<PAGE> 1
Page 1 of 95
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ ------------
COMMISSION FILE NUMBER: 0-24639
RAILWORKS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2382378
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1104 KENILWORTH DRIVE, SUITE 301
BALTIMORE, MARYLAND 21204
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (410) 512-0500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 February 15, 2000 (based on the closing sale price of the
Registrant's Common Stock as reported on The Nasdaq Stock Market on such date)
was approximately $156.8 million.
As of February 15, 2000, the registrant had 14,347,593 shares of Common
Stock outstanding.
<PAGE> 2
Page 2 of 95
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1999 are incorporated by references in Part I, II and IV. Portions
of the Proxy Statement for the Annual Meeting of Stockholders to be held on May
18, 2000 are incorporated by reference in Part III.
================================================================================
<PAGE> 3
Page 3 of 95
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
-------------
PART I
<S> <C> <C>
Item 1. Business...................................................................... 2
Item 2. Properties.................................................................... 13
Item 3. Legal Proceedings............................................................. 13
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....................................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................... 16
Item 8. Financial Statements and Supplementary Data................................... 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 17
Item 11. Executive Compensation........................................................ 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................ 17
Item 13. Certain Relationships and Related Transactions................................ 17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................................... 18
</TABLE>
<PAGE> 4
Page 4 of 95
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, "we," "us," "our" or "RailWorks"
refers to the business of RailWorks Corporation and its subsidiaries.
COMPANY OVERVIEW
Our company was formed in March 1998. In August 1998, we acquired in
separate concurrent transactions 14 groups of companies engaged principally in
the rail system services and products business and we consummated our initial
public offering, which we refer to as the IPO. We refer to these groups of
companies as the Founding Companies. Since August 1998 through December 31,
1999, we acquired an additional 16 companies or groups of companies.
We are a leading provider of integrated rail system services and products
to a diverse base of customers throughout the United States. We provide a full
range of rail-related services and products on a "turnkey" basis throughout
North America and offer rail system solutions under the "RailWorks" brand. We
provide:
- track construction, rehabilitation, repair and maintenance;
- installation of electrification, communication and signaling
equipment and systems for rail applications; and
- related products and services.
We provide these services to a wide variety of customers, including Class I,
regional and shortline railroads, passenger rail and rail transit authorities
and commercial and industrial companies. We also provide non-rail products and
services such as electrical contracting, bridge and highway support structures
and related concrete products to public agencies, commercial, power and
industrial customers.
SERVICES AND PRODUCTS
We operate in three business lines:
- transit services;
- rail track services; and
- rail products and supplies.
Information with respect to segment operations and segment financial
conditions as of and for the year ended December 31, 1999 is set forth in Note
18 of our Consolidated Financial Statements, which is incorporated herein by
reference.
-2-
<PAGE> 5
Page 5 of 95
Transit Services
Our transit services business includes all products and services that we
provide to rail-based public transit agencies and authorities in various U. S.
metropolitan markets. We typically contract with these agencies to install:
- electric train traction power systems (by means of third rail or
overhead catenary wiring),
- train control and signal systems,
- train, station and control center communications systems,
- general electrical installations for lighting and other
applications, and
- tunnel and station track.
Projects for new public transit lines generally include the installation of all
of these systems. These projects may also involve track installation including
excavation, grading, paving and drainage improvements as well as other
rehabilitation projects.
In addition, we leverage our knowledge of transit systems to provide
cost-effective mechanical services, including installation of heating and air
conditioning systems, ventilating and pump rooms, fan chambers, elevators and
escalators. We have experience with rubber tired vehicular people mover systems,
for which we have installed concrete guided trackway, power guide beam, central
guidance rail, walkway and handrails.
The duration and size of our transit contracts vary greatly depending on
the scope of the project. Contracts for work on large-scale transit projects can
exceed $100 million in value and take four or more years to complete. We have
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. We generally
perform our services as either a prime contractor directly to the transit
agencies or as a subcontractor to large civil engineering companies 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, we focus our
business to:
- provide accurate bid estimating to both win contracts and ensure a
profit, and
- monitor costs to ensure that projects are completed on time and within
budget.
Our bid preparation and submission process is highly involved and draws on the
expertise of many individuals within RailWorks. We carefully consider a variety
of factors, including material prices, local labor rates and practices, our
knowledge of the work site and practices of the transit authorities. We have a
rigorous project review process that continually monitors the incurred labor and
material costs against an initial plan in order to avoid overruns.
As an outgrowth of our transit-related business, we also perform
commercial real estate electrical installation work in the New York City
metropolitan area and industrial electrical installation work throughout the
United States. Contracts for these projects are pursued on an
-3-
<PAGE> 6
Page 6 of 95
opportunistic basis; that is, when we have resources available and can realize
attractive returns.
Rail Track Services
Our rail track services business consists of providing rail design,
construction and maintenance services to Class I, regional and shortline
railroads and industrial companies with on-site rail infrastructure. Rail design
is a highly specialized discipline and only a limited number of companies
provide these services. We utilize our rail design capabilities to facilitate
access to rail track projects. By having the ability to provide integrated
design-build services, we have been successful in increasing our project flow.
Our rail track services 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, we enter into annual and multi-year contracts with customers
to provide ongoing maintenance of on-site rail infrastructure. Maintenance
contracts provide recurring revenues and give us access to new track projects
from the same customer. Additional rail track services include the removal of
tracks that are no longer in use, switch grinding, railcar switching and track
equipment repair for railroads and rail transit agencies.
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:
- site preparation and grading,
- the laying of gravel ballast or concrete surfacing to provide a
solid track fixation medium,
- the positioning of cross ties,
- securing rail with high precision using metal plates, spikes and
clamps,
- installing complex track crossings and turnouts, and
- installing other track related systems such as signal,
communications and automatic train control and safety devices.
We believe that our ability to bundle these services on a turnkey basis gives us
a significant competitive advantage.
We provide our rail services on a nationwide basis through a network of
regional operating centers. In contrast, most of our competitors in this market
are focused on one geographic region. We believe that this results in a
competitive advantage for us due to our presence in virtually all regional
markets and our ability to direct equipment and labor resources to regions with
higher demand. We also maintain track and track material inventory at most of
our locations. By coordinating information across our network we are able to
maximize inventory utilization and improve supply for projects in different
regions.
-4-
<PAGE> 7
Page 7 of 95
Rail Products and Supplies
Our rail products and supplies consist of specialty wood and concrete
products, rail fastening systems and specialized track maintenance services. We
sell our rail products and supplies directly to contractors (including our own
subsidiaries) and to Class I, regional and shortline railroads that perform
their own track installation and maintenance. Some of our products are used in
non-rail applications such as highway construction (precast concrete structures)
and decorative landscaping (used wood ties).
We provide full service handling of specialty wood products used by
railroads. Our wood products, which we manufacture in four of our facilities,
include cross ties and switch and bridge timbers. Our wood treating operations
consist of pressure-treating pre-cut hardwood beams to provide weather-proofing.
Treated cross ties and timbers are used for securing rail for tracks or
assembled to construct bridge support structures. In addition, we operate four
facilities that prepare used, treated wood products for disposition utilizing a
proprietary technology.
We manufacture concrete products, which consist primarily of pre-cast
structural components for bridges and other support structures. Our concrete
operations consist of pouring mixed concrete into large molds to create
specialized structural support components.
We also design and manufacture rail fastening systems, which are
primarily used in overhead and portal crane rail applications, and we lease rail
related construction and maintenance equipment.
Our product capabilities provide us with an advantage in supplying our
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 environmental regulations. We have also developed
strong customer relationships through product sales, particularly with Class I,
regional and shortline railroads. Additionally, by offering operating leases for
construction and maintenance equipment, we have formed additional industry
relationships, created an additional revenue source and established an avenue to
utilize our equipment more fully during its operating life.
ACQUISITION PROGRAM
We believe that the combination of our acquisition expertise and the
highly fragmented nature of the rail services and products industry provides us
with significant acquisition opportunities. We identify acquisition candidates
by leveraging the relationships of our experienced operational managers and
utilizing our dedicated acquisitions team. We focus on acquiring companies that
have a strategic fit, provide us with cost synergies, complement our geographic
presence, and demonstrate a willingness to learn and share best practices
through open communications. After an initial screening, we evaluate each
acquisition candidate through our due diligence process, which includes detailed
financial and operational reviews. During the due diligence process, we often
identify a number of areas in which we expect to realize efficiencies during the
integration process. We offer acquisition candidates several benefits,
including:
-5-
<PAGE> 8
Page 8 of 95
- 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 our acquisition program include:
Retain and Provide Incentives to Existing Management. We seek
acquisitions of successful companies whose senior managers will remain as our
employees and continue to operate their respective businesses on a local level.
We motivate these managers and align their interests with our interests through:
- employment agreements,
- shares of common stock as a portion of the acquisition
consideration, and
- a structured earnout program which is tied to the acquired entity
meeting specific earnings targets.
Leverage Industry Reputation and Contacts. We use existing industry
relationships established by our operating companies and our management team to
develop a broad base of potential acquisitions. We intend to remain actively
involved in industry organizations on local and national levels, working with
independent companies to support issues of interest to us.
Acquisition Consideration. In the course of implementing our acquisition
strategy, we have typically used cash and performance-based earn-outs as
consideration for the acquired businesses. In the future, we expect to use a
combination of cash, common stock, promissory notes and performance-based
earn-outs as consideration for acquired businesses.
During 1999, we acquired the following companies:
<TABLE>
<CAPTION>
ACQUISITION NAME OF FISCAL 1998
DATE ACQUIRED COMPANY REVENUE ($) HEADQUARTERS BUSINESS LINE
- ---------------------- -------------------------------- --------------- ----------------- ------------------
(in millions)
<S> <C> <C> <C> <C>
January 1999 Gantrex Group.................. 13.9 Ajax, Ontario, Rail products
Canada and supplies
January 1999 Mid West Railroad Construction
and Maintenance Corporation
of Wyoming..................... 13.2 Salt Lake City, Rail track
UT services
January 1999 FCM Rail, Ltd.................. 4.9 Grand Blanc, MI Rail products
and supplies
</TABLE>
-6-
<PAGE> 9
Page 9 of 95
<TABLE>
<CAPTION>
ACQUISITION NAME OF FISCAL 1998
DATE ACQUIRED COMPANY REVENUE ($) HEADQUARTERS BUSINESS LINE
- ---------------------- -------------------------------- --------------- ----------------- ------------------
(in millions)
<S> <C> <C> <C> <C>
March 1999 F&V Metro Contracting Corp. 46.0 Farmingdale, NY Transit services
and Affiliates, currently
known as RWKS Transit, Inc.....
April 1999 M-Track Enterprises, Inc....... 10.6 Bronx, NY Transit services
April 1999 McCord Treated Wood, Inc./
Birmingham Wood, Inc........... 11.1 Warrior, AL Rail products and
supplies
May 1999 Pacific Northern Rail
Contractors.................... 21.9 Abbotsford, Rail track
British services
Columbia,
Canada
June 1999 Neosho Incorporated and
Affiliates..................... 80.7 Topeka, KS Rail track
services
June 1999 Earl Campbell Construction
Company, Inc................... 7.4 Houston, TX Rail track
services
August 1999 Wood Waste Energy, Inc......... 6.0 St. Louis, MO Rail products and
supplies
October 1999 W. T. Byler Co., Inc........... 56.2 Houston, TX Rail track
services
December 1999 An operating division of
Harsco Corporation (1)......... 6.2 Syracuse, NY Rail track
services
December 1999 Twigg Corporation.............. 29.4 Upper Transit services
Marlborough, MD
December 1999 Dura-Wood, LLC................. 16.0 Alexandria, LA Rail products and
supplies
</TABLE>
- -----------------------
(1) We acquired certain assets that are related to the manufacture and
sale of rail and switch grinders and the furnishing of related
services from Harsco Corporation, a Delaware corporation, and related
companies. These assets were previously owned by Pandrol Jackson,
Inc., a Delaware corporation.
-7-
<PAGE> 10
Page 10 of 95
SOURCES OF SUPPLY
Our transit services group purchases equipment from a limited number of
suppliers. These suppliers include primarily manufacturers of communications,
electrification and signaling and control equipment and systems for rail
applications. Our rail track services business source rail and other track
materials (primarily metal components such as plates and spikes) from
- the reclamation of existing track that is no longer in use,
- track materials brokers and
- manufacturers.
We purchase 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 "re-lay" rail. Re-lay 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. We
also purchase a large volume of re-lay rail that is refurbished by third parties
and resold.
Similarly, we regularly purchase entire sections of track that are
removed and subsequently disassembled at our facilities. We inspect the various
track components -- rail, ties and accessories -- and place items into our
inventory (either in their "as removed" condition or after being refurbished by
third parties) or sell these items for scrap.
We also process creosote-treated wooden ties. These operations include
the purchase of raw lumber, trimming the lumber to specified sizes, pressurized
impregnation of the lumber with creosote preservative and finishing of the ties
(which would include the pre-drilling of spike holes and the attachment of
plates, as specified by the customer).
We believe we can purchase materials in sufficient quantities to permit
us to realize purchasing economies and discounts from our 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 we
will be able to recoup any such increases by increasing the prices of our
products. Further, a reduction in supply of lumber, steel or copper due to
increased demand or other factors could have an adverse effect on our business,
financial condition and results of operations.
SALES AND MARKETING
We maintain a targeted national sales program to assist in the
development of the business of each of our operating companies. The focus of
this initiative is on the Class I railroads and other large industrial companies
with facilities in several geographic regions. Prior to their acquisition by us,
our operating companies had been unable to serve such customers on a
comprehensive, nationwide basis. Our expansive geographic coverage enables
customers to use our services and products in multiple locations rather than
dealing with numerous regional or local companies. In addition, our ability to
offer electrical installation services together with rail
-8-
<PAGE> 11
Page 11 of 95
construction, rehabilitation, repair and maintenance services and related
products provides us with opportunities to cross-sell our services to large
industrial companies.
We have achieved significant synergies in our marketing programs. We have
developed and will continue to refine cross-selling programs under which:
- our design and engineering groups provide timely leads to our rail
services, product supply and electrical installation subsidiaries,
- our electrical signaling and communications subsidiaries, which
have previously used third parties for track engineering and
construction, use other subsidiary operating companies for these
projects, and
- our rail services subsidiaries contract with other subsidiary
operating companies for signaling, communication and electrical
installation services.
Similarly, our product supply subsidiaries have, over the years,
developed long-term relationships with the Class I railroads and large
industrial companies, and we believe that these relationships provide an
attractive basis for marketing our installation and maintenance services.
BIDDING AND CONTRACTS
Our transit services group derives a substantial portion of its revenue
from contracts entered into through a competitive bidding process. Public
agencies, such as the New York City Transit Authority, which we refer to as
"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, we typically enter into a contract with the customer. The activities
of our rail track services and rail products and supply groups usually 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, net worth and work in progress. The bond provides the customer
with insurance in the event that the company is unable to complete the project.
Our size, as compared to our operating companies on a stand-alone basis,
facilitates increased bonding limits for each operating company and thereby
improves their ability to bid on and undertake significantly larger projects. We
believe that our increased bonding capacity permits us to bid on and undertake
more projects than smaller companies in our industry.
CUSTOMERS
The following table lists our top four customers for 1999 (by dollar
value) for each of our lines of business:
<TABLE>
<S> <C>
TRANSIT SERVICES:
New York City Transit Authority $83,026,000
New York City Department of Transportation 24,745,000
Tishman Interiors Corporation 18,556,000
Judlau Contracting, Inc. 12,108,000
</TABLE>
-9-
<PAGE> 12
Page 12 of 95
<TABLE>
<S> <C>
RAIL TRACK SERVICES:
Louisiana Department of Transportation $10,343,000
Union Pacific Railroad 7,324,000
Bantrel/Nova Chemicals 6,086,000
USX Corporation 4,225,000
RAIL PRODUCTS AND SUPPLIES:
Hill Brothers $ 2,864,000
South Central Florida 1,606,000
Union Pacific Railroad 1,508,000
Dement Construction 1,400,000
</TABLE>
We derived approximately 41.9% of our revenue for the year ended
December 31, 1999 from our top ten customers. Approximately 17.7% of our 1999
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. No
customer other than NYCTA accounted for more than 5.3% of our revenue for the
year ended December 31, 1999.
BACKLOG
At December 31, 1999, our total order backlog was approximately $750
million, of which 72.6% represents backlog under transit services group
contracts. At December 31, 1998, our total order backlog was approximately
$350 million, of which 78.6% represented backlog under transit services group
contracts. Our backlog is not necessarily indicative of total future revenue.
We expect to recognize revenue of approximately 60% of our ending 1999
backlog during 2000.
COMPETITION
The rail system services and products industry is highly competitive, and
projects are often awarded through competitive bidding. We compete with other
rail system services, rehabilitation and maintenance companies, electrical
contractors and suppliers of products. Certain competitors have significantly
greater resources than we do, provide a broad range of services and products and
have sufficient bonding capacity to undertake large projects. We compete on the
basis of our breadth of services and products, ability to take on large projects
and nationwide presence. Any inability to compete successfully against future
competitors would have a material adverse effect on our business, results of
operations and financial condition. Moreover, we may depend in part upon
opportunities for consolidation in the rail system services and products
industry in order to execute effectively our acquisition and vertical
integration strategy. If our customers do not respond favorably to our vertical
integration, they have numerous alternative sources of services and supply.
-10-
<PAGE> 13
Page 13 of 95
RISK MANAGEMENT AND SAFETY
Because our business is labor intensive, workers' compensation is a
significant operating expense for us. We could be exposed to liability for the
acts or negligence of our 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. We have adopted policies and procedures intended to
reduce our exposure to these risks.
We maintain insurance against these risks with policy limits that we
consider sufficient and consistent with industry standards. We have established
a risk management department that is responsible for claims management and the
establishment of appropriate reserves for the deductible portion of claims. We
hold regular meetings with the presidents of our operating companies at which
safety issues are discussed. We also conduct routine safety inspections of local
work sites.
EQUIPMENT
We own and maintain specialized equipment used in rail construction,
rehabilitation, repair and maintenance. This equipment may be moved between job
sites and, consequently, we are seeking to increase the sharing of equipment
between our subsidiary operating companies where it is appropriate and cost
effective. For example, during the winter months, our operating companies
located in the Northern United States could relocate their equipment to our
operating companies located in the South. Each of our subsidiary operating
companies generally performs its own equipment maintenance. We intend to manage
our equipment through our equipment management subsidiary, which will maintain a
comprehensive database that tracks the use of all of our equipment.
GOVERNMENT REGULATION
Overview. In addition to the environmental, safety and other regulations
generally applicable to all businesses, our business is impacted by regulations
that are administered by the Surface Transportation Board, which we refer to as
the STB, the successor to the Interstate Commerce Commission, which we refer to
as the ICC, the Federal Transit Administration, which we refer to as the FTA,
the Federal Railroad Administration, which we refer to as the FRA, and by
regulatory agencies in the various states in which we and our 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 our customers. Various
interests in the United States have sought and continue to seek re-imposition 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 that began functioning
on January 1, 1996. The ICC Termination Act changed the procedure and timing for
federal approval of railroad projects,
-11-
<PAGE> 14
Page 14 of 95
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.
Transit Regulations. The FTA regulates certain aspects of rail transit
operations and provides significant funding for rail transit construction and
operations. On June 9, 1998, the President signed TEA 21, a six-year surface
transportation program that represents a significant development in federal
funding of rail transit programs. 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% more than the 1991 Intermodal
Surface Transportation Efficiency Act, whose funding has expired.
State Regulatory Agencies. State regulatory agencies no longer have
authority to engage in economic regulation of railroads that are part of the
intrastate network. State and local governments generally retain jurisdiction
over local rail safety matters, such as the installation of grade crossings and
grade crossing warning devices.
ENVIRONMENTAL MATTERS
Our 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 our operations relate to the use of creosote to treat
lumber, and the generation, storage, transportation, treatment and disposal of
solid and hazardous wastes. We believe that our operations have all required
environmental permits and currently are in compliance, in all material respects,
with applicable regulatory requirements.
We have had environmental assessments performed for recent acquisitions.
Based on these reports and available information, we are not aware of any
significant environmental exposures or claims against us. However, the
historical and current uses of our facilities may have resulted in spills or
releases of various hazardous materials, which now, or in the future, could
require remediation or special monitoring. We also may be subject to
requirements related to remediation of hazardous materials that have been
released into the environment at properties that we own or operate, or owned or
operated in the past or at properties to which we send, 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, 1999, we employed approximately 2,500 employees. We
believe that our relations with our employees are good.
-12-
<PAGE> 15
Page 15 of 95
Approximately 55% of our employees are members of certain labor unions
and are employed pursuant to collective bargaining agreements. Certain of our
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 our customers only hire unionized labor. Our largest
collective bargaining agreement, covering approximately 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, we have not experienced any work
stoppages in the past five years.
INFORMATION TECHNOLOGY SYSTEMS
We are in the process of implementing integrated information technology
systems that will be utilized by each of our 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 our financial, general ledger, payables and receivables functions.
In addition, we will network our corporate offices to the offices of our
operating companies and will have e-mail capability at all offices. We are
currently working on the installation of these systems and, although upgrade
will be a continuous process, we expect completion of the initial installation
by December 31, 2000. Until these new systems are fully operational, each of our
operating companies will continue using the information systems that are
currently being used.
ITEM 2. PROPERTIES
Our corporate offices currently consist of approximately 5,500 square
feet of leased space in a suburb of Baltimore, Maryland. On or about April 1,
2000, the Company will relocate its corporate offices to a different suburban
Baltimore site consisting of approximately 15,000 square feet of leased space.
In addition to our corporate offices, we lease or own numerous facilities
throughout the United States and Canada. These facilities consist of local
offices, storage yards, distribution facilities, warehouses and wood processing
plants. We believe our existing facilities are sufficient to meet the existing
demand for our services. We consider our facilities to be in good condition.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in routine legal proceedings
incidental to the conduct of our business. In the opinion of management, the
litigation to which we are currently a party, is not likely, individually or in
the aggregate, to have a material adverse effect on our business, financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-13-
<PAGE> 16
Page 16 of 95
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ------------------------------------ ----- ------------------------------
<S> <C> <C>
John G. Larkin...................... 44 Chairman of the Board, Chief
Executive Officer and Director
since inception of Railworks
in March 1998; from December
1994 to February 1998,
Managing Director of BT Alex.
Brown Incorporated;
Michael R. Azarela.................. 42 Executive Vice President,
Chief Financial Officer and
Director since May 1998; from
February 1998 to August 1998,
Chief Executive Officer of L.
K. Comstock & Company, Inc.;
from May 1994 to February
1998, Senior Vice President
and Chief Financial Officer of
Comstock Group Inc. and Spie
Group Inc.
Kenneth R. Burk..................... 40 Executive Vice President and
Chief Operating Officer since
May 1999 and Director since
July 1999; from July 1994 to
May 1999, Senior Vice
President and Chief Financial
Officer of Dick Corporation.
Gene J. Cellini..................... 42 Vice President - Tax since
August, 1998; from January
1985 to August, 1998, Vice
President - Tax of L. K.
Comstock & Company Inc. and
Spie Group Inc.
William R. Donley................... 43 Vice President - Manufacturing
and Supply Group since April,
1999; from April 1998 to April
1999, Vice President - Total
Quality, Productivity and
Strategic Planning of Koppers
Industries Inc.; from October
1995 to April 1998, Vice
President and General Manager
of Koppers Industries Inc.
Timothy Fuller...................... 37 Vice President - Information
Services since October 1999;
from May 1999 to July 1999,
Vice President & Chief
Information Officer of
Creditrust Corporation; from
October 1991 to April 1999,
Director of Information
Services of Crown Central
Petroleum Company.
John Kennedy........................ 61 Vice President, Business
Development since July 1999
and Director since March 1998;
from January 1999 to July
1999, Vice President and Chief
Operating Officer - Track
Contractors; from March 1998
to January 1999, Vice
President and Chief Operating
Officer; from June 1965 to
February 1998, President of
Kennedy Railroad Builders,
Inc.
</TABLE>
-14-
<PAGE> 17
Page 17 of 95
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ------------------------------------ ----- ------------------------------
<S> <C> <C>
Harold C. Kropp, Jr................. 42 Vice President - Chief
Accounting Officer since March
1998; from May 1996 to March
1998, valuation specialist at
Larson, Kellett & Associates,
P. C.; from September 1994 to
May 1996, controller of Eck
Realty Company.
C. William Moore.................... 52 Vice President - Transit
Systems Group since September,
1999 and President and CEO of
L. K. Company & Company, Inc.
since April 1999; from 1991 to
September, 1999, founder and
principal of Peninsula
Associates, a consulting firm.
John P. Nuzzo....................... 52 Vice President - Risk
Management since August 1998;
from November 1992, Vice
President - Administration of
L. K. Comstock & Company, Inc.
Michael P. Rivera................... 53 Vice President - Corporate
Counsel since November 1999;
from August 1997 to March
1999, Vice President & General
Counsel of QuesTech, Inc.;
from December 1989 to June
1997, Vice President & General
Counsel of Union Switch &
Signal Inc.
Robert D. Wolff..................... 56 Vice President - Track Systems
Group since July 1999; from
January 1999 to July 1999,
Vice President - Western Track
Construction & Maintenance;
from 1977 to January 1999,
Chief Executive Officer of
Midwest Railroad Construction
& Maintenance Corp.
</TABLE>
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
Page 18 of 95
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information set forth under the caption "Market for Common Stock"
in our Annual Report to Stockholders for the year ended December 31, 1999 is
hereby incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data"
in our Annual Report to Stockholders for the year ended December 31, 1999 is
hereby incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Annual
Report to Stockholders for the year ended December 31, 1999 is hereby
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Quantitative
and Qualitative Disclosures About Market Risk" in our Annual Report to
Stockholders for the year ended December 31, 1999 is hereby incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of our company and our subsidiaries
included in the Annual Report to Stockholders for the year ended December 31,
1999 are hereby incorporated herein by reference:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Report of Independent Public Accountants
Notes to Consolidated Financial Statements
-16-
<PAGE> 19
Page 19 of 95
The information in Note 19 "Quarterly Results of Operations
(Unaudited)" to our financial statements in our Annual Report to Stockholders
for the year ended December 31, 1999 is hereby incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in
the subsections entitled "--What is the background of this years nominees?",
"--Who are the directors continuing in office until 200l?" and "--Who are the
directors continuing in office until 2002?" in our Proxy Statement for the
Annual Meeting of Stockholders to be held on May 18, 2000 is hereby incorporated
by reference for information regarding the directors of the Registrant. See Item
X in Part I hereof for information regarding executive officers of the
Registrant. The information under the caption "16(a) Beneficial Ownership
Reporting Compliance" in our Proxy Statement for the Annual Meeting of
Stockholders to be held May 18, 2000 is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under (1) the caption "Election of Directors" in the
subsection entitled "How are directors compensated?" and (2) the caption
"Executive Compensation" in the subsection entitled "Summary Compensation
Table," and "Employment Agreements" in our Proxy Statement for the Annual
Meeting of Stockholders to be held on May 18, 2000 is hereby incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners" in our Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2000 is hereby incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Party Transactions" in our Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2000 is hereby incorporated herein by
reference.
-17-
<PAGE> 20
Page 20 of 95
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of our company and our
subsidiaries and the Report of the Independent Auditors, included in our Annual
Report to Stockholders for the year ended December 31, 1999 are incorporated by
reference in Part II, Item 8.
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Report of Independent Public Accountants
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in Part IV of
this report:
Schedule II -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or not
required.
3. EXHIBITS
The list of exhibits to this Report are set forth on the accompanying
Index to Exhibits to this Annual Report and such list is incorporated herein by
reference.
(B) REPORTS ON FORM 8-K
One current Report on Form 8-K was filed during the quarter ended
December 31, 1999:
<TABLE>
<CAPTION>
ITEM REPORTED DATE OF REPORT
------------------------------------ -------------------
<S> <C>
Acquisition of W. T. Byler Co., Inc. November 5, 1999
</TABLE>
The following audited financials of W.T. Byler Co., Inc. were filed:
(1) Independent Auditors' Report;
-18-
<PAGE> 21
Page 21 of 95
(2) Balance Sheet as of December 31, 1998;
(3) Statement of Income for the year ended December 31, 1998;
(4) Statement of Changes in Stockholder's Equity for the year
ended December 31, 1998;
(5) Statement of Cash Flows for the year ended December 31,
1998; and
(6) Notes to the Financial Statements
The following unaudited financials of W.T. Byler Co., Inc. were filed:
(1) Balance Sheet as of September 30, 1999 and as of December
31, 1998 (audited);
(2) Statements of Income for the nine months ended September
30, 1999 and 1998;
(3) Statements of Changes in Stockholder's Equity for the nine
months ended September 30, 1999 and 1998 and
(4) Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998.
(C) See Item 14(a)(3) and separate Exhibit Index attached hereto.
(D) See Item 14(a)(2).
-19-
<PAGE> 22
Page 22 of 95
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.
RAILWORKS CORPORATION
Dated: February 25, 2000 By: /s/
---------------------------------
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 and on the dates indicated:.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------------------------------------- -------------
<S> <C> <C>
/s/
- ----------------------------------------
Michael R. Azarela Executive Vice President, Chief Financial Feb. 25, 2000
Officer and Director (Principal Financial
Officer)
/s/
- ----------------------------------------
Harold C. Kropp, Jr. Vice President and Chief Accounting Officer Feb. 25, 2000
(Principal Accounting Officer)
/s/
- ----------------------------------------
John Kennedy Vice President - Business Development Feb. 25, 2000
and Director
/s/
- ----------------------------------------
Kenneth R. Burk Vice President, Chief Operating Feb.25, 2000
Officer and Director
/s/
- ----------------------------------------
Scott D. Brace Director Feb. 25, 2000
/s/
- ----------------------------------------
Ronald W. Drucker Director Feb. 22, 2000
</TABLE>
-20-
<PAGE> 23
Page 23 of 95
<TABLE>
<S> <C> <C>
/s/
- ----------------------------------------
R.C. Matney Director Feb. 22, 2000
/s/
- ----------------------------------------
Donald P. Traviss Director Feb. 25, 2000
</TABLE>
-21-
<PAGE> 24
Page 24 of 95
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
------ ----------------------- --------
<S> <C> <C> <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)
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-4, File No. 333-53483)
4.2 -- Specimen Preferred Stock Certificate (incorporated by *
reference to Exhibit 4.2 to Registration Statement on
Form S-4, File No. 333-79649)
4.3 -- Indenture dated as of April 7, 1999 among Railworks *
Corporation, the Guarantors named therein, and First
Union National Bank, as Trustee (incorporated by
reference to Exhibit 4.5 to Registration Statement on
Form S-4, File No. 333-79649)
4.4 -- Form of 11 1/2% Senior Subordinated Notes due 2009 *
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-4, File No. 333-79649)
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)
</TABLE>
1
<PAGE> 25
Page 25 of 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
------ ----------------------- --------
<S> <C> <C> <C>
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>
2
<PAGE> 26
Page 26 of 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
------ ----------------------- --------
<S> <C> <C> <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)
</TABLE>
3
<PAGE> 27
Page 27 of 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
------ ----------------------- --------
<S> <C> <C> <C>
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)
10.24 -- Stock Purchase Agreement by and between RailWorks *
Corporation, W.T. Byler and William Troy Byler dated
as of October 1, 1999, incorporated by reference to
Exhibit 2.1 to Registrant's Current Report on Form 8-K
filed on November 5, 1999.
10.25 -- 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)
10.26 -- 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)
</TABLE>
4
<PAGE> 28
Page 28 of 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
------ ----------------------- --------
<S> <C> <C> <C>
10.27 -- 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)
10.28 -- 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 -- Amended and Restated RailWorks Corporation 1998 *
Incentive Stock Plan effective January 1, 1999
(incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q filed on
November 15, 1999)
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 -- Amended and Restated Credit Agreement dated as of *
August 5, 1999 among RailWorks Corporation, as
Borrower, Certain Subsidiaries, as Guarantors, the
Lenders named therein, Bank of America, N.A., as
Domestic Administrative Agent, Bank of America,
N.A., as Canadian Administrative Agent and First
Union National Bank, as Documentation Agent
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q filed on
November 15, 1999.
</TABLE>
5
<PAGE> 29
Page 29 of 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
------ ----------------------- --------
<S> <C> <C> <C>
10.34 -- Amendment No. 1 to the Amended and Restated Credit *
Agreement dated September 29, 1999 among RailWorks
Corporation, as Borrower, Certain Subsidiaries, as
Guarantors, the Lenders named therein, Bank of
America, N.A., as Domestic Administrative Agent and
Bank of America, N.A., as Canadian Administrative
Agent (incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q filed
on November 15, 1999)
10.35 -- Amendment No. 2 to the Amended and Restated Credit *
Agreement dated November 5, 1999 among RailWorks
Corporation, as Borrower, Certain Subsidiaries, as
Guarantors, the Lenders named therein, Bank of
America, N.A., as Domestic Administrative Agent and
Bank of America, N.A., as Canadian Administrative
Agent (incorporated by reference to Exhibit 10.36 to
Registration Statement on Form S-4/A (File No.
333-90071)
10.36 -- Amendment No. 3 to the Amended and Restated Credit 32 - 40
Agreement dated January 25, 2000 among RailWorks
Corporation, as Borrower, Certain Subsidiaries, as
Guarantors, the Lenders named therein, Bank of
America Canada, as Canadian Administrative Agent and
Bank of America, N.A., as Domestic Administrative
Agent.
10.37 -- Term Loan Agreement dated as of November 5, 1999 *
among RailWorks Corporation, as Borrower, Certain
Subsidiaries of the Borrower, as Guarantors, the
Lenders named herein, First Union National Bank, as
Documentation Agent and Bank of America, N.A., as
Administrative Agent (incorporated by reference to
Exhibit 10.37 to Registration Statement on Form
S-4/A (File No. 333-90071)
10.38 -- Employment Agreement between RailWorks Corporation *
and Kenneth R. Burk dated as of May 10, 1999
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q filed on
May 14, 1999)
10.39 -- Amendment dated August 4, 1999 to the Employment *
Agreement dated as of August 4, 1998 between
RailWorks Corporation and Michael R. Azarela
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q filed on
November 15, 1999)
</TABLE>
6
<PAGE> 30
Page 30 of 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
------ ----------------------- --------
<S> <C> <C> <C>
10.40 -- Amendment dated August 4, 1999 to the Employment *
Agreement dated as of August 4, 1998 between
RailWorks Corporation and John G. Larkin
(incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q filed on
November 15, 1999)
12.1 -- Statement of Computation of Ratios 41
13.1 -- Annual Report to Stockholders for the year ended *
December 31, 1999 but not "filed" except for those
portions expressly incorporated by reference into
this Annual Report on Form 10-K. 42-88
21.1 -- List of Subsidiaries 89
23.1 -- Consent of Independent Public Accountant 90
27.1 -- Financial Data Schedule (for SEC use only) 91
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)
99.2 -- Cautionary Statements relative to Forward-Looking 92-95
Statements
</TABLE>
- ----------------
* Previously filed; incorporated herein by reference.
7
<PAGE> 31
Page 31 of 95
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGES TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS (1) END OF YEAR
- --------------------------------- ------------- ------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year Ended December 31, 1999 $442 $ 0 $1,566 $(18) $1,990
Year Ended December 31, 1998 58 0 399 (15) 442
Year Ended December 31, 1997 363 0 185 (490) 58
</TABLE>
(1) Deductions, represent uncollectible balances of accounts receivable written
off, net of recoveries.
<PAGE> 1
Page 32 of 95
EXHIBIT 10.36
AMENDMENT NO. THIS AMENDMENT NO. 3 (this "Amendment") dated as of January 25,
2000, to the Credit Agreement referenced below, is by and among RAILWORKS
CORPORATION, a Delaware corporation (the "Domestic Borrower"), the Subsidiaries
of the Borrower identified herein, the Lenders identified herein, BANK OF
AMERICA CANADA, as Canadian Administrative Agent, and BANK OF AMERICA, N.A., as
Domestic Administrative Agent. Terms used herein but not otherwise defined
herein shall have the meanings provided to such terms in the Credit Agreement.
W I T N E S S E T H
WHEREAS, a $105 million credit facility has been extended to the
Domestic Borrower and certain of its Subsidiaries pursuant to the terms of that
Amended and Restated Credit Agreement dated as of August 5, 1999 (as amended and
modified, the "Credit Agreement") among the Domestic Borrower, certain of its
Subsidiaries as Canadian Borrowers, certain of its Subsidiaries as Guarantors,
the lenders identified therein, First Union National Bank, as Documentation
Agent, Bank of America Canada, as Canadian Administrative Agent, and Bank of
America, N.A., as Domestic Administrative Agent;
WHEREAS, the Domestic 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 are hereby
acknowledged, the parties agree as follows:
1. The Credit Agreement is amended in the following respects:
1.1 Clause (xvi) of the definition of "Permitted Liens" is hereby
amended to read as follows:
(xvi) Liens on real and personal property of the
Canadian Subsidiaries in favor of one or more Canadian lenders
securing the Indebtedness described under Section 8.1(j); and
1.2 Clause (j) of Section 8.1 is hereby amended to read as
follows:
(j) Indebtedness of Canadian Subsidiaries of up to
US$10 million in the aggregate owing under a Canadian working
capital credit facility extended by one or more Canadian
lenders, secured by real and personal property of the Canadian
Subsidiaries, guaranteed by the Domestic Borrower and the
Canadian Subsidiaries (but not the Domestic Subsidiaries), and
extensions and renewals thereof;
2. By execution of this Amendment, the Required Lenders authorize
and direct the Collateral Agent, on behalf of the Lenders, to enter into a
Priority Agreement between the Collateral Agent, Royal Bank of Canada and
certain of the Canadian Guarantors, substantially in the form of Exhibit A
hereto.
1
<PAGE> 2
Page 33 of 95
3. This Amendment shall be effective as of the date hereof upon
execution of this Amendment by the Credit Parties and the Required Lenders.
4. 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.
5. Each of the Guarantors (i) acknowledges and consents to all
of the terms and conditions of this Amendment, (ii) affirms all of its
obligations under the Credit Documents and (iii) agrees that this Amendment and
all documents executed in connection herewith do not operate to reduce or
discharge the Guarantors' obligations under the Credit Agreement or the other
Credit Documents.
6. The Borrower and the Guarantors, as applicable, affirm the
liens and security interests created and granted in the Credit Agreement and
the Credit Documents and agree that this Amendment shall in no manner adversely
affect or impair such liens and security interests.
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.
[Remainder of Page Intentionally Left Blank]
2
<PAGE> 3
Page 34 of 95
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment No. 3 to be duly executed and delivered as of the date first
above written.
DOMESTIC
BORROWER: RAILWORKS CORPORATION,
a Delaware corporation
By:
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President and
Chief Financial Officer
CANADIAN
BORROWERS: GANTREX RW COMPANY,
a Nova Scotia unlimited liability company
By:
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President and
Chief Financial Officer
RAILWORKS CANADA COMPANY,
a Nova Scotia unlimited liability company
By:
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President and
Chief Financial Officer
[Signature Pages Continue]
3
<PAGE> 4
Page 35 of 95
DOMESTIC
GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC.,
a Pennsylvania corporation
ANNEX RAILROAD BUILDERS, INC.,
an Indiana corporation
ARMCORE ACQUISITION CORP.,
a Delaware corporation
ARMCORE RAILROAD CONTRACTORS, INC.,
an Illinois corporation
BIRMINGHAM WOOD, INC.,
an Alabama 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
EARL CAMPBELL CONSTRUCTION COMPANY, INC.,
a Texas corporation
FCM RAIL, LTD., a Michigan corporation
F&V METRO CONTRACTING CORP.,
a New York corporation
GANTREX CORPORATION,
a Pennsylvania corporation
H.P. MCGINLEY INC.,
a Pennsylvania corporation
IMPULSE ENTERPRISES OF NEW YORK, INC.,
a New York corporation
KENNEDY RAILROAD BUILDERS, INC.,
a Pennsylvania corporation
M-TRACK ENTERPRISES, INC.,
a New York corporation
MCCORD TREATED WOOD, INC.,
an Alabama corporation
MERIT RAILROAD CONTRACTORS, INC.,
a Missouri corporation
By:
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Domestic Guarantors
[Signature Pages Continue]
4
<PAGE> 5
Page 36 of 95
MIDWEST CONSTRUCTION SERVICES, INC.,
an Indiana corporation
MIDWEST RAILROAD CONSTRUCTION & MAINTENANCE
CORPORATION OF WYOMING, a Wyoming corporation
MIDWEST RW, INC.,
a Delaware corporation
MINNESOTA RAILROAD SERVICE, INC.,
a Tennessee corporation
NEOSHO ASIA, INC.,
a Kansas corporation
NEOSHO CENTRAL AMERICA, INC.,
a Kansas corporation
NEOSHO CONSTRUCTION COMPANY, INCORPORATED,
a Kansas corporation
NEOSHO CONTRACTORS, INC.,
a Wyoming corporation
NEOSHO INCORPORATED,
a Kansas corporation
NEOSHO INTERNATIONAL, INC.,
a Kansas corporation
NEW ENGLAND RAILROAD CONSTRUCTION CO., INC.,
a Connecticut corporation
NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC.,
a Michigan corporation
NEOSHO RAILWAY SHOPS, INC.,
a Kansas corporation
R.& M. B. RAIL CO., INC.,
an Indiana corporation
RAILCORP, INC.,
an Ohio corporation
RAILROAD RESOURCES, INC.,
a Missouri corporation
RAILROAD SERVICE, INC.,
a Nevada corporation
RAILROAD SPECIALTIES, INC.,
an Indiana corporation
SOUTHERN INDIANA WOOD PRESERVING CO., INC.,
an Indiana corporation
By:
-----------------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Domestic Guarantors
[Signature Pages Continue]
5
<PAGE> 6
Page 37 of 95
U.S. RAILWAY SUPPLY, INC.,
an Indiana corporation
U.S. TRACKWORKS, INC.,
a Michigan corporation
V&R ELECTRICAL CONTRACTORS, INC.,
a New York corporation
WM. A. SMITH CONSTRUCTION CO., INC.,
a Texas corporation
WM. A. SMITH RERAILING SERVICES, INC.,
a Texas corporation
By:
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Domestic Guarantors
L.K. COMSTOCK & COMPANY, INC.,
a New York corporation
By:
-----------------------------------------
Name: C. William Moore
Title: Chief Executive Officer and President
F&V METRO RW, INC.,
a Delaware corporation
By:
-----------------------------------------
Name: John P. Nuzzo
Title: Assistant Secretary
GANTREX RW, INC.,
a Delaware corporation
GANTREX SYSTEMS, INC.,
a Delaware corporation
RAILWORKS CANADA, INC.
a Delaware corporation
By:
-----------------------------------------
Name: John P. Nuzzo
Title: Secretary of each of the foregoing
Domestic Guarantors
By:
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Domestic Guarantors
[Signature Pages Continue]
6
<PAGE> 7
Page 38 of 95
CANADIAN
GUARANTORS: GANTREX GROUP, LTD.,
an Ontario corporation
GANTREX HOLDINGS-CANADA, INC.,
a Nova Scotia corporation
GANTREX LIMITED,
an Ontario corporation
GANTREX SYSTEMS LIMITED,
an Ontario corporation
PACIFIC NORTHERN RAIL CONTRACTORS CORP.,
a British Columbia company
PACIFIC NORTHERN RAIL HOLDINGS LTD.,
a British Columbia company
PACIFIC NORTHERN RAIL RW, INCORPORATED,
a Nova Scotia corporation
PNR LEASING LTD.,
a British Columbia company
PNR INVESTMENTS LTD.,
a British Columbia company
By:
-----------------------------------------
Name: Michael R. Azarela
Title: Executive Vice President of each
of the foregoing Canadian Guarantors
[Signature Pages Continue]
7
<PAGE> 8
Page 39 of 95
LENDERS: BANK OF AMERICA, N.A.,
individually in its capacity as a Lender
and in its capacity as Domestic Administrative Agent
By:
---------------------------------------------------
Name:
Title:
BANK OF AMERICA CANADA,
individually in its capacity as a Lender
and in its capacity as Canadian Administrative Agent
By:
---------------------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By:
---------------------------------------------------
Name:
Title:
SUMMIT BANK
By:
---------------------------------------------------
Name:
Title:
FLEET BANK, N.A.
By:
---------------------------------------------------
Name:
Title:
KEYBANK NATIONAL ASSOCIATION
By:
---------------------------------------------------
Name:
Title:
BANK ONE OF MICHIGAN
By:
---------------------------------------------------
Name:
Title:
[Signature Pages Continue]
8
<PAGE> 9
Page 40 of 95
M&T BANK
By:
-----------------------------------------
Name:
Title:
CONGRESS FINANCIAL CORPORATION [CANADA]
By:
-----------------------------------------
Name:
Title:
9
<PAGE> 1
Page 41 of 95
EXHIBIT 12.1
RAILWORKS CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997, 1996 AND 1995
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations ..... $ 20,086 $(12,847) $ 1,428 $ 58 $(19,972)
Add (deduct):
Income tax .............................. 11,063 1,472 1,198 500 150
-------- -------- -------- -------- --------
Sub-total .......................... 31,149 (11,375) 2,626 558 (19,822)
Interest and other financial charges .... 19,781 2,334 1,761 2,023 871
Amortization of deferred financing costs 972 224 -- -- --
Interest factor attributable to rentals . 1,627 762 671 882 792
-------- -------- -------- -------- --------
Earnings as adjusted ......................... $ 53,529 $ (8,055) $ 5,058 $ 3,463 $(18,159)
======== ======== ======== ======== ========
Fixed charges from above ..................... $ 22,380 $ 3,320 $ 2,432 $ 2,905 $ 1,663
======== ======== ======== ======== ========
Ratio of earnings, as adjusted, to total fixed
charges ...................................... 2.4 * 2.1 1.2 *
</TABLE>
* Earnings were inadequate to cover fixed charges by $11,375 in 1998 and
$19,822 in 1995.
1
<PAGE> 1
Page 42 of 95
EXHIBIT 13.1
ANNUAL REPORT TO STOCKHOLDERS
Mission Statement
Founded in March of 1998, RailWorks Corporation is an integrated network of
companies providing construction and maintenance services, materials and
products to the rail industry throughout North America.
Our mission is three-fold: to furnish customers with the most comprehensive
range of solutions; to provide growth opportunities for our employees; and to
create value consistently for our shareholders.
By taking full advantage of rail infrastructure growth drivers and its own
proven acquisition model, RailWorks is positioning itself as the continent's
premier rail system solutions integrator.
RailWorks. Way Ahead.
1
<PAGE> 2
Page 43 of 95
Chairman's Letter
The underlying market dynamic against which RailWorks was formed in March 1998
has not changed. If anything, it has intensified. Class I and regional railroads
continue to look for innovative outsourced solutions to infrastructure
maintenance, rehabilitation and construction challenges. Transit authorities are
planning and designing the rehabilitation, extension and new start projects that
will revitalize rail transit throughout the United States, and industries
continue to invest in track infrastructure to maintain logistics systems that
are competitive on a world scale basis.
What has changed is our ability to actively penetrate and capitalize on the
opportunities this dynamic affords, as evidenced by the tripling of our backlog
to over $750 million since our initial public offering, and the effective
doubling of our business through internal growth and acquisitions. This is a
direct result of establishing an infrastructure and management process designed
to optimize operations without stifling entrepreneurial spirit. Thus we are well
on our way to becoming a fully integrated organization offering a vast array of
services to the industry across an entire continent.
The TEA-21 factor continues to play a large role in our strategy. The Act frees
up 50 percent more federal funding for projects which are a perfect fit for our
capabilities: the rehabilitation of old urban transit systems (such as New York
City Transit Authority); the extension and rehabilitation of systems funded in
the 70's (for example the Washington D.C. Metro, Atlanta's MARTA, San
Francisco's BART); and the extension of ISTEA funded rail transit (i.e: those
systems inaugurated by the TEA 21's predecessor act e.g. Portland Tri-Met,
Dallas' DART System, St. Louis' MetroLink Light Rail System). Additionally, such
funding will provide many new rail transit projects in cities such as
Minneapolis, Seattle and Harrisburg -- with needs in trackwork, signals,
traction power and communications -- all of which are our specialties.
Over the past year, we believe RailWorks has become the premier source for North
America's right-of-way railroad resources, targeting Class I Railroads, regional
railroads, rail transit authorities and rail-served industrial operating units.
Reinforced by a strong management team, a regional "hub-and-spoke"
organizational structure and a common systems platform, our companies whether
founder members or recent acquisitions -- function as part of a seamless,
integrated network.
Accordingly, we expect our position to become even more formidable throughout
2000 and beyond, enabling us to expand our integrated operations, acquire more
companies that match our overall strategic objectives, and continue to optimize
each and every opportunity. All of which is good news for the company, for the
industry and -- of course -- for our shareholders.
2
<PAGE> 3
Page 44 of 95
Corporate Overview
RailWorks Corporation is the leading provider of integrated services and
products for railroad, rail transit and industrial rail rights-of-way. Anchored
by a combination of 14 founding member companies with an average operating
history of over 30 years, RailWorks comprehensive network of rail-related
services and products now serves the entire continental United States and
Alaska, with a collective revenue run rate currently in excess of $650 million.
RailWorks has put in place an experienced management team with extensive
backgrounds in supplying goods and services to railroads, rail transit agencies
and industrial rail system operators and performing complex projects involving
installation of track, power, signal and similar systems. This considerable
collective industry experience and business acumen, allied to superior cash flow
and borrowing capacity, has enabled RailWorks to establish the organizational
infrastructure which makes the company the first to consolidate the services and
products industry into a single national provider network.
This framework has also enabled us to attain -- and in some cases, surpass
- -- the strategic objectives outlined a year ago: further expansion, based on
continuing internal growth of the founding and acquired companies,
synergy-driven growth through their diverse customer base and the continued
pursuit of our strategic acquisition program.
3
<PAGE> 4
Page 45 of 95
Senior Executives
John G. Larkin
Chairman & Chief Executive Officer
Through 1998, Larkin was Managing Director of BT Alex. Brown, where he focused
on transportation companies. From 1984 to 1987 he served as AVP of CSX. Through
1982, he worked on various rail projects for Day & Zimmermann, Inc. Larkin has
an Masters of Business Administration from Harvard University and Masters and
Bachelors degrees in Civil Engineering.
Michael R. Azarela
Executive Vice President & Chief Financial Officer
Azarela previously served as Chief Executive Officer of L.K. Comstock and was
also the company's Chief Financial Officer and Treasurer. Azarela, who joined
Comstock in 1983, is a certified public accountant, and has a Masters of
Business Administration from Iona College and a Bachelors degree from Northern
Illinois University.
Kenneth R. Burk
Executive Vice President & Chief Operating Officer
Involved in senior management in the construction industry for over 16 years,
Burk previously served at the Dick Corporation as Senior Vice President & Chief
Financial Officer, responsible for corporate marketing, finance, human resources
and strategic planning. Burk earned a Masters of Business Administration from
Pepperdine and a Bachelors degree from Troy State.
4
<PAGE> 5
Page 46 of 95
COVERAGE ACROSS THE CONTINENT
Covering the North American continent, RailWorks provides a comprehensive
network of rail-related services and products: new construction, rehabilitation,
repair and maintenance of track; installation of signaling, communications,
electrical and other track-related systems; and rail products. Our major
customers are freight railroads, transit authorities and industrial rail users.
>>New Construction & Rehabilitation: installation of traction, power, signaling
and communication, mechanical and track systems for transit authorities as well
as design and/or construction of track work for railroads, commercial and
industrial companies.
>>Repair & Maintenance: moving turnouts, adding rail car storage and replacing
ties, rail and surfacing; design and implementation of preventive maintenance
programs; and site services, including rail bed work.
>>Products & Services: provision of materials and supplies in conjunction with
the company's construction, rehabilitation and maintenance services, including
relay rail, ties and wood products, tie recycling, concrete products and other
track materials. Rail services include leasing, switch grinding, railcar
switching and equipment repair and maintenance.
As the accompanying illustration shows, the RailWorks network of capabilities is
geographically diverse, but organizationally centralized for optimum deployment
and implementation of any permutation of products and services. Our recently
implemented hub-and-spoke structure is designed to assist RailWorks operating
companies achieve even greater economies of scale while providing our management
team the mechanism to closely monitor our diverse operations in the "field".
5
<PAGE> 6
Page 47 of 95
RailWorks' National Network
TRACK SERVICES
NATIONAL
RailWorks Rail Services
Kansas City, MO
RailWorks Neosho
Topeka, KS
Pacific Northern Rail Contractors Inc.
Abbotsford, BC Canada
NORTHEAST REGION
RailWorks Kennedy
Shiremanstown, PA
Alpha Keystone Engineering, Inc.
Shiremanstown, PA
RailWorks New England
Bridgeport, CT
RailWorks Railcorp
Youngstown, Ohio
MIDWEST REGION
RailWorks Annex/Armcore
Indianapolis, IN.
RailWorks Midwest Services
Merrillville, IN
RailWorks Merit
Bridgeton, MO
RailWorks US Trackworks
Wayland, MI
WEST REGION
RailWorks Condon
Spokane, WA
RailWorks MidWest Construction
Salt Lake City, UT
RailWorks Railroad Service
Lakeville, MN
RailWorks Minnesota
Lakeville, MN
SOUTHWEST REGION
RailWorks Campbell
Houston, TX
RailWorks Wm. A. Smith
Houston, TX
RailWorks WT Byler
Houston, TX
TRANSIT SERVICES
RailWorks Comtrak
Alpharetta, GA
6
<PAGE> 7
Page 48 of 95
L.K. Comstock & Co., Inc.
White Plains, NY
M-Track Enterprises, Inc.
Bronx, NY
RWKS Comstock
Maspeth, NY
RWKS Transit
Farmingdale, NY
Impulse Enterprises of NY, Inc.
Farmingdale, NY
Sheldon Electric, Inc.
Long Island City, NY
Twigg Corporation
Upper Marlboro, MD
MANUFACTURERS/SUPPLIERS
CPI Concrete Products, Inc.
Memphis, TN
Dura-Wood Treating Company
Alexandria, LA
Gantrex Corporation
Pittsburgh, PA
H.P. McGinley, Inc.
McAlisterville, PA
McCord Treated Wood, Inc.
Warrior, AL
RailWorks FCM
Grand Blanc, MI
RailWorks Wood Waste Energy
St. Louis, MO
Southern Indiana Wood Preserving Co.
Winslow, IN
U.S. Railway Supply
Troy, IL
7
<PAGE> 8
Page 49 of 95
Maximizing Market Potential
Increased levels of private and public spending on rail infrastructure projects
(the rail industry's total 1998 spending was well over $16 billion) have
contributed to RailWorks' solid growth and make the opportunities for a
dedicated national provider pervasive. One of the key strengths of the RailWorks
operation is that it provides the associative heft and leverage to target these
opportunities more aggressively than they would in an independent mode.
As outlined in our Chairman's Letter, the rail transit market should see
maintenance and capital spending grow over the next several years as the fresh
funds provided by TEA-21 help the nation's rail transit agencies accelerate
their rehabilitation and upgrade schedules. In addition, a number of new rail
system start-ups are planned.
Another potentially lucrative marketplace lies in the sphere of short-line
railroads, thanks to the shift by Class I carriers from fully loaded freight
cars weighing 263,000 pounds to higher-capacity models carrying a gross weight
of 286,000 (the so-called 286 issue). This necessitates an extensive upgrade
program by the short-line railroad industry. Track, roadbed, bridges and other
items will need to be rehabilitated to support the new industry standard heavier
cars, and -- since many of the country's 500 short-line operators have limited
in-house maintenance capabilities -- RailWorks believes that it is well
positioned to win a great deal of this work for which over $2 billion of
Government funding is expected to be made available.
Whether the project be a small-scale repair or the construction of a
multi-million dollar regional transit system, the RailWorks connection -- and,
more significantly, its perception as a single nationwide brand -- enables our
operating companies to challenge and bid for a far greater spectrum of
contracts, through an integrated combination of techniques such as co-ordinated
bidding, team-bidding, customer cross-selling and building relationships with
general contractors and suppliers. Recent key project awards, shown in the
Tracking Progress section, bear out the successful application of these
processes.
8
<PAGE> 9
Page 50 of 95
A Culture of Safety
An integral part of RailWorks' business success is the pursuit of our "Zero
Accidents Goal." By investing in our safety program on a daily basis -- from the
educational to the procedural -- RailWorks is leading the industry in providing
a safe workplace for customers, employees and citizens.
Because safety performance is vital to overall performance, and can be an
influential factor in awarding contracts, RailWorks strives to provide customers
higher safety service than they can reasonably provide for themselves. This is
accomplished via safety outreach programs, safety inspections, seminars and
educational materials for our clients and our employees.
At RailWorks we pride ourselves on maintaining our proven safety record, and our
ability to use our knowledge of safety issues to benefit the industries and
railroads we serve.
9
<PAGE> 10
Page 51 of 95
Tracking Progress
New York City Transit Authority (NYCTA) Canarsie Line (NYC) Communications Based
Train Control System (CBTC) installation for 13 miles of the Canarsie Line
subway in association with Matra Transport International and Union Switch &
Signal. Contract: $75 million
Williamsburg Bridge (NYC) Two RailWorks companies completed the Williamsburg
Bridge's steel superstructure, transit tracks and electrical system
reconstruction, removed more than 2.7 miles of track; upgraded and built signal
department central instrument rooms; installed train speed control and signal
systems; updated third rail power, communication and fiber optic systems.
Contract: $41 million (combined)
Panama Canal Railway - A Kansas City Southern Industries/Lanco International
venture for reconstruction and expansion of track and facilities on a 44-mile
stretch of track from Colon to Balboa. Contract: $26 million
NYCTA Flushing Line (NYC) Rehabilitation of the train control signal system for
5.1 miles of the Flushing Line track. Contract: $67 million
Sparrows Point (Baltimore, MD) Four RailWorks companies constructed Sparrows
Point Scrap Processing, Inc.'s railroad switching facility, removing or
rehabilitating existing track and installing new track with turn-outs and remote
controlled switches. Contract: $1 million
Norfolk Southern Bison Yard (Buffalo, NY) Track facility reconstruction with
78,000 track feet and 35 turn-outs on former Norfolk & Western/Conrail rail yard
site. Contract: $1.6 million
South Eastern Pennsylvania Transit Authority Three-year supply of crossties.
Order value: $1.7 million
Port Everglades (Miami, FL) Supplied and installed the Port Everglades Pier 30
Gantrex crane rail and Panzerbelt cable protection systems. Contract: $1.4
million
Dallas Area Rapid Transit North Central & Northeast Corridors (Dallas, TX)
Traction power and overhead electrification installation. Contract: $17.8
million
Powder Basin Mines (Gillette, WY) Track maintenance contract for 13 coalmines.
Contract: $5 million
Nova/Bantrel (Red Deer, Alberta, Canada) Supplied and installed track and
turnouts for Nova/Bantrel. Combined Contract: $9.5 million
10
<PAGE> 11
Page 52 of 95
Acquisition Strategy
Our quest for strategically important acquisitions continues and is designed to
expand the RailWorks national network, affording us both geographic and product
breadth. We target prospective companies in three principal spheres: suppliers
of products for the right-of-way, installers of railroad and rail transit
right-of-way systems.
Since our August 1998 Initial Public Offering, we have acquired sixteen
companies with a total acquired annual revenue base of more than $355 million.
We believe there are many acquisition opportunities of interest among design
and engineering firms, installers of traction power, signal and communications
systems, and manufacturers and suppliers of electrical equipment, specialty
trackwork, crossing panels, cross-ties, as well as other track materials.
We search for well-established companies who are the leaders in their respective
region or market segment. We research each prospect carefully to ensure an
optimum strategic fit and financial compatibility. Our plans are to become even
more selective concerning acquisitions and to target a smaller number of larger
companies, but only if they can add value, service and operating leverage to the
RailWorks network.
11
<PAGE> 12
Page 53 of 95
Operations
Under the leadership of the RailWorks senior management team, we have
established a common operating platform for all divisions and subsidiaries,
entailing the adoption of optimum practices, enabling us to undertake projects
and assignments of any scale. This organizational infrastructure is augmented by
the implementation of our national hub-and-spoke network, a natural complement
of the acquisition strategy outlined in the previous section.
By establishing geographically dispersed anchor companies, newly added
subsidiaries are placed under their advisory control and receive vastly improved
information concerning contract bids and awards, as well as superior technical
and managerial expertise on a regional level. Cumulatively, this increases each
operating company's prospective customer base, helping them realize new business
opportunities more quickly and giving them the chance to develop more quickly
than if they had remained independent.
The result is a national network within which everyone functions at a regional
and local level, a network which affords a continent-wide range of resources,
but one made more economically viable by the ability to centralize the
purchasing and sharing of crews and equipment. Large national customers also
benefit from RailWorks increased geographic scope. A large company with rail
served facilities throughout a region may have had to deal with 30 to 40 rail
system contractors; now they can contact one single source to optimize field
operations and minimize administrative costs.
Since RailWorks has centralized and consolidated its administration, we possess
a more enhanced cost structure than regional and smaller companies, from which
our clients consistently benefit. One such benefit lies in our implementation of
a systems plan integrating all the companies with financial and communication
systems, including purchasing programs which provide significant savings in
buying materials, equipment and insurance. As a result of these and other
efficiencies, we believe we can offer our customers very competitive pricing.
Centralized administration also allows the companies in the field to focus on
their priorities. Lifting administrative burdens that used to occupy one-third
to one-half of their time frees our operational leaders to spend more of their
time providing high quality service to clients, providing a responsive product
at a competitive cost, and ensuring projects are managed intensively in the
field.
As a national provider with greatly increased bonding capacity, centralized
through a regional hub-and-spoke system, any combination of our considerable
cumulative workforce, consultancy and management services can be mobilized
quickly and accurately to respond anywhere, anytime.
12
<PAGE> 13
Page 54 of 95
2000 Outlook
Rail Transit - The present trends indicate a bias towards upgrading old transit
systems, extending relatively new ones (5-25 years) and building light and
commuter rail systems. All of these should continue to be in demand for the
foreseeable future, since the Federal Government has approved $36 billion worth
of funding for the next five years, in addition to $1 billion per year in
discretionary funds as well as state and local matches. All of these projects
are a perfect fit with RailWorks capabilities.
Industrial Rail Systems - Rail-served industries tend to focus on safety and
efficiency, along with risk management and just-in-time (JIT) inventory
management systems. In that sense, RailWorks' capabilities may be used as a
virtual insurance policy. We plan to leverage our existing relationships with
railroads in North America and local plants to obtain contracts and commitments
on a multi-plant or national level.
Short-line Railroads - This sphere of RailWorks business will be heavily
influenced by the "286 issue," which should cause the release of increased
funding to upgrade short-lines to carry heavier Class I stock. Accordingly, in
addition to the conventional construction maintenance and repair assignments,
RailWorks expects a significant increase in the number of projects associated
with the "286 issue".
Class I Railroads - Revenues from the outsourcing of track maintenance and
construction work has already increased, thanks to our acquisition of
established suppliers of products and services to the Class I railroads. As
Class I Railroad executives continue to solicit creative outsourced solutions,
we are confident that our unique combination of services will put us in a strong
position to capture a significant portion of the right-of-way oriented work that
the Class I's ultimately outsource.
13
<PAGE> 14
Page 55 of 95
Conclusion
There is no question the rail service and supply industry has entered a period
of increasingly accelerating growth. Factors such as the greater focus that
North American railroads are placing on operating efficiencies and network
throughput, plus the enhanced levels of Federal funding for transit projects
have created a marketplace for which RailWorks is ideally equipped to take full
advantage.
There is a strong demand for a nationally-structured company which can provide
railroad operators with low-cost, high-quality infrastructure improvements and
maintenance solutions, technologically advanced repair capabilities as well as
bundled rail system services and products.
We are that company. Established, integrated, multi-disciplined, perfectly
positioned to serve rail system operators on a regional and national basis, as
well as to benefit from trends both current and upcoming. In an industry whose
evolution never stops rolling, RailWorks has become the single source for all
its infrastructure needs.
14
<PAGE> 15
Page 56 of 95
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS: PAGE
<S> <C>
Report of Management 15
Selected Financial Data 16
Management's Discussion and Analysis 17 - 22
Quantitative and Qualitative Disclosures about Market Risk 22
Cautionary Statements 22
Consolidated Balance Sheets 23, 24
Consolidated Statements of Operations 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27, 28
Notes to Consolidated Financial Statements 29 - 44
Report of Independent Public Accountants 45
Audit Committee Report 45
Market for Common Stock 46
Executive Officers and Directors 46
Stockholder Information 47
</TABLE>
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report rests with RailWorks management. The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, applying certain estimates and
judgments as required.
RailWorks maintains an effective internal control structure which consists, in
part, of an organization with clearly defined lines of responsibility and
delegation of authority, comprehensive systems and control procedures. We
believe this structure provides reasonable assurance that transactions are
executed in accordance with management authorization and generally accepted
accounting principles. An important element of the control environment is an
ongoing internal audit program.
To assure the effective administration of internal control, we carefully select
and train our employees, develop and disseminate written policies and
procedures, provide appropriate communication channels and foster an environment
conducive to the effective functioning of controls. We believe that it is
essential for RailWorks to conduct its business affairs in accordance with the
highest ethical standards.
Arthur Andersen, LLP, independent public accountants have been retained to audit
RailWorks' financial statements. Their accompanying report is based on an audit
conducted in accordance with generally accepted auditing standards, including a
review of internal control structure and tests of accounting procedures and
records.
The Audit Committee of the Board of Directors is responsible for recommending to
the Board the independent accounting firm retained for the coming year. The
Audit Committee meets periodically and privately with the independent
accountants, with our internal auditors, as well as with RailWorks management,
to review accounting, auditing, internal control structure and financial
reporting matters.
/s/ /s/
- ------------------------------- -----------------------------------
John G. Larkin Michael R. Azarela
Chairman Executive Vice President
Chief Executive Officer Chief Financial Officer
15
<PAGE> 16
Page 57 of 95
SELECTED FINANCIAL DATA
In August 1998, we acquired in separate concurrent transactions 14 groups of
companies engaged principally in the rail system services and products business,
which we refer to as the Founding Companies, and we consummated our initial
public offering, which we refer to as the IPO. 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 SEC. All other acquisitions have been accounted for as purchases
in accordance with APB No. 16.
<TABLE>
<CAPTION>
RAILWORKS PREDECESSOR COMPANY
------------------------- -------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999(3) 1998(2) 1997(1) 1996(1) 1995(1)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue .................................... $ 468,105 $ 212,533 $ 153,610 $ 188,767 $ 181,616
Cost of revenue ............................ 369,083 182,817 136,678 169,303 164,777
--------- --------- --------- --------- ---------
Gross profit ............................... 99,022 29,716 16,932 19,464 16,839
Selling, general and administrative expenses 50,434 19,145 13,520 16,418 16,887
Non-recurring expenses ..................... -- 19,965(4) -- -- --
Transaction fees ........................... -- 1,281(5) -- -- --
--------- --------- --------- --------- ---------
Operating income (loss) .................... 48,588 (10,675) 3,412 3,046 (48)
Interest expense ........................... (20,054) (2,334) (1,761) (2,023) (871)
Interest and other income .................. 2,615 1,634 975 476 2,115
Income (loss) before income taxes .......... 31,149 (11,375) 2,626 558 (19,822)
Net income (loss) .......................... 20,086 (12,847) 1,428 58 (19,972)
Basic earnings (loss) per share ............ 1.44 (1.67) .48 -- --
Diluted earnings (loss) per share .......... 1.31 (1.67) .48 -- --
</TABLE>
<TABLE>
<CAPTION>
RAILWORKS PREDECESSOR COMPANY
----------------------- ------------------------------------
AS OF DECEMBER 31,
----------------------------------------------------------------
1999(3) 1998(2) 1997(1) 1996(1) 1995(1)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(6).......................... $ 119,270 $ 67,391 $ 26,500 $ 19,257 $ 31,915
Total assets................................ 571,657 228,636 68,352 84,344 86,108
Total debt.................................. 294,431 51,504 15,004 24,890 19,241
Stockholders' equity........................ 135,881 110,008 1,438 16,990 20,567
- ----------
</TABLE>
(1) The selected historical consolidated financial data as of and for the
fiscal years ended December 31, 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 as of and for the year
ended December 31, 1998 are derived from our 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 two companies we acquired in November 1998 from each of their
respective dates of acquisition through December 31, 1998. We refer to
these companies as the 1998 Acquired Companies.
(3) The selected historical consolidated financial data as of and for the year
ended December 31, 1999 are derived from our Consolidated Financial
Statements, which are comprised of financial data of all companies that we
owned as of January 1, 1999 and companies we acquired during 1999 from each
of their respective dates of acquisition through December 31, 1999.
(4) Consists of : $14.5 million in restricted common stock granted to certain
of our executive 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.
(5) Represents offering expenses incurred in connection with the IPO.
(6) 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.
16
<PAGE> 17
Page 58 of 95
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and results of operations
should be read in conjunction with our Consolidated Financial Statements and the
related Notes thereto appearing elsewhere herein.
GENERAL
We were formed in March 1998 to become a leading nationwide provider of rail
system services, including construction and rehabilitation, repair and
maintenance, and related products. We primarily perform services pursuant to
contracts for the completion of specific projects, some of which take up to five
years to complete. On most projects, we contract directly with rail system
operators, while on other projects we act as a subcontractor.
In August 1998, we acquired in separate concurrent transactions 14 Founding
Companies engaged principally in the rail system services and products business
and we consummated our IPO. In November 1998, we acquired the two 1998 Acquired
Companies and, in 1999, we acquired fourteen companies or groups of companies,
which we refer to as the 1999 Acquired Companies. Except for the acquisition of
Comstock Holdings, Inc., a Founding Company, all of our 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 No. 97, or
SAB, of the SEC 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. Our historical financial statements prior to August
4, 1998 are those of Comstock.
Our consolidated balance sheet as of December 31, 1999 includes all companies
that we acquired through December 31, 1999. Our statement of operations and
statement of cash flows for the year ended December 31, 1999 include the results
of operations and cash flows of all companies owned as of December 31, 1998 and
the results of operations and cash flows of the 1999 Acquired Companies from
each of their respective dates of acquisition. Our consolidated balance sheet as
of December 31, 1998, includes the Founding Companies and the 1998 Acquired
Companies. Our statement of operations and 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. We 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, we believe that financial comparisons of individual Founding
Companies, 1998 Acquired Companies or our financial statements are not
meaningful for the 1998 period and any period prior.
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 us. The aggregate compensation paid to
such executive officers was reduced following the IPO. Following the initial
two-year term of these employment agreements entered into at the IPO, we will
reevaluate our compensation structure after examining operating results and the
value of the services such individuals are providing us.
Prior to their affiliation with us, 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 our company, 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
We recognize 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.
17
<PAGE> 18
Page 59 of 95
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, we recognize 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, 1999 Compared to the Year Ended December
31, 1998.
Revenue. Revenue increased $255.6 million, or 120.3%, from $212.5 million for
the year ended December 31, 1998 to $468.1 million for the year ended December
31, 1999. The increase was due to the fact that the 1998 data is that of
Comstock alone for the first seven months of the year and all fourteen original
Founding Companies for the remaining five months of the year. The 1999 data
includes all of the Founding Companies and the 1998 Acquired Companies for the
entire year, as well as the fourteen 1999 Acquired Companies from their date of
acquisition.
Transit services revenue increased $78.9 million, or 47.5%, from $166.0 million
for the year ended December 31, 1998 to $244.9 million for the year ended
December 31, 1999. The increase was due to the fact that the 1998 data is that
of Comstock alone for the first seven months of the year, one other Founding
Company for the next five months of the year, and one of the 1998 Acquired
Companies for the final two months of the year. The 1999 data includes all of
the Founding Companies and one of the 1998 Acquired Companies for the entire
year, as well as, three 1999 Acquired Companies from their date of acquisition.
Rail products and supplies revenue increased $38.8 million, or 380.4%, from
$10.2 million for the year ended December 31, 1998 to $49.0 million for the year
ended December 31, 1999. The increase was due to the fact that the 1998 data is
that of three Founding Companies for the last five months of the year, whereas
the 1999 data includes three Founding Companies for the entire year, as well as,
five 1999 Acquired Companies from their date of acquisition.
Rail track services revenue increased $137.9 million, or 380.0%, from $36.3
million for the year ended December 31, 1998 to $174.2 million for the year
ended December 31, 1999. The increase was due to the fact that the 1998 data is
that of nine Founding Companies for the last five months of the year and one of
the 1998 Acquired Companies for the final two months of the year, whereas the
1999 data includes nine Founding Companies and one of the 1998 Acquired
Companies for the entire year, as well as, six 1999 Acquired Companies from
their date of acquisition.
Gross Profit. Gross profit increased $69.3 million or 233.3% from $29.7 million
for the year ended December 31, 1998 to $99.0 million for the year ended
December 31, 1999. The increase was due to the fact that the 1998 data is that
of Comstock alone for the first seven months of the year and all fourteen
Founding Companies for the remaining five months of the year. The 1999 data
includes all of the Founding Companies and the 1998 Acquired Companies for the
entire year, as well as, all of the fourteen 1999 Acquired Companies from their
date of acquisition. The gross profit percentage increased from 14.0% for the
year ended December 31, 1998 to 21.2% for the year ended December 31, 1999. This
increase was the result of higher profitability associated with the mix and type
of work performed during 1999 by the consolidated group as compared to mix and
type of work performed during 1998.
Transit services gross profit increased $21.1 million or 104.5% from $20.2
million for the year ended December 31, 1998 to $41.3 million for the year ended
December 31, 1999. The increase was due to the fact that the 1998 data is that
of Comstock alone for the first seven months of the year, one other Founding
Company for the next five months of the year and one of the 1998 Acquired
Companies for the final two months in the year. The 1999 data includes all of
the Founding Companies and one of the 1998 Acquired Companies for the entire
year, as well as, three 1999 Acquired Companies from their date of acquisition.
The gross profit percentage increased from 12.2% for the year ended December 31,
1998 to 16.9% for the year ended December 31, 1999. This increase was the result
of higher profitability associated with the mix and type of work performed
during 1999 by the consolidated group as compared to the mix and type of work
performed during 1998.
Rail products and supplies gross profit increased $16.3 million, or 679.2%, from
$2.4 million for the year ended December 31, 1998 to $18.7 million for the year
ended December 31, 1999. The increase was due to the fact that the 1998 data is
that of three Founding Companies for the last five months in the year, whereas
the 1999 data includes three Founding Companies for the entire year, as well as,
five 1999 Acquired Companies from their date of acquisition. The gross profit
percentage increased from 23.5% for the year ended December 31, 1998 to 38.1%
for the year ended December 31, 1999. This increase was the result of higher
profitability associated with the mix and type of work performed during 1999 by
the consolidated group as compared to the mix and type of work performed during
1998.
18
<PAGE> 19
Page 60 of 95
Rail track services gross profit increased $31.9 million, or 449.3%, from $7.1
million for the year ended December 31, 1998 to $39.0 million for the year ended
December 31, 1999. The increase was due to the fact that the 1998 data is that
of nine Founding Companies for the last five months in the year and one of the
1998 Acquired Companies for the final two months of the year, whereas the 1999
data includes nine Founding Companies and one of the 1998 Acquired Companies for
the entire year, as well as, six 1999 Acquired Companies from their date of
acquisition. The gross profit percentage increased from 19.6% for the year ended
December 31, 1998 to 22.4% for the year ended December 31, 1999. This increase
was the result of higher profitability associated with the mix and type of work
performed during 1999 by the consolidated group as compared to the mix and type
of work performed during 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $31.3 million or 163.9%, from $19.1 million
for the year ended December 31, 1998 to $50.4 million for the year ended
December 31, 1999. The increase was due to the fact that the 1998 data is that
of Comstock alone for the first seven months and all fourteen original Founding
Companies for the remaining five months in the year. The 1999 data includes all
of the Founding Companies and the 1998 Acquired Companies for the entire year,
as well as, all of the fourteen 1999 Acquired Companies from their date of
acquisition. As a percentage of revenue, selling, general and administrative
expenses increased from 9.0% for the year ended December 31, 1998 to 10.8% for
the year ended December 31, 1999. This increase was the result of the 1999
Acquired Companies having higher selling, general and administrative cost
structures than the original Founding Companies.
Transit services selling, general and administrative expenses increased $3.8
million or 28.4%, from $13.4 million for the year ended December 31, 1998 to
$17.2 million for the year ended December 31, 1999. The increase was due to the
fact that the 1998 data is that of Comstock only for the first seven months of
the year, one other Founding Company for the next five months of the year and
one of the 1998 Acquired Companies for the final two months of the year. The
1999 data includes all of the Founding Companies and one of the 1998 Acquired
Companies for the entire year. As a percentage of segment revenue, selling,
general and administrative expenses decreased from 8.1% for the year ended
December 31, 1998 to 7.0% for the year ended December 31, 1999. This percentage
decrease was a result of the 1999 Acquired Companies having lower overhead
selling, general and administrative cost structures than Comstock.
Rail products and supplies selling, general and administrative expenses
increased $7.1 million, or 1,014.3%, from $700,000 for the year ended December
31, 1998 to $7.8 million for the year ended December 31, 1999. The increase was
due to the fact that the 1998 data is that of three Founding Companies for the
last five months in the year, whereas the 1999 data includes three Founding
Companies for the entire year, as well as, five 1999 Acquired Companies from
their date of acquisition. As a percentage of segment revenue, selling, general
and administrative expenses increased from 6.8% for the year ended December 31,
1998 to 16.0% for the year ended December 31, 1999. This percentage increase was
a result of the 1999 Acquired Companies having higher overhead selling, general
and administrative cost structures than the Founding Companies.
Rail track services selling, general and administrative expenses increased $10.4
million, or 346.7%, from $3.0 million for the year ended December 31, 1998 to
$13.4 million for the year ended December 31, 1999. The increase was due to the
fact that the 1998 data is that of nine Founding Companies for the last five
months in the year and one of the 1998 Acquired Companies for the final two
months of the year, whereas the 1999 data includes nine Founding Companies and
one of the 1998 Acquired Companies for the entire year, as well as, six 1999
Acquired Companies from their date of acquisition. As a percentage of segment
revenue, selling, general and administrative expenses decreased from 8.3% for
the year ended December 31, 1998 to 7.7% for the year ended December 31, 1999.
This percentage decrease was a result of the 1999 Acquired Companies having
lower overhead, selling, general and administrative cost structures than the
Founding Companies.
Corporate selling, general and administrative expenses increased $10.0 million,
or 500.0%, from $2.0 million for the year ended December 31, 1998 to $12.0
million for the year ended December 31, 1999. The increase was due to the fact
that the 1998 expense is that of an overhead structure to support fourteen
Founding Companies for five months. The 1999 expense is that of an overhead
structure to support the Founding Companies, as well as, the 1999 Acquired
Companies for the entire year. As a percentage of total revenue, selling,
general and administrative expenses increased from 1.0% for the year ended
December 31, 1998 to 2.6% for the year ended December 31, 1999. The increase in
percentage is due to the larger corporate overhead structure required to support
thirty operating entities and a full year of corporate operations.
Net Income. Net income increased $32.9 million, from a loss of $12.8 million for
the year ended December 31, 1998 to a profit of $20.1 million for the year ended
December 31, 1999, as a result of the items mentioned above. In addition,
included in 1998 were non-recurring expenses of $20.0 million and transaction
fees of $1.3 million relating to the IPO.
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 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
19
<PAGE> 20
Page 61 of 95
associated with our former west coast operations. Included in other income in
the fourth quarter was a gain of $861,000 on the disposition of our 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 table 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
data only includes the results of operations of the 1998 Acquired Companies from
November 4, 1998 to December 31, 1998. The 1999 Acquired Companies are not
included in the data presented below. The presentation includes pro forma
results of the Founding Companies and the 1998 Acquired Companies on a combined
basis.
The pro forma results of operations for the periods presented may not be
comparable to, and may not be indicative of, our actual results of operations
because (1) the Founding Companies and the 1998 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 we
expect 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 our 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 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.
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
20
<PAGE> 21
Page 62 of 95
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. We expect
to continue to experience such quarterly fluctuations in operating results,
including possible net losses.
Liquidity and Capital Resources
On August 4, 1998, we completed our IPO of 5.0 million shares of its Common
Stock at a price of $12.00 per share. The proceeds from the IPO were
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
our acquisitions of the Founding Companies and approximately $1.4 million was
used for the repayment of debt.
At December 31, 1999, we had working capital of approximately $119.3 million.
Net cash used in operating activities for the year ended December 31, 1999, was
approximately $31.4 million. Net cash used in investing activities for the year
ended December 31, 1999 was approximately $142.5 million which consisted of
$121.1 million of cash for acquisitions and $15.8 million for purchase of
equipment and leasehold improvements. Net cash provided by financing activities
for the year ended December 31, 1999 was approximately $175.5 million, which
included borrowings of approximately $59.4 million and the issuance of senior
subordinated notes of approximately $173.9 million, offset by debt repayment of
approximately $48.9 million.
Capital expenditures were $15.8 million, $1.3 million and $448,000 in fiscal
1999, 1998 and 1997, respectively. Historically, capital expenditures have been,
and future expenditures are anticipated to be, primarily to support expansion of
our operations, including our management information systems. Our 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.
We anticipate capital expenditures of approximately $15.0 million for equipment
and leasehold improvements in 2000. This investment, which we expect to finance
primarily with 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 our credit facilities with Bank of
America, N.A. We have in place a $105 million senior revolving credit facility
which matures in August, 2002, however we may request a one year extension of
the revolving credit facility. We also have a $30 million senior term credit
facility that matures in November, 2004. The credit facilities are secured by a
first lien on all of the capital stock of our subsidiaries and on all of our
accounts receivable of our domestic subsidiaries. The credit facilities contain
a negative pledge on all of our domestic subsidiaries' assets as well as 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 our option, 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 Bank of America 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. We may also finance future acquisitions with shares of common stock
and other contingent consideration.
In connection with certain acquisitions, we have agreed, and in the future may
agree, to pay additional consideration based on operating results of the
acquired entity. The payment of any such contingent consideration could result
in an increase in the purchase prices of such acquisitions and, as a result,
additional goodwill. Additional consideration recorded as goodwill at December
31, 1999 relating to 1999 operating performance amounted to approximately
$10,482,000. Such amounts are to be paid by March 31, 2000.
We believe that funds generated from operations, together with existing cash and
borrowings under our revolving credit facility, will be sufficient to finance
our current operations, planned capital expenditures, potential acquisitions and
internal growth. If we were to make a significant acquisition for cash, it may
be necessary to obtain additional debt or equity financing. There can be no
assurance that we will be able to obtain any such financing on terms
satisfactory to us, if at all.
INFLATION
We do not believe that inflation has had a material effect on our results of
operations in recent years. However, there can be no assurance that our business
will not be affected by inflation in the future.
21
<PAGE> 22
Page 63 of 95
YEAR 2000
We have not experienced any disruptions to our business or any other problems as
a result of Year 2000 issues. We developed and implemented a plan that addressed
three main areas: information systems, embedded chips and supply chain readiness
(including customers as well as inventory and non-inventory suppliers). To
oversee the process, we established a committee comprised of accounting and
information systems personnel who reported regularly to the board of directors
and the audit committee.
We believe that, by identifying potential deficiencies related to Year 2000 in
our information systems and other equipment with date sensitive operating
controls, by identifying and contacting suppliers and customers to determine the
state of their Year 2000 readiness, and by addressing them through upgrades and
other remediation, we have successfully avoided material Year 2000 problems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk associated principally with changes in interest
rates. Interest rate exposure has been principally limited to the $77.2 million
of long-term debt under our revolving credit facility and term loan agreement
outstanding at December 31, 1999. All of that debt is priced at interest rates
that float with the market. A 50 basis point movement in the interest rate on
our floating rate debt would have resulted in an approximately $386,000
annualized increase or decrease in interest expense and cash flows. We will from
time to time enter into interest rate swaps on our debt, when we believe there
is a clear financial advantage for doing so. We do 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 our outstanding
long-term debt. Our exposure related to such derivative instruments is, in the
aggregate, not material to our financial position, results of operations and
cash flows. There were no swap agreements in effect as of December 31, 1999.
CAUTIONARY STATEMENTS
This annual report to our stockholders contains forward-looking statements
within the meaning of the Securities Act of 1933 and the Securities Exchange Act
of 1934. You can find discussions containing forward-looking statements in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as well as elsewhere herein. We use the words
"believes," "anticipates," "expects", "estimates," "plans," "intends" and
similar expressions so as to identify forward-looking statements. All
forward-looking statements involve substantial risks and uncertainties. There
may be events in the future that we are not accurately able to predict, or over
which we have no control. Some factors that may cause actual results to differ
from projected results are:
- the absence of a combined operating history of our operating companies
and difficulties in integrating their operations;
- unanticipated difficulties or delays in implementing our acquisition
program;
- cyclicality in the demand for rail systems services and products;
- availability of capital, including our ability to service or refinance
indebtedness;
- the unanticipated decrease in public sector contracts and funding;
- changes in our relationships with major customers;
- effects of changes in general economic conditions;
- actions by competitors;
- ability to retain qualified personnel;
- the resolution of former West Coast operations' contract claims or
litigation uncertainties.
Forward-looking statements include, without limitation, our expectations and
estimates as to development of our services and products and expansion of our
customer base, future financial performance, including growth in revenues and
earnings and the effect on new acquisitions on our financial position and
results of operations, cash flows from operations, acquisitions, capital
expenditures, the availability of funds from credit facilities and the sale of
securities. Consequently, you should regard forward-looking statements only as
our current plans, estimates and beliefs. We do not promise to notify you if we
learn that our assumptions or projections are wrong for any reason. Additional
information concerning the risk and uncertainties listed above, and other
factors that you may wish to consider, are contained in our filings with the
Securities and Exchange Commission, including our Annual Report of Form 10-K.
Copies of these filings are available from us free of charge.
22
<PAGE> 23
Page 64 of 95
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998 (in thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
-------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................................... $ 4,617 $ 2,846
Accounts receivable, net of allowance for doubtful accounts of $1,990 and $442 153,084 77,181
Costs and estimated earnings in excess of billings on uncompleted contracts .. 56,295 24,792
Inventories:
Raw materials ............................................................ 19,197 7,535
Finished goods ........................................................... 4,562 1,550
Deferred tax asset ........................................................... 2,426 870
Other current assets ......................................................... 11,535 3,401
-------- ---------
Total current assets .................................................. 251,716 118,175
-------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET ............................................. 73,897 13,392
-------- ---------
OTHER ASSETS:
Excess of cost over net assets acquired, net of amortization ............... 223,886 93,845
Loans to officers .......................................................... 6,735 959
Assets held for sale ....................................................... 5,573 --
Other ...................................................................... 9,850 2,265
-------- ---------
Total other assets .................................................... 246,044 97,069
-------- ---------
TOTAL ........................................ $571,657 $ 228,636
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ......................................... $ 19,740 $ 931
Accounts payable and accrued liabilities ..................................... 79,662 35,436
Accrued payroll and related withholdings ..................................... 3,626 3,777
Billings in excess of costs and estimated earnings on uncompleted
contracts................................................................. 20,070 5,958
Other current liabilities .................................................... 9,348 4,682
-------- ---------
Total current liabilities ............................................. 132,446 50,784
-------- ---------
Long-term debt ............................................................... 274,691 50,573
Deferred tax liability ....................................................... 8,071 --
Excess of acquired net assets over cost, net of amortization ................. 8,434 8,662
Other liabilities ............................................................ 12,134 8,609
-------- ---------
Total long-term liabilities ........................................... 303,330 67,844
-------- ---------
Total liabilities ................................................ 435,776 118,628
-------- ---------
Stockholders' Equity:
Series A, convertible preferred stock, $1.00 par value, authorized
10,000,000 shares, 13,700 shares issued and outstanding .................... 14 14
Common stock, $0.01 par value, authorized 100,000,000 shares,
14,255,705 shares issued and outstanding at December 31, 1999,
13,703,530 issued and outstanding at December 31, 1998 ..................... 142 137
Additional paid-in capital ................................................... 126,903 121,296
Accumulated other comprehensive income ....................................... 175 --
</TABLE>
23
<PAGE> 24
Page 65 of 95
<TABLE>
<S> <C> <C>
Retained earnings (deficit) .................................................. 8,647 (11,439)
-------- ---------
Total stockholders' equity ............................................ 135,881 110,008
-------- ---------
TOTAL ........................................ $571,657 $ 228,636
======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE> 25
Page 66 of 95
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue ....................................... $ 468,105 $ 212,533 $ 153,610
Cost of revenue ............................... 369,083 182,817 136,678
------------ ------------ ------------
Gross profit .................................. 99,022 29,716 16,932
Selling, general and administrative expenses .. 50,434 19,145 13,520
Non-recurring expenses ........................ -- 19,965 --
Transaction fees .............................. -- 1,281 --
------------ ------------ ------------
Operating income (loss) ....................... 48,588 (10,675) 3,412
------------ ------------ ------------
Other income(expense):
Interest expense ............................ (20,054) (2,334) (1,761)
Interest and other income ................... 2,615 1,634 975
------------ ------------ ------------
Other expense, net ....................... (17,439) (700) (786)
------------ ------------ ------------
Income(loss) before income taxes .............. 31,149 (11,375) 2,626
Provision for income taxes .................... 11,063 1,472 1,198
------------ ------------ ------------
Net income(loss) .............................. $ 20,086 $ (12,847) $ 1,428
============ ============ ============
Basic earnings(loss) per share ................ $ 1.44 $ (1.67) $ .48
============ ============ ============
Diluted earnings(loss) per share .............. $ 1.31 $ (1.67) $ .48
============ ============ ============
Weighted average shares used in computing basic
earnings(loss) per share ................... 13,948,163 7,694,267 2,959,291
============ ============ ============
Weighted average shares used in computing
diluted earnings(loss) per share ........... 15,326,422 7,694,267 2,959,291
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE> 26
Page 67 of 95
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED
COMMON STOCK PREFERRED STOCK PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (DEFICIT) INCOME
------- ------- ------- ------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ................. -- $ -- -- $ -- $ -- $ -- $ -- $ --
Capital contribution ................... 111 1 -- -- 9 -- -- --
Recapitalization ....................... 2,849 29 -- -- (9) -- (20) --
Net income ............................. -- -- -- -- -- -- 1,428 --
------- ------- ------- ------- ---------- ------------- ---------- -------------
BALANCE, DECEMBER 31, 1997 ............... 2,960 30 -- -- -- -- 1,408 --
Issuance of common stock ............... 5,908 59 -- -- 54,023 -- -- --
Non-cash compensation charge ........... 1,206 12 -- -- 14,861 -- -- --
Initial public offering, net of
underwriting discount and offering
expenses ............................. 5,000 50 -- -- 52,412 -- -- --
Issuance of preferred stock ............ (1,370) (14) 14 14 -- -- -- --
Net loss ............................... -- -- -- -- -- -- (12,847) --
------- ------- ------- ------- ---------- ------------- ---------- -------------
BALANCE, DECEMBER 31, 1998 ............... 13,704 137 14 14 121,296 -- (11,439) --
Issuance of common stock for
acquisitions ......................... 552 5 -- -- 5,695 -- -- --
Stock option compensation .............. -- -- -- -- 37 -- -- --
Stock issuance costs ................... -- -- -- -- (125) -- -- --
Foreign currency translation adjustment -- -- -- -- -- 175 -- 175
Net income ............................. -- -- -- -- -- -- 20,086 20,086
------- ------- ------- ------- ---------- ------------- ---------- -------------
BALANCE, DECEMBER 31, 1999 ............... 14,256 $ 142 14 $ 14 $ 126,903 $ 175 $ 8,647 $ 20,261
======= ======= ======= ======= ========== ============= ========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE> 27
Page 68 of 95
RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................. $ 20,086 $ (12,847) $ 1,428
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization .................................................. 12,808 2,105 (213)
Non-cash compensation charge ................................................... -- 14,873 --
Deferred taxes ................................................................. -- 65 664
Bond discount amortization ..................................................... 13 -- --
Gain on sale of division ....................................................... -- (861) --
Gain on sale of equipment ...................................................... (33) (3) (194)
Change in operating assets and liabilities:
Accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts .................................................... (32,002) (15,236) (8,176)
Inventory ................................................................... 465 (274) 296
Other current assets ........................................................ 1,846 (1,066) (271)
Accounts payable and accrued liabilities .................................... (15,681) 2,726 (1,159)
Accrued payroll and related withholdings .................................... (2,293) (1,269) 549
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................................... (1,504) (4,458) 3,320
Other current liabilities ................................................... (3,501) (1,252) 909
Other assets ................................................................ 1,316 (1,145) (18)
Other liabilities ........................................................... (12,930) 4,713 (336)
---------- ---------- ----------
Net cash used in operating activities ............................. (31,410) (13,929) (3,201)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ................................................ 2,359 32 194
Purchase of equipment and leasehold improvements ............................... (15,803) (1,280) (448)
Loans to officers .............................................................. (5,776) (959) --
Acquisition of subsidiaries, net of cash acquired .............................. (121,152) (52,535) --
Proceeds from sale of division ................................................. -- 1,000 --
Contingent earnout payments .................................................... (2,083) (1,600) --
---------- ---------- ----------
Net cash used in investing activities ............................. (142,455) (55,342) (254)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on revolving line of credit ..................................... (2,098) -- --
Debt issuance costs ............................................................ (5,636) -- --
Payment of loan origination fees ............................................... (1,232) (1,615) --
Proceeds from long-term borrowing .............................................. 59,388 61,325 16,937
Proceeds from issuance of senior subordinated notes ............................ 173,938 -- --
</TABLE>
27
<PAGE> 28
Page 69 of 95
<TABLE>
<S> <C> <C> <C>
Repayment of long-term borrowing ............................................... (48,899) (41,175) (26,823)
Proceeds from issuance of common stock, net .................................... -- 52,462 --
Proceeds from contingent promissory notes ...................................... -- -- 14,608
Repayment of contingent promissory notes ....................................... -- -- (157)
Proceeds from note payable ..................................................... -- -- 4,000
Repayments of note payable ..................................................... -- -- (4,000)
---------- ---------- ----------
Net cash provided by financing activities .......................... 175,461 70,997 4,565
---------- ---------- ----------
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS .................................. 175 -- --
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 1,596 1,726 1,110
CASH AND CASH EQUIVALENTS, beginning of year ....................................... 2,846 1,120 10
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year.............................................. $ 4,617 $ 2,846 $ 1,120
========== ========== ==========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......................................... $ 16,723 $ 2,107 $ 1,478
========== ========== ==========
Cash paid during the year for income taxes...................................... $ 6,353 $ 392 $ 188
========== ========== ==========
</TABLE>
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES: During 1998,
the Company issued 8,867,648 shares of common stock in exchange for 100% of the
outstanding common stock of the Founding Companies.
During 1999, the Company issued 493,842 shares of common stock as
partial consideration in exchange for 100% of the outstanding stock in the FCM
Rail, Ltd, W.T. Byler, Inc. and McCord Treated Wood, Inc., acquisitions. The
Company also issued 58,334 shares of common stock in exchange for all present
and future contingent consideration to the former shareholders of Armcore.
Subsequent to December 31, 1999, the Company issued 99,379 shares of common
stock as partial consideration in exchange for 100% of the outstanding stock in
the Twigg Corporation acquisition, which was completed in December, 1999.
During 1999, the Company issued an aggregate amount of $18,130,000 in
promissory notes and deferred payments as partial consideration for various 1999
acquisitions closed during the year.
See Notes to Consolidated Financial Statements.
28
<PAGE> 29
Page 70 of 95
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.
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 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.
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 Holdings 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 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
$8,240,000 and $12,240,000 at December 31, 1999 and 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, 1999
and 1998 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,
29
<PAGE> 30
Page 71 of 95
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 track 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 track
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 inter-company
transactions have been eliminated.
The Company accounts for inter-segment sales and transfers as if the sales
or transfers were to third parties, utilizing current market prices and arms
length terms and conditions.
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 estimate of 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 and supply 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.
30
<PAGE> 31
Page 72 of 95
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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Included in machinery
and equipment are 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 - 10 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.
Assets Held for Sale consists of non-strategic machinery and equipment
purchased as part of the 1999 acquisitions. This machinery has been segregated
as of December 31, 1999 for sale in an auction which is anticipated to occur in
the second quarter of 2000. The assets are valued based on appraisals and
estimates of liquidation value.
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.
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>
1999 1998 1997
--------- --------- -------
<S> <C> <C> <C>
Net income (loss) $ 20,086 $ (12,847) $ 1,428
========= ========= =======
Shares used for determining basic EPS 13,948 7,694 2,960
Dilutive effect of:
Stock options 8 * --
Convertible preferred shares 1,370 * --
--------- --------- -------
Shares used for determining diluted EPS 15,326 7,694 2,960
========= ========= =======
Basic EPS $ 1.44 $ (1.67) $ .48
========= ========= =======
Diluted EPS $ 1.31 $ (1.67) $ .48
========= ========= =======
</TABLE>
* Outstanding stock options and convertible preferred shares would be
antidilutive in 1998 and therefore were excluded.
31
<PAGE> 32
Page 73 of 95
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 $228,000, $252,000
and $269,000 in 1999, 1998 and 1997, for the years ended December 31, 1999,
1998, and 1997 amounted to $4,652,000, $965,000 and $(269,000), respectively.
4. ACQUISITIONS
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. Subsequent to the initial recording of goodwill, an
additional $3,023,000 of goodwill has been recorded through December 31, 1999
relating to the acquisition of Sheldon. Such adjustment reflects the resolution
of the uncertainties related to the fair value of contracts acquired. During
1999, the Company issued 58,334 shares of common stock and recorded an
additional $700,000 in goodwill related to the settlement of any further
contingent purchase price payments to the former shareholders of Armcore.
On January 7, 1999, the Company acquired all of the outstanding stock of
MidWest Railroad Construction & Maintenance Corporation of Wyoming ("MidWest")
which specializes in construction, repair and maintenance of railroad tracks in
various western states. On January 26, 1999, the Company acquired all of the
outstanding 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 of the outstanding stock of FCM Rail, Ltd. ("FCM") which provides customized
leasing services to users of on-track rail equipment. On March 15, 1999, the
Company acquired all of the outstanding stock of F&V Metro Contracting Corp. and
Affiliates ("F&V") which performs electrical and mechanical installations for
transit and transportation agencies in the metropolitan New York City area. The
combined purchase price for these first quarter 1999 acquisitions was
$33,649,000 in cash, $8,545,000 of promissory notes payable and deferred
payments, and 100,000 shares of RailWorks Common Stock at an aggregate value of
$1,000,000, plus the potential to receive earn-outs if targeted revenue and
profit goals are achieved over the next five years. The fair market value of
assets purchased was $10,887,000 and the preliminary goodwill recorded was
approximately $32,307,000. Subsequent to the initial recording of goodwill, an
additional $9,056,000 of goodwill has been recorded through December 31, 1999
relating to these first quarter 1999 acquisitions. Such adjustments reflect the
resolution of the uncertainties related to the fair value of contracts acquired
and the appraisal of fixed assets acquired. On December 31, 1999, the Company
recorded an additional $6,123,000 in goodwill related to the settlement of 1999
contingent purchase price payments for these first quarter acquisitions.
On April 12, 1999, the Company acquired all of the outstanding stock of
McCord Treated Wood, Inc. and Birmingham Wood, Inc. ("McCord") which supply
creosote treated wooden cross ties throughout the Southeastern United States. On
April 30, 1999, the Company acquired all of the outstanding stock of M-Track
Enterprises, Inc. ("M-Track") which specializes in rail transit construction,
repair and maintenance of track in the metropolitan New York City area. On May
18, 1999, the Company acquired all of the outstanding stock of Pacific Northern
Rail Contractors, Inc. ("PNR") which specializes in construction, repair and
maintenance of railroad tracks throughout Canada. On June 3, 1999, the Company
acquired all the outstanding stock of Neosho, Incorporated ("Neosho") which
provides track and transit construction, repair and maintenance to public and
private industrial customers nationally. On June 30, 1999, the Company acquired
all of the outstanding stock of Earl Campbell Construction Company, Inc.
("Campbell") which specializes in construction, repair and maintenance of
railroad tracks in various Southern states. The combined purchase price for
these second quarter 1999 acquisitions was $49,535,000 in cash, $3,915,000 of
promissory notes payable and deferred payments and 93,842 shares of common stock
at an aggregate value of $1,000,000, plus the potential to receive earn-outs if
targeted revenue and profit goals are achieved over the next five years. The
fair market value of assets purchased for the second quarter 1999 acquisitions
was approximately $16,262,000 and the preliminary goodwill recorded was
approximately $38,188,000. Subsequent to the initial recording of goodwill, an
additional $11,668,000 of goodwill has been recorded through December 31, 1999
relating to these second quarter 1999 acquisitions. Such adjustments represent
the results from an appraisal of fixed assets acquired,
32
<PAGE> 33
Page 74 of 95
the resolution of litigation which was pending at the time of acquisition and
the resolution of uncertainties related to the fair value of contracts acquired.
On December 31, 1999, the Company recorded an additional $4,359,000 in goodwill
related to the settlement of 1999 contingent purchase price payments for these
second quarter acquisitions.
On August 4, 1999, the Company acquired all of the outstanding stock of
Wood Waste Energy, Inc. ("Wood Waste") which collects used cross ties along the
railroad rights of way and processes them into fuel which is sold to industrial
customers. The purchase price for this third quarter acquisition was $5,000,000
in cash and a $2,775,000 promissory note, plus the potential to receive
earn-outs if targeted revenue and profit goals are achieved for the years ended
December 31, 2000 and 2001. The fair market value of assets purchased was
approximately $1,078,000 and the preliminary goodwill recorded was approximately
$6,697,000. Subsequent to the initial recording of goodwill, an additional
$1,194,000 of goodwill has been recorded through December 31, 1999 related to
the acquisition of Wood Waste. Such adjustment reflects the resolution of the
uncertainties related to the fair value of assets acquired.
On October 22, 1999, the Company acquired all of the outstanding stock of
W.T. Byler, Inc. ("Byler") which provides track and transit construction, repair
and maintenance to public and private industrial customers in Texas and
surrounding states. On December 7, 1999, the Company acquired all of the assets
of Pandrol Jackson's Switch and Transit Grinding Operation ("Pandrol Jackson").
The switch grinding operation utilizes highly specialized machines to re-profile
rail in order to extend the useful life of trackwork. On December 16, the
Company acquired all of the outstanding stock of Twigg Corporation ("Twigg"),
which provides niche mechanical/heating, ventilation and air conditioning
services within the Mid-Atlantic region. On December 30, 1999, the Company
acquired all of the certain assets of the Dura-Wood Treating Company
("Dura-Wood"), a division of Roy O. Martin Lumber Company, Inc. Located in
Alexandria, Louisiana, Dura-Wood serves the southwest with creosote-treated
railroad cross ties, switch ties and crossing panels. The combined purchase
price for these fourth quarter acquisitions was $42,268,000 in cash, 399,379
shares of common stock at an aggregate value of $4,000,000, $2,895,000 of
promissory notes, plus the potential to receive earn-outs if targeted revenue
and profit goals are achieved for the years ended December 31, 2000 through
2003. The fair market value of assets purchased was approximately $30,284.000
and the preliminary goodwill recorded was approximately $18,880,000.
Assets acquired and liabilities assumed are recorded at their estimated
fair values at the time of acquisition. The excess of the purchase price over
the net fair value is allocated to goodwill. The estimated fair values of
acquired assets and liabilities are subject to adjustment pending finalization
of, among other things, certain fixed asset appraisals, the quantification of
contract and/or litigation uncertainties based on information which was not
available at the time of acquisition but subsequently obtained. Goodwill is
adjusted as these items are resolved as well as when, and if, additional
contingent purchase price is paid. The Company evaluates periodically whether
events and circumstances indicate that any goodwill is impaired. At December 31,
1999, the Company has completed its allocation of purchase price for all of the
Founding Companies and the 1998 Acquired Companies. The Company has also
completed its allocation of deferred taxes for all of the Founding and Acquired
Companies; however any subsequent changes will be reflected as adjustments to
goodwill as required by FAS 109.
The summary unaudited pro forma combined results of operations for the 1998
and 1999 acquisitions as if each of the acquisitions occurred at the beginning
of the period are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenue..................................... $637,333 $576,131
Net income.................................. 19,771 11,736
Earnings per share ......................... 1.39 .82
</TABLE>
5. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROGRESS
Accounts receivable at December 31, 1999 and 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Billed...................................... $114,586 $ 58,702
Retainages.................................. 38,498 18,479
-------- --------
$153,084 $ 77,181
======== ========
</TABLE>
Retainages of approximately $13,206,000 and $5,783,000 at December 31, 1999
and 1998 are invested in U.S. government obligations and municipal bonds. The
Company anticipates that approximately 54% of all retainages at December 31,
1999 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 errors or changes in contract specifications or
design, contract change orders in dispute or unapproved as to both scope and
price, or other customer-related causes of unanticipated additional contract
costs (pending change orders or claims). These amounts are recorded at their
estimated net realizable value when realization is probable and can be
33
<PAGE> 34
Page 75 of 95
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 $25,106,000
and $11,054,000 at December 31, 1999 and 1998, respectively, related to these
contracts. In addition, billed accounts receivable and retainages include
contractually billed amounts related to these contracts of approximately
$12,412,000 and $3,105,000 at December 31, 1999 and 1998, 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,
1999 and 1998, the Company had reserves of approximately $5,379,000 and
$4,500,000, respectively, related to unbilled revenue and estimated legal costs
to settle.
Costs and estimated earnings at December 31, 1999 and 1998, on uncompleted
contracts and related amounts billed are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Costs............................................ $ 776,130 $ 429,114
Estimated earnings............................... 97,000 47,575
--------- ---------
873,130 476,689
Billings......................................... 836,905 457,855
--------- ---------
$ 36,225 $ 18,834
========= =========
</TABLE>
Such amounts are included in the accompanying consolidated balance sheets
under the following captions (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on uncompleted contracts ..... $ 56,295 $ 24,792
Billings in excess of costs and estimated earnings on uncompleted contracts ..... (20,070) (5,958)
-------- --------
$ 36,225 $ 18,834
======== ========
</TABLE>
At December 31, 1999, 1998 and 1997, earned revenues from government related
funding sources were 44%, 40% and 66%, respectively, of total earned revenues.
Approximately 25%, 27% and 30% of total earned revenues for 1999, 1998 and 1997,
respectively, were from a single government customer.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land and buildings................................................. $ 6,246 $ 1,780
Transportation equipment........................................... 7,355 2,121
Machinery and equipment............................................ 67,122 10,038
Office furniture and equipment..................................... 2,028 326
Leasehold improvements............................................. 994 249
-------- --------
83,745 14,514
Less accumulated depreciation and amortization..................... 9,848 1,122
-------- --------
Property, plant and equipment, net................................. $ 73,897 $ 13,392
======== ========
</TABLE>
34
<PAGE> 35
Page 76 of 95
Depreciation and amortization expense on property, plant and equipment
charged to operations for the years ended December 31, 1999, 1998 and 1997 was
approximately $8,156,000, $1,140,000 and $56,000, respectively.
7. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Revolving credit agreement(a)............................... $ 47,202 $ 49,300
Term note(b)................................................ 30,000 --
Senior subordinated notes(c)................................ 173,953 --
Seller promissory notes(d).................................. 15,630 --
Fixed asset notes........................................... 27,646 2,204
--------- --------
294,431 51,504
Less current portion........................................ 19,740 931
--------- --------
$ 274,691 $ 50,573
========= ========
</TABLE>
(a) On August 5, 1999 the Company entered into a secured $105,000,000 revolving
credit agreement with Bank of America, N.A. and other lenders (the "Credit
Facility"). The Credit Facility amended and increased the $75,000,000
revolving credit agreement dated August 4, 1998. The Credit Facility
expires on August 5, 2002; however, the Company may request the lending
banks to extend the agreement for an additional one-year period. Further,
the Company can request the lending banks to increase the Credit Facility
up to a total of $115,000,000. On September 29, 1999 the Credit Facility
was amended to permit the Company to issue an additional $50,000,000 in
Senior Subordinated Notes (See footnote(c)). The proceeds of the Credit
Facility are utilized to finance working capital requirements, to fund
acquisitions and to issue letters of credit. The aggregate amount of letter
of credit obligations that can be drawn against the Credit Facility is
$20,000,000. At December 31, 1999 there was one outstanding letter of
credit for $2,150,000. There were no outstanding letters of credit 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, 1999, for Prime and LIBOR borrowings were 9.25% and 8.43%,
respectively. A one-time arrangement fee of $507,500 was paid on the Credit
Facility.
(b) On November 5, 1999 the Company entered into a new secured $30,000,000 term
loan agreement with Bank of America, N.A. and other lenders (the "Term
Loan"). The Term Loan, which is fully drawn, is repayable in 16 consecutive
quarterly principal installments of $75,000 each commencing February 5,
2000, and four consecutive quarterly principal installments of $7,200,000
each commencing February 5, 2004 and ending November 5, 2004. The Term Loan
was established in conjunction with the Company's Credit Facility utilizing
identical collateral and cross-referencing the Credit Facility's terms and
conditions. The proceeds of the Term Loan were utilized to pay down the
Credit Facility. Interest on the Term Loan is based on consolidated
leverage ratios in a pricing matrix which may be based on Prime or LIBOR.
The annual interest rates in effect at December 31, 1999, for Prime and
LIBOR borrowings were 10.50% and 9.82%, respectively. A one-time
arrangement fee of $475,000 was paid on the Term Loan.
(c) On April 7, 1999, the Company sold $125,000,000 of 11.5% senior
subordinated notes (the "Notes") in a private placement pursuant to Rule
144A under the Securities Act of 1933. On July 1, 1999, the Company made an
offer to exchange the $125,000,000 outstanding Notes for new Notes with
terms that were substantially identical to the outstanding Notes, except
that the new Notes are freely tradable. On September 30, 1999 the Company
sold an additional $50,000,000 of its 11.5% senior subordinated notes at a
2.125% discount in a private placement pursuant to Rule 144A under the
Securities Act of 1933. On December 20, 1999, the Company made an offer to
exchange the $50,000,000 outstanding Notes for new Notes with terms that
were substantially identical to the outstanding Notes, except that the new
Notes are freely tradable. All $175,000,000 of the Notes have an interest
rate of 11.5%, payable semi-annually on April 15 and October 15 and are due
in 2009 with no interim amortization requirements. The net proceeds from
both offerings were used to repay indebtedness under the Credit Facility
and other indebtedness. The Notes may be redeemed at any time on or after
April 2004. In addition, until April 15, 2002, up to 35% of the notes may
be redeemed with the net proceeds of certain equity offerings. If the
Company undergoes a change of control or sells certain of its assets, the
Company may be required to offer to purchase the Notes. The Notes are
unsecured and subordinated to all of the Company's existing and future
senior debt, including obligations under the Credit Facility.
(d) In conjunction with several of the acquisitions, the Company issued
promissory notes payable over the next several years
35
<PAGE> 36
Page 77 of 95
representing additional purchase price consideration in each respective
acquisition. The notes bear interest and typically mature on the anniversary
date of each respective acquisition. Approximately $8,470,000 of the notes
become due during the year 2000.
The Credit Facility and the Term Loan are collectively 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. Both the Credit
Facility and the Term Loan contain restrictive covenants that, among other
things impose limitations on the Company with respect to its ability to incur
additional indebtedness, make certain investments, sell assets or pay dividends.
The Credit Facility and the Term Loan also contain 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.
The following table sets forth the next five year maturities of long-term
debt:
<TABLE>
<CAPTION>
Year ending December 31
<S> <C>
2000............................................................... $ 19,740
2001............................................................... 17,620
2002............................................................... 54,018
2003............................................................... 300
2004............................................................... 28,800
Thereafter......................................................... 173,953
--------
Total.................................................... $294,431
========
</TABLE>
8. INCOME TAXES
The Company files a consolidated federal income tax return. The 1999 pretax
income consists of approximately $24.4 million from US subsidiaries and
approximately $6.7 million from foreign subsidiaries. There were no foreign
operations during 1998 and 1997. The income tax provision in the accompanying
consolidated statements of operations for the years ended December 31, 1999,
1998 and 1997 consists of (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.................................... $ -- $ -- $ --
Foreign ................................... 1,599 -- --
State...................................... 140 895 132
------- ------- -------
1,739 895 132
------- ------- -------
Deferred:
Federal.................................... 6,128 503 941
Foreign.................................... 1,436 -- --
State...................................... 1,760 74 125
------- ------- -------
9,324 577 1,066
------- ------- -------
$11,063 $ 1,472 $ 1,198
======= ======= =======
</TABLE>
Factors accounting for the variation from U.S. statutory income tax rates
relating to continuing operations for the years ended December 31, 1999, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Federal income taxes at the statutory rate................ $ 10,902 $ (3,981) $ 893
Foreign taxes............................................. 505 -- --
State and local taxes, net of federal benefit............. 1,900 (680) 206
Other (primarily non-deductible goodwill)................. 1,468 229 99
Change in valuation allowance............................. (3,712) 5,904 --
-------- -------- -------
$ 11,063 $ 1,472 $ 1,198
======== ======== =======
</TABLE>
The components of the deferred income tax accounts in the accompanying
consolidated balance sheets at December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward ............................................................. $ -- $ 3,005
Excess of amounts expensed for financial statement purposes over
amounts deducted for income tax purposes ................................................. 2,072 4,097
State and local income taxes, net of federal tax benefits ................................... 354 915
-------- --------
Total deferred tax asset ...................................................................... 2,426 8,017
-------- --------
Deferred tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax
purposes ................................................................................. 6,893 1,158
State and local income taxes, net of deferred federal tax benefits .......................... 1,178 --
-------- --------
Total deferred tax liability .................................................................. 8,071 1,158
-------- --------
</TABLE>
36
<PAGE> 37
Page 78 of 95
<TABLE>
<S> <C> <C>
Net deferred tax (liability) asset before valuation allowance ................................. (5,645) 6,859
Valuation allowance for deferred tax asset .................................................... -- (5,904)
-------- --------
$ (5,645) $ 955
======== ========
</TABLE>
9. 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.
10. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through its
subsidiaries. All of the Company's domestic subsidiaries have fully and
unconditionally guaranteed the Notes ("Subsidiary Guarantors"). The Company's
non-U.S. subsidiaries have not guaranteed the Notes (the "Non-Guarantor
Subsidiaries"). The Notes are effectively subordinated in right of payment to
all indebtedness and other liabilities (including trade payables) of the
Non-Guarantor Subsidiaries.
Set forth below are condensed consolidating financial statements for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as of
December 31, 1999 and for the year ended December 31, 1999. The Company has not
presented a balance sheet, statements of operations or a statement of cash flows
for the year ended December 31, 1998 because during such period all of the
Company's subsidiaries had fully and unconditionally guaranteed the Notes. The
equity method has been used by the Company with respect to investments in
subsidiaries. Separate financial statements for the Subsidiary Guarantors are
not presented based on management's determination that they do not provide
additional information that is material to investors.
RAILWORKS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
RAILWORKS
CORPORATION NON-
(PARENT GUARANTOR GUARANTOR
COMPANY ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash ................................. $ (13) $ 1,283 $ 3,347 $ -- $ 4,617
Accounts receivable, net ............. 205 151,328 8,471 (6,920)(a) 153,084
Costs and estimated earnings in excess
of billings on uncompleted
contracts ...................... -- 56,240 55 -- 56,295
Inventories:
Raw Materials .................. -- 15,697 3,500 -- 19,197
Finished goods ................. -- 3,178 1,384 -- 4,562
Deferred tax asset ................... 2,426 -- -- -- 2,426
Due to/(from) parent company ......... 63,192 (57,692) (5,500) -- --
Other current assets ................. 355 10,692 488 -- 11,535
------------- ------------ ------------ ------------ ------------
Total current assets ..... 66,165 180,726 11,745 (6,920) 251,716
------------- ------------ ------------ ------------ ------------
INVESTMENT IN SUBSIDIARIES ............... 346,580 -- -- (346,580)(b) --
------------- ------------ ------------ ------------ ------------
PROPERTY, PLANT AND
EQUIPMENT, NET ...................... 179 69,699 4,019 -- 73,897
------------- ------------ ------------ ------------ ------------
OTHER ASSETS:
Excess of cost over acquired net
assets, net of amortization .... -- 201,700 22,186 -- 223,886
Loans to officers ................... 6,735 -- -- -- 6,735
Assets held for sale ................ -- 5,573 -- -- 5,573
Other ............................... 6,149 3,635 66 -- 9,850
------------- ------------ ------------ ------------ ------------
Total other assets ...... 12,884 210,908 22,252 -- 246,044
------------- ------------ ------------ ------------ ------------
Total ............. $ 425,808 $ 461,333 $ 38,016 $ (353,500) $ 571,657
============= ============ ============ ============ ============
</TABLE>
(a) Elimination of inter-company receivables, payable.
(b) Elimination of investments in subsidiaries.
37
<PAGE> 38
Page 79 of 95
RAILWORKS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
RAILWORKS
CORPORATION NON-
(PARENT CO. GUARANTOR GUARANTOR
ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Current maturities of long-term debt .............. $ 8,770 $ 10,970 $ -- $ -- $ 19,740
Accounts payable and accrued liabilities .......... 22,064 61,396 3,122 (6,920)(a) 79,662
Accrued payroll and related
Withholdings .................................. 371 3,125 130 -- 3,626
Billings in excess of costs and estimated
Earnings on uncompleted contracts ............. -- 19,311 759 -- 20,070
Other current liabilities ......................... 6,755 2,497 96 -- 9,348
----------- ------------ ------------ ------------ ------------
Total current liabilities ................ 37,960 97,299 4,107 (6,920) 132,446
----------- ------------ ------------ ------------ ------------
LONG TERM DEBT .......................................... 258,012 14,579 2,100 -- 274,691
EXCESS OF ACQUIRED NET ASSETS OVER COST ................. -- 8,434 -- -- 8,434
DEFERRED TAX LIABILITIES ................................ -- 8,071 -- -- 8,071
OTHER LIABILITIES ....................................... 8,353 3,568 213 -- 12,134
----------- ------------ ------------ ------------ ------------
Total long-term liabilities ................... 266,365 34,652 2,313 -- 303,330
----------- ------------ ------------ ------------ ------------
Total liabilities ........................ 304,325 131,951 6,420 (6,920) 435,776
----------- ------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Series A, convertible preferred stock ............ 14 -- -- -- 14
Common stock ..................................... 112 2,118 215 (2,303)(b) 142
Additional paid-in capital ....................... 126,903 264,262 27,506 (291,768)(b) 126,903
Accumulated other comprehensive income ........... -- -- 175 -- 175
Retained earnings (deficit) ...................... (5,546) 63,002 3,700 (52,509)(b) 8,647
----------- ------------ ------------ ------------ ------------
Total stockholders' equity (deficit) .. 121,483 329,382 31,596 (346,580) 135,881
----------- ------------ ------------ ------------ ------------
Total ......................... $ 425,808 $ 461,333 $ 38,016 $ (353,500) $ 571,657
=========== ============ ============ ============ ============
</TABLE>
(a) Elimination of inter-company receivables/payables.
(b) Elimination of investments in subsidiaries.
RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
RAILWORKS
CORPORATION NON-
(PARENT CO. GUARANTOR GUARANTOR
ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales ............................................... $ -- $ 447,527 $ 36,157 $ (15,579)(a) $ 468,105
Cost of sales ........................................... -- 361,034 23,628 (15,579)(a) 369,083
----------- ------------ ------------ ------------ ------------
Gross profit ............................................ -- 86,493 12,529 -- 99,022
Selling, general and administrative
Expenses ............................................ 7,927 36,627 5,880 -- 50,434
----------- ------------ ------------ ------------ ------------
Income (loss) from operations ........................... (7,927) 49,866 6,649 -- 48,588
Equity in earnings of subsidiaries ...................... 38,041 -- -- (38,041)(b) --
Interest expense ........................................ (18,157) (1,683) (214) -- (20,054)
Other income, net ....................................... 358 1,956 301 -- 2,615
----------- ------------ ------------ ------------ ------------
Income before income taxes .............................. 12,315 50,139 6,736 (38,041) 31,149
Income taxes ............................................ -- 8,028 3,035 -- 11,063
----------- ------------ ------------ ------------ ------------
Net income .............................................. $ 12,315 $ 42,111 $ 3,701 $ (38,041) $ 20,086
=========== ============ ============ ============ ============
</TABLE>
(a) Elimination of inter-company revenue.
(b) Elimination of equity in earnings in subsidiaries.
38
<PAGE> 39
Page 80 of 95
RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
RAILWORKS NON-
CORPORATION GUARANTOR GUARANTOR
(PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
(ONLY) ------------ ------------ ------------ ------------
------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net Income ........................................... $ 12,315 $ 42,111 $ 3,701 $(38,041) $ 20,086
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ....................... 38 11,721 1,049 -- 12,808
Bond discount amortization .......................... 13 -- -- -- 13
Equity in earnings of subsidiaries .................. (38,041) -- -- 38,041 --
Gain on sale of equipment ........................... -- (27) (6) -- (33)
Changes in operating assets and liabilities:
Accounts receivable and costs and
estimated earnings in excess of billings
on uncompleted contracts ......................... (205) (31,442) (355) -- (32,002)
Inventory .......................................... -- 847 (382) -- 465
Other current assets ............................... 793 84 969 -- 1,846
Accounts payable and accrued liabilities ........... 2,193 (13,797) (4,077) -- (15,681)
Accrued payroll and related withholdings ........... 370 (2,597) (66) -- (2,293)
Billings in excess of costs and estimated
earnings on uncompleted contracts ................ -- (2,263) 759 -- (1,504)
Other current liabilities .......................... 1,584 (6,162) 1,077 -- (3,501)
Other assets ....................................... 2,111 (844) 49 -- 1,316
Other liabilities .................................. 2,087 (13,135) (1,882) -- (12,930)
Due (to) from Parent ............................... (40,350) 34,824 5,526 -- --
--------- -------- ------- -------- ---------
Net cash (used in) provided by
operating activities .......................... (57,092) 19,320 6,362 -- (31,410)
--------- -------- ------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ..................... -- 2,295 64 -- 2,359
Purchase of equipment and leasehold improvements .... (136) (14,652) (1,015) -- (15,803)
Loans to officers ................................... (5,776) -- -- -- (5,776)
Acquisition of subsidiaries, net of cash acquired ... (129,898) -- -- 8,746 (121,152)
Contingent earnout payments ......................... (2,083) -- -- -- (2,083)
--------- -------- ------- -------- ---------
Net cash (used in) investing activities ......... (137,893) (12,357) (951) 8,746 (142,455)
--------- -------- ------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on revolving line of credit .......... (2,098) -- -- -- (2,098)
Payment of loan origination fees .................... (1,232) -- -- -- (1,232)
Proceeds from long-term borrowing ................... 30,000 27,288 2,100 -- 59,388
Debt issuance costs ................................. (5,636) -- -- -- (5,636)
Proceeds from issuance of senior subordinated notes . 173,938 -- -- -- 173,938
Repayment of long-term borrowing .................... -- (43,966) (4,933) -- (48,899)
--------- -------- ------- -------- ---------
Net cash provided by (used in)
financing activities ....................... 194,972 (16,678) (2,833) -- 175,461
--------- -------- ------- -------- ---------
EXCHANGE RATE EFFECT ON CASH ......................... -- -- 175 -- 175
NET (DECREASE)INCREASE IN CASH ....................... (13) (9,715) 2,578 8,746 1,596
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ......... -- 10,998 594 (8,746) 2,846
--------- -------- ------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............... $ (13) $ 1,283 $ 3,347 $ -- $ 4,617
========= ======== ======= ======== =========
</TABLE>
(a) Elimination of equity in earnings of subsidiary.
(b) Elimination of cash acquired.
39
<PAGE> 40
Page 81 of 95
11. STOCK OPTION PLAN
On August 13, 1998, the Board of Directors approved the 1998 Stock Incentive
Plan (the "Plan") which provides for the granting or awarding of stock options
and stock appreciation rights to non-employee directors, officers and other key
employees (including officers of the Subsidiaries) and consultants. The Plan
reserves for issuance 2,000,000 shares of common stock. In general, the terms of
the option awards (including vesting schedules) will be established by the
Compensation Committee of the Company's board of directors.
During 1999 options covering an aggregate of 1,027,500 shares of common
stock were issued under the Plan. Various key management employees as well as
officers of acquired companies were issued options on shares of common stock
with an exercise price equal to the price of the common stock on the dates of
each of the respective grants. In all cases, the options expire ten years after
the date of grant.
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, 1999 and 1998, the following options were outstanding:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at August 4, 1998 .............. -- $ --
Granted ................................ 30,000 10.02
Exercised .............................. -- --
--------- --------
Balance, December 31, 1998 ............. 30,000 10.02
Granted ................................ 1,027,500 9.92
Forfeited .............................. (30,000) (9.38)
Exercised .............................. -- --
--------- --------
Balance, December 31, 1999 ............. 1,027,500 $ 9.94
========= ========
Exercisable, December 31, 1999 ......... 380,000 $ 10.00
========= ========
</TABLE>
The weighted average fair value of options granted in 1999 and 1998 at
market value was $4.52 and $4.79, respectively.
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......................... 5.12--6.42%
Expected lives.................................................... 3 to 6 years
Expected volatility............................................... 43.0 - 44.0%
Expected dividend yield........................................... 0%
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER OF OPTIONS WEIGHTED WEIGHTED
-------------- OUTSTANDING AT AVERAGE REMAINING AVERAGE
DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE
----------------- ----------------- --------------
<S> <C> <C> <C>
$6.06 to 12.00......................... 1,027,500 9.41 $ 9.94
========= ==== ======
</TABLE>
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER OF OPTIONS WEIGHTED WEIGHTED
-------------- OUTSTANDING AT AVERAGE REMAINING AVERAGE
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 years ended
December 31, 1999 and 1998 for options granted during the years. Had
compensation expense for all stock options granted in 1999 and 1998 been
determined consistent with SFAS No. 123, the Company's net income and net income
per share would have been as follows:
<TABLE>
<CAPTION>
Net income (loss): 1999 1998
--------- ---------
<S> <C> <C>
As Reported................................................... $ 20,086 $ (12,847)
========= =========
Pro Forma..................................................... $ 18,036 $ (12,864)
========= =========
Net income (loss) per share:
As Reported -- basic ......................................... $ 1.44 $ (1.67)
========= =========
As Reported -- diluted........................................ $ 1.31 $ (1.67)
========= =========
Pro Forma -- basic ........................................... $ 1.29 $ (1.67)
========= =========
Pro Forma -- diluted.......................................... $ 1.18 $ (1.67)
========= =========
</TABLE>
40
<PAGE> 41
Page 82 of 95
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.
12. 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 Company and its
subsidiaries currently offer no post-employment or post-retirement benefits. The
expense incurred related to the Plans by the Company was approximately $817,000,
$367,000 and $321,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Prior to 1997 in the case of Comstock and June 1999 in the case of Neosho,
these companies were generally self insured for their 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, 1999 and 1998 are reserves of approximately $1,461,000 and
$2,348,000, respectively, relating to these insurance liabilities. The Company,
including Comstock and Neosho, currently participates in a paid indemnity plan
for these insurance coverages.
The Company also has nonqualified defined benefit plans covering certain
current and former employees of one of the Subsidiaries which provides benefits
based on years of service and compensation. At December 31, 1999 and 1998,
approximately $2,410,000 and $3,007,000, respectively, has been recorded as
obligations in the accompanying balance sheets related to these plans.
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 the amount by which the
Company's net income exceeds certain benchmarks. During the year ended December
31, 1999, the Company accrued approximately $1,800,000 as payable under the two
bonus incentive Plans. No benefits were earned or paid under either of the Plans
during 1998.
13. 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>
<CAPTION>
Years Ending December 31
<S> <C>
2000....................................... $ 3,686
2001....................................... 3,365
2002....................................... 3,180
2003....................................... 2,661
2004....................................... 1,416
Thereafter................................. 511
</TABLE>
Rent expense for all operating leases, including amounts charged to cost of
revenues, for the year ended December 31, 1999, 1998 and 1997 was approximately
$6,506,000, $3,047,000 and $2,685,000, respectively.
Subsequent to December 31, 1999, the Company has entered into an agreement
to lease new corporate office facilities. The agreement which was entered into
on January 28, 2000 runs for five years and requires rental payments of
approximately $1,682,000 over the term of the lease.
14. 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 during 1999 and 1998 amounted to $1,078,000
and $330,000, respectively. The Company believes the rents to be the fair market
rental value of the property.
15. COMMITMENTS AND CONTINGENCIES
41
<PAGE> 42
Page 83 of 95
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 former shareholders of MidWest, Gantrex, FCM Rail, F&V Metro, PNR
Contractors, M-Track, Neosho, Wood Waste, Byler and Twigg are eligible to
receive additional cash amounts ("earn-outs"), consisting of cash, as
adjustments to the purchase prices paid for those companies. Such cash payments
are contingent upon the achievement of earnings targets over the next 2 to 5
years depending on each agreement. At December 31, 1999, approximately
$10,482,000 was recorded as an obligation regarding payments to be made by March
31, 2000, under the earn-out program for various companies achieving their
performance targets during 1999.
During 1999, approximately $2,083,000 was paid to the former shareholders of
Gantrex representing an earn-out payment based on Gantrex's operating
performance for the year ended December 31, 1998. This payment was recorded as
additional purchase price consideration relating to that acquisition.
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. 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.
16. 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 at the Company's
incremental borrowing rate at the date of the loan(s) and are collateralized by
the stock granted.
For the year ended December 31, 1999, interest income in the amount of
approximately $379,000 was recorded based upon the outstanding balances of the
indebtedness. This amount was offset by recording compensation expense on
behalf of each applicable employee. The 1999 interest payments were forgiven as
a result of the Company achieving certain operating performance benchmarks.
17. FINANCIAL INSTRUMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued. 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
pronouncement if effective for all entities with fiscal years beginning after
June 15, 2000. The Company does not anticipate that SFAS 133 will have a
material impact upon its operations.
42
<PAGE> 43
Page 84 of 95
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.
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. At December 31, 1999, the fair
market value of the Company's fixed rate Senior Subordinated Notes was
approximately $178,872,000.
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.
There were no swap agreements in effect as of December 31, 1999. The fair value
of the swap agreement that was in effect as of December 31, 1998 was
approximately $10,500.
18. SEGMENT REPORTING
Comstock operated in one reportable segment: transit services. Accordingly,
no disclosures for 1997 are required under SFAS No. 131. The following matrix
presents operational and financial condition data as of and for the year ended
December 31, 1999 for analysis by reportable segment (in thousands):
<TABLE>
<CAPTION>
TRANSIT RAIL PRODUCTS RAIL OTHER/
SERVICES AND SUPPLIES TRACK CORPORATE TOTAL
-------- ------------ ----- --------- -----
<S> <C> <C> <C> <C> <C>
Total revenues for reportable segments ................ $250,759 $ 53,524 $ 179,401 -- $483,684
Intersegmental revenue ................................ 5,868 4,563 5,148 -- 15,579
Depreciation/amortization ............................. 321 2,391 5,177 4,919 12,808
Segment operating profit (loss) ....................... 25,401 10,964 25,698 (13,475) 48,588
Costs and estimated earnings in excess of billings
on uncompleted contracts ............................ 47,555 227 8,513 -- 56,295
Segment assets ........................................ 133,566 47,175 99,804 440,507 721,052
</TABLE>
The Company's reconciliation of segment totals to enterprise values is as
follows (in thousands):
<TABLE>
<S> <C>
REVENUES:
Total revenues for reportable segments.................................. $ 483,684
Elimination of intersegment revenues.................................... (15,579)
---------
Consolidated revenues................................................... $ 468,105
=========
OPERATING PROFIT OR LOSS:
Total profit for reportable segments.................................... $ 48,588
=========
ASSETS:
Total assets for reportable segments.................................... $ 721,052
Elimination of intercompany receivables/payables........................ (6,920)
Elimination of investments in subsidiaries.............................. (142,475)
---------
Consolidated assets..................................................... $ 571,657
=========
</TABLE>
The Company's Canadian operations produced revenues in 1999 of $36,157,000.
The net book value of long-lived assets relating to the Canadian operations
amounted to $4,019,000 as of December 31, 1999. There were no Canadian
operations during 1998.
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 TRACK CORPORATE TOTAL
-------- ------------ ----- --------- -----
<S> <C> <C> <C> <C> <C>
Total revenues for reportable segments ................ $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
</TABLE>
43
<PAGE> 44
Page 85 of 95
The Company's reconciliation of segment totals to enterprise values is 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>
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1999, 1998
and 1997 are summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues........................................ $ 72,673 $ 115,810 $ 137,425 $ 142,197
Operating income................................ 3,835 10,799 17,571 16,383
Net income...................................... 1,636 4,135 7,693 6,622
Basic earnings per share........................ .12 .30 .55 .47
Diluted earnings per share...................... .11 .27 .50 .43
<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 earnings per share........................ .23 .15 (1.72) .37
Diluted earnings per share...................... .23 .15 (1.72) .34
<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 earnings per share........................ .15 .14 .16 .03
Diluted earnings per share...................... .15 .14 .16 .03
</TABLE>
44
<PAGE> 45
Page 86 of 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RailWorks Corporation:
We have audited the accompanying consolidated balance sheets of RailWorks
Corporation (a Delaware corporation) and Subsidiaries (the "Company"), as of
December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the three years in the
period ended December 31, 1999. 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, 1999 and 1998 and the results of its operations and its cash
flows for the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
/s/Arthur Andersen LLP
Stamford, Connecticut
February 9, 2000
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is composed of three non-employee
directors. The Committee held two meetings during fiscal year 1999. The
meetings also are designed to facilitate any private communication with the
Committee desired by the internal auditors or independent accountants.
The responsibilities of the Committee are set forth in its Charter, which is
reviewed and amended periodically, as appropriate. The Committee reviews and
monitors the Company's financial reporting process on behalf of the Board of
Directors. In fulfilling its responsibility, the Committee recommends to the
full Board of Directors the selection of the Company's independent public
accountants. The Audit Committee discusses with the internal auditors and the
independent public accountants the overall scope and specific plans for their
respective audits. The Committee also discusses the Company's consolidated
financial statements, the effectiveness and adequacy of the Company's internal
controls and pending litigation. The Committee meets regularly with the
Company's internal auditors and independent public accountants, without
management present, to discuss the results of their examinations, their
evaluations of the Company's internal controls and the overall quality of the
Company's financial reporting. The meetings also are designed to facilitate any
private communication with the committee desired by the internal auditors or
independent public accountants.
The Committee also discusses the Company's consolidated financial statements,
the effectiveness and adequacy of the Company's internal auditors and
independent accountants, without management present, to discuss the results of
their examinations, their evaluations of the Company's internal controls and
the overall quality of the Company's financial reporting.
Audit Committee
MARKET FOR COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market since
July 29, 1998, under the symbol of "RWKS".
The Company's initial public offering price was $12.00 per share. The following
table sets forth the range of high and low sales prices for the Common Stock on
the Nasdaq National Market for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31, 1999: High Low
<S> <C> <C>
Fourth quarter $ 11.00 $ 8.25
Third quarter 10.375 8.75
Second Quarter 12.00 9.25
First Quarter 11.50 7.75
</TABLE>
As of February 15, 2000, there were 117 holders of record of the Company's
Common Stock.
45
<PAGE> 46
Page 87 of 95
Inside Back Cover
RailWorks Corporation
6225 Smith Avenue
Baltimore, MD 21209
John G. Larkin
Chairman of the Board, Chief Executive Officer and Director
Michael R. Azarela
Executive Vice President, Chief Financial Officer and Director
Kenneth R. Burk
Executive Vice President, Chief Operating Officer and Director
John Kennedy
Vice President of Business Development and Director
Scott D. Brace
President of RailWorks Railroad Service and Director
Donald Traviss
President, Chief Executive Officer of Envirotrol, Inc. and Director
Ronald W. Drucker
Independent Consultant on Transportation and Technology Issues and Director
R.C. Matney
President, Chairman of the Board and Chief Executive Officer of Mark VII
Transportation Company, Inc. and Director
Financial Reports
Financial reports, including the Form 10-K, Form 10-Q, and quarterly earnings
releases, can be accessed through our Web site at www.railworks.com.
You may also obtain financial documents including the Form 10-K, without charge
by writing:
RailWorks Corporation
Attn: Investors Relations
6225 Smith Avenue
Baltimore, MD 21209
Annual Meeting
The Annual Meeting of Stockholders will be held May 18, 2000, 10:00 a.m. at the
RailWorks Headquarters 6225 Smith Avenue, Baltimore, MD 21209
Common Stock
RailWorks' common stock trades on the Nasdaq National Market under the symbol
RWKS.
46
<PAGE> 47
Page 88 of 95
Independent Accountants:
Arthur Andersen, LLP
Stamford, Connecticut
RailWorks On Line
For more information about RailWorks, including our operations, products and
services, visit our web site at www.railworks.com.
Transfer Agent and Registrar
For information regarding RailWorks' securities transfer, lost certificates or
change of address, please contact our transfer agent:
First Union National Bank
Shareholder Services
1525 West W. T. Harris Blvd, 3C3
Charlotte, NC 28262-1153
1-800-829-8432
47
<PAGE> 1
Page 89 of 95
EXHIBIT 21.1
SUBSIDIARIES OF RAILWORKS CORPORATION
<TABLE>
<S> <C>
Alpha-Keystone Engineering, Inc. Neosho Asia, Inc.
Alpha-Keystone, Inc. Neosho Central America, Inc.
Annex Railroad Builders, Inc. Neosho Construction Company, Inc.
Birmingham Wood, Inc. Neosho Contractors, Inc.
Comstock Holdings Inc. Neosho, Incorporated
Comtrak Construction, Inc. Neosho International, Inc.
Condon Brothers, Inc. Neosho Rail Services, Inc.
CPI Concrete Products, Inc. New England Railroad Construction Co.,
Cranequip Ltd. Inc.
Dura-Wood, LLC Northern Rail Service and Supply Company,
Earl Campbell Construction Company, Inc. Inc.
FCM Rail, Ltd. Pacific Northern Rail Contractors Inc.
F&V Metro RW, Inc. PNR Leasing Ltd.
Gantrex Corporation Railcorp, Inc.
Gantrex Limited Railroad Service, Inc.
HP McGinley, Inc. RailWorks Canada Company
Impulse Electric Enterprises RailWorks Canada, Inc.
of New York, Inc. Railworks Rail Services of Canada Ltd.
Kennedy Railroad Builders, Inc. RWKS Transit, Inc.
L. K. Comstock & Company, Inc. Sheldon Electric, Inc.
McCord Treated Wood, Inc. Southern Indiana Wood Preserving Co., Inc.
Merit Railroad Contractors, Inc. Twigg Corporation
Midwest Construction Services, Inc. U. S. Railway Supply, Inc.
Midwest Railroad Construction U. S. Trackworks, Inc.
and Maintenance Corporation of V&R Electrical Contractors, Inc.
Wyoming Wm. A. Smith Construction Co., Inc.
Minnesota Railroad Service, Inc. Wood Waste Energy, Inc.
M-Track Enterprises, Inc. W.T. Byler Co., Inc.
Neosho Asia, Inc.
</TABLE>
<PAGE> 1
Page 90 of 95
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 9, 2000 included in
the Company's Annual Report to Stockholders for the year ended December 31,
1999. It should be noted that we have not audited any financial statements of
the Company subsequent to December 31, 1999 or performed any audit procedures
subsequent to the date of our report.
Arthur Andersen LLP
February 25, 2000
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Page 91 of 95
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RAILWORKS CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,617,000
<SECURITIES> 0
<RECEIVABLES> 153,084,000
<ALLOWANCES> 1,990,000
<INVENTORY> 23,759,000
<CURRENT-ASSETS> 251,716,000
<PP&E> 83,745,000
<DEPRECIATION> 9,848,000
<TOTAL-ASSETS> 571,657,000
<CURRENT-LIABILITIES> 132,446,000
<BONDS> 0
0
14,000
<COMMON> 142,000
<OTHER-SE> 126,903,000
<TOTAL-LIABILITY-AND-EQUITY> 571,657,000
<SALES> 468,105,000
<TOTAL-REVENUES> 468,105,000
<CGS> (369,083,000)
<TOTAL-COSTS> (369,083,000)
<OTHER-EXPENSES> (50,434,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20,054,000)
<INCOME-PRETAX> 31,149,000
<INCOME-TAX> (11,063,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,086,000
<EPS-BASIC> 1.44
<EPS-DILUTED> 1.31
</TABLE>
<PAGE> 1
Page 92 of 95
EXHIBIT 99.2
We, or our executive officers and directors on our behalf, may from time to
time make "forward looking statements" within the meaning of the Securities Act
of 1933 and the Securities Exchange Act of 1934. These statements may be
contained in reports and other documents that we file with the SEC or may be
oral statements made by our executive officers and directors to the press,
potential investors, securities analysts and others. These forward looking
statements could involve, among other things, statements regarding the
Company's intent, belief or expectation with respect to:
- our results of operations and financial condition,
- the consummation of acquisitions and financial transactions and their
effect on our business, and
- our plans and objectives for future operations and expansion.
Any forward looking statements would be subject to risks and uncertainties that
could cause our actual results of operations, financial condition,
acquisitions, financing transactions, operations, expansion and other events to
differ materially from those expressed or implied in such forward looking
statements. Any forward looking statements would be subject to a number of
assumptions regarding, among other things, future economic, competitive and
market conditions generally. These assumptions would be based on facts and
conditions as they exist at the time the forward looking statements are made as
well as predictions as to future facts and conditions. These future facts and
conditions may be difficult for us to predict accurately and may involve the
assessment of events beyond our control. Further, our business is subject to a
number of risks that would affect any such forward looking statements. These
risks include, among other things, the following:
WE HAVE SUBSTANTIAL LEVERAGE
We have a substantial amount of debt outstanding, which could adversely
affect our financial health. Despite current indebtedness levels, we and our
subsidiaries may incur substantial additional debt in the future. If new debt
is added to our and our subsidiaries' current debt levels, the related risks
that we and they now face could intensify.
Our substantial amount of debt could have important consequences for you. For
example, it could:
- limit our ability to obtain additional financing, if we need it, for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes;
- increase our vulnerability to adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing funds available
for operations, future business opportunities or other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- place us at a competitive disadvantage compared to our competitors
that have less debt.
To service our indebtedness, we will require a significant amount of cash.
Our ability to make payments on our debt and to fund planned capital
expenditures and acquisitions will depend on our future operating performance
and on our ability to successfully implement our business strategy.
Prevailing general economic conditions and financial, business, regulatory
and other factors, many of which are beyond our control, will affect our
ability to make these payments. If future cash flow is not sufficient to make
scheduled payments on our debt, we will need to refinance all or a portion of
our debt before maturity, obtain additional financing, delay planned
acquisitions and capital expenditures, or sell assets. Any such event could
have a material adverse effect on our business, financial condition and
results of operations.
OUR OPERATING COMPANIES DO NOT HAVE A COMBINED OPERATING HISTORY; WE MAY BE
UNSUCCESSFUL INTEGRATING THEIR DECENTRALIZED OPERATIONS
Our company was founded in March 1998 but conducted no operations and
generated no revenue until we completed the initial public offering, or IPO,
of our common stock in August 1998. We acquired 14 groups of companies, which
we refer to as the Founding Companies, concurrently with the completion of
our IPO and have acquired an additional 16 operating companies, or groups of
companies, since the IPO through December 31, 1999. Our operating companies
were separate independent entities before we acquired them and to a certain
extent they continue to operate as independent entities because we conduct
our operations on a decentralized basis. The integration of our operating
companies, while allowing them to retain decentralized operations and
management, is important to our operating and growth strategies and the
achievement of efficiencies in our combined operations. We 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 our management
group have only recently joined our company and there can be no assurance
that the management group will be able to implement our acquisition and
operating strategies. We cannot assure you that we will be able to establish,
maintain or increase the profitability of the operating companies. Our
financial statements include results of operations for certain operating
companies when they were not
<PAGE> 2
Page 93 of 95
under common control or management. As a result, our financial statements
may not be indicative of our future results of operations. Any failure by
our management group to implement our strategies, integrate the operating
companies without substantial costs, delays or other operational or
financial difficulties, or effectively oversee the combined entity could
have a material adverse effect on our business, financial condition and
results of operations.
WE MAY BE UNABLE TO COMPLETE AND FINANCE ACQUISITIONS
We have completed a significant number of acquisitions since the IPO and
we intend to continue to grow through acquisitions. Our 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 our growth
or adversely affect our financial performance.
We cannot assure you that we will maintain or accelerate our growth or
anticipate all of the changing demands that expanding operations will
impose on our management, personnel, operational and management
information systems and financial systems. We 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 of these occurrences
could have a material adverse effect on our business, financial condition
and results of operations.
We cannot predict the timing, size and success of our acquisition efforts
and any associated capital commitments. We currently intend to finance
future acquisitions with bank borrowings, shares of our common stock,
internally generated funds or a combination of common stock and cash. If
our 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, we
may be required to utilize more of our cash resources or borrowings to
maintain our acquisition program. In addition, our 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.
WE MAY BE UNABLE TO GENERATE INTERNAL GROWTH
Our ability to grow will be affected by various factors, including demand
for rail system services and products, our success in bidding on new
projects, the success of our cross-selling efforts and our ability to
develop a national accounts program. Our growth may also depend on
increased outsourcing by rail system operators. Many of these factors are
beyond our control. Our strategies may not be successful or we 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 our
business, financial condition and results of operations.
WE HAVE BEEN DEPENDENT ON CERTAIN CUSTOMERS
We derived approximately 41.9% of our revenue for the year ended December
31, 1999 from our top ten customers. Approximately 17.7% of our 1999
revenue was derived from projects undertaken for the New York City Transit
Authority, which we refer to as 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.
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 our operating
companies have experienced net losses. See "-- Our Fixed Price Contracts
Expose us to Significant Risks" below. We cannot assure you that we or our
operating companies will be profitable in the future.
WE FACE INTENSE COMPETITION
The rail system services and products industry is highly competitive.
Numerous companies 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 our competitors have greater resources than we have, 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 our existing and future competitors would
have a material adverse effect on our business, financial condition and
results of operations. Certain of our operating companies also provide
electrical contracting services to non-rail industrial and commercial
customers. While we believe that we currently compete effectively in the
non-rail electrical contracting business, this
<PAGE> 3
Page 94 of 95
industry is highly competitive and is served by small, owner-operated
private companies, public companies and several large regional companies.
Additionally, we could face competition in the future from other
competitors entering our markets.
WE ARE 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, which we refer to as 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; the availability of public funds 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. We cannot assure you that these factors or
others unique to public sector contracts will not have a material adverse
effect on our business, financial condition and results of operations.
OUR FIXED PRICE CONTRACTS EXPOSE US TO SIGNIFICANT RISKS
Fixed price contracts are typically awarded in the rail system services
industry pursuant to a competitive bidding process. In compiling our bid
on a particular project, we 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 our control. If we cannot accurately predict the costs of fixed
price contracts, certain projects could have lower margins than
anticipated or we could suffer losses on the projects. Lower margins and
losses could have a material adverse effect on our business, financial
condition and results of operations.
WE RELY ON SUBCONTRACTORS AND SUPPLIERS
We generally perform 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, we act as the prime contractor and subcontract the design of
the signal or communication system and necessary equipment. When we are a
prime contractor for such projects, we generally require subcontractors to
post performance bonds. We 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 us as prime
contractor. We sometimes depend upon the subcontractor to perform design
and other services and provide equipment. For certain projects only a
limited number of companies can perform the subcontract if the initial
subcontractor defaults. As a result, we depend upon our 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 cannot do
business with us, it could have a material adverse effect on our business,
financial condition and results of operations.
THE RAIL SYSTEM INDUSTRY IS CYCLICAL
We derive a substantial portion of our revenue from public contracts,
which we expect will constitute a relatively stable source of business due
to funding provided by the Transportation Equity Act for the 21st Century.
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 we provide. During periods of peak usage, rail
system owners may defer certain expenditures because they may need to
address operational challenges these conditions cause. 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, may exacerbate the effects
of these uncertainties.
WE ARE EXPOSED TO DOWNTURNS IN COMMERCIAL CONSTRUCTION
We derive a significant portion of our revenue 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 our business, financial condition and results
of operations.
<PAGE> 4
Page 95 of 95
Further, our electrical installation business is focused in the
northeastern United States and is therefore particularly susceptible to
economic downturns in that region.
OUR WORKFORCE IS UNIONIZED
As of December 31, 1999, approximately 55% of our employees were covered
under collective bargaining agreements. In June 1994, one of our operating
companies was affected by a one-week work stoppage by the United
Brotherhood of Teamsters. We cannot assure you that future work stoppages
will not affect us. In addition, labor agreements are generally negotiated
on an industry-wide basis and the terms and conditions of future labor
agreements could be beyond our control. We may be subject to terms and
conditions in future labor agreements that could have a material adverse
effect on our business, financial condition and results of operations.
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL AND GOVERNMENT REGULATION
Our 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. We could incur significant ongoing costs associated with
environmental regulatory compliance. Further, we sometimes use hazardous
materials in connection with our operations. Although we believe that we
materially comply with all of the various environmental regulations
applicable to our business, we cannot assure you that requirements will
not change in the future or that we will not incur significant costs to
comply with such requirements.
In addition to safety, health and other regulations of general
applicability, our 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 our business, financial condition and results of operations.
WE ARE DEPENDENT ON KEY PERSONNEL
Our 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.
We also rely on senior management of our operating companies. While we
have entered into employment agreements with Messrs. Larkin and Azarela
and certain senior managers of the operating companies, we cannot be sure
that such individuals will remain with us throughout the terms of their
agreements, or thereafter. Further, we likely will depend on the senior
management of any significant businesses we acquire in the future. The
loss of the services of one or more of these key employees before we are
able to attract and retain qualified replacement personnel could have a
material adverse effect on our business, financial condition and results
of operation.
