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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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________.
COMMISSION FILE NUMBER 0-21986
ABLE TELCOM HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0013218
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1601 FORUM PLACE
SUITE 1110
WEST PALM BEACH, FLORIDA 33401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(561) 688-0400
(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 October 9, 1998, there were 11,065,670 shares, par value $.001
per share, of the Registrant's Common Stock outstanding.
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<PAGE>
<TABLE>
<CAPTION>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 1998 (Unaudited)
and October 31, 1997...................................................... 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months and nine months ended July 31, 1998 and 1997.......... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended July 31, 1998 and 1997........................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities........................................................ 16
Item 3. Default Upon Senior Securities............................................... 16
SIGNATURES........................................................................................... 17
</TABLE>
2
<PAGE>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, OCTOBER 31,
1998 1997(1)
--------- ----------
<S> <C> <C>
ASSETS
Currents Assets:
Cash and cash equivalents........................................ $ 5,078,750 $ 6,229,602
Accounts receivable, net......................................... 59,696,806 13,399,327
Inventories...................................................... 22,016,046 1,257,218
Costs and profits in excess of billings on uncompleted contracts 100,216,707 5,614,813
Prepaid expenses and other current assets........................ 2,281,426 508,591
------------ -----------
Total current assets......................................... 189,289,735 27,009,551
Property and equipment, net........................................ 27,885,038 13,113,638
Other assets:
Goodwill, net.................................................... 14,156,511 8,341,064
Other non-current assets......................................... 3,265,463 1,881,741
------------ -----------
Total other assets........................................... 17,421,974 10,222,805
------------ -----------
Total assets................................................. $234,596,747 $50,345,994
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term-debt................................ $ 6,340,229 $ 3,154,428
Accounts payable................................................. 29,197,037 5,392,871
Billings in excess of costs and profits on uncompleted contracts. 42,084,937 291,165
Accrued and other current liabilities............................ 22,693,872 4,130,173
------------ -----------
Total current liabilities.................................... 100,316,075 12,968,637
Long-term debt, non-current portion.............................. 55,932,136 14,139,567
Other non-current liabilities.................................... 28,582,100 1,277,866
------------ -----------
Total liabilities............................................ 184,830,311 28,386,070
Contingencies...................................................... _____ _____
Convertible redeemable Series A preferred stock, $.10 par value,
authorized, 1,000,000 shares; 995 shares issued and outstanding
at October 31, 1997............................................. _____ 6,713,314
Convertible redeemable Series B preferred stock, $.10 par value,
authorized 1,000,000 shares, 4,000 shares issued and outstanding
at July 31, 1998................................................ 14,690,000 _____
Shareholders' Equity:
Common stock, $.001 par value, authorized 25,000,000 shares;
10,057,743 and 8,580,422 shares issued and outstanding at
July 31, 1998 and October 31, 1997, respectively................ 10,058 8,579
Additional paid-in capital...................................... 33,686,277 15,095,863
Dividends on preferred stock.................................... (203,846) _____
Retained earnings............................................... 1,583,947 142,168
------------ -----------
Total shareholders' equity................................... 35,076,436 15,246,610
------------ -----------
Total liabilities and shareholders' equity................... $234,596,747 $50,345,994
============ ===========
<FN>
- -----------------
(1) The balance sheet at October 31, 1997 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.
</FN>
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................................. $57,704,843 $21,984,127 $114,524,482 $61,181,275
Costs and expenses:
Costs of revenues....................... 46,421,401 17,618,429 89,640,694 47,652,773
General and administrative.............. 4,637,348 2,143,050 12,703,229 6,366,327
Depreciation and amortization........... 1,883,374 1,197,826 4,468,311 3,237,199
----------- ----------- ------------ -----------
Total costs and expenses.............. 52,942,123 20,959,305 106,812,234 57,256,299
----------- ----------- ------------ -----------
Income from operations.................... 4,762,720 1,024,822 7,712,248 3,924,976
Other expense, net........................ 2,222,315 83,355 2,656,780 654,602
----------- ----------- ------------ -----------
Income before income taxes and
minority interest....................... 2,540,405 941,467 5,055,468 3,270,374
Provision (benefit) for income taxes...... 712,963 (33,778) 1,669,721 850,432
----------- ----------- ------------ -----------
Income before minority interest........... 1,827,442 975,245 3,385,747 2,419,942
Minority Interest......................... 363,214 42,668 756,495 130,148
----------- ----------- ------------ -----------
Net income................................ 1,464,228 932,577 2,629,252 2,289,794
Preferred stock dividends................. 21,267 75,000 203,846 185,000
Discount attributable to beneficial
conversion privilege of preferred
stock.................................. 618,557 366,231 723,330 938,831
----------- ----------- ------------ -----------
Income applicable to common stock......... $ 824,404 $ 491,346 $ 1,702,076 $ 1,165,963
=========== =========== ============ ===========
Income per common share (See Note 6):
Basic................................... $ 0.08 $ 0.06 $ 0.18 $ 0.14
=========== =========== ============ ===========
Diluted................................. $ 0.07 $ 0.06 $ 0.18 $ 0.14
=========== =========== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED JULY 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash provided by operating activities............................. $ 5,882,784 $ 3,761,221
Investing Activities:
Capital expenditures, net....................................... (8,743,600) (2,375,226)
Acquisitions of businesses (net of cash acquired of $4,704,829
in 1998 and $403,617 in 1997)................................. (1,209,462) (2,596,383)
Sale of investments, net.......................................... 0 625,000
------------ -----------
Net cash used in investing activities........................... (9,953,062) (4,346,609)
------------ -----------
Financing Activities:
Repayments of long-term debt and other borrowings............... (91,074,992) (7,526,293)
Proceeds from the issuance of long-term debt
and other borrowings.......................................... 71,413,238 6,131,459
Net proceeds from preferred stock offering...................... 20,000,000 5,664,148
Proceeds from the exercise of stock options..................... 2,784,367 21,312
Dividends paid on preferred stock............................... (203,846) (150,000)
Other........................................................... 659 (440,731)
------------ -----------
Net cash provided by financing activities..................... 2,919,426 3,699,895
------------ -----------
(Decrease) increase in cash and cash equivalents.................. (1,150,852) $ 3,114,507
Cash and cash equivalents, beginning of period.................... 6,229,602 $ 3,267,161
------------ -----------
Cash and cash equivalents, end of period.......................... $ 5,078,750 $ 6,381,668
============ ===========
Supplemental Disclosure:
Valuation of detachable warrants................................ $ 6,644,284 $ --
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATION AND BASIS OF PRESENTATION
Able Telcom Holding Corp. and subsidiaries ("Able" or the "Company")
specializes in the design, installation, maintenance and system
integration of advanced communication networks for voice, data and video
systems. These services are provided for an array of complimentary
applications, including telecommunications infrastructure, traffic
management systems, automated manufacturing systems and utility networks.
In the opinion of management, the unaudited condensed consolidated
financial statements furnished herein include all adjustments, consisting
of only recurring adjustments necessary for a fair presentation of the
results of operations for the interim periods presented. These interim
results of operations are not necessarily indicative of results for the
entire year. The condensed consolidated financial statements contained
herein should be read in conjunction with the consolidated financial
statements and related notes contained in the Company's 1997 Annual Report
on Form 10-K ("Form 10-K").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions on
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required for complete
financial statements.
Certain items in the condensed consolidated financial statements as of
July 31, 1997 and October 31, 1997 have been reclassified to conform with
the current presentation.
2. ACQUISITIONS
On December 2, 1996, the Company, through a wholly owned subsidiary,
acquired all of the outstanding common stock of Dial Communications, Inc.
("Dial"). As consideration, the Company paid $3.0 million in cash, issued
108,489 shares of common stock and issued an $0.9 million promissory note.
The acquisition was accounted for using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, BUSINESS
COMBINATIONS ("APB No. 16"), and approximately $1.5 million of goodwill
was recorded which is being amortized on a straight line basis over 20
years. The results of operations of Dial have been included since the date
of acquisition. The cash component of the purchase was funded in part from
the Company's line of credit and the remainder through a $1.9 million term
loan from a bank. On July 15, 1997, this initial debt was repaid with an
approximately $3.0 million term note.
On February 25, 1998, the Company, through its wholly owned subsidiary,
Georgia Electric Company ("GEC") acquired substantially all of the assets
and assumed certain liabilities of COMSAT RSI Acquisition, Inc. (d/b/a/
COMSAT RSI JEFA Wireless Systems) ("COMSAT"), a subsidiary of COMSAT
Corporation. As part of the transaction, GEC assumed certain construction
contracts with the Texas Department of Transportation and various other
telecommunications customers. GEC acquired the accounts receivable and
fixed assets of the seller, assumed its trade payables, and received a
cash payment from the seller at closing of approximately $4.7 million. In
addition, the Company recorded significant accruals related to the
contracts assumed of approximately $12.5 million, of which approximately
$4.9 million remains outstanding at July 31, 1998 and is reflected as
accrued and other current liabilities in the consolidated balance sheet.
The acquisition was accounted for using the purchase method of accounting
in accordance with APB No. 16.
On April 1, 1998, the Company purchased all of the outstanding common
stock of Patton Management Corporation ("Patton") for a total purchase
price of approximately $4.0 million, of which approximately $1.7 million
was
6
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
funded by the Company's revolving credit facility (See Note 3). The
acquisition was accounted for using the purchase method of accounting in
accordance with APB No. 16. Approximately $2.8 million in goodwill was
recorded, which is being amortized on a straight line basis over 20 years.
The results of operations of Patton have been included since the date of
acquisition. In connection with the acquisition, approximately $3.6
million in long-term debt outstanding at Patton, excluding that related to
capital lease obligations, was repaid in April 1998 from the Company's
revolving credit facility.
On July 2, 1998, Able acquired all of the outstanding common stock of MFS
Network Technologies, Inc. ("MFSNT") from MFS Communications Company, Inc.
("MFSCC"), a subsidiary of Worldcom, Inc. ("WorldCom") pursuant to a
merger agreement dated April 26, 1998 ("Plan of Merger"). The purchase
price was originally equal to the shareholders' equity of MFSNT as of
March 31, 1998, subject to certain adjustments, including adding back the
cumulative advance by MFSCC or its affiliates to MFSNT, plus $10.0
million. The purchase price at that time was projected to be $101.4
million, as well as additional consideration in the form of options as
described below. On September 9, 1998, the Company and WorldCom Network
Services, Inc. ("WorldCom Network"), a wholly owned subsidiary of
WorldCom, as assignee from MFSCC, entered into an agreement amending
various terms of the transaction (the "September Agreement").
The September Agreement, among other things, finalizes the cash portion of
the purchase price of MFSNT at approximately $58.8 million (which was
determined by negotiation without reference to the original purchase
formula). The cash portion of the purchase price is subject to additional
amounts payable as contingent consideration on December 29, 2000 which
relate to the resolution of certain pre-acquisition contingencies for
pending litigation, claims, assessments and losses on certain projects.
Additionally, the general terms and conditions of the grant of stock
options (as previously granted pursuant to the Plan of Merger) and a
phantom stock award or other equity participation award to be granted were
also addressed.
As of July 31, 1998 the Company paid $33.6 million of the consideration in
cash, and temporarily financed the then estimated remaining amount with a
seller note originally issued for $86.4 million, with a 12% note ("MFSNT
Note") delivered to MFSCC. As security for the MFSNT Note and an indemnity
agreement, the Company has pledged to Worldcom and MFSCC all of the shares
of MFSNT. Pursuant to the September Agreement, the MFSNT Note will be
replaced by a new promissory note between the Company and WorldCom Network
in the principal amount of $30.0 million at an interest rate of 11.5% (the
"New Note"). The New Note represents $20.0 million associated with the
remaining cash portion of the purchase price of MFSNT and $10.0 million
relates to an estimated advance for receivables of MFSNT, subject to
certain adjustments. The New Note matures December 15, 2000 and may be
prepaid without penalty. The principal amount of the New Note is to be
prepaid by applying a portion of certain fees (i) due to the Company by
WorldCom and (ii) received by the Company in connection with the lease and
installation of certain conduit projects.
The cash portion of the purchase price was obtained in part from the
Company's operations and its line of credit. Additionally, a portion was
paid with certain of the proceeds from a private offering, which closed on
June 30, 1998 of (i) 4,000 shares of the Company's Series B Convertible
Preferred Stock, par value $.10, which bear annual dividends of 4%, and
(ii) warrants to purchase up to an aggregate of 1,000,000 shares of the
Company's common stock at $19.80 per share for a period of five years from
the date of grant. See Note 4.
The Company's senior lender and the holder of the Company's $10.0 million
12% Senior Subordinated Notes (the "12% Notes") consented to the original
MFSNT Note and the stock pledge agreement. In connection with the consent
of the 12% Notes holders, the Company agreed to prepay the 12% Notes,
together with a prepayment penalty, on August 31, 1998, which was extended
until October 16, 1998. See Note 3.
Pursuant to the merger agreement, the Company agreed with WorldCom, MFSCC
and its affiliates to assume (a) their obligations under a certain
Guaranty Agreement in favor of Credit Lyonnais' New York branch, as
Administrative Agent for lenders, under a Credit Agreement dated November
1, 1996 between the lenders and Kanas Telcom, Inc., a partially-owned
affiliate of MFSNT, and (b) their obligations under surety indemnity
agreements relating to various surety bonds issued in favor of MFSNT.
In addition, MFSNT entered into a five-year Master Services Agreement with
WorldCom Network to provide telecommunications infrastructure services to
WorldCom affiliates for a minimum of $40.0 million per year, provided that
the aggregate sum payable to MFSNT shall be not less than $325.0 million,
including a fee of 12% of reimbursable costs under the agreement
("Aggregate Sum"). To achieve these established minimums, WorldCom Network
has agreed to award MFSNT at least 75% of all of WorldCom Network's
outside plant work related to its local network projects. If MFSNT
declines any of the first $130.0 million of contract work in any year of
the agreement, the value of the declined work reduces the Aggregate Sum.
MFSNT has agreed that WorldCom Network will have met all of its
obligations to MFSNT to the extent that payments to MFSNT reach an
aggregate of $500.0 million at any time during the five-year term.
7
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
As was the case for the MFSNT Note, it is anticipated that if the New Note
is in default, WorldCom Network's obligations under the Master Services
Agreement would be reduced in certain respects, and it would not be
obligated to order further work under the Master Services Agreement during
the period the New Note remained in full. In addition, upon a default
under the New Note, WorldCom and MFSCC would have the right to retain the
shares of MFSNT as well as all payments made by the Company under the New
Note, and in certain circumstances WorldCom could have a claim against the
Company for any balance due under the New Note in excess of the deemed
value of MFSNT as calculated under the stock pledge agreement.
Under the merger agreement, the Company is entitled to use the name
"MFSNT" during the 18-month transition period commencing July 2, 1998, and
will not be entitled to use it after such 18-month period.
Pursuant to the Plan of Merger, as amended, the Company also granted to
MFSCC an option to purchase up to 2,000,000 shares of the Company's common
stock, during the period commencing July 2, 1998 ending six months after
payment of the MFSNT Note, as amended by the September Agreement to extend
the exercise period. The exercise price is $7.00 per share, except that
MFSCC may elect to exercise the option, in whole or in part, on a
"cashless" basis under which it will receive shares of common stock with a
market value equal to the difference between the common stock's then
market price and $7.00, subject to a 1,817,941 share limitation. Should
the options be exercised, MFSCC will be entitled to designate a
representative to serve on the Company's Board of Directors as long as
MFSCC retains these shares aggregating at least 5.0% of the then
outstanding shares. In addition, pursuant to the September Agreement, the
Company agreed to issue a phantom stock award or other equity
participation award which covers an amount equivalent to 600,000 shares of
the Company's common stock, payable in cash, stock or a combination
thereof at the Company's option, and which is exercisable with respect to
the following three days: July 2, 1999, July 2, 2000, or July 2, 2001.
When issued, WorldCom will be entitled to receive any appreciation of the
common stock over a base price of $5-3/32 per share, but not more than
$30-3/32 per share.
The September Agreement also modified certain other provisions including,
among other things, (i) extending the term of the stock pledge agreement
(whereby the stock of MFSNT was pledged as security for certain of the
Registrant's obligations to WorldCom), (ii) indemnifying WorldCom Network
and its affiliates arising out of MFSNT's operations, exclusive of certain
matters, and (iii) executing mutual releases between the parties. The
final terms and conditions of the September Agreement, including the
provisions thereof relating to a grant of a phantom stock award or other
equity participation award, are expected to be more fully set forth in
certain additional agreements in the future and may be modified to conform
with other agreements of the Company and various third parties or may
require certain consents or waivers from such third parties (including the
New Credit Facility lenders as described below). There can be no
assurance, however, that the Company will be able to so modify or conform
the terms of the September Agreement or obtain appropriate waivers or
consents. The failure to do so could have a material adverse effect on the
financial condition of the Company.
The acquisition of MFSNT was accounted for using the purchase method of
accounting, in accordance with APB No. 16, whereby all assets acquired and
liabilities assumed were fair-valued, which resulted in negative goodwill
totaling approximately $50.7 million which was first allocated to fixed
assets, reducing them to zero, with the remainder reducing the value of
certain ongoing projects. The results of operations of MFSNT have been
included since the date of acquisition.
The following summarizes the fair value of the assets acquired and the
liabilities assumed in connection with the acquisition of MFSNT on July 2,
1998 (in millions):
<TABLE>
<CAPTION>
ALLOCATION OF
NEGATIVE FAIR VALUE
FAIR VALUE GOODWILL RECORDED
---------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents............................................. $ 0.5 $ 0.5
Accounts receivable................................................... 46.3 46.3
Costs and profits in excess of billings on uncompleted contracts...... 82.6 82.6
Resalable conduit inventory........................................... 65.7 ($45.0) 20.7
Prepaid expenses and other current assets............................. 0.5 0.5
Property, plant and equipment......................................... 5.7 (5.7) --
Accounts payable...................................................... (13.7) (13.7)
Billings in excess of costs and profits on uncompleted contracts...... (42.3) (42.3)
Accrued liabilities................................................... (35.8) (35.8)
Note payable.......................................................... (58.8) (58.8)
Negative Goodwill................................................ (50.7) 50.7 --
</TABLE>
The pro forma unaudited results of operations for the three and nine
months ended July 31, 1998 and 1997, assuming consummation of the
purchases for Dial, COMSAT, Patton, and MFSNT at the beginning of the
respective periods are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................................. $91,401,281 $108,773,491 $297,350,870 $325,662,942
Basic loss per share:
Loss applicable to common stock........ $(3,478,554) $ (3,248,049) $(15,752,820) $ (9,026,577)
Loss per common share.................. $ (0.35) $ (0.39) $ (1.63) $ (1.09)
Diluted loss per share:
Loss applicable to common stock........ $(3,457,287) $ (3,173,049) $(15,548,974) $ (8,841,577)
Loss per common share.................. $ (0.30) $ (0.34) $ (1.50) $ (1.00)
</TABLE>
The unaudited pro forma information does not purport to be indicative of
the results of operations which would have resulted had the acquisitions
been consummated at the date assumed.
3. BORROWINGS
On June 1, 1997, the Company entered into a $6.0 million Line of Credit
Facility (the "Line of Credit"). The Line of Credit was due March 1, 1998
with interest payable monthly and contained covenants which required among
other conditions, that the Company maintain certain tangible net worth,
working capital and debt service coverage. The Line of Credit was
collateralized by all real and personal property of the Company. The
proceeds of the Line of Credit were used to repay existing debt, purchase
assets and for working capital requirements. This amount was repaid with
proceeds from the Company's new revolving credit agreement described
below.
8
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
Effective January 6, 1998, the Company issued $10.0 million of unsecured
12% Senior Subordinated Notes due January 6, 2005 (the "12% Notes") with
detachable warrants to purchase 409,505 shares of common stock at a price
of $8.25 per share. The warrants were fair valued at approximately $1.2
million and are reflected as debt discount on the consolidated balance
sheet at July 31, 1998. Amortization of debt discount for the nine months
ended July 31, 1998 totaled $0.1 million. Interest under the 12% Notes is
payable semi-annually in arrears. Equal principal payments are due in
January 2004 and 2005 giving the 12% Notes an average life of six and
one-half years. The agreement, pursuant to when the 12% Notes were issued,
contains covenants which require, among other conditions, that the Company
maintain certain tangible net worth, minimum fixed charge coverage and
limitations on total debt and which limit the Company's ability to pay
dividends and make certain other payments, make investments and sell
assets or subsidiaries. The proceeds from the issuance of the 12% Notes
were used for current working capital needs, to pay off existing debts and
to provide liquidity to finance growth and certain expenditures, including
acquisitions, associated with the Company's overall strategic plan.
Between May 29, 1998 and September 17, 1998, the Company received either
waivers and/or consents, or letters of forbearance relating to the
acquisition of MFSNT and the related financing of the acquisition. These
letters also accelerated the expiration date of the 12% Notes to August
31, 1998, which has been extended through October 16, 1998 by the last
letter dated September 17, 1998. At July 31, 1998, this amount has been
reflected as long-term debt as it is expected to be refinanced with long
term debt. The Company believes that it will be able to refinance or
further extend the time for payment of the 12% Notes due October 16, 1998.
However, there can be no assurance that the Company will be able to so
satisfy the 12% Notes by such date, or if satisfied, that the terms and
conditions of such refinancing or extension will not be adverse to the
Company. Failure to timely satisfy the 12% Notes would constitute a
default under the New Credit Facility (described below) and could have a
material adverse effect on the Company.
On April 6, 1998, the Company obtained a $25.0 million three year senior
secured revolving credit facility (the "Credit Facility") with a $2.0
million sub-limit for the issuance of standby letter(s) of credit. The
Credit Facility allowed the Company to select an interest rate based upon
the prime rate or on a short-term LIBOR, in each case, plus an applicable
margin, with respect to each draw the Company made thereunder. Interest
was payable monthly in arrears on base rate advances and at the expiration
of each interest period for LIBOR advances. The Credit Facility contained
certain covenants which required, among other conditions, that the Company
maintain certain net worth, minimum fixed charge coverage and limitations
on total debt, and was secured by a perfected first priority security
interest on all tangible assets of the Company. The proceeds of the Credit
Facility were used to finance working capital requirements and for other
general corporate purposes, including acquisitions and capital
expenditures, not to exceed $15.0 million, associated with the Company's
overall strategic plan. On June 11, 1998, this amount was repaid with
proceeds from the Company's New Credit Facility defined below.
On June 11, 1998, the Company replaced the Credit Facility with a new
$35.0 million three year senior secured revolving credit facility ("New
Credit Facility") with a $5.0 million sub-limit for the issuance of
standby letter(s) of credit. The New Credit Facility allows the Company to
select an interest rate based upon the prime rate or on a short-term
LIBOR, in each case plus an applicable margin, with respect to each draw
the Company makes thereunder. Interest is payable monthly in arrears on
base rate advances and at the expiration of each interest period for LIBOR
advances. The New Credit Facility contains certain financial covenants
which require, among other conditions, that the Company maintain certain
minimum ratios, including current and debt leverage, minimum fixed charge
coverage, interest coverage, as well as limitations on total debt. The New
Credit Facility is secured by a perfected first priority security interest
on all tangible assets of the Company and a pledge of the shares of stock
of each of the Company's subsidiaries operating in the United States. On
June 30, 1998, the New Credit Facility was amended to include (i) the
Company's acquisition of MFSNT and the related financing of such
transaction, (ii) changes in financial covenants related thereto, and
(iii) other amendments relating to investments, pledging and intercompany
matters. The Company is currently engaged in discussions with its senior
lenders under the New Credit Facility with respect to the waiver or
consent of various provisions of such Facility (of which it may be in
violation) arising out of the MFSNT transaction, including the September
Agreement. In connection with the Company's quarterly reporting
obligations to such senior lenders, and again in connection with a recent
draw request by the Company for the balance of funds available under the
New Credit Facility, the senior lenders granted the Company a limited
waiver with regard to compliance with one of the minimum financial ratios
required under the New Credit Facility. The Company anticipates that it
will need additional waivers with respect to such minimum financial ratio
in the future, including in connection with its future quarterly reporting
obligations to the senior lenders. The Company also anticipates that, and
is analyzing the extent to which, additional waivers or consents with
respect to other provisions of the New Credit Facility may be necessary
arising out of the MFSNT transaction, including the September Agreement.
The Company also intends to seek additional financing. There can be no
assurance, however, that the Company will be able to obtain additional
appropriate waivers or consents, or additional financing on commercially
reasonable terms. The failure to obtain appropriate waivers or consents
could have a material adverse effect on the Company. The New Credit
Facility matures in June 2001.
On July 2, 1998 the Company entered into the MFSNT Note with MFSCC for
$86.4 million, at an interest rate of 12%, due on August 31, 1998. As
security for the MFSNT Note and an indemnity agreement, the Company has
pledged to WorldCom and MFSCC all of the shares of MFSNT. As a result of
the September Agreement, the MFSNT Note will be replaced with a New Note
in the principal amount of $30.0 million bearing interest at 11.5%. The
New Note represents $20.0 million associated with the purchase price of
MFSNT and $10.0 million related to an estimated advance for receivables at
MFSNT, subject to certain adjustments. The New Note matures on December
15, 2000, may be prepaid without penalty, and will be reduced by the
proceeds from the sale of certain assets which were acquired in the
transaction.
4. PREFERRED STOCK
SERIES A PREFERRED STOCK
Effective December 20, 1996, the Company completed a private placement
transaction of 1,000 shares of $.10 par value, Series A Convertible
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
200,000 shares of the Company's common stock at $9.82 per share. Proceeds
from the offering totaled $6.0 million. Each share of Series A Preferred
Stock was convertible into shares of the Company's common stock after
April 30, 1997 at the lesser of $9.82 per share or at a discount
(increased to a maximum of 20% for conversions after
9
<PAGE>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
December 20, 1997) of the average closing bid price of a share of common
stock for three days preceding the date of conversion. This accretion
adjustment, which also represents the amount needed to accrete to the
redemption value of the Series A Preferred Stock for the nine months ended
July 31, 1998, was recorded as a charge to equity and accompanying credit
to the Series A Preferred Stock. The Series A Preferred Stock accrued
dividends at an annual rate of 5% and was payable quarterly in arrears in
cash or through a dividend of additional shares of Series A Preferred
Stock. The warrants are exercisable during the four year period commencing
on the first anniversary of the private placement, provided that for each
share of Series A Preferred Stock which is converted prior to the one year
anniversary of the placement, warrants to purchase 200 shares of common
stock were forfeited.
During the nine months ended July 31, 1998, 995 shares of Series A
Preferred Stock were converted into an aggregate of 920,946 shares of
common stock. As of July 31, 1998, all of the shares of Series A Preferred
Stock have been converted to common stock.
During the nine months ended July 31, 1998, 106,800 warrants were
forfeited and 62,200 warrants remain outstanding.
SERIES B PREFERRED STOCK
Effective June 30, 1998 (the "Closing"), the Company completed a private
offering (the "Offering") of 4,000 shares of $0.10 par value, non-voting
Series B Convertible Preferred Stock (the "Series B Preferred Stock"),
which bear annual dividends of 4%, and warrants to purchase 1,000,000
shares of the Company's common stock at $19.80 per share for a period of
five years from the date of grant (the "Warrants"). Proceeds from the
Offering totaled $20.0 million which were used to pay part of the cash
payment towards the cash portion of the MFSNT purchase price, as well as
other costs associated with the acquisition. In general, the conversion
amount of each share of Series B Preferred Stock is convertible into
shares of the Company's common stock commencing on June 30, 1998 at 97% of
the lesser of the (i) average of the low trading prices for any three days
during the twenty-two (22) trading days immediately preceding the
conversion date, or (ii) the low trading price on the day immediately
preceding the conversion date, subject to a minimum equal to 95% of such
conversion price. The conversion amount of each share of Series B
Preferred Stock is equal to $5,000 plus any unpaid dividends thereon.
Unless waived by a holder on not less than 61 days prior written notice,
no holder may convert an amount which would result in such holders and its
affiliates' beneficial ownership exceeding 4.99% of the then outstanding
common stock of the Company.
The holders of the Series B Preferred Stock and the Warrants (the "Series
B Securities") are entitled to certain registration rights to register the
common stock underlying the Series B Securities pursuant to the Securities
Act of 1933, as amended. In the event that such underlying common stock is
not registered with the Securities and Exchange Commission by late October
1998, is not listed with the securities exchange and/or markets on which
the common stock is then listed, within a definitive period of time, or
various other covenants are not complied with, then certain penalties may
be incurred to certain or all of the holders of the Series B Securities,
including, among other things, a reduction in the conversion and/or
exercise price of the applicable securities and/or additional monetary
payments. Unless waived, the Company expects to have difficulty in timely
complying with certain of its obligations relating to the Series B
Securities, including accomplishing registration of the Series B
Securities by late October.
Additionally, 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 within 180
days of the Closing, the Company is delisted under certain circumstances
from any securities exchange, or any representation or warranty by the
Company to the holders is not true and correct, then the holders of the
Series B Securities, in whole or in part, also have the option to require
the Company to redeem their securities at premium prices. Furthermore, so
long as any Series B Security is outstanding, the Company is prohibited
from declaring or paying any dividends (other than to holders of Series B
Preferred Stock) or purchasing any equity security of the Company.
The accretion adjustment attributable to the beneficial conversion feature
of $0.6 million has been recorded as a charge to equity and an
accompanying credit to the Series B Preferred Stock. The Series B
Preferred Stock accrues dividends at an annual rate of 4% and is payable
quarterly in arrears, in cash, or through a dividend of shares of the
Company's common stock. The warrants are exercisable over a five year
period commencing June 30, 1998 and are fair valued at $5.4 million in
accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "ACCOUNTING FOR STOCK BASED COMPENSATION," and will be
amortized as a dividend over five years.
During the three months ended July 31, 1998, dividends of $0.2 million
were recorded consisting of $0.1 million as the cumulative dividend and
$0.1 million for the amortization of the valuation of the warrants. None
of the Series B Preferred Stock had been converted nor had any warrants
been exercised as of July 31, 1998. Costs incurred in connection with the
offering of approximately $1.0 million will be expensed over the five year
conversion period commencing June 30, 1998.
As of October 2, 1998, 436 shares of the Series B Preferred Stock were
converted into 1,007,927 shares of common stock at a price of $2.18 per
share.
5. STOCK OPTION PLAN
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, which requires expanded disclosures of stock based
compensation arrangements with employees and encourages compensation cost
to be measured based on the fair value of the equity instrument. Under
SFAS No. 123, companies are permitted to continue to apply Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees," which recognizes compensation cost based on the intrinsic
value of the equity instrument awarded. The Company has elected to
continue to apply APB Opinion No. 25, and related Interpretations in
accounting for its employee stock options because the alternative fair
value accounting provided for under SFAS No. 123 requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, to the extent the exercise price of the Company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized. The following is
the pro forma effect on net income an earnings per share as if the Company
had adopted the expense recognition requirement of SFAS No. 123:
10
<PAGE>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
---------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Pro forma income (loss) available to common
stockholders:
Basic..................................... $ (336,786) $438,848 $238,876 $788,836
Diluted................................... $ (315,519) $513,848 $442,722 $973,836
Pro forma income (loss):
Per share:
Basic..................................... $(0.03) $0.05 $0.02 $0.09
Diluted................................... $(0.03) $0.05 $0.04 $0.11
</TABLE>
Under the Company's 1995 Stock Option Plan, as amended, up to 1.3 million
shares of the Company's common stock are available for issuance pursuant
to the grant of stock options.
6. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "EARNINGS PER SHARE",
which changes the method of calculating earnings per share and was
effective for the Company beginning with the quarter ended January 31,
1998. All periods presented have been restated in accordance with the
provisions of SFAS No. 128.
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computation as required by SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
------------------------ -------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Basic:
Net income available to common stockholders
(numerator).................................. $ 824,404 $ 491,346 $ 1,702,076 $1,165,963
Weighted-average number of common shares
(denominator)................................. 9,918,292 8,321,534 9,660,921 8,304,036
Earnings per common share-basic................. $ 0.08 $ 0.06 $ 0.18 $ 0.14
Diluted:
Net income available to common stockholders
(numerator).................................. $ 845,671 $ 566,346 $ 1,905,922 $1,241,457
Weighted-average number of common shares
(denominator)................................. 9,916,404 8,321,534 9,642,253 8,304,036
Common stock equivalents arising from stock
options, warrants and convertible preferred
stock......................................... 1,683,266 1,108,514 706,234 517,412
Total shares (denominator)...................... 11,601,558 9,430,048 10,367,155 8,821,448
Earnings per common share-diluted............... $ 0.07 $ 0.06 $ 0.18 $ 0.14
</TABLE>
11
<PAGE>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
7. LITIGATION
On May 21, 1998, SIRIT Technologies, Inc. ("SIRIT") filed a lawsuit in the
United States District Court for the Southern District of Florida, against
the company and Thomas M. Davidson, who has since become a member of the
Company's Board of Directors. SIRIT asserts claims against the Company for
tortious interference, fraudulent inducement, negligent misrepresentation
and breach of contract in connection with the Company's agreement to
purchase the shares of MFSNT (See Note 7) and seeks injunctive relief and
compensatory damages in excess of $100.0 million. In the opinion of
management, the lawsuit will not have a material adverse effect upon the
consolidated financial position or results of operations of the Company.
The Company intends to vigorously defend this matter.
On September 10, 1998, Shipping Financial Services Corp. ("SFSC") filed a
lawsuit in the United States District Court for the Southern District of
Florida against the Company, Chairman of the Board Gideon Taylor, Chief
Executive Officer Frazier L. Gaines, Chief Accounting Officer Jesus
Dominguez, and Chief Financial Officer Mark A. Shain. SFSC asserts claims
under the federal securities laws against the Company and four of its
officers that the defendants allegedly caused the Company to falsely
represent and mislead the public with respect to two acquisitions, COMSAT
and MFSNT, and the ongoing financial condition of the Company as a result
of the acquisitions and the related financing of those acquisitions. SFSC
seeks certification as a class action on behalf of itself and all others
similarly situated and seeks unspecified damages and attorneys' fees.
Management is currently assessing the allegations set forth in the
lawsuit and the Company intends to vigorously defend this matter.
Although the Company has not yet been served, it is aware of the filing of
additional shareholder lawsuits. The allegations of these lawsuits appear
to be based on allegations similar to those set forth in the SFSC lawsuit.
The Company intends to vigorously defend these similar lawsuits as well.
The Company is party, from time to time, to other various legal
proceedings. In the opinion of management, none of these other proceedings
are expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
12
<PAGE>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis relates to the financial condition
and results of operations of the Company for the three and nine months
ended July 31, 1998 and 1997. This information should be read in
conjunction with the Company's condensed consolidated financial statements
appearing elsewhere in this document. Except for historical information
contained herein, the matters discussed below contain forward looking
statements that involve risk and uncertainties, including but not limited
to economic, governmental and technological factors affecting the
Company's operations, markets and profitability.
As a result of three acquisitions during the nine month period ended July
31, 1998, primarily the acquisition of MFS Network Technologies Inc.
("MFSNT"), material changes exist in substantially all balance sheet and
statements of operations categories.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
elements of the Company's condensed statements of operations as a
percentage of its revenues.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues 100.00% 100.00% 100.00% 100.00%
Cost of Revenues 80.45 80.14 78.27 77.89
General and Administrative 8.04 9.75 11.09 10.41
Depreciation and amortization 3.26 5.45 3.90 5.29
Income from Operations 8.25 4.66 6.73 6.42
Other expense, net 3.85 0.38 2.32 1.07
Net income 2.54 4.24 2.30 3.74
</TABLE>
The following table sets forth the selected elements of the Company's
condensed statement of operations for MFSNT as a percentage of
revenues for the period July 3 through July 31, 1998.
<TABLE>
<S> <C>
Revenues 100.00%
Cost of Revenues 80.62
General and Administrative 9.47
Depreciation and amortization 0.00
Income from Operations 9.94
Net income 4.36
</TABLE>
For the quarter ended July 31, 1998 revenues increased $35.7 million over
the same period in the prior year from $22.0 million to $57.7 million. For
the nine months ended July 31, 1998 revenues increased $53.3 million from
$61.2 million through July 31, 1997 to $114.5 for the nine months ended
July 31, 1998. These increases in revenue are due primarily to growth of
the Company's Operations through the acquisition of MFSNT in the third
quarter and the acquisition of COMSAT RSI JEFA Wireless Systems ("COMSAT")
and Patton Management Corporation ("Patton") in the second quarter of
fiscal 1998, as well as increased demands for services in the traffic
management and telecommunications industry. For the quarter ended July 31,
1998 revenues increased by approximately $18.6 million, $5.1 million and
$7.5 million related to the acquisitions of MFSNT, COMSAT, and Patton,
respectively. For the nine months ended July 31, 1998 the revenue growth
associated with the acquisitions was $18.6 million, $15.5 million and
$10.3 million, respectively.
As a percentage of revenues, cost of revenues increased from 80.14% to
80.45% for the three months ended compared to the same period in the prior
year. For the nine month period ended July 31, 1998 and 1997 cost of
revenues as a percentage of revenues increased slightly from 77.89% to
78.27%. The increases are due to increased cost related to the
telecommunications service group resulting from tighter margins and
competition in the telecommunications industry, as well as inclement
weather which restricted some work during the winter months and extended
completion dates into later periods, offset by decreased cost related to
the traffic management group acquisition of COMSAT's operations.
General and administrative expenses increased $2.5 million from $2.1
million to $4.6 million for the three months ended July 31, 1998 compared
to the same period in the previous year. For the nine month ended July 31,
1998 general and administrative expenses were $12.7 million, an increase
of $6.4 over the same period in the prior year. These increases are due to
the overall increase in the management structure, at the corporate level
as well as the division offices, necessary to support the Company's
increased revenue in accordance with the Company's strategic objective of
growth through acquisition and an increase in cost resulting from the
acquisition of MFSNT. For the three and nine month period ended July 31,
1998 general and administrative expense relating to the operations of
MFSNT were approximately $1.7 million.
As a percentage of revenues, depreciation and amortization expense
decreased from 5.45% to 3.26% for the three months ended July 31, 1998 as
compared to the same period in the prior year. For the nine month period
ended July 31, 1998 the depreciation and amortization expense as a
percentage of revenue decreased from 5.29% to 3.90% as compared to the
same period in 1997. This decrease, as a percentage of revenue, is due to
the significant increase in revenues which did not require the same
percentage increase in capital assets to support the operations of the
Company. The MFSNT acquisition resulted in negative goodwill which
resulted in the reduction in the depreciable base of the fixed assets to
zero. Therefore no depreciation is recorded for the MFSNT operations.
For the quarter ended July 31, 1998 income from operations for the
Company was $4.7 million compared to income of $1.0 million in the
quarter ended July 31, 1998. For the nine months ended July 31, 1998
income from operations was $7.7 million compared to $3.9 million for the
same period in the prior year as discussed above.
Other expense, net increased by $2.1 million to $2.2 for the three month
period ended July 31, 1998 as compared to $0.1 million for the comparable
period in 1997. This increase is due to increased interest cost relating
to the acquisition of MFSNT, the write-off of loan cost on the Bank Of
America credit facility of approximately $0.2 million, and a noncash
expense of approximately $0.1 million relating to the earnout agreement
associated with the acquisition of GEC. Other expense, net was also
impacted by noncash charges associated with stock option granted at below
market prices, the amortization of the cost basis of the warrants issued
in conjunction with the Series B preferred stock and amortization of loan
cost associated with the Nations Bank revolver. Other expense, net
increased by $1.9 million to $2.6 million for the nine month period ended
July 31, 1998 from the same period in 1997 for the same reasons discussed
above.
The Company has provided income taxes at a rate which approximates the
rate used when applying federal and state statutory rates to pre-tax
income, after adjusting for the amortization of nondeductible goodwill.
Net income before the discount attributable to beneficial conversion
privilege of preferred stock and preferred dividends for the three months
ended July 31, 1998 increased $.6 million from $.9 million in 1997 to $1.5
million in 1998 for the reasons described above. For the nine months ended
July 31, 1998 net income before the discount attributable to beneficial
conversion privilege of preferred stock and preferred dividends was $2.6
million compared to $2.3 million for the comparable period in 1997 for the
reasons described above.
Income applicable to common stock was $.8 million and $1.7 million for the
three and nine months ending July 31, 1998 as compared to $.5 million and
$1.2 million for the three and nine months ended July 31, 1997,
respectively. On a diluted basis, income per share was $.07 per share
for the three months ended July 31, 1998 as compared to $.06 per share for
the same period in 1997. For the nine month period ended July 31, 1998
income per share on a diluted basis was $.18 compared to $.14 for the
nine months ended July 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash resources were $5.1 million at July 31, 1998 compared to
$6.2 million at October 31, 1997.
Cash provided from operating activities of $5.9 million is a result of net
income generated by the Company of $2.6 million for the nine month period,
increased by depreciation and amortization charges of $4.5 million, $0.8
million for contingent consideration for a non-cash charge related to the
acquisition of GEC, and $0.8 million for a non-cash charge for the
accretive dividend on the Series B Preferred Stock, and offset by
increases in accounts receivable balances due to increased revenues as a
result of the Company's significant growth in operations.
Cash used in investing activities of $10.0 million is due to net capital
expenditures required to support increased operations and replacement of
existing equipment and net expenditures for acquisitions of businesses.
Cash provided from financing activities of approximately $2.9 million is
due primarily to net increases in long term debt and other borrowings in
order to fund the acquisitions of MESNT and Patton, general corporate
needs, and working capital requirements.
13
<PAGE>
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
Effective January 6, 1998, the Company issued $10.0 million of 12%
unsecured Senior Subordinated Notes due January 6, 2005 (the "12% Notes")
with detachable warrants to purchase 409,505 shares of common stock at a
price of $8.25 per share. The warrants were valued at approximately $1.2
million and are reflected as debt discount on the consolidated balance
sheet at July 31, 1998. Amortization of debt discount for the nine months
ended July 31, 1998 totaled $0.1 million. Interest under the Notes is
payable semi-annually in arrears. Equal principal payments are due in
January 2004 and 2005 giving the Notes an average life of 6.5 years. The
agreement pursuant to which the Notes were issued contains covenants which
require, among other conditions, that the Company maintain certain
tangible net worth, minimum fixed charge coverage and limitations on total
debt and which limit the Company's ability to pay dividends and make
certain other payments, make investments and sell assets or subsidiaries.
The proceeds from issuance of the Notes were used for current working
capital needs, to pay off existing debt and to provide liquidity to
finance growth and certain expenditures, including acquisitions,
associated with the Company's overall strategic plan. Between May 29, 1998
and September 17, 1998, the Company received either waivers and/or
consents, or letters of forbearance relating to the acquisition of MFSNT
and the related financing of the acquisition. These letters also
accelerated the expiration date of the 12% Notes to August 31, 1998, which
has been extended through October 16, 1998 by the last letter dated
September 17, 1998. At July 31, 1998, this amount has been reflected as
long-term debt as it is expected to be refinanced with long-term debt. The
Company believes that it will be able to refinance or further extend the
time for payment of the 12% Notes due October 16, 1998. However, there can
be no assurance that the Company will be able to so satisfy the 12% Notes
by such date, or if satisfied, that the terms and conditions of such
refinancing or extension will not be adverse to the Company. Failure to
timely satisfy the 12% Notes would constitute a default under the New
Credit Facility (described below) and could have a material adverse effect
on the Company.
In addition to the 12% Notes, on April 6, 1998, the Company obtained a
$25.0 million three year senior secured revolving credit facility (the
"Credit Facility") with a $2.0 million sub-limit for the issuance of
standby letter(s) of credit. The Credit Facility allows the Company to
select an interest rate based upon the prime rate or on a short-term
LIBOR, in each case, plus an applicable margin, with respect to each draw
the Company makes thereunder. Interest was payable monthly in arrears on
base rate advances and at the expiration of each period for LIBOR
advances. The Credit Facility contained certain covenants which require,
among other conditions, that the Company maintain certain net worth,
minimum fixed charge coverage and limitations on total debt, and was
secured by a perfected first priority security interest on all tangible
assets of the Company. The proceeds of the Credit Facility were used to
finance working capital requirements and for other general corporate
purposes, including acquisitions and equipment capital expenditures, not
to exceed $15.0 million, associated with the Company's overall strategic
plan. On June 11, 1998 this amount was repaid with proceeds from the
Company's New Credit Facility defined below.
On June 11, 1998, the Company replaced the Credit Facility with a new
$35.0 million three year senior secured revolving credit facility ("New
Credit Facility") with a $5.0 million sub-limit for the issuance of
standby letter(s) of credit. The Credit Facility allows the Company to
select an interest rate based upon the prime rate or on a short-term
LIBOR, in each case plus an applicable margin, with respect to each draw
it makes thereunder. Interest will be payable monthly in arrears on base
rate advances and at the expiration of each interest period for LIBOR
advances. The New Credit Facility contains certain financial covenants
which require, among other conditions, that the Company maintain certain
minimum ratios, including current and debt leverage, minimum fixed charge
coverage, interest coverage, as well as limitations on total debt. The New
Credit Facility will be secured by a perfected first priority security
interest on all tangible assets of the Company and a pledge of the shares
of stock of each of the Company's subsidiaries operating in the United
States. On June 30, 1998, the New Credit Facility was amended to include
(i) the Company's acquisition of MFSNT and the related financing of such
transaction, (ii) changes in financial covenants related thereto, and
(iii) other amendments relating to investments pledging and intercompany
matters. The Company is currently engaged in discussions with its senior
lenders under the New Credit Facility with respect to the waiver or
consent of various provisions of such Facility (of which it may be in
violation) arising out of the MFSNT transaction, including the September
Agreement. In connection with the Company's quarterly reporting
obligations to such senior lenders, and again in connection with a recent
draw request by the Company for the balance of funds available under the
New Credit Facility, the senior lenders granted the Company a limited
waiver with regard to compliance with one of the minimum financial ratios
required under the New Credit Facility. The Company anticipates that it
will need additional waivers with respect to such minimum financial ratio
in the future, including in connection with its future quarterly reporting
obligations to the senior lenders. The Company also anticipates that, and
is analyzing the extent to which, additional waivers or consents with
respect to other provisions of the New Credit Facility may be necessary
arising out of the MFSNT transaction, including the September Agreement.
The Company also intends to seek additional financing. There can be no
assurance, however, that the Company will be able to obtain additional
appropriate waivers or consents, or additional financing on commercially
reasonable terms. The failure to obtain appropriate waivers or consents
could have a material adverse effect on the Company. The New Credit
Facility matures in June 2001.
On July 2, 1998 the Company entered into the MFSNT Note with MFSCC for
$86.4 million, at an interest rate of 12%, due on August 31, 1998. As
security for the MFSNT Note and an indemnity agreement, the Company has
pledged to WorldCom and MFSCC all of the shares of MFSNT. Pursuant to the
September Agreement, the MFSNT Note will be replaced with a New Note in
the principal amount of $30.0 million bearing interest at 11.5%. The New
Note represents $20.0 million associated with the purchase price of MFSNT
and $10.0 million related to an estimated advance for receivables at
MFSNT, subject to certain adjustments. The New Note matures on December
15, 2000, may be prepaid without penalty, and will be reduced by the
proceeds from the sale of certain assets which were acquired in the
transaction.
The amount available under the New Credit Facility was used to repay
existing secured indebtedness, and will be used to finance working capital
requirements of existing and acquired businesses, to fund acquisitions and
capital expenditures and for other general corporate purposes.
Subject to the foregoing discussion regarding the necessity of various
consents and waivers from the Company's senior lenders under the New
Credit Facility and the discussion below, the Company expects that its
cash on hand, cash flow from operations and available borrowing capacity
under the New Credit Facility will be sufficient to fund its capital
requirements for the next twelve months. Nonetheless, pursuant to the
terms of the documents relating to the Series B Securities, 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 within 180 days of the Closing
(December 27, 1998), the Company is delisted under certain circumstances
from any securities exchange, or any representation or warranty by the
Company to the holders is not true and correct, then the holders of the
Series B Securities, in whole or in part, have the option to require the
Company to redeem their securities at premium prices. Although the Company
intends to use its best efforts to comply with the provisions in the
documents relating to the Series B Securities, 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). Additionally,
there are certain ambiguities or inconsistencies in the documents relating
to the Series B Securities, which if interpreted contrary to the
interpretation given by the Company, could result in a default or
acceleration of the foregoing redemption option. To the extent the holders
of the Series B Securities become entitled to exercise a redemption right
and seek to require the redemption of their shares, such exercise would
materially increase the cash requirements of the Company, could result in
a default under the terms of its New Credit Facility (which in turn, would
constitute a default under the Subordinated Notes) and would likely have a
material adverse impact on the Company. In addition, there can be no
assurance, however, that the Company will not experience adverse operating
results or other factors, including the inability to refinance the 12%
Notes or a default in connection with its obligations to the holders of
Series B Securities, 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,"
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
"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 Able's ability to continue its strategy of growth through
acquisitions; (iii) risks associated with Able's ability to successfully
integrate all of its recent acquisitions: (iv) Able'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. 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
In 1996, the Company initiated a conversion from existing accounting
software to programs that are Year 2000 compliant. Management has
determined that the Year 2000 issue will not pose significant operational
problems for its computer systems. As a result, all costs associated with
this conversion, excluding those related to the purchase of new software
which will be capitalized, are being expensed as incurred. The Company
plans to utilize both internal and external resources to reprogram or
replace, and test the software for Year 2000 modifications and anticipates
completing its conversions prior to October 31, 1999 at a total projected
cost of $0.3 million.
The Company has also initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties'
failures to remediate their own Year 2000 issue.
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 24, 1998, the Company granted to each of its Directors, options
to purchase 10,000 shares of the Company's common stock, (an aggregate of
60,000 shares) par value $.001 per share. The options were granted under
the Company's 1995 Stock Option Plan, as amended, as compensation for
prior service and are non-qualified, vest immediately and are exercisable
at $6.20 per share, which represents 80% of the stock price on the date of
grant, through April 24, 2005.
On April 24, 1998, the Company also granted to each of its Directors,
additional options to purchase 20,000 shares of the Company's common stock
(aggregate of 120,000 shares), par value $.001 per share, at an exercise
price equal to the fair market value on the day immediately following the
announcement of the acquisition of MFSNT. The options were granted under
the Company's 1995 Stock Option Plan, as amended, as compensation for each
Director's efforts in connection with the acquisition of MFSNT (see Note 2
to Consolidated Financial Statements), are non-qualified, vested on July
3, 1998, and are exercisable at $11.9375 per share through July 3, 2004.
On April 24, 1998, the Company accelerated the vesting of 35,000 options
which were granted in 1997 for an employee and a consultant for the
Company.
On June 23, 1998, the Company issued 30,000 shares of common stock to
Silverton International Fund, Ltd. upon exercising warrants previously
granted in connection with the Company's Series A Preferred Stock. Such
shares were issued pursuant to Section 3(a)(9) of the Securities Act of
1933, as amended, as an exchange with existing security holders
exclusively.
Effective June 30, 1998 (the "Closing"), the Company completed a private
offering (the "Offering") of its securities to seven accredited investors
pursuant to Rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933, as amended (the "Act"). Each investor was provided with, or
otherwise has access to, information, including financial information,
concerning the Company. Proceeds from the Offering totaled $20.0 million
and were used to pay part of the cash payment towards the MFSNT purchase
price, as well as other costs associated with the Plan of Merger.
The Offering consisted of (i) four thousand (4,000) shares of non-voting,
Series B Convertible Preferred Stock, par value $.10 ("Series B Preferred
Stock"), which pay a 4% dividend per annum, payable quarterly in cash, or,
at the Company's option, in common stock, provided there is a registration
statement effective with the Securities and Exchange Commission as to the
underlying common stock, and (ii) warrants ("Warrants") to purchase an
aggregate of one million shares of common stock of the Company, as
described below.
At any time following the Closing, a holder may convert any or all of the
Series B Preferred Stock into shares of common stock, par value $.001, of
the Company. At maturity, June 25, 2003 ("Maturity"), an remaining
outstanding shares of Series B Preferred Stock will automatically convert
into common stock. The conversion amount of each share of Series B
Preferred Stock is convertible into shares of common stock at 97% of the
lesser of (a) the average of the low stock price of the common stock
during any three trading days in the last 22 trading days immediately
preceding the date of conversion, or (b) the low stock price on the
trading day immediately preceding the date of conversion, provided that
any conversions pursuant to (b) are subject to a minimum equal to 95% of
such conversion price. The conversion amount of each share of Series B
Preferred Stock is equal to $5,000 plus any unpaid dividends thereon.
Unless waived by a holder on not less than 61 days prior written notice,
no holder may convert an amount which would result in such holders and its
affiliates' beneficial ownership interest exceeding 4.99% of the then
outstanding common stock of the Company. The conversion price may be
further reduced upon the occurrence of certain dilutive issuances of the
Company's securities.
The Warrants are exercisable for a period of five years commencing as of
the Closing through Maturity, at $19.80 per share, which represents 110%
of the market price of the common stock as of Closing. The Warrants may be
exercised on a cashless basis by surrendering the appropriate number of
Warrants. The Warrants also contain certain anti-dilutive provisions. The
Warrants may be called by the Company at $35.00 per share.
The holders of the Series B Preferred Stock and the Warrants (the "Series
B Securities") are entitled to certain registration rights to register the
common stock underlying the Series B Securities pursuant to the Securities
Act of 1933, as amended. In the event that such underlying common stock is
not registered with the Securities and Exchange Commission by late October
1998, is not listed with the securities exchange and/or markets on which
the common stock is then listed, within a definitive period of time, or
various other covenants are not complied with, then certain penalties may
be incurred to certain or all of the holders of the Series B Securities,
including, among other things, a reduction in the conversion and/or
exercise price of the applicable securities and/or additional monetary
payments. Unless waived, the Company expects to have difficulty in timely
complying with certain of its obligations relating to the Series B
Securities, including accomplishing registration of the Series B
Securities by late October.
Additionally, 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 within 180
days of the Closing, the Company is delisted under certain circumstances
from any securities exchange, or any representation or warranty by the
Company to the holders was not true and correct, then the holders of the
Series B Securities, in whole or in part, also have the option to require
the Company to redeem their securities at premium prices. Furthermore, so
long as any Series B Security is outstanding, the Company is prohibited
from declaring or paying any dividends (other than to holders of Series B
Preferred Stock) or purchasing any equity security of the Company.
On July 8, 1998, the Company granted options to purchase 230,000 shares of
the Company's common stock, par value $.001 to various officers,
directors, and a significant employee, all of which were granted as
compensation for certain additional contributions to the MFSNT acquisition
(see Note 2 to Consolidated Financial Statements). These options were
granted pursuant to the 1995 Stock Option Plan, as amended, and are
non-qualified. The subject options vest immediately or over a period of
two years and are exercisable at $14.00 through July 8, 2000.
On July 8, 1998, the Company granted 150,000 shares to two employees of
the Company at the fair market value of $14.00 per share, pursuant to
employment agreements. These options are exercisable after one year of
employment and vest ratably over three years.
As of October 2, 1998, 436 shares of Series B Preferred Stock were
converted into 1,007,927 shares of common stock of the Company at an
exercise price of $2.18 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On June 11, 1998, the Company replaced its existing $25.0 million three
year senior secured revolving credit facility with a new $35.0 million
three year senior secured revolving credit facility ("New Credit
Facility") with a $5.0 million sub-limit for the issuance of standby
letter(s) of credit. The Credit Facility allows the Company to select an
interest rate based upon the prime rate or on a short-term LIBOR, in each
case plus an applicable margin, with respect to each draw it makes
thereunder. Interest will be payable monthly in arrears on base rate
advances and at the expiration of each interest period for LIBOR advances.
The New Credit Facility contains certain financial covenants which
require, among other conditions, that the Company maintain certain minimum
ratios, including current and debt leverage, minimum fixed charge
coverage, interest coverage, as well as limitations on total debt. The New
Credit Facility will be secured by a perfected first priority security
interest on all tangible assets of the Company and a pledge of the shares
of stock of each of the Company's subsidiaries operating in the United
States. On June 30, 1998, the New Credit Facility was amended to include
(i) the Company's acquisition of MFSNT and the related financing of such
transaction, (ii) changes in financial covenants related thereto, and
(iii) other amendments relating to investments, pledging and intercompany
matters. The Company is currently engaged in discussions with its senior
lenders under the New Credit Facility with respect to the waiver or
consent of various provisions of such Facility (of which it may be in
violation) arising out of the MFSNT transaction, including the September
Agreement. In connection with the Company's quarterly reporting
obligations to such senior lenders, and again in connection with a recent
draw request by the Company for the balance of funds available under the
New Credit Facility, the senior lenders granted the Company a limited
waiver with regard to compliance with one of the minimum financial ratios
required under the New Credit Facility. The Company anticipates that it
will need additional waivers with respect to such minimum financial ratio
in the future, including in connection with its future quarterly reporting
obligations to the senior lenders. The Company also anticipates that, and
is analyzing the extent to which, additional waivers or consents with
respect to other provisions of the New Credit Facility may be necessary
arising out of the MFSNT transaction, including the September Agreement.
There can be no assurance, however, that the Company will be able to
obtain additional appropriate waivers or consents. The failure to obtain
appropriate waivers or consents could have a material adverse effect on
the Company. The New Credit Facility matures in June 2001.
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
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)
October 12, 1998 By: /S/ FRAZIER L. GAINES
-----------------------
Frazier L. Gaines
President and Chief Executive Officer
October 12, 1998 /S/ MARK A. SHAIN
---------------------
Mark A. Shain
Chief Financial Officer
17
