UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


x		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the quarterly period ended June 30, 2002

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the transition period from to

Commission file number 0-24639

RAILWORKS CORPORATION
(Exact name of registrant as specified in its governing instrument)


Delaware (State of Organization)		58-2382378 (IRS Employer Identification No.)

6225 Smith Avenue, Suite 200, Baltimore, Maryland (Address of principal executive office)		21209 (Zip Code)

(Registrant’s telephone number, including area code) (410) 580-6000

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 o

14,383,551 shares of Common Stock were outstanding as of August 1, 2002.

TABLE OF CONTENTS


PART I. — FINANCIAL INFORMATION
	Item 1. Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
DISCLOSURE STATEMENT
SECTION 906 CERTIFICATION OF THE CEO
SECTION 906 CERTIFICATION OF THE CFO

TABLE OF CONTENTS


		page

PART I. – FINANCIAL INFORMATION			2
	Item 1. Consolidated Financial Statements		2
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
PART II. – OTHER INFORMATION			50
	Item 1. Legal Proceedings		50
	Item 6. Exhibits and Reports on Form 8-K		51

PART I. — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
JUNE 30, 2002 AND DECEMBER 31, 2001

(in thousands, except share and per share data)


					2002			2001

ASSETS
CURRENT ASSETS:
		Cash and cash equivalents			$	1,269		$	2,830
		Accounts receivable, net of allowance for doubtful accounts of $14,770 and $14,170, respectively				171,983			174,429
		Costs and estimated earnings in excess of billings on uncompleted contracts				36,083			40,693
		Inventories:
				Raw materials		11,058			10,192
				Finished goods		13,735			12,578
		Other current assets				9,976			12,250

				Total current assets		244,104			252,972

PROPERTY, PLANT AND EQUIPMENT, NET						48,800			50,963

OTHER ASSETS:
			Excess of cost over net assets acquired, net of amortization			205,315			204,812
			Other			267			9,106

				Total other assets		205,582			213,918

				TOTAL	$	498,486		$	517,853

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Liabilities Not Subject to Compromise:
Current Liabilities:
		Cash overdraft			$	1,238		$	2,995
		Current maturities of long-term debt				55,399			41,523
		Accounts payable				47,849			30,341
		Accrued payroll and related withholdings				7,690			6,650
		Accrued interest payable				1,658			477
		Billings in excess of costs and estimated earnings on uncompleted contracts				18,834			13,809
		Other accrued liabilities				19,925			15,865

				Total current liabilities		152,593			111,660

		Long-term debt, net of current maturities				730			346
		Deferred tax liability				568			551
		Excess of acquired net assets over cost, net of amortization				—			5,323
		Other liabilities				4,026			4,978

				Total long-term liabilities		5,324			11,198

				Total liabilities not subject to compromise		157,917			122,858
		Liabilities subject to compromise				428,876			455,065

				Total liabilities		586,793			577,923

	Minority interest					1,944			1,749
Stockholders’ Deficit:
		Series A, convertible preferred stock, $1.00 par value, authorized 10,000,000 shares, 13,700 shares issued and outstanding				14			14
		Common stock, $0.01 par value, authorized 100,000,000 shares, 15,512,585 shares issued and 14,383,551 outstanding at June 30, 2002 and December 31, 2001				155			155
		Treasury Stock				(2,667	)		(2,667	)
		Officer Loans, net				—			(1,876	)
		Additional paid-in capital				136,572			136,572
		Accumulated other comprehensive loss				(965	)		(1,969	)
		Retained deficit				(223,360	)		(192,048	)

				Total stockholders’ deficit		(90,251	)		(61,819	)

				TOTAL	$	498,486		$	517,853

See Notes to Consolidated Financial Statements.

RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001

(in thousands, except share and per share data)


		(Unaudited)
		2002			2001

Revenue		$	144,157		$	198,280
Costs of revenue			125,793			191,113

Gross profit			18,364			7,167
Selling, general and administrative expenses			19,438			17,324
Restructuring and other unusual charges			—			650

Operating loss			(1,074	)		(10,807	)

	Interest expense		(2,377	)		(10,258	)
	Interest and other (expense) income		(219	)		153
	Loss on sale of subsidiary		—			(13,964	)

Loss before reorganization items, income taxes, minority interest and extraordinary item			(3,670	)		(34,876	)
Reorganization items			(17,599	)		—

Loss before income taxes, minority interest and extraordinary item			(21,269	)		(34,876	)
Provision for income taxes			473			3,244

Loss before minority interest and extraordinary item			(21,742	)		(38,120	)
Minority interest, net of tax			(161	)		60

Net loss before extraordinary item			(21,903	)		(38,060	)
Extraordinary gain on extinguishment of debt, net of tax			—			537

Net loss		$	(21,903	)	$	(37,523	)

Basic and diluted loss per share before extraordinary item		$	(1.52	)	$	(2.48	)
Basic and diluted earnings per share from extinguishment of debt			—			.04
Basic and diluted loss per share		$	(1.52	)	$	(2.44	)

Weighted average shares used in computing basic income (loss) per share			14,383,551			15,354,450

Weighted average shares used in computing diluted income (loss) per share			14,383,551			15,354,450

See Notes to Consolidated Financial Statements.

RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(in thousands, except share and per share data)


		(Unaudited)
		2002			2001

Revenue		$	255,435		$	368,668
Costs of revenue			225,738			331,391

Gross profit			29,697			37,277
Selling, general and administrative expenses			37,200			36,078
Restructuring and other unusual charges			—			881

Operating income (loss)			(7,503	)		318

	Interest expense		(4,827	)		(20,493	)
	Interest and other (expense) income		(50	)		527
	Loss on sale of subsidiary		—			(14,576	)

Loss before reorganization items, income taxes, minority interest, extraordinary item and change in accounting principle			(12,380	)		(34,224	)
Reorganization items			(23,709	)		—

Loss before income taxes, minority interest, extraordinary item and change in accounting principle			(36,089	)		(34,224	)
Provision for income taxes			385			3,744

Loss before minority interest, extraordinary item and change in accounting principle			(36,474	)		(37,968	)
Minority interest, net of tax			(161	)		60

Net loss before extraordinary item and change in accounting principle			(36,635	)		(37,908	)
Extraordinary gain on extinguishment of debt, net of tax			—			537

Net loss before change in accounting principle			(36,635	)		(37,371	)
Effect of change in accounting principle, net of tax			5,323			—

Net loss		$	(31,312	)	$	(37,371	)

Basic and diluted loss per share before extraordinary item and change in accounting principle		$	(2.55	)	$	(2.47	)
Basic and diluted earnings per share from extinguishments of debt			—			.04
Basic and diluted earnings per share from change in accounting principle			0.37			—

Basic and diluted loss per share		$	(2.18	)	$	(2.43	)

Weighted average shares used in computing basic income (loss) per share			14,383,551			15,362,063

Weighted average shares used in computing diluted income (loss) per share			14,383,551			15,362,063

RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(in thousands) (Unaudited)


					(Unaudited)
					2002			2001

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss					$	(31,312	)	$	(37,371	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization					6,450			10,523
	Deferred tax valuation allowance					—			2,964
	Non-cash gain on extinguishment of bonds					—			(537	)
	Non-cash reorganization items					8,787			—
	Effect of change in accounting principle					(5,323	)		—
	Minority interest					161			—
	Bond discount amortization					—			36
	Loss (gain) on sale of equipment					271			(128	)
	Loss on sale of subsidiary					—			14,576
	Other non-cash charges					1,876			(630	)
	Change in operating assets and liabilities:
		Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts				7,056			(28,093	)
		Inventories				(2,411	)		872
		Other current assets				2,274			(1,000	)
		Accounts payable				(8,781	)		29,337
		Accrued payroll and related withholdings				1,040			3,624
		Accrued interest payable				1,180			(601	)
		Billings in excess of costs and estimated earnings on uncompleted contracts				5,025			(5,672	)
		Other accrued liabilities				4,641			2,680
		Other assets				965			827
		Other liabilities				(960	)		(1,198	)

				Net cash used in operating activities		(9,061	)		(9,791	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Proceeds from sale of equipment					509			351
	Purchase of equipment and leasehold improvements					(4,469	)		(6,378	)
	Proceeds from sale of subsidiary					—			23,126
	Acquisition of subsidiaries, net of cash acquired					—			(48	)
	Distribution from minority interest					34			—
	Contingent earn-out payments					(1,098	)		(3,239	)

				Net cash provided by (used in) investing activities		(5,024	)		13,812

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net change in cash overdraft					(1,757	)		(7,717	)
	Net activity on revolving line of credit					(500	)		10,635
	Payment of loan origination fees					—			(171	)
	Net change in debtor-in-possession funding					14,355			—
	Proceeds from fixed asset borrowings					508			284
	Repayments of fixed asset borrowings					(416	)		(3,877	)
	Repayments of term loan					—			(4,972	)
	Repayments of sellers notes					—			(3,457	)
	Proceeds from exercise of stock options					—			4

			Net cash provided by (used in) financing activities			12,190			(9,271	)

EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS						334			(327	)

NET DECREASE IN CASH AND CASH EQUIVALENTS						(1,561	)		(5,577	)
CASH AND CASH EQUIVALENTS, beginning of period						2,830			7,138

CASH AND CASH EQUIVALENTS, end of period					$	1,269		$	1,561

See Notes to Consolidated Financial Statements.

RAILWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. Operating results for the three or six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

On September 20, 2001, RailWorks Corporation and twenty-two of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (Baltimore Division) (See Note 2). The Company’s ability to continue as a going concern is contingent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of its debtor-in-possession (“DIP”) financing and the ability to generate sufficient cash flow from operations and financing arrangements to fund ongoing operations. There can be no assurance that the Company will be able to confirm a plan or comply with the terms of the DIP Facility. As of August 1, 2002, the amount outstanding under the Company’s Transit Revolver (as defined below) totaled $45.0 million, the maximum amount permitted under the facility, of which $30.0 million was outstanding borrowings and $15.0 million was a letter of credit supporting the Company’s commercial insurance. At that date, the amount outstanding under the TP&S Revolver (as defined below) was $31.7 million, consisting of $21.2 million of outstanding borrowings and $10.5 million of letters of credit outstanding. We had $11.7 million of collateral outstanding under the Bonding Facility (as defined below). No further borrowing capacity presently exists under the Transit Revolver. The lack of additional availability under the Transit Revolver will require that the transit services segment internally generate the cash necessary to fund its operations and its share of the administrative costs of reorganization, but there is no assurance that it will be able to do so. Failure to do so coupled with a failure to obtain additional funding for the transit services segment could result in the discontinuation of this business segment. These financial statements do not include adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities or any other adjustments that might result should the Company be unable to continue as a going concern.

Nature of the Business

RailWorks Corporation (the “Company”) 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 and Canada.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, the Company has three reportable segments: (1) transit services, (2) rail track services and (3) rail products and services. The transit services segment provides transit construction and rehabilitation services, general electrical contracting, power generation facilities contracting, as well as installation of signaling, communications and electrical systems. The rail track services segment provides design, engineering, construction, rehabilitation and repair and maintenance of track systems. The rail products and services segment provides a broad range of rail related products, including treated wood ties. The Company evaluates performance based on profit or loss from operations before income taxes, interest income and expense, and non-recurring gains and losses.

Chapter 11 Bankruptcy

The consolidated financial statements of the Company have been presented in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7: “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”) and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern. These principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business. The uncertainty regarding the eventual outcome of the reorganization cases, related problems with subcontractors and customers and the effect of other unknown adverse factors could threaten the Company’s existence as a going concern.

SOP 90-7 states, among other things, that revenues, expenses, realized gains and losses, and provisions from losses resulting from the reorganization and the restructuring of the business should be reported separately as reorganization items in the consolidated statement of operations. The consolidated balance sheets at June 30, 2002 and December 31, 2001 distinguish between prepetition liabilities that are subject to compromise and those that are not, such as fully secured liabilities that are not expected to be compromised. If there is uncertainty about whether a secured claim is under secured, or will be impaired under the reorganization plan, the entire amount of the claim is included with liabilities subject to compromise. See Note 2 for more information on liabilities classified as subject to compromise and amounts recorded as reorganization items.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” which requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Implementation of this statement did not have an effect on the Company’s financial statements.

In June 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which requires companies to cease amortizing goodwill. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The adoption of SFAS No. 142 resulted in the discontinuation of amortization of goodwill commencing January 1, 2002, which resulted in the Company not recording approximately $1.3 million and $2.7 million of amortization expense during the three and six months ended June 30, 2002, respectively. Had the Company adopted SFAS No. 142 effective January 1, 2001, the Company would not have recorded approximately $1.7 million and $3.1 million of amortization expense during the three and six months ended June 30, 2001, respectively.

The following table provides the comparable effects of adoption of SFAS No. 142 for the three months ended June 30, 2002 and 2001 (in thousands, except per share data).


	(Unaudited)
	2002			2001

Reported net loss before extraordinary item	$	(21,903	)	$	(38,060	)
Add back: goodwill amortization (net of tax)		—			1,734

Adjusted net loss before extraordinary item	$	(21,903	)	$	(36,326	)

Reported basic and diluted loss per share before extraordinary item	$	(1.52	)	$	(2.48	)
Add back: goodwill amortization (net of tax)		—			.11

Adjusted basic and diluted loss per share before extraordinary item	$	(1.52	)	$	(2.37	)

The following table provides the comparable effects of adoption of SFAS No. 142 for the six months ended June 30, 2002 and 2001 (in thousands, except per share data).


	(Unaudited)
	2002			2001

Reported net loss before extraordinary item and change in accounting principle	$	(36,635	)	$	(37,908	)
Add back: goodwill amortization (net of tax)		—			3,097

Adjusted net loss before extraordinary item and change in accounting principle	$	(36,635	)	$	(34,811	)

Reported basic and diluted loss per share before extraordinary item and change in accounting principle	$	(2.55	)	$	(2.47	)
Add back: goodwill amortization (net of tax)		—			.20

Adjusted basic and diluted loss per share before extraordinary item and change in accounting principle	$	(2.55	)	$	(2.27	)

The Company is currently in the process of testing goodwill for impairment under SFAS No. 142. The first step of the process, which was required to be completed by June 30, 2002, requires the Company to determine whether the carrying value of its reporting units exceeds the fair value of those reporting units. As of June 30, 2002, the Company has identified seven reporting units with associated goodwill and has determined that the carrying value exceeds the fair value for each of these reporting units. The second step of the process requires the Company to determine the measurement of the impairment. The Company expects to complete such impairment analysis by December 31, 2002. While the Company has not determined the measurement of the impairment as of June 30, 2002, it believes that this statement will require a material impairment charge on the Company’s financial statements upon final implementation. Further, upon emergence from Chapter 11 Bankruptcy, the Company may be required to record an additional charge to write off the goodwill to the extent that it exceeds excess reorganization value of the Company upon emergence.

In June 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe this statement will have a material impact on its results of operations.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. Implementation of this statement did not have a material impact on the Company’s financial statements.

On May 1, 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 143 is effective for the Company’s fiscal year beginning January 1, 2003. The Company is in the process of evaluating what impact, if any, this standard will have on the Company’s financial statements.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 is effective for the Company’s fiscal year beginning January 1, 2003. The Company is in the process of evaluating what impact, if any, this standard will have on the Company’s Consolidated Financial Statements.

The Company has already adopted or will adopt the above accounting pronouncements upon emergence from bankruptcy.

Officers Loans

The Company has loans, which are secured by RailWorks common stock, outstanding to current or former offices of the Company. During the third quarter of 2001, the Company forgave both the principal and interest on certain of these loans, which were extended to former officers, through foreclosure of the Company's stock, which was held as collateral. This stock has been classified as treasury stock in the accompanying consolidated balance sheets. During the three months ended June 30, 2002, the Company recorded additional compensation expense of approximately $1.8 million to establish a reserve for the entire balance of the remaining officer loans outstanding. This charge has been included in selling, general and administrative expenses on the consolidated statements of operations for the three and six months ended June 30, 2002.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

The recognition of revenues and costs in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1: “Accounting for Performance of Construction-Type and Certain Production Type Contracts” (“SOP 81-1”) involves considerable use of estimates and is complicated by the need to evaluate continually the uncertainties inherent in the performance of contracts and by the need to rely on estimates of revenues, costs and the extent of progress toward completion of contracts. Operating in Chapter 11 bankruptcy and related problems with subcontractors and customers provides even more risk and uncertainty in the estimates. Changes in these estimates can cause significant volatility in the Company’s financial results.

Revenue Recognition

The Company recognizes revenues from fixed-fee contracts using the percentage-of-completion method in accordance with SOP 81-1, measured by the percentage of cost incurred to date to management’s estimate of total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Revenues from time-and-material contracts are recognized currently as the work is performed.

Contract revenue recognition inherently involves estimation. Examples of estimates include the contemplated level of effort to accomplish the tasks under contract, the costs of the effort, and an ongoing assessment of progress toward completing the contract. The Company utilizes a number of management processes to monitor contract performance and revenue estimates, including monthly in-process reviews that cover, among other matters, outstanding action items, progress against schedule, effort and staffing, quality, risks and other issues,

subcontractor management costs, and commitments. From time to time, as part of the normal management processes, facts develop that require revisions to estimated total costs or revenues expected. The cumulative effect of any such revisions is recorded in the period in which the facts requiring revisions become known. The full amount of anticipated losses on any type of contract are recognized in the period in which they become known.

Disputes may arise in the normal course of the Company’s business on projects when the Company is contesting with customers for collection of funds because of events such as delays, changes in contract specifications, and questions of cost allowability or collectibility. Such disputes, whether claims or unapproved change orders in the process of negotiation, are recorded at the lesser of their estimated net realizable value or actual cost incurred, and only when realization is probable and can be reliably estimated.

With regard to the rail products and services 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.

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. 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.

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 and services segment. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

2. PETITION FOR REORGANIZATION UNDER CHAPTER 11

On September 20, 2001 (the “Filing Date”), RailWorks Corporation and twenty-two of its domestic subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (Baltimore Division) (the “Bankruptcy Court”). The filings have been consolidated for the purpose of joint administration as case No. 01-6-4463, but the cases have not been deemed consolidated for reorganization plan purposes by the Bankruptcy Court. Our Canadian subsidiaries were not included in the filings and continue to operate in the normal course of business outside of bankruptcy. The consolidated financial statements of the Company have been presented in accordance with SOP 90-7 and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern. These principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business. The uncertainty regarding the eventual outcome of the reorganization cases, related problems with subcontractors and customers and the effect of other unknown adverse factors could threaten the Company’s existence as a going concern.

Under Chapter 11, except for certain statutory exceptions and for relief that might otherwise be granted by the Bankruptcy Court, claims against the Debtors in existence prior to the Filing Date (including claims secured by the Debtors’ assets) are stayed while the Debtors continue business operations as debtors-in-possession. Additional claims may arise subsequent to the Filing Date resulting from rejection of executory contracts, including leases and construction contracts, and from the determination by the Bankruptcy Court (or agreed to by the parties in interest) of allowed claims for contingencies and other disputed amounts.

Since the Filing Date, the Bankruptcy Court has approved, on a final basis, the Debtors’ debtor-in-possession financing arrangements (collectively, as amended, restated and/or replaced, the “DIP Facility”) with Bank of America, N.A. (“BOA”), for itself and as agent for a syndicate of lenders, Matlin Patterson Global Opportunities Fund L.P. (“Matlin Patterson”), for itself and Stonehill Capital Management, and Travelers Casualty & Surety Company of America (“Travelers”). Matlin Patterson, a private investment fund formerly known as CSFB Global Opportunities Advisers, LLC, was spun off by Credit Suisse First Boston on July 16, 2002. Credit Suisse First Boston no longer has any affiliation with Matlin Patterson other than as a limited partner. Matlin Patterson Global Partners LLC is the general partner of Matlin Patterson and Matlin Patterson Global Advisors LLC is its investment advisor. The DIP Facility includes an Amended and Restated DIP Transit Revolving Credit Agreement (the “Transit Revolver”) for up to $30.0 million in borrowings and a $15.0 million letter of credit in support of our company-wide liability and casualty insurance in connection with the Debtors’ rail transit division; a DIP Transit Bonding Facility (the “Bonding Facility”) for up to $100.0 million in bonding commitment to support our project bonding requirements; a DIP Bond Support Credit Agreement (the “Bond Support Facility”) with Matlin Patterson for up to $40.0 million of collateral support for the transit services division’s project surety bonds underwritten by Travelers; and a DIP Financing Agreement, as replaced on March 5, 2002 (the “TP&S Revolver”) with certain lenders represented by BOA as administrative agent for up to $35.0 million of financing and letter of credit commitments to support the track services and products and services divisions’ operating cash obligations and project bonding requirements. The Debtors intend to utilize the DIP Facility and existing cash flow to fund ongoing operations during the Chapter 11 proceedings. As of August 1, 2002 approximately $45.0 million was outstanding under the Transit Revolver, consisting of $30.0 million of borrowings and a $15.0 million letter of credit; $31.7 million was outstanding under the TP&S Revolver, consisting of $21.2 million in borrowings and $10.5 million of letters of credit outstanding; and we had $11.7 million of collateral outstanding under the Bonding Facility. No further borrowing capacity presently exists under the Transit Revolver. The lack of additional availability under the Transit Revolver will require that the transit services segment internally generate the cash necessary to fund its operations and its share of the administrative costs of reorganization, but there is no assurance that it will be able to do so.

Under the Transit Revolver (as amended and restated), the Company is obligated to pay: 1) an up-front fee of 3.00% of the aggregate commitments; 2) an unused commitment fee of 0.50% per annum on the average daily unused portion of the commitment; and 3) an additional fee of $900,000 (together, with the Additional Fee for the TP&S Revolver referred to below, the “Additional Fees”) if it does not have a plan of reorganization acceptable to Matlin Patterson, BOA and Travelers confirmed by the Bankruptcy Court by April 30, 2002 and/or consummated by May 15, 2002. Borrowings under the Transit Revolver bear interest at the prime rate plus 3.00%.

Under the Bond Support Facility the Company is obligated to pay: 1) an up-front fee of 3.00% of the aggregate commitments; 2) an unused commitment fee of 0.50% per annum on the average daily unused portion of the commitment; and 3) a letter of credit fee of 1.50%; and a fronting and negotiation issuer fee of 0.125% per annum, both calculated on the average daily maximum amount to be drawn under the letters of credit from the date of issuance to the date of expiration.

Under the Bonding Facility the Company is obligated to pay: 1) to Travelers all premiums due for bonds issued within 60 days of issuance; 2) any broker’s fees or commissions for all bond issuances; and 3) to Travelers a monthly management fee of $10,000. In connection with the issuance of any bond under the Bonding Facility, and as a necessary condition precedent thereto, the Company must obtain collateral or letters of credit in an amount of 40% of the penal sum of such bond as security for such bond.

Under the TP&S Revolver, the Company is obligated to pay: 1) an up-front fee of 3.00% of the aggregated commitment amount; 2) an administrative fee of $125,000; 3) a letter of credit fee of 1.50%; and a fronting and negotiation issuer fee of 0.125% per annum, both calculated on the average daily maximum amount to be drawn under the letters of credit from the date of issuance to the date of expiration; 4) a monthly adequate protection payment of $500,000; and 5) an Additional Fee of $750,000 if it does not have a plan of reorganization acceptable to Matlin Patterson, BOA and Travelers confirmed by the Bankruptcy Court by April 30, 2002 and/or consummated by May 15, 2002. Borrowings under the TP&S Revolver bear interest at the prime rate plus 3.00%.

The Additional Fees discussed above became due on May 7, 2002. As of the date of this filing, the Company has not paid the Additional Fees. A liability for these fees is included in other accrued liabilities on the accompanying consolidated balance sheet as of June 30, 2002.

Since the Filing Date, the Debtors also have received approval from the Bankruptcy Court to pay or otherwise honor certain prepetition claims, including employee wages and benefits, and unsecured claims resulting from contract assumptions and critical vendor orders. The Debtors intend to remain in possession of their assets and continue in the management and operation of their businesses and properties, and to pay postpetition claims of their various vendors and subcontractors in the ordinary course of business.

The Debtors have determined that insufficient financial resources exist to cover the interest portion of scheduled payments on their prepetition debt obligations and therefore in accordance with SOP 90-7 have discontinued accruing interest on these obligations. Contractual interest on these obligations, which has not been accrued for, amounts to approximately $9.0 million and $18.0 million for the three and six months ended June 30, 2002, respectively.

On March 15, 2002, the Debtors filed a plan of reorganization (as the same has been or may be amended, the “Plan”) in the U.S. Bankruptcy Court for the District of Maryland in Baltimore. On June 18, 2002, the Debtors filed a first amended version of the Plan, and on August 2, 2002, the Debtors filed a second amended version of the Plan. The Plan contemplates full repayment of debtor-in-possession or DIP claims, satisfaction of secured claims held by certain of the Company’s pre-petition secured lenders through the issuance of a new secured note and certain preferred stock, and satisfaction of the balance of claims held by the Company’s pre-petition secured lenders through the conversion of such claims into substantially all of the equity of the reorganized company. The Plan also provides that holders of the Company’s $174.0 million 11 1/2% senior subordinated notes due in 2009 and unsecured creditors that were not authorized by the Bankruptcy Court to be paid as critical vendors will receive (if their Plan class votes to accept the Plan) 3% of the stock of the reorganized company and that the interests of the current equity holders of the Company will be eliminated. Confirmation of the Plan, which remains subject to supplementation, modification and amendment, also remains subject to Bankruptcy Court approval and certain other conditions.

Liabilities Subject to Compromise

The principal categories of claims reclassified in the consolidated balance sheets and included in “liabilities subject to compromise” at June 30, 2002 and December 31, 2001 are identified below (in thousands). These amounts may be subject to further adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, whether or not such claims are secured, and the value of any security interests securing such claims or other events.


	June 30, 2002		December 31, 2001

Senior subordinated notes due 2009	$	174,000	$	173,073
Revolving credit agreement due 2004		97,513		97,513
Term note due through 2006		94,278		94,278
Accounts payable		31,959		58,249
Accrued interest		12,400		12,400
Deferred earnout obligations		7,672		7,672
Other accrued liabilities		3,648		4,166
Fixed asset and other notes payable		2,083		2,382
Other long-term liabilities		2,140		2,149
Promissory notes payable in 2002		1,972		1,972
Warrants payable		1,211		1,211

Total prepetition liabilities subject to compromise	$	428,876	$	455,065

Under the Bankruptcy Code, the Debtors may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts, construction contracts and other unexpired executory prepetition contracts, subject to Bankruptcy Court approval. As of June 30, 2002 the Debtors have rejected certain construction and executory contracts with approval from the Bankruptcy Court. The Debtors cannot presently determine with certainty the ultimate aggregate liability that will result from the filing of claims relating to such contracts that have been rejected or may be rejected in the future.

Reorganization Expenses

The Company has incurred reorganization related charges of approximately $17.6 million and $23.7 million for the three and six months ended June 30, 2002, respectively, which, in accordance with SOP 90-7, have been reflected in the reorganization items line of the consolidated statements of operations. Reorganization costs for the three months ended June 30, 2002 consist of approximately $6.8 million of professional and advisory fees incurred that are directly associated with the reorganization proceedings under the Company’s Chapter 11 filings, $1.5 million of adequate protection fees paid to the Company’s prepetition secured lenders and $9.3 million related to the write off of deferred financing costs and issuance discounts related to the Company’s prepetition debt.

3. EARNINGS PER SHARE

The Company reports its earnings (loss) per share in basic and diluted earnings per share. Basic earnings per share (“EPS”) is calculated using the weighted average number of shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the potentially dilutive effect of contingently issuable shares and the dilutive effect, if any, which would occur if outstanding options and warrants to purchase common stock were exercised. Approximately 1.4 million of contingently issuable common shares were outstanding during both the three and six months ended June 30, 2002 and 2001 but were not included in the computation of Diluted EPS as the effect would be anti-dilutive. Certain options to purchase shares of common stock were outstanding during both the three and six months ended June 30, 2002 and 2001 but were not included in the computation of Diluted EPS because the options exercise price was greater than the average market price of the common shares.

4. RESTRUCTURING AND OTHER UNUSUAL CHARGES

During the third and fourth quarters of 2000, the Company’s management and Board of Directors conducted and completed a strategic review of RailWorks’ operations. The resulting restructuring plan (the “2000 Restructuring Plan”) contemplated systems integration, rationalization of real estate, equipment and inventory and maximization of human resource productivity around three lines of business. The Company reduced its headcount, consolidated certain facilities and identified other synergies and cost reduction opportunities as a result of the 2000 Restructuring Plan.

As of December 31, 2001, approximately $0.6 million remained as accrued restructuring costs for employee termination benefits under the 2000 Restructuring Plan. There has been no activity in this accrual during the six months ended June 30, 2002.

5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

The following table presents supplemental cash flow information for the six months ended June 30, 2002 and 2001, respectively (in thousands):


	(Unaudited)
	2002		2001

Cash paid during the period for interest	$	794	$	12,970
Cash paid during the period for income taxes		387		4,319
Reorganization items paid, net of interest earned		7,801		—

6. LONG-TERM DEBT

Due to the Company’s failure to comply with certain financial covenants and the commencement of the Chapter 11 cases, the Company is in default on substantially all of its prepetition debt obligations except those held by the Canadian subsidiaries. Except as otherwise may be determined by the Bankruptcy Court, and subject to any statutory exceptions, the automatic stay afforded by the Chapter 11 filings prevents any action from being taken with regard to any of the defaults under the Company’s prepetition debt obligations. These prepetition debt obligations related to the Company and its domestic subsidiaries are classified as liabilities subject to compromise at June 30, 2002 and December 31, 2001. See Note 2 for additional information on these prepetition debt obligations.

Long-term debt consisted of the following at June 30, 2002 and December 31, 2001 (in thousands):


	(Unaudited)
	2002		2001

Debtor-in-possession financing	$	50,755	$	36,400
Canadian credit facility		4,500		5,000
Fixed asset and other notes payable		873		469

		56,128		41,869
Less current portion		55,398		41,523

	$	730	$	346

7. CAPITAL STOCK AND STOCK INCENTIVE PLAN

The Stock Incentive Plan reserves for issuance 2,000,000 shares of common stock of the Company. 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 the second quarter of 2002, there were no options issued under the Stock Incentive Plan.

8. COMPREHENSIVE LOSS

The following table summarizes the components of comprehensive loss for the three months ended June 30, 2002 and 2001 (in thousands):


	(Unaudited)
	2002			2001

TOTAL COMPREHENSIVE LOSS:
Net loss	$	(21,903	)	$	(37,523	)
Foreign currency translation gain (loss)		1,192			324

Total comprehensive loss	$	(20,711	)	$	(37,199	)

The following table summarizes the components of comprehensive loss for the six months ended June 30, 2002 and 2001 (in thousands):


	(Unaudited)
	2002			2001

TOTAL COMPREHENSIVE LOSS:
Net loss	$	(31,312	)	$	(37,371	)
Foreign currency translation gain (loss)		1,004			(597	)

Total comprehensive loss	$	(30,308	)	$	(37,968	)

9. SEGMENT REPORTING

The following table presents certain financial data as of and for the three months ended June 30, 2002 by reportable segment (in thousands) (Unaudited):


					RAIL
	TRANSIT		RAIL PRODUCTS		TRACK		OTHER/
	SERVICES		AND SERVICES		SERVICES		CORPORATE			TOTAL

Total revenues for reportable segments		79,920		25,430		40,776		—			146,126
Inter-segmental revenue		—		1,573		396		—			1,969
Depreciation/amortization		388		1,068		1,596		120			3,172
Segment operating profit (loss)		357		1,154		2,164		(4,749	)		(1,074	)
Costs and estimated earnings in excess of billings on uncompleted contracts		29,166		307		6,610		—			36,083
Segment assets		223,157		133,100		171,665		31,736			559,658

The Company’s reconciliation of segment totals to enterprise values is as follows (in thousands):


REVENUES:
	Total revenues for reportable segments	146,126
	Elimination of inter-segment revenues	(1,969	)

	Consolidated revenues	144,157

ASSETS:
	Total assets for reportable segments	559,658
	Elimination of inter-segment receivables	(61,172	)

	Consolidated assets	498,486

The Company’s Canadian operations produced revenues for the three month period ended June 30, 2002 of approximately $9.4 million. The net book value of long-lived assets relating to the Canadian operations amounted to approximately $24.6 million as of June 30, 2002.

The following table presents certain financial data as of and for the three months ended June 30, 2001 by reportable segment (in thousands) (Unaudited):


						RAIL
	TRANSIT			RAIL PRODUCTS		TRACK		OTHER/
	SERVICES			AND SERVICES		SERVICES		CORPORATE			TOTAL

Total revenues for reportable segments	$	112,868		$	31,513	$	55,956	$	—		$	200,337
Inter-segmental revenue		—			1,622		435		—			2,057
Depreciation/amortization		1,197			1,086		2,645		351			5,279
Segment operating profit (loss)		(14,784	)		2,079		4,139		(2,241	)		(10,807	)
Costs and estimated earnings in excess of Billings on uncompleted contracts		46,260			437		8,398		—			55,095
Segment assets		280,841			131,265		177,075		25,523			614,704

The segment data presented above as of and for the three months ended June 30, 2001 has been restated to reflect changes in the organization of the Company’s segment structure.

The Company’s reconciliation of segment totals to enterprise values is as follows (in thousands):


REVENUES:
	Total revenues for reportable segments	$	200,337
	Elimination of inter-segment revenues		(2,057	)

	Consolidated revenues	$	198,280

ASSETS:
	Total assets for reportable segments	$	614,704
	Elimination of inter-segment receivables		(45,046	)

	Consolidated assets	$	569,658

The Company’s Canadian operations produced revenues for the three month period ended June 30, 2001 of $10.1 million. The net book value of long-lived assets relating to the Canadian operations amounted to $26.9 million as of June 30, 2001.

The following table presents certain financial data as of and for the six months ended June 30, 2002 by reportable segment (in thousands) (Unaudited):


					RAIL
	TRANSIT		RAIL PRODUCTS		TRACK			OTHER/
	SERVICES		AND SERVICES		SERVICES			CORPORATE			TOTAL

Total revenues for reportable segments		146,920		43,461		68,214			—			258,595
Inter-segmental revenue		—		2,576		584			—			3,160
Depreciation/amortization		904		2,067		3,144			335			6,450
Segment operating profit (loss)		1,002		588		(1,445	)		(7,648	)		(7,503	)
Costs and estimated earnings in excess of billings on uncompleted contracts		29,166		307		6,610			—			36,083
Segment assets		223,157		133,100		171,665			31,736			559,658

The Company’s reconciliation of segment totals to enterprise values is as follows (in thousands):


REVENUES:
	Total revenues for reportable segments	258,595
	Elimination of inter-segment revenues	(3,160	)

	Consolidated revenues	255,435

ASSETS:
	Total assets for reportable segments	559,658
	Elimination of inter-segment receivables	(61,172	)

	Consolidated assets	498,486

The Company’s Canadian operations produced revenues for the six month period ended June 30, 2002 of approximately $14.6 million. The net book value of long-lived assets relating to the Canadian operations amounted to approximately $24.6 million as of June 30, 2002.

The following table presents certain financial data as of and for the six months ended June 30, 2001 by reportable segment (in thousands) (Unaudited):


						RAIL
	TRANSIT			RAIL PRODUCTS		TRACK		OTHER/
	SERVICES			AND SERVICES		SERVICES		CORPORATE			TOTAL

Total revenues for reportable segments	$	216,118		$	57,239	$	99,937	$	—		$	373,294
Inter-segmental revenue		—			3,151		1,475		—			4,626
Depreciation/amortization		2,022			2,376		5,427		698			10,523
Segment operating profit (loss)		(3,509	)		3,951		5,022		(5,146	)		318
Costs and estimated earnings in excess of Billings on uncompleted contracts		46,260			437		8,398		—			55,095
Segment assets		280,841			131,265		177,075		25,523			614,704

The segment data presented above as of and for the six months ended June 30, 2001 has been restated to reflect changes in the organization of the Company’s segment structure.

The Company’s reconciliation of segment totals to enterprise values is as follows (in thousands):


REVENUES:
	Total revenues for reportable segments	$	373,294
	Elimination of inter-segment revenues		(4,626	)

	Consolidated revenues	$	368,668

ASSETS:
	Total assets for reportable segments	$	614,704
	Elimination of inter-segment receivables		(45,046	)

	Consolidated assets	$	569,658

The Company’s Canadian operations produced revenues for the six month period ended June 30, 2001 of $16.3 million. The net book value of long-lived assets relating to the Canadian operations amounted to $26.9 million as of June 30, 2001.

10. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR SUBSIDIARIES

The Company conducts a significant portion of its business through its subsidiaries. All of the Company’s domestic subsidiaries (the “Subsidiary Guarantors”) have fully and unconditionally guaranteed the Company’s 11.5% Senior Subordinated Notes (the “Notes”). The Company’s non-U.S. subsidiaries (the “Non-Guarantor Subsidiaries”) have not guaranteed the Notes. The Notes are effectively subordinated in right of payment to all indebtedness and other liabilities (including trade payables) of the Non-Guarantor Subsidiaries.

Set forth below are condensed consolidating financial statements for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as of June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001. The equity method of accounting has been used by the Company to report its investments in subsidiaries. Separate financial statements for the Subsidiary Guarantors are not presented based on management’s determination that they do not provide additional information that is material to investors.

In accordance with SOP 90-7, the Company is required to report combined financial statements of the Debtors. The parent company and Subsidiary Guarantors included in the condensed consolidating financial statements set forth below represent the Debtors. The Non-Guarantor Subsidiaries (which are the Canadian subsidiaries) were not included in the filings with the Bankruptcy Court and are therefore not Debtors under the provisions of Chapter 11 of the Bankruptcy Code.

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002

(In Thousands) (Unaudited)


					DEBTORS-IN-POSSESSION

					RAILWORKS
					CORPORATION						NON-
					(PARENT CO.			GUARANTOR			GUARANTOR
					ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

ASSETS:
CURRENT ASSETS:
	Cash and cash equivalents				$	436		$	567		$	266		$	—		$	1,269
	Accounts receivable, net					—			166,686			5,297			—			171,983
	Costs and estimated earnings in excess of billings on uncompleted contracts					—			35,251			832			—			36,083
	Inventories:
				Raw materials		—			7,698			3,360			—			11,058
				Finished goods		—			12,480			1,255			—			13,735
	Due from affiliates					—			—			3,965			(3,965	)(a)		—
	Due from parent company					12,897			—						(12,897	)(a)		—
	Other current assets					4,091			4,055			1,830			—			9,976

				Total current assets		17,424			226,737			16,805			(16,862	)		244,104

INVESTMENT IN SUBSIDIARIES						347,628			—			—			(347,628	)(b)		—

PROPERTY, PLANT AND EQUIPMENT, NET						822			40,400			7,578			—			48,800

OTHER ASSETS:
		Excess of cost over acquired net assets, net				—			188,441			16,874			—			205,315
		Other				—			248			19			—			267

				Total other assets		—			188,689			16,893			—			205,582

				Total	$	365,874		$	455,826		$	41,276		$	(364,490	)	$	498,486

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY:
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
			Cash overdraft		$	(4,329	)	$	5,567		$	—		$	—		$	1,238
			Current maturities of long-term debt			50,755			—			4,644			—			55,399
			Accounts payable			225			45,165			2,459			—			47,849
			Accrued payroll and related withholdings			—			7,061			629			—			7,690
			Accrued interest payable			1,584			58			16			—			1,658
			Billings in excess of costs and estimated earnings on uncompleted contracts			—			18,561			273			—			18,834
			Due to parent company			—			10,038			2,859			(12,897	)(a)		—
			Due to affiliates			—			3,965			—			(3,965	)(a)		—
			Other accrued liabilities			13,502			4,514			1,909			—			19,925

				Total current liabilities		61,737			94,929			12,789			(16,862	)		152,593

LONG TERM DEBT, NET						—			—			730			—			730
DEFERRED TAX LIABILITY						—			—			568			—			568
OTHER LIABILITIES						—			4,001			25			—			4,026

				Total long-term liabilities		—			4,001			1,323			—			5,324

				Total liabilities not subject to compromise		61,737			98,930			14,112			(16,862	)		157,917

LIABILITIES SUBJECT TO COMPROMISE						391,069			37,807			—						428,876
				Total liabilities		452,806			136,737			14,112			(16,862	)		586,793
MINORITY INTEREST						—			1,944			—			—			1,944
STOCKHOLDERS’ (DEFICIT) EQUITY:
				Series A, convertible preferred stock		14			—			—			—			14
				Common stock		125			2,816			378			(3,164	)(b)		155
				Treasury stock		(2,667	)		—			—			—			(2,667	)
				Officer loans, net		—			—			—			—			—
				Additional paid-in capital		136,572			364,248			24,221			(388,469	)(b)		136,572
				Accumulated other comprehensive income (loss)		—			—			(965	)		—			(965	)
				Retained earnings (deficit)		(220,976	)		(49,919	)		3,530			44,005	(b)		(223,360	)

				Total stockholders’ (deficit) equity		(86,932	)		317,145			27,164			(347,628	)		(90,251	)

				Total	$	365,874		$	455,826		$	41,276		$	(364,490	)	$	498,486

(a)		Elimination of inter-company receivables.
(b)		Elimination of investments in subsidiaries.

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002

(In Thousands) (Unaudited)


	DEBTORS-IN-POSSESSION

	RAILWORKS						NON-
	CORPORATION			GUARANTOR			GUARANTOR
	(PARENT CO. ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Revenue	$	—		$	135,482		$	9,424		$	(749	)(a)	$	144,157
Cost of revenue		—			119,213			7,329			(749	)(a)		125,793

Gross profit		—			16,269			2,095			—			18,364
Selling, general and administrative expenses		4,692			13,663			1,083			—			19,438

Operating (loss) income		(4,692	)		2,606			1,012			—			(1,074	)
Equity in earnings (loss) of subsidiaries		(315	)		—			—			315	(b)		—
Interest expense		(2,127	)		(50	)		(200	)		—			(2,377	)
Interest and other (expense) income		(274	)		64			(9	)		—			(219	)

Income (loss) before reorganization items, income taxes and minority		(7,408	)		2,620			803			315			(3,670	)
Reorganization items		(17,599	)		—			—			—			(17,599	)

Income (loss) before income taxes and minority interest		(25,007	)		2,620			803			315			(21,269	)
Provision for income taxes		—			80			393			—			473

Income (loss) before minority interest		(25,007	)		2,540			410			315			(21,742	)
Minority interest, net		—			(161	)		—			—			(161	)

Net income (loss)	$	(25,007	)	$	2,379		$	410		$	315		$	(21,903	)

(a)		Elimination of inter-company revenue.
(b)		Elimination of equity in earnings of subsidiaries.

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

(In Thousands) (Unaudited)


	DEBTORS-IN-POSSESSION

	RAILWORKS						NON-
	CORPORATION			GUARANTOR			GUARANTOR
	(PARENT CO. ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Revenue	$	—		$	242,387		$	14,575		$	(1,527	)(a)	$	255,435
Cost of revenue		—			215,365			11,900			(1,527	)(a)		225,738

Gross profit		—			27,022			2,675			—			29,697
Selling, general and administrative expenses		7,564			27,520			2,116			—			37,200

Operating (loss) income		(7,564	)		(498	)		559			—			(7,503	)
Equity in earnings (loss) of subsidiaries		(6,299	)		—			—			6,299	(b)		—
Interest expense		(4,466	)		(83	)		(278	)		—			(4,827	)
Interest and other (expense) income		(279	)		177			52			—			(50	)

Income (loss) before reorganization items, income taxes, minority interest and effect of change in accounting principle		(18,608	)		(404	)		333			6,299			(12,380	)
Reorganization items		(23,709	)		—			—			—			(23,709	)

Income (loss) before income taxes, minority interest and effect of change in accounting principle		(42,317	)		(404	)		333			6,299			(36,089	)
Provision for income taxes		—			160			225			—			385

Income (loss) before minority interest and effect of change in accounting principle		(42,317	)		(564	)		108			6,299			(36,474	)
Minority interest, net		—			(161	)		—			—			(161	)

Income (loss) before effect of change in accounting principle		(42,317	)		(725	)		108			6,299			(36,635	)
Effect of change in accounting principle, net		—			5,323			—			—			5,323

Net income (loss)	$	(42,317	)	$	4,598		$	108		$	6,299		$	(31,312	)

(a)		Elimination of inter-company revenue.
(b)		Elimination of equity in earnings of subsidiaries

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

(In Thousands) (Unaudited)


				DEBTORS-IN-POSSESSION

				RAILWORKS						NON-
				CORPORATION			GUARANTOR			GUARANTOR
				(PARENT CO. ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)				$	(42,317	)	$	4,598		$	108		$	6,299	(a)	$	(31,312	)
Adjustments to reconcile net income (loss) to net cash provided (used in) by operating activities:
Depreciation and amortization					335			5,238			877			—			6,450
Non-cash reorganization items					8,787			—			—			—			8,787
Effect of change in accounting principle					—			(5,323	)		—			—			(5,323	)
Minority interest in losses					—			161			—			—			161
Equity in earnings of subsidiaries					6,299			—			—			(6,299	)(a)		—
Loss (gain) on sale of equipment					270			36			(35	)		—			271
Other non-cash charges					1,876			—			—			—			1,876
Changes in operating assets and liabilities:
	Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts				—			7,508			(452	)		—			7,056
	Inventories				—			(2,667	)		256			—			(2,411	)
	Other current assets				2,898			(643	)		19			—			2,274
	Accounts payable				80			(9,885	)		1,024			—			(8,781	)
	Accrued payroll and related withholdings				—			795			245			—			1,040
	Accrued interest payable				1,142			37			1			—			1,180
	Billings in excess of costs and estimated earnings on uncompleted contracts				—			5,906			(881	)		—			5,025
	Other accrued liabilities				6,292			(1,702	)		51			—			4,641
	Other assets				975			(14	)		4			—			965
	Other liabilities				—			(960	)		—			—			(960	)
	Due (to/from affiliates				—			1,938			(1,938	)		—			—
	Due (to)/from parent company				480			(1,592	)		1,112			—			—

			Net cash provided (used in) by operating activities		(12,883	)		3,431			391			—			(9,061	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment					—			194			315			—			509
Purchase of equipment and leasehold improvements					(17	)		(3,320	)		(1,132	)		—			(4,469	)
Distribution from minority interest					—			34			—			—			34
Contingent earn-out payments					—			—			(1,098	)		—			(1,098	)

		Net cash provided by (used in) investing activities			(17	)		(3,092	)		(1,915	)		—			(5,024	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash overdraft					(4,329	)		2,572			—			—			(1,757	)
Net activity on revolving line of credit					—			—			(500	)		—			(500	)
Net change in debtor-in-possession funding					14,355			—			—			—			14,355
Proceeds from fixed asset borrowings					—			—			508						508

Repayment of fixed asset borrowings					—			(368	)		(48	)		—			(416	)

		Net cash provided by (used in) financing activities			10,026			2,204			(40	)		—			12,190

EXCHANGE RATE ON CASH					—			—			334			—			334

NET (DECREASE) INCREASE IN CASH					(2,874	)		2,543			(1,230	)		—			(1,561	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD					3,310			(1,976	)		1,496			—			2,830

CASH AND CASH EQUIVALENTS, END OF PERIOD				$	436		$	567		$	266		$	—		$	1,269

(a)

Elimination of equity in earnings of subsidiaries.

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001

(In Thousands) (Unaudited)


					DEBTORS-IN-POSSESSION

					RAILWORKS
					CORPORATION						NON-
					(PARENT CO.			GUARANTOR			GUARANTOR
					ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

ASSETS:
CURRENT ASSETS:
	Cash and cash equivalents				$	3,310		$	(1,976	)	$	1,496		$	—		$	2,830
	Accounts receivable, net					—			169,208			5,221			—			174,429
	Costs and estimated earnings in excess of billings on uncompleted contracts					—			40,237			456			—			40,693
	Inventories:
				Raw materials		—			6,191			4,001			—			10,192
				Finished goods		—			11,708			870			—			12,578
	Due from affiliates					—			—			2,027			(2,027	)(a)		—
	Due from parent company					13,377			—			—			(13,377	)(a)		—
	Other current assets					6,989			3,412			1,849			—			12,250

				Total current assets		23,676			228,780			15,920			(15,404	)		252,972

INVESTMENT IN SUBSIDIARIES						353,926			—			—			(353,926	)(b)		—

PROPERTY, PLANT AND EQUIPMENT, NET						1,410			42,146			7,407			—			50,963

OTHER ASSETS:
		Excess of cost over acquired net assets, net				—			188,440			16,372			—			204,812
		Other				8,835			246			25			—			9,106

				Total other assets		8,835			188,686			16,397			—			213,918

				Total	$	387,847		$	459,612		$	39,724		$	(369,330	)	$	517,853

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY:
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
			Cash overdraft		$	—		$	2,995		$	—		$	—		$	2,995
			Current maturities of long-term debt			36,400			66			5,057			—			41,523
			Accounts payable			126			28,780			1,435			—			30,341
			Accrued payroll and related withholdings			—			6,266			384			—			6,650
			Accrued interest payable			442			20			15			—			477
			Billings in excess of costs and estimated earnings on uncompleted contracts			—			12,655			1,154			—			13,809
			Due to parent company			—			11,630			1,747			(13,377	)(a)		—
			Due to affiliates			—			2,027			—			(2,027	)(a)		—
			Other accrued liabilities			7,210			5,695			2,960			—			15,865

				Total current liabilities		44,178			70,134			12,752			(15,404	)		111,660

LONG TERM DEBT, NET						—			—			346			—			346
DEFERRED TAX LIABILITY						—			—			551			—			551
EXCESS OF ACQUIRED NET ASSETS OVER COST, NET						—			5,323			—			—			5,323
OTHER LIABILITIES						—			4,954			24			—			4,978

				Total long-term liabilities		—			10,277			921			—			11,198

				Total liabilities not subject to compromise		44,178			80,411			13,673			(15,404	)		122,858

LIABILITIES SUBJECT TO COMPROMISE						390,161			64,904			—						455,065
				Total liabilities		434,339			145,315			13,673			(15,404	)		577,923
MINORITY INTEREST						—			1,749			—						1,749
STOCKHOLDERS’ (DEFICIT) EQUITY:
				Series A, convertible preferred stock		14			—			—			—			14
				Common stock		125			2,816			378			(3,164	)(b)		155
				Treasury stock		(2,667	)		—			—			—			(2,667	)
				Officer loans, net		(1,876	)		—			—			—			(1,876	)
				Additional paid-in capital		136,572			364,248			24,221			(388,469	)(b)		136,572
				Accumulated other comprehensive income (loss)		—			—			(1,969	)		—			(1,969	)
				Retained earnings (deficit)		(178,660	)		(54,516	)		3,421			37,707	(b)		(192,048	)

				Total stockholders’ (deficit) equity		(46,492	)		312,548			26,051			(353,926	)		(61,819	)

				Total	$	387,847		$	459,612		$	39,724		$	(369,330	)	$	517,853

(a)		Elimination of inter-company receivables.
(b)		Elimination of investments in subsidiaries.

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001

(In Thousands) (Unaudited)


		RAILWORKS						NON-
		CORPORATION			GUARANTOR			GUARANTOR
		(PARENT CO. ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Revenue		$	—		$	189,255		$	10,090		$	(1,065	)(a)	$	198,280
Cost of revenue			—			184,521			7,657			(1,065	)(a)		191,113

Gross profit			—			4,734			2,433			—			7,167
Selling, general and administrative expenses			3,515			12,816			993			—			17,324
Restructuring and other unusual charges			1,514			(864	)		—			—			650

Operating income (loss)			(5,029	)		(7,218	)		1,440			—			(10,807	)
Equity in loss of subsidiaries			(29,958	)		—			—			29,958	(b)		—
Interest expense			(10,030	)		(135	)		(93	)		—			(10,258	)
Other (expense) income			1			162			(10	)		—			153
Loss on sale of subsidiary			1,247			(15,211	)		—			—			(13,964	)

Income (loss) before income taxes, minority interest and extraordinary item			(43,769	)		(22,402	)		1,337			29,958			(34,876	)
	Provision for income taxes		—			2,726			518			—			3,244

Income (loss) before minority interest and extraordinary item			(43,769	)		(25,128	)		819			29,958			(38,120	)
	Minority interest in losses		—			60			—			—			60

Income (loss) before extraordinary item			(43,769	)		(25,068	)		819			29,958			(38,060	)
Extraordinary gain on extinguishment of debt			537			—			—			—			537

Net income (loss)		$	(43,232	)	$	(25,068	)	$	819		$	29,958		$	(37,523	)

(a)		Elimination of intercompany revenue.
(b)		Elimination of equity in earnings of subsidiaries.

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001

(In Thousands) (Unaudited)


		RAILWORKS						NON-
		CORPORATION			GUARANTOR			GUARANTOR
		(PARENT CO. ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Revenue		$	—		$	354,195		$	16,267		$	(1,794	)(a)	$	368,668
Cost of revenue			—			320,494			12,691			(1,794	)(a)		331,391

Gross profit			—			33,701			3,576			—			37,277
Selling, general and administrative expenses			6,160			27,545			2,373			—			36,078
Restructuring and other unusual charges			1,745			(864	)		—			—			881

Operating (loss) income			(7,905	)		7,020			1,203			—			318
Equity in loss of subsidiaries			(22,623	)		—			—			22,623	(b)		—
Interest expense			(19,872	)		(389	)		(232	)		—			(20,493	)
Other (expense) income			(8	)		455			80			—			527
Loss on sale of subsidiary			635			(15,211	)		—			—			(14,576	)

Income (loss) before income taxes, minority interest and extraordinary item			(49,773	)		(8,125	)		1,051			22,623			(34,224	)
	Provision for income taxes		—			3,313			431			—			3,744

Income (loss) before minority interest and extraordinary item			(49,773	)		(11,438	)		620			22,623			(37,968	)
	Minority interest in losses		—			60			—			—			60

Income (loss) before extraordinary item			(49,773	)		(11,378	)		620			22,623			(37,908	)
Extraordinary gain on extinguishment of debt			537			—			—			—			537

Net income (loss)		$	(49,236	)	$	(11,378	)	$	620		$	22,623		$	(37,371	)

(a)		Elimination of inter-company revenue.
(b)		Elimination of equity in earnings of subsidiaries.

RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001

(In Thousands) (Unaudited)


			RAILWORKS
			CORPORATION						NON-
			(PARENT CO.			GUARANTOR			GUARANTOR
			ONLY)			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income			$	(49,236	)	$	(11,378	)	$	620		$	22,623	(a)	$	(37,371	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization				687			8,605			1,231			—			10,523
Deferred tax valuation allowance				—			2,964			—						2,964
Non-cash gain on extinguishment of bonds				(537	)		—			—						(537	)
Non-cash restructuring and other special charges				234			(864	)		—						(630	)
Provision for accounts receivable, claims, loss contracts and costs and estimated earnings in excess of billings				—			21,115			—						21,115
Bond discount amortization				36			—			—			—			36
Equity in earnings of subsidiaries				22,623			—			—			(22,623	)(a)		—
Gain on sale of equipment				—			(55	)		(73	)		—			(128	)
Loss on sale of subsidiary				(635	)		15,211			—			—			14,576
Changes in operating assets and liabilities:
	Accounts receivable and costs and estimated earnings In excess of billings on uncompleted contracts			—			(48,956	)		(252	)		—			(49,208	)
	Inventories			—			320			552			—			872
	Other current assets			7			(1,445	)		438			—			(1,000	)
	Accounts payable and accrued liabilities			1,259			27,946			132			—			29,337
	Accrued payroll and related withholdings			11			3,385			228			—			3,624
	Accrued interest payable			(637	)		1			35			—			(601	)
	Billings in excess of costs and estimated earnings on uncompleted contracts			—			(5,510	)		(162	)		—			(5,672	)
	Other current liabilities			2,277			521			(118	)		—			2,680
	Other assets			283			526			18			—			827
	Other liabilities			(68	)		(1,031	)		(99	)		—			(1,198	)
	Due (to/from affiliates			—			(237	)		237			—			—
	Due (to)/from parent company			998			(232	)		(766	)		—			—

		Net cash (used in) provided by operating activities		(22,698	)		10,886			2,021			—			(9,791	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment				—			177			174			—			351
Purchase of equipment and leasehold improvements				(358	)		(5,081	)		(939	)		—			(6,378	)
Proceeds from sale of subsidiary				23,388			(262	)		—			—			23,126
Acquisitions of subsidiaries, net of cash acquired				—			(48	)		—			—			(48	)
Contingent earn-out payments				(3,239	)		—			—			—			(3,239	)

		Net cash provided by (used in) investing activities		19,791			(5,214	)		(765	)		—			13,812

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank overdraft				(1,164	)		(6,993	)		440			—			(7,717	)
Net activity on revolving line of credit				12,085			—			(1,450	)		—			10,635
Payment of loan origination fees				(171	)		—			—			—			(171	)
Proceeds from fixed asset borrowings				—			238			46			—			284
Repayments of fixed asset borrowings				—			(3,816	)		(61	)		—			(3,877	)
Repayments of term loan				(4,972	)		—			—			—			(4,972	)
Repayments of seller notes				(3,457	)		—			—						(3,457	)
Proceeds from exercise of stock options				4			—			—			—			4

		Net cash used in financing activities		2,325			(10,571	)		(1,025	)		—			(9,271	)

EXCHANGE RATE EFFECT ON CASH				—			18			(345	)					(327	)

NET (DECREASE) INCREASE IN CASH				(582	)		(4,881	)		(114	)		—			(5,577	)
CASH AND CASH EQUIVALENTS, beginning of period				1,532			5,420			186			—			7,138

CASH AND CASH EQUIVALENTS, end of period			$	950		$	539		$	72		$	—		$	1,561

(a)

Elimination of equity in earnings of subsidiaries.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We were formed in March 1998 to become a leading nationwide provider of rail system services, including construction and rehabilitation, repair and maintenance, and related products. We primarily perform services pursuant to contracts for the completion of specific projects, some of which take up to five years to complete. On most projects, we contract directly with rail system operators, while on other projects we act as a subcontractor.

In August 1998, we acquired, in separate concurrent transactions, fourteen companies (the “Founding Companies”) engaged principally in the rail system services and products business and we consummated our initial public offering (“IPO”) of Common Stock. In November 1998, we acquired two companies; in 1999, we acquired fourteen companies or groups of companies; and in 2000, we acquired five companies or groups of companies. Except for the acquisition of Comstock Holdings, Inc. (“Comstock”), a Founding Company, all of our acquisitions have been accounted for as purchases in accordance with APB No. 16. Comstock has been identified as the accounting acquirer for accounting and financial statement purposes consistent with Staff Accounting Bulletin No. 97 of the SEC because its owners received the largest portion, 34.6% of the shares of Common Stock issued to the owners of the Founding Companies at the time of their acquisition.

Our consolidated balance sheet as of June 30, 2002 includes all companies that were owned as of June 30, 2002. Our consolidated statement of operations for the three and six months ended June 30, 2002 and statement of cash flows for the six months ended June 30, 2002 includes the results of operations and cash flows of all companies owned as of June 30, 2002. There were no acquisitions or dispositions during the three or six months ended June 30, 2002. Our consolidated balance sheet as of December 31, 2001 includes all companies that were owned as of December 31, 2001. During the second quarter of 2001, we sold Railworks W.T. Byler, LP. Our statement of operations for the three and six months ended June 30, 2001 and statement of cash flows for the six months ended June 30, 2001 include the results of operations and cash flows of all companies owned as of June 30, 2001 and the results of operations and cash flows of Railworks W.T. Byler, LP, through the date of disposition. There were no acquisitions during the three or six months ended June 30, 2001.

On September 20, 2001 (the “Filing Date”), RailWorks Corporation and twenty-two of its domestic subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (Baltimore Division). The filings have been consolidated for the purpose of joint administration as case No. 01-6-4463, but the cases have not been deemed consolidated for Plan purposes by the Bankruptcy Court. Our Canadian subsidiaries were not included in the filings and continue to operate in the normal course of business outside of bankruptcy. Under Chapter 11, except for certain statutory exceptions and for relief that might otherwise be granted by the Bankruptcy Court, claims against the Debtors in existence prior to the Filing Date (including claims secured by the Debtors’ assets) are stayed while the Debtors continue business operations as debtors-in-possession. Additional claims may arise subsequent to the Filing Date resulting from rejection of executory contracts, including leases and construction contracts, and from the determination by the Bankruptcy Court (or agreed to by the parties in interest) of allowed claims for contingencies and other disputed amounts.

Our ability to continue as a going concern is contingent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the DIP facility and the ability to generate sufficient cash flow from operations and financing arrangements to fund ongoing operations. There can be no assurance that we will be able to confirm a plan or comply with the terms of the DIP Facility or the credit facilities under the proposed Plan. As of August 1, 2002, the amount outstanding under the Company’s Transit Revolver totaled $45.0 million, the maximum amount permitted under the facility, of which $30.0 million was outstanding borrowings and $15.0 million was a letter of credit supporting the Company’s commercial insurance. At that date, the amount outstanding under the TP&S Revolver was $31.7 million, consisting of $21.2 million of outstanding borrowings and $10.5 million of letters of credit outstanding. We had $11.7 million of collateral outstanding under the Bonding Facility. No further borrowing capacity presently exists under the Transit Revolver. The lack of additional availability under the Transit Revolver will require that the transit services segment internally generate the cash necessary to fund its operations and its share of the administrative costs of reorganization, but there is no assurance that it will be able to do so. Failure to do so coupled with a failure to obtain additional funding for the transit services segment could result in the discontinuation of this business segment.

Since the Filing Date, the Bankruptcy Court has approved, on a final basis, the Debtors’ debtor-in-possession financing arrangements (collectively, as amended, restated and/or replaced, the “DIP Facility”) with Bank of America, N.A. (“BOA”), for itself and as agent for a syndicate of lenders, Matlin Patterson Global Opportunities Fund L.P. (“Matlin Patterson”), for itself and Stonehill Capital Management, and Travelers Casualty & Surety Company of America (“Travelers”). Matlin Patterson, a private investment fund formerly known as CSFB Global Opportunities Advisers, LLC, was spun off by Credit Suisse First Boston on July 16, 2002. Credit Suisse First Boston no longer has any affiliation with Matlin Patterson other than as a limited partner. Matlin Patterson Global Partners LLC is the general partner of Matlin Patterson and Matlin Patterson Global Advisors LLC is its investment advisor. The DIP Facility includes an Amended and Restated DIP Transit Revolving Credit Agreement (the “Transit Revolver”) for up to $30.0 million in borrowings and a $15.0 million letter of credit in support of our company wide liability and casualty insurance in connection with the Debtors’ rail transit division; a DIP Transit Bonding Facility (the “Bonding Facility”) for up to $100.0 million in bonding commitment to support our project bonding requirements; a DIP Bond Support Credit Agreement (the “Bond Support Facility”) with Matlin Patterson for up to $40.0 million of collateral support for the transit services division’s project surety bonds underwritten by Travelers; and a DIP Financing Agreement, as replaced on March 5, 2002 (the “TP&S Revolver”) with certain lenders represented by BOA as administrative agent for up to $35.0 million of financing and letter of credit commitments to support the track services and products and services divisions’ operating cash obligations and project bonding requirements. The Debtors intend to utilize the DIP Facility and existing cash flow to fund ongoing operations during the Chapter 11 proceedings. As of August 1, 2002 approximately $45.0 million was outstanding under the Transit Revolver, consisting of $30.0 million of borrowings and a $15.0 million letter of credit; $31.7 million was outstanding under the TP&S Revolver, consisting of $21.2 million in borrowings and $10.5 million of letters of credit outstanding; and we had $11.7 million of collateral outstanding under the Bonding Facility.

On March 15, 2002, the Debtors filed a plan of reorganization in the U.S. Bankruptcy Court for the District of Maryland in Baltimore. On June 18, 2002, the Debtors filed a first amended plan version of the Plan, and on August 2, 2002, the Debtors filed a second amended version of the Plan. The Plan contemplates full repayment of debtor-in-possession or DIP claims, satisfaction of secured claims held by certain of the Company’s pre-petition secured lenders through the issuance of a new secured note and certain preferred stock, and satisfaction of the

balance of claims held by the Company’s pre-petition secured lenders through the conversion of such claims into substantially all of the equity of the reorganized company. The Plan also provides that holders of the Company’s $174.0 million 11 1/2% senior subordinated notes due in 2009 and unsecured creditors that were not authorized by the Bankruptcy Court to be paid as critical vendors will receive (if their Plan class votes to accept the Plan) 3% of the stock of the reorganized company and that the interests of the current equity holders of the Company will be eliminated. Confirmation of the Plan, which remains subject to supplementation, modification and amendment, also remains subject to Bankruptcy Court approval and certain other conditions.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses RailWorks’ consolidated financial statements and results of operations by segment, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. On an ongoing basis, management evaluates its estimates and assumptions, including those related to contract revenue, anticipated contract costs, bad debts, inventories, intangible assets, income taxes, retirement benefits, and contingencies and litigation. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making assumptions about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

The recognition of revenues and costs in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1: “Accounting for Performance of Construction-Type and Certain Production Type Contracts” (“SOP 81-1”) involves considerable use of estimates and is complicated by the need to evaluate continually the uncertainties inherent in the performance of contracts and by the need to rely on estimates of revenues, costs and the extent of progress toward completion of contracts. Operating in Chapter 11 bankruptcy and certain related problems with subcontractors and customers provides even more risk and uncertainty in the estimates. Changes in these estimates can cause significant volatility in the Company’s financial results.

We recognize revenue from fixed price contracts using the percentage-of-completion method in accordance with SOP 81-1, measured by the percentage of costs incurred to date to management’s estimate of total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Revenue from time-and-material contracts is recognized currently as the work is performed.

Contract revenue recognition inherently involves estimation. Examples of estimates include the contemplated level of effort to accomplish the tasks under contract, the costs of the effort, and an ongoing assessment of progress toward completing the contract. We utilize a number of management processes to monitor contract performance and revenue estimates, including monthly in-process reviews that cover, among other matters, outstanding action items, progress against schedule, effort and staffing, quality, risks and other issues, subcontractor management, costs, and commitments. From time to time, as part of the normal management

processes, facts develop that require revisions to estimated total costs or revenues expected. The cumulative effect of any such revisions is recorded in the period in which the facts requiring revisions become known. The full amount of anticipated losses on any type of contract are recognized in the period in which they become known.

Disputes may arise in the normal course of our business on projects when we are contesting with customers for collection of funds because of events such as delays, changes in contract specifications, and questions of cost allowability or collectibility. Such disputes, whether claims or unapproved change orders in the process of negotiation, are recorded at the lesser of their estimated net realizable value or actual cost incurred, and only when realization is probable and can be reliably estimated.

With regard to the rail products and services segment, we recognize 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.

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 and services segment. RailWorks writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Chapter 11 Bankruptcy

The consolidated financial statements of the Company have been presented in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7: “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”) and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern. These principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business. The uncertainty regarding the eventual outcome of the reorganization cases, the liquidity constraints at the transit services segment, the financial feasibility of the Plan, related problems with subcontractors and customers and the effect of other unknown adverse factors could threaten the Company’s existence as a going concern.

SOP 90-7 states, among other things, that revenues, expenses, realized gains and losses, and provisions from losses resulting from the reorganization and the restructuring of the business should be reported separately as reorganization items in the statement of operations. The balance sheet should distinguish between prepetition liabilities that are subject to compromise and those that are not such as fully secured liabilities that are not expected to be compromised. If there is uncertainty about whether a secured claim is undersecured, or will be impaired under the reorganization plan, the entire amount of the claim should be included with liabilities subject to

compromise. See Note 2 to the consolidated financial statements for more information on liabilities classified as subject to compromise and amounts recorded as reorganization items.

Pursuant to SOP 90-7, approval of the Plan by the Bankruptcy Court may entail adoption by the Debtors of fresh-start accounting. Under fresh-start accounting, the Debtors must allocate their reorganization value to their assets in accordance with the rules for purchase accounting set forth in Accounting Principles Board Opinion No. 16, “Business Combinations” (APB No. 16). Any excess of reorganization value that cannot be allocated to specific tangible or identified intangible assets must be reported as the intangible asset “reorganization value in excess of amounts allocable to identifiable assets.” All liabilities existing at the Plan confirmation date, other than deferred taxes, are required to be stated at present values of amounts to be paid. The Company is currently assessing this matter and has not yet determined the effect that the adoption of fresh-start accounting might have on the financial statements.

Impact of Recently Issued Accounting Pronouncements

The following table provides the comparable effects of adoption of SFAS No. 142 for the three months ended June 30, 2002 and 2001 (in thousands, except per share data).


	(Unaudited)
	2002			2001

Reported net loss before extraordinary item	$	(21,903	)	$	(38,060	)
Add back: goodwill amortization (net of tax)		—			1,734

Adjusted net loss before extraordinary item	$	(21,903	)	$	(36,326	)

Reported basic and diluted loss per share before extraordinary item	$	(1.52	)	$	(2.48	)
Add back: goodwill amortization (net of tax)		—			.11

Adjusted basic and diluted loss per share before extraordinary item	$	(1.52	)	$	(2.37	)

The following table provides the comparable effects of adoption of SFAS No. 142 for the six months ended June 30, 2002 and 2001 (in thousands, except per share data).


	(Unaudited)
	2002			2001

Reported net loss before extraordinary item and change in accounting principle	$	(36,635	)	$	(37,908	)
Add back: goodwill amortization (net of tax)		—			3,097

Adjusted net loss before extraordinary item and change in accounting principle	$	(36,635	)	$	(34,811	)

Reported basic and diluted loss per share before extraordinary item and change in accounting principle	$	(2.55	)	$	(2.47	)
Add back: goodwill amortization (net of tax)		—			.20

Adjusted basic and diluted loss per share before extraordinary item and change in accounting principle	$	(2.55	)	$	(2.27	)

Results of Operations

Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30, 2001.

Revenue. Revenue decreased $54.1 million, or 27.3%, from $198.3 million for the three months ended June 30, 2001 to $144.2 million for the three months ended June 30, 2002. A portion of the decrease in revenue for the three months ended June 30, 2002 was attributable to

our decision to lessen our transit services segment’s exposure to the power and industrial and commercial sectors as well as a lack of new projects in that segment. Revenue also decreased in our rail track services group due to the sale of the civil and maintenance divisions of RailWorks W.T. Byler during 2001. Additional decreases resulted from the winding down of a project in our rail products and services group as well as liquidity constraints and other effects of operating in bankruptcy during 2002.

Transit services revenue decreased $33.0 million, or 29.2%, from $112.9 million for the three months ended June 30, 2002 to $79.9 million for the three months ended June 30, 2002. The majority of this decrease in revenue for the three months ended June 30, 2002 is a result of our decision to lessen our exposure to the power and industrial and commercial sectors. In addition, in our core transit business we lack sufficient revenues from new projects to offset revenues of those completed since the second quarter of 2001.

Rail track services revenue decreased $15.1 million, or 27.2%, from $55.5 million for the three months ended June 30, 2001 to $40.4 million for the three months ended June 30, 2002. This decrease is primarily the result of the inclusion of a full quarter of revenue in 2001 from the civil and maintenance divisions of RailWorks W.T. Byler, LP, which was sold during the second quarter of 2001.

Rail products and services revenue decreased $6.0 million, or 20.1%, from $29.9 million for the three months ended June 30, 2001 to $23.9 million for the three months ended June 30, 2002. This decrease in revenue for the three months ended June 30, 2002 is primarily a result of the winding down of our railroad construction contract in Panama.

Gross Profit. Gross profit increased $11.2 million, or 155.6%, from $7.2 million for the three months ended June 30, 2001 to $18.4 million for the three months ended June 30, 2002. This increase is primarily the result of increased gross profit in the transit services division partially offset by decreased gross profit in the rail track services and rail products and services segments. As a result, the gross profit percentage increased from 3.6% for the three months ended June 30, 2001 to 12.8% for the three months ended June 30, 2002.

Transit services gross profit increased $14.3 million from a loss of $7.0 million for the three months ended June 30, 2001 to gross profit of $7.3 million for the three months ended June 30, 2002. This increase is primarily the result of decreased gross profit of approximately $21.1 million during the three months ended June 30, 2001 due to required provisions for contract claims and other contract exposures on several power and industrial and commercial projects. This increase is partially offset by decreased gross profit during the three months ended June 30, 2002 as a result of the decrease in revenue discussed above, changes in management’s estimates to complete on several contracts in our commercial and transit sectors as well as the application of percentage of completion accounting to management’s lowered profit estimates made during the course of 2001 for ongoing projects. The gross profit percentage increased from negative 6.1% for the three months ended June 30, 2001 to 9.1% for the three months ended June 30, 2002 as a result of the items mentioned above.

Rail track services gross profit decreased $1.6 million, or 18.4%, from $8.7 million for the three months ended June 30, 2001 to $7.1 million for the three months ended June 30, 2002. The decrease in gross profit for the rail track services segment for the three months ended June 30, 2002 is primarily due to the sale of the civil and maintenance divisions of RailWorks W.T. Byler in the second quarter of 2001. The gross profit percentage increased from 15.7 % for the three months ended June 30, 2001 to 17.6 % for the three months ended June 30, 2002 primarily as a result of the sale of the division discussed above which has lower margins than the remainder of the rail track services segment.

Rail products and services gross profit decreased $1.5 million, or 27.3%, from $5.5 million for the three months ended June 30, 2001 to $4.0 million for the three months ended June 30, 2002. This decrease in gross profit for the three months ended June 30, 2002 is partially a result of the winding down of our railroad construction contract in Panama. The remaining decrease was caused by liquidity constraints and other effects of operating in bankruptcy. As a result of the foregoing, the gross profit percentage decreased from 20.0% for the three months ended June 30, 2001 to 16.8% for the three months ended June 30, 2002.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.1 million or 12.1%, from $17.3 million for the three months ended June 30, 2001 to $19.4 million for the three months ended June 30, 2002. Approximately $1.8 million of the increase in selling, general and administrative expenses for the three months ended June 30, 2002 was due to additional compensation expense recorded at corporate to reserve for the remaining outstanding balance of officer stock grant loans receivable. The remaining increase was the result of higher insurance costs in the rail track services and rail products and services segments during 2002 and additional provisions for uncollectable accounts receivable, partially offset by the cessation of amortization of goodwill in 2002 in accordance with SFAS No. 142. As a percentage of revenue, selling, general and administrative expenses increased from 8.4% for the three months ended June 30, 2001 to 13.5% for the three months ended June 30, 2002. This increase was primarily the result of the items mentioned above as well as the decrease in revenue discussed above.

Transit services selling, general and administrative expenses decreased $0.8 million or 10.3%, from $7.8 million for the three months ended June 30, 2001 to $7.0 million for the three months ended June 30, 2002. The decrease in selling, general and administrative expenses for the three months ended June 30, 2002 was due primarily to the cessation of amortization of goodwill in 2002 and decreased insurance costs in 2002 partially offset by additional selling, general and administrative expenses related to additional provisions for uncollectable accounts receivable. As a percentage of segment revenue, selling, general and administrative expenses increased from 6.8% for the three months ended June 30, 2001 to 8.8% for the three months ended June 30, 2002. This percentage increase was primarily the result of the decrease in revenue discussed above.

Rail track services selling, general and administrative expenses increased $0.1 million, or 2.1%, from $4.8 million for the three months ended June 30, 2001 to $4.9 million for the three months ended June 30, 2002. The increase in selling, general and administrative expenses for the three months ended June 30, 2002 was due primarily to increased insurance costs in 2002 partially offset by the cessation of amortization of goodwill in 2002. As a percentage of segment revenue, selling, general and administrative expenses increased from 8.6% for the three months ended June 30, 2001 to 12.1% for the three months ended June 30, 2002. This percentage increase was primarily the result the decrease in revenue discussed above.

Rail products and services selling, general and administrative expenses decreased $0.4 million, or 12.5%, from $3.2 million for the three months ended June 30, 2001 to $2.8 million for the three months ended June 30, 2002. The decrease in selling, general and administrative expenses for the three months ended June 30, 2002 was due partially to the cessation of amortizing goodwill in 2002 in addition to savings from the development of a centralized hub for our rail services division. As a percentage of segment revenue, selling, general and administrative expenses increased from 11.6% for the three months ended June 30, 2001 to 11.7% for the three months ended June 30, 2002. This percentage increase was primarily the result the decrease in revenue discussed above.

Corporate selling, general and administrative expenses increased $3.2 million, or 213.3%, from $1.5 million for the three months ended June 30, 2001 to $4.7 million for the three months ended June 30, 2002. Approximately $1.8 million of this increase was due to additional compensation expense recorded to reserve for the remaining outstanding balance of officer stock grant loans receivable. The remainder of the increase was the result of decreased selling general and administrative expenses during the three months ended June 30, 2001 from the release of corporate reserves that were determined to be excess. As a percentage of total revenue, selling, general and administrative expenses increased from 0.8% for the three months ended June 30, 2001 to 3.3% for the three months ended June 30, 2002. The percentage increase was primarily due to the items mentioned above as well as the decrease in revenue discussed above.

Operating Loss. Operating loss decreased $9.7 million, from a loss of $10.8 million for the three months ended June 30, 2001 to a loss of $1.1 million for the three months ended June 30, 2002. This increase is primarily a result of the items mentioned above.

Interest Expense. Interest expense decreased $7.9 million, or 76.7%, from $10.3 million for the three months ended June 30, 2001 to $2.4 million for the three months ended June 30, 2002. The decrease in interest expense for the three months ended June 30, 2002 was due primarily to the Company not accruing approximately $9.0 million of interest expense during the three months ended June 30, 2002 related to prepetition debt in accordance with SOP 90-7. This decrease is partially offset by the addition of interest expense in 2002 related to the DIP Facility.

Reorganization Items. In accordance with SOP 90-7, we have recorded approximately 17.6 million of reorganization costs for the three months ended June 30, 2002. These reorganization costs consist of approximately $6.8 million of professional and advisory fees incurred that are directly associated with the reorganization proceedings under the Company’s Chapter 11 filings, $1.5 million of adequate protection fees paid to our prepetition secured lenders and $9.3 million related to the write off of deferred financing costs and issuance discounts related to our prepetition debt.

Taxes. The Company has recorded an income tax provision of approximately $0.5 million for the three months ended June 30, 2002. This amount includes a provision for our Canadian subsidiaries in addition to a provision recorded for domestic state taxes.

Net Loss. Net loss decreased $15.6 million, from a loss of $37.5 million for the three months ended June 30, 2001 to a loss of $21.9 million for the three months ended June 30, 2002. This decrease in net loss is a result of the items mentioned above. The net loss for the three months ended June 30, 2001 is net of an extraordinary gain from the extinguishments of bonds of approximately $0.5 million.

Six months Ended June 30, 2002 Compared to the Six months Ended June 30, 2001.

Revenue. Revenue decreased $113.3 million, or 30.7%, from $368.7 million for the six months ended June 30, 2001 to $255.4 million for the six months ended June 30, 2002. A portion of the decrease in revenue for the six months ended June 30, 2002 was attributable to our decision to lessen our transit services segment’s exposure to the power and industrial and commercial sectors as well as a lack of new projects in that segment. Revenue also decreased in our rail track services group due to the sale of the civil and maintenance divisions of RailWorks W.T. Byler during 2001. Additional decreases resulted from the winding down of a project in our rail products and services group as well as liquidity constraints and other effects of operating in bankruptcy during 2002.

Transit services revenue decreased $69.2 million, or 32.0%, from $216.1 million for the six months ended June 30, 2002 to $146.9 million for the six months ended June 30, 2002. The majority of this decrease in revenue for the six months ended June 30, 2002 is a result of our decision to lessen our exposure to the power and industrial and commercial sectors. In addition, in our core transit business we lack sufficient revenues from new projects to offset revenues of those completed since the second quarter of 2001.

Rail track services revenue decreased $30.9 million, or 31.4%, from $98.5 million for the six months ended June 30, 2001 to $67.6 million for the six months ended June 30, 2002. This decrease is primarily the result of the inclusion of a full quarter of revenue in 2001 from the civil and maintenance divisions of RailWorks W.T. Byler, LP, which was sold during the second quarter of 2001.

Rail products and services revenue decreased $13.2 million, or 24.4%, from $54.1 million for the six months ended June 30, 2001 to $40.9 million for the six months ended June 30, 2002. This decrease in revenue for the six months ended June 30, 2002 is primarily a result of the winding down of our railroad construction contract in Panama.

Gross Profit. Gross profit decreased $7.5 million, or 20.2%, from $37.2 million for the six months ended June 30, 2001 to $29.7 million for the six months ended June 30, 2002. A portion of the decrease in gross profit for the six months ended June 30, 2002 is directly related to the shortfall in revenue earned during the period as well as the sales of FCM Rail. Ltd and the civil and maintenance divisions of RailWorks W.T. Byler during 2001. Additionally, increased estimates of costs to complete resulting from liquidity constraints and other operational factors caused a deterioration of gross profit margins. These decreases were partially offset by required provisions for contract claims and other contract exposures in the transit services segment recorded during the six months ended June 30, 2001. As a result of the foregoing, the gross profit percentage increased from 10.1% for the six months ended June 30, 2001 to 11.6% for the six months ended June 30, 2002.

Transit services gross profit increased $3.7 million, or 33.3%, from $11.1 million for the six months ended June 30, 2001 to gross profit of $14.8 million for the six months ended June 30, 2002. This increase is the result of decreased gross profit due to required provisions of approximately $21.1 million for contract claims and other contract exposures on several power and industrial and commercial projects during the six months ended June 30, 2001. The increase is partially offset by decreased gross profit during the six months ended June 30, 2002 as a result of the decrease in revenue discussed above, changes in management’s estimates to complete on several contracts in our commercial and transit sectors and the application of percentage of completion accounting to management’s lowered profit estimates made during the course of 2001 for ongoing projects. As a result of the foregoing, the gross profit percentage increased from 5.1% for the six months ended June 30, 2001 to 10.1% for the six months ended June 30, 2002.

Rail track services gross profit decreased $6.5 million, or 43.3%, from $15.0 million for the six months ended June 30, 2001 to $8.5 million for the six months ended June 30, 2002. The decrease in gross profit for the rail track services segment for the six months ended June 30, 2002 is primarily due to the sale of the civil and maintenance divisions of RailWorks W.T. Byler in the second quarter of 2001. The remainder of this decrease is attributable to management’s estimates of greater costs to complete on several projects due to complications of operating in bankruptcy.

The gross profit percentage decreased from 15.2% for the six months ended June 30, 2001 to 12.6% for the six months ended June 30, 2002 primarily as a result of the items mentioned above.

Rail products and services gross profit decreased $4.7 million, or 45.8%, from $11.1 million for the six months ended June 30, 2001 to $6.4 million for the six months ended June 30, 2002. This decrease in gross profit for the six months ended June 30, 2002 is partially a result of the winding down of our railroad construction contract in Panama. A portion of the decrease is also due to the inclusion of FCM Rail, Ltd. for a portion of the six months ended June 30, 2001 prior to its sale. The remaining decrease was caused by liquidity constraints and other effects of operating in bankruptcy. As a result of the foregoing, the gross profit percentage decreased from 20.7% for the six months ended June 30, 2001 to 15.7% for the six months ended June 30, 2002.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.1 million or 3.0%, from $36.1 million for the six months ended June 30, 2001 to $37.2 million for the six months ended June 30, 2002. Selling, general and administrative expenses increased approximately $1.8 million for the six months ended June 30, 2002 due to additional compensation expense recorded at corporate to reserve for the remaining outstanding balance of officer stock grant loans receivable. Additional increases resulted from increased insurance costs in the rail track services and rail products and services segments during 2002 and additional provisions for uncollectable accounts receivable. These increases were partially offset by the cessation of amortization of goodwill in 2002 in accordance with SFAS No. 142. As a percentage of revenue, selling, general and administrative expenses increased from 9.8% for the six months ended June 30, 2001 to 14.6% for the six months ended June 30, 2002. This increase was primarily the result of the items mentioned above as well as the decrease in revenue discussed above.

Transit services selling, general and administrative expenses decreased $0.8 million or 5.5%, from $14.6 million for the six months ended June 30, 2001 to $13.8 million for the six months ended June 30, 2002. The decrease in selling, general and administrative expenses for the six months ended June 30, 2002 was due primarily to the cessation of amortization of goodwill in 2002 and decreased insurance costs in 2002 partially offset by additional selling, general and administrative expenses related to additional provisions for uncollectable accounts receivable. As a percentage of segment revenue, selling, general and administrative expenses increased from 6.8% for the six months ended June 30, 2001 to 9.4% for the six months ended June 30, 2002. This percentage increase was primarily the result of the decrease in revenue discussed above.

Rail track services selling, general and administrative expenses increased $0.3 million, or 2.9%, from $10.2 million for the six months ended June 30, 2001 to $9.9 million for the six months ended June 30, 2002. The increase in selling, general and administrative expenses for the six months ended June 30, 2002 was due primarily to increased insurance costs in 2002 partially offset by the cessation of amortization of goodwill in 2002. As a percentage of segment revenue, selling, general and administrative expenses increased from 10.4% for the six months ended June 30, 2001 to 14.6% for the six months ended June 30, 2002. This percentage increase was primarily the result the decrease in revenue discussed above.

Rail products and services selling, general and administrative expenses decreased $1.4 million, or 19.4%, from $7.2 million for the six months ended June 30, 2001 to $5.8 million for the six months ended June 30, 2002. The decrease in selling, general and administrative expenses for the six months ended June 30, 2002 was due partially to the cessation of amortization of goodwill in 2002 in addition to savings from the development of a centralized hub for our rail services division. As a percentage of segment revenue, selling, general and administrative expenses increased from 13.3% for the six months ended June 30, 2001 to 14.2% for the six months ended June 30, 2002. This percentage decrease was primarily the result of the cessation of goodwill amortization and the savings from the centralized hub discussed above.

Corporate selling, general and administrative expenses increased $3.6 million, or 87.8%, from $4.1 million for the six months ended June 30, 2001 to $7.7 million for the six months ended June 30, 2002. Approximately $1.8 million of this increase was due to additional compensation expense recorded to reserve for the remaining outstanding balance of officer stock grant loans receivable. The remaining increase was due to decreased selling general and administrative expenses during the six months ended June 30, 2001 from the release of corporate reserves that were determined to be excess. As a percentage of total revenue, selling, general and administrative expenses increased from 1.1% for the six months ended June 30, 2001 to 2.3% for the six months ended June 30, 2002. The percentage increase was primarily due to the items mentioned above as well as the decrease in revenue discussed above.

Operating Income. Operating income decreased $7.8 million, from $0.3 million for the six months ended June 30, 2001 to a loss of $7.5 million for the six months ended June 30, 2002. This decrease is primarily a result of the items mentioned above.

Interest Expense. Interest expense decreased $15.7 million, or 76.6%, from $20.5 million for the six months ended June 30, 2001 to $4.8 million for the six months ended June 30, 2002. The decrease in interest expense for the six months ended June 30, 2002 was due primarily to the Company not accruing approximately $18.0 million of interest expense during the six months ended June 30, 2002 related to prepetition debt in accordance with SOP 90-7. This decrease was partially offset by the addition of interest expense in 2002 related to the DIP Facility.

Reorganization Items. In accordance with SOP 90-7, we have recorded approximately 23.7 million of reorganization costs for the three months ended June 30, 2002. These reorganization costs consist of approximately $11.4 million of professional and advisory fees incurred that are directly associated with the reorganization proceedings under the Company’s Chapter 11 filings, $3.0 million of adequate protection fees paid to our prepetition secured lenders and $9.3 million related to the write off of deferred financing costs and issuance discounts related to our prepetition debt.

Taxes. The Company has recorded an income tax provision of approximately $0.4 million for the six months ended June 30, 2002. This amount includes a provision for our Canadian subsidiaries in addition to a provision recorded for domestic state taxes.

Net Loss. Net loss decreased $6.1 million from a loss $37.4 million for the six months ended June 30, 2001 to a loss of $31.3 million for the six months ended June 30, 2002. This decrease in net loss is a result of the items mentioned above as well as a gain from a change in accounting principle related to the write off of negative goodwill in accordance with SFAS 142. The net loss for the six months ended June 30, 2001 is net of an extraordinary gain from the extinguishments of bonds of approximately $0.5 million.

Fluctuations in Quarterly Operating Results

We experience 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 seasonality, 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 and may be particularly pronounced, and net losses have been and may be incurred, in the first and fourth calendar quarters, generally due to adverse weather conditions. We expect to continue to experience such quarterly fluctuations in operating results, including possible net losses.

Liquidity and Capital Resources

Working Capital. At June 30, 2002, we had $1.3 million in cash and cash equivalents offset by a cash overdraft of $1.2 million resulting in a net cash position of $0.1 million compared to $2.8 million in cash and cash equivalents offset by a cash overdraft of $3.0 million resulting in a negative net cash position of $0.2 million as of December 31, 2001. Net cash used in operating activities for the six months ended June 30, 2002 was approximately $9.1 million. Net cash used in investing activities for the six months ended June 30, 2002 was approximately $5.0 million, which consisted primarily of cash payments for capital expenditures and earnout obligations. Net cash provided by financing activities for the six months ended June 30, 2002 was approximately $12.2 million, which included borrowings of approximately $14.9 million offset by debt and cash overdraft repayments of approximately $2.7 million.

We had working capital of $91.5 million as of June 30, 2002, which does not include liabilities subject to compromise of approximately $428.9 million which otherwise would be recorded as current. These liabilities represent claims in existence prior to the Filing Date, which are generally stayed while the Debtors continue business operations as debtors-in-possession under Chapter 11 of the Bankruptcy Code. Including such liabilities subject to compromise as current liabilities, our working capital deficit as of June 30, 2002 would be $337.4 million. Our working capital as of December 31, 2001 was $141.3 million excluding liabilities subject to compromise of approximately $455.1 million. Including such liabilities subject to compromise as current liabilities, our working capital deficit as of December 31, 2001 would have been $313.8 million.

The Debtors have determined that insufficient financial resources exist to cover the interest portion of scheduled payments on their prepetition debt obligations, including the obligations under the Credit Agreement and the senior subordinated notes, and therefore have discontinued accruing interest on these obligations. Contractual interest on these obligations, which has not been accrued, amounts to approximately $9.0 and $18.0 million for the three and six months ended June 30, 2002. Capital expenditures were $4.5 million and $6.4 million for the six months ended June 30, 2002 and 2001, respectively. Historically, capital expenditures have been, and future expenditures are anticipated to be, primarily to support expansion of our operations, including our management information systems. Our capital expenditures over the next several years, as a percentage of revenues, are expected to decrease compared to those of the past two fiscal years.

In connection with certain acquisitions, we have agreed to pay additional consideration based on operating results of the acquired entity. The payment of any such contingent consideration could result in an increase in the purchase prices of such acquisitions and, as a result, additional goodwill. Additional consideration payable as of June 30, 2002 related to 2000 and 2001 operating performance amounted to approximately $8.9 million. As a result of the Chapter 11 filings, additional consideration payable of approximately $7.7 million related to our domestic subsidiaries has been classified as liabilities subject to compromise.

Indebtedness. As of June 30, 2002, we had a total of $426.0 million of indebtedness outstanding, which includes approximately $191.8 million outstanding under our Amended and

Restated Credit Agreement (the “Credit Agreement”), $174.0 million of 11 (1/2)% Senior Subordinated Notes (the “Notes”), $50.8 million under the DIP Facility, $4.5 million under our Canadian credit agreement and $4.9 million of fixed asset and other notes payable.

Of the $191.8 million of borrowings outstanding under the Credit Agreement, $94.3 million was borrowed under a term loan payable through 2006 and $97.5 million was borrowed under the revolving credit commitment. In connection with the Credit Agreement, the Company granted to BOA a security interest in essentially all of the assets, including receivables, of the Company.

As a result of the Chapter 11 filings, approximately $369.0 million of our total debt outstanding has been classified as liabilities subject to compromise. This includes the $191.8 million of borrowings under the Credit Agreement and $174.0 million of Senior Subordinated Notes outstanding. It does not include the debt of our Canadian subsidiaries or the DIP Facility which was obtained after the Filing Date. In addition, we have not made interest payments on our obligations under the Credit Agreement since July of 2001 and did not make our semi-annual interest payments due October 15, 2001 and April 15, 2002 under the Notes. As a result, approximately $12.4 million of prepetition accrued interest related to the Credit Agreement and the Notes has been included in liabilities subject to compromise. We have not accrued any interest on our prepetition debt obligations since the Filing Date.

In October 2001, we entered into the DIP Facility that was subsequently amended and partially replaced in March 2002, which includes: 1) the Transit Revolver with Matlin Patterson for up to $30 million (subsequently increased to $45 million, as discussed below) of financing supporting the transit services division’s operations; 2) the Bond Support Facility with Matlin Patterson for up to $40 million of collateral supporting the transit services division’s project surety bonds underwritten by Travelers; 3) the Bonding Facility with Travelers for up to $100 million of surety bond commitment supporting the Debtor’s project bonding requirements; and 4) the TP&S Revolver with certain lenders represented by BOA as administrative agent for up to $35 million of financing and letter of credit commitments supporting the track services and products & services divisions’ operating cash obligations and project bonding requirements. The DIP Facility matures on September 30, 2002.

Under the Transit Revolver (as amended and restated), we are obligated to pay: 1) an up-front fee of 3.00% of the aggregate commitments; 2) an unused commitment fee of 0.50% per annum on the average daily unused portion of the commitment; and 3) an additional fee of $900,000 (together, with the Additional Fee for the TP&S Revolver referred to below, the “Additional Fees”) if we do not have a plan of reorganization acceptable to Matlin Patterson, BOA and Travelers confirmed by the Bankruptcy Court by April 30, 2002 and/or consummated by May 15, 2002. Borrowings under the Transit Revolver bear interest at the prime rate plus 3.00%.

Under the Bond Support Facility we are obligated to pay: 1) an up-front fee of 3.00% of the aggregate commitments; 2) an unused commitment fee of 0.50% per annum on the average daily unused portion of the commitment; and 3) a letter of credit fee of 1.50%; and a fronting and negotiation issuer fee of 0.125% per annum, both calculated on the average daily maximum amount to be drawn under the letters of credit from the date of issuance to the date of expiration.

Under the Bonding Facility we are obligated to pay: 1) to Travelers all premiums due for bonds issued within 60 days of issuance; 2) any broker’s fees or commissions for all bond issuances; and 3) to Travelers a monthly management fee of $10,000. In connection with the issuance of any bond under the Bonding Facility, and as a necessary condition precedent thereto, we must obtain collateral or letters of credit in an amount of 40% of the penal sum of such bond as security for such bond.

Under the TP&S Revolver, we are obligated to pay: 1) an up-front fee of 3.00% of the aggregated commitment amount; 2) an administrative fee of $125,000; 3) a letter of credit fee of 1.50%; and a fronting and negotiation issuer fee of 0.125% per annum, both calculated on the average daily maximum amount to be drawn under the letters of credit from the date of issuance to the date of expiration; 4) a monthly adequate protection payment of $500,000; and 5) an Additional Fee of $750,000 if we do not have a plan of reorganization acceptable to Matlin Patterson, BOA and Travelers confirmed by the Bankruptcy Court by April 30, 2002 and/or consummated by May 15, 2002. Borrowings under the TP&S Revolver bear interest at the prime rate plus 3.00%.

On February 1, 2002, the Bankruptcy Court authorized the amendment and restatement of the Transit Revolver to, among other things, provide for an increase in the amount of the commitment thereunder from $30 million to $45 million, of which $15 million represents a letter of credit to secure certain of the Company’s insurance obligations. In connection with the amendment, the Company is obligated to pay a letter of credit issuance fee equal to $225,000, payable in four equal quarterly installments beginning on March 31, 2002. On March 5, 2002, the Bankruptcy Court authorized the Debtors to replace the TP&S Revolver with a substantially identical revolving facility. In connection with the replacement of the TP&S Revolver, the lenders under both the Transit Revolver and the TP&S Revolver agreed to extend the triggering deadlines for the payment of the Additional Fees referred to above to the dates indicated above. The Additional Fees discussed above became due on May 7, 2002. As of the date of this filing, the Company has not paid the Additional Fees. A liability for these fees is included in other accrued liabilities on the accompanying consolidated balance sheet as of June 30, 2002. As of August 1, 2002, approximately $45.0 million was outstanding under the Transit Revolver, consisting of $30.0 million of borrowings and a $15.0 million letter of credit; $31.7 million was outstanding under the TP&S Revolver, consisting of $21.2 million of borrowings and $10.5 million of letters of credit; and we had approximately $11.7 million of collateral outstanding under the Bonding Facility.

Our obligations under the DIP Facility are jointly and severally guaranteed by each of the other Debtors. Generally, pursuant to the DIP Facility agreements, we have granted to the DIP Facility lenders first priority liens and security interests (subject to valid, perfected, enforceable and non-avoidable liens existing as of the Filing Date and other carve-outs and exceptions as fully described in the DIP Facility and the Bankruptcy Court orders related thereto) in all of the Debtors’ property. The DIP Facility agreements limit, among other things, our ability to incur additional indebtedness or obligations, to permit additional liens, to make additional acquisitions, to sell or dispose of assets, to create or incur liens on assets, and to merge or consolidate with any other entity. The DIP Facility also limits our ability to file certain “Material Pleadings” in our Chapter 11 case, unless we first obtain the consent of BOA, Matlin Patterson and Travelers. Pleadings requiring the consent of BOA, Matlin Patterson and Travelers include, among others, a plan of reorganization and disclosure statement, material asset sale motions, and an employee retention plan motion. The DIP Facility contains customary representations, warranties and covenants, including certain financial covenants and DIP Facility usage covenants. The breach of any such provisions, to the extent not cured or waived within applicable grace or cure periods, could result in our inability to obtain further advances under the DIP Facility and the potential exercise of remedies by the lenders under the DIP Facility, which could materially impair our ability to reorganize under Chapter 11 and could force us into a liquidation. In a liquidation, holders of our public and unsecured debt and holders of our equity would likely receive no value for their respective interests. There can be no assurance that the funding provided by the DIP

Facilities will be sufficient to satisfy our working capital needs or that we will be able to secure additional financing if needed. We are currently in compliance with the covenants under the DIP Facility.

Contractual Obligations and Commitments. The following table presents projected payments and expirations under our contractual obligations and commercial commitments as of June 30, 2002 (in thousands):


		Payments Due and/or Expiration By Period

			Total		Less than 1 year		1-3 years		4-5 years		After 5 years

	Contractual Obligations
Long-term debt (a)			$	270,250	$	270,250	$	—	$	—	$	—
Capital lease obligations (b)				2,956		2,226		730		—		—
Operating leases (c)				25,473		8,761		10,789		3,936		1,987

Total contractual cash obligations			$	297,751	$	280,309	$	11,519	$	3,936	$	1,987

	Other Commercial Commitments
Lines of Credit (d)			$	152,768	$	152,768	$	—	$	—	$	—
Letters of Credit (e)				22,161		8,307		13,654		200		—

Total commercial commitments			$	174,929	$	161,075	$	13,654	$	200	$	—

(a)		Long term debt includes approximately $174.0 million of Notes due in 2009, $94.3 million under the term loan portion of the Credit Agreement payable through 2006 and $2.0 million of seller notes due through 2002 related to the purchase of one of our subsidiaries. As a result of the bankruptcy, these obligations have been classified as liabilities subject to compromise in the consolidated balance sheet as of June 30, 2002 and have been included as due in less than one year for purposes of this schedule.

(b)		As a result of the bankruptcy, all of our capital lease obligations, with the exception of the capital lease obligations of our non-debtor Canadian subsidiaries, have been classified as liabilities subject to compromise in the consolidated balance sheet as of June 30, 2002 and have been included as due in less than one year for purposes of this schedule.

(c)		We lease various office buildings, machinery, equipment and vehicles under operating leases expiring at various dates. Most of the real property leases have escalation clauses related to increases in real property taxes.

(d)		Lines of credit include $97.5 million under the revolving credit portion of the Credit Agreement due in 2004, $50.8 million under the DIP Facility due in 2002 and $4.5 million under our Canadian credit facility which is payable on demand with no set final maturity. As a result of the bankruptcy, the amount due under the revolving credit portion of the Credit Agreement has been classified as a liability subject to compromise in the consolidated balance sheet as of June 30, 2002 and has been included as due in less than one year for purposes of this schedule.

(e)		As of June 30, 2002, we had letters of credit and other collateral outstanding of approximately $22.2 million under the DIP Facility.

Certain of our subsidiaries lease their operating facilities from former Founding Company owners who remained employees or directors of the Company. We believe the rents to be the fair market rental value of the property.

Certain executives of RailWorks have entered into employment agreements with the Company. In general, the employment agreements provide that, in the event of a termination of employment without cause, such employee will be entitled to receive from us an amount in cash equal to the employee’s then current annual base salary for the remainder of the term.

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. We are also subject to certain federal, state and local environmental laws and regulations relating to the use of creosote. Creosote is used in certain of our 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. We believe that we are in compliance with all of the various regulations applicable to our business and we have not been notified of any violations by regulatory agencies.

Inflation

We do not believe that inflation has had a material effect on our results of operations in recent years. However, there can be no assurance that our business will not be affected by inflation in the future.

Risk Factors

This quarterly report may contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. You can find discussions containing forward-looking statements in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in other sections. We use the words “believes,” “anticipates,” “expects”, “estimates,” “plans,” “intends” and similar expressions so as to identify forward-looking statements. All forward-looking statements involve substantial risks and uncertainties. There may be events in the future that we are not accurately able to predict, or over which we have no control.

Forward-looking statements include, without limitation, our expectations and estimates as to development of our services and products and expansion of our customer base, future financial performance, including growth in revenues and earnings and the effect on new acquisitions on our financial position and results of operations, cash flows from operations, acquisitions, capital expenditures, the availability of funds from credit facilities and the sale of securities. Consequently, you should regard forward-looking statements only as our current plans, estimates and beliefs. We do not promise to notify you if we learn that our assumptions or projections are wrong for any reason. Additional information concerning the risk and uncertainties listed above, and other factors that you may wish to consider, are contained in our filings with the Securities and Exchange Commission. Copies of these filings are available from us free of charge.

Some factors that may cause actual results to differ from projected results are:

Under the Plan of Reorganization, Holders of Common Stock Will Receive No Value and Holders of the Publicly-Traded Debt Will Receive Minimal Value. You are likely to lose all or part of your investment in the Company’s Common Stock or debt. The Bankruptcy Code requires that all debts be paid in full before stockholders can receive any recovery in our restructuring. We cannot assure you that our restructuring will ultimately result in any value for

our stockholders. In the event of our liquidation, we believe that our equity would have no value. Furthermore, we cannot predict the value of any recovery to the holders of our debt. The holders of our unsecured debt will likely receive substantially less than the holders of our secured debt. All of our assets and the assets of all of our subsidiaries are pledged to secure our debt obligations under various secured debt facilities. Under applicable law, collateral for secured claims must be used first to satisfy secured claims. Our Plan which we filed with the Bankruptcy Court on March 15, 2002, provides that the holders of our public and other unsecured debt will receive 3% of the stock of the reorganized company and that the holders of equity will be eliminated entirely. The Company is continuing to negotiate certain terms and conditions of the plan of reorganization with their prepetition secured lenders and anticipates filing an amended plan of reorganization in the near term. It is anticipated that the terms and conditions of the amended plan of reorganization will differ from the terms and conditions of the plan of reorganization described above. Confirmation of the Plan, which remains subject to supplementation, modification and amendment, also remains subject to Bankruptcy Court approval and certain other conditions.

Bankruptcy Cases. Our commencement of Chapter 11 cases in the Bankruptcy Court, and other factors such as our recurring losses, raise substantial doubt as to our ability to continue as a going-concern. The financial statements contained herein have been prepared assuming that we will continue as a going-concern with the realization of assets and the settlement of liabilities and commitments in the normal course of business. However, as a result of the bankruptcy cases and circumstances relating to this event, including our leveraged financial structure and losses from operations, such realization of assets and liquidation of liabilities and the ability to complete our contracts and process them in an efficient manner is subject to significant uncertainty. In addition, our relationships with our customers and suppliers may suffer as a result of our bankruptcy. While in Chapter 11, we may sell or otherwise dispose of assets (subject to provisions of the DIP Facility and Bankruptcy Court approval), and liquidate or settle liabilities and claims, for amounts other than those reflected in the financial statements. Further, a plan of reorganization could materially change the amounts reported in the financial statements. Additionally, deadlines have been established for the assertion of pre-Filing Date claims against the Company (commonly referred to as bar dates), including contingent, unliquidated or disputed claims, which claims could result in an increase in liabilities subject to compromise as reported in the financial statements. Our ability to continue as a going-concern is contingent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the DIP Facility and the ability to generate sufficient cash flow from operations and financing arrangements to meet ongoing obligations. There can be no assurance that we will be able to confirm a plan or comply with the terms of the DIP Facility. On March 15, as discussed previously, the Company filed a plan of reorganization in the U.S. Bankruptcy Court for the District of Maryland in Baltimore for itself and twenty-two of its domestic debtor subsidiaries. On June 18 and August 2, 2002, amended versions of the Plan were filed. The Plan is subject to confirmation and Bankruptcy Court approval and requires the Debtors to have sufficient funds on hand on the effective date to comply with claim treatments as proposed in the Plan. There can be no assurance that the Company will in fact have such sufficient funds or that the Bankruptcy Court will approve the Plan.

Potential Breach of DIP Financing. The DIP Facility imposes on us operating and financial restrictions. These restrictions significantly limit or prohibit, among other things, our ability to incur additional indebtedness or create liens on our assets, pay dividends, sell assets, engage in mergers or acquisitions, or make investments. The DIP Facility also imposes certain financial covenants as well as reporting requirements and other non-financial covenants. Absent a waiver, failure to comply with any of these restrictions or covenants could result in a default under the DIP Facility. Following a default, the lenders under the DIP Facility may be able to accelerate the indebtedness and exercise certain remedies without further Bankruptcy Court

approval. There can be no assurance that the funding provided by the DIP Facility will be sufficient to satisfy our working capital needs or that we will be able to secure additional financing if needed. We may not have the funds to repay the DIP Facility debt upon acceleration, which would significantly impede our ability to remain in Chapter 11 and could force us into a liquidation. In a liquidation, holders of our public and other unsecured debt and holders of our equity would likely receive no value for their respective interests.

Posting of Bonds. Our transit services group derives a substantial portion of its revenue from contracts entered into through a competitive bid process. Many projects that are competitively bid require us to post a bond to provide the customer with insurance in the event we are unable to complete the project. Prior to the Filing Date, Travelers furnished almost all of the bonding for such projects. In May 2001, Travelers indicated that, if it were to continue furnishing payment and performance bonds in support of our projects, it would be necessary for Travelers and our lenders to enter into an Inter-creditor Agreement by August 1, 2001. No inter-creditor agreement was reached prior to the Filing Date. Under the DIP Facility, Travelers has agreed to provide up to $100 million in postpetition payment and performance bonds in support of the Company’s projects. The Company’s ability to continue to secure new business will be significantly and adversely affected absent continued bonding from Travelers or another source because a large percentage of our business (particularly in the Transit Systems Group) is dependent upon the ability to furnish such bonds to owners and general contractors.

Illiquidity of Common Stock. A liquid public market for our Common Stock does not exist, which may make it difficult for you to sell our Common Stock. Our Common Stock is traded on the NASD OTC Bulletin Board Market. There may be very limited demand for our Common Stock.

Substantial Leverage. We have a substantial amount of debt outstanding (most of which is subject to compromise), which could adversely affect our financial health. Our substantial amount of debt could have important consequences for you. For example, it could:

	•		limit our ability to obtain additional financing, if we need it, for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;

	•		increase our vulnerability to adverse economic and industry conditions;

	•		require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities or other purposes;

	•		limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

	•		place us at a competitive disadvantage compared to our competitors that have less debt.

Losses. With the exception of the year ended December 31, 1999, we have reported net losses since our inception in August 1998. Even if the reorganized company achieves its projected results, we expect to have net losses until December 31, 2002.

Lack of Combined Operating History. Our company was founded in March 1998 but conducted no operations and generated no revenue until we completed the initial public offering, or IPO, of our common stock in August 1998. We acquired 14 groups of companies concurrently

with the completion of our IPO and have acquired an additional 21 operating companies, or groups of companies, since the IPO through December 31, 2001. The integration of our operating companies, while allowing them to retain decentralized operations and management, is important to our operating and growth strategies and the achievement of efficiencies in our combined operations. We may not be able to integrate the operations or the necessary systems and procedures, including accounting and financial reporting systems and project management systems, to effectively manage the combined enterprise. Certain members of our management group have only recently joined our company and there can be no assurance that the management group will be able to implement our operating strategies. We cannot assure you that we will be able to establish, maintain or increase the profitability of the operating companies. Our financial statements include results of operations for certain operating companies when they were not under common control or management. As a result, our financial statements may not be indicative of our future results of operations. Any failure by our management group to implement our strategies, integrate the operating companies without substantial costs, delays or other operational or financial difficulties, dispose of non-strategic subsidiaries or effectively oversee the combined entity could have a material adverse effect on our business, financial condition and results of operations.

Internal Growth. Our ability to grow will be affected by various factors, including demand for rail system services and products, our success in bidding on new projects, the success of our cross-selling efforts and our ability to develop a national accounts program. Our growth may also depend on increased outsourcing by rail system operators. Many of these factors are beyond our control. Our strategies may not be successful or we may be unable to generate cash flow adequate for combined operations and to support internal growth. The senior managers of the operating companies retain responsibility for day-to-day operations. If proper business controls are not implemented and maintained, this decentralized operating strategy could result in inconsistent operating and financial practices of the operating companies, which could have a material adverse effect on our business, financial condition and results of operations.

Dependence on Certain Customers. We derived approximately 37.8% of our revenue for the year ended December 31, 2001 from our top ten customers. Approximately 17.9% of our 2001 revenue was derived from projects undertaken for the New York City Transit Authority, which we refer to as NYCTA. These projects were undertaken under a number of separate contracts. If the NYCTA were to significantly reduce the amount of business that it does with us or determine not to do business with us in the future, it would have a material adverse effect on our business, financial condition and results of operations. In addition, we rely on timely and regular payments from our customers on ordinary course business terms. The failure of our top ten customers to pay on ordinary course business terms may have a material adverse effect on our business, financial condition and results of operations.

Competition. The rail system services and products industry is highly competitive. Numerous companies provide services to transit authorities, construct and repair rail systems or sell related products or supplies, and some of these companies operate in more than one of these lines of business. Some of our competitors have greater resources than we have, may also provide a broad range of services and products, and may have sufficient bonding capacity and other resources to undertake large projects. Any inability to compete successfully against our existing and future competitors would have a material adverse effect on our business, financial condition and results of operations. Certain of our operating companies also provide electrical contracting services to non-rail industrial and commercial customers. While we believe that we currently compete effectively in the non-rail electrical contracting business, this industry is highly competitive and is served by small, owner-operated private companies, public companies and several large regional companies. Additionally, we could face competition in the future from other competitors entering our markets. The effect of us operating in Chapter 11 could also put us at a significant competitive disadvantage.

Public Sector Contracts and Funding. The rail system services and products business involves contracts that are supported by funding from federal, state and local governmental agencies, as well as contracts with such agencies, which we refer to as public sector contracts. Public sector contracts are subject to detailed regulatory requirements and public policies, as well as funding priorities. These contracts may be conditioned upon the continuing availability of public funds; the availability of public funds depends upon lengthy and complex budgetary procedures. These contracts may also be subject to significant pricing constraints. Moreover, public sector contracts may generally be terminated for reasons beyond the control of the contractor, including when such termination is in the best interests of the governmental agency. We cannot assure you that these factors or others unique to public sector contracts will not have a material adverse effect on our business, financial condition and results of operations.

Fixed Price Contracts. Fixed price contracts are typically awarded in the rail system services industry pursuant to a competitive bidding process. In compiling our bid on a particular project, we must estimate the time it will take to complete the project, along with the project’s labor and supply costs. These costs may be affected by a variety of factors, some of which may be beyond our control. If we cannot accurately predict the costs of fixed price contracts, certain projects could have lower margins than anticipated or we could suffer losses on the projects. From time to time we may incur unanticipated additional contract costs for which we seek recovery from customers. Recovery of such amounts involves various uncertainties and may require extended periods of negotiation, litigation or other costs. As a result of these uncertainties, amounts ultimately realized from these contracts may not be known for a significant period following completion of a contract, and lower contract margins or losses may result. Lower margins and losses could have a material adverse effect on our business, financial condition and results of operations.

Reliance on Subcontractors and Suppliers. When we perform a contract for transit signaling and communication systems, it may be as a subcontractor to the company that designs the systems and manufactures or purchases the necessary equipment. In other instances, we act as the prime contractor and subcontract the design of the signal or communication system and necessary equipment. When we are a prime contractor for such projects, we generally require subcontractors to post performance bonds. We may not require a subcontractor to post a performance bond in situations where (1) the subcontractor has strong experience with a specific type of project and demonstrates financial stability and (2) the customer does not require bonds from us as prime contractor. We sometimes depend upon the subcontractor to perform design and other services and provide equipment. For certain projects only a limited number of companies can perform the subcontract if the initial subcontractor defaults. As a result, we depend upon our subcontractors to perform under the subcontracts. Further, the major components of signaling and communication systems for transit authorities are manufactured to specifications and require long lead times for production. If a subcontractor or supplier defaults, or if a supplier refuses or cannot do business with us, it could have a material adverse effect on our business, financial condition and results of operations. While we have obtained authority from the Bankruptcy Court to pay prepetition claims of certain vendors and subcontractors, we have not yet paid a significant portion of such claims. The failure or inability to make these payments likely will have a material adverse effect on the business and our relationships with subcontractors and suppliers.

Unionized Workforce. As of December 31, 2001, approximately 29.0% of our employees were covered under collective bargaining agreements. Approximately 11.0% of our employees were covered under our largest collectively bargaining agreement. We cannot assure you that

future work stoppages will not affect us. In addition, labor agreements are generally negotiated on an industry-wide basis and the terms and conditions of future labor agreements could be beyond our control. We may be subject to terms and conditions in future labor agreements that could have a material adverse effect on our business, financial condition and results of operations.

Environmental and Other Government Regulation. Our operations are subject to extensive federal, state and local regulation under environmental laws and regulations. Among other things, these laws and regulations cover emissions to the air, discharges to waters and the generation, handling, storage, transportation, treatment and disposal of waste, underground and aboveground storage tanks and remediation of soil and groundwater contamination. Environmental liability can extend to previously owned or operated properties, leased properties and properties owned by third parties, as well as to properties currently owned and used by us. Environmental liabilities may also arise from claims asserted by adjacent landowners or other third parties in toxic tort litigation. We could incur significant ongoing costs associated with environmental regulatory compliance. Further, we sometimes use hazardous materials in connection with our operations. Although we believe that we materially comply with all of the various environmental regulations applicable to our business, we cannot assure you that requirements will not change in the future or that we will not incur significant costs to comply with such requirements.

In addition to safety, health and other regulations of general applicability, our operations may be significantly affected by regulations of the Surface Transportation Board, the Federal Railroad Administration, the Occupational Safety and Health Administration, state departments of transportation and other state and local regulatory agencies. Changes in regulation of the rail and transit industries through legislative, administrative, judicial or other action could have a material adverse effect on our business, financial condition and results of operations.

Dependence on Key Personnel. Our success depends to a significant extent upon the efforts and abilities of certain key senior managers at Company headquarters and at various of the Company’s operations. While we have entered into employment agreements with certain of these senior managers, we cannot be sure that such individuals will remain with us throughout the terms of their agreements, or thereafter. The loss of the services of one or more of these key employees before we are able to attract and retain qualified replacement personnel could have a material adverse effect on our business, financial condition and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk associated principally with changes in interest rates. Interest rate exposure is principally limited to the $55.3 million outstanding as of June 30, 2002 under the post petition DIP Facility and non-debtor Canadian line of credit. All of that debt is priced at interest rates that float with the market. A 50 basis point movement in the interest rate on our floating rate debt could result in an approximately $0.3 million annualized increase or decrease in interest expense and cash flows. We will from time to time enter into interest rate swaps on our debt, when we believe there is a clear financial advantage for doing so. We do not use derivative financial or commodity instruments for trading purposes and the use of such instruments is subject to strict approval levels by senior officers. Typically, the use of such derivative instruments is limited to interest rate swaps on our outstanding long-term debt. Our exposure related to such derivative instruments is, in the aggregate, not material to our financial position, results of operations and cash flows. There were no swap agreements in effect as of June 30, 2002.

PART II. — OTHER INFORMATION

Item 1. Legal Proceedings

On September 20, 2001, the Company and 22 of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (Baltimore Division). The Company is currently operating as a debtor-in-possession under the supervision of the Bankruptcy Court. The following are the material developments which have occurred since April 1, 2002:

	•		On May 9, 2002, the Company filed a motion with the Bankruptcy Court requesting authority to employ James Kimsey as President and Chief Operating Officer. Pending Bankruptcy Court consideration of this motion, Mr. Kimsey has been serving the Company in an “at-will” capacity. A hearing to consider this application presently is scheduled to take place on September 3, 2002.

	•		On June 18, 2002 and August 2, 2002, the Company filed amended versions of its plan of reorganization with the Bankruptcy Court. The Plan, as amended, contemplates full repayment of debtor-in-possession or DIP claims, satisfaction of secured claims held by certain of the Company’s pre-petition secured lenders through the issuance of a new secured note, and preferred stock and warrants, and satisfaction of the balance of claims held by the Company’s pre-petition secured lenders through the conversion of such claims into substantially all of the equity of the reorganized company. The Plan also provides that holders of the Company’s $174.0 million 11 1/2% senior subordinated notes due in 2009 and unsecured creditors that were not authorized by the Bankruptcy Court to be paid as critical vendors will, provided their Plan class votes to accept the Plan, receive 3% of the stock of the reorganized company and that the interests of the current equity holders of the Company will be eliminated. Confirmation of the Plan remains subject to Bankruptcy Court approval and certain other conditions.

	•		On August 6, 2002, the Bankruptcy Court approved the Company’s disclosure statement which provides a summary of the plan of reorganization, as well as other information to the Debtors’ businesses and reorganization cases. The Bankruptcy Court also established September 23, 2002 as the hearing date to consider approval of the Plan.

Shortly before May 9, 2002, InfraSource, Inc. (“InfraSource”) notified the Company for the first time of an alleged breach of non-compete agreements by Jim Kimsey, and repeatedly thereafter, InfraSource demanded that the Company terminate Mr. Kimsey’s employment or be prepared to defend itself against alleged claims for tortuous interference with certain contracts and for unfair competition. In response to these threats, the Company filed an adversary

proceeding in the Bankruptcy Court on June 6, 2002 seeking a declaratory judgment against InfraSource, asking the Bankruptcy Court to declare that the Company did not tortuously interfere with certain contracts or compete unfairly. InfraSource counterclaimed against the Company seeking injunctive relief and damages. In addition, on June 12, 2002, InfraSource and one of its subsidiaries filed a civil action against Mr. Kimsey in a Pennsylvania state court, seeking, among other things, to enjoin Mr. Kimsey from working for the Company and to compel Mr. Kimsey to return certain documents. Mr. Kimsey removed the civil action to federal court in Pennsylvania, after which, by agreement of the parties, the matter (now an adversary proceedings before the Bankruptcy Court) was transferred to the Bankruptcy Court. The plaintiffs then filed a motion to remand the action to Pennsylvania state court, which motion was denied by the Bankruptcy Court, as was the motion for abstention filed by InfraSource in the declaratory judgment action. Consequently, both adversary proceedings remain pending before the Bankruptcy Court and a trial in request for preliminary and permanent injunctive relief is scheduled for September 3, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a)


EXHIBIT
NUMBER	DESCRIPTION OF EXHIBITS

2.1	Disclosure Statement to Debtors’ Second Amended Joint Plan of Reorganization, dated as of August 8, 2002.	+

99.1	Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

99.2	Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

Filed herewith.

(b) Reports on Form 8-K:

A current report on Form 8-K, which included and reported “Changes in Registrant’s Certifying Accountant” under Item 4, was filed on August 6, 2002, and announced that Arthur Andersen LLP, the Company’s auditor of record, had notified the Securities and Exchange Commission that it is unable to perform future audit services for the Company and, as a result, Arthur Andersen’s relationship with the Company is effectively terminated.

A current report on Form 8-K, which included and reported “Changes in Registrant’s Certifying Accountant” under Item 4, was filed on August 13, 2002, and announced that PricewaterhouseCoopers LLP has been retained by the Company as its independent auditors and tax accountants.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: August 19, 2002

		RAILWORKS CORPORATION



		/s/ John Polatz
		John Polatz
		Chief Financial Officer

INDEX TO EXHIBITS


EXHIBIT
NUMBER	DESCRIPTION OF EXHIBITS

2.1	Disclosure Statement to Debtors’ Second Amended Joint Plan of Reorganization, dated as of August 8, 2002.	+

99.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

99.2	Certification of acting Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

Filed herewith.

RAILWORKS CORP 10-Q