-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ad6BivkZ0dQHKHPEsM/T8X9TfeNR6Ya5jKIuFbhH7t5FHQyUCuAGLLfnSmGOUAuc MTE56Wx25HIdBWUyfxdrDg== 0000950144-99-003388.txt : 19990330 0000950144-99-003388.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950144-99-003388 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAILWORKS CORP CENTRAL INDEX KEY: 0001061857 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 582382378 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24639 FILM NUMBER: 99575902 BUSINESS ADDRESS: STREET 1: 1104 KENILWORTH DRIVE STREET 2: SUITE 301 CITY: BALTIMORE STATE: MD ZIP: 21204 BUSINESS PHONE: 4104679504 MAIL ADDRESS: STREET 1: 1104 KENILWORTH DRIVE STREET 2: SUITE 301 CITY: BALTIMORE STATE: MD ZIP: 21204 10-K405 1 RAILWORKS CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM --------------- TO ---------------
COMMISSION FILE NUMBER: 0-24639 RAILWORKS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 58-2382378 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
1104 KENILWORTH DRIVE SUITE 301 BALTIMORE, MARYLAND 21204 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (410) 512-0500 Securities registered pursuant to Section 12(b)of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, par value $.01 The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the Registrant) as of March 1, 1999 (based on the closing sale price of the Registrant's Common Stock, par value $.01, as reported on The Nasdaq Stock Market on such date) was $106,460,325 and there were 13,796,038 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999 are herein incorporated by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 14 Item 3. Legal Proceedings........................................... 14 Item 4. Submission of Matters to a Vote of Security Holders......... 14 Item X. Executive Officers of the Registrant........................ 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 16 Item 6. Selected Financial Data..................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 28 Item 8. Financial Statements and Supplementary Data................. 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 28 PART III Item 10. Directors and Executive Officers of the Registrant.......... 29 Item 11. Executive Compensation...................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 29 Item 13. Certain Relationships and Related Transactions.............. 29 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 30
3 PART I ITEM 1. BUSINESS OVERVIEW RailWorks Corporation ("RailWorks" or the "Company"), a Delaware corporation organized in 1998, is a leading provider of integrated rail system services and products to a diverse base of customers throughout the United States. Management believes RailWorks is positioned to grow significantly due to its ability to comprehensively design, supply, construct and maintain rail systems. The Company's strategy is based on providing a full range of rail-related services and products on a "turnkey" basis throughout North America and offering rail system solutions under the "RailWorks" brand. RailWorks provides track construction, rehabilitation, repair, maintenance and operations; rail electrification and installation of communication and signaling systems; and related products and supplies. The Company provides these services to a wide variety of customers, including Class I and shortline railroads, publicly funded transit authorities and commercial and industrial companies. RailWorks also provides non-rail products and services such as electrical contracting, bridge and highway support structures and related concrete products. INDUSTRY OVERVIEW The rail passenger and freight industries have undergone significant changes in recent years. Changes in the industry have affected Class I railroads, shortline and regional railroads, passenger railroads and transit systems. In addition, industrial and other commercial companies that own and maintain their own rail systems have become more focused on transportation logistics and achieving cost efficiencies. These changes have resulted in an ongoing reconfiguration of the country's rail infrastructure, significant new construction projects and emerging demand for outsourced construction, rehabilitation, repair and maintenance services. Total Expenditures. Based on information published by the American Association of Railroads (the "AAR") and the American Public Transit Association ("APTA"), management estimates that expenditures by rail system operators for domestic new construction, rehabilitation, repair and maintenance were approximately $16 billion in 1998. Management estimates that the breakdown of expenditures was as follows: (EXPENDITURES PIE CHART) The Company also believes that expenditures for these services outside the United States have increased significantly in recent years as a result of infrastructure construction and modernization programs, as well as privatization of large rail systems. In many instances, foreign governments and companies have sought the expertise of designers, engineers and construction managers in the United States. 1 4 Class I Railroads. According to the AAR, Class I track usage (defined as tons shipped per track mile) has increased significantly from 4.7 million in 1988 to 7.8 million in 1997, representing a 5.9% compound annual growth rate. As a result of industry consolidation, there are only eight Class I railroads (as defined by the Surface Transportation Board ("STB")) operating in the United States today, compared to 27 in 1980. These railroads are Burlington Northern Sante Fe Railway, CSX Transportation, Kansas City Southern Lines, Norfolk Southern Railway Company, Union Pacific Railroad, Canadian National, Canadian Pacific and Consolidated Rail Corporation. According to the AAR, these railroads accounted for 71% of the rail mileage operated in the United States and 91% of railroad revenue in 1997. In recent years, the Class I railroads have sought to rationalize their systems, for example by "double-tracking" certain high traffic main lines and abandoning portions of their systems that generate lower volumes of traffic. Mergers of Class I systems have also created significant construction projects as the systems are reconfigured and integrated. Historically, the major railroads have been vertical organizations that sought to perform their own construction and maintenance by utilizing specialized workforces and equipment for these functions. Management believes that as Class I railroads seek to continue to improve their cost structures, they will increasingly continue to outsource certain construction and maintenance functions to independent contractors. Shortline and Regional Railroads. In recent years, the number and coverage of shortline and regional railroads (i.e., those railroads which are not Class I railroads) have increased significantly. The Staggers Rail Act of 1980 provided for partial deregulation of the railroad industry and created mechanisms by which larger railroads could more easily dispose of portions of rail line. Since that time, the larger railroad systems in the United States have streamlined their operations by disposing of portions of their systems that generate lower volumes of traffic and other companies have acquired portfolios of shortline railroads. According to the AAR, there are approximately 550 shortline and regional railroads, which in the aggregate generated approximately 9% of all railroad revenue in 1997. The percentage of total track miles operated by shortline and regional railroads in the United States increased to 29% in 1997 from approximately 17% in 1986. Shortline and regional railroads spend a relatively large portion of their capital and operating budgets on maintenance of their track assets, because these assets are often in poor condition when they are acquired. These railroads typically utilize independent contractors for their maintenance and construction programs, because they do not have systems large enough to support the purchases of equipment and development of workforces that would be required for these functions. Passenger Rail Transit Services. The growth of major metropolitan areas and the aging of existing rail systems have resulted in significant developments in passenger rail transit services. Heavy rail, commuter rail (service between metropolitan and suburban areas) and light rail (typically, short trains operating on rights-of-way that are not separated from other traffic) have emerged as attractive alternatives to bus or automobile transit and older commuter rail systems have been rehabilitated and extended to handle increased ridership. Many older urban systems (such as the New York City subway system) are undergoing significant rehabilitation and/or modernization, while major heavy rail systems built in the 1970s (such as the systems in San Francisco and Atlanta) are being extended and upgraded. Additionally, there have been several recent initiatives to develop high-speed rail transit networks between major urban areas (for example, in Florida and the Northeast corridor). According to APTA, there are now 18 commuter rail agencies in 14 urban areas, 14 heavy rail agencies in 11 urban areas and 23 light rail agencies nationwide. According to APTA, commuter and light rail ridership has increased 30% and 99%, respectively, from 1985 to 1997. Since 1979, approximately 16 cities have constructed new light rail-based transit systems and other cities have either extended or refurbished their existing systems, with ridership increasing by approximately 150% over the period from 1978 through 1996. In June 1998, the President signed the Transportation Equity Act for the 21st Century ("TEA 21"), which is expected to provide $42 billion of funds for transit projects through 2003. See "Government Regulation -- TEA 21." This represents more than a 50% increase of funding from the previous six-year period. According to APTA, in 1997, 53.7% of transit spending was derived from federal funding with the balance derived from state and local sources. Accordingly, opportunities to provide rail-related signaling, communication, electrical and track system construction, rehabilitation, repair and maintenance services for transit systems have increased and are expected to continue to increase significantly. 2 5 Industrial Companies. Companies install trackwork in their plants to transport raw materials, equipment and finished goods. This trackwork consists of connector lines that provide access to Class I or shortline railroads and railyards to coordinate the shipment and delivery of cargo to and from their plants. Companies are responsible for maintaining their own track and typically construct and reconfigure trackage as part of plant construction and expansion. Companies seek to optimize their track infrastructure in order to (1) reduce the risk of accidents that can cause delays, property damage, and environmental spills, (2) gain access to competing railroads to drive down costs and (3) reduce transportation costs by minimizing the switching of railcars which is time consuming and expensive. Such companies generally do not have the internal resources to perform these services and typically use independent contractors to design, construct and maintain these rail lines. COMPANY HISTORY RailWorks was formed in March 1998 to become a leading nationwide provider of rail system services, including construction and rehabilitation, repair and maintenance, and related products. The Company currently has 20 operating companies that have been in the rail systems business for an average of 29 years. The Company has acquired the operating companies through the following transactions: - In August 1998, RailWorks acquired in separate concurrent transactions 14 groups of companies engaged principally in the rail system services and products business and RailWorks consummated its initial public offering (the "IPO"). These groups of companies are referred to as the "Founding Companies." - In November 1998, RailWorks acquired two companies. These companies are referred to as the "1998 Acquired Companies." - In the first quarter of 1999, RailWorks acquired four companies. These companies are referred to as the "1999 Acquired Companies." The 1998 Acquired Companies and the 1999 Acquired Companies are together referred to as the "Acquired Companies." The Acquired Companies had combined fiscal 1998 revenue of $83.1 million. COMPETITIVE STRENGTHS Breadth of Services and Products. Management believes that the Company offers a broader range of services and products than most industry participants. The Company believes that larger rail system operators are seeking to establish relationships with contractors that specialize in rail system services and products and that can provide efficient, integrated solutions over the entire life cycle of their assets. The Company further believes that rail system operators and industrial companies are increasingly seeking to enter into arrangements with a smaller number of companies that can provide integrated services on a national or regional basis, in order to ensure centralized management of their rail assets, adherence to uniform quality standards and more cost-effective procurement practices. The Company is able to cross-sell its services and products as it combines the strengths of the operating companies to provide its customers with integrated rail system solutions. For example, the Company combines its design and engineering services with track construction to offer a turnkey approach to track construction projects. The Company's ability to bundle services, including construction, rehabilitation and maintenance, under a single contract has allowed it to compete more effectively against companies that provide a more limited range of services. Expansive Geographic Coverage. The Company's 37 operating facilities provide it with expansive geographic coverage that enables it to reach customers throughout North America. These multiple facilities enable the Company to undertake projects in a more cost effective manner than would be possible without local facilities. RailWorks is able to perform projects at multiple locations for its national account customers, enabling them to use a single company for rail system projects throughout the United States and Canada. The Company also can allocate equipment and technical specialists throughout the United States and Canada to maximize asset utilization, satisfy regional demand and complete projects in remote locations. Management believes its broad geographic presence allows it to reduce the impact of local and regional economic cycles, as well as weather-related or seasonal variations in its business. 3 6 Significant Market Presence. In an industry that has traditionally been comprised of regional competitors, management believes that the Company's size gives it a competitive advantage. The Company's substantial contract bonding capacity allows it to bid on additional projects and more substantial projects that may not be available to smaller companies. This has allowed the Company to significantly increase its project backlog since August 1998. In addition, the Company's size provides significant economies of scale in terms of materials purchasing, capital expenditures and administrative costs. Diverse Sources of Revenue. The Company derives a significant portion of its revenue from public transit authorities whose funding is appropriated from federal, state and local sources and is less sensitive to economic cycles. In addition, a portion of the Company's work is related to government-mandated safety standards and, therefore, cannot be postponed. The Company sells its services through a large number of individual contracts. No contract accounted for more than 5.2% of the Company's pro forma revenue for the year ended December 31, 1998. More than half of the Company's contracts have a duration in excess of one year, providing the Company with a significant source of future revenue. The Company has strong relationships with a wide variety of customers, including: Class I railroads which have utilized RailWorks for repair and maintenance, construction or engineering and supply: - CSX Transportation - Union Pacific Railroad - Burlington Northern Santa Fe Railway - Canadian National Railway Shortline and regional railroads, which have contracted with RailWorks for track construction and maintenance work or product supply: - Alaska Railroad Corp. - Louisville & Indiana Railroad - Indiana Southern Railroad Company - Indiana & Ohio Rail Systems Publicly funded transit authorities, which have contracted with RailWorks for electrical installations, signaling, communications and station projects: - New York City Transit Authority - New York Department of Transportation - Los Angeles Metropolitan Transit Authority - Connecticut Department of Transportation Rail Division Commercial and industrial companies, which have contracted with RailWorks for track construction and maintenance and non-rail electrical contracting work: - United States Steel - Bethlehem Steel - Morse Diesel - Babcock & Wilcox Experienced Management. The Company's senior operating managers have an average of 26 years of experience in the rail services and products industry, and many of them are or have previously served as leaders of industry trade groups. The Company uses a corporate management structure that allows these senior managers to focus on marketing and growing their operations instead of administrative responsibilities. 4 7 Management has created a culture of cooperation and teamwork among the operating companies that emphasizes dissemination of best practices among the Company's regional and local management teams. For example, management believes that the Company can successfully implement best practices in the areas of 24-hour emergency rerailment services, annual maintenance contracts and efficient inventory management. As of February 28, 1999, the Company's directors and executive officers and senior managers of the operating companies beneficially owned an aggregate of 36.9% of the Company's outstanding common stock. STRATEGY Key elements of the Company's strategy include the following: Capitalize on Scale and Geographic Coverage. By combining the operations of the Founding Companies and the Acquired Companies, the Company has achieved greater size and scope than regional and local contractors. The Company believes that it will be able to achieve continued internal growth by building its national accounts program to serve rail customers with multiple sites and by enhancing its sales and marketing programs. Management expects to leverage the Company's geographic network and greater bonding capacity to increase its business. The Company currently has very limited international operations but over time it may increase its activity in international markets, where privatizations of railroads and large transit projects are creating increased demand for sophisticated design and construction management services. The Company also shares equipment and labor while managing multiple worksites. The Company believes that this process of sharing resources and its comprehensive bidding capabilities enable it to compete more effectively. Utilize Cross-Selling. The Founding Companies and the Acquired Companies have provided RailWorks with a broad range of rail-related services and products. The Company intends to leverage its existing customer base to "cross-sell" these services and products. For example, we will seek to provide additional track construction and maintenance services to Class I railroads who are already significant buyers of our track supplies. We also intend to continue to emphasize the marketing of rail maintenance programs which provide recurring revenue and strengthen customer relationships. The Company has been successful in leveraging its maintenance relationships to obtain new rail system installation projects. In addition, by placing a stronger emphasis on our design and engineering services we expect to gain access to more track construction opportunities. Expand Through Acquisitions. Management believes the Company is well-positioned to capitalize on the consolidation of the rail system services and products industry on a regional and nationwide basis. The Company has created an efficient operating platform that management expects will facilitate the integration of future acquisitions. The Company's acquisition program includes expanding geographic coverage throughout North America, broadening the Company's lines of services and products, and adding density and operating leverage within the Company's current markets. Management believes that the experience and industry reputations of the senior managers of the operating companies and senior corporate management of the Company provide it with a competitive advantage in identifying, completing and integrating acquisitions. Since the Company completed its IPO in August 1998, it has acquired six companies with aggregate revenue of $83.1 million for fiscal 1998. The Company currently has letters of intent to acquire four companies. The Company expects to execute definitive purchase agreements, which will have customary closing conditions (including completion of due diligence), in the second quarter of 1999. However, there can be no assurance that the Company will acquire any or all of these companies. The Company's acquisition strategy includes the following elements: - Enter New Geographic Markets. Management intends to expand into geographic markets the Company does not currently serve by acquiring well-established contractors and related supply companies that are leaders in their regional or local markets. In addition, after an initial emphasis on acquisitions within the United States and Canada, management may pursue international acquisition opportunities. - Enter Complementary Services and Product Markets. Management intends to continue acquiring companies offering complementary services and products to those currently offered by the operating companies. Specifically, management believes that there will continue to be attractive acquisition 5 8 opportunities with respect to design and engineering firms, designers and manufacturers of signaling and communication systems and suppliers of electrical equipment, rail, switches and panels, and concrete and steel ties. - Expand Within Existing Geographic Markets. Management plans to acquire additional companies in many of the regions in which the Company currently operates in order to expand the volume and scope of the Company's operations in a particular market. Management will continue to pursue acquisitions of smaller companies to increase utilization of the Company's existing fixed assets and equipment or to gain access to new customers. Management believes these types of acquisitions will improve operating efficiencies and more effectively use the Company's capital resources without a proportionate increase in administrative costs. Reduce Operating Costs. Key areas in which management has achieved and expects to continue to achieve cost savings include (1) purchasing of equipment and supplies, (2) insurance expenses and (3) financing costs. The Company also has established an operating platform to achieve optimal utilization of equipment, inventory and the Company's workforce. The Company expects to continue to reduce administrative expenses through the integration of certain accounting, financing, human resources and other functions. SERVICES AND PRODUCTS The Company operates in three business lines: (1) transit services; (2) rail construction services; and (3) rail products and supplies. The following chart sets forth the percentage of 1998 pro forma revenue that was represented by each business line. LOGO Transit Services The Company's transit services business includes all products and services that it provides to rail-based public transit agencies and authorities in various metropolitan markets. The Company typically contracts with these agencies to install (1) electric train traction power systems (by means of third rail or overhead catenary wiring), (2) train control signal systems, (3) train, station and command station communications systems, (4) general electrical installations for lighting and other applications and (5) tunnel and station track. The Company can perform major new projects that involve track installation including excavation, grading, paving and drainage improvements as well as minor rehabilitation projects. Projects for new public transit lines generally include the installation of all of these systems, giving the Company a competitive advantage. In addition, the Company leverages its knowledge of transit systems to efficiently provide mechanical services, including installations of heating and air conditioning systems, ventilating and pump rooms, fan chambers, elevators and escalators. The Company has experience with rubber tired vehicular people mover systems, installing concrete guided trackway, power guide beam, central guidance rail, walkway and handrails. 6 9 The duration and size of the Company's transit contracts vary greatly depending on the scope of the project. Large scale transit projects have had a term of up to four years and have a total contract size of up to $100 million. The Company has performed installations for most of the country's transit authorities, including those in Atlanta, Boston, Chicago, Los Angeles, New York, Philadelphia, Portland, San Diego, San Francisco, St. Louis and Washington, D.C. The Company generally performs its services as either a prime contractor directly to the transit agencies or as a subcontractor to large civil engineering contractors or equipment manufacturers. Contracts with transit authorities are competitively bid and awarded on a fixed price basis generally to the lowest bidder. As a result, the Company focuses its business to (1) provide accurate bid estimating to both win contracts and ensure a profit and (2) monitor construction costs to ensure that projects are completed on time and within budget. The Company's bidding process is highly involved and draws on the expertise of many individuals within the Company. The Company carefully considers a variety of factors, including material prices, local labor rates and practices, its knowledge of the work site and contracting practices of the transit authorities. The Company has a rigorous project review process that continually monitors the incurred labor and material costs against an initial plan to avoid overruns. The Company believes that these methods provide it with a competitive advantage. As an outgrowth of its transit-related business, the Company also performs commercial real estate electrical installations (primarily in the New York City metropolitan area) and industrial electrical installations (throughout the United States). The Company contracts for these projects on an opportunistic basis, that is, when it has resources available and can realize attractive returns. The Company does not intend to grow its non-rail-related businesses beyond its current scope. Rail Construction Services The Company's rail construction services business consists of providing rail design, construction and maintenance services to Class I and shortline railroads and industrial companies with on-site rail infrastructure. Rail design is a highly specialized discipline and there are a limited number of companies that can provide these services. The Company utilizes its rail design capabilities to facilitate access to rail construction projects. By having the ability to provide integrated design-build services, the Company has been successful in increasing its project flow. The Company's rail construction efforts primarily involve the construction of main line segments, passing sidings, rail yards, connector segments between railroads and industrial sites, turnouts and track and road intersections. With respect to track maintenance, the Company enters into multi-year contracts with several customers to provide ongoing maintenance of on-site rail infrastructure. Maintenance contracts allow the Company to obtain recurring revenues and gain access to additional new construction projects from the same customer. Additional rail contracting services also include the removal of tracks which are no longer in use. Rail construction and maintenance are highly complex processes that usually involve numerous separate parties that design, supply and construct the different elements of the track. Following the design stage, construction entails (1) site preparation and grading, (2) the laying of ballast (gravel) to provide a solid track fixation medium, (3) the positioning of cross ties, (4) securing rail with high precision using metal plates, spikes and clamps, (5) installing complex track crossings and turnouts and (6) installing other track related systems such as signal, communications and automatic train control and safety devices. Management believes that the Company's ability to bundle these services on a turnkey basis provides it with a significant competitive advantage. The Company provides its rail services on a nationwide basis. Since it is generally not economical to work on contracts outside of a 300 mile radius of an operating facility, this broad footprint facilitates servicing customers with multiple sites across regions. Most of the Company's competitors in this market are regionally focused. Management believes the Company has a competitive advantage due to its ability to direct equipment and labor resources to regions with higher demand due to economic or seasonal fluctuations. The Company also maintains track and track material inventory at each location. By coordinating information across its network the Company is able to maximize inventory utilization and improve supply for projects in different regions. 7 10 Rail Products and Supplies The Company manufactures wooden and concrete products and rail fastening systems out of four facilities. The Company's wooden products include cross ties and switch and bridge timbers. The Company's wood treating operations consist of pressure-treating pre-cut beams of hardwood to provide weather-proofing. These treated cross ties are used for securing rail for tracks or assembled to construct bridge support structures. Concrete products consist primarily of pre-cast structural components for bridges and other support structures. The Company's concrete operations consist of pouring mixed concrete into large molds to create specialized structural support components. The Company also designs and manufactures rail fastening systems which are primarily used in overhead and portal crane rail applications. The Company's rail construction operations source rail and other track materials (primarily metal components such as plates and spikes) from (1) the reclamation of existing track that is no longer in use, (2) track materials brokers and (3) manufacturers. The Company sells its rail products and supplies directly to contractors (including its own subsidiaries) and to Class I and shortline railroads that perform their own track construction and maintenance. Some of the Company's products are used in non-rail applications such as highway construction and decorative landscaping. The Company's product capabilities provide it with an advantage in supplying its track construction and maintenance operations. This is particularly important in the context of wooden cross ties as the market has experienced shortages in the past. There are a limited number of cross tie manufacturing facilities in North America due to stringent regulations. The Company enhances its competitive advantage by having uninterrupted access to cross ties and other track products. The Company has also developed strong customer relationships through products sales, particularly with Class I and shortline railroads. Additionally, the Company leases track construction and maintenance equipment. By offering operating leases for such equipment, the Company has formed additional industry relationships, created an additional revenue source and established an avenue to fully utilize the operating life of its equipment. As part of its growth strategy, the Company intends to leverage these relationships to cross-sell other services, particularly design and engineering as well as track construction and maintenance. ACQUISITION PROGRAM Management believes the combination of management's acquisition expertise and the highly fragmented nature of the rail services and products industry provides the Company with significant acquisition opportunities. RailWorks identifies acquisition candidates by leveraging the relationships of its experienced operational managers and utilizing its dedicated acquisitions team. The Company focuses on acquiring companies that have a strategic fit, provide RailWorks with cost synergies, complement its geographic presence, and demonstrate a willingness to learn and share best practices through open communications. After an initial screening, management evaluates each acquisition candidate through its due diligence process, which includes detailed financial and operational reviews. During the due diligence process, the Company often identifies a number of areas in which it expects to realize efficiencies during the integration process. The Company offers acquisition candidates several benefits, including: - expertise to expand in specialized markets; - enhanced productivity through the reduction of administrative burdens; - national name recognition; - increased bonding capacity; - access to public capital markets; and - the opportunity for a continued role in management. Other key elements of the Company's acquisition program include: Retain and Provide Incentives to Existing Management. The Company seeks acquisitions of successful companies whose senior managers will remain as employees of the Company and continue to operate their respective businesses on a local level. The Company motivates these managers and aligns their interests with those of the Company through (1) employment agreements, (2) shares of common stock as a portion of the 8 11 acquisition consideration and (3) a structured earnout program which is tied to the acquired entity meeting specific earnings targets. Leverage Industry Reputation and Contacts. The Company utilizes existing industry relationships established by the operating companies and Company management to develop a broad base of potential acquisitions. The Company intends to remain actively involved in industry organizations on local and national levels, working with independent companies to support issues of interest to the Company. Acquisition Consideration. In the course of implementing its acquisition strategy, the Company has typically used cash and performance-based earnouts as consideration for the acquired businesses. In the future, the Company expects to use a combination of cash, common stock, promissory notes and performance-based earnouts as consideration for acquired businesses. Since completion of the IPO, RailWorks has acquired the following companies:
ACQUISITION NAME OF FISCAL 1998 DATE ACQUIRED COMPANY REVENUE HEADQUARTERS BUSINESS LINE - ------------- ------------------------------ ------------- --------------- --------------------------- (in millions) November 1998 Armcore Railroad Contractors, Inc........................... $ 3.8 Frankfort, IN Rail construction services November 1998 Sheldon Electric Co., Inc..... 1.4(1) Long Island Transit services City, NY January 1999 Gantrex Group................. 13.8 Ajax, Ontario, Rail products and supplies Canada January 1999 Mid West Railroad Construction and Maintenance Corporation of Wyoming....................... 13.2 Salt Lake City, Rail construction services UT January 1999 FCM Rail, Ltd. ............... 4.9 Grand Blanc, MI Rail products and supplies March 1999 F&V Metro Contracting Corp. and Affiliates ............... 46.0 Farmingdale, NY Transit services
- --------------- (1) Railworks acquired certain assets and ongoing contracts of Sheldon Electric Co., Inc. Therefore, only revenue since the date of acquisition ($1.4 million since November 4, 1998) has been included above. SOURCES OF SUPPLY The Company purchases new rail from a limited number of suppliers. New rail is generally installed only on main lines, where the track may carry high volumes of heavy traffic at high speeds. Over time, rail is removed, inspected and, if in the appropriate condition, refurbished for sale as "relay" rail. Relay rail is typically installed on secondary (non-main line) tracks, as well as yard or branch tracks. Total rail life before scrapping may be as long as 60 years. The Company also purchases a large volume of relay rail that is refurbished by third parties and resold. Similarly, the Company regularly purchases entire sections of track that are removed and subsequently disassembled at the Company's facilities. The Company inspects the various track components -- rail, ties, and accessories -- and items are placed into its inventory (either in their "as removed" condition or after being refurbished by third parties) or sold for scrap. Additionally, in connection with certain repair and rehabilitation projects, the Company acquires trackwork that is removed. Management believes the Company's network of contractors enables the Company to acquire previously-used track on comparatively advantageous terms. For installing electrical signaling and communication systems for transit authorities, the Company purchases equipment from a limited number of suppliers. Certain of the Company's operating companies process creosote-treated wooden ties. Their operations include the purchase of raw lumber, trimming the lumber to specified sizes, pressurized impregnation of the 9 12 lumber with creosote preservative and finishing of the ties (which would include the pre-drilling of spike holes and the attachment of plates, as specified by the customer). The service life of pressure treated ties has been extended to a range of 25 to 40 years. Management believes the Company is able to purchase materials in sufficient quantities to permit it to realize purchasing economies and discounts from its suppliers. Historically, the cost of the lumber used to produce wooden ties, steel used to produce rail and copper used to produce electrical wiring has fluctuated significantly due to market and industry conditions. Increasing demand for these raw materials may result in cost increases. There can be no assurance that the Company will be able to recoup any such increases by increasing the prices of its products. Further, a reduction in supply of lumber, steel or copper due to increased demand or other factors could have an adverse effect on the Company's business, financial condition and results of operations. SALES AND MARKETING The Company maintains a targeted national sales program to further develop the business of each of the operating companies. The focus of this initiative is on the Class I railroads and other large industrial companies with facilities in multiple areas. Prior to their acquisition by the Company, the individual operating companies had been unable to serve such customers on a comprehensive, nationwide basis. In addition, the Company's ability to offer electrical installation services together with rail construction, rehabilitation, repair and maintenance services and related products provides the Company with opportunities to cross-sell its services to large industrial companies. Management believes that the Company has an advantage over its competitors since it can offer consistent, high-quality service and products throughout the United States. The Company's expansive geographic coverage enables customers to use its services and products in multiple locations rather than dealing with numerous regional or local companies. The Company has achieved significant synergies in its marketing programs. Management also believes that the Company has developed and will continue to refine cross-selling programs under which: (1) the Company's design and engineering groups provide timely leads to its construction, product supply and electrical installation companies, (2) the Company's electrical signaling and communications companies, which have previously utilized third parties for track engineering and construction, utilize other operating companies for these projects, and (3) the Company's track construction companies contract with other operating companies for signaling, communication and electrical installation services. Similarly, the Company's product supply companies have, over the years, developed long-term relationships with the Class I railroads and large industrial companies, and management believes that these relationships provide an attractive basis for marketing the Company's construction and maintenance services. BIDDING AND CONTRACTS A majority of the Company's pro forma revenue for the year ended December 31, 1998 was derived from contracts entered into through a competitive bidding process. Public agencies, including the New York City Transit Authority ("NYCTA"), that solicit bids are generally required to accept the lowest cost proposal. In some cases, the party that submitted the low bid must first pass a technical qualification before being awarded a project. Following the acceptance of a bid, the Company typically enters into a contract with the customer. The Company's track construction and repair projects generally do not involve long-term contracts. Many projects that are competitively bid require the company that is awarded the project to post a bond, which varies according to the size of the project. Each company has a bonding limit, which is based on the company's working capital and work in progress. The bond provides the customer with insurance in the event that the company is unable to complete the project. Accordingly, the ability of each of the operating companies to bid on larger projects had, prior to their acquisition by the Company, been limited by their 10 13 ability to obtain the required bonding. The size of the Company, as compared to the size of the individual operating companies, facilitated increases in the bonding limits for each operating company thereby better positioning them to bid on and undertake significantly larger construction and maintenance projects. Management believes that the increased bonding capacity permits the Company to bid on and undertake more projects than could smaller companies. CUSTOMERS The following table lists the Company's top four customers in each category on a pro forma basis giving effect to the acquisitions of the Founding Companies and the Acquired Companies as if they had occurred on January 1, 1998:
CLASS I RAILROADS SHORTLINE AND REGIONAL RAILROADS - -------------------------------------------- -------------------------------------------- CSX Transportation Alaska Railroad Corporation Union Pacific Railroad Louisville & Indiana Railroad Burlington Northern Santa Fe Indiana Southern Railroad Company Canadian National Railway Indiana & Ohio Rail Systems
TRANSIT AUTHORITIES AND INDUSTRIAL COMPANIES AND COMMUTER RAILROADS COMMERCIAL ENTERPRISES - -------------------------------------------- -------------------------------------------- NYCTA (New York) United States Steel NYDOT (New York) Bethlehem Steel LAMTA (Los Angeles) Morse Diesel CDOT Rail Division (Connecticut) Babcock & Wilcox
The Company derived approximately 43.7% of its pro forma revenue for the year ended December 31, 1998 from its top ten customers. Approximately 21.1% of the Company's 1998 pro forma revenue was derived from projects undertaken for the NYCTA. These projects were undertaken under a number of separate contracts. If the NYCTA were to significantly reduce the amount of business that it does with us or determine not to do business with us in the future, it would have a material adverse effect on our business, financial condition and results of operations. COMPETITION The rail system services and products industry is competitive, and projects are often awarded through competitive bidding. The Company competes with other rail system construction, rehabilitation and maintenance companies, electrical contractors and suppliers of products. Certain competitors have significantly greater resources than the Company, may provide a broad range of services and products and may have sufficient bonding capacity to undertake large projects. The Company competes on the basis of its breadth of services and products, ability to take on large projects and nationwide presence. Any inability of the Company to compete successfully against existing and future competitors would have a material adverse effect on the Company's business, results of operations and financial condition. Moreover, the Company may depend in part upon opportunities for consolidation in the rail system services and products industry in order to execute effectively its acquisition and vertical integration strategy. If the Company's customers do not receive the Company's vertical integration strategy favorably, such customers have numerous alternative sources of services and supply. 11 14 RISK MANAGEMENT AND SAFETY Because the Company's business is labor intensive, workers' compensation is a significant operating expense for the Company. The Company could be exposed to liability for the acts or negligence of its employees who cause personal injury or damage while on assignment, as well as claims of misuse of customer proprietary information or theft of client property. The Company has adopted policies and procedures intended to reduce its exposure to these risks. The Company maintains insurance against these risks with policy limits it considers sufficient and consistent with industry standards. The Company has retained a risk management professional who is responsible for claims management and the establishment of appropriate reserves for the deductible portion of claims. The Company holds regular meetings with the presidents of the operating companies at which safety issues are discussed. The Company also conducts routine safety inspections of local work sites. EQUIPMENT The Company owns and maintains specialized equipment used in rail construction, rehabilitation, repair and maintenance. This equipment may be moved between job sites and, consequently, the Company is seeking to increase the sharing of equipment between the operating companies where it is appropriate and cost effective. For example, during the winter months, the operating companies located in the Northern United States could relocate their equipment to the operating companies located in the South. Each of the operating companies generally performs its own equipment maintenance. The Company intends to manage its equipment through its equipment leasing subsidiary, which will maintain a comprehensive database that tracks the use of all of the Company's equipment. GOVERNMENT REGULATION Overview. In addition to the environmental, safety and other regulations generally applicable to all businesses, the Company's business is impacted by regulations that are administered by the STB, the successor to the Interstate Commerce Commission ("ICC"), and the FRA and by regulatory agencies in the various states in which the Company and its customers do business. Since 1980, there has been a significant relaxation in regulations governing the sale, leasing or other transfer of railroad properties, and this change has favorably affected the operations of many of the Company's customers. Various interests in the United States have sought and continue to seek reimposition of government controls on the railroad industry in areas deregulated in whole or in part since 1980, including stricter rate regulation and more onerous labor protection conditions for rail line transfers. Railroad Regulations. The ICC Termination Act, which was enacted on December 29, 1995, eliminated the ICC as an independent agency and created the STB, a new agency within the Department of Transportation which began functioning on January 1, 1996. The ICC Termination Act changed the procedure and timing for federal approval of rail projects, including abandonments, line sales, mergers, rates and tariffs, simplifying and streamlining the abandonment process. The FRA regulates railroad safety and equipment standards, including track maintenance and train speed standards, special procedures for handling hazardous shipments, locomotive and railcar inspection and repair requirements, operating practices and crew qualifications. The Roadway Worker Protection Rules, which were promulgated by the FRA, apply to rail contractors and establish certain safety criteria that must be complied with on rail projects. TEA 21. On June 9, 1998, the President signed TEA 21, the six-year surface transportation program that represents a significant development in the federal transit program. TEA 21, the largest infrastructure funding bill in U.S. history, authorizes funding for transit in the amount of $42 billion through 2003. TEA 21 authorizes over 50 percent more than the 1991 Intermodal Surface Transportation Efficiency Act, whose funding has expired. State Regulatory Agencies. State regulatory agencies no longer have authority to engage in economic regulation of railroads that are part of the intrastate network. State and local governments generally retain 12 15 jurisdiction over local rail safety matters, such as the installation of grade crossings and grade crossing warnings devices. ENVIRONMENTAL MATTERS The Company's operations and properties are subject to environmental laws and regulations relating to pollution and protection of the environment and public and employee health and safety. The principal environmental regulatory requirements applicable to the Company's operations relate to the use of creosote to treat lumber, and the generation, storage, transportation, treatment and disposal of solid and hazardous wastes. The Company believes that its operations have all required environmental permits and currently are in compliance, in all material respects, with applicable regulatory requirements. The Company has had environmental assessments performed for recent acquisitions. Based on these reports and available information, the Company is not aware of any significant environmental exposures or claims against it. However, the historical and current uses of the Company's facilities may have resulted in spills or releases of various hazardous materials, which now, or in the future, could require remediation. The Company also may be subject to requirements related to remediation of hazardous materials that have been released into the environment at properties that it owns or operates, or owned or operated in the past or at properties to which it sends, or may have sent, hazardous materials for treatment or disposal. Such remediation requirements generally are imposed without regard to fault, and liability for any required environmental remediation can be substantial. EMPLOYEES As of December 31, 1998, the Company employed approximately 2,000 employees. The Company believes that its relations with its employees are good. Approximately 66.9% of the Company's employees are members of certain labor unions and are employed pursuant to collective bargaining agreements. Certain of the operating companies are parties to collective bargaining agreements with the International Brotherhood of Electrical Workers, Laborers' International Union of North America, the International Union of Operating Engineers, United Brotherhood of Carpenters and Joiners of America and the United Brotherhood of Teamsters. Certain of the Company's customers only hire unionized labor. The Company's largest collective bargaining agreement, covering 1,054 employees, expires in June 2001. Except for a one-week work stoppage in Connecticut by the United Brotherhood of Teamsters in June 1994, the Company has not experienced any work stoppages in the past five years. INFORMATION TECHNOLOGY SYSTEMS The Company is in the process of implementing integrated information technology systems that will be utilized by each of the operating companies. These information technology systems will be used for a variety of purposes, including monitoring inventory levels, tracking the progress of construction projects and integrating the Company's financial, general ledger, payables and receivables functions. In addition, the Company will network its corporate offices to the offices of its operating companies and will have e-mail capability at all offices. The Company expects that the required systems will be purchased and installed in 1999 and that its expenditures for these systems will not be material to the Company. All of the new systems will be Year 2000 compatible. Until these new systems are fully operational, each of the operating companies will continue using the information systems that are currently being used. 13 16 ITEM 2. PROPERTIES The Company's corporate offices are in approximately 3,000 square feet of leased space in a suburb of Baltimore, Maryland. In addition to its corporate offices, the Company leases 27 facilities and owns 10 facilities. these facilities consist of local offices, storage yards, distribution facilities, warehouses and wood processing plants. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the Company's executive officers:
NAME: AGE POSITION - ----- --- -------- John G. Larkin............................. 43 Chairman of the Board, Chief Executive Officer and Director Michael R. Azarela......................... 40 Executive Vice President, Chief Financial Officer and Director John Kennedy............................... 60 Vice President, Chief Operating Officer -- Track Contractors and Director Peter Alan Pasch........................... 48 Vice President, Chief Operating Officer -- Transit Operations and Director Robert D. Wolff............................ 56 Vice President, Chief Operating Officer -- Western Track Construction & Maintenance
John G. Larkin has been the Chairman of the Board and Chief Executive Officer and a director of RailWorks since its inception in March 1998. For the past 21 years, Mr. Larkin has worked in the transportation industry. From December 1994 to February 1998, Mr. Larkin was a managing director of BT Alex. Brown Incorporated, where he focused on the transportation industry. Prior thereto, he served in various capacities at BT Alex. Brown Incorporated since 1987, including as an equity research analyst, focused exclusively on the transportation industry. From 1986 to 1987, Mr. Larkin was Assistant Vice President of CSX Transportation, Inc., where he was responsible for strategic planning and analysis. From 1985 to 1986, Mr. Larkin was Director of Strategic Planning of Seaboard System Railroad, Inc. From January 1979 through July of 1982, Mr. Larkin served as an engineering project coordinator for Day & Zimmermann, Inc., an engineering and construction management firm. During this period, Mr. Larkin was focused exclusively on railroad and rail transit design and valuation projects. Mr. Larkin has a Master of Business Administration from Harvard University and a Master of Science in Civil Engineering from the University of Texas. Michael R. Azarela has served as the Executive Vice President, Chief Financial Officer and a director of RailWorks since May 1998. Mr. Azarela was Chief Executive Officer of L.K. Comstock from February 1998 to August 1998 and Senior Vice President and Chief Financial Officer of CGI and Spie from May 1994 to February 1998, Chairman of the Board of Comstock Holdings, Inc. since November 1996 and Vice President and Treasurer of L.K. Comstock from September 1992 to April 1994 and in various other positions at Comstock since June 1983. Mr. Azarela is a certified public accountant and has a Master of Business Administration from Iona College. John Kennedy has served as Vice President and a director of RailWorks since its inception in March 1998, and Chief Operating Officer -- Track Contractors since January 1999. From March 1998 to January 1999, he was Chief Operating Officer of RailWorks. Mr. Kennedy has served as President of Kennedy 14 17 Railroad, a Founding Company, from June 1965 to February 1998, as President of Railcorp, Inc. from April 1986 to February 1998 and as Principal of Alpha-Keystone from January 1996 to February 1998. From 1980 to 1988, Mr. Kennedy served as an Elected Member of the Pennsylvania House of Representatives. Peter Alan Pasch has served as a director of RailWorks since the IPO and as Vice President and Chief Operating Officer -- Transit Operations since January 1999. From August 1998 to January 1999, Mr. Pasch served as Chief Executive Officer of Comstock and from April 1997 to August 1998 he served as President and Chief Operating Officer of Comstock. From October 1995 to April 1997, Mr. Pasch served as Executive Vice President of Comstock in charge of operations outside the New York Metropolitan area. Mr. Pasch served as Executive Vice President of Comstock from October 1987 to September 1995. Mr. Pasch joined Comstock in 1973 after receiving his Master of Engineering Degrees from Rensselaer Polytechnic Institute. Mr. Pasch is a Registered Professional Engineer in 45 states, a Master Electrician in 18 states and is a member of the International Brotherhood of Electrical Workers. Robert D. Wolff has served as Vice President, Chief Operating Officer -- Western Track Construction and Maintenance of RailWorks since January 1999. From 1977 to January 1999, Mr. Wolff was the Chief Executive Officer of Mid West Railroad Construction & Maintenance Corp. Mr. Wolff is a past President of the National Railroad Construction and Maintenance Association, Inc. Each of the above executive officers was elected by the Board of Directors to hold office until the next annual election of officers and until his successor is elected and qualified or until his earlier resignation or removal. 15 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS RailWorks Corporation's Common Stock began trading on July 30, 1998 in the Nasdaq National Market under the symbol "RWKS." The following table details the high and low bid information for the Common Stock as reported by the Nasdaq National Market for the periods indicated:
HIGH LOW ------ ----- Third Quarter 1998 (from July 30, 1998)................... $12.00 $5.69 Fourth Quarter 1998....................................... 9.50 4.56
On March 23, 1999, (1) the last sale price of the Common Stock as reported by the Nasdaq National Market was $11.50 per share and (2) there were 124 holders of record of the Common Stock. The Company has never paid any cash dividends on its Common Stock, and the Board of Directors currently intends to retain all earnings for use in the Company's business for the foreseeable future. Any future payment of dividends will depend upon the Company's results of operations, financial condition, cash requirements, restrictions contained in credit and other agreements and other factors deemed relevant by the Board of Directors. Recent Sales of Unregistered Securities On October 14, 1998 the Company issued 13,700 unregistered shares of its non-voting Series A Convertible Preferred Stock to BT Alex. Brown Incorporated in exchange for 1,370,000 shares of its Common Stock pursuant to the exemption from registration under Section 4(2) of the Securities Act of 1933. In 1998, the Company issued options to certain employees and non-employee directors under its stock option plan to purchase an aggregate of 30,000 shares of Common Stock at exercise prices equal to the fair market value of the Common Stock on the date of grant. Such options were issued in reliance on the exemption contained in Rule 701 under the Securities Act of 1933. In 1998, the Company granted an aggregate of 1,200,393 shares of Common Stock to an aggregate ten officers and key employees pursuant to the exemption from registration under Section 4(2) of the Securities Act of 1933. 16 19 ITEM 6. SELECTED FINANCIAL DATA RailWorks acquired the Founding Companies concurrently with the consummation of the IPO on August 4, 1998. For accounting and financial statement purposes, Comstock Holdings, Inc. (one of the Founding Companies) was identified as the "accounting acquirer" consistent with the requirements of SAB No. 97 of the Securities and Exchange Commission. All other acquisitions have been accounted for as purchases in accordance with APB No. 16.
PREDECESSOR COMPANY RAILWORKS ----------------------------------------- --------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1994(1) 1995(1) 1996(1) 1997(1) 1998(2) -------- -------- -------- -------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue................................. $157,749 $181,616 $188,767 $153,610 $212,533 Cost of revenue......................... 137,607 164,777 169,303 136,678 182,817 -------- -------- -------- -------- -------- Gross profit............................ 20,142 16,839 19,464 16,932 29,716 Selling, general and administrative expenses.............................. 16,963 15,624 15,053 13,733 17,040 Non-recurring expenses.................. -- -- -- -- 19,965(3) Transaction fees........................ -- -- -- -- 1,281(4) Depreciation and amortization........... 1,447 1,263 1,365 (213) 2,105 -------- -------- -------- -------- -------- Operating income (loss)................. 1,732 (48) 3,046 3,412 (10,675) Interest expense........................ (38) (871) (2,023) (1,761) (2,334) Interest and other income............... 2,401 2,115 476 975 1,634 Income (loss) before income taxes....... 3,134 (19,822) 558 2,626 (11,375) Net income (loss)....................... 2,782 (19,972) 58 1,428 (12,847) Basic and diluted earnings (loss) per share................................. .48 (1.67)
PREDECESSOR COMPANY RAILWORKS --------------------------------------- --------- AS OF DECEMBER 31, --------------------------------------------------- 1994(1) 1995(1) 1996(1) 1997(1) 1998(2) -------- -------- ------- ------- --------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital(5)........................ $ 30,456 $ 31,915 $19,257 $26,500 $ 67,391 Total assets.............................. 89,168 86,108 84,344 68,352 228,636 Total debt................................ -- 19,241 24,890 15,004 51,504 Stockholders' equity...................... 56,329 20,567 16,990 1,438 110,008
- --------------- (1) The selected historical consolidated financial data as of and for the fiscal years ended December 31, 1994, 1995, 1996 and 1997 are derived from the financial statements of Comstock Holdings, Inc., the accounting acquirer, and its predecessor, L.K. Comstock & Company, Inc., for the respective periods. (2) The selected historical consolidated financial data for the fiscal year ended and as of December 31, 1998 are derived from the Company's Consolidated Financial Statements, which are comprised of financial data of: - Comstock Holdings, Inc., the accounting acquirer, for the year ended December 31, 1998; - the Founding Companies, other than Comstock Holdings, Inc., for the period from August 1, 1998 through December 31, 1998; and - the 1998 Acquired Companies for the period from November 4, 1998 through December 31, 1998. (3) Consists of $14.5 million in restricted common stock granted to the Company's officers, $2.9 million related to the settlement of employee benefit obligations of one of the operating companies and corporate relocation costs, $2.2 million in estimated legal and settlement costs in connection with former operations of one of the operating companies and $400,000 in common stock gifts made by certain employees of an operating company to other employees of that operating company. 17 20 (4) Represents offering expenses incurred in connection with the IPO. (5) Working capital is the sum of cash, accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, inventories, deferred tax asset and other current assets, less the sum of current maturities of long-term debt, accounts payable and accrued liabilities, accrued payroll and related withholdings, billings in excess of costs and estimated earnings on uncompleted contracts and other current liabilities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes thereto appearing elsewhere herein. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements made in this report, and other written or oral statements made by or on behalf of the Company, may constitute "forward-looking statements" within the meaning of the federal securities laws. Statements regarding future events and developments and the Company's future performance, as well as management's expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. Such risks and uncertainties include, among others, the lack of a combined operating history of the Company's operating companies and the possible failure to integrate their decentralized operations, the inability to complete and finance acquisitions, the inability to grow internally, the Company's dependence on a principal customer, a history of losses of certain of the Company's operating companies, competitive factors, the Company's dependence on public sector contracts and funding, the nature of fixed priced contracts pursuant to which the Company provides services and products, the Company's reliance on subcontractors and suppliers, the cyclical nature of the rail system industry, the Company's exposure to downturns in commercial construction, the unionization of the Company's workforce, the impact of various regulations on the Company's business, the Company's dependence on key personnel, the Company's ability to pay its indebtedness and the Company's ability to address Year 2000 problems. Management believes that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. These statements are based on current expectations and speak only as of the date of such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. Additional information concerning the risk and uncertainties listed above, and other factors that you may wish to consider, is contained below in this Item under the sections entitled "Year 2000" and "Risk Factors." GENERAL RailWorks was formed in March 1998 to become a leading nationwide provider of rail system services, including construction and rehabilitation, repair and maintenance, and related products. The Company primarily performs services pursuant to contracts for the completion of specific projects, some of which take up to five years to complete. On most projects, the Company contracts directly with rail system operators, while on other projects the Company acts as a subcontractor. In August 1998, RailWorks acquired in separate concurrent transactions 14 Founding Companies engaged principally in the rail system services and products business and RailWorks consummated its IPO. In November 1998, RailWorks acquired the two 1998 Acquired Companies and, in the first quarter of 1999, RailWorks acquired the four 1999 Acquired Companies. Except for the acquisition of Comstock Holdings, Inc., ("Comstock"), a Founding Company, all of the acquisitions have been accounted for as purchases in accordance with APB No. 16. For accounting and financial statement purposes, Comstock has been identified as the accounting acquirer consistent with Staff Accounting Bulletin ("SAB") No. 97 of the Securities and Exchange 18 21 Commission because its owners received the largest portion, 34.6%, of the shares of Common Stock issued to the owners of the Founding Companies at the time of their acquisition. The historical financial statements prior to August 4, 1998 are those of Comstock. The Company's consolidated balance sheet as of December 31, 1998, includes the Founding Companies and the 1998 Acquired Companies. The results of operations for the year ended December 31, 1998, and the statement of cash flows for the year ended December 31, 1998 include the results of operations and cash flows of Comstock for the entire period, the results of operations and cash flows of the Founding Companies from August 1, 1998 and the results of operations and cash flows of the 1998 Acquired Companies from November 4, 1998. RailWorks conducted no operations prior to the consummation of its IPO other than the acquisitions of the Founding Companies and the financing activities related thereto, including the IPO, and had no revenue or operating expenses prior to August 1, 1998. Consequently, management believes that RailWorks, or individual Founding Company and 1998 Acquired Company financial comparisons, are not meaningful. The Founding Companies and the Acquired Companies have operated historically under varying tax structures, including both S and C corporations, which have influenced the historical level of owners' compensation. Certain executive officers of each of the Founding Companies and the Acquired Companies have entered into employment agreements with the Company. The aggregate compensation paid to such executive officers was reduced following the IPO. Following the initial two-year term of the employment agreements, the Company will reevaluate its compensation structure after examining operating results and the value of the services such individuals are providing the Company. Prior to their affiliation with RailWorks, the Founding Companies and the Acquired Companies were privately owned and managed as separate entities. Operating performance and management compensation depended on regional market conditions and the priorities and strategies of individual owners. For example, under private ownership these companies experienced limitations on project bonding capacity, access to capital and human resources. In addition, many of these companies operated under an S corporation tax structure. In many instances, management and employee compensation was not necessarily directed toward the achievement of growth in profitability. As part of RailWorks, these businesses have access to significantly more resources, including higher bonding capacity, lower input costs through greater purchasing power, access to lower cost capital and cross-selling opportunities. REVENUE AND COSTS The Company recognizes revenue from fixed price contracts using the percentage-of-completion method, measured by the percentage of costs incurred to date to management's estimate of total cost for each contract. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenue from time-and-material contracts are recognized currently as the work is performed. Contract costs consist principally of wages and benefits of employees, subcontracted services, materials, parts and supplies, depreciation and other vehicle expenses and equipment rental, as well as indirect costs related to contract performance. Contract costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. In the case of product sales, the Company recognizes revenue when products are delivered to customers pursuant to shipping agreements. Cost of goods sold includes raw materials cost and production cost. RESULTS OF OPERATIONS Historical -- Year Ended December 31, 1998 Revenue was $212.5 million for the year ended December 31, 1998. Cost of revenue was $182.8 million. Gross profit for the year ended December 31, 1998 was $29.7 million. Selling, general and administrative expenses were $38.3 million, including non-recurring expenses of $20.0 million and transaction fees of $1.3 million recorded during the third quarter related to the IPO. The $20.0 million of non-recurring expenses 19 22 consists of a non-cash compensation charge of $14.9 million for stock grants issued to management resulting from the consummation of the IPO, $2.9 million related to the settlement of certain employee benefit obligations and relocation expenses and $2.2 million for estimated legal and settlement costs in connection with certain claims and litigation associated with the Company's former west coast operations. Included in other income in the fourth quarter was a gain of $861,000 on the disposition of the Company's Longview, Washington industrial electrical contracting division. This divestiture was in conjunction with Comstock's change in strategic focus to rail-based transit projects. The net loss for the year ended December 31, 1998 was $12.8 million. Pro Forma Founding Companies -- Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997 The presentation below provides the pro forma results of operations of the Founding Companies as if the Founding Companies had been acquired on January 1, 1997. The presentation only includes the results of the 1998 Acquired Companies from November 4, 1998 to December 31, 1998. Acquired Companies are otherwise excluded. The presentation includes pro forma results of the Founding Companies and the Acquired Companies on a combined basis. The pro forma results of operations of the Company for the periods presented may not be comparable to, and may not be indicative of, the Company's actual results of operations because (1) the Founding Companies and the Acquired Companies were not under common control or management during the periods presented and (2) the pro forma data do not reflect all of the potential benefits and cost savings the Company expects to realize as a result of operating as a combined entity. The following table sets forth selected pro forma financial data for the periods indicated.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS ------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1998 ---------------- ---------------- (DOLLARS IN THOUSANDS) 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
Revenue. Revenue increased $13.0 million, or 5.1%, from $256.5 million for the year ended December 31, 1997 to $269.5 million for the year ended December 31, 1998. The increase was primarily due to growth of the Company's transit services segment, which grew at 7.1% and represented $11.0 million in additional revenue. Gross Profit. Gross profit increased $5.3 million, or 14.4%, from $37.1 million for the year ended December 31, 1997 to $42.4 million for the year ended December 31, 1998. As a percentage of revenue, gross profit increased to 15.8% for the year ended December 31, 1998 from 14.5% for the year ended December 31, 1997. The increase in gross profit was due to the higher revenue base and improved revenue mix as a result of higher margin contracts. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.5 million, or 7.3%, from $20.8 million for the year ended December 31, 1997 to $19.3 million for the year ended December 31, 1998. As a percentage of revenue, selling, general and administrative expenses decreased 20 23 from 8.1% for the year ended December 31, 1997 to 7.2% for the year ended December 31, 1998. The decrease in selling, general and administrative expenses was the result of decreased salaries and wages during 1998. Net Income. Net income increased to $8.8 million for the year ended December 31, 1998 from $5.4 million for the year ended December 31, 1997, an increase of $3.4 million, or 62.0%. As a percentage of revenue, net income increased to 3.3% for the year ended December 31, 1998 from 2.1% for the year ended December 31, 1997. The increase was the result of the increase in revenue and profitability discussed above. Historical -- December 31, 1997 Compared to December 31, 1996 -- Comstock Holdings, Inc. Founded in 1904, L.K. Comstock & Co., Inc. ("L.K. Comstock"), a wholly-owned subsidiary of Comstock, is one of the largest electrical contractors in the United States based on revenue. L.K. Comstock specializes in power, communication and signaling installations for rail-based transit systems and also provides electrical contracting services for commercial buildings, heavy industrial and manufacturing plants and power plants. Through incremental investments from 1986 through 1989, L.K. Comstock's former parent company, Comstock Group, Inc. ("CGI"), was acquired by Spie Enertrans S.A. ("Spie"), a multinational electrical engineering firm headquartered in Paris, France. During Spie's ownership, L.K. Comstock sought to increase revenue by expanding its non-transit operations in California and entering into joint ventures to design and build large power and industrial projects in other locations. Effective January 1, 1997, L.K. Comstock was acquired (the "Comstock Acquisition") from Spie by Comstock, a corporation owned by certain employees of L.K. Comstock. Following the Comstock Acquisition, Comstock's management instituted a plan to reduce Comstock's costs and improve profitability. As a result of this plan, Comstock has reduced general and administrative expenses by eliminating certain management positions, including those of several French expatriates, and reducing its Los Angeles-based staff. Comstock also improved gross profit margins through (1) improved control over contract costs by consolidating transit project estimating and bidding functions and (2) exiting unprofitable, risky operations which had been expanded under Spie's ownership (such as electrical projects for traffic systems, non-rail projects in California and large joint ventures for the design and construction of power and industrial plants). Under joint ventures with general construction contractors, as preferred by Spie, Comstock had limited management control and was subject to increased costs due to general contract conditions. Following the Comstock Acquisition, management focused the business to benefit from its core competencies, including rail-based transit projects. However, Comstock's electricians and supervisors are capable of performing services on rail and non-rail projects, thus enabling the efficient use of experienced labor on projects in response to demand. Additionally, its accounting and management systems are designed to provide necessary information for both rail and non-rail projects. In 1997, Comstock derived 56.7% of its revenue and 58.6% of its gross profit from rail-related projects as compared to 48.1% and 48.5%, respectively, in 1996. Revenue. Revenue decreased to $153.6 million for the year ended December 31, 1997 from $188.8 million for the year ended December 31, 1996, a decrease of $35.2 million, or 18.6%. This decrease was due to a decrease in revenue from Comstock's power and industrial operations attributable to the completion of certain large projects in 1996 and early 1997 that were not immediately replaced, as well as a decrease in revenue from Comstock's traffic operations, offset in part by an increase in revenue from Comstock's commercial operations. The decrease in revenue from traffic operations, as well as a portion of the decrease in revenue from power and industrial operations, were due to the change in strategic focus discussed above and it is unlikely that such projects will be replaced. Rail-related revenue did not change significantly from 1996 to 1997 due to limited bonding capacity. Gross Profit. Gross profit decreased to $16.9 million for the year ended December 31, 1997 from $19.5 million for the year ended December 31, 1996, a decrease of $2.5 million, or 13.0%. As a percentage of revenue, gross profit increased to 11.0% for the year ended December 31, 1997 from 10.3% for the year ended December 31, 1996. Gross profit decreased as a result of the decline in revenue, offset in part by tighter cost controls implemented by management and a reduction in the amount of activity in traffic and Los Angeles-based non-rail projects which had significantly lower margins. Additionally, 1996 gross profit benefitted from a 21 24 reduction in contract reserves of approximately $3.0 million related to the settlement of outstanding project contingencies. General and Administrative Expenses. General and administrative expenses decreased to $13.7 million for the year ended December 31, 1997 from $15.1 million for the year ended December 31, 1996, a decrease of $1.3 million, or 8.8%. This decrease was a result of the tighter cost controls implemented by management, including reductions in executive and administrative staff in the power, industrial and Los Angeles-based non-rail operations. As a percentage of revenue, general and administrative expenses increased to 8.9% for the year ended December 31, 1997 from 8.0% for the year ended December 31, 1996. This increase was the result of the decrease in revenue. Net Income. Net income increased to $1.4 million for the year ended December 31, 1997 from $58,000 for the year ended December 31, 1996, an increase of $1.3 million. For each period, net income as a percentage of revenue was less than 1%. The increase in net income was partially due to the reduction of general and administrative expenses discussed above and the elimination of management expenses of $941,000 paid to Spie and related entities in 1996. In addition, as a result of the Comstock Acquisition and the related purchase accounting, approximately $1.6 million of depreciation and amortization were eliminated in 1997 as compared to 1996. These factors were partially offset by the decrease in gross profit due to the factors discussed above. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Founding Companies and the Acquired Companies have in the past experienced quarterly variations in revenue, operating income (including operating losses), net income (including net losses) and cash flows (including operating cash flow deficits) as a result of various factors, including projects commenced and completed during a quarter, the number of business days in a quarter and the size and scope of projects. A variation in the number of projects, progress on projects or the timing of the initiation or completion of projects can cause periods in which certain operating resources are not generating revenue and can cause significant variations in operating results between reporting periods. Negative fluctuations have been particularly pronounced, and net losses have been incurred, in the first and fourth calendar quarters, generally due to adverse weather conditions. The Company expects to continue to experience such quarterly fluctuations in operating results, including possible net losses. LIQUIDITY AND CAPITAL RESOURCES On August 4, 1998, the Company completed the IPO of 5.0 million shares of its Common Stock at a price of $12.00 per share. The capital raised by this offering was approximately $52.5 million, net of underwriting discounts and other offering expenses, of which approximately $51.1 million was used for the cash portion of the Company's acquisitions of the Founding Companies and approximately $1.4 million was used for the repayment of debt. At December 31, 1998, RailWorks had working capital of approximately $67.4 million. Net cash used in operating activities for the year ended December 31, 1998, was approximately $13.9 million. Net cash used in investing activities for the year ended December 31, 1998 was approximately $54.4 million which consisted of $52.5 million of cash for acquisitions (including $49.9 million for the Founding Companies) and $1.3 million for purchase of equipment and leasehold improvements. Net cash provided by financing activities for the year ended December 31, 1998 was approximately $70.0 million, which included $52.5 million from the issuance of common stock relating to the IPO and borrowings of approximately $61.3 million, offset by debt repayment of approximately $41.2 million. Capital expenditures were $1.3 million, $448,000 and $690,000 in fiscal 1998, 1997 and 1996, respectively. Historically, capital expenditures have been, and future expenditures are anticipated to be, primarily to support expansion of the Company's operations, including its management information systems. The Company's capital expenditures over the next several years, as a percentage of its revenues, are expected to decrease compared to those of the past three fiscal years. 22 25 Capital expenditures of approximately $5.0 million for equipment and leasehold improvements are anticipated in 1999. This investment, which is expected to be able to be financed primarily by working capital and vendor financing, relates to the anticipated facility consolidations of the operating companies, the installation of a comprehensive financial reporting computer system and the purchase of supplemental machinery and equipment needed to meet operational demands. There are no other significant commitments for future capital expenditures, although it is likely that cash outflows for business acquisitions and equipment leases will continue. Cash for acquisitions and working capital are financed by funds generated from operations, together with borrowings under the Company's credit facilities with NationsBank, N.A. The Company has in place a three-year, $75 million senior revolving credit facility. The Company also has a $25 million senior term credit facility that matures upon the earlier of June 30, 1999 and consummation of a debt or equity offering. The credit facilities are secured by a first lien on all of the capital stock of the Company's subsidiaries and on all accounts receivable of the Company and its subsidiaries. The credit facilities contain a negative pledge on all other assets of the Company and its subsidiaries and other usual and customary covenants and events of default for transactions of the type contemplated by the credit facilities. Borrowings under the credit facilities bear interest, at the option of the Company, at an interest rate equal to (1) LIBOR plus the applicable margin for LIBOR loans, which ranges from 125 basis points to 250 basis points based on the ratio of Funded Debt to EBITDA (as such terms are defined in the credit facility) or (2) the Alternate Base Rate (defined as the higher of (a) the NationsBank prime rate and (b) the Federal Funds rate plus 50 basis points) plus up to 125 basis points based on the ratio of Funded Debt to EBITDA. The Company may also finance future acquisitions with shares of common stock and contingent consideration. In connection with certain acquisitions, the Company has agreed, and in the future may agree, to pay additional consideration based on operating results of the acquired entity. The payment of any such earnouts could result in an increase in the purchase prices of such acquisitions and, as a result, additional goodwill. The Company believes that funds generated from operations, together with existing cash and borrowings under the $75 million credit facility, will be sufficient to finance its current operations, planned capital expenditures, pending acquisitions and internal growth for at least the next several years. If the Company were to make a significant acquisition for cash, it may be necessary for the Company to obtain additional debt or equity financing. INFLATION The Company does not believe that inflation has had a material effect on its results of operations in recent years. However, there can be no assurance that the Company's business will not be affected by inflation in the future. YEAR 2000 The Company has developed a plan to address Year 2000 issues. The plan addresses three main areas: (a) information systems; (b) embedded chips; and (c) supply chain readiness (including customers as well as inventory and non-inventory suppliers). To oversee the process, the Company has established a committee comprised of accounting and information systems personnel who are reporting regularly to the board of directors and the Audit Committee. The Company has identified potential deficiencies related to Year 2000 in its information systems and is in the process of addressing them through upgrades and other remediation. The Company expects to complete remediation and testing of its internal systems in the summer of 1999. With respect to other equipment with date sensitive operating controls, such as manufacturing equipment, HVAC, security and other similar systems, the Company is in the process of identifying those items which may require remediation or replacement. The Company expects to complete remediation or replacement and testing of these internal systems in the summer of 1999. The Company is in the process of identifying and contacting suppliers, both inventory and non-inventory, and customers to determine the state of their Year 2000 readiness. 23 26 Based upon the Company's current estimates, incremental out-of-pocket costs of its Year 2000 program are expected to be approximately $250,000. As of December 31, 1998, none of these funds had been spent. These costs are expected to include third party consultants, remediation of existing computer software and replacement and remediation of embedded chips. These costs do not include internal management time and the deferral of other projects, the effects of which are not expected to be material to the Company's results of operations or financial condition. At this stage of the process, the Company believes that it is difficult to specifically identify the most reasonably likely worst case Year 2000 scenario. As with all service providers and manufacturers, a reasonably likely worst case scenario would be the result of failures of third parties (including, without limitation, governmental entitles and entities with which the Company has no direct involvement) that continue for more than several days in various geographic areas where the Company provides services, its products are manufactured or from which the Company's raw materials and components are sourced. In connection with its manufacturing and supply of raw materials and components, the Company is considering various contingency plans. Any such plans would necessarily be limited to matters which the Company can reasonably control. The Company's Year 2000 efforts are ongoing and its overall plan, as well as the consideration of contingency plans, will continue to evolve as new information becomes available. While the Company anticipates continuity of its business activities, that continuity will be dependent upon its ability, and the ability of third parties upon whom the Company relies directly or indirectly, to be Year 2000 compliant. RISK FACTORS The Operating Companies Do Not Have a Combined Operating History; The Company May be Unsuccessful Integrating Their Decentralized Operations. RailWorks was founded in March 1998 but conducted no operations and generated no revenue until it completed its IPO in August 1998. The Company acquired the Founding Companies concurrently with the completion of the IPO, has acquired six additional operating companies since that time, and has entered into letters of intent to acquire four additional operating companies. The operating companies were separate independent entities before RailWorks acquired them and to a certain extent they continue to operate as independent entities because the Company conducts its operations on a decentralized basis. The integration of the operating companies, while allowing them to retain decentralized operations and management, is important to the Company's operating and growth strategies and the achievement of efficiencies in the combined operation. Management may not be able to integrate the operations or the necessary systems and procedures, including accounting and financial reporting systems and project management systems, to manage effectively the combined enterprise. Certain members of the Company's management group have only recently joined RailWorks and there can be no assurance that the management group will be able to implement the Company's acquisition and operating strategies. There can be no assurance that the Company will be able to establish, maintain or increase the profitability of the operating companies. RailWorks' pro forma financial statements include results of operations for certain operating companies when they were not under common control or management. As a result, the pro forma financial statements may not be indicative of the Company's future results of operations. Any failure by management to implement the Company's strategies, integrate the operating companies without substantial costs, delays or other operational or financial difficulties, or oversee effectively the combined entity could have a material adverse effect on the Company's business, financial condition and results of operations. The Company May be Unable to Complete and Finance Acquisitions. The Company has completed six acquisitions since the IPO and intends to grow significantly through the acquisition of additional businesses. The Company's acquisition strategy entails reviewing acquired business operations, corporate infrastructure and systems and financial controls. Unforeseen expenses, difficulties, complications and delays frequently encountered in connection with the rapid expansion of operations could inhibit RailWorks' growth or adversely affect its financial performance. In March 1999, the Company signed letters of intent to purchase four operating companies. Management expects to execute definitive purchase agreements, which will have customary closing conditions (including 24 27 completion of due diligence), in the second quarter of 1999. However, there can be no assurance that the Company will acquire any or all of these companies. There can be no assurance that the Company will maintain or accelerate its growth or anticipate all of the changing demands that expanding operations will impose on its management, personnel, operational and management information systems and financial systems. Management may not be able to identify, acquire or manage profitably additional businesses or to integrate successfully any acquired businesses without substantial costs, delays or other operational or financial difficulties. Any such occurrence could have a material adverse effect on the Company's business, financial condition and results of operations. Management cannot predict the timing, size and success of RailWorks' acquisition efforts and any associated capital commitments. The Company currently intends to finance future acquisitions by bank borrowings, shares of RailWorks Common Stock, internally generated funds or a combination of Common Stock and cash. If RailWorks Common Stock does not maintain a sufficient market value, or if potential acquisition candidates are otherwise unwilling to accept Common Stock as part of the consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources or borrowings to maintain its acquisition program. In addition, the Company's acquisitions typically provide for the sellers to receive contingent consideration, which is only paid if the acquired companies achieve certain operating results. These payments could be substantial. The Company May be Unable to Generate Internal Growth. RailWorks' ability to grow will be affected by various factors, including demand for rail system services and products, the Company's success in bidding on new projects, the success of cross-selling efforts and management's ability to develop a national accounts program. The Company's growth may also depend on increased outsourcing by rail system operators. Many of these factors are beyond the Company's control. The Company's strategies may not be successful or the Company may be unable to generate cash flow adequate for combined operations and to support internal growth. The senior managers of the operating companies retain responsibility for day-to-day operations. If proper business controls are not implemented and maintained, this decentralized operating strategy could result in inconsistent operating and financial practices of the operating companies, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company Has Been Dependent on Certain Customers. The Company derived approximately 43.7% of its pro forma revenue for the year ended December 31, 1998 from its top ten customers. Approximately 21.1% of RailWorks' 1998 pro forma revenue was derived from projects undertaken for the NYCTA. These projects were undertaken under a number of separate contracts. If the NYCTA were to significantly reduce the amount of business that it does with the Company or determine not to do business with the Company in the future, it would have a material adverse effect on the Company's business, financial condition and results of operations. Certain Operating Companies Have a History of Losses. From time to time, primarily due to industry cyclicality and uncertainties inherent in the competitive bidding process, certain of the Company's operating companies have experienced net losses. There can be no assurance that the Company or its operating companies will be profitable in the future. The Company May Face Intense Competition. The rail system services and products industry is highly competitive. There are numerous companies that provide services to transit authorities, construct and repair rail systems or sell related products or supplies, and some of these companies operate in more than one of these lines of business. Some of the Company's competitors have greater resources than the Company has, may also provide a broad range of services and products and may have sufficient bonding capacity and other resources to undertake large projects. Any inability to compete successfully against the Company's existing and future competitors would have a material adverse effect on the Company's business, financial condition and results of operations. Certain of the Company's operating companies also provide electrical contracting services to non-rail industrial and commercial customers. While management believes that the Company currently competes effectively in the non-rail electrical contracting business, this industry is highly competitive and is served by small, owner-operated private companies, public companies and several large regional 25 28 companies. Additionally, the Company could face competition in the future from other competitors entering the Company's markets. The Company is Dependent on Public Sector Contracts and Funding. The rail system services and products business involves contracts that are supported by funding from federal, state and local governmental agencies, as well as contracts with such agencies ("public sector contracts"). Public sector contracts are subject to detailed regulatory requirements and public policies, as well as funding priorities. These contracts may be conditioned upon the continuing availability of public funds, which in turn depends upon lengthy and complex budgetary procedures. These contracts may also be subject to significant pricing constraints. Moreover, public sector contracts may generally be terminated for reasons beyond the control of the contractor, including when such termination is in the best interests of the governmental agency. There can be no assurance that these factors or others unique to public sector contracts will not have a material adverse effect on the Company's business, financial condition and results of operations. Fixed Price Contracts Expose the Company to Significant Risks. Fixed price contracts are typically awarded in the rail system services industry pursuant to a competitive bidding process. In compiling the Company's bid on a particular project, management must estimate the time it will take to complete the project, along with the project's labor and supply costs. These costs may be affected by a variety of factors, some of which may be beyond the Company's control. If management is unable to predict accurately the costs of fixed price contracts, certain projects could have lower margins than anticipated or the Company could suffer losses on the projects. This could have a material adverse effect on the Company's business, financial condition and results of operations. The Company Relies on Subcontractors and Suppliers. The Company generally performs electrical contracting services for transit signaling and communication systems as a subcontractor to companies that design the systems and manufacture or purchase the necessary equipment. In other instances, the Company acts as the prime contractor and subcontracts the design of the signal or communication system and necessary equipment. When the Company is a prime contractor for such projects, management generally requires subcontractors to post performance bonds. Management may not require a subcontractor to post a performance bond in situations where (1) the subcontractor has strong experience with a specific type of project and demonstrates financial stability and (2) the customer does not require bonds from the Company as prime contractor. The Company is sometimes dependent upon the subcontractor to perform design and other services and provide equipment. For certain projects there are a limited number of companies that can perform the subcontract if the initial subcontractor defaults. As a result, the Company is dependent upon its subcontractors to perform under the subcontracts. Further, the major components of signaling and communication systems for transit authorities are manufactured to specifications and require long lead times for production. If a subcontractor or supplier defaults, or if a supplier refuses or is unable to do business with the Company, it could have a material adverse effect on the Company's business, financial condition and results of operations. The Rail System Industry is Cyclical. A substantial portion of RailWorks' revenue is derived from public contracts, which are expected to constitute a relatively stable source of business due to funding provided by TEA 21. However, demand for rail system services and products could fluctuate in conjunction with overall economic conditions. In economic downturns, rail system operators may defer certain construction and rehabilitation projects and purchases of related products to conserve cash in the short term. Reductions in freight traffic due to economic downturns or other factors may also reduce demand for our construction and rehabilitation services and related products. In economic upturns, railroads, particularly Class I railroads, experience heavier traffic demands that can cause problems associated with congestion. The operational problems related to congestion have an unpredictable impact on railroad expenditures for construction and rehabilitation services and related products, including those provided by the Company. During periods of peak usage, rail system owners may defer certain expenditures because they may need to address operational challenges caused by these conditions. Such uncertainties may be exacerbated by certain other issues, such as the possibility of heightened government regulation during periods of congestion and the internal challenges of managing railroad operations as the Class I railroads continue to consolidate. 26 29 Exposure to Downturns in Commercial Construction. Approximately 16.2% of RailWorks' pro forma revenue for the year ended December 31, 1998, was derived from installation of electrical systems in newly constructed or renovated commercial buildings and power and industrial plants. The demand for electrical installation services is affected by fluctuations in the level of new construction and renovation of commercial buildings. These fluctuations reflect the cyclical nature of the construction industry and depend upon general economic conditions, changes in interest rates and other related factors. Downturns in levels of commercial construction and renovation could have a material adverse effect on the Company's business, financial condition and results of operations. Further, the Company's electrical installation business is focused in the northeastern United States and is therefore particularly susceptible to economic downturns in that region. The Company's Workforce is Unionized. As of December 31, 1998, approximately 66.9% of RailWorks' employees were covered under collective bargaining agreements. In June 1994, one of RailWorks' operating companies was affected by a one-week work stoppage by the United Brotherhood of Teamsters. There can be no assurance that future work stoppages will not affect the Company. In addition, labor agreements are generally negotiated on an industry-wide basis and the terms and conditions of future labor agreements could be beyond the Company's control. The Company may be subject to terms and conditions in future labor agreements that could have a material adverse effect on its business, financial condition and results of operations. The Company is Subject to Extensive Environmental and Government Regulation. RailWorks' operations are subject to extensive federal, state and local regulation under environmental laws and regulations. Among other things, these laws and regulations cover emissions to the air, discharges to waters and the generation, handling, storage, transportation, treatment and disposal of waste, underground and aboveground storage tanks and remediation of soil and groundwater contamination. Environmental liability can extend to previously owned or operated properties, leased properties and properties owned by third parties, as well as to properties currently owned and used by us. Environmental liabilities may also arise from claims asserted by adjacent landowners or other third parties in toxic tort litigation. The Company could incur significant ongoing costs associated with environmental regulatory compliance. Further, the Company sometimes uses hazardous materials in connection with its operations. Although the Company believes it is in material compliance with all of the various environmental regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur significant costs to comply with such requirements. In addition to safety, health and other regulations of general applicability, the Company's operations may be significantly affected by regulations of the Surface Transportation Board, the Federal Railroad Administration, the Occupational Safety and Health Administration, state departments of transportation and other state and local regulatory agencies. Changes in regulation of the rail and transit industries through legislative, administrative, judicial or other action could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is Dependent on Key Personnel. The Company's success depends to a significant extent upon the efforts and abilities of John G. Larkin, Chairman of the Board and Chief Executive Officer, and Michael R. Azarela, Executive Vice President and Chief Financial Officer. The Company also relies on senior management of its operating companies. While the Company has entered into employment agreements with Messrs. Larkin and Azarela and certain senior managers of the operating companies, the Company cannot be certain that such individuals will remain with the Company throughout the terms of their agreements, or thereafter. Further, the Company likely will depend on the senior management of any significant businesses the Company acquires in the future. The loss of the services of one or more of these key employees before the Company is able to attract and retain qualified replacement personnel could have a material adverse effect on the Company's business, financial condition and results of operation. The Company's Systems May Not be Year 2000 Compliant. Management identified potential deficiencies related to the Year 2000 in the Company's information systems, and the Company is in the process of addressing them through upgrades and other remediation. The Company's Year 2000 efforts are ongoing and its overall plan, as well as the consideration of contingency plans, will continue to evolve as new information becomes available. While the Company anticipates continuity of its business activities, that continuity will be dependent upon its ability, and the 27 30 ability of third parties upon whom it relies directly or indirectly, to be Year 2000 compliant. For a further discussion of the risks associated with the Year 2000, see the section above entitled "Year 2000" in this Item. The Company May be Unable to Service Debt. To service the Company's indebtedness, the Company will require a significant amount of cash. The Company's ability to make payments on its debt, and to fund planned capital expenditures and acquisitions will depend on its future operating performance and on its ability to successfully implement its business strategy. Prevailing general economic conditions and financial, business, regulatory and other factors, many of which are beyond its control, will affect its ability to make these payments. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk associated principally with changes in interest rates. Interest rate exposure has been principally limited to the $49.3 million of long-term debt under the Company's revolving credit agreement outstanding at December 31, 1998. Approximately 80% of that debt is priced at interest rates that float with the market. A 50 basis point movement in the interest rate on the floating rate debt would have resulted in an approximate $200,000 annualized increase or decrease in interest expense and cash flows. The remaining debt is either fixed rate debt or debt that has been essentially fixed through the use of interest rate swaps. The Company will from time to time enter into interest rate swaps on its debt, when it believes there is a clear financial advantage for doing so. The Company does not use derivative financial or commodity instruments for trading purposes and the use of such instruments is subject to strict approval levels by senior officers. Typically, the use of such derivative instruments is limited to interest rate swaps on the Company's outstanding long-term debt. The Company's exposure related to such derivative instruments is, in the aggregate, not material to the Company's financial position, results of operations and cash flows. In March 1999, RailWorks entered into a hedge instrument with First Union National Bank known as a "swaption," or a collared swap for a notional amount of $50.0 million. This agreement, which carries no premium, allows the Company to "swap" into a fixed interest rate beginning March 31, 1999 at no lower than 5.73% and no higher than 6.23% against the current swap rate, which was 5.93% at the time of trade. This instrument protects the Company against dramatic swings in interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are listed under Item 14(a) and are filed as part of this report on the pages indicated. The supplementary data are included in Note 17 of the Notes to the Consolidated Financial Statements of the Company. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 28 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to directors and executive officers of the Registrant, except certain information regarding executive officers which is contained in Part I of this Report pursuant to General Instruction G, is included under the heading "Election of Directors" of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999 and is incorporated herein by reference. The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the heading "16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement for the Annual Meeting of Stockholders to be held May 27, 1999 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information included under the heading "Executive Compensation" in the subsections entitled "Employment Agreements," "Executive Compensation Summary Table," "Option Grants During 1998 and Year-End Option Values" and "Aggregate Option Exercises During 1998 and Year-End Option Values" of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included under the heading "Beneficial Ownership of Common Stock" of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included under the heading "Certain Relationships and Related Party Transactions" of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999 and is incorporated herein by reference. 29 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS AND SCHEDULES 1. Financial Statements
PAGE ----- RAILWORKS CORPORATION Consolidated Financial Statements: Report of Independent Public Accountants.................. F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997................................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996....................... F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996........... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996....................... F-5 Notes to Consolidated Financial Statements................ F-6 Financial Statements: Report of Independent Public Accountants.................. F-21 Balance Sheet as of July 31, 1998......................... F-22 Statement of Operations for the Period From April 1, 1998 to July 31, 1998....................................... F-23 Statement of Cash Flows for the Period From April 1, 1998 to July 31, 1998....................................... F-24 Notes to Financial Statements............................. F-25 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES Report of Independent Public Accountants.................. F-26 Combined Balance Sheets as of July 31, 1998 and December 31, 1997............................................... F-27 Combined Statements of Operations for the Seven Months Ended July 31, 1998, Nine Months Ended December 31, 1997 and Year Ended March 31, 1997..................... F-28 Combined Statements of Stockholders' Equity for the Periods Ended March 31, 1996, March 31, 1997, December 31, 1997 and July 31, 1998............................. F-29 Combined Statements of Cash Flows for the Seven Months Ended July 31, 1998, Nine Months Ended December 31, 1997 and Year Ended March 31, 1997..................... F-30 Notes to Combined Financial Statements.................... F-31 CPI CONCRETE PRODUCTS INCORPORATED Report of Independent Public Accountants.................. F-37 Balance Sheet as of July 31, 1998......................... F-38 Statement of Operations for the Six Months Ended July 31, 1998................................................... F-39 Statement of Stockholders' Equity for the Six Months Ended July 31, 1998.......................................... F-40 Statement of Cash Flows for the Six Months Ended July 31, 1998................................................... F-41 Notes to Financial Statements............................. F-42 CONDON BROTHERS, INC. Report of Independent Public Accountants.................. F-46 Balance Sheets as of July 31, 1998 and December 31, 1997................................................... F-47 Statements of Operations for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996................................................... F-48 Statements of Stockholders' Equity for the Periods Ended December 31, 1995, 1996 and 1997 and July 31, 1998..... F-49 Statements of Cash Flows for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996................................................... F-50 Notes to Financial Statements............................. F-51
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PAGE ----- H.P. McGINLEY, INCORPORATED Report of Independent Public Accountants.................. F-57 Balance Sheets as of July 31, 1998 and December 31, 1997................................................... F-58 Statements of Operations for the Seven Months Ended July 31, 1998, the Ten Months Ended December 31, 1997 and the Year Ended February 28, 1997....................... F-59 Statements of Stockholder's Equity for the Periods Ended February 29, 1996, February 28, 1997, December 31, 1997 and July 31, 1998...................................... F-60 Statements of Cash Flows for the Seven Months Ended July 31, 1998, the Ten Months Ended December 31, 1997 and the Year Ended February 28, 1997....................... F-61 Notes to Financial Statements............................. F-62 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES Report of Independent Public Accountants.................. F-66 Combined Balance Sheets as of July 31, 1998 and December 31, 1997............................................... F-67 Combined Statements of Operations for the Seven Months Ended July 31, 1998, the Nine Months Ended December 31, 1997 and the Year Ended March 31, 1997................. F-68 Combined Statements of Stockholders' Equity for the Periods Ended March 31, 1996 and 1997, December 31, 1997 and July 31, 1998................................. F-69 Combined Statements of Cash Flows for the Seven Months Ended July 31, 1998, the Nine Months Ended December 31, 1997 and the Year Ended March 31, 1997................. F-70 Notes to Combined Financial Statements.................... F-71 MERIT RAILROAD CONTRACTORS, INC. Report of Independent Public Accountants.................. F-78 Balance Sheets as of July 31, 1998 and December 31, 1997................................................... F-79 Statements of Operations for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996................................................... F-80 Statements of Stockholders' Equity for the Periods Ended December 31, 1995, 1996 and 1997 and July 31, 1998..... F-81 Statements of Cash Flows for the Seven Months Ended 1998 and the Years Ended 1997 and 1996...................... F-82 Notes to Financial Statements............................. F-83 MIDWEST CONSTRUCTION SERVICES, INC. Report of Independent Public Accountants.................. F-89 Balance Sheets as of July 31, 1998 and December 31, 1997................................................... F-90 Statements of Operations and Retained Earnings for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996............................. F-91 Statements of Cash Flows for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996................................................... F-92 Notes to the Financial Statements......................... F-93 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. Report of Independent Public Accountants.................. F-99 Balance Sheet as of July 31, 1998......................... F-100 Statement of Operations for the Seven Months Ended July 31, 1998............................................... F-101 Statement of Stockholders' Equity for the Seven Months Ended July 31, 1998.................................... F-102 Statement of Cash Flows for the Seven Months Ended July 31, 1998............................................... F-103 Notes to Financial Statements............................. F-104 RAILROAD SERVICES, INC. AND MINNESOTA RAILROAD SERVICES, INC. Report of Independent Public Accountants.................. F-108 Combined Balance Sheets as of July 31, 1998 and December 31, 1997............................................... F-109 Combined Statements of Operations for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996.......................................... F-110
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PAGE ----- Combined Statements of Stockholders' Equity as of December 31, 1995, 1996 and 1997 and July 31, 1998.............. F-111 Combined Statements of Cash Flows for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996.......................................... F-112 Notes to Combined Financial Statements.................... F-113 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. Report of Independent Public Accountants.................. F-120 Balance Sheets as of July 31, 1998 and December 31, 1997................................................... F-121 Statements of Operations for the Seven Months Ended July 31, 1998 and the Year Ended December 31, 1997.......... F-122 Statements of Stockholder's Equity for the Periods Ended December 31, 1996 and 1997 and July 31, 1998........... F-123 Statements of Cash Flows for the Seven Months Ended July 31, 1998 and the Year Ended December 31, 1997.......... F-124 Notes to Financial Statements............................. F-125 US. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. Report of Independent Public Accountants.................. F-128 Combined Balance Sheets as of July 31, 1998 and December 31, 1997............................................... F-129 Combined Statements of Operations for the Seven Months Ended July 31, 1998 and December 31, 1997 and 1996..... F-130 Combined Statements of Changes in Stockholders' Equity as of December 31, 1995, 1996 and 1997 and July 31, 1998................................................... F-131 Combined Statements of Cash Flows for the Seven Months Ended July 31, 1998 and the Years Ended December 31, 1997 and 1996.......................................... F-132 Notes to Combined Financial Statements.................... F-133
2. Financial Statement Schedules SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGES TO BEGINNING OF COSTS AND OTHER BALANCE AT END DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS (1) OF YEAR ----------- ------------ --------- ---------- -------------- -------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended December 31, 1998......... 58 0 399 (15) 442 Year Ended December 31, 1997......... 363 0 185 (490) 58 Year Ended December 31, 1996......... 238 0 125 0 363
(1) Deductions, represent uncollectible balances of accounts receivable written off, net of recoveries. 3. Exhibits The following list of exhibits includes both exhibits submitted with this Report as filed with the Securities and Exchange Commission and those incorporated by reference to other filings:
EXHIBIT NUMBER NUMBER DESCRIPTION - ------- ------------------ 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)
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EXHIBIT NUMBER NUMBER DESCRIPTION - ------- ------------------ 3.3 -- Certificate of Designation of the Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on October 14, 1998) 4.1 -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, File No. 333-53483) 10.1 -- Uniform Provisions for the Acquisition of Founding Companies (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-1, File No. 333-53483) 10.2 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Wildcats Alpha-Keystone Company, Alpha-Keystone Engineering, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1, File No. 333-53483) 10.3 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Bulldog Comtrak Company, Comtrak Construction, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-1, File No. 333-53483) 10.4 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Cardinal Annex Railroad Builders Company, Annex Railroad Builders, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1, File No. 333-53483) 10.5 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Huskies Condon Brothers Company, Condon Brothers Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1, File No. 333-53483) 10.6 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Commodores Concrete Company, CPI Concrete Products, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.6 to Registration Statement on Form S-1, File No. 333-53483) 10.7 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Nittany Lions McGinley Company, HP McGinley Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1, File No. 333-53483) 10.8 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Owls Kennedy Railroad Builders Company, Kennedy Railroad Builders, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1, File No. 333-53483) 10.9 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Red Storm Comstock Company, Inc., L.K. Comstock & Company, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-1, File No. 333-53483) 10.10 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Sycamores Midwest Construction Company, Midwest Construction Services, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-1, File No. 333-53483) 10.11 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Bears Merit Company, Merit Railroad Contractors, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-1, File No. 333-53483)
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EXHIBIT NUMBER NUMBER DESCRIPTION - ------- ------------------ 10.12 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Hoosier Mize Company, Mize Construction Company and the stockholders named therein (incorporated by reference to Exhibit 10.12 to Registration Statement on Form S-1, File No. 333-53483) 10.13 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Husky New England Railroad Construction Company, New England Railroad Construction Company Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.13 to Registration Statement on Form S-1, File No. 333-53483) 10.14 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Wolverines Northern Rail Services Company, Northern Rail Service and Supply Company, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1, File No. 333-53483) 10.15 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Big Orange Minnesota Company, Minnesota Railroad Service Company and the stockholders named therein (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1, File No. 333-53483) 10.16 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Buckeye Railcorp, Inc., Railcorp Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.16 to Registration Statement on Form S-1, File No. 333-53483) 10.17 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Runnin' Rebels Railroad Service Company, Railroad Service, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.17 to Registration Statement on Form S-1, File No. 333-53483) 10.18 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Crusader Railroad Specialties Company, Railroad Specialties, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.18 to Registration Statement on Form S-1, File No. 333-53483) 10.19 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Screaming Eagle Wood Preserving Company, Southern Indiana Wood Preserving Company, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.19 to Registration Statement on Form S-1, File No. 333-53483) 10.20 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Fighting Irish-U.S. Railway Supply Company, U.S. Railway Supply, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.20 to Registration Statement on Form S-1, File No. 333-53483) 10.21 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Spartans Trackworks Company, U.S. Trackworks, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.21 to Registration Statement on Form S-1, File No. 333-53483) 10.22 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Mustang Smith Construction Company, Wm. A. Smith Construction Co., Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.22 to Registration Statement on Form S-1, File No. 333-53483) 10.23 -- Agreement and Plan of Reorganization dated as of May 21, 1998 by and between RailWorks Corporation, Longhorn Smith Rerailing Company, Wm. A. Smith Rerailing Services, Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.23 to Registration Statement on Form S-1, File No. 333-53483)
34 37
EXHIBIT NUMBER NUMBER DESCRIPTION - ------- ------------------ 10.24 -- Amended and Restated Employment Agreement between RailWorks Corporation and John G. Larkin dated as of August 4, 1998 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on September 11, 1998) 10.25 -- Amended and Restated Employment Agreement between RailWorks Corporation and Michael R. Azarela dated as of August 4, 1998 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on September 11, 1998) 10.26 -- Amended and Restated Employment Agreement between RailWorks Corporation and John Kennedy dated as of August 4, 1998 (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on September 11, 1998) 10.27 -- Amended and Restated Employment Agreement between RailWorks Corporation and Harold C. Kropp, Jr. dated as of August 4, 1998 (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed on September 11, 1998) 10.28 -- Form of Employment Agreement between each Founding Company and Founding Company Officer (incorporated by reference to Exhibit 10.28 to Registration Statement on Form S-1, File No. 333-53483) 10.29 -- 1998 Incentive Stock Plan (incorporated by reference to Exhibit 10.29 to Registration Statement on Form S-1, File No. 333-53483) 10.30 -- Indemnity and Cooperation Agreement dated as of April 3, 1997 between Spie Enertrans S.A., Comstock Group, Inc., L.K. Comstock & Company and LKC Acquisition Corp., together with Memorandum of Understanding dated August 20, 1997 between Spie Enertrans S.A., Comstock Group, Inc., L.K. Comstock & Company and LKC Acquisition Corp. (incorporated by reference to Exhibit 10.30 to Registration Statement on Form S-1, File No. 333-53483) 10.31 -- Stock Purchase Agreement dated April 3, 1997 between Comstock Group, Inc. and LKC Acquisition Corp., as amended (incorporated by reference to Exhibit 10.31 to Registration Statement on Form S-1, File No. 333-53483) 10.32 -- Contingent Promissory Note dated April 3, 1997 made by L.K. Comstock & Company, Inc. to the order of Spie Enertrans S.A. (incorporated by reference to Exhibit 10.32 to Registration Statement on Form S-1, File No. 333-53483) 10.33 -- Employment Agreement dated as of January 7, 1999 between Robert D. Wolff and MidWest Railroad Construction and Maintenance Corporation of Wyoming 10.34 -- Credit Agreement dated as of August 4, 1998 among RailWorks Corporation, as Borrower, Certain Subsidiaries, as Guarantors, the Lenders named therein, First Union National Bank, as Documentation Agent and NationsBank, N.A., as Administrative Agent 10.35 -- Amendment No. 1 to Credit Agreement dated December , 1998 among RailWorks Corporation, as Borrower, the Guarantors and Lenders named therein and NationsBank, N.A., as Administrative Agent 10.36 -- Amendment No. 2 to Credit Agreement dated February 2, 1999 among RailWorks Corporation, and as Borrower, the Guarantors and Lenders named therein and NationsBank, N.A., as Administrative Agent 10.37 -- Credit Agreement dated as of February 2, 1999 among RailWorks Corporation, as Borrower, Certain Subsidiaries, as Guarantors, the Lenders named therein and NationsBank, N.A., as Administrative Agent 21.1 -- List of Subsidiaries
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EXHIBIT NUMBER NUMBER DESCRIPTION - ------- ------------------ 27.1 -- Financial Data Schedule (for SEC use only) (incorporated by reference to Exhibit 27.1 to the Registrant's Current Report on Form 8-K filed on March 17, 1999) 99.1 -- Stock Exchange Agreement dated October 8, 1998 between the Registrant and BT Alex. Brown Incorporated (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on October 14, 1998)
(B) REPORTS ON FORM 8-K One report on Form 8-K was filed during the quarter ended December 31, 1998:
ITEM REPORTED FINANCIAL STATEMENTS FILED DATE OF REPORT - ------------- -------------------------- --------------- On October 14, 1998, the Registrant filed a Form 8-K to report the issuance on October 8, 1998 of 13,700 shares of its non-voting Series A Convertible Preferred Stock to BT Alex. Brown Incorporated in exchange for 1,370,000 shares of its Common Stock..... None October 8, 1998
(C) EXHIBITS Exhibits are listed in Item 14(a). (D) FINANCIAL STATEMENT SCHEDULES Schedules are listed in Item 14(a). 36 39 SIGNATURES Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 29 day of March, 1999. RAILWORKS CORPORATION (Registrant) By: /s/ JOHN G. LARKIN ------------------------------------ John G. Larkin Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 29, 1999.
SIGNATURE TITLE --------- ----- /s/ MICHAEL R. AZARELA Executive Vice President, Chief Financial - ----------------------------------------------------- Officer and Director (Principal Financial Michael R. Azarela Officer) /s/ HAROLD C. KROPP, JR. Vice President and Chief Accounting Officer - ----------------------------------------------------- (Principal Accounting Officer) Harold C. Kropp, Jr. /s/ JOHN KENNEDY Vice President, Chief Operating - ----------------------------------------------------- Officer -- Track Contractors and Director John Kennedy /s/ PETER ALAN PASCH Vice President, Chief Operating - ----------------------------------------------------- Officer -- Transit Operations and Director Peter Alan Pasch /s/ SCOTT D. BRACE Director - ----------------------------------------------------- Scott D. Brace /s/ LAMBERTUS L. TAMELING Director - ----------------------------------------------------- Lambertus L. Tameling /s/ RONALD W. DRUCKER Director - ----------------------------------------------------- Ronald W. Drucker /s/ R.C. MATNEY Director - ----------------------------------------------------- R.C. Matney
37 40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RailWorks Corporation: We have audited the accompanying consolidated balance sheets of RailWorks Corporation (a Delaware corporation) and Subsidiaries and its predecessor entity (the "Company"), as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and the disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997 and the results of its operations and its cash flows for the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Stamford, Connecticut February 8, 1999 F-1 41 RAILWORKS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 1997 -------- ------- ASSETS Current Assets: Cash and cash equivalents................................. $ 2,846 $ 1,120 Accounts receivable, net of allowance for doubtful accounts of $442 and $58................................ 77,181 46,436 Costs and estimated earnings in excess of billings on uncompleted contracts................................... 24,792 17,149 Inventories: Raw materials........................................... 7,535 1,240 Finished goods.......................................... 1,550 -- Deferred tax asset........................................ 870 1,020 Other current assets...................................... 3,401 977 -------- ------- Total current assets............................... 118,175 67,942 -------- ------- PROPERTY, PLANT AND EQUIPMENT............................... 14,514 448 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION.............................................. 1,122 56 -------- ------- PROPERTY, PLANT AND EQUIPMENT, NET.......................... 13,392 392 -------- ------- OTHER ASSETS: Excess of cost over net assets acquired, net of amortization............................................ 93,845 -- Deferred tax asset........................................ 85 -- Loans to officers......................................... 959 -- Other..................................................... 2,180 18 -------- ------- Total other assets................................. 97,069 18 -------- ------- $228,636 $68,352 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt...................... $ 931 $ 2,555 Accounts payable and accrued liabilities.................. 35,436 22,547 Accrued payroll and related withholdings.................. 3,777 4,711 Billings in excess of costs and estimated earnings on uncompleted contracts................................... 5,958 8,510 Other current liabilities................................. 4,682 3,119 -------- ------- Total current liabilities.......................... 50,784 41,442 -------- ------- Long-term debt............................................ 50,573 12,449 Excess of acquired net assets over cost, net of amortization............................................ 8,662 10,210 Other liabilities......................................... 8,609 2,813 -------- ------- Total long-term liabilities........................ 67,844 25,472 -------- ------- Total liabilities.................................. 118,628 66,914 -------- ------- Stockholders' Equity: Series A, convertible preferred stock, $1.00 par value, authorized 10,000,000 shares, 13,700 shares issued and outstanding............................................. 14 -- Common stock, $0.01 par value, authorized 100,000,000 shares, 13,703,530 shares issued and outstanding in 1998, 2,959,291 issued and outstanding in 1997.......... 137 30 Additional paid-in capital................................ 121,296 -- Retained earnings (deficit)............................... (11,439) 1,408 -------- ------- Total stockholders' equity......................... 110,008 1,438 -------- ------- $228,636 $68,352 ======== =======
See Notes to Consolidated Financial Statements. F-2 42 RAILWORKS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR COMPANY 1998 1997 1996 ---------- ---------- ----------- Revenue.................................................... $ 212,533 $ 153,610 $188,767 Cost of revenue............................................ 182,817 136,678 169,303 ---------- ---------- -------- Gross profit............................................... 29,716 16,932 19,464 Selling, general and administrative expenses............... 17,040 13,733 15,053 Non-recurring expenses..................................... 19,965 -- -- Transaction fees........................................... 1,281 -- -- Depreciation and amortization expense...................... 2,105 (213) 1,365 ---------- ---------- -------- Operating (loss) income.................................... (10,675) 3,412 3,046 ---------- ---------- -------- Other income(expense): Interest expense......................................... (2,334) (1,761) (2,023) Interest and other income................................ 1,634 975 476 Management fee to former parent.......................... -- -- (941) ---------- ---------- -------- Other expense, net....................................... (700) (786) (2,488) ---------- ---------- -------- (Loss) income before income taxes.......................... (11,375) 2,626 558 Provision for income taxes................................. 1,472 1,198 500 ---------- ---------- -------- Net (loss) income.......................................... $ (12,847) $ 1,428 $ 58 ========== ========== ======== Basic and diluted (loss) earnings per share................ $ (1.67) $ .48 ========== ========== Weight average shares used in computing (loss) earnings per share.................................................... 7,694,267 2,959,291 ========== ==========
See Notes to Consolidated Financial Statements. F-3 43 RAILWORKS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
COMMON STOCK PREFERRED STOCK ADDITIONAL --------------- --------------- PAID-IN RETAINED EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ------ ------ ------ ------ --------------- ----------------- -------- PREDECESSOR COMPANY BALANCE, DECEMBER 31, 1995................. 1,200 $ -- -- $-- $ 22,114 $ (1,547) $ 20,567 Capital contribution..................... -- -- -- -- 1,110 -- 1,110 Transfer of note receivable.............. -- -- -- -- (4,745) -- (4,745) Net income............................... -- -- -- -- -- 58 58 ------ ---- -- --- -------- -------- -------- BALANCE DECEMBER 31, 1996.................. 1,200 $ -- -- $-- $ 18,479 $ (1,489) $ 16,990 ====== ==== == === ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------- BALANCE JANUARY 1, 1997.................... -- $ -- -- $-- $ -- $ -- $ -- Capital contribution..................... 111 1 -- -- 9 -- 10 Recapitalization......................... 2,849 29 -- -- (9) (20) -- Net income............................... -- -- -- -- -- 1,428 1,428 ------ ---- -- --- -------- -------- -------- BALANCE DECEMBER 31, 1997.................. 2,960 30 -- -- -- 1,408 1,438 Issuance of common stock................. 5,908 59 -- -- 54,023 -- 54,082 Non-cash compensation charge............. 1,206 12 -- -- 14,861 -- 14,873 Initial public offering, net of underwriting discount and offering expenses............................... 5,000 50 -- -- 52,412 -- 52,462 Issuance of preferred stock.............. (1,370) (14) 14 14 -- -- -- Net loss................................. -- -- -- -- -- (12,847) (12,847) ------ ---- -- --- -------- -------- -------- BALANCE, DECEMBER 31, 1998................. 13,704 $137 14 $14 $121,296 $(11,439) $110,008 ====== ==== == === ======== ======== ========
See Notes to Consolidated Financial Statements. F-4 44 RAILWORKS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR COMPANY 1998 1997 1996 -------- -------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income........................................... $(12,847) $ 1,428 $ 58 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization............................. 2,105 (213) 1,365 Non-cash compensation charge.............................. 14,873 -- -- Deferred taxes............................................ 65 664 -- Gain on sale of division.................................. (861) -- -- Gain on sale of equipment................................. (3) (194) (39) Change in contract reserves............................... -- -- (3,000) Change in operating assets and liabilities: Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts............ (15,236) (8,176) (6,231) Inventory............................................... (274) 296 (947) Other current assets.................................... (1,066) (271) (4,209) Accounts payable and accrued liabilities................ 2,726 (1,159) (1,772) Accrued payroll and related withholdings................ (1,269) 549 365 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. (4,458) 3,320 2,307 Other current liabilities............................... (1,252) 909 (103) Other assets............................................ (1,145) (18) (3) Other liabilities....................................... 4,713 (336) 257 -------- -------- -------- Net cash used in operating activities............... (13,929) (3,201) (11,952) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of division............................ 1,000 -- -- Proceeds from sale of equipment........................... 32 194 130 Purchase of equipment and leasehold improvements.......... (1,280) (448) (690) Acquisition of subsidiaries, net of cash acquired......... (52,535) -- -- Contingent earnout payment................................ (1,600) -- -- -------- -------- -------- Net cash used in investing activities............... (54,383) (254) (560) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of loan origination fee........................... (1,615) -- -- Proceeds from issuance of common stock, net............... 52,462 -- 1,110 Proceeds from contingent promissory notes................. -- 14,608 -- Repayment of contingent promissory notes.................. -- (157) -- Loans to officers......................................... (959) -- -- Proceeds from note payable................................ -- 4,000 -- Repayments of note payable................................ -- (4,000) -- Proceeds from long-term borrowing......................... 61,325 16,937 7,961 Repayment of long-term borrowing.......................... (41,175) (26,823) (2,312) -------- -------- -------- Net cash provided by financing activities........... 70,038 4,565 6,759 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,726 1,110 (5,753) CASH AND CASH EQUIVALENTS, beginning of year................ 1,120 10 9,924 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of year...................... $ 2,846 $ 1,120 $ 4,171 ======== ======== ======== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest.................... $ 2,107 $ 1,478 $ 1,305 ======== ======== ======== Cash paid during the year for income taxes................ $ 392 $ 188 $ 57 ======== ======== ========
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES: The Company issued 8,867,648 shares of common stock in exchange for 100% of the outstanding common stock of the Subsidiaries. See Notes to Consolidated Financial Statements. F-5 45 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION RailWorks Corporation, a Delaware corporation, ("RailWorks" or the "Company"), was formed in March 1998 to acquire, integrate and facilitate the growth of similar and complementary companies in the rail system services and products industry. On July 29, 1998, RailWorks announced the initial public offering ("IPO") of 5,000,000 shares of its common stock at a price of $12.00 per share. The initial public offering was consummated on August 4, 1998. The capital raised by this offering was $55,800,000 net of underwriting discounts. Concurrent with the consummation of the IPO, the Company acquired 14 groups of companies (the "Founding Companies") in the rail system services and related products industry. The aggregate consideration paid by the Company to acquire these companies was approximately $51,100,000 in cash and 8,867,648 shares of RailWorks common stock. For accounting and financial statement purposes, Comstock Holdings, Inc. (one of the Founding Companies) ("Comstock" or the "Accounting Acquirer") has been identified as the accounting acquirer consistent with Staff Accounting Bulletin ("SAB") No. 97 of the Securities and Exchange Commission. The acquisitions of the remaining Founding Companies were accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon the fair values at the date of acquisition. The acquisitions of the Founding Companies resulted in the recording of goodwill of approximately $94,817,000, which is being amortized over 40 years. On November 4, 1998, the Company acquired substantially all of the net assets of Sheldon Electric, Inc. ("Sheldon"). Also, on November 4, 1998, the Company acquired the stock of Armcore Railroad Contractors, Inc. ("Armcore"), an Indiana corporation located in Frankfurt, Indiana. The aggregate price paid for these acquisitions was approximately $3,100,000 in cash. The acquisitions of Sheldon and Armcore were accounted for using the purchase method of accounting. The estimated goodwill associated with these acquisitions aggregated approximately $2,449,000. Comstock was incorporated on November 20,1996 as a Delaware corporation for the purpose of acquiring L.K. Comstock & Company, Inc. (the "Predecessor Company"). Comstock had no operations from incorporation through January 1, 1997. Effective January 1, 1997, Comstock purchased the stock of the Predecessor Company. The financial statements, including those of the Predecessor Company prior to its acquisition, have been prepared by Comstock management and present the financial position and results of operations of Comstock as of and for the year ended December 31, 1997 and of the Predecessor Company for the periods prior to January 1, 1997. Accordingly, the financial information for periods prior to 1997 do not reflect the significant impact of the Predecessor Company acquisition or of the purchase accounting adjustments on the financial position and results of operations of Comstock. The Predecessor Company was acquired by Comstock through various agreements (the "Agreements") entered into with Comstock Group, Inc. ("Group", the Predecessor Company's former parent), Spie Group Inc. ("Spie", the parent of Group), Spie Enertrans SA ("Enertrans", the former parent of Spie) and Schneider Electric Comstock Inc. ("Schneider", parent of Spie). The Agreements principally called for: (1) the sale of the common stock of the Predecessor Company to Comstock (the "Sale"), (2) the issuance of various contingent promissory notes by Comstock to Enertrans and Group in exchange for approximately $18,903,000, (3) the transfer of various intangible assets of Spie to Comstock, (4) the provision for various income tax elections and indemnifications, and (5) certain other indemnifications and cooperative understandings. The effects of the Agreements have been accounted for as a purchase in the accompanying financial statements as of and for the year ended December 31, 1997. In connection with the IPO of RailWorks, Group agreed to accept a one-time payment of $1,600,000 to satisfy all potential contingent F-6 46 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payments owed in connection with the Agreements. Such payment was made by RailWorks on September 8, 1998. As part of the Agreements, certain intangible assets (recorded at no value) were assigned to Comstock. In addition, Comstock issued a promissory note (the "Contingent Promissory Note"), collateralized by certain investments related to customer contracts involving claims and an investment in a joint venture (the "Investments"). The remaining balance of the Contingent Promissory Note of $12,240,000 at December 31, 1998 is payable only from amounts collected by Comstock relating to the Investments until April 3, 2007, at which time the note is cancelled. As such, Enertrans and any successor to it or creditor may not look to any other Comstock assets to satisfy this indebtedness. Accordingly, management believes a right of offset exists for financial reporting purposes and the Investments and the Contingent Promissory Note have been offset in the accompanying balance sheets at December 31, 1998 and 1997 in accordance with Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In connection with the Sale, $5,095,000 of cash from the Predecessor Company was used by Comstock to fund its acquisition of the Predecessor Company. Accordingly, and as a result of the purchase price adjustments, the fair value of the net assets acquired exceeds the purchase price funded solely by Comstock. In accordance with Accounting Principles Board Opinion No. 16 "Business Combinations", the excess of the cost of net assets acquired first reduced the non current assets to zero with the remainder allocated to "Excess of Acquired Net Assets Over Cost", (negative goodwill) which amount is being amortized over 40 years. 2. NATURE OF BUSINESS RailWorks was formed to become a leading nationwide provider of rail system services, including construction and rehabilitation, repair and maintenance, and related products. The Company provides contracting services and rail related products to a broad range of customers including Class I railroads, transit authorities and commuter railroads, municipalities, industrial companies and commercial enterprises. RailWorks operates principally in the United States. During 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). In accordance with SFAS No. 131, the Company has three reportable segments: (1) transit services, (2) rail construction, rehabilitation, repair and maintenance services and (3) rail products and supplies. The transit services segment provides transit construction and rehabilitation services, as well as installation of signaling, communications and electrical systems. The rail construction services segment provides design, engineering, construction, rehabilitation and repair and maintenance of track systems. The rail products and supplies segment provides a broad range of rail related products, including treated wood ties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. RailWorks evaluates performance based on profit or loss from operations before income taxes, interest income and expense, and non-recurring gains and losses. 3. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, utilizing current market prices and arms length terms and conditions. F-7 47 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenues from fixed-fee contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized currently as the work is performed. Contract costs include all direct material, labor and equipment costs and those indirect costs related to contract performance and are charged to cost of revenues as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. With regard to the rail products segment, the Company recognizes revenue when products are delivered to customers pursuant to shipping agreements. Cost of goods sold includes the raw materials cost, labor and overhead costs of producing the product. In accordance with industry practice, the Company classifies as current all assets and liabilities related to the performance of long-term contracts. The contracting cycle for certain long-term contracts may extend beyond one year and, accordingly, collection or payment of amounts related to these contracts may extend beyond one year. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include cash on hand and temporary cash investments purchased with an original maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Inventory consists of stored materials and parts to be used in long-term construction contracts and raw materials and finished goods produced by the rail products segment companies. F-8 48 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Included in machinery and equipment is specialty construction tools and other equipment which, although purchased in connection with a particular contract, is expected to be used in future contracts. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Building and improvements................................... 15 - 30 years Machinery and equipment..................................... 3 - 7 years Office furniture and equipment.............................. 5 - 7 years Transportation equipment.................................... 5 - 7 years
Leasehold improvements are capitalized and amortized over the shorter of the estimated useful lives of the assets or the terms of the related leases. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statements of operations. INCOME TAXES The Company follows the liability method of accounting for income taxes in accordance with SFAS No. 109. Under this method, deferred income taxes are recorded based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets or liabilities are received or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. F-9 49 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share". This statement supersedes APB Opinion No. 15, "Earnings per Share" and simplifies the computation of earnings per share ("EPS"). Primary EPS is replaced with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Fully diluted EPS is replaced with diluted EPS. Diluted EPS reflects the potential dilution if certain securities are converted and also includes certain shares that are contingently issuable. The following is the computation of earnings per share (in thousands, except per share data):
1998 1997 -------- ------ Net (loss) income........................................... $(12,847) $1,428 ======== ====== Shares used for determining basic EPS....................... 7,694 2,960 Dilutive effect of: Stock options............................................. * -- Convertible preferred shares.............................. * -- -------- ------ Shares used for determining diluted EPS..................... 7,694 2,960 ======== ====== Basic EPS................................................... $ (1.67) $ .48 ======== ====== Diluted EPS................................................. $ (1.67) $ .48 ======== ======
- --------------- * Outstanding stock options and convertible preferred shares would be antidilutive in 1998 and therefore were excluded. No stock options or convertible preferred shares were outstanding in 1997. INTANGIBLE ASSETS Intangible assets consist primarily of excess purchase price over net assets acquired (goodwill), which is being amortized over its estimated useful life of 40 years. In conformance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company's management regularly evaluates whether events and circumstances indicate that the remaining balance of intangibles or other long-lived assets may not be recoverable. The Excess of Acquired Net Assets Over Cost (negative goodwill) was generated from the acquisition of the Predecessor Company. The amortization period of the negative goodwill is 40 years. During 1998, the negative goodwill was reduced by the additional $1,600,000 purchase price paid to Group. Amortization expense, including negative amortization of $252,000 in 1998 and $269,000 in 1997, of the years ended December 31, 1998, 1997 and 1996 amounted to $965,000, $(269,000) and $16,000, respectively. 4. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROGRESS Accounts receivable at December 31, 1998 and 1997 consisted of the following (in thousands):
1998 1997 ------- ------- Billed...................................................... $58,702 $31,400 Retainages.................................................. 18,479 15,036 ------- ------- $77,181 $46,436 ======= =======
F-10 50 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Retainages of approximately $5,783,000 and $4,388,000 at December 31, 1998 and 1997 are invested in U.S. government obligations and municipal bonds. The Company anticipates that 47% of all retainages at December 31, 1998 will be collected within one year. Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues have been recorded but the amounts cannot be billed currently under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of the contract. The Company anticipates that substantially all amounts, other than unanticipated additional contract costs (see below), will be billed and collected within one year. The Company has recorded as costs and estimated earnings in excess in billings on uncompleted contracts amounts that it seeks or will seek to collect from customers or others for error or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price, or other customer-related causes of unanticipated additional contract costs (pending change orders or claims). These amounts are recorded at their estimated net realizable value when realization is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection with these amounts. Pending change orders and claims involve the use of estimates and it is reasonably possible that revisions to the estimated recoverable amounts of recorded pending change orders and claims may be made in the near-term. Claims made by the Company involve negotiation and, in certain cases litigation. The Company expenses such costs as incurred, although it may seek to recover these costs as part of the claim. The Company believes that it has established legal bases for pursuing recovery of recorded claims and it is management's intention to pursue and litigate these claims, if necessary, until a decision or settlement is reached. The Company is pursuing unanticipated additional contract costs on certain completed contracts. Costs and estimated earnings in excess of billings on uncompleted contracts includes unbilled revenues of approximately $11,054,000 and $3,915,000 at December 31, 1998 and 1997, respectively, related to these contracts. In addition, billed accounts receivable and retainages include contractually billed amounts related to these contracts of approximately $3,105,000 and $2,257,000 at December 31, 1998 and 1997, respectively. Certain contractually billed amounts related to these contracts may not be paid by the customer to the Company until final resolution of the contract. At December 31, 1998 and 1997, the Company had reserves of approximately $4,500,00 and $2,285,000, respectively, related to unbilled revenue and estimated legal costs to settle. Costs and estimated earnings at December 31, 1998 and 1997, on uncompleted contracts and related amounts billed are as follows (in thousands):
1998 1997 -------- -------- Costs....................................................... $429,114 $363,561 Estimated earnings.......................................... 47,575 46,027 -------- -------- 476,689 409,588 Billings.................................................... 457,855 400,949 -------- -------- $ 18,834 $ 8,639 ======== ========
F-11 51 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Such amounts are included in the accompanying consolidated balance sheets under the following captions (in thousands):
1998 1997 ------- ------- Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $24,792 $17,149 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... (5,958) (8,510) ------- ------- $18,834 $ 8,639 ======= =======
At December 31, 1998, 1997 and 1996, earned revenues from government related funding sources were 40%, 66% and 61%, respectively, of total earned revenues. Approximately 27%, 30% and 27% of total earned revenues for 1998, 1997 and 1996, respectively, were from a single government customer. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 ------- ---- Land and buildings.......................................... $ 1,780 $ -- Transportation equipment.................................... 2,121 -- Machinery and equipment..................................... 10,038 448 Office furniture and equipment.............................. 326 -- Leasehold improvements...................................... 249 -- ------- ---- 14,514 448 Less accumulated depreciation and amortization.............. 1,122 56 ------- ---- Property, plant and equipment, net.......................... $13,392 $392 ======= ====
Depreciation and amortization expense on property, plant and equipment charged to operations for the years ended December 31, 1998, 1997 and 1996 was approximately $1,140,000, $56,000 and $1,349,000, respectively. 6. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 ------- ------- Revolving credit agreement(a)............................... $49,300 $ -- Revolving credit agreement(b)............................... -- 12,057 Temporary revolver(c)....................................... -- 550 Promissory note(d).......................................... -- 1,700 Fixed asset notes........................................... 2,204 697 ------- ------- 51,504 15,004 Less current portion........................................ 931 2,555 ------- ------- $50,573 $12,449 ======= =======
- --------------- (a) On August 4, 1998, the Company entered into a secured $75,000,000 revolving credit agreement with NationsBank, N.A. (the "Credit Facility"). The Credit Facility expires on August 4, 2001; however, the Company may request the bank to extend the agreement for two, one-year periods. The proceeds of the Credit Facility are to be utilized for working capital, future acquisitions and letters of credit. The aggregate amount of letter of credit obligations that can be drawn against the Credit Facility shall not F-12 52 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exceed $20,000,000. There were no letters of credit outstanding at December 31, 1998. Interest on loans, commitment fees, and letter of credit fees are based upon consolidated leverage ratios in a pricing matrix which may be based on prime or LIBOR. The annual interest rates in effect at December 31, 1998, for prime and LIBOR borrowings were 8.5% and 7.26%, respectively. A one time facility fee of 2% was paid on the total Credit Facility. (b) On April 4, 1997, the Company entered into a secured revolving credit agreement (the "Revolver") with a maximum aggregate principal amount of $15,000,000 (the "Commitment"). Interest on Base Rate loans was at a rate of 1% plus the Base Rate, as defined (approximately prime rate); interest on Eurodollar loans was at 3.25% plus the Eurodollar Rate, as defined (approximately LIBOR). An annual facility fee of 1% and a commitment fee of 1/2 of 1% were payable on the total Commitment and the total unused Commitment, respectively. Up to $10,000,000 of letters of credit could be drawn against the Commitment, $2,911,655 of which was drawn at December 31, 1997. This obligation was repaid in its entirety on August 4, 1998. (c) On December 11, 1997, the Company entered into a short-term secured revolving credit agreement (the "Temporary Revolver") with a maximum principal amount of $2,000,000. Interest on the unpaid principal was at a rate of 2% plus the Base Rate (approximately prime rate). The Temporary Revolver was extended from its original maturity and was repaid in its entirety on August 4, 1998. (d) Interest on this agreement was payable semi-annually at a rate of 8.5%. This obligation was repaid in its entirety on August 4, 1998. The Credit Facility is secured by a first lien on all of the capital stock of the Company's subsidiaries and on all accounts receivable of the Company and its subsidiaries. In addition, the Credit Facility contains a negative pledge on all other assets of the Company and its subsidiaries. The Credit Facility contains restrictive covenants that, among other things impose limitations on the Company with respect to its ability to incur additional indebtedness, make certain investments, sell assets or pay dividends. The Credit Facility also contains various financial covenants which require the Company to meet certain targets including, but not limited to, the maintenance of net worth, earnings before interest, taxes, depreciation and amortization (EBITDA) to debt ratio and fixed charge coverage ratio. 7. INCOME TAXES The Company files a consolidated federal income tax return. The Predecessor Company's results were included in the consolidated federal income tax return of Spie. The income tax provision in the accompanying consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996 consists of (in thousands):
PREDECESSOR COMPANY 1998 1997 1996 ------ ------ ----------- Current: Federal.................................................. $ -- $ -- $150 State.................................................... 895 132 268 ------ ------ ---- 895 132 418 ------ ------ ---- Deferred: Federal.................................................. 503 941 70 State.................................................... 74 125 12 ------ ------ ---- 577 1,066 82 ------ ------ ---- $1,472 $1,198 $500 ====== ====== ====
F-13 53 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Factors accounting for the variation from U.S. statutory income tax rates relating to continuing operations for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
PREDECESSOR COMPANY 1998 1997 1996 ------- ------ ----------- Federal income taxes at the statutory rate................ $(3,981) $ 893 $189 Benefit of NOL............................................ -- -- (189) Federal alternative minimum tax........................... -- -- 150 State and local taxes..................................... (680) 206 242 Other..................................................... 229 99 108 Valuation allowance....................................... 5,904 -- -- ------- ------ ---- $ 1,472 $1,198 $500 ======= ====== ====
The components of the net deferred income tax asset in the accompanying consolidated balance sheets at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ------- ------ Deferred tax assets: Net operating loss carryforward........................... $ 3,005 $ 317 Excess of amounts expensed for financial statement purposes over amounts deducted for income tax purposes............................................... 4,097 1,451 State and local income taxes, net of federal tax benefits............................................... 915 481 ------- ------ Total deferred tax asset.................................... 8,017 2,249 ------- ------ Deferred tax liability, Costs capitalized for financial statement purposes and deducted for income tax purposes....................... 1,158 1,229 ------- ------ Total deferred tax liability................................ 1,158 1,229 ------- ------ Net deferred tax asset before valuation allowance........... 6,859 1,020 Valuation allowance for net deferred tax asset.............. (5,904) -- ------- ------ $ 955 $1,020 ======= ======
8. PREFERRED STOCK The Company has authorized 10,000,000 shares of Series A convertible preferred stock. The stock has no voting rights, shares dividends ratably with the common stock, is non-cumulative and has a liquidation preference over shares of common stock. Each share of preferred stock is convertible into 100 shares of the Company's common stock. On October 8, 1998, the Company issued 13,700 shares of its nonvoting Series A convertible preferred stock in exchange for 1,370,000 shares of common stock. Each share of Series A convertible preferred stock is convertible to 100 shares of common stock upon five days prior written notice from the holder, subject to certain conditions. 9. STOCK OPTION PLAN On August 13, 1998, the Company approved the 1998 Stock Incentive Plan (the "Plan") which provides for the granting or awarding of stock options and stock appreciation rights to non-employee directors, officers and other key employees (including officers of the Subsidiaries) and consultants. The Plan reserves for F-14 54 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) issuance 2,000,000 shares of common stock. In general, the terms of the option awards (including vesting schedules) will be established by the Compensation Committee of the Company's board of directors. During 1998 options covering an aggregate of 30,000 shares of common stock were issued under the Plan. Two non-employee directors were each issued options to purchase 10,000 shares of common stock at the IPO price. Options to purchase 10,000 shares were also issued to a President of one of the Subsidiaries at the price of the common stock on the date of the grant. The options expire ten years after the date of grant. At December 31, 1998, 30,000 options were outstanding:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ ---------------- Balance at inception........................................ -- $ -- Granted..................................................... 30,000 10.02 Exercised................................................... -- -- ------ ------ Balance, December 31, 1998.................................. 30,000 $10.02 ====== ====== Exercisable, December 31, 1998.............................. -- $ -- ====== ======
The weighted average fair value of options granted in 1998 at market value was $4.79. The fair value of each stock option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Risk-free interest rate at date of grants................... 5.25 - 5.79% Expected lives.............................................. 3 to 6 years Expected volatility......................................... 44.0% Expected dividend yield..................................... 0%
The following table summarizes information about stock options outstanding at December 31, 1998:
NUMBER OF OPTIONS WEIGHTED WEIGHTED OUTSTANDING AT AVERAGE REMAINING AVERAGE EXERCISE PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE - -------------- ----------------- ----------------- -------------- $6.06 to 12.00............................ 30,000 9.59 $10.02 ====== ==== ======
The Company applies APB No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized in the accompanying consolidated statements of operations for the year ended December 31, 1998 for options granted during that year. Had compensation expense for all stock options granted in 1998 been determined consistent with SFAS No. 123, the Company's net income per share would have been as follows: Net loss: As Reported............................................... $(12,847) ======== Pro Forma................................................. $(12,864) ======== Net loss per share: As Reported -- basic and diluted.......................... $ (1.67) ======== Pro Forma -- basic and diluted............................ $ (1.67) ========
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts and additional awards in future years are anticipated. F-15 55 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. EMPLOYEE BENEFIT PLANS Certain of the acquired companies have qualified defined contribution employee benefit plans (the "Plans"), the majority of which allowed for voluntary pretax contributions by employees. The Subsidiaries paid all general and administrative expenses of the Plans and in some cases, the Subsidiaries made matching and discretionary contributions to the Plans. The Subsidiaries currently offer no post-employment or post-retirement benefits. The expense incurred related to the Plans by the Company was approximately $367,000, $321,000 and $337,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Prior to 1997, Comstock was generally self insured for its automobile and general liability insurance and, to a lesser extent, for workers' compensation. Included primarily in accrued payroll and related withholdings, and other liabilities at December 31, 1998 and 1997 are reserves of $2,348,000 and $3,574,000, respectively, relating to these insurance liabilities. The Company, including Comstock, currently participates in a paid indemnity plan for these insurance coverages. Comstock sponsored an unfunded, fully insured postretirement medical plan covering eligible retirees and their dependents which it elected to terminate effective December 31, 1997. In 1996 Comstock offered, at group rates, comprehensive medical care benefits to retirees and their covered dependents. Comstock contributed approximately one-half of the total premium medical cost. Under the plan, employees were eligible to enroll on the first day of the month following retirement from Comstock after age 55 and ten years of service. Upon adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" the accumulated postretirement benefit obligation was $943,000. This amount was amortized over 20 years. The postretirement benefit cost for 1996 included the following items (in thousands):
PREDECESSOR COMPANY 1996 ----------- Service cost................................................ $ 42 Interest cost............................................... 81 Transition amortization..................................... 47 ---- $170 ====
The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.25% in 1996. The assumed health care cost trend rate was 9.5% in December 31, 1996, gradually decreasing to an ultimate rate of 5% in 2004 for participants under age 65. For those above age 65, a rate of 7.5% was used in 1996, gradually decreasing to an ultimate rate of 5% in 2004. A one percent increase in the assumed health care cost trend rate would increase costs by $25,000 in 1996. This plan was discontinued in 1997. The Company also has nonqualified defined benefit plans covering certain current and former employees of one of the Subsidiaries which provide benefits based on years of service and compensation. In aggregate, at December 31, 1998 and 1997 approximately $3,007,000 and $1,518,000, respectively relating to these programs is included in the accompanying balance sheets. The Company's self-insurance programs and certain employee benefit plan liabilities are estimated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience could cause these estimates to change. The Company has established two bonus incentive plans (the "Plans") covering certain employees. The first bonus pool consists of 10% of the Company's pre-tax profits and the second bonus pool consists of 15% of F-16 56 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the amount by which the Company's net income exceeds certain benchmarks. No benefits were earned or paid under either of the Plans during 1998. 11. LEASE COMMITMENTS The Company and its subsidiaries lease various office buildings, machinery, equipment, and vehicles under operating leases expiring at various dates through 2004. Most of the real property leases have escalation clauses related to increases in real property taxes. Future minimum lease payments under operating leases are as follows (in thousands): Years Ending December 31 1999...................................................... $2,163 2000...................................................... 1,252 2001...................................................... 1,070 2002...................................................... 1,046 2003...................................................... 930
Rent expense for all operating leases, including amounts charged to cost of revenues, for the year ended December 31, 1998, 1997 and 1996 was approximately $3,047,000, $2,685,000 and $3,527,000, respectively. 12. RELATED-PARTY TRANSACTIONS LEASING TRANSACTIONS Certain of the subsidiaries lease their operating facilities from former Founding Company owners who remained employees or directors of the Company. Total rent paid to related parties for 1998 was $330,000. The Company believes the rents to be the fair market rental value of the property. 13. COMMITMENTS AND CONTINGENCIES PERFORMANCE BONDS The Company's performance under certain construction contracts is secured by performance bonds for which the Company pays a separate fee. EMPLOYMENT CONTRACTS Certain executives of the Company have entered into employment agreements with the Company. In general, the employment agreements provide that, in the event of a termination of employment by the Company without cause, such employee will be entitled to receive from the Company an amount in cash equal to the employee's then current annual base salary for the remainder of the term. CONTINGENT PURCHASE PRICE FOR ACQUISITIONS The sellers of Sheldon and Armcore are eligible to receive additional cash amounts ("earnouts"), consisting of cash, as adjustments to the purchase prices paid for those companies. Such cash payments are contingent upon the achievement of earnings targets for 1999, 2000 and 2001. ENVIRONMENTAL The Company's operations are subject to extensive federal, state and local regulations under environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters and the generation, handling, storage, transportation, treatment and disposal of waste, hazardous substances, underground and aboveground storage tanks and soil and groundwater contamination. The Company is also subject to certain Federal, state and local environmental laws and regulations relating to the use of creosote. F-17 57 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Creosote is used in certain of the Company's manufacturing processes to treat wood railroad ties so that they can withstand exposure to outside elements. Creosote, a coal tar treated derivative, has been recognized by the environmental regulating agencies as a hazardous material. The Company believes that it is in material compliance with all of the various regulations applicable to their businesses and has not been notified of any violations by regulatory agencies. LITIGATION The Company is involved in legal proceedings and claims, asserted by and against the Company, which have arisen in the ordinary course of business. The Company believes it has a number of valid defenses to these actions and the Company intends to vigorously defend or assert these claims. Management believes, upon advice of outside counsel, that none of these actions will have a material adverse effect on the financial position or results of operations of the Company. 14. LOANS TO OFFICERS Pursuant to their employment agreements, certain officers of the Company have been granted loans for the payment of income taxes related to stock grants. These loans have a term of five years, are interest bearing and are collateralized by the stock granted. 15. FINANCIAL INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. SFAS 133 requires that changes in each derivative's fair value be recognized into earnings unless specific hedge accounting criteria are met. The Company does not anticipate that SFAS 133 will have a material impact upon its operations. INTEREST RATE SWAPS The Company has entered into an interest rate swap agreement to manage exposure to interest rate fluctuations. The outstanding agreement involves the exchange of floating rate interest payments for fixed rate interest payments over a specified time period without the exchange of any underlying principal amounts. The Company's credit exposure is limited to the fair value of the agreements, and the Company only enters into agreements with highly rated counterparties. The Company does not enter into interest rate swap agreements for trading or speculative purposes and matches the terms and contract notional amounts to existing debt. The net amounts paid or received under interest rate swap agreements are recognized as an adjustment to interest expense. At December 31, 1998, the Company had an interest rate swap agreement with a total notional value of $10,000,000, expiring December 7, 2001 or December 7, 2000 at the counterparties' option. The agreements effectively convert floating rate obligations to a fixed rate of 4.85 percent. If the Company were to terminate its existing interest rate swap agreements, any resulting gain or loss would be deferred and recognized over the remaining life of the related debt. RailWorks uses the following methods and assumptions in estimating the fair value of its financial instruments: Cash and Cash Equivalents -- The carrying amount is equal to fair market value due to their short-term nature. F-18 58 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. Government and Municipal Bonds -- These securities are classified as held to maturity and are valued at cost which approximates market value. Debt -- The Company's bank loans and floating rate debt approximate fair value. The fair value of fixed rate long-term debt is based upon quoted market prices for these or similar issues, or rates currently available to the Company for debt with similar terms and maturities. Interest Rate Swap Agreements -- The fair value of interest rate swap agreements is based upon the estimated cost to terminate the agreements, taking into account current interest rates and creditworthiness of the counterparties. The fair value at December 31, 1998 was approximately $10,500. 16. SEGMENT REPORTING Comstock and the Predecessor Company operated in one reportable segment: transit services. Accordingly, no additional disclosures are required under SFAS No. 131. The following matrix presents operational and financial condition data as of and for the year ended December 31, 1998 for analysis by reportable segment (in thousands):
TRANSIT RAIL PRODUCTS RAIL OTHER/ SERVICES AND SUPPLIES CONSTRUCTION CORPORATE TOTAL -------- ------------- ------------ --------- -------- Revenues from external customers...................... $165,989 $11,195 $37,184 $ -- $214,368 Intersegmental revenue........... -- 952 883 -- 1,835 Depreciation/amortization........ (17) 192 709 1,221 2,105 Segment operating profit (loss)......................... 6,084 1,683 4,596 (23,038) (10,675) Costs and estimated earnings in excess of billings on uncompleted contracts.......... 22,897 -- 1,895 -- 24,792 Segment assets................... 58,224 8,299 26,676 159,677 252,876 Capital Expenditures............. 676 29 490 85 1,280
The Company's reconciliation of segment totals to enterprise values are as follows (in thousands): 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 ========
F-19 59 RAILWORKS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly financial information for the years ended December 31, 1998 and 1997 are summarized as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 1998 ------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Revenues.......................................... $41,628 $44,752 $53,077 $73,076 Operating income (loss)........................... 1,237 1,172 (18,404) 5,320 Net income (loss)................................. 666 456 (19,036) 5,067 Basic EPS......................................... .23 .15 (1.72) .37 Diluted EPS....................................... .23 .15 (1.72) .34
YEAR ENDED DECEMBER 31, 1997 ------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Revenues.......................................... $32,401 $34,739 $41,197 $45,273 Operating income.................................. 604 1,105 992 711 Net income........................................ 440 418 467 103 Basic EPS......................................... .15 .14 .16 .03 Diluted EPS....................................... .15 .14 .16 .03
18. SUBSEQUENT EVENTS (UNAUDITED) On January 7, 1999, the Company acquired all the stock of Mid West Railroad Construction Maintenance Corporation of Wyoming (Mid West) which specializes in construction, repair and maintenance of railroad tracks in various western states. On January 26, 1999, the Company acquired all the stock of Gantrex Group (Gantrex) which manufactures and supplies crane rail fastening systems including pad manufacturing, extrusion and continuous vulcanizing capabilities. On January 29, 1999, the Company acquired all the stock of FCM Rail, Ltd. (FCM) which provides customized leasing services to users of on track rail equipment. On February 1, 1999, the Company acquired all of the stock of F & V Metro Contracting Corp. and Affiliates (F & V) which performs electrical and mechanical installations for transit and transportation agencies in the metropolitan New York City area. The acquisitions were accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon the fair values at the date of acquisition. The combined purchase price was $26,000,000 in cash, $8,833,000 of promissory notes payable and 100,000 shares of Common Stock, plus the potential to receive earnouts if targeted revenue and profit goals are achieved over the next 5 years. The estimated fair market value of assets purchased was approximately $6,300,000 and the estimated goodwill was $29,500,000. Any additional purchase price paid will increase the goodwill reported. The estimated fair market values reflected above are based on preliminary estimates and assumptions and are subject to revision. F-20 60 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RailWorks Corporation: We have audited the accompanying balance sheet of RAILWORKS CORPORATION (a Delaware Corporation), as of July 31, 1998, and the related statements of operations and cash flows for the period from April 1 to July 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RAILWORKS CORPORATION as of July 31, 1998, and the results of its operations and cash flows for the period from April 1 to July 31, 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP Stamford, Connecticut February 8, 1999 F-21 61 RAILWORKS CORPORATION BALANCE SHEET JULY 31, 1998 (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash...................................................... $89 --- Total current assets.............................. 89 --- Total assets...................................... $89 === LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Advances from founding companies.......................... $89 --- Total current liabilities......................... 89 --- Total liabilities................................. 89 --- STOCKHOLDER'S EQUITY: Preferred stock, $1.00 par value authorized 10,000,000 shares. No shares issued............................... -- Common stock, $0.01 par value authorized 100,000,000 shares, 10 shares issued and outstanding............... -- Paid-in capital........................................... -- --- Total stockholder's equity........................ -- --- Total liabilities and stockholder's equity........ $89 ===
See Notes to Financial Statements. F-22 62 RAILWORKS CORPORATION STATEMENT OF OPERATIONS FOR THE PERIOD FROM APRIL 1, 1998 TO JULY 31, 1998 (IN THOUSANDS) Revenues.................................................... $-- Selling, general and administrative expenses................ -- --- Income before income taxes.................................. -- Provision for income taxes.................................. -- --- Net income.................................................. $-- ===
See Notes to Financial Statements. F-23 63 RAILWORKS CORPORATION STATEMENT OF CASH FLOWS FOR THE PERIOD FROM APRIL 1, 1998 TO JULY 31, 1998 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES........................ $ -- CASH FLOWS FROM INVESTING ACTIVITIES........................ -- CASH FLOWS FROM FINANCING ACTIVITIES, 34 Advances from founding companies..................... Net cash provided by financing activities......... 34 ---- NET INCREASE IN CASH........................................ 34 CASH, beginning of period................................... 55 ---- CASH, end of period......................................... $ 89 ==== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ -- ==== Cash paid during the period for income taxes.............. $ -- ====
See Notes to Financial Statements. F-24 64 RAILWORKS CORPORATION NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION RailWorks Corporation ("RailWorks" or the "Company"), was formed in March 1998 to become a leading nationwide provider of rail services, including system construction and rehabilitation, repair and maintenance services and related products. RailWorks acquired fourteen U.S. businesses (the "Acquisitions") and, completed an initial public offering (the "Offering") of its common stock in August, 1998. Subsequent to the Offering, the Company intends to continue to acquire, through merger or purchase, similar companies to expand its national operations. RailWorks did not conduct any operations, and all activities to date have related to the Acquisitions and the Offering. Cash of $100 was generated from the initial capitalization of the Company (see Note 2). 2. STOCKHOLDER'S EQUITY In connection with the organization and initial capitalization of RailWorks, the Company issued 10 shares of common stock for $100. 3. SUBSEQUENT EVENTS RailWorks and its newly formed, wholly owned subsidiaries have acquired by merger, the Founding Companies as follows: Annex Railroad Builders, Inc. and Affiliates, Comtrak Construction, Inc., Comstock Holdings, Inc., Condon Brothers, Inc., CPI Concrete Products Incorporated, H.P. McGinley, Incorporated, Kennedy Railroad Builders, Inc. and Associated Companies, Merit Railroad Contractors, Inc., Midwest Construction Services, Inc., New England Railroad Construction Company, Inc., Railroad Service, Inc. and Minnesota Railroad Service, Inc., Southern Indiana Wood Preserving Company, Inc., U.S. Trackworks, Inc. and Northern Rail Service and Supply Co., and Wm. A. Smith Construction Co. and Wm. A. Smith Rerailing Service, Inc. Consideration paid by RailWorks to acquire the Founding Companies consisted of a combination of cash and common stock. Additionally, RailWorks granted 1,205,872 shares of its common stock to its executive management team. The Company recorded compensation expense upon granting the shares of approximately $14,500,000. F-25 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Annex Railroad Builders, Inc. and Affiliates: We have audited the accompanying combined balance sheets of ANNEX RAILROAD BUILDERS, INC. (an Indiana corporation) AND AFFILIATES (collectively, the "Company") as of July 31, 1998 and December 31, 1997, and the related combined statements of operations, stockholders' equity and cash flows for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and year ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES as of July 31, 1998, and December 31, 1997 and the results of their operations and their cash flows for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Nashville, Tennessee September 18, 1998 F-26 66 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES COMBINED BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 578,622 $ 201,016 Accounts receivable, net of allowance of $52,306 and $20,000, respectively.................................. 2,731,322 2,775,817 Employee loans and advances............................... 14,075 16,360 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 701,652 1,162,368 Inventory................................................. 153,930 166,718 Prepaid expenses.......................................... 26,373 27,663 Income tax receivable..................................... 520,792 -- Deferred tax assets....................................... 7,856 48,683 ---------- ---------- Total current assets.............................. 4,734,622 4,398,625 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Land and buildings........................................ 137,314 279,853 Machinery and equipment................................... 2,219,467 2,269,335 Office furniture and equipment............................ 74,516 56,343 ---------- ---------- 2,431,297 2,605,531 Less accumulated depreciation.......................... 1,831,816 1,779,337 ---------- ---------- Property, plant and equipment, net.......................... 599,481 826,194 ---------- ---------- OTHER ASSET: Cash value of life insurance, face value of $1,810,000.... -- 295,448 ---------- ---------- $5,334,103 $5,520,267 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 969,510 $1,337,542 Line of credit............................................ 1,075,000 50,000 Current obligations under capital leases.................. 87,766 99,604 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. 322,828 213,703 Accrued wages............................................. 653,086 142,839 Accrued expenses.......................................... 248,444 453,115 Current maturities of long-term debt...................... 29,489 93,763 ---------- ---------- Total current liabilities......................... 3,386,123 2,390,566 ---------- ---------- Long-term debt, net of current maturities................... 7,613 105,102 ---------- ---------- Capital lease obligations, net of current obligations....... -- 42,935 ---------- ---------- Commitments and contingencies............................... -- -- ---------- ---------- STOCKHOLDERS' EQUITY: Common Stock, no par value; 8,000 shares authorized, 5,750 outstanding............................................ 56,769 56,769 Retained earnings......................................... 1,883,598 2,924,895 ---------- ---------- Total stockholders' equity........................ 1,940,367 2,981,664 ---------- ---------- $5,334,103 $5,520,267 ========== ==========
See Notes to Combined Financial Statements. F-27 67 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES COMBINED STATEMENTS OF OPERATIONS
SEVEN MONTHS NINE MONTHS ENDED ENDED YEAR ENDED JULY 31, DECEMBER 31, MARCH 31, 1998 1997 1997 ------------ ------------ ----------- Revenue................................................. $7,410,225 $15,098,726 $15,467,498 Contract costs.......................................... 7,211,829 12,405,910 12,948,083 ---------- ----------- ----------- Gross profit.......................................... 198,396 2,692,816 2,519,415 General and administrative expenses..................... 932,604 1,326,435 1,674,321 ---------- ----------- ----------- (Loss) income from operations........................... (734,208) 1,366,381 845,094 ---------- ----------- ----------- Other income (expense): Interest income....................................... 7,227 15,065 31,216 Interest expense...................................... (23,400) (42,530) (47,956) ---------- ----------- ----------- (16,173) (27,465) (16,740) ---------- ----------- ----------- (Loss) income before (benefit) provision for income taxes................................................. (750,381) 1,338,916 828,354 (Benefit) provision for income taxes.................... (367,074) 369,011 228,946 ---------- ----------- ----------- Net (loss) income....................................... $ (383,307) $ 969,905 $ 599,408 ========== =========== ===========
See Notes to Combined Financial Statements. F-28 68 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF COMMON COMMON TREASURY RETAINED SHARES STOCK STOCK EARNINGS TOTAL --------- -------- --------- ---------- ---------- BALANCE, MARCH 31, 1996................. 5,750 $56,769 $(109,274) $2,300,628 $2,248,123 Net income............................ -- -- -- 599,408 599,408 Dividends............................. -- -- -- (386,300) (386,300) ----- ------- --------- ---------- ---------- BALANCE, MARCH 31, 1997................. 5,750 56,769 (109,274) 2,513,736 2,461,231 Net income............................ -- -- -- 969,905 969,905 Dividends............................. -- -- -- (449,472) (449,472) Retirement of treasury stock.......... -- -- 109,274 (109,274) -- ----- ------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1997.............. 5,750 56,769 -- 2,924,895 2,981,664 Net loss.............................. -- -- -- (383,307) (383,307) Dividends............................. -- -- -- (657,990) (657,990) ----- ------- --------- ---------- ---------- BALANCE, JULY 31, 1998.................. 5,750 $56,769 $ -- $1,883,598 $1,940,367 ===== ======= ========= ========== ==========
See Notes to Combined Financial Statements. F-29 69 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS
SEVEN MONTHS NINE MONTHS ENDED ENDED YEAR ENDED JULY 31, DECEMBER 31, MARCH 31, 1998 1997 1997 ------------ ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................................... $(383,307) $969,905 $599,408 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Deferred income tax provision (benefit)................. 40,827 (19,924) -- Depreciation and amortization........................... 142,404 192,773 250,215 (Gain)/loss from sale of equipment...................... (706) 145 1,117 Non-cash compensation expense........................... 295,448 -- -- Change in operating assets and liabilities: Accounts receivable.................................. 44,495 (234,939) (677,293) Costs and estimated earnings in excess of billings on uncompleted contracts.............................. 460,716 (361,290) (287,483) Inventory............................................ 12,788 (82,633) (25,290) Prepaid expenses..................................... 1,290 104,356 (106,458) Income tax receivable................................ (520,792) -- -- Accounts payable..................................... (368,032) (170,342) 577,961 Accrued expenses..................................... 305,576 252,961 (107,036) Billings in excess of costs and estimated earnings on uncompleted contracts.............................. 109,125 87,005 (59,381) --------- -------- -------- Net cash provided by operating activities.......... 139,832 738,017 165,760 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net employee advances (payments).......................... 2,285 5,920 (728) Increase in cash value of life insurance.................. -- (45,145) (53,796) Proceeds from life insurance policies..................... -- 56,163 -- Decrease in notes receivable.............................. -- -- 43,574 Purchases of property, plant, and equipment............... (51,735) (146,640) (110,932) Proceeds from sale of equipment........................... 14,995 20,011 -- --------- -------- -------- Net cash used in investing activities.............. (34,455) (109,691) (121,882) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under line of credit............ 1,025,000 (275,000) 75,000 Principal payments on capital lease obligations........... (54,773) (97,144) (17,712) Principal payments on long-term debt...................... (73,747) (73,290) (131,138) Borrowings under long-term debt........................... -- 70,272 19,752 Dividends paid............................................ (624,251) (449,472) (386,300) --------- -------- -------- Net cash provided by (used in) financing activities....................................... 272,229 (824,634) (440,398) --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 377,606 (196,308) (396,520) CASH AND CASH EQUIVALENTS, beginning of period.............. 201,016 397,324 793,844 --------- -------- -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 578,622 $201,016 $397,324 ========= ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.................................................. $ 14,910 $ 52,894 $ 55,023 ========= ======== ======== Income taxes.............................................. $ 35,548 $218,799 $235,131 ========= ======== ========
See Notes to Combined Financial Statements. F-30 70 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS ACTIVITIES The accompanying combined financial statements of Annex Railroad Builders, Inc. and Affiliates (collectively the "Company") include the accounts of Annex Railroad Builders, Inc. ("Annex") (an Indiana corporation), R. & M. B. Rail Co., d/b/a Mize Construction Company ("Mize") (an Indiana corporation), Railroad Specialties, Inc., ("RSI") (an Indiana corporation) and U.S. Railway Supply, Inc. ("US Rail") (an Indiana corporation). These entities are included in the combined financial statements due to certain shareholder's majority ownership in each. The majority of the Company operates as a construction contractor constructing, repairing, and maintaining railroad tracks for private and government customers located throughout the Midwest. This work is performed under various forms of contracts, including fixed-fee and time-and-material contracts. One entity operates a supply company that provides railroad construction supplies to certain railroad construction contractors. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION The above companies have been included in the combined financial statements. All material intercompany transactions and balances have been eliminated. Although the fiscal year of Annex used to be March 31, the affiliates are included in the combined financial statements on the basis of fiscal years ending December 31. In 1997, Annex changed its financial reporting year-end to December 31. RECLASSIFICATIONS Certain reclassifications have been made in the December 31, 1997 combined financial statements to conform with the July 31, 1998 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. REVENUE AND COST RECOGNITION The Company recognizes revenues from fixed-fee contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized currently as the work is performed. Contract costs include all direct material, labor and equipment costs and those indirect costs related to contract performance and are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. F-31 71 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include cash on hand and temporary cash investments purchased with an original maturity of three months or less. FINANCIAL INSTRUMENTS AND CREDIT RISK The Company operates primarily in the Midwestern United States. As such, the Company's accounts receivable are from the same geographic region. The terms of sales give rise to unsecured accounts receivable, as is common industry practice. Contract revenue earned from three customers comprised approximately 29%, 29% and 23% of total contract revenue for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the twelve months ended March 31, 1997, respectively. INVENTORY Inventory, consisting principally of stored materials and parts to be used for contracts, is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT The Company records property, plant and equipment at cost. Depreciation is computed using the straight-line and accelerated methods over the estimated useful life of the asset as follows: Buildings................................................... 27.5 - 39 years Machinery and equipment..................................... 5 years Office furniture and equipment.............................. 7 years
As assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is reflected in net income. INCOME TAXES Mize, RSI and U.S. Rail operate as Sub-Chapter S Corporations. Accordingly, the taxable income of Mize, RSI, and US Rail included in the combined financial statements of the Company is reported by the owners in their respective individual tax returns; therefore, the combined financial statements of the Company do not reflect an income tax provision for these entities. The provision for (benefit from) income taxes is based on earnings (losses) reported by Annex. In accordance with Statement of Financial Accounting Standards No. 109, a deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. F-32 72 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS RECEIVABLE Accounts receivable at July 31, 1998 and December 31, 1997, consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Contract receivables....................................... $1,347,155 $1,633,139 Contract retainages........................................ 1,436,473 1,162,678 ---------- ---------- 2,783,628 2,795,817 Less allowance for doubtful accounts....................... 52,306 20,000 ---------- ---------- $2,731,322 $2,775,817 ========== ==========
Contract retainages have been billed but are not due pursuant to contract provisions until contract completion. Such contract retainages are expected to be collected within the following year. 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information with respect to contracts in process at July 31, 1998 and December 31, 1997, is as follows:
JULY 31, DECEMBER 31, 1998 1997 ----------- ------------ Costs incurred on uncompleted contracts................... $13,921,261 $ 9,508,537 Estimated earnings........................................ 5,435,876 3,477,468 ----------- ----------- 19,357,137 12,986,005 Less billings to date..................................... 18,978,313 12,037,340 ----------- ----------- $ 378,824 $ 948,665 =========== ===========
Contracts in process are included in the accompanying combined balance sheets under the following captions:
JULY 31, DECEMBER 31, 1998 1997 --------- ------------ Costs and estimated earnings in excess of billings on uncompleted contracts.................................... $ 701,652 $1,162,368 Billings in excess of costs and estimated earnings on uncompleted contracts.................................... (322,828) (213,703) --------- ---------- $ 378,824 $ 948,665 ========= ==========
5. LINE OF CREDIT The Company maintained a revolving line of credit with maximum borrowings of $1,500,000. The line of credit bears interest at prime plus .75% (9% at July 31, 1998) which is payable monthly. The collateral for the line of credit includes the Company's accounts receivable, inventory, machinery and equipment. In addition, it is personally guaranteed up to $500,000 by one of the principal stockholders. During the seven months ended July 31, 1998, nine months ended December 31, 1997 and the year ended March 31, 1997, the weighted average amount outstanding on the line of credit was approximately $327,000, $221,000, and $356,000 respectively, and the maximum amount outstanding was approximately $1,075,000, $500,000 and $575,000, respectively. The outstanding balance of the revolving credit facility at July 31, 1998 and December 31, 1997 was $1,075,000, and $50,000 respectively. In connection with the transaction discussed in Note 13, the line of credit was repaid subsequent to July 31, 1998. F-33 73 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. CAPITAL LEASES The Company's capital leases relate to machinery and equipment which have net book values of $174,142 and $205,916 at July 31, 1998 and December 31, 1997 respectively. The terms of these leases range from 15 to 24 months. The effective interest rates on these leases range from 5% to 11%. Future minimum lease payments under capital leases for the period ending July 31, 1999 are $87,766. 7. LONG-TERM DEBT At July 31, 1998 and December 31, 1997, long-term debt consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Note payable to bank, interest at 8.90%, payable in monthly installments of $3,811, maturing September 1998, secured by equipment.............................................. $ 7,407 $ 32,927 Mortgage note payable to bank, interest at 7.125%, payable in monthly installments of $996, assumed by stockholder in 1998...................................................... -- 90,802 Note payable to bank, interest at 8.42%, payable in monthly installments of $1,367, matured March 1998................ -- 4,009 Note payable to bank, interest at 7.90%, payable in monthly installments of $892, maturing October 1998, secured by equipment................................................. 2,707 8,675 Note payable to bank, interest at 8.50%, payable in monthly installments of $738, maturing February 2000, secured by equipment................................................. 12,964 17,359 Other notes payable......................................... 14,024 45,093 ------- -------- 37,102 198,865 Less current maturities..................................... 29,489 93,763 ------- -------- $ 7,613 $105,102 ======= ========
The future maturities of long-term debt as of July 31, 1998 are as follows:
PERIOD ENDING JULY 31, - ---------------------- 1999...................................................... $29,489 2000...................................................... 7,613 ------- $37,102 =======
Both long-term debt and the line of credit contain certain restrictive covenants which place requirements and restrictions on the Company regarding disposition of assets, financial ratios, capital expenditures, acquisitions and operations. The Company was in compliance with these covenants at July 31, 1998. 8. PROFIT SHARING PLAN The Company maintains a profit sharing plan for full-time, non-union employees. To be eligible, an employee must be employed with the Company for two years. All contributions, which are at management's discretion, are vested after six years. Company contributions to the plan were $0, $121,421 and $117,717, for the seven months ended July 31, 1998, the nine months ended December 31, 1997, and the year ended March 31, 1997, respectively. F-34 74 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES The income tax provision (benefit) for the seven months ended July 31, 1998, the nine months ended December 31, 1997, and the year ended March 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, MARCH 31, 1998 1997 1997 --------- ------------ --------- Current provision (benefit): Federal....................................... $(324,826) $309,722 $186,675 State......................................... (83,075) 79,213 42,271 --------- -------- -------- (407,901) 388,935 228,946 Deferred provision (benefit).................... 40,827 (19,924) -- --------- -------- -------- $(367,074) $369,011 $228,946 ========= ======== ========
The income tax provision (benefit) as reported in the combined statements of operations differs from the amounts computed by applying federal statutory rates due to the following:
JULY 31, DECEMBER 31, MARCH 31, 1998 1997 1997 --------- ------------ --------- Federal income tax at statutory rate................ $(323,454) $322,899 $179,709 State income taxes, net of federal income tax benefit........................................... (52,370) 52,281 27,899 Other............................................... 8,750 (6,169) 21,338 --------- -------- -------- Income tax (benefit) provision...................... $(367,074) $369,011 $228,946 ========= ======== ========
The tax effect of temporary differences that give rise to significant portions of deferred tax assets at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Deferred tax assets: Allowance for doubtful accounts........................... $7,856 $ 7,856 Accrued management bonus.................................. -- 40,827 ------ ------- Total deferred tax assets......................... $7,856 $48,683 ====== =======
10. RELATED PARTY TRANSACTIONS The Company has sales and purchases of supplies and services with related parties under common ownership. Sales to these companies were $17,830, $58,752 and $105,840 for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997, respectively. The Company had receivables from these companies totaling $12,883 and $17,771 at July 31, 1998 and December 31, 1997, respectively. During 1998, the Company distributed certain property with a net book value of $121,745 to the principal stockholder along with the assumption of $88,016 of outstanding debt by the stockholder. In addition, during 1998 the Company transferred certain officer life insurance policies to the stockholders in the form of compensation expense. F-35 75 ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES The Company is engaged in various lawsuits arising in the ordinary course of business. In the opinion of management, based upon the advice of counsel, the ultimate outcome of these lawsuits will not have a material impact on the Company's financial statements. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair values of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts of these items are a reasonable estimate of their fair value due to their short-term nature. LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS The carrying amount of the line of credit facility approximates fair value as the interest rate fluctuates with changes in market conditions. The carrying amount of long-term debt and capital lease obligations based on borrowing rates currently available to the Company is a reasonable estimation of fair value. 13. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-36 76 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CPI Concrete Products Incorporated: We have audited the accompanying balance sheet of CPI CONCRETE PRODUCTS INCORPORATED, (a Tennessee Corporation), as of July 31, 1998, and the related statements of operations, stockholders' equity and cash flows for the six months ended July 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CPI CONCRETE PRODUCTS INCORPORATED, as of July 31, 1998, and the results of its operations and its cash flows for the six months then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Stamford, Connecticut September 18, 1998 F-37 77 CPI CONCRETE PRODUCTS INCORPORATED BALANCE SHEET JULY 31, 1998
JULY 31, 1998 ---------- ASSETS CURRENT ASSETS: Cash...................................................... $ 635,416 Accounts receivable....................................... 993,633 Inventory................................................. 1,434,823 Prepaid expenses.......................................... 41,255 Deferred tax assets....................................... 16,847 ---------- Total current assets.............................. 3,121,974 ---------- EQUIPMENT................................................... 2,752,519 LESS ACCUMULATED DEPRECIATION............................... 1,885,315 ---------- EQUIPMENT, NET.............................................. 867,204 ---------- OTHER ASSETS: Loan costs, net of accumulated amortization of $11,154.... 15,092 Refundable deposits....................................... 550 ---------- Other assets, net................................. 15,642 ---------- $4,004,820 ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 413,156 Customer deposits......................................... 41,731 Accrued wages............................................. 47,352 Taxes withheld and accrued................................ 51,789 Accrued expenses.......................................... 169,450 Accrued income taxes...................................... 235,712 Current portion of long-term debt......................... 212,089 ---------- Total current liabilities......................... 1,171,279 LONG-TERM DEBT, less current portion........................ 473,188 DEFERRED INCOME TAXES....................................... 42,477 ---------- Total liabilities................................. 1,686,944 ---------- STOCKHOLDERS' EQUITY: Common Stock, no par value; shares authorized 3,000; shares issued 2,161 (8 in Treasury, 253 in ESOP)....... 428,700 Retained earnings......................................... 1,892,392 ---------- 2,321,092 Less treasury stock, 8 shares at cost..................... 3,216 ---------- Stockholders' equity, net......................... 2,317,876 ---------- $4,004,820 ==========
See Notes to Financial Statements. F-38 78 CPI CONCRETE PRODUCTS INCORPORATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 31, 1998 ---------------- Revenue..................................................... $3,642,118 Cost of goods sold.......................................... 3,085,629 ---------- Gross profit................................................ 556,489 Selling, general and administrative expenses................ 602,071 ---------- Loss from operations........................................ (45,582) ---------- Other Income (expense): Interest expense.......................................... (31,821) Loss on sale of equipment................................. (2,975) Rental income............................................. 9,571 Interest income........................................... 17,437 Miscellaneous income...................................... 28,673 ---------- Other income, net........................................... 20,885 ---------- Loss before provision for income taxes...................... (24,697) Provision for income taxes.................................. 400,008 ---------- Net loss.................................................... $ (424,705) ==========
See Notes To Financial Statements. F-39 79 CPI CONCRETE PRODUCTS INCORPORATED STATEMENT OF STOCKHOLDERS' EQUITY
NUMBER OF COMMON COMMON TREASURY RETAINED SHARES STOCK STOCK EARNINGS TOTAL --------- -------- -------- ---------- ---------- BALANCE, January 31, 1998................. 2,161 $428,700 $(3,216) $2,864,039 $3,289,523 Net loss................................ -- -- -- (424,705) (424,705) Dividends............................... -- -- -- (546,942) (546,942) ----- -------- ------- ---------- ---------- BALANCE, July 31, 1998.................... 2,161 $428,700 $(3,216) $1,892,392 $2,317,876 ===== ======== ======= ========== ==========
See Notes to Financial Statements. F-40 80 CPI CONCRETE PRODUCTS INCORPORATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 1998 ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Adjustments to reconcile net loss to net cash provided by operating activities: Net loss.................................................. $(424,705) Amortization.............................................. 1,312 Depreciation.............................................. 147,809 Loss on sale of equipment................................. 2,975 Change in operating assets and liabilities: Accounts receivable.................................... 135,415 Inventory.............................................. 296,698 Prepaid expenses....................................... 16,588 Deferred tax assets.................................... 4,529 Accounts payable....................................... (85,699) Customer deposits...................................... (51,365) Accrued wages.......................................... 4,656 Taxes withheld and accrued............................. 178,991 Accrued expenses....................................... 1,860 Accrued income taxes................................... (6,974) Deferred income taxes.................................. 16,477 --------- Net cash provided by operating activities......... 238,567 --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of equipment..................................... (103,342) --------- CASH FLOWS USED IN FINANCING ACTIVITIES: Repayment of long-term debt............................... (156,380) --------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (21,155) CASH AND CASH EQUIVALENTS, beginning of period.............. 656,571 --------- CASH AND CASH EQUIVALENTS, end of period.................... $ 635,416 ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes.............................................. $ 206,985 ========= Interest.................................................. $ -- =========
See Notes to Financial Statements. F-41 81 CPI CONCRETE PRODUCTS INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS The accompanying financial statements include the accounts of CPI Concrete Products Incorporated (The "Company") as of July 31, 1998. The Company is located in Memphis, Tennessee and is in the business of processing and selling concrete poles and concrete products in the Mid-South geographical region. The Company extends credit to their customers, with the majority of customers located in Tennessee, Mississippi and Arkansas. No collateral is required for trade accounts receivable. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of management estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. INVENTORY Inventory is valued at the lower of cost (first-in, first-out method) or market. At July 31, 1998 inventory consisted of the following: Raw Materials............................................... $ 375,150 Finished Goods.............................................. 1,059,673 ---------- $1,434,823 ==========
REVENUE RECOGNITION These statements reflect the accrual basis of accounting which requires recognition of revenues when earned and expenses when incurred without regard to the exchange of each. EQUIPMENT Equipment is stated at cost. Depreciation is provided on the straight-line and declining balance methods over the estimated useful lives of the various assets. Lives used for calculating depreciation are: machinery and equipment 3-10 years. Amortization of loan costs is made over a 120 month period. Expenditures for maintenance, repairs and minor renewals are expenses as incurred; expenditures for improvements, replacements and major renewals are capitalized. Assets retired, or otherwise disposed of, are eliminated from the asset accounts along with related amounts of accumulated depreciation. Any gains or losses from disposals are included in income. INCOME TAXES The Company has adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. F-42 82 CPI CONCRETE PRODUCTS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FINANCIAL INSTRUMENTS AND CREDIT RISK As of July 31, 1998, the Company has deposits in a financial institution which exceed the FDIC insured limit by $268,528. CASH AND CASH EQUIVALENTS For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. INTANGIBLE ASSETS Amortizable assets are recorded at cost. Amortization is calculated by the straight-line method over a 5 year life. Amortization expense for the seven months ended July 31, 1998 was $1,312. 3. LONG-TERM DEBT Long-term debt as of July 31, 1998 consisted of the following: Union Planters National Bank SBA loan payable in monthly installments of $11,453 through April, 2004, including interest at a variable rate adjustable to 1% above prime, currently at 8.5%; secured by equipment, mortgage on property and a personal guarantee by stockholders......... $441,574 Tennessee Small Business Energy Loan Program note payable for purchasing boiler; payable in monthly installments of $1,808 through April, 2000, including interest at 5%; collateralized by boiler and associated equipment......... 36,295 Union Planters Bank note payable for conversion of two operating leases to term debt; payable in monthly installments of $5,914 through April, 2001, including interest at 8.15%; secured by equipment................... 169,571 Union Planters Bank note payable for purchasing travel lift; payable in monthly installments of $4,861 through April, 1999, including interest at 8.15%; collateralized by travel lift............................................... 37,837 -------- 685,277 Less current maturities..................................... 212,089 -------- $473,188 ========
Aggregate maturities on principal under long-term obligations are as follows:
PERIOD ENDING DECEMBER 31, - -------------------------- 1998...................................................... $118,130 1999...................................................... 201,004 2000...................................................... 198,672 2001...................................................... 149,190 2002...................................................... 18,281 -------- $685,277 ========
F-43 83 CPI CONCRETE PRODUCTS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. LEASE AGREEMENTS The Company leases certain autos and trucks under the classification of operating leases. The following is a schedule of future minimum lease payments for operating leases as of July 31, 1998:
PERIOD ENDING DECEMBER 31, - -------------------------- 1998...................................................... $39,468 1999...................................................... 30,174 2000...................................................... 3,661 ------- $73,303 =======
Rent expense under operating leases totaled $56,889 for the seven months ended July 31, 1998. 5. INCOME TAXES The provision for income taxes for the seven months ended July 31, 1998 consisted of the following: Currently payable: Federal................................................... $339,361 State..................................................... 63,706 -------- 403,067 -------- Deferred taxes: Federal................................................... (2,576) State..................................................... (483) -------- (3,059) -------- Provision for income taxes.................................. $400,008 ========
The Items which give rise to temporary differences at July 31, 1998 are as follows: Deferred Tax Assets: Uniform capitalization of inventory -- federal............ $15,836 Uniform capitalization of inventory -- state.............. 1,011 ------- $16,847 ======= Deferred Tax Liabilities: Excess tax depreciation -- federal........................ $39,929 Excess tax depreciation -- state.......................... 2,548 ------- $42,477 =======
6. EMPLOYEE BENEFIT PLANS In 1986, the Company established an Employee Stock Ownership Plan (ESOP) to provide additional retirement benefits to employees. The vesting provisions of the ESOP trust instrument are based on vesting years of service. A participant will always be 100% vested at normal retirement age. At July 31,1998, the ESOP owned 253 shares of the Company's Common Stock at a cost of $212,995. There were no contributions by the Company to the ESOP for the seven months ended July 31, 1998. In connection with the Company's acquisition (see Note 10), the ESOP shares were purchased by RailWorks and the plan was terminated. In June 1996, the Company adopted a 401(k) plan covering substantially all employees who have met the minimum age requirements and who have completed one year of continuous service. The Company's F-44 84 CPI CONCRETE PRODUCTS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) contribution is equal to 50% of each participant's contribution of up to 3% of salary. Contributions totaled $15,250 for the seven months ended July 31, 1998. 7. TREASURY STOCK The Company purchased Common Stock from employees who had been participants in the ESOP as follows: September 9, 1988........................................... 2.22 Shares September 1, 1989........................................... 4.41 Shares December 27, 1989........................................... 1.85 Shares ----------- Total............................................. 8.48 Shares ===========
No activity from December 28, 1989 to July 31, 1998. 8. CONTINGENCIES AND COMMITMENTS The Company and its two principal shareholders are parties to a stock retirement agreement which requires the Company, upon the death of any of these shareholders, to purchase his holdings of the Company's Common Stock at a price of $514 per share. The Company has life insurance policies on the lives of the aforementioned shareholders to fund substantially all of such obligation in the event of their death. At July 31, 1998, the Company had an unused line of credit with a bank. The line totals $800,000, has an interest rate of prime plus 1.0%, and the principal and interest are due on the first day of each month. No gains or losses were recorded with respect to this transaction. 9. RELATED PARTY TRANSACTION In July 1998, the Company redeemed the outstanding shares of one shareholder in exchange for the Company's land and building. No gain or loss was recorded with respect to this transaction. 10. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-45 85 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Condon Brothers, Inc.: We have audited the accompanying balance sheets of CONDON BROTHERS, INC. (a Washington corporation) as of July 31, 1998 and December 31, 1997, and the related statements of operations, stockholders' equity and cash flows for the seven months ended July 31, 1998 and the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CONDON BROTHERS, INC. as of July 31, 1998 and December 31, 1997, and the results of its operations and its cash flows for the seven months ended July 31, 1998 and for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Boise, Idaho September 30, 1998 F-46 86 CONDON BROTHERS, INC. BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 488 $ 1,096 Accounts receivable, net of allowance of $28,725 and $30,060, respectively................................... 865,758 445,677 Costs and estimated earnings in excess of billings on uncompleted contracts................................... 127,914 75,987 Inventory................................................. 1,517,372 1,172,193 Prepaid expenses.......................................... 38,632 40,839 Shareholder receivable.................................... 50,000 -- ---------- ---------- Total current assets............................... 2,600,164 1,735,792 ---------- ---------- PLANT AND EQUIPMENT: Machinery and equipment................................... 1,301,153 1,072,916 Vehicles.................................................. 467,587 473,128 Office furniture and equipment............................ 32,933 30,021 ---------- ---------- 1,801,673 1,576,065 Less accumulated depreciation........................... 821,772 720,374 ---------- ---------- Plant and equipment, net................................ 979,901 855,691 ---------- ---------- OTHER ASSETS: Cash surrender value of life insurance.................... 35,150 28,338 Investments -- land....................................... -- 20,800 ---------- ---------- Total other assets................................. 35,150 49,138 ---------- ---------- $3,615,215 $2,640,621 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $1,013,344 $ 847,919 Deferred compensation..................................... 83,989 82,910 Due to related party...................................... -- 10,000 Lines of credit........................................... 1,498,407 -- Current maturities of long-term debt...................... 539,385 214,718 Billings in excess of costs and estimated earnings on uncompleted contracts................................... -- 7,949 ---------- ---------- Total current liabilities.......................... 3,135,125 1,163,496 LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 55,367 491,307 ---------- ---------- Total liabilities.................................. 3,190,492 1,654,803 ---------- ---------- STOCKHOLDERS' EQUITY: Common Stock, $.05 par value; authorized shares, 1,000,000; issued and outstanding shares, 580,000....... 29,000 29,000 Additional paid-in capital................................ 118,055 24,155 Retained earnings......................................... 277,668 932,663 ---------- ---------- Total stockholders' equity......................... 424,723 985,818 ---------- ---------- $3,615,215 $2,640,621 ========== ==========
See Notes to Financial Statements. F-47 87 CONDON BROTHERS, INC. STATEMENTS OF OPERATIONS
SEVEN MONTHS YEAR ENDED ENDED DECEMBER 31, JULY 31, ----------------------- 1998 1997 1996 ------------ ---------- ---------- Revenue................................................... $3,390,320 $4,487,098 $5,516,610 Contract costs............................................ 2,222,026 3,370,548 4,115,260 ---------- ---------- ---------- Gross profit............................................ 1,168,294 1,116,550 1,401,350 General and administrative expenses....................... 699,534 983,116 838,725 ---------- ---------- ---------- Income from operations.................................... 468,760 133,434 562,625 Other income (expense): Other revenue, net...................................... 109,397 59,729 141,342 Interest income......................................... 432 1,608 -- Interest expense........................................ (67,984) (75,625) (55,834) ---------- ---------- ---------- Net income...................................... $ 510,605 $ 119,146 $ 648,133 ========== ========== ==========
See Notes to Financial Statements. F-48 88 CONDON BROTHERS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF ADDITIONAL COMMON COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL --------- ------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1995.............. 580,000 $29,000 $ 24,155 $ 317,786 $ 370,941 Net income............................ -- -- -- 648,133 648,133 Dividends............................. -- -- -- (43,478) (43,478) ------- ------- -------- ----------- ----------- BALANCE, DECEMBER 31, 1996.............. 580,000 29,000 24,155 922,441 975,596 Net income............................ -- -- -- 119,146 119,146 Dividends............................. -- -- -- (108,924) (108,924) ------- ------- -------- ----------- ----------- BALANCE, DECEMBER 31, 1997.............. 580,000 29,000 24,155 932,663 985,818 Net income............................ -- -- -- 510,605 510,605 Dividends............................. -- -- -- (1,165,600) (1,165,600) Obligation transferred to owners...... -- -- 93,900 -- 93,900 ------- ------- -------- ----------- ----------- BALANCE, JULY 31, 1998.................. 580,000 $29,000 $118,055 $ 277,668 $ 424,723 ======= ======= ======== =========== ===========
See Notes to Financial Statements. F-49 89 CONDON BROTHERS, INC. STATEMENTS OF CASH FLOWS
SEVEN MONTHS YEAR ENDED ENDED DECEMBER 31, JULY 31, ---------------------- 1998 1997 1996 ------------ --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 510,605 $ 119,146 $ 648,133 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation............................................ 169,541 184,479 139,772 Gain from sale of equipment............................. (110,813) (60,858) (120,468) Reserve for losses on uncompleted contracts............. -- (167,107) 167,107 Other................................................... 15,955 (7,944) (20,411) Change in working capital Items: Accounts receivable..................................... (420,081) 832,378 (954,769) Costs and estimated earnings in excess of billings on uncompleted contracts................................. (51,927) 129,249 (86,695) Inventory............................................... (345,179) (239,276) (502,304) Prepaid expenses........................................ 2,207 6,226 2,065 Accounts payable and accrued expenses................... 280,125 (37,537) 528,659 Deferred compensation................................... 1,079 (2,500) -- Due to related party.................................... (10,000) (2,788) (7,961) Billings in excess of costs and estimated earnings on uncompleted contracts................................. (7,949) (62,872) 66,783 ----------- --------- ---------- Net cash provided by (used in) operating activities....................................... 33,563 690,596 (140,089) ----------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (375,627) (372,987) (432,024) Proceeds from sale of plant and equipment................. 169,922 97,624 126,943 ----------- --------- ---------- Net cash used in investing activities.............. (205,705) (275,363) (305,081) ----------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from lines of credit............................. 1,600,000 428,425 1,173,106 Payments on lines of credit............................... (101,593) (628,425) (593,521) Payments on long-term debt................................ (111,273) (105,862) (90,730) Dividends paid............................................ (1,165,600) (108,924) (43,478) Loan to shareholder....................................... (50,000) -- -- ----------- --------- ---------- Net cash provided by (used in) financing activities....................................... 171,534 (414,786) 445,377 ----------- --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (608) 447 207 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,096 649 442 ----------- --------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 488 $ 1,096 $ 649 =========== ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 67,984 $ 75,625 $ 55,834 =========== ========= ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Refinance of lines of credit and long-term debt........... $ -- $ 450,000 $ -- =========== ========= ========== Transfer of accounts payable to related parties........... $ 114,700 $ -- $ -- =========== ========= ========== Transfer of land to related party......................... $ 20,800 $ -- $ -- =========== ========= ==========
See Notes to Financial Statements. F-50 90 CONDON BROTHERS, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Condon Brothers, Inc. (the "Company"), a Washington corporation, is in the business of railroad track construction, maintenance, salvage and related sales primarily in the Pacific Northwest. The majority of construction and maintenance work is performed under fixed price contracts. The duration of the Company's contracts is typically less than one year. 2. SIGNIFICANT ACCOUNTING POLICIES REVENUE AND CONTRACT COST RECOGNITION The Company recognizes revenues from fixed-fee contracts using the percentage-of-completion method, measured by the percentage of contract cost incurred to date to management's estimated total cost for each contract. Management considers comparison of costs incurred to date to total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to total expected project costs and the anticipated gross profit and are recognized in the period in which determined. Revenues from time-and-material contracts are recognized as the work progresses. Contract costs include all direct material, labor and equipment costs and those indirect costs related to contract performance and are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include cash on hand and temporary cash investments purchased with an original maturity of three months or less. FINANCIAL INSTRUMENTS AND CREDIT RISK The Company operates primarily in the Pacific Northwest. As such, the Company's revenues and related accounts receivable are principally from the same geographic region. The terms of the sales give rise to unsecured accounts receivable, as is common industry practice. INVENTORY Inventory consists principally of stored rails, ties and other track materials ("OTM") and parts to be used for contracts or resale and are stated at the lower of cost or market. Market is based on estimated proceeds expected to be obtained upon ultimate sale. The Company's principal method of acquiring inventory items is through salvage operations. Items acquired through salvage operations are valued based on costs incurred to acquire the items, including payments to third parties, direct labor and other direct contract costs, and those indirect costs related to contract performance. These costs are netted with any third party payments received for the salvage operations. The Company compares total cost of salvaged materials to market for rails, ties and OTM recovered and adjustments are made if the calculated market value is less than the total salvage cost. In addition, the Company evaluates amounts held in inventory and adjusts for rails, ties and OTM quantities that exceed anticipated usage. F-51 91 CONDON BROTHERS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Inventory at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Rails....................................................... $ 962,283 $ 536,825 Ties........................................................ 154,585 210,932 Other track material........................................ 233,938 229,005 ---------- ---------- Total rail inventory.............................. 1,350,806 976,762 Mining equipment and other items............................ 166,566 195,431 ---------- ---------- Total Inventory................................... $1,517,372 $1,172,193 ========== ==========
The Company has salvaged and recorded at cost $166,566 and $195,431 at July 31, 1998 and December 31, 1997, respectively, inventory which is comprised of various mine equipment, small locomotives and other items. The Company believes it will realize amounts recorded upon disposition. PLANT AND EQUIPMENT The Company records plant and equipment at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset as follows: Machinery and equipment..................................... 5 - 10 years Vehicles.................................................... 5 - 7 years Office furniture and equipment.............................. 5 years
As assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from their respective accounts and any gain or loss is reflected in net income. Maintenance, repairs and minor replacements are expensed as incurred and were $241,585 for the seven months ended July 31, 1998, $353,428 in 1997 and $256,727 in 1996. INCOME TAXES The Company operates as a sub-chapter S corporation. Accordingly, the income taxes for the earnings of the Company are the responsibility of the owners; therefore, these financial statements do not reflect any current or deferred federal or state income taxes for the Company. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. RECLASSIFICATIONS Certain reclassifications have been made to conform prior years' information to the current year's presentation. F-52 92 CONDON BROTHERS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS RECEIVABLE Accounts receivable at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Contract receivables........................................ $793,899 $401,698 Contract retainages......................................... 90,061 53,186 Other....................................................... 10,523 20,853 -------- -------- 894,483 475,737 Less allowance for doubtful accounts........................ 28,725 30,060 -------- -------- $865,758 $445,677 ======== ========
Contract retainages have been billed but are not considered due until contract completion. Such contract retainage is expected to be collected within the following year. Other accounts receivable consist primarily of amounts due from current and former employees. 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information with respect to contracts in process at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Costs incurred on uncompleted contracts..................... $729,944 $626,543 Estimated earnings.......................................... 231,880 129,903 -------- -------- 961,824 756,446 Less billings to date....................................... 833,910 688,408 -------- -------- $127,914 $ 68,038 ======== ========
Contracts in process at July 31, 1998 and December 31, 1997 are included in the accompanying balance sheets under the following captions:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $127,914 $75,987 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... -- (7,949) -------- ------- $127,914 $68,038 ======== =======
Provisions for losses on uncompleted contracts are recognized when it is determined that total costs will exceed the allowable contract revenue. F-53 93 CONDON BROTHERS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. OPERATING LEASES The Company leases from C. B. Enterprises, a related party, the Spokane, Washington yard, which includes a maintenance shop and office building under an agreement expiring on November 1, 1999. Minimum rental commitments under the noncancellable lease agreement are:
PERIOD ENDING DECEMBER 31, - -------------------------- 1998...................................................... $25,000 1999...................................................... 55,000 ------- $80,000 =======
Total rental expense for the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996 for all operating leases amounted to $40,969, $109,989 and $77,086, respectively. 6. LINES OF CREDIT At July 31, 1998, the Company had a total of four operating lines of credit with Washington Trust Bank. Interest was payable monthly at the Bank's prime rate plus .75% - 1%. Advances on the operating line were $1,498,407, as of July 31, 1998. The operating lines expire on varying maturities in 1998. At December 31, 1997, the Company had a $300,000 operating line of credit at an interest rate of prime plus .75%. No amounts were outstanding against this line at December 31, 1997. Security for the line is accounts receivable, inventory and equipment. In addition to the above operating lines of credit with Washington Trust Bank, two additional lines of credit were issued during the year ended December 31, 1996, for operations. These additional lines allow draws up to $350,000. Advances on the lines were $350,000 as of December 31, 1996. Interest accrues monthly at the Bank's prime rate plus .75%. Security for the lines is accounts receivable, inventory and equipment. These operating lines were repaid during 1997. 7. LONG-TERM DEBT Long-term debt at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Note payable to Washington Trust Bank, payable in monthly installments of $11,226 including interest at 9% with the balance due January 30, 1999. Secured by accounts receivable, inventory and equipment....................... $402,482 $450,000 Note payable to Washington Trust Bank, payable in monthly installments of $11,305 including interest at 9.50% and matures January 1, 2000. Secured by accounts receivable, inventory and equipment................................... 192,270 256,025 -------- -------- 594,752 706,025 Less current maturities..................................... 539,385 214,718 -------- -------- $ 55,367 $491,307 ======== ========
F-54 94 CONDON BROTHERS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Aggregate maturities on principal under long-term debt obligations are as follows:
PERIOD ENDING JULY 31, - ---------------------- 1999...................................................... $539,385 2000...................................................... 55,367 -------- $594,752 ========
8. RELATED PARTY TRANSACTIONS Payments were made to C. B. Enterprises (a partnership), a related party, under an operating lease for the Spokane, Washington yard and buildings. Such payments totaled $35,000 for the seven months ended July 31, 1998 and $60,000 for the years ended December 31, 1997 and 1996. The Company also leases certain equipment to C. B. Enterprises, which is recognized as revenue. Revenue recognized totaled $0 for the seven months ended July 31, 1998 and $12,683 and $8,085 for the years ended December 31, 1997 and 1996. Amounts due to C. B. Enterprises are classified as Due to related party in the Balance Sheets and are zero as of July 31, 1998 and $10,000 as of December 31, 1997, respectively. The Company had recorded $114,700 in accounts payable and accrued expenses in the Balance Sheets related to amounts owed for materials recovered during a 1993 salvage operation. Included in this salvage operation was land acquired for $20,800. This asset and liability were transferred to C.B. Enterprises, with the offsetting difference reflected as an increase in additional paid-in capital. The Company's management and counsel have drafted all agreements related to the transfer of the liability and asset. For purposes of the Statements of Cash Flows, these transfers of $114,700 and $20,800, have been treated as a noncash transaction. In 1998, the Company loaned, on an interest free basis, $50,000 to a principal stockholder of the Company. The loan is payable on demand and is non-collateralized. It is reflected as Shareholder receivable in the accompanying Balance Sheets. 9. PROFIT SHARING PLAN The Company has adopted a profit-sharing plan (the Plan) covering all full time employees with one year of service. Participants become fully vested after six years of service. Contributions to the Plan amounted to $14,000 for the seven months ended July 31, 1998. Contributions made to the Plan for the years ended December 31, 1997 and 1996, were $100,000 and $50,000, respectively. 10. DEFERRED COMPENSATION PAYABLE In 1993, the Company and one of its officers entered into a discretionary deferred compensation agreement. The deferred compensation was to be payable to the officer 90 days following the date on which he gives written notification to Condon Brothers, Inc. of his retirement from the Company. During 1995, the Company made the decision to suspend the agreement. During 1998, the Company made the decision to re-initiate the agreement. At July 31, 1998 and December 31, 1997, the Company has a $83,989 and a $82,910 deferred compensation liability, respectively, to the officer which will be paid to him upon his retirement. The amount charged to operations was $10,000 for 1998 and zero for 1997 and 1996. 11. CASH SURRENDER VALUE OF LIFE INSURANCE The Company maintains life insurance policies on two officers. The face value of these policies was $300,000 each at July 31, 1998 and December 31, 1997. The cash surrender value on these policies was $35,150 and $28,338 as of July 31, 1998 and December 31, 1997, respectively. F-55 95 CONDON BROTHERS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values of financial instruments are provided pursuant to the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts of these items at July 31, 1998 and December 31, 1997, are a reasonable estimate of their fair value due to their short-term and liquid nature. LONG-TERM DEBT The carrying amount of the line of credit facility approximates fair value as the interest rate fluctuates with changes in market conditions. It is estimated that the fair value of the long-term debt is approximately market. Management estimated the fair value of the long-term debt based on the remaining term to maturity and a comparison of their current interest rates to market rates for similar obligations. 13. CONTINGENCIES The Company is engaged in various lawsuits arising in the ordinary course of business. In the opinion of management, based upon the advice of counsel, the ultimate outcome of these lawsuits will not have a material adverse impact on the Company's financial position, operations or liquidity. The Company has accrued $120,000 in accounts payable and accrued expenses in the Balance Sheets associated with a 1997 railroad salvage contract. The total amount of the salvage contract was originally $174,000. Due to a reduction in the amount of rail, ties and OTM allowed to be salvaged, the Company is presently in negotiations to have the contract obligation reduced. If the Company is unsuccessful in obtaining a change-order for the contract, an additional cost of $54,000 will be recognized in the financial statements as inventory to the extent the value is supported by comparison to the Company's expected market value. 14. EQUITY In 1998, the original shareholders of the Company redistributed a limited number of previously issued shares to various family members. 15. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-56 96 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To H.P. McGinley, Incorporated: We have audited the accompanying balance sheets of H.P. MCGINLEY, INCORPORATED (the "Company") (a Pennsylvania corporation) as of July 31, 1998 and December 31, 1997, and the related statements of operations, stockholder's equity and cash flows for the seven months ended July 31, 1998, the ten months ended December 31, 1997 and the year ended February 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of H.P. MCGINLEY, INCORPORATED as of July 31, 1998 and December 31, 1997, and the results of its operations and its cash flows for the seven months ended July 31, 1998, the ten months ended December 31, 1997 and the year ended February 28, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Nashville, Tennessee August 21, 1998 F-57 97 H.P. MCGINLEY, INCORPORATED BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 1,390 $ 575,514 Accounts receivable....................................... 1,148,755 975,707 Inventory................................................. 1,002,344 893,783 Prepaid expenses.......................................... 4,441 8,083 ---------- ---------- Total current assets.............................. 2,156,930 2,453,087 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Land and improvements..................................... 98,982 98,982 Buildings and improvements................................ 231,891 231,891 Machinery and equipment................................... 1,433,821 1,433,821 Office furniture and equipment............................ 76,805 76,805 Transportation equipment.................................. 678,066 574,578 ---------- ---------- 2,519,565 2,416,077 Less accumulated depreciation............................. 1,860,652 1,836,255 ---------- ---------- Property, plant and equipment, net................ 678,913 579,822 ---------- ---------- OTHER ASSETS: Deferred income taxes..................................... 5,815 6,500 ---------- ---------- $2,841,658 $3,039,409 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 78,840 $ 79,668 Demand note payable to stockholder........................ 593,922 946,375 Accrued expenses.......................................... 50,783 10,186 Income taxes payable...................................... 169,037 336,100 ---------- ---------- Total current liabilities......................... 892,582 1,372,329 ---------- ---------- COMMITMENTS AND CONTINGENCIES............................... -- -- ---------- ---------- STOCKHOLDER'S EQUITY: Common Stock, $1 par value; authorized shares, 10,000; issued and outstanding shares, 1,000................... 1,000 1,000 Retained earnings......................................... 1,948,076 1,666,080 ---------- ---------- Total stockholder's equity........................ 1,949,076 1,667,080 ---------- ---------- $2,841,658 $3,039,409 ========== ==========
See Notes to Financial Statements. F-58 98 H.P. MCGINLEY, INCORPORATED STATEMENTS OF OPERATIONS
TEN MONTHS SEVEN MONTHS ENDED ENDED YEAR ENDED JULY 31, 1998 DECEMBER 31, 1997 FEBRUARY 28, 1997 ------------------ ----------------- ----------------- Revenue....................................... $3,931,653 $5,909,679 $4,425,187 Cost of goods sold............................ 2,775,459 3,356,518 3,016,827 ---------- ---------- ---------- Gross profit................................ 1,156,194 2,553,161 1,408,360 Selling, general and administrative expenses..................... 650,059 1,834,752 1,294,731 ---------- ---------- ---------- Income from operations........................ 506,135 718,409 113,629 Other income (expense): Interest income............................. 7,761 23,054 4,697 Interest expense............................ (25,000) (24,832) -- ---------- ---------- ---------- Income before provision for income taxes................................ 488,896 716,631 118,326 Provision for income taxes.................... 206,900 286,100 46,790 ---------- ---------- ---------- Net income.................................... $ 281,996 $ 430,531 $ 71,536 ========== ========== ==========
See Notes to Financial Statements. F-59 99 H.P. MCGINLEY, INCORPORATED STATEMENTS OF STOCKHOLDER'S EQUITY
NUMBER OF COMMON SHARES COMMON STOCK RETAINED EARNINGS TOTAL ------------- ------------ ----------------- ---------- BALANCE, FEBRUARY 29, 1996.............. 1,000 $1,000 $1,164,013 $1,165,013 Net income............................ -- -- 71,536 71,536 ----- ------ ---------- ---------- BALANCE, FEBRUARY 28, 1997.............. 1,000 1,000 1,235,549 1,236,549 Net income............................ -- -- 430,531 430,531 ----- ------ ---------- ---------- BALANCE, DECEMBER 31, 1997.............. 1,000 1,000 1,666,080 1,667,080 Net income............................ -- -- 281,996 281,996 ----- ------ ---------- ---------- BALANCE, JULY 31, 1998.................. 1,000 $1,000 $1,948,076 $1,949,076 ===== ====== ========== ==========
See Notes to Financial Statements. F-60 100 H.P. MCGINLEY, INCORPORATED STATEMENTS OF CASH FLOWS
SEVEN MONTHS TEN MONTHS YEAR ENDED ENDED ENDED JULY 31, DECEMBER 31, FEBRUARY 28, 1998 1997 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................. $281,996 $430,531 $ 71,536 Adjustments to reconcile net income to net cash used in operating activities: Depreciation......................................... 24,397 65,323 68,359 Deferred income taxes................................ 685 (500) (3,210) Change in operating assets and liabilities: Accounts receivable................................ (173,048) (637,678) (19,476) Inventory.......................................... (108,561) (205,203) (277,170) Prepaid expenses................................... 3,642 7,552 31,927 Accounts payable................................... (828) (21,157) 19,225 Accrued expenses................................... 40,597 (48,156) (39,262) Income taxes payable............................... (167,063) 286,100 50,000 -------- -------- --------- Net cash used in operating activities........... (98,183) (123,188) (98,071) -------- -------- --------- CASH USED IN INVESTING ACTIVITIES, Capital expenditures.................................... (123,488) -- (174,921) -------- -------- --------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES, Net (repayments) borrowings from stockholder............ (352,453) 689,236 858 -------- -------- --------- NET INCREASE (DECREASE) IN CASH........................... (574,124) 566,048 (272,134) CASH AND CASH EQUIVALENTS, beginning of period..................................... 575,514 9,466 281,600 -------- -------- --------- CASH AND CASH EQUIVALENTS, end of period........................................... $ 1,390 $575,514 $ 9,466 ======== ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest................ $ 25,000 $ 24,832 $ -- ======== ======== ========= Cash paid during the period for income taxes............ $373,278 $ -- $ -- ======== ======== =========
See Notes to Financial Statements. F-61 101 H.P. MCGINLEY, INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS H.P. McGinley, Inc. (the "Company") (a Pennsylvania corporation) operates as a manufacturer of specialty hardwood products, including railroad ties and shipping materials. The Company services customers in Pennsylvania and surrounding states. 2. SIGNIFICANT ACCOUNTING POLICIES YEAR-END In 1997, the Company changed its financial reporting year-end to December 31. These financial statements reflect the results of operations for the seven months ended July 31, 1998, the ten months ended December 31, 1997 and the year ended February 28, 1997. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. REVENUE AND COST RECOGNITION The Company recognizes revenue when products are delivered to customers pursuant to shipping agreements. Cost of goods sold includes the raw materials cost and costs of producing the product, including milling and preservative treatment. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include cash on hand and temporary cash investments purchased with an original maturity of three months or less. FINANCIAL INSTRUMENTS AND CREDIT RISK The Company operates primarily in the northeast United States. As such, the Company's accounts receivable are from the same geographic region. In addition, the Company's customers are primarily in the railroad/railroad construction business or the transportation business. The terms of the sales give rise to unsecured accounts receivable, as is common industry practice. INVENTORY Inventory, consisting principally of raw materials and finished goods, is stated at the lower of cost (first-in, first-out) or market. F-62 102 H.P. MCGINLEY, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT The Company records property, plant and equipment at cost. Depreciation is computed using the straight-line and accelerated methods over the estimated useful lives of the assets as follows: Buildings and improvements.................................. 15 to 30 years Machinery and equipment..................................... 5 to 7 years Office furniture and equipment.............................. 5 to 7 years Transportation equipment.................................... 5 to 7 years
As assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is reflected in net income. Normal maintenance and repairs are charged to expense as incurred; major renewals or betterments which extend the life or increase the value of assets are capitalized. INCOME TAXES The provision for income taxes is based on earnings reported by the Company. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, a deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. 3. INVENTORIES The principal components of inventories at July 31, 1998 and December 31, 1997 are as follows:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Raw materials............................................... $ 663,983 $378,814 Finished goods.............................................. 338,361 514,969 ---------- -------- $1,002,344 $893,783 ========== ========
4. EMPLOYEE BENEFIT PLANS The Company had a defined benefit pension plan (the "Plan") for all employees meeting certain age and length of service requirements. Benefits were based primarily on years of service and average annual compensation during the highest five consecutive years. In fiscal 1997, the Company terminated the Plan and distributed vested benefits in accordance with ERISA requirements. The Company made a final contribution to the Plan of $26,377 during the year ended February 28, 1997. The Company maintains a defined contribution benefit plan which covers substantially all eligible employees. Contributions to the defined contribution benefit plan during the seven months ended July 31, 1998, the ten months ended December 31, 1997 and the year ended February 28, 1997 amounted to $18,465, $0, and $40,922, respectively. 5. INCOME TAXES Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences F-63 103 H.P. MCGINLEY, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (Continued) are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A reconciliation of the United States income tax expense at the statutory corporate rate to the reported income tax expense is as follows:
SEVEN MONTHS TEN MONTHS ENDED ENDED YEAR ENDED JULY 31, DECEMBER 31, FEBRUARY 28, 1998 1997 1997 ------------- ------------ ------------ Tax charge at standard U.S. rate of 34%........... $166,225 $243,655 $40,231 State taxes, net of Federal benefit............... 40,675 43,194 6,334 Other............................................. -- (749) 225 -------- -------- ------- $206,900 $286,100 $46,790 ======== ======== =======
The components of the net deferred income tax asset at July 31, 1998 and December 31, 1997 are as follows:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Non-current asset (liability): Inventory................................................. $10,990 $10,125 Property, plant and equipment............................. (5,175) (3,645) Other..................................................... -- 20 ------- ------- Total non-current asset........................... $ 5,815 $ 6,500 ======= =======
State income taxes totaling approximately $40,675, $42,915 and $7,019 have been provided for the seven months ended July 31, 1998, the ten months ended December 31, 1997 and the year ended February 28, 1997, respectively. 6. RELATED PARTY TRANSACTIONS The Company's stockholder periodically advances funds to the Company. Such advances were noninterest bearing through February 28, 1997. Subsequent to March 1, 1997, the advances bear interest at 9% per annum. The advances are due on demand and repayment is expected as funds become available. Amounts advanced from the stockholder totaled $593,922 and $946,375 as of July 31, 1998 and December 31, 1997, respectively. 7. COMMITMENTS AND CONTINGENCIES LITIGATION The Company is subject to various claims and legal actions incidental to the Company's business. Management is not aware of any claims against the Company which might have a material impact on the Company's results of operations or financial position. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. F-64 104 H.P. MCGINLEY, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (Continued) CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts of these Items are a reasonable estimate of their fair value due to their short-term nature. 9. SIGNIFICANT CUSTOMERS A significant portion of the Company's sales were to one unaffiliated customer. Amounts due from this customer represented 42% and 25% of the total accounts receivable at July 31, 1998 and December 31, 1997 and 19% and 14% of sales for the periods then ended. The loss of this customer would have a material effect on the Company's business if this loss was not offset by additional business from other sources. 10. SUBSEQUENT EVENT On May 21, 1998, the stockholder of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholder exchanged his stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-65 105 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kennedy Railroad Builders, Inc.: We have audited the accompanying combined balance sheets of KENNEDY RAILROAD BUILDERS, INC. (a Pennsylvania corporation) AND ASSOCIATED COMPANIES (collectively, the "Company") as of July 31, 1998 and December 31, 1997 the related combined statements of operations, stockholders' equity and cash flows for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES as of July 31, 1998 and December 31, 1997 and the results of their operations and their cash flows for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Stamford, Connecticut October 16, 1998 F-66 106 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES COMBINED BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 226,839 $ 170,289 Accounts receivable, net of allowance of $66,609 and $25,000, respectively.................................. 1,154,987 1,543,062 Officer and affiliate notes receivable.................... 33,940 102,431 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 240,079 292,611 Inventory................................................. 853,015 855,723 Prepaid expenses.......................................... 73,308 106,115 Deferred income taxes..................................... 26,977 10,125 ---------- ---------- Total current assets.............................. 2,609,145 3,080,356 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Buildings................................................. 51,085 153,910 Machinery and equipment................................... 2,926,109 2,228,879 Office furniture and equipment............................ 100,455 96,194 Transportation equipment.................................. 1,230,991 1,182,299 Leasehold improvements.................................... 92,717 63,325 ---------- ---------- 4,401,357 3,724,607 Less accumulated depreciation.......................... 2,238,047 1,952,101 ---------- ---------- Property, plant and equipment, net.......................... 2,163,310 1,772,506 ---------- ---------- OTHER ASSETS, Cash surrender value of officer's life insurance.......... 36,871 19,330 ---------- ---------- $4,809,326 $4,872,192 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $1,223,124 $1,208,485 Line of credit............................................ 1,078,170 562,705 Current maturities of long-term debt and capital leases... 369,169 315,324 Officer notes payable..................................... 22,860 80,000 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. 24,217 280,569 Accrued expenses.......................................... 266,191 136,767 Income taxes payable...................................... -- 123,828 ---------- ---------- Total current liabilities......................... 2,983,731 2,707,678 Long-term debt and capital leases, net of current maturities................................................ 954,318 806,466 Deferred income taxes....................................... 24,647 14,580 ---------- ---------- Total liabilities................................. 3,962,696 3,528,724 ---------- ---------- Commitments and contingencies............................... -- -- ---------- ---------- STOCKHOLDERS' EQUITY: Contributed capital....................................... 20,000 20,000 Retained earnings......................................... 826,630 1,323,468 ---------- ---------- Total stockholders' equity........................ 846,630 1,343,468 ---------- ---------- $4,809,326 $4,872,192 ========== ==========
See Notes to Combined Financial Statements. F-67 107 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES COMBINED STATEMENTS OF OPERATIONS
SEVEN MONTHS NINE MONTHS ENDED ENDED YEAR ENDED JULY 31, DECEMBER 31, MARCH 31, 1998 1997 1997 ------------ ------------ ---------- Revenue.......................................... $5,240,278 $8,295,814 $9,703,996 Contract costs................................... 4,630,579 6,605,074 7,967,579 ---------- ---------- ---------- Gross profit................................ 609,699 1,690,740 1,736,417 General and administrative expenses.............. 1,162,717 1,163,290 1,497,998 ---------- ---------- ---------- (Loss) income from operations.................... (553,018) 527,450 238,419 Other income (expense): Interest income................................ 38,374 10,408 13,566 Interest expense............................... (41,557) (113,486) (108,736) Other income................................... 23,462 -- -- ---------- ---------- ---------- (Loss) income before provision (benefit) for income taxes................................... (532,739) 424,372 143,249 Provision (benefit) for income taxes............. (53,839) 178,587 65,206 ---------- ---------- ---------- Net (loss) income................................ $ (478,900) $ 245,785 $ 78,043 ========== ========== ==========
See Notes to Combined Financial Statements. F-68 108 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
CONTRIBUTED RETAINED CAPITAL EARNINGS TOTAL ----------- ---------- ---------- BALANCE, MARCH 31, 1996................................. $19,000 $1,024,640 $1,043,640 Net income............................................ -- 78,043 78,043 Issuance of equity.................................... 1,000 -- 1,000 Dividends............................................. -- (15,000) (15,000) ------- ---------- ---------- BALANCE, MARCH 31, 1997................................. 20,000 1,087,683 1,107,683 Net income............................................ -- 245,785 245,785 Dividends............................................. -- (10,000) (10,000) ------- ---------- ---------- BALANCE, DECEMBER 31, 1997.............................. 20,000 1,323,468 1,343,468 Net loss.............................................. -- (478,900) (478,900) Dividends............................................. -- (17,938) (17,938) ------- ---------- ---------- BALANCE, JULY 31, 1998.................................. $20,000 $ 826,630 $ 846,630 ======= ========== ==========
See Notes to Combined Financial Statements. F-69 109 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS
SEVEN MONTHS NINE MONTHS ENDED ENDED YEAR ENDED JULY 31, DECEMBER 31, MARCH 31, 1998 1997 1997 ------------- ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................................... $(478,900) $245,785 $ 78,043 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation............................................ 294,427 397,230 460,577 Deferred income taxes................................... (6,785) 6,054 (1,599) Loss from sale of equipment............................. 71 -- -- Allowance for doubtful accounts......................... 41,609 -- -- Change in operating assets and liabilities: Accounts receivable................................... 346,466 6,885 (759,843) Costs and estimated earnings in excess of billings on uncompleted contracts............................... 52,532 67,775 (261,195) Inventory............................................. 2,708 (330,097) 163,460 Prepaid expenses...................................... 32,807 (73,093) 14,092 Cash value of life insurance.......................... (17,541) -- (9,937) Accounts payable and accrued expenses................. 144,063 (120,396) 712,030 Billings in excess of costs and estimated earnings on uncompleted contracts............................... (256,352) 52,225 202,873 Income taxes payable.................................. (123,828) 111,825 (24,793) Other................................................. -- (42,986) (49,413) --------- -------- --------- Net cash provided by operating activities........... 31,277 321,207 524,295 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment........................... 1,460 -- -- Proceeds from officer notes receivable.................... 68,491 16,661 10,651 Capital expenditures...................................... (725,681) (240,058) (237,369) --------- -------- --------- Net cash used in investing activities............... (655,730) (223,397) (226,718) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt...................... (205,193) (286,281) (241,567) Long-term borrowings...................................... 457,871 -- -- Line of credit, net....................................... 515,465 312,705 (133,000) Notes payable to officers, net............................ (57,140) (12,088) (150,234) Payment of dividends...................................... (30,000) (10,000) (15,000) Proceeds from equity issuance............................. -- -- 1,000 --------- -------- --------- Net cash provided by (used in) financing activities........................................ 681,003 4,336 (538,801) --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 56,550 102,146 (241,224) CASH AND CASH EQUIVALENTS, beginning of period.............. 170,289 68,143 309,367 --------- -------- --------- CASH AND CASH EQUIVALENTS, end of period.................... $ 226,839 $170,289 $ 68,143 ========= ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................................ $ 51,817 $113,486 $ 109,075 ========= ======== ========= Income taxes............................................ $ 17,592 $ 66,869 $ 85,766 ========= ======== =========
NONCASH INVESTING AND FINANCING TRANSACTIONS: The Company incurred long-term liabilities for the purchase of equipment totaling $57,170, $323,861 and $527,744 for the seven months ended July 31, 1998, the nine months ended December 31, 1997, and the year ended March 31, 1997, respectively. See Notes to Combined Financial Statements. F-70 110 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF BUSINESS The accompanying combined financial statements include the accounts of Kennedy Railroad Builders, Inc. ("Kennedy"), Railcorp, Inc. ("Railcorp") and Alpha-Keystone Engineering, Inc. ("Alpha") (collectively, referred to as the "Company"). Each of these companies are subject to common control and are presented on a combined basis. The Company operates as a contractor, constructing, repairing and maintaining railroad tracks for private and government customers located throughout the northeastern region of the United States. The work is performed under various forms of contracts, including fixed-fee and time-and-material contracts. 2. SIGNIFICANT ACCOUNTING POLICIES YEAR-END In 1997, the Company changed its financial reporting year-end to December 31. These combined financial statements reflect the results of operations for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997. COMBINATION POLICIES The Company includes the combined accounts of three companies subject to common control. All significant transactions between the three companies are eliminated in combination. Alpha was incorporated in February 1996. The results for Alpha for the period from inception to March 31, 1997 are included in the Company's financial statements for the year ended March 31, 1997. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. REVENUE AND COST RECOGNITION The Company recognizes revenues from fixed-fee contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized currently as the work is performed. Contract costs include all direct material, labor and equipment costs and those indirect costs related to contract performance and are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. F-71 111 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include cash on hand and temporary cash investments purchased with an original maturity of three months or less. FINANCIAL INSTRUMENTS AND CREDIT RISK The Company operates primarily in the northeastern region of the United States. As such, the Company's accounts receivable are from the same geographic region. The terms of the sales give rise to unsecured accounts receivable, as is common industry practice. INVENTORIES Inventories, consisting principally of stored materials and parts to be used for contracts, are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT The Company records property, plant and equipment at cost. Depreciation is computed using the straight-line and the accelerated methods over the estimated useful life of the asset as follows: Buildings................................................... 39 years Machinery and equipment..................................... 3 - 7 years Office furniture and equipment.............................. 5 - 8 years Leasehold improvements...................................... 31 - 39 years
As assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is reflected in net income. The cost of maintenance and repair is charged to income as incurred. Significant renewals and betterments are capitalized and depreciated over the assets remaining useful life. INCOME TAXES The provision for income taxes is based on earnings reported by the Company. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, a deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Kennedy and Railcorp are both C corporations for federal income tax purposes. Alpha is a S corporation. As a result, the income of the Alpha is not taxed at the corporate level. For purposes of the accompanying financial statements, Alpha has been treated as a C corporation and income taxes have been provided at the statutory rate and recorded using the provisions of SFAS No. 109. F-72 112 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS RECEIVABLE Accounts receivable at July 31, 1998 and December 31,1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Contract receivables........................................ $1,180,568 $1,415,973 Contract retainages......................................... 41,028 152,089 Other....................................................... -- 102,431 ---------- ---------- 1,221,596 1,670,493 Less allowance for doubtful accounts........................ 66,609 25,000 ---------- ---------- $1,154,987 $1,645,493 ========== ==========
Contract retainages have been billed but are not due pursuant to contract provisions until contract completion. Such contract retainage is expected to be collected within the following year. 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information with respect to contracts in process at July 31, 1998 and December 31,1997 are as follows:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Costs incurred on uncompleted contracts..................... $2,798,847 $2,997,477 Estimated earnings.......................................... 835,938 1,267,960 ---------- ---------- 3,634,785 4,265,437 Less billings, plus retainage............................... 3,418,923 4,253,395 ---------- ---------- $ 215,862 $ 12,042 ========== ==========
Contracts in process are included in the accompanying balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $240,079 $292,611 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. (24,217) (280,569) -------- -------- $215,862 $ 12,042 ======== ========
5. LINE OF CREDIT The Company has a revolving line of credit agreement with a bank. The line of credit includes maximum borrowings totaling $1,300,000. Borrowing under the line of credit shall not exceed 80% of qualified accounts receivable and 50% of inventory. It bears interest at the bank's prime rate (8.5% at July 31, 1998) which is payable due monthly and expires on April 30, 1999. The line of credit is secured by all of Kennedy's assets and is guaranteed by the officers of Kennedy. The outstanding principal totals $971,905 and $562,705 as of July 31, 1998 and December 31, 1997, respectively. The company has an additional line of credit agreement with the bank. The line of credit includes maximum borrowings totaling $106,265. It bears interest at the bank's prime rate (8.5% at July 31, 1998) which is payable monthly and expires four months after origination. The line of credit is secured by Kennedy's inventory and accounts receivable. The outstanding principle totals $106,265 as of July 31, 1998. F-73 113 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM DEBT Long-term debt at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Note payable to a bank, interest at 8.25%, payable in monthly installments of $418, maturing August 2007, secured by real property.................................. $ 31,944 $ 33,449 Mortgage note payable to Alliance Benefit Group, interest at 9.00%, payable in monthly installments of $878 with a balloon payment due July 1999, secured by real property... -- 108,605 Equipment notes payable, principal and interest at rates from 4.8% to 15.48%, payable monthly, maturing from January 1998 to October 2003, secured by equipment........ 1,291,543 979,736 ---------- ---------- 1,323,487 1,121,790 Less current maturities..................................... 369,169 315,324 ---------- ---------- $ 954,318 $ 806,466 ========== ==========
Aggregate principal payments as of July 31, 1998 on long-term debt (excluding the line of credit) are scheduled as follows:
PERIOD ENDING DECEMBER 31, - -------------------------- 1998...................................................... $ 169,657 1999...................................................... 349,275 2000...................................................... 308,022 2001...................................................... 235,438 2002...................................................... 194,410 Thereafter................................................ 66,685 ---------- $1,323,487 ==========
7. PROFIT SHARING PLAN The Company maintains a 401(k) plan that allows eligible employees to defer a portion of their income through contributions to the plan. Under the provisions of the plan, employees may contribute a portion of their compensation, and the Company matches up to 2.00% percent of the employees qualified wages. In addition, the Company can make additional discretionary contributions. Company contributions to the plan were $18,098, $27,788 and $52,420, for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997, respectively. 8. INCOME TAXES In accordance with SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-74 114 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the United States statutory corporate rate to the effective tax rate is as follows:
SEVEN MONTHS NINE MONTHS ENDED ENDED YEAR ENDED JULY 31, DECEMBER 31, MARCH 31, 1998 1997 1997 ------------ ------------ ---------- Tax charge (benefit) at standard U.S. rate of 34%............................................. $(181,131) $144,286 $48,705 State taxes....................................... 5,886 27,852 9,454 Life insurance premiums........................... 3,712 6,075 6,485 Valuation allowance against deferred tax asset.... 117,694 -- -- Other............................................. -- 374 562 --------- -------- ------- $ (53,839) $178,587 $65,206 ========= ======== =======
The components of the net deferred income tax asset (liability) at July 31, 1998 and December 31, 1997 are as follows:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Current Asset: Accounts receivable valuation............................. $26,977 $10,125 ------- ------- Total current asset............................... 26,977 10,125 ------- ------- Non-current liability: Tax over book depreciation................................ (24,647) (14,580) ------- ------- Total non-current liability....................... (24,647) (14,580) ------- ------- Net deferred tax asset (liability).......................... $ 2,300 $(4,455) ======= =======
The Company has provided state income taxes totaling $8,918, $29,421 and $10,465 for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997, respectively. 9. RELATED PARTY TRANSACTIONS Payments were made to certain shareholders of the Company under operating leases for office facilities and a storage area. Such payments totaled $13,847, $29,128 and $36,552 for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997, respectively. The Company has notes receivable from officers of Kennedy. Monthly payments of $500 and $508 include principal and interest at 6%. The notes receivable are unsecured. The Company has a note payable to a shareholder in the amount of $22,860 and $80,000, as of July 31, 1998 and December 31, 1997. The note is unsecured and bears interest at 9%. F-75 115 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office space and equipment under agreements expiring at various dates through the year 1999, including leases with certain shareholders of the Company. Remaining minimum rental commitments under these noncancellable lease agreements in effect at July 31, 1998 are as follows:
THIRD PERIOD ENDING DECEMBER 31, SHAREHOLDERS PARTIES -------------------------- ------------ ------- 1998...................................................... $9,891 $3,270 1999...................................................... 5,934 3,270
Rental expense including leases with certain shareholders of the Company and cancelable leases totaled $80,714, $416,012 and $344,277 for the seven months ended July 31, 1998, the nine months ended December 31, 1997 and the year ended March 31, 1997, respectively. LITIGATION The Company is subject to various claims and legal actions incidental to the Company's business. Management is not aware of any claims against the Company which might have a material impact on the Company's results of operations or financial position. 11. SHAREHOLDERS' EQUITY The combined contributed capital of the Company at July 31, 1998 and December 31, 1997 is as follows:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Kennedy -- Common Stock, par value $1 per share; authorized 1,000,000 shares, issued and outstanding 18,000 shares.... $18,000 $18,000 Railcorp -- Common Stock, par value $1 per share; authorized 10,000 shares, issued and outstanding 1,000 shares........ 1,000 1,000 Alpha -- Common Stock, par value $.02 per share; authorized 100,000 shares, issued and outstanding 50,000 shares...... 1,000 1,000 ------- ------- $20,000 $20,000 ======= =======
12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts of these items are a reasonable estimate of their fair value due to their short-term nature. F-76 116 KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) LONG-TERM DEBT The carrying amount of the line of credit facility approximates fair value as the interest rate fluctuates with changes in market conditions. The carrying value of other loans relating to real estate, vehicles and equipment approximate fair value as the interest rates are comparable to current market rates. 13. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-77 117 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Merit Railroad Contractors, Inc.: We have audited the accompanying balance sheets of MERIT RAILROAD CONTRACTORS, INC. (a Missouri corporation) as of July 31, 1998 and December 31, 1997 and the related statements of operations, stockholders' equity and cash flows for the seven months ended July 31, 1998 and for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MERIT RAILROAD CONTRACTORS, INC. as of July 31, 1998 and December 31, 1997, the results of its operations and its cash flows for the seven months ended July 31, 1998 and for each of the two years in the period ended December 31, 1997 and in conformity with generally accepted accounting principles. Arthur Andersen LLP St. Louis, Missouri September 22, 1998 F-78 118 MERIT RAILROAD CONTRACTORS, INC. BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 9,005 $ 35,313 Accounts receivable, net of allowance of $75,317.......... 1,890,468 930,307 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 308,749 38,638 Other receivables......................................... -- -- Inventories............................................... 428,284 312,392 Prepaid expenses.......................................... -- 17,130 Other assets.............................................. 15,393 -- ---------- ---------- Total current assets.............................. 2,651,899 1,333,780 ---------- ---------- PROPERTY AND EQUIPMENT: Machinery and equipment................................... 1,003,092 985,419 Automobiles and trucks.................................... 705,934 619,928 Office furniture and equipment............................ 130,670 126,446 Leasehold improvements.................................... 54,244 54,244 ---------- ---------- 1,893,940 1,786,037 Less accumulated depreciation............................. 1,129,311 1,064,361 ---------- ---------- Property and equipment, net....................... 764,629 721,676 ---------- ---------- $3,416,528 $2,055,456 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 973,383 $ 210,222 Current maturities of long-term debt...................... 40,800 78,125 Revolving line of credit.................................. 450,000 300,000 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. 308,749 162,559 Accrued expenses.......................................... 248,701 165,057 Payable to affiliate...................................... 58,169 58,169 ---------- ---------- Total current liabilities......................... 2,079,802 974,132 ---------- ---------- LONG-TERM DEBT, net of current maturities................... 183,667 138,373 ---------- ---------- COMMITMENTS AND CONTINGENCIES............................... -- -- ---------- ---------- STOCKHOLDERS' EQUITY: Common Stock, $1 par value; authorized shares, 30,000; issued and outstanding shares, 1,000................... 1,000 1,000 Additional paid-in capital................................ 99,000 99,000 Retained earnings......................................... 1,053,059 842,951 ---------- ---------- Total stockholders' equity........................ 1,153,059 942,951 ---------- ---------- $3,416,528 $2,055,456 ========== ==========
See Notes to Financial Statements. F-79 119 MERIT RAILROAD CONTRACTORS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED SEVEN MONTHS DECEMBER 31, ENDED JULY 31, ----------------------- 1998 1997 1996 -------------- ---------- ---------- Revenue.................................................. $5,279,397 $6,949,859 $9,931,173 Contract costs........................................... 4,239,726 6,202,588 8,160,424 ---------- ---------- ---------- Gross profit............................................. 1,039,671 747,271 1,770,749 General and administrative expenses...................... 785,768 970,941 1,126,280 ---------- ---------- ---------- Income (loss) from operations............................ 253,903 (223,670) 644,469 Other income (expense) Interest income........................................ -- 416 8,806 Interest expense....................................... (31,334) (40,972) (17,371) Other, net............................................. (12,461) (121,865) 17,264 ---------- ---------- ---------- Net income (loss)........................................ $ 210,108 $ (386,091) $ 653,168 ========== ========== ==========
See Notes to Financial Statements. F-80 120 MERIT RAILROAD CONTRACTORS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF COMMON COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL ------ ------- ------- ---------- ---------- BALANCE, DECEMBER 31, 1995.................. 1,000 $1,000 $99,000 $ 944,671 $1,044,671 Dividends paid............................ -- -- -- (263,302) (263,302) Net income................................ -- -- -- 653,168 653,168 ----- ------ ------- ---------- ---------- BALANCE, DECEMBER 31, 1996.................. 1,000 1,000 99,000 1,334,537 1,434,537 Dividends paid............................ -- -- -- (105,495) (105,495) Net loss.................................. -- -- -- (386,091) (386,091) ----- ------ ------- ---------- ---------- BALANCE, DECEMBER 31, 1997.................. 1,000 1,000 99,000 842,951 942,951 Net income................................ -- -- -- 210,108 210,108 ----- ------ ------- ---------- ---------- BALANCE, JULY 31, 1998...................... 1,000 $1,000 $99,000 $1,053,059 $1,153,059 ===== ====== ======= ========== ==========
See Notes to Financial Statements. F-81 121 MERIT RAILROAD CONTRACTORS, INC. STATEMENTS OF CASH FLOWS
SEVEN MONTHS YEAR ENDED ENDED --------------------- 1998 1997 1996 ------------ --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................ $ 210,108 $(386,091) $ 653,168 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization......................... 124,812 194,915 199,096 Loss (gain) from sale of equipment.................... -- 14,865 (12,181) Change in operating assets: Accounts receivable, net............................ (960,161) 480,367 247,728 Costs and estimated earnings in excess of billings on uncompleted contracts......................... (270,111) 242,212 (263,696) Other receivables................................... -- 97,500 5,000 Inventory........................................... (115,892) (112,392) 132,455 Prepaid expenses.................................... 17,130 1,870 31,130 Accounts payable.................................... 763,161 (408,474) (215,773) Billings in excess of costs and estimated earnings on uncompleted contracts......................... 146,190 32,449 (578,630) Accrued expenses.................................... 83,644 (97,883) 49,549 Other assets........................................ (15,393) -- -- --------- --------- --------- Net cash (used in) provided by operating activities..................................... (16,512) 59,338 247,846 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment............. -- 10,052 3,300 Capital expenditures..................................... (97,349) (244,459) (234,413) Proceeds from repayment of affiliate loans............... -- -- 39,327 --------- --------- --------- Net cash used in investing activities............ (97,349) (234,407) (191,786) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt..................... 87,553 (105,397) (126,725) Borrowings under line of credit.......................... -- 300,000 -- Payable to affiliate..................................... -- -- 58,169 Dividends paid........................................... -- (105,495) (263,302) --------- --------- --------- Net cash provided by (used in) financing activities..................................... 87,553 89,108 (331,858) --------- --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (26,308) (85,961) (275,798) CASH AND CASH EQUIVALENTS, beginning of period............. 35,313 121,274 397,072 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period................... $ 9,005 $ 35,313 $ 121,274 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.............................................. $ 27,695 $ 40,972 $ 17,371 ========= ========= ========= Noncash transactions: Purchase of property and equipment under long-term debt................................................ $ 60,250 $ 130,385 $ 87,093 ========= ========= =========
See Notes to Financial Statements. F-82 122 MERIT RAILROAD CONTRACTORS, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Merit Railroad Contractors, Inc. (the "Company"), a Missouri corporation operates as a construction contractor, constructing, repairing and maintaining railroad tracks for private and government customers located throughout Illinois, Kentucky, Missouri, Tennessee and Wisconsin. The work is performed under various forms of contracts, including fixed-fee, unit-price and time-and-material contracts. The length of the contracts vary, but is typically less than one year. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. REVENUE AND COST RECOGNITION The Company recognizes revenues from fixed-fee contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized as the work is performed. Contract costs include all direct material, labor and equipment costs and those indirect costs related to contract performance and are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include cash on hand and temporary cash investments purchased with an original maturity of three months or less. FINANCIAL INSTRUMENTS AND CREDIT RISK The Company operates primarily in Illinois, Kentucky, Missouri, Tennessee and Wisconsin. As such, the Company's accounts receivable are from the same geographic region. The Company's customers are not concentrated in any specific industry group. Although the Company limits its credit risk by exercising lien rights when available, terms of the majority of sales give rise to unsecured accounts receivable, as is common industry practice. During the periods ended July 31, 1998, December 31, 1997 and 1996, one customer accounted for 13% of revenue, one customer accounted for 11% of revenue and one customer accounted for 37% of revenue, respectively. F-83 123 MERIT RAILROAD CONTRACTORS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INVENTORIES Inventories, consisting principally of stored materials and parts to be used for contracts, are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT The Company records property and equipment at cost. Depreciation is computed using the straight-line and accelerated methods over the estimated useful lives of the assets as follows: Machinery and equipment................................ 5-7 years Automobiles and trucks................................. 5 years Office furniture and equipment......................... 5-7 years Leasehold improvements................................. Lesser of 5 years or lease terms
As assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is reflected in other income. ASSET IMPAIRMENT If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value. OTHER INCOME (EXPENSE) Other income (expense) includes gain and loss on disposition of property and equipment, sale of scrap and other miscellaneous income and expense, all of which are not directly related to the Company's primary business. During 1997, the Company incurred $107,000 of costs related to the movement of inventory and equipment from an old location to a new location. INCOME TAXES The Company operates as a sub-chapter S corporation. Accordingly, the income taxes are the responsibility of the owners; and the accompanying financial statements do not reflect any federal or state income taxes for the Company. The Company uses different methods of accounting for tax and financial reporting. The primary difference relates to the use of the accrual basis for financial reporting and the cash basis for tax reporting. F-84 124 MERIT RAILROAD CONTRACTORS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS RECEIVABLE Accounts receivable at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Contract receivables........................................ $1,887,702 $ 919,270 Contract retainage.......................................... 78,083 86,354 ---------- ---------- 1,965,785 1,005,624 Less allowance for doubtful accounts........................ 75,317 75,317 ---------- ---------- $1,890,468 $ 930,307 ========== ==========
Contract retainage have been billed but are not due pursuant to contract provisions until contract completion. Such contract retainage is expected to be collected within the following year. 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information with respect to contracts in process at July 31, 1998 and December 31, 1997, is as follows:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Costs incurred on uncompleted contracts..................... $2,558,171 $1,383,021 Estimated earnings.......................................... 686,360 203,021 ---------- ---------- 3,244,531 1,586,042 Less billings to date....................................... 3,244,531 1,709,963 ---------- ---------- $ -- $ (123,921) ========== ==========
Contracts in process are included in the accompanying balance sheets under the following captions:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $308,749 $ 38,638 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... (308,749) (162,559) -------- --------- $ -- $(123,921) ======== =========
F-85 125 MERIT RAILROAD CONTRACTORS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. OPERATING LEASES The Company leases office space and a storage yard under an agreement expiring in June 2001. Minimum rental commitments under this noncancelable lease agreement in effect at July 31, 1998, are:
PERIOD ENDING DECEMBER 31, - -------------------------- 1998...................................................... $ 49,200 1999...................................................... 49,200 2000...................................................... 49,200 2001...................................................... 20,500 2002...................................................... Thereafter................................................ -------- $168,100 ========
Total rental expense for 1998, 1997 and 1996 for all operating leases amounted to $39,600, $68,000 and $60,700, respectively. 6. LINE OF CREDIT The Company has a revolving line of credit agreement with a bank. The line of credit has a maximum borrowing limit of $450,000 and is payable on demand. It bears interest at prime plus 1% which is due monthly. The outstanding principle was $450,000 and $300,000 at July 31, 1998 and December 31, 1997, respectively. The line is collateralized by accounts receivable, property and equipment, and personal guarantees of certain stockholders. 7. LONG-TERM DEBT Long-term debt at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Notes payable to banks and equipment Company; interest varying from 7.5% to 11.75%, per annum; payable in monthly installments, maturities ranging from July 1997 through August 2002.................................. $224,467 $216,498 Less current maturities..................................... 40,800 78,125 -------- -------- $183,667 $138,373 ======== ========
Several of the notes payable bear interest at prime plus 1%. The notes payable are collateralized by accounts receivable and property and equipment. Aggregate principal payments as of July 31, 1998 on long-term debt are scheduled as follows:
PERIOD ENDING DECEMBER 31, - -------------------------- 1998...................................................... $ 40,800 1999...................................................... 100,316 2000...................................................... 62,632 2001...................................................... 18,283 2002...................................................... 2,436 -------- $224,467 ========
F-86 126 MERIT RAILROAD CONTRACTORS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. PROFIT SHARING PLAN The Company maintains a 401(k) Salary Deferral Plan (the "401(k) Plan") that allows eligible employees to defer a portion of their income through contributions to the plan. Under the provisions of the plan, employees may contribute up to a maximum of 15 percent of employee compensation or limitations established pursuant to the Internal Revenue Code. The Company's contribution to the 401(k) Plan is discretionary and determined annually by the Board of Directors. The Company made no contributions to the 401(k) plan for the seven months ended July 31, 1998 and for the years ended December 31, 1997 and 1996. The Company also maintains a Money Purchase Plan whereby mandatory contributions are made by the Company. The Company makes contributions to this Plan based on 5% of employee eligible compensation. The Company contributed $17,500 to the Money Purchase Plan for the seven months ended July 31, 1998. The Company contributed $32,500 and $33,700 to the Money Purchase Plan for the years ended December 31, 1997 and 1996, respectively. 9. RELATED PARTY TRANSACTIONS The Company's office and storage yard are leased from an affiliated Company under a five year lease that expires in June 2001, with monthly payments of $4,100. In addition to the minimum rent, the Company is required to pay a percentage rent amount equal to 1% of gross receipts in excess of $6,100,000. The amount of rent charged to operations was, $57,900 , $57,200 and $58,700 for the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996 and, respectively. The Company also leases certain equipment from another affiliated entity on a month-to-month basis and was charged $124,500, $181,500 and $89,800 during 1998, 1997 and 1996, respectively. The payable to affiliate arose in 1996 and is payable on demand. No interest is due on the note. 10. COMMITMENTS AND CONTINGENCIES LITIGATION The Company is engaged in various lawsuits arising in the ordinary course of business. In the opinion of management, based upon the advice of legal counsel, the ultimate outcome of these lawsuits will not have a material adverse impact on the Company's financial position or results of operations. CONTINGENCY The Company completed a contract during 1995, on which a dispute arose with a subcontractor to the job. The subcontractor has indicated additional charges are due as a result of work performed over the amounts due under its original contract with the Company. Specifically, the subcontractor alleges the engineering firm contracted by the Company's customer grossly underestimated the amount of excavation work required at the job site. Although no evaluation of the threatened litigation can be determined at this time, management believes the Company's exposure for monetary damages should be minimal due to the fact that the subcontractor's claims are essentially against the Company's customer and the customer's engineering firm. At December 31, 1997, the Company was owed $81,000 from its customer that is being withheld pending resolution of the dispute and owed its subcontractor $38,053 in connection with the original contract terms. An allowance of $40,000 has been specifically provided for the potential uncollectibility of amounts due from the customer. F-87 127 MERIT RAILROAD CONTRACTORS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable and accounts payable are a reasonable estimate of their fair value due to their short-term nature. The carrying amount of the line of credit facility approximates fair value as the interest rate fluctuates with changes in market conditions. The carrying amount of long-term debt approximates fair value. 12. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-88 128 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Midwest Construction Services, Inc.: We have audited the accompanying balance sheets of MIDWEST CONSTRUCTION SERVICES, INC. ("the Company") (an Indiana corporation), as of July 31, 1998 and December 31, 1997, and the related statements of operations and retained earnings and cash flows for the seven months ended July 31, 1998 and for the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MIDWEST CONSTRUCTION SERVICES, INC. as of July 31, 1998 and December 31, 1997, and the results of its operations and its cash flows for the seven months ended July 31, 1998 and each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Nashville, Tennessee September 29, 1998 F-89 129 MIDWEST CONSTRUCTION SERVICES, INC. BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 12,575 $ 260,631 Accounts receivable -- net of allowance of $12,623 and $12,623, respectively................................... 1,897,589 999,168 Other receivables......................................... -- 896 Costs and estimated earnings in excess of billings on uncompleted contracts................................... 7,213 17,571 Inventory................................................. 628,450 637,367 Prepaid expenses.......................................... 147,782 45,486 ---------- ---------- Total current assets............................... 2,693,609 1,961,119 ---------- ---------- PROPERTY AND EQUIPMENT: Autos and trucks.......................................... 680,003 723,803 Construction equipment.................................... 1,659,542 1,650,838 Office equipment.......................................... 102,547 101,712 Leasehold improvements.................................... 26,131 26,131 ---------- ---------- 2,468,223 2,502,484 Less accumulated depreciation............................. 1,850,577 1,738,885 ---------- ---------- Property and equipment, net........................ 617,646 763,599 ---------- ---------- $3,311,255 $2,724,718 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable............................................. $ 722,259 $ 354,066 Notes payable -- stockholders............................. 4,213 3,389 Distribution payable...................................... 250,000 -- Accounts payable.......................................... 586,557 248,069 Other accrued expenses.................................... 104,230 208,051 Accrued salaries.......................................... 78,807 35,531 Billings in excess of costs and estimated earnings on uncompleted contracts................................... 39,761 81,957 ---------- ---------- Total current liabilities.......................... 1,785,827 931,063 ---------- ---------- LONG-TERM LIABILITIES: Notes payable............................................. -- 24,665 Notes payable -- stockholders............................. 26,688 37,436 ---------- ---------- Total long-term liabilities........................ 26,688 62,101 ---------- ---------- Total liabilities.................................. 1,812,515 993,164 ---------- ---------- STOCKHOLDERS' EQUITY: Common Stock, no par value, 1,000 shares authorized, issued and outstanding.................................. 10,000 10,000 Retained earnings......................................... 1,488,740 1,721,554 ---------- ---------- Total stockholders' equity......................... 1,498,740 1,731,554 ---------- ---------- $3,311,255 $2,724,718 ========== ==========
See Notes to Financial Statements. F-90 130 MIDWEST CONSTRUCTION SERVICES, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED SEVEN MONTHS DECEMBER 31, ENDED JULY 31, ------------------------ 1998 1997 1996 -------------- ---------- ----------- Revenue................................................. $6,001,993 $9,675,673 $10,842,457 Cost of revenue......................................... 5,178,675 8,636,800 9,338,686 ---------- ---------- ----------- Gross profit............................................ 823,318 1,038,873 1,503,771 General and administrative expenses..................... 356,470 644,871 649,368 ---------- ---------- ----------- Income from operations.................................. 466,848 394,002 854,403 Other income............................................ 28,348 38,801 38,909 ---------- ---------- ----------- Net income.............................................. 495,196 432,803 893,312 Retained earnings: Beginning of period................................... 1,721,554 1,983,852 1,090,540 Less -- dividend distributions........................ 728,010 695,101 -- ---------- ---------- ----------- End of period......................................... $1,488,740 $1,721,554 $ 1,983,852 ========== ========== ===========
See Notes to Financial Statements. F-91 131 MIDWEST CONSTRUCTION SERVICES, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED SEVEN MONTHS DECEMBER 31, ENDED JULY 31, ------------------------ 1998 1997 1996 -------------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 495,196 $ 432,803 $ 893,312 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation....................................... 175,360 317,538 316,434 Gain on sale of assets............................. (25,323) (15,235) (20,230) Change in operating assets and liabilities: Accounts receivable, net......................... (898,421) 16,561 390,776 Other receivables................................ 896 (896) -- Costs and estimated earnings in excess of billings on uncompleted contracts............. 10,358 (17,571) 303,051 Inventory........................................ 8,917 (10,803) (83,786) Prepaid expenses................................. (102,296) 14,926 19,257 Accounts payable................................. 338,488 56,495 (268,563) Other accrued expenses........................... (103,821) 98,383 (34,554) Accrued salaries................................. 43,276 (31,022) 15,922 Billings in excess of costs and estimated earnings on uncompleted contracts............. (42,196) 81,957 -- ---------- ----------- ---------- Net cash (used in) provided by operating activities.................................. (99,566) 943,136 1,531,619 ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment................................. (44,082) (117,161) (385,683) Proceeds from sale of assets.......................... 40,000 18,250 27,790 ---------- ----------- ---------- Net cash used in investing activities......... (4,082) (98,911) (357,893) ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Additional borrowing from notes payable............... 1,092,719 1,301,390 797,311 Reduction of principal of notes payable............... (749,191) (1,125,628) (880,483) Dividend distribution................................. (478,012) (695,101) -- Additional borrowing from notes payable, stockholder........................................ -- -- 16,368 Reduction of principal of notes payable, stockholder........................................ (9,924) (438,159) (764,696) ---------- ----------- ---------- Net cash used in financing activities......... (144,408) (957,498) (831,500) ---------- ----------- ---------- NET (DECREASE) INCREASE IN CASH......................... (248,056) (113,273) 342,226 CASH AND CASH EQUIVALENTS, beginning of period.......... 260,631 373,904 31,678 ---------- ----------- ---------- CASH AND CASH EQUIVALENTS, end of period................ $ 12,575 $ 260,631 $ 373,904 ========== =========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid for interest................................ $ 22,538 $ 23,733 $ 88,344 ========== =========== ==========
See Notes to Financial Statements. F-92 132 MIDWEST CONSTRUCTION SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Midwest Construction Services, Inc. (the "Company") operates as a construction contractor, constructing, repairing and maintaining railroad tracks primarily to steel processors throughout Northwest Indiana. The work is performed under various forms of contracts, including fixed-fee and time-and-material contracts. 2. SIGNIFICANT ACCOUNTING POLICIES REVENUE AND COST RECOGNITION The Company recognizes revenues from fixed-price construction contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized as the work is performed. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. CASH AND CASH EQUIVALENTS Cash and cash equivalents, as reported on the accompanying balance sheets and statements of cash flows, includes all amounts in non-interest-bearing checking accounts and interest-bearing money market accounts. FINANCIAL INSTRUMENTS AND CREDIT RISK The Company operates primarily in Northwest Indiana and primarily serves the steel industry. As such, the Company's accounts receivable are from the same geographic region. The terms of the sales give rise to unsecured accounts receivable, as is common industry practice. The Company is dependent on the steel industry and the economic trends that affect the steel industry. INVENTORY Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. Market is based on estimated net realizable value. F-93 133 MIDWEST CONSTRUCTION SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is computed using the straight-line and the accelerated method over the estimated useful life of the asset as follows: Autos and trucks............................................ 5 years Construction equipment...................................... 5-7 years Office equipment............................................ 3-10 years Leasehold improvements...................................... 39 years
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in net income. Maintenance and repairs are charged to income as incurred; significant renewals and betterments are capitalized. INCOME TAXES Effective April 1, 1991, the Company has elected to be taxed as an "S" Corporation under the provision of Subchapter "S" of the Internal Revenue Code. As such, the Corporation pays no income tax, and revenue and expenses pass through to the shareholders who pay income taxes on the earnings at their respective tax rates. Therefore, these financial statements do not reflect any federal or state income taxes for the Company. 3. ACCOUNTS RECEIVABLE Accounts receivable July 31, 1998 and December 31, 1997, consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Billed receivables.......................................... $1,813,861 $ 834,840 Unbilled receivables........................................ 96,351 176,951 ---------- ---------- 1,910,212 1,011,791 Less allowance for uncollectible accounts................... 12,623 12,623 ---------- ---------- $1,897,589 $ 999,168 ========== ==========
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information with respect to contracts in process at July 31, 1998 and December 31, 1997, are as follows:
JULY 31, DECEMBER 31, 1998 1997 --------- ------------ Costs incurred on uncompleted contracts..................... $ 73,161 $ 262,907 Estimated earnings.......................................... 10,124 32,619 --------- --------- 83,285 295,526 Less billings to date....................................... (115,833) (359,912) --------- --------- $ (32,548) $ (64,386) ========= =========
F-94 134 MIDWEST CONSTRUCTION SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Contracts in process are included in accompanying balance sheets under the following captions:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $ 7,213 $ 17,571 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... (39,761) (81,957) -------- -------- $(32,548) $(64,386) ======== ========
5. NOTES PAYABLE Notes payable at July 31, 1998 and December 31, 1997, consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ National City Bank, $750,000 revolving line of credit, interest at bank's base rate, due August 1998, secured by accounts receivable, inventory and general intangibles and stockholders' guarantee................................... $535,000 $325,000 National City Bank, 7.9%, monthly payments of $1,986 including interest, due January 2000, secured by four vehicles.................................................. -- 45,636 A.I. Credit Corp., 7.06%, monthly payments of $24,031 including interest, due April 1999........................ 187,259 8,095 -------- -------- Total notes payable............................... 722,259 378,731 Less current portion........................................ 722,259 354,066 -------- -------- $ -- $ 24,665 ======== ========
Aggregate principal payments as of July 31, 1998, on the notes payable are scheduled as follows:
PERIOD ENDING JULY 31, - ---------------------- 1998...................................................... $535,000 1999...................................................... 187,259 -------- $722,259 ========
6. NOTES PAYABLE, STOCKHOLDERS Notes payable, stockholders at July 31, 1998 and December 31, 1997 consisted of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Stockholder, 8%, monthly payments of $385 including interest, balloon payment due January 2001, secured by inventory, chattel paper, accounts receivable, equipment and general intangibles................................... $30,901 $40,825 Less current portion........................................ 4,213 3,389 ------- ------- $26,688 $37,436 ======= =======
F-95 135 MIDWEST CONSTRUCTION SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Aggregate principal payments as of July 31, 1998, on the notes payable to stockholders are scheduled as follows:
PERIOD ENDING JULY 31, - ---------------------- 1999...................................................... $ 4,213 2000...................................................... 4,563 2001...................................................... 4,941 2002...................................................... 4,298 2003...................................................... 917 Thereafter................................................ 11,969 ------- $30,901 =======
7. OPERATING LEASES The Company leases its office facility on a month-to-month basis. Monthly rent was $1,200 until June 30, 1998, thereafter the rent increased to $1,400 monthly. Rent expense for the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996, amounted to $8,600, $14,400, and $14,400, respectively. Management expects the future minimum lease obligation for the lease for its office facility to be $20,640, annually. The Company leases two vehicles under an operating lease. Total monthly lease payments are $1,197. The down payment of $12,600 for both vehicles is being amortized over the terms of the leases. The leases are for two years and expire in May, 1999. The vehicle lease payments for the seven months ended July 31, 1998 and the year ended December 31, 1997 were $12,053 and $15,506. The prepaid lease expense for the period ended July 31, 1998 and December 31, 1997 was $5,425 and $9,100, respectively. The expected minimum lease payments and amortization of the down payment for the remainder of the leases are as follows:
PERIOD ENDING DECEMBER 31, - -------------------------- 1998...................................................... $8,611 1999...................................................... 8,610
8. MAJOR CUSTOMERS The Company had two major customers for the seven months ended July 31, 1998 and the year ended December 31, 1997, each having sales exceeding 10% of total sales. Sales to these customers as a percentage of total revenues for the seven months ended July 31, 1998 and the year ended December 31, 1997, are as follows:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ USX Corp.................................................... 38.28% 46.4% Bethlehem Steel............................................. 41.59 37.9 All other customers......................................... 20.13 15.7 ------ ----- Total............................................. 100.0% 100.0% ====== =====
F-96 136 MIDWEST CONSTRUCTION SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 9. MAINTENANCE AGREEMENTS The Company is currently operating under the following open purchase orders or maintenance contracts:
EXPIRATION CUSTOMER DATE DESCRIPTION - -------- ---------- ----------- NIPSCO -- Schafer Generating Station 12-31-99 Cost-plus; supervision, labor and equipment for railroad track maintenance NIPSCO -- Michigan City Generating 12-31-99 Cost-plus; labor, material and Station equipment to perform repairs to railroad tracks and switches NIPSCO -- Mitchell Generating 12-31-99 Cost-plus; supervision and labor to Station replace rails, ties and ballast as needed on plant railroad tracks NIPSCO -- Bailey Generating Station 12-31-99 Cost-plus; supervision, material, labor and equipment to make emergency repairs to plant track system Philip Services Corp. 12-31-98 Cost-plus; supervision, labor, tools, equipment and material to maintain entire track system Bethlehem Steel Corp. -- Burns 12-31-00 Time and materials; supervision, Harbor Plant labor, material, insurance and equipment to perform general track maintenance and snow removal USX Corporation 09-22-02 Time and materials; supervision, labor, material, insurance and equipment to perform general track maintenance and snow removal
10. RETIREMENT PLAN As of January 1, 1996, the Company implemented a salary reduction simplified employee pension plan covering all eligible employees over the age of 21, who have completed a specific period of service, and are not covered by a collective bargaining agreement. Employer contributions are 5% of employees' gross income. The pension expense for the seven months ended July 31, 1998 and the year ended December 31, 1997, were $13,358 and $23,038, respectively. 11. COMMITMENTS AND CONTINGENCIES LITIGATION In the ordinary course of business, the Company enters into contracts that require the Company to provide general liability insurance coverage which names their customer as the co-insured policyholder. In addition, some contracts require that the Company indemnify their customers against certain legal claims related to the contracted work the Company will perform. As a result, the Company from time to time is involved in their customer's lawsuits and is contingently liable for the outcome of such legal cases. In 1994, an accident occurred on a customer's property that resulted in the death of two Company employees and the injury of two other Company employees. Settlements have been achieved in the fatality and injury cases which were funded by the Company's insurance carriers and the customer. F-97 137 MIDWEST CONSTRUCTION SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The Company is direct party to an uninsured personal injury suit resultant from a 1994 accident at a customer location that occurred in proximity to where the Company was working. The Company is vigorously defending this case and believes that it has both adequate reserves and good defenses to any claim of liability that may be asserted against it related to this personal injury case. The Company is involved in three other personal injury suits (one in which the Company is direct party and two in which the Company is indirectly involved) that are all covered by the Company's insurance policies. In the case of all known contingencies, the Company accrues a charge for a loss when it is probable and the amount is reasonably estimable. Based on the current available information, the Company believes that the established reserves are adequate to cover all known contingencies and that future costs related to these contingent liabilities will not have a material adverse effect on the Company's financial statements. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts of these Items are a reasonable estimate of their fair value due to their short-term nature. LINE-OF-CREDIT FACILITY The carrying amount of the line-of-credit facility approximates fair value as the interest rate fluctuates with changes in market conditions. 13. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-98 138 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To New England Railroad Construction Company, Inc.: We have audited the accompanying balance sheet of NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. (a Connecticut corporation) as of July 31, 1998, and the related statements of operations and stockholders' equity and cash flows for the seven months ended July 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. as of July 31, 1998, and the results of its operations and its cash flows for the seven months then ended, in conformity with generally accepted accounting principles. Arthur Andersen LLP Stamford, Connecticut October 16, 1998 F-99 139 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. BALANCE SHEET
JULY 31, 1998 ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 108,588 Contract and retainage receivables (net of allowance of $30,000)............................................... 1,539,947 Accounts receivable, related parties...................... 30,000 Inventory................................................. 145,405 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 219,111 Prepaid expenses and other................................ 25,297 ---------- Total current assets.............................. 2,068,348 ---------- EQUIPMENT: Vehicles and equipment.................................... 2,455,873 Tools..................................................... 49,487 Office equipment.......................................... 67,481 ---------- 2,572,841 Less accumulated depreciation............................. 1,951,882 ---------- Equipment, net............................................ 620,959 ---------- OTHER ASSET, Deferred tax asset............................. 32,166 ---------- $2,721,473 ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt......................... $ 350,267 Accounts payable.......................................... 724,937 Accrued expenses.......................................... 28,561 Deferred income taxes..................................... 52,940 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. 273,917 ---------- Total current liabilities......................... 1,430,622 ---------- LONG-TERM DEBT, net of current portion...................... 256,146 ---------- STOCKHOLDERS' EQUITY: Common Stock, no par value; authorized 5,000 shares; issued and outstanding 1,320 shares.................... 114,000 Retained earnings......................................... 920,705 ---------- Total Stockholders' equity........................ 1,034,705 ---------- $2,721,473 ==========
See Notes to Financial Statements. F-100 140 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. STATEMENT OF OPERATIONS
SEVEN MONTHS ENDED JULY 31, 1998 ------------ Earned revenue.............................................. $2,314,851 Cost of earned revenue...................................... 2,122,159 ---------- Gross profit........................................... 192,692 General and administrative expenses......................... 407,915 ---------- Loss from operations........................................ (215,223) ---------- Other income (expense): Gain on disposition of equipment.......................... 448 Other income.............................................. 5,594 Interest expense.......................................... (36,533) ---------- Other expense, net.......................................... (30,491) ---------- Loss before income taxes.................................... (245,714) ---------- Income taxes (benefit): Current................................................... (108,508) Deferred.................................................. 27,300 ---------- (81,208) ---------- Net loss.................................................... $ (164,506) ==========
See Notes to Financial Statements. F-101 141 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. STATEMENT OF STOCKHOLDERS' EQUITY
NUMBER OF COMMON RETAINED COMMON SHARES STOCK EARNINGS TOTAL ------------- -------- ---------- ---------- Balance, DECEMBER 31, 1997..................... 1,320 $114,000 $1,271,303 $1,385,303 Net loss..................................... -- -- (164,506) (164,506) Dividend..................................... -- -- (186,092) (186,092) ----- -------- ---------- ---------- Balance, JULY 31, 1998......................... 1,320 $114,000 $ 920,705 $1,034,705 ===== ======== ========== ==========
See Notes to Financial Statements. F-102 142 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED JULY 31, 1998 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(164,506) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 101,691 Gain on disposition of equipment....................... (448) Deferred income taxes.................................. (49,626) Change in operating assets and liabilities: Contract and retainage receivables................... (48,022) Accounts receivable, related parties................. 9,544 Inventory............................................ (1,874) Costs and estimated earnings in excess of billings on uncompleted contracts............................... (219,111) Prepaid expenses and other........................... 75,640 Accounts payable..................................... 509,293 Accrued expenses..................................... (152,156) Billings in excess of costs and estimated earnings on uncompleted contracts............................... (10,762) --------- Net cash provided by operating activities......... 49,663 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment........................... 448 Purchases of equipment.................................... (44,991) --------- Net cash used in investing activities............. (44,543) --------- CASH FROM FINANCING ACTIVITIES: Proceeds from issuance of debt............................ 146,625 Principal payments on long-term debt...................... (293,835) --------- Net cash used in financing activities............. (147,210) --------- NET DECREASE IN CASH........................................ (142,090) CASH AND CASH EQUIVALENTS, beginning of period.............. 250,678 --------- CASH AND CASH EQUIVALENTS, end of period.................... $ 108,588 ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest............................................... $ 37,128 ========= Income taxes........................................... $ 45,325 =========
See Notes to Financial Statements. F-103 143 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS The Company performs railroad repair and construction projects primarily for state and city governments located in the Northeastern United States. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash equivalents, contract and retainage receivable and accounts payable approximate fair value because of their short-term nature. The carrying amount of long-term debt approximates fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. REVENUE AND COST RECOGNITION The Company recognizes revenues from fixed-fee construction contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized as the work is performed. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. INVENTORY Inventory, principally materials and supplies, is stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost. Depreciation is provided principally by use of the straight-line method over the estimated useful life of the related asset. Accelerated methods are used for income tax reporting purposes. F-104 144 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Deferred income taxes are determined based on the difference between the financial statement and income tax basis of assets and liabilities using tax rates expected to be in effect in the years in which the differences are expected to reverse. The temporary differences related primarily to the reporting of revenue recognition on long-term contracts, depreciation and net operating loss carryforwards. CASH AND CASH EQUIVALENTS From time to time, the Company's cash balance with financial institutions exceeds the maximum FDIC insured balance of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. For the reporting of cash flows, the Company considers savings accounts and certificate of deposits with original maturities of three months or less to be cash and cash equivalents. 3. ACCOUNTS RECEIVABLE: Contracts and retainage receivable at July 31, 1998, consisted of the following: Contract Receivables........................................ $1,353,948 Retainage................................................... 215,999 ---------- 1,569,947 Less allowance for doubtful accounts........................ 30,000 ---------- $1,539,947 ==========
Contract retainage have been billed but are not due pursuant to contract provisions until contract completion. Such contract retainage is expected to be collected within the following year. 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS: Information with respect to contracts in process at July 31, 1998, are as follows: Costs incurred on uncompleted contracts..................... $1,139,214 Estimated earnings.......................................... 272,862 ---------- 1,412,076 Less billings to date....................................... 1,466,882 ---------- $ (54,806) ==========
Included in the balance sheet under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $ 219,111 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... (273,917) --------- $ (54,806) =========
5. RELATED PARTY TRANSACTIONS The Company has transactions in the normal course of business with various related parties. Balances with related parties are included in the balance sheets under the following captions: Contract and retainage receivables.......................... $310,014 Accounts receivable, related parties........................ 30,000 Due to affiliates........................................... 146,625
F-105 145 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Transactions with related parties are included in the statement of operations under the following captions: Cost of earned revenue...................................... $221,596 Rent expense................................................ 35,000
The Company rents a storage yard on a month to month basis, from a related party for $5,000 per month. In July 1998, the Company dividended the land and building to the stockholders. 6. LONG-TERM DEBT Long-term debt consists of the following: Note payable, bank, payable in monthly installments of $5,000 plus interest at prime plus 1.5% through October 2000. Substantially all assets are pledged as collateral and repayment is guaranteed by the stockholders........... $ 75,000 Notes payable, stockholders, due on demand plus interest at prime plus 1%............................................. 146,625 Notes payable, equipment, due in aggregate monthly installments of $8,942 including interest ranging from 7.9% to 9.3% maturing at various dates through October 2002. Collateralized by equipment......................... 337,650 Note payable, mortgage, payable in monthly installments of $1,190 including interest at prime plus 1.5% through September 2002............................................ 47,138 -------- 606,413 Less current maturities..................................... 350,267 -------- $256,146 ========
Aggregate principal payments as of July 31, 1998, on long-term debt are as follows:
YEAR ENDING DECEMBER 31, - ------------------------ 1998...................................................... $350,267 1999...................................................... 88,859 2000...................................................... 96,883 2001...................................................... 59,682 2002...................................................... 10,722 -------- $606,413 ========
Both the long-term debt and the line of credit contain certain restrictive covenants which place some requirements and restrictions on the Company regarding the maintenance of certain financial ratios measured on an annual basis. 7. MAJOR CUSTOMERS Approximately 69% of earned revenue was derived from the customers for the seven months ended July 31, 1998. 8. PROFIT SHARING PLAN The Company sponsors a noncontributory trusteed profit sharing plan covering substantially all of its employees not covered by a collective bargaining agreement meeting certain minimum requirements. The plan provides for contributions by the Company in such amounts as the Board of Directors may annually determine. Profit sharing expense was $21,010 for the seven months ended July 31, 1998. F-106 146 NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES The income tax benefit for the seven months ended July 31, 1998, consisted of the following: Current benefit: Federal................................................... $(77,056) State..................................................... (31,452) -------- (108,508) -------- Deferred provision: Federal................................................... 19,409 State..................................................... 7,891 -------- 27,300 -------- $(81,208) ========
The income tax benefit as reported in the combined statements of operations differs from the amounts computed by applying federal statutory rates due to the following: Federal income tax at statutory rate........................ $(83,543) Non deductible expenses..................................... 2,335 -------- Benefit for income taxes.................................... $(81,208) ========
The tax effect of temporary differences that give rise to significant portions of deferred tax liability at July 31, 1998 consisted of the following: Current asset (liability): Deferred gross profit on contracts in progress............ $(63,290) Accounts receivable....................................... 10,350 -------- (52,940) Non-current asset (liability): Tax depreciation in excess of book depreciation........... (49,119) Net operating loss carryforward............................. 81,285 -------- Net deferred tax liability.................................. $(20,774) ========
10. CONCENTRATION OF LABOR Approximately 72% of the Company's labor force is subject to a union contract expiring in March 1999. 11. SUBSEQUENT EVENT: On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-107 147 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Railroad Service, Inc. and Minnesota Railroad Service, Inc.: We have audited the accompanying combined balance sheets of RAILROAD SERVICE, INC. (a Nevada corporation) and MINNESOTA RAILROAD SERVICE, INC. (a Tennessee corporation) as of July 31, 1998 and December 31, 1997, and the related combined statements of operations, stockholders' equity and cash flows for and the seven months ended July 31, 1998 and the two years in the period ended December 31, 1997. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. as of July 31, 1998 and December 31, 1997, and the results of their combined operations and their combined cash flows for the seven months ended July 31, 1998 and each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Stamford, Connecticut September 4, 1998 F-108 148 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. COMBINED BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 417,923 $ 839,210 Accounts receivable....................................... 1,812,942 918,794 Costs and estimated earnings in excess of billings on uncompleted contracts................................... 621,766 155,140 Notes receivable, current portion......................... 78,387 66,666 Other receivables......................................... 16,806 -- Inventories............................................... 217,553 240,131 ---------- ---------- Total current assets............................... 3,165,377 2,219,941 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Tools and equipment....................................... 2,993,114 2,803,466 Vehicles and trailers..................................... 891,343 881,053 Office equipment.......................................... 108,450 129,612 Leasehold improvements.................................... 91,041 125,119 ---------- ---------- 4,083,948 3,939,250 Less accumulated depreciation and amortization............ 3,032,759 2,991,931 ---------- ---------- Property and equipment, net........................ 1,051,189 947,319 ---------- ---------- OTHER ASSETS: Notes receivable, long-term portion....................... 66,668 66,668 Notes receivable, related parties......................... -- 170,577 Cash value of life insurance.............................. -- 571,629 Loan origination costs, net............................... -- 2,794 ---------- ---------- Total other assets................................. 66,668 811,668 ---------- ---------- $4,283,234 $3,978,928 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $1,464,835 $ 445,800 Accrued expenses.......................................... 123,082 149,141 Billings in excess of costs and estimated earnings on uncompleted contracts................................... 282,113 79,733 Current maturities of long-term debt...................... 378,246 278,246 ---------- ---------- Total current liabilities.......................... 2,248,276 952,920 ---------- ---------- NOTES PAYABLE -- RELATED PARTIES............................ -- 246,798 LONG-TERM DEBT, net of current maturities................... 927,596 594,075 ---------- ---------- Total noncurrent liabilities....................... 927,596 840,873 ---------- ---------- Total liabilities.................................. 3,175,872 1,793,793 ---------- ---------- COMMITMENTS................................................. -- -- ---------- ---------- STOCKHOLDERS' EQUITY: Common Stock.............................................. 172,700 172,700 Additional paid-in capital................................ 1,216,877 838,731 Retained earnings (deficit)............................... (282,215) 1,173,704 ---------- ---------- Total stockholders' equity......................... 1,107,362 2,185,135 ---------- ---------- $4,283,234 $3,978,928 ========== ==========
See Notes to Combined Financial Statements. F-109 149 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEVEN MONTHS ENDED DECEMBER 31, JULY 31, ------------------------ 1998 1997 1996 ------------------ ---------- ----------- Revenue............................................. $6,223,925 $9,363,191 $10,708,870 Contract costs incurred............................. 5,285,256 7,065,419 8,199,458 ---------- ---------- ----------- Gross profit...................................... 938,669 2,297,772 2,509,412 General and administrative expenses................. 1,172,023 1,449,737 1,417,546 ---------- ---------- ----------- Operating (loss) income............................. (233,354) 848,035 1,091,866 ---------- ---------- ----------- Other income (expense): Interest income................................... 26,600 38,464 15,352 Interest expense.................................. (50,445) (116,345) (137,763) Gain on disposal of equipment..................... 464 207,160 31,763 Other income, net................................. 4,519 -- 5,106 ---------- ---------- ----------- Other (expense) income, net......................... (18,862) 129,279 (85,542) ---------- ---------- ----------- Net (loss) income................................... $ (252,216) $ 977,314 $ 1,006,324 ========== ========== ===========
See Notes to Combined Financial Statements. F-110 150 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL -------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1995..................... $172,700 $ 838,731 $ 169,266 $ 1,180,697 Net income................................... -- -- 1,006,324 1,006,324 Distributions to shareholders................ -- -- (356,220) (356,220) -------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1996..................... 172,700 838,731 819,370 1,830,801 Net income................................... -- -- 977,314 977,314 Distributions to shareholders................ -- -- (622,980) (622,980) -------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1997..................... 172,700 838,731 1,173,704 2,185,135 Net income................................... -- -- (252,216) (252,216) Gifted stock................................. -- 378,146 -- 378,146 Distributions to stockholders................ -- -- (1,203,703) (1,203,703) -------- ---------- ----------- ----------- BALANCE, JULY 31, 1998......................... $172,700 $1,216,877 $ (282,215) $ 1,107,362 ======== ========== =========== ===========
See Notes to Combined Financial Statements. F-111 151 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED SEVEN MONTHS DECEMBER 31, ENDED JULY 31, ----------------------- 1998 1997 1996 --------------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ (252,216) $ 977,314 $1,006,324 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 172,357 305,730 295,660 Gain on sale of equipment............................... (464) (207,160) (31,763) Compensation in exchange for paid-in capital............ 378,146 -- -- Change in assets and liabilities: Decrease (increase) in: Accounts receivable.................................. (894,148) 738,225 (400,191) Other Receivables.................................... (16,806) 9,558 1,442 Costs and estimated earnings in excess of billings on uncompleted contracts.............................. (466,626) (92,298) 23,450 Inventories.......................................... 22,578 62,736 93,611 Prepaid expenses..................................... -- -- 65,574 Loan origination costs............................... 2,794 -- -- Accounts payable..................................... 1,019,035 11,234 (149,087) Accrued expenses..................................... (26,059) 3,446 53,068 Billings in excess of costs and estimated earnings on uncompleted contracts.............................. 202,380 (5,108) (56,648) ----------- ---------- ---------- Net cash provided by operating activities.......... 140,971 1,803,677 901,440 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment.............. 2,748 122,634 42,500 Capital expenditures...................................... (278,513) (320,023) (532,158) Receipts on notes receivable.............................. 158,856 66,666 -- Cash value of life insurance.............................. 571,629 (43,930) (37,577) ----------- ---------- ---------- Net cash provided by (used in) investing activities....................................... 454,720 (174,653) (527,235) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt...................... (523,943) (414,523) (370,360) Long-term borrowings...................................... 957,466 186,460 354,130 Proceeds from issuance of notes payable -- related parties................................................. -- 119,433 39,865 Principal payments on notes payable -- related parties.... (246,798) (80,000) (130,114) Distribution to stockholders.............................. (1,203,703) (622,980) (356,220) ----------- ---------- ---------- Net cash used in financing activities.............. (1,016,978) (811,610) (462,699) ----------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (421,287) 817,414 (88,494) CASH AND CASH EQUIVALENTS, beginning of period.............. 839,210 21,796 110,290 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, end of period.................... $ 417,923 $ 839,210 $ 21,796 =========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................................ $ 47,842 $ 113,647 $ 135,940 =========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: During 1997 a note receivable in the amount of $200,000 was issued in exchange for fixed assets. See Notes to Combined Financial Statements. F-112 152 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Railroad Service, Inc. (RSI) and Minnesota Railroad Service, Inc. (MRSI) (together the "Companies") operate as a construction contractor, constructing, repairing and maintaining railroad tracks for private and government customers located throughout the United States with concentrations of work primarily in the upper midwest. The work is performed under various forms of contracts, including fixed-fee and time-and-material contracts. The time period of the contracts vary, but they are generally less than one year. The Companies have common ownership and share management personnel and facilities. The combined statements of financial position, income and cash flows are presented in these financial statements. All intercompany transactions and balances have been eliminated. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were assumed in preparing the financial statements. REVENUE AND COST RECOGNITION The Companies recognize revenues from fixed-fee contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and revenue, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized currently as the work is performed. Contract costs include all direct material, labor, equipment costs and those indirect costs related to contract performance which are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. CASH AND CASH EQUIVALENTS The Companies consider cash and cash equivalents to include cash on hand and temporary cash investments purchased with an original maturity of three months or less. FINANCIAL INSTRUMENTS AND CREDIT RISK The Companies operate primarily in the upper midwestern region of the United States. The Companies' accounts receivable are from the same geographic region. The terms of the sales give rise to unsecured accounts receivable, as is common industry practice. The Companies periodically assess collection of its receivables and provide allowance for doubtful accounts as appropriate. No such allowances were deemed necessary as of July 31, 1998 and December 31, 1997. F-113 153 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONCENTRATIONS OF CUSTOMERS Approximately 47% and 55% of accounts receivable at July 31, 1998 and December 31, 1997 were with three and four customers, respectively. For the seven months ended July 31, 1998 and the year ended December 31, 1997, two and three customers, respectively, accounted for approximately 26% and 40% of revenues. INVENTORIES Inventories principally consist of stored materials and parts to be used for contracts and have been stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT The Companies record property, plant and equipment at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful life of the asset as follows: Tools and equipment......................................... 4 - 7 years Vehicles and trailers....................................... 4 - 7 years Office equipment............................................ 4 - 10 years Leasehold improvements...................................... 7 - 18 years
As assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are eliminated from the accounts, and any gain or loss is reflected in net income. INCOME TAXES The Companies operate as sub-chapter S corporations for Federal and certain state income tax reporting purposes. Accordingly, the income taxes for the earnings of the Companies are the responsibility of the owners. Therefore, these financial statements do not reflect any Federal income taxes for the Companies. COMMON STOCK Common Stock of the Companies consists of the following:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Railroad Service, Inc. Authorized shares, no par value........................... $ 2,500 $ 2,500 -------- -------- Issued and outstanding.................................... 1,577 1,577 -------- -------- Stated at................................................. 157,700 157,700 -------- -------- Minnesota Railroad Service, Inc. Authorized shares, no par value........................... 2,500 2,500 -------- -------- Issued and outstanding.................................... 150 150 -------- -------- Stated at................................................. 15,000 15,000 -------- -------- Total Common Stock................................ $172,700 $172,700 ======== ========
F-114 154 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Contract receivables........................................ $1,628,877 $887,194 Contract retainages......................................... 184,065 31,600 ---------- -------- $1,812,942 $918,794 ========== ========
Contract retainages have been billed but are not due pursuant to contract provisions until contract completion. Such contract retainage is expected to be collected within the following year. 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information with respect to contracts in process at July 31, 1998 and December 31, 1997 are as follows:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Costs incurred on uncompleted contracts..................... $3,980,353 $1,150,665 Estimated earnings.......................................... 664,642 400,247 ---------- ---------- 4,644,995 1,550,912 Less billings to date....................................... 4,305,342 1,475,505 ---------- ---------- $ 339,653 $ 75,407 ========== ==========
Contracts in process are included in the accompanying combined balance sheets under the following captions:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $621,766 $155,140 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... 282,113 79,733 -------- -------- $339,653 $ 75,407 ======== ========
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. F-115 155 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. OPERATING LEASES The Companies lease office space and equipment under agreements expiring at various dates through the year 2000. Minimum rental commitments under these noncancelable lease agreements in effect at July 31, 1998, are:
PERIOD ENDING DECEMBER 31, -------------------------- 1998........................................................ $32,857 1999........................................................ 28,658 2000........................................................ 1,977 2001........................................................ -- 2002........................................................ -- Thereafter.................................................. -- ------- $63,492 =======
Total rental expense for the seven months ended July 31, 1998 and years ended December 31, 1997 and 1996 for all operating leases amounted to $24,250, $60,000 and $67,000, respectively. 6. LINE OF CREDIT RSI has a $300,000 line of credit, with an additional seasonal limit of $100,000 from a bank. Interest is payable monthly at 1% over the bank's reference rate of interest for the seven months ended July 31, 1998, at 1% over the bank's reference rate of interest for the year ended December 31, 1997 and at 2.5% over the bank's reference rate of interest for the years ended December 31, 1996. The line is secured by accounts receivable, material on hand, equipment and assignment of certain life insurance policies. The line is also personally guaranteed by certain shareholders of the Companies. At July 31, 1998 and December 31, 1997, there were no borrowings against the line. F-116 156 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT Long-term debt consists of the following:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Note payable to insurance company (RSI), interest at 8%, with no monthly principal installments or maturity date, secured by the life insurance policy...................... $ -- $ 410,140 Note payable to bank (RSI), interest at 9.5%, payable in six monthly installments of $42,222 each year (May-October), maturing December 1999, secured by all of RSI's assets.... 357,420 399,642 Note payable to shareholder (RSI), interest at 9.5%, with no monthly installments, maturing April 2000, unsecured...... -- 246,799 Various notes payable to banks and finance companies (RSI and MRSI), interest rates from 2.9% to 11.75%, due in even monthly principal and interest payments, secured by vehicles and equipment.................................... 48,366 62,538 Note payable to bank (RSI), interest at 9.0%, with monthly payments of $6,374, maturing May 2001, secured by all Company assets............................................ 200,000 -- Note payable to bank (RSI), interest at 9.5%, maturing April 1999, secured by all Company assets....................... 50,000 -- Note payable to shareholder's (RSI/MRSI), no interest rate with no monthly payments 7/28/98.......................... 650,056 -- ---------- ---------- Total debt.................................................. 1,305,842 1,119,119 Less current maturities..................................... 378,246 278,246 ---------- ---------- Long-term portion........................................... $ 927,596 $ 840,873 ========== ==========
Aggregate principal payments, as of July 31, 1998, on long-term debt are scheduled as follows: 1998........................................................ $ -- 1999........................................................ 1,282,389 2000........................................................ 23,453 2001........................................................ -- 2002........................................................ -- ---------- $1,305,842 ==========
Certain of the long-term debt instruments and the line of credit agreement contain restrictive covenants which places requirements and restrictions on the Companies regarding disposition of assets, financial ratios, capital expenditures, acquisitions and operations. The Companies were not in compliance with certain covenants at July 31, 1998; however, waivers for the covenants were obtained from the bank. 8. PROFIT SHARING PLAN The Companies have 401(k) profit sharing plans covering substantially all employees not covered under collective bargaining agreements. The Companies may contribute a discretionary amount as determined each year by the Companies. The discretionary contribution is subject to a six-year vesting schedule. The discretionary contribution expense for the Companies was $50,000, $80,485 and $101,683 for the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996, respectively. F-117 157 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. SALE OF BRANCH Effective March 1997, RSI sold all assets relating to the Milwaukee branch operations. RSI received an initial $75,000 payment and a note receivable for $200,000 with an interest rate of 2% over the base rate paid by RSI to a certain bank. RSI realized a gain of $160,603 on the sale. For the year ended December 31, 1997, the note had a remaining balance of $133,334 which is included in other income in the combined 1997 statement of income. The balance due on the note receivable as of July 31, 1998 is $133,334. This amount is due on December 31, 1999. This receivable is secured by the equipment involved in the sale and is personally guaranteed by the owners of the acquiring Company. In connection with the sale, the Companies and their shareholders have entered into a covenant not to compete for a period of five years from the date of the agreement, subject to certain geographical and size limitations. The Companies may bid new work in the circumscribed area if certain restrictions are met. 10. RELATED PARTY TRANSACTIONS Related parties of the Companies include the shareholders of the Companies and various entities related through common ownership and management. The Companies and related parties provide products and services to each other. Transactions with related parties included in the combined financial statements resulted in the recognition of approximately $92,902, $15,300 and $26,900 of income and approximately $43,400, $72,400 and $86,400 of expense for the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996, respectively. Due from related parties consists of charges from the Companies to affiliated companies for labor, equipment and administrative services. Effective January 2, 1998, the majority stockholder gifted 55 shares of Railroad Service, Inc. stock and 5 shares of Minnesota Railroad Service, Inc. stock to another shareholder. Accordingly, $378,146 was recorded as a charge to compensation expense and a contribution of paid-in capital. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Companies using available market information and appropriate valuation methodologies. CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts of these Items are a reasonable estimate of their fair value due to their short-term nature. LONG-TERM DEBT The line of credit facility approximates fair value as the interest rate fluctuates with changes in market conditions. It is estimated that the carrying amount of the long-term debt approximates market. Management estimated the fair value of the long-term debt based on the remaining term to maturity and the current interest rate environment as a market does not exist for the debt or similar debt of the Companies. F-118 158 RAILROAD SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 12. SUBSEQUENT EVENTS On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-119 159 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Southern Indiana Wood Preserving Company, Inc.: We have audited the accompanying balance sheets of SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. (the "Company") (an Indiana corporation) as of July 31, 1998 and December 31, 1997, and the related statements of operations, stockholder's equity and cash flows for the seven months ended July 31, 1998 and for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. as of July 31, 1998 and December 31, 1997, and the results of its operations and its cash flows for the seven months ended July 31, 1998 and the year ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Nashville, Tennessee September 25, 1998 F-120 160 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ -- $ -- Receivables, net of allowance of $94,347 and $78,119, respectively.................................. 1,405,108 1,510,605 Inventory................................................. 2,098,122 2,171,870 Prepaid expenses and other................................ 48,308 16,870 ---------- ---------- Total current assets.............................. 3,551,538 3,699,345 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Land and improvements..................................... 7,372 7,372 Buildings and improvements................................ 84,697 84,697 Leasehold improvements.................................... 128,328 128,328 Machinery and equipment................................... 1,452,699 1,309,439 Transportation equipment.................................. 226,340 258,074 Office furniture and equipment............................ 34,578 34,578 ---------- ---------- 1,934,014 1,822,488 Less accumulated depreciation............................. 1,161,868 1,143,341 ---------- ---------- Property, plant and equipment, net................ 772,146 679,147 ---------- ---------- OTHER ASSETS................................................ 1,802 1,802 ---------- ---------- $4,325,486 $4,380,294 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Cash overdraft............................................ $ 64,932 $ 70,680 Accounts payable.......................................... 131,438 186,685 Line of credit/note payable............................... 4,009,034 680,000 Accrued expenses.......................................... 87,940 134,160 Taxes payable............................................. 11,138 11,570 ---------- ---------- Total current liabilities......................... 4,304,482 1,083,095 ---------- ---------- COMMITMENTS AND CONTINGENCIES............................... ---------- ---------- STOCKHOLDER'S EQUITY: Common Stock, no par value; authorized shares, 1,000; issued and outstanding shares, 100.............. 1,000 1,000 Additional paid-in capital................................ 194,100 194,100 Retained earnings (deficit)............................... (174,096) 3,102,099 ---------- ---------- Total stockholder's equity........................ 21,004 3,297,199 ---------- ---------- $4,325,486 $4,380,294 ========== ==========
See Notes to Financial Statements. F-121 161 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. STATEMENTS OF OPERATIONS
SEVEN MONTHS YEAR ENDED ENDED JULY 31, DECEMBER 31, 1998 1997 ------------ ------------ Sales....................................................... $6,567,727 $8,900,635 Cost of sales............................................... 5,071,098 7,538,546 ---------- ---------- Gross profit.............................................. 1,496,629 1,362,089 Selling, general and administrative expenses................ 433,933 529,106 ---------- ---------- Income from operations...................................... 1,062,696 832,983 ---------- ---------- Other income (expense): Interest income........................................... 947 10,966 Interest expense.......................................... (32,491) (5,132) Gain on sale of equipment................................. -- 5,000 Miscellaneous income (expense)............................ 1,297 (2,807) ---------- ---------- Other (expense) income, net............................ (30,247) 8,027 ---------- ---------- Net income.................................................. $1,032,449 $ 841,010 ========== ==========
See Notes to Financial Statements. F-122 162 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. STATEMENTS OF STOCKHOLDER'S EQUITY
NUMBER OF ADDITIONAL COMMON COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL --------- ------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1996................ 100 $1,000 $194,100 $3,346,357 $3,541,457 Net income.............................. -- -- -- 841,010 841,010 Distributions........................... -- -- -- (1,085,268) (1,085,268) --- ------ -------- ---------- ---------- BALANCE, DECEMBER 31, 1997................ 100 1,000 194,100 3,102,099 3,297,199 Net income.............................. -- -- -- 1,032,449 1,032,449 Distributions........................... -- -- -- (4,308,644) (4,308,644) --- ------ -------- ---------- ---------- BALANCE, JULY 31, 1998.................... 100 $1,000 $194,100 $ (174,096) $ 21,004 === ====== ======== ========== ==========
See Notes to Financial Statements. F-123 163 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. STATEMENTS OF CASH FLOWS
SEVEN MONTHS YEAR ENDED ENDED JULY 31, DECEMBER 31, 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $1,032,449 $ 841,010 Adjustments to reconcile net income to net cash used in by operating activities: Depreciation and amortization.......................... 78,024 121,416 Gain on sale of equipment.............................. -- (5,000) Change in operating assets and liabilities: Receivables.......................................... 105,495 (659,924) Inventory............................................ 73,748 (708,084) Prepaid expenses and other........................... (31,438) 11,577 Cash overdraft....................................... (5,748) 70,680 Accounts payable..................................... (55,247) 159,321 Accrued expenses..................................... (46,650) 11,778 ---------- ----------- Net cash provided by (used in) operating activities...................................... 1,150,633 (157,226) ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (171,023) (260,417) Proceeds from sale of equipment........................... -- 5,000 ---------- ----------- Net cash used in investing activities............. (171,023) (255,417) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings..................................... 3,329,034 680,000 Payments of distributions................................. (4,308,644) (1,085,268) ---------- ----------- Net cash used in financing activities............. (979,610) (405,268) ---------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... -- (817,911) ---------- ----------- CASH AND CASH EQUIVALENTS, beginning of period.............. -- 817,911 ---------- ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ -- $ -- ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 32,491 $ 5,132 ========== ===========
See Notes to Financial Statements. F-124 164 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Southern Indiana Wood Preserving Company, Inc. (the "Company") (an Indiana corporation) operates as a wood preserving Company specializing in producing pressure, creosote treated wood products for private and government customers located throughout the United States, primarily in the Midwest. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates. REVENUE RECOGNITION The Company recognizes revenues at the time of shipment of goods. FINANCIAL INSTRUMENTS AND CREDIT RISK The Company operates in Indiana. However, the Company's accounts receivable include other geographic regions of the United States. The terms of the sales give rise to unsecured accounts receivable, as is common industry practice. During the seven months ended July 31, 1998, 17.97% of sales were to one government entity. INVENTORY Inventory, consisting principally of trimmed and graded railroad ties, is stated at the lower of cost or market. Cost is determined by the weighted average cost method. PROPERTY, PLANT AND EQUIPMENT The Company records property, plant and equipment at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets as follows: Buildings................................................... 25 Years Machinery and equipment..................................... 7 - 10 Years Office furniture and equipment.............................. 5 - 10 Years Leasehold improvements...................................... 10 Years
As assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is reflected in the statement of income. INCOME TAXES The Company operates as an S corporation. Accordingly, the income taxes for the earnings of the Company are the responsibility of the owner; therefore, these financial statements do not reflect any Federal or state income taxes. F-125 165 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. NOTE TO FINANCIAL STATEMENTS -- (CONTINUED) 3. RECEIVABLES Receivables consist of the following at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Trade receivables........................................... $1,484,005 $1,545,035 Supplier receivables........................................ 15,050 43,259 Other receivables........................................... 400 430 ---------- ---------- 1,499,455 1,588,724 Less allowance for doubtful accounts........................ 94,347 78,119 ---------- ---------- $1,405,108 $1,510,605 ========== ==========
4. INVENTORY Inventory consists of the following at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ Raw materials............................................... $ 384,726 $ 143,140 Work in process............................................. 1,620,649 1,743,072 Finished goods.............................................. 92,747 285,658 ---------- ---------- $2,098,122 $2,171,870 ========== ==========
5. OPERATING LEASES The Company leases production space under an agreement expiring May 1, 1999. Minimum future lease payments under the current lease agreement in effect at July 31, 1998 are: PERIOD ENDING DECEMBER 31, - ------------------------------------------------------------ 1998...................................................... $10,031 1999...................................................... 11,034 ------- $21,065 =======
Total rental expense for the seven months ended July 31, 1998 and for the year ended December 31, 1997 was $5,851 and $9,119, respectively. 6. LINE OF CREDIT AND SHORT TERM NOTE PAYABLE The Company has a revolving line of credit agreement with a bank. The line of credit has a limit of $2,000,000 and is secured by the Company's trade receivables and inventories. Interest is at prime (8.5% at July 31, 1998) which is payable monthly. The outstanding principle at July 31, 1998 is $309,034. In July of 1998, the Company obtained a note payable in the amount of $3,700,000 with a bank with a maturity date of August 23, 1998. Interest is at prime and the outstanding balance at July 31, 1998 is $3,700,000. Both the revolving line of credit and the short-term note payable were repaid in connection with the transaction discussed in Note 10. 7. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) The Company has adopted a noncontributory cash employees' stock ownership plan (ESOP) covering all full-time employees who have met certain service requirements. The plan provides for discretionary F-126 166 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC. NOTE TO FINANCIAL STATEMENTS -- (CONTINUED) contributions by the corporation up to the maximum amount permitted under Internal Revenue Code. The plan has received IRS approval under Sec. 401(A) and 501(A) of the Internal Revenue Code. Total contributions made to the plan for the seven months ended July 31, 1998 and the year ended December 31, 1997 were $55,374 and $157,480, respectively. 8. CONTINGENCIES The Company is subject to certain Federal, state and local environmental laws and regulations relating to the use of creosote. Creosote is used in the Company's manufacturing process to treat the ties so that they can withstand exposure to outside elements. Creosote, a coal tar treated derivative, has been recognized by environmental regulating agencies as a hazardous material. The Company currently believes that it is in compliance with the environmental laws and regulations surrounding creosote. The Company has not been notified of any violations of the regulations by regulatory agencies. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments is determined in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The carrying value of receivables, accounts payable, the line of credit and the short-term note payable have been determined by the Company to approximate their fair value using available market information and appropriate valuation methodologies. 10. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-127 167 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To U.S. Trackworks, Inc. and Northern Rail Service and Supply Co.: We have audited the accompanying combined balance sheets of U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. (Michigan corporations) as of July 31, 1998 and December 31, 1997, and the related combined statements of operations, changes in stockholders' equity and cash flows for the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. as of July 31, 1998 and December 31, 1997, and the results of their operations and their cash flows for the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Nashville, Tennessee October 2, 1998 F-128 168 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. COMBINED BALANCE SHEETS
JULY 31, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 211,440 $ 124,522 Accounts receivable....................................... 540,113 992,277 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 92,495 259,388 Inventory................................................. 321,677 259,427 Prepaid expenses.......................................... 87,407 30,418 ---------- ---------- Total current assets.............................. 1,253,132 1,666,032 ---------- ---------- PROPERTY AND EQUIPMENT: Construction equipment.................................... 1,095,748 1,012,099 Transportation equipment.................................. 471,957 468,783 Office equipment.......................................... 10,101 10,101 ---------- ---------- 1,577,806 1,490,983 Less accumulated depreciation............................. 1,083,252 995,245 ---------- ---------- Property and equipment, net....................... 494,554 495,738 ---------- ---------- OTHER ASSETS, net........................................... 5,144 89,468 ---------- ---------- $1,752,830 $2,251,238 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 236,480 $ 611,430 Current maturities of long-term debt...................... -- 68,015 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. 3,000 21,303 Accrued expenses.......................................... 139,882 113,447 Line of credit............................................ 500,000 465,000 Short-term note payable................................... 96,311 -- ---------- ---------- Total current liabilities......................... 975,673 1,279,195 DEFERRED COMPENSATION....................................... -- 83,135 LONG-TERM DEBT, net of current maturities................... -- 13,123 COMMITMENTS AND CONTINGENCIES............................... -- -- ---------- ---------- Total liabilities................................. 975,673 1,375,453 ---------- ---------- STOCKHOLDERS' EQUITY: Common Stock.............................................. 431,550 431,550 Additional paid-in capital................................ 45,291 45,291 Retained earnings......................................... 300,316 398,944 ---------- ---------- Total stockholders' equity........................ 777,157 875,785 ---------- ---------- $1,752,830 $2,251,238 ========== ==========
See Notes to Combined Financial Statements. F-129 169 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEVEN MONTHS ENDED DECEMBER 31, JULY 31, ----------------------- 1998 1997 1996 ------------------ ---------- ---------- Revenues............................................. $2,108,331 $4,814,005 $4,819,123 Cost of revenues..................................... 1,806,110 3,740,346 4,466,547 ---------- ---------- ---------- Gross profit......................................... 302,221 1,073,659 352,576 General and administrative expenses.................. 277,924 736,138 442,754 ---------- ---------- ---------- Income (loss) from operations........................ 24,297 337,521 (90,178) ---------- ---------- ---------- Other income (expense): Interest income.................................... 104 179 509 Interest expense................................... (23,029) (40,841) (38,555) ---------- ---------- ---------- Other expense, net................................... (22,925) (40,662) (38,046) ---------- ---------- ---------- Net income (loss).................................... $ 1,372 $ 296,859 $ (128,224) ========== ========== ==========
See Notes to Combined Financial Statements. F-130 170 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NUMBER OF ADDITIONAL COMMON COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL --------- -------- ---------- --------- --------- BALANCE, DECEMBER 31, 1995................. 43,155 $431,550 $45,291 $ 503,785 $ 980,626 Distributions to stockholders............ -- -- -- (224,728) (224,728) Net loss................................. -- -- -- (128,224) (128,224) ------ -------- ------- --------- --------- BALANCE, DECEMBER 31, 1996................. 43,155 431,550 45,291 150,833 627,674 Distributions to stockholders............ -- -- -- (48,748) (48,748) Net income............................... -- -- -- 296,859 296,859 ------ -------- ------- --------- --------- BALANCE, DECEMBER 31, 1997................. 43,155 431,550 45,291 398,944 875,785 Distributions to stockholders............ -- -- -- (100,000) (100,000) Net income............................... -- -- -- 1,372 1,372 ------ -------- ------- --------- --------- BALANCE, JULY 31, 1998..................... 43,155 $431,550 $45,291 $ 300,316 $ 777,157 ====== ======== ======= ========= =========
See Notes to Combined Financial Statements. F-131 171 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. COMBINED STATEMENTS OF CASH FLOWS
SEVEN MONTHS YEAR ENDED ENDED DECEMBER 31, JULY 31, --------------------- 1998 1997 1996 ----------------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................................... $ 1,372 $ 296,859 $(128,224) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation...................................... 88,006 133,904 136,968 Amortization...................................... 1,189 2,000 2,124 Gain from sales of property and equipment......... -- (2,051) (615) Changes in operating assets and liabilities: Accounts receivable............................. 452,164 (171,073) (129,595) Costs and estimated earnings in excess of billings on uncompleted contracts............ 166,893 (238,811) (20,577) Inventory....................................... (62,250) (42,082) (57,410) Prepaid expenses................................ (56,989) 3,395 (40,494) Accounts payable................................ (374,950) 447,676 (49,843) Billings in excess of costs and estimated earnings on uncompleted contracts............ (18,303) 21,303 -- Accrued expenses................................ 26,435 19,020 (116,927) --------- --------- --------- Net cash (used in) provided by operating activities................................. 223,567 470,140 (404,593) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property and equipment........ -- 25,600 7,100 Purchases of property and equipment.................. (86,822) (215,511) (64,995) --------- --------- --------- Net cash used in investing activities........ (86,822) (189,911) (57,895) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt................. (81,138) (136,464) (33,917) Proceeds from long-term debt......................... -- 133,219 26,634 Line of credit borrowings (repayments), net.......... 35,000 (25,000) 440,000 Note payable -- related party borrowings (repayments), net................................. -- (100,000) 100,000 Principal payments on short-term note payable........ (10,922) -- -- Proceeds from short-term note payable................ 107,233 -- -- Distributions to stockholders........................ (100,000) (48,748) (224,728) --------- --------- --------- Net cash (used in) provided by financing activities................................. (49,827) (176,993) 307,989 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 86,918 103,236 (154,499) CASH AND CASH EQUIVALENTS, beginning of period......... 124,522 21,286 175,785 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period............... $ 211,440 $ 124,522 $ 21,286 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest............................................. $ 23,029 $ 20,878 $ 33,283 ========= ========= =========
See Notes to Combined Financial Statements. F-132 172 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. NOTES TO COMBINED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS U.S. Trackworks, Inc. (a Michigan corporation) operates as a construction contractor, constructing, repairing and maintaining railroad tracks for private and government customers located primarily in the Midwest United States. The work is performed under various forms of contracts, including fixed-fee and time-and-material contracts. Northern Rail Service and Supply Co. (a Michigan corporation) operates in Michigan and provides maintenance services on railroad tracks primarily under time-and-material contracts. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION These combined financial statements include the accounts and results of operations of both U.S. Trackworks, Inc. and Northern Rail Service and Supply Co., which are commonly owned. U.S. Trackworks, Inc. and Northern Rail Service and Supply Co. are collectively referred to as the "Company." All significant intercompany transactions and balances have been eliminated in combination. CASH AND CASH EQUIVALENTS For purposes of the combined balance sheets and the combined statements of cash flows, the Company considers cash and cash equivalents to include cash on hand and highly liquid debt instruments with an original maturity of three months or less. INVENTORY Inventory, consisting principally of stored materials and parts to be used for contracts, is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT The Company records property and equipment at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Newly purchased equipment is depreciated over eight years and used equipment is depreciated over five years. Repairs to existing equipment that lengthen the asset's useful life are depreciated over three years. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the combined statements of operations. CONCENTRATION OF CREDIT RISK The Company's credit risk primarily relates to cash and accounts receivable. Cash is primarily held in bank accounts. Accounts receivable represent amounts due from the Company's customers. The Company performs continual credit evaluations of its customers and, from time to time, an individual customer's accounts receivable balance may represent a significant portion of the Company's total accounts receivable balance. At July 31, 1998, three customers individually accounted for 10% to 15% and in the aggregate accounted for approximately 39% of the Company's total accounts receivable balance. At December 31, 1997, one customer accounted for approximately 36% of the accounts receivable balance. REVENUE AND COST RECOGNITION The Company recognizes revenues from fixed-fee contracts using the percentage-of-completion method, measured by the percentage of cost incurred to date to management's estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on F-133 173 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the contracts. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Revenues from time-and-material contracts are recognized currently as the work is performed. Contract costs include all direct material, labor and equipment costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. INCOME TAXES The Company operates as an S Corporation. Accordingly, the income taxes related to the earnings of the Company are the responsibility of the owners; therefore, these combined financial statements do not reflect any federal or state income taxes for the Company. SINGLE BUSINESS TAX The Company is subject to a single business tax in its incorporated state of Michigan. The tax is calculated on the apportioned activity of the Company in Michigan and is included in general and administrative expenses in the accompanying combined statements of operations. USE OF ESTIMATES Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Contract receivables........................................ $497,956 $966,668 Retainage................................................... 42,157 25,609 -------- -------- $540,113 $992,277 ======== ========
Retained accounts receivable represents amounts retained by customers from contract billings and are payable to the Company upon satisfactory completion of contract terms. At July 31, 1998, all retainage was expected to be collected within one year. F-134 174 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information with respect to contracts in process at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Costs incurred on uncompleted contracts..................... $416,459 $ 730,843 Estimated earnings.......................................... 158,638 352,761 -------- ---------- 575,097 1,083,604 Less billings to date....................................... 485,602 845,519 -------- ---------- $ 89,495 $ 238,085 ======== ==========
Contracts in process are included in the accompanying combined balance sheets under the following captions at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $92,495 $259,388 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... (3,000) (21,303) ------- -------- $89,495 $238,085 ======= ========
5. LINE OF CREDIT The Company has a revolving line of credit agreement collateralized by the assets of the Company with a credit limit of $550,000. The line of credit bears interest at the prime rate plus 1/2% (9% at July 31, 1998) which is payable monthly. The Company is subject to ongoing compliance with financial and other covenants under the line of credit, all of which the Company is in compliance or has obtained appropriate waivers at July 31, 1998. During the seven months ended July 31, 1998 and the year ended December 31, 1997, the weighted average amount outstanding on the line of credit was approximately $460,000 and $360,000, respectively, and the maximum amount outstanding was approximately $645,000 and $590,000, respectively. At July 31, 1998 and December 31, 1997, the balance outstanding under the line of credit is $500,000 and $465,000, respectively, and is due on demand. The line of credit was paid off in connection with the subsequent event discussed in Note 12. 6. LONG-TERM DEBT Long-term debt consists of the following at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ Long-term note, paid off in 1998............................ $-- $24,416 Long-term note, paid off in 1998............................ -- 19,096 Long-term note, paid off in 1998............................ -- 15,886 Unsecured long-term note, paid off in 1998.................. -- 21,740 --- ------- -- 81,138 Less current maturities..................................... -- 68,015 --- ------- $-- $13,123 === =======
F-135 175 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. BENEFIT PLANS The Company participates in a defined contribution pension plan for certain union employees. The plan provides benefits to all employees covered under the union's collective bargaining agreement. The benefits are based upon the number of hours worked. The Company's practice is to fund amounts that are tax deductible and that are required by statute and applicable regulations. The Company contributed $15,460 related to the seven months ended July 31, 1998 and $33,167 and $31,118 related to the 1997 and 1996 plan years, respectively. The Company participates in a discretionary contribution pension plan for certain union employees. The plan provides for annual contributions at the discretion of management during years when the Company generates a profit. The Company contributed $7,000 related to the seven months ended July 31, 1998 and approximately $12,000 for both the 1997 and 1996 plan years. The Company maintains a non-contributory profit sharing plan for all non-union employees. The plan provides for annual contributions of up to 15% of wages earned during years when the Company generates a profit. The Company contributed $13,320 for the seven months ended July 31, 1998 and $20,952 for the 1997 plan year. No plan contributions were made in 1996. The Company maintains a 401(k) plan for certain employees of the Company that is funded by these employees through payroll deductions. The Company does not make any contributions to this plan. The Company also maintained life insurance policies on certain management personnel. These policies were designed to transfer to the insured personnel upon retirement and were included in deferred compensation in the accompanying combined balance sheet at December 31, 1997. During the seven months ended July 31, 1998, the Company transferred these policies to the insured personnel. 8. COMMON STOCK Common Stock consists of the following at July 31, 1998 and December 31, 1997:
JULY 31, DECEMBER 31, 1998 1997 -------- ------------ U.S. Trackworks, Inc. -- $10 par value; 45,000 shares authorized, 26,314 shares issued and outstanding.......... $263,140 $263,140 Northern Rail Service and Supply Co. -- $10 par value; 16,841 shares authorized, issued and outstanding.......... 168,410 168,410 -------- -------- $431,550 $431,550 ======== ========
9. RELATED PARTY TRANSACTIONS Two management companies that are owned by a member of management provide certain management services to the Company, as well as lease office space and equipment to the Company. The Company incurred management fees to these management companies of approximately $48,000, $450,000 and $225,000 in the seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996, respectively. The Company maintains a relationship with a subcontracting Company that is owned by a stockholder of the Company. Fees paid to the subcontractor in the seven months ended July 31, 1998 and December 31, 1997 were approximately $6,200 and $80,000, respectively. No fees were paid in 1996. F-136 176 U.S. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain equipment under a noncancellable operating lease that expires in 1998. The remaining commitment under this operating lease was $4,365 and $14,550 at July 31, 1998 and December 31, 1997, respectively. Rent expense for the seven months ended July 31, 1998 and for the years ended December 31, 1997 and 1996 amounted to $24,232, $70,134 and $130,777, respectively. LITIGATION The Company is engaged in various lawsuits arising in the ordinary course of business. In the opinion of management, based upon the advice of counsel, the ultimate outcome of these lawsuits will not have a material impact on the Company's financial statements. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts of these Items are a reasonable estimate of their fair value due to their short-term nature. LINE OF CREDIT AND LONG-TERM DEBT The carrying amount of the line of credit facility approximates fair value as the interest rate fluctuates with changes in market conditions. The carrying amount of long-term debt, based on borrowing rates currently available to the Company, is a reasonable estimation of fair value. 12. SUBSEQUENT EVENT On May 21, 1998, the stockholders of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under the terms of the Agreement, the stockholders exchanged their stock of the Company for cash and stock of RailWorks Corporation. The transaction was completed on August 4, 1998. F-137 EX-10.33 2 EMPLOYMENT AGREEMENT DATED JANUARY 7, 1999 1 EXHIBIT 10.33 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of this 7th day of January 1999, by and between Robert D. Wolff, an individual resident of the State of Utah ("Employee"), and MidWest Railroad Construction and Maintenance Corporation of Wyoming ("Employer"), a wholly owned subsidiary of RailWorks Corporation ("RailWorks"), a Delaware corporation, and RailWorks. W I T N E S S E T H WHEREAS, pursuant to an acquisition that became effective on the date of this Agreement (the "Acquisition"), Employer became a wholly owned subsidiary of RailWorks; WHEREAS, as a condition to the Acquisition, Employee agreed to enter into this Agreement; and WHEREAS, Employer and RailWorks each desires to employ Employee, and Employee desires to be employed by each of Employer and RailWorks, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Employment. Subject to the terms hereof, Employer hereby employs Employee, and Employee hereby accepts such employment as his primary employment. Employee will serve as Chief Executive Officer of Employer or in such other capacity as the Board of Directors of Employer and Employee shall agree from time to time and will have duties and responsibilities customarily assigned to a person with such title within Employer's industry. Although Employee's primary employment responsibilities are with Employer, Employee will also serve as Vice-President - Western Track Construction and Maintenance for RailWorks and will coordinate, develop and expand RailWorks' track contracting operations west of the Mississippi River and perform such other duties as the Board of Directors of RailWorks may hereafter from time to time determine. From time-to-time, Employee may, at the request of the Board of Directors of RailWorks, perform services for certain other subsidiaries of RailWorks. Employee agrees to devote his full business time and best efforts to the performance of the duties that Employer or RailWorks may assign Employee from time to time. Section 2. Term of Employment. 2.1 The term of Employee's employment hereunder (the "Initial Term") shall 2 be from the date hereof until the earlier of (a) the third anniversary of the date of this Agreement or (b) the occurrence of any of the following events: (i) The death or total disability of Employee (total disability meaning the failure to fully perform his normal required services hereunder for a period of six (6) consecutive months during any consecutive twelve (12) month period during the term hereof, as determined by an independent medical doctor jointly chosen by the Employee and the Employer), by reason of mental or physical disability; or (ii) The termination by Employer of Employee's employment hereunder, upon seven (7) days prior written notice to Employee, which termination may be for (A) for "Cause", as determined by the Board of Directors of Employer in accordance with the terms hereof or, (B) subject to Section 2.4, for any reason other than Cause or no reason at all. For purposes of this Agreement, "Cause" for termination of Employee's employment shall exist (V) if Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (W) if Employee has engaged in a dishonest act to the material damage or prejudice of Employer or RailWorks or its subsidiaries, or in conduct or activities materially damaging to the property, business, or reputation of Employer or RailWorks or its subsidiaries, (X) if Employee violates any of the provisions contained in Section 4 of this Agreement, after receiving written notice from Employer specifically outlining the alleged violations by the Employee of Section 4 hereof and either (1) the Employee fails to stop the alleged behavior which is claimed to be such a breach within thirty (30) days of receipt by the Employer of such written notice or (2) the Employee prevails in binding arbitration pursuant to the commercial arbitration rules of the American Arbitration Association, which arbitration is commenced by the Employee within thirty (30) days of receipt by the Employer of such notice in accordance with the provision of Section 4.5 hereof; or (Y) Employee willfully breaches or habitually neglects the duties he is required to perform hereunder, or (Z) or Employee performs such duties in a negligent manner, provided that Employee has received written notice from Employer on at least one prior occasion detailing negligent conduct by Employee and that negligent conduct (related to or similar to the conduct contained in the written notice) occurs after the Employer's receipt of written notice. (iii) The termination of the employment by Employee for Good Cause (as defined). "Good Cause" shall be defined as (A) any material and adverse change in the position or duties of the Employee or (B) relocation of the primary office of Employer to a location over 60 miles from its current location (a "Relocation"). RailWorks agrees to reimburse Employee for reasonable moving expenses incurred in connection with the relocation of Employee following any Relocation of Employer. 2.2 Successive Terms. After the Initial Term, this Agreement shall continue upon a year-to-year basis (the "Successive Terms"; together with the Initial Term, the "Term") unless terminated by either the Employer or the Employee upon written notice to the other at least ninety (90) days before the expiration of the then current Term. 3 2.3 Retirement. Notwithstanding the provisions of Sections 2.1 and 2.2, Employee may retire upon reaching age 65, or any time thereafter, at his or her election, provided that Employee gives Employer and RailWorks six (6) months advance written notice of such election and the date of such retirement. 2.4 Termination During the Earn-Out. Capitalized terms used in this section but not defined herein shall have the meaning ascribed to them in the Stock Purchase Agreement dated January 7, 1999 between RailWorks, Employer and Employee. During any Annual Period in which the Employee is eligible to receive an Earn-Out Payment, Employee may be terminated pursuant to Section 2.1(b)(ii)(B) hereof only if Employer's EBITDA for the full year preceding the termination was below the amount necessary for the Stockholders to receive an Earn-Out Payment of at least $450,000. Section 3. Compensation. 3.1 Term of Employment. Employer will provide Employee with the following salary, expense reimbursement and additional employee benefits during the term of employment hereunder: (a) Salary. During the Initial Term, Employee will be paid a salary (the "Salary"), that shall be no less than $135,000 per annum, less deductions and withholdings required by applicable law. Thereafter, and during the Successive Terms, Employee will be paid a salary (the "Successive Terms Salary") determined in good faith negotiations between Employer and Employee. The Salary and Successive Terms Salary shall be paid to Employee in equal monthly installments (or on such more frequent basis as other executives of Employer are compensated). The Salary and Successive Terms Salary shall be reviewed by the Board of Directors of RailWorks on at least an annual basis and may be increased but not decreased as a result of such review. (b) Performance Bonuses. In addition to the Salary and the Successive Terms Salary, the Employee shall have the right to receive from the Employer, and the Employer shall be obligated to pay to the Employee, a performance bonus (the "Performance Bonus") for each fiscal year during the term of this Agreement after the year ended December 31, 1998, equal to the aggregate amount determined by the bonus formulas delineated herein below. Any amount of a Performance Bonus required to be paid to the Employee for a fiscal year during the term of this Agreement shall be paid by the Employer in the first pay period of the Employer immediately following the finalization of the accounting audit for financial accounting purposes of the Employer for the preceding fiscal year but in all events by March 31 of the year immediately following the end of the fiscal year for which such Performance Bonus is attributable. Employee shall have the option with regard to any amount due to him as part of the Performance Bonus, to direct RailWorks to make distribution of all or any part of such bonus to any employee or employees of Employer, or any entity established solely for the benefit of such employee or employees, as determined in the Employee's sole discretion. At least thirty 4 (30) days prior to the intent to direct such bonus, RailWorks shall advise the Employee in writing of the amount due the Employee under the bonus pool and the Employee shall have ten (10) days from such date in which to advise RailWorks in writing of his intent to distribute all or any portion of such bonus to any such person. In the event of such written notification, RailWorks hereby agrees to so distribute the bonus. Absent such written notification, the bonus shall be payable in full to the Employee as described herein. The formulas to determine a Performance Bonus for any fiscal year during the term of this Agreement shall be as follows: (i) For each fiscal year of RailWorks, a portion of the bonus pool (the "First Bonus Pool") as determined by the Board of Directors of RailWorks, as set forth in this section. The First Bonus Pool will consist of ten percent (10%) of pre-tax income (computed before performance or other periodic bonuses for any of the employees of RailWorks and any of its consolidated subsidiaries) on a consolidated basis for financial accounting basis based upon applying generally accepted principles and generally accepted auditing standards on a consistent basis. This bonus shall be calculated by the independent certified public accountant regularly employed by RailWorks (the "CPA") applying such generally accepted accounting principles and generally accepted auditing standards on a consistent basis. The Employer's portion ("Employer First Bonus Pool") of the First Bonus Pool shall be equal to the percentage of the Employer's contribution to the operating income of RailWorks, as determined by the CPA. Ten percent (10%) of the Employer First Bonus Pool (i.e., one percentage point of the First Bonus Pool) will be allocated by the Board of Directors of RailWorks to employees of RailWorks' corporate offices. Forty (40%) will be allocated to Employee. The remainder of the Employer First Bonus Pool shall be allocated as designated by the Board of Directors of Employer. Plus (ii) For each fiscal year of RailWorks, a portion of the bonus pool (the "Second Bonus Pool") as determined by the Board of Directors of RailWorks, as set forth in this section. The Second Bonus Pool for each fiscal year of RailWorks will consist of five percent (5%) of the excess of (a) the consolidated after tax net income of RailWorks and its consolidated subsidiaries for a fiscal year, computed by the CPA applying generally accepted accounting principles and generally accepted auditing standards on a consistent basis over (b) the Wall Street Estimate (as hereinafter defined) for such fiscal year. For purposes of this subsection (ii)(b), Wall Street Estimate for a fiscal year shall mean the simple arithmetical average of the consolidated earnings per share estimates for a fiscal year of RailWorks and its consolidated subsidiaries in the possession of First Call on the Determination Date (as hereinafter defined), translated by the CPA into the equivalent consolidated after tax net income of RailWorks and its consolidated subsidiaries for such fiscal year. For purposes of this subsection (ii)(b), the Determination Date shall mean the date of this Agreement and thereafter shall be the first day of the fiscal year for which such computation applies. This bonus shall be calculated by the CPA applying such generally accepted accounting principles and generally accepted auditing standards on a consistent basis. The Employer's portion ("Employer Second Bonus Pool") of the Second Bonus Pool shall be equal to the percentage of the Employer's contribution to the 5 operating income of RailWorks, as determined by the CPA. The Second Bonus Pool shall be allocated as designated by the Board of Directors of Employer. (c) RailWorks' Stock Options. For each of the calendar years 1999, 2000 and 2001 RailWorks, shall grant Employee options to purchase one (1) share of Common Stock $.01 par value (the "Common Stock") of RailWorks for every $100 that the gross profit of RailWorks' track contracting operations west of the Mississippi River (other than Merit Railroad) exceeds the Target Gross Profit. Target Gross Profit shall mean gross profit of said territory calculated by RailWorks in accordance with GAAP, consistently applied, of $7,000,000 for 1999, $7,700,000 for 2000 and $8,470,000 for 2001. The exercise price for the shares of Common Stock shall be the average closing price of the Common Stock for the last ten (10) trading days of the year for which the options are being awarded. The options shall vest on the first anniversary of the date on which they are granted and shall expire on the tenth anniversary of such date. The options shall be deemed granted on the last day of the year for which the options are being awarded. The options are subject to the terms of the RailWorks 1998 Employee Stock Option Plan. (d) Discretionary Bonus. The Board of Directors of Employer may, from time to time, award the Employee a discretionary bonus based upon such factors as the Board of Directors of Employer deems appropriate. The Employer shall have no entitlement to such a discretionary bonus until and unless so awarded by the Board of Directors of Employer. (e) Vacation. Employee shall receive four (4) weeks vacation time per calendar year during the term of this Agreement in addition to customary holidays afforded employees of RailWorks. Any unused vacation days in any calendar year may not be carried over to subsequent years. (f) Expenses. Employer shall reimburse Employee within thirty (30) days of its receipt of a reimbursement report from the Employee, for all reasonable and necessary expenses incurred by Employee at the request of and on behalf of Employer or RailWorks. (g) Benefit Plans. Employee shall have the option of participating in such medical, dental, disability, hospitalization, life insurance, stock option and other benefit plans (such as pension and profit sharing plans) as Employer maintains from time to time for the benefit of other employees of RailWorks on the terms and subject to the conditions set forth in such plans. 3.2 Effect of Termination. Except as hereinafter provided, upon the termination of the employment of Employee hereunder for any reason, Employee shall be entitled to all compensation and benefits earned or accrued under Section 3.1 as of the effective date of termination (the "Termination Date"), but from and after the Termination Date no additional compensation or benefits shall be earned by Employee hereunder. Notwithstanding any of the foregoing, in the event that the employment of Employee is terminated by Employer pursuant to Section 2.1(b)(ii)(B) or 2.1(b)(iii), Employer shall pay as severance pay to Employee all remaining amounts due to Employee for the remainder of the Initial Term or the then current 6 Successive Term pursuant to Section 3.1(a), which payments shall be made when due in accordance with such section. The Employee and his eligible dependents shall be entitled to receive at the sole cost of the Employer the health insurance benefits generally made available to persons in similar positions within RailWorks for a period of six (6) months following the Termination Date (the "Continuation Period") and following such time period, the Employee shall be entitled to all rights afforded to him under the Federal Omnibus Reconciliation Act ("COBRA") to purchase continuation coverage of such health insurance benefits for himself and his dependents for the maximum period permitted by law, and the employee shall be deemed to have elected to exercise his rights under Cobra as of the first day of the Continuation Period. (i) Upon termination of this Agreement pursuant to the provisions of Sections 2.1(b)(i), 2.1(b)(ii)(B) or 2.1(b)(iii) hereof, any stock grants or options previously awarded to the Employee, either by this Agreement or otherwise, shall fully and completely vest and the Employee shall be able to retain or obtain as the case may be, such stock, as though there was no vesting period or criteria of any kind or nature, with respect to such stock. If stock options have previously been awarded to the Employee, notwithstanding any terms and conditions of such award or any plan pursuant to which such stock options were awarded, the Employee or his authorized representative shall have (i) a period of three (3) months from the Termination Date to exercise any or all stock options that, as of the date of their grant, were intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended, and acquire for his own benefit the shares of stock covered by such stock options, and (ii) a period of one (1) year from the Termination Date to exercise any or all other stock options and acquire for his own benefit the shares of stock covered by such stock options. (ii) Upon termination of the Agreement pursuant to the terms of Section 2.1 (b)(ii)(A) hereof, all granted but unvested, at the Termination Date, stock grants and/or options shall be forfeited upon such termination; provided that the Employee shall be able to retain or exercise any rights for a period of one (1) month after the Termination Date, notwithstanding the terms and provisions of such stock options awarded or the plan under which they were awarded, with respect to any shares of stock granted or shares of stock covered by stock options that have fully vested as of the Termination Date. Section 4. Noncompetition and Nonsolicitation During Employment. 4.1 Definitions. For the purposes of this Section 4, the following definitions shall apply. (a) "Company Activities" means the business of construction and maintenance of railway beds and tracks; construction and maintenance of elevated rail systems and structures; construction and maintenance of railway switching and signaling equipment, distributorships and supply in the field of rail and railway construction materials; distributorships and supply in the field of electromechanical controls for use in the railroad industry, namely, railway switching equipment and railway signaling equipment; and design for others in the field of railroad industry, namely, engineering design of rail and railway related structures and equipment. 7 (b) "Competitor" means any business, individual, partnership, joint venture, association, firm, corporation or other entity, other than the RailWorks or Employer or their affiliates or subsidiaries, engaged, wholly or partly, in Company Activities. (c) "Competitive Position" means (i) having any financial interest in a Competitor, including but not limited to, the direct or indirect ownership or control of all or any portion of a Competitor, or acting as a partner, officer, director, principal, agent or trustee of any Competitor or (ii) engaging in any employment or independent contractor arrangement, business or other activity with any Competitor whereby Employee will serve such Competitor in any senior managerial capacity. (d) "Confidential Information" means any confidential, proprietary business information or data belonging to or pertaining to RailWorks or Employer or their subsidiaries that does not constitute a "Trade Secret" (as hereinafter defined) and that is not generally known by or available through legal means to the public, including, but not limited to, information regarding RailWorks' or the Employer's or their subsidiaries' customers or actively sought prospective customers, acquisition targets, suppliers, manufacturers and distributors gained by Employee as a result of his employment with Employer. (e) "Customer" means actual customers or actively sought prospective customers of RailWorks or Employer or their affiliates or subsidiaries. (f) "Territory" means the United States of America west of the Mississippi River. (g) "Trade Secrets" means information or data of or about RailWorks or Employer or their affiliates or subsidiaries, including but not limited to technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, products plans, or lists of actual or potential customers, clients, distributees or licensees, information concerning RailWorks' or Employer's or their affiliates or subsidiaries' finances, services, staff, contemplated acquisitions, marketing investigations and surveys, that are not generally known to, and/or are not readily ascertainable by proper means by, other persons. (h) "Work Product" means any and all work product property, data documentation or information of any kind prepared, conceived, discovered, developed or created by Employee for RailWorks or its subsidiaries or affiliates, or any of RailWorks' or its affiliates' clients or customers for utilization in Company Activities, not generally known by or not readily ascertainable by proper means by other persons who can obtain economic value from their disclosure or use. 4.2 Trade Name and Confidential Information. (a) Employee hereby agrees that, except as required in the performance of his duties hereunder, with regard to each item constituting all or any portion of the Trade Secrets and 8 Confidential Information, at all times during the Term: (i) Employee shall not, directly or by assisting others own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be connected in any manner with, any business conducted under any corporate or trade name of Employer or name confusingly similar thereto, without the prior written consent of RailWorks; (ii) Employee shall hold in confidence all Trade Secrets and all Confidential Information and will not, either directly or indirectly, use, sell, lend, lease, distribute, license, give, transfer, assign, show, disclose, disseminate, reproduce, copy, appropriate or otherwise communicate any Trade Secrets or Confidential Information, without the prior written consent of RailWorks; and (iii) Employee shall immediately notify RailWorks of any unauthorized disclosure or use of any Trade Secrets or Confidential Information of which Employee becomes aware, Employee shall assist RailWorks, to the extent necessary, in the procurement or any protection of RailWorks' or Employer's rights to or in any of the Trade Secrets or Confidential Information. (b) Upon the request of RailWorks or Employer, Employee shall deliver to Employer all memoranda, notes, records, manuals and other documents, including all copies of such materials and all documentation prepared or produced in connection therewith, pertaining to the performance of Employee's services hereunder or RailWorks' or Employer's business or containing Trade Secrets or Confidential Information, whether made or complied by Employee or furnished to Employee from another source by virtue of Employee's employment with Employer. (c) To the greatest extent possible, all Work Product shall be deemed to be "work made for hire" (as defined in the Copyright Act, 17 U.S.C.A. " 101 et seq., as amended) and owned exclusively by Employer. Employee hereby unconditionally and irrevocably transfers and assigns to Employer all rights, title and interest Employee may have in or to any and all Work Product, including, without limitation, all patents, copyrights, trademarks, service marks and other intellectual property rights. Employee agrees to execute and deliver to Employer any transfers, assignments, documents or other instruments which Employer may deem necessary or appropriate to vest complete title and ownership of any and all such Work Product, and all rights therein, exclusively in Employer. 4.3 Noncompetition. (a) The parties hereto acknowledge that Employee is conducting Company Activities throughout the Territory. Employee acknowledges that to protect adequately the interest of Employer in the business of Employer it is essential that any noncompete covenant with respect thereto cover all Company Activities and the entire Territory. (b) Employee hereby agrees that, during the Term and for period of one year thereafter, Employee will not, in the Territory, either directly or indirectly, alone or in 9 conjunction with any other party, accept, enter into or take any action in conjunction with or in furtherance of a Competitive Position with Employer. Employee shall notify Employer promptly in writing if Employee receives an offer of a Competitive Position during the Term, and such notice shall describe all material terms of such offer. Nothing contained in this Section 4 shall prohibit Employee from acquiring not more than five percent (5%) of any Competitor, or from acquiring any percentage of any company which is non-competitive with RailWorks, whose common stock is publicly traded on a national securities exchange or in the over-the-counter market. 4.4 Nonsolicitation. Employee hereby agrees that Employee will not, during the Term and for a period of one year thereafter, either directly or indirectly, alone or in conjunction with any other party: (a) solicit, divert or appropriate or attempt to solicit, divert or appropriate, any Customer for the purpose of providing the Customer with services or products competitive with those offered by RailWorks during the Term, or (b) solicit or attempt to solicit any officer, director, employee, consultant, contractor, agent, lessor, lessee, licensor, licensee or supplier of RailWorks or Employer or other personnel of Employer or any of its subsidiaries to terminate, alter or lessen that party's affiliation with RailWorks, Employer or such subsidiary or to violate the terms of any agreement or understanding between such employee, consultant, contractor or other person and RailWorks or Employer. 4.5 Binding Arbitration. The parties shall refer any dispute as to whether or not the Employee has violated the provisions of this Section 4 to a mediator and, in the event that mediation is unsuccessful, such dispute shall be resolved by binding arbitration before one arbitrator selected by, and in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The cost of the mediator and, if necessary, the arbitrator and all other costs of the mediation and, if necessary, the arbitration shall be split equally between the Employee and the Employer, except for attorneys fees which shall be paid by the party employing such attorney. Section 5. Miscellaneous. 5.1 Severability. The covenants in this Agreement shall be construed as covenants independent of one another and as obligations distinct from any other contract between Employee and Employer. Any claim that Employee may have against Employer shall not constitute a defense to enforcement by Employer of this Agreement. 5.2 Survival of Obligations. The covenants in Section 4 of this Agreement shall survive termination of Employee's employment, except in the case of termination of this Agreement pursuant to the provisions of Sections 2.1 (iii) hereof, in which case they shall terminate also and have no further force or legal effect as of the Termination Date. 10 5.3 Notices. Any notice or other document to be given hereunder by any party hereto to any other party hereto shall be in writing and delivered in person or by courier, by telecopy transmission or sent by any express mail service, postage or fees prepaid at the following addresses: Employer c/o RailWorks Corporation 1104 Kenilworth Drive, Suite 301 Baltimore, Maryland 21204 Attention: John G. Larkin Telecopy No.: (410) 825-6920 Employee Robert D. Wolff 1525 Beck Street Salt Lake City, Utah or at such other address or number for a party as shall be specified by like notice. Any notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party or its agent. 5.4 Binding Effect. This Agreement inures to the benefit of, and is binding upon, Employer and their respective successors and assigns, and Employee, together with Employee's executor, administrator, personal representative, heirs, and legatees. 5.5 Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement supersedes and terminates all prior employment and compensation agreements, arrangements and understandings between or among Employer and Employee, except for the rights and obligations of the parties under the Stock Purchase Agreement dated January 7, 1999, which rights and obligations shall not be diminished by any portion of this Agreement. In the case of any conflict between this Agreement and the Stock Purchase Agreement, the latter agreement shall take precedence. This Agreement may be modified only by a written instrument signed by all of the parties hereto. 5.6 Governing Law. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed, and governed by and in accordance with, the laws of the State of Maryland without regard to the conflicts of law provisions thereof. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority or by any board of arbitrators by reason 11 of such party or its counsel having or being deemed to have structured or drafted such provision. 5.7 Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 5.8 Specific Performance. Each party hereto hereby agrees that any remedy at law for any breach of the provisions contained in this Agreement shall be inadequate and that the other parties hereto shall be entitled to specific performance and any other appropriate injunctive relief in addition to any other remedy such party might have under this Agreement or at law or in equity. 5.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. [Signatures on following page] 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. MIDWEST RAILROAD CONSTRUCTION AND MAINTENANCE CORPORATION OF WYOMING By: /s/ Robert D. Wolff -------------------------------------- Name: Robert D. Wolff Title: Chief Executive Officer RAILWORKS CORPORATION By: /s/ Michael R. Azarela -------------------------------------- Name: Michael R. Azarela Title: Executive Vice-President /s/ Robert D. Wolff ----------------------------------------- ROBERT D. WOLFF EX-10.34 3 CREDIT AGREEMENT DATED AUGUST 4, 1998 1 Exhibit 10.34 CREDIT AGREEMENT Dated as of August 4, 1998 among RAILWORKS CORPORATION, as Borrower, Certain Subsidiaries, as Guarantors, THE LENDERS NAMED HEREIN, FIRST UNION NATIONAL BANK, as Documentation Agent AND NATIONSBANK, N.A., as Administrative Agent 2 TABLE OF CONTENTS SECTION 1 DEFINITIONS 1.1 Definitions...........................................................................1 1.2 Computation of Time Periods..........................................................23 1.3 Accounting Terms; Certain Calculations...............................................23 SECTION 2 CREDIT FACILITIES........................................................................25 2.1 Revolving Loans......................................................................25 2.2 Letter of Credit Subfacility.........................................................28 SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES...........................................33 3.1 Default Rate.........................................................................33 3.2 Extension and Conversion.............................................................33 3.3 Prepayments..........................................................................34 3.4 Termination and Reduction of Commitments.............................................35 3.5 Fees.................................................................................35 3.6 Capital Adequacy.....................................................................36 3.7 Inability To Determine Interest Rate.................................................36 3.8 Illegality...........................................................................36 3.9 Requirements of Law..................................................................37 3.10 Taxes...............................................................................38
i 3 3.11 Indemnity...........................................................................40 3.13 Pro Rata Treatment..................................................................41 3.14 Sharing of Payments.................................................................42 3.15 Payments, Computations, Etc.........................................................43 3.16 Evidence of Debt....................................................................45 SECTION 4 GUARANTY.................................................................................45 4.1 The Guarantee........................................................................45 4.2 Obligations Unconditional............................................................46 4.3 Reinstatement........................................................................47 4.4 Certain Additional Waivers...........................................................47 4.5 Remedies.............................................................................47 4.6 Rights of Contribution...............................................................48 4.7 Continuing Guarantee.................................................................48 SECTION 5 CONDITIONS...............................................................................49 5.1 Conditions to Closing................................................................49 5.2 Conditions to All Extensions of Credit...............................................50 SECTION 6 REPRESENTATIONS AND WARRANTIES...........................................................51 6.1 Financial Condition..................................................................51 6.2 No Changes or Restricted Payments....................................................52
ii 4 6.3 Organization; Existence; Compliance with Law.........................................52 6.4 Power; Authorization; Enforceable Obligations........................................52 6.5 No Legal Bar.........................................................................53 6.6 No Material Litigation...............................................................53 6.7 No Default...........................................................................53 6.8 Ownership of Property; Liens.........................................................53 6.9 Intellectual Property................................................................54 6.10 No Burdensome Restrictions..........................................................54 6.11 Taxes...............................................................................54 6.12 ERISA...............................................................................54 6.13 Governmental Regulations, Etc.......................................................55 6.14 Subsidiaries........................................................................56 6.15 Purpose of Extensions of Credit.....................................................56 6.16 Environmental Matters...............................................................56 6.17 Year 2000 Compliance................................................................57 SECTION 7 AFFIRMATIVE COVENANTS....................................................................58 7.1 Financial Statements................................................................58 7.2 Certificates; Other Information.....................................................59 7.3 Notices.............................................................................60 7.4 Payment of Obligations..............................................................61
iii 5 7.5 Conduct of Business and Maintenance of Existence.....................................62 7.6 Maintenance of Property; Insurance...................................................62 7.7 Inspection of Property; Books and Records; Discussions...............................62 7.8 Environmental Laws...................................................................63 7.9 Financial Covenants..................................................................63 7.10 Administrative Fees.................................................................64 7.11 Additional Guaranties and Stock Pledges.............................................64 7.12 Ownership of Subsidiaries...........................................................65 7.13 Use of Proceeds.....................................................................65 SECTION 8 NEGATIVE COVENANTS.......................................................................65 8.1 Indebtedness........................................................................65 8.2 Liens...............................................................................66 8.3 Consolidation, Merger, Divestiture, etc.............................................66 8.5 Investments.........................................................................68 8.6 Ownership of Equity Interests.......................................................68 8.7 Fiscal Year.........................................................................68 8.8 Restricted Payments.................................................................68 8.9 Sale Leasebacks.....................................................................68 8.10 No Further Negative Pledges.........................................................68
iv 6 SECTION 9 EVENTS OF DEFAULT........................................................................69 9.1 Events of Default...................................................................69 9.2 Acceleration; Remedies..............................................................71 SECTION 10 AGENCY PROVISIONS.......................................................................72 10.1 Appointment.........................................................................72 10.2 Delegation of Duties................................................................72 10.3 Exculpatory Provisions..............................................................73 10.4 Reliance on Communications..........................................................73 10.5 Notice of Default...................................................................74 10.6 Non-Reliance on Administrative Agent and Other Lenders..............................74 10.7 Indemnification.....................................................................74 10.8 Administrative Agent in its Individual Capacity.....................................75 10.9 Successor Administrative Agent......................................................75 SECTION 11 MISCELLANEOUS...........................................................................76 11.1 Notices.............................................................................76 11.2 Right of Set-Off....................................................................77 11.3 Benefit of Agreement................................................................77 11.4 No Waiver; Remedies Cumulative......................................................80 11.5 Payment of Expenses, etc............................................................80
v 7 11.6 Amendments, Waivers and Consents....................................................81 11.7 Counterparts........................................................................82 11.8 Headings............................................................................82 11.9 Survival............................................................................82 11.10 Governing Law; Submission to Jurisdiction; Venue...................................82 11.11 Severability.......................................................................83 11.12 Entirety...........................................................................83 11.13 Binding Effect; Termination........................................................84 11.14 Confidentiality....................................................................84 11.15 Source of Funds....................................................................84 11.16 Conflict...........................................................................85
vi 8 SCHEDULES Schedule 2.1(a) Lenders and Commitments Schedule 2.1(b)(i) Form of Notice of Borrowing Schedule 2.1(e) Form of Revolving Note Schedule 2.2(b)-2 Form of Notice of Request for Letter of Credit Schedule 3.2 Form of Notice of Extension/Conversion Schedule 5.1(h)(v) Form of Officer's Certificate Schedule 6.8 Existing Liens Schedule 6.14 Subsidiaries Schedule 7.2(b) Form of Officer's Compliance Certificate Schedule 7.11 Form of Joinder Agreement Schedule 8.1 Indebtedness Schedule 11.1 Lenders and Addresses Schedule 11.3(b) Form of Assignment and Acceptance 9 CREDIT AGREEMENT THIS CREDIT AGREEMENT dated as of August 4, 1998 (the "Credit Agreement"), is by and among RAILWORKS CORPORATION, a Delaware corporation (the "Borrower"), the Subsidiaries identified on the signature pages hereto and such other Subsidiaries as may from time to time become Guarantors hereunder in accordance with the provisions hereof (the "Guarantors"), the lenders named herein and such other lenders as may become a party hereto (the "Lenders"), and NATIONSBANK, N.A., as Administrative Agent (in such capacity, the "Administrative Agent"). W I T N E S S E T H WHEREAS, the Borrower has requested that the Lenders provide a $75 million credit facility for the purposes hereinafter set forth; WHEREAS, the Lenders have agreed to make the requested credit facility available to the Borrower on the terms and conditions hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS 1.1 Definitions. As used in this Credit Agreement, the following terms shall have the meanings specified below unless the context otherwise requires: "Acquisition" means any transaction in which the Borrower or any of its Subsidiaries directly or indirectly (i) acquires any Property with which an ongoing business is conducted or is to be conducted, (ii) acquires all or substantially all of the assets of any Person or division thereof, whether through a purchase of assets, merger or otherwise, (iii) acquires (in one transaction or as the most recent transaction in a series of transactions) control of at least a majority of the Voting Stock of a corporation, other than the acquisition of Voting Stock of a wholly-owned Subsidiary solely in connection with the organization and capitalization of that Subsidiary by the Borrower or another Credit Party, or (iv) acquires control of more than 50% ownership interest in any partnership, joint venture or limited liability company, but specifically excluding the Combination. 10 "Additional Credit Party" means each Person that becomes a Guarantor after the Closing Date by execution of a Joinder Agreement. "Administrative Agent" shall have the meaning assigned to such term in the heading hereof, together with any successors or assigns. "Administrative Agent's Fee Letter" means that certain letter agreement dated as of July 31, 1998, between the Administrative Agent and the Borrower, as amended, modified, supplemented or replaced from time to time. "Administrative Agent's Fees" shall have the meaning assigned to such term in Section 3.5(c). "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agency Services Address" means NationsBank, N.A., NC1-001-15-04, 101 North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency Services, or such other address as may be identified by written notice from the Administrative Agent to the Borrower. "Aggregate Revolving Committed Amount" means the aggregate amount of Revolving Commitments in effect from time to time, being initially SEVENTY-FIVE MILLION DOLLARS ($75,000,000). "Applicable Percentage" means for any day, the rate per annum set forth below opposite the applicable Consolidated Leverage Ratio then in effect, it being understood that the Applicable Percentage for (i) Base Rate Loans shall be the percentage set forth under the column "Base Rate Margin", (ii) Eurodollar Loans shall be the percentage set forth under the column "Eurodollar Margin and Letter of Credit Fee", (iii) the Letter of Credit Fee shall be the percentage set forth under the column "Eurodollar Margin and Letter of Credit Fee" and (iv) the Commitment Fee shall be the percentage set forth under the column "Commitment Fee": 2 11
Eurodollar Margin Consolidated and Pricing Leverage Base Rate Letter of Commitment Level Ratio Margin Credit Fee Fee ----- ----- ------ ---------- --- I >2.25 1.25% 2.50% .500% - II >2.0 but <2.25 .75% 2.00% .500% - III >1.5 but <2.0 .25% 1.75% .375% - IV >1.0 but <1.5 0% 1.50% .300% - V <1.0 0% 1.25% .250%
The Applicable Percentage shall be determined and adjusted quarterly on the date (each a "Rate Determination Date") five (5) Business Days after the date by which the annual and quarterly compliance certificates and related financial statements and information are required in accordance with the provisions of Sections 7.1(a) and (b) and Section 7.2(b), as appropriate; provided that: (i) from the Closing Date until the Rate Determination Date occurring in connection with delivery of the financial statements for the fiscal quarter ending September 30, 1998, the Applicable Percentages shall be based on Pricing Level II; (ii) from the Rate Determination Date occurring in connection with delivery of the financial statements for the fiscal quarter ending September 30, 1998 until the Rate Determination Date occurring in connection with delivery of the financial statements for the fiscal quarter ending December 31, 1998, the Applicable Percentages shall be based on Pricing Level II unless the Consolidated Leverage Ratio as of September 30, 1998 equals or exceeds 2.25, in which case the Applicable Percentages shall be based on Pricing Level I; and (iii) in the event an annual or quarterly compliance certificate and related financial statements and information are not delivered timely to the Agency Services Address by the date required by Sections 7.1(a) and (b) and Section 7.2(b), as appropriate, the Applicable Percentages shall be based on Pricing Level I until such time as an appropriate compliance certificate and related financial statements and information are delivered, whereupon the applicable Pricing Level shall be adjusted based on the information contained in such compliance certificate and related financial statements and information. Each Applicable Percentage shall be effective from a Rate Determination Date until the next such Rate Determination Date. The Administrative Agent shall determine the appropriate Applicable Percentages in the pricing matrix promptly upon receipt of the quarterly or annual compliance certificate and related financial information and shall promptly notify the Borrower and the Lenders of any change thereof. Such determinations by the Administrative Agent shall be conclusive absent manifest error. Adjustments in the Applicable Percentages shall be effective as to existing Extensions of Credit as well as new Extensions of Credit made thereafter. 3 12 "Bankruptcy Code" means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time. "Bankruptcy Event" means, with respect to any Person, the occurrence of any of the following with respect to such Person: (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or ordering the winding up or liquidation of its affairs; or (ii) there shall be commenced against such Person an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or any case, proceeding or other action for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or for the winding up or liquidation of its affairs, and such involuntary case or other case, proceeding or other action shall remain undismissed, undischarged or unbonded for a period of sixty (60) consecutive days; or (iii) such Person shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or make any general assignment for the benefit of creditors; or (iv) such Person shall be unable to, or shall admit in writing its inability to, pay its debts generally as they become due. "Base Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the greater of (a) the Federal Funds Rate in effect on such day plus 1/2 of 1% or (b) the Prime Rate in effect on such day. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable after due inquiry to ascertain the Federal Funds Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (a) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. "Base Rate Loan" means any Revolving Loan bearing interest at a rate determined by reference to the Base Rate. "Borrower" means RailWorks Corporation, a Delaware corporation, as referenced in the opening paragraph, its successors and permitted assigns. 4 13 "Borrowing Base" means, as of any day, an amount equal to the sum of (a) eighty percent (80%) of Eligible Receivables, (b) fifty percent (50%) of Eligible Receivables Retainage and (c) fifty percent (50%) of Eligible Inventory, in each case as set forth in the most recent Borrowing Base Certificate delivered to the Administrative Agent and the Lenders in accordance with the terms of Section 7.1(d), with adjustments to give effect to Acquisitions and Divestitures since the date of such Borrowing Base Certificate on a Pro Forma Basis. "Borrowing Base Certificate" shall have the meaning assigned to such term in Section 7.1(d). "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina, Baltimore, Maryland or New York, New York are authorized or required by law to close, except that, when used in connection with a Eurodollar Loan, such day shall also be a day on which dealings between banks are carried on in U.S. dollar deposits in London, England. "Capital Lease" means, as applied to any Person, any lease of any Property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "Capital Lease Obligation" means the capital lease obligations relating to a Capital Lease determined in accordance with GAAP. "Cash Equivalents" means (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) U.S. dollar denominated time deposits and certificates of deposit of (i) any Lender, or (ii) any domestic commercial bank of recognized standing (y) having capital and surplus in excess of $500,000,000 and (z) whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "Approved Bank"), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody's and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by a Person with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States of America in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations, (e) obligations of 5 14 any State of the United States or any political subdivision thereof, the interest with respect to which is exempt from federal income taxation under Section 103 of the Internal Revenue Code, having a long term rating of at least AA- or Aa-3 by S&P or Moody's, respectively, and maturing within three years from the date of acquisition thereof, (f) Investments in municipal auction preferred stock (i) rated AAA (or the equivalent thereof) or better by S&P or Aaa (or the equivalent thereof) or better by Moody's and (ii) with dividends that reset at least once every 365 days, (g) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by reputable financial institutions having capital of at least $100,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (f), and (h) other Investments deemed to be cash equivalents in accordance with GAAP. "Change of Control" means the occurrence of either of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Borrower, a corporation owned directly or indirectly by the stockholders of the Borrower (immediately after the IPO) or any of their respective Affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Borrower representing 50% or more of the total voting power represented by the Borrower's then outstanding securities that vote generally in the election of directors; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Borrower's Board of Directors and any new directors whose election by the Borrower's Board of Directors or nomination for election by the Borrower's stockholders was approved by a vote or a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Borrower's Board of Directors. "Closing Date" means the date hereof. "Combination" has the meaning assigned to such term in the Registration Statement. "Commitment" means the Revolving Commitment and the LOC Commitment. "Commitment Fee" shall have the meaning given such term in Section 3.5(a). "Commitment Percentage" means the Revolving Commitment Percentage. "Commitment Period" means the period from and including the Closing Date to but not including the earlier of (i) the Termination Date, or (ii) the date on which the Commitments terminate in accordance with the provisions of this Credit Agreement. 6 15 "Comstock Holdings" means Comstock Holdings Inc., a Delaware corporation. "Consolidated Adjusted EBITDA" means for any period for the Consolidated Group, the sum of Consolidated EBITDA minus capital expenditures, in each case on a consolidated basis determined in accordance with GAAP applied on an consistent basis. "Consolidated Base EBITDA" means, for any period, Consolidated EBITDA for those members of the Consolidated Group existing as of the Closing Date (excluding for purposes hereof, Consolidated EBITDA attributable to an Acquisition after the Closing Date) as determined in accordance with GAAP. "Consolidated EBITDA" means for any period for the Consolidated Group, the sum of Consolidated Net Income plus Consolidated Interest Expense plus all provisions for any Federal, state or other domestic and foreign income taxes plus depreciation and amortization, in each case on a consolidated basis determined in accordance with GAAP applied on a consistent basis, but excluding for purposes hereof extraordinary gains and losses and related tax effects thereon. "Consolidated Fixed Charge Coverage Ratio" means for the period of four consecutive fiscal quarters ending as of the date of determination, the ratio of Consolidated Adjusted EBITDA to Consolidated Fixed Charges. "Consolidated Fixed Charges" means for any period for the Consolidated Group, the sum of the principal amount of Consolidated Interest Expense (excluding the amortization of debt discount and premium) plus the greater of (i) twenty percent (20%) of Obligations outstanding hereunder on the date of determination or (ii) Two Million Dollars ($2,000,000), in each case on a consolidated basis determined in accordance with GAAP applied on an consistent basis. Except as otherwise expressly provided, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Funded Debt" means Funded Debt of the Consolidated Group determined on a consolidated basis in accordance with GAAP applied on a consistent basis. "Consolidated Group" means the Borrower and its consolidated subsidiaries as determined in accordance with GAAP. "Consolidated Interest Expense" means for any period for the Consolidated Group, all interest expense, including the amortization of debt discount and premium, the interest component under Capital Leases and the implied interest component under Securitization Transactions, in each case on a consolidated basis determined in accordance with GAAP applied on a consolidated basis. Except as expressly provided 7 16 otherwise, the applicable period shall be for the four consecutive quarters ending as of the date of determination. "Consolidated Leverage Ratio" means, as of the last day of any fiscal quarter, the ratio of Consolidated Funded Debt on such day to Consolidated EBITDA for the period of four consecutive fiscal quarters ending as of such day. "Consolidated Net Income" means for any period for the Consolidated Group, net income on a consolidated basis determined in accordance with GAAP applied on a consistent basis plus the amount of any deduction from such net income with respect to the fiscal quarter ending September 30, 1998 attributable to (i) the Stock Incentive Plan and (ii) other nonrecurring expenses related to the IPO, the Combination and this Credit Agreement. Except as expressly provided otherwise, the applicable period shall be for the four consecutive quarters ending as of the date of determination. "Consolidated Net Worth" means, as of any date for the Consolidated Group, shareholders' equity or net worth as determined in accordance with GAAP. "Consolidated Rent Expense" means rental expense under Operating Leases of the Consolidated Group on a consolidated basis for the applicable period, as determined in accordance with GAAP. Except as expressly provided otherwise, the applicable period shall be for the four consecutive quarters ending as of the date of determination. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any material agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Credit Documents" means a collective reference to this Credit Agreement, the Notes, the LOC Documents, the Pledge Agreement, the Security Agreement, each Joinder Agreement, the Administrative Agent's Fee Letter, and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto. "Credit Party" means any of the Borrower and the Guarantors. "Default" means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" means, at any time, any Lender that, at such time, (i) has failed to make an Extension of Credit required pursuant to the terms of this Credit Agreement, (ii) has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of the Credit Agreement or any other of the Credit Documents, or (iii) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar proceeding. 8 17 "Divestiture" means any transaction by which the Borrower or any Subsidiary sells, leases, transfers or otherwise disposes of (i) any Property with which an ongoing business is conducted or to be conducted; (ii) all or substantially all or any substantial portion of its assets; or (iii) the capital stock of a Subsidiary, in each case other than (x) the sale of Inventory in the ordinary course of business, (y) the sale, lease, transfer or other disposition of plant, property and equipment which is no longer used or useful in the business of such Credit Party or as to which the proceeds thereof are reinvested in plant, property or equipment within six months thereof, or (z) sales, leases, transfers or other dispositions of Property or capital stock of a Subsidiary by one Credit Party to another. "Dollars" and "$" means dollars in lawful currency of the United States of America. "Domestic Credit Party" means any Credit Party which is incorporated or organized under the laws of any State of the United States or the District of Columbia. "Domestic Subsidiary" means any Subsidiary which is incorporated or organized under the laws of any State of the United States or the District of Columbia. "Eligible Inventory" means, as of any date of determination, the aggregate book value (based on a FIFO valuation) of all inventory owned by the Credit Parties on a consolidated basis after deducting allowances or reserves relating thereto, as shown on the books and records of the Credit Parties. "Eligible Receivables" means, as of any date of determination, the aggregate book value of all accounts, accounts receivable, receivables, and obligations for payment created or arising from the sale of inventory or the rendering of services in the ordinary course of business (collectively, the "Receivables"), owned by or owing to the Credit Parties on a consolidated basis after deducting retainage and allowances or reserves relating thereto, as shown on the books and records of the Credit Parties, but excluding in any event Receivables owing by an account debtor which is not solvent or is subject to any bankruptcy or insolvency proceeding of any kind. "Eligible Receivables Retainage" means, as of any date of determination, the aggregate book value of that portion of Receivables owned by or owing to t he Credit Parties on a consolidated basis consisting of retainage but excluding in any event such portion of Receivables owing by an account debtor which is not solvent or is subject to any bankruptcy or insolvency proceeding of any kind. "Environmental Laws" means any and all lawful and applicable Federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases or threatened releases of 9 18 pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "Equity Transaction" means, with respect to any member of the Consolidated Group, any issuance of shares of its capital stock or other equity interest, other than an issuance (i) to a member of the Consolidated Group, (ii) in connection with a conversion of debt securities to equity or (iii) in connection with exercise by a present or former employee, officer or director under a stock incentive plan, stock option plan or other equity-based compensation plan or arrangement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "ERISA Affiliate" means an entity which is under common control with any Credit Party within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group which includes the Borrower and which is treated as a single employer under Sections 414(b) or (c) of the Internal Revenue Code. "ERISA Event" means (i) with respect to any Plan, the occurrence of a Reportable Event or the substantial cessation of operations (within the meaning of Section 4062(e) of ERISA); (ii) the withdrawal by the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan; (iii) the distribution of a notice of intent to terminate or the actual termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (iv) the institution of proceedings to terminate or the actual termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any event or condition which would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (vi) the complete or partial withdrawal of the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for imposition of a lien under Section 302(f) of ERISA exist with respect to any Plan; or (vii) the adoption of an amendment to any Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA. "Eurodollar Loan" means any Revolving Loan bearing interest at a rate determined by reference to the Eurodollar Rate. 10 19 "Eurodollar Rate" means, for the Interest Period for each Eurodollar Loan comprising part of the same borrowing (including conversions, extensions and renewals), a per annum interest rate determined pursuant to the following formula: Eurodollar Rate = Interbank Offered Rate ------------------------------------------- 1 - Eurodollar Reserve Percentage "Eurodollar Reserve Percentage" means for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Loans is determined), whether or not Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to a Lender. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "Event of Default" means such term as defined in Section 9.1. "Extension of Credit" means, as to any Lender, the making of, or participation in, a Revolving Loan by such Lender or the issuance or extension of, or participation in, a Letter of Credit. "Fees" means all fees payable pursuant to Section 3.5. "Federal Funds Rate" means, for any day, the rate of interest per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (A) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (B) if no such rate is so published on such next preceding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Administrative Agent on such day on such transactions as determined by the Administrative Agent. "Foreign Subsidiary" means a Subsidiary which is not a Domestic Subsidiary. 11 20 "Founding Companies" means the Credit Parties (other than the Borrower) party to this Credit Agreement on the Closing Date, as they existed immediately prior to the Combination. "Funded Debt" means, with respect to any Person, without duplication, (i) all Indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, (iii) all purchase money Indebtedness (including for purposes hereof, indebtedness and obligations described in clauses (iii) and (iv) of the definition of "Indebtedness") of such Person, including without limitation the principal portion of all obligations of such Person under Capital Leases, (iv) all Support Obligations of such Person with respect to Funded Indebtedness of another Person, (v) the maximum available amount of all standby letters of credit or acceptances issued or created for the account of such Person, (vi) all Funded Debt of another Person secured by a Lien on any Property of such Person, whether or not such Funded Indebtedness has been assumed, provided that for purposes of this clause (vi) the amount of such Funded Debt shall be limited to the greater of (A) the amount of such Funded Debt as to which there is recourse to such Person and (B) the fair market value of the property which is subject to the Lien, (vii) the outstanding attributed principal amount under any Securitization Transaction, and (viii) the principal balance outstanding under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product to which such Person is a party, where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease in accordance with GAAP. The Funded Debt of any Person shall (i) include the Funded Debt of any partnership or joint venture in which such Person is a general partner or joint venturer, but only to the extent to which there is recourse to such Person for the payment of such Funded Debt, but (ii) exclude, in any event, amounts in respect of financed insurance premium obligations permitted under Section 8.1(g). "GAAP" means generally accepted accounting principles in the United States applied on a consistent basis and subject to the terms of Section 1.3 hereof. "Governmental Authority" means any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantor" means each of those other Persons identified as a "Guarantor" on the signature pages hereto, and each other Person which may hereafter become a Guarantor by execution of a Joinder Agreement, together with their successors and permitted assigns. "Guaranteed Obligations" means, as to each Guarantor, without duplication, (i) all obligations of the Borrower (including interest accruing after a Bankruptcy Event, regardless of whether such interest is allowed as a claim under the Bankruptcy Code) to the Lenders and the Administrative Agent, whenever arising, under this Credit Agreement, the Notes or the other Credit Documents, and (ii) all liabilities and 12 21 obligations, whenever arising, owing from the Borrower to any Lender, or any Affiliate of a Lender, arising under any Hedging Agreement relating to Obligations hereunder. "Hedging Agreement" means any interest rate protection agreement or foreign currency exchange agreement between the Borrower and any Lender, or any Affiliate of a Lender. "Indebtedness" of any Person means (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, (iii) all obligations of such Person under conditional sale or other title retention agreements relating to Property purchased by such Person (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), (iv) all obligations of such Person issued or assumed as the deferred purchase price of Property or services purchased by such Person (other than trade debt incurred in the ordinary course of business and due within six months of the incurrence thereof) which would appear as liabilities on a balance sheet of such Person, (v) all obligations of such Person under take-or-pay or similar arrangements or under commodities agreements, (vi) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, Property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, provided that for purposes hereof the amount of such Indebtedness shall be limited to the greater of (A) the amount of such Indebtedness as to which there is recourse to such Person and (B) the fair market value of the property which is subject to the Lien, (vii) all Support Obligations of such Person, (viii) the principal portion of all obligations of such Person under Capital Leases, (ix) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements, commodity purchase or option agreements or other interest or exchange rate or commodity price hedging agreements (including, but not limited to, the Hedging Agreements), (x) the maximum amount of all standby letters of credit issued or bankers' acceptances facilities created for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), (xi) all preferred stock issued by such Person and required by the terms thereof to be redeemed, or for which mandatory sinking fund payments are due, by a fixed date, (xii) the outstanding attributed principal amount under any Securitization Transaction and (xiii) the principal balance outstanding under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product to which such Person is a party, where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease in accordance with GAAP. The Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer, but only to the extent to which there is recourse to such Person for payment of such Indebtedness. 13 22 "IPO" means the initial public offering of the Borrower's common stock pursuant to the Registration Statement. "Interbank Offered Rate" means, for the Interest Period for each Eurodollar Loan comprising part of the same borrowing (including conversions, extensions and renewals), a per annum interest rate (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the rate of interest, determined by the Administrative Agent on the basis of the offered rates for deposits in dollars for a period of time corresponding to such Interest Period (and commencing on the first day of such Interest Period), appearing on Telerate Page 3750 (or, if, for any reason, Telerate Page 3750 is not available, the Reuters Screen LIBO Page) as of approximately 11:00 A.M. (London time) two (2) Business Days before the first day of such Interest Period. As used herein, "Telerate Page 3750" means the display designated as page 3750 by Dow Jones Markets, Inc. (or such other page as may replace such page on that service for the purpose of displaying the British Bankers Association London interbank offered rates) and "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks). "Interest Payment Date" means (i) as to any Base Rate Loan, the last day of each March, June, September and December and the Termination Date and (ii) as to any Eurodollar Loan, the last day of each Interest Period for such Loan, the date of repayment of principal of such Loan and on the Termination Date, and in addition where the applicable Interest Period is more than three months, then also on the date three months from the beginning of the Interest Period, and each three months thereafter. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day. "Interest Period" means as to any Eurodollar Loan, a period of one, two, three or six months' duration, as the Borrower may elect, commencing in each case on the date of the borrowing (including conversions, extensions and renewals); provided, however, (A) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (B) no Interest Period shall extend beyond the Termination Date, and (C) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last day of such calendar month. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto, as interpreted by the rules and regulations issued thereunder, in each case as in effect from time to time. References to sections of the Internal Revenue Code shall be construed also to refer to any successor sections. 14 23 "Investment", in any Person, means any loan or advance to such Person, any purchase or other acquisition of any capital stock, warrants, rights, options, obligations or other securities of, or equity interest in, such Person, any capital contribution to such Person or any other investment in such Person, including, without limitation, any Support Obligation incurred for the benefit of such Person. "Issuing Lender" means NationsBank. "Issuing Lender Fees" shall have the meaning assigned to such term in Section 3.5(b)(ii). "Joinder Agreement" means a Joinder Agreement substantially in the form of Schedule 7.11 hereto, executed and delivered by an Additional Credit Party in accordance with the provisions of Section 7.11. "Joint Venture" means any corporation, partnership, limited liability company or other entity in which the Borrower or any other Credit Party owns or acquires fifty percent (50%) or less of the Voting Stock or economic interests, and which conducts any business that the Credit Parties would be permitted to conduct in accordance with Section 7.5. "Lenders" means each of the Persons identified as a "Lender" on the signature pages hereto, and their successors and assigns. "Letter of Credit" means any letter of credit issued by the Issuing Lender for the account of the Borrower in accordance with the terms of Section 2.2. "Letter of Credit Fee" shall have the meaning given such term in Section 3.5(b)(i). "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, and any lease in the nature thereof). "Loan" or "Loans" means the Revolving Loans. "LOC Commitment" means the commitment of the Issuing Lender to issue, and to honor payment obligations under, Letters of Credit hereunder and with respect to each Lender, the commitment of each Lender to purchase participation interests in the Letters of Credit up to such Lender's LOC Committed Amount as specified in Schedule 2.1(a), as such amount may be reduced from time to time in accordance with the provisions hereof. 15 24 "LOC Committed Amount" means, collectively, the aggregate amount of all of the LOC Commitments of the Lenders to issue and participate in Letters of Credit as referenced in Section 2.2(a) and, individually, the amount of each Lender's LOC Commitment as specified in Schedule 2.1(a). "LOC Documents" means, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (i) the rights and obligations of the parties concerned or at risk or (ii) any collateral security for such obligations. "LOC Obligations" means, at any time, the sum of (i) the maximum amount which is, or at any time thereafter may become, available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit plus (ii) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender but not theretofore reimbursed. "Material Adverse Effect" means a material adverse effect on (i) the condition (financial or otherwise), operations, business, assets or liabilities of the Consolidated Group taken as a whole, (ii) the ability of the Credit Parties taken as a whole to perform any material obligation under the Credit Documents to which it is a party or (iii) the rights and remedies of the Lenders under the Credit Documents. "Material Credit Party" means (i) the Borrower and (ii) any other Credit Party at any time whose assets at the time of determination constitute five percent (5%) or more of the assets of the Consolidated Group or whose revenues at the time of determination constitute five percent (5%) or more of the revenues of the Consolidated Group. "Materials of Environmental Concern" means any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Laws, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Moody's" means Moody's Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities. "Multiemployer Plan" means a Plan which is a multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA. 16 25 "Multiple Employer Plan" means a Plan which the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate and at least one employer other than the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate are contributing sponsors. "NationsBank" means NationsBank, N.A. and its successors. "Non-Excluded Taxes" means such term as is defined in Section 3.10. "Note" or "Notes" means any Revolving Note. "Notice of Borrowing" means a written notice of borrowing in substantially the form of Schedule 2.1(b)(i), as required by Section 2.1(b)(i). "Notice of Extension/Conversion" means a written notice of extension or conversion in substantially the form of Schedule 3.2, as required by Section 3.2. "Obligations" means, collectively, the Revolving Loans and the LOC Obligations. "Operating Lease" means, as applied to any Person, any lease (including, without limitation, leases which may be terminated by the lessee at any time) of any Property (whether real, personal or mixed) which is not a Capital Lease other than any such lease in which that Person is the lessor. "Participation Interest" means the purchase by a Lender of a participation in LOC Obligations as provided in Section 2.2(c) and in Revolving Loans as provided in Section 3.14. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereof. "Permitted Investments" means Investments which are either (i) cash and Cash Equivalents; (ii) accounts receivable created, acquired or made in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (iii) Investments consisting of stock, obligations, securities or other property received in settlement of accounts receivable (created in the ordinary course of business) from obligors; (iv) Support Obligations permitted by Section 8.1; (v) Acquisitions permitted by Section 8.4; (vi) advances or loans to employees, directors or officers to pay the tax liabilities associated with participation in the Stock Incentive Plan and other advances or loans to employees, directors, officers or agents not to exceed $500,000 in the aggregate at any time outstanding; (vii) advances or loans to customers or suppliers (other than advance payment of sums due under contracts in the ordinary course of business) that do not exceed $100,000 in the aggregate at any one time outstanding, (viii) Investments by a member of the Consolidated Group or an Affiliate of a member of the Consolidated Group in connection with a Permitted Securitization Transaction, (ix) Investments by members of the Consolidated Group in their 17 26 Subsidiaries and Affiliates existing on the Closing Date, (x) Investments by one Credit Party in and to a Domestic Credit Party, (x) Investments in Joint Ventures not to exceed, on a cost basis, $4,000,000 in any individual Joint Venture, and $10,000,000, in the aggregate in all Joint Ventures at any one time outstanding, and (xii) other loans, advances and investments of a nature not contemplated in the foregoing subsections in an amount not to exceed $500,000 in the aggregate at any time outstanding. "Permitted Liens" means: (i) Liens in favor of the Administrative Agent on behalf of the Lenders; (ii) Liens in favor of a Lender or an Affiliate of a Lender pursuant to a Hedging Agreement permitted hereunder, but only (A) to the extent such Liens secure obligations under such agreements permitted under Section 8.1, (B) to the extent such Liens are on the same collateral as to which the Lenders also have a Lien and (C) if such provider and the Lender shall share pari passu in the collateral subject to such Liens; (iii) Liens (other than Liens created or imposed under ERISA) for taxes, assessments or governmental charges or levies not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (iv) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and suppliers and other Liens imposed by law or pursuant to customary reservations or retentions of title arising in the ordinary course of business, provided that such Liens secure only amounts not yet due and payable or, if due and payable, are unfiled and no other action has been taken to enforce the same or are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (v) Liens (other than Liens created or imposed under ERISA) incurred or deposits made by the Borrower and its Subsidiaries in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); 18 27 (vi) Liens in connection with attachments or judgments (including judgment or appeal bonds) provided that the judgments secured shall, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall have been discharged within 30 days after the expiration of any such stay; (vii) easements, rights-of-way, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered Property for its intended purposes; (viii) Liens securing purchase money and sale/leaseback Indebtedness (including Capital Leases) to the extent permitted under Sections 8.1(b) and 8.1(c) provided that any such Lien attaches only to the Property financed or leased and such Lien attaches thereto concurrently with or within 90 days after the acquisition thereof in connection with the purchase money transactions and within 30 days after the closing of any sale/leaseback transaction; (ix) leases or subleases granted to others not interfering in any material respect with the business of any member of the Consolidated Group; (x) any interest of title of a lessor under, and Liens arising from UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases permitted by this Credit Agreement; (xi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xii) Liens created or deemed to exist in connection with a Permitted Securitization Transaction (including any related filings of any financing statements), but only to the extent that any such Lien relates to the applicable receivables and related property actually sold, contributed or otherwise conveyed pursuant to such transaction; (xiii) Liens deemed to exist in connection with Investments in repurchase agreements permitted under Section 8.5; (xiv) normal and customary rights of setoff upon deposits of cash in favor of banks or other depository institutions; 19 28 (xv) Liens in respect of Indebtedness permitted under Section 8.1(g) hereof, limited solely to sums payable under the policy or policies to which such Indebtedness relates; and (xvi) Liens existing as of the Closing Date and set forth on Schedule 6.8; provided that no such Lien shall at any time be extended to or cover any Property other than the Property subject thereto on the Closing Date. "Person" means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated) or any Governmental Authority. "Plan" means any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" within the meaning of Section 3(5) of ERISA. "Pledge Agreement" means the Pledge Agreement dated as of the Closing Date given by the Borrower and Comstock Holdings to NationsBank, N.A., as Administrative Agent, to secure the obligations hereunder, as amended and modified. "Prime Rate" means the rate of interest per annum publicly announced from time to time by NationsBank as its prime rate in effect at its principal office in Charlotte, North Carolina, with each change in the Prime Rate being effective on the date such change is publicly announced as effective (it being understood and agreed that the Prime Rate is a reference rate used by NationsBank in determining interest rates on certain loans and is not intended to be the lowest rate of interest charged on any extension of credit by NationsBank to any debtor). "Pro Forma Basis" means, with respect to any calculation of financial covenants in connection with any proposed Acquisition or Divestiture pursuant to Sections 8.4 or 8.3, respectively, that (i) such financial covenants shall be calculated on a pro forma basis giving effect to such Acquisition or Divestiture, (ii) such Acquisition or Divestiture shall be deemed to have occurred as of the first day of the four fiscal quarter period ending as of the most recent fiscal quarter end preceding the date of such Acquisition or Divestiture with respect to which the Administrative Agent and the Lenders have received the Officer's Certificate required by Section 7.2(b), (iii) any Indebtedness incurred in connection with any such Acquisition shall be deemed to have been incurred as of the first day of such four fiscal quarter period, (iv) any Indebtedness repaid in connection with any such Divestiture shall be deemed to have been repaid as of the first day of such four fiscal quarter period, and (v) if such Indebtedness incurred or repaid for the purposes of clause (iv) has a floating or formula rate, then the implied rate of interest for such Indebtedness for the applicable four quarter 20 29 period shall be determined by utilizing the rate which is or would be in effect with respect to such Indebtedness as at the relevant date of determination. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Register" shall have the meaning given such term in Section 11.3(c). "Registration Statement" means the Registration Statement of the Borrower on Form S-1, initially filed with the SEC on May 22, 1998, as amended and supplemented through Post-Effective Amendment No. 1 thereto, filed with the SEC on July 29, 1998 and declared effective by the SEC on July 29, 1998. "Regulation T, U or X" means Regulation T, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of barrels, containers and other closed receptacles containing any Materials of Environmental Concern). "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the notice requirement has been waived by regulation. "Required Lenders" means, at any time, Lenders having more than fifty percent (50%) of the Commitments (as such Commitments may be increased pursuant to Section 2.1(k)), or if the Commitments have been terminated, Lenders having more than fifty percent (50%) of the aggregate principal amount of the Obligations outstanding (taking into account in each case Participation Interests or obligation to participate therein); provided that the Commitments of, and outstanding principal amount of Obligations (taking into account Participation Interests therein) owing to, a Defaulting Lender shall be excluded for purposes hereof in making a determination of Required Lenders. "Requirement of Law" means any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its material property is subject. "Responsible Officer" means the Chief Executive Officer, the Chief Financial Officer, the Controller, the Chief Operating Officer, the Chief Accounting Officer and the Treasurer of the Borrower. 21 30 "Restricted Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock now or hereafter outstanding, except (A) a dividend payable solely in shares of that class to the holders of that class, (B) dividends and other distributions payable to a Credit Party, (C) dividends paid or payable to the shareholders of certain of the Founding Companies in respect of tax liabilities incurred under Subchapter S of the Internal Revenue Code on or before the Closing Date (whether such dividends are paid on, before or after the Closing Date) and (D) the repurchase of stock of a minority shareholder of one of the Founding Companies referred to in note 4g(1) to the unaudited pro forma as adjusted financial statements of the Borrower, as set forth on page F-8 of the Registration Statement, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock now or hereafter outstanding, and (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock now or hereafter outstanding. "Revolving Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans in an aggregate principal amount at any time outstanding of up to such Lender's Commitment Percentage of the Aggregate Revolving Committed Amount as specified in Schedule 2.1(a), as such amount may be reduced from time to time in accordance with the provisions hereof. "Revolving Commitment Percentage" means, for each Lender, a fraction (expressed as a decimal) the numerator of which is the Revolving Commitment of such Lender at such time and the denominator of which is the Aggregate Revolving Committed Amount at such time. The initial Revolving Commitment Percentages are set out on Schedule 2.1(a). "Revolving Committed Amount" means, collectively, the aggregate amount of all of the Revolving Commitments and, individually, the amount of each Lender's Revolving Commitment as specified in Schedule 2.1(a). "Revolving Loans" shall have the meaning assigned to such term in Section 2.1(a). "Revolving Note" or "Revolving Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Revolving Loans in substantially the form attached as Schedule 2.1(e), individually or collectively, as appropriate, as such promissory notes may be amended, modified, supplemented, extended, renewed or replaced from time to time. "SEC" means the Securities and Exchange Commission and any successor Governmental Authority. 22 31 "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., or any successor or assignee of the business of such division in the business of rating securities. "Securitization Transaction" means any financing transaction or series of financing transactions that have been or may be entered into by a member of the Consolidated Group pursuant to which such member of the Consolidated Group may sell, convey or otherwise transfer to (i) a Subsidiary or affiliate (a "Securitization Subsidiary"), or (ii) any other Person, or may grant a security interest in, any receivables or interests therein secured by merchandise or services financed thereby (whether such receivables are then existing or arising in the future) of such member of the Consolidated Group, and any assets related thereto, including without limitation, all security interests in merchandise or services financed thereby, the proceeds of such receivables, and other assets which are customarily sold or in respect of which security interests are customarily granted in connection with securitization transactions involving such assets. "Security Agreement" means the Security Agreement dated as of the Closing Date given by the Borrower and the other grantors identified therein to NationsBank, N.A., as Administrative Agent, to secure the obligations hereunder, as amended and modified. "Single Employer Plan" means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple Employer Plan. "Stock Incentive Plan" means the Borrower's 1998 Stock Incentive Plan described in the Registration Statement. "Subordinated Debt" means any Indebtedness of a member of the Consolidated Group which by its terms is expressly subordinated in right of payment to the prior payment of the obligations under the Credit Agreement and the other Credit Documents on terms and conditions satisfactory to the Required Lenders. "Subsidiary" means, as to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries has more than 50% of the voting interests at any time. Unless otherwise identified, "Subsidiary" or "Subsidiaries" shall mean Subsidiaries of the Borrower. "Support Obligations" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any 23 32 Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any Property constituting security therefor, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keep well agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase Property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof, but specifically excluding guaranties or other assurances with respect to any Credit Party's performance obligations under bids or contracts made or entered into in the ordinary course of business (including, without limitation, guaranties in favor of sureties under performance bonds or the like and guaranties issued by Credit Parties in substitution for or in support of such guaranties issued prior to the Closing Date by the Founding Companies or their respective stockholders and principals). The amount of any Support Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Support Obligation is made. "Termination Date" means August 4, 2001, or if extended pursuant to the provisions of Section 2.1(g), such later date as to which the Termination Date may be extended. "Voting Stock" means, with respect to any Person, capital stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency. 1.2 Computation of Time Periods. For purposes of computation of periods of time hereunder, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." 24 33 1.3 Accounting Terms; Certain Calculations (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Credit Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 7.1 hereof (or, prior to the delivery of the first financial statements pursuant to Section 7.1 hereof, consistent with the annual audited financial statements of Comstock Holdings set forth beginning on page F-26 of the Registration Statement, except to the extent that the Borrower intends to capitalize the cost of tools, whereas Comstock Holdings historically has expensed such costs); provided, however, if (a) the Borrower shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Administrative Agent or the Required Lenders shall so object in writing within 30 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Borrower to the Lenders as to which no such objection shall have been made. (b) Notwithstanding anything to the contrary contained in subsection (a) above, the parties hereto agree that the financial covenants set forth in Section 7.9 shall be calculated as follows (including, without limitation, calculation of the Consolidated Leverage Ratio for the purpose of the definition of "Applicable Percentage" set forth in Section 1.1 and calculation of all such financial covenants for the purposes of Sections 8.3 and 8.4): (i) all such calculations shall be performed on a Pro Forma Basis with respect to any Acquisition or Divestiture occurring within such four quarter period (or, solely for the purposes of Sections 8.3 and 8.4 hereof, contemplated to occur within the fiscal quarter following such period); (ii) solely for the purpose of calculations to be performed on a Pro Forma Basis for the purposes of Section 8.4, any adjustments to pro forma consolidated income statement items attributable to an Acquisition shall be performed in accordance with Rule 11.02 of Regulation S-X promulgated by the SEC or otherwise consented to by the Administrative Agent and the Required Lenders; and (iii) all such calculations with respect to periods ending on or before June 30, 1999 shall be performed utilizing, to the extent applicable, the unaudited pro forma as adjusted financial statements for the fiscal quarters ended December 31, 1997, March 31, 1998, June 30, 1998 and September 30, 1998 delivered pursuant to Sections 6.1(iii) and (iv) and 7.1(c). 25 34 SECTION 2 CREDIT FACILITIES 2.1 Revolving Loans. (a) Revolving Commitment. During the Commitment Period, subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (the "Revolving Loans") to the Borrower from time to time in the amount of such Lender's Revolving Commitment Percentage of such Revolving Loans for the purposes hereinafter set forth; provided that (i) with regard to the Lenders collectively, the aggregate principal amount of Obligations outstanding at any time shall not exceed the lesser of (A) the Aggregate Revolving Committed Amount or (B) the Borrowing Base, and (ii) with regard to each Lender individually, such Lender's Revolving Commitment Percentage of Obligations outstanding at any time shall not exceed the lesser of (A) such Lender's Revolving Committed Amount or (B) such Lender's Revolving Commitment Percentage of the Borrowing Base. Revolving Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request, and may be repaid and reborrowed in accordance with the provisions hereof. (b) Revolving Loan Borrowings. (i) Notice of Borrowing. The Borrower shall request a Revolving Loan borrowing by written notice (or telephone notice promptly confirmed in writing) to the Administrative Agent not later than 11:00 A.M. (Charlotte, North Carolina time) on the date of the requested borrowing in the case of Base Rate Loans, and on the third Business Day prior to the date of the requested borrowing in the case of Eurodollar Loans. Each such request for borrowing shall be irrevocable and shall specify (A) that a Revolving Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) whether the borrowing shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. If the Borrower shall fail to specify in any such Notice of Borrowing (I) an applicable Interest Period in the case of a Eurodollar Loan, then such notice shall be deemed to be a request for an Interest Period of one month, or (II) the type of Revolving Loan requested, then such notice shall be deemed to be a request for a Base Rate Loan hereunder. The Administrative Agent shall give notice to each Lender promptly upon receipt of each Notice of Borrowing pursuant to this Section 2.1(b)(i), the contents thereof and each such Lender's share of any borrowing to be made pursuant thereto. (ii) Minimum Amounts. Each Revolving Loan shall be, in the case of Eurodollar Loans, in a minimum aggregate principal amount of $2,500,000 and integral multiples of $500,000 in excess thereof, or, in the case of Base Rate Loans, in a minimum aggregate principal amount of $1,000,000 (or the remaining Revolving Committed Amount, if less) and integral multiples of $100,000 in excess thereof. 26 35 (iii) Advances. Each Lender will make its Revolving Commitment Percentage of each Revolving Loan borrowing available to the Administrative Agent for the account of the Borrower, or in such other manner as the Administrative Agent may specify in writing, by 1:00 P.M. (Charlotte, North Carolina time) on the date specified in the applicable Notice of Borrowing in Dollars and in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent by crediting the account of the Borrower with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. (c) Repayment. The principal amount of all Revolving Loans shall be due and payable in full on the Termination Date. (d) Interest. Subject to the provisions of Section 3.1, (i) Base Rate Loans. During such periods as Revolving Loans shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Base Rate plus the Applicable Percentage; (ii) Eurodollar Loans. During such periods as Revolving Loans shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Eurodollar Rate plus the Applicable Percentage. Interest on Revolving Loans shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (e) Revolving Notes. The Revolving Loans shall be evidenced by a duly executed Revolving Note in favor of each Lender. (f) Maximum Number of Eurodollar Loans. The Borrower will be limited to a maximum number of five (5) Eurodollar Loans outstanding at any time. For purposes hereof, Eurodollar Loans with separate or different Interest Periods will be considered as separate Eurodollar Loans even if their Interest Periods expire on the same date. (g) Extension of Termination Date (i) First Extension Option. Not more than 15 months and not less than 60 days prior to the Termination Date, the Borrower may, by notice to the Administrative Agent, make written request of the Lenders to extend the Termination Date for an additional one year period. The Administrative Agent will give prompt notice to each of the Lenders of its receipt of any such request for extension of the Termination Date. Each Lender shall notify the Administrative Agent in writing not later than 30 days after receipt of such notice as to whether or not it will agree to extend the Termination Date as requested. Each decision by a Lender shall be in its sole discretion; provided, 27 36 however, that failure by any Lender to make a timely response to the Borrower's request for extension of the Termination Date shall be deemed to constitute a refusal by such Lender to extension of the Termination Date. If Lenders holding more than 50% of the aggregate Commitments (as such Commitments may be increased pursuant to Section 2.1(k) below) timely agree in writing to extend the Termination Date for an additional one year period, then the Termination Date shall be extended for an additional one year period. (ii) Second Extension Option. If the Termination Date has been extended pursuant to the terms and conditions of the preceding paragraph, not more than 15 months and not less than 60 days prior to such extended Termination Date, the Borrower may, by notice to the Administrative Agent, make written request of the Lenders to extend such Termination Date for an additional one year period. The Administrative Agent will give prompt notice to each of the Lenders of its receipt of any such request for extension of such Termination Date. Each Lender shall make notify the Administrative Agent in writing not later than 30 days after receipt of such notice as to whether or not it will agree to extend such Termination Date as requested. Each decision by a Lender shall be in its sole discretion; provided, however, that failure by any Lender to make a timely response to the Borrower's request for extension of such Termination Date shall be deemed to constitute a refusal by such Lender to extension of such Termination Date. If Lenders holding more than 50% of the aggregate Commitments (as such Commitments may be increased pursuant to Section 2.1(k) below) timely agree in writing to extend such Termination Date for an additional one year period, then such Termination Date shall be extended for an additional one year period. (h) Lender Not Consenting. If any Lender does not timely agree in writing to extend the Termination Date, the Termination Date, as it relates to such Lender, shall not be extended, the Commitment of such Lender shall terminate on the Termination Date applicable to it and any Revolving Loans made by such Lender and all accrued and unpaid interest thereon shall be due and payable on the Termination Date applicable to it. Upon the termination of the Commitment of any such Lender, unless this Agreement is amended as provided in Subsections 2.1(k), the aggregate amount of the Commitments shall be reduced by the amount of such terminated Commitment, and the Revolving Commitment Percentage of each other Lender shall be adjusted to that percentage obtained by dividing the Commitment of such Lender by the aggregate amount of the Commitments after giving effect to such reduction as provided in the definition of "Revolving Commitment Percentage". (i) Other Lenders. No refusal by any Lender or Lenders to consent to any extension of the Termination Date shall affect the extension of the Termination Date as it may relate to the Commitment and Revolving Loans of any Lender which consents to such extension pursuant to Section 2.1(g), and one or more Lenders may consent to the extension of the Termination Date as it relates to them notwithstanding any refusal by any other Lenders so to consent; provided that even as to the consenting Lenders the Termination Date will be extended only upon consent to such an extension by Lenders holding more than 50% of the aggregate Commitments (as such Commitments may be increased pursuant to Section 2.1(k) below). 28 37 (j) Termination of Commitment. If any Lender does not timely consent to the extension of the Termination Date pursuant to Section 2.1(g) and no Revolving Loans are then outstanding, the Borrower may upon at least three (3) Business Days' prior notice to such Lender and to the Administrative Agent terminate the Commitment of such Lender. Upon any such termination the Revolving Commitment Percentage of each other Lender shall be adjusted, if necessary, to that percentage obtained by dividing the Commitment of such Lender by the aggregate amount of the Commitments after giving effect to such termination and any increases in the aggregate amount of the Commitments under the provisions of Section 2.1(k). (k) Increase in Commitment of Other Lender or Lenders. If any Lender does not timely consent to the extension of the Termination Date pursuant to Section 2.1(g), upon the expiration of the Commitment of such Lender, or upon its termination as provided in Section 2.1(j), the Borrower may offer each Lender which has timely consented to the extension of the Termination Date pursuant to Subsection 2.1(g) a reasonable opportunity to increase its Commitment by an amount equal to its pro-rata share (based on its Commitment before such increase) of the Commitment of the Lender which does not timely consent to the extension of the Termination Date pursuant to Section 2.1(g). After giving such Lenders such an opportunity, the Borrower and the Administrative Agent, acting on behalf of the Lenders, shall amend this Agreement to increase the Commitment of any Lender or Lenders that consent to an increase in their respective Commitments hereunder, and such amendment shall be binding on all of the Lenders, provided that such increase does not increase the aggregate amount of the Commitments to an amount greater than the aggregate amount of Commitments in effect immediately before such expiration or termination. (l) Notice. The Administrative Agent shall promptly advise each Lender of any change in Revolving Commitment Percentages made pursuant to Section 2.1(j) and shall promptly provide each of the Lenders with a copy of any amendment made pursuant to Section 2.1(k). 2.2 Letter of Credit Subfacility. (a) Issuance. During the Commitment Period, subject to the terms and conditions hereof and of the LOC Documents, if any, and such other terms and conditions which the Issuing Lender may reasonably require, the Issuing Lender shall issue, and the Lenders shall participate in, such Letters of Credit as the Borrower may request for its own account or for the account of another Credit Party as provided herein, in a form acceptable to the Issuing Lender, for the purposes hereinafter set forth; provided that (i) the aggregate amount of LOC Obligations shall not exceed TWENTY MILLION DOLLARS ($20,000,000) at any time (the "LOC Committed Amount"), (ii) with regard to the Lenders collectively, the aggregate principal amount of Obligations outstanding at any time shall not exceed the lesser of (A) the Aggregate Revolving Committed Amount or (B) the Borrowing Base, and (iii) with regard to each Lender individually, such Lender's Revolving Commitment Percentage of Obligations outstanding at any time shall not exceed the lesser of (A) such Lender's Revolving Committed Amount or (B) such Lender's Revolving Commitment Percentage of the Borrowing Base. Letters of Credit issued hereunder 29 38 shall not have an original expiry date more than one year from the date of issuance or extension. If any Letter of Credit issued hereunder shall have an expiry date, whether as originally issued or by extension, extending beyond the Termination Date, the Borrower shall, on the Termination Date, either (i) cause such Letter of Credit to be surrendered to the Issuing Lender, (ii) provide to the Issuing Lender a back-to-back letter of credit in respect thereof reasonably satisfactory to the Issuing Lender or (iii) provide cash collateral to the Issuing Lender in an amount equal to the maximum amount available to be drawn under such Letter of Credit. Each Letter of Credit shall comply with the related LOC Documents. The issuance date of each Letter of Credit shall be a Business Day. (b) Notice and Reports. Except for those Letters of Credit described on Schedule 2.2(b)-1 which shall be issued on the Closing Date, the request for the issuance of a Letter of Credit shall be submitted by the Borrower to the Issuing Lender at least three (3) Business Days prior to the requested date of issuance (or such shorter period as may be agreed by the Issuing Lender). A form of Notice of Request for Letter of Credit is attached as Schedule 2.2(b)-2. The Issuing Lender will provide to the Administrative Agent at least monthly, and more frequently upon request, a detailed summary report on its Letters of Credit and the activity thereon, in form and substance acceptable to the Administrative Agent. In addition, the Issuing Lender will provide to the Administrative Agent for dissemination to the Lenders at least quarterly, and more frequently upon request, a detailed summary report on its Letters of Credit and the activity thereon, including, among other things, the Credit Party for whose account the Letter of Credit is issued, the beneficiary, the face amount, and the expiry date. The Issuing Lender will provide copies of the Letters of Credit to the Administrative Agent and the Lenders promptly upon request. (c) Participation. Each Lender, upon issuance of a Letter of Credit, shall be deemed to have purchased without recourse a risk participation from the applicable Issuing Lender in such Letter of Credit and the obligations arising thereunder, in each case in an amount equal to its pro rata share of the obligations under such Letter of Credit (based on the respective Commitment Percentages of the Lenders) and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to the Issuing Lender therefor and discharge when due, its pro rata share of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender's participation in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed as required hereunder or under any such Letter of Credit, each such Lender shall pay to the Issuing Lender its pro rata share of such unreimbursed drawing in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) hereof. The obligation of each Lender to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided. (d) Reimbursement. In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Borrower. Unless the Borrower shall immediately notify the Issuing 30 39 Lender that the Borrower intends to otherwise reimburse the Issuing Lender for such drawing, the Borrower shall be deemed to have requested that the Lenders make a Revolving Loan in the amount of the drawing as provided in subsection (e) hereof on the related Letter of Credit, the proceeds of which will be used to satisfy the related reimbursement obligations. The Borrower promises to reimburse the Issuing Lender on the day of drawing under any Letter of Credit (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) in same day funds. If the Borrower notifies the Issuing Lender that it intends to reimburse the Issuing Lender other than through a Revolving Loan and thereafter, shall fail to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Base Rate plus the sum of (i) the Applicable Percentage and (ii) two percent (2%). The Borrower's reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of setoff, counterclaim or defense to payment the Borrower may claim or have against the Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including without limitation any defense based on any failure of the Borrower or any other Credit Party to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit. The Issuing Lender will promptly notify the other Lenders of the amount of any unreimbursed drawing and each Lender shall promptly pay to the Administrative Agent for the account of the Issuing Lender in Dollars and in immediately available funds, the amount of such Lender's pro rata share of such unreimbursed drawing. Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 2:00 P.M. (Charlotte, North Carolina time) otherwise such payment shall be made at or before 12:00 Noon (Charlotte, North Carolina time) on the Business Day next succeeding the day such notice is received. If such Lender does not pay such amount to the Issuing Lender in full upon such request, such Lender shall, on demand, pay to the Administrative Agent for the account of the Issuing Lender interest on the unpaid amount during the period from the date of such drawing until such Lender pays such amount to the Issuing Lender in full at a rate per annum equal to, if paid within two (2) Business Days of the date that such Lender is required to make payments of such amount pursuant to the preceding sentence, the Federal Funds Rate and thereafter at a rate equal to the Base Rate. Each Lender's obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the obligations of the Borrower hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever. Simultaneously with the making of each such payment by a Lender to the Issuing Lender, such Lender shall, automatically and without any further action on the part of the Issuing Lender or such Lender, acquire a participation in an amount equal to such payment (excluding the portion of such payment constituting interest owing to the Issuing Lender) in the related unreimbursed drawing portion of the LOC Obligation and in the interest thereon and in the related LOC Documents, and shall have a claim against the Borrower with respect thereto. (e) Repayment with Revolving Loans. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan advance to reimburse a drawing under a Letter of Credit, the Administrative Agent shall give notice to the Lenders that a Revolving 31 40 Loan has been requested or deemed requested by the Borrower to be made in connection with a drawing under a Letter of Credit, in which case a Revolving Loan advance comprised of Base Rate Loans (or Eurodollar Loans to the extent the Borrower has complied with the procedures of Section 2.1(b)(i) with respect thereto) shall be immediately made to the Borrower by all Lenders (notwithstanding any termination of the Commitments pursuant to Section 9.2) pro rata based on the respective Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9.2) and the proceeds thereof shall be paid directly to the Issuing Lender for application to the respective LOC Obligations. Each such Lender hereby irrevocably agrees to make its pro rata share of each such Revolving Loan immediately upon any such request or deemed request in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (i) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 5.2 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) failure for any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (v) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (vi) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower or any Credit Party), then each such Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Issuing Lender such participation in the outstanding LOC Obligations as shall be necessary to cause each such Lender to share in such LOC Obligations ratably (based upon the respective Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9.2)), provided that in the event such payment is not made on the day of drawing, such Lender shall pay in addition to the Issuing Lender interest on the amount of its unfunded Participation Interest at a rate equal to, if paid within two (2) Business Days of the date of drawing, the Federal Funds Rate, and thereafter at the Base Rate. (f) Designation of other Credit Parties as Account Parties. Notwithstanding anything to the contrary set forth in this Credit Agreement, including without limitation Section 2.2(a) hereof, a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a member of the Consolidated Group other than the Borrower, provided that notwithstanding such statement, the Borrower shall be deemed to be the account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Borrower's reimbursement obligations hereunder with respect to such Letter of Credit. (g) Renewal, Extension. The renewal or extension of any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder. 32 41 (h) Uniform Customs and Practices. The Issuing Lender may have the Letters of Credit be subject to The Uniform Customs and Practice for Documentary Credits, as published as of the date of issue by the International Chamber of Commerce (the "UCP"), in which case the UCP may be incorporated therein and deemed in all respects to be a part thereof. (i) Indemnification; Nature of Issuing Lender's Duties. (i) In addition to its other obligations under this Section 2.2, the Borrower hereby agrees to protect, indemnify, pay and save the Issuing Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) that the Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of the Issuing Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority (all such acts or omissions, herein called "Government Acts"). (ii) As between the Borrower and the Issuing Lender, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The Issuing Lender shall not be responsible: (A) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (D) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (E) for any consequences arising from causes beyond the control of the Issuing Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender's rights or powers hereunder. (iii) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Issuing Lender, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to the Borrower or any other Credit Party. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify the Issuing Lender against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower (on behalf of itself and each of the other Credit Parties), including, without limitation, any and all Government Acts. The Issuing Lender shall not, in any way, be liable 33 42 for any failure by the Issuing Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Issuing Lender. (iv) Nothing in this subsection (i) is intended to limit the reimbursement obligations of the Borrower contained in subsection (d) above. The obligations of the Borrower under this subsection (i) shall survive the termination of this Credit Agreement. No act or omissions of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Issuing Lender to enforce any right, power or benefit under this Credit Agreement. (v) Notwithstanding anything to the contrary contained in this subsection (i), the Borrower shall have no obligation to indemnify the Issuing Lender in respect of any liability incurred by the Issuing Lender (A) arising out of the gross negligence or willful misconduct of the Issuing Lender, as determined by a court of competent jurisdiction, or (B) caused by the Issuing Lender's failure to pay under any Letter of Credit after presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit, as determined by a court of competent jurisdiction, unless such payment is prohibited by any law, regulation, court order or decree. (j) Responsibility of Issuing Lender. It is expressly understood and agreed that the obligations of the Issuing Lender hereunder to the Lenders are only those expressly set forth in this Credit Agreement and that the Issuing Lender shall be entitled to assume that the conditions precedent set forth in Section 5.2 have been satisfied unless it shall have acquired actual knowledge that any such condition precedent has not been satisfied; provided, however, that nothing set forth in this Section 2.2 shall be deemed to prejudice the right of any Lender to recover from the Issuing Lender any amounts made available by such Lender to the Issuing Lender pursuant to this Section 2.2 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit constituted gross negligence or willful misconduct on the part of the Issuing Lender. (k) Conflict with LOC Documents. In the event of any conflict between this Credit Agreement and any LOC Document (including any letter of credit application), this Credit Agreement shall control. SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES 3.1 Default Rate. Upon the occurrence, and during the continuance, of an Event of Default, the principal of and, to the extent permitted by law, interest on the Revolving Loans and any other amounts owing hereunder or under the other Credit Documents shall bear interest, payable on demand, at a per 34 43 annum rate 2% greater than the rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then 2% greater than the Base Rate). 3.2 Extension and Conversion. Subject to the terms of Section 5.2, the Borrower shall have the option, on any Business Day, to extend existing Eurodollar Loans into a subsequent permissible Interest Period or to convert Base Rate Loans into Eurodollar Loans; provided, however, that (i) except as provided in Section 3.8, Eurodollar Loans may be converted into Base Rate Loans only on the last day of the Interest Period applicable thereto, (ii) Eurodollar Loans may be extended, and Base Rate Loans may be converted into Eurodollar Loans, only if no Default or Event of Default is in existence on the date of extension or conversion, (iii) Revolving Loans extended as, or converted into, Eurodollar Loans shall be subject to the terms of the definition of "Interest Period" set forth in Section 1.1 and shall be in such minimum amounts as provided in Section 2.1(b)(ii) , and (iv) any request for extension or conversion of a Eurodollar Loan which shall fail to specify an Interest Period shall be deemed to be a request for an Interest Period of one month. Each such extension or conversion shall be effected by the Borrower by giving a Notice of Extension/Conversion (or telephone notice promptly confirmed in writing) to the Administrative Agent prior to 11:00 A.M. (Charlotte, North Carolina time) on the Business Day of, in the case of the conversion of a Eurodollar Loan into a Base Rate Loan, and on the third Business Day prior to, in the case of the extension of a Eurodollar Loan as, or conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the proposed extension or conversion, specifying the date of the proposed extension or conversion, the Revolving Loans to be so extended or converted, the types of Revolving Loans into which such Revolving Loans are to be converted and, if appropriate, the applicable Interest Periods with respect thereto. Each request for extension of a Eurodollar Loan or conversion of a Base Rate Loan into a Eurodollar Loan shall be irrevocable and shall constitute a representation and warranty by the Borrower of the matters specified in subsections (a) and (b) of Section 5.2. In the event the Borrower fails to request extension or conversion of any Eurodollar Loan in accordance with this Section, or any such conversion or extension is not permitted or required by this Section, then such Eurodollar Loan shall be automatically converted into a Base Rate Loan at the end of the Interest Period applicable thereto. The Administrative Agent shall give each Lender notice as promptly as practicable of any such proposed extension or conversion affecting any Revolving Loan. 3.3 Prepayments. (a) Voluntary Prepayments. Revolving Loans may be repaid in whole or in part without premium or penalty; provided that (i) Eurodollar Loans may be prepaid only upon three (3) Business Days' prior written notice to the Administrative Agent and must be accompanied by payment of any amounts owing under Section 3.11, and (ii) partial prepayments shall be, in the case of Eurodollar Loans, in a minimum aggregate principal amount of $2,500,000 and integral multiples of $500,000 in excess thereof, or, in the case of Base Rate Loans, in a minimum aggregate principal amount of $1,000,000 (or the remaining Revolving Committed Amount, if less) and integral multiples of $100,000 in excess thereof. 35 44 (b) Mandatory Prepayments. If at any time, (A) the aggregate principal amount of Obligations shall exceed the lesser of (i) the Aggregate Revolving Committed Amount or (ii) the Borrowing Base, or (B) the aggregate amount of LOC Obligations shall exceed the LOC Committed Amount, the Borrower shall immediately make payment on the Revolving Loans and/or to a cash collateral account in respect of the LOC Obligations, in an amount sufficient to eliminate the deficiency. (c) Application. Unless otherwise specified by the Borrower, prepayments made hereunder shall be applied first to Revolving Loans which are Base Rate Loans, then to Revolving Loans which are Eurodollar Loans in direct order of Interest Period maturities, and then to a cash collateral account to secure LOC Obligations. Amounts prepaid hereunder may be reborrowed in accordance with the provisions hereof. 3.4 Termination and Reduction of Commitments (a) Voluntary Reductions. The Revolving Commitments may be terminated or permanently reduced in whole or in part upon three (3) Business Days' prior written notice to the Administrative Agent, provided that (i) after giving effect to any voluntary reduction the aggregate amount of Obligations shall not exceed the lesser of (A) the Aggregate Revolving Committed Amount, as reduced, or (B) the Borrowing Base, and (ii) partial reductions shall be in a minimum principal amount of $5,000,000, and in integral multiples of $1,000,000 in excess thereof. (b) Termination. The Commitments hereunder shall terminate on the Termination Date. 3.5 Fees. (a) Commitment Fee. In consideration of the Revolving Commitments hereunder, the Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders a commitment fee (the "Commitment Fee") equal to the Applicable Percentage per annum on the average daily unused amount of the Revolving Committed Amount for the applicable period. The Commitment Fee shall be payable quarterly in arrears on the 15th day following the last day of each calendar quarter for the immediately preceding quarter (or portion thereof) beginning with the first such date to occur after the Closing Date. For purposes of computation of the Commitment Fee, LOC Obligations shall be counted toward or considered usage under the Revolving Loan facility. 36 45 (b) Letter of Credit Fees. (i) Letter of Credit Fee. In consideration of the LOC Commitment hereunder, the Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders a fee (the "Letter of Credit Fee") equal to the Applicable Percentage per annum on the average daily maximum amount available to be drawn under Letters of Credit from the date of issuance to the date of expiration. The Letter of Credit Fee shall be payable quarterly in arrears on the 15th day following the last day of each calendar quarter for the immediately preceding quarter (or portion thereof) beginning with the first such date to occur after the Closing Date. (ii) Issuing Lender Fee. In addition to the Letter of Credit Fee, the Borrower agrees to pay to the Issuing Lender for its own account without sharing by the other Lenders a fronting and negotiation fee of .125% per annum on the average daily maximum amount available to be drawn under Letters of Credit issued by it from the date of issuance to the date of expiration (collectively, the "Issuing Lender Fees"). (c) Administrative Agent's Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, an annual administrative fee and such other fees, if any, referred to in the Administrative Agent's Fee Letter (collectively, the "Administrative Agent's Fees"). 3.6 Capital Adequacy. If any Lender has reasonably determined, after the date hereof, that the adoption or the becoming effective of, or any change in, or any change by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof in the interpretation or administration of, any applicable law, rule or regulation regarding capital adequacy, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy), then, subject to the provisions of Section 3.12, the Borrower shall be obligated to pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. 3.7 Inability To Determine Interest Rate. If prior to the first day of any Interest Period, the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, the Administrative Agent shall give telecopy 37 46 or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter (which notice shall be withdrawn the Administrative Agent whenever such circumstances no longer exist). If such notice is given (a) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans and (b) any Revolving Loans that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Loans shall be converted to or continued as Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Base Rate Loans to Eurodollar Loans. 3.8 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof occurring after the Closing Date shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Credit Agreement, (a) such Lender shall promptly give written notice of such circumstances to the Borrower and the Administrative Agent (which notice shall be withdrawn by such Lender whenever such circumstances no longer exist), (b) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert a Base Rate Loan to Eurodollar Loans shall forthwith be canceled and, until such time as it shall no longer be unlawful for such Lender to make or maintain Eurodollar Loans, such Lender shall then have a commitment only to make a Base Rate Loan when a Eurodollar Loan is requested and (c) such Lender's Revolving Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 3.11. 3.9 Requirements of Law. If, after the date hereof, the adoption of or any change in any Requirement of Law or in the interpretation or application thereof applicable to any Lender, or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority, in each case made subsequent to the Closing Date (or, if later, the date on which such Lender becomes a Lender): (a) shall subject such Lender to any tax of any kind whatsoever with respect to any Letter of Credit, any Eurodollar Loans made by it or its obligation to make Eurodollar Loans, or change the basis of taxation of payments to such Lender in respect thereof (except for (i) Non-Excluded Taxes covered by Section 3.10 (including Non-Excluded Taxes imposed solely by reason of any failure of such Lender to comply with its obligations under Section 3.10(b)) and (ii) changes in taxes measured by or imposed upon the overall net income, or franchise tax (imposed in lieu of such net income tax), of such Lender or its applicable lending office, branch, or any affiliate thereof)); 38 47 (b) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (c) shall impose on such Lender any other condition (excluding any tax of any kind whatsoever); and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit or to reduce any amount receivable hereunder in respect thereof, then, in any such case, subject to the provisions of Section 3.12, the Borrower shall be obligated to promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable, provided that, in any such case, the Borrower may elect to convert the Eurodollar Loans made by such Lender hereunder to Base Rate Loans by giving the Administrative Agent at least one Business Day's notice of such election, in which case the Borrower shall promptly pay to such Lender, upon demand, without duplication, such amounts, if any, as may be required pursuant to Section 3.11. Each Lender agrees that, as promptly as practicable after it becomes aware of any circumstances of the type referred to in paragraphs (a) through (c) above which would result in any such increased cost or reduced amount receivable, the affected Lender shall, to the extent not inconsistent with such Lender's internal policies of general application, designate a different lending office for the making of Revolving Loans hereunder or otherwise use reasonable commercial efforts to minimize the amounts payable to it by the Borrower pursuant to this Section 3.9. This covenant shall survive the termination of this Credit Agreement and the payment of the Revolving Loans and all other amounts payable hereunder. 3.10 Taxes. (a) Except as provided below in this subsection, all payments made by the Borrower under this Credit Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any court, or governmental body, agency or other official, excluding taxes measured by or imposed upon the overall net income of any Lender or its applicable lending office, or any branch or affiliate thereof, and all franchise taxes, branch taxes, taxes on doing business or taxes on the overall capital or net worth of any Lender or its applicable lending office, or any branch or affiliate thereof, in each case imposed in lieu of net income taxes, imposed: (i) by the jurisdiction under the laws of which such Lender, applicable lending office, branch or affiliate is organized or is located, or in which its principal executive office is located, or any nation within which such jurisdiction is located or any political subdivision thereof; or (ii) by reason of any connection between 39 48 the jurisdiction imposing such tax and such Lender, applicable lending office, branch or affiliate other than a connection arising solely from such Lender having executed, delivered or performed its obligations, or received payment under or enforced, this Credit Agreement or any Notes. If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non- Excluded Taxes") are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder or under any Notes, (A) the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Credit Agreement and any Notes, provided, however, that the Borrower shall be entitled to deduct and withhold any Non-Excluded Taxes and shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this subsection whenever any Non-Excluded Taxes are payable by the Borrower, and (B) as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this subsection shall survive the termination of this Credit Agreement and the payment of the Revolving Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated under the laws of the United States of America or a state thereof shall: (X)(i) on or before the date of any payment by the Borrower under this Credit Agreement or Notes to such Lender, deliver to the Borrower and the Administrative Agent (A) two (2) duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, certifying that it is entitled to receive payments under this Credit Agreement and any Notes without deduction or withholding of any United States federal income taxes and (B) an Internal Revenue Service Form W-8 or W- 9, or successor applicable form, as the case may be, certifying that it is entitled to an exemption from United States backup withholding tax; (ii) deliver to the Borrower and the Administrative Agent two (2) further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; or 40 49 (Y) in the case of any such Lender that is not a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (i) represent to the Borrower (for the benefit of the Borrower and the Administrative Agent) that it is not a bank within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (ii) agree to furnish to the Borrower on or before the date of any payment by the Borrower, with a copy to the Administrative Agent two (2) accurate and complete original signed copies of Internal Revenue Service Form W-8, or successor applicable form certifying to such Lender's legal entitlement at the date of such certificate to an exemption from U.S. withholding tax under the provisions of Section 881(c) of the Internal Revenue Code with respect to payments to be made under this Credit Agreement and any Notes (and to deliver to the Borrower and the Administrative Agent two (2) further copies of such form on or before the date it expires or becomes obsolete and after the occurrence of any event requiring a change in the most recently provided form and, if necessary, obtain any extensions of time reasonably requested by the Borrower or the Administrative Agent for filing and completing such forms), and (iii) agree, to the extent legally entitled to do so, upon reasonable request by the Borrower, to provide to the Borrower (for the benefit of the Borrower and the Administrative Agent) such other forms as may be reasonably required in order to establish the legal entitlement of such Lender to an exemption from withholding with respect to payments under this Credit Agreement and any Notes; unless in any such case any change in treaty, law or regulation has occurred after the date such Person becomes a Lender hereunder which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Each Person that shall become a Lender or a participant of a Lender pursuant to subsection 11.3 shall, upon the effectiveness of the related transfer, be required to provide all of the forms, certifications and statements required pursuant to this subsection, provided that in the case of a participant of a Lender the obligations of such participant of a Lender pursuant to this subsection (b) shall be determined as if the participant of a Lender were a Lender except that such participant of a Lender shall furnish all such required forms, certifications and statements to the Lender from which the related participation shall have been purchased. 3.11 Indemnity. The Borrower promises to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur (other than through such Lender's gross negligence or willful misconduct) as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Credit Agreement, (b) default by the Borrower in making any prepayment of a Eurodollar Loan after the Borrower has given a notice thereof in accordance with the provisions of this Credit Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. With respect to Eurodollar Loans, such indemnification may be calculated, in lieu of any other method, based on an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the 41 50 date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Revolving Loans provided for herein (excluding, however, the Applicable Percentage included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. The covenants of the Borrower set forth in this Section 3.11 shall survive the termination of this Credit Agreement and the payment of the Revolving Loans and all other amounts payable hereunder. 3.12 Certain Limitations. The provisions of Sections 3.6, 3.9, 3.10 and 3.11 hereof shall be subject to the following: (a) Each Lender that desires compensation or indemnification under Sections 3.6, 3.9 or 3.11 hereof shall notify the Borrower through the Administrative Agent of any event occurring after the Closing Date entitling such Lender to compensation or indemnification under any of such Sections as promptly as practicable, but in any event within 90 days after the occurrence of the event giving rise thereto; provided that (i) if any such Lender fails to give such notice within 90 days after the occurrence of such an event, such Lender shall only be entitled to compensation or indemnification in respect of such event accruing under Sections 3.6, 3.9 or 3.11 hereof with respect to the period from and after the date 90 days prior to the date that such Lender does give notice. (b) Any notice given by a Lender pursuant to subsection (a) above shall certify (i) that one of the events described in Sections 3.6, 3.9 or 3.11 hereof has occurred, describing in reasonable detail the nature of such event, (ii) as to the increased cost, reduced amount receivable or loss or expense resulting from such event and (iii) as to the additional amount demanded by such Lender, attaching a reasonably detailed explanation of the calculation thereof. Such a certificate as to any compensation or indemnification payable pursuant to Sections 3.6, 3.9 or 3.11, submitted by such Lender through the Administrative Agent to the Borrower, shall be conclusive and binding on the parties hereto in the absence of manifest error. (c) If any Lender requests compensation or indemnification from the Borrower under Sections 3.6, 3.9 or 3.10 hereof, the Borrower may, at its option, within fifteen (15) days after receipt by the Borrower of written demand from the affected Lender for payment of such compensation or indemnification, notify the Administrative Agent and such affected Lender of its intention to replace the affected Lender. So long as no Event of Default shall have occurred and be continuing, the Borrower may obtain, at the Borrower's expense, a replacement Lender for the affected Lender. If the Borrower obtains a replacement Lender within ninety (90) days following notice of its intention to do so, the affected Lender must sell and assign its Loans and any Revolving Commitment to such replacement Lender pursuant to Section 11.3(b) hereof (without giving effect to any requirement therein that the Administrative Agent consent thereto), for an amount equal to the principal balance of all Revolving Loans held by the affected Lender 42 51 and all accrued interest and Fees with respect thereto through the date of such sale, provided that the Borrower shall have paid to such affected Lender the compensation or indemnification that it is entitled to receive under Sections 3.6, 3.9 or 3.10 hereof, through the date of such sale and assignment. Notwithstanding the foregoing, the Borrower shall not have the right to obtain a replacement Lender if the affected Lender rescinds its demand for such compensation or indemnification within fifteen (15) days following its receipt of the Borrower's notice of intention to replace such affected Lender. Additionally, if the Borrower gives a notice to the Administrative Agent and an affected Lender of its intention to replace such affected Lender and does not so replace such affected Lender within ninety (90) days thereafter, the Borrower's rights under this Section 3.12(c) shall terminate and the Borrower shall promptly pay all compensation or indemnification demanded by such affected Lender pursuant to Sections 3.6, 3.9 or 3.10 hereof. 3.13 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) Revolving Loans. Each Revolving Loan, each payment or prepayment of principal of any Revolving Loan or reimbursement obligations arising from drawings under Letters of Credit, each payment of interest on the Revolving Loans or reimbursement obligations arising from drawings under Letters of Credit, each payment of Commitment Fees, each payment of the Letter of Credit Fee, each reduction of the Revolving Committed Amount and each conversion or extension of any Revolving Loan, shall be allocated pro rata among the Lenders in accordance with the respective principal amounts of their outstanding Revolving Loans and Participation Interests. (b) Advances. No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make its ratable share of a borrowing hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder. Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its ratable share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by such Lender within the time period specified therefor hereunder, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the Federal Funds Rate for a period of two (2) Business Days, and thereafter at the Base Rate, for the period until such Lender makes such amount immediately available to the Administrative Agent. If such Lender does not pay such amounts to the Administrative Agent forthwith upon demand, the Administrative Agent may notify the Borrower and request the Borrower to immediately pay such amount to the Administrative Agent with interest at the rate applicable thereto. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. 43 52 3.14 Sharing of Payments. The Lenders agree among themselves that, in the event that any Lender shall obtain payment in respect of any Revolving Loan, LOC Obligations or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker's lien or counterclaim, or pursuant to a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided for in this Credit Agreement, such Lender shall promptly purchase from the other Lenders a participation in such Revolving Loans, LOC Obligations and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their respective ratable shares as provided for in this Credit Agreement. The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker's lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Lender which shall have shared the benefit of such payment shall, by repurchase of a participation theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker's lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Revolving Loan, LOC Obligations or other obligation in the amount of such participation. Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to the Administrative Agent or any other Lender an amount payable by such Lender or the Administrative Agent to the Administrative Agent or such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.14 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.14 to share in the benefits of any recovery on such secured claim. 3.15 Payments, Computations, Etc. (a) Except as otherwise specifically provided herein, all payments hereunder shall be made to the Administrative Agent in Dollars in immediately available funds, without setoff, deduction, counterclaim or withholding of any kind, at the Administrative Agent's office specified in Section 11.1 not later than 2:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments received after such time shall be deemed to have been received on the next succeeding Business Day. The Administrative Agent may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower maintained with the Administrative Agent (with notice to the Borrower). The Borrower shall, at the time it makes any 44 53 payment under this Credit Agreement, specify to the Administrative Agent the Revolving Loans, LOC Obligations, Fees, interest or other amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails so to specify, or if such application would be inconsistent with the terms hereof, the Administrative Agent shall distribute such payment to the Lenders in such manner as the Administrative Agent may determine to be appropriate in respect of obligations owing by the Borrower hereunder, subject to the terms of Section 3.13(a)). The Administrative Agent will distribute such payments to such Lenders, if any such payment is received prior to 12:00 Noon (Charlotte, North Carolina time) on a Business Day in like funds as received prior to the end of such Business Day and otherwise the Administrative Agent will distribute such payment to such Lenders entitled thereto on the next succeeding Business Day. Whenever any payment hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and Fees for the period of such extension), except that in the case of Eurodollar Loans, if the extension would cause the payment to be made in the next following calendar month, then such payment shall instead be made on the next preceding Business Day. Except as expressly provided otherwise herein, all computations of interest and fees shall be made on the basis of the actual number of days elapsed over a year of 360 days, except with respect to computation of interest on Base Rate Loans which (unless the Base Rate is determined by reference to the Federal Funds Rate) shall be calculated based on a year of 365 or 366 days, as appropriate. Interest shall accrue from and include the date of borrowing, but exclude the date of payment. (b) Allocation of Payments After Event of Default. Notwithstanding any other provisions of this Credit Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Administrative Agent or any Lender on account of the Obligations or any other amounts outstanding under any of the Credit Documents shall be paid over or delivered as follows: FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation reasonable attorneys' fees) of the Administrative Agent in connection with enforcing the rights of the Lenders under the Credit Documents; SECOND, to payment of any Administrative Agent's Fees then due and payable; THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of each of the Lenders in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Obligations owing to such Lender; FOURTH, to the payment of all accrued interest and Fees on or in respect of the Obligations; FIFTH, to the payment of the outstanding principal amount of the Obligations (including the payment of all LOC Obligations then reimbursable by the Borrower pursuant 45 54 to Section 2.2(d), but excluding any LOC Obligations attributable to issued but undrawn Letters of Credit); SIXTH, to the cash collateralization of all LOC Obligations attributable to issued but undrawn Letters of Credit; SEVENTH, to all other Obligations and other obligations which shall have become due and payable under the Credit Documents or otherwise and not repaid pursuant to clauses "FIRST" through "SIXTH" above; and EIGHTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; and (ii) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion that the then outstanding Obligations held by such Lender bears to the aggregate then outstanding Obligations) of amounts available to be applied pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above; and (iii) all amounts available to be applied to pursuant to clause "SIXTH" above shall be held by the Administrative Agent in a cash collateral account and applied (A) first, to reimburse the Issuing Lender for any drawings under such Letters of Credit and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses "SIXTH" AND "SEVENTH" above in the manner provided in this Section 3.15(b). 3.16 Evidence of Debt. (a) Each Lender shall maintain an account or accounts evidencing each Revolving Loan made by such Lender to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Credit Agreement. Each Lender will make reasonable efforts to maintain the accuracy of its account or accounts and to promptly update its account or accounts from time to time, as necessary. (b) The Administrative Agent shall maintain the Register pursuant to Section 11.3(c) hereof, and a subaccount for each Lender, in which Register and subaccounts (taken together) shall be recorded (i) the amount, type and Interest Period of each such Revolving Loan hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from or for the account of the Borrower and each Lender's share thereof. The Administrative Agent will make reasonable efforts to maintain the accuracy of the subaccounts referred to in the preceding sentence and to promptly update such subaccounts from time to time, as necessary. (c) The entries made in the accounts, Register and subaccounts maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent with the entries of the Administrative Agent, 46 55 subsection (a)) shall be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain any such account, such Register or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Borrower to repay the Revolving Loans made by such Lender in accordance with the terms hereof. SECTION 4 GUARANTY 4.1 The Guarantee. (a) Each of the Guarantors hereby jointly and severally guarantees to each Lender, to each Affiliate of a Lender that enters into a Hedging Agreement and to the Administrative Agent as hereinafter provided the prompt payment of the Guaranteed Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, a mandatory cash collateralization or otherwise) strictly in accordance with the terms thereof. The Guarantors hereby further agree that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as mandatory cash collateralization or otherwise), the Guarantors will, jointly and severally, promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration or otherwise) in accordance with the terms of such extension or renewal. (b) Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents or Hedging Agreements, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of each Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the Bankruptcy Code). 4.2 Obligations Unconditional. The obligations of the Guarantors under Section 4.1 hereof are joint and several, absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Credit Documents or Hedging Agreements, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 4.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or 47 56 contribution against the Borrower or any other Guarantor of the Guaranteed Obligations for amounts paid under this Guaranty until such time as the Lenders (and any Affiliates of Lenders entering into Hedging Agreements) have been paid in full, all Commitments under the Credit Agreement have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from the Lenders in connection with monies received under the Credit Documents or Hedging Agreements. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to any Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Administrative Agent or any Lender or Lenders as security for any of the Guaranteed Obligations shall fail to attach or be perfected; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Lender exhaust any right, power or remedy or proceed against any Person under any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 48 57 4.3 Reinstatement. The obligations of the Guarantors under this Section 4 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 4.4 Certain Additional Waivers. Each Guarantor agrees that such Guarantor shall have no right of recourse to security for the Guaranteed Obligations, except through the exercise of the rights of subrogation pursuant to Section 4.2. 4.5 Remedies. The Guarantors agree that, to the fullest extent permitted by law, as between the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 9.2 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 9.2) for purposes of Section 4.1 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or the Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors for purposes of said Section 4.1. 4.6 Rights of Contribution. The Guarantors hereby agree, as among themselves, that if any Guarantor shall become an Excess Funding Guarantor (as defined below), each other Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the succeeding provisions of this Section 4.6), pay to such Excess Funding Guarantor an amount equal to such Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, assets, liabilities and debts of such Excess Funding Guarantor) of such Excess Payment (as defined below). The payment obligation of any Guarantor to any Excess Funding Guarantor under this Section 4.6 shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Section 4, and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes hereof, (i) "Excess Funding Guarantor" shall mean, in respect of any obligations arising 49 58 under the other provisions of this Section 4 (hereafter, the "Guarantied Obligations"), a Guarantor that has paid an amount in excess of its Pro Rata Share of the Guarantied Obligations; (ii) "Excess Payment" shall mean, in respect of any Guarantied Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guarantied Obligations; and (iii) "Pro Rata Share", for the purposes of this Section 4.6, shall mean, for any Guarantor, the ratio (expressed as a percentage) of (a) the amount by which the aggregate present fair saleable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (b) the amount by which the aggregate present fair saleable value of all assets and other properties of the Borrower and all of the Guarantors exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Borrower and the Guarantors hereunder) of the Borrower and all of the Guarantors, all as of the Closing Date (if any Guarantor becomes a party hereto subsequent to the Closing Date, then for the purposes of this Section 4.6 such subsequent Guarantor shall be deemed to have been a Guarantor as of the Closing Date and the information pertaining to, and only pertaining to, such Guarantor as of the date such Guarantor became a Guarantor shall be deemed true as of the Closing Date). 4.7 Continuing Guarantee. The guarantee in this Section 4 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. SECTION 5 CONDITIONS 5.1 Conditions to Closing. This Credit Agreement shall become effective, and the initial Extensions of Credit may be made, upon the satisfaction of the following conditions precedent: (a) Execution of Credit Agreement and Credit Documents. Receipt by the Administrative Agent of (i) multiple counterparts of this Credit Agreement, (ii) a Revolving Note for each Lender, (iii) multiple counterparts of the Pledge Agreement, (iv) multiple counterparts of the Security Agreement and (v) UCC financing statements relating to the Pledge Agreement and the Security Agreement, if any, in each case executed by a duly authorized officer of each party thereto and in each case conforming to the requirements of this Credit Agreement. (b) Legal Opinions. Receipt of multiple counterparts of opinions of counsel for the Credit Parties relating to the Credit Documents and the transactions contemplated herein, in form and substance satisfactory to the Administrative Agent and the Required Lenders. 50 59 (c) Stock Certificates. Receipt of original stock certificates evidencing the ownership interests of the Credit Parties pledged pursuant to the Pledge Agreement, together in each case with original undated stock powers executed in blank. (d) Evidence of Insurance. Receipt of insurance certificates or policies evidencing casualty insurance (including builders' risk and all-risk permanent policies) and liability insurance conforming to the requirements of this Credit Agreement and the other Credit Documents, together with evidence of payment of premiums thereon. (e) Absence of Legal Proceedings. The absence of any action, suit, investigation or proceeding pending in any court or before any arbitrator or governmental instrumentality which could reasonably be expected to have a Material Adverse Effect. (f) Public Offering. Evidence of completion of the IPO, receipt by the Borrower of net cash proceeds therefrom in excess of $55 million and the use of such proceeds by the Borrower to effect the Combination. (g) Corporate Documents. Receipt of the following (or their equivalent) for each of the Credit Parties: (i) Articles of Incorporation. Copies of the articles of incorporation or charter documents certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state of its incorporation. (ii) Resolutions. Copies of resolutions of the Board of Directors approving and adopting the respective Credit Documents, the transactions contemplated therein and authorizing execution and delivery thereof, certified by a secretary or assistant secretary as of the Closing Date to be true and correct and in force and effect as of such date. (iii) Bylaws. Copies of the bylaws certified by a secretary or assistant secretary as of the Closing Date to be true and correct and in force and effect as of such date. (iv) Good Standing. Copies, where applicable, of (A) certificates of good standing, existence or its equivalent certified as of a recent date by the appropriate governmental authorities of the state of incorporation and each other state in which the failure to so qualify and be in good standing would have a material adverse effect on the business or operations in such state and (B) a certificate indicating payment of all corporate franchise taxes certified as of a recent date by the appropriate governmental taxing authorities. (v) Officer's Certificate. An officer's certificate for each of the Credit Parties dated as of the Closing Date substantially in the form of Schedule 5.1(j)(v) with appropriate insertions and attachments. 51 60 (i) Fees. Receipt of all fees, if any, owing pursuant to the Administrative Agent's Fee Letter, Section 3.5 or otherwise. (j) Subsection 5.2 Conditions. The conditions specified in Section 5.2 shall be satisfied. 5.2 Conditions to All Extensions of Credit. The obligation of each Lender to make any Extension of Credit hereunder (including the initial Extension of Credit to be made hereunder) is subject to the satisfaction of the following conditions precedent on the date of making such Extension of Credit: (a) Representations and Warranties. The representations and warranties made by the Credit Parties herein or in any other Credit Documents or which are contained in any certificate furnished at any time under or in connection herewith shall be true and correct in all material respects on and as of the date of such Extension of Credit as if made on and as of such date (except for those which expressly relate to an earlier date and those which are untrue solely as a result of a change permitted by this Agreement). (b) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extension of Credit to be made on such date unless such Default or Event of Default shall have been waived in accordance with this Credit Agreement. (c) Additional Conditions to Revolving Loans. If a Revolving Loan is made pursuant to Section 2.1, all conditions set forth therein shall have been satisfied. (d) Additional Conditions to Letters of Credit. If such Extension of Credit is made pursuant to Section 2.2, all conditions set forth therein shall have been satisfied. Each request for Extension of Credit (including extensions of Eurodollar Loans and conversions of Base Rate Loans into Eurodollar Loans) and each acceptance by the Borrower of an Extension of Credit (including extensions of Eurodollar Loans and conversions of Base Rate Loans into Eurodollar Loans) shall be deemed to constitute a representation and warranty by the Borrower as of the date of such Extension of Credit that the applicable conditions in paragraphs (a) and (b), and in (c) or (d) of this subsection have been satisfied. 52 61 SECTION 6 REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Credit Agreement and to make Extensions of Credit herein provided for, each of the Credit Parties hereby represents and warrants to the Administrative Agent and to each Lender that, after giving effect to the IPO and the Combination: 6.1 Financial Condition. Each of the financial statements described below (copies of which have heretofore been provided to the Administrative Agent for distribution to the Lenders), have been prepared in accordance with GAAP consistently applied throughout the periods covered thereby, are complete and correct in all material respects and present fairly the financial condition and results from operations of the entities and for the periods specified (subject in the case of interim company-prepared statements to normal year-end adjustments and the absence of footnotes and subject in the case of the financial statements prepared on a pro forma as adjusted basis to the statement as to basis of presentation set forth on page F-4 of the Registration Statement): (i) the balance sheet of the Borrower as at March 31, 1998 and the related statements of income and changes in stockholders equity for the period from inception (March 20, 1998) to March 31, 1998, accompanied by the audit report thereon of Arthur Andersen LLP; (ii) the balance sheets of certain of the Credit Parties (other than the Borrower) and the related statements of operations, stockholders' equity and cash flows as at the dates set forth therein and for the respective periods then ended, all as set forth as pages F-15 through F-143 of the Registration Statement, accompanied by the audit reports thereon of Arthur Andersen LLP or such other independent public accountants as are identified therein; (iii) the unaudited pro forma as adjusted balance sheets of the Borrower as at December 31, 1997 and March 31, 1998 and the related unaudited pro forma as adjusted statements of income for the respective fiscal year and fiscal quarter then ended, as set forth as pages F-4 through F-9 of the Registration Statement; and (iv) the unaudited pro forma as adjusted statement of income of the Borrower for the fiscal quarter ended December 31, 1997 and the unaudited pro forma as adjusted balance sheet of the Borrower as at June 30, 1998 and the related unaudited pro forma as adjusted statement of income for the fiscal quarter then ended, prepared by the Borrower on a basis consistent with the unaudited pro forma as adjusted financial statements described in Section 6.1(iii). 53 62 6.2 No Changes or Restricted Payments. Since the date of the audited financial statements referenced in Section 6.1(ii), (a) there has been no circumstance, development or event relating to or affecting the members of the Consolidated Group which has had or would be reasonably expected to have a Material Adverse Effect, and (b) except as permitted herein, no Restricted Payments have been made or declared by any members of the Consolidated Group. 6.3 Organization; Existence; Compliance with Law. Each of the Credit Parties (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, except to the extent that the failure to be in good standing would not, in the aggregate, have a Material Adverse Effect, (b) has the corporate or other necessary power and authority, and the legal right to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not, in the aggregate, have a Material Adverse Effect, and (d) is in compliance with its certificate of incorporation and bylaws (or other organizational or governing documents) and all Requirements of Law, except to the extent that the failure to comply therewith would not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 6.4 Power; Authorization; Enforceable Obligations. Each of the Credit Parties has the corporate or other necessary power and authority, and the legal right, to make, deliver and perform the Credit Documents to which it is a party and has taken all necessary corporate or other action to authorize the execution, delivery and performance by it of the Credit Documents to which it is a party. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with acceptance of extensions of credit or the making of the guaranties hereunder or with the execution, delivery or performance of any Credit Documents by the Credit Parties (other than those which have been obtained, such filings as are required by the Securities and Exchange Commission and to fulfill other reporting requirements with Governmental Authorities) or with the validity or enforceability of any Credit Document against the Credit Parties (except such filings as are necessary in connection with the perfection of the Liens created by such Credit Documents). Each Credit Document to which it is a party constitutes a legal, valid and binding obligation of such Credit Party enforceable against such Credit Party in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 54 63 6.5 No Legal Bar. The execution, delivery and performance of the Credit Documents, the borrowings hereunder and the use of the Extensions of Credit will not violate any Requirement of Law, the certificate of incorporation or bylaws (or other organizational or governing documents) or any Contractual Obligation of any Credit Party (except those as to which waivers or consents have been obtained), and will not result in, or require, the creation or imposition of any Lien on any of its respective properties or revenues pursuant to any Requirement of Law, its certificate of incorporation or bylaws (or other organizational or governing documents) or Contractual Obligation other than the Liens arising under or contemplated in connection with the Credit Documents. No member of the Consolidated Group is in default under or with respect to any of its Contractual Obligations in any respect which would reasonably be expected to have a Material Adverse Effect. 6.6 No Material Litigation. No claim, litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge of the Credit Parties, threatened by or against, any members of the Consolidated Group or against any of their respective properties or revenues which (a) purports to affect the legality, validity or enforceability of any of the Credit Documents and which is reasonably likely to be adversely determined, or (b) is reasonably likely to have a Material Adverse Effect. 6.7 No Default. No Default or Event of Default has occurred and is continuing. 6.8 Ownership of Property; Liens. Each of the Credit Parties has good record and marketable title in fee simple to, or (subject to the documentation of certain agreed-upon leases between certain Credit Parties and certain of the shareholders or principals of the corresponding Founding Companies) a valid leasehold interest in, all its real property material to the Consolidated Group, and good title to, or a valid leasehold interest in, all its other property material to the Consolidated Group, and none of such property is subject to any Lien, except for Permitted Liens. 6.9 Intellectual Property. Each of the members of the Consolidated Group owns, or has the legal right to use, all United States trademarks, tradenames, copyrights, technology, know-how and processes, if any, necessary for each of them to conduct its business as currently conducted (the "Intellectual Property") except for those the failure to own or have such legal right to use would not be reasonably expected to have a Material Adverse Effect. No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does any Credit Party know of any such claim, and the use of such 55 64 Intellectual Property by the members of the Consolidated Group does not infringe on the rights of any Person, except for such claims and infringements that in the aggregate, would not be reasonably expected to have a Material Adverse Effect. 6.10 No Burdensome Restrictions. Neither the certificate of incorporation or bylaws (or other organizational or governing documents) nor any Requirement of Law or Contractual Obligation of the members of the Consolidated Group would be reasonably expected to have a Material Adverse Effect. 6.11 Taxes. Each of the Credit Parties has filed or caused to be filed all United States federal income tax returns and all other material tax returns which, to the best knowledge of the Credit Parties, are required to be filed and has paid (a) all taxes shown to be due and payable on said returns or (b) all taxes shown to be due and payable on any assessments of which it has received notice made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any (i) taxes, fees or other charges with respect to which the failure to pay, in the aggregate, would not have a Material Adverse Effect or (ii) taxes, fees or other charges the amount or validity of which are currently being contested and with respect to which reserves in conformity with GAAP have been provided on the books of such Person), and no tax Lien has been filed (other than tax Liens which, in the aggregate, would not have a Material Adverse Effect), and, to the best knowledge of the Credit Parties, no claim is being asserted, with respect to any such tax, fee or other charge (other than such claims which, in the aggregate, would not have a Material Adverse Effect). 6.12 ERISA Except as would not reasonably be expected to have a Material Adverse Effect: (a) During the five-year period prior to the date on which this representation is made or deemed made: (i) no ERISA Event has occurred, and, to the best knowledge of the Credit Parties, no event or condition has occurred or exists as a result of which any ERISA Event could reasonably be expected to occur, with respect to any Plan; (ii) no "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code, whether or not waived, has occurred with respect to any Plan; (iii) each Plan has been maintained, operated, and funded in compliance with its own terms and in material compliance with the provisions of ERISA, the Internal Revenue Code, and any other applicable federal or state laws; and (iv) no lien in favor of the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan. (b) The actuarial present value of all "benefit liabilities" (as defined in Section 4001(a)(16) of ERISA), whether or not vested, under each Single Employer Plan, as of the last annual 56 65 valuation date prior to the date on which this representation is made or deemed made (determined, in each case, in accordance with Financial Accounting Standards Board Statement 87, utilizing the actuarial assumptions used in such Plan's most recent actuarial valuation report), did not exceed as of such valuation date the fair market value of the assets of such Plan. (c) No member of the Consolidated Group nor any ERISA Affiliate has incurred, or, to the best knowledge of the Credit Parties, could be reasonably expected to incur, any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. No member of the Consolidated Group nor any ERISA Affiliate would become subject to any withdrawal liability under ERISA if any member of the Consolidated Group or any ERISA Affiliate were to withdraw completely from all Multiemployer Plans and Multiple Employer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No member of the Consolidated Group nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Credit Parties, reasonably expected to be in reorganization, insolvent, or terminated. (d) No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code) or breach of fiduciary responsibility has occurred with respect to a Plan which has subjected or may subject any member of the Consolidated Group or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Internal Revenue Code, or under any agreement or other instrument pursuant to which any member of the Consolidated Group or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability. (e) No member of the Consolidated Group nor any ERISA Affiliates has any material liability with respect to "expected post-retirement benefit obligations" within the meaning of the Financial Accounting Standards Board Statement 106. Each Plan which is a welfare plan (as defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Internal Revenue Code apply has been administered in compliance in all material respects of such sections. 6.13 Governmental Regulations, Etc. (a) No part of the proceeds of the Extensions of Credit hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. No indebtedness being reduced or retired out of the proceeds of the Extensions of Credit hereunder was or will be incurred for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U or any "margin security" within the meaning of Regulation T. "Margin stock" within the meanings of Regulation U does not constitute more than 25% of the value of the consolidated assets of the 57 66 Borrower and its Subsidiaries. None of the transactions contemplated by this Credit Agreement (including, without limitation, the direct or indirect use of the proceeds of the Revolving Loans) will violate or result in a violation of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or regulations issued pursuant thereto, or Regulation T, U or X. (b) None of the members of the Consolidated Group is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940, each as amended. In addition, none of the members of the Consolidated Group is (i) an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled by such a company, or (ii) a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (c) No director, executive officer or principal shareholder of any member of the Consolidated Group is a director, executive officer or principal shareholder of any Lender. For the purposes hereof the terms "director", "executive officer" and "principal shareholder" (when used with reference to any Lender) have the respective meanings assigned thereto in Regulation O issued by the Board of Governors of the Federal Reserve System. 6.14 Subsidiaries. Set forth on Schedule 6.14 are all the Subsidiaries of the Borrower at the Closing Date, the jurisdiction of their incorporation and the direct or indirect ownership interest of the Borrower therein. 6.15 Purpose of Extensions of Credit. The Extensions of Credit may be used (i) for working capital, capital expenditures and other lawful corporate purposes, (ii) to the extent necessary, to refinance certain indebtedness of the Borrower and its Subsidiaries and to pay expenses of the transactions contemplated herein (including, without limitation, the IPO and the Combination) and (iii) to finance Acquisitions permitted hereunder. 6.16 Environmental Matters. Except as would not reasonably be expected to have a Material Adverse Effect: (a) Each of the facilities and properties owned, leased or operated by the members of the Consolidated Group (the "Properties") and all operations at the Properties are in compliance with all applicable Environmental Laws, and there is no violation of any Environmental Law with respect to the Properties or the businesses operated by the members of the Consolidated Group (the "Businesses"), and there are no conditions relating to the Businesses or Properties that could give rise to liability under any applicable Environmental Laws. 58 67 (b) None of the Properties contains, or has previously contained, any Materials of Environmental Concern at, on or under the Properties in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, Environmental Laws. (c) None of the members of the Consolidated Group has received any written or verbal notice of, or inquiry from any Governmental Authority regarding, any violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Businesses, nor does any member of the Consolidated Group have knowledge or reason to believe that any such notice will be received or is being threatened. (d) Materials of Environmental Concern have not been transported or disposed of from the Properties, or generated, treated, stored or disposed of at, on or under any of the Properties or any other location, in each case by or on behalf any members of the Consolidated Group in violation of, or in a manner that would be reasonably likely to give rise to liability under, any applicable Environmental Law. (e) No judicial proceeding or governmental or administrative action is pending or, to the best knowledge of any Credit Party, threatened, under any Environmental Law to which any member of the Consolidated Group is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to any member of the Consolidated Group, the Properties or the Businesses. (f) There has been no release or, threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations (including, without limitation, disposal) of any member of the Consolidated Group in connection with the Properties or otherwise in connection with the Businesses, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws. 6.17 Year 2000 Compliance. The Borrower has (i) developed a plan and timeline for addressing the "Year 2000 Problem" (that is, the risk that computer applications used by such Person may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999) on a timely basis, (ii) to date, implemented that plan in accordance with that timetable and (iii) believes that all of its computer applications that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 59 68 SECTION 7 AFFIRMATIVE COVENANTS Each of the Credit Parties covenants and agrees that on the Closing Date, and so long as this Credit Agreement is in effect and until the Commitments have been terminated, no Obligations remain outstanding and all amounts owing hereunder or in connection herewith have been paid in full, unless the Required Lenders otherwise consent in writing, the Borrower shall, and in the case of Sections 7.4, 7.5, 7.6, 7.7 and 7.8 below, shall cause each of the other Credit Parties to: 7.1 Financial Statements. Furnish, or cause to be furnished, to the Administrative Agent and Lenders: (a) Audited Financial Statements. As soon as available, but in any event within 95 days after the end of each fiscal year, an audited consolidated balance sheet of the Borrower and its subsidiaries as of the end of the fiscal year and the related consolidated statements of operations, shareholders' equity and cash flows for the year, audited by Arthur Andersen LLP, or other firm of independent certified public accountants of nationally recognized standing reasonably acceptable to the Required Lenders, setting forth in each case in comparative form the figures for the previous year (except for the period prior to the merger of a Subsidiary of the Borrower with Comstock Holdings Inc. pursuant to the Combination, for which period the financial statements presented will be those of Comstock Holdings Inc.), reported without a "going concern" or like qualification or exception, or qualification indicating that the scope of the audit was inadequate to permit such independent certified public accountants to certify such financial statements without such qualification. (b) Company-Prepared Financial Statements. As soon as available, but in any event (i) within 50 days after the end of each of the first three fiscal quarters, a company-prepared consolidated balance sheet of the Borrower and its subsidiaries as of the end of the quarter and related company-prepared consolidated statements of operations, shareholders' equity and cash flows for such quarterly period and for the fiscal year to date; (ii) within 30 days prior to the end of each fiscal year, an annual business plan and budget for the members of the Consolidated Group, containing, among other things, projected financial statements for the next fiscal year, in each case setting forth in comparative form the consolidated figures for the corresponding period or periods of the preceding fiscal year or the portion of the fiscal 60 69 year ending with such period, as applicable (except for the period prior to the merger of a Subsidiary of the Borrower with Comstock Holdings Inc. pursuant to the Combination, for which period the financial statements presented will be those of Comstock Holdings Inc.), in each case subject to normal year-end audit adjustments. (c) Third Quarter 1998 Pro Forma. As soon as available, but in any event within 50 days after the end of the Borrower's fiscal quarter ending on September 30, 1998, a company-prepared unaudited pro forma as adjusted consolidated statement of income of the Borrower for the fiscal quarter ended September 30, 1998, prepared on a basis consistent with the unaudited pro forma as adjusted financial statements described in Section 6.1(iii). (d) Borrowing Base Certificate. Concurrently with the delivery of the financial statements referred to in Sections 7.1(a) and 7.1(b) above, a statement of the Borrowing Base and its components as of the end of the immediately preceding fiscal quarter, in form and content satisfactory to the Administrative Agent and certified by the chief financial officer of the Borrower to be true and correct as of the date thereof (the "Borrowing Base Certificate"). All such financial statements shall be complete and correct in all material respects (subject, in the case of interim statements, to normal year-end audit adjustments and subject in the case of the financial statements prepared on a pro forma as adjusted basis to the statement as to basis of presentation set forth on page F-4 of the Registration Statement) and shall be prepared in reasonable detail and, in the case of the annual and quarterly financial statements provided in accordance with subsections (a) and (b) above, in accordance with GAAP applied consistently throughout the periods reflected therein and further accompanied by a description of, and an estimation of the effect on the financial statements on account of, any change in the application of accounting principles as provided in Section 1.3(a). 7.2 Certificates; Other Information. Furnish, or cause to be furnished, to the Administrative Agent for distribution to the Lenders: (a) Accountant's Certificate and Reports. Concurrently with the delivery of the financial statements referred to in subsection 7.1(a) above, a certificate of the independent certified public accountants reporting on such financial statements stating that in the course of performing their audit, nothing came to their attention that caused them to believe the Borrower was not in compliance with the financial covenants contained in Section 7.9 below insofar as such covenants relate to accounting matters, except as specified in such certificate. (b) Officer's Compliance Certificate. Concurrently with the delivery of the financial statements referred to in Sections 7.1(a) and 7.1(b) above, a certificate of a Responsible Officer stating that, to the best of such Responsible Officer's knowledge and belief, (i) the financial statements fairly present in all material respects the financial condition 61 70 of the parties covered by such financial statements, (ii) during such period the Credit Parties have observed or performed in all material respects the covenants and other agreements hereunder and under the other Credit Documents relating to them, and satisfied in all material respects the conditions contained in this Credit Agreement to be observed, performed or satisfied by them, and (iii) such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate. Such certificate shall include the calculations required to indicate compliance with Section 7.9. A form of Officer's Certificate is attached as Schedule 7.2(b). (c) Accountants' Reports. Promptly upon receipt, a copy of any final (as distinguished from a preliminary or discussion draft) "management letter" or other similar report submitted by independent accountants or financial consultants to the members of the Consolidated Group in connection with any annual, interim or special audit. (d) Public Information. Within thirty days after the same are sent, copies of all reports (other than those otherwise provided pursuant to subsection 7.1) and other financial information which the Borrower sends to its public stockholders, and within thirty days after the same are filed, copies of all financial statements and non-confidential reports which the Borrower may make to, or file with, the SEC. (e) Other Information. Promptly, such additional financial and other information as the Administrative Agent, at the request of any Lender, may from time to time reasonably request. 7.3 Notices. Give notice to the Administrative Agent (which shall promptly transmit such notice to each Lender) of: (a) Defaults. Immediately (and in any event within five (5) Business Days) after any Responsible Officer knows or has reason to know thereof, the occurrence of any Default or Event of Default. (b) Contractual Obligations. Promptly (and in any event within ten (10) Business Days) after any Responsible Officer knows or has reason to know of the occurrence of any default or event of default under any Contractual Obligation of any member of the Consolidated Group which would reasonably be expected to have a Material Adverse Effect. (c) Legal Proceedings. Promptly (and in any event within ten (10) Business Days) after any Responsible Officer knows or has reason to know of any litigation, or any investigation or proceeding (including without limitation, any environmental proceeding), or any material development in respect thereof, affecting any member of the Consolidated Group which, if adversely determined, would reasonably be expected to have a Material Adverse Effect. 62 71 (d) ERISA. Promptly (and in any event within thirty (30) Business Days) after any Responsible Officer knows or has reason to know of (i) any event or condition, including, but not limited to, any Reportable Event, that constitutes, or might reasonably lead to, an ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against any of their ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which the members of the Consolidated Group or any ERISA Affiliate are required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Internal Revenue Code with respect; or (iv) any change in the funding status of any Plan that reasonably could be expected to have a Material Adverse Effect; together with a description of any such event or condition or a copy of any such notice and a statement by the chief financial officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken by the Credit Parties with respect thereto. Promptly upon request, the members of the Consolidated Group shall furnish the Administrative Agent and the Lenders with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Internal Revenue Code, respectively, for each "plan year" (within the meaning of Section 3(39) of ERISA). (e) Other. Promptly (and in any event within ten (10) Business Days), any other development or event which a Responsible Officer determines could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the relevant Credit Parties propose to take with respect thereto. 63 72 7.4 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, in accordance with prudent business practice (subject, where applicable, to specified grace periods) all material obligations of each Credit Party of whatever nature and any additional costs that are imposed as a result of any failure to so pay, discharge or otherwise satisfy such obligations, except when the amount or validity of such obligations and costs is currently being contested in good faith by appropriate proceedings and reserves, if applicable, in conformity with GAAP with respect thereto have been provided on the books of the Consolidated Group, as the case may be. 7.5 Conduct of Business and Maintenance of Existence. Continue to engage in business of the same general type as conducted on the Closing Date by the Borrower and the other Credit Parties, taken as a whole, and similar or related businesses; preserve, renew and keep in full force and effect its corporate existence except as otherwise permitted by this Credit Agreement and take all reasonable action to maintain all rights, privileges, licenses and franchises necessary or desirable in the normal conduct of its business except to the extent that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect; and comply with all Contractual Obligations, its certificate of incorporation or bylaws (or other organizational or governing documents) and all Requirements of Law applicable to it except to the extent that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect. 7.6 Maintenance of Property; Insurance. Keep all material property useful and necessary in its business in reasonably good working order and condition (ordinary wear and tear excepted) except to the extent that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect; maintain with financially sound and reputable insurance companies casualty, liability and such other insurance (which may include plans of self-insurance) with such coverage and deductibles, and in such amounts as may be consistent with prudent business practice and in any event consistent with normal industry practice (except to any greater extent as may be required by the terms of any of the other Credit Documents); and furnish to the Administrative Agent, upon written request, full information as to the insurance carried. 7.7 Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its businesses and activities; and permit, during regular business hours and upon reasonable notice to a Responsible Officer by the Administrative Agent, the Administrative Agent to visit and inspect any of its properties and examine and make abstracts (including photocopies) from any of its books and records (other than materials protected by the 64 73 attorney-client privilege and materials which the Credit Parties may not disclose without violation of a confidentiality obligation binding upon them) and to discuss the business, operations, properties and financial and other condition of the Credit Parties with officers and employees of the Borrower and, so long as any discussion takes place in the presence of a Responsible Officer, with officers and employees of the Credit Parties and with the Borrower's independent certified public accountants. The cost of the inspection referred to in the preceding sentence shall be for the account of the Lenders unless an Event of Default has occurred and is continuing, in which case the cost of such inspection shall be for the account of the Credit Parties. The Credit Parties agree that the Administrative Agent, and its representatives, may conduct an annual audit of the inventory and receivables of the Credit Parties, at the expense of the Borrower. 7.8 Environmental Laws. (a) Comply in all material respects with, and take reasonable actions to ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with and maintain, and take reasonable actions to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so would not reasonably be expected to have a Material Adverse Effect; and (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings and the failure to do or the pendency of such proceedings would not reasonably be expected to have a Material Adverse Effect. 7.9 Financial Covenants. Comply with the following financial covenants (each of which shall be computed in accordance with Section 1.3(b), to the extent applicable): (a) Consolidated Leverage Ratio. As of the end of each fiscal quarter ending during the respective periods set forth below, the Consolidated Leverage Ratio shall be not greater than the ratio set forth opposite such period: Closing Date through June 30, 1999 3.0:1.0 July 1, 1999 and thereafter 2.5:1.0 (b) Minimum Consolidated Base EBITDA. For the period from the Closing Date through the fiscal quarter ending June 30, 1999, as of the end of each fiscal quarter for the period 65 74 of four consecutive fiscal quarters then ending, Consolidated Base EBITDA shall be not less than Fifteen Million Dollars ($15,000,000). (c) Consolidated Net Worth. As of the end of each fiscal quarter, Consolidated Net Worth shall be not less than the sum of $88,000,000 plus on the last day of each fiscal quarter to occur after the Closing Date, seventy-five percent (75%) of Consolidated Net Income for the fiscal quarter (but not less than zero), such increases to be cumulative, plus one hundred percent (100%) of any increases in Consolidated Net Worth resulting from Equity Transactions occurring after the Closing Date. (d) Consolidated Fixed Charge Coverage Ratio. As of the end of each fiscal quarter, Consolidated Fixed Charge Coverage Ratio shall be not less than 1.75:1.0. (e) Consolidated Rent Expense. Consolidated Rent Expense for any fiscal year, commencing with the fiscal year ending December 31, 1999, shall be not more than $5,000,000. 7.10 Administrative Fees. Pay to the Administrative Agent the Administrative Agent's Fees and comply with the other agreements provided for in the Administrative Agent's Fee Letter. 7.11 Additional Guaranties and Stock Pledges. (a) Domestic Subsidiaries. Where Domestic Subsidiaries of the Borrower which are not Credit Parties hereunder (the "Non-Guarantor Subsidiaries") shall at any time constitute more than (the "Threshold Requirement"): (i) in any instance for any such Non-Guarantor Subsidiary, five percent (5%) of consolidated assets for the Consolidated Group or five percent (5%) of consolidated revenues for the Consolidated Group, or (ii) in the aggregate for all such Non-Guarantor Subsidiaries, ten percent (10%) of consolidated assets for the Consolidated Group or ten percent (10%) of consolidated revenues for the Consolidated Group, then the Borrower shall (i) notify the Administrative Agent thereof within 10 days after a Responsible Officer has knowledge thereof, and, within 20 days thereafter, (A) cause such Domestic Subsidiary or Subsidiaries to become a Guarantor by execution of a Joinder Agreement, such that immediately after joinder as a Guarantor, the remaining Non-Guarantor Subsidiaries shall not in any instance, or collectively, exceed the Threshold Requirement, (B) deliver with the Joinder Agreement, supporting resolutions, incumbency certificates, corporate formation and organizational documentation and opinions of counsel as the Administrative Agent may reasonably request, and (C) deliver stock certificates and related pledge agreements 66 75 or pledge joinder agreements evidencing the pledge of 100% of the Voting Stock of all Domestic Subsidiaries (whether or not they are Guarantors) and 66% of the Voting Stock of all Foreign Subsidiaries, together with undated stock transfer powers executed in blank. (b) Foreign Subsidiaries. At any time any Person becomes a Foreign Subsidiary, the Borrower will notify the Administrative Agent thereof within 10 days after a Responsible Officer has knowledge thereof, and, within 45 days thereafter, cause (A) delivery of supporting resolutions, incumbency certificates, corporation formation and organizational documentation and opinions of counsel as the Administrative Agent may reasonably request, and (B) delivery of stock certificates (where required for perfection under local law) and a related pledge agreement or pledge joinder agreement evidencing the pledge of 66% of the Voting Stock of such Foreign Subsidiary and of 66% of the Voting Stock of each of its Domestic Subsidiaries and 66% of the Voting Stock of each of its Foreign Subsidiaries, together in each case with undated stock transfer powers executed in blank. 7.12 Ownership of Subsidiaries. Except to the extent otherwise permitted in Section 8.6, the Borrower shall, directly or indirectly, own at all times 100% of the Voting Stock of each of its Subsidiaries. 7.13 Use of Proceeds. Extensions of Credit will be used solely for the purposes provided in Section 6.15. 7.14 Year 2000 Compatibility. Take all action reasonably necessary to assure that its computer based systems are Year 2000 Compliant within the meaning of Section 6.17), except to the extent that a failure to do so would not have a Material Adverse Effect, and, at the reasonable request of the Administrative Agent or the Required Lenders, provide evidence to the Lenders that it is taking such action. SECTION 8 NEGATIVE COVENANTS Each of the Credit Parties covenants and agrees that on the Closing Date, and so long as this Credit Agreement is in effect and until the Commitments have been terminated, no Obligations remain outstanding and all amounts owing hereunder or in connection herewith, have been paid in full, no member of the Consolidated Group shall (without the prior written consent of the Required Lenders): 67 76 8.1 Indebtedness. Contract, create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness arising or existing under this Credit Agreement and the other Credit Documents; (b) Indebtedness set forth in Schedule 8.1, and renewals, refinancings and extensions thereof on terms and conditions consistent with then prevailing market standards for such existing Indebtedness; (c) Capital Lease Obligations and Indebtedness incurred, in each case, to provide all or a portion of the purchase price or costs of construction of an asset or, in the case of a sale/leaseback transaction as described in Section 8.9, to finance the value of such asset owned by a member of the Consolidated Group, provided that (i) such Indebtedness when incurred shall not exceed the purchase price or cost of construction of such asset or, in the case of a sale/leaseback transaction, the fair market value of such asset, (ii) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing, and (iii) the total amount of all such Indebtedness shall not exceed $1,500,000 at any time outstanding; (d) Indebtedness and obligations owing under interest rate protection agreements relating to the Obligations hereunder and under interest rate, commodities and foreign currency exchange protection agreements entered into in the ordinary course of business to manage existing or anticipated risks and not for speculative purposes; (e) unsecured intercompany Indebtedness owing by a member of the Consolidated Group to another member of the Consolidated Group (subject, however, to the limitations of Section 8.5 in the case of the member of the Consolidated Group extending the intercompany loan, advance or credit); (f) Subordinated Debt of the Borrower; (g) Indebtedness in respect of financed insurance premium obligations; (h) other unsecured Indebtedness of any of the Credit Parties of up to $1,000,000 in the aggregate at any time outstanding; and (i) Support Obligations of Indebtedness permitted under this Section 8.1. 68 77 8.2 Liens. Contract, create, incur, assume or permit to exist any Lien with respect to any of their respective property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or hereafter acquired, except for Permitted Liens. 8.3 Consolidation, Merger, Divestiture, etc. (a) Enter into a transaction of merger or consolidation, except (i) a member of the Consolidated Group may be a party to a transaction of merger or consolidation with another member of the Consolidated Group, provided that (A) if the Borrower is a party thereto, it shall be the surviving corporation, (B) if a Guarantor is a party thereto and the Borrower is not a party thereto, a Guarantor shall be the surviving corporation or the surviving corporation shall be a Domestic Subsidiary and shall become a Guarantor hereunder as an Additional Credit Party pursuant to Section 7.11 concurrently therewith, and (C) no Default or Event of Default shall exist either immediately prior to or immediately after giving effect thereto; and (ii) a member of the Consolidated Group (other than the Borrower) may be a party to a transaction of merger or consolidation with any other Person in connection with an Acquisition permitted under Section 8.4 and a Divestiture permitted under Section 8.3(b), provided that, in connection with an Acquisition, the provisions of Section 7.11 regarding joinder of certain Subsidiaries as Additional Credit Parties hereunder shall be complied with. (b) Make any Divestiture which: (i) in any instance (including any series of related transactions comprising a Divestiture) shall be of Property (or of a Person owning Property) constituting more than five percent (5%) of Consolidated Assets at the end of the immediately preceding fiscal year or generating more than five percent (5%) of Consolidated Net Income for the immediately preceding fiscal year, or (ii) in the aggregate in any fiscal year shall be of Property (or of a Person owning Property) constituting more than ten percent (10%) of Consolidated Assets at the end of the immediately preceding fiscal year or generating more than ten percent (10%) Consolidated Net Income for the immediately preceding fiscal year; provided in the case of any Divestiture permitted under subsections (i) and (ii) above, that no Default of Event of Default would exist after giving effect thereto, determined in the case of financial covenant compliance on a Pro Forma Basis and as otherwise set forth in Section 1.3(b). 69 78 (c) In the case of the Borrower, liquidate, wind-up or dissolve, whether voluntarily or involuntarily (or suffer to permit any such liquidation or dissolution). Any consent of the Required Lenders requested by the Borrower under this Section 8.3 shall not be arbitrarily withheld or unreasonably delayed. 8.4 Acquisitions. Make any Acquisition, unless (a) the cash consideration payable in respect of any such Acquisition (or series of related transactions comprising an Acquisition) shall not exceed $10,000,000 in any instance; (b) the cash consideration payable in respect of all such Acquisitions (excluding acquisitions consented to in writing by the Required Lenders) in any period of four consecutive fiscal quarters shall not exceed $20,000,000 in the aggregate; (c) the Board of Directors of the Person which is, or whose Property is, the subject of the Acquisition shall have approved the Acquisition; and (d) no Default or Event of Default would exist after giving effect thereto, determined in the case of financial covenant compliance on a Pro Forma Basis and as otherwise set forth in Section 1.3(b). Any consent of the Required Lenders requested by the Borrower under this Section 8.4 shall not be arbitrarily withheld or unreasonably delayed. 8.5 Investments. Make any Investment in any Person except for Permitted Investments. 8.6 Ownership of Equity Interests. Issue, sell, transfer, pledge or otherwise dispose of any partnership interests, shares of capital stock or other equity or ownership interests ("Equity Interests") in any member of the Consolidated Group, except (i) issuance, sale or transfer of Equity Interests to a Credit Party by a Subsidiary of such Credit Party, (ii) in connection with a transaction permitted by Sections 8.3, 8.4 or 8.5, (iii) as needed to qualify directors under applicable law and (iv) dispositions of Permitted Investments (other than Investments by a Credit Party in another Credit Party). 70 79 8.7 Fiscal Year. Change its fiscal year from a December 31 fiscal year end. 8.8 Restricted Payments. Make or permit any Restricted Payments. 8.9 Sale Leasebacks. Except as permitted pursuant to Section 8.1(c) hereof, directly or indirectly, become or remain liable as lessee or as guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any Property (whether real or personal or mixed), whether now owned or hereafter acquired, (i) which such Person has sold or transferred or is to sell or transfer to any other Person other than a Credit Party or (ii) which such Person intends to use for substantially the same purpose as any other Property which has been sold or is to be sold or transferred by such Person to any other Person in connection with such lease. 8.10 No Further Negative Pledges. Except with respect to prohibitions against other encumbrances on specific Property encumbered to secure payment of particular Indebtedness (which Indebtedness relates solely to such specific Property, and improvements and accretions thereto, and is otherwise permitted hereby), no member of the Consolidated Group will enter into, assume or become subject to any agreement prohibiting or otherwise restricting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for such obligation if security is given for some other obligation. SECTION 9 EVENTS OF DEFAULT 9.1 Events of Default. An Event of Default shall exist upon the occurrence of any of the following specified events (each an "Event of Default"): (a) Payment. Any Credit Party shall (i) default in the payment on the Termination Date of any principal of any of the Revolving Loans, or 71 80 (ii) default, and such default shall continue for three (3) or more Business Days, in the payment when due of any reimbursement obligations arising from drawings under Letters of Credit, or of any interest on the Revolving Loans or on any reimbursement obligations arising from drawings under Letters of Credit, or of any Fees or other amounts owing hereunder, under any of the other Credit Documents or in connection herewith or therewith; or (b) Representations. Any representation, warranty or statement made or deemed to be made herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was made or deemed to have been made (other than those which are untrue solely as a result of changes permitted by this Agreement); or (c) Covenants. (i) Default in the due performance or observance of any term, covenant or agreement contained in Section 7.3(a), 7.9, 7.11, 7.13 or 8.1 through 8.10, inclusive, or (ii) Default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b) or (c)(i) of this Section 9.1) contained in this Credit Agreement and such default shall continue unremedied for a period of at least 30 days after the earlier of a Responsible Officer becoming aware of such default or notice thereof by the Administrative Agent; or (d) Other Credit Documents. (i) Any Credit Party shall default in the due performance or observance of any material term, covenant or agreement in any of the other Credit Documents (subject to applicable grace or cure periods, if any), or (ii) except as to the Credit Party which is dissolved, released or merged or consolidated out of existence as the result of or in connection with a dissolution, merger or disposition permitted by Section 8.3 or Section 8.4, any Credit Document shall fail to be in full force and effect or to give the Administrative Agent and/or the Lenders any material part of the Liens, rights, powers and privileges purported to be created thereby; or (e) Guaranties. Except as to the Credit Party which is dissolved, released or merged or consolidated out of existence as the result of or in connection with a dissolution, merger or disposition permitted by Section 8.3 or Section 8.4, the guaranty given by any Guarantor hereunder or any material provision thereof shall cease to be in full force and effect, or any Guarantor hereunder or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under such guaranty, or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any guaranty; or 72 81 (f) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect to any Material Credit Party; or (g) Defaults under Other Agreements. With respect to any Indebtedness (other than Indebtedness outstanding under this Credit Agreement) in excess of $1,500,000 in the aggregate for the Consolidated Group taken as a whole, (A) (1) any Material Credit Party shall default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness, or (2) the occurrence and continuance of a default in the observance or performance relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required), any such Indebtedness to become due prior to its stated maturity; or (B) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or (h) Judgments. Any Material Credit Party shall fail within 30 days of the date due and payable to pay, bond or otherwise discharge any judgment, settlement or order for the payment of money which judgment, settlement or order, when aggregated with all other such judgments, settlements or orders due and unpaid at such time, exceeds $1,500,000, and which is not stayed on appeal (or for which no motion for stay is pending) or is not otherwise being executed; or (i) ERISA. Any of the following events or conditions, if such event or condition could reasonably be expected to have a Material Adverse Effect: (1) any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of a member of the Consolidated Group or any ERISA Affiliate in favor of the PBGC or a Plan; (2) an ERISA Event shall occur with respect to a Single Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (3) an ERISA Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in (i) the termination of such Plan for purposes of Title IV of ERISA, or (ii) a member of the Consolidated Group or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency of (within the meaning of Section 4245 of ERISA) such Plan; or (4) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code) or breach of fiduciary responsibility shall occur which may subject a member of the Consolidated Group or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Internal Revenue Code, or under any agreement or other instrument pursuant to which a member of the Consolidated Group or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability; or 73 82 (j) Ownership. There shall occur a Change of Control. 9.2 Acceleration; Remedies. Upon the occurrence and during the continuation of an Event of Default, the Administrative Agent shall, upon the request and direction of the Required Lenders, by written notice to the Credit Parties take any of the following actions: (i) Termination of Commitments. Declare the Commitments terminated whereupon the Commitments shall be immediately terminated. (ii) Acceleration. Declare the unpaid principal of and any accrued interest in respect of all Revolving Loans, any reimbursement obligations arising from drawings under Letters of Credit and any and all other indebtedness or obligations of any and every kind owing by the Credit Parties to the Administrative Agent and/or any of the Lenders hereunder to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each of the Credit Parties. (iii) Cash Collateral. Direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default under Section 9.1(f), it will immediately pay) to the Administrative Agent additional cash, to be held by the Administrative Agent, for the benefit of the Lenders, in a cash collateral account as additional security for the LOC Obligations in respect of subsequent drawings under all then outstanding Letters of Credit in an amount equal to the maximum aggregate amount which may be drawn under all Letters of Credits then outstanding. (iv) Enforcement of Rights. Enforce any and all rights and interests created and existing under the Credit Documents and all rights of set-off. Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(f) shall occur, then the Commitments shall automatically terminate and all Revolving Loans, all reimbursement obligations arising from drawings under Letters of Credit, all accrued interest in respect thereof, all accrued and unpaid Fees and other indebtedness or obligations owing to the Administrative Agent and/or any of the Lenders hereunder automatically shall immediately become due and payable without presentment, demand, protest or the giving of any notice or other action by the Administrative Agent or the Lenders, all of which are hereby waived by the Credit Parties. 74 83 SECTION 10 AGENCY PROVISIONS 10.1 Appointment. Each Lender hereby designates and appoints NationsBank, N.A. as administrative agent (in such capacity, the "Administrative Agent") of such Lender to act as specified herein and the other Credit Documents, and each such Lender hereby authorizes the Administrative Agent as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Credit Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated by the terms hereof and of the other Credit Documents, together with such other powers as are reasonably incidental thereto. Each Lender further directs and authorizes the Administrative Agent to execute releases (or similar agreements) to give effect to the provisions of this Credit Agreement and the other Credit Documents, including specifically, without limitation, in connection with a Divestiture consented to or permitted pursuant the provisions of Section 8.3 hereof or a sale, lease, transfer or other disposition of Property not prohibited by this Credit Agreement. Notwithstanding any provision to the contrary elsewhere herein and in the other Credit Documents, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or any of the other Credit Documents, or shall otherwise exist against the Administrative Agent. The provisions of this Section are solely for the benefit of the Administrative Agent and the Lenders and none of the Credit Parties shall have any rights as a third party beneficiary of the provisions hereof (other than as set forth in the second sentence hereof). In performing its functions and duties under this Credit Agreement and the other Credit Documents, the Administrative Agent shall act solely as Administrative Agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for any Credit Party or any of their respective Affiliates. 10.2 Delegation of Duties. The Administrative Agent may execute any of its duties hereunder or under the other Credit Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 10.3 Exculpatory Provisions. The Administrative Agent and its officers, directors, employees, agents, attorneys-in-fact or affiliates shall not be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection herewith or in connection with any of the other Credit Documents (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any 75 84 of the Credit Parties contained herein or in any of the other Credit Documents or in any certificate, report, document, financial statement or other written or oral statement referred to or provided for in, or received by the Administrative Agent under or in connection herewith or in connection with the other Credit Documents, or enforceability or sufficiency therefor of any of the other Credit Documents, or for any failure of any Credit Party to perform its obligations hereunder or thereunder. The Administrative Agent shall not be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectability or sufficiency of this Credit Agreement, or any of the other Credit Documents or for any representations, warranties, recitals or statements made herein or therein or made by the Borrower or any Credit Party in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Administrative Agent to the Lenders or by or on behalf of the Credit Parties to the Administrative Agent or any Lender or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Revolving Loans or the use of the Letters of Credit or of the existence or possible existence of any Default or Event of Default or to inspect the properties, books or records of the Credit Parties or any of their respective Affiliates. 10.4 Reliance on Communications. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to any of the Credit Parties, independent accountants and other experts selected by the Administrative Agent with reasonable care). The Administrative Agent may deem and treat the Lenders as the owners of their respective interests hereunder for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent in accordance with Section 11.3(b) hereof. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Credit Agreement or under any of the other Credit Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under any of the other Credit Documents in accordance with a request of the Required Lenders (or to the extent specifically provided in Section 11.6, all the Lenders) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders (including their successors and assigns). 10.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or a Credit Party referring to the Credit Document, describing such Default or Event of 76 85 Default and stating that such notice is a "notice of default." In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders. 10.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that each of the Administrative Agent and its officers, directors, employees, Administrative Agents, attorneys-in-fact or affiliates has not made any representations or warranties to it and that no act by the Administrative Agent or any affiliate thereof hereinafter taken, including any review of the affairs of any Credit Party or any of their respective Affiliates, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower, the other Credit Parties or their respective Affiliates and made its own decision to make its Revolving Loans hereunder and enter into this Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower, the other Credit Parties and their respective Affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial or other conditions, prospects or creditworthiness of the Borrower, the other Credit Parties or any of their respective Affiliates which may come into the possession of the Administrative Agent or any of its officers, directors, employees, Administrative Agents, attorneys-in-fact or affiliates. 10.7 Indemnification. The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitments (or if the Commitments have expired or been terminated, in accordance with the respective principal amounts of outstanding Revolving Loans and Participation Interests of the Lenders), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the final payment of all of the obligations of the Borrower hereunder and under the other Credit Documents) be imposed on, incurred by or asserted against the Administrative Agent in its capacity as such in any way relating to or arising out of this Credit Agreement or the other Credit Documents or any 77 86 documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent. If any indemnity furnished to the Administrative Agent for any purpose shall, in the opinion of the Administrative Agent, be insufficient or become impaired, the Administrative Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section shall survive the repayment of the Revolving Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 10.8 Administrative Agent in its Individual Capacity. The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower, its Subsidiaries or their respective Affiliates as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Revolving Loans made by and all obligations of the Borrower hereunder and under the other Credit Documents, the Administrative Agent shall have the same rights and powers under this Credit Agreement as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 10.9 Successor Administrative Agent. The Administrative Agent may, at any time, resign upon 20 days' written notice to the Lenders, and may be removed, upon show of cause, by the Required Lenders upon 30 days' written notice to the Administrative Agent. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the notice of resignation or notice of removal, as appropriate, then the retiring Administrative Agent shall select a successor Administrative Agent provided such successor is a Lender hereunder or a commercial bank organized under the laws of the United States of America or of any State thereof and has a combined capital and surplus of at least $400,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations as Administrative Agent, as appropriate, under this Credit Agreement and the other Credit Documents and the provisions of this Section 10.9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Credit Agreement. 78 87 SECTION 11 MISCELLANEOUS 11.1 Notices. Except as otherwise expressly provided herein, all notices and other communications shall have been duly given and shall be effective (i) when delivered, (ii) when transmitted via telecopy (or other facsimile device) to the number set out below, (iii) the day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (iv) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address, in the case of the Borrower, Guarantors and the Administrative Agent, set forth below, and, in the case of the Lenders, set forth on Schedule 11.1, or at such other address as such party may specify by written notice to the other parties hereto: if to the Borrower or the Guarantors: Railworks Corporation 1104 Kenilworth Drive Towson, MD 21204 Attn: Michael R. Azarela Telephone: (410) 467-9504 Telecopy: (410) 467-9505 if to the Administrative Agent: NationsBank, N.A. 101 N. Tryon Street Independence Center, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attn: Gregg Newland Agency Services Telephone: (704) 386-4218 Telecopy: (704) 388-9436 79 88 with a copy to: NationsBank, N.A. 10 Light Street Sixteenth Floor MD4-302-16-01 Baltimore, MD 21202-1435 Attn: Monica Brandes Telephone: (410) 605-8019 Telecopy: (410) 539-7508 11.2 Right of Set-Off. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, each Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to set-off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Lender (including, without limitation branches, agencies or Affiliates of such Lender wherever located) to or for the credit or the account of any Credit Party against obligations and liabilities of such Person to such Lender hereunder, under the Notes, the other Credit Documents or otherwise, irrespective of whether such Lender shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such set-off shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of such Lender subsequent thereto. Any Person purchasing a participation in the Revolving Loans and Commitments hereunder pursuant to Section 3.14 or Section 11.3(d) may exercise all rights of set-off with respect to its participation interest as fully as if such Person were a Lender hereunder. 11.3 Benefit of Agreement. (a) Generally. This Credit Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided that none of the Credit Parties may assign or transfer any of its interests without prior written consent of the Lenders; provided further that the rights of each Lender to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth in this Section 11.3, provided however that nothing herein shall prevent or prohibit any Lender from (i) pledging its Revolving Loans hereunder to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank, or (ii) granting assignments or selling participations in such Lender's Revolving Loans and/or Commitments hereunder to its parent company and/or to any Affiliate or Subsidiary of such Lender. 80 89 (b) Assignments. Each Lender may assign all or a portion of its rights and obligations hereunder (including, without limitation, all or a portion of its Commitments or its Revolving Loans), pursuant to an assignment agreement substantially in the form of Schedule 11.3(b), to (i) a Lender, (ii) an affiliate of a Lender or (iii) any bank, financial institution, commercial lender or institutional investor reasonably acceptable to the Administrative Agent and, so long as no Default or Event of Default has occurred and is continuing, the Borrower (the consent of the Borrower shall not be unreasonably withheld or delayed); provided that (i) any such assignment (other than any assignment to an existing Lender) shall be in a minimum aggregate amount of $5,000,000 (or, if less, the remaining amount of the Commitment being assigned by such Lender) of the Commitments and in integral multiples of $1,000,000 above such amount and (ii) each such assignment shall be of a constant, not varying, percentage of all such Lender's rights and obligations under this Credit Agreement. Any assignment hereunder shall be effective upon delivery to the Administrative Agent of written notice of the assignment together with a transfer fee of $3,500 payable to the Administrative Agent for its own account from and after the later of (i) the effective date specified in the applicable assignment agreement and (ii) the date of recording of such assignment in the Register pursuant to the terms of subsection (c) below. The assigning Lender will give prompt notice to the Administrative Agent and the Borrower of any such assignment. Upon the effectiveness of any such assignment (and after notice to, and (to the extent required pursuant to the terms hereof), with the consent of, the Borrower as provided herein), the assignee shall become a "Lender" for all purposes of this Credit Agreement and the other Credit Documents and, to the extent of such assignment, the assigning Lender shall be relieved of its obligations hereunder to the extent of the Revolving Loans and Commitment components being assigned. Along such lines the Borrower agrees that upon notice of any such assignment and surrender of the appropriate Note or Notes, it will promptly provide to the assigning Lender and to the assignee separate promissory notes in the amount of their respective interests substantially in the form of the original Note (but with notation thereon that it is given in substitution for and replacement of the original Note or any replacement notes thereof). By executing and delivering an assignment agreement in accordance with this Section 11.3(b), the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim; (ii) except as set forth in clause (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto or the financial condition of any Credit Party or any of their respective Affiliates or the performance or observance by any Credit Party of any of its obligations under this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such assignment agreement; (iv) such assignee confirms that it has received a copy of this Credit Agreement, the other Credit Documents and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such assignment agreement; (v) such assignee will independently and without 81 90 reliance upon the Administrative Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Credit Agreement and the other Credit Documents; (vi) such assignee appoints and authorizes the Administrative Agent to take such action on its behalf and to exercise such powers under this Credit Agreement or any other Credit Document as are delegated to the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Credit Agreement and the other Credit Documents are required to be performed by it as a Lender. (c) Maintenance of Register. The Administrative Agent shall maintain at one of its offices in Charlotte, North Carolina a copy of each Lender assignment agreement delivered to it in accordance with the terms of subsection (b) above and a register for the recordation of the identity of the principal amount, type and Interest Period of each Revolving Loan outstanding hereunder, the names, addresses and the Commitments of the Lenders pursuant to the terms hereof from time to time (the "Register"). The Administrative Agent will make reasonable efforts to maintain the accuracy of the Register and to promptly update the Register from time to time, as necessary. The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrower and each Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Participations. Each Lender may sell, transfer, grant or assign participations in all or a portion of such Lender's rights, obligations or rights and obligations hereunder (including all or a portion of its Commitments or its Revolving Loans); provided that (i) such selling Lender shall remain a "Lender" for all purposes under this Credit Agreement (such selling Lender's obligations under the Credit Documents remaining unchanged) and the participant shall not constitute a Lender hereunder, (ii) no such participant shall have, or be granted, rights to approve any amendment or waiver relating to this Credit Agreement or the other Credit Documents except to the extent any such amendment or waiver would (A) reduce the principal of or rate of interest on or Fees in respect of any Revolving Loans in which the participant is participating, (B) postpone the date fixed for any payment of principal (including extension of the Termination Date or the date of any mandatory prepayment), interest or Fees in which the participant is participating, (C) except as the result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.3, release the Borrower or substantially all of the Guarantors from its or their obligations under the Credit Documents, or (D) except as the result of or in connection with a Divestiture permitted under Section 8.3(b), release all or substantially all of the collateral, and (iii) sub- participations by the participant (except to an affiliate, parent company or affiliate of a parent company of the participant) shall be prohibited. In the case of any such participation, the participant shall not have any rights under this Credit Agreement or the other Credit Documents (the participant's rights against the selling Lender in respect of such participation to be those set forth in the participation agreement with such Lender creating such participation) and all amounts payable by the Borrower hereunder shall be 82 91 determined as if such Lender had not sold such participation, provided, however, that such participant shall be entitled to receive additional amounts under Sections 3.6, 3.9, 3.10, 3.11 and 11.2 on the same basis as if it were a Lender. 11.4 No Waiver; Remedies Cumulative. No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Administrative Agent or any Lender and any of the Credit Parties shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle the Borrower or any other Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. 11.5 Payment of Expenses, etc. The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses (A) of the Administrative Agent in connection with the negotiation, preparation, execution and delivery and administration of this Credit Agreement and the other Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and expenses of Moore & Van Allen, PLLC, special counsel to the Administrative Agent) and any amendment, waiver or consent relating hereto and thereto including, but not limited to, any such amendments, waivers or consents resulting from or related to any work-out, renegotiation or restructure relating to the performance by the Credit Parties under this Credit Agreement and (B) of the Administrative Agent and the Lenders in connection with enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, in connection with any such enforcement, the reasonable fees and disbursements of counsel for the Administrative Agent and each of the Lenders); (ii) permit the Administrative Agent to perform inventory and accounts receivable field audits at the Borrower's expense, provided that unless an Event of Default shall be in existence the Borrower's obligation to reimburse the Administrative Agent for such field audits shall be limited to one such field audit each fiscal year; (iii) pay and hold each of the Lenders harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes; and (iv) indemnify each Lender, its officers, directors, employees, representatives and Administrative Agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of (A) any investigation, litigation or other proceeding (whether or not any Lender is a party thereto) related to the entering into and/or performance of any 83 92 Credit Document or the use of proceeds of any Revolving Loans (including other Extensions of Credit) hereunder or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding or (B) the presence or Release of any Materials of Environmental Concern at, under or from any Property owned, operated or leased by the Borrower or any of its Subsidiaries, or the failure by the Borrower or any of its Subsidiaries to comply with any Environmental Law (but excluding, in the case of either of clause (A) or (B) above, any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of gross negligence or willful misconduct on the part of the Person to be indemnified). 11.6 Amendments, Waivers and Consents. Neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing entered into by, or approved in writing by, the Required Lenders and the Borrower, provided, however, that: (a) without the consent of each Lender affected thereby, neither this Credit Agreement nor any of the other Credit Documents may be amended to (i) except as contemplated by Section 2.1(g) hereof, extend the final maturity of any Revolving Loan or the time of payment of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit, or any portion thereof, (ii) reduce the rate or extend the time of payment of interest thereon or Fees hereunder (other than as a result of waiving the applicability of any increase in interest rates or Fees after the occurrence of an Event of Default or on account of a failure to deliver financial statements on a timely basis), (iii) reduce or waive the principal amount of any Revolving Loan or of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit, (iv) increase the Commitment of a Lender over the amount thereof in effect (it being understood and agreed that a waiver of any Default or Event of Default shall not constitute an increase in the Commitment of any Lender), (v) except as the result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.3, release the Borrower or substantially all of the Guarantors from its or their obligations under the Credit Documents, 84 93 (vi) except as the result of or in connection with a Divestiture permitted under Section 8.3(b), release all or substantially all of the collateral, (vii) amend, modify or waive any provision of this Section 11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.13, 3.14, 3.15, 9.1(a), 11.2, 11.3, 11.5 or 11.9, (viii) reduce any percentage specified in, or otherwise modify, the definition of Required Lenders, or (ix) consent to the assignment or transfer by the Borrower (or another Credit Party) of any of its rights and obligations under (or in respect of) the Credit Documents except as permitted thereby; (b) without the consent of the Administrative Agent, no provision of Section 10 may be amended; (c) without the consent of the Issuing Lender, no provision of Section 2.2 may be amended. Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (x) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Revolving Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein and (y) the Required Lenders may consent to allow a Credit Party to use cash collateral in the context of a bankruptcy or insolvency proceeding. 11.7 Counterparts. This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Credit Agreement to produce or account for more than one such counterpart. 11.8 Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement. 11.9 Survival. All indemnities set forth herein, including, without limitation, in Section 2.2(i), 3.9, 3.11, 10.7 or 11.5 shall survive the execution and delivery of this Credit Agreement, the making of the Revolving Loans, the issuance of the Letters of Credit, the repayment of the Revolving Loans, LOC Obligations 85 94 and other obligations under the Credit Documents and the termination of the Commitments hereunder, and all representations and warranties made by the Credit Parties herein shall survive delivery of the Notes and the making of the Revolving Loans hereunder. 11.10 Governing Law; Submission to Jurisdiction; Venue. (a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (b) Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the courts of the State of North Carolina in Mecklenburg County, or of the United States for the Western District of North Carolina, and, by execution and delivery of this Credit Agreement, each of the Credit Parties hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the nonexclusive jurisdiction of such courts. Each of the Credit Parties further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices pursuant to Section 11.1, such service to become effective three (3) days after such mailing. Nothing herein shall affect the right of the Administrative Agent to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Credit Party in any other jurisdiction. (c) Each of the Credit Parties hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Credit Agreement or any other Credit Document brought in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (d) TO THE EXTENT PERMITTED BY LAW, EACH OF THE ADMINISTRATIVE AGENT, THE LENDERS, THE BORROWER AND THE OTHER CREDIT PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.11 Severability. If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 86 95 11.12 Entirety. This Credit Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein. 11.13 Binding Effect; Termination. (a) This Credit Agreement shall become effective at such time on or after the Closing Date when it shall have been executed by the Borrower, the Guarantors and the Administrative Agent, and the Administrative Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Guarantors, the Administrative Agent and each Lender and their respective successors and assigns. (b) The term of this Credit Agreement shall commence on the effective date pursuant to subsection (a) above and shall continue until no Revolving Loans, LOC Obligations or any other amounts payable hereunder or under any of the other Credit Documents shall remain outstanding and until all of the Commitments hereunder shall have expired or been terminated. 11.14 Confidentiality. The Administrative Agent and the Lenders agree to keep confidential (and to cause their respective affiliates, officers, directors, employees, agents and representatives to keep confidential) all information, materials and documents furnished to the Administrative Agent or any such Lender by or on behalf of any Credit Party (whether before or after the Closing Date) which relates to the Borrower or any of its Subsidiaries (the "Information"). Notwithstanding the foregoing, the Administrative Agent and each Lender shall be permitted to disclose Information (i) to its affiliates, officers, directors, employees, agents and representatives in connection with its participation in any of the transactions evidenced by this Credit Agreement or any other Credit Documents or the administration of this Credit Agreement or any other Credit Documents, subject to the provisions of this Section 11.14; (ii) to the extent required by applicable laws and regulations or by any subpoena or similar legal process, or requested by any Governmental Authority; (iii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this Credit Agreement or any agreement entered into pursuant to clause (iv) below, (B) becomes available to the Administrative Agent or such Lender on a non-confidential basis from a source other than a Credit Party or (C) was available to the Administrative Agent or such Lender on a non-confidential basis prior to its disclosure to the Administrative Agent or such Lender by a Credit Party; (iv) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first specifically agrees in a writing furnished to and for the benefit of the Credit Parties to be bound by the terms of this Section 11.14; or (v) to the extent that the Borrower shall have consented in writing to such disclosure. Nothing set forth in this Section 11.14 87 96 shall obligate the Administrative Agent or any Lender to return any materials furnished by the Credit Parties. 11.15 Source of Funds. Each of the Lenders hereby represents and warrants to the Borrower that at least one of the following statements is an accurate representation as to the source of funds to be used by such Lender in connection with the financing hereunder: (a) no part of such funds constitutes assets allocated to any separate account maintained by such Lender in which any employee benefit plan (or its related trust) has any interest; (b) to the extent that any part of such funds constitutes assets allocated to any separate account maintained by such Lender, such Lender has disclosed to the Borrower the name of each employee benefit plan whose assets in such account exceed 10% of the total assets of such account as of the date of such purchase (and, for purposes of this subsection (b), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (c) to the extent that any part of such funds constitutes assets of an insurance company's general account, such insurance company has complied with all of the requirements of the regulations issued under Section 401(c)(1)(A) of ERISA; or (d) such funds constitute assets of one or more specific benefit plans which such Lender has identified in writing to the Borrower. As used in this Section 11.15, the terms "employee benefit plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 11.16 Conflict. To the extent that there is a conflict or inconsistency between any provision hereof, on the one hand, and any provision of any Credit Document, on the other hand, this Credit Agreement shall control. [Signature Page to Follow] 88 97 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written. BORROWER: RAILWORKS CORPORATION, a Delaware corporation By: /s/ Michael R. Azarela ----------------------------------- Name: Michael R. Azarela Title: Executive Vice President and Chief Financial Officer GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC., a Pennsylvania corporation ANNEX RAILROAD BUILDERS, INC., an Indiana corporation COMSTOCK HOLDINGS INC., a Delaware corporation COMTRAK CONSTRUCTION, INC., a Georgia corporation CONDON BROTHERS, INC., a Washington corporation CPI CONCRETE PRODUCTS INCORPORATED, a Tennessee corporation H.P. MCGINLEY INC., a Pennsylvania corporation KENNEDY RAILROAD BUILDERS, INC., a Pennsylvania corporation L.K. COMSTOCK & COMPANY, INC., a New York corporation MERIT RAILROAD CONTRACTORS, INC., a Missouri corporation MIDWEST CONSTRUCTION SERVICES, INC., an Indiana corporation MINNESOTA RAILROAD SERVICE, INC., a Tennessee corporation By: /s/ Michael R. Azarela ------------------------------------- Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors 1 98 NEW ENGLAND RAILROAD CONSTRUCTION CO., INC., a Connecticut corporation NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC., a Michigan corporation R. & M. B. RAIL CO., INC., an Indiana corporation RAILCORP, INC., an Ohio corporation RAILROAD SERVICE, INC., a Nevada corporation RAILROAD SPECIALTIES, INC., an Indiana corporation SOUTHERN INDIANA WOOD PRESERVING CO., INC., an Indiana corporation U.S. TRACKWORKS, INC., a Michigan corporation U.S. RAILWAY SUPPLY, INC., an Indiana corporation WM. A. SMITH CONSTRUCTION CO., INC., a Texas corporation WM. A. SMITH RERAILING SERVICES, INC., a Texas corporation By: /s/ Michael R. Azarela --------------------------------------- Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors LENDERS: NATIONSBANK, N.A., individually in its capacity as a Lender and in its capacity as Administrative Agent By: /s/ Monica Brandes --------------------------------------- Name: Monica Brandes Title: Senior Vice President 2 EX-10.35 4 AMENDMENT #1 TO CREDIT AGREEMENT 1 EXHIBIT 10.35 AMENDMENT NO. 1 THIS AMENDMENT NO. 1 (this "Amendment") dated as of December __, 1998, to the Credit Agreement referenced below, is by and among RAILWORKS CORPORATION, a Delaware corporation, the subsidiaries identified herein, the lenders identified herein, and NATIONSBANK, N.A., as Administrative Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. WITNESSETH WHEREAS, a $75 million credit facility has been established in favor of RAILWORKS CORPORATION, a Delaware corporation (the "Borrower"), pursuant to the terms of that Credit Agreement dated as of August 4, 1998 (as amended and modified, the "Credit Agreement") among the Borrower, the Guarantors and Lenders identified therein, and NationsBank, N.A., as Administrative Agent; WHEREAS, the Borrower has requested certain modifications to the Credit Agreement; WHEREAS, the requested modifications require the consent of the Required Lenders; WHEREAS, the Required Lenders have agreed to the requested modifications on the terms and conditions set forth herein; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. The Credit Agreement is amended in the following respects: 1.1 In Section 1.1, the following definitions are amended or added to read as follows: "Commitment" means the Revolving Commitment, the LOC Commitment and the Swingline Commitment. "Interest Payment Date" means (i) as to any Swingline Loan, the last day of each Interest Period for such Swingline Loan or such other dates as the Swingline Lender may agree or require, (ii) as to any Revolving Loan which is a Base Rate Loan, the last day of each March, June, September and December and the Termination Date and (iii) as to any Revolving Loan which is a Eurodollar Loan, the last day of each Interest Period for such Loan, the date of repayment of principal of such Loan and on the Termination Date, and in addition where the applicable Interest Period is more than three months, then also on the date three months from the beginning of the Interest Period, and each three months thereafter. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day. "Interest Period" means (i) as to any Eurodollar Loan, a period of one, two, three or six months' duration, as the Borrower may elect, commencing in each case on the date of the borrowing (including conversions, extensions and renewals) and (ii) as to any Swingline Loan, a period of such duration as the Borrower may request and the Swingline Lender may agree in accordance with the provisions of Section 2.3(b)(i), commencing in each case on the date of borrowing; provided, however, (A) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next 2 succeeding Business Day (where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (B) no Interest Period shall extend beyond the Termination Date, and (C) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last day of such calendar month. "LOAN" or "LOANS" means the Revolving Loans and/or the Swingline Loans. "NOTE" or "NOTES" means any Revolving Note and/or the Swingline Note. "OBLIGATIONS" means, collectively, the Revolving Loans, the LOC Obligations and the Swingline Loans. "PARTICIPATION INTEREST" means the purchase by a Lender of a participation in LOC Obligations as provided in Section 2.2(c), in Swingline Loans as provided in Section 2.3(b)(iii) and in Revolving Loans as provided in Section 3.14. "QUOTED RATE" means, with respect to a Quoted Rate Swingline Loan, the fixed or floating percentage rate per annum, if any, offered by the Swingline Lender and accepted by the Borrower in accordance with the provisions hereof. "QUOTED RATE SWINGLINE LOAN" means a Swingline Loan bearing interest at the Quoted Rate. "SWINGLINE COMMITMENT" means the commitment of the Swingline Lender to make Swingline Loans in an aggregate principal amount at any time outstanding up to the Swingline Committed Amount and the commitment of the Lenders to purchase participation interests in the Swingline Loans up to their respective Revolving Commitment Percentage as provided in Section 2.3(b)(iii), as such amounts may be reduced from time to time in accordance with the provisions hereof. "SWINGLINE COMMITTED AMOUNT" means the amount of the Swingline Lender's Commitment as specified in Section 2.3(a). "SWINGLINE LENDER" means NationsBank or its successor. "SWINGLINE LOAN" means a swingline revolving loan made by the Swingline Lender pursuant to the provisions of Section 2.3. "SWINGLINE NOTE" means the promissory note of the Borrower in favor of the Swingline Lender evidencing the Swingline Loans, in substantially the form attached hereto as SCHEDULE 2.3(d), as such promissory note may be amended, modified, supplemented, extended, renewed or replaced from time to time. 1.2 A new Section 2.3 is added to read as follows: 2.3 SWINGLINE LOAN SUBFACILITY. (a) SWINGLINE COMMITMENT. During the Commitment Period, subject to the terms and conditions hereof, the Swingline Lender, in its individual capacity, agrees to make certain revolving credit loans (each a "SWINGLINE LOAN" and, collectively, the 2 3 "Swingline Loans") to the Borrower from time to time for the purposes hereinafter set forth; provided, however, (i) the aggregate principal amount of Swingline Loans outstanding at any time shall not exceed TWO MILLION DOLLARS ($2,000,000.00) (the "Swingline Committed Amount"), and (ii) with regard to the Lenders collectively, the aggregate principal amount of Obligations outstanding at any time shall not exceed the lesser of (A) the Aggregate Revolving Committed Amount or (B) the Borrowing Base. Swingline Loans hereunder shall be made as Base Rate Loans or Quoted Rate Swingline Loans, and may be repaid or reborrowed in accordance with the provisions hereof. (b) Swingline Loan Advances. (i) Notices; Disbursement. Whenever the Borrower desires a Swingline Loan advance hereunder it shall give written notice (or telephonic notice promptly confirmed in writing) to the Swingline Lender not later than 11:00 A.M. (Charlotte, North Carolina time) on the Business Day of the requested Swingline Loan advance. Each such notice shall be irrevocable and shall specify (A) that a Swingline Loan advance is requested, (B) the date of the requested Swingline Loan advance (which shall be a Business Day) and (C) the principal amount of and Interest Period for the Swingline Loan advance requested. Each Swingline Loan shall have such maturity date as the Swingline Lender and the Borrower shall agree upon receipt by the Swingline Lender of any such notice from the Borrower. The Swingline Lender shall initiate the transfer of funds representing the Swingline Loan advance to the Borrower by 3:00 P.M. (Charlotte, North Carolina time) on the Business Day of the requested borrowing. Notwithstanding the foregoing provisions of this subsection (i), the Borrower and the Swingline Lender may from time to time agree to make Swingline Loan advances pursuant to an "auto-borrow" and "zero balance" or other similar arrangement, subject however to the conditions and limitations relating to the Swingline Loans set out herein. (ii) Minimum Amounts. Each Swingline Loan advance shall be in a minimum principal amount of $1,000,000 and in integral multiples of $500,000 in excess thereof (or the remaining amount of the Swingline Committed Amount, if less), provided that in the event that an "auto-borrow" or "zero balance" or other similar arrangement shall then be in place with the Swingline Lender, such minimum amounts, if any, provided by such agreement. (iii) Repayment of Swingline Loans. The principal amount of all Swingline Loans shall be due and payable on the earlier of (A) the maturity date agreed to by the Swingline Lender and the Borrower with respect to such Loan or (B) the Termination Date. The Swingline Lender may, at any time, in its sole discretion, by written notice to the Borrower and the Lenders, demand repayment of its Swingline Loans by way of a Revolving Loan advance, in which case the Borrower shall be deemed to have requested a Revolving Loan advance comprised solely of Base Rate Loans in the amount of such Swingline Loans; provided, however, that any such demand shall be deemed to have been given one Business Day prior to the Termination Date and on the date of the occurrence of any Event of Default described in Section 9.1 and upon acceleration of the indebtedness hereunder and the exercise of remedies in accordance with the provisions of Section 9.2. Each Lender hereby irrevocably agrees to make its pro rata share of each such Revolving Loan in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (I) the amount of such borrowing may 3 4 not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (II) whether any conditions specified in Section 5.2 are then satisfied, (III) whether a Default or an Event of Default then exists, (IV) failure of any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (V) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (VI) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower or any other Credit Party), then each Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Swingline Lender such Participation Interests in the outstanding Swingline Loans as shall be necessary to cause each such Lender to share in such Swingline Loans ratably based upon its Commitment Percentage of the Revolving Committed Amount (determined before giving effect to any termination of the Commitments pursuant to Section 3.4), provided that (A) all interest payable on the Swingline Loans shall be for the account of the Swingline Lender until the date as of which the respective Participation Interest is purchased and (B) at the time any purchase of Participation Interests pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Swingline Lender, to the extent not paid to the Swingline Lender by the Borrower in accordance with the terms of subsection (c) below, interest on the principal amount of Participation Interests purchased for each day from and including the day upon which such borrowing would otherwise have occurred to but excluding the date of payment for such Participation Interests, at the rate equal to the Federal Funds Rate. (c) Interest on Swingline Loans. Subject to the provisions of Section 3.1, each Swingline Loan shall bear interest at a per annum rate equal to (i) if such Swingline Loan is a Base Rate Loan, the Base Rate plus the Applicable Percentage, or (ii) if such Swingline Loan is a Quoted Rate Swingline Loan, the Quoted Rate. Interest on Swingline Loans shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein), unless accelerated sooner pursuant to Section 9.2. (d) Swingline Note. The Swingline Loans shall be evidenced by the Swingline Note. 1.3 Section 3.5(a) is amended by the addition of the following provision to the end thereof: (a) Voluntary Prepayments. Loans may be repaid in whole or in part without premium or penalty; provided that (i) Eurodollar Loans may be prepaid only upon three (3) Business Days' prior written notice to the Administrative Agent and must be accompanied by payment of any amounts owing under Section 3.11, and (ii) partial prepayments shall be (A) in the case of Revolving Loans which are Eurodollar Loans, in a minimum aggregate principal amount of $2,500,000 and integral multiples of $500,000 in excess thereof, (B) in the case of Revolving Loans which are Base Rate Loans, in a minimum aggregate principal amount of $1,000,000 and integral multiples of $100,000 in excess thereof, and (C) in the case of Swingline Loans, in a minimum aggregate 4 5 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. BORROWER: RAILWORKS CORPORATION, a Delaware corporation By: /s/ MICHAEL R. AZARELA --------------------------- Name: Title: GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC., a Pennsylvania corporation ANNEX RAILROAD BUILDERS, INC., an Indiana corporation COMSTOCK HOLDINGS INC., a Delaware corporation COMTRAK CONSTRUCTION, INC., a Georgia corporation CONDON BROTHERS, INC., a Washington corporation CPI CONCRETE PRODUCTS INCORPORATED, a Tennessee corporation H.P. MCGINLEY INC., a Pennsylvania corporation KENNEDY RAILROAD BUILDERS, INC., a Pennsylvania corporation L.K. COMSTOCK & COMPANY, INC., a New York corporation By: /s/ MICHAEL R. AZARELA --------------------------- Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors 6 MERIT RAILROAD CONTRACTORS, INC., a Missouri corporation MIDWEST CONSTRUCTION SERVICES, INC., an Indiana corporation MINNESOTA RAILROAD SERVICE, INC., a Tennessee corporation NEW ENGLAND RAILROAD CONSTRUCTION CO., INC., a Connecticut corporation NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC., a Michigan corporation R. & M. B. RAIL CO., INC., an Indiana corporation RAILCORP, INC., an Ohio corporation RAILROAD SERVICE, INC., a Nevada corporation RAILROAD SPECIALTIES, INC., an Indiana corporation SOUTHERN INDIANA WOOD PRESERVING CO., INC., an Indiana corporation U.S. TRACKWORKS, INC., a Michigan corporation U.S. RAILWAY SUPPLY, INC., an Indiana corporation WM. A. SMITH CONSTRUCTION CO., INC., a Texas corporation WM. A. SMITH RERAILING SERVICES, INC., a Texas corporation By: /s/ MICHAEL R. AZARELA -------------------------------------- Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors 7 LENDERS: NATIONSBANK, N.A. individually in its capacity as a Lender and in its capacity as Administrative Agent By: /s/ MONICA BRANDES -------------------------------- Name: Monica R. Brandes Title: Senior Vice President FIRST UNION NATIONAL BANK By: -------------------------------- Name: Bob Bauer Title: Vice President CRESTAR BANK By: -------------------------------- Name: Paul Beliveau Title: Vice President SUMMIT BANK By: -------------------------------- Name: Noel Lassise Title: Vice President EX-10.36 5 AMENDMENT #2 TO CREDIT AGREEMENT 1 EXHIBIT 10.36 AMENDMENT NO. 2 THIS AMENDMENT NO. 2 (this "Amendment") dated as of February 2, 1999, to the Credit Agreement referenced below, is by and among RAILWORKS CORPORATION, a Delaware corporation, the subsidiaries identified herein, the lenders identified herein, and NATIONSBANK, N.A., as Administrative Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. WITNESSETH WHEREAS, a $75 million credit facility has been extended to RAILWORKS CORPORATION, a Delaware corporation (the "Borrower"), pursuant to the terms of that Credit Agreement dated as of August 4, 1998 (as amended and modified, the "Credit Agreement") among the Borrower, the Guarantors and Lenders identified therein, and NationsBank, N.A., as Administrative Agent; WHEREAS, the Borrower has requested certain modifications to the Credit Agreement which require the consent of the Required Lenders; WHEREAS, the Required Lenders have agreed to the requested modifications on the terms and conditions set forth herein; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. The Credit Agreement is amended in the following respects: 1.1 In Section 1.1, the following definitions are amended or added to read as follows: "Amendment Date" means February 2, 1999 (being the date of Amendment No. 2). "Bridge Credit Agreement" means that certain Credit Agreement dated as of February 2, 1999 by and among the Borrower, the Guarantors, the lenders party thereto and NationsBank, N.A., as Administrative Agent, as amended, modified, extended or renewed. "Bridge Repayment Date" means the date on which all loans and obligations under the Bridge Credit Agreement are paid in full. "Consolidated EBITDA" means for any period for the Consolidated Group, the sum of Consolidated Net Income plus Consolidated Interest Expense plus all provisions for any Federal, state or other domestic and foreign income taxes plus depreciation and amortization minus, to the extent not deducted in determining Consolidated Net Income, earn-out payments made in connection with the Permitted Acquisitions, in each case on a consolidated basis determined in accordance with GAAP applied on a consistent basis, but excluding for purposes hereof extraordinary gains and losses and related tax effects thereon. 2 "Consolidated Fixed Charges" means for any period for the Consolidated Group, the sum of the principal amount of Consolidated Interest Expense (excluding the amortization of debt discount and premium) plus the greater of (i) (A) from the Amendment Date until the Bridge Repayment Date, ten percent (10%) of the sum of Obligations outstanding hereunder plus loans outstanding under the Bridge Credit Agreement, in each case on the date of determination and (B) subsequent to the Bridge Repayment Date, twenty percent (20%) of Obligations outstanding hereunder on the date of determination, or (ii) Two Million Dollars ($2,000,000), in each case on a consolidated basis determined in accordance with GAAP applied on an consistent basis. Except as otherwise expressly provided, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Senior Debt" means Consolidated Funded Debt less Subordinated Debt of the Consolidated Group on a consolidated basis as determined in accordance with GAAP. "Consolidated Senior Leverage Ratio" means, as of the last day of any fiscal quarter, the ratio of Consolidated Senior Debt on such day to Consolidated EBITDA for the period of four consecutive fiscal quarters ending as of such day. "Debt Transaction" means, with respect to any member of the Consolidated Group, any sale, issuance or placement of Subordinated Debt permitted by Section 8.1. "Intercreditor Agreement" means that certain Intercreditor Agreement dated as of the date hereof by and among NationsBank, N.A., as Administrative Agent under the Bridge Credit Agreement, NationsBank, N.A., as Administrative Agent under this Credit Agreement, and the Credit Parties, as amended or modified from time to time, in substantially the form of Exhibit A attached hereto. "Permitted Acquisitions" means the acquisition by the Borrower or any of its Subsidiaries of the following entities: (a) Gantrex Group, (b) FCM Rail, LTD, (c) Walpar Inc., (d) Midwest Railroad Construction and (e) F&V Metro Contracting Corp. and Affiliates. 1.2 The definition of "Credit Documents" in Section 1.1 shall be amended to include the "Intercreditor Agreement". 1.3 In the definition of "Permitted Liens" in Section 1.1, clauses (xv) and (xvi) are renumbered as clauses (xvi) and (xvii), and a new clause (xv) is added to read as follows: (xv) Liens in favor of the administrative agent and lenders under the Bridge Credit Agreement securing the loans and obligations owing under the Bridge Credit Agreement on a pari passu basis with the loans and obligations owing under this Credit Agreement, but only to the extent (A) such Liens are on the same collateral as to which the Lenders also have a lien and (B) such Liens are subject to the Intercreditor Agreement. 1.4 Section 7.1(d) is amended to read as follows: (d) Borrowing Base Certificate. Within 30 days after the end of each calendar month, a statement of the Borrowing Base and its components as of the end of such calendar month, in form 2 3 and content satisfactory to the Administrative Agent and certified by the chief financial officer of the Borrower to be true and correct as of the date thereof (the "Borrowing Base Certificate"). 1.5 Section 7.9(a) (Consolidated Leverage Ratio) is amended to read as follows: (a) Consolidated Leverage Ratio. As of the end of each fiscal quarter ending during the respective periods set forth below, the Consolidated Leverage Ratio shall not be greater than the ratio set forth opposite such period: Closing Date through June 30, 1999 3.0:1.0 July 1, 1999 and thereafter 2.5:1.0 provided that, notwithstanding the foregoing, on the date of and subsequent to any Debt Transaction of at least $25,000,000, the Consolidated Leverage Ratio shall not be greater than 4.0:1.0. 1.6 Section 7.9(c) (Consolidated Net Worth) is amended to read as follows: (c) Consolidated Net Worth. As of the end of each fiscal quarter, Consolidated Net Worth shall be not less than the sum of $95,000,000 plus on the last day of each fiscal quarter to occur after the Closing Date, seventy-five percent (75%) of Consolidated Net Income for the fiscal quarter (but not less than zero), such increases to be cumulative, plus one hundred percent (100%) of any increases in Consolidated Net Worth resulting from Equity Transactions occurring after the Closing Date. 1.7 Section 7.9(d) (Consolidated Fixed Charge Coverage Ratio) is amended to read as follows: (d) Consolidated Fixed Charge Coverage Ratio. As of the end of each fiscal quarter ending during the respective periods set forth below, the Consolidated Fixed Charge Coverage Ratio shall not be less than the ratio set forth opposite such period: Closing Date to the date of any 1.75:1.0 Debt Transaction of at least $25,000,000 On or subsequent to the date of any 1.50:1.0 Debt Transaction of at least $25,000,000 1.8 A new clause (f) is added to Section 7.9 to read as follows: (f) Consolidated Senior Leverage Ratio. As of the end of each fiscal quarter, beginning with the fiscal quarter ending the earlier of (i) on June 30, 1999 or (ii) on or subsequent to the date of any Debt Transaction of at least $25,000,000, the Consolidated Senior Leverage Ratio shall not be greater than 2.5:1.0. 1.9 Clause (f) of Section 8.1 is amended to read as follows: 3 4 (f) Subordinated Debt of the Borrower, provided that (i) the Borrower shall demonstrate it will be in compliance with the financial covenants in Section 7.9 after giving effect thereto on a Pro Forma Basis, (ii) no Default or Event of Default shall exist after giving effect thereto, and (iii) the net proceeds therefrom shall be applied first to repay the term loan and other obligations under the Bridge Credit Agreement; 1.10 Clause (h) of Section 8.1 is amended to read as follows: (h) other unsecured Indebtedness of any of the Credit Parties of up to $2,500,000 in the aggregate at any time outstanding; 1.11 Clauses (h) and (i) of Section 8.1 are renumbered as clauses (k) and (l), and new clauses (h), (i) and (j) are is added to read as follows: (h) other senior secured Indebtedness of the Credit Parties in an aggregate principal amount of up to $25 million incurred pursuant to the Bridge Credit Agreement; (i) purchase money Indebtedness (including Capital Lease Obligations) assumed in connection with the Permitted Acquisitions in an aggregate principal amount not to exceed $12,000,000 at any time outstanding; (j) seller financing obligations incurred in connection with the Permitted Acquisitions in an aggregate principal amount not to exceed $9,000,000 at any time outstanding; 1.12 Section 8.10 is amended to read as follows: 8.10 No Further Negative Pledges. Except with respect to (i) prohibitions against other encumbrances on specific Property encumbered to secure payment of particular Indebtedness (which Indebtedness relates solely to such specific Property, and improvements and accretions thereto, and is otherwise permitted hereby) and (ii) the Bridge Credit Agreement, no member of the Consolidated Group will enter into, assume or become subject to any agreement prohibiting or otherwise restricting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for such obligation if security is given for some other obligation. 1.13 A new Section 8.11 is added to read as follows: 8.11 Amendment or Modification of Bridge Credit Agreement. Amend or modify (or consent to, permit or acquiesce to the amendment or modification of) any of the terms of the Bridge Credit Agreement without the consent of the Required Lenders hereunder, unless such amendment or modification conforms to an amendment or modification under this Agreement. 4 5 1.14 Clause (i) of Section 9.1(c) is amended to read as follows: (i) Default in the due performance or observance of any term, covenant or agreement contained in Section 7.3(a), 7.9, 7.11, 7.13 to 8.1 through 8.11, inclusive; or 1.15 Clause (j) of Section 9.1 is renumbered as clause (k), and a new clause (j) is added to read as follows: (j) The occurrence of an Event of Default under the Bridge Credit Agreement; or 1.16 The address for all notices and other communications to the Borrower and the Guarantors as set forth in Section 11.1 is amended to read as follows: Railworks Corporation 1104 Kenilworth Drive Suite 301 Baltimore, MD 21204 Attn: Michael R. Azarela Telephone: (410) 512-0501 Telecopy: (410) 825-6920 2. Notwithstanding any provision to the contrary in the Credit Agreement, from the Amendment Date until the Bridge Repayment Date, (A) the Applicable Percentage for Base Rate Loans shall be 1.25%, (B) the Applicable Percentage for Eurodollar Loans shall be 2.50%, (C) the Applicable Percentage for the Letter of Credit Fee shall be 2.50% and (D) the Applicable Percentage for the Commitment Fee shall be 0.500%. 3. Notwithstanding the terms of Section 8.4 of the Credit Agreement, other than the Permitted Acquisitions, no member of the Consolidated Group shall make any Acquisition prior to the Bridge Repayment Date without the prior written consent of the Required Lenders. Subsequent to the Bridge Repayment Date, members of the Consolidated Group may make Acquisitions permitted by Section 8.4 of the Credit Agreement; provided that all Acquisitions prior to the Bridge Repayment Date shall not be considered when calculating the dollar limit on cash consideration payable in respect of Acquisitions under Section 8.4(b). 4. By execution of this Amendment, the Required Lenders authorize and direct the Administrative Agent, on behalf of the Lenders under the Credit Agreement, to enter into the Intercreditor Agreement. 5. This Amendment shall be effective upon satisfaction of the following conditions: (a) execution of this Amendment by the Credit Parties and the Required Lenders; and 5 6 (b) receipt by the Administrative Agent of legal opinions of counsel to the Credit Parties relating to this Amendment. 6. The Credit Parties hereby affirm (i) the representations and warranties set out in Section 6 of the Credit Agreement are true and correct as of the date hereof (except those which expressly relate to an earlier period) and (ii) no Default or Event of Default presently exists. 7. Except as modified hereby, all of the terms and provisions of the Credit Agreement (including Schedules and Exhibits) shall remain in full force and effect. 8. The Borrower agrees to pay all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. 9. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 10. This Amendment shall be deemed to be a contract made under, and for all purposes shall be construed in accordance with the laws of the State of New York. 6 7 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. BORROWER: RAILWORKS CORPORATION, a Delaware corporation By: /s/ Michael R. Azarela ---------------------------------- Name: Michael R. Azarela Title: Executive Vice President and Chief Financial Officer GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC., a Pennsylvania corporation ANNEX RAILROAD BUILDERS, INC., an Indiana corporation COMSTOCK HOLDINGS INC., a Delaware corporation COMTRAK CONSTRUCTION, INC., a Georgia corporation CONDON BROTHERS, INC., a Washington corporation CPI CONCRETE PRODUCTS INCORPORATED, a Tennessee corporation H.P. MCGINLEY INC., a Pennsylvania corporation KENNEDY RAILROAD BUILDERS, INC., a Pennsylvania corporation L.K. COMSTOCK & COMPANY, INC., a New York corporation MERIT RAILROAD CONTRACTORS, INC., a Missouri corporation MIDWEST CONSTRUCTION SERVICES, INC., an Indiana corporation MINNESOTA RAILROAD SERVICE, INC., a Tennessee corporation NEW ENGLAND RAILROAD CONSTRUCTION CO., INC., a Connecticut corporation NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC., a Michigan corporation R. & M. B. RAIL CO., INC., an Indiana corporation RAILCORP, INC., an Ohio corporation By: /s/ Michael R. Azarela --------------------------------------- Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors 7 8 RAILROAD SERVICE, INC., a Nevada corporation RAILROAD SPECIALTIES, INC., an Indiana corporation SOUTHERN INDIANA WOOD PRESERVING CO., INC., an Indiana corporation U.S. TRACKWORKS, INC., a Michigan corporation U.S. RAILWAY SUPPLY, INC., an Indiana corporation WM. A. SMITH CONSTRUCTION CO., INC., a Texas corporation WM. A. SMITH RERAILING SERVICES, INC., a Texas corporation By: /s/ Michael R. Azarela ------------------------------------------ Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors LENDERS: NATIONSBANK, N.A., individually in its capacity as a Lender and in its capacity as Administrative Agent By: /s/ Monica R. Brandes ------------------------------------------ Name: Monica R. Brandes Title: Senior Vice President FIRST UNION NATIONAL BANK By: /s/ Robert J. Bauer ------------------------------------------ Name: Robert J. Bauer Title: Vice President CRESTAR BANK By: ------------------------------------------ Name: Title: SUMMIT BANK By: ------------------------------------------ Name: Title: 8 EX-10.37 6 CREDIT AGREEMENT DATED FEBRUARY 2, 1999 1 Exhibit 10.37 CREDIT AGREEMENT Dated as of February 2, 1999 among RAILWORKS CORPORATION, as Borrower, Certain Subsidiaries, as Guarantors, THE LENDERS NAMED HEREIN AND NATIONSBANK, N.A., as Administrative Agent 2 TABLE OF CONTENTS SECTION 1 DEFINITIONS.............................................................................................1 1.1 Definitions. 1.2 Computation of Time Periods..........................................................................7 SECTION 2 CREDIT FACILITIES.......................................................................................8 2.1 Term Loan. SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES..........................................................9 3.1 Default Rate.........................................................................................9 3.2 Extension and Conversion.............................................................................9 3.3 Prepayments.........................................................................................10 3.4 [Intentionally Omitted].............................................................................10 3.5 Fees................................................................................................11 3.5 Capital Adequacy....................................................................................11 3.6 Inability To Determine Interest Rate................................................................11 3.7 Illegality..........................................................................................11 3.8 Requirements of Law.................................................................................12 3.9 Taxes...............................................................................................13 3.10 Indemnity..........................................................................................15 3.11 Certain Limitations................................................................................16 3.12 Pro Rata Treatment.................................................................................17 3.13 Sharing of Payments................................................................................17 3.14 Payments, Computations, Etc........................................................................18 3.15 Evidence of Debt...................................................................................20
i 3 SECTION 4 GUARANTY...............................................................................................20 4.1 The Guarantee.......................................................................................20 4.2 Obligations Unconditional...........................................................................21 4.3 Reinstatement.......................................................................................22 4.4 Certain Additional Waivers..........................................................................23 4.5 Remedies............................................................................................23 4.6 Rights of Contribution..............................................................................23 4.7 Continuing Guarantee................................................................................24 SECTION 5 CONDITIONS.............................................................................................24 5.1 Conditions to Closing...............................................................................24 5.2 Conditions to All Extensions of Credit..............................................................25 SECTION 6 REPRESENTATIONS, WARRANTIES AND COVENANTS..............................................................26 6.1 Incorporation.......................................................................................26 6.2 Additional Representations..........................................................................27 6.3 Additional Covenants................................................................................27 SECTION 7 EVENTS OF DEFAULT......................................................................................27 7.1 Events of Default...................................................................................27 7.2 Acceleration; Remedies..............................................................................30 SECTION 8 AGENCY PROVISIONS......................................................................................30 8.1 Appointment.........................................................................................30 8.2 Delegation of Duties................................................................................31 8.3 Exculpatory Provisions..............................................................................31 8.4 Reliance on Communications..........................................................................32 8.5 Notice of Default...................................................................................32
ii 4 8.6 Non-Reliance on Administrative Agent and Other Lenders..............................................33 8.7 Indemnification.....................................................................................33 8.8 Administrative Agent in its Individual Capacity.....................................................34 8.9 Successor Administrative Agent......................................................................34 8.10 Intercreditor Agreement............................................................................34 SECTION 9 MISCELLANEOUS..........................................................................................35 9.1 Notices.............................................................................................35 9.2 Right of Set-Off....................................................................................36 9.3 Benefit of Agreement................................................................................36 9.4 No Waiver; Remedies Cumulative......................................................................39 9.5 Payment of Expenses, etc............................................................................39 9.6 Amendments, Waivers and Consents....................................................................40 9.7 Counterparts........................................................................................41 9.8 Headings............................................................................................41 9.9 Survival............................................................................................41 9.10 Governing Law; Submission to Jurisdiction; Venue...................................................42 9.11 Severability.......................................................................................42 9.12 Entirety...........................................................................................43 9.13 Binding Effect; Termination........................................................................43 9.14 Confidentiality....................................................................................43 9.15 Source of Funds....................................................................................44 9.16 Conflict...........................................................................................44
iii 5 SCHEDULES Schedule 2.1(a) Lenders and Commitments Schedule 2.1(b)(i) Form of Notice of Borrowing Schedule 2.1(e) Form of Term Note Schedule 3.2 Form of Notice of Extension/Conversion Schedule 5.1(e)(iii) Form of Officer's Certificate Schedule 8.10 Form of Intercreditor Agreement Schedule 9.1 Lenders and Addresses Schedule 9.3(b) Form of Assignment and Acceptance iv 6 CREDIT AGREEMENT THIS CREDIT AGREEMENT dated as of February 2, 1999 (the "Credit Agreement"), is by and among RAILWORKS CORPORATION, a Delaware corporation (the "Borrower"), the Subsidiaries identified on the signature pages hereto and such other Subsidiaries as may from time to time become Guarantors hereunder in accordance with the provisions hereof (the "Guarantors"), the lenders named herein and such other lenders as may become a party hereto (the "Lenders"), and NATIONSBANK, N.A., as Administrative Agent (in such capacity, the "Administrative Agent"). W I T N E S S E T H WHEREAS, the Borrower has requested that the Lenders provide a $25 million bridge credit facility for the purposes hereinafter set forth; WHEREAS, the Lenders have agreed to make the requested bridge credit facility available to the Borrower on the terms and conditions hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS 1.1 Definitions. As used in this Credit Agreement, the following terms shall have the meanings specified below unless the context otherwise requires. Terms used in this Credit Agreement but not otherwise defined in this Credit Agreement shall have the meanings provided in the Revolving Credit Agreement: "Additional Credit Party" means each Person that becomes a Guarantor after the Closing Date by execution of a Joinder Agreement. "Administrative Agent" shall have the meaning assigned to such term in the heading hereof, together with any successors or assigns. "Administrative Agent's Fee Letter" means that certain letter agreement dated as of December 15, 1998, between the Administrative Agent and the Borrower, as amended, modified, supplemented or replaced from time to time. 1 7 "Administrative Agent's Fees" shall have the meaning assigned to such term in Section 3.5. "Asset Disposition" shall mean and include (i) any Divestiture other than Divestitures permitted by Section 8.3(b) of the Incorporated Covenants, and (ii) receipt by a member of the Consolidated Group of any cash insurance proceeds or condemnation award payable by reason of theft, loss, physical destruction or damage, taking or similar event with respect to any of its property or assets to the extent the aggregate amount of such proceeds and awards, together with Divestitures, exceeds the threshold levels provided in Section 8.3 of the Incorporated Covenants. "Base Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the greater of (a) the Federal Funds Rate in effect on such day plus 1/2 of 1% or (b) the Prime Rate in effect on such day. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable after due inquiry to ascertain the Federal Funds Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (a) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. "Base Rate Loan" means any Loan bearing interest at a rate determined by reference to the Base Rate. "Borrower" means RailWorks Corporation, a Delaware corporation, as referenced in the opening paragraph, its successors and permitted assigns. "Closing Date" means the date hereof. "Commitment" means the Term Loan Commitment. "Consolidated Group" means the Borrower and its consolidated subsidiaries as determined in accordance with GAAP. "Credit Documents" means a collective reference to this Credit Agreement, the Notes, the Pledge Agreement, the Security Agreement, the Intercreditor Agreement, each Joinder Agreement, the Administrative Agent's Fee Letter, and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto. "Credit Party" means any of the Borrower and the Guarantors. 2 8 "Debt Transaction" means, with respect to any member of the Consolidated Group, any sale, issuance or placement of Funded Debt, whether or not evidenced by promissory note or other written evidence of indebtedness, except for Funded Debt permitted to be incurred pursuant to Section 8.1(a) through (e) and Section 8.1(g) through (i) of the Incorporated Covenants. "Default" means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" means, at any time, any Lender that, at such time, (i) has failed to make an Extension of Credit required pursuant to the terms of this Credit Agreement, (ii) has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of the Credit Agreement or any other of the Credit Documents, or (iii) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar proceeding. "Equity Transaction" means, with respect to any member of the Consolidated Group, any issuance of shares of its capital stock or other equity interest, other than an issuance (i) to a member of the Consolidated Group, (ii) in connection with a conversion of debt securities to equity or (iii) in connection with exercise by a present or former employee, officer or director under a stock incentive plan, stock option plan or other equity-based compensation plan or arrangement. "Eurodollar Loan" means any Loan bearing interest at a rate determined by reference to the Eurodollar Rate. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Loan comprising part of the same borrowing (including conversions, extensions and renewals), a per annum interest rate determined pursuant to the following formula: Eurodollar Rate = Interbank Offered Rate ---------------------------------------- 1 - Eurodollar Reserve Percentage "Eurodollar Reserve Percentage" means for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Loans is determined), whether or not Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Loans shall be deemed 3 9 to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to a Lender. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "Event of Default" means such term as defined in Section 7.1. "Extension of Credit" means, as to any Lender, the making of, or participation in, a Loan by such Lender. "Fees" means all fees payable pursuant to Section 3.5. "Federal Funds Rate" means, for any day, the rate of interest per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (A) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (B) if no such rate is so published on such next preceding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Administrative Agent on such day on such transactions as determined by the Administrative Agent. "Guarantor" means each of those other Persons identified as a "Guarantor" on the signature pages hereto, and each other Person which may hereafter become a Guarantor by execution of a Joinder Agreement, together with their successors and permitted assigns. "Guaranteed Obligations" means, as to each Guarantor, without duplication, (i) all obligations of the Borrower (including interest accruing after a Bankruptcy Event, regardless of whether such interest is allowed as a claim under the Bankruptcy Code) to the Lenders and the Administrative Agent, whenever arising, under this Credit Agreement, the Notes or the other Credit Documents, and (ii) all liabilities and obligations, whenever arising, owing from the Borrower to any Lender, or any Affiliate of a Lender, arising under any Hedging Agreement relating to Obligations hereunder. "Hedging Agreement" means any interest rate protection agreement or foreign currency exchange agreement between the Borrower and any Lender, or any Affiliate of a Lender. "Incorporated Covenants" means such term as defined in Section 6.1. "Incorporated Representations" means such term as defined in Section 6.1. 4 10 "Interbank Offered Rate" means, for the Interest Period for each Eurodollar Loan comprising part of the same borrowing (including conversions, extensions and renewals), a per annum interest rate (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the rate of interest, determined by the Administrative Agent on the basis of the offered rates for deposits in dollars for a period of time corresponding to such Interest Period (and commencing on the first day of such Interest Period), appearing on Telerate Page 3750 (or, if, for any reason, Telerate Page 3750 is not available, the Reuters Screen LIBO Page) as of approximately 11:00 A.M. (London time) two (2) Business Days before the first day of such Interest Period. As used herein, "Telerate Page 3750" means the display designated as page 3750 by Dow Jones Markets, Inc. (or such other page as may replace such page on that service for the purpose of displaying the British Bankers Association London interbank offered rates) and "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks). "Intercreditor Agreement" means that certain Intercreditor Agreement dated as of the date hereof by and among NationsBank, N.A., as Administrative Agent under the Revolving Credit Agreement, NationsBank, N.A., as Administrative Agent under this Credit Agreement, and the Credit Parties, as amended or modified from time to time, in substantially the form of Schedule 8.10. "Joinder Agreement" means a Joinder Agreement substantially in the form of Schedule 7.11 to the Revolving Credit Agreement but relating to this Credit Agreement, executed and delivered by an Additional Credit Party in accordance with the provisions of Section 6.3(b). "Lenders" means each of the Persons identified as a "Lender" on the signature pages hereto, and their successors and assigns. "Loan" or "Loans" means the Term Loan. "Material Adverse Effect" means a material adverse effect on (i) the condition (financial or otherwise), operations, business, assets or liabilities of the Consolidated Group taken as a whole, (ii) the ability of the Credit Parties taken as a whole to perform any material obligation under the Credit Documents to which it is a party or (iii) the rights and remedies of the Lenders under the Credit Documents. "Net Proceeds" means gross cash proceeds (including any cash received by way of deferred payment pursuant to a promissory note, receivable or otherwise, but only as and when received) received in connection with an Equity Transaction or Debt Transaction, net of (i) reasonable transaction costs, including in the case of an Equity Transaction or a Debt Transaction, underwriting discounts and commissions, (ii) 5 11 estimated taxes payable in connection therewith, and (iii) in the case of a Debt Transaction, any amounts payable in respect of Subordinated Debt, including without limitation principal, interest, premiums and penalties, which is secured by, or otherwise related to, any property or asset which is the subject thereof to the extent that such Subordinated Debt and any payments in respect thereof are paid with a portion of the proceeds therefrom. "Note" or "Notes" means any Term Note. "Notice of Borrowing" means a written notice of borrowing in substantially the form of Schedule 2.1(b)(i), as required by Section 2.1(b)(i). "Notice of Extension/Conversion" means a written notice of extension or conversion in substantially the form of Schedule 3.2, as required by Section 3.2. "Obligations" means the Term Loan. "Participation Interest" means the purchase by a Lender of a participation in Loans as provided in Section 3.14. "Pledge Agreement" means the Pledge Agreement dated as of the Closing Date given by the Borrower and Comstock Holdings to NationsBank, N.A., as Administrative Agent, to secure the obligations hereunder, as amended and modified. "Prime Rate" means the rate of interest per annum publicly announced from time to time by NationsBank as its prime rate in effect at its principal office in Charlotte, North Carolina, with each change in the Prime Rate being effective on the date such change is publicly announced as effective (it being understood and agreed that the Prime Rate is a reference rate used by NationsBank in determining interest rates on certain loans and is not intended to be the lowest rate of interest charged on any extension of credit by NationsBank to any debtor). "Register" shall have the meaning given such term in Section 9.3(c). "Required Lenders" means, at any time, Lenders having more than sixty-six and two-thirds percent (66%) of the aggregate principal amount of the Obligations outstanding (taking into account in each case Participation Interests or obligation to participate therein); provided that the outstanding principal amount of Obligations (taking into account Participation Interests therein) owing to a Defaulting Lender shall be excluded for purposes hereof in making a determination of Required Lenders. "Revolving Credit Agreement" means that certain Credit Agreement dated as of August 4, 1998 by and among the Borrower, certain subsidiaries of the Borrower as 6 12 guarantors, the lenders party thereto and NationsBank, N.A., as Administrative Agent, as amended, modified, supplemented, extended, renewed or replaced from time to time. "Security Agreement" means the Security Agreement dated as of the Closing Date given by the Borrower and the other grantors identified therein to NationsBank, N.A., as Administrative Agent, to secure the obligations hereunder, as amended and modified. "Subordinated Debt" means any Indebtedness of a member of the Consolidated Group which by its terms is expressly subordinated in right of payment to the prior payment of the obligations under the Credit Agreement and the other Credit Documents on terms and conditions satisfactory to the Required Lenders. "Term Loan" shall have the meaning assigned to such term in Section 2.1(a). "Term Loan Commitment" means, with respect to each Lender, the commitment of such Lender to make its portion of the Term Loan as specified on Schedule 2.1(a) (and for purposes of making determinations of Required Lenders hereunder after the Closing Date and for purposes of calculations referred to in Section 9.6(b), the principal amount outstanding on the Term Loan). "Term Loan Commitment Percentage" means, for each Lender, a fraction (expressed as a percentage) the numerator of which is the amount of the Term Loan Commitment (and after the Closing Date, the outstanding principal amount of such Lender's Term Loan) of such Lender at such time and the denominator of which is the aggregate amount of the Term Loan Commitment (and after the Closing Date, the aggregate principal amount of the Term Loan) at such time. The initial Term Loan Commitment Percentages are set out on Schedule 2.1(a). "Term Loan Committed Amount" means, collectively, the aggregate amount of all of the Term Loan Commitments and, individually, the amount of each Lender's Term Loan Commitment as specified on Schedule 2.1(a), as such amounts may be reduced from time to time in accordance with the provisions hereof. "Term Note" or "Term Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Term Loan in substantially the form attached as Schedule 2.1(e), individually or collectively, as appropriate, as such promissory notes may be amended, modified, supplemented, extended, renewed or replaced from time to time. "Termination Date" means June 30, 1999. 1.2 Computation of Time Periods. For purposes of computation of periods of time hereunder, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." 7 13 1.3 Accounting Terms. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. SECTION 2 CREDIT FACILITIES 2.1 Term Loan. (a) Term Loan Commitment. Subject to the terms and conditions hereof, each Lender severally agrees to make its Term Loan Commitment Percentage of a term loan (the "Term Loan") in the aggregate principal amount of TWENTY-FIVE MILLION DOLLARS ($25,000,000) to the Borrower for the purposes hereinafter set forth. The Term Loan may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request. Amounts repaid on the Term Loan may not be reborrowed. (b) Term Loan Borrowing. The Borrower shall submit an appropriate Notice of Borrowing relating to the Term Loan not later than 11:00 A.M. (Charlotte, North Carolina time) on the date of the requested borrowing, with respect to the portion of the Term Loan initially consisting of a Base Rate Loan, or on the third Business Day prior to the date of the requested borrowing, with respect to the portion of the Term Loan initially consisting of one or more Eurodollar Loans, which Notice of Borrowing shall be irrevocable and shall specify (i) that the funding of the Term Loan is requested, (ii) the date of the requested borrowing, and (iii) whether the funding of the Term Loan shall be comprised of Base Rate Loans, Eurodollar Loans or combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. Each Lender shall make its Term Loan Commitment Percentage of the Term Loan available to the Administrative Agent for the account of the Borrower, or in such other manner as the Administrative Agent may specify in writing, by 1:00 P.M. (Charlotte, North Carolina time) on the date of the requested borrowing in Dollars and in funds immediately available to the Administrative Agent. (c) Minimum Amounts. The Term Loan may be comprised of minimum aggregate principal amounts of $2,500,000 and integral multiples of $500,000 in excess thereof, in the case of Eurodollar Loans, and $1,000,000 (or the remaining portion of the Term Loan, if less) and integral multiples of $100,000 in excess thereof, in the case of Base Rate Loans. (d) Repayment. The aggregate principal amount of the Term Loan shall be due and payable in full on the Termination Date. 8 14 (e) Interest. Subject to the provisions of Section 3.1, (i) Base Rate Loans. During such periods as the Term Loan shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Base Rate plus 125 basis points (1.25%); and (ii) Eurodollar Loans. During such periods as the Term Loan shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Eurodollar Rate plus 250 basis points (2.50%). Interest on the Term Loan shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (f) Term Notes. The Term Loan shall be evidenced by a duly executed Term Note in favor of each Lender. (g) Maximum Number of Eurodollar Loans. The Borrower will be limited to a maximum number of five (5) Eurodollar Loans outstanding at any time. For purposes hereof, Eurodollar Loans with separate or different Interest Periods will be considered as separate Eurodollar Loans even if their Interest Periods expire on the same date. SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES 3.1 Default Rate. Upon the occurrence, and during the continuance, of an Event of Default, the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents shall bear interest, payable on demand, at a per annum rate 2% greater than the rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then 2% greater than the Base Rate). 3.2 Extension and Conversion. Subject to the terms of Section 5.2, the Borrower shall have the option, on any Business Day, to extend existing Eurodollar Loans into a subsequent permissible Interest Period or to convert Base Rate Loans into Eurodollar Loans; provided, however, that (i) except as provided in Section 3.8, Eurodollar Loans may be converted into Base Rate Loans only on the last day of the Interest Period applicable thereto, (ii) Eurodollar Loans may be extended, and Base Rate Loans may be converted into Eurodollar Loans, only if no Default or Event of Default is in existence on the date of extension or conversion, (iii) Loans extended as, or converted into, Eurodollar Loans shall be subject to the terms of the definition of "Interest Period" and shall be in such minimum amounts as provided in 9 15 Section 2.1(c), and (iv) any request for extension or conversion of a Eurodollar Loan which shall fail to specify an Interest Period shall be deemed to be a request for an Interest Period of one month. Each such extension or conversion shall be effected by the Borrower by giving a Notice of Extension/Conversion (or telephone notice promptly confirmed in writing) to the Administrative Agent prior to 11:00 A.M. (Charlotte, North Carolina time) on the Business Day of, in the case of the conversion of a Eurodollar Loan into a Base Rate Loan, and on the third Business Day prior to, in the case of the extension of a Eurodollar Loan as, or conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the proposed extension or conversion, specifying the date of the proposed extension or conversion, the Loans to be so extended or converted, the types of Loans into which such Loans are to be converted and, if appropriate, the applicable Interest Periods with respect thereto. Each request for extension of a Eurodollar Loan or conversion of a Base Rate Loan into a Eurodollar Loan shall be irrevocable and shall constitute a representation and warranty by the Borrower of the matters specified in subsections (a) and (b) of Section 5.2. In the event the Borrower fails to request extension or conversion of any Eurodollar Loan in accordance with this Section, or any such conversion or extension is not permitted or required by this Section, then such Eurodollar Loan shall be automatically converted into a Base Rate Loan at the end of the Interest Period applicable thereto. The Administrative Agent shall give each Lender notice as promptly as practicable of any such proposed extension or conversion affecting any Loan. 3.3 Prepayments. (a) Voluntary Prepayments. Loans may be repaid in whole or in part without premium or penalty; provided that (i) Eurodollar Loans may be prepaid only upon three (3) Business Days' prior written notice to the Administrative Agent and must be accompanied by payment of any amounts owing under Section 3.11, and (ii) partial prepayments shall be (A) in the case of Eurodollar Loans, in a minimum aggregate principal amount of $2,500,000 and integral multiples of $500,000 in excess thereof and (B) in the case of Base Rate Loans, in a minimum aggregate principal amount of $1,000,000 and integral multiples of $100,000 in excess thereof. (b) Mandatory Prepayments. The Borrower shall promptly prepay the Term Loan in an amount equal to one hundred percent (100%) of the Net Proceeds received from any Asset Disposition, Debt Transaction or Equity Transaction. (c) Application. Unless otherwise specified by the Borrower, amounts prepaid on the Term Loan shall be applied first to Base Rate Loans, then to Eurodollar Loans in direct order of Interest Period maturities. Amounts prepaid on the Term Loan may not be reborrowed. 3.4 [Intentionally Omitted]. 10 16 3.5 Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, an annual administrative fee and such other fees, if any, referred to in the Administrative Agent's Fee Letter (collectively, the "Administrative Agent's Fees"). 3.6 Capital Adequacy. If any Lender has reasonably determined, after the date hereof, that the adoption or the becoming effective of, or any change in, or any change by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof in the interpretation or administration of, any applicable law, rule or regulation regarding capital adequacy, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy), then, subject to the provisions of Section 3.12, the Borrower shall be obligated to pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. 3.7 Inability To Determine Interest Rate. If prior to the first day of any Interest Period, the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter (which notice shall be withdrawn the Administrative Agent whenever such circumstances no longer exist). If such notice is given (a) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans and (b) any Loans that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Loans shall be converted to or continued as Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Base Rate Loans to Eurodollar Loans. 3.8 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof occurring after the Closing Date shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Credit Agreement, (a) such Lender shall promptly give written notice of such circumstances to the Borrower and the Administrative Agent (which notice shall be withdrawn by such Lender whenever such circumstances no longer exist), (b) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert a Base Rate Loan to Eurodollar Loans shall 11 17 forthwith be canceled and, until such time as it shall no longer be unlawful for such Lender to make or maintain Eurodollar Loans, such Lender shall then have a commitment only to make a Base Rate Loan when a Eurodollar Loan is requested and (c) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 3.11. 3.9 Requirements of Law. If, after the date hereof, the adoption of or any change in any Requirement of Law or in the interpretation or application thereof applicable to any Lender, or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority, in each case made subsequent to the Closing Date (or, if later, the date on which such Lender becomes a Lender): (a) shall subject such Lender to any tax of any kind whatsoever with respect to any Eurodollar Loans made by it or its obligation to make Eurodollar Loans, or change the basis of taxation of payments to such Lender in respect thereof (except for (i) Non-Excluded Taxes covered by Section 3.10 (including Non-Excluded Taxes imposed solely by reason of any failure of such Lender to comply with its obligations under Section 3.10(b)) and (ii) changes in taxes measured by or imposed upon the overall net income, or franchise tax (imposed in lieu of such net income tax), of such Lender or its applicable lending office, branch, or any affiliate thereof)); (b) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (c) shall impose on such Lender any other condition (excluding any tax of any kind whatsoever); and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, subject to the provisions of Section 3.12, the Borrower shall be obligated to promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable, provided that, in any such case, the Borrower may elect to convert the Eurodollar Loans made by such Lender hereunder to Base Rate Loans by giving the Administrative Agent at least one Business Day's notice of such election, in which case the Borrower shall promptly pay to such Lender, upon demand, without duplication, such amounts, if any, as may be required 12 18 pursuant to Section 3.11. Each Lender agrees that, as promptly as practicable after it becomes aware of any circumstances of the type referred to in paragraphs (a) through (c) above which would result in any such increased cost or reduced amount receivable, the affected Lender shall, to the extent not inconsistent with such Lender's internal policies of general application, designate a different lending office for the making of Loans hereunder or otherwise use reasonable commercial efforts to minimize the amounts payable to it by the Borrower pursuant to this Section 3.9. This covenant shall survive the termination of this Credit Agreement and the payment of the Loans and all other amounts payable hereunder. 3.10 Taxes. (a) Except as provided below in this subsection, all payments made by the Borrower under this Credit Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any court, or governmental body, agency or other official, excluding taxes measured by or imposed upon the overall net income of any Lender or its applicable lending office, or any branch or affiliate thereof, and all franchise taxes, branch taxes, taxes on doing business or taxes on the overall capital or net worth of any Lender or its applicable lending office, or any branch or affiliate thereof, in each case imposed in lieu of net income taxes, imposed: (i) by the jurisdiction under the laws of which such Lender, applicable lending office, branch or affiliate is organized or is located, or in which its principal executive office is located, or any nation within which such jurisdiction is located or any political subdivision thereof; or (ii) by reason of any connection between the jurisdiction imposing such tax and such Lender, applicable lending office, branch or affiliate other than a connection arising solely from such Lender having executed, delivered or performed its obligations, or received payment under or enforced, this Credit Agreement or any Notes. If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder or under any Notes, (A) the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Credit Agreement and any Notes, provided, however, that the Borrower shall be entitled to deduct and withhold any Non-Excluded Taxes and shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this subsection whenever any Non-Excluded Taxes are payable by the Borrower, and (B) as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result 13 19 of any such failure. The agreements in this subsection shall survive the termination of this Credit Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated under the laws of the United States of America or a state thereof shall: (X)(i) on or before the date of any payment by the Borrower under this Credit Agreement or Notes to such Lender, deliver to the Borrower and the Administrative Agent (A) two (2) duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, certifying that it is entitled to receive payments under this Credit Agreement and any Notes without deduction or withholding of any United States federal income taxes and (B) an Internal Revenue Service Form W-8 or W- 9, or successor applicable form, as the case may be, certifying that it is entitled to an exemption from United States backup withholding tax; (ii) deliver to the Borrower and the Administrative Agent two (2) further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; or (Y) in the case of any such Lender that is not a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (i) represent to the Borrower (for the benefit of the Borrower and the Administrative Agent) that it is not a bank within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (ii) agree to furnish to the Borrower on or before the date of any payment by the Borrower, with a copy to the Administrative Agent two (2) accurate and complete original signed copies of Internal Revenue Service Form W-8, or successor applicable form certifying to such Lender's legal entitlement at the date of such certificate to an exemption from U.S. withholding tax under the provisions of Section 881(c) of the Internal Revenue Code with respect to payments to be made under this Credit Agreement and any Notes (and to deliver to the Borrower and the Administrative Agent two (2) further copies of such form on or before the date it expires or becomes obsolete and after the occurrence of any event requiring a change in the most recently provided form and, if necessary, obtain any extensions of time reasonably requested by the Borrower or the Administrative Agent for filing and completing such forms), and (iii) agree, to the extent legally entitled to do so, upon reasonable request by the Borrower, to provide to the Borrower (for the benefit of the Borrower and the Administrative Agent) such other forms as may be reasonably required in order to establish the legal entitlement of such Lender to an exemption from withholding with respect to payments under this Credit Agreement and any Notes; 14 20 unless in any such case any change in treaty, law or regulation has occurred after the date such Person becomes a Lender hereunder which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Each Person that shall become a Lender or a participant of a Lender pursuant to subsection 9.3 shall, upon the effectiveness of the related transfer, be required to provide all of the forms, certifications and statements required pursuant to this subsection, provided that in the case of a participant of a Lender the obligations of such participant of a Lender pursuant to this subsection (b) shall be determined as if the participant of a Lender were a Lender except that such participant of a Lender shall furnish all such required forms, certifications and statements to the Lender from which the related participation shall have been purchased. 3.11 Indemnity. The Borrower promises to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur (other than through such Lender's gross negligence or willful misconduct) as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Credit Agreement, (b) default by the Borrower in making any prepayment of a Eurodollar Loan after the Borrower has given a notice thereof in accordance with the provisions of this Credit Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. With respect to Eurodollar Loans, such indemnification may be calculated, in lieu of any other method, based on an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. The covenants of the Borrower set forth in this Section 3.11 shall survive the termination of this Credit Agreement and the payment of the Loans and all other amounts payable hereunder. 3.12 Certain Limitations. The provisions of Sections 3.6, 3.9, 3.10 and 3.11 hereof shall be subject to the following: (a) Each Lender that desires compensation or indemnification under Sections 3.6, 3.9 or 3.11 hereof shall notify the Borrower through the Administrative Agent of any event occurring after the Closing Date entitling such Lender to compensation or indemnification under any of such Sections as promptly as practicable, but in any event within 90 days after the occurrence of the event giving rise thereto; provided that (i) if any such Lender fails to give such notice within 90 days after 15 21 the occurrence of such an event, such Lender shall only be entitled to compensation or indemnification in respect of such event accruing under Sections 3.6, 3.9 or 3.11 hereof with respect to the period from and after the date 90 days prior to the date that such Lender does give notice. (b) Any notice given by a Lender pursuant to subsection (a) above shall certify (i) that one of the events described in Sections 3.6, 3.9 or 3.11 hereof has occurred, describing in reasonable detail the nature of such event, (ii) as to the increased cost, reduced amount receivable or loss or expense resulting from such event and (iii) as to the additional amount demanded by such Lender, attaching a reasonably detailed explanation of the calculation thereof. Such a certificate as to any compensation or indemnification payable pursuant to Sections 3.6, 3.9 or 3.11, submitted by such Lender through the Administrative Agent to the Borrower, shall be conclusive and binding on the parties hereto in the absence of manifest error. (c) If any Lender requests compensation or indemnification from the Borrower under Sections 3.6, 3.9 or 3.10 hereof, the Borrower may, at its option, within fifteen (15) days after receipt by the Borrower of written demand from the affected Lender for payment of such compensation or indemnification, notify the Administrative Agent and such affected Lender of its intention to replace the affected Lender. So long as no Event of Default shall have occurred and be continuing, the Borrower may obtain, at the Borrower's expense, a replacement Lender for the affected Lender. If the Borrower obtains a replacement Lender within ninety (90) days following notice of its intention to do so, the affected Lender must sell and assign its Loans and any related Commitments to such replacement Lender pursuant to Section 9.3(b) hereof (without giving effect to any requirement therein that the Administrative Agent consent thereto), for an amount equal to the principal balance of all Loans held by the affected Lender and all accrued interest and Fees with respect thereto through the date of such sale, provided that the Borrower shall have paid to such affected Lender the compensation or indemnification that it is entitled to receive under Sections 3.6, 3.9 or 3.10 hereof, through the date of such sale and assignment. Notwithstanding the foregoing, the Borrower shall not have the right to obtain a replacement Lender if the affected Lender rescinds its demand for such compensation or indemnification within fifteen (15) days following its receipt of the Borrower's notice of intention to replace such affected Lender. Additionally, if the Borrower gives a notice to the Administrative Agent and an affected Lender of its intention to replace such affected Lender and does not so replace such affected Lender within ninety (90) days thereafter, the Borrower's rights under this Section 3.12(c) shall terminate and the Borrower shall promptly pay all compensation or indemnification demanded by such affected Lender pursuant to Sections 3.6, 3.9 or 3.10 hereof. 3.13 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) Loans. Each payment or prepayment of principal on the Term Loan, each payment of interest on the Term Loan and each conversion or extension of any Loan comprising the Term Loan, shall be allocated pro rata among the Lenders in accordance with the respective principal amounts of their respective Term Loan Commitment Percentages. 16 22 (b) Advances. No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make its ratable share of a borrowing hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder. Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its ratable share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by such Lender within the time period specified therefor hereunder, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the Federal Funds Rate for a period of two (2) Business Days, and thereafter at the Base Rate, for the period until such Lender makes such amount immediately available to the Administrative Agent. If such Lender does not pay such amounts to the Administrative Agent forthwith upon demand, the Administrative Agent may notify the Borrower and request the Borrower to immediately pay such amount to the Administrative Agent with interest at the rate applicable thereto. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. 3.14 Sharing of Payments. The Lenders agree among themselves that, in the event that any Lender shall obtain payment in respect of any Loan or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker's lien or counterclaim, or pursuant to a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided for in this Credit Agreement, such Lender shall promptly purchase from the other Lenders a participation in such Loans and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their respective ratable shares as provided for in this Credit Agreement. The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker's lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Lender which shall have shared the benefit of such payment shall, by repurchase of a participation theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker's lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Loan or other obligation in the amount of such participation. Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to the Administrative Agent or any other Lender an amount payable by such Lender or the 17 23 Administrative Agent to the Administrative Agent or such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.14 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.14 to share in the benefits of any recovery on such secured claim. 3.15 Payments, Computations, Etc. (a) Except as otherwise specifically provided herein, all payments hereunder shall be made to the Administrative Agent in Dollars in immediately available funds, without setoff, deduction, counterclaim or withholding of any kind, at the Administrative Agent's office specified in Section 9.1 not later than 2:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments received after such time shall be deemed to have been received on the next succeeding Business Day. The Administrative Agent may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower maintained with the Administrative Agent (with notice to the Borrower). The Borrower shall, at the time it makes any payment under this Credit Agreement, specify to the Administrative Agent the Loans, Fees, interest or other amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails so to specify, or if such application would be inconsistent with the terms hereof, the Administrative Agent shall distribute such payment to the Lenders in such manner as the Administrative Agent may determine to be appropriate in respect of obligations owing by the Borrower hereunder, subject to the terms of Section 3.13(a)). The Administrative Agent will distribute such payments to such Lenders, if any such payment is received prior to 12:00 Noon (Charlotte, North Carolina time) on a Business Day in like funds as received prior to the end of such Business Day and otherwise the Administrative Agent will distribute such payment to such Lenders entitled thereto on the next succeeding Business Day. Whenever any payment hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and Fees for the period of such extension), except that in the case of Eurodollar Loans, if the extension would cause the payment to be made in the next following calendar month, then such payment shall instead be made on the next preceding Business Day. Except as expressly provided otherwise herein, all computations of interest and fees shall be made on the basis of the actual number of days elapsed over a year of 360 days, except with respect to computation of interest on Base Rate Loans which (unless the Base Rate is determined by reference to the Federal Funds Rate) shall be calculated based on a year of 365 or 366 days, as appropriate. Interest shall accrue from and include the date of borrowing, but exclude the date of payment. (b) Allocation of Payments After Event of Default. Notwithstanding any other provisions of this Credit Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Administrative Agent or any Lender on account of 18 24 the Obligations or any other amounts outstanding under any of the Credit Documents shall be paid over or delivered as follows: FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation reasonable attorneys' fees) of the Administrative Agent in connection with enforcing the rights of the Lenders under the Credit Documents; SECOND, to payment of any Administrative Agent's Fees then due and payable; THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of each of the Lenders in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Obligations owing to such Lender; FOURTH, to the payment of all accrued interest and Fees on or in respect of the Obligations; FIFTH, to the payment of the outstanding principal amount of the Obligations; SIXTH, to all other Obligations and other obligations which shall have become due and payable under the Credit Documents or otherwise and not repaid pursuant to clauses "FIRST" through "SIXTH" above; and SEVENTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; and (ii) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion that the then outstanding Obligations held by such Lender bears to the aggregate then outstanding Obligations) of amounts available to be applied pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above. 3.16 Evidence of Debt. (a) Each Lender shall maintain an account or accounts evidencing each Loan made by such Lender to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Credit Agreement. Each Lender will make reasonable efforts to maintain the accuracy of its account or accounts and to promptly update its account or accounts from time to time, as necessary. (b) The Administrative Agent shall maintain the Register pursuant to Section 9.3(c) hereof, and a subaccount for each Lender, in which Register and subaccounts (taken together) shall be 19 25 recorded (i) the amount, type and Interest Period of each such Loan hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from or for the account of the Borrower and each Lender's share thereof. The Administrative Agent will make reasonable efforts to maintain the accuracy of the subaccounts referred to in the preceding sentence and to promptly update such subaccounts from time to time, as necessary. (c) The entries made in the accounts, Register and subaccounts maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent with the entries of the Administrative Agent, subsection (a)) shall be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain any such account, such Register or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Borrower to repay the Loans made by such Lender in accordance with the terms hereof. SECTION 4 GUARANTY 4.1 The Guarantee. (a) Each of the Guarantors hereby jointly and severally guarantees to each Lender, to each Affiliate of a Lender that enters into a Hedging Agreement and to the Administrative Agent as hereinafter provided the prompt payment of the Guaranteed Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, a mandatory cash collateralization or otherwise) strictly in accordance with the terms thereof. The Guarantors hereby further agree that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as mandatory cash collateralization or otherwise), the Guarantors will, jointly and severally, promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration or otherwise) in accordance with the terms of such extension or renewal. (b) Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents or Hedging Agreements, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of each Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the Bankruptcy Code). 20 26 4.2 Obligations Unconditional. The obligations of the Guarantors under Section 4.1 hereof are joint and several, absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Credit Documents or Hedging Agreements, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 4.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower or any other Guarantor of the Guaranteed Obligations for amounts paid under this Guaranty until such time as the Lenders (and any Affiliates of Lenders entering into Hedging Agreements) have been paid in full, all Commitments under the Credit Agreement have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from the Lenders in connection with monies received under the Credit Documents or Hedging Agreements. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to any Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Administrative Agent or any Lender or Lenders as security for any of the Guaranteed Obligations shall fail to attach or be perfected; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be 21 27 subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Lender exhaust any right, power or remedy or proceed against any Person under any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 4.3 Reinstatement. The obligations of the Guarantors under this Section 4 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 4.4 Certain Additional Waivers. Each Guarantor agrees that such Guarantor shall have no right of recourse to security for the Guaranteed Obligations, except through the exercise of the rights of subrogation pursuant to Section 4.2. 4.5 Remedies. The Guarantors agree that, to the fullest extent permitted by law, as between the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.2 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.2) for purposes of Section 4.1 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or the Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors for purposes of said Section 4.1. 22 28 4.6 Rights of Contribution. The Guarantors hereby agree, as among themselves, that if any Guarantor shall become an Excess Funding Guarantor (as defined below), each other Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the succeeding provisions of this Section 4.6), pay to such Excess Funding Guarantor an amount equal to such Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, assets, liabilities and debts of such Excess Funding Guarantor) of such Excess Payment (as defined below). The payment obligation of any Guarantor to any Excess Funding Guarantor under this Section 4.6 shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Section 4, and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes hereof, (i) "Excess Funding Guarantor" shall mean, in respect of any obligations arising under the other provisions of this Section 4 (hereafter, the "Guarantied Obligations"), a Guarantor that has paid an amount in excess of its Pro Rata Share of the Guarantied Obligations; (ii) "Excess Payment" shall mean, in respect of any Guarantied Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guarantied Obligations; and (iii) "Pro Rata Share", for the purposes of this Section 4.6, shall mean, for any Guarantor, the ratio (expressed as a percentage) of (a) the amount by which the aggregate present fair saleable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (b) the amount by which the aggregate present fair saleable value of all assets and other properties of the Borrower and all of the Guarantors exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Borrower and the Guarantors hereunder) of the Borrower and all of the Guarantors, all as of the Closing Date (if any Guarantor becomes a party hereto subsequent to the Closing Date, then for the purposes of this Section 4.6 such subsequent Guarantor shall be deemed to have been a Guarantor as of the Closing Date and the information pertaining to, and only pertaining to, such Guarantor as of the date such Guarantor became a Guarantor shall be deemed true as of the Closing Date). 4.7 Continuing Guarantee. The guarantee in this Section 4 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. 23 29 SECTION 5 CONDITIONS 5.1 Conditions to Closing. This Credit Agreement shall become effective, and the initial Extensions of Credit may be made, upon the satisfaction of the following conditions precedent: (a) Execution of Credit Agreement and Credit Documents. Receipt by the Administrative Agent of (i) multiple counterparts of this Credit Agreement, (ii) a Term Note for each Lender, (iii) multiple counterparts of the Pledge Agreement, (iv) multiple counterparts of the Security Agreement, (v) multiple counterparts of the Intercreditor Agreement and (vi) UCC financing statements relating to the Pledge Agreement and the Security Agreement, if any, in each case executed by a duly authorized officer of each party thereto and in each case conforming to the requirements of this Credit Agreement. (b) Legal Opinions. Receipt of multiple counterparts of opinions of counsel for the Credit Parties relating to the Credit Documents and the transactions contemplated herein, in form and substance satisfactory to the Administrative Agent and the Required Lenders. (c) Stock Certificates. Acknowledgment from NationsBank, N.A., as Administrative Agent under the Revolving Credit Agreement, (i) of its receipt of original stock certificates evidencing the ownership interests of the Credit Parties pledged pursuant to the Pledge Agreement, together in each case with original undated stock powers executed in blank, (ii) of the interests of the Administrative Agent and the Lenders hereunder therein pursuant to the Pledge Agreement and (iii) that it holds such stock certificates and stock powers as bailee for the Administrative Agent hereunder. (d) Absence of Legal Proceedings. The absence of any action, suit, investigation or proceeding pending in any court or before any arbitrator or governmental instrumentality which could reasonably be expected to have a Material Adverse Effect. (e) Corporate Documents. Receipt of the following (or their equivalent) for each of the Credit Parties: (i) Resolutions. Copies of resolutions of the Board of Directors approving and adopting the respective Credit Documents, the transactions contemplated therein and authorizing execution and delivery thereof, certified by a secretary or assistant secretary as of the Closing Date to be true and correct and in force and effect as of such date. (ii) Good Standing. Copies, where applicable, of (A) certificates of good standing, existence or its equivalent certified as of a recent date by the appropriate governmental authorities of the state of incorporation and each other state in which the failure to so qualify and be in good standing would have a material adverse effect on the business or operations in such state and (B) a certificate indicating payment of all corporate franchise taxes certified as of a recent date by the appropriate governmental taxing authorities. 24 30 (iii) Officer's Certificate. An officer's certificate for each of the Credit Parties dated as of the Closing Date substantially in the form of Schedule 5.1(e)(iii) with appropriate insertions and attachments. (f) Amendment No. 2 to Revolving Credit Agreement. Receipt of an executed copy of Amendment No. 2 to the Revolving Credit Agreement, in form and substance satisfactory to the Lenders hereunder. (g) Fees. Receipt of all fees, if any, owing pursuant to the Administrative Agent's Fee Letter, Section 3.5 or otherwise. (h) Subsection 5.2 Conditions. The conditions specified in Section 5.2 shall be satisfied. 5.2 Conditions to All Extensions of Credit. The obligation of each Lender to make any Extension of Credit hereunder (including the initial Extension of Credit to be made hereunder) is subject to the satisfaction of the following conditions precedent on the date of making such Extension of Credit: (a) Representations and Warranties. The representations and warranties made by the Credit Parties herein or in any other Credit Documents or which are contained in any certificate furnished at any time under or in connection herewith shall be true and correct in all material respects on and as of the date of such Extension of Credit as if made on and as of such date (except for those which expressly relate to an earlier date and those which are untrue solely as a result of a change permitted by this Agreement). (b) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extension of Credit to be made on such date unless such Default or Event of Default shall have been waived in accordance with this Credit Agreement. (c) Section 2.1 Conditions. If the Term Loan is made pursuant to Section 2.1, all conditions set forth therein shall have been satisfied. Each request for Extension of Credit (including extensions of Eurodollar Loans and conversions of Base Rate Loans into Eurodollar Loans) and each acceptance by the Borrower of an Extension of Credit (including extensions of Eurodollar Loans and conversions of Base Rate Loans into Eurodollar Loans) shall be deemed to constitute a representation and warranty by the Borrower as of the date of such Extension of Credit that the applicable conditions in paragraphs (a), (b) and (c) of this subsection have been satisfied. 25 31 SECTION 6 REPRESENTATIONS, WARRANTIES AND COVENANTS 6.1 Incorporation. The representations and warranties contained in Section 6 of the Revolving Credit Agreement (the "Incorporated Representations") and the affirmative and negative covenants contained in Sections 7 and 8, respectively, of the Revolving Credit Agreement (the "Incorporated Covenants") as in effect on the Closing Date are incorporated herein by reference with the same effect as if stated at length. The Credit Parties affirm and represent and warrant to the Administrative Agent and the Lenders that the Incorporated Representations are true and correct in all material respects as of the date hereof (except for those which expressly relate to an earlier date and those which are untrue solely as a result of a change permitted by the Revolving Credit Agreement) and covenant and agree that the Incorporated Covenants shall be as binding on the Credit Parties as if set forth fully herein, provided that (i) such Incorporated Representations and Incorporated Covenants as incorporated herein shall reflect that they are delivered to and run in favor of the Administrative Agent and the Lenders hereunder, rather than just to the Administrative Agent and the Lenders under the Revolving Credit Agreement as literally provided in the Revolving Credit Agreement, and references therein to the "Credit Agreement" and "Credit Documents" shall be deemed for purposes hereof to include this Credit Agreement and the Credit Documents relating hereto, and (ii) in the event that the Existing Credit Agreement shall be refinanced or replaced by another credit agreement, then the Incorporated Representations and Incorporated Covenants shall be as in effect immediately prior to such refinancing or replacement. 6.2 Additional Representations. (a) Purposes of Term Loan. Notwithstanding the provisions of Section 6.15 of the Incorporated Representations, the proceeds of the Term Loan shall be used solely to refinance Indebtedness outstanding under the Revolving Credit Agreement. 6.3 Additional Covenants. (a) Purposes of Term Loan. Notwithstanding the provisions of Section 7.13 of the Incorporated Covenants, the proceeds of the Term Loan shall be used solely for the purposes provided in Section 6.2(a) hereof. (b) Additional Credit Parties. The Borrower will provide to the Administrative Agent, for the benefit of the Lenders, a Joinder Agreement and the other items required by Section 7.11 of the Incorporated Covenants in the same form and from the same Subsidiaries as required therein, except that such Joinder Agreement and other items shall reflect that they are delivered to, and run in favor of, the Administrative Agent and secure the obligations of the Credit Parties under this Credit Agreement and the other Credit Documents. 26 32 SECTION 7 EVENTS OF DEFAULT 7.1 Events of Default. An Event of Default shall exist upon the occurrence of any of the following specified events (each an "Event of Default"): (a) Payment. Any Credit Party shall (i) default in the payment on the Termination Date of any principal of any of the Loans, or (ii) default, and such default shall continue for three (3) or more Business Days, in the payment when due of any interest on the Loans, or of any Fees or other amounts owing hereunder, under any of the other Credit Documents or in connection herewith or therewith; or (b) Representations. Any representation, warranty or statement made or deemed to be made herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was made or deemed to have been made (other than those which are untrue solely as a result of changes permitted by this Agreement); or (c) Covenants. (i) Default in the due performance or observance of any term, covenant or agreement contained in Section 7.3(a), 7.9, 7.11, 7.13 or 8.1 through 8.10, inclusive, in each case of the Incorporated Covenants; or (ii) Default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b) or (c)(i) of this Section 7.1) contained in this Credit Agreement and such default shall continue unremedied for a period of at least 30 days after the earlier of a Responsible Officer becoming aware of such default or notice thereof by the Administrative Agent; or (d) Other Credit Documents. (i) Any Credit Party shall default in the due performance or observance of any material term, covenant or agreement in any of the other Credit Documents (subject to applicable grace or cure periods, if any), or (ii) except as to the Credit Party which is dissolved, released or merged or consolidated out of existence as the result of or in connection with a dissolution, merger or disposition permitted by Section 8.3 or Section 8.4 of the Incorporated Covenants, any Credit Document shall fail to be in full force and effect or to give 27 33 the Administrative Agent and/or the Lenders any material part of the Liens, rights, powers and privileges purported to be created thereby; or (e) Guaranties. Except as to the Credit Party which is dissolved, released or merged or consolidated out of existence as the result of or in connection with a dissolution, merger or disposition permitted by Section 8.3 or Section 8.4 of the Incorporated Covenants, the guaranty given by any Guarantor hereunder or any material provision thereof shall cease to be in full force and effect, or any Guarantor hereunder or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under such guaranty, or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any guaranty; or (f) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect to any Material Credit Party; or (g) Defaults under Other Agreements. With respect to any Indebtedness (other than Indebtedness outstanding under this Credit Agreement) in excess of $1,500,000 in the aggregate for the Consolidated Group taken as a whole, (A) (1) any Material Credit Party shall default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness, or (2) the occurrence and continuance of a default in the observance or performance relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required), any such Indebtedness to become due prior to its stated maturity; or (B) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or (h) Judgments. Any Material Credit Party shall fail within 30 days of the date due and payable to pay, bond or otherwise discharge any judgment, settlement or order for the payment of money which judgment, settlement or order, when aggregated with all other such judgments, settlements or orders due and unpaid at such time, exceeds $1,500,000, and which is not stayed on appeal (or for which no motion for stay is pending) or is not otherwise being executed; or (i) ERISA. Any of the following events or conditions, if such event or condition could reasonably be expected to have a Material Adverse Effect: (1) any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of a member of the Consolidated Group or any ERISA Affiliate in favor of the PBGC or a Plan; (2) an ERISA Event shall occur with respect to a Single Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (3) an ERISA Event shall occur with respect to a 28 34 Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in (i) the termination of such Plan for purposes of Title IV of ERISA, or (ii) a member of the Consolidated Group or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency of (within the meaning of Section 4245 of ERISA) such Plan; or (4) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code) or breach of fiduciary responsibility shall occur which may subject a member of the Consolidated Group or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Internal Revenue Code, or under any agreement or other instrument pursuant to which a member of the Consolidated Group or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability; or (j) Ownership. There shall occur a Change of Control; or (k) Revolving Credit Agreement. There shall occur an Event of Default under the Revolving Credit Agreement. 7.2 Acceleration; Remedies. Upon the occurrence and during the continuation of an Event of Default, the Administrative Agent shall, upon the request and direction of the Required Lenders, by written notice to the Credit Parties take any of the following actions: (i) Acceleration. Declare the unpaid principal of and any accrued interest in respect of all Loans and any and all other indebtedness or obligations of any and every kind owing by the Credit Parties to the Administrative Agent and/or any of the Lenders hereunder to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each of the Credit Parties. (ii) Enforcement of Rights. Enforce any and all rights and interests created and existing under the Credit Documents and all rights of set-off. Notwithstanding the foregoing, if an Event of Default specified in Section 7.1(f) shall occur, then all Loans, all accrued interest in respect thereof, all accrued and unpaid Fees and other indebtedness or obligations owing to the Administrative Agent and/or any of the Lenders hereunder automatically shall immediately become due and payable without presentment, demand, protest or the giving of any notice or other action by the Administrative Agent or the Lenders, all of which are hereby waived by the Credit Parties. 29 35 SECTION 8 AGENCY PROVISIONS 8.1 Appointment. Each Lender hereby designates and appoints NationsBank, N.A. as administrative agent (in such capacity, the "Administrative Agent") of such Lender to act as specified herein and the other Credit Documents, and each such Lender hereby authorizes the Administrative Agent as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Credit Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated by the terms hereof and of the other Credit Documents, together with such other powers as are reasonably incidental thereto. Each Lender further directs and authorizes the Administrative Agent to execute releases (or similar agreements) to give effect to the provisions of this Credit Agreement and the other Credit Documents, including specifically, without limitation, in connection with a Divestiture consented to or permitted pursuant the provisions of Section 8.3 of the Incorporated Covenants or a sale, lease, transfer or other disposition of Property not prohibited by this Credit Agreement. Notwithstanding any provision to the contrary elsewhere herein and in the other Credit Documents, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or any of the other Credit Documents, or shall otherwise exist against the Administrative Agent. The provisions of this Section are solely for the benefit of the Administrative Agent and the Lenders and none of the Credit Parties shall have any rights as a third party beneficiary of the provisions hereof (other than as set forth in the second sentence hereof). In performing its functions and duties under this Credit Agreement and the other Credit Documents, the Administrative Agent shall act solely as Administrative Agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for any Credit Party or any of their respective Affiliates. 8.2 Delegation of Duties. The Administrative Agent may execute any of its duties hereunder or under the other Credit Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.3 Exculpatory Provisions. The Administrative Agent and its officers, directors, employees, agents, attorneys-in-fact or affiliates shall not be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection herewith or in connection with any of the other Credit Documents (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any 30 36 of the Credit Parties contained herein or in any of the other Credit Documents or in any certificate, report, document, financial statement or other written or oral statement referred to or provided for in, or received by the Administrative Agent under or in connection herewith or in connection with the other Credit Documents, or enforceability or sufficiency therefor of any of the other Credit Documents, or for any failure of any Credit Party to perform its obligations hereunder or thereunder. The Administrative Agent shall not be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectability or sufficiency of this Credit Agreement, or any of the other Credit Documents or for any representations, warranties, recitals or statements made herein or therein or made by the Borrower or any Credit Party in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Administrative Agent to the Lenders or by or on behalf of the Credit Parties to the Administrative Agent or any Lender or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Term Loan or of the existence or possible existence of any Default or Event of Default or to inspect the properties, books or records of the Credit Parties or any of their respective Affiliates. 8.4 Reliance on Communications. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to any of the Credit Parties, independent accountants and other experts selected by the Administrative Agent with reasonable care). The Administrative Agent may deem and treat the Lenders as the owners of their respective interests hereunder for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent in accordance with Section 9.3(b) hereof. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Credit Agreement or under any of the other Credit Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under any of the other Credit Documents in accordance with a request of the Required Lenders (or to the extent specifically provided in Section 9.6, all the Lenders) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders (including their successors and assigns). 8.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or a Credit Party referring to the Credit Document, describing such Default or Event of 31 37 Default and stating that such notice is a "notice of default." In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders. 8.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that each of the Administrative Agent and its officers, directors, employees, Administrative Agents, attorneys-in-fact or affiliates has not made any representations or warranties to it and that no act by the Administrative Agent or any affiliate thereof hereinafter taken, including any review of the affairs of any Credit Party or any of their respective Affiliates, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower, the other Credit Parties or their respective Affiliates and made its own decision to make its Loans hereunder and enter into this Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower, the other Credit Parties and their respective Affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial or other conditions, prospects or creditworthiness of the Borrower, the other Credit Parties or any of their respective Affiliates which may come into the possession of the Administrative Agent or any of its officers, directors, employees, Administrative Agents, attorneys-in-fact or affiliates. 8.7 Indemnification. The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably in accordance with the respective principal amounts of outstanding Loans and Participation Interests of the Lenders), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the final payment of all of the obligations of the Borrower hereunder and under the other Credit Documents) be imposed on, incurred by or asserted against the Administrative Agent in its capacity as such in any way relating to or arising out of this Credit Agreement or the other Credit Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by 32 38 the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent. If any indemnity furnished to the Administrative Agent for any purpose shall, in the opinion of the Administrative Agent, be insufficient or become impaired, the Administrative Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section shall survive the repayment of the Loans and other obligations under the Credit Documents and the termination of the Commitments hereunder. 8.8 Administrative Agent in its Individual Capacity. The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower, its Subsidiaries or their respective Affiliates as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans made by and all obligations of the Borrower hereunder and under the other Credit Documents, the Administrative Agent shall have the same rights and powers under this Credit Agreement as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 8.9 Successor Administrative Agent. The Administrative Agent may, at any time, resign upon 20 days' written notice to the Lenders, and may be removed, upon show of cause, by the Required Lenders upon 30 days' written notice to the Administrative Agent. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the notice of resignation or notice of removal, as appropriate, then the retiring Administrative Agent shall select a successor Administrative Agent provided such successor is a Lender hereunder or a commercial bank organized under the laws of the United States of America or of any State thereof and has a combined capital and surplus of at least $400,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations as Administrative Agent, as appropriate, under this Credit Agreement and the other Credit Documents and the provisions of this Section 8.9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Credit Agreement. 33 39 8.10 Intercreditor Agreement. Inasmuch as the obligations under the Revolving Credit Agreement are secured by the same collateral as that securing the obligations under this Credit Agreement, an intercreditor agreement is required in order that the respective obligations share in such collateral on a pari passu basis. By execution hereof, each Lender hereby acknowledges and agrees to be bound by the terms of the Intercreditor Agreement and further authorizes and directs the Administrative Agent to enter into the Intercreditor Agreement on its behalf. SECTION 9 MISCELLANEOUS 9.1 Notices. Except as otherwise expressly provided herein, all notices and other communications shall have been duly given and shall be effective (i) when delivered, (ii) when transmitted via telecopy (or other facsimile device) to the number set out below, (iii) the day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (iv) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address, in the case of the Borrower, Guarantors and the Administrative Agent, set forth below, and, in the case of the Lenders, set forth on Schedule 9.1, or at such other address as such party may specify by written notice to the other parties hereto: If to the Borrower or the Guarantors: Railworks Corporation 1104 Kenilworth Drive Suite 301 Baltimore, MD 21204 Attn: Michael R. Azarela Telephone: (410) 512-0501 Telecopy: (410) 825-6920 If to the Administrative Agent: NationsBank, N.A. 101 N. Tryon Street Independence Center, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attn: Gregg Newland Agency Services 34 40 Telephone: (704) 386-4218 Telecopy: (704) 388-9436 with a copy to: NationsBank, N.A. 10 Light Street Sixteenth Floor MD4-302-16-01 Baltimore, MD 21202-1435 Attn: Monica Brandes Telephone: (410) 605-8019 Telecopy: (410) 539-7508 9.2 Right of Set-Off. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, each Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to set-off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Lender (including, without limitation branches, agencies or Affiliates of such Lender wherever located) to or for the credit or the account of any Credit Party against obligations and liabilities of such Person to such Lender hereunder, under the Notes, the other Credit Documents or otherwise, irrespective of whether such Lender shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such set-off shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of such Lender subsequent thereto. Any Person purchasing a participation in the Loans and Commitments hereunder pursuant to Section 3.14 or Section 9.3(d) may exercise all rights of set-off with respect to its participation interest as fully as if such Person were a Lender hereunder. 9.3 Benefit of Agreement. (a) Generally. This Credit Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided that none of the Credit Parties may assign or transfer any of its interests without prior written consent of the Lenders; provided further that the rights of each Lender to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth in this Section 9.3, provided however that nothing herein shall prevent or prohibit any Lender from (i) pledging its Loans hereunder to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank, or (ii) granting assignments or selling 35 41 participations in such Lender's Loans and/or Commitments hereunder to its parent company and/or to any Affiliate or Subsidiary of such Lender. (b) Assignments. Each Lender may assign all or a portion of its rights and obligations hereunder (including, without limitation, all or a portion of its Commitments or its Loans), pursuant to an assignment agreement substantially in the form of Schedule 9.3(b), to (i) a Lender, (ii) an affiliate of a Lender or (iii) any bank, financial institution, commercial lender or institutional investor reasonably acceptable to the Administrative Agent and, so long as no Default or Event of Default has occurred and is continuing, the Borrower (the consent of the Borrower shall not be unreasonably withheld or delayed); provided that (i) any such assignment (other than any assignment to an existing Lender) shall be in a minimum aggregate amount of $5,000,000 (or, if less, the remaining amount of the Commitment being assigned by such Lender) of the Commitments and in integral multiples of $250,000 above such amount and (ii) each such assignment shall be of a constant, not varying, percentage of all such Lender's rights and obligations under this Credit Agreement. Any assignment hereunder shall be effective upon delivery to the Administrative Agent of written notice of the assignment together with a transfer fee of $3,500 payable to the Administrative Agent for its own account from and after the later of (i) the effective date specified in the applicable assignment agreement and (ii) the date of recording of such assignment in the Register pursuant to the terms of subsection (c) below. The assigning Lender will give prompt notice to the Administrative Agent and the Borrower of any such assignment. Upon the effectiveness of any such assignment (and after notice to, and (to the extent required pursuant to the terms hereof), with the consent of, the Borrower as provided herein), the assignee shall become a "Lender" for all purposes of this Credit Agreement and the other Credit Documents and, to the extent of such assignment, the assigning Lender shall be relieved of its obligations hereunder to the extent of the Loans and Commitment components being assigned. Along such lines the Borrower agrees that upon notice of any such assignment and surrender of the appropriate Note or Notes, it will promptly provide to the assigning Lender and to the assignee separate promissory notes in the amount of their respective interests substantially in the form of the original Note (but with notation thereon that it is given in substitution for and replacement of the original Note or any replacement notes thereof). By executing and delivering an assignment agreement in accordance with this Section 9.3(b), the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim; (ii) except as set forth in clause (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto or the financial condition of any Credit Party or any of their respective Affiliates or the performance or observance by any Credit Party of any of its obligations under this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such assignment agreement; (iv) such assignee confirms that it has 36 42 received a copy of this Credit Agreement, the other Credit Documents and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such assignment agreement; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Credit Agreement and the other Credit Documents; (vi) such assignee appoints and authorizes the Administrative Agent to take such action on its behalf and to exercise such powers under this Credit Agreement or any other Credit Document as are delegated to the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Credit Agreement and the other Credit Documents are required to be performed by it as a Lender. (c) Maintenance of Register. The Administrative Agent shall maintain at one of its offices in Charlotte, North Carolina a copy of each Lender assignment agreement delivered to it in accordance with the terms of subsection (b) above and a register for the recordation of the identity of the principal amount, type and Interest Period of each Loan outstanding hereunder, the names, addresses and the Commitments of the Lenders pursuant to the terms hereof from time to time (the "Register"). The Administrative Agent will make reasonable efforts to maintain the accuracy of the Register and to promptly update the Register from time to time, as necessary. The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrower and each Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Participations. Each Lender may sell, transfer, grant or assign participations in all or a portion of such Lender's rights, obligations or rights and obligations hereunder (including all or a portion of its Commitments or its Loans); provided that (i) such selling Lender shall remain a "Lender" for all purposes under this Credit Agreement (such selling Lender's obligations under the Credit Documents remaining unchanged) and the participant shall not constitute a Lender hereunder, (ii) no such participant shall have, or be granted, rights to approve any amendment or waiver relating to this Credit Agreement or the other Credit Documents except to the extent any such amendment or waiver would (A) reduce the principal of or rate of interest on or Fees in respect of any Loans in which the participant is participating, (B) postpone the date fixed for any payment of principal (including extension of the Termination Date or the date of any mandatory prepayment), interest or Fees in which the participant is participating, (C) except as the result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.3 of the Incorporated Covenants, release the Borrower or substantially all of the Guarantors from its or their obligations under the Credit Documents, or (D) except as the result of or in connection with a Divestiture permitted under Section 8.3(b) of the Incorporated Covenants, release all or substantially all of the collateral, and (iii) sub-participations by the participant (except to an affiliate, parent company or affiliate of a parent company of the participant) shall be prohibited. In the case of any such 37 43 participation, the participant shall not have any rights under this Credit Agreement or the other Credit Documents (the participant's rights against the selling Lender in respect of such participation to be those set forth in the participation agreement with such Lender creating such participation) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation, provided, however, that such participant shall be entitled to receive additional amounts under Sections 3.6, 3.9, 3.10, 3.11 and 9.2 on the same basis as if it were a Lender. 9.4 No Waiver; Remedies Cumulative. No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Administrative Agent or any Lender and any of the Credit Parties shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle the Borrower or any other Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. 9.5 Payment of Expenses, etc. The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses (A) of the Administrative Agent in connection with the negotiation, preparation, execution and delivery and administration of this Credit Agreement and the other Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and expenses of Moore & Van Allen, PLLC, special counsel to the Administrative Agent) and any amendment, waiver or consent relating hereto and thereto including, but not limited to, any such amendments, waivers or consents resulting from or related to any work-out, renegotiation or restructure relating to the performance by the Credit Parties under this Credit Agreement and (B) of the Administrative Agent and the Lenders in connection with enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, in connection with any such enforcement, the reasonable fees and disbursements of counsel for the Administrative Agent and each of the Lenders); (ii) permit the Administrative Agent to perform inventory and accounts receivable field audits at the Borrower's expense, provided that unless an Event of Default shall be in existence the Borrower's obligation to reimburse the Administrative Agent for such field audits shall be limited to one such field audit each fiscal year; (iii) pay and hold each of the Lenders harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes; and (iv) indemnify each Lender, its officers, directors, employees, representatives and Administrative Agents from and hold each of them harmless against any and all 38 44 losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of (A) any investigation, litigation or other proceeding (whether or not any Lender is a party thereto) related to the entering into and/or performance of any Credit Document or the use of proceeds of any Loans (including other Extensions of Credit) hereunder or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding or (B) the presence or Release of any Materials of Environmental Concern at, under or from any Property owned, operated or leased by the Borrower or any of its Subsidiaries, or the failure by the Borrower or any of its Subsidiaries to comply with any Environmental Law (but excluding, in the case of either of clause (A) or (B) above, any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of gross negligence or willful misconduct on the part of the Person to be indemnified). 9.6 Amendments, Waivers and Consents. Neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing entered into by, or approved in writing by, the Required Lenders and the Borrower, provided, however, that: (a) without the consent of each Lender affected thereby, neither this Credit Agreement nor any of the other Credit Documents may be amended to (i) extend the final maturity of any Loan, (ii) reduce the rate or extend the time of payment of interest thereon or Fees hereunder (other than as a result of waiving the applicability of any increase in interest rates or Fees after the occurrence of an Event of Default or on account of a failure to deliver financial statements on a timely basis), (iii) reduce or waive the principal amount of any Loan, (iv) increase the Commitment of a Lender over the amount thereof in effect (it being understood and agreed that a waiver of any Default or Event of Default shall not constitute an increase in the Commitment of any Lender), (v) except as the result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.3 of the Incorporated Covenants, release the Borrower or substantially all of the Guarantors from its or their obligations under the Credit Documents, 39 45 (vi) except as the result of or in connection with a Divestiture permitted under Section 8.3(b) of the Incorporated Covenants, release all or substantially all of the collateral, (vii) amend, modify or waive any provision of this Section 9.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.13, 3.14, 3.15, 7.1(a), 9.2, 9.3, 9.5 or 9.9, (viii) reduce any percentage specified in, or otherwise modify, the definition of Required Lenders, or (ix) consent to the assignment or transfer by the Borrower (or another Credit Party) of any of its rights and obligations under (or in respect of) the Credit Documents except as permitted thereby; (b) without the consent of the Administrative Agent, no provision of Section 8 may be amended; Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (x) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein and (y) the Required Lenders may consent to allow a Credit Party to use cash collateral in the context of a bankruptcy or insolvency proceeding. 9.7 Counterparts. This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Credit Agreement to produce or account for more than one such counterpart. 9.8 Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement. 9.9 Survival. All indemnities set forth herein, including, without limitation, in Section 3.9, 3.11, 8.7 or 9.5 shall survive the execution and delivery of this Credit Agreement, the making of the Loans, the repayment of the Loans and other obligations under the Credit Documents and the termination of the Commitments hereunder, and all representations and warranties made by the Credit Parties herein shall survive delivery of the Notes and the making of the Loans hereunder. 40 46 9.10 Governing Law; Submission to Jurisdiction; Venue. (a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (b) Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the courts of the State of North Carolina in Mecklenburg County, or of the United States for the Western District of North Carolina, and, by execution and delivery of this Credit Agreement, each of the Credit Parties hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the nonexclusive jurisdiction of such courts. Each of the Credit Parties further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices pursuant to Section 9.1, such service to become effective three (3) days after such mailing. Nothing herein shall affect the right of the Administrative Agent to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Credit Party in any other jurisdiction. (c) Each of the Credit Parties hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Credit Agreement or any other Credit Document brought in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (d) TO THE EXTENT PERMITTED BY LAW, EACH OF THE ADMINISTRATIVE AGENT, THE LENDERS, THE BORROWER AND THE OTHER CREDIT PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. 9.11 Severability. If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 41 47 9.12 Entirety. This Credit Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein. 9.13 Binding Effect; Termination. (a) This Credit Agreement shall become effective at such time on or after the Closing Date when it shall have been executed by the Borrower, the Guarantors and the Administrative Agent, and the Administrative Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Guarantors, the Administrative Agent and each Lender and their respective successors and assigns. (b) The term of this Credit Agreement shall commence on the effective date pursuant to subsection (a) above and shall continue until no Loans or any other amounts payable hereunder or under any of the other Credit Documents shall remain outstanding and until all of the Commitments hereunder shall have expired or been terminated. 9.14 Confidentiality. The Administrative Agent and the Lenders agree to keep confidential (and to cause their respective affiliates, officers, directors, employees, agents and representatives to keep confidential) all information, materials and documents furnished to the Administrative Agent or any such Lender by or on behalf of any Credit Party (whether before or after the Closing Date) which relates to the Borrower or any of its Subsidiaries (the "Information"). Notwithstanding the foregoing, the Administrative Agent and each Lender shall be permitted to disclose Information (i) to its affiliates, officers, directors, employees, agents and representatives in connection with its participation in any of the transactions evidenced by this Credit Agreement or any other Credit Documents or the administration of this Credit Agreement or any other Credit Documents, subject to the provisions of this Section 9.14; (ii) to the extent required by applicable laws and regulations or by any subpoena or similar legal process, or requested by any Governmental Authority; (iii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this Credit Agreement or any agreement entered into pursuant to clause (iv) below, (B) becomes available to the Administrative Agent or such Lender on a non-confidential basis from a source other than a Credit Party or (C) was available to the Administrative Agent or such Lender on a non-confidential basis prior to its disclosure to the Administrative Agent or such Lender by a Credit Party; (iv) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first specifically agrees in a writing furnished to and for the benefit of the Credit Parties to be bound by the terms of this Section 9.14; or (v) to the extent that the Borrower shall have consented in writing to such disclosure. Nothing set forth in this Section 9.14 42 48 shall obligate the Administrative Agent or any Lender to return any materials furnished by the Credit Parties. 9.15 Source of Funds. Each of the Lenders hereby represents and warrants to the Borrower that at least one of the following statements is an accurate representation as to the source of funds to be used by such Lender in connection with the financing hereunder: (a) no part of such funds constitutes assets allocated to any separate account maintained by such Lender in which any employee benefit plan (or its related trust) has any interest; (b) to the extent that any part of such funds constitutes assets allocated to any separate account maintained by such Lender, such Lender has disclosed to the Borrower the name of each employee benefit plan whose assets in such account exceed 10% of the total assets of such account as of the date of such purchase (and, for purposes of this subsection (b), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (c) to the extent that any part of such funds constitutes assets of an insurance company's general account, such insurance company has complied with all of the requirements of the regulations issued under Section 401(c)(1)(A) of ERISA; or (d) such funds constitute assets of one or more specific benefit plans which such Lender has identified in writing to the Borrower. As used in this Section 9.15, the terms "employee benefit plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 9.16 Conflict. To the extent that there is a conflict or inconsistency between any provision hereof, on the one hand, and any provision of any Credit Document, on the other hand, this Credit Agreement shall control. [Signature Page to Follow] 43 49 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written. BORROWER: RAILWORKS CORPORATION, a Delaware corporation By: /s/ Michael R. Azarela ----------------------------------------- Name: Michael R. Azarela Title: Executive Vice President and Chief Financial Officer GUARANTORS: ALPHA-KEYSTONE ENGINEERING, INC., - ---------- a Pennsylvania corporation ANNEX RAILROAD BUILDERS, INC., an Indiana corporation COMSTOCK HOLDINGS INC., a Delaware corporation COMTRAK CONSTRUCTION, INC., a Georgia corporation CONDON BROTHERS, INC., a Washington corporation CPI CONCRETE PRODUCTS INCORPORATED, a Tennessee corporation H.P. MCGINLEY INC., a Pennsylvania corporation KENNEDY RAILROAD BUILDERS, INC., a Pennsylvania corporation L.K. COMSTOCK & COMPANY, INC., a New York corporation MERIT RAILROAD CONTRACTORS, INC., a Missouri corporation MIDWEST CONSTRUCTION SERVICES, INC., an Indiana corporation MINNESOTA RAILROAD SERVICE, INC., a Tennessee corporation NEW ENGLAND RAILROAD CONSTRUCTION CO., INC., a Connecticut corporation By: /s/ Michael R. Azarela ----------------------------------------- Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors 1 50 NORTHERN RAIL SERVICE AND SUPPLY COMPANY, INC., a Michigan corporation R. & M. B. RAIL CO., INC., an Indiana corporation RAILCORP, INC., an Ohio corporation RAILROAD SERVICE, INC., a Nevada corporation RAILROAD SPECIALTIES, INC., an Indiana corporation SOUTHERN INDIANA WOOD PRESERVING CO., INC., an Indiana corporation U.S. TRACKWORKS, INC., a Michigan corporation U.S. RAILWAY SUPPLY, INC., an Indiana corporation WM. A. SMITH CONSTRUCTION CO., INC., a Texas corporation WM. A. SMITH RERAILING SERVICES, INC., a Texas corporation By: /s/ Michael R. Azarela ----------------------------------------- Name: Michael R. Azarela Title: Executive Vice President of each of the foregoing Guarantors LENDERS: NATIONSBANK, N.A., individually in its capacity as a Lender and in its capacity as Administrative Agent By: /s/ Monica R. Brandes ----------------------------------------- Name: Monica R. Brandes Title: Senior Vice President FIRST UNION NATIONAL BANK By: /s/ Robert J. Bauer ----------------------------------------- Name: Robert J. Bauer Title: Vice President BANKERS TRUST COMPANY By: /s/ Mary Kay Coyle ----------------------------------------- Name: Mary Kay Coyle Title: Managing Director 2 EX-21.1 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF RAILWORKS CORPORATION
NAMES UNDER WHICH NAME OF COMPANY STATE OF INCORPORATION DOING BUSINESS - --------------- ---------------------- ------------------- Alpha-Keystone Engineering, Inc. Pennsylvania - ------------------------------------------------------------------------------------------------------------------------------------ Alpha-Keystone, Inc. Ohio - ------------------------------------------------------------------------------------------------------------------------------------ Armcore Acquisition Corp. Delaware - ------------------------------------------------------------------------------------------------------------------------------------ Armcore Railroad Contractors, Inc. (subsidiary of Illinois Armcore Acquisition Corp.) - ------------------------------------------------------------------------------------------------------------------------------------ Annex Railroad Builders, Inc. Indiana - ------------------------------------------------------------------------------------------------------------------------------------ Comstock Holdings Inc. Delaware - ------------------------------------------------------------------------------------------------------------------------------------ L.K. Comstock & Company, Inc. New York (subsidiary of Comstock Holdings Inc.) - ------------------------------------------------------------------------------------------------------------------------------------ Comtrak Construction, Inc. Georgia - ------------------------------------------------------------------------------------------------------------------------------------ Condon Brothers, Inc. Washington - ------------------------------------------------------------------------------------------------------------------------------------ CPI Concrete Products Incorporated Tennessee - ------------------------------------------------------------------------------------------------------------------------------------ FCM Rail, Ltd. Michigan - ------------------------------------------------------------------------------------------------------------------------------------ F&V Metro RW, Inc. Delaware - ------------------------------------------------------------------------------------------------------------------------------------ F&V Metro Contracting Corp. (subsidiary of F&V New York Metro RW, Inc.) - ------------------------------------------------------------------------------------------------------------------------------------ Impulse Enterprises of New York, Inc. (subsidiary of F&V New York Metro RW, Inc.) - ------------------------------------------------------------------------------------------------------------------------------------ V&R Electrical Contractors, Inc. (subsidiary of F&V New York Metro RW, Inc.) - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex RW, Inc. Delaware - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex Holding Corporation (subsidiary of Gantrex Delaware RW, Inc.) - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex Corporation (subsidiary of Gantrex Holding Pennsylvania Corp) - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex Systems, Inc. (subsidiary of Gantrex RW, Delaware Inc. and Gantrex Holding Corp) - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex RW Company (subsidiary of Gantrex RW, Nova Scotia unlimited Inc.) liability company - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex Holdings-Canada, Inc. ("GHC")(subsidiary of Nova Scotia Gantrex RW Co) corporation - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex Group Ltd (subsidiary of GHC) Ontario corporation - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex Limited (subsidiary of Gantrex Group Ltd) Ontario corporation - ------------------------------------------------------------------------------------------------------------------------------------ Gantrex Systems Limited (subsidiary of Gantrex Ontario corporation Group Ltd) - ------------------------------------------------------------------------------------------------------------------------------------ Norapco Limited (subsidiary of GHC) Ontario corporation - ------------------------------------------------------------------------------------------------------------------------------------ H.P. McGinley, Inc. Pennsylvania - ------------------------------------------------------------------------------------------------------------------------------------ Kennedy Railroad Builders, Inc. Pennsylvania - ------------------------------------------------------------------------------------------------------------------------------------ Merit Railroad Contractors, Inc. Missouri - ------------------------------------------------------------------------------------------------------------------------------------
2 Midwest Construction Services, Inc. Indiana - ---------------------------------------------------------------------------------------------------------- MidWest RW, Inc. Delaware - ---------------------------------------------------------------------------------------------------------- MidWest Railroad Construction & Maintenance Wyoming Corporation of Wyoming (subsidiary of Mid West RW, Inc.) - ---------------------------------------------------------------------------------------------------------- Minnesota Railroad Service, Inc. Tennessee - ---------------------------------------------------------------------------------------------------------- New England Railroad Construction Co., Inc. Connecticut NERRCO, Inc. - ---------------------------------------------------------------------------------------------------------- Northern Rail Service and Supply Company, Inc. Michigan - ---------------------------------------------------------------------------------------------------------- R. & M. B. Rail Co., Inc. Indiana Mize Construction Company - ---------------------------------------------------------------------------------------------------------- Railcorp Inc. Ohio - ---------------------------------------------------------------------------------------------------------- Railroad Service, Inc. Nevada Brace and Matson, Inc.; Brace and Matson, Co. - ---------------------------------------------------------------------------------------------------------- Railroad Specialties, Inc. Indiana - ---------------------------------------------------------------------------------------------------------- Sheldon Electric, Inc. Delaware - ---------------------------------------------------------------------------------------------------------- Southern Indiana Wood Preserving Co., Inc. Indiana - ---------------------------------------------------------------------------------------------------------- U. S. Trackworks, Inc. Michigan - ---------------------------------------------------------------------------------------------------------- U. S. Railway Supply, Inc. Indiana - ---------------------------------------------------------------------------------------------------------- Wm. A. Smith Construction Co., Inc. Texas - ---------------------------------------------------------------------------------------------------------- Wm. A. Smith Rerailing Services, Inc. Texas - ----------------------------------------------------------------------------------------------------------
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