credit Agreement and the other Credit Documents and to exercise such powers and
perform such duties as are expressly delegated by the terms hereof and of the
other Credit Documents, together with such other powers as are reasonably
incidental thereto. Each Lender further directs and authorizes the
Administrative Agent to execute releases (or similar agreements) to give effect
to the provisions of this Credit Agreement and the other Credit Documents,
including specifically, without limitation, in connection with a Divestiture
consented to or permitted pursuant the provisions of Section 8.3 hereof or a
sale, lease, transfer or other disposition of Property not prohibited by this
Credit Agreement. Notwithstanding any provision to the contrary elsewhere herein
and in the other Credit Documents, the Administrative Agent shall not have any
duties or responsibilities, except those expressly set forth herein and therein,
or any fiduciary relationship with any Lender, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be read
into this Credit Agreement or any of the other Credit Documents, or shall
otherwise exist against the Administrative Agent. The provisions of this Section
are solely for the benefit of the Administrative Agent and the Lenders and none
of the Credit Parties shall have any rights as a third party beneficiary of the
provisions hereof (other than as set forth in the second sentence hereof). In
performing its functions and duties under this Credit Agreement and the other
Credit Documents, the Administrative Agent shall act solely as Administrative
Agent of the Lenders and does not assume and shall not be deemed to have assumed
any obligation or relationship of agency or trust with or for any Credit Party
or any of their respective Affiliates.
10.2 Delegation of Duties.
The Administrative Agent may execute any of its duties hereunder or
under the other Credit Documents by or through agents or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. The Administrative Agent shall not be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by it with reasonable
care.
10.3 Exculpatory Provisions.
The Administrative Agent and its officers, directors, employees,
agents, attorneys-in-fact or affiliates shall not be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection herewith or in connection with any of the other Credit Documents
(except for its or such Person's own gross negligence or willful misconduct), or
(ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by any
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of the Credit Parties contained herein or in any of the other Credit Documents
or in any certificate, report, document, financial statement or other written or
oral statement referred to or provided for in, or received by the Administrative
Agent under or in connection herewith or in connection with the other Credit
Documents, or enforceability or sufficiency therefor of any of the other Credit
Documents, or for any failure of any Credit Party to perform its obligations
hereunder or thereunder. The Administrative Agent shall not be responsible to
any Lender for the effectiveness, genuineness, validity, enforceability,
collectability or sufficiency of this Credit Agreement, or any of the other
Credit Documents or for any representations, warranties, recitals or statements
made herein or therein or made by the Borrower or any Credit Party in any
written or oral statement or in any financial or other statements, instruments,
reports, certificates or any other documents in connection herewith or therewith
furnished or made by the Administrative Agent to the Lenders or by or on behalf
of the Credit Parties to the Administrative Agent or any Lender or be required
to ascertain or inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein or
as to the use of the proceeds of the Revolving Loans or the use of the Letters
of Credit or of the existence or possible existence of any Default or Event of
Default or to inspect the properties, books or records of the Credit Parties or
any of their respective Affiliates.
10.4 Reliance on Communications.
The Administrative Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to any of the Credit Parties, independent accountants and
other experts selected by the Administrative Agent with reasonable care). The
Administrative Agent may deem and treat the Lenders as the owners of their
respective interests hereunder for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Administrative Agent in accordance with Section 11.3(b) hereof. The
Administrative Agent shall be fully justified in failing or refusing to take any
action under this Credit Agreement or under any of the other Credit Documents
unless it shall first receive such advice or concurrence of the Required Lenders
as it deems appropriate or it shall first be indemnified to its satisfaction by
the Lenders against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action. The Administrative
Agent shall in all cases be fully protected in acting, or in refraining from
acting, hereunder or under any of the other Credit Documents in accordance with
a request of the Required Lenders (or to the extent specifically provided in
Section 11.6, all the Lenders) and such request and any action taken or failure
to act pursuant thereto shall be binding upon all the Lenders (including their
successors and assigns).
10.5 Notice of Default.
The Administrative Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless the
Administrative Agent has received notice from a Lender or a Credit Party
referring to the Credit Document, describing such Default or Event of
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Default and stating that such notice is a "notice of default." In the event that
the Administrative Agent receives such a notice, the Administrative Agent shall
give prompt notice thereof to the Lenders. The Administrative Agent shall take
such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders.
10.6 Non-Reliance on Administrative Agent and Other Lenders.
Each Lender expressly acknowledges that each of the Administrative
Agent and its officers, directors, employees, Administrative Agents,
attorneys-in-fact or affiliates has not made any representations or warranties
to it and that no act by the Administrative Agent or any affiliate thereof
hereinafter taken, including any review of the affairs of any Credit Party or
any of their respective Affiliates, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrower,
the other Credit Parties or their respective Affiliates and made its own
decision to make its Revolving Loans hereunder and enter into this Credit
Agreement. Each Lender also represents that it will, independently and without
reliance upon the Administrative Agent or any other Lender, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit analysis, appraisals and decisions in taking or not taking
action under this Credit Agreement, and to make such investigation as it deems
necessary to inform itself as to the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrower,
the other Credit Parties and their respective Affiliates. Except for notices,
reports and other documents expressly required to be furnished to the Lenders by
the Administrative Agent hereunder, the Administrative Agent shall not have any
duty or responsibility to provide any Lender with any credit or other
information concerning the business, operations, assets, property, financial or
other conditions, prospects or creditworthiness of the Borrower, the other
Credit Parties or any of their respective Affiliates which may come into the
possession of the Administrative Agent or any of its officers, directors,
employees, Administrative Agents, attorneys-in-fact or affiliates.
10.7 Indemnification.
The Lenders agree to indemnify the Administrative Agent in its capacity
as such (to the extent not reimbursed by the Borrower and without limiting the
obligation of the Borrower to do so), ratably according to their respective
Commitments (or if the Commitments have expired or been terminated, in
accordance with the respective principal amounts of outstanding Revolving Loans
and Participation Interests of the Lenders), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever which may at any time
(including without limitation at any time following the final payment of all of
the obligations of the Borrower hereunder and under the other Credit Documents)
be imposed on, incurred by or asserted against the Administrative Agent in its
capacity as such in any way relating to or arising out of this Credit Agreement
or the other Credit Documents or any
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documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the
Administrative Agent under or in connection with any of the foregoing; provided
that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the gross negligence or willful
misconduct of the Administrative Agent. If any indemnity furnished to the
Administrative Agent for any purpose shall, in the opinion of the Administrative
Agent, be insufficient or become impaired, the Administrative Agent may call for
additional indemnity and cease, or not commence, to do the acts indemnified
against until such additional indemnity is furnished. The agreements in this
Section shall survive the repayment of the Revolving Loans, LOC Obligations and
other obligations under the Credit Documents and the termination of the
Commitments hereunder.
10.8 Administrative Agent in its Individual Capacity.
The Administrative Agent and its affiliates may make loans to, accept
deposits from and generally engage in any kind of business with the Borrower,
its Subsidiaries or their respective Affiliates as though the Administrative
Agent were not the Administrative Agent hereunder. With respect to the Revolving
Loans made by and all obligations of the Borrower hereunder and under the other
Credit Documents, the Administrative Agent shall have the same rights and powers
under this Credit Agreement as any Lender and may exercise the same as though it
were not the Administrative Agent, and the terms "Lender" and "Lenders" shall
include the Administrative Agent in its individual capacity.
10.9 Successor Administrative Agent.
The Administrative Agent may, at any time, resign upon 20 days' written
notice to the Lenders, and may be removed, upon show of cause, by the Required
Lenders upon 30 days' written notice to the Administrative Agent. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Administrative Agent. If no successor Administrative Agent shall have
been so appointed by the Required Lenders, and shall have accepted such
appointment, within 30 days after the notice of resignation or notice of
removal, as appropriate, then the retiring Administrative Agent shall select a
successor Administrative Agent provided such successor is a Lender hereunder or
a commercial bank organized under the laws of the United States of America or of
any State thereof and has a combined capital and surplus of at least
$400,000,000. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor, such successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Administrative Agent, and the retiring Administrative Agent
shall be discharged from its duties and obligations as Administrative Agent, as
appropriate, under this Credit Agreement and the other Credit Documents and the
provisions of this Section 10.9 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent under this
Credit Agreement.
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SECTION 11
MISCELLANEOUS
11.1 Notices.
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (i) when
delivered, (ii) when transmitted via telecopy (or other facsimile device) to the
number set out below, (iii) the day following the day on which the same has been
delivered prepaid to a reputable national overnight air courier service, or (iv)
the third Business Day following the day on which the same is sent by certified
or registered mail, postage prepaid, in each case to the respective parties at
the address, in the case of the Borrower, Guarantors and the Administrative
Agent, set forth below, and, in the case of the Lenders, set forth on Schedule
11.1, or at such other address as such party may specify by written notice to
the other parties hereto:
if to the Borrower or the Guarantors:
Railworks Corporation
1104 Kenilworth Drive
Towson, MD 21204
Attn: Michael R. Azarela
Telephone: (410) 467-9504
Telecopy: (410) 467-9505
if to the Administrative Agent:
NationsBank, N.A.
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attn: Gregg Newland
Agency Services
Telephone: (704) 386-4218
Telecopy: (704) 388-9436
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with a copy to:
NationsBank, N.A.
10 Light Street
Sixteenth Floor
MD4-302-16-01
Baltimore, MD 21202-1435
Attn: Monica Brandes
Telephone: (410) 605-8019
Telecopy: (410) 539-7508
11.2 Right of Set-Off.
In addition to any rights now or hereafter granted under applicable law
or otherwise, and not by way of limitation of any such rights, upon the
occurrence of an Event of Default, each Lender is authorized at any time and
from time to time, without presentment, demand, protest or other notice of any
kind (all of which rights being hereby expressly waived), to set-off and to
appropriate and apply any and all deposits (general or special) and any other
indebtedness at any time held or owing by such Lender (including, without
limitation branches, agencies or Affiliates of such Lender wherever located) to
or for the credit or the account of any Credit Party against obligations and
liabilities of such Person to such Lender hereunder, under the Notes, the other
Credit Documents or otherwise, irrespective of whether such Lender shall have
made any demand hereunder and although such obligations, liabilities or claims,
or any of them, may be contingent or unmatured, and any such set-off shall be
deemed to have been made immediately upon the occurrence of an Event of Default
even though such charge is made or entered on the books of such Lender
subsequent thereto. Any Person purchasing a participation in the Revolving Loans
and Commitments hereunder pursuant to Section 3.14 or Section 11.3(d) may
exercise all rights of set-off with respect to its participation interest as
fully as if such Person were a Lender hereunder.
11.3 Benefit of Agreement.
(a) Generally. This Credit Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided that none of the Credit Parties may
assign or transfer any of its interests without prior written consent of the
Lenders; provided further that the rights of each Lender to transfer, assign or
grant participations in its rights and/or obligations hereunder shall be limited
as set forth in this Section 11.3, provided however that nothing herein shall
prevent or prohibit any Lender from (i) pledging its Revolving Loans hereunder
to a Federal Reserve Bank in support of borrowings made by such Lender from such
Federal Reserve Bank, or (ii) granting assignments or selling participations in
such Lender's Revolving Loans and/or Commitments hereunder to its parent company
and/or to any Affiliate or Subsidiary of such Lender.
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(b) Assignments. Each Lender may assign all or a portion of its
rights and obligations hereunder (including, without limitation, all or a
portion of its Commitments or its Revolving Loans), pursuant to an assignment
agreement substantially in the form of Schedule 11.3(b), to (i) a Lender, (ii)
an affiliate of a Lender or (iii) any bank, financial institution, commercial
lender or institutional investor reasonably acceptable to the Administrative
Agent and, so long as no Default or Event of Default has occurred and is
continuing, the Borrower (the consent of the Borrower shall not be unreasonably
withheld or delayed); provided that (i) any such assignment (other than any
assignment to an existing Lender) shall be in a minimum aggregate amount of
$5,000,000 (or, if less, the remaining amount of the Commitment being assigned
by such Lender) of the Commitments and in integral multiples of $1,000,000 above
such amount and (ii) each such assignment shall be of a constant, not varying,
percentage of all such Lender's rights and obligations under this Credit
Agreement. Any assignment hereunder shall be effective upon delivery to the
Administrative Agent of written notice of the assignment together with a
transfer fee of $3,500 payable to the Administrative Agent for its own account
from and after the later of (i) the effective date specified in the applicable
assignment agreement and (ii) the date of recording of such assignment in the
Register pursuant to the terms of subsection (c) below. The assigning Lender
will give prompt notice to the Administrative Agent and the Borrower of any such
assignment. Upon the effectiveness of any such assignment (and after notice to,
and (to the extent required pursuant to the terms hereof), with the consent of,
the Borrower as provided herein), the assignee shall become a "Lender" for all
purposes of this Credit Agreement and the other Credit Documents and, to the
extent of such assignment, the assigning Lender shall be relieved of its
obligations hereunder to the extent of the Revolving Loans and Commitment
components being assigned. Along such lines the Borrower agrees that upon notice
of any such assignment and surrender of the appropriate Note or Notes, it will
promptly provide to the assigning Lender and to the assignee separate promissory
notes in the amount of their respective interests substantially in the form of
the original Note (but with notation thereon that it is given in substitution
for and replacement of the original Note or any replacement notes thereof). By
executing and delivering an assignment agreement in accordance with this Section
11.3(b), the assigning Lender thereunder and the assignee thereunder shall be
deemed to confirm to and agree with each other and the other parties hereto as
follows: (i) such assigning Lender warrants that it is the legal and beneficial
owner of the interest being assigned thereby free and clear of any adverse
claim; (ii) except as set forth in clause (i) above, such assigning Lender makes
no representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Credit Agreement, any of the other Credit Documents or any other instrument or
document furnished pursuant hereto or thereto, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Credit
Agreement, any of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto or the financial condition of any Credit
Party or any of their respective Affiliates or the performance or observance by
any Credit Party of any of its obligations under this Credit Agreement, any of
the other Credit Documents or any other instrument or document furnished
pursuant hereto or thereto; (iii) such assignee represents and warrants that it
is legally authorized to enter into such assignment agreement; (iv) such
assignee confirms that it has received a copy of this Credit Agreement, the
other Credit Documents and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
assignment agreement; (v) such assignee will independently and without
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reliance upon the Administrative Agent, such assigning Lender or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under this Credit Agreement and the other Credit Documents; (vi) such
assignee appoints and authorizes the Administrative Agent to take such action on
its behalf and to exercise such powers under this Credit Agreement or any other
Credit Document as are delegated to the Administrative Agent by the terms hereof
or thereof, together with such powers as are reasonably incidental thereto; and
(vii) such assignee agrees that it will perform in accordance with their terms
all the obligations which by the terms of this Credit Agreement and the other
Credit Documents are required to be performed by it as a Lender.
(c) Maintenance of Register. The Administrative Agent shall
maintain at one of its offices in Charlotte, North Carolina a copy of each
Lender assignment agreement delivered to it in accordance with the terms of
subsection (b) above and a register for the recordation of the identity of the
principal amount, type and Interest Period of each Revolving Loan outstanding
hereunder, the names, addresses and the Commitments of the Lenders pursuant to
the terms hereof from time to time (the "Register"). The Administrative Agent
will make reasonable efforts to maintain the accuracy of the Register and to
promptly update the Register from time to time, as necessary. The entries in the
Register shall be conclusive in the absence of manifest error and the Borrower,
the Administrative Agent and the Lenders may treat each Person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Credit Agreement. The Register shall be available for
inspection by the Borrower and each Lender, at any reasonable time and from time
to time upon reasonable prior notice.
(d) Participations. Each Lender may sell, transfer, grant or
assign participations in all or a portion of such Lender's rights, obligations
or rights and obligations hereunder (including all or a portion of its
Commitments or its Revolving Loans); provided that (i) such selling Lender shall
remain a "Lender" for all purposes under this Credit Agreement (such selling
Lender's obligations under the Credit Documents remaining unchanged) and the
participant shall not constitute a Lender hereunder, (ii) no such participant
shall have, or be granted, rights to approve any amendment or waiver relating to
this Credit Agreement or the other Credit Documents except to the extent any
such amendment or waiver would (A) reduce the principal of or rate of interest
on or Fees in respect of any Revolving Loans in which the participant is
participating, (B) postpone the date fixed for any payment of principal
(including extension of the Termination Date or the date of any mandatory
prepayment), interest or Fees in which the participant is participating, (C)
except as the result of or in connection with a dissolution, merger or
disposition of a Subsidiary permitted under Section 8.3, release the Borrower or
substantially all of the Guarantors from its or their obligations under the
Credit Documents, or (D) except as the result of or in connection with a
Divestiture permitted under Section 8.3(b), release all or substantially all of
the collateral, and (iii) sub- participations by the participant (except to an
affiliate, parent company or affiliate of a parent company of the participant)
shall be prohibited. In the case of any such participation, the participant
shall not have any rights under this Credit Agreement or the other Credit
Documents (the participant's rights against the selling Lender in respect of
such participation to be those set forth in the participation agreement with
such Lender creating such participation) and all amounts payable by the Borrower
hereunder shall be
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determined as if such Lender had not sold such participation, provided, however,
that such participant shall be entitled to receive additional amounts under
Sections 3.6, 3.9, 3.10, 3.11 and 11.2 on the same basis as if it were a Lender.
11.4 No Waiver; Remedies Cumulative.
No failure or delay on the part of the Administrative Agent or any
Lender in exercising any right, power or privilege hereunder or under any other
Credit Document and no course of dealing between the Administrative Agent or any
Lender and any of the Credit Parties shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under any other Credit Document preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder or
thereunder. The rights and remedies provided herein are cumulative and not
exclusive of any rights or remedies which the Administrative Agent or any Lender
would otherwise have. No notice to or demand on any Credit Party in any case
shall entitle the Borrower or any other Credit Party to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Administrative Agent or the Lenders to any other or further action
in any circumstances without notice or demand.
11.5 Payment of Expenses, etc.
The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and
expenses (A) of the Administrative Agent in connection with the negotiation,
preparation, execution and delivery and administration of this Credit Agreement
and the other Credit Documents and the documents and instruments referred to
therein (including, without limitation, the reasonable fees and expenses of
Moore & Van Allen, PLLC, special counsel to the Administrative Agent) and any
amendment, waiver or consent relating hereto and thereto including, but not
limited to, any such amendments, waivers or consents resulting from or related
to any work-out, renegotiation or restructure relating to the performance by the
Credit Parties under this Credit Agreement and (B) of the Administrative Agent
and the Lenders in connection with enforcement of the Credit Documents and the
documents and instruments referred to therein (including, without limitation, in
connection with any such enforcement, the reasonable fees and disbursements of
counsel for the Administrative Agent and each of the Lenders); (ii) permit the
Administrative Agent to perform inventory and accounts receivable field audits
at the Borrower's expense, provided that unless an Event of Default shall be in
existence the Borrower's obligation to reimburse the Administrative Agent for
such field audits shall be limited to one such field audit each fiscal year;
(iii) pay and hold each of the Lenders harmless from and against any and all
present and future stamp and other similar taxes with respect to the foregoing
matters and save each of the Lenders harmless from and against any and all
liabilities with respect to or resulting from any delay or omission (other than
to the extent attributable to such Lender) to pay such taxes; and (iv) indemnify
each Lender, its officers, directors, employees, representatives and
Administrative Agents from and hold each of them harmless against any and all
losses, liabilities, claims, damages or expenses incurred by any of them as a
result of, or arising out of, or in any way related to, or by reason of (A) any
investigation, litigation or other proceeding (whether or not any Lender is a
party thereto) related to the entering into and/or performance of any
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Credit Document or the use of proceeds of any Revolving Loans (including other
Extensions of Credit) hereunder or the consummation of any other transactions
contemplated in any Credit Document, including, without limitation, the
reasonable fees and disbursements of counsel incurred in connection with any
such investigation, litigation or other proceeding or (B) the presence or
Release of any Materials of Environmental Concern at, under or from any Property
owned, operated or leased by the Borrower or any of its Subsidiaries, or the
failure by the Borrower or any of its Subsidiaries to comply with any
Environmental Law (but excluding, in the case of either of clause (A) or (B)
above, any such losses, liabilities, claims, damages or expenses to the extent
incurred by reason of gross negligence or willful misconduct on the part of the
Person to be indemnified).
11.6 Amendments, Waivers and Consents.
Neither this Credit Agreement nor any other Credit Document nor any of
the terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing entered into by, or approved in writing by, the Required Lenders and the
Borrower, provided, however, that:
(a) without the consent of each Lender affected thereby,
neither this Credit Agreement nor any of the other Credit Documents may
be amended to
(i) except as contemplated by Section 2.1(g)
hereof, extend the final maturity of any Revolving Loan or the
time of payment of any reimbursement obligation, or any
portion thereof, arising from drawings under Letters of
Credit, or any portion thereof,
(ii) reduce the rate or extend the time of
payment of interest thereon or Fees hereunder (other than as a
result of waiving the applicability of any increase in
interest rates or Fees after the occurrence of an Event of
Default or on account of a failure to deliver financial
statements on a timely basis),
(iii) reduce or waive the principal amount of any
Revolving Loan or of any reimbursement obligation, or any
portion thereof, arising from drawings under Letters of
Credit,
(iv) increase the Commitment of a Lender over the
amount thereof in effect (it being understood and agreed that
a waiver of any Default or Event of Default shall not
constitute an increase in the Commitment of any Lender),
(v) except as the result of or in connection
with a dissolution, merger or disposition of a Subsidiary
permitted under Section 8.3, release the Borrower or
substantially all of the Guarantors from its or their
obligations under the Credit Documents,
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<PAGE> 93
(vi) except as the result of or in connection
with a Divestiture permitted under Section 8.3(b), release all
or substantially all of the collateral,
(vii) amend, modify or waive any provision of this
Section 11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.13,
3.14, 3.15, 9.1(a), 11.2, 11.3, 11.5 or 11.9,
(viii) reduce any percentage specified in, or
otherwise modify, the definition of Required Lenders, or
(ix) consent to the assignment or transfer by the
Borrower (or another Credit Party) of any of its rights and
obligations under (or in respect of) the Credit Documents
except as permitted thereby;
(b) without the consent of the Administrative Agent, no
provision of Section 10 may be amended;
(c) without the consent of the Issuing Lender, no
provision of Section 2.2 may be amended.
Notwithstanding the fact that the consent of all the Lenders is
required in certain circumstances as set forth above, (x) each Lender is
entitled to vote as such Lender sees fit on any bankruptcy reorganization plan
that affects the Revolving Loans, and each Lender acknowledges that the
provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous
consent provisions set forth herein and (y) the Required Lenders may consent to
allow a Credit Party to use cash collateral in the context of a bankruptcy or
insolvency proceeding.
11.7 Counterparts.
This Credit Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument. It shall not be necessary in
making proof of this Credit Agreement to produce or account for more than one
such counterpart.
11.8 Headings.
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
11.9 Survival.
All indemnities set forth herein, including, without limitation, in
Section 2.2(i), 3.9, 3.11, 10.7 or 11.5 shall survive the execution and delivery
of this Credit Agreement, the making of the Revolving Loans, the issuance of the
Letters of Credit, the repayment of the Revolving Loans, LOC Obligations
85
<PAGE> 94
and other obligations under the Credit Documents and the termination of the
Commitments hereunder, and all representations and warranties made by the Credit
Parties herein shall survive delivery of the Notes and the making of the
Revolving Loans hereunder.
11.10 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED
BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
(b) Any legal action or proceeding with respect to this Credit
Agreement or any other Credit Document may be brought in the courts of the State
of North Carolina in Mecklenburg County, or of the United States for the Western
District of North Carolina, and, by execution and delivery of this Credit
Agreement, each of the Credit Parties hereby irrevocably accepts for itself and
in respect of its property, generally and unconditionally, the nonexclusive
jurisdiction of such courts. Each of the Credit Parties further irrevocably
consents to the service of process out of any of the aforementioned courts in
any such action or proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to it at the address set out for notices
pursuant to Section 11.1, such service to become effective three (3) days after
such mailing. Nothing herein shall affect the right of the Administrative Agent
to serve process in any other manner permitted by law or to commence legal
proceedings or to otherwise proceed against any Credit Party in any other
jurisdiction.
(c) Each of the Credit Parties hereby irrevocably waives any
objection which it may now or hereafter have to the laying of venue of any of
the aforesaid actions or proceedings arising out of or in connection with this
Credit Agreement or any other Credit Document brought in the courts referred to
in subsection (a) hereof and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum.
(d) TO THE EXTENT PERMITTED BY LAW, EACH OF THE ADMINISTRATIVE
AGENT, THE LENDERS, THE BORROWER AND THE OTHER CREDIT PARTIES HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY.
11.11 Severability.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
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<PAGE> 95
11.12 Entirety.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and supersede
all prior agreements and understandings, oral or written, if any, including any
commitment letters or correspondence relating to the Credit Documents or the
transactions contemplated herein and therein.
11.13 Binding Effect; Termination.
(a) This Credit Agreement shall become effective at such time on
or after the Closing Date when it shall have been executed by the Borrower, the
Guarantors and the Administrative Agent, and the Administrative Agent shall have
received copies hereof (telefaxed or otherwise) which, when taken together, bear
the signatures of each Lender, and thereafter this Credit Agreement shall be
binding upon and inure to the benefit of the Borrower, the Guarantors, the
Administrative Agent and each Lender and their respective successors and
assigns.
(b) The term of this Credit Agreement shall commence on the
effective date pursuant to subsection (a) above and shall continue until no
Revolving Loans, LOC Obligations or any other amounts payable hereunder or under
any of the other Credit Documents shall remain outstanding and until all of the
Commitments hereunder shall have expired or been terminated.
11.14 Confidentiality.
The Administrative Agent and the Lenders agree to keep confidential
(and to cause their respective affiliates, officers, directors, employees,
agents and representatives to keep confidential) all information, materials and
documents furnished to the Administrative Agent or any such Lender by or on
behalf of any Credit Party (whether before or after the Closing Date) which
relates to the Borrower or any of its Subsidiaries (the "Information").
Notwithstanding the foregoing, the Administrative Agent and each Lender shall be
permitted to disclose Information (i) to its affiliates, officers, directors,
employees, agents and representatives in connection with its participation in
any of the transactions evidenced by this Credit Agreement or any other Credit
Documents or the administration of this Credit Agreement or any other Credit
Documents, subject to the provisions of this Section 11.14; (ii) to the extent
required by applicable laws and regulations or by any subpoena or similar legal
process, or requested by any Governmental Authority; (iii) to the extent such
Information (A) becomes publicly available other than as a result of a breach of
this Credit Agreement or any agreement entered into pursuant to clause (iv)
below, (B) becomes available to the Administrative Agent or such Lender on a
non-confidential basis from a source other than a Credit Party or (C) was
available to the Administrative Agent or such Lender on a non-confidential basis
prior to its disclosure to the Administrative Agent or such Lender by a Credit
Party; (iv) to any assignee or participant (or prospective assignee or
participant) so long as such assignee or participant (or prospective assignee or
participant) first specifically agrees in a writing furnished to and for the
benefit of the Credit Parties to be bound by the terms of this Section 11.14; or
(v) to the extent that the Borrower shall have consented in writing to such
disclosure. Nothing set forth in this Section 11.14
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<PAGE> 96
shall obligate the Administrative Agent or any Lender to return any materials
furnished by the Credit Parties.
11.15 Source of Funds.
Each of the Lenders hereby represents and warrants to the Borrower that
at least one of the following statements is an accurate representation as to the
source of funds to be used by such Lender in connection with the financing
hereunder:
(a) no part of such funds constitutes assets allocated to
any separate account maintained by such Lender in which any employee
benefit plan (or its related trust) has any interest;
(b) to the extent that any part of such funds constitutes
assets allocated to any separate account maintained by such Lender,
such Lender has disclosed to the Borrower the name of each employee
benefit plan whose assets in such account exceed 10% of the total
assets of such account as of the date of such purchase (and, for
purposes of this subsection (b), all employee benefit plans maintained
by the same employer or employee organization are deemed to be a single
plan);
(c) to the extent that any part of such funds constitutes
assets of an insurance company's general account, such insurance
company has complied with all of the requirements of the regulations
issued under Section 401(c)(1)(A) of ERISA; or
(d) such funds constitute assets of one or more specific
benefit plans which such Lender has identified in writing to the
Borrower.
As used in this Section 11.15, the terms "employee benefit plan" and "separate
account" shall have the respective meanings assigned to such terms in Section 3
of ERISA.
11.16 Conflict.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit Document, on
the other hand, this Credit Agreement shall control.
[Signature Page to Follow]
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<PAGE> 97
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Credit Agreement to be duly executed and delivered as of the date first
above written.
BORROWER: RAILWORKS CORPORATION,
a Delaware corporation
By: /s/ Michael R. Azarela
-----------------------------------
Name: Michael R. Azarela
Title: Executive Vice President and
Chief Financial Officer
GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC.,
a Pennsylvania corporation
ANNEX RAILROAD BUILDERS, INC.,
an Indiana corporation
COMSTOCK HOLDINGS INC.,
a Delaware corporation
COMTRAK CONSTRUCTION, INC.,
a Georgia corporation
CONDON BROTHERS, INC.,
a Washington corporation
CPI CONCRETE PRODUCTS INCORPORATED,
a Tennessee corporation
H.P. MCGINLEY INC.,
a Pennsylvania corporation
KENNEDY RAILROAD BUILDERS, INC.,
a Pennsylvania corporation
L.K. COMSTOCK & COMPANY, INC.,
a New York corporation
MERIT RAILROAD CONTRACTORS, INC.,
a Missouri corporation
MIDWEST CONSTRUCTION SERVICES, INC.,
an Indiana corporation
MINNESOTA RAILROAD SERVICE, INC.,
a Tennessee corporation
By: /s/ Michael R. Azarela
-------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
1
<PAGE> 98
NEW ENGLAND RAILROAD CONSTRUCTION CO., INC.,
a Connecticut corporation
NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC.,
a Michigan corporation
R. & M. B. RAIL CO., INC.,
an Indiana corporation
RAILCORP, INC.,
an Ohio corporation
RAILROAD SERVICE, INC.,
a Nevada corporation
RAILROAD SPECIALTIES, INC.,
an Indiana corporation
SOUTHERN INDIANA WOOD PRESERVING CO., INC.,
an Indiana corporation
U.S. TRACKWORKS, INC.,
a Michigan corporation
U.S. RAILWAY SUPPLY, INC.,
an Indiana corporation
WM. A. SMITH CONSTRUCTION CO., INC.,
a Texas corporation
WM. A. SMITH RERAILING SERVICES, INC.,
a Texas corporation
By: /s/ Michael R. Azarela
---------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as Administrative
Agent
By: /s/ Monica Brandes
---------------------------------------
Name: Monica Brandes
Title: Senior Vice President
2
<PAGE> 1
EXHIBIT 10.35
AMENDMENT NO. 1
THIS AMENDMENT NO. 1 (this "Amendment") dated as of December __, 1998, to
the Credit Agreement referenced below, is by and among RAILWORKS CORPORATION, a
Delaware corporation, the subsidiaries identified herein, the lenders identified
herein, and NATIONSBANK, N.A., as Administrative Agent. Terms used but not
otherwise defined shall have the meanings provided in the Credit Agreement.
WITNESSETH
WHEREAS, a $75 million credit facility has been established in favor of
RAILWORKS CORPORATION, a Delaware corporation (the "Borrower"), pursuant to the
terms of that Credit Agreement dated as of August 4, 1998 (as amended and
modified, the "Credit Agreement") among the Borrower, the Guarantors and Lenders
identified therein, and NationsBank, N.A., as Administrative Agent;
WHEREAS, the Borrower has requested certain modifications to the Credit
Agreement;
WHEREAS, the requested modifications require the consent of the Required
Lenders;
WHEREAS, the Required Lenders have agreed to the requested modifications
on the terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. The Credit Agreement is amended in the following respects:
1.1 In Section 1.1, the following definitions are amended or added to
read as follows:
"Commitment" means the Revolving Commitment, the LOC Commitment
and the Swingline Commitment.
"Interest Payment Date" means (i) as to any Swingline Loan, the
last day of each Interest Period for such Swingline Loan or such other
dates as the Swingline Lender may agree or require, (ii) as to any
Revolving Loan which is a Base Rate Loan, the last day of each March,
June, September and December and the Termination Date and (iii) as to
any Revolving Loan which is a Eurodollar Loan, the last day of each
Interest Period for such Loan, the date of repayment of principal of
such Loan and on the Termination Date, and in addition where the
applicable Interest Period is more than three months, then also on the
date three months from the beginning of the Interest Period, and each
three months thereafter. If an Interest Payment Date falls on a date
which is not a Business Day, such Interest Payment Date shall be
deemed to be the next succeeding Business Day.
"Interest Period" means (i) as to any Eurodollar Loan, a period
of one, two, three or six months' duration, as the Borrower may elect,
commencing in each case on the date of the borrowing (including
conversions, extensions and renewals) and (ii) as to any Swingline
Loan, a period of such duration as the Borrower may request and the
Swingline Lender may agree in accordance with the provisions of
Section 2.3(b)(i), commencing in each case on the date of borrowing;
provided, however, (A) if any Interest Period would end on a day which
is not a Business Day, such Interest Period shall be extended to the
next
<PAGE> 2
succeeding Business Day (where the next succeeding Business Day falls in
the next succeeding calendar month, then on the next preceding Business
Day), (B) no Interest Period shall extend beyond the Termination Date, and
(C) where an Interest Period begins on a day for which there is no
numerically corresponding day in the calendar month in which the Interest
Period is to end, such Interest Period shall end on the last day of such
calendar month.
"LOAN" or "LOANS" means the Revolving Loans and/or the Swingline
Loans.
"NOTE" or "NOTES" means any Revolving Note and/or the Swingline Note.
"OBLIGATIONS" means, collectively, the Revolving Loans, the LOC
Obligations and the Swingline Loans.
"PARTICIPATION INTEREST" means the purchase by a Lender of a
participation in LOC Obligations as provided in Section 2.2(c), in
Swingline Loans as provided in Section 2.3(b)(iii) and in Revolving Loans
as provided in Section 3.14.
"QUOTED RATE" means, with respect to a Quoted Rate Swingline Loan, the
fixed or floating percentage rate per annum, if any, offered by the
Swingline Lender and accepted by the Borrower in accordance with the
provisions hereof.
"QUOTED RATE SWINGLINE LOAN" means a Swingline Loan bearing interest
at the Quoted Rate.
"SWINGLINE COMMITMENT" means the commitment of the Swingline Lender to
make Swingline Loans in an aggregate principal amount at any time
outstanding up to the Swingline Committed Amount and the commitment of the
Lenders to purchase participation interests in the Swingline Loans up to
their respective Revolving Commitment Percentage as provided in Section
2.3(b)(iii), as such amounts may be reduced from time to time in accordance
with the provisions hereof.
"SWINGLINE COMMITTED AMOUNT" means the amount of the Swingline
Lender's Commitment as specified in Section 2.3(a).
"SWINGLINE LENDER" means NationsBank or its successor.
"SWINGLINE LOAN" means a swingline revolving loan made by the
Swingline Lender pursuant to the provisions of Section 2.3.
"SWINGLINE NOTE" means the promissory note of the Borrower in favor of
the Swingline Lender evidencing the Swingline Loans, in substantially the
form attached hereto as SCHEDULE 2.3(d), as such promissory note may be
amended, modified, supplemented, extended, renewed or replaced from time to
time.
1.2 A new Section 2.3 is added to read as follows:
2.3 SWINGLINE LOAN SUBFACILITY.
(a) SWINGLINE COMMITMENT. During the Commitment Period, subject to
the terms and conditions hereof, the Swingline Lender, in its individual
capacity, agrees to make certain revolving credit loans (each a "SWINGLINE
LOAN" and, collectively, the
2
<PAGE> 3
"Swingline Loans") to the Borrower from time to time for the purposes
hereinafter set forth; provided, however, (i) the aggregate principal amount of
Swingline Loans outstanding at any time shall not exceed TWO MILLION DOLLARS
($2,000,000.00) (the "Swingline Committed Amount"), and (ii) with regard to the
Lenders collectively, the aggregate principal amount of Obligations outstanding
at any time shall not exceed the lesser of (A) the Aggregate Revolving
Committed Amount or (B) the Borrowing Base. Swingline Loans hereunder shall be
made as Base Rate Loans or Quoted Rate Swingline Loans, and may be repaid or
reborrowed in accordance with the provisions hereof.
(b) Swingline Loan Advances.
(i) Notices; Disbursement. Whenever the Borrower desires a
Swingline Loan advance hereunder it shall give written notice (or
telephonic notice promptly confirmed in writing) to the Swingline
Lender not later than 11:00 A.M. (Charlotte, North Carolina time) on
the Business Day of the requested Swingline Loan advance. Each such
notice shall be irrevocable and shall specify (A) that a Swingline
Loan advance is requested, (B) the date of the requested Swingline
Loan advance (which shall be a Business Day) and (C) the principal
amount of and Interest Period for the Swingline Loan advance
requested. Each Swingline Loan shall have such maturity date as the
Swingline Lender and the Borrower shall agree upon receipt by the
Swingline Lender of any such notice from the Borrower. The Swingline
Lender shall initiate the transfer of funds representing the Swingline
Loan advance to the Borrower by 3:00 P.M. (Charlotte, North Carolina
time) on the Business Day of the requested borrowing. Notwithstanding
the foregoing provisions of this subsection (i), the Borrower and the
Swingline Lender may from time to time agree to make Swingline Loan
advances pursuant to an "auto-borrow" and "zero balance" or other
similar arrangement, subject however to the conditions and limitations
relating to the Swingline Loans set out herein.
(ii) Minimum Amounts. Each Swingline Loan advance shall be in a
minimum principal amount of $1,000,000 and in integral multiples of
$500,000 in excess thereof (or the remaining amount of the Swingline
Committed Amount, if less), provided that in the event that an
"auto-borrow" or "zero balance" or other similar arrangement shall
then be in place with the Swingline Lender, such minimum amounts, if
any, provided by such agreement.
(iii) Repayment of Swingline Loans. The principal amount of all
Swingline Loans shall be due and payable on the earlier of (A) the
maturity date agreed to by the Swingline Lender and the Borrower with
respect to such Loan or (B) the Termination Date. The Swingline Lender
may, at any time, in its sole discretion, by written notice to the
Borrower and the Lenders, demand repayment of its Swingline Loans by
way of a Revolving Loan advance, in which case the Borrower shall be
deemed to have requested a Revolving Loan advance comprised solely of
Base Rate Loans in the amount of such Swingline Loans; provided,
however, that any such demand shall be deemed to have been given one
Business Day prior to the Termination Date and on the date of the
occurrence of any Event of Default described in Section 9.1 and upon
acceleration of the indebtedness hereunder and the exercise of
remedies in accordance with the provisions of Section 9.2. Each Lender
hereby irrevocably agrees to make its pro rata share of each such
Revolving Loan in the amount, in the manner and on the date specified
in the preceding sentence notwithstanding (I) the amount of such
borrowing may
3
<PAGE> 4
not comply with the minimum amount for advances of Revolving Loans
otherwise required hereunder, (II) whether any conditions specified in
Section 5.2 are then satisfied, (III) whether a Default or an Event of
Default then exists, (IV) failure of any such request or deemed request for
Revolving Loan to be made by the time otherwise required hereunder, (V)
whether the date of such borrowing is a date on which Revolving Loans are
otherwise permitted to be made hereunder or (VI) any termination of the
Commitments relating thereto immediately prior to or contemporaneously with
such borrowing. In the event that any Revolving Loan cannot for any reason
be made on the date otherwise required above (including, without
limitation, as a result of the commencement of a proceeding under the
Bankruptcy Code with respect to the Borrower or any other Credit Party),
then each Lender hereby agrees that it shall forthwith purchase (as of the
date such borrowing would otherwise have occurred, but adjusted for any
payments received from the Borrower on or after such date and prior to such
purchase) from the Swingline Lender such Participation Interests in the
outstanding Swingline Loans as shall be necessary to cause each such Lender
to share in such Swingline Loans ratably based upon its Commitment
Percentage of the Revolving Committed Amount (determined before giving
effect to any termination of the Commitments pursuant to Section 3.4),
provided that (A) all interest payable on the Swingline Loans shall be for
the account of the Swingline Lender until the date as of which the
respective Participation Interest is purchased and (B) at the time any
purchase of Participation Interests pursuant to this sentence is actually
made, the purchasing Lender shall be required to pay to the Swingline
Lender, to the extent not paid to the Swingline Lender by the Borrower in
accordance with the terms of subsection (c) below, interest on the
principal amount of Participation Interests purchased for each day from and
including the day upon which such borrowing would otherwise have occurred
to but excluding the date of payment for such Participation Interests, at
the rate equal to the Federal Funds Rate.
(c) Interest on Swingline Loans.
Subject to the provisions of Section 3.1, each Swingline Loan shall bear
interest at a per annum rate equal to (i) if such Swingline Loan is a Base Rate
Loan, the Base Rate plus the Applicable Percentage, or (ii) if such Swingline
Loan is a Quoted Rate Swingline Loan, the Quoted Rate. Interest on Swingline
Loans shall be payable in arrears on each applicable Interest Payment Date (or
at such other times as may be specified herein), unless accelerated sooner
pursuant to Section 9.2.
(d) Swingline Note. The Swingline Loans shall be evidenced by the
Swingline Note.
1.3 Section 3.5(a) is amended by the addition of the following provision to the
end thereof:
(a) Voluntary Prepayments. Loans may be repaid in whole or in part
without premium or penalty; provided that (i) Eurodollar Loans may be prepaid
only upon three (3) Business Days' prior written notice to the Administrative
Agent and must be accompanied by payment of any amounts owing under Section
3.11, and (ii) partial prepayments shall be (A) in the case of Revolving Loans
which are Eurodollar Loans, in a minimum aggregate principal amount of
$2,500,000 and integral multiples of $500,000 in excess thereof, (B) in the case
of Revolving Loans which are Base Rate Loans, in a minimum aggregate principal
amount of $1,000,000 and integral multiples of $100,000 in excess thereof, and
(C) in the case of Swingline Loans, in a minimum aggregate
4
<PAGE> 5
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: RAILWORKS CORPORATION,
a Delaware corporation
By: /s/ MICHAEL R. AZARELA
---------------------------
Name:
Title:
GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC.,
a Pennsylvania corporation
ANNEX RAILROAD BUILDERS, INC.,
an Indiana corporation
COMSTOCK HOLDINGS INC.,
a Delaware corporation
COMTRAK CONSTRUCTION, INC.,
a Georgia corporation
CONDON BROTHERS, INC.,
a Washington corporation
CPI CONCRETE PRODUCTS INCORPORATED,
a Tennessee corporation
H.P. MCGINLEY INC.,
a Pennsylvania corporation
KENNEDY RAILROAD BUILDERS, INC.,
a Pennsylvania corporation
L.K. COMSTOCK & COMPANY, INC.,
a New York corporation
By: /s/ MICHAEL R. AZARELA
---------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
<PAGE> 6
MERIT RAILROAD CONTRACTORS, INC.,
a Missouri corporation
MIDWEST CONSTRUCTION SERVICES, INC.,
an Indiana corporation
MINNESOTA RAILROAD SERVICE, INC.,
a Tennessee corporation
NEW ENGLAND RAILROAD CONSTRUCTION CO., INC.,
a Connecticut corporation
NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC.,
a Michigan corporation
R. & M. B. RAIL CO., INC.,
an Indiana corporation
RAILCORP, INC.,
an Ohio corporation
RAILROAD SERVICE, INC.,
a Nevada corporation
RAILROAD SPECIALTIES, INC.,
an Indiana corporation
SOUTHERN INDIANA WOOD PRESERVING CO., INC.,
an Indiana corporation
U.S. TRACKWORKS, INC.,
a Michigan corporation
U.S. RAILWAY SUPPLY, INC.,
an Indiana corporation
WM. A. SMITH CONSTRUCTION CO., INC.,
a Texas corporation
WM. A. SMITH RERAILING SERVICES, INC.,
a Texas corporation
By: /s/ MICHAEL R. AZARELA
--------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
<PAGE> 7
LENDERS: NATIONSBANK, N.A.
individually in its capacity as a
Lender and in its capacity as Administrative Agent
By: /s/ MONICA BRANDES
--------------------------------
Name: Monica R. Brandes
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By:
--------------------------------
Name: Bob Bauer
Title: Vice President
CRESTAR BANK
By:
--------------------------------
Name: Paul Beliveau
Title: Vice President
SUMMIT BANK
By:
--------------------------------
Name: Noel Lassise
Title: Vice President
<PAGE> 1
EXHIBIT 10.36
AMENDMENT NO. 2
THIS AMENDMENT NO. 2 (this "Amendment") dated as of February 2, 1999,
to the Credit Agreement referenced below, is by and among RAILWORKS CORPORATION,
a Delaware corporation, the subsidiaries identified herein, the lenders
identified herein, and NATIONSBANK, N.A., as Administrative Agent. Terms used
but not otherwise defined shall have the meanings provided in the Credit
Agreement.
WITNESSETH
WHEREAS, a $75 million credit facility has been extended to RAILWORKS
CORPORATION, a Delaware corporation (the "Borrower"), pursuant to the terms of
that Credit Agreement dated as of August 4, 1998 (as amended and modified, the
"Credit Agreement") among the Borrower, the Guarantors and Lenders identified
therein, and NationsBank, N.A., as Administrative Agent;
WHEREAS, the Borrower has requested certain modifications to the Credit
Agreement which require the consent of the Required Lenders;
WHEREAS, the Required Lenders have agreed to the requested
modifications on the terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. The Credit Agreement is amended in the following respects:
1.1 In Section 1.1, the following definitions are amended
or added to read as follows:
"Amendment Date" means February 2, 1999 (being the date of
Amendment No. 2).
"Bridge Credit Agreement" means that certain Credit Agreement
dated as of February 2, 1999 by and among the Borrower, the Guarantors,
the lenders party thereto and NationsBank, N.A., as Administrative
Agent, as amended, modified, extended or renewed.
"Bridge Repayment Date" means the date on which all loans and
obligations under the Bridge Credit Agreement are paid in full.
"Consolidated EBITDA" means for any period for the
Consolidated Group, the sum of Consolidated Net Income plus
Consolidated Interest Expense plus all provisions for any Federal,
state or other domestic and foreign income taxes plus depreciation and
amortization minus, to the extent not deducted in determining
Consolidated Net Income, earn-out payments made in connection with the
Permitted Acquisitions, in each case on a consolidated basis determined
in accordance with GAAP applied on a consistent basis, but excluding
for purposes hereof extraordinary gains and losses and related tax
effects thereon.
<PAGE> 2
"Consolidated Fixed Charges" means for any period for the
Consolidated Group, the sum of the principal amount of Consolidated
Interest Expense (excluding the amortization of debt discount and
premium) plus the greater of (i) (A) from the Amendment Date until the
Bridge Repayment Date, ten percent (10%) of the sum of Obligations
outstanding hereunder plus loans outstanding under the Bridge Credit
Agreement, in each case on the date of determination and (B) subsequent
to the Bridge Repayment Date, twenty percent (20%) of Obligations
outstanding hereunder on the date of determination, or (ii) Two Million
Dollars ($2,000,000), in each case on a consolidated basis determined
in accordance with GAAP applied on an consistent basis. Except as
otherwise expressly provided, the applicable period shall be for the
four consecutive fiscal quarters ending as of the date of
determination.
"Consolidated Senior Debt" means Consolidated Funded Debt less
Subordinated Debt of the Consolidated Group on a consolidated basis as
determined in accordance with GAAP.
"Consolidated Senior Leverage Ratio" means, as of the last day
of any fiscal quarter, the ratio of Consolidated Senior Debt on such
day to Consolidated EBITDA for the period of four consecutive fiscal
quarters ending as of such day.
"Debt Transaction" means, with respect to any member of the
Consolidated Group, any sale, issuance or placement of Subordinated
Debt permitted by Section 8.1.
"Intercreditor Agreement" means that certain Intercreditor
Agreement dated as of the date hereof by and among NationsBank, N.A.,
as Administrative Agent under the Bridge Credit Agreement, NationsBank,
N.A., as Administrative Agent under this Credit Agreement, and the
Credit Parties, as amended or modified from time to time, in
substantially the form of Exhibit A attached hereto.
"Permitted Acquisitions" means the acquisition by the Borrower
or any of its Subsidiaries of the following entities: (a) Gantrex
Group, (b) FCM Rail, LTD, (c) Walpar Inc., (d) Midwest Railroad
Construction and (e) F&V Metro Contracting Corp. and Affiliates.
1.2 The definition of "Credit Documents" in Section 1.1
shall be amended to include the "Intercreditor Agreement".
1.3 In the definition of "Permitted Liens" in Section 1.1,
clauses (xv) and (xvi) are renumbered as clauses (xvi) and (xvii), and a new
clause (xv) is added to read as follows:
(xv) Liens in favor of the administrative agent and lenders
under the Bridge Credit Agreement securing the loans and obligations
owing under the Bridge Credit Agreement on a pari passu basis with the
loans and obligations owing under this Credit Agreement, but only to
the extent (A) such Liens are on the same collateral as to which the
Lenders also have a lien and (B) such Liens are subject to the
Intercreditor Agreement.
1.4 Section 7.1(d) is amended to read as follows:
(d) Borrowing Base Certificate. Within 30 days after the
end of each calendar month, a statement of the Borrowing Base and its
components as of the end of such calendar month, in form
2
<PAGE> 3
and content satisfactory to the Administrative Agent and certified by
the chief financial officer of the Borrower to be true and correct as
of the date thereof (the "Borrowing Base Certificate").
1.5 Section 7.9(a) (Consolidated Leverage Ratio) is amended to
read as follows:
(a) Consolidated Leverage Ratio. As of the end of each
fiscal quarter ending during the respective periods set forth below,
the Consolidated Leverage Ratio shall not be greater than the ratio set
forth opposite such period:
Closing Date through June 30, 1999 3.0:1.0
July 1, 1999 and thereafter 2.5:1.0
provided that, notwithstanding the foregoing, on the
date of and subsequent to any Debt Transaction of at least
$25,000,000, the Consolidated Leverage Ratio shall not be
greater than 4.0:1.0.
1.6 Section 7.9(c) (Consolidated Net Worth) is amended to read
as follows:
(c) Consolidated Net Worth. As of the end of each fiscal
quarter, Consolidated Net Worth shall be not less than the sum of
$95,000,000 plus on the last day of each fiscal quarter to occur after
the Closing Date, seventy-five percent (75%) of Consolidated Net Income
for the fiscal quarter (but not less than zero), such increases to be
cumulative, plus one hundred percent (100%) of any increases in
Consolidated Net Worth resulting from Equity Transactions occurring
after the Closing Date.
1.7 Section 7.9(d) (Consolidated Fixed Charge Coverage Ratio)
is amended to read as follows:
(d) Consolidated Fixed Charge Coverage Ratio. As of the
end of each fiscal quarter ending during the respective periods set
forth below, the Consolidated Fixed Charge Coverage Ratio shall not be
less than the ratio set forth opposite such period:
Closing Date to the date of any 1.75:1.0
Debt Transaction of at least $25,000,000
On or subsequent to the date of any 1.50:1.0
Debt Transaction of at least $25,000,000
1.8 A new clause (f) is added to Section 7.9 to read as
follows:
(f) Consolidated Senior Leverage Ratio. As of the end of
each fiscal quarter, beginning with the fiscal quarter ending the
earlier of (i) on June 30, 1999 or (ii) on or subsequent to the date of
any Debt Transaction of at least $25,000,000, the Consolidated Senior
Leverage Ratio shall not be greater than 2.5:1.0.
1.9 Clause (f) of Section 8.1 is amended to read as follows:
3
<PAGE> 4
(f) Subordinated Debt of the Borrower, provided that (i)
the Borrower shall demonstrate it will be in compliance with the
financial covenants in Section 7.9 after giving effect thereto on a Pro
Forma Basis, (ii) no Default or Event of Default shall exist after
giving effect thereto, and (iii) the net proceeds therefrom shall be
applied first to repay the term loan and other obligations under the
Bridge Credit Agreement;
1.10 Clause (h) of Section 8.1 is amended to read as follows:
(h) other unsecured Indebtedness of any of the Credit
Parties of up to $2,500,000 in the aggregate at any time outstanding;
1.11 Clauses (h) and (i) of Section 8.1 are renumbered as
clauses (k) and (l), and new clauses (h), (i) and (j) are is added to read as
follows:
(h) other senior secured Indebtedness of the Credit
Parties in an aggregate principal amount of up to $25 million incurred
pursuant to the Bridge Credit Agreement;
(i) purchase money Indebtedness (including Capital Lease
Obligations) assumed in connection with the Permitted Acquisitions in
an aggregate principal amount not to exceed $12,000,000 at any time
outstanding;
(j) seller financing obligations incurred in connection
with the Permitted Acquisitions in an aggregate principal amount not to
exceed $9,000,000 at any time outstanding;
1.12 Section 8.10 is amended to read as follows:
8.10 No Further Negative Pledges.
Except with respect to (i) prohibitions against other
encumbrances on specific Property encumbered to secure payment of
particular Indebtedness (which Indebtedness relates solely to such
specific Property, and improvements and accretions thereto, and is
otherwise permitted hereby) and (ii) the Bridge Credit Agreement, no
member of the Consolidated Group will enter into, assume or become
subject to any agreement prohibiting or otherwise restricting the
creation or assumption of any Lien upon its properties or assets,
whether now owned or hereafter acquired, or requiring the grant of any
security for such obligation if security is given for some other
obligation.
1.13 A new Section 8.11 is added to read as follows:
8.11 Amendment or Modification of Bridge Credit Agreement.
Amend or modify (or consent to, permit or acquiesce
to the amendment or modification of) any of the terms of the Bridge
Credit Agreement without the consent of the Required Lenders hereunder,
unless such amendment or modification conforms to an amendment or
modification under this Agreement.
4
<PAGE> 5
1.14 Clause (i) of Section 9.1(c) is amended to read as
follows:
(i) Default in the due performance or observance of any
term, covenant or agreement contained in Section 7.3(a), 7.9, 7.11,
7.13 to 8.1 through 8.11, inclusive; or
1.15 Clause (j) of Section 9.1 is renumbered as clause
(k), and a new clause (j) is added to read as follows:
(j) The occurrence of an Event of Default under the
Bridge Credit Agreement; or
1.16 The address for all notices and other communications to
the Borrower and the Guarantors as set forth in Section 11.1 is amended to read
as follows:
Railworks Corporation
1104 Kenilworth Drive
Suite 301
Baltimore, MD 21204
Attn: Michael R. Azarela
Telephone: (410) 512-0501
Telecopy: (410) 825-6920
2. Notwithstanding any provision to the contrary in the Credit
Agreement, from the Amendment Date until the Bridge Repayment Date, (A) the
Applicable Percentage for Base Rate Loans shall be 1.25%, (B) the Applicable
Percentage for Eurodollar Loans shall be 2.50%, (C) the Applicable Percentage
for the Letter of Credit Fee shall be 2.50% and (D) the Applicable Percentage
for the Commitment Fee shall be 0.500%.
3. Notwithstanding the terms of Section 8.4 of the Credit
Agreement, other than the Permitted Acquisitions, no member of the Consolidated
Group shall make any Acquisition prior to the Bridge Repayment Date without the
prior written consent of the Required Lenders. Subsequent to the Bridge
Repayment Date, members of the Consolidated Group may make Acquisitions
permitted by Section 8.4 of the Credit Agreement; provided that all Acquisitions
prior to the Bridge Repayment Date shall not be considered when calculating the
dollar limit on cash consideration payable in respect of Acquisitions under
Section 8.4(b).
4. By execution of this Amendment, the Required Lenders authorize
and direct the Administrative Agent, on behalf of the Lenders under the Credit
Agreement, to enter into the Intercreditor Agreement.
5. This Amendment shall be effective upon satisfaction of the
following conditions:
(a) execution of this Amendment by the Credit Parties and
the Required Lenders; and
5
<PAGE> 6
(b) receipt by the Administrative Agent of legal opinions
of counsel to the Credit Parties relating to this Amendment.
6. The Credit Parties hereby affirm (i) the representations and
warranties set out in Section 6 of the Credit Agreement are true and correct as
of the date hereof (except those which expressly relate to an earlier period)
and (ii) no Default or Event of Default presently exists.
7. Except as modified hereby, all of the terms and provisions of
the Credit Agreement (including Schedules and Exhibits) shall remain in full
force and effect.
8. The Borrower agrees to pay all reasonable costs and expenses
of the Administrative Agent in connection with the preparation, execution and
delivery of this Amendment, including without limitation the reasonable fees and
expenses of Moore & Van Allen, PLLC.
9. This Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original and it
shall not be necessary in making proof of this Amendment to produce or account
for more than one such counterpart.
10. This Amendment shall be deemed to be a contract made under,
and for all purposes shall be construed in accordance with the laws of the State
of New York.
6
<PAGE> 7
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: RAILWORKS CORPORATION,
a Delaware corporation
By: /s/ Michael R. Azarela
----------------------------------
Name: Michael R. Azarela
Title: Executive Vice President and
Chief Financial Officer
GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC.,
a Pennsylvania corporation
ANNEX RAILROAD BUILDERS, INC.,
an Indiana corporation
COMSTOCK HOLDINGS INC.,
a Delaware corporation
COMTRAK CONSTRUCTION, INC.,
a Georgia corporation
CONDON BROTHERS, INC.,
a Washington corporation
CPI CONCRETE PRODUCTS INCORPORATED,
a Tennessee corporation
H.P. MCGINLEY INC.,
a Pennsylvania corporation
KENNEDY RAILROAD BUILDERS, INC.,
a Pennsylvania corporation
L.K. COMSTOCK & COMPANY, INC.,
a New York corporation
MERIT RAILROAD CONTRACTORS, INC.,
a Missouri corporation
MIDWEST CONSTRUCTION SERVICES, INC.,
an Indiana corporation
MINNESOTA RAILROAD SERVICE, INC.,
a Tennessee corporation
NEW ENGLAND RAILROAD CONSTRUCTION CO., INC.,
a Connecticut corporation
NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC.,
a Michigan corporation
R. & M. B. RAIL CO., INC.,
an Indiana corporation
RAILCORP, INC.,
an Ohio corporation
By: /s/ Michael R. Azarela
---------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
7
<PAGE> 8
RAILROAD SERVICE, INC.,
a Nevada corporation
RAILROAD SPECIALTIES, INC.,
an Indiana corporation
SOUTHERN INDIANA WOOD PRESERVING CO., INC.,
an Indiana corporation
U.S. TRACKWORKS, INC.,
a Michigan corporation
U.S. RAILWAY SUPPLY, INC.,
an Indiana corporation
WM. A. SMITH CONSTRUCTION CO., INC.,
a Texas corporation
WM. A. SMITH RERAILING SERVICES, INC.,
a Texas corporation
By: /s/ Michael R. Azarela
------------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a Lender and in
its capacity as Administrative Agent
By: /s/ Monica R. Brandes
------------------------------------------
Name: Monica R. Brandes
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ Robert J. Bauer
------------------------------------------
Name: Robert J. Bauer
Title: Vice President
CRESTAR BANK
By:
------------------------------------------
Name:
Title:
SUMMIT BANK
By:
------------------------------------------
Name:
Title:
8
<PAGE> 1
Exhibit 10.37
CREDIT AGREEMENT
Dated as of February 2, 1999
among
RAILWORKS CORPORATION,
as Borrower,
Certain Subsidiaries,
as Guarantors,
THE LENDERS NAMED HEREIN
AND
NATIONSBANK, N.A.,
as Administrative Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1 DEFINITIONS.............................................................................................1
1.1 Definitions.
1.2 Computation of Time Periods..........................................................................7
SECTION 2 CREDIT FACILITIES.......................................................................................8
2.1 Term Loan.
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES..........................................................9
3.1 Default Rate.........................................................................................9
3.2 Extension and Conversion.............................................................................9
3.3 Prepayments.........................................................................................10
3.4 [Intentionally Omitted].............................................................................10
3.5 Fees................................................................................................11
3.5 Capital Adequacy....................................................................................11
3.6 Inability To Determine Interest Rate................................................................11
3.7 Illegality..........................................................................................11
3.8 Requirements of Law.................................................................................12
3.9 Taxes...............................................................................................13
3.10 Indemnity..........................................................................................15
3.11 Certain Limitations................................................................................16
3.12 Pro Rata Treatment.................................................................................17
3.13 Sharing of Payments................................................................................17
3.14 Payments, Computations, Etc........................................................................18
3.15 Evidence of Debt...................................................................................20
</TABLE>
i
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<TABLE>
<S> <C> <C>
SECTION 4 GUARANTY...............................................................................................20
4.1 The Guarantee.......................................................................................20
4.2 Obligations Unconditional...........................................................................21
4.3 Reinstatement.......................................................................................22
4.4 Certain Additional Waivers..........................................................................23
4.5 Remedies............................................................................................23
4.6 Rights of Contribution..............................................................................23
4.7 Continuing Guarantee................................................................................24
SECTION 5 CONDITIONS.............................................................................................24
5.1 Conditions to Closing...............................................................................24
5.2 Conditions to All Extensions of Credit..............................................................25
SECTION 6 REPRESENTATIONS, WARRANTIES AND COVENANTS..............................................................26
6.1 Incorporation.......................................................................................26
6.2 Additional Representations..........................................................................27
6.3 Additional Covenants................................................................................27
SECTION 7 EVENTS OF DEFAULT......................................................................................27
7.1 Events of Default...................................................................................27
7.2 Acceleration; Remedies..............................................................................30
SECTION 8 AGENCY PROVISIONS......................................................................................30
8.1 Appointment.........................................................................................30
8.2 Delegation of Duties................................................................................31
8.3 Exculpatory Provisions..............................................................................31
8.4 Reliance on Communications..........................................................................32
8.5 Notice of Default...................................................................................32
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
8.6 Non-Reliance on Administrative Agent and Other Lenders..............................................33
8.7 Indemnification.....................................................................................33
8.8 Administrative Agent in its Individual Capacity.....................................................34
8.9 Successor Administrative Agent......................................................................34
8.10 Intercreditor Agreement............................................................................34
SECTION 9 MISCELLANEOUS..........................................................................................35
9.1 Notices.............................................................................................35
9.2 Right of Set-Off....................................................................................36
9.3 Benefit of Agreement................................................................................36
9.4 No Waiver; Remedies Cumulative......................................................................39
9.5 Payment of Expenses, etc............................................................................39
9.6 Amendments, Waivers and Consents....................................................................40
9.7 Counterparts........................................................................................41
9.8 Headings............................................................................................41
9.9 Survival............................................................................................41
9.10 Governing Law; Submission to Jurisdiction; Venue...................................................42
9.11 Severability.......................................................................................42
9.12 Entirety...........................................................................................43
9.13 Binding Effect; Termination........................................................................43
9.14 Confidentiality....................................................................................43
9.15 Source of Funds....................................................................................44
9.16 Conflict...........................................................................................44
</TABLE>
iii
<PAGE> 5
SCHEDULES
Schedule 2.1(a) Lenders and Commitments
Schedule 2.1(b)(i) Form of Notice of Borrowing
Schedule 2.1(e) Form of Term Note
Schedule 3.2 Form of Notice of Extension/Conversion
Schedule 5.1(e)(iii) Form of Officer's Certificate
Schedule 8.10 Form of Intercreditor Agreement
Schedule 9.1 Lenders and Addresses
Schedule 9.3(b) Form of Assignment and Acceptance
iv
<PAGE> 6
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of February 2, 1999 (the "Credit
Agreement"), is by and among RAILWORKS CORPORATION, a Delaware corporation (the
"Borrower"), the Subsidiaries identified on the signature pages hereto and such
other Subsidiaries as may from time to time become Guarantors hereunder in
accordance with the provisions hereof (the "Guarantors"), the lenders named
herein and such other lenders as may become a party hereto (the "Lenders"), and
NATIONSBANK, N.A., as Administrative Agent (in such capacity, the
"Administrative Agent").
W I T N E S S E T H
WHEREAS, the Borrower has requested that the Lenders provide a $25 million
bridge credit facility for the purposes hereinafter set forth;
WHEREAS, the Lenders have agreed to make the requested bridge credit
facility available to the Borrower on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions.
As used in this Credit Agreement, the following terms shall have
the meanings specified below unless the context otherwise requires. Terms used
in this Credit Agreement but not otherwise defined in this Credit Agreement
shall have the meanings provided in the Revolving Credit Agreement:
"Additional Credit Party" means each Person that becomes a
Guarantor after the Closing Date by execution of a Joinder Agreement.
"Administrative Agent" shall have the meaning assigned to such
term in the heading hereof, together with any successors or assigns.
"Administrative Agent's Fee Letter" means that certain letter
agreement dated as of December 15, 1998, between the Administrative
Agent and the Borrower, as amended, modified, supplemented or replaced
from time to time.
1
<PAGE> 7
"Administrative Agent's Fees" shall have the meaning assigned
to such term in Section 3.5.
"Asset Disposition" shall mean and include (i) any Divestiture
other than Divestitures permitted by Section 8.3(b) of the Incorporated
Covenants, and (ii) receipt by a member of the Consolidated Group of
any cash insurance proceeds or condemnation award payable by reason of
theft, loss, physical destruction or damage, taking or similar event
with respect to any of its property or assets to the extent the
aggregate amount of such proceeds and awards, together with
Divestitures, exceeds the threshold levels provided in Section 8.3 of
the Incorporated Covenants.
"Base Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest whole multiple of 1/100 of 1%)
equal to the greater of (a) the Federal Funds Rate in effect on such
day plus 1/2 of 1% or (b) the Prime Rate in effect on such day. If for
any reason the Administrative Agent shall have determined (which
determination shall be conclusive absent manifest error) that it is
unable after due inquiry to ascertain the Federal Funds Rate for any
reason, including the inability or failure of the Administrative Agent
to obtain sufficient quotations in accordance with the terms hereof,
the Base Rate shall be determined without regard to clause (a) of the
first sentence of this definition until the circumstances giving rise
to such inability no longer exist. Any change in the Base Rate due to a
change in the Prime Rate or the Federal Funds Rate shall be effective
on the effective date of such change in the Prime Rate or the Federal
Funds Rate, respectively.
"Base Rate Loan" means any Loan bearing interest at a rate
determined by reference to the Base Rate.
"Borrower" means RailWorks Corporation, a Delaware
corporation, as referenced in the opening paragraph, its successors
and permitted assigns.
"Closing Date" means the date hereof.
"Commitment" means the Term Loan Commitment.
"Consolidated Group" means the Borrower and its consolidated
subsidiaries as determined in accordance with GAAP.
"Credit Documents" means a collective reference to this Credit
Agreement, the Notes, the Pledge Agreement, the Security Agreement, the
Intercreditor Agreement, each Joinder Agreement, the Administrative
Agent's Fee Letter, and all other related agreements and documents
issued or delivered hereunder or thereunder or pursuant hereto or
thereto.
"Credit Party" means any of the Borrower and the Guarantors.
2
<PAGE> 8
"Debt Transaction" means, with respect to any member of the
Consolidated Group, any sale, issuance or placement of Funded Debt,
whether or not evidenced by promissory note or other written evidence
of indebtedness, except for Funded Debt permitted to be incurred
pursuant to Section 8.1(a) through (e) and Section 8.1(g) through (i)
of the Incorporated Covenants.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Defaulting Lender" means, at any time, any Lender that, at
such time, (i) has failed to make an Extension of Credit required
pursuant to the terms of this Credit Agreement, (ii) has failed to pay
to the Administrative Agent or any Lender an amount owed by such Lender
pursuant to the terms of the Credit Agreement or any other of the
Credit Documents, or (iii) has been deemed insolvent or has become
subject to a bankruptcy or insolvency proceeding or to a receiver,
trustee or similar proceeding.
"Equity Transaction" means, with respect to any member of the
Consolidated Group, any issuance of shares of its capital stock or
other equity interest, other than an issuance (i) to a member of the
Consolidated Group, (ii) in connection with a conversion of debt
securities to equity or (iii) in connection with exercise by a present
or former employee, officer or director under a stock incentive plan,
stock option plan or other equity-based compensation plan or
arrangement.
"Eurodollar Loan" means any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate.
"Eurodollar Rate" means, for the Interest Period for each
Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
determined pursuant to the following formula:
Eurodollar Rate = Interbank Offered Rate
----------------------------------------
1 - Eurodollar Reserve Percentage
"Eurodollar Reserve Percentage" means for any day, that
percentage (expressed as a decimal) which is in effect from time to
time under Regulation D of the Board of Governors of the Federal
Reserve System (or any successor), as such regulation may be amended
from time to time or any successor regulation, as the maximum reserve
requirement (including, without limitation, any basic, supplemental,
emergency, special, or marginal reserves) applicable with respect to
Eurocurrency liabilities as that term is defined in Regulation D (or
against any other category of liabilities that includes deposits by
reference to which the interest rate of Eurodollar Loans is
determined), whether or not Lender has any Eurocurrency liabilities
subject to such reserve requirement at that time. Eurodollar Loans
shall be deemed
3
<PAGE> 9
to constitute Eurocurrency liabilities and as such shall be deemed
subject to reserve requirements without benefits of credits for
proration, exceptions or offsets that may be available from time to
time to a Lender. The Eurodollar Rate shall be adjusted automatically
on and as of the effective date of any change in the Eurodollar Reserve
Percentage.
"Event of Default" means such term as defined in Section 7.1.
"Extension of Credit" means, as to any Lender, the making of,
or participation in, a Loan by such Lender.
"Fees" means all fees payable pursuant to Section 3.5.
"Federal Funds Rate" means, for any day, the rate of interest
per annum (rounded upwards, if necessary, to the nearest whole multiple
of 1/100 of 1%) equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding
such day, provided that (A) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions
on the next preceding Business Day and (B) if no such rate is so
published on such next preceding Business Day, the Federal Funds Rate
for such day shall be the average rate quoted to the Administrative
Agent on such day on such transactions as determined by the
Administrative Agent.
"Guarantor" means each of those other Persons identified as a
"Guarantor" on the signature pages hereto, and each other Person which
may hereafter become a Guarantor by execution of a Joinder Agreement,
together with their successors and permitted assigns.
"Guaranteed Obligations" means, as to each Guarantor, without
duplication, (i) all obligations of the Borrower (including interest
accruing after a Bankruptcy Event, regardless of whether such interest
is allowed as a claim under the Bankruptcy Code) to the Lenders and the
Administrative Agent, whenever arising, under this Credit Agreement,
the Notes or the other Credit Documents, and (ii) all liabilities and
obligations, whenever arising, owing from the Borrower to any Lender,
or any Affiliate of a Lender, arising under any Hedging Agreement
relating to Obligations hereunder.
"Hedging Agreement" means any interest rate protection
agreement or foreign currency exchange agreement between the Borrower
and any Lender, or any Affiliate of a Lender.
"Incorporated Covenants" means such term as defined in Section
6.1.
"Incorporated Representations" means such term as defined in
Section 6.1.
4
<PAGE> 10
"Interbank Offered Rate" means, for the Interest Period for
each Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
(rounded upwards, if necessary, to the nearest whole multiple of 1/100
of 1%) equal to the rate of interest, determined by the Administrative
Agent on the basis of the offered rates for deposits in dollars for a
period of time corresponding to such Interest Period (and commencing on
the first day of such Interest Period), appearing on Telerate Page 3750
(or, if, for any reason, Telerate Page 3750 is not available, the
Reuters Screen LIBO Page) as of approximately 11:00 A.M. (London time)
two (2) Business Days before the first day of such Interest Period. As
used herein, "Telerate Page 3750" means the display designated as page
3750 by Dow Jones Markets, Inc. (or such other page as may replace such
page on that service for the purpose of displaying the British Bankers
Association London interbank offered rates) and "Reuters Screen LIBO
Page" means the display designated as page "LIBO" on the Reuters
Monitor Money Rates Service (or such other page as may replace the LIBO
page on that service for the purpose of displaying London interbank
offered rates of major banks).
"Intercreditor Agreement" means that certain Intercreditor
Agreement dated as of the date hereof by and among NationsBank, N.A.,
as Administrative Agent under the Revolving Credit Agreement,
NationsBank, N.A., as Administrative Agent under this Credit Agreement,
and the Credit Parties, as amended or modified from time to time, in
substantially the form of Schedule 8.10.
"Joinder Agreement" means a Joinder Agreement substantially in
the form of Schedule 7.11 to the Revolving Credit Agreement but
relating to this Credit Agreement, executed and delivered by an
Additional Credit Party in accordance with the provisions of Section
6.3(b).
"Lenders" means each of the Persons identified as a "Lender"
on the signature pages hereto, and their successors and assigns.
"Loan" or "Loans" means the Term Loan.
"Material Adverse Effect" means a material adverse effect on
(i) the condition (financial or otherwise), operations, business,
assets or liabilities of the Consolidated Group taken as a whole, (ii)
the ability of the Credit Parties taken as a whole to perform any
material obligation under the Credit Documents to which it is a party
or (iii) the rights and remedies of the Lenders under the Credit
Documents.
"Net Proceeds" means gross cash proceeds (including any cash
received by way of deferred payment pursuant to a promissory note,
receivable or otherwise, but only as and when received) received in
connection with an Equity Transaction or Debt Transaction, net of (i)
reasonable transaction costs, including in the case of an Equity
Transaction or a Debt Transaction, underwriting discounts and
commissions, (ii)
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estimated taxes payable in connection therewith, and (iii) in the case
of a Debt Transaction, any amounts payable in respect of Subordinated
Debt, including without limitation principal, interest, premiums and
penalties, which is secured by, or otherwise related to, any property
or asset which is the subject thereof to the extent that such
Subordinated Debt and any payments in respect thereof are paid with a
portion of the proceeds therefrom.
"Note" or "Notes" means any Term Note.
"Notice of Borrowing" means a written notice of borrowing in
substantially the form of Schedule 2.1(b)(i), as required by Section
2.1(b)(i).
"Notice of Extension/Conversion" means a written notice of
extension or conversion in substantially the form of Schedule 3.2, as
required by Section 3.2.
"Obligations" means the Term Loan.
"Participation Interest" means the purchase by a Lender of a
participation in Loans as provided in Section 3.14.
"Pledge Agreement" means the Pledge Agreement dated as of the
Closing Date given by the Borrower and Comstock Holdings to
NationsBank, N.A., as Administrative Agent, to secure the obligations
hereunder, as amended and modified.
"Prime Rate" means the rate of interest per annum publicly
announced from time to time by NationsBank as its prime rate in effect
at its principal office in Charlotte, North Carolina, with each change
in the Prime Rate being effective on the date such change is publicly
announced as effective (it being understood and agreed that the Prime
Rate is a reference rate used by NationsBank in determining interest
rates on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit by NationsBank to any
debtor).
"Register" shall have the meaning given such term in Section
9.3(c).
"Required Lenders" means, at any time, Lenders having more
than sixty-six and two-thirds percent (66%) of the aggregate principal
amount of the Obligations outstanding (taking into account in each case
Participation Interests or obligation to participate therein); provided
that the outstanding principal amount of Obligations (taking into
account Participation Interests therein) owing to a Defaulting Lender
shall be excluded for purposes hereof in making a determination of
Required Lenders.
"Revolving Credit Agreement" means that certain Credit
Agreement dated as of August 4, 1998 by and among the Borrower, certain
subsidiaries of the Borrower as
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guarantors, the lenders party thereto and NationsBank, N.A., as
Administrative Agent, as amended, modified, supplemented, extended,
renewed or replaced from time to time.
"Security Agreement" means the Security Agreement dated as of
the Closing Date given by the Borrower and the other grantors
identified therein to NationsBank, N.A., as Administrative Agent, to
secure the obligations hereunder, as amended and modified.
"Subordinated Debt" means any Indebtedness of a member of the
Consolidated Group which by its terms is expressly subordinated in
right of payment to the prior payment of the obligations under the
Credit Agreement and the other Credit Documents on terms and conditions
satisfactory to the Required Lenders.
"Term Loan" shall have the meaning assigned to such term in
Section 2.1(a).
"Term Loan Commitment" means, with respect to each Lender, the
commitment of such Lender to make its portion of the Term Loan as
specified on Schedule 2.1(a) (and for purposes of making determinations
of Required Lenders hereunder after the Closing Date and for purposes
of calculations referred to in Section 9.6(b), the principal amount
outstanding on the Term Loan).
"Term Loan Commitment Percentage" means, for each Lender, a
fraction (expressed as a percentage) the numerator of which is the
amount of the Term Loan Commitment (and after the Closing Date, the
outstanding principal amount of such Lender's Term Loan) of such Lender
at such time and the denominator of which is the aggregate amount of
the Term Loan Commitment (and after the Closing Date, the aggregate
principal amount of the Term Loan) at such time. The initial Term Loan
Commitment Percentages are set out on Schedule 2.1(a).
"Term Loan Committed Amount" means, collectively, the
aggregate amount of all of the Term Loan Commitments and, individually,
the amount of each Lender's Term Loan Commitment as specified on
Schedule 2.1(a), as such amounts may be reduced from time to time in
accordance with the provisions hereof.
"Term Note" or "Term Notes" means the promissory notes of the
Borrower in favor of each of the Lenders evidencing the Term Loan in
substantially the form attached as Schedule 2.1(e), individually or
collectively, as appropriate, as such promissory notes may be amended,
modified, supplemented, extended, renewed or replaced from time to
time.
"Termination Date" means June 30, 1999.
1.2 Computation of Time Periods.
For purposes of computation of periods of time hereunder, the word
"from" means "from and including" and the words "to" and "until" each mean "to
but excluding."
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1.3 Accounting Terms.
Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to the
Lenders hereunder shall be prepared, in accordance with GAAP applied on a
consistent basis.
SECTION 2
CREDIT FACILITIES
2.1 Term Loan.
(a) Term Loan Commitment. Subject to the terms and conditions
hereof, each Lender severally agrees to make its Term Loan Commitment Percentage
of a term loan (the "Term Loan") in the aggregate principal amount of
TWENTY-FIVE MILLION DOLLARS ($25,000,000) to the Borrower for the purposes
hereinafter set forth. The Term Loan may consist of Base Rate Loans or
Eurodollar Loans, or a combination thereof, as the Borrower may request. Amounts
repaid on the Term Loan may not be reborrowed.
(b) Term Loan Borrowing. The Borrower shall submit an appropriate
Notice of Borrowing relating to the Term Loan not later than 11:00 A.M.
(Charlotte, North Carolina time) on the date of the requested borrowing, with
respect to the portion of the Term Loan initially consisting of a Base Rate
Loan, or on the third Business Day prior to the date of the requested borrowing,
with respect to the portion of the Term Loan initially consisting of one or more
Eurodollar Loans, which Notice of Borrowing shall be irrevocable and shall
specify (i) that the funding of the Term Loan is requested, (ii) the date of the
requested borrowing, and (iii) whether the funding of the Term Loan shall be
comprised of Base Rate Loans, Eurodollar Loans or combination thereof, and if
Eurodollar Loans are requested, the Interest Period(s) therefor. Each Lender
shall make its Term Loan Commitment Percentage of the Term Loan available to the
Administrative Agent for the account of the Borrower, or in such other manner as
the Administrative Agent may specify in writing, by 1:00 P.M. (Charlotte, North
Carolina time) on the date of the requested borrowing in Dollars and in funds
immediately available to the Administrative Agent.
(c) Minimum Amounts. The Term Loan may be comprised of minimum
aggregate principal amounts of $2,500,000 and integral multiples of $500,000 in
excess thereof, in the case of Eurodollar Loans, and $1,000,000 (or the
remaining portion of the Term Loan, if less) and integral multiples of $100,000
in excess thereof, in the case of Base Rate Loans.
(d) Repayment. The aggregate principal amount of the Term Loan
shall be due and payable in full on the Termination Date.
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(e) Interest. Subject to the provisions of Section 3.1,
(i) Base Rate Loans. During such periods as the Term Loan
shall be comprised in whole or in part of Base Rate Loans, such Base
Rate Loans shall bear interest at a per annum rate equal to the Base
Rate plus 125 basis points (1.25%); and
(ii) Eurodollar Loans. During such periods as the Term
Loan shall be comprised in whole or in part of Eurodollar Loans, such
Eurodollar Loans shall bear interest at a per annum rate equal to the
Eurodollar Rate plus 250 basis points (2.50%).
Interest on the Term Loan shall be payable in arrears on each applicable
Interest Payment Date (or at such other times as may be specified herein).
(f) Term Notes. The Term Loan shall be evidenced by a duly
executed Term Note in favor of each Lender.
(g) Maximum Number of Eurodollar Loans. The Borrower will be
limited to a maximum number of five (5) Eurodollar Loans outstanding at any
time. For purposes hereof, Eurodollar Loans with separate or different Interest
Periods will be considered as separate Eurodollar Loans even if their Interest
Periods expire on the same date.
SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITIES
3.1 Default Rate.
Upon the occurrence, and during the continuance, of an Event of
Default, the principal of and, to the extent permitted by law, interest on the
Loans and any other amounts owing hereunder or under the other Credit Documents
shall bear interest, payable on demand, at a per annum rate 2% greater than the
rate which would otherwise be applicable (or if no rate is applicable, whether
in respect of interest, fees or other amounts, then 2% greater than the Base
Rate).
3.2 Extension and Conversion.
Subject to the terms of Section 5.2, the Borrower shall have the
option, on any Business Day, to extend existing Eurodollar Loans into a
subsequent permissible Interest Period or to convert Base Rate Loans into
Eurodollar Loans; provided, however, that (i) except as provided in Section 3.8,
Eurodollar Loans may be converted into Base Rate Loans only on the last day of
the Interest Period applicable thereto, (ii) Eurodollar Loans may be extended,
and Base Rate Loans may be converted into Eurodollar Loans, only if no Default
or Event of Default is in existence on the date of extension or conversion,
(iii) Loans extended as, or converted into, Eurodollar Loans shall be subject to
the terms of the definition of "Interest Period" and shall be in such minimum
amounts as provided in
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Section 2.1(c), and (iv) any request for extension or conversion of a Eurodollar
Loan which shall fail to specify an Interest Period shall be deemed to be a
request for an Interest Period of one month. Each such extension or conversion
shall be effected by the Borrower by giving a Notice of Extension/Conversion (or
telephone notice promptly confirmed in writing) to the Administrative Agent
prior to 11:00 A.M. (Charlotte, North Carolina time) on the Business Day of, in
the case of the conversion of a Eurodollar Loan into a Base Rate Loan, and on
the third Business Day prior to, in the case of the extension of a Eurodollar
Loan as, or conversion of a Base Rate Loan into, a Eurodollar Loan, the date of
the proposed extension or conversion, specifying the date of the proposed
extension or conversion, the Loans to be so extended or converted, the types of
Loans into which such Loans are to be converted and, if appropriate, the
applicable Interest Periods with respect thereto. Each request for extension of
a Eurodollar Loan or conversion of a Base Rate Loan into a Eurodollar Loan shall
be irrevocable and shall constitute a representation and warranty by the
Borrower of the matters specified in subsections (a) and (b) of Section 5.2. In
the event the Borrower fails to request extension or conversion of any
Eurodollar Loan in accordance with this Section, or any such conversion or
extension is not permitted or required by this Section, then such Eurodollar
Loan shall be automatically converted into a Base Rate Loan at the end of the
Interest Period applicable thereto. The Administrative Agent shall give each
Lender notice as promptly as practicable of any such proposed extension or
conversion affecting any Loan.
3.3 Prepayments.
(a) Voluntary Prepayments. Loans may be repaid in whole or in part
without premium or penalty; provided that (i) Eurodollar Loans may be prepaid
only upon three (3) Business Days' prior written notice to the Administrative
Agent and must be accompanied by payment of any amounts owing under Section
3.11, and (ii) partial prepayments shall be (A) in the case of Eurodollar Loans,
in a minimum aggregate principal amount of $2,500,000 and integral multiples of
$500,000 in excess thereof and (B) in the case of Base Rate Loans, in a minimum
aggregate principal amount of $1,000,000 and integral multiples of $100,000 in
excess thereof.
(b) Mandatory Prepayments. The Borrower shall promptly prepay the
Term Loan in an amount equal to one hundred percent (100%) of the Net Proceeds
received from any Asset Disposition, Debt Transaction or Equity Transaction.
(c) Application. Unless otherwise specified by the Borrower,
amounts prepaid on the Term Loan shall be applied first to Base Rate Loans, then
to Eurodollar Loans in direct order of Interest Period maturities. Amounts
prepaid on the Term Loan may not be reborrowed.
3.4 [Intentionally Omitted].
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3.5 Fees.
The Borrower agrees to pay to the Administrative Agent, for its own
account, an annual administrative fee and such other fees, if any, referred to
in the Administrative Agent's Fee Letter (collectively, the "Administrative
Agent's Fees").
3.6 Capital Adequacy.
If any Lender has reasonably determined, after the date hereof, that
the adoption or the becoming effective of, or any change in, or any change by
any Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof in the interpretation or administration
of, any applicable law, rule or regulation regarding capital adequacy, or
compliance by such Lender with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on such Lender's capital or assets as a consequence of its commitments or
obligations hereunder to a level below that which such Lender could have
achieved but for such adoption, effectiveness, change or compliance (taking into
consideration such Lender's policies with respect to capital adequacy), then,
subject to the provisions of Section 3.12, the Borrower shall be obligated to
pay to such Lender such additional amount or amounts as will compensate such
Lender for such reduction.
3.7 Inability To Determine Interest Rate.
If prior to the first day of any Interest Period, the Administrative Agent
shall have determined (which determination shall be conclusive and binding upon
the Borrower) that, by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar Rate
for such Interest Period, the Administrative Agent shall give telecopy or
telephonic notice thereof to the Borrower and the Lenders as soon as practicable
thereafter (which notice shall be withdrawn the Administrative Agent whenever
such circumstances no longer exist). If such notice is given (a) any Eurodollar
Loans requested to be made on the first day of such Interest Period shall be
made as Base Rate Loans and (b) any Loans that were to have been converted on
the first day of such Interest Period to or continued as Eurodollar Loans shall
be converted to or continued as Base Rate Loans. Until such notice has been
withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made
or continued as such, nor shall the Borrower have the right to convert Base Rate
Loans to Eurodollar Loans.
3.8 Illegality.
Notwithstanding any other provision herein, if the adoption of or any
change in any Requirement of Law or in the interpretation or application thereof
occurring after the Closing Date shall make it unlawful for any Lender to make
or maintain Eurodollar Loans as contemplated by this Credit Agreement, (a) such
Lender shall promptly give written notice of such circumstances to the Borrower
and the Administrative Agent (which notice shall be withdrawn by such Lender
whenever such circumstances no longer exist), (b) the commitment of such Lender
hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and
convert a Base Rate Loan to Eurodollar Loans shall
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forthwith be canceled and, until such time as it shall no longer be unlawful for
such Lender to make or maintain Eurodollar Loans, such Lender shall then have a
commitment only to make a Base Rate Loan when a Eurodollar Loan is requested and
(c) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be
converted automatically to Base Rate Loans on the respective last days of the
then current Interest Periods with respect to such Loans or within such earlier
period as required by law. If any such conversion of a Eurodollar Loan occurs on
a day which is not the last day of the then current Interest Period with respect
thereto, the Borrower shall pay to such Lender such amounts, if any, as may be
required pursuant to Section 3.11.
3.9 Requirements of Law.
If, after the date hereof, the adoption of or any change in any
Requirement of Law or in the interpretation or application thereof applicable to
any Lender, or compliance by any Lender with any request or directive (whether
or not having the force of law) from any central bank or other Governmental
Authority, in each case made subsequent to the Closing Date (or, if later, the
date on which such Lender becomes a Lender):
(a) shall subject such Lender to any tax of any kind whatsoever
with respect to any Eurodollar Loans made by it or its obligation to make
Eurodollar Loans, or change the basis of taxation of payments to such Lender in
respect thereof (except for (i) Non-Excluded Taxes covered by Section 3.10
(including Non-Excluded Taxes imposed solely by reason of any failure of such
Lender to comply with its obligations under Section 3.10(b)) and (ii) changes in
taxes measured by or imposed upon the overall net income, or franchise tax
(imposed in lieu of such net income tax), of such Lender or its applicable
lending office, branch, or any affiliate thereof));
(b) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by, deposits
or other liabilities in or for the account of, advances, loans or other
extensions of credit by, or any other acquisition of funds by, any office of
such Lender which is not otherwise included in the determination of the
Eurodollar Rate hereunder; or
(c) shall impose on such Lender any other condition (excluding any
tax of any kind whatsoever);
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or to reduce any amount receivable
hereunder in respect thereof, then, in any such case, subject to the provisions
of Section 3.12, the Borrower shall be obligated to promptly pay such Lender,
upon its demand, any additional amounts necessary to compensate such Lender for
such increased cost or reduced amount receivable, provided that, in any such
case, the Borrower may elect to convert the Eurodollar Loans made by such Lender
hereunder to Base Rate Loans by giving the Administrative Agent at least one
Business Day's notice of such election, in which case the Borrower shall
promptly pay to such Lender, upon demand, without duplication, such amounts, if
any, as may be required
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pursuant to Section 3.11. Each Lender agrees that, as promptly as practicable
after it becomes aware of any circumstances of the type referred to in
paragraphs (a) through (c) above which would result in any such increased cost
or reduced amount receivable, the affected Lender shall, to the extent not
inconsistent with such Lender's internal policies of general application,
designate a different lending office for the making of Loans hereunder or
otherwise use reasonable commercial efforts to minimize the amounts payable to
it by the Borrower pursuant to this Section 3.9. This covenant shall survive the
termination of this Credit Agreement and the payment of the Loans and all other
amounts payable hereunder.
3.10 Taxes.
(a) Except as provided below in this subsection, all payments made
by the Borrower under this Credit Agreement and any Notes shall be made free and
clear of, and without deduction or withholding for or on account of, any present
or future income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any court, or governmental body, agency or other
official, excluding taxes measured by or imposed upon the overall net income of
any Lender or its applicable lending office, or any branch or affiliate thereof,
and all franchise taxes, branch taxes, taxes on doing business or taxes on the
overall capital or net worth of any Lender or its applicable lending office, or
any branch or affiliate thereof, in each case imposed in lieu of net income
taxes, imposed: (i) by the jurisdiction under the laws of which such Lender,
applicable lending office, branch or affiliate is organized or is located, or in
which its principal executive office is located, or any nation within which such
jurisdiction is located or any political subdivision thereof; or (ii) by reason
of any connection between the jurisdiction imposing such tax and such Lender,
applicable lending office, branch or affiliate other than a connection arising
solely from such Lender having executed, delivered or performed its obligations,
or received payment under or enforced, this Credit Agreement or any Notes. If
any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions
or withholdings ("Non-Excluded Taxes") are required to be withheld from any
amounts payable to the Administrative Agent or any Lender hereunder or under any
Notes, (A) the amounts so payable to the Administrative Agent or such Lender
shall be increased to the extent necessary to yield to the Administrative Agent
or such Lender (after payment of all Non-Excluded Taxes) interest or any such
other amounts payable hereunder at the rates or in the amounts specified in this
Credit Agreement and any Notes, provided, however, that the Borrower shall be
entitled to deduct and withhold any Non-Excluded Taxes and shall not be required
to increase any such amounts payable to any Lender that is not organized under
the laws of the United States of America or a state thereof if such Lender fails
to comply with the requirements of paragraph (b) of this subsection whenever any
Non-Excluded Taxes are payable by the Borrower, and (B) as promptly as possible
thereafter the Borrower shall send to the Administrative Agent for its own
account or for the account of such Lender, as the case may be, a certified copy
of an original official receipt received by the Borrower showing payment
thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the
appropriate taxing authority or fails to remit to the Administrative Agent the
required receipts or other required documentary evidence, the Borrower shall
indemnify the Administrative Agent and the Lenders for any incremental taxes,
interest or penalties that may become payable by the Administrative Agent or any
Lender as a result
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of any such failure. The agreements in this subsection shall survive the
termination of this Credit Agreement and the payment of the Loans and all other
amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall:
(X)(i) on or before the date of any payment by the Borrower
under this Credit Agreement or Notes to such Lender, deliver to the
Borrower and the Administrative Agent (A) two (2) duly completed copies
of United States Internal Revenue Service Form 1001 or 4224, or
successor applicable form, as the case may be, certifying that it is
entitled to receive payments under this Credit Agreement and any Notes
without deduction or withholding of any United States federal income
taxes and (B) an Internal Revenue Service Form W-8 or W- 9, or
successor applicable form, as the case may be, certifying that it is
entitled to an exemption from United States backup withholding tax;
(ii) deliver to the Borrower and the
Administrative Agent two (2) further copies of any such form or
certification on or before the date that any such form or certification
expires or becomes obsolete and after the occurrence of any event
requiring a change in the most recent form previously delivered by it
to the Borrower; and
(iii) obtain such extensions of time for filing
and complete such forms or certifications as may reasonably be
requested by the Borrower or the Administrative Agent; or
(Y) in the case of any such Lender that is not a "bank"
within the meaning of Section 881(c)(3)(A) of the Internal Revenue
Code, (i) represent to the Borrower (for the benefit of the Borrower
and the Administrative Agent) that it is not a bank within the meaning
of Section 881(c)(3)(A) of the Internal Revenue Code, (ii) agree to
furnish to the Borrower on or before the date of any payment by the
Borrower, with a copy to the Administrative Agent two (2) accurate and
complete original signed copies of Internal Revenue Service Form W-8,
or successor applicable form certifying to such Lender's legal
entitlement at the date of such certificate to an exemption from U.S.
withholding tax under the provisions of Section 881(c) of the Internal
Revenue Code with respect to payments to be made under this Credit
Agreement and any Notes (and to deliver to the Borrower and the
Administrative Agent two (2) further copies of such form on or before
the date it expires or becomes obsolete and after the occurrence of any
event requiring a change in the most recently provided form and, if
necessary, obtain any extensions of time reasonably requested by the
Borrower or the Administrative Agent for filing and completing such
forms), and (iii) agree, to the extent legally entitled to do so, upon
reasonable request by the Borrower, to provide to the Borrower (for the
benefit of the Borrower and the Administrative Agent) such other forms
as may be reasonably required in order to establish the legal
entitlement of such Lender to an exemption from withholding with
respect to payments under this Credit Agreement and any Notes;
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unless in any such case any change in treaty, law or regulation has
occurred after the date such Person becomes a Lender hereunder which
renders all such forms inapplicable or which would prevent such Lender
from duly completing and delivering any such form with respect to it
and such Lender so advises the Borrower and the Administrative Agent.
Each Person that shall become a Lender or a participant of a Lender
pursuant to subsection 9.3 shall, upon the effectiveness of the related
transfer, be required to provide all of the forms, certifications and
statements required pursuant to this subsection, provided that in the
case of a participant of a Lender the obligations of such participant
of a Lender pursuant to this subsection (b) shall be determined as if
the participant of a Lender were a Lender except that such participant
of a Lender shall furnish all such required forms, certifications and
statements to the Lender from which the related participation shall
have been purchased.
3.11 Indemnity.
The Borrower promises to indemnify each Lender and to hold each Lender
harmless from any loss or expense which such Lender may sustain or incur (other
than through such Lender's gross negligence or willful misconduct) as a
consequence of (a) default by the Borrower in making a borrowing of, conversion
into or continuation of Eurodollar Loans after the Borrower has given a notice
requesting the same in accordance with the provisions of this Credit Agreement,
(b) default by the Borrower in making any prepayment of a Eurodollar Loan after
the Borrower has given a notice thereof in accordance with the provisions of
this Credit Agreement or (c) the making of a prepayment of Eurodollar Loans on a
day which is not the last day of an Interest Period with respect thereto. With
respect to Eurodollar Loans, such indemnification may be calculated, in lieu of
any other method, based on an amount equal to the excess, if any, of (i) the
amount of interest which would have accrued on the amount so prepaid, or not so
borrowed, converted or continued, for the period from the date of such
prepayment or of such failure to borrow, convert or continue to the last day of
the applicable Interest Period (or, in the case of a failure to borrow, convert
or continue, the Interest Period that would have commenced on the date of such
failure) in each case at the applicable rate of interest for such Loans provided
for herein over (ii) the amount of interest (as reasonably determined by such
Lender) which would have accrued to such Lender on such amount by placing such
amount on deposit for a comparable period with leading banks in the interbank
Eurodollar market. The covenants of the Borrower set forth in this Section 3.11
shall survive the termination of this Credit Agreement and the payment of the
Loans and all other amounts payable hereunder.
3.12 Certain Limitations.
The provisions of Sections 3.6, 3.9, 3.10 and 3.11 hereof shall be
subject to the following:
(a) Each Lender that desires compensation or indemnification under
Sections 3.6, 3.9 or 3.11 hereof shall notify the Borrower through the
Administrative Agent of any event occurring after the Closing Date entitling
such Lender to compensation or indemnification under any of such Sections as
promptly as practicable, but in any event within 90 days after the occurrence of
the event giving rise thereto; provided that (i) if any such Lender fails to
give such notice within 90 days after
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the occurrence of such an event, such Lender shall only be entitled to
compensation or indemnification in respect of such event accruing under Sections
3.6, 3.9 or 3.11 hereof with respect to the period from and after the date 90
days prior to the date that such Lender does give notice.
(b) Any notice given by a Lender pursuant to subsection (a) above
shall certify (i) that one of the events described in Sections 3.6, 3.9 or 3.11
hereof has occurred, describing in reasonable detail the nature of such event,
(ii) as to the increased cost, reduced amount receivable or loss or expense
resulting from such event and (iii) as to the additional amount demanded by such
Lender, attaching a reasonably detailed explanation of the calculation thereof.
Such a certificate as to any compensation or indemnification payable pursuant to
Sections 3.6, 3.9 or 3.11, submitted by such Lender through the Administrative
Agent to the Borrower, shall be conclusive and binding on the parties hereto in
the absence of manifest error.
(c) If any Lender requests compensation or indemnification from
the Borrower under Sections 3.6, 3.9 or 3.10 hereof, the Borrower may, at its
option, within fifteen (15) days after receipt by the Borrower of written demand
from the affected Lender for payment of such compensation or indemnification,
notify the Administrative Agent and such affected Lender of its intention to
replace the affected Lender. So long as no Event of Default shall have occurred
and be continuing, the Borrower may obtain, at the Borrower's expense, a
replacement Lender for the affected Lender. If the Borrower obtains a
replacement Lender within ninety (90) days following notice of its intention to
do so, the affected Lender must sell and assign its Loans and any related
Commitments to such replacement Lender pursuant to Section 9.3(b) hereof
(without giving effect to any requirement therein that the Administrative Agent
consent thereto), for an amount equal to the principal balance of all Loans held
by the affected Lender and all accrued interest and Fees with respect thereto
through the date of such sale, provided that the Borrower shall have paid to
such affected Lender the compensation or indemnification that it is entitled to
receive under Sections 3.6, 3.9 or 3.10 hereof, through the date of such sale
and assignment. Notwithstanding the foregoing, the Borrower shall not have the
right to obtain a replacement Lender if the affected Lender rescinds its demand
for such compensation or indemnification within fifteen (15) days following its
receipt of the Borrower's notice of intention to replace such affected Lender.
Additionally, if the Borrower gives a notice to the Administrative Agent and an
affected Lender of its intention to replace such affected Lender and does not so
replace such affected Lender within ninety (90) days thereafter, the Borrower's
rights under this Section 3.12(c) shall terminate and the Borrower shall
promptly pay all compensation or indemnification demanded by such affected
Lender pursuant to Sections 3.6, 3.9 or 3.10 hereof.
3.13 Pro Rata Treatment.
Except to the extent otherwise provided herein:
(a) Loans. Each payment or prepayment of principal on the Term
Loan, each payment of interest on the Term Loan and each conversion or extension
of any Loan comprising the Term Loan, shall be allocated pro rata among the
Lenders in accordance with the respective principal amounts of their respective
Term Loan Commitment Percentages.
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(b) Advances. No Lender shall be responsible for the failure or
delay by any other Lender in its obligation to make its ratable share of a
borrowing hereunder; provided, however, that the failure of any Lender to
fulfill its obligations hereunder shall not relieve any other Lender of its
obligations hereunder. Unless the Administrative Agent shall have been notified
in writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its ratable share of such borrowing available to
the Administrative Agent, the Administrative Agent may assume that such Lender
is making such amount available to the Administrative Agent, and the
Administrative Agent may, in reliance upon such assumption, make available to
the Borrower a corresponding amount. If such amount is not made available to the
Administrative Agent by such Lender within the time period specified therefor
hereunder, such Lender shall pay to the Administrative Agent, on demand, such
amount with interest thereon at a rate equal to the Federal Funds Rate for a
period of two (2) Business Days, and thereafter at the Base Rate, for the period
until such Lender makes such amount immediately available to the Administrative
Agent. If such Lender does not pay such amounts to the Administrative Agent
forthwith upon demand, the Administrative Agent may notify the Borrower and
request the Borrower to immediately pay such amount to the Administrative Agent
with interest at the rate applicable thereto. A certificate of the
Administrative Agent submitted to any Lender with respect to any amounts owing
under this subsection shall be conclusive in the absence of manifest error.
3.14 Sharing of Payments.
The Lenders agree among themselves that, in the event that any Lender
shall obtain payment in respect of any Loan or any other obligation owing to
such Lender under this Credit Agreement through the exercise of a right of
setoff, banker's lien or counterclaim, or pursuant to a secured claim under
Section 506 of the Bankruptcy Code or other security or interest arising from,
or in lieu of, such secured claim, received by such Lender under any applicable
bankruptcy, insolvency or other similar law or otherwise, or by any other means,
in excess of its pro rata share of such payment as provided for in this Credit
Agreement, such Lender shall promptly purchase from the other Lenders a
participation in such Loans and other obligations in such amounts, and make such
other adjustments from time to time, as shall be equitable to the end that all
Lenders share such payment in accordance with their respective ratable shares as
provided for in this Credit Agreement. The Lenders further agree among
themselves that if payment to a Lender obtained by such Lender through the
exercise of a right of setoff, banker's lien, counterclaim or other event as
aforesaid shall be rescinded or must otherwise be restored, each Lender which
shall have shared the benefit of such payment shall, by repurchase of a
participation theretofore sold, return its share of that benefit (together with
its share of any accrued interest payable with respect thereto) to each Lender
whose payment shall have been rescinded or otherwise restored. The Borrower
agrees that any Lender so purchasing such a participation may, to the fullest
extent permitted by law, exercise all rights of payment, including setoff,
banker's lien or counterclaim, with respect to such participation as fully as if
such Lender were a holder of such Loan or other obligation in the amount of such
participation. Except as otherwise expressly provided in this Credit Agreement,
if any Lender or the Administrative Agent shall fail to remit to the
Administrative Agent or any other Lender an amount payable by such Lender or the
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Administrative Agent to the Administrative Agent or such other Lender pursuant
to this Credit Agreement on the date when such amount is due, such payments
shall be made together with interest thereon for each date from the date such
amount is due until the date such amount is paid to the Administrative Agent or
such other Lender at a rate per annum equal to the Federal Funds Rate. If under
any applicable bankruptcy, insolvency or other similar law, any Lender receives
a secured claim in lieu of a setoff to which this Section 3.14 applies, such
Lender shall, to the extent practicable, exercise its rights in respect of such
secured claim in a manner consistent with the rights of the Lenders under this
Section 3.14 to share in the benefits of any recovery on such secured claim.
3.15 Payments, Computations, Etc.
(a) Except as otherwise specifically provided herein, all payments
hereunder shall be made to the Administrative Agent in Dollars in immediately
available funds, without setoff, deduction, counterclaim or withholding of any
kind, at the Administrative Agent's office specified in Section 9.1 not later
than 2:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments
received after such time shall be deemed to have been received on the next
succeeding Business Day. The Administrative Agent may (but shall not be
obligated to) debit the amount of any such payment which is not made by such
time to any ordinary deposit account of the Borrower maintained with the
Administrative Agent (with notice to the Borrower). The Borrower shall, at the
time it makes any payment under this Credit Agreement, specify to the
Administrative Agent the Loans, Fees, interest or other amounts payable by the
Borrower hereunder to which such payment is to be applied (and in the event that
it fails so to specify, or if such application would be inconsistent with the
terms hereof, the Administrative Agent shall distribute such payment to the
Lenders in such manner as the Administrative Agent may determine to be
appropriate in respect of obligations owing by the Borrower hereunder, subject
to the terms of Section 3.13(a)). The Administrative Agent will distribute such
payments to such Lenders, if any such payment is received prior to 12:00 Noon
(Charlotte, North Carolina time) on a Business Day in like funds as received
prior to the end of such Business Day and otherwise the Administrative Agent
will distribute such payment to such Lenders entitled thereto on the next
succeeding Business Day. Whenever any payment hereunder shall be stated to be
due on a day which is not a Business Day, the due date thereof shall be extended
to the next succeeding Business Day (subject to accrual of interest and Fees for
the period of such extension), except that in the case of Eurodollar Loans, if
the extension would cause the payment to be made in the next following calendar
month, then such payment shall instead be made on the next preceding Business
Day. Except as expressly provided otherwise herein, all computations of interest
and fees shall be made on the basis of the actual number of days elapsed over a
year of 360 days, except with respect to computation of interest on Base Rate
Loans which (unless the Base Rate is determined by reference to the Federal
Funds Rate) shall be calculated based on a year of 365 or 366 days, as
appropriate. Interest shall accrue from and include the date of borrowing, but
exclude the date of payment.
(b) Allocation of Payments After Event of Default. Notwithstanding
any other provisions of this Credit Agreement to the contrary, after the
occurrence and during the continuance of an Event of Default, all amounts
collected or received by the Administrative Agent or any Lender on account of
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the Obligations or any other amounts outstanding under any of the Credit
Documents shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable out-of-pocket costs
and expenses (including without limitation reasonable attorneys' fees)
of the Administrative Agent in connection with enforcing the rights of
the Lenders under the Credit Documents;
SECOND, to payment of any Administrative Agent's Fees then due
and payable;
THIRD, to the payment of all reasonable out-of-pocket costs
and expenses (including without limitation, reasonable attorneys' fees)
of each of the Lenders in connection with enforcing its rights under
the Credit Documents or otherwise with respect to the Obligations owing
to such Lender;
FOURTH, to the payment of all accrued interest and Fees on or
in respect of the Obligations;
FIFTH, to the payment of the outstanding principal amount of
the Obligations;
SIXTH, to all other Obligations and other obligations which
shall have become due and payable under the Credit Documents or
otherwise and not repaid pursuant to clauses "FIRST" through "SIXTH"
above; and
SEVENTH, to the payment of the surplus, if any, to whoever may
be lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be applied in
the numerical order provided until exhausted prior to application to
the next succeeding category; and (ii) each of the Lenders shall
receive an amount equal to its pro rata share (based on the proportion
that the then outstanding Obligations held by such Lender bears to the
aggregate then outstanding Obligations) of amounts available to be
applied pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH"
above.
3.16 Evidence of Debt.
(a) Each Lender shall maintain an account or accounts evidencing
each Loan made by such Lender to the Borrower from time to time, including the
amounts of principal and interest payable and paid to such Lender from time to
time under this Credit Agreement. Each Lender will make reasonable efforts to
maintain the accuracy of its account or accounts and to promptly update its
account or accounts from time to time, as necessary.
(b) The Administrative Agent shall maintain the Register pursuant
to Section 9.3(c) hereof, and a subaccount for each Lender, in which Register
and subaccounts (taken together) shall be
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recorded (i) the amount, type and Interest Period of each such Loan hereunder,
(ii) the amount of any principal or interest due and payable or to become due
and payable to each Lender hereunder and (iii) the amount of any sum received by
the Administrative Agent hereunder from or for the account of the Borrower and
each Lender's share thereof. The Administrative Agent will make reasonable
efforts to maintain the accuracy of the subaccounts referred to in the preceding
sentence and to promptly update such subaccounts from time to time, as
necessary.
(c) The entries made in the accounts, Register and subaccounts
maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent
with the entries of the Administrative Agent, subsection (a)) shall be prima
facie evidence of the existence and amounts of the obligations of the Borrower
therein recorded; provided, however, that the failure of any Lender or the
Administrative Agent to maintain any such account, such Register or such
subaccount, as applicable, or any error therein, shall not in any manner affect
the obligation of the Borrower to repay the Loans made by such Lender in
accordance with the terms hereof.
SECTION 4
GUARANTY
4.1 The Guarantee.
(a) Each of the Guarantors hereby jointly and severally guarantees
to each Lender, to each Affiliate of a Lender that enters into a Hedging
Agreement and to the Administrative Agent as hereinafter provided the prompt
payment of the Guaranteed Obligations in full when due (whether at stated
maturity, as a mandatory prepayment, by acceleration, a mandatory cash
collateralization or otherwise) strictly in accordance with the terms thereof.
The Guarantors hereby further agree that if any of the Guaranteed Obligations
are not paid in full when due (whether at stated maturity, as a mandatory
prepayment, by acceleration, as mandatory cash collateralization or otherwise),
the Guarantors will, jointly and severally, promptly pay the same, without any
demand or notice whatsoever, and that in the case of any extension of time of
payment or renewal of any of the Guaranteed Obligations, the same will be
promptly paid in full when due (whether at extended maturity, as a mandatory
prepayment, by acceleration or otherwise) in accordance with the terms of such
extension or renewal.
(b) Notwithstanding any provision to the contrary contained herein
or in any other of the Credit Documents or Hedging Agreements, to the extent the
obligations of a Guarantor shall be adjudicated to be invalid or unenforceable
for any reason (including, without limitation, because of any applicable state
or federal law relating to fraudulent conveyances or transfers) then the
obligations of each Guarantor hereunder shall be limited to the maximum amount
that is permissible under applicable law (whether federal or state and
including, without limitation, the Bankruptcy Code).
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4.2 Obligations Unconditional.
The obligations of the Guarantors under Section 4.1 hereof are joint
and several, absolute and unconditional, irrespective of the value, genuineness,
validity, regularity or enforceability of any of the Credit Documents or Hedging
Agreements, or any other agreement or instrument referred to therein, or any
substitution, release or exchange of any other guarantee of or security for any
of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever which might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Section 4.2 that the obligations of the
Guarantors hereunder shall be absolute and unconditional under any and all
circumstances. Each Guarantor agrees that such Guarantor shall have no right of
subrogation, indemnity, reimbursement or contribution against the Borrower or
any other Guarantor of the Guaranteed Obligations for amounts paid under this
Guaranty until such time as the Lenders (and any Affiliates of Lenders entering
into Hedging Agreements) have been paid in full, all Commitments under the
Credit Agreement have been terminated and no Person or Governmental Authority
shall have any right to request any return or reimbursement of funds from the
Lenders in connection with monies received under the Credit Documents or Hedging
Agreements. Without limiting the generality of the foregoing, it is agreed that,
to the fullest extent permitted by law, the occurrence of any one or more of the
following shall not alter or impair the liability of any Guarantor hereunder
which shall remain absolute and unconditional as described above:
(i) at any time or from time to time, without notice to
any Guarantor, the time for any performance of or compliance with any
of the Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of
any of the Credit Documents, any Hedging Agreement or any other
agreement or instrument referred to in the Credit Documents or Hedging
Agreements shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations
shall be accelerated, or any of the Guaranteed Obligations shall be
modified, supplemented or amended in any respect, or any right under
any of the Credit Documents, any Hedging Agreement or any other
agreement or instrument referred to in the Credit Documents or Hedging
Agreements shall be waived or any other guarantee of any of the
Guaranteed Obligations or any security therefor shall be released or
exchanged in whole or in part or otherwise dealt with;
(iv) any Lien granted to, or in favor of, the
Administrative Agent or any Lender or Lenders as security for any of
the Guaranteed Obligations shall fail to attach or be perfected; or
(v) any of the Guaranteed Obligations shall be determined
to be void or voidable (including, without limitation, for the benefit
of any creditor of any Guarantor) or shall be
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subordinated to the claims of any Person (including, without
limitation, any creditor of any Guarantor).
With respect to its obligations hereunder, each Guarantor hereby expressly
waives diligence, presentment, demand of payment, protest and all notices
whatsoever, and any requirement that the Administrative Agent or any Lender
exhaust any right, power or remedy or proceed against any Person under any of
the Credit Documents, any Hedging Agreement or any other agreement or instrument
referred to in the Credit Documents or Hedging Agreements, or against any other
Person under any other guarantee of, or security for, any of the Guaranteed
Obligations.
4.3 Reinstatement.
The obligations of the Guarantors under this Section 4 shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of any Person in respect of the Guaranteed Obligations is rescinded
or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify
the Administrative Agent and each Lender on demand for all reasonable costs and
expenses (including, without limitation, reasonable fees and expenses of
counsel) incurred by the Administrative Agent or such Lender in connection with
such rescission or restoration, including any such costs and expenses incurred
in defending against any claim alleging that such payment constituted a
preference, fraudulent transfer or similar payment under any bankruptcy,
insolvency or similar law.
4.4 Certain Additional Waivers.
Each Guarantor agrees that such Guarantor shall have no right of
recourse to security for the Guaranteed Obligations, except through the exercise
of the rights of subrogation pursuant to Section 4.2.
4.5 Remedies.
The Guarantors agree that, to the fullest extent permitted by law, as
between the Guarantors, on the one hand, and the Administrative Agent and the
Lenders, on the other hand, the Guaranteed Obligations may be declared to be
forthwith due and payable as provided in Section 7.2 hereof (and shall be deemed
to have become automatically due and payable in the circumstances provided in
said Section 7.2) for purposes of Section 4.1 hereof notwithstanding any stay,
injunction or other prohibition preventing such declaration (or preventing the
Guaranteed Obligations from becoming automatically due and payable) as against
any other Person and that, in the event of such declaration (or the Guaranteed
Obligations being deemed to have become automatically due and payable), the
Guaranteed Obligations (whether or not due and payable by any other Person)
shall forthwith become due and payable by the Guarantors for purposes of said
Section 4.1.
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4.6 Rights of Contribution.
The Guarantors hereby agree, as among themselves, that if any Guarantor
shall become an Excess Funding Guarantor (as defined below), each other
Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the
succeeding provisions of this Section 4.6), pay to such Excess Funding Guarantor
an amount equal to such Guarantor's Pro Rata Share (as defined below and
determined, for this purpose, without reference to the properties, assets,
liabilities and debts of such Excess Funding Guarantor) of such Excess Payment
(as defined below). The payment obligation of any Guarantor to any Excess
Funding Guarantor under this Section 4.6 shall be subordinate and subject in
right of payment to the prior payment in full of the obligations of such
Guarantor under the other provisions of this Section 4, and such Excess Funding
Guarantor shall not exercise any right or remedy with respect to such excess
until payment and satisfaction in full of all of such obligations. For purposes
hereof, (i) "Excess Funding Guarantor" shall mean, in respect of any obligations
arising under the other provisions of this Section 4 (hereafter, the "Guarantied
Obligations"), a Guarantor that has paid an amount in excess of its Pro Rata
Share of the Guarantied Obligations; (ii) "Excess Payment" shall mean, in
respect of any Guarantied Obligations, the amount paid by an Excess Funding
Guarantor in excess of its Pro Rata Share of such Guarantied Obligations; and
(iii) "Pro Rata Share", for the purposes of this Section 4.6, shall mean, for
any Guarantor, the ratio (expressed as a percentage) of (a) the amount by which
the aggregate present fair saleable value of all of its assets and properties
exceeds the amount of all debts and liabilities of such Guarantor (including
contingent, subordinated, unmatured, and unliquidated liabilities, but excluding
the obligations of such Guarantor hereunder) to (b) the amount by which the
aggregate present fair saleable value of all assets and other properties of the
Borrower and all of the Guarantors exceeds the amount of all of the debts and
liabilities (including contingent, subordinated, unmatured, and unliquidated
liabilities, but excluding the obligations of the Borrower and the Guarantors
hereunder) of the Borrower and all of the Guarantors, all as of the Closing Date
(if any Guarantor becomes a party hereto subsequent to the Closing Date, then
for the purposes of this Section 4.6 such subsequent Guarantor shall be deemed
to have been a Guarantor as of the Closing Date and the information pertaining
to, and only pertaining to, such Guarantor as of the date such Guarantor became
a Guarantor shall be deemed true as of the Closing Date).
4.7 Continuing Guarantee.
The guarantee in this Section 4 is a continuing guarantee, and shall
apply to all Guaranteed Obligations whenever arising.
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SECTION 5
CONDITIONS
5.1 Conditions to Closing.
This Credit Agreement shall become effective, and the initial
Extensions of Credit may be made, upon the satisfaction of the following
conditions precedent:
(a) Execution of Credit Agreement and Credit Documents. Receipt by
the Administrative Agent of (i) multiple counterparts of this Credit Agreement,
(ii) a Term Note for each Lender, (iii) multiple counterparts of the Pledge
Agreement, (iv) multiple counterparts of the Security Agreement, (v) multiple
counterparts of the Intercreditor Agreement and (vi) UCC financing statements
relating to the Pledge Agreement and the Security Agreement, if any, in each
case executed by a duly authorized officer of each party thereto and in each
case conforming to the requirements of this Credit Agreement.
(b) Legal Opinions. Receipt of multiple counterparts of opinions
of counsel for the Credit Parties relating to the Credit Documents and the
transactions contemplated herein, in form and substance satisfactory to the
Administrative Agent and the Required Lenders.
(c) Stock Certificates. Acknowledgment from NationsBank, N.A., as
Administrative Agent under the Revolving Credit Agreement, (i) of its receipt of
original stock certificates evidencing the ownership interests of the Credit
Parties pledged pursuant to the Pledge Agreement, together in each case with
original undated stock powers executed in blank, (ii) of the interests of the
Administrative Agent and the Lenders hereunder therein pursuant to the Pledge
Agreement and (iii) that it holds such stock certificates and stock powers as
bailee for the Administrative Agent hereunder.
(d) Absence of Legal Proceedings. The absence of any action, suit,
investigation or proceeding pending in any court or before any arbitrator or
governmental instrumentality which could reasonably be expected to have a
Material Adverse Effect.
(e) Corporate Documents. Receipt of the following (or their
equivalent) for each of the Credit Parties:
(i) Resolutions. Copies of resolutions of the Board of
Directors approving and adopting the respective Credit Documents, the
transactions contemplated therein and authorizing execution and
delivery thereof, certified by a secretary or assistant secretary as of
the Closing Date to be true and correct and in force and effect as of
such date.
(ii) Good Standing. Copies, where applicable, of (A)
certificates of good standing, existence or its equivalent certified as
of a recent date by the appropriate governmental authorities of the
state of incorporation and each other state in which the failure to so
qualify and be in good standing would have a material adverse effect on
the business or operations in such state and (B) a certificate
indicating payment of all corporate franchise taxes certified as of a
recent date by the appropriate governmental taxing authorities.
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(iii) Officer's Certificate. An officer's certificate for
each of the Credit Parties dated as of the Closing Date substantially
in the form of Schedule 5.1(e)(iii) with appropriate insertions and
attachments.
(f) Amendment No. 2 to Revolving Credit Agreement. Receipt of an
executed copy of Amendment No. 2 to the Revolving Credit Agreement, in form and
substance satisfactory to the Lenders hereunder.
(g) Fees. Receipt of all fees, if any, owing pursuant to the
Administrative Agent's Fee Letter, Section 3.5 or otherwise.
(h) Subsection 5.2 Conditions. The conditions specified in Section
5.2 shall be satisfied.
5.2 Conditions to All Extensions of Credit.
The obligation of each Lender to make any Extension of Credit hereunder
(including the initial Extension of Credit to be made hereunder) is subject to
the satisfaction of the following conditions precedent on the date of making
such Extension of Credit:
(a) Representations and Warranties. The representations and
warranties made by the Credit Parties herein or in any other Credit Documents or
which are contained in any certificate furnished at any time under or in
connection herewith shall be true and correct in all material respects on and as
of the date of such Extension of Credit as if made on and as of such date
(except for those which expressly relate to an earlier date and those which are
untrue solely as a result of a change permitted by this Agreement).
(b) No Default or Event of Default. No Default or Event of Default
shall have occurred and be continuing on such date or after giving effect to the
Extension of Credit to be made on such date unless such Default or Event of
Default shall have been waived in accordance with this Credit Agreement.
(c) Section 2.1 Conditions. If the Term Loan is made pursuant to
Section 2.1, all conditions set forth therein shall have been satisfied.
Each request for Extension of Credit (including extensions of
Eurodollar Loans and conversions of Base Rate Loans into Eurodollar Loans) and
each acceptance by the Borrower of an Extension of Credit (including extensions
of Eurodollar Loans and conversions of Base Rate Loans into Eurodollar Loans)
shall be deemed to constitute a representation and warranty by the Borrower as
of the date of such Extension of Credit that the applicable conditions in
paragraphs (a), (b) and (c) of this subsection have been satisfied.
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SECTION 6
REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Incorporation.
The representations and warranties contained in Section 6 of the
Revolving Credit Agreement (the "Incorporated Representations") and the
affirmative and negative covenants contained in Sections 7 and 8, respectively,
of the Revolving Credit Agreement (the "Incorporated Covenants") as in effect on
the Closing Date are incorporated herein by reference with the same effect as if
stated at length. The Credit Parties affirm and represent and warrant to the
Administrative Agent and the Lenders that the Incorporated Representations are
true and correct in all material respects as of the date hereof (except for
those which expressly relate to an earlier date and those which are untrue
solely as a result of a change permitted by the Revolving Credit Agreement) and
covenant and agree that the Incorporated Covenants shall be as binding on the
Credit Parties as if set forth fully herein, provided that (i) such Incorporated
Representations and Incorporated Covenants as incorporated herein shall reflect
that they are delivered to and run in favor of the Administrative Agent and the
Lenders hereunder, rather than just to the Administrative Agent and the Lenders
under the Revolving Credit Agreement as literally provided in the Revolving
Credit Agreement, and references therein to the "Credit Agreement" and "Credit
Documents" shall be deemed for purposes hereof to include this Credit Agreement
and the Credit Documents relating hereto, and (ii) in the event that the
Existing Credit Agreement shall be refinanced or replaced by another credit
agreement, then the Incorporated Representations and Incorporated Covenants
shall be as in effect immediately prior to such refinancing or replacement.
6.2 Additional Representations.
(a) Purposes of Term Loan. Notwithstanding the provisions of
Section 6.15 of the Incorporated Representations, the proceeds of the Term Loan
shall be used solely to refinance Indebtedness outstanding under the Revolving
Credit Agreement.
6.3 Additional Covenants.
(a) Purposes of Term Loan. Notwithstanding the provisions of
Section 7.13 of the Incorporated Covenants, the proceeds of the Term Loan shall
be used solely for the purposes provided in Section 6.2(a) hereof.
(b) Additional Credit Parties. The Borrower will provide to the
Administrative Agent, for the benefit of the Lenders, a Joinder Agreement and
the other items required by Section 7.11 of the Incorporated Covenants in the
same form and from the same Subsidiaries as required therein, except that such
Joinder Agreement and other items shall reflect that they are delivered to, and
run in favor of, the Administrative Agent and secure the obligations of the
Credit Parties under this Credit Agreement and the other Credit Documents.
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SECTION 7
EVENTS OF DEFAULT
7.1 Events of Default.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. Any Credit Party shall
(i) default in the payment on the Termination Date of any
principal of any of the Loans, or
(ii) default, and such default shall continue for three
(3) or more Business Days, in the payment when due of any interest on
the Loans, or of any Fees or other amounts owing hereunder, under any
of the other Credit Documents or in connection herewith or therewith;
or
(b) Representations. Any representation, warranty or statement
made or deemed to be made herein, in any of the other Credit Documents, or in
any statement or certificate delivered or required to be delivered pursuant
hereto or thereto shall prove untrue in any material respect on the date as of
which it was made or deemed to have been made (other than those which are untrue
solely as a result of changes permitted by this Agreement); or
(c) Covenants.
(i) Default in the due performance or observance of any
term, covenant or agreement contained in Section 7.3(a), 7.9, 7.11,
7.13 or 8.1 through 8.10, inclusive, in each case of the Incorporated
Covenants; or
(ii) Default in the due performance or observance by it of
any term, covenant or agreement (other than those referred to in
subsections (a), (b) or (c)(i) of this Section 7.1) contained in this
Credit Agreement and such default shall continue unremedied for a
period of at least 30 days after the earlier of a Responsible Officer
becoming aware of such default or notice thereof by the Administrative
Agent; or
(d) Other Credit Documents. (i) Any Credit Party shall default in
the due performance or observance of any material term, covenant or agreement in
any of the other Credit Documents (subject to applicable grace or cure periods,
if any), or (ii) except as to the Credit Party which is dissolved, released or
merged or consolidated out of existence as the result of or in connection with a
dissolution, merger or disposition permitted by Section 8.3 or Section 8.4 of
the Incorporated Covenants, any Credit Document shall fail to be in full force
and effect or to give
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the Administrative Agent and/or the Lenders any material part of the Liens,
rights, powers and privileges purported to be created thereby; or
(e) Guaranties. Except as to the Credit Party which is dissolved,
released or merged or consolidated out of existence as the result of or in
connection with a dissolution, merger or disposition permitted by Section 8.3 or
Section 8.4 of the Incorporated Covenants, the guaranty given by any Guarantor
hereunder or any material provision thereof shall cease to be in full force and
effect, or any Guarantor hereunder or any Person acting by or on behalf of such
Guarantor shall deny or disaffirm such Guarantor's obligations under such
guaranty, or any Guarantor shall default in the due performance or observance of
any term, covenant or agreement on its part to be performed or observed pursuant
to any guaranty; or
(f) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect
to any Material Credit Party; or
(g) Defaults under Other Agreements. With respect to any
Indebtedness (other than Indebtedness outstanding under this Credit Agreement)
in excess of $1,500,000 in the aggregate for the Consolidated Group taken as a
whole, (A) (1) any Material Credit Party shall default in any payment (beyond
the applicable grace period with respect thereto, if any) with respect to any
such Indebtedness, or (2) the occurrence and continuance of a default in the
observance or performance relating to such Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event or condition shall occur or condition exist, the effect of which default
or other event or condition is to cause, or permit, the holder or holders of
such Indebtedness (or trustee or agent on behalf of such holders) to cause
(determined without regard to whether any notice or lapse of time is required),
any such Indebtedness to become due prior to its stated maturity; or (B) any
such Indebtedness shall be declared due and payable, or required to be prepaid
other than by a regularly scheduled required prepayment, prior to the stated
maturity thereof; or
(h) Judgments. Any Material Credit Party shall fail within 30 days
of the date due and payable to pay, bond or otherwise discharge any judgment,
settlement or order for the payment of money which judgment, settlement or
order, when aggregated with all other such judgments, settlements or orders due
and unpaid at such time, exceeds $1,500,000, and which is not stayed on appeal
(or for which no motion for stay is pending) or is not otherwise being executed;
or
(i) ERISA. Any of the following events or conditions, if such
event or condition could reasonably be expected to have a Material Adverse
Effect: (1) any "accumulated funding deficiency," as such term is defined in
Section 302 of ERISA and Section 412 of the Internal Revenue Code, whether or
not waived, shall exist with respect to any Plan, or any lien shall arise on the
assets of a member of the Consolidated Group or any ERISA Affiliate in favor of
the PBGC or a Plan; (2) an ERISA Event shall occur with respect to a Single
Employer Plan, which is, in the reasonable opinion of the Administrative Agent,
likely to result in the termination of such Plan for purposes of Title IV of
ERISA; (3) an ERISA Event shall occur with respect to a
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Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable
opinion of the Administrative Agent, likely to result in (i) the termination of
such Plan for purposes of Title IV of ERISA, or (ii) a member of the
Consolidated Group or any ERISA Affiliate incurring any liability in connection
with a withdrawal from, reorganization of (within the meaning of Section 4241 of
ERISA), or insolvency of (within the meaning of Section 4245 of ERISA) such
Plan; or (4) any prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Internal Revenue Code) or breach of fiduciary
responsibility shall occur which may subject a member of the Consolidated Group
or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or
502(l) of ERISA or Section 4975 of the Internal Revenue Code, or under any
agreement or other instrument pursuant to which a member of the Consolidated
Group or any ERISA Affiliate has agreed or is required to indemnify any person
against any such liability; or
(j) Ownership. There shall occur a Change of Control; or
(k) Revolving Credit Agreement. There shall occur an Event of
Default under the Revolving Credit Agreement.
7.2 Acceleration; Remedies.
Upon the occurrence and during the continuation of an Event of Default,
the Administrative Agent shall, upon the request and direction of the Required
Lenders, by written notice to the Credit Parties take any of the following
actions:
(i) Acceleration. Declare the unpaid principal of and any
accrued interest in respect of all Loans and any and all other
indebtedness or obligations of any and every kind owing by the Credit
Parties to the Administrative Agent and/or any of the Lenders hereunder
to be due whereupon the same shall be immediately due and payable
without presentment, demand, protest or other notice of any kind, all
of which are hereby waived by each of the Credit Parties.
(ii) Enforcement of Rights. Enforce any and all rights and
interests created and existing under the Credit Documents and all
rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section
7.1(f) shall occur, then all Loans, all accrued interest in respect thereof, all
accrued and unpaid Fees and other indebtedness or obligations owing to the
Administrative Agent and/or any of the Lenders hereunder automatically shall
immediately become due and payable without presentment, demand, protest or the
giving of any notice or other action by the Administrative Agent or the Lenders,
all of which are hereby waived by the Credit Parties.
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SECTION 8
AGENCY PROVISIONS
8.1 Appointment.
Each Lender hereby designates and appoints NationsBank, N.A. as
administrative agent (in such capacity, the "Administrative Agent") of such
Lender to act as specified herein and the other Credit Documents, and each such
Lender hereby authorizes the Administrative Agent as the Administrative Agent
for such Lender, to take such action on its behalf under the provisions of this
Credit Agreement and the other Credit Documents and to exercise such powers and
perform such duties as are expressly delegated by the terms hereof and of the
other Credit Documents, together with such other powers as are reasonably
incidental thereto. Each Lender further directs and authorizes the
Administrative Agent to execute releases (or similar agreements) to give effect
to the provisions of this Credit Agreement and the other Credit Documents,
including specifically, without limitation, in connection with a Divestiture
consented to or permitted pursuant the provisions of Section 8.3 of the
Incorporated Covenants or a sale, lease, transfer or other disposition of
Property not prohibited by this Credit Agreement. Notwithstanding any provision
to the contrary elsewhere herein and in the other Credit Documents, the
Administrative Agent shall not have any duties or responsibilities, except those
expressly set forth herein and therein, or any fiduciary relationship with any
Lender, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Credit Agreement or any of
the other Credit Documents, or shall otherwise exist against the Administrative
Agent. The provisions of this Section are solely for the benefit of the
Administrative Agent and the Lenders and none of the Credit Parties shall have
any rights as a third party beneficiary of the provisions hereof (other than as
set forth in the second sentence hereof). In performing its functions and duties
under this Credit Agreement and the other Credit Documents, the Administrative
Agent shall act solely as Administrative Agent of the Lenders and does not
assume and shall not be deemed to have assumed any obligation or relationship of
agency or trust with or for any Credit Party or any of their respective
Affiliates.
8.2 Delegation of Duties.
The Administrative Agent may execute any of its duties hereunder or
under the other Credit Documents by or through agents or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. The Administrative Agent shall not be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by it with reasonable
care.
8.3 Exculpatory Provisions.
The Administrative Agent and its officers, directors, employees,
agents, attorneys-in-fact or affiliates shall not be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection herewith or in connection with any of the other Credit Documents
(except for its or such Person's own gross negligence or willful misconduct), or
(ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by any
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of the Credit Parties contained herein or in any of the other Credit Documents
or in any certificate, report, document, financial statement or other written or
oral statement referred to or provided for in, or received by the Administrative
Agent under or in connection herewith or in connection with the other Credit
Documents, or enforceability or sufficiency therefor of any of the other Credit
Documents, or for any failure of any Credit Party to perform its obligations
hereunder or thereunder. The Administrative Agent shall not be responsible to
any Lender for the effectiveness, genuineness, validity, enforceability,
collectability or sufficiency of this Credit Agreement, or any of the other
Credit Documents or for any representations, warranties, recitals or statements
made herein or therein or made by the Borrower or any Credit Party in any
written or oral statement or in any financial or other statements, instruments,
reports, certificates or any other documents in connection herewith or therewith
furnished or made by the Administrative Agent to the Lenders or by or on behalf
of the Credit Parties to the Administrative Agent or any Lender or be required
to ascertain or inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein or
as to the use of the proceeds of the Term Loan or of the existence or possible
existence of any Default or Event of Default or to inspect the properties, books
or records of the Credit Parties or any of their respective Affiliates.
8.4 Reliance on Communications.
The Administrative Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to any of the Credit Parties, independent accountants and
other experts selected by the Administrative Agent with reasonable care). The
Administrative Agent may deem and treat the Lenders as the owners of their
respective interests hereunder for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Administrative Agent in accordance with Section 9.3(b) hereof. The
Administrative Agent shall be fully justified in failing or refusing to take any
action under this Credit Agreement or under any of the other Credit Documents
unless it shall first receive such advice or concurrence of the Required Lenders
as it deems appropriate or it shall first be indemnified to its satisfaction by
the Lenders against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action. The Administrative
Agent shall in all cases be fully protected in acting, or in refraining from
acting, hereunder or under any of the other Credit Documents in accordance with
a request of the Required Lenders (or to the extent specifically provided in
Section 9.6, all the Lenders) and such request and any action taken or failure
to act pursuant thereto shall be binding upon all the Lenders (including their
successors and assigns).
8.5 Notice of Default.
The Administrative Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless the
Administrative Agent has received notice from a Lender or a Credit Party
referring to the Credit Document, describing such Default or Event of
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Default and stating that such notice is a "notice of default." In the event that
the Administrative Agent receives such a notice, the Administrative Agent shall
give prompt notice thereof to the Lenders. The Administrative Agent shall take
such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders.
8.6 Non-Reliance on Administrative Agent and Other Lenders.
Each Lender expressly acknowledges that each of the Administrative
Agent and its officers, directors, employees, Administrative Agents,
attorneys-in-fact or affiliates has not made any representations or warranties
to it and that no act by the Administrative Agent or any affiliate thereof
hereinafter taken, including any review of the affairs of any Credit Party or
any of their respective Affiliates, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrower,
the other Credit Parties or their respective Affiliates and made its own
decision to make its Loans hereunder and enter into this Credit Agreement. Each
Lender also represents that it will, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Credit Agreement, and to make such investigation as it deems necessary to
inform itself as to the business, assets, operations, property, financial and
other conditions, prospects and creditworthiness of the Borrower, the other
Credit Parties and their respective Affiliates. Except for notices, reports and
other documents expressly required to be furnished to the Lenders by the
Administrative Agent hereunder, the Administrative Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the business, operations, assets, property, financial or other
conditions, prospects or creditworthiness of the Borrower, the other Credit
Parties or any of their respective Affiliates which may come into the possession
of the Administrative Agent or any of its officers, directors, employees,
Administrative Agents, attorneys-in-fact or affiliates.
8.7 Indemnification.
The Lenders agree to indemnify the Administrative Agent in its capacity
as such (to the extent not reimbursed by the Borrower and without limiting the
obligation of the Borrower to do so), ratably in accordance with the respective
principal amounts of outstanding Loans and Participation Interests of the
Lenders), from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind whatsoever which may at any time (including without limitation at
any time following the final payment of all of the obligations of the Borrower
hereunder and under the other Credit Documents) be imposed on, incurred by or
asserted against the Administrative Agent in its capacity as such in any way
relating to or arising out of this Credit Agreement or the other Credit
Documents or any documents contemplated by or referred to herein or therein or
the transactions contemplated hereby or thereby or any action taken or omitted
by
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the Administrative Agent under or in connection with any of the foregoing;
provided that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the gross negligence or willful
misconduct of the Administrative Agent. If any indemnity furnished to the
Administrative Agent for any purpose shall, in the opinion of the Administrative
Agent, be insufficient or become impaired, the Administrative Agent may call for
additional indemnity and cease, or not commence, to do the acts indemnified
against until such additional indemnity is furnished. The agreements in this
Section shall survive the repayment of the Loans and other obligations under the
Credit Documents and the termination of the Commitments hereunder.
8.8 Administrative Agent in its Individual Capacity.
The Administrative Agent and its affiliates may make loans to, accept
deposits from and generally engage in any kind of business with the Borrower,
its Subsidiaries or their respective Affiliates as though the Administrative
Agent were not the Administrative Agent hereunder. With respect to the Loans
made by and all obligations of the Borrower hereunder and under the other Credit
Documents, the Administrative Agent shall have the same rights and powers under
this Credit Agreement as any Lender and may exercise the same as though it were
not the Administrative Agent, and the terms "Lender" and "Lenders" shall include
the Administrative Agent in its individual capacity.
8.9 Successor Administrative Agent.
The Administrative Agent may, at any time, resign upon 20 days' written
notice to the Lenders, and may be removed, upon show of cause, by the Required
Lenders upon 30 days' written notice to the Administrative Agent. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Administrative Agent. If no successor Administrative Agent shall have
been so appointed by the Required Lenders, and shall have accepted such
appointment, within 30 days after the notice of resignation or notice of
removal, as appropriate, then the retiring Administrative Agent shall select a
successor Administrative Agent provided such successor is a Lender hereunder or
a commercial bank organized under the laws of the United States of America or of
any State thereof and has a combined capital and surplus of at least
$400,000,000. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor, such successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Administrative Agent, and the retiring Administrative Agent
shall be discharged from its duties and obligations as Administrative Agent, as
appropriate, under this Credit Agreement and the other Credit Documents and the
provisions of this Section 8.9 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent under this
Credit Agreement.
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8.10 Intercreditor Agreement.
Inasmuch as the obligations under the Revolving Credit Agreement are
secured by the same collateral as that securing the obligations under this
Credit Agreement, an intercreditor agreement is required in order that the
respective obligations share in such collateral on a pari passu basis. By
execution hereof, each Lender hereby acknowledges and agrees to be bound by the
terms of the Intercreditor Agreement and further authorizes and directs the
Administrative Agent to enter into the Intercreditor Agreement on its behalf.
SECTION 9
MISCELLANEOUS
9.1 Notices.
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (i) when
delivered, (ii) when transmitted via telecopy (or other facsimile device) to the
number set out below, (iii) the day following the day on which the same has been
delivered prepaid to a reputable national overnight air courier service, or (iv)
the third Business Day following the day on which the same is sent by certified
or registered mail, postage prepaid, in each case to the respective parties at
the address, in the case of the Borrower, Guarantors and the Administrative
Agent, set forth below, and, in the case of the Lenders, set forth on Schedule
9.1, or at such other address as such party may specify by written notice to the
other parties hereto:
If to the Borrower or the Guarantors:
Railworks Corporation
1104 Kenilworth Drive
Suite 301
Baltimore, MD 21204
Attn: Michael R. Azarela
Telephone: (410) 512-0501
Telecopy: (410) 825-6920
If to the Administrative Agent:
NationsBank, N.A.
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attn: Gregg Newland
Agency Services
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Telephone: (704) 386-4218
Telecopy: (704) 388-9436
with a copy to:
NationsBank, N.A.
10 Light Street
Sixteenth Floor
MD4-302-16-01
Baltimore, MD 21202-1435
Attn: Monica Brandes
Telephone: (410) 605-8019
Telecopy: (410) 539-7508
9.2 Right of Set-Off.
In addition to any rights now or hereafter granted under applicable law
or otherwise, and not by way of limitation of any such rights, upon the
occurrence of an Event of Default, each Lender is authorized at any time and
from time to time, without presentment, demand, protest or other notice of any
kind (all of which rights being hereby expressly waived), to set-off and to
appropriate and apply any and all deposits (general or special) and any other
indebtedness at any time held or owing by such Lender (including, without
limitation branches, agencies or Affiliates of such Lender wherever located) to
or for the credit or the account of any Credit Party against obligations and
liabilities of such Person to such Lender hereunder, under the Notes, the other
Credit Documents or otherwise, irrespective of whether such Lender shall have
made any demand hereunder and although such obligations, liabilities or claims,
or any of them, may be contingent or unmatured, and any such set-off shall be
deemed to have been made immediately upon the occurrence of an Event of Default
even though such charge is made or entered on the books of such Lender
subsequent thereto. Any Person purchasing a participation in the Loans and
Commitments hereunder pursuant to Section 3.14 or Section 9.3(d) may exercise
all rights of set-off with respect to its participation interest as fully as if
such Person were a Lender hereunder.
9.3 Benefit of Agreement.
(a) Generally. This Credit Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided that none of the Credit Parties may
assign or transfer any of its interests without prior written consent of the
Lenders; provided further that the rights of each Lender to transfer, assign or
grant participations in its rights and/or obligations hereunder shall be limited
as set forth in this Section 9.3, provided however that nothing herein shall
prevent or prohibit any Lender from (i) pledging its Loans hereunder to a
Federal Reserve Bank in support of borrowings made by such Lender from such
Federal Reserve Bank, or (ii) granting assignments or selling
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participations in such Lender's Loans and/or Commitments hereunder to its parent
company and/or to any Affiliate or Subsidiary of such Lender.
(b) Assignments. Each Lender may assign all or a portion of its
rights and obligations hereunder (including, without limitation, all or a
portion of its Commitments or its Loans), pursuant to an assignment agreement
substantially in the form of Schedule 9.3(b), to (i) a Lender, (ii) an affiliate
of a Lender or (iii) any bank, financial institution, commercial lender or
institutional investor reasonably acceptable to the Administrative Agent and, so
long as no Default or Event of Default has occurred and is continuing, the
Borrower (the consent of the Borrower shall not be unreasonably withheld or
delayed); provided that (i) any such assignment (other than any assignment to an
existing Lender) shall be in a minimum aggregate amount of $5,000,000 (or, if
less, the remaining amount of the Commitment being assigned by such Lender) of
the Commitments and in integral multiples of $250,000 above such amount and (ii)
each such assignment shall be of a constant, not varying, percentage of all such
Lender's rights and obligations under this Credit Agreement. Any assignment
hereunder shall be effective upon delivery to the Administrative Agent of
written notice of the assignment together with a transfer fee of $3,500 payable
to the Administrative Agent for its own account from and after the later of (i)
the effective date specified in the applicable assignment agreement and (ii) the
date of recording of such assignment in the Register pursuant to the terms of
subsection (c) below. The assigning Lender will give prompt notice to the
Administrative Agent and the Borrower of any such assignment. Upon the
effectiveness of any such assignment (and after notice to, and (to the extent
required pursuant to the terms hereof), with the consent of, the Borrower as
provided herein), the assignee shall become a "Lender" for all purposes of this
Credit Agreement and the other Credit Documents and, to the extent of such
assignment, the assigning Lender shall be relieved of its obligations hereunder
to the extent of the Loans and Commitment components being assigned. Along such
lines the Borrower agrees that upon notice of any such assignment and surrender
of the appropriate Note or Notes, it will promptly provide to the assigning
Lender and to the assignee separate promissory notes in the amount of their
respective interests substantially in the form of the original Note (but with
notation thereon that it is given in substitution for and replacement of the
original Note or any replacement notes thereof). By executing and delivering an
assignment agreement in accordance with this Section 9.3(b), the assigning
Lender thereunder and the assignee thereunder shall be deemed to confirm to and
agree with each other and the other parties hereto as follows: (i) such
assigning Lender warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim; (ii) except
as set forth in clause (i) above, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Credit
Agreement, any of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit Agreement, any
of the other Credit Documents or any other instrument or document furnished
pursuant hereto or thereto or the financial condition of any Credit Party or any
of their respective Affiliates or the performance or observance by any Credit
Party of any of its obligations under this Credit Agreement, any of the other
Credit Documents or any other instrument or document furnished pursuant hereto
or thereto; (iii) such assignee represents and warrants that it is legally
authorized to enter into such assignment agreement; (iv) such assignee confirms
that it has
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received a copy of this Credit Agreement, the other Credit Documents and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such assignment agreement; (v) such
assignee will independently and without reliance upon the Administrative Agent,
such assigning Lender or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Credit Agreement and
the other Credit Documents; (vi) such assignee appoints and authorizes the
Administrative Agent to take such action on its behalf and to exercise such
powers under this Credit Agreement or any other Credit Document as are delegated
to the Administrative Agent by the terms hereof or thereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees that
it will perform in accordance with their terms all the obligations which by the
terms of this Credit Agreement and the other Credit Documents are required to be
performed by it as a Lender.
(c) Maintenance of Register. The Administrative Agent shall
maintain at one of its offices in Charlotte, North Carolina a copy of each
Lender assignment agreement delivered to it in accordance with the terms of
subsection (b) above and a register for the recordation of the identity of the
principal amount, type and Interest Period of each Loan outstanding hereunder,
the names, addresses and the Commitments of the Lenders pursuant to the terms
hereof from time to time (the "Register"). The Administrative Agent will make
reasonable efforts to maintain the accuracy of the Register and to promptly
update the Register from time to time, as necessary. The entries in the Register
shall be conclusive in the absence of manifest error and the Borrower, the
Administrative Agent and the Lenders may treat each Person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Credit Agreement. The Register shall be available for
inspection by the Borrower and each Lender, at any reasonable time and from time
to time upon reasonable prior notice.
(d) Participations. Each Lender may sell, transfer, grant or
assign participations in all or a portion of such Lender's rights, obligations
or rights and obligations hereunder (including all or a portion of its
Commitments or its Loans); provided that (i) such selling Lender shall remain a
"Lender" for all purposes under this Credit Agreement (such selling Lender's
obligations under the Credit Documents remaining unchanged) and the participant
shall not constitute a Lender hereunder, (ii) no such participant shall have, or
be granted, rights to approve any amendment or waiver relating to this Credit
Agreement or the other Credit Documents except to the extent any such amendment
or waiver would (A) reduce the principal of or rate of interest on or Fees in
respect of any Loans in which the participant is participating, (B) postpone the
date fixed for any payment of principal (including extension of the Termination
Date or the date of any mandatory prepayment), interest or Fees in which the
participant is participating, (C) except as the result of or in connection with
a dissolution, merger or disposition of a Subsidiary permitted under Section 8.3
of the Incorporated Covenants, release the Borrower or substantially all of the
Guarantors from its or their obligations under the Credit Documents, or (D)
except as the result of or in connection with a Divestiture permitted under
Section 8.3(b) of the Incorporated Covenants, release all or substantially all
of the collateral, and (iii) sub-participations by the participant (except to an
affiliate, parent company or affiliate of a parent company of the participant)
shall be prohibited. In the case of any such
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participation, the participant shall not have any rights under this Credit
Agreement or the other Credit Documents (the participant's rights against the
selling Lender in respect of such participation to be those set forth in the
participation agreement with such Lender creating such participation) and all
amounts payable by the Borrower hereunder shall be determined as if such Lender
had not sold such participation, provided, however, that such participant shall
be entitled to receive additional amounts under Sections 3.6, 3.9, 3.10, 3.11
and 9.2 on the same basis as if it were a Lender.
9.4 No Waiver; Remedies Cumulative.
No failure or delay on the part of the Administrative Agent or any
Lender in exercising any right, power or privilege hereunder or under any other
Credit Document and no course of dealing between the Administrative Agent or any
Lender and any of the Credit Parties shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under any other Credit Document preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder or
thereunder. The rights and remedies provided herein are cumulative and not
exclusive of any rights or remedies which the Administrative Agent or any Lender
would otherwise have. No notice to or demand on any Credit Party in any case
shall entitle the Borrower or any other Credit Party to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Administrative Agent or the Lenders to any other or further action
in any circumstances without notice or demand.
9.5 Payment of Expenses, etc.
The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and
expenses (A) of the Administrative Agent in connection with the negotiation,
preparation, execution and delivery and administration of this Credit Agreement
and the other Credit Documents and the documents and instruments referred to
therein (including, without limitation, the reasonable fees and expenses of
Moore & Van Allen, PLLC, special counsel to the Administrative Agent) and any
amendment, waiver or consent relating hereto and thereto including, but not
limited to, any such amendments, waivers or consents resulting from or related
to any work-out, renegotiation or restructure relating to the performance by the
Credit Parties under this Credit Agreement and (B) of the Administrative Agent
and the Lenders in connection with enforcement of the Credit Documents and the
documents and instruments referred to therein (including, without limitation, in
connection with any such enforcement, the reasonable fees and disbursements of
counsel for the Administrative Agent and each of the Lenders); (ii) permit the
Administrative Agent to perform inventory and accounts receivable field audits
at the Borrower's expense, provided that unless an Event of Default shall be in
existence the Borrower's obligation to reimburse the Administrative Agent for
such field audits shall be limited to one such field audit each fiscal year;
(iii) pay and hold each of the Lenders harmless from and against any and all
present and future stamp and other similar taxes with respect to the foregoing
matters and save each of the Lenders harmless from and against any and all
liabilities with respect to or resulting from any delay or omission (other than
to the extent attributable to such Lender) to pay such taxes; and (iv) indemnify
each Lender, its officers, directors, employees, representatives and
Administrative Agents from and hold each of them harmless against any and all
38
<PAGE> 44
losses, liabilities, claims, damages or expenses incurred by any of them as a
result of, or arising out of, or in any way related to, or by reason of (A) any
investigation, litigation or other proceeding (whether or not any Lender is a
party thereto) related to the entering into and/or performance of any Credit
Document or the use of proceeds of any Loans (including other Extensions of
Credit) hereunder or the consummation of any other transactions contemplated in
any Credit Document, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding or (B) the presence or Release of any Materials
of Environmental Concern at, under or from any Property owned, operated or
leased by the Borrower or any of its Subsidiaries, or the failure by the
Borrower or any of its Subsidiaries to comply with any Environmental Law (but
excluding, in the case of either of clause (A) or (B) above, any such losses,
liabilities, claims, damages or expenses to the extent incurred by reason of
gross negligence or willful misconduct on the part of the Person to be
indemnified).
9.6 Amendments, Waivers and Consents.
Neither this Credit Agreement nor any other Credit Document nor any of
the terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing entered into by, or approved in writing by, the Required Lenders and the
Borrower, provided, however, that:
(a) without the consent of each Lender affected thereby,
neither this Credit Agreement nor any of the other Credit Documents may
be amended to
(i) extend the final maturity of any Loan,
(ii) reduce the rate or extend the time of
payment of interest thereon or Fees hereunder (other than as a
result of waiving the applicability of any increase in
interest rates or Fees after the occurrence of an Event of
Default or on account of a failure to deliver financial
statements on a timely basis),
(iii) reduce or waive the principal amount of any
Loan,
(iv) increase the Commitment of a Lender over the
amount thereof in effect (it being understood and agreed that
a waiver of any Default or Event of Default shall not
constitute an increase in the Commitment of any Lender),
(v) except as the result of or in connection
with a dissolution, merger or disposition of a Subsidiary
permitted under Section 8.3 of the Incorporated Covenants,
release the Borrower or substantially all of the Guarantors
from its or their obligations under the Credit Documents,
39
<PAGE> 45
(vi) except as the result of or in connection
with a Divestiture permitted under Section 8.3(b) of the
Incorporated Covenants, release all or substantially all of
the collateral,
(vii) amend, modify or waive any provision of this
Section 9.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.13,
3.14, 3.15, 7.1(a), 9.2, 9.3, 9.5 or 9.9,
(viii) reduce any percentage specified in, or
otherwise modify, the definition of Required Lenders, or
(ix) consent to the assignment or transfer by the
Borrower (or another Credit Party) of any of its rights and
obligations under (or in respect of) the Credit Documents
except as permitted thereby;
(b) without the consent of the Administrative Agent, no
provision of Section 8 may be amended;
Notwithstanding the fact that the consent of all the Lenders is
required in certain circumstances as set forth above, (x) each Lender is
entitled to vote as such Lender sees fit on any bankruptcy reorganization plan
that affects the Loans, and each Lender acknowledges that the provisions of
Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent
provisions set forth herein and (y) the Required Lenders may consent to allow a
Credit Party to use cash collateral in the context of a bankruptcy or insolvency
proceeding.
9.7 Counterparts.
This Credit Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument. It shall not be necessary in
making proof of this Credit Agreement to produce or account for more than one
such counterpart.
9.8 Headings.
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
9.9 Survival.
All indemnities set forth herein, including, without limitation, in
Section 3.9, 3.11, 8.7 or 9.5 shall survive the execution and delivery of this
Credit Agreement, the making of the Loans, the repayment of the Loans and other
obligations under the Credit Documents and the termination of the Commitments
hereunder, and all representations and warranties made by the Credit Parties
herein shall survive delivery of the Notes and the making of the Loans
hereunder.
40
<PAGE> 46
9.10 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED
BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
(b) Any legal action or proceeding with respect to this Credit
Agreement or any other Credit Document may be brought in the courts of the State
of North Carolina in Mecklenburg County, or of the United States for the Western
District of North Carolina, and, by execution and delivery of this Credit
Agreement, each of the Credit Parties hereby irrevocably accepts for itself and
in respect of its property, generally and unconditionally, the nonexclusive
jurisdiction of such courts. Each of the Credit Parties further irrevocably
consents to the service of process out of any of the aforementioned courts in
any such action or proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to it at the address set out for notices
pursuant to Section 9.1, such service to become effective three (3) days after
such mailing. Nothing herein shall affect the right of the Administrative Agent
to serve process in any other manner permitted by law or to commence legal
proceedings or to otherwise proceed against any Credit Party in any other
jurisdiction.
(c) Each of the Credit Parties hereby irrevocably waives any
objection which it may now or hereafter have to the laying of venue of any of
the aforesaid actions or proceedings arising out of or in connection with this
Credit Agreement or any other Credit Document brought in the courts referred to
in subsection (a) hereof and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum.
(d) TO THE EXTENT PERMITTED BY LAW, EACH OF THE ADMINISTRATIVE
AGENT, THE LENDERS, THE BORROWER AND THE OTHER CREDIT PARTIES HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY.
9.11 Severability.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
41
<PAGE> 47
9.12 Entirety.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and supersede
all prior agreements and understandings, oral or written, if any, including any
commitment letters or correspondence relating to the Credit Documents or the
transactions contemplated herein and therein.
9.13 Binding Effect; Termination.
(a) This Credit Agreement shall become effective at such time on
or after the Closing Date when it shall have been executed by the Borrower, the
Guarantors and the Administrative Agent, and the Administrative Agent shall have
received copies hereof (telefaxed or otherwise) which, when taken together, bear
the signatures of each Lender, and thereafter this Credit Agreement shall be
binding upon and inure to the benefit of the Borrower, the Guarantors, the
Administrative Agent and each Lender and their respective successors and
assigns.
(b) The term of this Credit Agreement shall commence on the
effective date pursuant to subsection (a) above and shall continue until no
Loans or any other amounts payable hereunder or under any of the other Credit
Documents shall remain outstanding and until all of the Commitments hereunder
shall have expired or been terminated.
9.14 Confidentiality.
The Administrative Agent and the Lenders agree to keep confidential
(and to cause their respective affiliates, officers, directors, employees,
agents and representatives to keep confidential) all information, materials and
documents furnished to the Administrative Agent or any such Lender by or on
behalf of any Credit Party (whether before or after the Closing Date) which
relates to the Borrower or any of its Subsidiaries (the "Information").
Notwithstanding the foregoing, the Administrative Agent and each Lender shall be
permitted to disclose Information (i) to its affiliates, officers, directors,
employees, agents and representatives in connection with its participation in
any of the transactions evidenced by this Credit Agreement or any other Credit
Documents or the administration of this Credit Agreement or any other Credit
Documents, subject to the provisions of this Section 9.14; (ii) to the extent
required by applicable laws and regulations or by any subpoena or similar legal
process, or requested by any Governmental Authority; (iii) to the extent such
Information (A) becomes publicly available other than as a result of a breach of
this Credit Agreement or any agreement entered into pursuant to clause (iv)
below, (B) becomes available to the Administrative Agent or such Lender on a
non-confidential basis from a source other than a Credit Party or (C) was
available to the Administrative Agent or such Lender on a non-confidential basis
prior to its disclosure to the Administrative Agent or such Lender by a Credit
Party; (iv) to any assignee or participant (or prospective assignee or
participant) so long as such assignee or participant (or prospective assignee or
participant) first specifically agrees in a writing furnished to and for the
benefit of the Credit Parties to be bound by the terms of this Section 9.14; or
(v) to the extent that the Borrower shall have consented in writing to such
disclosure. Nothing set forth in this Section 9.14
42
<PAGE> 48
shall obligate the Administrative Agent or any Lender to return any materials
furnished by the Credit Parties.
9.15 Source of Funds.
Each of the Lenders hereby represents and warrants to the Borrower that
at least one of the following statements is an accurate representation as to the
source of funds to be used by such Lender in connection with the financing
hereunder:
(a) no part of such funds constitutes assets allocated to
any separate account maintained by such Lender in which any employee
benefit plan (or its related trust) has any interest;
(b) to the extent that any part of such funds constitutes
assets allocated to any separate account maintained by such Lender,
such Lender has disclosed to the Borrower the name of each employee
benefit plan whose assets in such account exceed 10% of the total
assets of such account as of the date of such purchase (and, for
purposes of this subsection (b), all employee benefit plans maintained
by the same employer or employee organization are deemed to be a single
plan);
(c) to the extent that any part of such funds constitutes
assets of an insurance company's general account, such insurance
company has complied with all of the requirements of the regulations
issued under Section 401(c)(1)(A) of ERISA; or
(d) such funds constitute assets of one or more specific
benefit plans which such Lender has identified in writing to the
Borrower.
As used in this Section 9.15, the terms "employee benefit plan" and "separate
account" shall have the respective meanings assigned to such terms in Section 3
of ERISA.
9.16 Conflict.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit Document, on
the other hand, this Credit Agreement shall control.
[Signature Page to Follow]
43
<PAGE> 49
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Credit Agreement to be duly executed and delivered as of the date first
above written.
BORROWER: RAILWORKS CORPORATION,
a Delaware corporation
By: /s/ Michael R. Azarela
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President and
Chief Financial Officer
GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC.,
- ---------- a Pennsylvania corporation
ANNEX RAILROAD BUILDERS, INC.,
an Indiana corporation
COMSTOCK HOLDINGS INC.,
a Delaware corporation
COMTRAK CONSTRUCTION, INC.,
a Georgia corporation
CONDON BROTHERS, INC.,
a Washington corporation
CPI CONCRETE PRODUCTS INCORPORATED,
a Tennessee corporation
H.P. MCGINLEY INC.,
a Pennsylvania corporation
KENNEDY RAILROAD BUILDERS, INC.,
a Pennsylvania corporation
L.K. COMSTOCK & COMPANY, INC.,
a New York corporation
MERIT RAILROAD CONTRACTORS, INC.,
a Missouri corporation
MIDWEST CONSTRUCTION SERVICES, INC.,
an Indiana corporation
MINNESOTA RAILROAD SERVICE, INC.,
a Tennessee corporation
NEW ENGLAND RAILROAD CONSTRUCTION CO., INC.,
a Connecticut corporation
By: /s/ Michael R. Azarela
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
1
<PAGE> 50
NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC.,
a Michigan corporation
R. & M. B. RAIL CO., INC.,
an Indiana corporation
RAILCORP, INC.,
an Ohio corporation
RAILROAD SERVICE, INC.,
a Nevada corporation
RAILROAD SPECIALTIES, INC.,
an Indiana corporation
SOUTHERN INDIANA WOOD PRESERVING CO., INC.,
an Indiana corporation
U.S. TRACKWORKS, INC.,
a Michigan corporation
U.S. RAILWAY SUPPLY, INC.,
an Indiana corporation
WM. A. SMITH CONSTRUCTION CO., INC.,
a Texas corporation
WM. A. SMITH RERAILING SERVICES, INC.,
a Texas corporation
By: /s/ Michael R. Azarela
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Guarantors
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as Administrative Agent
By: /s/ Monica R. Brandes
-----------------------------------------
Name: Monica R. Brandes
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ Robert J. Bauer
-----------------------------------------
Name: Robert J. Bauer
Title: Vice President
BANKERS TRUST COMPANY
By: /s/ Mary Kay Coyle
-----------------------------------------
Name: Mary Kay Coyle
Title: Managing Director
2
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF RAILWORKS CORPORATION
<TABLE>
<CAPTION>
NAMES UNDER WHICH
NAME OF COMPANY STATE OF INCORPORATION DOING BUSINESS
- --------------- ---------------------- -------------------
<S> <C> <C>
Alpha-Keystone Engineering, Inc. Pennsylvania
- ------------------------------------------------------------------------------------------------------------------------------------
Alpha-Keystone, Inc. Ohio
- ------------------------------------------------------------------------------------------------------------------------------------
Armcore Acquisition Corp. Delaware
- ------------------------------------------------------------------------------------------------------------------------------------
Armcore Railroad Contractors, Inc. (subsidiary of Illinois
Armcore Acquisition Corp.)
- ------------------------------------------------------------------------------------------------------------------------------------
Annex Railroad Builders, Inc. Indiana
- ------------------------------------------------------------------------------------------------------------------------------------
Comstock Holdings Inc. Delaware
- ------------------------------------------------------------------------------------------------------------------------------------
L.K. Comstock & Company, Inc. New York
(subsidiary of Comstock Holdings Inc.)
- ------------------------------------------------------------------------------------------------------------------------------------
Comtrak Construction, Inc. Georgia
- ------------------------------------------------------------------------------------------------------------------------------------
Condon Brothers, Inc. Washington
- ------------------------------------------------------------------------------------------------------------------------------------
CPI Concrete Products Incorporated Tennessee
- ------------------------------------------------------------------------------------------------------------------------------------
FCM Rail, Ltd. Michigan
- ------------------------------------------------------------------------------------------------------------------------------------
F&V Metro RW, Inc. Delaware
- ------------------------------------------------------------------------------------------------------------------------------------
F&V Metro Contracting Corp. (subsidiary of F&V New York
Metro RW, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------------
Impulse Enterprises of New York, Inc. (subsidiary of F&V New York
Metro RW, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------------
V&R Electrical Contractors, Inc. (subsidiary of F&V New York
Metro RW, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex RW, Inc. Delaware
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex Holding Corporation (subsidiary of Gantrex Delaware
RW, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex Corporation (subsidiary of Gantrex Holding Pennsylvania
Corp)
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex Systems, Inc. (subsidiary of Gantrex RW, Delaware
Inc. and Gantrex Holding Corp)
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex RW Company (subsidiary of Gantrex RW, Nova Scotia unlimited
Inc.) liability company
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex Holdings-Canada, Inc. ("GHC")(subsidiary of Nova Scotia
Gantrex RW Co) corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex Group Ltd (subsidiary of GHC) Ontario corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex Limited (subsidiary of Gantrex Group Ltd) Ontario corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Gantrex Systems Limited (subsidiary of Gantrex Ontario corporation
Group Ltd)
- ------------------------------------------------------------------------------------------------------------------------------------
Norapco Limited (subsidiary of GHC) Ontario corporation
- ------------------------------------------------------------------------------------------------------------------------------------
H.P. McGinley, Inc. Pennsylvania
- ------------------------------------------------------------------------------------------------------------------------------------
Kennedy Railroad Builders, Inc. Pennsylvania
- ------------------------------------------------------------------------------------------------------------------------------------
Merit Railroad Contractors, Inc. Missouri
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Midwest Construction Services, Inc. Indiana
- ----------------------------------------------------------------------------------------------------------
MidWest RW, Inc. Delaware
- ----------------------------------------------------------------------------------------------------------
MidWest Railroad Construction & Maintenance Wyoming
Corporation of Wyoming (subsidiary of Mid West
RW, Inc.)
- ----------------------------------------------------------------------------------------------------------
Minnesota Railroad Service, Inc. Tennessee
- ----------------------------------------------------------------------------------------------------------
New England Railroad Construction Co., Inc. Connecticut NERRCO, Inc.
- ----------------------------------------------------------------------------------------------------------
Northern Rail Service and Supply Company, Inc. Michigan
- ----------------------------------------------------------------------------------------------------------
R. & M. B. Rail Co., Inc. Indiana Mize Construction Company
- ----------------------------------------------------------------------------------------------------------
Railcorp Inc. Ohio
- ----------------------------------------------------------------------------------------------------------
Railroad Service, Inc. Nevada Brace and Matson, Inc.;
Brace and Matson, Co.
- ----------------------------------------------------------------------------------------------------------
Railroad Specialties, Inc. Indiana
- ----------------------------------------------------------------------------------------------------------
Sheldon Electric, Inc. Delaware
- ----------------------------------------------------------------------------------------------------------
Southern Indiana Wood Preserving Co., Inc. Indiana
- ----------------------------------------------------------------------------------------------------------
U. S. Trackworks, Inc. Michigan
- ----------------------------------------------------------------------------------------------------------
U. S. Railway Supply, Inc. Indiana
- ----------------------------------------------------------------------------------------------------------
Wm. A. Smith Construction Co., Inc. Texas
- ----------------------------------------------------------------------------------------------------------
Wm. A. Smith Rerailing Services, Inc. Texas
- ----------------------------------------------------------------------------------------------------------
</TABLE>
