-----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, Fti2Qz7cUHQn8GzciahyNzblTnQeUEG29Rn8aUI5IpX3mORQcyD6/oAxsXOvrXhI mq3Yw2w/U67buVuM3JvmaA== /in/edgar/work/20000526/0000950144-00-007312/0000950144-00-007312.txt : 20000919 0000950144-00-007312.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950144-00-007312 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 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: 645085 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 JULY 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 OF 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 July 31, 1999, there were 12,070,795 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 September 14, 1999 to (i) include the restated financial statements for the three and nine months ended July 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 July 31, 1999 (Unaudited) and October 31, 1998. ..................................... 3 Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended July 31, 1999 and 1998 ..... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended July 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 ................................................. 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................... 21 PART II. OTHER INFORMATION Items 1, 4 and 5 - Not Applicable Item 2. Changes in Securities and Use of Proceeds .................................... 22 Item 3. Defaults Upon Senior Securities .............................................. 23 Item 6. Exhibits and Reports on Form 8-K ............................................. 25 SIGNATURES ................................................................................... 29
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JULY 31, OCTOBER 31, 1999 1998(1) ---------- ---------- (Unaudited) ASSETS Currents Assets: Cash and cash equivalents .................................................. $ 15,649 $ 13,544 Accounts receivable, net ................................................... 79,111 64,159 Costs and profits in excess of billings on uncompleted contracts ........... 68,032 105,478 Prepaid expenses and other current assets .................................. 4,601 2,641 --------- --------- Total current assets .............................................. 167,393 185,822 --------- --------- Property and equipment, net ........................................................... 28,378 32,074 --------- --------- Other assets: Goodwill, net .............................................................. 40,253 31,374 Assets held for sale ....................................................... 12,526 38,750 Other non-current assets ................................................... 13,894 2,740 --------- --------- Total other assets ................................................ 66,673 72,864 --------- --------- Total assets ...................................................... $ 262,444 $ 290,760 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt........................................... 526 $ 14,438 Accounts payable and accrued liabilities.................................... 36,171 61,229 Accruals for incurred job costs............................................. 59,621 51,111 Billings in excess of costs and profits on uncompleted contracts............ 10,710 6,328 Reserves for losses on uncompleted contracts................................ 12,320 25,390 Notes payable shareholders/directors........................................ -- 1,182 Stock appreciation rights payable .......................................... 3,792 -- --------- --------- Total current liabilities.......................................... 123,140 159,678 Long-term debt, non-current portion......................................... 64,768 61,685 Advances from WorldCom ..................................................... 32,000 -- Property tax payable, non-current portion................................... 14,837 15,118 Other non-current liabilities .............................................. 5,278 2,737 --------- --------- Total liabilities.......................................................... 240,023 239,218 Contingencies Series B Preferred Stock, $.10 par value; aggregate liquidation value of $15,096,000 and $17,820,000; 4,000 shares authorized; 779 and 3,564 shares issued and outstanding .................................... 15,096 11,325 Shareholders' Equity: Common stock, $.001 par value, authorized 25,000,000 shares; 12,070,795 and 11,065,670 shares issued and outstanding, respectively ..................... 12 11 Additional paid-in capital.................................................. 38,492 35,164 Senior Note Warrants ....................................................... 1,244 1,244 Series B Preferred Stock Warrants.......................................... 2,735 5,400 WorldCom Stock Options ..................................................... -- 3,490 WorldCom Phantom Stock ..................................................... 606 606 Retained earnings (deficit) ................................................ (35,764) (5,698) --------- --------- Total shareholders' equity................................................. 7,325 40,217 --------- --------- Total liabilities and shareholders' equity ................................. $ 262,444 $ 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 FOR THE NINE MONTHS ENDED JULY 31, ENDED JULY 31, 1999 1998 1999 1998 Revenue: Construction and maintenance $ 102,781 $ 58,305 $ 283,869 $ 115,125 Conduit -- -- 35,721 -- ----------- ---------- ----------- ----------- Total revenue 102,781 58,305 319,590 115,125 Costs and expenses: Construction and maintenance 87,558 46,615 243,214 90,222 Costs of conduit -- -- 34,673 -- General and administrative expense 10,871 5,337 29,238 14,703 Impairment of intangible assets -- -- 2,465 -- Depreciation and amortization expense 2,897 2,034 8,880 4,865 ----------- ---------- ----------- ----------- Total costs and expenses 101,326 53,986 318,470 109,790 ----------- ---------- ----------- ----------- Income from operations 1,455 4,319 1,120 5,335 ----------- ---------- ----------- ----------- Other income (expense): Interest expense (2,070) (1,304) (6,758) (2,092) Change in value of stock appreciation rights (3,792) -- (1,896) -- Other (1,037) (1,205) (1,592) (1,046) ----------- ---------- ----------- ----------- Total other income (expense) (6,899) (2,509) (10,246) (3,138) Income (loss) before income taxes, minority interest and extraordinary item (5,444) 1,810 (9,126) 2,197 Provision for (benefit from) income taxes (52) 706 (86) 857 ----------- ---------- ----------- ----------- Income (loss) before minority interest and extraordinary item (5,392) 1,104 (9,040) 1,340 Minority interest 93 314 292 610 ----------- ---------- ----------- ----------- Income (loss) before extraordinary item (5,485) 790 (9,332) 730 Extraordinary loss on the early extinguishment of debt, net of tax of zero -- -- 3,067 -- ----------- ---------- ----------- ----------- Net income (loss) (5,485) 790 (12,399) 730 Preferred stock dividends (39) (67) (283) (145) Redemption of 2,785 shares of Series B Preferred Stock -- -- (4,323) -- Modification of exercise price of Series B Preferred Stock Warrants -- -- (1,894) -- Increase in default redemption value of Series B Preferred Stock (4,741) -- (4,741) -- Modification of conversion price of Series B Preferred Stock -- (7,909) (6,430) (8,013) ----------- ---------- ----------- ----------- Income (loss) applicable to common stock $ (10,265) $ (7,186) $ (30,070) $ (7,428) =========== ========== =========== =========== Weighted average shares outstanding: Basic 11,794,718 9,918,292 11,939,517 9,660,921 Diluted 11,794,718 9,918,292 11,939,517 9,660,921 Income (loss) per share: Basic: Income (loss) applicable to common stock before extraordinary item $ (0.87) $ (0.72) $ (2.26) $ (0.77) Extraordinary loss on the early extinguishment of debt, net of tax of zero -- -- (0.26) -- Income (loss) applicable to common stock (0.87) (0.72) (2.52) (0.77) Diluted: Income (loss) applicable to common stock before extraordinary item $ (0.87) $ (0.72) $ (2.26) $ (0.77) Extraordinary loss on the early extinguishment of debt, net of tax of zero -- -- (0.26) -- Income (loss) applicable to common stock (0.87) (0.72) (2.52) (0.77)
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 NINE MONTHS ENDED JULY 31, 1999 1998 Cash provided by operating activities $ 7,110 $ 3,993 ------- -------- Cash flows from Investing Activities: Capital expenditures, net (4,252) (8,744) Acquisition of businesses (net of cash acquired of $4,705 in 1998) -- (1,209) ------- -------- Net cash used in investing activities (4,252) (9,953) ------- -------- Cash flows from Financing Activities: Repayments of long-term debt and other borrowings (12,555) (91,075) Redemption of Series B Preferred Stock (18,677) -- Repurchase of Series B Preferred Stock Warrants (1,890) -- Proceeds from the issuance of long-term debt and other borrowings 32,131 71,413 Proceeds from the issuance of preferred stock, net (92) 18,110 Proceeds from the exercise of stock options 497 2,784 Dividends paid on preferred stock (167) (204) Other -- 1 -------- -------- Net cash provided by (used in) financing activities (753) 1,029 -------- -------- (Decrease) Increase in cash and cash equivalents 2,105 (1,151) Cash and cash equivalents, beginning of period 13,544 6,230 -------- -------- Cash and cash equivalents, end of period $ 15,649 $ 5,079 ======== ======== Supplemental Disclosure: Valuation of detachable warrants -- 6,644 Common stock issued in accordance with GEC earnout provisions 4,595 1,278 Common stock issued in exchange for note payable to director 828 -- Modification of conversion price of Series B Preferred Stock 6,430 8,013 Modification of exercise price of Series B Preferred Stock Warrants 1,894 -- Increases to Series B Preferred Stock default redemption value 12,711 -- Compensation recognized on common stock options awarded to non-employees 131 -- Compensation recognized on below market options -- 93 Conversion of Series A Preferred Stock -- 6,818 Valuation of options and equity awards issued in acquisition -- 4,096 Cash paid for: Interest 1,993 2,092 Income taxes 4,364 --
See notes to condensed consolidated financial statements. 5 6 ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management of Able Telcom Holding Corp. ("Able Telcom" or the "Company"), the unaudited condensed consolidated financial statements furnished herein include all adjustments (consisting only of normal 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-2 ("Form 10-K/A-2"). The accompanying unaudited condensed consolidated financial statements are prepared on an accrual basis and include the accounts of the Company and all its subsidiaries. A substantial portion of consolidated total assets, liabilities and revenues are generated by one subsidiary of the Company, MFS Network Technologies, Inc. ("MFSNT"), which was acquired during the fiscal year ended October 31, 1998. The value assigned to the Company's interest in Kanas Telcom, Inc. ("Kanas") in conjunction with the acquisition of MFNST (as described below) represented Company management's best estimate of the net proceeds expected to be received from the sale of the Company's interest in Kanas. That estimate was based, in part, on active negotiations with potential buyers and included the expected earnings or losses from the operations of Kanas during the holding period (from July 2, 1998, through the ultimate sale of the asset or approximately July 2, 1999. Company management continues to evaluate opportunities to sell the Company's interest in Kanas. However, Company management no longer contemplates that such transaction will occur before fiscal year 2000. Therefore, beginning July 2, 1999, the Company began to account for its interest in Kanas, which it intends to continue to classify as "assets available for sale," under the equity method of accounting. The Company intends to reevaluate the net realizable value of its interest in Kanas on an ongoing basis. All material intercompany accounts and transactions have been eliminated. 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 July 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 July 31, 1999, are summarized below (in thousands, except per share data):
As Reported Adjustments Adjusted - ------------------------------------------------------------------------------------------ Revenues $102,562 $ 219 $102,781 Operating income (loss) 6,546 (5,091) 1,455 Net income (loss) 161 (5,646) (5,485) Income (loss) applicable to common stock 122 (10,387) (10,265) Income (loss) applicable to common stock per share 0.01 (0.88) (0.87)
Net Income (Loss) Applicable to Net Income (Loss) Common Stock - -------------------------------------------------------------------------------------------- Amounts previously reported $ 161 $ 122 Adjustments: WorldCom SAR obligation (1) (687) (687) Improperly deferred costs (2) (2,778) (2,778) Costs improperly charged against reserves (3) (1,514) (1,514) Tax effects of all adjustments (4) 309 309 Series B redemption and modification (5) -- (3,338) Series B liquidation value adjustment (6) -- (1,403) Other adjustments (7) (92) (92) Long-term service contracts adjustments (8) (884) (884) - -------------------------------------------------------------------------------------------- Total adjustments (5,646) (10,387) - -------------------------------------------------------------------------------------------- Restated amounts $(5,485) $(10,265)
(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) The tax provision for all quarters has been restated, including reversal of approximately $1.2 million tax benefit originally offset against the extraordinary loss of the early extinguishment of debt. (5) The February 1999 redemption of Series B Preferred Stock and the modification of the terms of the then remaining Series B shares was not correctly determined. (6) The Series B Preferred Stock should have been reflected at its liquidation value upon recharacterization as a default obligation in May 1999. (7) Other adjustments made as a result of the year-end audit affected the previously reported quarterly amounts as shown. (8) These adjustments recognize losses on long-term service contracts as incurred as discussed more fully in the following paragraph. 6 7 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 such losses cannot be reasonably estimated due to potential changes in various assumptions. Consequently, the Company has determined 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. 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. In addition, the MFSNT acquisition agreements, as amended, provide that on November 30, 2000, the Company shall pay to WorldCom certain amounts, if positive: (i) the difference between $9.0 million related to losses on MFSNT projects in existence on March 31, 1998 and recorded by MFSNT as of June 30, 1998, and the amount actually lost on such contracts through November 30, 2000, (ii) the difference between $3.0 million related to losses on MFSNT projects not recorded by MFSNT as of June 30, 1998 and the amount actually lost on such contracts through November 30, 2000, and (iii) the difference between $5.0 million and the aggregate costs of Able in defending the litigation, and payments made in settlement or in payment of judgements with respect to preacquisition litigation. The range of this contingent consideration potentially payable to WorldCom is from $0 to $17.0 million. Presently, Company management expects to pay no additional consideration to WorldCom pursuant to the aforementioned provisions. During the three months ended July 31, 1999, the Company completed its allocation of the MFSNT purchase price. The purchase price allocation disclosed in the Company's Form 10-K/A and the final purchase price allocation is as follows (in millions):
FINAL FORM 10-K/A ADJUSTMENTS ALLOCATION ----------- ----------- --------- Cash and accounts receivable (4) $ 47.0 $ (1.4) $ 45.6 Costs and profits in excess billing on uncompleted contracts (5) 93.7 (5.0) 88.7 Assets held for sale 38.8 -- 38.8 Prepaid expenses 1.0 -- 1.0 Property 5.7 -- 5.7 Goodwill (1) 16.5 9.8 26.3 Accounts payable (6) (13.7) (0.5) (14.2) Billings in excess of costs and profits on uncompleted contracts (56.6) -- (56.6) Reserve for losses on uncompleted contracts (7) (40.5) 0.6 (39.9) Accrued restructuring costs (2) (2.0) 0.3 (1.7) Property taxes payable (15.0) -- (15.0) Other accrued liablilites (3)(8) (7.4) (3.8) (11.2) ------- ------ ------- Total allocated purchase price $ 67.5 $ -- $ 67.5 ======= ====== =======
- ---------------- (1) Goodwill is being amortized on a straight-line basis over 20 years. (2) Accrued restructuring costs related primarily to severance and benefit costs associated with the involuntary termination of employees pursuant to an approved restructuring plan. During the fiscal year ended October 31, 1998, approximately $1.7 million was incurred and charged against this reserve. The excess reserve of $0.3 million was reversed and goodwill was reduced. (3) Includes allowances for costs related to litigation and claims of $5.0 million which, according to the Plan of Merger, is payable to WorldCom in the event specified litigation costs and claims are not paid by the Company. (4) It was determined that a receivable from WorldCom of $1.4 million should not have been recorded as part of the purchase price allocation. Therefore, the Company has adjusted accounts receivable and goodwill. (5) It was determined that certain long-term receivables were recorded at their gross value versus their present values. These receivables are to be paid to MFSNT over 20 years. Therefore, an adjustment of approximately $5.0 million to cost and profits in excess of billings (i.e. unbilled receivables) and goodwill was necessary to properly reflect the present value of these receivables. Refer to Note 5, "Network Assets Held for Sale." (6) It was determined that $0.5 million of accounts payable assumed had not been included in the original purchase price allocation. The Company adjusted accounts payable and goodwill to reflect these accounts payable. (7) The Company reviewed its estimates of losses on loss contracts and recorded adjustments to such reserves. The adjustments decreased the reserves and goodwill by $0.6 million. (8) Subsequent to the acquisition of MFSNT, the Company recorded an additional accrued liability of $3.8 million relating to a claim not previously recognized by MFSNT. 7 8 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 were 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 into stock appreciation rights ("SARs") with similar terms and provisions, except that the SARs 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 SARs may revert back to the WorldCom Option allowing for the exercise of all 2,000,000 shares (no longer subject to the 1,817,941 share limitation) if certain shareholder approvals are received. In connection with the establishment of the SAR liability as of January 8, 1999, the intrinsic value of the SARs was estimated to be approximately $1.9 million as compared to the previously estimated fair value of the WorldCom Option. The difference of $1.6 million represents a reduction of paid-in capital. The exercise period for the SARs granted commences on the earlier of: (i) one (1) business day after the date upon which the potential issuance of common stock is voted on by the shareholders of the Company, and (ii) July 1, 1999, and ending on January 2, 2002. As of July 31, 1999, the intrinsic value of the stock appreciation rights liability has been estimated to be $3.8 million. Changes in the valuation of the SARs has resulted in a charge to earnings during the three and nine months ended July 31, 1999, of $3.8 million and $1.9 million, respectively. 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 and nine months ended July 31, 1999 (amounts in thousands): Three Nine Months Months ----- ------ Billings on the COMSAT contracts(1) 1,754 7,310 Deferred revenue recognized 739 3,269 - ------------------------------------------------------------------------------------------------------------------------ 2,493 10,579 Direct contracts costs 1,727 6,842 - ------------------------------------------------------------------------------------------------------------------------ Gross margin from COMSAT contracts 766 3,737 - ------------------------------------------------------------------------------------------------------------------------
- ----------- (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 approximately $26.0 million of certain fiber optic conduit that was constructed by MFSNT prior to the MFSNT Acquisition (the "NYSTA Network") and sold during the quarter ended April 30, 1999. 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 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. When the sale closed in April 1999, Able recorded actual revenues of $35.7 million, and costs of approximately $34.7 million, equal to $26.0 million assigned to the conduit in purchase accounting, plus a revenue sharing payment due NYSTA from the transaction of approximately $8.7 million. 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. Upon closing the April 1999 sale of the remaining conduit inventory, a Partial Release and Settlement Agreement was made with NYSTA. From those proceeds, $6.8 million was placed into escrow until NYSTA's rights to share in revenues equal to twice that amount can be decided through arbitration or otherwise settled. The escrowed funds are included in other non-current assets as of July 31, 1999. 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 $3.9 million at July 31, 1999. Interest income from amortization of the discount was approximately $0.1 million for the nine months ended July 31, 1999. While MFSNT and the Company have sold IRU's that constitute virtually all the 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 $0.6 million and $1.7 million for the three months and nine months ended July 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 the conduit sale closed by the Company in April 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) 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 July 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 July 31, 1999, the unaudited financial statements of Kanas reflected total assets, liabilities and net deficit of $81.7 million, $88.8 million and $7.1 million, respectively. The July 31, 1999, deficit includes $6.6 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 July 31, 1999 was approximately $87.4 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 April 30, 1999, is as follows (amounts in thousands): Net goodwill, at April 30, 1999 $38,022 Patton Management Corporation ("Patton") (1) 1,460 MFSNT (2) 1,206 Amortization (435) - ----------------------------------------------------------------------- Net goodwill, at July 31, 1999 $40,253 - -----------------------------------------------------------------------
Adjustments made to goodwill during the quarter ended July 31, 1999, related to: (1) Goodwill was increased to recognize deferred tax and other liabilities of approximately $1.1 million and $0.4 million, respectively, assumed in the 1998 acquisition of Patton. (2) Goodwill was increased by approximately $1.2 million for adjustments to the MFSNT purchase price allocation. Amortization expense was $0.4 million and $1.3 million for the three and nine months ended July 31, 1999, respectively. 8. IMPAIRMENT OF INTANGIBLE ASSETS As part of the integration of MFSNT into the Company, management has undertaken a consolidation and realignment of all subsidiaries into operational divisions, both to achieve operational synergies and to close unprofitable operations. As a result of significant turnover and the deterioration of underlying contracts, the Company closed Dial Communications, Inc. ("Dial") during the three months ended April 30, 1999. For the three and nine months ended July 31, 1999, Dial had contract margins of $1.5 million and $(1.4) million, respectively, and income (losses) before income taxes of $0.5 million and $(6.1) million, respectively, which included a $1.3 million write-off of goodwill. In addition, the Company wrote-off $1.2 million of equipment during the quarter ended April 30, 1999. The Company, at each balance sheet date, evaluates whether events or changes in circumstances have occurred that indicate the carrying value of its long-lived assets and identifiable intangibles may not be recoverable. If such events or changes in circumstances are deemed to have occurred, the Company estimates the future cash flows related to the assets and compares the sum of the expected future cash flows (undiscounted and without interest charges) to the carrying amount of the assets to determine if there has been an impairment. If an impairment has occurred, the Company will write the assets down to their estimated fair value. The estimated fair value of the assets is typically calculated using the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. 11 12 9. RESERVES FOR LOSSES ON UNCOMPLETED CONTRACTS As of July 2, 1998, the Company estimated the need for reserves for contract losses with respect to MFSNT contracts of $40.5 million. These reserves for contract losses relate to specific MFSNT loss jobs, jobs where the current estimates of remaining contract costs exceed remaining contract revenues. Revenues and costs of revenues recognized in the Company's consolidated statement of operations on these contracts subsequent to the acquisition have resulted in no net margin. The following is a summary of the reserves for losses on uncompleted contracts (amounts in thousands):
NETWORK TRANSPORTATION SERVICES SERVICES JOBS JOBS TOTAL -------- --------------- -------- Balance, July 2, 1998 16,266 24,234 40,500 Amount utilized (8,237) (6,873) (15,110) -------- -------- -------- 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 Additions -- 1,858 1,858 Amount utilized (1,250) (1,044) (2,294) -------- -------- -------- Balance, April 30, 1999 5,548 12,107 17,655 Amount utilized (1,878) (2,838) (4,716) Valuation adjustments(1) 3,415 (4,034) (619) -------- -------- -------- Balance, July 31, 1999 $ 7,085 $ 5,235 $ 12,320 ======== ======== ========
(1) The valuation adjustments recorded during the three months ended July 31, 1999, were the result of final projected cost estimates on previously identified loss jobs unavailable at the date of acquisition. 10. BORROWINGS 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 July 31, 1999 was approximately $87.4 million. During the three months ended April 30, 1999, the Company finalized the sale of conduit inventory that runs from Ohio to New York, for approximately $35.7 million resulting in net cash proceeds, after revenue sharing payments, of $27.0 million. The conduit inventory, which had a carrying value of $26.0 million, was reported as "assets held for sale" at October 31, 1998. The WorldCom Advance agreement also provided for additional advances to the Company of up to $15.0 million against amounts otherwise payable pursuant to the WorldCom master services agreement. ("Additional WorldCom Advance") The Additional WorldCom Advance is non-interest bearing and would be repayable to WorldCom on November 30, 2000. To date, the Company has not received any additional advances against the Additional WorldCom Advance. During the three months ended April 30, 1999, the maturity date in the Company's Credit Facility was amended to November 1, 2000 and certain minimum ratios were also amended. The Company is currently in compliance with the provisions of the Credit Facility and anticipates continuing compliance therewith. If compliance is not maintained, or if waivers of non-compliance are not received, reported current liabilities would be increased by $35.0 million. 11. 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 Able and Thomas M. Davidson, who has since become a member of Able's Board of Directors. SIRIT asserts claims against Able for tortious interference, fraudulent inducement, negligent misrepresentation and breach of contract in connection with Able's acquisition of MFSNT and seeks injunctive relief and compensatory damages in excess of $100.0 million. At present, the parties are conducting discovery in this case. On or about 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, its then Chairman of the Board Gideon Taylor, then Chief Executive Officer Frazier L. Gaines, Chief Accounting Officer Jesus Dominguez, and then Chief Financial Officer Mark A. Shain (collectively, the "Defendants"). All of these cases have been consolidated with the SFCS case. The plaintiffs have not yet filed their consolidated amended complaint. The consolidated complaint asserts claims under the federal securities laws against Able and four of its officers and former officers allegedly that the Defendants caused the Company to falsely represent and mislead the public with respect to (i) two acquisitions: the MFSNT Acquisition and the acquisition of the COMSAT Contracts, and (ii) Able's ongoing financial condition as a result of the acquisitions and the related financing of those acquisitions. Plaintiffs have received certification as a class action on behalf of themselves and all others similarly situated persons and seek unspecified damages and attorneys' fees. Able is currently assessing the allegations set forth in the lawsuits and intends to vigorously defend this matter. An adverse outcome in this lawsuit or in other shareholder lawsuits would likely have a material adverse effect upon Able's consolidated financial position, results of operations and cash flow. The Company is subject to 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 Company does not believe that any of these suits will have a material adverse effect on the Company's financial position. 12 13 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. 12. 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 covering the resale of shares of common stock underlying the Series B Preferred Stock and warrants associated with the Series B Preferred Stock (the "Registration Statement") 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 was subsequently deferred. In February 1999, as described above, approximately 78% 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 Statement described above. The Purchaser and the remaining holders of the Series B Preferred Stock agreed to either waive all outstanding defaults under such securities or refrain from exercising any remedies with respect to any such outstanding defaults for a period of 90 days from February 17, 1999. During such period of time, the Company had agreed to use its best efforts to have the Registration Statement declared effective. To date, the Registration Statement has not been declared effective. In September 1999, the holders of the remaining 779 shares agreed to a further extensions to October 31, 1999. In connection with the purchase of the 78% of the Series B Preferred Stock, the Company agreed to clarify the conversion price with respect to the remaining 779 Series B Preferred Shares. The conversion price was modified from 97% of market value, as defined in the agreements, to a fixed amount of approximately $3.50 per share which will be further reduced by 1.5% per month until the Registration Statement is declared effective. The reduction of the conversion price resulted in a charges to income applicable to common stock of $6.4 million during the nine months ended July 31, 1999. The conversion price with respect to the remaining 779 Series B Preferred Shares at July 31, 1999, was $3.18. In connection with the purchase of the 78% of the Series B Preferred Stock, the Company agreed to certain modifications in the conversion price of the related warrants. The conversion price of (i) warrants to purchase a total of 370,000 shares of the Company's common stock was reduced to $13.25 per share and (ii) warrants to purchase a total of 630,000 shares of common stock was reduced to $13.50 per share. The Company determined the value of the Series B Preferred Stock warrants immediately preceding and after the February 17, 1999 modification. The difference in these valuations of approximately $1.9 million was charged to retained earnings during the three months ended April 30, 1999. On May 7, 1999, the warrants to purchase the 630,000 shares of common stock were purchased by the Company for $3.00 per share. In May 1999, the Company acknowledged that it was in default on the Series B Preferred Stock and agreed that further punitive default provisions included in the terms of the Series B Preferred Stock had been triggered. Those provisions effectively allowed the holders to convert their shares to common stock and put the common stock to the Company for a redemption price per common share of $12.125. Because of the put provision being invoked, the carrying value of the Series B Preferred Stock was adjusted in May 1999 to reflect the calculated redemption value. As the conversion price is decreased by 1.5 percent per month, additional common shares issuable on conversion have been calculated and the redemption amount has been increased as additional charges against income applicable to common stock. As of July 31, 1999, the calculated redemption price was approximately $15.1 million. The recharacterization of the Series B Preferred Stock as a cash obligation of the Company resulted in charges to income applicable to common stock of approximately $4.8 million and $1.1 million in the third and fourth quarters of fiscal 1999, respectively. 13. STOCKHOLDERS EQUITY During the nine months ended July 31, 1999, the Company: (a) issued 628,398 shares of common stock to the former owners of Georgia Electric Company ("GEC") pursuant to the earn-out provision of the acquisition agreement whereby the Company purchased all of the outstanding shares of GEC: (b) Issued 115,286 shares of common stock to a director of the Company in full settlement of amounts due this director and previously reported as "Notes Payable to Directors;" (c) Issued 140,000 options to terminating employees and non-employees resulting in compensation expense of $0.1 million; and (d) Issued 208,461 shares of common stock in connection with the exercise of options. 13 14 14. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted per share (dollars, in thousands):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED JULY 31, JULY 31, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Basic: Income (loss) available to common stockholders (numerator) $ (10,266) $ (7,186) $ (30,070) $ (7,428) Weighted-average number of common shares (denominator) 11,794,718 9,918,292 11,939,517 9,660,921 Income (loss) per common share $ (0.87) $ (0.72) $ (2.52) $ (0.77) Diluted: Income (loss) available to common stockholders (numerator) $ (10,266) $ (7,119) $ (30,070) $ (7,428) Weighted-average number of common shares 11,794,718 9,918,292 11,939,517 9,660,921 Common stock equivalents arising from stock options, warrants and convertible preferred stock 2,138,826 1,683,266 1,248,647 706,234 Total shares (denominator) 13,933,544 11,601,558 13,188,164 10,367,155 Income (loss) per common share(1) $ (0.87) $ (0.72) $ (2.52) $ (0.77)
(1) 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 warrants, stock options, warrants and phantom stock awards. 15. ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities" was issued in June 1998. The Statement requires all derivative instruments to be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement will generally require changes in the derivative's fair value to be recognized currently in operations. The Company expects to adopt SFAS No. 133 during the year ended October 31, 2000. The Company is currently evaluating the effect of the adoption and currently does not expect the adoption of this Statement will have a significant effect on the Company's Consolidated Financial Statements. 14 15 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 nine months ended July 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 acquisitions during the fiscal year ended October 31, 1998, primarily the acquisition of the network construction and transportation systems business of MFS Network Technologies Inc. ("MFSNT"), material changes exist in substantially all balance sheet and statements of operations categories. Additionally, during the fiscal year ended October, 31, 1998, the Company acquired the COMSAT Contracts which generated revenues, costs of revenues and margins as follows:
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31, --------------------------- --------------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Revenues $ 2,493 $ 5,858 $10,579 $ 9,764 Costs of revenues 1,727 2,816 6,842 5,084 ======= ======= ======= ======= Margins $ 766 $ 3,042 $ 3,737 $ 4,680 ======= ======= ======= =======
These revenues, costs of revenues and margins are non-recurring and are not generally indicative of returns the Company expects to achieve on future contracts. 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 FOR THE NINE MONTHS ENDED JULY 31, ENDED JULY 31, -------------------- ------------------- 1999 1998 1999 1998 ----- ----- ----- ----- Revenues: Construction and maintenance 100.0% 100.0% 88.8% 100.0% Conduit sales 0.0% 0.0% 11.2% 0.0% ----- ----- ----- ----- Total revenues 100.0% 100.0% 100.0% 100.0% Costs and expenses: Construction and maintenance costs 85.2% 80.0% 76.1% 78.4% Costs of conduit 0.0% 0.0% 10.8% 0.0% General and administrative 10.6% 9.1% 9.1% 12.8% Impairment on intangible assets 0.0% 0.0% 0.8% 0.0% Depreciation and amortization 2.8% 3.5% 2.8% 4.2% ----- ----- ----- ----- Total costs and expenses 98.6% 92.6% 99.6% 95.4% Income from operations 1.4% 7.4% 0.4% 4.6% Other income (expense), including minority interest (6.7)% (3.8)% (3.2)% 2.2% Provision for (benefit from) income taxes (0.1)% 1.2% 0.0% 0.7% Extraordinary loss from the extinguishment of debt, net of tax 0.0% 0.0% 1.0% 0.0% Net income (loss) (5.3)% 1.4% (3.9)% 0.6% Income (loss) applicable to common stock (10.0)% (12.3)% (9.4)% (6.5)%
REVENUES Construction and Maintenance - Construction and maintenance revenues were $102.8 million and $283.9 million for the three and nine months ended July 31, 1999, respectively, compared to $58.3 million and $115.1 for the same respective periods of fiscal 1998 increases of $44.5 million or 76.3 percent and $ 168.8 million or 146.7 percent, respectively. For the three and nine months ended July 31, 1999, MFSNT generated construction and maintenance revenues of $72.3 million and $190.4 million, respectively. Conduit Sales - Sales of conduit during the three months ended April 30, 1999 generated revenues of $35.7 million. The sale of the conduit inventory, which had previously been reported as held for sale and runs from Ohio to New York, generated net cash flow to the Company of $27.0 million. COSTS AND EXPENSES Construction and Maintenance - Construction and maintenance costs were $87.6 million and $243.2 million for the three and nine months ended July 31, 1999, respectively, compared to $46.6 million and $90.2 million for the same respective periods of fiscal 1998 increases of $41.0 million or 88.0 percent and $153.0 million or 169.6 percent, respectively. For the three and nine months ended July 31, 1999, MFSNT generated construction and maintenance costs of $64.4 million and $168.3 million, respectively. The Company's construction and maintenance margins were 14.8 percent and 14.3 percent for the three and nine months ended July 31, 1999, respectively, compared to 20.0 percent and 21.6 percent for the same respective periods of fiscal 1998. The Company's construction and maintenance margins for the nine months ended have been adversely effected by losses from Dial Communications, Inc. (Dial), a wholly-owed subsidiary of the Company, that has generated negative margins of $1.4 million for the nine months ended July 31, 1999, respectively. As part of the integration of MFSNT into the Company, management has undertaken a consolidation and realignment of all subsidiaries into operational divisions, both to achieve operational synergies and to close unprofitable operations. As a result of significant turnover and the deterioration of underlying contracts, the 15 16 Company closed Dial during the three months ended April 30, 1999. For the nine months ended July 31,1999 Dial had losses before income taxes of $6.1 million, which included a $1.3 million reduction of goodwill. In addition, the Company wrote-off $1.2 million of equipment during the quarter ended April 30, 1999. The reduction of goodwill and the write-off of equipment are reflected in the accompanying statement of operations for the nine months ended July 31, 1999 as "Impairment of Intangible Assets." 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. In addition, the MFSNT acquisition agreements, as amended, provide that on November 30, 2000, the Company shall pay to WorldCom certan amounts, if positive: (i) the difference between $9.0 million related to losses on MFSNT projects in existence on March 31, 1998 and recorded by MFSNT as of June 30, 1998, and the amount actually lost on such contracts through November 30, 2000, (ii) the difference between $3.0 million related to losses on MFSNT projects not recorded by MFSNT as of June 30, 1998 and the amount actually lost on such contracts through November 30, 2000, and (iii) the difference between $5.0 million and the aggregate costs of Able in defending the ligigation, and payments made in settlement or in payment of judgements with respect to preacquisition litigation. The range of this contingent consideration potentially payable to WorldCom is from $0 to $17.0 million. Presently, Company management expects to pay no additional consideration to WorldCom pursuant to the aforementioned provisions. During the three months ended July 31, 1999, the Company completed its allocation of the MFSNT purchase price. The purchase price allocation disclosed in the Company's Form 10-K/A and the final purchase price allocation is as follows (in millions):
FINAL FORM 10-K/A ADJUSTMENTS ALLOCATION ----------- ----------- ---------- Cash and accounts receivable (4) $ 47.0 $ (1.4) $ 45.6 Costs and profits in excess billing on uncompleted contracts (5) 93.7 (5.0) 88.7 Assets held for sale 38.8 -- 38.8 Prepaid expenses 1.0 -- 1.0 Property 5.7 -- 5.7 Goodwill (1) 16.5 9.8 26.3 Accounts Payable (6) (13.7) (0.5) (14.2) Billings in excess of costs and profits on uncompleted contracts (56.6) -- (56.6) Reserve for losses on uncompleted contracts (7) (40.5) 0.6 (39.9) Accrued restructuring costs (2) (2.0) 0.3 (1.7) Property taxes payable (15.0) -- (15.0) Other accrued liabilities (3)(8) (7.4) (3.8) (11.2) ------- ------- ------ Total allocated purchase price $ 67.5 $ -- $ 67.5 ======= ======= ======
(1) Goodwill is being amortized on a straight-line basis over 20 years. (2) Accrued restructuring costs related primarily to severance and benefit costs associated with the involuntary termination of employees pursuant to an approved restructuring plan. During the fiscal year ended October 31, 1998, approximately $1.7 million was incurred and charged against this reserve. The excess reserve of $0.3 million was reversed and goodwill was reduced. (3) Includes allowances for costs related to litigation and claims of $5.0 million which, according to the Plan of Merger, is payable to WorldCom in the event specified litigation costs and claims are not paid by the Company. (4) It was determined that a receivable from WorldCom of $1.4 million should not have been recorded as part of the purchase price allocation. Therefore, the company has adjusted accounts receivable and goodwill. (5) It was determined that certain long-term receivables were recorded at their gross values versus their present values. These receivables are to be paid to MFSNT over 20 years. Therefore, an adjustment of approximately $5.0 million to cost and profits in excess of billings (i.e. unbilled receivables) and goodwill was necessary to properly reflect the present value of these receivables. Refer to Note 5, "Network Assets Held For Sale." (6) It was determined that $0.5 million of accounts payable assumed had not been included in the original purchase price allocation. The Company adjusted accounts payable and goodwill to reflect these accounts payable. (7) The Company reviewed its estimates of losses on loss contracts and recorded adjustments to such reserves. The adjustments decreased the reserves and goodwill by $0.6 million. (8) Subsequent to the acquisition of MFSNT, the Company recorded an additional accrued liability of $3.8 million relating to a claim not previously recognized by MFSNT. General and Administrative - General and administrative expenses were $10.9 million and $29.2 million for the three and nine months ended July 31, 1999, respectively, compared to $5.3 million and $14.7 million for the same respective periods of fiscal 1998 increases of $5.6 million or 106.0 percent and $14.5 million or 98.6 percent, respectively. For the three and nine months ended July 31, 1999, general and administrative expense attributable to MFNST was $3.6 million and $10.9 million, respectively. General and administrative expenses during the three and nine months ended July 31, 1999 were adversely effected by charges of $0.9 million related to deferred compensation, stock compensation and severance agreements with former and existing officers of the Company. Depreciation and Amortization - Depreciation and amortization expense was $2.9 million and $8.9 million for the three and nine months ended July 31, 1999, respectively, compared to $2.0 million and $4.9 million for the same respective periods of fiscal 1998 increases of $0.9 million or 45.0 percent and $4.0 million or 81.6 percent, respectively. For the three and nine months ended July 31, 1999, depreciation and amortization expense attributable to MFSNT was $1.7 million and $2.9 million, respectively. Depreciation and amortization expense as a percentage of revenues was 2.8 percent and 2.8 percent for the three and nine months ended July 31, 1999, respectively, compared to 3.5 percent and 4.2 percent for the same respective 16 17 periods of fiscal 1998. These decreases as a percentage of revenue, are attributable to the significant increase in revenues from MFSNT which, as a construction management company, does not require the same percentage increase in capital assets as the Company's construction companies. OTHER INCOME (EXPENSE) Other income (expense) was $(6.9) million and $(10.5) million for the three and nine months ended July 31, 1999, respectively, compared to $(2.8) million and $(3.7) million for the same respective period of fiscal 1998 and consist of the following:
FOR THE THREE MONTHS ENDED JULY 31, ---------------------------------------------------- CHANGE 1999 1998 $CHANGE % CHANGE - ------ -------- ------- -------- -------- Change in the value of stock appreciation rights $(3,792) $ 0 $(3,792) -- Interest expense (2,070) (1,304) (766) (58.7)% Minority interest (93) (314) 221 70.4 Other (1,037) (1,205) 168 13.9 ------- ------- ------- ----- $(6,992) $(2,823) $(4,169) (147.7)% ======= ======= ======= =====
FOR THE NINE MONTHS ENDED JULY 31, ------------------------------------------------------- 1999 1998 $CHANGE % CHANGE ------- -------- -------- -------- Change in the value of stock appreciation rights $ (1,896) $ -- $(1,896) -- Interest expense (6,758) (2,092) (4,666) (223.0)% Minority interest (292) (610) 318 52.1% Other (1,592) (1,046) (546) (52.2)% -------- ------- ------- ------ $(10,538) $(3,748) $(6,790) (181.2)% ======== ======= ======= ======
Stock Appreciation Rights - The change in the value of the stock appreciation rights is a non-cash item related to the value of amounts potentially owed to WorldCom under the existing WorldCom stock appreciation rights (WorldCom SARs). Management expects the conversion of WorldCom SARs into options for the Company's common stock at the Company's next shareholders' meeting and will not result in a cash charge to the Company. The 17 18 value of the WorldCom SARs will be increased or decreased based on the intrinsic value of the WorldCom SAR's utilizing the price of the Company's common stock at each reporting date until the WorldCom SARs are converted to options or exercised by WorldCom. Interest Expense - The increase in interest expense during fiscal 1999 compared to fiscal 1998 is primarily attributable to the acquisition of MFSNT. During the three and nine months ended July 31,1999, the Company had $35.0 million outstanding under its Credit Facility with an average interest rate of approximately 7.5 percent, $30.0 million outstanding under the WorldCom Note with an interest rate of 11.5 percent and $15.0 million outstanding under its property taxes payable that imputes interest at 15 percent. The $32.0 million outstanding under the WorldCom Advance is non-interest bearing. PROVISION FOR (BENEFIT FROM) INCOME TAXES The provision for (benefit from) income taxes was $(0.1) million and $(0.1) million for the three and nine months ended July 31, 1999, respectively, compared to $0.7 million and $0.9 million for the same respective periods of fiscal 1998 increases (decreases) of $(0.8) million or 114.3% percent and $(1.0) million or 111.1% percent, respectively. EXTRAORDINARY LOSS During the nine months ended July 31, 1999, the Company purchased all of its outstanding Senior Subordinated Notes with an outstanding principal balance of $10.0 million resulting in an extraordinary loss from the early extinguishment of debt of $3.1 million. The Senior Subordinated Note were purchased with proceeds from the WorldCom Advance. INCOME (LOSS) APPLICABLE TO COMMON STOCK Income (loss) applicable to common stock was $(10.3) million and $(30.1) million for the three and nine months ended July 31, 1999, respectively, compared to $(7.2) million and $(7.4) million for the same respective periods of fiscal 1998 increases of $(3.1) million or 43.1 percent and $(22.7) million or 306.8 percent, respectively. During the nine months ended July 31, 1999, the Company purchased 2,785 shares, or approximately 78 percent, of the Company's outstanding Series B Preferred Stock, modified the conversion price of the remaining Series B Preferred Stock, modified the terms of the Series B Preferred Stock Warrants and recorded an increase in the default redemption value of the Series B Preferred Stock resulting in charges to income applicable to common stock of $17.4 million. Additionally, during the three and nine months ended July 31, 1999, dividends on the Series B Preferred Stock totaled $0.3 million. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $15.6 million at July 31, 1999 compared to $13.5 million at October 31, 1998. The increase in cash and cash equivalents of $2.1 million during the nine months ended July 31, 1999 resulted from cash provided by operating and financing activities of $7.1 million and $1.1 million, respectively, offset by cash used in investing activities of $6.1 million. Cash provided by operating activities during the nine months ended July 31, 1999 of $7.1 million is primarily the result of net unrestricted proceeds from conduit sales of $20.0 million offset, in part, by costs on loss contracts of $14.3 million that were charged against the reserve for contract losses. Cash used in investing activities during the nine months ended July 31, 1999 of $4.3 million is due to net capital expenditures required to support increased operations and replacement of existing equipment. Cash used in financing activities during the nine months ended July 31, 1999 of $0.8 million is due primarily to redemptions of Series B Preferred Stock, net repayments of long term debt and other borrowings, dividends paid on preferred stock, proceeds from the issuance of stock options and the repurchase of some of the Series B Preferred Stock warrants. 18 19 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 non-interest bearing and 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. As of July 31, 1999, the Company had fully utilized its availability under its Credit Facility. WorldCom has agreed to make available additional non-interest bearing 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. As of July 31, 1999 and the date of this filing, no amounts were outstanding under WorldCom's obligation to provide such additional advances. 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 October 30, 1999 may 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. 19 20 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. Additionally, the Company has no independent verification nor validation processes to assure the reliability of third party relationships' risks and cost estimates. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Since inception of its program through October 31, 1998, 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. 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 or a third-party vendor or service provider on which 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 a contingency 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. 20 21 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 conversions, 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 testing certain non-IT systems, the perceived cost-benefit constraints against 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): EXPECTED MATURITY DURING THE FISCAL YEARS ENDED
1999 2000 2001 2002 2003 THEREAFTER ------ ------ ------- ------ ------ ---------- Fixed rate debt $3,216 $2,543 $32,109 $1,895 $1,703 $6,355 Average interest rate 12.6% 13.0% 11.9% 15% 15% 15% Variable rate debt $ -- $ -- $35,000 $ -- $ -- $ -- Average interest rate --% --% 7.5% --% --% --%
21 22 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 July 31, 1999. Additionally, foreign currency transaction gains and losses were not material to the Company's results of operations for the six months ended July 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 12, 1998, the Company granted options to purchase 150,000 shares of the Company's common stock, par value $0.001 per share ("Common Stock") to two employees of the Company. The options were granted pursuant to the Company's 1995 Stock Option Plan, as amended (the "Plan"), are non-qualified, vested over three years, are exercisable at $7.125 per share, and expire on July 8, 2000. In addition, on November 12, 1998, the Company granted options to purchase 350,000 shares of Common Stock to employees of the Company's subsidiaries acquired in connection with the MFSNT acquisition. The options were granted outside the Plan. On December 23, 1998, the Company granted options to purchase 12,500 shares of Common Stock to employees of the Company. The options were granted pursuant to the Plan, are qualified, vested immediately, are exercisable at $5.75 per share, and expire on December 31, 2004. On December 31, 1998, in an effort to correct certain of the actions taken by the Company's Board of Directors in order to maintain compliance with the Plan, as amended, the Board of Director's rescinded certain of the stock option grants made during the fiscal year ended October 31, 1998, or 530,000 options under the Plan and 310,000 options outside the Plan. These ambiguities and compliance issues included, in certain instances, (i) granting options that had been granted inside the Plan where there were not a sufficient number of shares available, (ii) granting options at below market prices to nonemployee directors with the Plan, contrary to terms of the Plan, (iii) not specifying whether the grants were issued inside or outside the Plan, (iv) not specifying the exercise period for the options granted or (v) issuing options outside the Plan, which could be considered contrary to the terms of certain financing documents. These options, which vested immediately, were reissued at the fair market value ($5.75 per share), as defined by the Plan, on December 31, 1998, as well as shortened certain of the expiration dates of the options. In addition, the Company rescinded and reissued the 350,000 options outside the Plan and the 150,000 options pursuant to the Plan described above on December 31, 1998 at $5.75 per share for the reasons described above. These options vested immediately and expire on November 12, 2004 (outside the Plan) and December 31, 2004 (pursuant to the Plan). On December 31, 1998, the Company granted options to purchase 1,050,000 shares of Common Stock to employees of the Company's subsidiaries acquired in connection with the MFSNT acquisition. The options were granted outside the Plan, are non-qualified, vest over three years, are exercisable at $5.75 per share, and expire on November 12, 2004. On December 31, 1998, the Company granted options to purchase 40,000 shares of Common Stock to an employee of the Company. The options were granted outside the Plan, are non-qualified, 20,000 of which vested on January 1, 1999, 10,000 vest on December 31, 1999 and 10,000 vest on December 31, 2000, are exercisable at $5.75 per share, and expire on the earlier of September 19, 2005 or two years after the date of termination. On December 31, 1998, the Company granted options to purchase 180,000 shares of Common Stock to three employees of the Company. The options were granted pursuant to the Plan, are non-qualified, vested immediately, are exercisable at $5.75 per share, and expire on December 31, 2001. 22 23 On February 17, 1999, 2,785 shares of non-voting Series B Convertible Preferred Stock, $0.10 par value ("Series B Preferred Stock") were purchased by the Company for approximately $18.9 million and retired. In connection with the purchase of the 78% of the Series B Preferred Stock, the Company agreed to certain modifications in the conversion price of the related warrants. The terms of the existing Series B Preferred Stock conversion price for the remaining shares were modified from 97% of market value, as defined in the agreements, to a fixed amount of approximately $3.50 per share for 404 of the remaining 779 shares. The conversion price of (i) warrants to purchase a total of 370,000 shares of the Company's common stock was reduced to $13.25 per share and (ii) warrants to purchase a total of 630,000 shares of common stock was reduced to $13.50 per share. On May 7, 1999, the warrants to purchase the 630,000 shares of common stock were purchased by the Company for $3.00 per share. On February 19, 1999, 628,398 shares were issued to the former owners, or their assignees, of Georgia Electric Corporation ("GEC") pursuant to the earn-out provision of the acquisition agreement whereby the Company purchased all of the outstanding stock of GEC. Effective April 1, 1999, the Company granted to an employee options to purchase 100,000 shares of Common Stock. The options were granted outside the Plan, are non-qualified, 75,000 of which vested immediately with the remaining 25,000 vesting on June 21, 2000, are exercisable at $6.375 per share, and expire at the earlier of September 19, 2005 or two years from the date of termination. Effective April 1, 1999, the Company granted a consultant options to purchase 40,000 shares of Common Stock. The options were granted outside the Plan, are non-qualified, 20,000 of which vested immediately, 10,000 vest on April 1, 2000, and 10,000 vest on April 1, 2001, are exercisable at $6.375 per share, and expire two years from the date of expiration of the consulting agreement or any extensions or renewals thereof. On April 30, 1999, the Company granted to an employee a restricted stock award of 50,000 shares of Common Stock. On April 30, 1999, the Company converted a payable to a Director of the Company in the amount of $0.8 million into 118,286 shares of Common Stock based upon a conversion rate equal to the fair market value of the Company's common stock on the date of conversion, or $7.00 per share. ITEM 3. DEFAULTS UPON SENIOR SECURITIES For the period from November 1, 1998 through February 17, 1999, the Company was in violation of the payment terms of its $10.0 million principal amount 12% Senior Subordinated Notes (the "Senior Notes"). These Senior Notes were purchased from the holders effective February 17, 1999, as described above, and subsequently canceled. The Company was not in compliance with certain provisions (i.e., certain minimum ratios, total debt limitations) of the Company's $35.0 million three-year senior secured revolving credit facility ("Credit Facility") during the six months ended April 30, 1999. The Company has obtained a waiver for its noncompliance during the six months ended April 30, 1999. During the three months ended April 30, 1999, the Credit Facility was amended to change certain minimum ratios. In February 1999, as was reported on the Company's Form 10-K/A, approximately 78% 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 a registration statement covering the resale of shares of common stock underlying the Series B Preferred Stock and warrants associated with the Series B Preferred Stock (the "Registration Statement"). The purchaser and the remaining holders of the Series B Preferred Stock agreed to either waive all outstanding defaults under such securities or refrain from exercising any remedies with respect to any such outstanding defaults for a period of 90 days from February 17, 1999. During such period of time, the Company had agreed to use its best efforts to have the Registration Statement declared effective. To date, the Registration Statement has not been declared effective. In May 1999, the holders of the remaining 22% agreed to a further extension from May 19, 1999 until August 18, 1999. In addition, during the second quarter ended April 30, 1999, the Company was and continues to be in default on the 23 24 Series B Preferred Stock for the nonpayment of dividends related to the remaining 22% (or 779 shares) of shares of Series B Preferred Stock. 24 25 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) 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)
25 26 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) 2.5.9.1 Amendment and Restatement of Financing Agreement by and between WorldCom Network Services, Inc. and Able Telcom Holding Corp. dated April 1, 1999 (16) 2.5.10 Agreement dated March 15, 1999 by and between Able Telcom Holding Corp. and WorldCom Network Services, Inc. (16) 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) 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)
26 27 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) 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) 10.32.1 Amendment and Amended and Restated Limited Waiver to June 11, 1998 Credit Agreement among Able Telcom Holding Corp., NationsBank N.A., and the Several Lenders from Time to Time Parties thereto, dates as of June 30, 1998 (14) 10.33 Employment Agreement with Billy V Ray, Jr., dated December 1, 1998 (12) 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)
27 28 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) 10.41.1 Termination Agreement between Able Telcom Holding Corp. and Cotton Communications, Inc. dated March 22, 1999 (14) 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) 10.44 Employment Agreement with Michael Arp, dated January 1, 1999 (14) 10.45 Consulting Agreement and Employment Agreement with James E. Brands, dated March 15, 1999 (14) 10.46 Employment Agreement with Michael Summers, dated May___, 1999(16) 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 Restated Financial Data Schedule
(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 6 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), 28 29 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. (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, as amended April 8, 1999. (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. (16) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-21986), for the quarter ended April 30, 1999, as filed June 14, 1999. (b) Reports on Form 8-K On February 16, 1999, the Company filed a Current Report on Form 8-K (File No. 0-21986), dated February 16, 1999, announcing earnings for the fiscal year ended October 31, 1998 and the timing of filing the Annual Report on Form 10-K. On March 16, 1999, the Company filed a Current Report on Form 8-K (File No. 0-21986), dated March 12, 1999, announcing the resignation of Gideon D. Taylor from the Company's Board of Directors. 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. (REGISTRANT) May 26, 2000 By: /s/ BILLY V. RAY, JR. -------------------------------- Billy V. Ray, Jr. Chief Executive Officer 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 NINE MONTHS ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS OCT-31-1999 NOV-01-1998 JUL-31-1999 15,649 0 80,041 930 0 167,393 50,532 22,154 262,444 123,140 0 0 15,096 12 7,313 262,444 0 319,590 277,887 318,470 3,780 0 6,758 (9,126) (86) (9,332) 0 3,067 0 (12,399) (2.52) (2.52)
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