-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DkppTw9IceAlGK/MzKPuGpDwB0aDoa0Bqv8qf8ri/fYflGpbM3O+Wh1E947TtLge UDHOyEc14kgtYwUnJ4ySxQ== /in/edgar/work/20000526/0000950144-00-007307/0000950144-00-007307.txt : 20000919 0000950144-00-007307.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950144-00-007307 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 20000526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABLE TELCOM HOLDING CORP CENTRAL INDEX KEY: 0000826411 STANDARD INDUSTRIAL CLASSIFICATION: [1731 ] IRS NUMBER: 650013218 STATE OF INCORPORATION: FL FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-21986 FILM NUMBER: 644881 BUSINESS ADDRESS: STREET 1: 1000 HOLCOMB WOODS PARKWAY STREET 2: SUITE 440 CITY: ROSWELL STATE: GA ZIP: 33401 BUSINESS PHONE: 7709931570 MAIL ADDRESS: STREET 1: 1601 FORUM PLACE STREET 2: STE 305 CITY: WEST PALM BEACH STATE: FL ZIP: 33401 FORMER COMPANY: FORMER CONFORMED NAME: DELTA VENTURE FUND INC DATE OF NAME CHANGE: 19890312 10-Q/A 1 ABLE TELCOM HOLDING CORP. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ________. COMMISSION FILE NUMBER 0-21986 ABLE TELCOM HOLDING CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) FLORIDA 65-0013218 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1000 HOLCOMB WOODS PARKWAY SUITE 440 ROSWELL, GEORGIA 30076 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (770) 993-1570 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) 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 [ ] As of March 11, 1999, there were 11,754,593 shares, par value $.001 per share, of the Registrant's Common Stock outstanding. ================================================================================ 2 ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES TABLE OF CONTENTS Able Telcom Holding Corp. ("Registrant" or "Company") is amending its Form 10-Q filed on March 17, 1999 to (i) include the restated financial statements for the three months ended January 31, 1999. Refer to note 2 of this amended 10-Q and note 22 of the Company's Form 10-K for the year ended October 31, 1999, for an explanation of the adjustments made to the financial statements, and (ii) include certain additional disclosures in the notes to the quarterly financial statements.
PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of January 31, 1999 (Unaudited) and October 31, 1998................................................... 3 Condensed Consolidated Statements of Operations (Unaudited) for the three months ended January 31, 1999 and 1998.................... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended January 31, 1999 and 1998.................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited)......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 19 PART II. OTHER INFORMATION Items 1, 2, 4 and 5 - Not Applicable Item 3. Defaults Upon Senior Securities........................................... 20 Item 6. Exhibits and Reports on Form 8-K.......................................... 22 SIGNATURES.................................................................................... 28
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JANUARY 31, OCTOBER 31, 1999 1998(1) ----------- ----------- ASSETS Currents Assets: Cash and cash equivalents ............................................ $ 6,670 $ 13,544 Accounts receivable, net ............................................. 84,735 64,159 Costs and profits in excess of billings on uncompleted contracts ..... 66,083 105,478 Network assets held for sale ......................................... 25,975 -- Prepaid expenses and other current assets ............................ 4,536 2,641 --------- --------- Total current assets ............................................. 187,999 185,822 Property and equipment, net ............................................ 31,603 32,074 Other assets: Goodwill, net ........................................................ 35,997 31,374 Assets held for sale ................................................. 12,775 38,750 Other non-current assets ............................................. 7,549 2,740 --------- --------- Total other assets ............................................... 56,321 72,864 --------- --------- Total assets ..................................................... $ 275,923 $ 290,760 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt .................................... $ 14,652 $ 14,438 Accounts payable and accrued liabilities.............................. 51,631 61,229 Accruals for incurred job costs....................................... 49,459 51,111 Billings in excess of costs and profits on uncompleted contracts ..... 5,587 6,328 Reserves for losses on uncompleted contracts ......................... 18,091 25,390 Notes payable shareholders/directors.................................. -- 1,182 Stock appreciation rights payable..................................... 7,230 -- --------- --------- Total current liabilities ........................................ 146,650 159,678 Long-term debt, non-current portion .................................. 60,992 61,685 Property tax payable, non-current portion............................. 16,104 15,118 Other non-current liabilities ........................................ 8,037 2,737 --------- --------- Total liabilities ................................................ 231,783 239,218 Contingencies........................................................... Convertible redeemable Series B preferred stock, $.10 par value, authorized 1,000,000 shares, 5,200 shares issued and 3,564 outstanding ......................................................... 11,233 11,325 Shareholders' Equity: Common stock, $.001 par value, authorized 25,000,000 shares; 11,694,088 and 11,065,670 shares issued and outstanding, respectively ........................................................ 11 11 Additional paid-in capital .......................................... 36,842 35,164 Senior Subordinated Note Warrants ................................... 1,244 1,244 Series B Preferred Stock Warrants.................................... 5,400 5,400 WorldCom Stock Options .............................................. -- 3,490 WorldCom Phantom Stock .............................................. 606 606 Retained earnings (deficit) ......................................... (11,196) (5,698) --------- --------- Total shareholders' equity .......................................... 32,907 40,217 --------- --------- Total liabilities and shareholders' equity ....................... $ 275,923 $ 290,760 ========= =========
- ---------- 1. The balance sheet at October 31, 1998 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 4 ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED JANUARY 31, --------------------- 1999 1998 -------- -------- Revenues ........................................ $ 93,080 $ 22,268 Costs and expenses: Costs of revenues ............................. 78,097 18,996 General and administrative .................... 9,686 3,196 Depreciation and amortization ................. 2,776 1,240 -------- -------- Total costs and expenses .................... 90,559 23,432 -------- -------- Income (loss) from operations ................... 2,521 (1,164) Other expense, net: Interest expense (2,478) (276) Change in value of stock appreciation rights (5,334) -- Other (3) 102 -------- -------- Income (loss) before income taxes and minority interest ............................. (5,294) (1,338) Provision (benefit) for income taxes ............ (50) (522) -------- -------- Income (loss) before minority interest .......... (5,244) (816) Minority interest ............................... (74) (111) -------- -------- Net income (loss) ............................... (5,318) (927) Preferred stock dividends ....................... 180 49 Beneficial conversion privilege of preferred stock ........................................ -- 105 -------- -------- Income (loss) applicable to common stock ........ $ (5,498) $ (1,081) ======== ======== Income (loss) per common share: Basic ......................................... $ (.47) $ (.12) ======== ======== Diluted ....................................... $ (.47) $ (.12) ======== ========
See notes to condensed consolidated financial statements 4 5 ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
FOR THE THREE MONTHS JANUARY 31, -------------------------------- 1999 1998 -------- -------- Cash used in operating activities .......................... $ (5,900) $ (514) Investing Activities: Capital expenditures, net ................................ (291) (3,076) -------- -------- Net cash used in investing activities .................... (291) (3,076) -------- -------- Financing Activities: Repayments of long-term debt and other borrowings ........ (478) (7,817) Proceeds from the issuance of long-term debt and other borrowings ................................... -- 10,419 Net proceeds from (costs of) preferred stock offering .... (92) (949) Proceeds from the exercise of stock options .............. 82 63 Dividends paid on preferred stock ........................ (262) (50) Distributions to minority interests ...................... (28) (160) Foreign currency translation adjustment................... (42) -- Other .................................................... 137 (174) -------- -------- Net cash provided by (used in) financing activities .... (683) 1,332 -------- -------- (Decrease) in cash and cash equivalents .................... (6,874) (2,258) Cash and cash equivalents, beginning of period ............. 13,544 6,230 -------- -------- Cash and cash equivalents, end of period ................... $ 6,670 $ 3,972 ======== ======== Supplemental Disclosure: Valuation of stock appreciation rights...................... $ (5,334) $ --
See notes to condensed consolidated financial statements. 5 6 ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. OPERATION AND BASIS OF PRESENTATION Able Telcom Holding Corp. and Subsidiaries ("Able Telcom" or the "Company") develops, builds and maintains communications systems for companies and governmental authorities. The Company is headquartered in West Palm Beach, Florida, and operates its subsidiaries throughout the United States, as well as in South America. The Company is organized in the following groups:
ORGANIZATIONAL GROUP SERVICES PROVIDED - -------------------- ----------------- Network Services Group Design, development, engineering, installation, construction, operation and maintenance services for telecommunications systems Transportation Services Group Design, development, integration, installation, construction, project management, maintenance and operation of automated toll collection systems, electronic traffic management and control systems, and computerized manufacturing systems Communications Development Group Design, installation and maintenance (Latin America) services to foreign telephone companies
Each group is comprised of subsidiaries of the Company with each having local executive management functioning under a decentralized operating environment. The Company's customers include local and long distance telephone companies, utilities, cable television operators, financial institutions, universities, medical facilities, correctional facilities and local, state and federal governments. 6 7 1. OPERATION AND BASIS OF PRESENTATION-(CONTINUED) In the opinion of management, the unaudited condensed consolidated financial statements furnished herein include all adjustments, consisting of only recurring adjustments necessary for a fair presentation of the results of operations for the interim periods presented. These interim results of operations are not necessarily indicative of results for the entire year. The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes contained in the Company's 1998 Annual Report on Form 10-K/A ("Form 10-K/A"). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. Certain items in the condensed consolidated financial statements as of October 31, 1998 have been reclassified to conform with the current presentation. 2. QUARTERLY FINANCIAL DATA The quarterly unaudited amounts for the three months ended January 31, 1999, have been adjusted from amounts previously reported by the Company in its quarterly filings with the Securities and Exchange Commission. The adjustments relate to accounting errors discovered subsequent to October 31, 1999. Their nature and effects on the results of operations for the quarterly period ended January 31, 1999, are summarized below (in thousands, except per share data):
As Reported Adjustments Adjusted - ------------------------------------------------------------------------------------------------------------ Revenues $91,777 $ 1,303 $93,080 Operating income (loss) 5,363 (2,842) 2,521 Net income (loss) (581) (4,737) (5,318) Income (loss) applicable to common stock (761) (4,737) (5,498) Income (loss) applicable to common stock per share (0.06) (0.41) (0.47)
Net Loss Applicable to Net Loss Common Stock - ------------------------------------------------------------------------------------------------------------ Amounts previously reported $ (581) $ (761) Adjustments: WorldCom SAR obligation (1) (1,906) (1,906) Improperly deferred costs (2) (763) (763) Costs improperly charged against reserves (3) (132) (132) Prior year accrual adjustment (4) (957) (957) Tax effects of all adjustments (118) (118) Other adjustments (5) (625) (625) Long-term service contracts adjustments (6) (236) (236) - ------------------------------------------------------------------------------------------------------------ Total adjustments (4,737) (4,737) - ------------------------------------------------------------------------------------------------------------ Restated amounts $(5,318) $(5,498) - ------------------------------------------------------------------------------------------------------------
(1) The obligation under the WorldCom SARs was calculated using a Black-Scholes option-pricing model. The obligation should have been accounted for at "intrinsic value" determined as the difference between the closing price of the Company's common stock on the balance sheet date and the strike price of $7.00. (2) The Company deferred certain costs relating to its operation of the Violation Processing Center for the New Jersey Consortium that should have been expensed as incurred. (3) Indirect costs were not consistently allocated to Transportation Services Group jobs. In addition, costs were charged against reserves for Loss Jobs that were not related to those jobs. (4) A prior year consolidating adjustment to reduce accrued expenses was inappropriately not reversed in the preparation of the 1999 consolidations. (5) Other adjustments made as a result of the year-end audit affected the previously reported quarterly amounts as shown. (6) These adjustments recognize losses on long-term service contracts as incurred as discussed more fully in the following paragraph. LONG-TERM SERVICE CONTRACTS During the three months ended July 31, 1999, an accrual of $8.4 million was made with an offsetting increase to goodwill for projected losses on long-term service contracts assumed as part of the acquisition of MFSNT for operation and maintenance of fiber networks. The contracts extend for fifteen to twenty years. Performance under these agreements, which were predominately executed in 1996 and 1997, began during fiscal 1999. The Company subsequently determined that the costs to perform under these contracts are expected to be greater than amounts presently expected to be billable to network users under firm contractual commitments. The appropriate accounting treatment for long-term service contracts of this nature is not clearly defined, particularly when the contracts have been assumed as part of a purchase business combination. However, based on the Company's ongoing discussions with the SEC, the Company believes the SEC does not believe accruals for future losses on these types of long-term service obligations are appropriate. The Company has also subsequently determined that the appropriate accounting for these obligations is to record any such losses in the periods in which the losses are incurred. The Company has restated its quarterly results for the first, second and third quarters of 1999 to reflect these losses as incurred and to reverse the additional $8.4 million accrued for these obligations. In March 2000, the SEC informed the Company that it would not object to the conclusion that such revised accounting is appropriate under generally accepted accounting principles. 7 8 3. ACQUISITION On July 2, 1998, the Company acquired the network construction and transportation systems business of ("MFSNT") from WorldCom, Inc. ("WorldCom") pursuant to a merger agreement dated April 26, 1998 ("Plan of Merger"). On September 9, 1998, the Company and WorldCom finalized the terms of the Plan of Merger through the execution of an amended agreement. The acquisition of MFSNT was accounted for using the purchase method of accounting at a total price of approximately $67.5 million. The allocation of purchase price to identifiable assets and liabilities acquired is based upon preliminary estimates. The Company is in the process of obtaining additional information necessary to finalize the allocation of purchase price. The effect of the final allocation on previously reported amounts is not expected to be significant. In conjunction with the acquisition of MFSNT, the Company granted an option to WorldCom (the "WorldCom Option") to purchase up to 2,000,000 shares of the Company's common stock, at an exercise price of $7.00 per share, but subject to a 1,817,941 share maximum limitation, and the right to receive upon satisfaction of certain conditions phantom stock awards (the "Phantom Stock Awards") equivalent to 600,000 shares of common stock, payable in cash, stock, or a combination of both at the Company's option. The WorldCom Phantom Stock Awards are exercisable only on the following three days: July 2, 1999, July 2, 2000, or July 2, 2001. WorldCom will be entitled to receive any appreciation of the Common Stock over a base price of $5 3/32 per share, but in no event shall the maximum payment exceed $25.00 per share. The fair values of the WorldCom Option and Phantom Stock Awards were estimated at the date of grant at $3.5 million and $0.6 million, respectively, and are included as a component of the total consideration paid for the acquisition of MFSNT. On January 8, 1999, the Company and WorldCom agreed to convert the WorldCom Option to stock appreciation rights with similar terms and provisions, except that the stock appreciation rights provide for the payment of cash to WorldCom based upon the appreciation of the Company's common stock over a base price of $7.00 per share. The stock appreciation rights may revert back to the WorldCom Option if certain shareholder approvals are received. In connection with the establishment of the stock appreciation rights liability as of January 8, 1999, the intrinsic value was estimated to be approximately $1.9 million as compared to the previously estimated fair value of the option of $3.5 million. The difference of $1.6 million represents a reduction of paid-in capital. In addition, as of January 31, 1999, the intrinsic value of the stock appreciation rights liability has been estimated to be $7.2 million and a charge to income of $5.3 million has been reflected as a change in value of stock appreciation rights in the accompanying condensed consolidated statement of operations. 4. ASSUMPTION OF COMSAT CONTRACTS On February 25, 1998, Georgia Electric Company ("GEC") assumed obligations to complete 12 contracts (the 'COMSAT Contracts') with the Texas Department of Transportation from CRSI Acquisition, Inc., a subsidiary of COMSAT Corporation ("COMSAT"). The COMSAT Contracts were for the installation of intelligent traffic management systems and the design and construction of wireless communication networks. In exchange for assuming the obligations to perform under the COMSAT Contracts, GEC received consideration from COMSAT of approximately $15.0 million and assumed existing payables of approximately $2.6 million. On February 25, 1998, the date when GEC assumed the COMSAT contracts, the remaining amounts billable to the customers for these contracts totaled $17.0 million. The estimated costs to complete these contracts for COMSAT was from $17.0 million to $27.3 million. GEC made the following entry to reflect the assumption of the COMSAT contracts (amounts in thousands): Consideration received: Cash $ 4,663 Accounts receivable 3,754 Equipment and other assets 6,548 - ----------------------------------------------------------------------------------------------- Subtotal 14,965 Accounts payable assumed (2,549) - ----------------------------------------------------------------------------------------------- Deferred revenue (net amount received from COMSAT to complete the contracts) $(12,416) - ----------------------------------------------------------------------------------------------- The following is a summary of revenues and costs associated with the COMSAT contracts for the three months ended January 31, 1999 (amounts in thousands): Billings on the COMSAT contracts (1) $ 2,305 Deferred revenue recognized 1,499 - ----------------------------------------------------------------------------------------------- 3,804 Direct contract costs 3,067 - ----------------------------------------------------------------------------------------------- Gross margin from COMSAT contracts $ 737 - -----------------------------------------------------------------------------------------------
(1) Billings on the COMSAT contracts include approved change order revenues associated with these contracts but not anticipated when GEC assumed such contracts. The revenues, cost of revenues and gross margins are non-recurring and are not generally indicative of returns the Company expects to achieve on future contracts. 8 9 5. NETWORK ASSETS HELD FOR SALE: Assets held for sale at October 31, 1998 (included in non-current other assets) and January 31, 1999 includes approximately $26.0 million of certain fiber optic conduit that was constructed by MFSNT prior to the MFSNT Acquisition (the "NYSTA Network). A portion (approximately 528 miles) of the NYSTA Network, was constructed on rights of way obtained from the New York State Thruway Authority (i.e., "NYSTA"). This portion of the network is referred to as the "On-NYSTA network." Separately, MFSNT was granted use of the right of way from others for a contiguous network (the "Off-NYSTA" network) that connects the "On-NYSTA" network to Cleveland, Ohio. MFSNT owned or owns the conduit and equipment shelters installed in both portions of the network. The conduit network was substantially complete and sold at the date of acquisition in July 1998. As the system was constructed, the costs had been initially deferred as "inventory" because it was MFSNT's intention to sell undivided interests (indefeasible rights of use, or "IRU's") in the owned ducts and shelters to other users. The fiber and electronics for the network are generally owned by the users, although the Company retained rights to a limited amount of excess capacity for some minor segments of the network. The right of way for the On-NYSTA portion of the network is owned by NYSTA (see revenue sharing with NYSTA below). Title to the On-NYSTA portion of the network will transfer to NYSTA after twenty years. The Company is not in the telephone or data distribution business, so no part of the networks have been viewed as the construction of productive assets for their own use. The construction accounting was implemented with respect to the NYSTA Network as follows: - -- Total construction costs were estimated and accumulated in the job cost ledgers as incurred. Costs incurred were effectively charged to cost of construction and maintenance or left on the balance sheet as "costs and profits in excess of billings on uncompleted contracts" based on signed contracts from users. - -- The approach treated each new contract signed as a sale of partially completed "inventory." Some of the revenue would be recognized on signing based on the calculated percentage complete and a proportionate part of the "inventory" costs would be charged off. In this way, revenues from each new contract were effectively recognized on a progress to completion basis. - -- When it became apparent that total revenues to be received from sale of the inventory, as well as profits from separate installation agreements with the users, would be less than the costs to construct the conduit network, an estimated loss expected to be incurred to complete the project was accrued. As owner of the right of way, NYSTA shares in user fees from the "On-NYSTA" system. The arrangement entitled MFSNT to retain 100% of user fees up to approximately $50.7 million. Then, NYSTA was entitled to 10% of user fees until MFSNT had received and retained, as cost recovery, approximately $95.5 million (i.e., from cumulative user fees of approximately $101.3 million); thereafter, NYSTA is entitled to 50% of user fees and 20% of revenues received by MFSNT for performance under operation and maintenance ("O&M") contracts with the users. The O&M contracts provide for installment payments to MFSNT, generally over twenty years, to offset costs of providing this service. As part of the agreement, MFSNT also installed and maintains for NYSTA, free of charge, a 16-strand fiber optic communications network within the conduit system owned by MFSNT for the sole use of NYSTA. At the date of acquisition of MFSNT by the Company, negotiations were in process with a telecommunications company for purchase of nearly all of the remaining network capacity. In purchase accounting, the Company applied a similar conceptual "inventory" approach to the valuation of this asset. It was estimated that the user would pay a one-time, up-front fee of $34.5 million for the IRU's with respect to both the On-NYSTA and Off-NYSTA portions of the network. Of that amount it was estimated that approximately $8.5 million would be payable to NYSTA based on the revenue sharing arrangement. Consequently, the Company allocated $26.0 million of the purchase price to this asset. The agreement with NYSTA also provides for sharing of "profits" experienced by MFSNT in excess of certain specified percentages of related costs with respect to fiber and equipment installation contracts for the "On-NYSTA" system separately entered into by MFSNT with the users. Disputes have arisen between MFSNT and NYSTA with respect to sharing of revenues from a specific installation contract. With only two exceptions, user fees were paid in their entirety at or shortly after the time of execution of the user agreements. However, two of the user agreements provide for the fees to be paid in installments over twenty years. MFSNT had included these amounts in unbilled receivables (costs and profits in excess of billings) at their gross, undiscounted future amounts. Consequently, an adjustment was recorded by the Company to reallocate the purchase price to recognize a discount on these long-term receivables. The discounted (at 10%) present value of these long-term receivables was approximately $3.8 million at January 31, 1999. Interest income from amortization of the discount was less than $0.1 million for the quarter ended January 31, 1999. While MFSNT and the Company have sold IRU's that constitute a significant portion of usable value of the network, MFSNT is still the legal owner and responsible for property taxes assessed on the network. Ownership of the On-NYSTA portion of the network automatically transfers to NYSTA after twenty years. Consistent with the concept of having sold the network, MFSNT accrued and expensed, prior to the acquisition, the estimated present value of future property taxes that would be payable over the twenty-year term of the agreements. The Company recorded this liability in purchase accounting at approximately $15.0 million, using a discount rate of 15%. Amortization of the discount is included in interest expense and amounted to approximately $0.6 million for the quarter ended January 31, 1999. Prospective Accounting for Sales of IRU's: FIN 43 broadens the definition of real estate and will likely require that some or all elements of fiber optic networks (e.g., right-of-way and conduit) must now be defined as real estate and revenue recognition criteria for the sale or lease of IRU's will be provided by SFAS No. 66, "Accounting for Sales of Real Estate." SFAS 66 is a different accounting model and is likely to result in the deferral and amortization of both costs and revenues related to network assets that would have previously been accounted for as described above. Among other requirements, SFAS 66 requires title to transfer to the buyer for up-front revenue recognition to be appropriate. FIN 43 is effective for all sales of real estate with property improvements or integral equipment entered into after June 30, 1999. Consequently, none of the transactions entered into by MFSNT prior to July 2, 1998, or any conduit sales closed by the Company before July 1999 are subject to those provisions. However, for transactions subsequent to June 30, 1999, the Company will be required to apply the guidance of FIN 43. Much of the conceptual basis for the IRU accounting historically followed by MFSNT is that the arrangements for use of the conduit qualify for revenue recognition as sales-type leases under SFAS No. 13. No part of the transaction was viewed as a "real-estate" transaction, so the legal transfer of title to the "leased" assets was not considered determinative as to whether or not the transactions could be recorded as sales versus operating leases. 9 10 6. INVESTMENT IN KANAS (HELD FOR SALE - OTHER ASSETS) An equity interest in Kanas was acquired in the MFSNT Acquisition, and has been held for sale since that time. The original carrying value of the Company's interest in Kanas, which was assigned in purchase accounting, represents the net proceeds originally expected to be received from the sale of Kanas stock and was based, in part, on active negotiations with potential buyers. The Company is a 25% owner of Kanas, with the remaining 75 percent owned by native corporations of Alaska. Kanas was established by its shareholders with a $100,000 total equity contribution ($25,000 per shareholder) to construct a telecommunications network along the Alaskan Pipeline system between Prudhoe Bay, Alaska and Valdez, Alaska (the "Alyeska Network"). MFSNT had been contracted by Kanas to build the fiber optic network which cost in excess of $83.0 million and was funded by Kanas through a credit agreement that is guaranteed by WorldCom. Kanas owns and is responsible for maintaining the Alyeska Network. While the Company does not participate in the day-to-day management of Kanas, Kanas had contracted with MFSNT to operate and maintain the Alyeska Network for 15 years. The term of the Kanas O&M agreement began in December 1998. Through January 31, 1999, service contract revenues have been insufficient to cover costs of performance and are not projected to be sufficient to do so for at least the foreseeable future. As of January 31, 1999, the unaudited financial statements of Kanas reflected total assets, liabilities and net deficit of $88.2 million, $89.2 million and $1.0 million, respectively. The January 31, 1999, deficit includes $1.9 million of network depreciation. At the date of the acquisition of MFSNT, the Company anticipated a near-term sale of its interest in Kanas. Accordingly, the estimated amount expected to be realized on sale was allocated to this investment in purchase accounting and, in accordance with the guidance of EITF Issue 87-11, "Allocation of Purchase Price to Assets to be Sold," the equity method of accounting was not employed. The anticipated final acceptance of the network by Alyeska has yet to occur and the timing of any sale of this interest by the Company is uncertain. WorldCom was and continues to be the guarantor of the payment obligations of Kanas under its credit agreement. In conjunction with the acquisition of MFSNT, the Company has agreed to indemnify WorldCom under its guarantee. The aggregate commitment of the lenders under the Kanas credit agreement at January 31, 1999 was approximately $83.4 million. 10 11 7. GOODWILL Goodwill represents the amount by which the purchase price of businesses acquired exceeds the fair value of the net assets acquired under the purchase method of accounting. Goodwill is being amortized on a straight-line basis over 20 years. A rollforward of goodwill from October 31, 1998, is as follows (amounts in thousands): Net goodwill, at October 31, 1998 $31,374 MFSNT (1) 5,042 Amortization (419) - ------------------------------------------------------------- Net goodwill, at January 31, 1999 35,997 - -------------------------------------------------------------
Adjustments made to goodwill during the quarter ended January 31, 1999, related to: (1) Goodwill was increased by approximately $5.0 million for adjustments to the MFSNT purchase price allocation. 8. RESERVES FOR LOSSES ON UNCOMPLETED CONTRACTS The following is a summary of the reserves for losses on uncompleted contracts (amounts in thousands):
Network Services Group Transportation Services Group Total - --------------------------------------------------------------------------------------------------------------- Balance, October 31, 1998 $ 8,029 $17,361 $25,390 Amount utilized (1,231) (6,068) (7,299) - --------------------------------------------------------------------------------------------------------------- Balance, January 31, 1999 $ 6,798 $11,293 $18,091 - ---------------------------------------------------------------------------------------------------------------
9. BORROWINGS During the three months ended January 31, 1999, the Company was in violation of the payment terms of its $10.0 million principal amount 12 percent Senior Subordinated Notes (the "Senior Notes"). These Senior Notes were purchased from the holders effective February 17, 1999. Refer to Note 13, "Subsequent Events." On June 11, 1998, and amended on June 30, 1998, the Company obtained a $35.0 million three-year senior secured revolving credit facility ("Credit Facility"). The Credit Facility contains certain financial covenants which require, among other conditions, that the Company maintain certain minimum ratios, as well as limitations on total debt. In connection with the senior secured revolving credit facility, the company is currently in compliance with the provisions of such agreement and anticipates continuing compliance therewith. If compliance is not maintained, reported current liabilities would be increased by $35 million. 11 12 10. CONTINGENCIES LITIGATION On May 21, 1998, SIRIT Technologies, Inc. ("SIRIT") filed a lawsuit in the United States District Court for the Southern District of Florida, against the Company and Thomas M. Davidson, who has since become a member of the Company's Board of Directors. SIRIT asserts claims against the Company for tortuous interference, fraudulent inducement, negligent misrepresentation and breach of contract in connection with the Company's agreement to purchase the shares of MFSNT and seeks injunction relief and compensatory damages in excess of $100.0 million. On September 10, 1998, Shipping Financial Services Corp. ("SFSC") filed a lawsuit in the United States District Court for the Southern District of Florida against the Company, and certain of its officers. SFSC asserts claims under the federal securities laws against the Company and four of its officers that the defendants allegedly caused the Company to falsely represent and mislead the public with respect to two acquisitions, COMSAT and MFSNT, and the ongoing financial condition of the Company as a result of the acquisitions and the related financing of those acquisitions. SFSC seeks certification as a class action on behalf of itself and all others similarly situated and seeks unspecified damages and attorneys' fees. The Company is subject to a number of shareholder and other lawsuits and claims for various amounts which arise out of the normal course of its business. The Company intends to vigorously defend itself in these matters. The disposition of all pending lawsuits and claims is not determinable and may have a material adverse effect on the Company's financial position. KANAS GUARANTY AGREEMENT In conjunction with the acquisition of MFSNT, the Company has agreed to indemnify WorldCom with respect to WorldCom's guarantee of the payment obligations of Kanas under its credit agreement. The aggregate commitment of the lenders under this agreement is $83.4 million, and the purpose of the Kanas Credit Agreement is to provide the funds necessary to complete the Alyeska Project. CONTRACTS The Company has and will continue to execute various construction and other contracts which may require the Company to, among other items, maintain specific financial parameters, meet specific milestones and post adequate collateral generally in the form of performance bonds. Failure by the Company to meet its obligation under these contracts may result in the loss of the contract and subject the Company to litigation and various claims, including liquidated damages. 11. SERIES B PREFERRED STOCK During the three months ended January 31, 1999, the Company was in technical violation of certain provisions of its Series B Preferred Convertible Stock ("Series B Preferred Stock") issued in June 1998. Such default resulted from the Company's failure to have a registration statement registering the common stock underlying the Series B Preferred Stock and certain related warrants declared effective by December 27, 1998. Such default gave the holders of the Series B Preferred Stock the option to require the Company to redeem their securities at premium prices. During the quarter ended January 31, 1999, the holders of the Series B Preferred Stock notified the Company of their intent to exercise such redemption right; however, such notice has been withdrawn. In February 1999, approximately 78 percent of the Series B Preferred Stock was purchased from the original holders and, in connection with such purchase, the Company was given until May 18, 1999 to effect the registration described above. Refer to Note 13, "Subsequent Events." 12 13 12. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted per share computation as required by SFAS No. 128, EARNINGS PER SHARE (dollars, in thousands):
FOR THE THREE MONTHS ENDED JANUARY 31, -------------------------------------- 1999 1998 ----------- ----------- Basic: Loss applicable to common stockholders (numerator) ................................ $ (5,498) $ (1,081) Weighted-average number of common shares (denominator)(1)............................. 11,694,088 8,759,300 (Loss) per common share ....................... $ (.47) $ (.12) Diluted: (Loss) applicable to common stockholders (numerator) ................................ $ (5,498) $ (1,081) Weighted-average number of common shares (denominator) ............................... 11,694,088 8,759,300 Common stock equivalents arising from stock options, warrants and convertible preferred stock ....................................... 2,809,081 66,062 Total shares (denominator) .................... 14,503,169 8,825,362 Loss per common share-diluted (2) ............. $ (.47) $ (.12)
- ------------ (1) Amount includes 628,418 shares issuable as contingent consideration related to the acquisition of Georgia Electric Company. (2) The effect of securities that could dilute basic earnings per share are antidilutive for all periods presented, therefore, basic and diluted earnings per share are equivalent. The Company has potentially dilutive securities that could have a dilutive effect in the future. Those securities include warrants related to the Series A Preferred Stock, Series B Preferred Stock, stock options, warrants and phantom stock awards. 13. SUBSEQUENT EVENTS The following transactions were effected in February 1999 to resolve defaults by the Company with respect to the Senior Subordinated Notes and the Series B Preferred Stock. WORLDCOM ADVANCE In February 1999, WorldCom advanced the Company $32.0 million ("WorldCom Advance") as an advance against amounts otherwise payable by WorldCom to the Company pursuant to the WorldCom Master Services Agreement. As amended, the WorldCom Advance bears no interest and is subordinate to the New Credit Facility. Payments under the WorldCom Advance were further subordinated to liabilities associated with certain construction projects that are expected to be completed during fiscal 2001. The WorldCom Advance agreement also provides for additional advances to the Company through November 30, 1999, of up to $15.0 million against amounts otherwise payable pursuant to the WorldCom Master Services Agreement. These additional advances are non-interest bearing and, subject to the subordination agreements described above, include a stated date for repayment to WorldCom of November 30, 2000. To date, the Company has not received any additional advances against the $15.0 million available. REPURCHASE OF SENIOR SUBORDINATED NOTES In February 1999, the Company repurchased the Senior Subordinated Notes for approximately $11.5 million using part of the proceeds from the WorldCom Advance. The purchase of Senior Subordinated Notes resulted in an extraordinary loss on the early extinguishment of debt of approximately $3.1 million, recognized during the second quarter of fiscal 1999. PURCHASE OF SERIES B PREFERRED STOCK The WorldCom Advance was also used to purchase 2,785 shares (approximately 78%) of the Series B Preferred Stock from the original holders for $18.9 million. The transaction was treated as a repurchase of the shares and the related beneficial conversion feature. The excess of the amount paid over the carrying value of the preferred stock and the intrinsic value of the beneficial conversion privilege was recognized as an additional loss applicable to common stock of approximately $4.5 million during the second quarter of fiscal 1999. The holders of the remaining Series B shares agreed to either waive all outstanding defaults or refrain from exercising any remedies with respect to any such defaults until May 18, 1999. During such period of time, the Company agreed to use its best efforts to have a registration statement declared effective. The Company also agreed to a modification of the conversion price with respect to the remaining 779 shares of Series B Preferred Stock. The conversion price was changed to a fixed amount of approximately $3.50 per share, to be further reduced by 1.5 percent per month until a registration statement was declared effective. The modification of the conversion price of the remaining 779 shares of Series B Preferred Stock resulted in a charge to income applicable to common stock of approximately $6.4 million in the second quarter of fiscal 1999. The Company also agreed to certain modifications in the conversion price of the Series B Preferred Stock Warrants. The conversion price of warrants to purchase 370,000 shares of the Company's common stock was reduced to $13.25 per share and the conversion price of warrants to purchase 630,000 shares of the Company's common stock was reduced to $13.50 per share. The modification of the conversion prices of the Series B Preferred Stock Warrants resulted in a charge to income applicable to common stock of approximately $1.9 million in the second quarter of fiscal 1999. The charge was determined based on valuation of the Warrants immediately before the modification and immediately after the modification using a Black Scholes pricing model. PRO FORMA EFFECT ON SHAREHOLDERS' EQUITY Had the above transactions occurred during the three months ended January 31, 1999 shareholders' equity at that date would have been as follows:
AS REPORTED PRO FORMA ----------- --------- Common stock............. $ 11 $ 11 Paid-in capital.......... 36,842 37,766 Senior warrants.......... 1,244 1,244 Series B Preferred Stock Warrants................ 5,400 7,294 WorldCom phantom stock... 606 606 Retained earnings (deficit)............... (11,196) (27,083) ------- -------- $32,907 $ 19,838 ======= ========
13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis relates to the financial condition and results of operations of the Company for the three months ended January 31, 1999 and 1998. This information should be read in conjunction with the Company's condensed consolidated financial statements appearing elsewhere in this document. Except for historical information contained herein, the matters discussed below contain forward looking statements that involve risk and uncertainties, including but not limited to economic, governmental and technological factors affecting the Company's operations, markets and profitability. As a result of three acquisitions during the fiscal year ended October 31, 1998, primarily the acquisition of MFS Network Technologies Inc. ("MFSNT"), material changes exist in substantially all balance sheet and statements of operations categories. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected elements of the Company's condensed statements of operations as a percentage of its revenues:
FOR THE THREE MONTHS ENDED JANUARY 31, -------------------------------------- 1999 1998 ---- ---- Revenues 100.0% 100.0% Cost of revenues 83.9% 85.3% General and administrative expenses 10.4% 14.4% Depreciation and amortization 3.0% 5.6% Income (loss) from operations 2.7% (5.3)% Other expense, net 8.4% 1.1% Net income (loss) (5.7)% (4.2)%
14 15 REVENUES: For the quarter ended January 31, 1999, revenues increased $70.8 million over the same period in the prior year from $22.3 million to $93.1 million. These increases in revenue are due primarily to growth of the Company's operations through the acquisition of MFSNT in the third quarter of fiscal 1998, the acquisition of certain contracts from COMSAT RSI JEFA Wireless Systems ("COMSAT") and the acquisition of Patton Management Corporation ("Patton") in the second quarter of fiscal 1998, as well as increased demands for services in the traffic management and telecommunications industry. For the three months ended January 31, 1999, MFSNT generated revenues of $60.2 million. COST OF REVENUES: As a percentage of revenues, cost of revenues decreased from 85.3% to 83.9% for the three months ended January 31, 1999, compared to the same period in the prior year. The decreases are due to increased revenues related to the acquisitions of MFSNT and COMSAT resulting in slightly higher margins. For the three months ended January 31, 1999, MFSNT represented 65 percent of the Company's cost of revenues. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased $6.5 million, from $3.2 million to $9.7 million, for the three months ended January 31, 1999 compared to the same period in the previous year. These increases are primarily due to the overall increase in the management structure to support the Company's increased revenues. For the three months ended January 31, 1999, general and administrative expense attributable to MFSNT was $3.9 million. DEPRECIATION AND AMORTIZATION: As a percentage of revenues, depreciation and amortization expense decreased from 5.6% to 3.0% for the three months ended January 31, 1999 as compared to the same period in the prior year. This decrease, as a percentage of revenue, is due to the significant increase in revenues which did not require the same percentage increase in capital assets to support the operations of the Company. For the three months ended January 31, 1999, MFSNT represented 14 percent of the Company's depreciation and amortization expense. INCOME (LOSS) FROM OPERATIONS: For the quarter ended January 31, 1999 income from operations for the Company was $2.5 million compared to loss of $(1.2) million in the quarter ended January 31, 1998. OTHER EXPENSE NET: Other expense, net increased by $8.0 million to $7.8 million for the three month period ended January 31, 1999 as compared to other income, net of $0.2 million for the comparable period in 1998. This increase is due to increased interest cost relating to the acquisition of MFSNT and the Senior Notes issued in January 1998 in the amount of $2.5 million and changes in value of stock appreciation rights (SAR's) in connection with the purchase of MFSNT in the amount of $5.3 million. The SAR's are not exercisable until the earlier of June 1, 1999 or one business day after the date upon which the potential issuance of Common Stock under the MFSNT purchase agreement is voted upon by the shareholders of Able. The amount reflected as the charge to the statement of operations is based on a determination of the change in the intrinsic value of the SAR's during the quarter. This value will be increased or decreased based on the intrinsic value of the SAR's utilizing the price of the Company's stock at each reporting date until the stock appreciation rights are converted to options or exercised by the holder. NET INCOME (LOSS): Net loss for the three months ended January 31, 1999 increased $(4.4) million from $(0.9) million in 1998 to $(5.3) million in 1999 for the reasons described above. INCOME (LOSS) APPLICABLE TO COMMON STOCK: Loss applicable to common stock was $(5.5) million for the three months ending January 31, 1999 as compared to $(1.1) million for the three months ended January 31, 1998, respectively. On a diluted basis, income per share was $(.47) per share for the three months ended January 31, 1999 as compared to $(.12) per share for the same period in 1998. 15 16 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $6.7 million at January 31, 1999 compared to $13.5 million at October 31, 1998. Cash used in operating activities of $(5.9) million during the three months ended January 31, 1999, is due primarily to a net loss of $5.3 million, increases in accounts receivable of $20.6 million, decreases in accounts payable and accrued liabilities of $9.6 million and $7.3 million in reserves for losses on uncompleted contracts, offset by decreases in costs and profits in excess of billings on uncompleted contracts of $28.8 million, depreciation of $2.8 million and changes in the value of stock appreciation rights of $5.3 million. Cash used in investing activities of $(0.3) million is due to net capital expenditures required to support increased operations and replacement of existing equipment. Cash used in financing activities of approximately $(0.7) million is due primarily to net repayments of long term debt and other borrowings, dividends paid on preferred stock and proceeds from the issuance of stock options. In February 1999, WorldCom advanced the Company $32.0 million for the purposes of arranging the purchase of 2,785 shares, or approximately 78 percent of the Series B Preferred Stock and the purchase of the outstanding $10.0 million of Senior Notes. This advance is due the earlier of (i) October 31, 2000 or (ii) the dates of redemption and/or conversion of the Series B Preferred Stock or the Senior Notes. WorldCom has also agreed to make available additional advances to the Company of up to $15.0 million against amounts otherwise payable pursuant to the WorldCom Master Services Agreement, which, if advanced, would be due on October 31, 2000. At the date of this filing, the Company has obtained all necessary waivers which cover various defaults under the Company's financing and preferred stock agreements. 16 17 The Company believes that is has available cash from operations, as well as from the additional advance available from WorldCom described above, sufficient to meet the Company's operating and capital requirements for the next twelve months. Nonetheless, pursuant to the terms of the documents relating to the Series B Preferred Stock, under certain circumstances, including without limitation, if the registration statement that includes the shares of common stock underlying the Series B Securities is not declared effective on or before May 18, 1999, the Company is delisted under certain circumstances from any securities exchange, or any representation or warranty by the Company to the holders is not true and correct, then the holders of certain outstanding shares of Series B Preferred Stock, in whole or part, have the option to require the Company to redeem their securities at premium prices. Although the Company intends to use its best efforts to comply with the provisions in the documents relating to the Series B Preferred Stock, the failure of which would provide the holder the right to exercise such redemption option, there can be no assurance that the Company will be able to do so, in part, because certain of such matters are dependent upon the efforts or approval of others (such as the Securities and Exchange Commission with respect to the effectiveness of the aforementioned registration statement). In addition, there can be no assurance that the Company will not experience adverse operating results or other factors which could materially increase its cash requirements or adversely affect its liquidity position. CAUTIONARY STATEMENTS Certain of the information contained herein may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as the same may be amended from time to time ("the Act") and in releases made by the Securities and Exchange Commission ("SEC") from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements expressed or implied by such forward-looking statements. The words "estimate," "believes," "project," "intend," "expect" and similar expressions when used in connection with the Company, are intended to identify forward-looking statements. Any such forward-looking statements are based on various factors and derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those on the forward-looking statements. These cautionary statements are being made pursuant to the Act, with the intention of obtaining benefits of the "Safe Harbor" provisions of the Act. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to those set forth below. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: (i) risks associated with leverage, including cost increases due to rising interest rates: (ii) risks associated with the Company's ability to continue its strategy of growth through acquisitions; (iii) risks associated with the Company's ability to successfully integrate all of its recent acquisitions: (iv) the Company's ability to make effective acquisitions in the future and to successfully integrate newly acquired businesses into existing operations and the risks associated with such newly acquired businesses; (v) changes in laws and regulations, including changes in tax rates, accounting standards, environmental laws, occupational, health and safety laws: (vi) access to foreign markets together with foreign economic conditions, including currency fluctuations; (vii) the effect of, or changes in, general economic conditions; (viii) economic uncertainty in Venezuela; (ix) weather conditions that are adverse to the specific businesses of the Company, and (x) the outcome of litigation, claims and assessments involving the Company. 17 18 Other factors and assumptions not identified above may also be involved in the derivation of forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. YEAR 2000 The Company's business is dependent upon various computer software programs and operating systems that utilize dates and process data beyond the year 2000. The Company's actions to address the risks associated with the year 2000 are as follows: THE COMPANY'S STATE OF READINESS. The Company has established programs to coordinate its year 2000 "Y2K" compliance efforts across all business functions and geographic areas. The scope of the programs include addressing the risks associated with the Company's (i) information technology "IT" systems (including the Company's products and services), (ii) non-IT systems that include embedded technology (e.g., equipment and other infrastructure), and (iii) significant vendors and their Y2K readiness. The Company is utilizing the following steps in executing its Y2K compliance program: 1) awareness, 2) assessment, 3) renovation, 4) validation and testing, and 5) implementation. The Company has completed the awareness and assessment steps for all areas. IT SYSTEMS. The Company's most significant renovation effort involves the conversion of substantially all of MFSNT's IT Systems. The Company believes it will be substantially completed with its testing and implementation for all IT Systems by October 31, 1999. NON-IT SYSTEMS. The Company expects to have all of its mission critical non-IT Systems Y2K compliant by October 31, 1999. The Company is currently formulating its testing and implementation plans for its mission critical non-IT systems. SIGNIFICANT VENDORS. As part of the Company's Y2K compliance program, the Company has contacted its significant vendors to assess their Y2K readiness. For all mission critical third party software embedded in or specified for use in conjunction with the Company's IT systems and products, the Company's communications with the vendors indicates that the vendors believe they will be Y2K compliant by October 31, 1999. Such third party software is being tested in conjunction with the testing of the IT systems and products discussed above. There can be no assurance that i) the Company's significant vendors will succeed in their Y2K compliance efforts, or ii) the failure of vendors to address year 2000 compliance will not have a material adverse effect on the Company's business or results of operations. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Since inception of its program through January 31, 1999, the costs related to the Company's Y2K compliance efforts were not material. The total estimated costs to complete the Company's Y2K compliance effort are approximately $2.0 million. The estimated costs to complete, which does not include any costs which may be incurred by the Company if its significant vendors fail to timely address Y2K compliance, is based on currently known circumstances and various assumptions regarding future events. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. 18 19 THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company's failure to timely resolve the Y2K risks could result in system failures, the generation of erroneous information, and other significant disruptions of business activities. Although the Company believes it will be successful in its Y2K compliance efforts, there can be no assurance that the Company's systems and products contain all necessary date code changes. In addition, the Company's operations may be at risk if its vendors and other third parties fail to adequately address the Y2K issue or if software conversions result in system incompatibilities with these third parties. To the extent that either the Company relies does not achieve Y2K compliance, the Company's results of operations could be materially adversely affected. Furthermore, it has been widely reported that a significant amount of litigation surrounding business interruption will arise out of Y2K issues. It is uncertain whether, or to what extent, the Company may be affected by such litigation. THE COMPANY'S CONTINGENCY PLAN. The Company has not yet developed a comprehensive contingency plan to address the situation that may result if the Company or its vendors are unable to achieve Y2K compliance for its critical operations. During fiscal 1999, based upon the status of the Company's Y2K compliance efforts at that time and the Company's perceived risks to critical business operations, the Company plans to evaluate what areas the Company believes a contingency plan may be necessary, and execute such contingency plan if warranted. The i) inability to timely implement such a plan, if deemed necessary, and ii) the cost to develop and implement such a plan, may have a material adverse effect on the Company's results of operations. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS. Except for statements of existing or historical facts, the foregoing discussion of Y2K consists of forward-looking statements and assumptions relating to forward-looking statements, including without limitation the statements relating to future costs, the timetable for completion of Y2K compliance efforts, potential problems relating to Y2K, the Company's state of readiness, third party representations, and the Company's plans and objectives for addressing Y2K problems. Certain factors could cause actual results to differ materially from the Company's expectations, including without limitation (i) the failure of vendors and service providers to timely achieve Y2K compliance, (ii) system incompatibilities with third parties resulting from software conversion, (iii) the Company's systems and products not containing all necessary date code changes, (iv) the failure of existing or future clients to achieve Y2K compliance, (v) potential litigation arising out of Y2K issues, the risk of which may be greater for information technology based service providers such as the Company, (vi) the failure of the Company's validation and testing phase to detect operational problems internal to the Company, in the Company's products or services or in the Company's interface with service providers, vendors or clients, whether such failure results from the technical inadequacy of the Company's validation and testing efforts, the technological infeasibility of conducting all available testing, or the unavailability of third parties to participate in testing, or (vii) the failure to timely implement a contingency plan to the extent Y2K compliance is not achieved. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on debt obligations that impact the fair value of these obligations. The Company's policy is to manage interest rates through a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. The table below provides information about the Company's risk exposure associated with changing interest rates (amounts in thousands): 19 20
EXPECTED MATURITY ----------------------------------------------------------------------- 1999 2000 2001 2002 2003 THEREAFTER ----------------------------------------------------------------------- Fixed rate debt $14,868 $18,225 $ 1,021 $ 935 $ 872 $19,939 Average interest rate 12.40% 13.00% 13.64% 13.61% 13.57% 13.54% Variable rate debt $ -- $ -- $ 35,000 $ -- $ -- $ -- Average interest rate --% --% 7.69% --% --% --%
The Company has no cash flow exposure due to interest rate changes for its fixed debt obligations. All of the Company's debt is non-trading. The fair value of the Company's debt approximates its carrying value. Although the Company conducts business in foreign countries, the international operations were not material to the Company's consolidated financial position, results of operations or cash flows as of January 31, 1999. Additionally, foreign currency transaction gains and losses were not material to the Company's results of operations for the three months ended January 31, 1999. Accordingly, the Company was not subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on the Company's future costs or on future cash flows it would receive from its foreign subsidiaries. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. PART II. OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES During the three months ended January 31, 1999, the Company was in violation of the payment terms of its $10.0 million principal amount 12 percent Senior Subordinated Notes (the "Senior Notes"). As was reported in the Company's 10-K/A for the fiscal year ended October 31, 1998 filed with the Securities and Exchange Commission on March 1, 1999 (the "Form 10-K/A"), these Senior Notes were purchased from the holders effective February 17, 1999. During the three months ended January 31, 1999, the Company was also in default of certain provisions of its Series B Preferred Stock. Such default resulted from the Company's failure to have a registration statement 20 21 registering the common stock underlying the Series B Preferred Stock and certain related warrants declared effective by December 27, 1998. Such default gave the holders of the Series B Preferred Stock the option to require the Company to redeem their securities at premium prices. During the quarter ended January 31, 1999, the holders of the Series B Preferred Stock notified the Company of their intent to exercise such redemption right; however, such notice has been withdrawn. As was reported in the Form 10-K/A, subsequent to January 31, 1999, approximately 78 percent of the Series B Preferred Stock was purchased from the original holders and, in connection with such purchase, the Company was given until May 18, 1999 to effect the registration described above. For a further description of the transactions engaged in with respect to the Series B Preferred Stock, the reader is referred to the Form 10-K/A. 21 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NO. DESCRIPTION ------------ 2.1 Asset Purchase Agreement, dated November 26, 1997, among Able Telcom Holding Corp., Georgia Electric Company, Transportation Safety Contractors, Inc., COMSAT RSI Acquisitions, Inc. and COMSAT Corporation (1) 2.2 Indemnification Agreement, dated February 25, 1998, among Able Telcom Holding Corp., Georgia Electric Company, Transportation Safety Contractors, Inc., COMSAT RSI Acquisitions, Inc. and COMSAT Corporation (1) 2.3 Stock Purchase Agreement, dated as of April 1, 1998, among Able Telcom Holding Corp., James P. Patton, Rick Boyle and Claiborne K. McLemore III (2) 2.4 Closing Memorandum and Schedule, dated April 1, 1998, among Able Telcom Holding Corp., James P. Patton, Rick Boyle and Claiborne K. McLemore III (2) 2.5 Agreement and Plan of Merger by an among MFS Acquisition Corp., Able Telcom Holding Corp., MFS Network Technologies, Inc. and MFS Communications Company, Inc. dated as of April 22, 1998 (9) 2.5.1 Amendment to Agreement and Plan of Merger among MFS Acquisition Corp., Able Telcom Holding Corp., MFS Network Technologies, Inc. and MFS Communications Company, Inc. dated as of July 2, 1998 (10) 2.5.1.1 Amendment No. 2 dated as of July 21, 1998 to Agreement and Plan of Merger among MFS Acquisition Corp., Able Telcom Holding Corp., MFS Network Technologies, Inc. and MFS Communications Company, Inc. (11) 2.5.1.2 Agreement between WorldCom Network Services, Inc. and Able Telcom Holding Corp. dated as of September 9, 1998 (13) 2.5.1.3 Agreement between WorldCom Network Services, Inc. and Able Telcom Holding Corp. dated January 26, 1999 (12) 2.5.2 Promissory Note of Able Telcom Holding Corp. dated July 2, 1998 to MFS Communications Company, Inc. (10) 2.5.2.1 11.5% Promissory Note between Able Telcom Holding Corp., and WorldCom Network Services, Inc. dated as of September 1, 1998 (12)
22 23 2.5.3 Stock Pledge Agreement dated as of July 2, 1998 by Able Telcom Holding Corp. in favor of WorldCom, Inc. (10) 2.5.4 Master Services Agreement between WorldCom Network Services, Inc. and MFS Network Technologies, Inc. dated as of July 2, 1998 (exhibits omitted) (11) 2.5.5 Assumption and Indemnity Agreement dated as of July 2, 1998 among Able Telcom Holding Corp., WorldCom Inc., MFS Communications Company, Inc., MFS Intelenet, Inc., MFS Datanet, Inc., MFS Telcom, Inc. and MFS Communications, Ltd. (schedule omitted) (10) 2.5.6 License Agreement between MFS Communications Company, Inc. and Able Telcom Holding Corp. dated as of July 2, 1998 (10) 2.5.7 Modification to Stock Option Agreement between the Company and WorldCom, Inc. dated January 8, 1999 (12) 2.5.8 Agreement to Enter Into Stock Appreciation Rights Agreement between the Company and WorldCom, Inc. dated January 8, 1999 (12) 2.5.9 Financing Agreement between WorldCom Network Services, Inc. and Able Telcom Holding Corp. dated February 16, 1999 (12) 3.1 Articles of Incorporation of Able Telcom Holding Corp., as amended (3) (4) 3.1.1 Articles of Amendment to the Articles of Incorporation of Able Telcom Holding Corp. (13) 3.2 Bylaws of Able Telcom Holding Corp., as amended (3) 4.2 Specimen Common Stock Certificate (3) 4.3 Specimen Series A Preferred Stock Certificate (6) 4.4 Form of Warrant issued to Credit Suisse, First Boston and Silverton International Fund Limited (4) 4.6 Able Telcom Holding Corp. 1995 Stock Option Plan (13) 4.7 Amendment to Able Telcom Holding Corp. 1995 Stock Option Plan, dated April 24, 1998 (13) 4.8 Series B Convertible Preferred Stock Purchase Agreement (13) 4.9 Registration Rights Agreement for Series B Convertible Preferred Stock Purchase Agreement and 350,000 Warrants (13)
23 24 4.10 Registration Rights Agreement for 650,000 Warrants associated with Series B Convertible Preferred Stock Purchase Agreement (13) 4.11 Form of Common Stock Purchase Warrants for 350,000 Shares in connection with Series B Convertible Preferred Stock Purchase Agreement (13) 4.12 Form of Common Stock Purchase Warrants for 650,000 Shares in connection with Series B Convertible Preferred Stock Purchase Agreement (13) 4.13 Preferred Stock Purchase Agreement by and among Able Telcom Holding Corp., RGC International Investors, LDC, and Cotton Communications, Inc. dated February 17, 1999 (12) 4.14 Warrant Amendment between Able Telcom Holding Corp., and Purchasers (as defined) dated February 17, 1999 (12) 4.15 Securities Purchase Agreement by and between the Sellers (as defined) and Cotton Communications, Inc. dated February 17, 1999 (12) 10.15 Stock Purchase Agreement between Able Telcom Holding Corp., Traffic Management Group, Inc., Georgia Electric Company, Gerry W. Hall and J. Barry Hall (5) 10.16 Stock Purchase Agreement between Able Telcom Holding Corp., Telecommunications Services Group, Inc., Dial Communications, Inc., William E. Newton and Sybil C. Newton (8) 10.17 Promissory Note of Able Telcom Holding Corp. Payable to William E. Newton and Sybil C. Newton (8) 10.23 Form of Stock Purchase Agreement among Able Telcom Holding Corp., Traffic Management Group, Inc., Georgia Electric Company, Gerry W. Hall and J. Barry Hall (5) 10.25 Securities Purchase Agreements, dated as of January 6, 1998, between Able Telcom Holding Corp. and each of the Purchasers named therein (6) 10.25.1 Letter Agreement dated July 2, 1998 related to Securities Purchase Agreements dated as of January 6, 1998 (13) 10.26 Senior Secured Revolving Credit Agreement dated as of April 6, 1998, between Able Telcom Holding Corp. and Suntrust Bank, South Florida, N.A. and Bank of America, FSB (9) 10.27 Credit Agreement among Able Telcom Holding Corp., NationsBank, N.A. and The Several Lenders from Time to Time Parties Hereto dated as of June 11, 1998 (exhibits and schedules omitted) (13)
24 25 10.29 Employment Agreement with Jesus G. Dominguez, dated April 27, 1998 (13) 10.30 Employment Agreement with Stacy Jenkins, dated July 16, 1998 (13) 10.32 Amendment to June 11, 1998 Credit Agreement among Able Telcom Holding Corp. NationsBank N.A., and the Several Lenders from Time to Time Parties thereto, dated as of June 30, 1998 (13) 10.33 Employment Agreement with Billy V Ray, Jr., dated October 1, 1998 (12) 10.34 Employment Agreement with Curtis A. "Butch" Dale, dated August 17, 1998 (14) 10.35 Financial Advisor and Placement Engagement Letter, dated April 3, 1998, between Washington Equity Partners and Able Telcom Holding Corp. (14) 10.36 Employment Agreement with G. Vance Cartee, dated January 4, 1999 (12) 10.37 Employment Agreement with Edward Pollock, dated January 1, 1999 (12) 10.38 Employment Agreement with Frazier L. Gaines, dated November 12, 1998 (12) 10.39 Employment Agreement with Gideon D. Taylor, dated December 7, 1998 (12) 10.40 Employment Agreement with Rick Boyle, dated April 1, 1998 (12) 10.41 Financing Agreement between Able Telcom Holding Corp. and Cotton Communications, Inc. dated February 17, 1999 (without exhibits) (12) 10.42 11.5% Non-Recourse Promissory Note between Cotton Communications, Inc. and Able Telcom Holding Corp. dated February 17, 1999 (12) 10.43 Stock Pledge Agreement between Able Telcom Holding Corp. and Cotton Communications, Inc. dated February 17, 1999 (12) 11 Computation of Per Share Earnings (7) 16.1 Letter regarding change in certifying accountants (15) 21 Subsidiaries of Able Telcom Holding Corp. (13) 27 Financial Data Schedule (for SEC use only)
25 26 - ------------------- (1) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K (File No. 0-21986), dated February 25, 1998, as filed with the Commission on March 12, 1998, as amended by Form 8-K/A-1, dated May 11, 1998, as filed with the Commission on April 14, 1998. (2) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K (File No. 0-21986), dated April 1, 1998, as filed with the Commission on April 14, 1998. (3) Incorporated by reference from an exhibit to the Company's Registration Statement on Form S-1 (File No. 33-65854), as declared effective by the Commission on February 26, 1994. (4) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K (File No. 0-21986), dated December 20, 1996, as filed with the Commission on December 31, 1996. (5) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K (File No. 0-21986), dated October 12, 1996, as filed with the Commission on October 25, 1996. (6) Incorporated by reference from an exhibit to the Company's Annual Report on Form 10-K (File No. 0-21986) for the fiscal year ended October 31, 1997, as filed with the Commission on February 13, 1998, as amended by 10-K/A, as filed with the commission on March 20, 1998. (7) Incorporated by reference from Note 5 to the Condensed Consolidated Financial Statements (Unaudited) filed herewith. (8) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K (File No. 0-21986), dated December 2, 1996, as filed with the Commission on December 13, 1996, as amended by Form 8-K/A-1, dated February 11, 1997, as filed with the Commission on February 11, 1997. (9) Incorporated by reference from an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-21986), for the quarter ended April 30, 1998, as filed with the Commission on June 14, 1998. (10) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K (File No. 0-21986), dated July 2, 1998, as filed with the Commission on July 16, 1998. (11) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K/A (File No. 0-21986), dated July 2, 1998, as filed with the Commission on August 3, 1998. (12) Incorporated by reference from an exhibit to the Company's Annual Report on Form 10-K/A (File No. 0-21986), for the fiscal year ended October 31, 1998, as filed with the Commission on March 1, 1999. 26 27 (13) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-21986), for the quarter ended July 31, 1998, as filed with the Commission on September 21, 1998, as amended by Form 10-Q/A, as filed with the Commission on October 13, 1998. (14) Incorporated by reference to an exhibit to the Company's Form S-1 (File No. 333-65991), as filed with the Commission on October 22, 1998. (15) Incorporated by reference from an exhibit to the Company's Current Report on Form 8-K (File No. 0-21986), as filed September 14, 1998. (b) Reports on Form 8-K None 27 28 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABLE TELCOM HOLDING CORP. May 26, 2000 By: /S/ BILLY V. RAY, JR. ----------------------------------- BILLY V. RAY, JR. Chief Executive Officer 28 29 EXHIBIT INDEX 27 Restated Financial Data Schedule 29 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ABLE TELCOM HOLDING CORPORATION FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS OCT-31-1999 NOV-01-1998 JAN-31-1999 6,670 0 85,156 421 0 187,999 48,935 17,332 275,923 146,650 0 0 11,233 11 32,981 275,923 0 93,080 78,097 90,559 5,411 0 2,478 (5,294) (50) (5,498) 0 0 0 (5,498) (.47) (.47)
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