<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 2000
REGISTRATION STATEMENT NO. 333-65991
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
ABLE TELCOM HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
STATE OF FLORIDA 1731 65-0013218
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
BILLY V. RAY, JR.
CHIEF EXECUTIVE OFFICER
1000 HOLCOMB WOODS PARKWAY, SUITE 440 ABLE TELCOM HOLDING CORP.
ROSWELL, GEORGIA 30076 1000 HOLCOMB WOODS PARKWAY, SUITE 440
(770) 993-1570 ROSWELL, GEORGIA 30076
(Address, including zip code, and telephone number, including (Name, address, including zip code, and telephone
area code, of Registrant's principal executive offices) number, including area code, of agent for services)
</TABLE>
COPIES TO
ELIZABETH NOE, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP
600 PEACHTREE STREET, N.E., SUITE 2400
ATLANTA, GEORGIA 30308
(404)815-2400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
AS DETERMINED BY THE SELLING SHAREHOLDERS.
---------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the earlier offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed
Maximum
Offering Price Proposed Maximum
Title of Each Class Amount to be Per Share Aggregate Offering Amount of
of Securities to be Registered Registered(1) Price Registration Fee(2)
====================================================================================================================
<S> <C> <C> <C> <C>
Common stock, par value $.001(3) 2,000,000 $ 7.00 $14,000,000 $ 3,696
Common stock, par value $.001(4) 409,505 8.25 3,378,416 892
Common stock, par value $.001(5)(6) 2,932,991 2.59375 7,607,445 2,009
Common stock, par value $.001(7) 200,000 10.125 2,025,000 535
Common stock, par value $.001(7) 370,000 13.50 4,995,000 1,319
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
====================================================================================================================
Proposed
Maximum
Offering Price Proposed Maximum
Title of Each Class Amount to be Per Share Aggregate Offering Amount of
of Securities to be Registered Registered(1) Price Registration Fee(2)
====================================================================================================================
<S> <C> <C> <C> <C>
Common stock, par value $.001(6)(8) 600,000 2.59375 1,556,250 411
Common stock, par value $.001(9) 3,750,000 4.00 15,000,000 3,960
Common stock, par value $.001(10) 210,000 10.75 2,257,500 596
Common stock, par value $.001(10) 393,750 6.00 2,362,500 624
Common stock, par value $.001(10) 393,750 8.00 3,150,000 832
Common stock, par value $.001(6)(11) 5,011,511 2.59375 12,998,606 3,432
Total 16,271,507 -- 69,330,717 18,306(2)
====================================================================================================================
</TABLE>
(1) In accordance with Rule 416, this Registration Statement includes an
indeterminable number of shares of common stock, $.001 par value per
share (the "Common stock") that may be necessary to adjust the number
of shares to be issued as described in this table as a result of a
stock split, stock dividend or other anti-dilution rights or similar
adjustments.
(2) A registration fee of $28,613.50 was paid in connection with the
initial filing of this Registration Statement on October 22, 1998.
(3) Represents shares of common stock underlying an option granted to
WorldCom, Inc.
(4) Represents shares of common stock underlying warrants to purchase
shares of common stock held by John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company and Signature 1A
(Cayman), Ltd.
(5) Represents shares of common stock issued or to be issued upon
conversion or redemption or otherwise to former holders of the
Company's Series B Preferred Stock.
(6) In accordance with Rule 457(c), this maximum offering price per share
has been calculated based upon the average of the high ($2.9375) and
low ($2.25) trading prices of the common stock as reported by the
Nasdaq National Market System on August 29, 2000.
(7) Represents shares of common stock underlying warrants to purchase
common stock granted to holders of the Company's Series B Preferred
Stock.
(8) Represents the maximum number of shares of common stock that may be
issued upon the exercise of certain SARs granted to WorldCom, Inc.
(9) Represents shares of common stock underlying the Company's Series C
Preferred Stock assuming a conversion price of $4.00 per share.
(10) Represents shares of common stock underlying the warrants granted to
holders of the Company's Series C Preferred Stock. Because the exercise
price of these warrants is subject to certain adjustments, the Company
has agreed to register 105% of the number of shares of common stock
that would have been received by such holders if all such warrants were
exercised as of the date of this Registration Statement.
(11) Represents shares of common stock issuable to Sirit Technologies, Inc.
pursuant to a Settlement Agreement between Sirit Technologies, Inc. and
the Company dated July 7, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE.
<PAGE> 3
This information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST ___, 2000
PROSPECTUS
16,271,507 SHARES OF
COMMON STOCK, PAR VALUE $.001
ABLE TELCOM HOLDING CORP.
This is a public offering of common stock of Able Telcom Holding Corp. We are
registering 16,271,507 shares of common stock for sale by selling shareholders
(the "Selling Shareholders"), as follows:
- 2,000,000 shares of common stock that WorldCom, Inc. may
receive upon the exercise in full of an option granted to it
by us on April 24, 1998.
- 600,000 shares of common stock, which is the maximum number of
shares of common stock that WorldCom may receive upon the
exercise of certain stock appreciation rights ("SARs") granted
by us on September 9, 1998.
- 409,505 shares of common stock that certain holders of
warrants may receive upon the exercise of all of these
warrants. We issued these warrants in connection with the sale
of our 12% Senior Subordinated Notes originally due January 6,
2005.
- 2,932,991 shares of common stock issued or issuable upon the
conversion or redemption of securities held by former holders
of our Series B Preferred Stock.
- 570,000 shares of common stock, representing the total amount
of common stock that holders of certain warrants may receive
upon the exercise of all of their warrants. We issued these
warrants at various times in connection with the sale and
conversion and exchange of the Series B Preferred Stock.
Because the exercise price of and number of shares issuable
pursuant to these warrants is subject to adjustment under
certain circumstances, this amount does not necessarily
represent the actual total number of shares of common stock
that these holders may receive if they exercise all of their
warrants.
- 3,750,000 shares of common stock issuable upon the conversion
of our Series C Convertible Preferred Stock. This amount
represents the number of shares of common stock that would be
issued upon the conversion of all outstanding Series C
Preferred Stock at a conversion price of $4.00 per share.
- 997,500 shares of common stock, representing 105% of the total
amount of common stock that holders of certain warrants may
receive upon the exercise of all of their warrants. We issued
these warrants in connection with the sale and amendment of
the terms of the Series C Preferred Stock. Because the
exercise price of and number of shares issuable pursuant to
these warrants is subject to adjustment under certain
circumstances, this amount does not necessarily represent the
actual total number of shares of common stock that these
holders may receive if they exercise all of their warrants.
- 5,011,511 shares of common stock to be issued to Sirit
Technologies, Inc. in settlement of a lawsuit between us and
Sirit.
We will not be selling any of the shares of common stock that we register in
this prospectus. No underwriters will be used to sell the shares. We will not
receive any proceeds from the sale of these shares. However, we may receive cash
upon the exercise of the options and warrants described above.
Our common stock is traded on the Nasdaq National Market under the symbol
"ABTE." We intend to list the common stock that we are registering in this
prospectus on the Nasdaq National Market, but this application has not yet been
approved. On August 29, 2000, the last reported sales price of the common stock
was $2.88 per share.
<PAGE> 4
The Selling Shareholders may offer their shares of common stock in public or
private transactions, on or off the Nasdaq National Market, at prevailing market
prices, or at privately negotiated prices.
An investment in our common stock involves a high amount of risk. Before you
invest in our common stock, we strongly recommend that you carefully consider
all of the risks and information contained in this prospectus, including the
information contained in the "Risk Factors" section that begins on page 6.
Our principal executive offices are located at 1000 Holcomb Woods Parkway, Suite
440, Roswell, Georgia 30076, and our telephone number is (770) 993-1570.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS DATED , 2000
No dealer, salesperson or other person is authorized to provide any
oral or written information about us or this offering that is not
included in this prospectus.
<PAGE> 5
TABLE OF CONTENTS
Where You Can Find Additional Information About Us ......................... 1
Forward-Looking Statements ................................................. 1
Prospectus Summary ......................................................... 2
Summary Consolidated Financial Information ................................. 5
Risk Factors ............................................................... 6
Use of Proceeds ............................................................ 12
Capitalization ............................................................. 13
Market Price of Common Stock and Dividend Policy ........................... 14
Selected Consolidated Financial Data ....................................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations .............................................................. 17
Quantitative and Qualitative Disclosures about Market Risk ................. 26
Business ................................................................... 27
Management ................................................................. 40
Principal Shareholders ..................................................... 49
Description of Indebtedness ................................................ 51
Description of Securities .................................................. 52
Shares Eligible for Future Sale ............................................ 57
Selling Shareholders ....................................................... 57
Plan of Distribution ....................................................... 58
Legal Matters .............................................................. 59
Experts .................................................................... 59
Index to Consolidated Financial Statements ................................. F-1
i
<PAGE> 6
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any document we file at the SEC's public reference room at the
following locations:
-Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
-Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
-Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's public reference rooms
by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically. You can
access the electronic versions of these filings on the Internet at the SEC's
website, located at http://www.sec.gov.
We have included this prospectus in our registration statement that we filed
with the SEC. The registration statement provides additional information that we
are not required to include in the prospectus. You can receive a copy of the
entire registration statement as described above. Please note that the
registration statement also includes complete copies of the documents described
in the prospectus.
FORWARD-LOOKING STATEMENTS
We have included "forward-looking statements" throughout this prospectus. These
statements describe our attempt to predict future occurrences. We use the words
"believes," "anticipates," "expects," and similar expressions, to identify
forward-looking statements. Forward-looking statements are subject to a number
of risks, assumptions and uncertainties, such as risks associated with:
-Our liquidity requirements and existing leverage, including the need
to obtain additional funds to provide working capital for operations
and to replace our existing debt facility which is in default;
-Our ability to satisfy the registration obligations to the holders of
our Series B Preferred Stock, the holders of our Series C Preferred
Stock and Sirit Technologies, Inc.;
-Our ability to comply with contract terms in a timely manner,
including the terms of our contract with the Regional Consortium for
Electronic Toll Collection;
-Our ability to successfully integrate newly acquired businesses into
existing operations and the risks associated with such newly acquired
businesses;
-Changes in laws and regulations, including changes in tax rates,
accounting standards, environmental laws, and occupational, health and
safety laws;
-The effect of, or changes in, general economic conditions;
-Weather conditions that are adverse to our specific businesses; and
-The outcome of litigation, claims and assessments involving us.
This list is only an example of some of the risks, uncertainties and assumptions
that may affect our forward-looking statements. If any of these risks or
uncertainties materialize (or fail to materialize), or if the underlying
assumptions prove incorrect, actual results may differ materially from those
projected in the forward-looking statements. You should consider the information
provided in the section "Risk Factors" and the other information in this
prospectus before investing in the common stock.
1
<PAGE> 7
PROSPECTUS SUMMARY
In this section, we have provided you with an overview of some of the
more important information in this prospectus. However, we caution you
that this information is not complete. You should read all of the
information in this prospectus before purchasing any common stock.
Unless the context otherwise requires, we use the terms "we," "our,"
"us" and the "Company" to mean Able Telcom Holding Corp. and its
subsidiaries, including the subsidiaries we acquired in the acquisition
of the network construction and transportation systems business of
WorldCom, Inc. on July 2, 1998. We use the term "Able" when we refer to
Able Telcom Holding Corp. and its subsidiaries prior to this
acquisition. We sometimes use the term "MFSNT" to refer to MFS Network
Technologies and its subsidiaries before we acquired them and to refer
to our subsidiaries that now own the assets and liabilities that we
acquired from WorldCom, Inc.
THE COMPANY
We develop, build and maintain communications systems for companies and
government authorities. We have five main organizational groups. Each group is
comprised of subsidiaries of the Company with each group having local executive
management functioning in a decentralized operating environment. We completed
operational restructuring of our subsidiaries during fiscal 1999. As a result,
we now have fourteen subsidiaries, eleven of which are wholly owned. We own at
least 80% of each of the remaining three subsidiaries.
The services provided by each group are as follows:
<TABLE>
<CAPTION>
Organizational Group Service Provided
-------------------- ----------------
<S> <C>
Network Service .................. Design, development, engineering, installation,
construction, operation and maintenance services for
telecommunications systems.
Network Development .............. Own, operate and maintain local and regional
telecommunication networks.
Transportation Services .......... Design, development, integration, installation,
construction, project management, maintenance and
operation of automated toll collection systems.
Construction ..................... Design, development, installation, construction,
maintenance and operation of electronic traffic management
and control systems, and road signage and telcom
infrastructure construction.
Communications Development ....... Design, installation and maintenance services to foreign
telephone companies in South America.
</TABLE>
In conjunction with our reorganization, much of our executive management has
changed. We have replaced several senior executives and Group Presidents and
have added other senior people to our executive staff.
As reflected above, we reorganized our subsidiaries into five main operating
groups. Additionally, as part of our ongoing efforts to strategically align the
profitable portions of our business, we took the following steps during the
fiscal year ended October 31, 1999 to discontinue the operations of, merge,
and/or manage unprofitable subsidiaries:
- We assigned control of certain of our previously independent
operating subsidiaries (Patton Management Corp. and Able
Telecommunications & Power) to the Construction Group.
- We merged several of our previously independent operating
subsidiaries into Construction Group subsidiaries.
- As a result of significant turnover and a deterioration of
underlying contracts, we discontinued the operations of two
subsidiaries, which together used cash flows from operations
of approximately $7.4 million and $3.8 million during the
fiscal years ended October 31, 1998 and 1999.
The Company was originally incorporated in 1987 as a Colorado corporation under
the name "Delta Venture Fund, Inc." We adopted our current name in 1989 and
became a Florida corporation in 1991. Our principal executive offices are
located at 1000 Holcomb Woods Parkway, Suite 440, Roswell, Georgia 30076 and our
telephone number is (770) 993-1570.
2
<PAGE> 8
MATERIAL DEVELOPMENTS
BRACKNELL MERGER. On August 24, 2000, we announced that we had entered into an
agreement to merge with Bracknell Corporation of Toronto in a stock-for-stock
transaction with a conversion rate of 0.6 shares of Bracknell's common stock for
each share of our common stock. The completion of this merger is conditioned
upon a number of items, including the receipt of regulatory and shareholder
approval, the receipt by Bracknell of appropriate financing and the absence of a
material adverse change as to us. Bracknell is a leading provider of value-added
facilities and structure services to businesses across North America, servicing
customers in the technology, telecommunications, industrial and commercial
sectors. If the merger is consummated, we will become a wholly owned subsidiary
of Bracknell and our stock will no longer be publicly traded. However, our
shareholders will receive shares of Bracknell's common stock, which is traded on
the Toronto Stock Exchange. There can be no assurance that the merger with
Bracknell will be consummated.
In connection with our signing the merger agreement with Bracknell, and to
comply with terms of our settlement with Sirit which is described below, we
entered into a new Master Services Agreement with WorldCom which extends the
term of that agreement and provides for a minimum purchase of $55 million of our
services by WorldCom each year. WorldCom also agreed to vote in favor of the
merger with Bracknell when it is proposed to our shareholders. Further, WorldCom
converted $37,000,000 of our indebtedness to WorldCom for advances under the
Master Services Agreement into our Series D Preferred Stock. The Series D
Preferred Stock is convertible into our common stock at a price of $10.01 per
share. For a description of the terms of our Series D Preferred Stock see the
discussion under the heading "Description of Securities -- Preferred Stock --
Series D Convertible Preferred Stock." Further, WorldCom agreed to extend the
term of our $4.5 million note payable to WorldCom to a seven-year, 8% interest
rate note. As extended, this note will mature on July 12, 2007.
SHAREHOLDERS' MEETING. We are submitting a number of proposals related to the
securities covered by this prospectus for approval at an annual meeting of our
shareholders currently scheduled to be held in late September or early October
of this year. In addition to other matters to be considered at this annual
meeting, we are submitting the following proposals to our shareholders:
- to approve grants of stock options to officers and directors
outside of our 1995 Stock Option Plan;
- to approve issuing up to 2,600,000 shares of our common stock
to WorldCom if it exercises options and stock appreciation
rights obtained from us when we acquired the network,
construction and transportation systems business from
WorldCom;
- to approve issuing shares of our common stock in connection
with conversion, redemption and exercise of securities issued
to finance our acquisition of the network construction and
transportation business from WorldCom;
- to approve issuing shares of our common stock to holders of
our Series C Preferred Stock and warrants upon conversion or
exercise of those securities; and
- to approve issuing shares of our common stock in connection
with a litigation settlement with Sirit Technologies, Inc.
These proposals are being submitted for approval because they include actions
for which shareholder approval is required under rules applicable to companies
listed on the Nasdaq National Market System, such as us. Under Nasdaq rules,
certain transactions require us to obtain the approval of holders of a majority
of our shares casting votes if we plan to issue new shares of common stock that
represent 20% or more of the shares of common stock that are outstanding at the
time we agree to issue the common stock. The Nasdaq rules apply to the following
stock issuances relevant to the proposals being submitted to our shareholders:
- common stock to be issued to acquire another company;
- common stock to be issued at a price below the greater of book
value or market value of the common stock immediately prior to
the issuance; and
- common stock to be issued to officers and directors under an
arrangement that does not include other employees, even if
less than 20% of the outstanding common stock.
For purposes of disclosure in this prospectus, we have assumed that the
shareholders will approve each of the proposals described above. For a
discussion of risks related to the shareholders failure to approve such
proposals, see the discussion under the heading "Risk Factors." We also intend
to submit a proposal at our annual meeting to approve a change in our name to
"The Adesta Group, Inc." We will not reflect this proposed change in this
prospectus unless and until our name is actually changed.
3
<PAGE> 9
THE SIRIT SETTLEMENT. In May 1998, Sirit Technologies, Inc. filed a lawsuit
against us and Thomas M. Davidson, a former member of our Board of Directors.
Sirit sued for tortious interference, fraudulent inducement, negligent
misrepresentation and breach of contract in connection with our acquisition of
the network construction and transportation systems business of WorldCom. In May
2000, the jury awarded Sirit compensatory damages against us in the amount of
$1.2 million and punitive damages in the amount of $30.0 million. Additionally,
the Court assessed punitive damages against Mr. Davidson.
In July 2000, we and Sirit, among others, entered into a settlement agreement
which resulted in the court's entry of a consent judgment vacating the $31.2
million judgment. As part of the Sirit settlement, we agreed to issue Sirit and
its affiliates, subject to using our best efforts to obtain shareholder approval
at our annual shareholder meeting, the following securities:
- 4,074,597 shares of our common stock, and
- an additional 936,914 shares of common stock at such time as
holders of the Series C Convertible Preferred Stock have
converted their shares of Series C Convertible Preferred Stock
into common stock. This amount assumes that the Series C
Convertible Preferred Stock has a $15.0 million face value and
is converted at a conversion price of $4.00 per share.
The resale by Sirit of the common stock issued or issuable to it is covered by
this prospectus.
GOING CONCERN
We incurred losses applicable to common stock of $57.5 million during the six
months ended April 30, 2000, and losses applicable to common stock of $36.8
million during the fiscal year ended October 31, 1999. These net losses, our
default under our Secured Credit Facility and our contractual obligations are
placing a significant strain on our financial resources that raise substantial
doubt about our ability to continue as a going concern. See "Risk Factors,"
"Management's Discussion and Analysis" and the consolidated financial statements
and footnotes included in this prospectus.
Our ability to continue as a going concern is dependent upon our ability to:
- generate sufficient cash flow to meet our obligations on a
timely basis;
- obtain additional financing when we need it; and
- achieve and maintain profitability.
We have strategically realigned portions of our business, converted
some of our debt to common stock and discontinued unprofitable cash-intensive
operations to correct our financial difficulties. We also are reallocating
resources to meet contractual commitments and seeking other sources of capital,
whether with existing lenders or investors or new strategic investors. However,
we cannot assure you that the realignment or reallocation of resources will
be successful or that we will be able to secure additional capital on acceptable
terms or at all.
4
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
We have provided you with a summary of our historical financial statements. The
following information should be read in conjunction with the sections "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our results of operations
reflect the operating results of MFSNT and other acquired businesses only from
the respective dates of acquisition. Accordingly, our results are not
necessarily comparable on a period-to-period basis. See the Consolidated
Financial Statements for the Company, and the related notes to those statements,
which are included in this prospectus. The consolidated financial data for the
six months ended April 30, 1999 and 2000 include, in the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position and results of the Company
for such period. Due to seasonality and other market factors, the consolidated
historical results for the six months ended April 30, 2000 are not necessarily
indicative of results for a full year.
<TABLE>
<CAPTION>
Year Ended October 31, Six Months Ended April 30,
------------------------------------ --------------------------
1997 1998 1999 1999 2000
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenue ...................................... $ 86,334 $ 217,481 $ 418,565 $ 216,809 $ 238,741
Total Costs and Expenses ........................... 81,493 206,072 420,449 217,145 282,409
Income (loss) from operations ...................... 4,841 11,409 (1,884) (336) (43,668)
Total other expenses ............................... (964) (4,872) (12,678) (3,346) (12,071)
Net income (loss) .................................. 2,857 2,514 (18,060) (6,913) (55,789)
Income (loss) applicable to common stock ........... 1,331 (5,840) (36,758) (19,804) (57,455)
Income (loss) applicable to common stock per share:
Basic .............................................. $ 0.16 $ (0.59) $ (3.12) $ (1.69) $ (4.01)
Diluted ............................................ 0.16 (0.59) (3.12) (1.69) (4.01)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ....................... $ 6,230 $ 13,544 $ 16,568 $ 30,502 $ 11,441
Total assets .................................... 50,346 290,760 262,033 272,868 303,851
Total debt ...................................... 17,294 76,123 66,372 66,467 41,775
Total preferred stock ........................... 6,713 11,325 16,322 2,385 13,665
Total shareholders' equity (deficit)............. 15,247 40,217 431 27,287 (21,166)
</TABLE>
5
<PAGE> 11
RISK FACTORS
INVESTING IN OUR COMMON STOCK IS RISKY. YOU SHOULD BE ABLE TO BEAR A COMPLETE
LOSS OF YOUR INVESTMENT. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND
OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF
COMMON STOCK. YOU SHOULD ALSO BE AWARE THAT THIS SECTION CONTAINS
"FORWARD-LOOKING STATEMENTS." YOU SHOULD READ THESE STATEMENTS TOGETHER WITH THE
DISCUSSION OF THE RISKS AND UNCERTAINTIES REGARDING THESE STATEMENTS CONTAINED
UNDER THE HEADING "FORWARD-LOOKING STATEMENTS" IN THIS PROSPECTUS.
OUR DEFAULT UNDER OUR SECURED CREDIT FACILITY COULD TRIGGER ACCELERATION OF THE
DEBT AND DEFAULTS UNDER OTHER LOANS, AND WE MAY NOT HAVE THE FINANCIAL RESOURCES
TO PAY OFF THOSE LOANS IF THEY ARE ACCELERATED.
We are in default of covenants under the Secured Credit Facility, even though we
are able to make scheduled payments of principal and interest when due.
Therefore, under the Secured Credit Facility, the lenders are entitled to
declare all principal and interest that we owe them to be immediately due and
payable, an aggregate of $36.6 million as of April 30, 2000. Additionally, these
lenders could exercise their right to take control of all our tangible property,
including the stock of the subsidiaries that we pledged as collateral.
This default under the Secured Credit Facility could trigger default provisions
in our other loans, which would also make all principal and interest under those
loans immediately due and payable. If this happens or if the lenders under our
Secured Credit Facility elect to use their remedies, we may not have sufficient
funds to pay off all our defaulted loans. If these lenders take control of our
tangible assets, we would lose several of our operational subsidiaries.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE TO CONTINUE AS A GOING CONCERN AND
ADDITIONAL FUNDS MAY NOT BE AVAILABLE.
We currently anticipate that our available cash resources will be sufficient to
meet our expected working capital and capital expenditure requirements for less
than six months. Because we are in default under the Secured Credit Facility,
those lenders have refused to extend any additional credit to us. While we may
be able to reduce our expenditures under existing contracts, a reduction could
give rise to an obligation for us to pay liquidated damages.
We may not be able to obtain additional financing on terms favorable to us, if
at all. If adequate funds are not available, we may not be able to continue as
a going concern.
WE HAVE A SIGNIFICANT AMOUNT OF OUTSTANDING DEBT WHICH RESTRICTS OUR USE OF CASH
RESOURCES FOR OPERATIONS AND SUBJECTS US TO RISKS OF DEFAULT.
We have incurred a high level of debt. At April 30, 2000, we had approximately
$42 million of total debt outstanding. Payments of principal and interest on
borrowings may leave us with insufficient cash resources for our operations.
Further, a high debt level creates an increased risk that we may default on our
obligations. We are in default under our Secured Credit Facility, as discussed
above. As a result, the lenders who lent us funds under that facility could take
the property securing their loans and could immediately require us to pay our
obligations in full.
Our ability to repay our debt depends upon a number of factors, many of which
are beyond our control. These factors include, among other things:
- Changes in interest rates
- The state of the economy
- Our financial condition
- The amount of competition that we face
- Changes in the law
- Changes in the communications industry, generally
- Changes in our customer base
- Timing of our customers' payment for existing work orders and
projects
- Seasonal factors that may hinder our ability to work on
projects, including weather conditions
WE HAVE CONTRACTUAL OBLIGATIONS THAT WILL PLACE A SIGNIFICANT STRAIN ON OUR CASH
RESOURCES IF WE CANNOT MEET THOSE OBLIGATIONS, AND OUR ABILITY TO MEET THOSE
OBLIGATIONS IS IN SOME CASES OUT OF OUR CONTROL.
6
<PAGE> 12
According to the terms of the documents relating to the Series C Preferred Stock
if:
-this registration statement which includes the shares of common stock
underlying the Series C securities is not declared effective on or
before November 30, 2000,
-we are delisted under certain circumstances from any securities
exchange, or
-any representation or warranty by us to the holders is not true and
correct,
then the holders of the outstanding shares of Series C Preferred Stock, in whole
or part, have the option to require us to redeem their securities at a premium
price equalling at least $18.0 million. Further, Sirit has the right to seek
payment in cash of the $20.0 million judgment against us if this registration
statement is not declared effective on or before November 30, 2000. Although we
intend to use our commercially reasonable best efforts to comply with the
provisions in the documents relating to the Series C Preferred Stock and the
terms of the Sirit settlement, there can be no assurance that we 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 SEC with respect to the timely effectiveness
of this registration statement). In addition, there can be no assurance that we
will not experience adverse operating results or other factors which could
materially increase our cash requirements or adversely affect our liquidity
position.
WE ARE CURRENTLY NOT IN COMPLIANCE WITH THE CONTINUED LISTING CRITERIA OF THE
NASDAQ NATIONAL MARKET. AS A RESULT, OUR COMMON STOCK MAY BE DELISTED FROM THE
NASDAQ NATIONAL MARKET.
We are submitting a number of proposals for shareholder approval at a meeting
currently expected to be held in late September or early October. Several of the
proposals being submitted for approval include actions for which shareholder
approval is required under rules applicable to companies listed on the Nasdaq
National Market System, such as us.
Further, we did not hold an annual shareholders' meeting in 1999. We have
discussed our failure to hold an annual meeting in 1999 with Nasdaq and have
been granted a waiver of this requirement so long as we hold our annual meeting
on or before October 2, 2000. If we fail to hold our annual meeting by October
2, 2000, we will be in violation of this requirement and will be subject to
delisting.
Finally, we are required under the Nasdaq rules to establish and maintain an
audit committee of at least three members, all of whom shall be independent
directors by June 2001. We currently do not have three independent directors and
our audit committee does not consist solely of independent directors. We intend
to nominate for election at our annual shareholders' meeting two directors
meeting the independence requirement. If we are unable to locate a third
independent director or either of the two nominated directors are not elected by
June 2001, we would also be in violation of Nasdaq's requirements and would be
subject to additional delisting risks.
If we do not maintain the criteria required by Nasdaq or if shareholder approval
is not obtained, but we nonetheless issue common stock contrary to the Nasdaq
requirements, our securities could be delisted by Nasdaq. If we are delisted for
any of these reasons, the common stock would likely be traded in the
Over-The-Counter market on the OTC Electronic Bulletin Board. In such an event,
the market price of the common stock may be adversely impacted and a shareholder
may find it difficult to dispose, or obtain accurate quotations as to the market
value, of the common stock.
7
<PAGE> 13
WE GENERATE REVENUE FROM A CONCENTRATED GROUP OF CUSTOMERS, INCLUDING WORLDCOM
AND THE NEW JERSEY CONSORTIUM. IF WE LOSE THESE CUSTOMERS, OUR REVENUE WILL BE
NEGATIVELY AFFECTED.
Our customer base is highly concentrated and our key customers may change from
year to year. We receive, and expect to continue to receive, a substantial
portion of our total revenues and operating income from a concentrated group of
customers, including WorldCom. If we lose WorldCom, the New Jersey Consortium or
any other of our key customers and are unable to replace them, our business,
financial condition and results of operations will be materially affected. As of
April 30, 2000, the WorldCom Master Services Agreement accounted for
approximately 25% of our total revenues and the New Jersey Consortium agreements
accounted for approximately 20% of our total revenues. The termination of these
agreements would materially affect our financial condition and results of
operations.
IF WE FAIL TO MEET PERFORMANCE DEADLINES UNDER OUR SERVICE CONTRACTS, WE COULD
BE SUBJECT TO MONETARY PENALTIES AND TERMINATION OF THE CONTRACTS.
Our contracts contain performance milestones and deadlines for the
completion of phases of a project and the project as a whole. The failure to
meet such milestones or deadlines could result in the imposition of penalty
payments on us and/or termination of the contract, either of which would impair
our financial results.
In particular, we have missed deadlines and failed to meet performance
milestones under our contracts with the New Jersey Consortium, which includes
the New Jersey Turnpike Authority, New Jersey Highway Authority, Port Authority
of New York and New Jersey and the Delaware Department of Transportation. During
fiscal year 1999, we paid approximately $4.5 million in liquidated damages for
failing to perform our obligations and revenue had also been withheld under the
contracts. As of June 1, 2000, we executed an amendment which established new
milestones and deadlines. If we miss those new deadlines and performance
milestones, we will incur penalties of up to $60,000 per day, additional revenue
may be withheld from us and the New Jersey Consortium may terminate the
contracts, any of which will significantly negatively affect our cash position
and financial results generally.
MANY OF OUR CONTRACTS MAY BE CANCELED ON SHORT NOTICE, AND WE MAY NOT BE
SUCCESSFUL IN REPLACING OUR CONTRACTS AS THEY ARE COMPLETED OR EXPIRE.
Under most of our master services agreements, the customer may terminate the
agreement for any reason on 90 to 180 days' written notice. The termination or
renegotiation of any such contracts or our failure to enter into new master
services agreements with our customers could have a material adverse effect on
our business and results of operations. Many of our contracts, including master
contracts, are also opened to bid at the expiration of the contract term, and we
may not be able to renew existing contracts that come up for bid. Our failure to
win a significant number of existing contracts upon re-bid could have a material
adverse effect on our results of operations or financial condition.
IF WE DEFAULT ON OUR NOTE TO WORLDCOM, OUR ABILITY TO GENERATE REVENUE UNDER THE
WORLDCOM MASTER SERVICES AGREEMENT MAY BE NEGATIVELY AFFECTED, WHICH WOULD
SIGNIFICANTLY IMPAIR OUR FINANCIAL RESULTS.
Under the terms of our acquisition agreement with WorldCom, we agreed to execute
the WorldCom Note for $30.0 million in favor of WorldCom. As of April 30, 2000,
$4.5 million was outstanding under the WorldCom Note. The remaining outstanding
principal and interest on the WorldCom Note is due and payable by July 12, 2007.
If we default on our obligation to pay the WorldCom Note, WorldCom will be able
to do any or all of the following:
-Reduce the minimum yearly and aggregate revenues we would receive
under the Master Services Agreement;
-Refuse to make additional advances under the Master Services
Agreement;
-Refuse to give us additional work under the Master Services Agreement
while we are in default; and
-Require us to pay a 10.5 percent annual default rate of interest while
we are in default.
Our business and financial condition could be materially affected by any default
under the WorldCom Note.
WE MUST MAINTAIN THE ABILITY TO OBTAIN PERFORMANCE BONDS TO MEET OUR OBLIGATIONS
UNDER SERVICE CONTRACTS.
We must submit performance bonds on substantially all contracts obtained. As a
result of our financial condition, we have had difficulty obtaining sufficient
bonding capacity. If we continue to experience bonding difficulties it will
impact our ability to complete order backlogs and will have a material adverse
effect on our business and financial position.
WE ARE DEFENDANTS IN A LAWSUIT THAT COULD BECOME A CLASS ACTION LAWSUIT. AN
ADVERSE OUTCOME IN THIS LAWSUIT OR OTHER LITIGATION WOULD IMPAIR OUR FINANCIAL
POSITION AND CASH FLOW.
In 1998, Shipping Financial Services Corp. filed a lawsuit against us and some
of our officers. Shipping Financial Services asserted claims under the federal
securities laws that we and the officers named in the lawsuit allegedly caused
us to falsely represent and mislead the public in connection with our
acquisitions of MFSNT, assumption of certain contracts from COMSAT and our
acquisitions of MFSNT, assumption of certain contracts from COMSAT and our
ongoing financial
8
<PAGE> 14
condition as a result of the acquisition, assumption and the related financing
transactions. The plaintiff is seeking certification as a class action on behalf
of itself and all others similarly situated and is seeking unspecified damages
and attorneys fees. We are currently assessing the allegations in the lawsuits
and intend to vigorously defend this matter. An adverse outcome in this lawsuit
or in other shareholder lawsuits would likely have a material adverse effect
upon our consolidated financial position, results of operations and cash flow.
In the past six months, arbitrators have ruled against us in three separate
litigation matters, for approximately $8.7 million. While we intend to appeal
these arbitration awards, if we lose the appeal, payment of these awards would
significantly negatively impact our cash position and our financial position.
We are subject to other lawsuits and claims for various amounts which arise out
of the normal course of our business. We intend to vigorously defend these
matters. We do not believe that any of these other lawsuits and claims will have
a material adverse effect on our financial position.
OUR CUSTOMERS' FUTURE REQUIREMENTS MAY BE LESS THAN OUR BACKLOG ESTIMATE, WHICH
WOULD REDUCE OUR EXPECTED REVENUE.
Our backlog is comprised of the uncompleted portion of services to be performed
under our agreements with customers and the estimated value of future services
we expect to provide those customers. Our master service agreements allow the
customers to cancel orders at any time. Accordingly, our backlog estimate does
not necessarily indicate the amount of our future sales. Cancellations of
purchase orders or reductions in purchase orders in progress could negatively
impact our revenues and thus, our financial condition as a whole.
OUR BUSINESS IS LABOR INTENSIVE AND IF WE CANNOT ATTRACT AND RETAIN QUALIFIED
EMPLOYEES, WE MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH STRATEGY.
Our business has high employee turnover in many operations. The low unemployment
rate in the United States could continue to make it difficult to find qualified
personnel in some areas where we operate. Shortages of labor or increased labor
costs could have a material adverse effect on our operations. There can be no
assurance that we will be able to continue to hire and retain a sufficient labor
force of qualified persons.
BECAUSE SOME OF OUR REVENUE IS DERIVED FROM CONTRACTS WITH
GOVERNMENTALLY-CONTROLLED ENTITIES, OUR ABILITY TO GENERATE REVENUE FROM THOSE
CONTRACTS IS DEPENDENT ON THE CUSTOMERS RECEIVING NECESSARY GOVERNMENTAL
FUNDING.
Our customer base for our telecommunications services includes public utilities
and governmental units. Public utilities and governmental units often rely upon
funding from government sources. If our customers do not receive necessary
government funding, they may be unable to pay us for our work or order new work.
If this occurs, these customers may be forced to reduce the amount of our work,
cancel proposed projects, or delay payments under the contracts, which would
lower our revenues and profits.
TO SUCCESSFULLY OPERATE OUR BUSINESS, WE MUST KEEP UP WITH RAPID TECHNOLOGICAL
CHANGES IN THE TELECOMMUNICATIONS INDUSTRY.
The telecommunications industry is subject to rapid changes in technology.
Wireline systems used for the transmission of video, voice and data are subject
to potential displacement by various technologies, including wireless
technologies. Other companies may develop new technologies that allow users to
enhance their telecommunications services without significantly upgrading their
existing networks. These new technologies could reduce the need for wireline
services, undermine our ability to compete in the telecommunications business
and otherwise harm our business, financial condition and results of operations.
OUR BUSINESS IS SUBSTANTIALLY DEPENDENT ON PROPRIETARY TECHNOLOGY. IF WE DO NOT
ADEQUATELY PROTECT THIS TECHNOLOGY, OR IF OUR COMPETITORS DEVELOP SIMILAR
TECHNOLOGY, OUR BUSINESS COULD BE NEGATIVELY AFFECTED.
We do not hold or own any patents for our technology and currently rely on a
combination of contractual rights, exclusive and nonexclusive licenses, trade
secrets and trademarks, to establish and protect our proprietary rights. Despite
these efforts, our proprietary rights protection may not be sufficient to
prevent competitors from developing similar technology.
We currently license hardware and software technology from third parties
pursuant to contractual license arrangements and plan to continue to do so in
the future. We may not be able to retain any or all of our licenses for software
and hardware technology, and our inability to continue to utilize this
technology could have a material adverse effect upon our results of operations
and financial condition.
We attempt to ensure that our trade names, trademarks, technology and processes,
including patents, trade names, trademarks, technology and processes owned by
third parties that have been licensed to us, do not infringe patents and other
proprietary rights; however, third parties may allege that these proprietary
rights infringe upon the proprietary rights they hold. If infringement is
alleged, we may try to obtain a license to use the proprietary right, but we may
be unable to do so on acceptable terms, if at all. We may also try to challenge
the infringement claim in court, but we may ultimately lose the challenge and
could be required to pay the winning party damages, costs, and legal fees.
Intellectual property litigation is often
9
<PAGE> 15
lengthy and, if initiated or prosecuted by or against us, would divert
management's attention and resources from our operations. The legal costs and
other expenses we may incur to challenge an infringement claim, even for claims
that we may ultimately win, could also have a material adverse effect upon our
business, results of operations and financial condition.
THE TELECOMMUNICATIONS INFRASTRUCTURE SERVICE INDUSTRY IS HIGHLY COMPETITIVE AND
POTENTIAL COMPETITORS FACE FEW BARRIERS TO ENTRY. OUR INABILITY TO COMPETE
SUCCESSFULLY COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
The telecommunications industry is highly competitive and we compete with other
companies in most of the markets in which we operate. We may also face
competition from existing or prospective customers who employ in-house personnel
to perform some of the same types of services as we provide. There are
relatively few significant barriers to entry into the markets we serve, and as a
result, any organization that has adequate financial resources and access to
technical expertise may compete with us. Also, since a significant portion of
our revenues are derived from master service agreements where price is often an
important factor, we may be outbid by new or existing competitors. Increased
competition in the markets we serve may have a negative effect on our financial
results.
OUR OPERATING RESULTS FLUCTUATE FROM QUARTER TO QUARTER AND OUR REVENUE IS
GENERALLY LOWER IN THE FIRST AND FOURTH QUARTERS OF THE YEAR.
Our quarterly results may not be indicative of longer-term performance. We have
experienced and expect to continue to experience quarterly variations in
revenues and income from operations. These variations result from many factors,
including the following:
- The timing and volume of work under new or existing projects;
- The budgetary spending patterns of customers;
- Timing of services that we perform under master services
agreements;
- The termination of existing master services agreements;
- Costs incurred by us to support growth;
- The change in mix of our customers and business;
- Fluctuations in insurance expenses due to changes in claims
experience and actuarial assumptions;
- Changes in construction and design costs;
- General economic conditions;
- The effect of the change of business between negotiated
contracts and bid contracts; and
- The timing of additional general and administrative expenses
to support the growth of our business.
Revenues and income from operations in our first quarter and, occasionally, the
fourth quarter, have in the past been, and may in the future be, adversely
affected by weather conditions and the year-end budgetary spending patterns of
our customers.
IF WE LOSE MEMBERS OF OUR SENIOR MANAGEMENT TEAM, OUR RESULTS OF OPERATIONS WILL
BE NEGATIVELY AFFECTED.
We depend highly upon the continued services and experience of our senior
management team, and managers of key operating subsidiaries. In the past two
years, we have lost a number of significant members of senior management. We
have replaced those managers with highly qualified senior executives. To be
successful, we must efficiently integrate these new executives. In addition, the
loss of the services of key individuals could have a material adverse effect on
the business, financial condition and results of our operations.
OUR CHARTER DOCUMENTS AND FLORIDA LAW CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY
MAKE IT MORE DIFFICULT TO EFFECT A CHANGE IN OUR CONTROL AND COULD ADVERSELY
IMPACT THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation and bylaws, and provisions of the Florida Business
Corporation Act, may make it more difficult in some respects to effect a change
in our control and replace incumbent management. These provisions may:
-have a negative impact on the price of our common stock;
10
<PAGE> 16
-discourage third party bidders from making a bid for us; or
-reduce any premiums paid to you for your common stock.
In addition, our board of directors has the authority to fix the rights and
preferences of, and to issue additional shares of, our preferred stock. It also
may take other actions without shareholder consent that may have the effect of
delaying or preventing a change of our control.
FUTURE SALES OF OUR COMMON STOCK BY EXISTING SHAREHOLDERS MAY DEPRESS OUR STOCK
PRICE.
As of August 17, 2000 we had approximately 16,374,504 shares of common stock
issued and outstanding. Assuming that as of August 17, 2000 the Series B
securities, the Series C securities, our Series D Preferred Stock, the Senior
Note Warrants, the WorldCom securities and the Sirit shares were exercised,
converted or issued, we would have had approximately 34,508,854 shares of common
stock issued and outstanding on that date, substantially all of which would be
eligible for sale in the public market, except for the 3,696,303 shares of
common stock issuable upon conversion of the Series D Preferred Stock. Sales of
a substantial number of shares in the public market could cause a reduction in
the market price of our common stock.
11
<PAGE> 17
USE OF PROCEEDS
We are not selling any of the shares offered in this prospectus, and we will not
receive any of the proceeds from the sale of these shares. However, we may
receive proceeds from the exercise of the WorldCom option and the various
warrants described herein, assuming that all exercises occur by the payment of
the exercise price with cash, as follows:
- To the extent that WorldCom exercises the WorldCom Option in
full by paying the cash exercise price, we will receive gross
proceeds in an amount equal to $14,000,000.
- To the extent that the Series B warrants are exercised in
full, we will receive gross proceeds in an amount equal to
$7,020,000.
- To the extent that the warrants issued in connection with our
Senior Notes are exercised in full, we will receive gross
proceeds in an amount equal to $3,378,416.25.
- To the extent the Series C warrants are exercised we will
receive gross proceeds in an amount equal to $7,400,000.
We will bear all costs and expenses associated with registering the shares. The
gross proceeds that we receive from the exercise of these securities will be
reduced by the amount of related expenses. We anticipate that we will use the
gross proceeds from exercise, if any, for working capital and general corporate
purposes.
12
<PAGE> 18
CAPITALIZATION
The following table sets forth, as of April 30, 2000, the unaudited
capitalization of the Company, on a consolidated basis and as adjusted as
described below. This table should be read in conjunction with the historical
consolidated financial statements of the Company and the related notes thereto
included elsewhere in this prospectus. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
At April 20, 2000 As Adjusted( )
------------------- ----------------
<S> <C> <C>
Advances from WorldCom $ 32,000 $ --
======== =========
Total debt(1):
Secured Credit Facility 35,000 35,000
WorldCom Note(2) 4,456 4,456
Revolving lines of credit 1,459 1,459
Other debt(4) 860 860
-------- ---------
Total debt 41,775 41,775
======== =========
Temporary equity:
Series C Convertible Preferred Stock(5) 13,665 13,665
Common securities subject to mandatory redemption:
Common stock 4,911 4,911
Series B Preferred Stock Exchange Warrants 1,213 1,213
Series C Preferred Stock Warrants 784 1,458
-------- ---------
20,573 21,247
======== =========
Stockholders' deficit:
Common Stock 15 15
Series D Convertible Preferred Stock(5) -- 37,000
Additional paid-in capital 69,303 69,303
Senior Note Warrants 1,244 1,244
Series B Preferred Stock Warrants 2,735 2,735
Series C Preferred Stock Warrants 313 313
WorldCom SAR 606 606
Retained Deficit(6) (99,911) (129,813)
-------- ---------
Total Shareholders' Deficit (25,695) (18,597)
-------- ---------
Total Capitalization $ 68,653 $ 44,425
-------- ---------
</TABLE>
(1) For information concerning our indebtedness outstanding at April 30,
2000, see Note 10 "Debt" of Notes to our Condensed Consolidated
Financial Statements.
(2) See Note 10, "Debt" of Notes to our Condensed Consolidated Financial
Statements for discussion of the WorldCom Note.
(3) Consists of revolving lines of credit held by two of our subsidiaries.
(4) Consists primarily of capital leases for construction equipment.
(5) A total of 1 million shares of preferred stock is authorized, of which
1,200 shares have been designated Series A Convertible Preferred Stock,
4,000 shares have been designated Series B Convertible Preferred Stock,
5,000 shares have been designated Series C Convertible Preferred Stock
and 1,000 shares have been designated Series D Convertible Preferred
Stock. At April 30, 2000, all of the Series A Convertible Preferred
Stock had been converted, all of the Series B Convertible Preferred
Stock has been repurchased or converted and the Series C Convertible
Preferred Stock was outstanding. The Series D Convertible Preferred
Stock was issued to WorldCom subsequent to April 30, 2000 in exchange
for $32.0 million in advances made to us prior to April 30, 2000 plus
$5.0 million in advances we received after that date. See Note 10,
"Debt" and Note 12, "Preferred Stock" of Notes to our Condensed
Consolidated Financial Statements.
(6) The pro forma reduction in retained deficit relates to the following
charges we anticipate during the three months ended July 31, 2000: (a)
a $25.0 million charge related the SIRIT Settlement; (b) a $4.2 million
charge related to additional common shares issuable to the Palladin
group; and (c) a $0.7 million charge related 750,000 additional
warrants given to the Series C Stock holders. See Note 19, "Pro Forma
Financial Information," of Notes to our Condensed Consolidated
Financial Statements.
13
<PAGE> 19
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
The common stock is traded on the Nasdaq National Market under the trading
symbol "ABTE." The following table provides for each period indicated the high
and low sale prices for the common stock.
<TABLE>
<CAPTION>
SALE PRICE RANGE
---------------------
High Low
------- --------
<S> <C> <C>
YEAR ENDED OCTOBER 31, 1998
1ST Quarter $ 9.81 $ 9.63
2nd Quarter 12.44 7.31
3rd Quarter 20.31 9.38
4th Quarter 10.38 1.75
YEAR ENDED OCTOBER 31, 1999
1st Quarter 12.38 5.25
2nd Quarter 11.56 5.75
3rd Quarter 12.94 5.81
4th Quarter 10.06 7.50
YEAR ENDED OCTOBER 31, 2000
1st Quarter 11.87 4.50
2nd Quarter 6.72 1.88
3rd Quarter 3.88 1.13
4th Quarter (through August 29, 2000) 3.47 2.13
</TABLE>
On August 29, 2000 the last reported sales price of the common stock was
$2.88 and there were approximately 386 record holders of the common stock.
We have never paid any dividends to holders of shares of common stock. The terms
of our Secured Credit Facility, the Series C Preferred Stock and the Series D
Preferred Stock restrict or prohibit our ability to declare or pay dividends on
shares of common stock.
We expect that we will retain our earnings, if any, to finance operations. Thus,
we do not expect to pay dividends to holders of common stock for the foreseeable
future.
14
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
We have provided you with a summary of our historical consolidated financial
statements. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Our results of operations reflect the operating results of MFSNT
and other acquired businesses only from the respective dates of acquisition.
Accordingly, our results are not necessarily comparable on a period-to-period
basis. See the consolidated financial statements for the Company, and the
related notes to those statements, which are included in this prospectus. The
financial data for the six months ended April 30, 1999 and 2000 include, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the consolidated financial position and
results of the Company for such period. Due to seasonality and other market
factors, the consolidated historical results for the six months ended April 30,
2000 are not necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Construction and maintenance ...................... $ 35,408 $ 48,906 $ 86,334 $ 217,481 $ 382,844
Conduit Sale ...................................... -- -- -- -- 35,721
-------- -------- -------- --------- ---------
Total Revenue: ....................................... 35,408 48,906 86,334 217,481 418,565
Costs and Expenses:
Costs of revenues ................................. 27,720 40,486 68,164 179,505 330,387
Costs of Conduit Sale ............................. -- -- -- -- 34,673
General and administrative ........................ 5,464 8,404 8,797 18,967 41,041
Depreciation and amortization ..................... 1,914 2,750 4,532 7,600 11,833
Impairment of long-lived assets ................... -- -- -- -- 2,515
Charges and transactions/translations losses
related to Latin American operations .............. 96 3,553 -- -- --
-------- -------- -------- --------- ---------
Total costs and expenses ............................. 35,194 55,193 81,493 206,072 420,449
-------- -------- -------- --------- ---------
Income (loss) from operations ........................ 214 (6,287) 4,841 11,409 (1,884)
-------- -------- -------- --------- ---------
Other income (expenses):
Interest expense .................................. (1,118) (1,350) (1,565) (5,534) (9,512)
Change in value of stock appreciation rights ...... -- -- -- -- (1,814)
Equity in losses of investment in Kanas ........... -- -- -- -- (591)
Other ............................................. 574 238 601 662 (761)
-------- -------- -------- --------- ---------
Total other expenses.................................. (546) (1,112) (964) (4,872) (12,678)
-------- -------- -------- --------- ---------
Income (loss) before income taxes, minority
interest and extraordinary item ...................... (332) (7,399) 3,877 6,537 (14,562)
Provision for (benefit from) income taxes ............ (368) (891) 727 3,405 (138)
-------- -------- -------- --------- ---------
Income (loss) before minority interest and
extraordinary item ................................... 36 (6,508) 3,150 3,132 (14,424)
Minority interest .................................... (317) 598 (293) (618) (569)
-------- -------- -------- --------- ---------
Income (loss) before extraordinary item .............. (281) (5,910) 2,857 2,514 (14,993)
Extraordinary loss on early extinguishment of
debt, net of tax of zero in 1999 ..................... -- -- -- -- (3,067)
-------- -------- -------- --------- ---------
Net income (loss) .................................... (281) (5,910) 2,857 2,514 (18,060)
Beneficial conversion privilege of preferred stock ... -- -- (1,266) (8,013) --
Repurchase of Series B Preferred Stock ............... -- -- -- -- (4,496)
Modification of conversion price of Series B
Preferred Stock.................................... -- -- -- -- (6,430)
Modification of exercise price of Series B
Preferred Stock Warrants ............................. -- -- -- -- (1,894)
Increase in default redemption value of Series B
Preferred Stock ...................................... -- -- -- -- (5,878)
Preferred stock dividends ............................ -- -- (260) (341) --
-------- -------- -------- --------- ---------
Income (loss) applicable to common stock ............. $ (281) $ (5,910) $ 1,331 $ (5,840) $ (36,758)
======== ======== ======== ========= =========
Income (loss) applicable to common stock per
share:(1)
Basic:
Income (loss) applicable to common stock
before extraordinary item ......................... ($ 0.03) ($ 0.71) $ 0.16 ($ 0.59) ($ 2.86)
Extraordinary loss ................................ -- -- -- -- (0.26)
Income (loss) applicable to common stock .......... (0.03) (0.71) 0.16 (0.59) (3.12)
Diluted:
Income (loss) applicable to common stock
before extraordinary item ......................... (0.03) (0.71) 0.16 (0.59) (2.86)
Extraordinary loss ................................ -- -- -- -- (0.26)
Income (loss) applicable to common stock .......... (0.03) (0.71) 0.16 (0.59) (3.12)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ............................ $ 2,952 $ 3,267 $ 6,230 $ 13,544 $ 16,568
Total assets ...................................... 32,482 38,919 50,346 290,760 262,033
Total debt ........................................ 8,475 14,742 17,294 76,123 66,372
Total preferred stock ............................. -- -- 6,713 11,325 16,322
Total shareholders' equity ........................ 17,467 11,598 15,247 40,217 431
</TABLE>
15
<PAGE> 21
<TABLE>
<CAPTION>
Six Months Ended April 30, Three Months Ended April 30,
-------------------------- ----------------------------
1999 2000 1999 2000
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Construction and maintenance ........................... $ 181,088 $ 238,741 $ 88,008 $ 131,826
Conduit Sale ........................................... 35,721 -- 35,721 --
--------- --------- ---------- ----------
Total Revenue: ............................................ 216,809 238,741 123,729 131,826
Costs and Expenses:
Construction and Maintenance ........................... 155,656 247,167 77,560 144,641
Costs of Conduit ....................................... 34,673 -- 34,673 --
General and administrative ............................. 18,367 29,609 8,681 17,642
Impairment of intangible assets ........................ 2,465 -- 2,465 --
Depreciation and amortization .......................... 5,984 5,633 3,207 2,825
--------- --------- ---------- ----------
Total costs and expenses .................................. 217,145 282,409 126,586 165,108
--------- --------- ---------- ----------
Loss from operations ...................................... (336) (43,668) (2,857) (33,282)
--------- --------- ---------- ----------
Other income (expense):
Interest expense ....................................... (4,688) (3,965) (2,210) (1,516)
Equity in losses/impairment of investment in
Kanas .................................................. -- (12,184) -- (11,875)
Change in value of stock appreciation rights ........... 1,896 3,710 7,230 --
Other .................................................. (554) 368 (551) 44
--------- --------- ---------- ----------
Total other income (expense) .............................. (3,346) (12,071) 4,469 (13,347)
--------- --------- ---------- ----------
Loss before income taxes, minority interest
and extraordinary item .................................... (3,682) (55,739) 1,612 (46,629)
Provision for (benefit from) income taxes ................. (35) -- 15 (296)
--------- --------- ---------- ----------
Loss before minority interest and extraordinary item ...... (3,647) (55,739) 1,597 (46,333)
Minority interest ......................................... 199 50 125 122
--------- --------- ---------- ----------
Loss before extraordinary item ............................ (3,846) (55,789) 1,472 (46,455)
Extraordinary loss on early extinguishment of debt ........ (3,067) -- (3,067) --
--------- --------- ---------- ----------
Net loss .................................................. (6,913) (55,789) (1,595) (46,455)
Increase in default redemption value of Series B
Preferred Stock ........................................... -- (1,404) -- --
Redemption of 2,785 shares of Series B Preferred Stock .... (4,323) -- (4,323) --
Modification of exercise price of Series B
Preferred Stock Warrants .................................. (1,894) -- (1,894) --
Modification of conversion price of Series B
Preferred Stock ........................................... (6,430) -- (6,430) --
Series C Preferred Stock dividends and accretion .......... -- (262) -- (262)
Series B Preferred Stock dividends ........................ (244) -- (64) --
--------- --------- ---------- ----------
Loss applicable to common stock ........................... $ (19,804) $ (57,455) $ (14,306) $ (46,717)
========= ========= ========== ==========
Loss applicable to common stock per share (1)
Basic:
Loss before extraordinary item ......................... $ (1.43) $ (4.01) $ (0.96) $ (2.93)
Extraordinary loss on the early extinguishment
of debt ................................................ (0.26) -- (0.26) --
Loss applicable to common stock ........................ (1.69) (4.01) (1.22) (2.93)
Diluted:
Loss before extraordinary item ......................... (1.43) (4.01) (0.96) (2.93)
Extraordinary loss on the early extinguishment
of debt ................................................ (0.26) -- (0.26) --
Loss applicable to common stock ........................ (1.69) (4.01) (1.22) (2.93)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents .............................. 30,502 11,441 30,502 11,441
Total assets ........................................... 272,868 303,851 272,868 303,851
Total debt ............................................. 66,467 41,775 66,467 41,775
Total preferred stock .................................. 2,385 13,665 2,385 13,665
Total shareholders' equity (deficit) ................... 27,287 (21,166) 27,287 (21,166)
</TABLE>
(1) Per share data has been restated, where applicable, in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which became effective for the Company during the fiscal year
ended October 31, 1998.
16
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
OVERVIEW
The Company's unaudited operating results reflect the unaudited operating
results of Southern Aluminum & Steel Corporation ("SASCO") and Specialty
Electronic Systems, Inc. ("SES") only from the date of acquisition that was
November 1, 1999. Combined selected financial information of SASCO and SES
during the three and six months ended April 30, 2000 were as follows:
<TABLE>
<CAPTION>
For the Months Ended April 30, 2000
-----------------------------------
Three Six
--------- ---------
<S> <C> <C>
Revenues $ 6,273 $ 11,020
Costs of revenues 4,854 9,500
General and administrative expenses 514 1,032
Depreciation and amortization 28 59
Other expense 39 82
--------- ---------
Net income $ 838 $ 347
--------- ---------
</TABLE>
See Note 6, "Assumption of COMSAT Contracts," to the accompanying condensed
consolidated financial statements for a discussion and summary of contracts
assumed from the Texas Department of Transportation during the fiscal year ended
October 31, 1998. All of the COMSAT Contracts were substantially complete as of
October 31, 1999. The revenues, cost of revenues and gross margins were
non-recurring and are not generally indicative of returns we expect to achieve
on future contracts.
<TABLE>
<CAPTION>
For the Three Months For the Six Months For the Fiscal Years
Ended April 30, Ended April 30, Ended October 31,
-------------------- ------------------- ---------------------
2000 1999 2000 1999 1999 1998
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Billings on the COMSAT contracts(1) $ -- $3,251 $ -- $ 5,556 $ 7,952 $11,327
Deferred revenue recognized -- 1,032 -- 2,531 3,935 8,481
------ ------ ------ ------- ------- -------
-- 4,283 -- 8,087 11,887 19,808
Direct contract costs -- 2,048 -- 5,115 8,675 10,672
------ ------ ------ ------- ------- -------
Gross margin from COMSAT contracts $ -- $2,235 $ -- $ 2,972 $ 3,212 $ 9,136
------ ------ ------ ------- ------- -------
</TABLE>
The following table sets forth selected elements of our condensed consolidated
statements of operations as a percentage of our revenues:
<TABLE>
<CAPTION>
For the Three Months For the Six Months For the Fiscal Years Ended
Ended April 30, Ended April 30, October 31,
--------------------- -------------------- -----------------------------
2000 1999 2000 1999 1999 1998 1997
--------- --------- --------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Construction and maintenance 100.0% 71.1% 100.0% 83.5% 91.5% 100.0% 100.0%
Conduit sales -- 28.9 -- 16.5 8.5 -- --
--------- --------- --------- -------- ------- -------- -------
100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Construction and maintenance 109.7 62.7 103.5 71.8 78.9 82.5 79.0
Costs of conduit -- 28.0 -- 16.0 8.3 -- --
General and administrative
expense 13.4 7.0 12.4 8.5 9.8 8.7 10.2
Impairment of intangible assets -- 2.0 -- 1.1 0.6 -- --
Depreciation and amortization 2.1 2.6 2.4 2.8 2.8 3.5 5.2
--------- --------- --------- -------- ------- -------- -------
Income (loss) from operations (25.2) (2.3) (18.3) (0.2) (0.4) 5.3 5.6
Other expenses, net (10.0) 1.0 (5.1) (3.0) (3.9) (4.1) (2.3)
--------- --------- --------- -------- ------- -------- -------
Net income (loss) (35.2) (1.3) (23.4) (3.2) (4.3) 1.2 3.3
Income (loss) applicable to common
stock (35.4) (11.6) (24.1) (9.1) (8.8) (2.7) 1.5
--------- --------- --------- -------- ------- -------- -------
</TABLE>
17
<PAGE> 23
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED APRIL 30, 2000 COMPARED WITH THE THREE AND SIX MONTHS
ENDED APRIL 30, 1999
The following discussion and analysis relates to our financial condition and
results of operations for the three and six months ended April 30, 2000 and
1999. This information should be read in conjunction with our condensed
consolidated financial statements appearing elsewhere in this prospectus.
REVENUES. Construction and maintenance revenues were $131.8 million for the
three months ended April 30, 2000, compared to $88.0 million for the same three
month period of fiscal 1999 an increase of $43.8 million or 49.8 percent.
Construction and maintenance revenues were $238.7 million for the six months
ended April 30, 2000, compared to $181.1 million for the same six month period
of fiscal 1999 an increase of $57.6 million or 31.8 percent. Substantially all
of the increase is due to increased revenues from the WorldCom Master Services
Agreement and the New Jersey Consortium Contracts.
Our estimated backlog at May 30, 2000, was as follows (in thousands):
<TABLE>
<CAPTION>
Operations and
Construction Maintenance
Organizational Group Contracts Contracts Total
------------ -------------- --------
<S> <C> <C> <C>
Network Services $376,000 $111,000 $487,000
Transportation Services 110,000 110,000 220,000
Construction 138,000 29,000 167,000
-------- -------- --------
$624,000 $250,000 $874,000
-------- -------- --------
</TABLE>
We expect to complete approximately 40% of the total backlog within the next
twelve months. Due to the nature of our contractual commitments, in many
instances our customers do not commit to the volume of services to be purchased
under a contract but, rather, commit us to perform these services if requested
by the customer and commit to obtain these services from us if they are not
performed internally. Many of the contracts are multi-year agreements, ranging
from less than one year to 20 years. We include the full amount of services
projected to be performed over the lives of the contract in backlog due to our
historical relationships with our customers and our experience in procurements
of this nature. Contract backlog of $500 million is under performance bonds and
we may be subject to liquidated damages for failure to perform in a timely
manner. Our backlog may fluctuate and does not necessarily indicate the amount
of future sales. A substantial amount of the order backlog can be canceled at
any time without penalty, except, in some cases, we can recover actual committed
costs and profit on work performed up to the date of cancellation. Cancellations
of pending purchase orders or termination or reductions of purchase orders in
progress from our customers could have a material adverse effect on our
business, operating results and financial condition. In addition, there can be
no assurance as to customers' requirements during a particular period or that
such estimates at any point in time are accurate.
As a result of our consolidated financial condition, there can be no assurances
that we can obtain the bonding necessary to bid on and accept new projects.
Conduit Sales - Sales of conduit during the three months ended April 30, 1999,
related to sales of capacity in the NYSTA Network and generated revenues, costs
of conduit and margins of $35.7 million, $34.7 million and $1.0 million,
respectively. There were no comparable sales during the six months ended April
30, 2000. However, during that period we expended $39.8 million for "networks
under construction" that we expect to sell or lease in future periods. Refer to
Note 7, "Networks Under Construction," to the accompanying condensed
consolidated financial statements for a further discussion of these projects.
COSTS OF REVENUES. Construction and maintenance costs were $144.6 million for
the three months ended April 30, 2000, compared to $77.6 million for the same
three month period of fiscal 1999, an increase of $67.0 million or 86.5 percent.
Construction and maintenance costs were $247.2 million for the six months ended
April 30, 2000, compared to $155.7 million for the same three month period of
fiscal 1999, an increase of $91.5 million or 58.8 percent.
Our construction and maintenance margins were (9.7) percent and (3.5) percent
for the three and six months ended April 30, 2000, respectively, compared to
11.9 percent and 14.0 percent during the comparable periods of fiscal 1999. As
discussed and summarized in Note 16, "Segment Information" to the accompanying
condensed consolidated financial statements, the negative construction and
maintenance margins during fiscal 2000 and the substantial reduction in such
margins from fiscal 1999 related primarily to current and future losses recorded
on the New Jersey Consortium Contracts.
18
<PAGE> 24
The following is a summary of the reserves for losses on uncompleted contracts
(amounts in thousands):
<TABLE>
<CAPTION>
Network Services Group Transportation Services Group Total
----------------------- ----------------------------- -----------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of fiscal
year $ 5,703 $ 8,029 $ 2,917 $ 17,361 $ 8,620 $ 25,390
Additions(1) 141 -- 4,744 -- 4,885 --
Amount utilized (393) (1,231) (961) (6,068) (1,354) (7,299)
-------- -------- -------- -------- -------- --------
Balance, January 31 5,451 6,798 6,700 11,293 12,151 18,091
Additions(1) 627 -- 18,885 1,858 19,512 1,858
Amount utilized (53) (1,250) (1,005) (1,044) (1,058) (2,294)
-------- -------- -------- -------- -------- --------
Balance, April 30 $ 6,025 $ 5,548 $ 24,580 $ 12,107 $ 30,605 $ 17,655
-------- -------- -------- -------- -------- --------
</TABLE>
(1) Additions during the three and six months ended April 30, 2000, related
primarily to the New Jersey Consortium Contracts. Additions and amounts
utilized exclude previously unprojected losses incurred during each
period (refer to Note 16, "Segment Information").
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$17.6 million for the three months ended April 30, 2000, compared to $8.7
million for the same three month period of fiscal 1999, an increase of $8.9
million or 102.3 percent. General and administrative expenses were $29.6 million
for the six months ended April 30, 2000, compared to $18.4 million for the same
six month period of fiscal 1999, an increase of $11.2 million or 60.9 percent.
The increase in general and administrative expense during the three and six
months ended April 30, 2000, compared to the same period of fiscal 1999 related
primarily to increased professional fees associated with the SIRIT litigation
(refer to Note 11, "Contingencies," to the accompanying condensed consolidated
financial statements), increased financial advisory fees (refer to Note 14,
"Financial Advisory Services," to the accompanying condensed consolidated
financial statements) and higher overall executive compensation.
OTHER EXPENSE, NET. Other income (expense), consisted of the following (dollars
in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended April 30,
-----------------------------------------------------------
2000 1999 $Change %Change
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Interest expense $ (1,516) $ (2,210) $ 694 31.4%
Change in value of stock appreciation rights -- 7,230 7,230 100.0
Equity in losses/impairment of investment in Kanas (11,875) -- (11,875) --
Benefit from (provision for) income taxes 296 (15) 311 2,073.3
Minority interest (122) (125) (3) (2.4)
Extraordinary loss on the early extinguishment of debt -- (3,067) (3,067) (100.0)
Other, net 44 (551) 595 108.0
<CAPTION>
For the Six Months Ended April 30,
-----------------------------------------------------------
2000 1999 $Change %Change
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Interest expense $ (3,965) $ (4,688) $ 723 15.4%
Change in value of stock appreciation rights 3,710 1,896 1,814 95.7
Equity in losses/impairment of investment in Kanas (12,184) -- (12,184) --
Benefit from (provision for) income taxes -- 35 (35) (100.0)
Minority interest (50) (199) 149 74.9
Extraordinary loss on the early extinguishment of debt -- (3,067) 3,067 100.0
Other, net 368 (554) 922 166.4
</TABLE>
Interest Expense - The decrease in interest expense during fiscal 2000 compared
to fiscal 1999 is primarily attributable to the lower outstanding balance due
WorldCom resulting from the WorldCom Debt to Equity Conversion. During the three
months ended April 30, 2000, we had $35.0 million outstanding under our Secured
Credit Facility, $4.5 million outstanding under the WorldCom Note with an
interest rate of 11.5 percent per annum and $19.2 million outstanding under
property taxes payable that is net of imputed interest at 15 percent per annum.
The $32.0 million outstanding under the WorldCom Advance is non-interest
bearing.
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 our common
stock at our next shareholders' meeting and will not result
19
<PAGE> 25
in a cash charge to the Company. The value of the WorldCom SARs will be
increased or decreased based on the intrinsic value of the WorldCom SARs
utilizing the price of our common stock at each reporting date until the
WorldCom SARs are converted to options or exercised by WorldCom.
Equity in Losses/Impairment of Investment in Kanas - As reflected in Note 8,
"Investment in Kanas (Held for Sale)," in the accompanying condensed
consolidated financial statements, we wrote off our investment in Kanas during
the three months ended April 30, 2000.
Extraordinary Loss on the Early Extinguishment of Debt - During the three months
ended April 30, 1999, we purchased all of our 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 Notes were purchased with proceeds from the WorldCom
Advance.
LOSS APPLICABLE TO COMMON STOCK. Loss applicable to common stock was $46.7
million for the three months ended April 30, 2000, compared to $14.3 million for
the same three month period of fiscal 1999, an increase of $32.4 million or
226.6 percent. During the three months ended April 30, 2000, we recorded
approximately $0.3 million of dividends and accretion related to the Series C
Preferred Stock.
Loss applicable to common stock was $57.5 million for the six months ended April
30, 2000, compared to $19.8 million for the same six month period of fiscal
1999, an increase of $37.7 million or 190.1 percent. During the six months ended
April 30, 2000, we recorded approximately $1.4 million related to the increase
in default redemption value of the Series B Preferred Stock and approximately
$0.3 million of dividends and accretion related to the Series C Preferred Stock.
Loss applicable to common stock for the six months ended April 30, 1999, was
adversely affected by charges of $12.6 million related to the February 1999
partial redemption and modification of the Series B Preferred Stock and related
warrants.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED WITH FISCAL YEAR ENDED OCTOBER 31,
1998.
REVENUES. For the fiscal year ended October 31, 1999, revenues totaled $418.6
million compared to $217.5 million during the fiscal year ended October 31,
1998, an increase of $201.1 million or 92.0 percent. This increase in revenues
is due primarily to growth in our operations through the acquisition of MFSNT on
July 2, 1998. Revenues generated by MFSNT for the fiscal year ended October 31,
1999, totaled approximately $264.0 million and included sales of conduit
capacity of approximately $35.7 million.
COST OF REVENUES. For the fiscal year ended October 31, 1999 cost of revenues
totaled $365.1 million compared to $179.5 million during the fiscal year October
31, 1998, an increase of $185.6 million or 103.0 percent. This increase in cost
of revenues is due primarily to growth in our operations through the acquisition
of MFSNT on July 2, 1998. Cost of revenues incurred by MFSNT for the fiscal year
ended October 31, 1999, totaled approximately $233.5 million and included cost
associated with sales of conduit capacity of approximately $34.7 million.
Our construction and maintenance margins (Revenues less Cost of Revenues) were
$53.5 million or 12.8 percent for the fiscal year ended October 31, 1999,
compared to $38.0 million or 17.5 percent for the fiscal year ended October 31,
1998. The dollar increase in construction and maintenance margins is due
primarily to the acquisition of MFSNT on July 2, 1998. Construction and
maintenance margins generated by MFSNT for the fiscal year ended October 31,
1999, totaled approximately $31.6 million and included margins from sales of
conduit capacity of $1.0 million. The decrease in construction and maintenance
margins on a percentage basis from fiscal year 1999 to fiscal year 1998 was due
primarily to increased emphasis on cost plus contracts (predominately with
WorldCom) and negative margins generated by former subsidiaries Dial and AIS
(which were closed in fiscal year 1999).
As of July 2, 1998, we estimated the need for reserves for contract losses with
respect to MFSNT contracts of $40.5 million. These reserves relate to specific
MFSNT jobs identified as Loss Jobs. Revenues and costs recognized in our
consolidated statement of operations related to these identified Loss Jobs
subsequent to the acquisition date have resulted in no net margin as all losses
were recorded against the reserve balance. We utilized the reserves for losses
on uncompleted contracts only on those jobs identified as Loss Jobs at the date
of acquisition. The following is a summary of the reserves for losses on
uncompleted contracts (amounts in thousands):
20
<PAGE> 26
<TABLE>
<CAPTION>
Network Transportation
Services Services Total
-------- -------------- --------
<S> <C> <C> <C>
Balance, July 2, 1998(1) 16,266 24,234 40,500
Amount utilized (8,237) (6,873) (15,110)
-------- -------- --------
Balance, October 31, 1998 8,029 17,361 25,390
Valuation adjustments(2) 2,463 (3,082) (619)
Amount utilized (4,789) (11,362) (16,151)
-------- -------- --------
Balance, October 31, 1999 $ 5,703 $ 2,917 $ 8,620
-------- -------- --------
</TABLE>
(1) The valuation adjustments made during the fiscal year ended October 31,
1999, were the result of final projected cost estimates on previously
identified Loss Jobs unavailable at the date of acquisition.
GENERAL AND ADMINISTRATIVE EXPENSES. For the fiscal year ended October 31, 1999
general and administrative expenses were $41.0 million compared to $19.0 million
during the fiscal year ended October 31, 1998, an increase of $22.0 million or
116.0 percent. This increase in general and administrative expenses is due
primarily to growth in our operations through the acquisition of MFSNT on July
2, 1998. General and administrative expenses incurred by MFSNT for the fiscal
year ended October 31, 1999, totaled approximately $14.8 million. The remaining
increase was due to i) significant professional fees associated with pending
litigation and reviews by the Securities and Exchange Commission; ii) increases
in our management structure necessary to support our increased revenue in
accordance with our strategic objective; and iii) costs associated with ongoing
efforts to recapitalize the Company.
DEPRECIATION AND AMORTIZATION. For the fiscal year period ended October 31,
1999, depreciation and amortization expense totaled $11.8 million compared to
$7.6 million during the fiscal year ended October 31, 1998, an increase of $4.2
million or 55.0 percent. As a percentage of revenues, depreciation and
amortization decreased from 3.5 percent during fiscal year 1998 to 2.8 percent
during fiscal year 1999 due to an increase in revenues which did not require the
same percentage increase in capital assets to support our operations.
IMPAIRMENT OF LONG-LIVED ASSETS. During the fiscal year ended October 31, 1999,
we closed Dial and AIS that resulted in impairment of Dial goodwill of $1.3
million. We also wrote-off $1.2 million of equipment.
INCOME (LOSS) FROM OPERATIONS. For the fiscal year ended October 31, 1999, loss
from operations was $1.9 million compared to income from operations of $ 11.4
million for the fiscal year ended October 31, 1998, a decrease of $13.3 million
or 117.0 percent. This decrease, as discussed above, was due primarily to lower
construction and maintenance margins and increased general and administrative
expenses.
OTHER EXPENSE, NET. For the fiscal year ended October 31, 1999, other expense
totaled $16.2 million compared to $8.9 million during the fiscal year ended
October 31, 1998, an increase of $7.3 million or 82.0 percent. Other expense
includes the following for the fiscal years ended October 31 (amounts in
thousands):
<TABLE>
<CAPTION>
1999 1998 $Change %Change
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Interest expense $ 9,512 $ 5,534 $ 3,978 72%
Extraordinary loss 3,067 -- 3,067 --
Change in value of stock appreciation rights 1,814 -- 1,814 --
Provision for (benefit from) income taxes (138) 3,405 (3,543) (104)%
Other 1,921 (44) 1,965 4,466%
</TABLE>
Interest Expense - The increase of $4.0 million in interest expense is due
primarily to the $30.0 million, 11.5 percent debt associated with the
acquisition of MFSNT on July 2, 1998 and accreted interest at 15 percent on
property taxes payable assumed in the acquisition of MFSNT.
Extraordinary Loss - During the fiscal year ended October 31, 1999, we purchased
all of our 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 Notes were purchased by the
Company with proceeds from the non-interest bearing WorldCom Advance.
Change in Value of Stock Appreciation Rights - The change in the value of stock
appreciation rights is a non-cash charge associated with changes in the
intrinsic value of the WorldCom SAR. We anticipate shareholder approval for the
conversion of the WorldCom SAR into options for common stock at our next
shareholders' meeting. If shareholder approval is received, the SARs will not
result in cash payments by the Company. Pending approval, the WorldCom SAR
liability will be increased or decreased based upon the difference in the market
price of the common stock and the strike price of the SARs.
21
<PAGE> 27
Provision for (Benefit from) Income Taxes - For the fiscal year ended October
31, 1999, the benefit from income taxes was $0.1 million compared to a provision
for income taxes of $3.4 million during the fiscal year ended October 31, 1998,
a decrease of $3.5 million or 103.0 percent which corresponds to decreases in
our income before taxes.
NET INCOME (LOSS). For the fiscal year ended October 31, 1999, net loss was
$18.1 million compared to net income of $2.5 million for the fiscal year ended
October 31, 1998 a decrease of $20.6 million. Net loss applicable to common
stock was $36.8 million after $18.7 million in charges related to the Series B
Preferred Stock and Warrants (see Note 14 of Notes to Consolidated Financial
Statements).
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED WITH FISCAL YEAR ENDED OCTOBER 31,
1997.
RESULTS OF OPERATIONS. The following discussion and analysis relates to the
financial condition and results of operations of the Company for the fiscal
years ended October 31, 1998 and 1997. This information should be read in
conjunction with our condensed consolidated financial statements appearing
elsewhere in this document.
REVENUES. For the fiscal year ended October 31, 1998 revenues increased $131.2
million, from $86.3 million through October 31, 1997 to $217.5 million, for the
fiscal year ended October 31, 1998. This increase in revenues is due primarily
to growth in our operations through the acquisition of MFSNT in the third
quarter and the acquisition of Patton and the COMSAT Contracts in the second
quarter of fiscal 1998, as well as increased demands for services in the traffic
management and telecommunications industry. For the fiscal year ended October
31, 1998, revenues increased approximately $87.0 million, $17.6 million and
$17.4 million related to the acquisition of MFSNT, Patton, and the COMSAT
Contracts, respectively.
COST OF REVENUES. For the fiscal year ended October 31, 1998 and 1997, cost of
revenues as a percentage of revenues increased from 78.9 percent to 82.5
percent. The increase was due to increased costs related to the Network Services
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 costs as a result of COMSAT Contracts included in the Transportation
Services Group's operations.
GENERAL AND ADMINISTRATIVE EXPENSES. For the fiscal year ended October 31, 1998
general and administrative expenses were $19.0 million, an increase of $8.2
million over the same period in the prior year. This increase was due to the
overall increase in the management structure at the corporate level, as well as
the division offices, necessary to support our increased revenue in accordance
with our strategic objective of growth through acquisitions, and an increase in
costs resulting from the acquisition of MFSNT. For the fiscal year ended October
31, 1998, general and administrative expenses relating to the operations of
MFSNT were approximately $5.1 million.
DEPRECIATION AND AMORTIZATION. For the fiscal year period ended October 31,
1998, depreciation and amortization expense as a percentage of revenue decreased
from 5.3 percent to 3.5 percent 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 our operations.
INCOME FROM OPERATIONS. For the fiscal year ended October 31, 1998, income from
operations was $11.4 million compared to $4.8 million for the same period in the
prior year, primarily as a result of our strategy of growth through
acquisitions.
OTHER EXPENSE, NET. Other expense, net, increased by $3.9 million to $4.9
million for the fiscal year ended October 31, 1998 as compared to $1.0 million
for the comparable period in 1997. This increase is due primarily to increased
interest costs related to the acquisition of MFSNT. Other expense, net, was also
impacted by non-cash charges associated with stock options granted below market
prices, and amortization of loan costs associated with the Secured Credit
Facility.
Income taxes increased from $0.7 million in fiscal 1997 to $3.4 million in
fiscal 1998. This increase is due to increased income from operations, state
taxes in the State of Georgia, and the write-off of foreign tax credits.
NET INCOME. For the fiscal year ended October 31, 1998, net income was $2.5
million compared to net income of $2.9 million for the comparable period in 1997
for the reasons described above. For the year ended October 31, 1998, the loss
applicable to common stock of $(5.8) million, or $(0.59) per share, is a result
of an $8.0 million charge associated with the beneficial conversion privileges
on the Series B Preferred Stock, other non-recurring adjustments associated with
our obtaining financing for a portion of the purchase price of MFSNT and
preferred stock dividends. For the year ended October 31, 1997, income
applicable to common stock was $1.3 million, or $0.16 per share.
22
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly operating
results for each of the ten quarters in the period ended April 30, 2000. This
information has been derived from unaudited interim consolidated financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the consolidated financial statements contained elsewhere in
this prospectus and include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair statement of such information when read in
conjunction with our consolidated financial statements and notes thereto. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------
January 31, April 30, July 31, October 31, January 31, April 30,
1998 1998 1998 1998 1999 1999
----------- --------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue............................................. $22,268 $34,552 $58,305 $102,356 $93,080 $123,729
Income (Loss) from operations....................... (1,164) 2,180 4,319 6,074 2,521 (2,857)
Income (Loss) before extraordinary item............. (927) 867 790 1,784 (5,318) 1,472
Net income (loss)................................... (927) 867 790 1,784 (5,318) (1,595)
Income (Loss) applicable to common stock............ (1,081) 838 (7,186) 1,589 (5,498) (14,306)
Income (Loss) applicable to common stock per share:
Basic:
Income (Loss) before extraordinary item............. (0.12) 0.09 (0.72) 0.16 (0.47) (0.96)
Extraordinary loss on early extinguishment of debt.. -- -- -- -- -- (0.26)
Income (Loss) applicable to common stock............ (0.12) 0.09 (0.72) 0.16 (0.47) (1.22)
Diluted:
Income (Loss) before extraordinary item............. (0.12) 0.09 (0.72) 0.16 (0.47) (0.96)
Extraordinary loss on early extinguishment of debt.. -- -- -- -- -- (0.26)
Income (Loss) applicable to common stock............ (0.12) 0.09 (0.72) 0.16 (0.47) (1.22)
<CAPTION>
Quarter Ended
-------------------------------------------------
July 31, October 31, January 31, April 30,
1999 1999 2000 2000
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue............................................. $102,781 $98,975 $106,915 $131,826
Income (Loss) from operations....................... 1,455 (3,003) (10,386) (33,282)
Income (Loss) before extraordinary item............. (5,485) (5,662) (9,334) (46,555)
Net income (loss)................................... (5,485) (5,662) (9,334) (46,555)
Income (Loss) applicable to common stock............ (10,265) (6,689) (10,738) (46,717)
Income (Loss) applicable to common stock per share:
Basic:
Income (Loss) before extraordinary item............. (0.87) (0.56) (0.84) (2.93)
Extraordinary loss on early extinguishment of debt.. -- -- -- --
Income (Loss) applicable to common stock............ (0.87) (0.56) (0.84) (2.93)
Diluted:
Income (Loss) before extraordinary item............. (0.87) (0.56) (0.84) (2.93)
Extraordinary loss on early extinguishment of debt.. -- -- -- --
Income (Loss) applicable to common stock............ (0.87) (0.56) (0.84) (2.93)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $11.4 million at April 30, 2000 compared to $16.6
million at October 31, 1999. The decrease in cash and cash equivalents of $5.1
million during the six months ended April 30, 2000 resulted from cash from
financing activities
23
<PAGE> 29
of $3.8 million, offset by cash used in operating and investing activities of
$3.6 million and $5.3 million, respectively.
CASH FROM OPERATING ACTIVITIES
Cash used in operating activities during the six months ended April 30, 2000 of
$3.6 million consisted of the following:
<TABLE>
<S> <C>
Net loss $(55,789)
Adjustments to reconcile net loss to net cash used in operating activities, net of effects of acquisitions:
Depreciation and amortization 5,632
Equity in loss/impairment of Kanas 12,159
Change in value of stock appreciation rights (3,710)
Accretion of property tax payable 1,144
--------
(40,564)
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (24,251)
Decrease in costs and profits in excess of billings on uncompleted contracts 13,136
Increase in other current assets (2,797)
Increase in networks under construction (38,017)
Increase in accounts payable and other current liabilities 55,882
Increase in reserves for losses on uncompleted contracts 21,985
Increase in long-term deferred revenues 11,073
Other, net (74)
--------
Cash used in operating activities $ (3,627)
--------
</TABLE>
As discussed in Note 7, "Networks Under Construction," to our accompanying
unaudited condensed consolidated financial statements, the $38.0 million
increase in networks under construction related predominately to the ongoing
construction of the CDOT Network. We expect to incur significant additional
amounts to complete the construction of the CDOT Networks. Our failure to
execute sufficient user agreements for the CDOT Networks could have a material
adverse effect on the carrying value of our investment.
Cash flows from operations during the six months ended April 30, 2000, were
adversely affected by cash payments of $2.4 million related to Loss Jobs that
were charged to reserves for losses on uncompleted contracts. As discussed in
Note 9, "Reserves for Losses on Uncompleted Contracts," to the accompanying
unaudited condensed consolidated financial statements, reserves for losses on
uncompleted contracts at April 30, 2000, totaled $30.6 million, including $24.4
million of additions during the six months ended April 30, 2000, related
primarily to the New Jersey Consortium. Funding of these expected losses will
require cash resources not presently available to us.
CASH FROM INVESTING ACTIVITIES
Cash used in investing activities during the six months ended April 30, 2000, of
$5.3 million is due to net capital expenditures of approximately $5.4 million
required to support increased operations and replacement of existing equipment
offset by cash acquired in the acquisition of SASCO and SES of approximately
$0.1 million.
CASH FROM FINANCING ACTIVITIES
Cash provided by financing activities during the six months ended April 30, 2000
of $3.8 million is due primarily to proceeds from the issuance of the Series C
Preferred Stock and exercise of stock options of $14.4 million and $1.1 million,
respectively, offset by the redemption of the Series B Preferred Stock and
payments of debt of $11.6 million and $0.3 million, respectively.
As discussed in Note 10, "Debt," to the accompanying unaudited condensed
consolidated financial statements, we entered into an agreement with WorldCom
during the six months ended April 30, 2000, whereby WorldCom agreed to convert
approximately $25.5 million of its $30.0 million WorldCom Note into 3,050,000
shares of the Company's Common Stock. The conversion was based on the January 8,
2000 closing price of the Company's Common Stock at $8.375 per share. The
remainder of the original WorldCom Note, approximately $4.4 million, was
converted into an amended and restated 11.5 percent subordinated promissory note
due February 2001. This note has subsequently been converted to an 8 percent,
seven-year note, due July 12, 2007.
FUTURE LIQUIDITY
There can be no assurance that we will not experience adverse operating results
or other factors that could materially increase our cash requirements or
adversely affect our liquidity position.
GOING CONCERN. As described in Note 2, "Going Concern," to the accompanying
condensed consolidated financial statements, there is substantial doubt about
our ability to continue as a going concern. Our continuation as a going concern
is dependent upon our ability to (a) generate sufficient cash flow to meet our
obligations on a timely basis, (b) obtain additional financing as may be
required, and (c) ultimately sustain profitability. Management's plans in regard
to these matters are discussed in Note 2, "Going Concern," to the accompanying
condensed consolidated financial statements.
SIRIT SETTLEMENT. As described in Note 11, "Contingencies," to the accompanying
condensed consolidated financial statements, we have agreed to issue to Sirit up
to 5.0 million common shares, subject to shareholder approval and registration
rights. In the event we fail to deliver Sirit registered common stock by
November 30, 2000, Sirit can instead execute a $20.0 million consent judgement
against us (i.e. demand a cash payment of $20.0 million).
OTHER LITIGATION. As described in Note 11, "Contingencies," to the accompanying
condensed consolidated financial statements, we are the defendant in
various legal matters that individually or in aggregate could have a material
adverse effect on our future liquidity.
CREDIT FACILITY. As described in Note 10, "Debt," to the accompanying condensed
consolidated financial statements, we have borrowed the maximum available under
our existing Credit Facility and are in default of the related covenants. The
Credit Facility lenders have the right to demand payment and we have
insufficient liquidity to pay such amounts, if called. We have not yet been
successful in obtaining alternative financing and may have insufficient
liquidity to fund our continuing operations.
PREFERRED STOCK. As described in Note 12, "Preferred Stock," to the accompanying
condensed consolidated financial statements, we have certain outstanding
securities related to past preferred stock issuances that may require mandatory
cash redemption at premium prices if we fail to meet certain conditions. Those
securities include 801,787 common shares and 266,646 exchange warrants issued in
conjunction with the Series B Stock redemption and 200,000 warrants issued in
conjunction with the Series C Stock offering.
As also described in Note 12, "Preferred Stock," to the accompanying unaudited
condensed consolidated financial statements, we have agreed to issue to certain
of our preferred stockholders 1,057,031 shares of our common stock prior to
December 1, 2000; provided that our shareholders have approved such issuance. In
the event the shareholders have not approved such issuance, these holders may
demand a cash payment of $4.2 million. We expect to reflect a charge to income
applicable to common stock and a current liability for $4.2 million in our
financial statements for the quarter ended July 31, 2000. Upon shareholder
approval, we will issue the shares to satisfy the liability and adjust the
charge to equal the fair value of the shares on the date of approval.
CONTRACTS ACQUIRED FROM MFSNT. We have recorded reserves for losses on certain
contracts assumed in the MFSNT acquisition that are expected to use cash from
operations of approximately $30.6 million over the next two fiscal years.
We also assumed in the MFSNT acquisition certain obligations to perform under
long-term service contracts for the operation and maintenance of fiber networks.
Performance under these agreements, which were predominantly executed by MFSNT
in 1996 and 1997, began during fiscal 1999. We 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. We have also subsequently determined that such losses over the
contract terms (up to 20 years) cannot be reasonably estimated due to potential
changes in various assumptions.
In March 2000, our obligations and responsibilities with respect to the Kanas
operations and maintenance agreement were terminated. Increases in management's
estimates of costs to complete the Loss Jobs and to service the maintenance
contracts, without an offsetting increase in revenues, could have a material
adverse effect on our consolidated results of operations, financial condition
and liquidity.
OTHER CONTRACT MATTERS. Some of our construction contracts require payment of
liquidated damages if certain milestones are not achieved on schedule. Lack of
sufficient liquidity to pay vendors and subcontractors for those contracts on a
timely basis could result in delays and significant additional obligations to
the Company that are currently not anticipated or reflected in our consolidated
financial statements.
24
<PAGE> 30
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. We caution investors that any forward-looking
statements made by us 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 our
ability to successfully integrate all of our recent acquisitions; (iii) our
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; (iv) changes in laws and
regulations, including changes in tax rates, accounting standards, environmental
laws, occupational, health and safety laws; (v) access to foreign markets
together with foreign economic conditions, including currency fluctuations;
(vi) the effect of, or changes in, general economic conditions; (vii) weather
conditions that are adverse to our specific businesses, and (viii) the outcome
of litigation, claims and assessments involving us.
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.
25
<PAGE> 31
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):
<TABLE>
<CAPTION>
Expected Maturity During the Fiscal Year Ended October 31,
---------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
-------- -------- ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Variable rate debt:
Amount $ 35,531 -- -- -- -- --
Average interest rate 11.45% -- -- -- -- --
Fixed rate debt:
Amount $ 603 $ 4,777 $ 75 $ 19 $ 19 $ 19
Average interest rate 9.00% 11.10% 9.00% 9.00% 9.00% 9.00%
Total:
Amount $ 36,134 $ 4,777 $ 75 $ 19 $ 19 $ 19
Average 11.06% 11.10% 9.00% 9.00% 9.00% 9.00%
</TABLE>
The above presentation does not reflect the $32.0 million WorldCom Advance
(refer to Note 10, "Debt" to the accompanying condensed consolidated financial
statements) that was converted into Series D stock in August 2000. Additionally,
the above presentation does not reflect the present value of future property
taxes payable (over a period of 20 years). On the April 30, 2000, condensed
consolidated balance sheet, the long-term portion of this liability totaled
$16.6 million and is reflected as "Property Taxes Payable," while the current
portion totaled $2.5 million and is reflected in "Accounts Payable and Accrued
Liabilities."
The fair value of our debt approximates its carrying value.
Although we conduct business in foreign countries, the international operations
were not material to our consolidated financial position, results of operations
or cash flows as of October 31, 1999. Additionally, foreign currency transaction
gains and losses were not material to the Company's results of operations for
the six months ended April 30, 2000 and 1999. Accordingly, we were not subject
to material foreign currency exchange rate risk from the effects that exchange
rate movements of foreign currencies would have on our future costs or on future
cash flows which we would receive from our foreign subsidiaries. To date, we
have 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.
26
<PAGE> 32
BUSINESS
GENERAL OVERVIEW
We develop, build and maintain communications systems for companies and
government authorities. We have five main organizational groups. Each group is
comprised of subsidiaries of the Company with each having local executive
management functioning in a decentralized operating environment. We completed
operational restructuring of our subsidiaries during fiscal 1999. As a result,
we now have fourteen subsidiaries, eleven of which are wholly owned. We own at
least 80% of the remaining three subsidiaries. The table below shows these
subsidiaries in the operating group where the majority of their services are
categorized.
<TABLE>
<S> <C> <C> <C> <C>
AbleTelcom Holding
Corp.
Headquartered:
Atlanta, GA
Network Services Network Development Transportation Services Construction Communications
Omaha, NE ATLANTA, GA Mt. Laurel, NJ Tampa, FL Development
FY99 Consolidated FY99 CONSOLIDATED FY99 Consolidated FY99 Consolidated Ft. Lauderdale, FL
Revenue: 63% REVENUE: --% Revenue: 9% Revenue: 27% FY99 Consolidated
Revenue: 1%
Adesta Adesta Ventures, Inc. Adesta Georgia Electric Able Telcom
Communications,Inc. Ownership: 100% Transportation, Company International, Inc.
formerly Roswell, GA Inc. formerly Ownership: 100% Ownership: 100%
MFS Network MFS Transportation Albany, GA Ft. Lauderdale, FL
Technologies, Inc. Systems, Inc.
Ownership: 100% Ownership: 100%
Omaha, NE Mt. Laurel, NJ
TransTech, Inc. Patton Management Able Telcom CA
formerly Corp. Ownership: 80%
MFS TransTech, Inc. Ownership: 100% Venezuela
Ownership: 85% Tampa, FL
Mt. Laurel, NJ
Southern Aluminum & Transportation Safety Able Telcom Do
Steel Corp. Contractors, Inc. Brasil, LTDA
Ownership: 100% Ownership: 100% Ownership: 99.9%
Irondale, AL Tampa, FL Brazil
SES of Florida, Inc. Able Able Wireless, Inc.
Ownership: 100% Telecommunications Ownership: 100%
Chantilly, VA & Power, Inc. Ft. Lauderdale, FL
Ownership: 100%
Leesburg, FL
</TABLE>
The services provided by each operating group are as follows:
<TABLE>
<CAPTION>
Organization Group Service Provided
------------------ ----------------
<S> <C>
Network Service................. Design, development, engineering, installation, construction,
operation and maintenance services for telecommunications
systems.
Network Development............. Own, operate and maintain local and regional
telecommunication networks.
Transportation Services......... Design, development, integration, installation,
construction, project management, maintenance and
operation of automated toll collection systems.
Construction.................... Design, development, installation, construction,
maintenance and operation of electronic traffic
management and control systems, and road signage and
telcom infrastructure construction.
Communications Development...... Design, installation and maintenance services to
foreign telephone companies in South America.
</TABLE>
In conjunction with our reorganization much of our executive management has
changed. We have replaced several executives and Group Presidents and have added
other senior people to our executive staff.
27
<PAGE> 33
As part of our ongoing efforts to strategically align the profitable portions of
our business, the following steps were taken during the fiscal year ended
October 31, 1999 to discontinue the operations of, merge and/or manage
unprofitable subsidiaries:
- We assigned control of certain of our previously independent
operating subsidiaries (Patton and ATP) to the Construction
Group.
- We merged several of our previously independent operating
subsidiaries into currently profitable Construction Group
subsidiaries.
- As a result of significant turnover and the deterioration of
underlying contracts, we discontinued the operations of our
subsidiaries Dial and Able Integrated Systems, which together
used cash flow from operations of approximately $7.4 million
and $3.8 million during the fiscal years ended October 31,
1999 and 1998.
HISTORICAL DEVELOPMENT OF BUSINESS
We were incorporated in 1987 as "Delta Venture Fund, Inc.," a Colorado
corporation. We adopted our current name in 1989 and changed our corporate
domicile to Florida in 1991. We are presenting a proposal to shareholders at our
upcoming annual meeting to change our corporate name to "The Adesta Group, Inc."
Commencing in mid-1992 until mid-1994, 95 percent of our revenues and profits
were derived from telecommunication services provided primarily through two
majority owned subsidiaries located in Caracas, Venezuela. These services were
provided to one customer, CANTV, the Venezuelan national telephone company. To
decrease our exposure to foreign markets, in 1994, we expanded our business
focus by marketing our services in the southeastern United States, with the
acquisition of Florida-based Transportation Safety Contractors, Inc. and its
affiliates (collectively "TSCI"). TSCI installs and maintains traffic control
signage, signalization and lighting systems and performs outside plant
telecommunication services. The majority of TSCI's business is conducted in
Florida and Virginia with these states' respective Departments of Transportation
and various city and county municipalities.
To further expand in the domestic market and to facilitate a continued
acquisition program, we acquired the common stock of H.C. Connell, Inc. in
December 1995. Connell performs primarily outside plant telecommunication and
electric power services for local telephone and utility companies in central
Florida. Connell was renamed Able Telecommunications and Power, Inc. ("ATP") in
January 1999. In October 1996, we acquired the common stock of Georgia Electric
Company ("GEC"), headquartered in Albany, Georgia. GEC operates in eight
southeastern states and specializes in the installation, testing and maintenance
of intelligent highway and communication systems including computerized traffic
management, wireless and fiber optic data networks, weather sensors, voice data
and video systems and computerized manufacturing and control systems. In April
1998, we acquired the common stock of Patton Management Company ("Patton") of
Atlanta, Georgia which provides advanced telecommunication network services to
upgrade existing networks and to provide connectivity to office buildings, local
and wide area networks.
In July 1998, in a transaction that increased our revenues by approximately 300
percent, we acquired the network construction and transportation systems
business of MFS Network Technologies, Inc. from WorldCom, Inc. MFSNT was then
divided into two entities, 1) the network construction business became Adesta
Communications, Inc. and 2) the transportation systems business became Adesta
Transportation Systems, Inc. As part of the MFSNT acquisition, the Company,
WorldCom and MFSNT entered into a Master Services Agreement pursuant to which we
agreed to provide telecommunication infrastructure services to WorldCom on a
cost-plus 12 percent basis for a minimum of $40.0 million per year. For
additional detail about the MFSNT Acquisition, see the discussion under the
heading "Acquisition of Network Construction and Transportation Systems Business
of WorldCom and Issuance of Series B Securities" below.
In November 1999, we acquired the common stock of Southern Aluminum and Steel
Corporation ("SASCO") and Specialty Electronic Systems, Inc., renamed SES of
Florida, Inc. ("SES") which together provide expertise in design, installation
and project implementation of advanced highway communication networks and
Intelligent Transportation Systems.
In January 2000, we established Adesta Ventures, Inc. ("Adesta Ventures") which
will own, operate and maintain local and regional telecommunication networks as
part of our Network Development Group. Adesta Ventures is a development company
that is expected to require significant capital expenditures related to network
construction and which is not expected during fiscal 2000 to generate
significant net income or earnings before interest, depreciation, taxes and
amortization. Our ability to grow Adesta Ventures and to implement its business
plan will be dependent on our ability to fund our capital expenditure
28
<PAGE> 34
needs, either internally or through borrowings and the sale of equity. No
assurance can be given that we will be able to meet Adesta Ventures' funding
needs on a timely basis or at all, on terms acceptable to us, or that Adesta
Ventures will ever be profitable.
29
<PAGE> 35
BRACKNELL MERGER
On August 24, 2000, we announced that we had entered into an agreement to merge
with Bracknell Corporation of Toronto in a stock-for-stock transaction with a
conversation rate of 0.6 shares of Bracknell's common stock for each share of
our common stock. The completion of this merger is conditioned upon a number of
items, including the receipt of regulatory and shareholder approval and the
receipt by Bracknell of appropriate financing. Bracknell is a leading provider
of value-added facilities and structure services to businesses across North
America, servicing customers in the technology, telecommunications, industrial
and commercial sectors.
In connection with our signing the merger agreement with Bracknell, and to
comply with certain terms of our settlement with Sirit which is described below,
we entered into a new Master Services Agreement with WorldCom which extends the
term of that agreement and provides for a minimum purchase of $55.0 million by
WorldCom each year. WorldCom also agreed to vote in favor of the merger with
Bracknell when it is proposed to our shareholders. Further, WorldCom converted
$37,000,000 of our indebtedness to WorldCom for advances under the Master
Services Agreement into our Series D Preferred Stock. The Series D Preferred
Stock is convertible into our common stock at a price of $10.01 per share. For a
description of the terms of our Series D preferred stock see the discussion
under the heading "Description of Securities -- Preferred Stock -- Series D
Convertible Preferred Stock." Further, WorldCom agreed to extend the term of our
$4.5 million note payable to WorldCom to a seven-year, 8% interest rate note. As
extended, this note will expire on July 12, 2007.
ACQUISITION OF NETWORK CONSTRUCTION AND TRANSPORTATION SYSTEMS BUSINESS OF
WORLDCOM AND ISSUANCE OF SERIES B SECURITIES
In a transaction consummated on July 2, 1998, we acquired the network
construction and transportation systems businesses of WorldCom from its indirect
subsidiary MFS Network Technologies, Inc. The business acquired provides design,
development, engineering, installation, construction, operation and maintenance
services for telecommunication systems, as well as design, development,
integration, installation, construction, project management, maintenance and
operation of automated toll collection systems, electronic traffic management
and control systems and computerized manufacturing systems. These businesses are
now operated by our subsidiaries Adesta Communications and Adesta
Transportation.
The acquisition was accounted for using the purchase method of accounting at a
total price of approximately $67.5 million of which $30 million was paid by
issuance of a promissory note to WorldCom. In addition, in connection with the
acquisition, we granted an option to WorldCom to purchase up to 2,000,000 shares
of our common stock, at an exercise price of $7.00 per share and the right to
receive, upon satisfaction of certain conditions, phantom stock awards or stock
appreciation rights, ("SARs") equivalent to up to 600,000 shares of common
stock, payable in cash, stock or a combination of both at our option. For a
discussion of the terms of the WorldCom securities, see the discussion under the
heading "Description of Securities -- The WorldCom Option and the WorldCom
SARs."
In conjunction with the acquisition, we entered into a Master Services Agreement
with WorldCom to provide telecommunications infrastructure services to it, which
was recently amended as stated above to provide for WorldCom to receive services
for a minimum of $55.0 million per year through July 1, 2006. The agreement
further calls for WorldCom to pay an aggregate sum of not less than $390
million, including a fee of 12% of reimbursable costs under the agreement.
A portion of the consideration for the acquisition of the MFS Network
Technologies businesses from WorldCom was cash. To generate a portion of the
cash, we issued 4,000 shares of Series B Convertible Preferred Stock and
warrants to purchase up to an aggregate of 1,000,000 shares of our common stock
at an exercise price of $19.80.
As a result of conversions and redemptions of the Series B Preferred Stock, no
shares remain outstanding. In addition to the warrants initially granted to the
Series B investors, in connection with redemptions of and amendment of the terms
of the Series B securities we granted additional warrants to the Series B
investors. As of August 30, 2000, warrants to purchase an aggregate of 570,000
shares remain outstanding. For a discussion of the Series B warrants, see
"Description of Securities -- Warrants." Shares issuable upon exercise of these
Series B warrants are being offered through this prospectus.
THE SERIES C SECURITIES
In February 2000, we created and sold 5,000 shares of a new series of preferred
stock, the Series C Convertible Preferred Stock, and warrants to purchase
200,000 shares of common stock at $10.75 a share, for aggregate gross proceeds
of $15 million to us. We used a portion of this $15 million to repurchase
certain of our remaining shares of Series B Convertible Preferred Stock and the
rest for general working capital purposes.
In connection with our settlement of the Sirit litigation, we modified the terms
of the Series C Convertible Preferred Stock and agreed to issue to the Series C
Convertible Preferred Stock holders additional warrants to purchase 375,000
shares of common stock at $6.00 per share and to purchase 375,000 shares of
common stock at $8.00 per share.
For a discussion of the Series C Convertible Preferred Stock, see "Description
of Securities -- Preferred Stock -- Series C Convertible Preferred Stock." For a
discussion of the Series C warrants, see "Description of Securities --
Warrants." Shares issuable upon conversion of the Series C Convertible Preferred
Stock and upon exercise of the Series C warrants are being offered through this
prospectus.
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ACQUISITION OF SASCO AND SES
On November 5, 1999, we acquired all of the outstanding common stock of Southern
Aluminum & Steel Corporation ("SASCO") along with Specialty Electronic Systems,
Inc. ("SES"). SASCO has operations in Birmingham, Cape Canaveral and Atlanta and
has 40 years experience in surveillance systems, signalization, Intelligent
Transportation Systems ("ITS") and roadway lighting. It provides expertise in
design, installation, and project implementation of advanced highway
communication networks. SES is a systems/integration company in the ITS market,
having designed, fabricated, installed and integrated ITS systems in 11 states
from the East Coast to Ohio and Texas.
Consideration for SASCO and SES was 75,000 shares of common stock with a value
of approximately $0.7 million. In addition to the initial consideration, an
earn-out provision provides that additional consideration can result from
attaining certain performance measurements. The additional consideration can be
earned over a four-year period. We recorded this transaction using the purchase
method of accounting. The pro forma effect on consolidated results of
operations, from the acquisition of SASCO and SES, is not material.
The earn-out consideration for year one (ending October 31, 2000) will be
converted into our common stock by dividing the earn-out consideration by $8.00.
The earn-out consideration for year two through year four will be converted into
our common stock by dividing the earn-out consideration by the 52-week average
of the closing market price of our common stock for each
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respective year.
The consideration is to be paid in shares of our common stock. If the combined
consideration calculated pursuant to the terms of the two agreements, and which
includes the initial consideration and the earn-out consideration, ever equals
19.9 percent of the total Company common stock issued and outstanding, any and
all consideration in excess of 19.9 percent of issued and outstanding Company
common stock shall be paid in cash or promissory notes, as mutually agreed upon
by the Company and the former shareholders, at the time of payment and shall
include interest calculated on the notes at a market rate.
On a combined basis, SASCO and SES have total assets of less than $2.0 million
and are expected to generate third-party revenues during fiscal year 2000 of
approximately $15.0 million.
SERVICES, MARKETS AND CUSTOMERS
We conduct five distinct types of business activities, four of which are
primarily conducted in the United States and one of which is conducted abroad.
Domestically we provide network services, network development, transportation
services and construction. Abroad, principally in Venezuela, we conduct
communication development activities. Each of these activities is discussed in
more detail below. In most of our business activities we face competitors that
may be larger and may have substantially greater financing, distribution and
marketing resources than us.
NETWORK SERVICES GROUP. The Network Services Group provides telecommunications
network services through two divisions: (i) the Telecommunications Systems
Integration Division provides general contracting services for large-scale
telecommunications projects, and (ii) the Telecommunications Construction
Division specializes in the construction of network projects or project phases.
We provide turnkey telecommunications infrastructure solutions through the
Telecommunications Systems Integration Division. As a telecommunications systems
integrator, we provide "one-stop" capabilities that include project development,
design, engineering, construction management, and ongoing maintenance and
operations services for telecommunications networks. The projects include the
construction of fiber networks that provide advanced digital voice, data and
video communications and wireless infrastructure deployment.
Our Telecommunications Construction Division provides construction and technical
services for building both outside plant and inside plant telecommunications
systems. Outside plant services are large-scale installation and maintenance of
coaxial and fiber optic cable (installed either aerially or underground) and
ancillary equipment for digital voice, data and video transmissions. These
installations are most often undertaken to upgrade or replace existing
communications networks. Inside plant services, also known as premise wiring,
include design, engineering, installation and integration of telecommunications
networks for voice, video and data inside customers' facilities. We provide
outside plant telecommunications services primarily under hourly and per unit
basis contracts to local telephone companies. We also provide these services to
long distance telephone companies, electric utility companies, local
municipalities and cable television multiple system operators.
NETWORK DEVELOPMENT GROUP. Our Network Development Group was established during
fiscal 2000 to design, engineer, construct, operate and maintain
state-of-the-art, "future proof" (designed for low cost upgrades to avoid
obsolescence), fiber optic networks providing virtually unlimited bandwidth, and
a comprehensive suite of cutting edge multimedia telecommunications services for
users in cities with populations between 50,000 and 250,000.
TRANSPORTATION SERVICES GROUP. Our Transportation Services Group provides
"one-stop" electronic toll and traffic management solutions for intelligent
transportation system infrastructure projects, including project development and
management, design, development, integration, installation, engineering,
construction, and systems operation and maintenance. Additionally, we have and
continue to develop proprietary software and applications designed to support
these systems. The electronic toll and traffic management segment of the
intelligent transportation system industry uses technology to automate toll
collection for bridges and highways allowing for "non-stop" toll collection.
Electronic toll and traffic management systems use advanced scanning devices to
identify a vehicle's type, combined with the user's account information, as the
vehicle passes a tolling station and immediately charges the appropriate toll to
the user's account. In addition, significant support systems must be developed
to maintain electronic toll and traffic management accounts, and process
violations. We developed automatic vehicle identification technology jointly
with Texas Instruments and used it in many of its electronic toll and traffic
management projects. The Transportation Services Group markets its services to
state and local government transportation departments. No significant new
projects have been undertaken since 1999.
CONSTRUCTION GROUP. Our Construction Group installs and maintains traffic
control and signalization devices. These services include the design and
installation of signal devices (such as stop lights, crosswalk signals and other
traffic control devices) for rural and urban traffic intersections, drawbridge
and railroad track signals and gate systems, and traffic detection
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and data gathering devices. We also design, develop, install, maintain and
operate "intelligent highway" communications systems that involve the
interconnection of data and video systems, fog detection devices, remote
signalization or computerized signage. These systems monitor traffic conditions,
communicate such conditions to central traffic control computers, and provide
real-time responses to dynamic changes in traffic patterns and climate
conditions by changing speed limit display devices, lowering traffic control
gates, or changing the text on remote signs and signals. We also install and
maintains computerized manufacturing systems for various industrial businesses.
Many of the functions of the Construction Group, particularly those involved in
intelligent highway systems, complement those of the Network Services Group.
COMMUNICATIONS DEVELOPMENT GROUP. Our Communications Development Group operates
primarily in Venezuela. Their activities consist of management of the joint
venture arrangements, which were formed to provide telecommunication
installation and maintenance services to privatized local phone companies. These
joint ventures are in the form of subsidiaries in which we have an 80% voting
and ownership interest and a 50% share of profits and losses.
INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
Sales to unaffiliated customers, income (loss) from operations, and identifiable
assets pertaining to the groups in which we operate are presented below (in
thousands).
<TABLE>
<CAPTION>
For the Three Months For the Six Months For the Fiscal Years Ended
Ended April 30, Ended April 30, October 31,
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers:
Network Services $ 72,369 $ 86,420 $134,923 $134,942 $260,354 $ 62,243 $ --
Transportation Services 29,699 29,201 46,129 40,902 39,394 24,455 --
Construction 28,221 7,151 55,337 39,009 113,948 125,270 82,171
Communication Development 1,537 957 2,352 1,956 4,869 5,329 4,163
----------------------------------------------------------------------------- ------------------------------------------------------
$131,826 $123,729 $238,741 $216,809 $418,565 $217,297 $86,334
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Network Services $ (551) $7,601 $ 4,499 $ 11,277 $ 14,746 $ 6,272 --
Transportation Services (32,665) (5,915) (45,723) (4,493) (10,618) 2,586 --
Construction 777 (2,244) (885) (2,258) (5,730) 1,718 4,824
Communication Development 13 13 (183) (152) 346 182 17
Unallocated Corporate Overhead (856) (2,312) (1,376) (4,710) (628) 651 --
------------------------------------------------------------------------------------------------------------------------------------
$(33,282) $ (2,857) $(43,668) $ (336) $ (1,884) $ 11,409 $ 4,841
------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Network Services $185,617 $151,939 $185,617 $151,939 $139,460 $159,660 $ --
Transportation Services 38,685 47,918 38,685 47,918 50,178 48,830 --
Construction 72,314 63,865 72,314 63,865 66,667 71,941 44,751
Communication Development 3,270 3,468 3,270 3,468 3,813 4,496 2,509
Corporate 3,965 5,678 3,965 5,678 1,915 5,833 3,086
------------------------------------------------------------------------------------------------------------------------------------
$303,851 $272,868 $303,851 $272,868 $262,033 $290,760 $50,346
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPENDENCE UPON KEY CUSTOMERS
We derive a significant portion of our revenues from a few large customers.
Those customers are as follows
<TABLE>
<CAPTION>
For the Months Ended Percentage of Total Revenues During
April 30, 2000 The Fiscal Years Ended October 31,
Customer Operating Group Three Six 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Consortium Transportation and $25,716 $44,294 18% 7% --
Network Services
WorldCom Network Services 29,506 55,368 15% 14% --
Williams Communications, Inc. Network Services 620 2,435 12% -- --
Cooper Tire Company Construction 3,727 7,277 3% 6% 15%
Florida Power Corp. Construction 4,589 8,525 3% 2% 9%
State of Illinois (ISTHA) Network Services 798 1,385 2% 8% 12%
</TABLE>
We are party to multiple contracts with the New Jersey Consortium ("New Jersey
Consortium Contracts") which includes the New Jersey Turnpike Authority, New
Jersey Highway Authority, Port Authority of New York and New Jersey, South
Jersey Transportation Authority, and the State of Delaware Department of
Transportation/ The New Jersey Consortium Contracts generally provide for us to
(i) construct a fully integrated electronic toll collection ("ETC") system; (ii)
maintain the related Customer Service Center ("CSC") and Violations Processing
Center ("VPC") for periods of up to 10 years; and (iii) construct and maintain a
supporting fiber optic network. The estimated future gross revenues from the New
Jersey Consortium Contracts are projected to be at least $167 million, including
estimated minimum revenues of $51.4 million for VPC operations and $40.0 million
for fiber network operations and maintenance billable over the duration of the
agreements.
As of October 31, 1999, the Company estimated that the electronic toll
collection (ETC) construction segment of the New Jersey Consortium Contracts
would generate total margins of approximately $2.6 million. Based upon an
estimated completion percentage of 30 percent, the Company had recorded job-to-
date margins of $0.8 million through October 31, 1999.
During the three months ended January 31, 2000, the Company determined through
its ongoing analyses of the ETC construction segment of the New Jersey
Consortium Contracts (i.e., excluding the VPC and fiber network construction and
long-term service contracts) that costs to be incurred were expected to exceed
amounts billable by approximately $7.7 million. The change from October 31,
1999, related primarily to changes in estimated costs associated with changing
design specifications and certain near-term milestones. The loss recognized in
the January quarter was approximately $8.2 million, including costs incurred in
the quarter, reversal of previously recognized profit, and a loss reserve
accrual of $4.7 million for the remaining projected loss.
During the three months ended April 30, 2000, we continued negotiation of a
comprehensive amendment that was executed on June 1, 2000. While the scope of
work for the remainder of the project was clarified, we made significant
concessions to arrive at resolution and estimated losses for the construction
portion of the contract were revised to $35.3 million, resulting in a loss for
the quarter of $27.6 million. The remaining loss expected to be incurred in
completing the contract and accrued at April 30, 2000 was $17.1 million.
The loss was partially attributable to vagaries in the original contract
language that made it extremely difficult for us to meet performance criteria
and targeted completion deadlines, resulting in penalties and costs in excess of
original estimates. In addition, we were forced to engage subcontractors on a
time and materials or cost-plus basis and experienced significant overruns in an
attempt to meet our contractual obligations. The June 2000 amendment reduced the
scope of the contract, provided previously undefined benchmarks, provided a
revised and extended schedule for completion of the project and resolved various
claims between the parties. At the same time, we negotiated a revised agreement
with our primary subcontractor, comprising the majority of remaining contract
costs, from time and materials to a fixed price. While these agreements reduced
the uncertainty of some of the remaining costs on the project, they also
eliminated the opportunity to recover certain previously incurred costs.
The revised schedule includes several significant milestone dates. If not met,
the Consortium will have the right to terminate the contracts, including the VPC
and fiber maintenance contracts. If terminated, we would lose the opportunity to
earn potential future profits from these long-term service contracts.
At April 30, 2000, we had billed and unbilled receivables of $26.1 million and
$14.4 million, respectively, related to WorldCom and $15.1 million and $15.8
million, respectively, related to the New Jersey Consortium.
The loss of the New Jersey Consortium, WorldCom or any other major customers
could have a material adverse effect on our business, financial condition and
results of operations.
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SUPPLIERS AND RAW MATERIALS
We have no material dependence on any one supplier of raw materials.
CONSTRUCTION CONTRACTS. For construction contracts, we obtain fixed price or
cost-plus contracts for projects, either as a prime contractor or as a
subcontractor, on a competitive bid basis. Typically, for prime contracts, a
state department of transportation ("DOT") or other governmental body provides a
set of specifications for the project. We then estimate the total project cost
based on input from engineering, production and materials procurement personnel
and submit a bid along with a bid bond. For most government-funded projects, the
scope of work extends across many industry segments. In those cases, we
subcontract our expertise to a prime contractor. We must submit performance
bonds on substantially all contracts obtained. Our financial viability is
dependent on maintaining adequate bonding capacity and any loss of such could
have a material adverse effect on us.
Government business is, in general, subject to special risks, such as delays in
funding, termination of contracts or subcontracts for the convenience of the
government or default by a contractor, reduction or modification of contracts or
subcontracts, changes in governmental policies, and the imposition of budgetary
constraints. Our contracts with governmental agencies provide specifically that
such contracts are cancelable for the convenience of the government.
Contract duration is dependent on the size and scope of a project but typically
is from six months to three years. Contracts generally set forth date-specific
milestones and provide for liquidated damages for failure to meet the
milestones. During fiscal 1999, we were subject to liquidated damages relating
to the "Violations Processing Center" portion of the New Jersey Consortium
Contract amounting to approximately $4.9 million.
In most cases, we supply the materials required for a particular project,
including materials and component parts required for the production of highway
signage and guardrails and the assembly of various electrical and computerized
systems. Aluminum sheeting, steel poles, concrete, reflective adhesive, wood
products, cabling and electrical components are the principal materials
purchased domestically for the production of highway signage and guard railing.
Conduit and fiber optic cable are the major materials purchased for network
development. Generally, the supply and costs of most materials has been and is
expected to continue to be stable, and we are not dependent upon any one
supplier for these materials. We also purchase various components for the
assembly of various electrical, lighting and computerized traffic control
systems. Many of these materials must be certified as meeting specifications
established by the customer. The unavailability of those components could have
an adverse impact on meeting deadlines for the completion of projects which may
subject us to liquidated damages; however, the availability of these materials,
generally, has been adequate.
NETWORK DEVELOPMENT CONTRACTS. For development and construction of
telecommunication networks we contract with customers to develop and construct
conduit and/or fiber-optic cable for specific routes, normally on a negotiated
price basis. In those instances that we are responsible for obtaining
right-of-way usage, we contract with owners of rights of way. The development
and project management is done by our employees; construction is normally
sub-contracted, and we normally provide the material used.
Certain projects are "co-development" projects, whereby we undertake building
out routes which include fiber-optic capacity for several customers. When such
projects are on right of way such as interstate highways, we enter into
contracts with right-of-way owners, generally providing compensation to such
holders in the form of network systems or revenue sharing.
Projects to develop or expand local fiber-optic networks are done either on
fixed-price or cost-plus basis. Generally, we manage such projects and
sub-contract the construction activity.
Many network development contracts are several years in duration.
SERVICE CONTRACTS. We generally provide telecommunication, cable television,
electric utility and manufacturing system services (i.e., non-governmental
business) under comprehensive operation and maintenance and master service
contracts that either give us the right to perform certain services at
negotiated prices in a specified geographic area during the contract period or
pre-qualify us to bid on projects being offered by a customer. Contracts for
projects are awarded based on a number of factors such as price competitiveness,
quality of work, on-time completion and the ability to mobilize equipment and
personnel efficiently. We are typically compensated on an hourly or per unit
basis or, less frequently, at a fixed price for services performed. Contract
duration is either for a specified term, usually one to three years, or is
dependent on the size and scope of the project. In most cases, our customers
supply most of the materials required, generally consisting of cable, equipment
and hardware, and we supply the expertise, personnel, tools and equipment
necessary to perform its services.
SALES AND MARKETING
We market our systems integration services through a dedicated sales group. Our
salespeople market directly to existing and potential customers, including
municipalities and other government authorities and telecommunications
companies. Our salespeople work with those responsible for project development
and funding to facilitate network design and funding procurement.
Typically, the contracting process for systems integration projects entails the
development of a list of qualified bidders and the establishment of a bid
schedule, the distribution of, and response to, a request for proposal ("RFP"),
and the awarding of the contract to an approved service provider. Important
elements in determining the qualifications of a bidder are its reputation, its
previous projects and its ability to secure bonding for the project. The selling
cycle, which may be as much as 24 months in
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duration, is protracted due to the scope and complexity of the services
provided.
We market our telecommunications services to local and long distance telephone
companies, utility companies, local municipalities and certain corporations with
particular communications needs. In addition, we market our construction
services to certain systems integrators. A dedicated sales force, as well as
members of each subsidiaries' senior management, actively market our services.
Additionally, we market our transportation construction services to state and
local departments of transportation, public/private toll authorities and certain
international authorities.
Major development projects in which we retain an ownership interest after
completion, such as our current Colorado Department of Transportation ("CDOT")
projects, are marketed in differing ways. We contract for access to the right of
way and, simultaneously, contact various carriers whom we believe, based upon
our industry awareness, may have an interest in obtaining fiber capacity for a
particular route. As development and construction get underway we continue to
contact potential users of the capacity being built so that, by the time a
particular segment is completed, all capacity not being retained is sold.
Contracts with the customers normally provide for mobilization payments and
progress payments.
COMPETITION
NETWORK SERVICES GROUP. The Telecommunications Systems Integration Division of
the Network Services Group competes for business in two segments: the
traditional request for proposal ("RFP")/bid based segment for the installation
and integration of infrastructure projects and a less traditional "project
development" segment. Our largest competitors in the traditional RFP/bid based
segment are telecommunications service providers. The Telecommunications Systems
Integration Division has identified and pursued the "project development"
segment as a "niche" market for its services, providing network alternatives to
large public agencies, utilities and telecommunications service providers
through the use of public-private partnerships and other financing models unique
to the industry. These customers often must choose between building their own
networks and using an existing telecommunication service provider's network.
Once a customer has decided to build its own network, we assist the customer in
preparing a viable and customized project business plan that addresses the
customer's specific telecommunications needs, including budgetary and other
concerns. We also have focused on "project development" opportunities presenting
ownership or participation opportunities that can generate recurring revenues.
We believe that no other company provides this kind of complete, turnkey project
development service for these customers.
The Telecommunications Construction Division competes for business with several
large competitors. In addition, the Telecommunications Construction Division
also competes in a market characterized by a large number of smaller size
private companies that compete for business generally in a limited geographic
area or with few principal customers. The Telecommunications Construction
Division's largest competitors are MasTec, Inc. and Dycom Industries, Inc.
NETWORK DEVELOPMENT GROUP. The large metropolitan areas such as New York, Los
Angeles, Chicago and Atlanta, already have an Incumbent Local Exchange Carrier
("ILEC") and multiple Competitive Local Exchange Carriers ("CLECs") competing
for their large, high volume, business base. In addition, due to the high
density of apartment complexes, many have more than one cable company.
In contrast, the cities of 50,000 to 250,000 people that the Network Development
Group is targeting typically have an ILEC, one cable company and in some cases,
facilities-based CLECs each targeting a limited area of business. In most cases
both the cable company and the ILEC have legacy infrastructures with very
limited capability to provide modern services.
TRANSPORTATION SERVICES GROUP. The Transportation Services Group believes its
major competitor in the North American market is Transcore. Chase Manhattan and
Lockheed Martin are also competitors in this area.
CONSTRUCTION GROUP. The market in which the Construction Group competes is
characterized by large competitors who meet the experience, bonding and
licensure requirements for larger projects and by small private companies
competing for projects of $3 million or less in limited geographic areas. The
Construction Group's largest competitors include Dycom Industries, Inc. and
MasTec, Inc. The Construction Group has several smaller competitors some of
which may be larger, may have substantially greater financial, distribution and
marketing resources, and may have more established reputations than ours.
COMMUNICATION DEVELOPMENT GROUP. The Communications Development Group competes
for business in the international market, primarily in Latin America. The
operations of the Communications Development Group are in Venezuela and Brazil.
In Venezuela, the market is characterized by a single customer, CANTV, the
telephone company of Venezuela, and a large number of smaller private companies
that compete for business generally in a limited geographic area. In Brazil, the
market consists of myriad smaller companies competing for a growing but limited
market, which forces margins down.
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BACKLOG
Our estimated backlog at May 30, 2000, was as follows (in thousands):
Operations and
Construction Maintenance
Organizational Group Contracts Contracts Total
--------------------------------------------------------------------------------
Network Services $376,000 $111,000 $487,000
Transportation Services 110,000 110,000 220,000
Construction 138,000 29,000 167,000
--------------------------------------------------------------------------------
$624,000 $250,000 $874,000
--------------------------------------------------------------------------------
We expect to complete approximately 40% of the total backlog within the next
fiscal year. In many instances our customers do not commit to the volume of
services to be purchased under a contract but commit to obtain these services
from us if they are not performed internally. Our contracts commit us to perform
these services if requested by the customer. Many of the contracts are
multi-year agreements, ranging up to 20 years. We include the full amount of
services projected to be performed over the life of the contract in backlog due
to our historical relationships with our customers and experience in
procurements of this nature. Contract backlog of $500 million is under
performance bonds and we may be subject to liquidated damages for failure to
perform in a timely manner. Our backlog may fluctuate and does not necessarily
indicate the amount of future sales. A substantial amount of our order backlog
can be canceled at any time without penalty except, in some cases, we can
recover actual committed costs and profit on work performed up to the date of
cancellation. Cancellations of pending purchase orders or termination or
reductions of purchase orders in progress by our customers could have a material
adverse effect on our business, operating results and financial condition. In
addition, there can be no assurance as to customers' requirements during a
particular period or that such estimates at any point in time are accurate.
RESEARCH AND DEVELOPMENT: PROPRIETARY TECHNOLOGY AND RIGHTS
We acquired proprietary software in the MFSNT acquisition including applications
at the lane, plaza, host, and customer service center levels within a
sophisticated electronic toll collection system architecture. Prior to the MFSNT
acquisition, MFSNT had also developed a proprietary video and data multiplexing
system used for surveillance, monitoring, and system audit purposes. The
benefits of this proprietary software include reduced operating costs, non-stop
tolling, reduced traffic congestion, efficient traffic management, and increased
revenue accountability. However, we can make no assurances that products will
not be developed in the future that will produce the same or a better result or
be produced in a more economical manner. In connection with completion of
electronic toll collection projects, we have continued to refine the software.
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We rely on a combination of contractual rights, patents, trade secrets,
know-how, trademarks, non-disclosure agreements, licenses and other technical
measures to establish and protect our proprietary rights and to protect our
proprietary applications and technologies. To the extent necessary, we intend to
vigorously defend any and all rights we have, now or in the future, in our
proprietary applications and technologies. However, we can make no assurances
that we will be successful in pursuing any of our rights or, if successful, that
it will be timely.
EMPLOYEES
At August 30, 2000, the Company and its subsidiaries had approximately 2,000
employees. The number of employees considered as laborers can vary significantly
according to contracts in progress. Such employees are generally available to
the Company through an extensive network of contacts within the communications
industry.
PROPERTIES
Our corporate offices are in Roswell, Georgia, where we occupy 6,600 square feet
under a lease that expires July 31, 2004. We also lease 5,110 square feet of
office space under a lease that expires January 31, 2004 in West Palm Beach,
Florida, which we are currently negotiating to sublet. We lease 35,815 square
feet of office space in Omaha, Nebraska, under a lease that expires September
30, 2004 and which houses Adesta Communications, and 40,111 square feet in Mt.
Laurel, New Jersey, under a lease that expires February 28, 2003 and which
houses Adesta Transportation. We lease 6,800 square feet of space in Fort
Lauderdale, Florida, under a lease, which expires September 30, 2003, which
facility is presently available for sublet. We lease several field offices and
numerous smaller offices. We also lease on a short-term or cancelable basis
temporary equipment yards or storage locations in various areas as necessary to
enable it to efficiently perform its service contracts.
We own (subject to a mortgage) and operate a 10,000 square foot facility for
operations based in Chesapeake, Virginia. Our Venezuelan subsidiaries own and
operate from a 33,000 square foot floor of an office building located in
Caracas, Venezuela, and lease an additional 50,000 square feet of covered
parking and shop facilities. We own a 15,000 square foot facility located on
approximately three acres of land for operations in Tampa, Florida. We also own
a small facility in Birmingham, Alabama.
We believe that our properties are in good condition and adequate for current
operations and, if additional capacity becomes necessary due to growth, other
suitable locations are available in all areas where we currently do business.
See "Commitments and Contingencies" in the Notes to the Consolidated Financial
Statements for additional information relating to leased facilities which
includes mortgage/lease obligations. Certain of our properties are subject to
federal, state and local provisions involving the protection of the environment.
Compliance with these provisions has not had and is not expected to have a
material effect upon our financial position.
LEGAL PROCEEDINGS
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, the Company's then Chief Accounting
Officer, Jesus Dominguez, and then Chief Financial Officer Mark A. Shain
(collectively the "Defendants"). At or near that time, six additional plaintiffs
filed substantially similar lawsuits. By order dated December 30, 1998, all of
these cases have been consolidated with the SFCS case. The plaintiffs assert
claims
37
<PAGE> 43
under the federal securities laws against us and four of our officers
that the defendants allegedly caused us to falsely represent and mislead the
public with respect to:
- two acquisitions: the MFSNT Acquisition and the acquisition of
the COMSAT Contracts, and
- our ongoing financial condition as a result of the
acquisitions and the related financing of those acquisitions.
The plaintiffs seek an unspecified amount of damages and attorneys' fees.
Additionally, plaintiffs are expected to seek certification as a class action on
behalf of themselves and all others similarly situated persons. We have moved to
dismiss the action and discovery is stayed during the pendancy of this motion.
We intend 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.
In May 1998, SIRIT Technologies, Inc. filed a lawsuit against us and Thomas M.
Davidson, a former member of our Board of Directors. Sirit sued for tortious
interference, fraudulent inducement, negligent misrepresentation and breach of
contract in connection with our acquisition of Adesta Communications and Adesta
Transportation from WorldCom. In May 2000, the jury awarded Sirit compensatory
damages against us in the amount of $1.2 million and punitive damages in the
amount of $30.0 million. Additionally, the Court assessed punitive damages
against Mr. Davidson.
In July 2000, we and Sirit, among others, entered into a settlement agreement
which resulted in the court's entry of a consent judgment vacating the $31.2
million judgment. As part of the Sirit settlement, we agreed to issue Sirit and
its affiliates, subject to using our best efforts to obtain shareholder
approval,
- 4,074,597 shares of our common stock, and
- an additional 936,914 shares of common stock at such time as
holders of the Series C Convertible Preferred Stock have converted their shares
of Series C Convertible Preferred Stock into common stock. This amount assumes
that the Series C Convertible Preferred Stock has a $15.0 million face value and
is converted at a conversion price of $4.00 per share, which numbers were
accurate as of July 17, 2000.
We also made a cash payment to Sirit of $5,000,000. If we do not secure
shareholder approval to issue the above described shares or fail to have the
registration statement of which this prospectus is a part declared effective by
November 30, 2000, we will be obligated under the settlement agreement to pay
Sirit $20,000,000 instead of issuing the shares. Sirit also has the right to buy
additional shares from us, if we sell additional shares within the next two
years, on the same terms as the shares are sold to third parties in an amount
sufficient to maintain its pro rata ownership of common stock. However, this
right will not apply if we sell shares at a price of at least $10.00 per share.
Holders of the Series B Convertible Preferred Stock and warrants and holders of
the Series C Convertible Preferred Stock and warrants modified their own rights
to help convince Sirit to enter into the settlement agreement.
In addition to the shares that Sirit may receive when the Series C Convertible
Preferred Stock is converted, if the holders of our Series B warrants or our
Series C Preferred Stock are entitled to additional shares of our common stock
or derivative securities, we must issue a pro rata portion to Sirit so that
Sirit maintains the same percentage ownership interest it had immediately prior
to the issuance. Sirit may acquire those shares for the same consideration as is
paid by the holders of the other securities.
If we are required to make any cash payments to the holders of our Series B
warrants or Series C Preferred Stock or warrants, including cash penalties and
redemption payments, Sirit will become entitled to additional shares of common
stock for no additional consideration. The number of shares to which they would
become entitled would be the amount of funds paid to the holders in excess of
$15,000,000, divided by $4.00. If any shares to which Sirit is entitled would
increase its percentage ownership above 19.99 percent, Sirit has the right to
those shares, but they will not be issued to Sirit without Sirit's consent.
38
<PAGE> 44
In 1997, Bayport Pipeline, Inc. ("Bayport") filed a lawsuit against MFSNT
seeking a declaratory judgment concerning the rights and obligations of Bayport
and MFSNT under a Subcontract Agreement that was entered into on May 1, 1997
related to the NYSTA contract. The matter was referred to arbitration in January
1999. The total amount sought was not less than $5.5 million and subsequent to
October 31, 1999, was increased to $19 million.
On February 24, 2000, the independent arbitrator ruled that we owed Bayport $4.1
million. The Company has appealed the award in Federal District Court (Northern
District of Texas) and is subject to statutory interest from the date of the
award in the event the award is not overturned.
In 1997, U.S. Public Technologies, Inc. ("USPT") filed a lawsuit in the United
States District Court for the Southern District of California, (San Diego),
against MFSNT for breach of contract, breach of an alleged implied covenant of
good faith and fair dealing, tortuous interference, violation of the California
Unfair Competition Act, promissory estoppel and unjust enrichment in connection
with a Teaming Agreement between MFSNT and USPT concerning the Consortium
Regional Electronic Toll Collection Implementation Program in the state of New
Jersey. In this lawsuit, USPT seeks actual damages in excess of $8.5 million and
unspecified exemplary damages. On April 4, 2000, the magistrate judge extended
the discovery deadline until May 31, 2000, set July 14, 2000, as the deadline
for MFSNT to file its expert report, and set the pretrial for October 2, 2000.
In 1999, Newbery Alaska, Inc. ("Newbery") filed a demand for arbitration
seeking approximately $3.8 million. This dispute arises out of Newbery's
subcontract with MFSNT related to the fiber optic network constructed by MFSNT
for Kanas. Newbery's claims are for the balance of the subcontract, including
retainage and disputed claims for extras based on alleged deficiencies in the
plans and specifications and various other alleged constructive change orders.
In June 2000, the arbitrator awarded Newbery $2.7 million plus fees of
approximately $0.3 million and interest on the award of 8 percent until payment
to Newbery is made. Interest on the award through August 31, 2000, totals
approximately $55,000. We are challenging the arbitrators award in Federal
District Court (Alaska) and intend to appeal the ruling, if necessary.
In 1998, Alphatech, Inc. ("Alphatech") filed a lawsuit in the U.S. District
Court in Massachusetts against MFSNT. This suit alleges ten counts, including
breach of Teaming Agreements on the E-470 project and the New Jersey Regional
Consortium project, breach of implied duty of good faith and fair dealing on
both projects, misappropriation of trade secrets, deceit, violation of
Massachusetts General Laws Chapter 93A, promissory estoppel, quantum meruit, and
unjust enrichment. Alphatech's claim is for $15 million. The court has denied
our motion for summary judgment on breach of contract claims and granted our
motion for summary judgment on the Chapter 93A claim. The lawsuit has not yet
been set for trial.
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.
39
<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information, as of August ___, 2000 about
each person who is currently a Company director or executive officer.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Billy V. Ray, Jr. 42 Chief Executive Officer and Chairman of the
Board of Directors
Edwin D. Johnson 43 President, Chief Financial Officer, Director
Frazier L. Gaines 60 Former Chief Executive Officer, now President
- Able Telcom International
Charles C. Maynard 56 Chief Operating Officer
James E. Brands 63 Senior Executive Vice President
Michael Brenner 52 General Counsel and Executive Vice President
Edward Z. Pollock 61 Associate General Counsel
Robert Sommerfeld 50 President - Adesta Communications
Philip A. Kernan, Jr. 49 President - Adesta Transportation
J. Barry Hall 50 President - Transportation Safety
Contractors, Inc.
Richard A. Boyle 46 President - Patton Management Corp.
</TABLE>
All directors are elected annually at our Annual Meeting of Shareholders and
hold office following election or until their successors are elected and
qualified. Once elected, the newly elected Directors will determine who will
serve as members of our Audit Committee, Compensation Committee and Nominating
Committee. The chief executive officer is elected by and serves at the
discretion of our Board of Directors. All other executive officers are appointed
by the Chief Executive Officer.
BILLY V. RAY, JR. has served as our Chief Executive Officer since December 1,
1998. From December 1, 1998 to May 2000, Mr. Ray also served as our President.
Mr. Ray has served as a director since March 5, 1999 and was elected as Chairman
of the Board of Directors on May 12, 2000. Mr. Ray also served as our acting
Chief Financial Officer from November 30, 1998 to February 2000. From October 1,
1998 to November 30, 1998, Mr. Ray was our Executive Vice President of Mergers
and Acquisitions and Treasurer. From May 1998 to October 1998 and from January
1997 to June 1997, Mr. Ray served as a consultant to us. Mr. Ray served as our
Chief Financial Officer from June 1997 to April 1998. From December 1995 to
January 1997 and from April 1997 to July 1997, Mr. Ray was the President of
Ten-Ray Utility Construction, Inc., a utility construction company. During a
part of that period, he also served as a consultant to Alcatel, a maker of
intelligent highway systems.
EDWIN D. JOHNSON joined the Company in May 2000 and serves as President, Chief
Financial Officer and a director. From November 1998 to April 2000, Mr. Johnson
served as Executive Vice President and Chief Financial Officer of Mortgage.com,
an on-line banking and lending company. From March 1996 to June 1998, Mr.
Johnson served as Chief Financial Officer of
40
<PAGE> 46
MasTec, Inc., a telecommunications infrastructure company. From January 1995 to
March 1996, Mr. Johnson was a private real estate consultant.
FRAZIER L. GAINES was one of our Directors from August 1992 through March 19,
1999 and has served as President of Able Telcom International, Inc., one of our
wholly owned subsidiaries, since June 1994. Mr. Gaines served as our Interim
President and Chief Executive Officer from March 1998 to November 1998. From
1992 to 1994, Mr. Gaines was our Chief Operating Officer.
CHARLES C. MAYNARD was named Chief Operating Officer of the Company in February
2000. From July 1999 to January 2000, Mr. Maynard was an independent
communications consultant primarily for Able. From July 1997 to June 1999, Mr.
Maynard served as the Chief Executive Officer of International Satellite Group
(INSAT), a satellite telephone sales and rental company. From October 1996 to
June 1997, Mr. Maynard was an independent communications consultant to
Cybernetic Services, Inc. From October 1992 to September 1996, Mr. Maynard
served as the Managing Director, U.S. Business Development, of TeleDiffusion de
France (TDF), a division of French Telecom, which was established to develop an
international messaging network for the worldwide logistic industry.
JAMES E. BRANDS has served as our Senior Executive Vice President since March
1999. From November 1997 to March 1999, Mr. Brands was the CFO of Wilson Pest
Control, Inc., a pest control services company. From July 1997 to November 1997.
Mr. Brands served as the Executive Vice President and a Director of KBAS, Inc.,
an employee leasing company and from February 1997 to July 1997, he was the CFO
of Arrow Exterminators, which provides pest control services. From January 1993
to March 1995, Mr. Brands served as Chairman, CEO and a Director of Marquest
Medical Products, Inc. (NASDAQ: MMPI), which manufactures disposable products
for respiratory, pulmonary and related medical segments and also served as Vice
Chairman, CFO and a director of Scherer Healthcare, Inc. (Nasdaq:SCHR), which
was involved in disposable medical products, pharmaceutical development and
medical waste management.
MICHAEL BRENNER joined the Company in May 2000 and serves as General Counsel and
Executive Vice President. From November 1998 to April 2000, Mr. Brenner served
as General Counsel to Mortgage.com, an on-line mortgage and lending company.
From July 1995 to November 1998, Mr. Brenner served as deputy city attorney for
West Palm Beach, Florida.
EDWARD Z. POLLOCK became our General Counsel in November 1998; he became
Associate General Counsel in May 2000. From 1963 to 1998, Mr. Pollock was a sole
practitioner at the law firm of Edward Z. Pollock.
ROBERT SOMMERFELD was named President of Adesta Communications, Inc. in April
2000. From August 1998 to April 2000, Mr. Sommerfeld served as Vice President of
Business Development for Adesta Communications, Inc., formerly MFS Network
Technologies, Inc. ("MFSNT"). Prior to our purchase, Mr. Sommerfeld served MFSNT
as project manager since its inception in 1988, which was formed as a subsidiary
of Peter Kiewit Sons', Inc.
PHILIP A. KERNAN, JR. joined the company in February 2000 as President of Adesta
Transportation, Inc. From July 1997 to June 1999, Mr. Kernan served as President
and Chief Financial Officer of Skysite Communications, Inc, a satellite
communications company. From January 1994 to June 1997, Mr. Kernan served as
Vice President of David Werner International, an executive placement firm.
J. BARRY HALL serves as President of Transportation Safety Contractors, Inc.
("TSCI"). From October 1996 to October 1999, Mr. Hall served both as President
of TSCI and Georgia Electric Company. From 1990 to October 1996, Mr. Hall was
Vice President of Georgia Electric Company.
RICHARD A. BOYLE has been the President of Patton Management Corp., one of our
subsidiaries since March 1996. From May 1991 to March 1996, Mr. Boyle was Vice
President and General Manager of Wright & Lopez, Inc., a telecommunications
contractor.
RESIGNATIONS OF DIRECTORS DURING FISCAL YEARS 1998 AND 1999
During the fiscal year ended October 31, 1998, three of our directors, Robert C.
Nelles, John D. Foster and Richard J. Sandulli resigned to pursue other business
interests.
During the fiscal year ended October 31 1999, five of our directors resigned for
unrelated reasons. Gideon D. Taylor resigned in March 1999 to pursue other
business interests. Frazier L. Gaines resigned in March 1999 to devote time to
his duties as president of our wholly-owned subsidiary, Able Telcom
International. Robert Young resigned in May 1999 to devote more time to his
consulting business. Thomas Davidson resigned in January 2000 to devote more
time to his personal business. Jonathan Bratt resigned in February 2000 because
he found it difficult to attend board meetings from his residence in
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<PAGE> 47
Venezuela.
EXECUTIVE COMPENSATION
The following table contains summary information for the years indicated of
compensation to (i) those persons serving as our Chief Executive Officer during
the 1999 fiscal year, (ii) the other four of our most highly compensated
executive officers who were serving as such at October 31, 1999, and (iii) up to
two additional individuals who had served as one of our executive officers
during the 1999 fiscal year but who were not executive officers at October 31,
1999. The persons referred to in clauses (ii) and (iii) above generally are not
included in the table if they received total annual salary and bonus of $100,000
or less for the 1999 fiscal year end. The persons named in this table are
collectively referred to as the "Named Executive Officers".
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Other Securities
Annual Underlying
Compen- Options All other
sation (6)/ Compensation
Name and Principal Position Year Salary($) Bonus($) ($) SARs(#) ($)
<S> <C> <C> <C> <C> <C> <C>
Billy V. Ray, Jr. (1) 1999 203,792 200,000 24,000 160,000 --
Chief Executive Officer and 1998 48,462 0 -- 35,000 110,818
Chairman of the Board of Directors 1997 34,615 40,000 -- -- 56,961
Frazier L. Gaines (2) 1999 201,138 -- 2,500 -- --
Former Chief Executive Officer, and 1998 153,986 -- -- 290,000 4,609
President - Able Telcom 1997 110,000 -- -- -- 1,024,375
International
Stacy Jenkins (4) 1999 207,304 55,000 4,000 125,000 --
Former President of Adesta
Communications
Michael Arp (3) 1999 149,565 30,000 24,000 65,000 --
Former Acting President - GEC and
TSCI
J. Barry Hall (5) 1999 240,000 150,000 -- -- --
President - Transportation Safety 1998 209,173 0 -- -- 33,906
Richard Boyle (7) 1999 159,000 70,000 19,200 65,000 --
President - Patton Management Corp.
</TABLE>
(1) Mr. Ray has served as our Chief Executive Officer since
December 1, 1998. From December 1, 1998 to May 2000, Mr. Ray
also served as President. He served as acting Chief Financial
Officer from November 3, 1998 to February 2000. From October
1, 1998 to November 30, 1998, Mr. Ray served as Executive Vice
President of Mergers and Acquisition and Treasurer. From May
1998 to October 1998 and from January 1997 to June 1997, he
served as a consultant to us. From June 1997 to April 1998 he
served as our Chief Financial Officer. For 1999, other
compensation includes auto allowance of $6,000 and housing
allowance of $18,000. In 1998, other compensation included
consulting fees in the amount of $92,099, an automobile
allowance of $5,400, a housing allowance of $12,600 and health
insurance premiums paid on Mr. Ray's behalf of $719. In 1998,
25,000 options expired during the time Mr. Ray served as our
consultant. In 1997, other annual compensation includes
compensation for consulting services rendered prior to Mr.
Ray's appointment in June 1997, as our Chief Financial
Officer, and a travel and housing allowance.
(2) Mr. Gaines served as our President and Chief Executive Officer
from March 1998 through November 30, 1998. Prior thereto, Mr.
Gaines was President of Able Telcom International, Inc. (a
position which he continues to hold). For 1999, other
compensation includes an auto allowance of $2,500. For 1998,
other compensation includes an automobile allowance of $4,500
and health insurance premiums paid by us on Mr. Gaines behalf
in the amount of $109. For 1997, other compensation consists
of an automobile allowance, a housing allowance and an amount
of $991,375, which represents the difference between the price
paid by Mr. Gaines upon the exercise of certain stock options
and the fair market value of the underlying common stock on
the date of exercise.
(3) Mr. Arp is no longer employed by us but will receive severance
pay in the amount of $15,000 monthly through December 2000.
Mr. Arp joined us in January 1999. In 1999, Mr. Arp's other
compensation included a $1,500 monthly housing allowance and
a $5,000 auto allowance.
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<PAGE> 48
Mr. Arp served as Acting President of Georgia Electric Company
and Transportation Safety Contractors, Inc. from November 1999
to March 2000.
(4) Mr. Jenkins' other compensation includes $4,000 for automobile
allowance. Mr. Jenkins resigned from the Company in March
2000.
(5) In 1998, other compensation includes a housing allowance of
$24,000, an automobile allowance of $7,800 and contributions
to our 401K plan of $2,106.
(6) Includes options that have not yet been approved by
shareholders.
(7) Mr. Boyle's other compensation includes a housing allowance of
$14,400 plus an automobile allowance of $4,800.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
------------------------------------------------------------------------------------ -------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#)(1) Fiscal Year (2) ($/Sh) Date 5% ($) 10% ($)
---- -------------- --------------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Billy V. Ray 10,000 0.4% $5.75 12/31/00 5,894 12,075
100,000 3.7 5.75 12/31/00 90,634 190,325
50,000 1.8 6.375 05/07/03 61,958 147,931
Frazier L. Gaines 260,000 9.5 5.75 12/31/00 153,237 313,950
30,000 1.1 5.75 07/03/04 42,352 92,384
Stacy Jenkins 100,000 3.6 5.75 04/12/02 99,790 211,024
25,000 0.9 6.375 04/12/02 24,481 51,318
Michael Arp 40,000 1.5 5.75 12/31/00 49,566 106,743
25,000 0.9 6.375 05/07/03 34,346 73,965
J. Barry Hall -- -- -- -- -- --
Richard Boyle 65,000 2.4 6.375 05/07/01 42,473 87,018
</TABLE>
------------------
(1) Each option has anti-dilution provisions for stock splits, stock dividends
and similar events.
(2) Based on 2,734,000 options granted to employees during fiscal year 1999.
OPTION EXERCISES AND PERIOD END VALUES
No options were exercised during the last fiscal year by the Named
Executive Officers. As of August 17, 2000, there were 150,000 options
that were "in-the-money." Options are "in-the-money" if the exercise
price is less than or equal to the market price of our common stock.
These options are exercisable at $2.44 per share and the closing price
for our common stock on August 17, 2000 was $2.50 per share.
The following table sets forth information regarding exercisable and
unexercisable stock options held as of October 31, 1999 by the named
executive officers.
AGGREGATE FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-end Fiscal Year End
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Bill V. Ray 127,000 33,000 $377,995 $80,355
Frazier L. Gaines 290,000 -- 887,400 --
Stacy Jenkins 83,500 16,500 250,198 40,178
Michael Arp 36,750 28,250 101,986 81,288
J. Barry Hall -- -- -- --
Richard Boyle 43,500 21,500 105,923 52,353
</TABLE>
DIRECTOR COMPENSATION
Our directors who are not our employees and who do not own more than
5% of any class of our outstanding capital stock ("Non-Affiliate
Directors") are currently paid $12,000 annually plus $750 for each
committee meeting attended and are reimbursed for expenses associated
with Board responsibilities. In addition, pursuant to Able's 1995
Stock Option Plan, as amended, Non-Affiliate Directors currently
receive one-time automatic grants of options to purchase 5,000 shares
of common stock as of the date the Non-Affiliate Director is initially
elected or appointed, at an exercise price equal to the fair market
value at the date of grant.
In April 1998, we granted options to purchase 10,000 shares of common
stock to all directors, which grants were outside the Plan. These
options are subject to shareholder approval. Employee directors
receive no
43
<PAGE> 49
additional fees or remuneration for acting in their capacity as one of
our directors.
On May 7, 1999 and as ratified on May 12, 2000, our Board of Directors
voted to increase the annual fees paid and to make additional annual
grants of options under the 1995 Stock Option Plan to Non-Affiliate
Directors as described in the table below. The options grants are
subject to shareholder approval at our annual meeting.
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
POSITION FEES (ANNUALLY)
-------- ---- ----------
<S> <C> <C>
Chairman of the Board $2,500 per month 15,000
Board Member (other than Chairman of the Board) $1,750 per month 10,000
Audit Committee Chairman $1,000 per meeting 2,000
Audit Committee Member $ 750 per meeting 1,000
Compensation Committee Chairman $1,000 per meeting 2,000
Compensation Committee Member $ 750 per meeting 1,000
Nominating Committee Chairman $1,000 per meeting 2,000
Nominating Committee Member $ 750 per meeting 1,000
</TABLE>
The fees described above will be paid on a monthly basis so long as
the Non-Affiliate Director attends at least 65% of properly noticed
meetings. Any adjustments to fee payments will be done on a quarterly
basis.
During fiscal 1998 and fiscal 1999, the following options were granted
to our directors as additional compensation for service as directors,
some of whom no longer serve in that capacity and will not stand for
reelection. The terms of these option grants are summarized below.
Those of our directors who also serve or have served as our employees
have received option grants in their capacity as employees as is
discussed elsewhere in this proxy statement.
<TABLE>
<CAPTION>
NUMBER DATE OF EXPIRATION
DIRECTOR OF SHARES GRANT PRICE INITIAL GRANT(1) DATE
-------- --------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
Thomas M. Davidson (2) 20,000 $5.75 12/31/98 12/31/04
10,000 $6.25 5/7/99 5/8/01
John D. Foster (3) 10,000(4) $6.20 4/24/98 7/3/04
20,000(4) $11.93 4/24/98 7/3/04
Robert C. Nelles (5) 10,000(4) $6.20 4/24/98 7/3/04
20,000(4) $11.9375 4/24/98 7/3/04
15,000(4) $5.34 2/19/98 9/19/05
Richard J. Sandulli (6) 10,000(4) $6.20 4/24/98 7/3/04
20,000(4) $11.9375 4/24/98 7/3/04
C. Frank Swartz (7) 20,000 $5.75 12/31/98 12/31/04
10,000 $6.75 6/9/99 5/9/02
Robert H. Young (8) 10,000 $6.25 5/7/99 5/8/01
Alec McLarty (9) 10,000 $8.75 7/29/99 7/29/02
</TABLE>
(1) On December 31, 1998, in an effort to correct a number of ambiguities
in the minutes of the Board of Directors' meetings, and in order to
comply with the incentive stock option terms of our 1995 Stock Option
Plan, our Board of Directors rescinded all of the then issued option
grants prior to December 31, 1998, with the exception of the grants to
Mr. Nelles, Mr. Foster and Mr. Sandulli which met the requirements of
the Plan. The Board then reissued new options outside of the Plan as
reflected in the table in the amounts set forth above at the calculated
fair market value per share on December 31, 1998, which was $5.75.
However, because these new options were granted outside the Plan, the
Company was required to make the grants subject to shareholder approval
to comply with the Nasdaq rules.
(2) Mr. Davidson resigned from our Board of Directors in January 2000.
44
<PAGE> 50
(3) Mr. Foster resigned from our Board of Directors on June 5, 1998.
(4) Non-qualified stock options granted pursuant to our 1995 Stock Option
Plan.
(5) Mr. Nelles resigned from our Board of Directors on May 5, 1998
(6) Mr. Sandulli resigned from our Board of Directors on August 25, 1998.
(7) Mr. Swartz and Mr. McLarty are standing for reelection for our Board of
Directors.
(8) Mr. Young resigned from our Board of Directors in May 1999.
The options granted outside the Stock Option Plan, including those in the chart
granted to Messrs. Bratt, Davidson and Swartz, are subject to shareholder
approval.
THE ABLE TELCOM HOLDING CORP. 1995 STOCK OPTION PLAN, AS AMENDED
We adopted the 1995 Stock Option Plan (the "Plan") pursuant to which 550,000
shares of common stock were originally authorized for issuance. In April 1998,
our shareholders approved amendments to the Plan to increase the number of
shares outstanding under the Plan to 1,300,000. We intend to amend our
registration statement on Form S-8 to register an additional 750,000 shares of
common stock currently reserved for issuance under the Plan. Assuming we obtain
shareholder approval to increase the number of shares reserved under the Plan to
5 million shares, we will amend our registration statement on Form S-8
to register an additional 5 million shares.
We may grant Nonqualified Stock Options and Incentive Stock Options, and
restricted stock under the Plan to Non-Affiliate Directors, key employees,
advisors and consultants. With respect to the grant of awards under the Plan to
persons other than Non-Affiliate Directors, the Board of Directors, or a
committee appointed by the Board of Directors will determine persons to be
granted stock options and restricted stock, the amount of stock to be optioned
or granted to each such person, and the terms and conditions of any stock
options and restricted stock. Our Plan defines a "Non-Affiliate Director" as a
person who is not our employee and who does not own more than 5 percent of our
outstanding capital stock.
An Incentive Stock Option is intended to qualify as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended. Any Incentive Stock Option granted under the Plan will have an exercise
price of not less than 100% of the fair market value of the shares on the date
on which such option is granted. With respect to an Incentive Stock Option
granted to a Participant who owns more than 10% of the total combined voting
stock of the Company or any parent or subsidiary of the Company, the exercise
price for such option must be at least 110% of the fair market value of the
shares subject to the option on the date the option is granted. An option to
purchase common stock that does not meet the Code's requirements for Incentive
Stock Options is a Nonqualified Stock Option. Generally, a restricted stock
award will not require the payment of any option price by the Participant but
will call for the transfer of shares to the Participant subject to forfeiture,
without payment of any consideration by the Company, if the Participant's
employment terminates during a "restricted" period (which must be at least six
months) specified in the award of the restricted stock.
Amendments to the Plan are being submitted for shareholder approval at our next
annual meeting of shareholders currently planned for late September or early
October. These amendments include:
- increasing the number of shares of Common Stock which may be issued pursuant
to awards granted from 1,300,000 to 5,500,000,
- increasing the number of options granted to Non-Affiliate Directors from a
one-time grant of 5,000 options to an annual grant of 10,000 options,
- granting additional options, on an annual basis, to Non-Affiliate Directors
who serve as Chairman of the Board of the Company, or as Chairman or as a
member of a Board committee, and
- extending the exercise period of the date of grants to Non-Affiliate Directors
to the earlier of (A) September 19, 2005, or (B) the date which is two years
after the date that such Non-Affiliate Director is no longer serving as a
director.
EMPLOYMENT AGREEMENTS
BILLY V. RAY, JR., Chief Executive Officer and Chairman of the Board of
Directors, is party to an employment agreement, dated June 15, 2000 with us (the
"Ray Employment Agreement"). The Ray Employment Agreement terminates on May 1,
2003, and provides that Mr. Ray is to be paid a salary of $350,000 per year,
plus a housing allowance of $1,800 per month and an automobile allowance of $500
per month, as well as health and life insurance benefits for the term of the
agreement. The Ray Employment Agreement also provides for a minimum bonus of
$150,000 annually, and stock options for 150,000 shares which were fully vested
upon grant and are exercisable at $2.84 per share, fair market value at the date
of grant. These options expire on July 15, 2010 and are subject to shareholder
approval. This grant was in addition to a grant dated February 21, 2000 to
purchase 100,000 shares of common stock at an exercise price equal to the fair
market value of the common stock on the date our shareholders approve this
additional grant and which will vest immediately on the date approval is
received from the shareholders and a grant dated December 31, 1998 to purchase
100,000 shares of common stock at an exercise price of $5.75 per share. The
February 21, 2000 options vest immediately on the date approval is received from
the shareholders and the
45
<PAGE> 51
December 31, 1998 options vested immediately upon grant. These options were
issued to Mr. Ray under previous employment agreements all of which were
otherwise superceded by the Ray Employment Agreement. The Ray Employment
Agreement also contains a covenant by Mr. Ray not to compete with us for a
period of three years following termination of his employment. Should Mr. Ray's
employment be terminated without cause, or should Mr. Ray elect to terminate his
employment following a change of control, Mr. Ray will be entitled to a lump sum
payment equal to three times his current base salary and bonus, and to the
continuation of certain fringe benefits for three years after the date of
termination. To the extent he incurs any federal excise taxes on the severance
benefits, he is entitled to be reimbursed by us for those tax consequences. On
May 7, 1999, Mr. Ray was granted options to purchase 50,000 shares of common
stock at $6.37 per share, one third of which vested May 7, 1999, one third of
which vested May 31, 2000 and one third of which will vest on May 31, 2001.
EDWIN D. JOHNSON, President and Chief Financial Officer is a party to an
employment agreement, dated May 8, 2000 with us (the "Johnson Employment
Agreement"). The Johnson Employment Agreement terminates on May 7, 2003 and
provides that Mr. Johnson is to be paid a salary of $300,000 per year, plus an
automobile allowance of $1,500 per month, as well as health and life insurance
benefits for the term of the agreement. The Johnson Employment Agreement also
provides for a minimum bonus of $150,000 annually and stock options for 150,000
shares, which were fully vested upon grant and are exercisable at $2.44 per
share, fair market value at date of grant. These options expire on May 7, 2010
and are subject to shareholder approval. The Johnson Employment Agreement also
contains a covenant by Mr. Johnson not to compete with us for a period of three
years following termination of his employment. Should Mr. Johnson's employment
be terminated without cause, or should Mr. Johnson elect to terminate his
employment following a change of control, Mr. Johnson will be entitled to a lump
sum payment equal to three times his current base salary and bonus, and to the
continuation of certain fringe benefits for three years after the date of
termination. To the extent he incurs any federal excise taxes on the severance
benefits, he is entitled to be reimbursed by us for those tax consequences.
FRAZIER L. GAINES, President of Able Telcom International, Inc., is party to an
employment agreement, dated November 12, 1998 with us (the "Gaines Employment
Agreement"). The Gaines Employment Agreement terminates on November 11, 2001,
may be extended for one additional year by mutual agreement, allows for a
consulting agreement to be signed at the end of the initial three year term, and
provides that Mr. Gaines is to be paid a salary of $200,000 per year, plus
health and life insurance and a monthly automobile allowance of $500. The Gaines
Employment Agreement also provides that we will pay all health and life
insurance benefits plus $60,000 per year for the number of years equal to Mr.
Gaines' years of service currently 11 years and payable beginning at Mr. Gaines'
termination date. The Gaines Employment Agreement also contains a covenant by
Mr. Gaines not to compete with us for a period of three years following
termination of his employment. The Gaines Employment Agreement also provides
that if Mr. Gaines' employment is terminated with cause Mr. Gaines will be
entitled to 30 days prior notice. However, should Mr. Gaines' employment be
terminated without cause, Mr. Gaines will be paid one-year's severance plus
regular health and insurance benefits. $100,000 of this amount would be payable
immediately upon termination with the remainder of the $100,000 payable within
45 days from termination. In addition, the Gaines Employment Agreement provides
for the grant of options to purchase 100,000 shares of common stock, subject to
approval by our Board of Directors, which vest over a three year period, or
immediately upon either a change in control or ownership of us. To date, these
options have not been approved by our Board of Directors and thus have not yet
been granted.
CHARLES C. MAYNARD, Chief Operating Officer, is a party to an employment
agreement dated February 21, 2000 with us (the "Maynard Employment Agreement").
The Maynard Employment Agreement terminates on February 20, 2003 and provides
that Mr. Maynard is to be paid a salary of $240,000 per year, plus insurance and
other benefits. The Maynard Employment Agreement also provides that if Mr.
Maynard's employment is terminated with cause, that Mr. Maynard will be entitled
to 90 days prior notice. However, if Mr. Maynard's employment is terminated
without cause, Mr. Maynard will be paid out the remainder of his contract plus
fringe benefits without any rights of mitigation. In addition, the Maynard
Employment Agreement provides for the grant of options to purchase 200,000
shares of common stock, subject to approval of our shareholders, which will vest
over a two-year period at prices ranging from $6.00 to $9.50 per share.
JAMES E. BRANDS, Senior Executive Vice President, is party to a consulting and
employment agreement, dated March 15, 1999 with us (the "Brands Employment
Agreement"). The Brands Employment Agreement terminates on April 5, 2001, and
may be extended by mutual agreement for an additional one-year period. The
Brands Employment Agreement provides that Mr. Brands was paid (i) a consulting
fee of $20,000 for the period commencing March 15, 1999 and ending May 15, 1999,
and (ii) a salary of (A) $5,750 for the period between April 2, 1999 to April
30, 1999, and (B) $2,500 for the period between May 1, 1999 to May 31, 1999 and
that will be paid at least $12,500 per month from June 1, 1999 through April 5,
2001; provided that if another executive or management employee other than a CEO
is hired during the initial term of the Brands Employment Agreement at a rate of
more than $12,500 per month, Mr. Brands' monthly rate shall immediately become
the same as such employee. Mr. Brands is also entitled to an automobile
allowance of $500 per month or at our option, we may provide Mr. Brands with a
late model Lincoln Town Car and reimbursement of its operating costs, a housing
allowance of $1,500 per month effective August 1, 1999 (during the period April
2, 1999 to July 31, 1999, Mr. Brands was reimbursed for actual expenses
incurred), plus health and life insurance benefits. However, no housing
allowance has been paid to Mr. Brands. In addition, the Brands Employment
Agreement provides for the grant of options to purchase 100,000 shares of common
stock at $6.375 per share, of which 75,000 vested as of April 5, 1999 and 25,000
vested June 21, 2000. Shareholder approval is required for these options. The
exercise period terminates two years from each vesting date. Mr. Brands was
granted a salary increase to $175,000 per year as of January 1, 2000 and to
$240,000 per year as of February 21, 2000.
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<PAGE> 52
MICHAEL BRENNER, General Counsel and Executive Vice President, is party to an
employment agreement, dated May 3, 2000 with us (the "Brenner Employment
Agreement"). The Brenner Employment Agreement terminates on May 2, 2003 and
provides that Mr. Brenner is to be paid a salary of $200,000 per year, plus an
automobile allowance of $1,000 per month, as well as health and life insurance
benefits. The Brenner Employment Agreement also calls for a minimum bonus of
$50,000 annually, and stock options for 100,000 shares, which vest immediately
and are exercisable at $2.69 per share, fair market value at date of grant.
These options expire on May 2, 2010 and are subject to shareholder approval. The
Brenner Employment agreement also contains a covenant by Mr. Brenner not to
compete with us for a period of three years following termination of his
employment. Should Mr. Brenner's employment be terminated without cause, or
should Mr. Brenner elect to terminate his employment following a change of
control, he will be entitled to a lump sum payment equal to three times his
current base salary and bonus, and to the continuation of certain fringe
benefits for three years after the date of termination. To the extent he incurs
any federal excise taxes on the severance benefits, he is entitled to be
reimbursed by us for those tax consequences.
EDWARD POLLOCK, Associate General Counsel, is party to an employment agreement,
dated January 1, 1999 with us (the "Pollock Employment Agreement"). The Pollock
Employment Agreement terminates on December 31, 2000 and provides for Mr.
Pollock to be paid an initial salary of $10,000 per month for the period from
January 1, 1999 to June 30, 1999, increased to $11,000 per month for the period
from July 1, 1999 to December 31, 1999, increased to $12,000 monthly for the
period from January 1, 2000 to June 30, 2000, and increased to $12,500 monthly
for the period from July 1, 2000 to December 31, 2000. In addition, the Pollock
Employment Agreement provides an automobile allowance of $300 per month, plus
health insurance and other benefits. The Pollock Employment Agreement may be
extended for an additional two-year period by mutual agreement. The Pollock
Employment Agreement also contains a covenant by Mr. Pollock not to compete with
us for a period of three years following termination of his employment. The
Pollock Employment Agreement also provides that if Mr. Pollock's employment is
terminated with cause, Mr. Pollock will be entitled to 90 days prior notice.
However, should Mr. Pollock's employment be terminated without cause, Mr.
Pollock will be paid out the remainder of his contract. In addition, the Pollock
Employment Agreement provides for the grant of options to purchase 40,000 shares
of common stock, as approved by our Board of Directors, which vest over a three
year period (20,000 options vested on January 1, 1999, 10,000 options vested on
January 1, 2000 and 10,000 options will vest on January 2, 2001), unless there
is a change in control or ownership of us, in which case, the options vest.
Effective May 7, 1999, Mr. Pollock's salary increased to $150,000 per year and
he was granted options to purchase 25,000 shares at $6.375 per share, one-third
of which vested as of May 7, 1999, one-third vested on May 7, 2000 and one-third
will vest on May 7, 2001. All of these options are subject to shareholder
approval. The exercise period for the options granted on May 7, 1999 to Mr.
Pollock commences as of the date of vesting and continues through the earlier of
(i) September 19, 2005 or (ii) two years from the date he is no longer employed
by us.
PHILIP A. KERNAN, Jr., President of Adesta Transportation, is a party to an
employment agreement dated February 21, 2000 with us (the "Kernan Employment
Agreement"). The Kernan Employment Agreement terminates on February 20, 2003 and
provides that Mr. Kernan is to be paid a salary of $182,000 per year, plus
insurance and other benefits. The Kernan Employment Agreement also provides that
if Mr. Kernan's employment is terminated with cause, that Mr. Kernan will be
entitled to 90 days' prior notice. However, if Mr. Kernan's employment is
terminated without cause, Mr. Kernan will be paid out the remainder of his
contract plus fringe benefits without any rights of mitigation. In addition, the
Kernan Employment Agreement provides for the grant of options to purchase
125,000 shares of common stock, subject to approval of our shareholders, which
will vest over a two-year period at prices ranging from $6.00 to $9.50 per
share.
J. BARRY HALL, President of Transportation Safety Contractors, Inc. ("TSCI"), is
party to an employment agreement dated October 12, 1996 with TSCI (the "Hall
Employment Agreement"). The Hall Employment Agreement terminates on October 11,
2001, and provides that Mr. Hall is to be paid a salary of $150,000 per year,
plus insurance and other benefits. The Hall Employment Agreement also contains a
covenant by Mr. Hall not to compete with us for a period of two years following
termination of his employment, unless we terminate the Hall Employment Agreement
for cause or if Mr. Hall terminates the agreement with good reason, in which
case the non-competition period will terminate after six (6) months (which
period may be extended by us up to one year in exchange for additional
compensation). Effective May 7, 1999, Mr. Hall received a cash bonus of
$100,000, based upon compensation that has been assigned to Mr. Hall from Gerry
Hall, a former Chief Executive Officer of ours.
RICHARD A. BOYLE, President of the Patton Management Group, is party to an
employment agreement, dated April 1, 1998 with us (the "Boyle Employment
Agreement"). The Boyle Employment Agreement terminates on March 31, 2000, and
provides that Mr. Boyle is to be paid a salary of $159,000 per year, plus
insurance and other benefits. The Boyle Employment Agreement also contains a
covenant by Mr. Boyle not to compete with us for a period of two years following
termination of his employment. Also, pursuant to the terms of the Patton
Management Corporation acquisition documents, Mr. Boyle's non-competition
agreement has been extended for one additional year by mutual agreement. The
Boyle Employment Agreement also provides that if Mr. Boyle is terminated with
cause, Mr. Boyle will not be entitled to any notice. Effective May 7, 1999, Mr.
Boyle was granted options to purchase 65,000 shares of common stock at $6.375
per share, one-third of which vested as of May 7, 1999, one-third vested on May
7, 2000 and one-third vest on May 7, 2001. The exercise period for the options
granted on May 7, 1999 to Mr. Boyle commences as of the date of vesting and
continues through the earlier of (i) September 19, 2005 or (ii) two years from
the date Mr. Boyle is no longer employed by us.
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<PAGE> 53
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended October 31, 1999, compensation for our executive
officers was determined by our Compensation Committee, consisting of Messrs. C.
Frank Swartz, H. Alec McLarty and Billy V. Ray, Jr. Mr. Swartz is Chairman of
the Committee and he and Mr. McLarty are the two non-employee members of the
Compensation Committee. In addition to being a director of Able, Mr. Ray is our
Chief Executive Officer. Mr. Ray excused himself from all discussions and
abstained from voting on any issues relating to the compensation and bonuses to
be paid to Mr. Ray as Chief Executive Officer.
In April 1998, we engaged Washington Equity Partners ("WEP") as an advisor in
connection with the MFSNT acquisition. At the time of the engagement, Mr. Thomas
A. Davidson, a member of our Board of Directors and a former member of the
Compensation Committee, who resigned as a director in January 2000, was Managing
Director of WEP. In connection with the engagement, we agreed to pay WEP a fee
if we consummated the financing of the MFSNT acquisition through an investor
contacted by WEP. We also committed to reimburse WEP for its reasonable travel
and out-of-pocket expenses (up to a maximum of $20,000 without prior approval)
incurred in connection with its engagement. Mr. Davidson subsequently left his
position as Managing Director of WEP in April 1998 and WEP assigned its rights
in the agreement to Mr. Davidson. Mr. Davidson became one of our directors in
June 1998. On October 21, 1998, we agreed with Mr. Davidson to pay him
$1,332,000 in satisfaction of amounts owing under our agreement with WEP. During
the 1999 fiscal year, Mr. Davidson was paid $350,000 of this amount and on April
30, 1999, Mr. Davidson converted the remaining $828,002 due, into 118,286 shares
of common stock at the then market price of $7.00 per share.
Mr. Davidson was a codefendant with us in the Sirit lawsuit described elsewhere
in this prospectus. Under our indemnification obligations to Mr. Davidson as a
director and now a former director, we have paid attorneys fees and costs for
the defense of this lawsuit. One counsel has represented us and Mr. Davidson so
it is not possible to segregate amounts paid on his behalf from the amounts paid
on our behalf. However, Mr. Davidson has benefited materially from these
payments. Mr. Davidson paid the settlement amount related to claims against him
without our assistance.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On October 12, 1996, we acquired all of the issued and outstanding capital stock
of Georgia Electric Company ("GEC"), which prior to the acquisition was owned
equally by Gerry W. and J. Barry Hall (collectively, the "Halls"). Following the
acquisition, Gerry Hall was elected to our board of directors, and on June 12,
1997, was elected our President and Chief Executive Officer. Gerry Hall resigned
as our President, Chief Executive Officer and a director on March 2, 1998. Barry
Hall is president of our subsidiary Transportation Safety Contractors Inc. The
purchase price for the GEC acquisition was $3 million in cash, plus the issuance
at the end of each of the next five fiscal years of a number of shares of common
stock to be determined pursuant to a formula contained in the acquisition
agreement. The formula involves dividing a dollar figure derived from GEC's
actual pre-tax profits and operating margins compared with target profits and
margins for each fiscal year by a discounted per share price. The GEC
acquisition agreement was amended in February 1998 to increase the percentage
discount applicable to the price of the common stock for purposes of this
formula, thus increasing the potential earn-out consideration to the Halls. At
the same time the amendment limited the total market value of the shares of
common stock which could be issued under the agreement. In the event that GEC is
sold by us prior to the end of fiscal year 2001, we are obligated to issue to
Gerry Hall and Barry Hall a number of shares of common stock having a market
value (as determined in accordance with the contract) of $1 million for each
year that earn-out consideration remains payable. Gerry Hall's resignation as
our President, CEO and director had no relationship to the amendment to the
GEC acquisition Agreement. The shares issued to the Halls for fiscal year 1998
totaled 508,398 and for fiscal year 1999 totaled 204,944.
We have various agreements, and have entered into various transactions, with
WorldCom which beneficially owns 29.7% of our outstanding stock as of August 17,
2000. Among these agreements and transactions are the Master Services Agreement
and debt obligations and the conversion of debt into Series D Preferred Stock,
described elsewhere in the prospectus. We believe the terms of these agreements
are no less favorable to us than would have been obtained in arm's-length
transactions.
During fiscal 2000, we have loaned $300,000 to Edwin D. Johnson, our President,
$300,000 to Billy V. Ray, our Chief Executive Officer and Chairman and $200,000
to Michael Brenner, our General Counsel and Executive Vice President. Each of
these loans was made pursuant to requirements of the employment agreements
between us and these individuals. Interest accrues on these loans at the prime
rate and is payable annually. All outstanding principal and accrued interest is
due on the third anniversary of the loans to Messrs Johnson and Brenner and the
sixth anniversary of the loan to Mr. Ray.
In August 2000, we made a $2,000,000 loan to Billy V. Ray, Jr., our Chief
Executive Officer and Chairman. The purpose of this loan was to provide funds
for Mr. Ray to purchase a Certificate of Deposit which was then pledged on our
behalf to secure a performance bond required in connection with our performance
under a newly awarded contract. The bonding agency required that a third-party
provide collateral for such bond and, in light of our need to provide such
collateral quickly, Mr. Ray agreed to post a Certificate of Deposit if we would
loan the funds to him to purchase such Certificate of Deposit. The loan is
payable on or before June 30, 2001 and bears interest at a rate of 9.5 percent
per annum. The loan has been secured by a second priority pledge of the
Certificate of Deposit, but this security interest has not yet been perfected.
See also "Compensation Committee Interlocks and Insider Participation" regarding
certain related party transactions between members of our Compensation Committee
and with Mr. Thomas Davidson, one of our former directors.
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<PAGE> 54
PRINCIPAL SHAREHOLDERS
The following table shows, as of August 17, 2000 the common stock owned
beneficially by (i) each of our executive officers, (ii) each of our current
directors, (iii) all directors and executive officers as a group, and (iv) each
person known by us to be the "beneficial owner" of more than five percent of our
common stock. "Beneficial ownership" is a technical term broadly defined by the
Securities and Exchange Commission to mean more than ownership in the usual
sense. For example, you "beneficially" own common stock not only if you hold it
directly, but also if you indirectly (through a relationship, a position as a
director or trustee, or a contract or understanding), have or share the power to
vote the stock, or sell the stock, or you have the right to acquire it within 60
days. Except as disclosed in the footnotes below, each of the directors and
executive officers listed have sole voting and investment power over his shares.
As of August 17, 2000 there were 16,374,504 shares of common stock issued and
outstanding and approximately 386 holders of record.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (2)
------------------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE
--------- ----------
EXECUTIVE OFFICERS AND DIRECTORS:
<S> <C> <C>
Billy V. Ray, Jr(3) 410,000 2.4%
Edwin D. Johnson(4) 157,000 *
Frazier L. Gaines(5) 217,000 1.3%
Charles A. Maynard 200,000 1.2%
James E. Brands 100,000 *
Michael Brenner 100,000 *
Philip A. Kernan, Jr 125,000 *
Edward Z. Pollock(6) 66,000 *
Robert Sommerfeld 100,000 *
J. Barry Hall(7) 102,472 *
Richard A. Boyle 65,000 *
C. Franklin Swartz 30,000 *
H. Alec McLarty(8) 11,610 *
Gerald Pye -- *
All Executive Officers and Directors 1,684,082 9.9%
as a Group (15 Persons)
BENEFICIAL OWNER OF 5% OR MORE OF VOTING
SECURITIES
Gideon D. Taylor(9) 946,638 5.8%
Worldcom(10) 5,650,000 29.7%
</TABLE>
*Less than 1%.
(1) Unless otherwise indicated, the address of each Executive Officer,
Director and beneficial owner of more than 5% of the Company's voting
securities is 1000 Holcomb Woods Parkway, Suite 440, Roswell, Georgia
30076.
(2) Beneficial ownership is determined in accordance with the rules of the
SEC that deem shares to be beneficially owned by any person who has or
shares voting or investment power with respect to such shares. Unless
otherwise indicated below, the persons and entities named in the table
have sole voting and sole investment power with respect to all shares
beneficially owned. Shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of August 17, 2000
are deemed to be outstanding and to be beneficially owned by the person
holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(3) Mr. Ray owns 410,000 options subject to shareholders approval.
(4) Mr. Johnson owns 7,000 shares and options to purchase 150,000 shares
subject to shareholder approval.
(5) Includes 80,000 shares underlying stock options, which are immediately
exercisable subject to shareholder approval, 128,000 shares held in a
trust controlled by Mr. Gaines and an aggregate of 9,000 shares held by
Mr. Gaines as trustee to four minor children.
(6) Includes 65,000 shares underlying options which are immediately
exercisable subject to shareholder approval and 1,000 shares owned by
Mr. Pollock.
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<PAGE> 55
(7) Mr. Hall received these shares in payment of the October 31, 1999
portion of an earn-out owed from our acquisition of the Georgia
Electric Company.
(8) Includes 1,610 shares owned by Mr. McLarty's wife and 10,000 shares
underlying options, which are immediately exercisable subject to
shareholder approval.
(9) Includes 21,619 shares owned by Mr. Taylor's wife and 220 shares
underlying stock options which are immediately exercisable subject to
shareholder approval. Mr. Taylor's address is 265 Harper Road, Dry
Fork, VA 24549.
(10) Includes 3,050,000 shares issued to WorldCom by converting debt into
shares at $8.375 per share on January 13, 2000 and 2,600,000 shares are
issuable to WorldCom upon its exercise of the option and SAR granted to
WorldCom in 1998. Does not include 3,696,303 shares issuable upon
conversion of Series D Preferred Stock issued to WorldCom on August
24, 2000. WorldCom's address is 515 East Amite Street, Jackson,
Mississippi 39201. After considering the August 2000 issuance of the
Series D stock to WorldCom in exchange for amounts due under the
WorldCom Advance, WorldCom would have voting interests of 33.6 percent.
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<PAGE> 56
DESCRIPTION OF INDEBTEDNESS
The following discussion of certain of the provisions of our indebtedness are
not intended to be complete or exhaustive and are qualified in its entirety by
references to the provisions of the documents and agreements with respect to
such indebtedness. These documents and agreements have been filed as exhibits to
the Registration Statement of which this prospectus forms a part.
SECURED CREDIT FACILITY. Pursuant to a Secured Credit Facility, a syndicate of
lenders lent us $35.0 million in the form of senior secured revolving credit
facilities. The Secured Credit Facility has a letter of credit sublimit of $5.0
million. The Secured Credit Facility matures on November 1, 2000.
The interest rate under the Secured Credit Facility is, at our option, based
upon either (i) a Eurodollar rate or (ii) a base rate, for any day, the greater
of the prime rate announced from time to time by the Administrative Agent as its
U.S. dollar prime commercial lending rate (which rate may or may not be the
lowest rate of interest charged by the Administrative Agent) and the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System in effect on such day, plus 1 percent. Currently, we are
paying a default interest rate of an additional 2 percent.
The Secured Credit Facility is guaranteed by all of our existing and future
subsidiaries other than our international subsidiaries. The Secured Credit
Facility is secured by a pledge of all of the capital securities of those
subsidiaries, including all existing intercompany notes issued to any subsidiary
by any of its subsidiaries and all shares of capital securities set forth in the
Pledge Agreement.
The Secured Credit Facility contains covenants restricting our ability and our
Restricted Subsidiaries ability to, among others, (i) incur additional debt,
(ii) declare dividends or redeem or repurchase capital stock, (iii) prepay,
redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi)
make capital expenditures, (vii) engage in mergers, acquisitions and asset
sales, and (viii) engage in transactions with affiliates. We are required to
comply with financial covenants with respect to certain minimum ratios,
including debt coverage, interest, fixed charges and quick ratio. We currently
are in default under several of these covenants.
WORLDCOM NOTE. In order to finance the MFSNT Acquisition, we issued the WorldCom
Note to WorldCom, which has a current principal balance of $4.5 million as a
result of the conversion of $25 million of principal debt under this note into
common stock. We must repay the WorldCom Note in full on July 12, 2007. The
WorldCom Note bears interest at 8.0 percent per year. Our obligations under the
WorldCom Note are junior and fully subordinated to those under the Secured
Credit Facility. No amounts may be paid on the WorldCom Note so long as any debt
is outstanding under the Secured Credit Facility.
If we do not repay the WorldCom Note in full by July 12, 2007, WorldCom will be
able to:
- Require us to pay a 13.5 percent annual default rate of interest
while we are in default
- Reduce the minimum yearly and aggregate revenues we would receive
under the WorldCom Master Services Agreement
- Refuse to give us additional work under the WorldCom Master Services
Agreement while we are in default
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<PAGE> 57
DESCRIPTION OF PERFORMANCE BONDS. There are numerous risks inherent in providing
services in the telecommunications industry, which may result in a contractor or
subcontractor being unable to complete the contracted work. As a contractor, we
are required to supply the project owners with a performance and payment bond
and a certificate of insurance to protect the owners from liability. Internally,
we make use of builders' risk insurance to protect our own interests. If we
decide to subcontract a portion of the work, we also require our subcontractors
to provide performance and payment bonds and certificates of insurance to
protect us from liability. Depending upon the contract and/or the state and
local laws, we may also need to make use of other types of insurance or bonds.
As of April 30, 2000, we have contract backlog of approximately $444,000 under
performance bonds.
DESCRIPTION OF SECURITIES
We are currently authorized to issue 25,000,000 shares of common stock, par
value $.001 per share, and 1,000,000 shares of preferred stock, par value $.10
per share. We intend to ask our shareholders to approve an increase in our
authorized capital stock to 100,000,000 shares of common stock and 5,000,000
shares of common stock at our next annual meeting of shareholders, currently
planned for late September or October.
The following summary description of our common stock and preferred stock is not
intended to be complete or exhaustive and is qualified in its entirety by
reference to our Amended and Restated Articles of Incorporation (the "Articles")
and Bylaws, copies of which are included as exhibits to the Registration
Statement of which this prospectus forms a part.
COMMON STOCK. As of August 17, 2000, we had 16,374,504 shares of common stock
outstanding. Holders of common stock are entitled to one vote for each share
held on all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to any preferential dividend rights
of any outstanding preferred stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of common stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
offered by Selling Shareholders will be, when issued and paid for, fully paid
and non-assessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which the Company may
designate and issue in the future.
PREFERRED STOCK. The Board of Directors has the authority, without further
action of our shareholders, to issue up to an
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<PAGE> 58
aggregate of 1,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series.
The Board of Directors, without shareholder approval, can issue preferred stock
with voting and conversion rights that could adversely affect the voting power
of holders of common stock. Issuing preferred stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
As of August 30, 2000, we have designated 1,200 shares of Series A Convertible
Preferred Stock, 4,000 shares of Series B Convertible Preferred Stock, 5,000
shares of Series C Convertible Preferred Stock and 1,000 shares of Series D
Preferred Stock. No shares of Series A or Series B preferred stock are
outstanding. The following table shows the number of shares of Series C and
Series D preferred stock outstanding on August 30, 2000, the number of shares of
common stock unto which they are convertible and the percentage of our
outstanding shares of common stock they would represent if converted on August
17, 2000:
<TABLE>
<CAPTION>
Number
of Shares of Common Stock
Series of Preferred Stock Shares Issuable Upon Conversion Percentage
------------------------- ------ ------------------------ ----------
<S> <C> <C> <C>
Series C 5,000 3,750,000 18.6% (1)
Series D 1,000 3,696,304 18.4 (1)
----- --------- ----
Total 6,000 7,446,304 31.3% (2)
</TABLE>
----------
(1) Assumes conversion of only the Series C or Series D, as the case may be.
(2) Assumes conversion of both the Series C and Series D.
SERIES C CONVERTIBLE PREFERRED STOCK. We have designated and issued 5,000 shares
of preferred stock Series C Convertible Preferred Stock. The Series C Preferred
Stock is non-voting, pays dividends at a rate of 5.9% of the stated $3,000 value
of each share and is convertible at the option of the holder into common stock
at a conversion price of $4.00 per share. The conversion rights may be exercised
on the earlier of the date that we receive shareholder approval of this
conversion or December 1, 2000. We must pay dividends accrued through November
30, 2000 by December 31, 2000, in cash, or the accrued dividends will be added
to the $3,000 stated value of each share.
Conversion Rights. If holders of Series C Convertible Preferred Stock could
convert to common stock as of August 30, 2000, they would be entitled to
3,750,000 shares of common stock ($3,000 (stated value) divided by $4.00
(conversion price) multiplied by 5,000 (number of Series C shares outstanding)),
or 18.6% of our outstanding shares immediately following the conversion. The
$4.00 conversion price is subject to adjustment for stock splits, stock
dividends, mergers or similar transactions, and reorganizations or
reclassifications of our common stock or if we issue common stock or convertible
securities at a price less than the conversion price or at a variable price. The
conversion price is also subject to adjustment if certain events, like the
registration of the underlying common stock by November 30, 2000, do not occur.
Because of these potential adjustments, these securities may become convertible
at a price that is not now readily determinable. Because the conversion price
may be reduced, resulting in our issuing more shares of common stock than
originally contemplated, our then-existing holders of the common stock will face
additional dilution.
Holder Redemption Rights. In addition to our redemption obligations if we do not
timely register the common stock as described below, we may be required to
redeem the Series C Convertible Preferred Stock at the holders' option. We would
have five business days to make the redemption payments. Furthermore, if we
enter into a major transaction such as a merger, sale of all or substantially
all of our assets or a purchase, tender or exchange offer accepted by holders of
more than 30% of our outstanding shares of common stock, the holders can require
us to redeem the Series C Convertible Preferred Stock for 120% of the
liquidation value. For reference purposes, the aggregate liquidation value of
the Series C Convertible Preferred Stock on August 17, 2000 was $15 million.
This redemption payment would be required to be made before consummation of the
major transaction. The holders have agreed not to exercise their redemption
rights for the Bracknell merger.
Registration Rights. Holders of the Series C Convertible Preferred Stock have
the right to have the common stock issued upon conversion of the Series C
Convertible Preferred Stock and upon exercise of their warrants registered under
the Securities Act of 1933 on Form S-1. Our registration obligations cover all
of the common stock issuable upon conversion of the Series C Convertible
Preferred Stock, plus 997,500 shares issuable pursuant to exercise of the
warrants, plus any shares issued as anti-dilution adjustments. We have until
November 30, 2000 to register these securities.
If we fail to timely register the shares, the holders will have the right after
December 1, 2000 to require us to redeem for cash all of the Series C
Convertible Preferred Stock, for the greater of 120% of the liquidation value or
a price based on a formula incorporating the trading price of our common stock.
As measured on August 17, 2000, the trading price of our common
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<PAGE> 59
stock would have to be greater than $4.80 per share for the formula to produce a
redemption price greater than 120% of the liquidation value measured as of
August 17, 2000.
For 90 days after the registration statement is effective, neither we nor any of
our subsidiaries may issue any equity securities or instruments or rights
convertible into or exchangeable or exercisable for any equity securities
except:
- issuances pursuant to currently outstanding convertible securities;
- shares issued pursuant to our Stock Option Plan; or
- options otherwise issued to our employees.
Delinquent Payments. If we fail to timely pay any redemption price or any other
penalty that we are obligated to pay to holders of the Series C Convertible
Preferred Stock, the holders can require us to redeem all of the Series C
Convertible Preferred Stock, all of the Series C warrants held by them, and any
shares of common stock issued upon conversion or exercise of those securities.
The redemption price would be the greater of
- 1.20 multiplied by the conversion price on the date of redemption
multiplied by the total number of shares of common stock being redeemed
plus common stock issuable upon conversion or upon exercise; or
- a price based on a formula incorporating the trading price of our
common stock. Based on the conversion value of the Series C Convertible
Preferred Stock on July 17, 2000, the trading price of our common stock
would have to be greater than $6.01 per share for the formula to
produce a redemption price greater than the formula based on the
conversion price measured as of July 17, 2000.
We also would be required to pay default interest at 2% per month for any
delinquent amounts.
SERIES D CONVERTIBLE PREFERRED STOCK. We have designated and issued 1,000 shares
of preferred stock as Series D Convertible Preferred Stock. The Series D
Preferred Stock pays dividends at a rate of 6 percent of the stated value of
$37,000 for each share and is convertible at the option of the holder into
common stock at a conversion price of $10.01 per share. The conversion rights
may be exercised at any time after the date of issuance of the shares, but in no
event prior to the effective time of the proposed merger with Bracknell or the
termination of that proposed merger. Dividends on the Series D Preferred Stock
are not cumulative but must be paid if we are liquidated or dissolved, there is
an acquisition of us by another entity that results in a transfer of 50 percent
or more of our outstanding voting power or there is a sale of all or
substantially all of our assets.
Voting Rights. Holders of Series D Preferred Stock are entitled to one vote for
each share of common stock into which the Series D Preferred Stock may be
converted on all matters on which holders of common stock are entitled to vote,
voting as a class with the common stock.
Conversion Rights. If holders of Series D Preferred Stock could convert to
common stock as of August 30, 2000, they would be entitled to 3,696,303 shares
of common stock ($37,000 (stated value) divided by $10.01 (conversion price)
multiplied by 1,000 (number of Series D shares outstanding)) or 18.4% percent of
outstanding shares immediately following the conversion. The $10.01 conversion
price is subject to adjustment for stock splits, stock dividends, mergers or
similar transactions, and reorganizations or reclassifications of our common
stock or if we issue common stock or convertible securities at a price less than
the conversion price.
In addition, if there is a liquidation event, including the Bracknell merger,
the conversion price will be reduced to the price per share paid to holders of
common stock in the liquidation event. For example, if a liquidation event
occurred on August 29, 2000, the Series D Preferred Stock would convert to
12,869,565 shares of common stock ($37,000 (stated value) divided by $2.875
(adjusted conversion price based on the August 29, 2000 closing price)
multiplied by 1,000 (number of Series D shares outstanding)) or 44.0% of
outstanding shares immediately following the conversion. Because of these
potential adjustments, these securities may become convertible at a price that
is not now readily determinable. Because the conversion price may be reduced,
resulting in our issuing more shares of Common Stock than originally
contemplating, our then-existing holders of the Common Stock will face
additional dilution.
Liquidation Preference. Upon the occurrence of any of the events described above
which gives the holders the right to receive dividends, the holders of Series D
Preferred Stock will be entitled to receive in preference to any distribution of
assets to holders of common stock, but after satisfaction of the liquidation
preference of our Series C Preferred Stock, an amount equal to $37,000 per
share.
Company Redemption. We may at our option at any time after August 23, 2004
redeem all of the outstanding Series D Preferred Stock for a price equal to the
amount payable upon a liquidation together with an accrued dividend at the rate
stated above, whether or not actually declared.
SERIES B SECURITIES. In 1998, we issued 5,000 shares of Series B Preferred Stock
and related warrants to purchase our common stock. All of the Series B Preferred
Stock has been converted or redeemed. The following table summarizes current
holdings of common stock and warrants by the former holders of our Series B
Preferred Stock.
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<PAGE> 60
<TABLE>
<S> <C> <C>
Shares of Series B Convertible Preferred Stock outstanding 0
Shares of Common Stock issued upon conversion of Series B Convertible
Preferred Stock(1) 1,007,927
Shares of Common Stock issued in redemption of Series B Convertible
Preferred Stock(1) 801,787
Shares of Common Stock issued upon exercise of Warrants to purchase
Common Stock at $.01 per share(1) 66,246
TOTAL SHARES ISSUED TO SERIES B CONVERTIBLE PREFERRED STOCK HOLDERS 1,875,960
Shares of Common Stock to be issued in redemption of Series B Convertible
Preferred Stock upon shareholder approval(1)(5) 1,057,031
Shares of Common Stock issuable upon exercise of Warrants to purchase
Common Stock at $13.50 per share and upon shareholder approval(1)(2)(3)(4) 370,000
Shares of Common Stock issuable upon exercise of Warrants to purchase Common
Stock at $10.125 per share and upon shareholder approval(1)(2)(4) 200,000
TOTAL SHARES SUBJECT TO SHAREHOLDER APPROVAL
1,627,031
Total shares of Common Stock issued and issuable to Series B Convertible
Preferred Stock holders after receipt of shareholder approval 3,502,991
</TABLE>
(1) Subject to registration rights.
(2) Each of these warrants has a "cashless exercise" feature. A "cashless
exercise" means that a person exercising their warrants does not pay
cash, but elects to receive a lesser number of shares by using the
value of the shares issuable under the warrants to satisfy the exercise
price. In a "cashless exercise," the holder will receive shares of
common stock with a total market value equal to the per share excess of
the market value of the common stock over the exercise price multiplied
by the number of shares being exercised.
(3) We have the right to redeem these warrants for $35.00 per share unless
we are in default under the warrants. Because we have not yet
registered the underlying common stock, we currently do not have the
right to redeem these warrants.
(4) No holder may exercise warrants that would cause it to own more than
4.99% of the outstanding shares of our common stock on the date of
exercise.
(5) If we do not obtain shareholder approval to issue these shares before
November 30, 2000, we must pay former holders of the Series B Preferred
$4,228,124 instead of issuing the shares.
Registration Rights. Generally, the holders of the securities listed above have
a right to cash payments and other consideration if we do not timely register
the shares or maintain our listing on Nasdaq or another approved market.
Specifically, if we do not timely register the holders' shares, the exercise
price of the various warrants is reduced by 1% if our registration is late by 1
to 30 days, and 1.5% for each 30-day period thereafter. If during the
registration period our common stock is delisted, we owe cash penalty payments
of 3% of the value of the common stock owned or issuable to the holder for each
30 day period the common stock is not listed. If we fail to make any of these
payments, the warrant exercise price is reduced by 30% and the holder can
require us to redeem the common stock at 130% of their value, plus the
delinquent amounts.
The Warrants. Holders of the Series C Convertible Preferred Stock hold the
following warrants to purchase common stock:
- 200,000 at $10.75 per share, expiring February 4, 2005;
- 375,000 at $6.00 per share, expiring July 6, 2002; and
- 375,000 at $8.00 per share, expiring July 6, 2002.
The exercise prices of these warrants are subject to adjustment for stock
splits, stock dividends, mergers or similar transactions, and reorganizations or
reclassifications of our common stock, or if we issue common stock or
convertible securities at a price less than the exercise price or the fair
market value of our common stock.
THE WORLDCOM OPTION AND THE WORLDCOM SARs
Generally
As part of the MFSNT Acquisition, we granted an option (the WorldCom Option) to
WorldCom to purchase up to 2,000,000 shares of the common stock at an exercise
price of $7.00 per share. We also granted WorldCom an equity award in the form
of stock appreciation rights ("SARs") equivalent to 600,000 shares of common
stock, payable in cash, stock, or a combination of both at our option. The
WorldCom SARs are exercisable, in whole or in part, on the following days: July
2, 2001, or July 2, 2002.
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<PAGE> 61
The following chart summarizes the terms of the securities held by WorldCom.
<TABLE>
<CAPTION>
WORLDCOM OPTION WORLDCOM SARS(1)
<S> <C> <C>
Type of Security Stock options Stock appreciation right awards
Type of Property Issuable 2,000,000 shares of Common Stock Cash, Common Stock, or any
Pursuant to Exercise of Security combination, at our discretion
Aggregate Base Common Stock N/A 600,000 shares
Exercise Price(2) $7.00 per share $5.0938 per share(3)
Ceiling Collar Price, if any(2) None $32.0938 per share(3)
Determination of Amount of Number of shares exercised by Difference between the exercise price
Property Issuable WorldCom and the fair market value of our
Common Stock on the date of exercise
of the SAR, subject to the Ceiling
Collar Price
Exercise Period/Dates January 1, 2000 through January 2, 2002 July 2, 2001 or July 2, 2002
Other Material Terms Any stock issued pursuant to the SARs Any stock issued pursuant to the SARs
must be registered with the SEC must be registered with the SEC
Maximum Consideration Payable $14 million $0
to Us
Maximum Consideration Payable 2,000,000 shares of Common Stock $15 million in cash, stock or a
to WorldCom combination
</TABLE>
(1) The value of an SAR is determined by subtracting the exercise price
from the fair market value of Common Stock on the exercise date. For
example, if WorldCom exercised 1,000 SARs when the fair market value of
our Common Stock was $10.0938 per share, then the value of the SARs
exercised would be equal to $5,000 ($10.0938 (fair market value) less
$5.0938 (exercise price) x 1,000 shares (SARs exercised)).
(2) May be adjusted in the event of any capital restructuring such as stock
splits, recapitalization or reclassification of our Common Stock.
(3) If the fair market value of our Common Stock as of the date immediately
preceding our issuing the WorldCom SAR is greater than the exercise
price of $5.0938, then we will adjust the exercise price to then fair
market value, and the ceiling collar price shall be adjusted to a
dollar amount equal to the then fair market value plus $25.00.
Additionally, the Aggregate Base Common Stock will be adjusted by
- multiplying 600,000 by a fraction,
- the numerator of which shall be the adjusted exercise price,
and
- the denominator of which shall be $5.0938;
up to a maximum of 700,000 shares of Common Stock.
A general description of the common stock, underlying the WorldCom Option and
the WorldCom SARs is provided above. Other than as described above, WorldCom is
not entitled to any pre-emptive rights under the terms of either the WorldCom
Option or the WorldCom SARs. The rights granted to WorldCom under the WorldCom
Option and the WorldCom SARs are not limited or qualified by any rights of any
other class of securities.
LIMITED LIABILITY AND INDEMNIFICATION
Under the Florida Business Corporation Act (the "FBCA"), a director is not
personally liable for monetary damages to the corporation or any other person
for any statement, vote, decision, or failure to act unless (i) the director
breached or failed to perform his duties as a director and (ii) the director's
breach of, or failure to perform, those duties constitutes: (1) a violation of
the criminal law, unless the director had reasonable cause to believe his
conduct was lawful or had no reasonable cause to believe his conduct was
unlawful, (2) a transaction from which the director derived an improper personal
benefit, either directly or indirectly, (3) a circumstance under which an
unlawful distribution is made, (4) in a proceeding by or in the right of the
corporation to procure a judgment in its favor or by or in the right of a
shareholder, conscious disregard for the best interest of the corporation or
willful misconduct, or (5) in a proceeding by or in the right of someone other
than the corporation or shareholder, recklessness or an act or omission which
was committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety, or property. A corporation
may purchase and maintain insurance on behalf of any director or officer against
any liability asserted against him or her and incurred by him or her in his or
her capacity or arising out of his or her status as such,
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<PAGE> 62
whether or not the corporation would have the power to indemnify him or her
against such liability under the FBCA. Our Bylaws provide that we shall
indemnify our officers and directors against liability resulting from their
service as an officer or director of the Company and the Company has executed
indemnification agreements so providing.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN PROVISIONS OF THE FBCA AND THE ARTICLES
We are subject to (i) Section 607.0901 of the FBCA, which generally requires
super-majority approval by disinterested directors or shareholders of certain
specified transactions between a corporation and holders of more than 10 percent
of the outstanding shares of the corporation (or their affiliates), and (ii)
Section 607.0902 of the FBCA, which generally provides that shares acquired in
excess of certain specified thresholds will not possess any voting rights unless
such voting rights are approved by a majority vote of the corporation's
disinterested shareholders.
The authorized but unissued shares of common stock and Preferred Stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued and unreserved
common stock and Preferred Stock may enable the Board of Directors to issue
shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a proxy contest, tender, offer, merger or otherwise, and thereby protect the
continuity of the Company's management.
SHARES ELIGIBLE FOR FUTURE SALE
As of August 17, 2000, we had 16,374,504 shares of common stock issued and
outstanding. Assuming that as of August 30, 2000 all the Selling Shareholders
had converted or exercised the securities included in this prospectus into or
for common stock and the Series D Preferred Stock had been converted, the
Company would have had 34,508,854 shares of common stock issued and outstanding
on that date, substantially all of which would have been freely tradeable,
except for the 3,696,303 shares issuable upon conversion of the Series D
Preferred Stock, which will constitute restricted securities when issued.
On May 22, 1996, we filed a registration statement on Form S-8 with the SEC to
register 550,000 shares of common stock issuable under the Plan and 510,000
shares of common stock issuable under other agreements entered into with certain
of our current and former directors, officers and employees. On June 18, 1997,
we filed a post-effective amendment to this Form S-8 with the SEC to register
the resale of 459,800 of such shares by affiliates. On April 24, 1998, the
Company's shareholders amended the Plan to increase the aggregate number of
shares of common stock issuable under the Plan from 550,000 to 1,300,000 (an
increase in 750,000 shares). We intend to file a registration statement under
the Securities Act to register the additional 750,000 additional shares of
common stock reserved for issuance under the Plan and, to the extent that the
shareholders approve an additional increase of 4,200,000 shares (for a total of
5,500,000 shares), the Company will file a registration statement of Form S-8 to
register these additional shares. As of August 30, 2000, options to purchase
734,000 shares of common stock were outstanding under the Plan and options to
purchase 2,189,897 shares of common stock were outstanding outside the Plan.
Sales of substantial amounts of our securities in the public market could have a
significant adverse effect on prevailing market prices and could impair our
future ability to raise capital through the sale of our equity securities.
SELLING SHAREHOLDERS
The following table shows for all Selling Shareholders the number of shares of
common stock currently owned or which are currently issuable to them upon the
conversion or exercise of outstanding securities or under our contractual
obligations prior to the offering and the number of shares they will own
assuming the maximum shares registered hereunder are sold.
57
<PAGE> 63
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) OF SHARES AFTER OFFERING(2)
------------------------- OFFERED -------------------------
NAME OF SELLING SHAREHOLDER NUMBER PERCENTAGE HEREBY NUMBER PERCENTAGE
------------------------------ --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
John Hancock Mutual Life Insurance Company 409,505 2.4 409,505 -- --
DeAm Convertible Arbitrage Fund Limited 310,555 1.9 310,555 -- --
Halifax Fund, L.P. 2,911,654 15.0 2,911,654 -- --
Lancer Securities (Cayman) Limited 263,083 1.6 263,083 -- --
Palladin Partners I., L.P. 244,972 1.5 244,972 -- --
Palladin Overseas Fund Limited 310,555 1.9 310,555 -- --
Palladin Securities, L.L.C. 47,472 * 47,472 -- --
PGEP III, LLC 197,500 1.2 197,500 -- --
Quattro Fund Limited 150,250 * 150,250 -- --
RGC International Investors, LDC 479,092 2.8 479,092 -- --
Sirit Technologies, Inc. 5,011,511 23.4 5,011,511 -- --
WorldCom, Inc./MFS Communications Company,
Inc.(3) 5,650,000 29.7 2,600,000 3,050,000 9.9%
</TABLE>
------------
*Less than 1%.
(1) In addition to shares currently owned by each Selling Shareholder, the
number of shares set forth in the table represents an estimate of the
number of shares of common stock that will be offered by each Selling
Shareholder. The actual number of shares of common stock offered hereby
and included in the Registration Statement of which this prospectus
forms a part, includes such additional number of shares of common stock
as may be issued or issuable by reason of any stock split, stock
dividend or similar transaction involving the common stock, in order to
prevent dilution, in accordance with Rule 416 under the Securities Act.
We have agreed to register 105 percent of the actual number of shares
of common stock issuable pursuant to an assumed exercise of the Series
C warrants, as determined by us.
(2) Based on shares outstanding on August 17, 2000, assuming the sale of
all shares offered in this prospectus.
(3) Includes 2,000,000 shares of common stock exercisable pursuant to an
option granted by us in connection with the MFSNT acquisition and
600,000 shares of common stock that may be issued upon the exercise of
the SARs. Does not include 3,696,303 issuable upon conversion of Series
D Preferred Stock issued to WorldCom on August 24, 2000.
PLAN OF DISTRIBUTION
The Selling Shareholders may, from time to time, sell all or a portion of the
shares on Nasdaq (or such other exchange on which the common stock may from time
to time be trading), in privately negotiated transactions or otherwise, at fixed
prices that may be changed, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The shares may be
sold by the Selling Shareholders by one or more of the following methods,
without limitation: (i) block trades in which the broker or dealer so engaged
will attempt to sell the Shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction, (ii) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this prospectus, (iii) an exchange distribution in
accordance with the rules of such exchange, (iv) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, (v) privately
negotiated transactions, (vi) short sales and (vii) a combination of any such
methods of sale. In effecting sales, brokers and dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. Brokers or
dealers may receive discounts from the Selling Shareholders (or, if any such
broker-dealer acts as agent for the purchaser of such Shares, from such
purchaser) in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with
the Selling Shareholders to sell a specified number of such shares at a
stipulated price per share and, to the extent such broker-dealer is unable to do
so acting as agent for a Selling Shareholder, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment to
the Selling Shareholders. Broker-dealers who acquire shares as principal may
thereafter resell such shares from time to time in transactions (which may
involve block transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such shares discounts as described above. The
Selling Shareholders may also sell the shares in accordance with Rule 144 under
the Securities Act, rather than pursuant to this prospectus.
The Selling Shareholders and any broker-dealers or agents that participate with
the Selling Shareholders in sales of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any discounts received by such broker-dealers or agents
and any profit on the resale of the Shares purchased by them may be deemed to be
underwriting or discounts under the Securities Act.
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<PAGE> 64
From time to time, the Selling Shareholders may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the shares in
connection therewith or in settlement of securities loans. From time to time,
the Selling Shareholders may pledge their shares pursuant to the margin
provisions of its customer agreements with its brokers. Upon a default by the
Selling Shareholders, the broker may offer and sell the pledged shares from time
to time.
The Selling Shareholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder, which provisions may limit the timing of purchases and sales of any
of the shares by the Selling Shareholders or any other such person. The
foregoing may affect the marketability of the shares.
The Company has agreed to indemnify in certain circumstances the Selling
Shareholders against certain liabilities, including liabilities under the
Securities Act. The Selling Shareholders have agreed to indemnify in certain
circumstances the Company against certain liabilities, including liabilities
under the Securities Act.
To the extent required, this prospectus will be updated to reflect any change in
the Selling Shareholders for whose account shares are to be offered, the number
of shares so offered for such Selling Shareholder's account and, if such
offering is to be made by or through underwriters or dealers, the names of such
underwriters or dealers and the principal terms of the arrangements between the
underwriters or dealers and the Selling Shareholders for whose account such
offering is made.
The Company has agreed to use its best efforts to keep the Registration
Statement, of which this prospectus constitutes a part, effective until the
shares of common stock underlying such stock and warrants may be or have been
sold pursuant to Rule 144(k) of the Securities Act. The Company has agreed with
WorldCom to file and maintain an effective registration statement with respect
to the shares of common stock underlying the WorldCom Option until such time, if
any, as the holder of the WorldCom Option would be able to sell the shares on an
unrestricted basis without being required to comply with the volume limitations
contained in Rule 144(e) promulgated under the Securities Act. The Company has
agreed with the holders of the John Hancock Warrants to file and maintain an
effective Registration Statement until the earlier of (i) January 1, 2000, or
(ii) such time as all of the shares of common stock underlying the John Hancock
Warrants have been sold.
The Company will not receive any proceeds from the sale of the shares by any
Selling Shareholder pursuant to this prospectus. There can be no assurance that
any Selling Shareholder will sell any of the shares offered pursuant to this
prospectus. We have agreed to pay all expenses of registration of the shares,
which expenses are expected to be approximately $1.2 million.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be passed
upon for the Company by Michael Brenner, General Counsel to the Company.
EXPERTS
The consolidated financial statements of Able Telcom Holding Corp. and its
subsidiaries at October 31, 1999 and 1998 and for the years then ended included
in this prospectus and Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and is included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report.
The consolidated statements of operations, shareholders' equity and cash flows
of Able Telcom Holding Corp. and its subsidiaries for the year ended October 31,
1997, appearing in this prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent certified public accountants, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of Ernst & Young LLP as experts in
accounting and auditing.
During the year ended October 31, 1997 and during the subsequent interim period
prior to engaging Arthur Andersen LLP, neither the Company nor anyone on our
behalf consulted with Arthur Andersen LLP regarding either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements.
Previously, however, Arthur Andersen LLP was the independent auditors for MFS
Network Technologies, Inc. and Patton Management Corporation, both of which were
acquired by us during fiscal year 1998.
59
<PAGE> 65
On September 7, 1998, Ernst & Young LLP, our former accountants, resigned and,
on October 12, 1998, Arthur Andersen LLP was appointed our accountants. On
September 2, 1998, prior to the resignation by Ernst & Young LLP, we sent out a
request for proposals for the audit of our consolidated financial statements for
the fiscal year ending October 31, 1998 to several national accounting firms,
including Ernst & Young LLP. The reports of Ernst & Young LLP on Able's
financial statements for the two fiscal years ended October 31, 1997 and 1996
did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of our financial statements for each of the two
fiscal years ended October 31, 1997 and 1996, there were no disagreements with
Ernst & Young LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make reference to the matter in their reports.
Ernst & Young LLP informed us of the following "reportable events" (as defined
in Item 304(a)(i)(v) of Regulation S-K promulgated under the Securities Act of
1933, as amended):
- In their report to the Audit Committee for the year ended October 31,
1997, Ernst & Young LLP advised Able as to the existence of reportable
conditions in Able's system of internal controls. These reportable
conditions related to (i) the lack of segregation of duties over the
cash disbursements function, (ii) the failure to provide adequate
documentation to support the business purpose of certain significant
transactions with related parties, and (iii) the lack of monitoring
controls over operations of its foreign subsidiaries.
60
<PAGE> 66
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of April 30, 2000 (Unaudited) and October 31, 1999 ................................. F-2
Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended April 30, 2000 and 1999 ...... F-3
Condensed Consolidated Statements of Cash Flows (Unaudited) for six months ended April 30, 2000 and 1999 .................... F-4
Notes to Condensed Consolidated Financial Statements (Unaudited) ............................................................ F-5
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants .................................................................................... F-29
Report of Independent Certified Public Accountants .......................................................................... F-30
Consolidated Balance Sheets - October 31, 1999 and 1998 ..................................................................... F-31
Consolidated Statements of Operations - Years Ended October 31, 1999, 1998 and 1997 ......................................... F-32
Consolidated Statements of Shareholders' Equity - Years Ended October 31, 1999, 1998 and 1997 ............................... F-33
Consolidated Statements of Cash Flows -Years Ended October 31, 1999, 1998 and 1997 .......................................... F-34
Notes to Consolidated Financial Statements - October 31, 1999 ............................................................... F-35
FINANCIAL STATEMENT SCHEDULE
II. Valuation and Qualifying Accounts - Years Ended October 31, 1999, 1998 and 1997 ......................................... F-61
</TABLE>
<PAGE> 67
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS April 30, 2000 October 31, 1999(1)
-------------- -------------------
Currents Assets: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents ....................................................... $ 11,441 $ 16,568
Accounts receivable, including retainage of $18,809 and $16,158 and net of
allowances for bad debts of $3,323 and $3,514 at April 30, 2000 and
October 31, 1999, respectively ............................................. 104,326 73,645
Costs and profits in excess of billings on uncompleted contracts ................ 56,841 69,977
Prepaid expenses and other current assets ....................................... 9,332 5,853
--------- ---------
Total current assets .................................................... 181,940 166,043
Property and equipment:
Land and buildings .............................................................. 3,801 3,801
Equipment, furniture and fixtures ............................................... 47,642 43,989
--------- ---------
51,443 47,790
Less - Accumulated depreciation ................................................. (22,854) (19,987)
--------- ---------
Property and equipment, net ..................................................... 28,589 27,803
Other assets:
Goodwill, net of accumulated amortization of $5,208 and $4,078 at April 30,
2000 and October 31, 1999, respectively .................................... 40,485 41,222
Networks under construction ..................................................... 39,848 1,831
Investment in Kanas ............................................................. -- 12,159
Other non-current assets ........................................................ 12,989 12,975
--------- ---------
Total other assets ..................................................... 93,322 68,187
--------- ---------
Total assets .................................................................... $ 303,851 $ 262,033
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt ............................................... $ 41,043 $ 35,754
Accounts payable and accrued liabilities including retainage of $18,737
and $11,618 at April 30, 2000 and October 31, 1999, respectively .......... 117,120 66,617
Accruals for incurred job costs ................................................. 49,444 45,593
Advance from WorldCom ........................................................... 32,000 --
Reserves for losses on uncompleted contracts .................................... 30,605 8,620
Billings in excess of costs and profits on uncompleted contracts ................ 9,387 6,478
Notes payable to shareholders and employees ..................................... 607 --
Stock appreciation rights payable ............................................... -- 3,710
--------- ---------
Total current liabilities ............................................... 280,206 166,772
Long-term debt, non-current portion ............................................. 732 30,618
Advance from WorldCom ........................................................... -- 32,000
Property tax payable, non-current portion ....................................... 16,661 15,468
Long-term deferred revenues ..................................................... 11,073 --
Other non-current liabilities and minority interest ............................. 301 422
--------- ---------
Total liabilities ...................................................... 308,973 245,280
Commitments and contingencies
Series B Preferred Stock, $.10 par value; stated at aggregate accumulated
redemption value at October 31, 1999; 779 shares issued and outstanding at
October 31, 1999 ................................................................ -- 16,322
Series C Preferred Stock, $.10 par value; aggregate liquidation value of $15,000
plus accumulated dividends of $208; 5,000 shares issued and outstanding at
April 30, 2000 .................................................................. 13,665 --
Common securities subject to mandatory redemption:
Common stock (801,787 shares at April 30, 2000) .................................. 4.911 --
Series B Preferred Stock Exchange Warrants ....................................... 1,213 --
Series C Preferred Stock Warrants ................................................ 784 --
--------- ---------
Total temporary equity ................................................. 20,573 16,322
--------- ---------
Shareholders' Equity (Deficit):
Common stock, $.001 par value, authorized 25,000,000 shares; 15,206,428 and
11,891,338 shares issued and outstanding, respectively ........................ 15 12
Additional paid-in capital ...................................................... 69,303 38,290
Senior Note Warrants ............................................................ 1,244 1,244
Series B Preferred Stock Warrants ............................................... 2,735 2,735
Warrants issued to financial advisor ............................................ 313 --
WorldCom Phantom Stock .......................................................... 606 606
Retained deficit ................................................................ (99,911) (42,456)
--------- ---------
Total shareholders' equity (deficit) ................................... (25,695) 431
========= =========
Total liabilities and shareholders' equity (deficit) ............................ $ 303,851 $ 262,033
========= =========
</TABLE>
(1) The balance sheet at October 31, 1999 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.
F-2
<PAGE> 68
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended April 30 Ended April 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Restated)(1) (Restated)(1)
<S> <C> <C> <C> <C>
Revenue:
Construction and maintenance ........................... $ 131,826 $ 88,008 $ 238,741 $ 181,088
Conduit sale ........................................... -- 35,721 -- 35,721
------------ ------------ ------------ ------------
Total revenue .......................................... 131,826 123,729 238,741 216,809
Costs and expenses:
Construction and maintenance ........................... 144,641 77,560 247,167 155,656
Costs of conduit sale .................................. -- 34,673 -- 34,673
General and administrative expense ..................... 17,642 8,681 29,609 18,367
Impairment of intangible assets ........................ -- 2,465 -- 2,465
Depreciation and amortization expense .................. 2,825 3,207 5,633 5,984
------------ ------------ ------------ ------------
Total costs and expenses ............................... 165,108 126,586 282,409 217,145
------------ ------------ ------------ ------------
Loss from operations ............................................... (33,282) (2,857) (43,668) (336)
Other income (expense):
Interest expense ....................................... (1,516) (2,210) (3,965) (4,688)
Change in value of stock appreciation rights ........... -- 7,230 3,710 1,896
Equity in losses/impairment of investment in Kanas ..... (11,875) -- (12,184) --
Other .................................................. 44 (551) 368 (554)
------------ ------------ ------------ ------------
Total other income (expense) ........................... (13,347) 4,469 (12,071) (3,346)
------------ ------------ ------------ ------------
Income (loss) before income taxes, minority interest
and extraordinary item ........................................... (46,629) 1,612 (55,739) (3,682)
Provision for (benefit from) income taxes .......................... (296) 15 -- (35)
------------ ------------ ------------ ------------
Income (loss) before minority interest and
extraordinary item ............................................... (46,333) 1,597 (55,739) (3,647)
Minority interest .................................................. 122 125 50 199
------------ ------------ ------------ ------------
Income (loss) before extraordinary item ............................ (46,455) 1,472 (55,789) (3,846)
Extraordinary loss on early extinguishment of debt ................. -- (3,067) -- (3,067)
------------ ------------ ------------ ------------
Net loss ........................................................... (46,455) (1,595) (55,789) (6,913)
Increase in default redemption value of Series B Preferred Stock ... -- -- (1,404) --
Redemption of 2,785 shares of Series B Preferred Stock ............. -- (4,323) -- (4,323)
Modification of exercise price of Series B Preferred
Stock Warrants ................................................... -- (1,894) -- (1,894)
Modification of conversion price of Series B Preferred Stock ....... -- (6,430) -- (6,430)
Series C Preferred Stock dividends and accretion ................... (262) -- (262) --
Series B Preferred Stock dividends ................................. -- (64) -- (244)
------------ ------------ ------------ ------------
Loss applicable to common stock .................................... $ (46,717) $ (14,306) $ (57,455) $ (19,804)
============ ============ ============ ============
Weighted average shares outstanding:
Basic .............................................................. 15,966,215 11,717,244 14,339,220 11,709,839
Diluted ............................................................ 15,966,215 11,717,244 14,339,220 11,709,839
Loss applicable to common stock per share:
Basic:
Loss before minority interest and extraordinary item ............... (2.93) (0.96) (4.01) (1.43)
Extraordinary loss on early extinguishment of debt ................. -- (0.26) -- (0.26)
Loss applicable to common stock .................................... (2.93) (1.22) (4.01) (1.69)
Diluted:
Loss before minority interest and extraordinary item ............... (2.93) (0.96) (4.01) (1.43)
Extraordinary loss on early extinguishment of debt ................. -- (0.26) -- (0.26)
Loss applicable to common stock .................................... (2.93) (1.22) (4.01) (1.69)
</TABLE>
(1) The fiscal 1999 unaudited amounts have been adjusted from amounts
previously reported by the Company in quarterly filings with the
Securities and Exchange Commission. Refer to Note 4, "Quarterly
Financial Data."
See notes to condensed consolidated financial statements.
F-3
<PAGE> 69
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months
Ended April 30,
-----------------------
2000 1999
-------- --------
Restated (1)
<S> <C> <C>
Cash provided by (used in) operating activities ..................................... $ (3,627) $ 17,645
Cash flows from Investing Activities:
Capital expenditures, net ...................................................... (5,396) (1,646)
Cash acquired from acquisition of businesses ................................... 122 --
-------- --------
Net cash used in investing activities ...................................... (5,274) (1,646)
Cash flows from Financing Activities:
Repayments of long-term debt and other borrowings .............................. (291) (31,232)
Proceeds from the issuance of long-term debt and other borrowings .............. -- 32,163
Redemption of Series B Preferred Stock ......................................... (11,601) --
Proceeds from the issuance of preferred stock and warrants, net ................ 14,400 (92)
Proceeds from the exercise of stock options .................................... 1,102 330
Dividends paid on preferred stock .............................................. -- (244)
Other .......................................................................... 164 34
-------- --------
Net cash provided by financing activities ...................................... 3,774 959
-------- --------
Change in cash and cash equivalents ................................................. (5,127) 16,958
Cash and cash equivalents, beginning of period ...................................... 16,568 13,544
-------- --------
Cash and cash equivalents, end of period ............................................ $ 11,441 $ 30,502
======== ========
Supplemental disclosures:
Increases in goodwill resulting from acquisition of SASCO/SES .................. 392 --
Common stock issued in conjunction with the acquisition of SASCO/SES ........... 739 --
Conversion of WorldCom debt to common stock .................................... 25,544 --
Contribution of interest payable to WorldCom ................................... 3,483 --
Increase in default redemption value of Series B Preferred Stock ............... 1,404 --
Warrants issued to financial advisor for Series C Preferred Stock offering ..... 313 --
Common stock issued to redeem Series B Preferred Stock ......................... 4,911 --
Warrants issued to redeem Series B Preferred Stock ............................. 1,213 --
Valuation of stock appreciation rights ......................................... 3,710 1,896
Common stock issued or accrued in conjunction with GEC earnout provisions ...... 205 4,595
Common stock issued in exchange for note payable to director ................... -- 828
Modification of conversion price of Series B Preferred Stock ................... -- 6,430
Modification of exercise price of Series B Preferred Stock Warrants ............ -- 1,894
Compensation recognized on deferred compensation plans ......................... -- 710
</TABLE>
(1) The fiscal 1999 unaudited amounts have been adjusted from amounts
previously reported by the Company in quarterly filings with the
Securities and Exchange Commission. Refer to Note 4, "Quarterly
Financial Data."
See notes to condensed consolidated financial statements.
F-4
<PAGE> 70
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" or the
"Company"), the unaudited condensed consolidated financial statements furnished
herein include all adjustments (consisting 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 1999 Annual
Report on Form 10-K.
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, Adesta
Communications, Inc. ("Adesta"), formerly MFS Network Technologies, Inc.
All material intercompany accounts and transactions have been eliminated.
Certain items in the condensed consolidated financial statements for the three
and six months ended April 30, 1999, and as of October 31, 1999, have been
reclassified to conform with the current presentation.
2. GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The following
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
(1) The Company has negative working capital of $98.3 million and a
shareholders' deficit of $21.2 million as of April 30, 2000.
(2) The Company incurred losses from operations of $43.7 million, net
losses of $55.8 million, and losses applicable to common stock of $57.5
million during the six months ended April 30, 2000. The Company also
incurred losses from operations of $1.9 million, net losses of $18.1
million, and losses applicable to common stock of $36.8 million during
the fiscal year ended October 31, 1999.
(3) The Company has borrowed the maximum available under its existing
Credit Facility and is in default of the related covenants. The Credit
Facility lenders have the right to demand payment and the Company has
insufficient liquidity to pay such amounts, if called. The Company has
not yet been successful in obtaining alternative financing and may have
insufficient liquidity to fund its continuing operations.
(4) As discussed in Note 9, "Reserves for Losses on Uncompleted Contracts"
and Note 16, "Segment Information", reserves for losses on uncompleted
contracts at April 30, 2000, totaled $30.6 million, including a $24.4
million increase during the six months ended April 30, 2000 related
primarily to the New Jersey Consortium contract. Funding of these
expected losses will have a material adverse effect on the Company's
future liquidity.
(5) Some of the Company's construction contracts require payment of
liquidated damages if certain milestones are not achieved on schedule.
Lack of sufficient liquidity to pay vendors and subcontractors for
those contracts on a timely basis could result in delays and
significant additional obligations to the Company that are currently
not anticipated or reflected in the Company's consolidated financial
statements.
(6) As discussed in Note 11, "Contingencies," the Company is the defendant
in various legal matters that individually or in aggregate could have a
material adverse effect on the Company's financial position.
F-5
<PAGE> 71
Subsequent to April 30, 2000, a significant judgement was awarded by a
jury against the Company in favor of SIRIT Technologies, Inc.
("SIRIT"). Thereafter, the Company executed a settlement agreement with
SIRIT which is described in Note 11. Because the settlement was made
after the preparation and release of the April 30, 2000 financial
statements, the accompanying unaudited condensed consolidated financial
statements do not reflect any liability resulting from the SIRIT
litigation. Refer to Note 19, "Pro Forma Financial Information" for the
pro forma effects of the SIRIT settlement agreement.
(7) The Company has been involved in discussions with NASDAQ regarding the
Company's ability to meet certain minimum listing requirements,
including minimum net equity. Failure of the Company to meet such
requirements or present a plan approved by NASDAQ to meet such
requirements could result in delisting of the Company's common stock by
NASDAQ. As discussed in Note 12, "Preferred Stock," delisting by NASDAQ
is an event of default under certain of the Company's non-registered
securities that may require the Company to pay punitive interest and/or
redeem such securities at punitive liquidation values. The Company has
insufficient liquidity to redeem such securities if required to do so.
The accompanying condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts, including goodwill, or the amount and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent upon its
ability to (a) generate sufficient cash flow to meet its obligations on a timely
basis, (b) obtain additional financing as may be required, and (c) ultimately
sustain profitability.
In response to these conditions, Management has consummated the following over
the past 12 months:
(1) As part of the Company's ongoing efforts to align strategically the
profitable portions of its business and as a result of significant
turnover and the deterioration of underlying contracts, the Company
closed Dial Communications, Inc. ("Dial") and Able Integrated Systems,
Inc. ("AIS") during the fiscal year ended October 31, 1999, which
together used cash flows from operations of approximately $7.4 million
and $3.8 million during the fiscal years ended October 31, 1999 and
1998.
(2) As discussed in Note 10, "Debt," approximately $25.5 million of the
Company's indebtedness to WorldCom was converted to common stock of the
Company during January 2000. In addition, as also described in Notes
10, 18 and 19, in connection with the SIRIT settlement, WorldCom has
subsequently advanced an additional $5 million to the Company and
agreed to convert aggregate advances of $37.0 million to Series D
Preferred Stock.
(3) As discussed in Note 12, "Preferred Stock," approximately $6.1 million
of the accrued redemption value of the Company's Series B Preferred
Stock was paid by issuing common stock and warrants of the Company
during the quarter ended April 30, 2000. Concurrently, the remaining
Series B Preferred Stock redemption obligation of approximately $10.9
million was paid with cash funded through the issuance of $15.0 million
of Series C Preferred Stock.
(4) As discussed in Note 16, "Segment Information," the Company executed a
comprehensive amendment to the New Jersey Consortium Contracts in June
2000.
(5) As discussed in Note 11, "Contingencies," the Company has executed a
settlement agreement with SIRIT.
In addition to meeting the terms of the SIRIT settlement agreement, Management's
ongoing plans to deal with these conditions are as follows:
(1) As described in Note 18, "Subsequent Event," the Company has agreed to
merge with Bracknell Corporation. This transaction is scheduled to
close in December 2000 or early in calendar 2001.
(2) The Company is allocating its resources to meet its current contractual
commitments, particularly those commitments that could result in
contractual default and liquidated damages.
F-6
<PAGE> 72
(3) With regard to certain jobs, the Company continues to negotiate
significant change orders for out-of-scope and other work that the
Company has previously completed. Such change orders are not reflected
in the condensed consolidated financial statements.
(4) The Company continues with its efforts to raise replacement or
additional financing which include ongoing discussions with current
investors and the Credit Facility lenders.
3. REVIEW BY THE SECURITIES AND EXCHANGE COMMISSION
The Company has worked, over approximately the past year, with the staff of the
Securities and Exchange Commission ("SEC") to resolve certain issues relating to
accounting and other disclosures made by the Company in connection with the
acquisition of Adesta from WorldCom effective July 2, 1998. As a result of the
SEC's review, the following events have taken place:
(1) The Company has restated the preacquisition financial statements of
Adesta (formerly known as MFS Network Technologies, Inc. or MFSNT). The
restatement included the financial statements of MFSNT as of and for
the year ended December 31, 1997 and as of and for the period ended
July 2, 1998. See the Company's Form 8-K/A-4 that has been filed with
the SEC.
(2) The Company's 1998 Form 10-K/A-2 has been filed with the SEC to include
certain additional disclosures and to include changes required to the
"Pro Forma Financial Information" relating to the acquisition of MFSNT.
(3) The Company has also filed Forms 10-Q/A for the quarters ended January
31, 1999, April 30, 1999 and July 31, 1999. The financial statements
for the quarters were restated as disclosed in the Company's 1999 Form
10-K and certain additional disclosures in the notes to the financial
statements were added. The Company's 1999 Form 10-K/A has also been
filed to incorporate additional disclosures requested by the SEC staff.
The Company has received verbal acceptance from the SEC regarding resolution of
the accounting and disclosure issues related to the acquisition of Adesta.
However, the SEC has reserved the right to review the Company's Form 10-K/A for
1999 and the Form 10-Q for the quarter ended January 31, 2000.
The Company has also resubmitted its Notice of Annual Meeting, Proxy Statement
and Proxy (collectively the "Proxy") for the years ended October 31, 1999 and
1998 and responded to comments of the SEC Staff. As of August 31, 2000, the SEC
had not completed its review of the Proxy. As a result of the ongoing review by
the SEC, Able has not been able to hold a shareholders' meeting since April 1998
and shareholder approval of certain proposals included in the Proxy is necessary
to avoid punitive provisions relating to the Company's preferred stock as
described in Note 12, "Preferred Stock." Able expects to schedule and hold a
shareholders' meeting as soon as practicable after receiving clearance of its
Proxy from the SEC.
4. QUARTERLY FINANCIAL DATA
The quarterly unaudited amounts for the three and six months ended April 30,
1999, have been adjusted from amounts originally 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 three and six months
ended April 30, 1999, are summarized below (in thousands, except per share
data):
F-7
<PAGE> 73
<TABLE>
<CAPTION>
As Reported Adjustments Adjusted
----------- ----------- ---------
<S> <C> <C> <C>
For the Three Months Ended April 30, 1999:
Revenues $ 124,481 $ (752) $ 123,729
Operating income (loss) 536 (3,393) (2,857)
Net income (loss) 41 (1,636) (1,595)
Loss applicable to common stock (15,151) 845 (14,306)
Loss applicable to common stock per share (1.29) 0.07 (1.22)
For the Six Months Ended April 30, 1999:
Revenues $ 216,258 $ 551 $ 216,809
Operating income (loss) 5,899 (6,235) (336)
Net loss (540) (6,373) (6,913)
Loss applicable to common stock (15,912) (3,892) (19,804)
Loss applicable to common stock per share (1.35) (0.34) (1.69)
---------- ------- ---------
</TABLE>
<TABLE>
<CAPTION>
Net income (loss)
Net Income (loss) for Applicable to Common
the Months Ended Stock for the Months
April 30, 1999 Ended April 30, 1999
----------------------- -----------------------
Three Six Three Six
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Amounts previously reported $ 41 $ (540) $(15,151) $(15,912)
Adjustments:
WorldCom SAR obligation (1) 821 (1,085) 821 (1,085)
Improperly deferred costs (2) (2,382) (3,145) (2,382) (3,145)
Costs improperly charged against reserves (3) 623 491 623 491
Prior year accrual adjustment (4) -- (957) -- (957)
Equipment impairment loss (5) (1,146) (1,146) (1,146) (1,146)
Tax effects of all adjustments 807 689 807 689
Series B redemption and modification (6) -- -- 2,481 2,481
Other adjustments (7) (18) (643) (18) (643)
Long-term service contracts adjustments (8) (341) (577) (341) (577)
-------- -------- -------- --------
Total adjustments (1,636) (6,373) 845 (3,892)
-------- -------- -------- --------
Restated amounts $ (1,595) $ (6,913) $(14,306) $(19,804)
-------- -------- -------- --------
</TABLE>
(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, certain other costs were
inappropriately charged against the reserves for losses on uncompleted
contracts.
(4) A prior year consolidating adjustment to reduce accrued expenses was
inappropriately not reversed in the preparation of the 1999
consolidations.
(5) An impairment loss for certain equipment for one of the Company's
subsidiaries should have been recognized in the second quarter of
fiscal 1999.
(6) 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.
(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.
F-8
<PAGE> 74
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 Adesta 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. The Company
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. 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. 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.
5. ACQUISITIONS
SASCO/SES
On November 5, 1999, the Company acquired all of the outstanding common stock of
Southern Aluminum & Steel Corporation ("SASCO") along with Specialty Electronic
Systems, Inc. ("SES"). SASCO has operations in Birmingham, Cape Canaveral and
Atlanta and has 40 years' experience in surveillance systems, signalization,
Intelligent Transportation Systems ("ITS") and roadway lighting. It provides
expertise in design, installation, and project implementation of advanced
highway communication networks. SES is a systems/integration company in the ITS
market, having designed, fabricated, installed and integrated ITS systems in 11
states from the East Coast to Ohio and Texas.
Consideration for SASCO and SES was 75,000 shares of common stock with a value
of approximately $0.7 million. In addition to the initial consideration, the
Company has provided an earn-out provision to the prior shareholders whereby
additional consideration will be given based on certain performance
measurements. The additional consideration can be earned over a four-year
period. The Company has recorded this transaction using the purchase method of
accounting. The pro forma effect on consolidated results of operations, from the
acquisition of SASCO and SES, is not material.
The earn-out consideration for year one (ending October 31, 2000) shall be
converted into the Company's common stock by dividing the earn-out consideration
by $8. The earn-out consideration for year two through year four shall be
converted into the Company's common stock by dividing the earn-out consideration
by the 52-week average of the closing market price of the Company's common stock
for each respective year.
The consideration shall be paid in shares of the Company's common stock.
However, the cumulative shares issued (initial and earn-out) may never exceed
19.9 percent of the total Company common stock issued and outstanding. Should
the 19.9 percent threshold be reached, any additional consideration earned will
be paid in cash or promissory notes with interest calculated at a market rate,
as mutually agreed upon by the Company and the former shareholders, at the time
of payment.
As of April 30, 2000, the Company has outstanding approximately $0.6 million of
debt to former shareholders of SASCO and SES. Such amounts are reflected in the
accompanying condensed consolidated balance sheet as "Notes Payable to
Shareholders and Employees" and bear interest at 10 percent per annum.
F-9
<PAGE> 75
6. 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):
<TABLE>
<S> <C>
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)
--------
</TABLE>
The following is a summary of revenues and costs associated with the COMSAT
contracts for the periods ended April 30, 1999 (amounts in thousands):
<TABLE>
<CAPTION>
Three Six
Months Months
------ ------
<S> <C> <C>
Billings on the COMSAT contracts (1) $3,251 $5,556
Deferred revenue recognized 1,032 2,531
------ ------
4,283 8,087
Direct contract costs 2,048 5,115
------ ------
Gross margin from COMSAT contracts $2,235 $2,972
------ ------
</TABLE>
(1) Billings on the COMSAT contracts include approved change order revenues
associated with these contracts but not anticipated when GEC assumed
such contracts.
All of the COMSAT Contracts were substantially complete as of October 31, 1999.
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.
7. NETWORKS UNDER CONSTRUCTION
Networks under construction at April 30, 2000, and October 31, 1999, consisted
primarily of telecommunication infrastructure projects (the "CDOT Network") on
rights-of-way leased for 20 years, with renewal rights, from the Colorado
Department of Transportation ("CDOT"). The duct capacity varies along the CDOT
Network and is being constructed, marketed and sold or leased by Adesta under
long-term user (irrevocable rights of use) agreements. In addition to long-term
user agreements, the Company may execute fiber installation and long-term
maintenance contracts with the CDOT Network users.
As of April 30, 2000, there are three primary segments of the CDOT Network: (i)
the I-70 corridor from Denver, Colorado to Salt Lake City, Utah ("I-70 West");
(ii) I-70 corridor from Denver, Colorado to the Kansas border ("I-70 East"); and
(iii) the Denver, Colorado metro loop ("Denver Metro Loop"). The status of these
CDOT Network segments at April 30, 2000, was as follows:
F-10
<PAGE> 76
<TABLE>
<CAPTION>
Long-Term
Construction Deferred Percent Percent of Total
Costs Revenues Complete Capacity Leased
------------ --------- -------- ----------------
<S> <C> <C> <C> <C>
I-70 West $17,448 $ -- 18 --
I-70 East 4,643 3,335 99 18
Denver Metro Loop 15,037 5,901 28 50
Other 2,720 1,837 45 45
------- ------- -- --
$39,848 $11,073
------- -------
</TABLE>
Adesta and an independent telecommunications company ("the Co-owner") will
jointly own the I-70 West network. Future plans include extension of the network
to Salt Lake City, Utah. Adesta and the Co-owner will separately own one conduit
each. The other six conduits will be jointly owned by the parties. Initially,
one of the jointly-owned conduits will include fiber optic cable. Adesta and the
Co-owner will separately own 36 fibers each, 72 fibers will be jointly-owned,
and all rights to 24 fibers ("the CDOT fiber") will be transferred to CDOT as
consideration for the right-of-way along I-70. The right-of-way is for an
initial term of 20 years, with a 20-year renewal option.
Generally, Adesta and the Co-owner will share the costs of the network equally.
Adesta is accounting for this project as a "cost-sharing" agreement and the
Co-owner's share of network costs is not being recognized as revenues by Adesta.
The Co-owner has agreed to pay Adesta a percentage of the costs for constructing
the network which Adesta is recognizing as fee revenue as the construction takes
place. Fees earned of $1.8 million and $1.8 million were recognized for the
three and six months ended April 30, 2000, respectively.
Adesta and the Co-owner will jointly market the capacity of the network. Adesta
plans to enter into fiber installation agreements with users that contract for
use of the network. No installation agreements have been signed for this network
as of April 30, 2000. The accounting policies for revenues and costs applicable
to installation agreements will be based on the terms of the individual
agreements. FASB Interpretation No. 43, "Real Estate Sales" ("FIN 43"), issued
in June 1999, broadens the definition of real estate to include some or all
elements of fiber optic networks. Among other requirements, FIN 43 effectively
requires title to transfer to the user for up-front revenue recognition to be
appropriate.
Adesta and the Co-owner will jointly share the costs of maintaining the CDOT
fibers. Sharing of revenues and costs of maintenance for other users is to be
negotiated. Adesta plans to account for its share of the maintenance revenues
and costs as the revenues are earned and as the costs are incurred.
User fees received by Adesta through April 30, 2000, have been deferred.
Generally, the Company expects to recognize revenue from the user agreements
ratably over the lives of the agreements, while the cost of the CDOT network,
including the cost assigned to the capacity provided to CDOT as consideration
for the use of the rights-of-way, will be depreciated over the expected useful
life of the network. As of April 30, 2000, no revenues, except for the fees of
$1.8 million discussed above, or direct costs of construction associated with
the CDOT Network have been recognized in determining the results of operations.
The Company is not in the telephone service or data distribution business, so no
part of the networks have been viewed as the construction of productive assets
for its own use. Rather, the future sale/lease to third-party users of
telecommunication infrastructures represents a significant component of the
Company's operating plan, and the Company believes it should be reported as
such.
The Company expects to incur significant additional amounts to complete the
construction of the CDOT Networks. Failure of the Company to execute sufficient
user agreements for the CDOT Networks could have a material adverse effect on
the carrying value of the Company's investment.
8. INVESTMENT IN KANAS (HELD FOR SALE)
An equity interest in Kanas was acquired in the Adesta 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.
F-11
<PAGE> 77
Until March 2000, the Company was 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"). Adesta
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.
While Kanas provided Adesta with notice of substantial completion in December
1998, the owner of the Alyeska Network has yet to give Kanas final acceptance of
the system and significant outstanding claims exist among the parties. Reserves
were provided in purchase accounting for estimated amounts payable by the
Company to complete the project and to settle outstanding claims against Adesta.
While Adesta had outstanding claims of at least $15.8 million against Alyeska
for work it believed was outside the scope of the contract, no accounting
recognition was given to these claims because of the uncertainty of resolution
favorable to the Company.
Kanas owns and is responsible for maintaining the Alyeska Network. Kanas
contracted with Adesta to operate and maintain the Alyeska Network for 15 years,
beginning in December 1998. Through April 30, 2000, service contract revenues
were insufficient to cover related costs. In March 2000, the service contract
was terminated and the Company was released from further responsibilities and
obligations related to that arrangement.
At the date of the acquisition of Adesta, 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.
However, the timing of any sale of this interest by the Company became
uncertain. Consequently, effective one year from the date of acquisition, the
Company began to apply equity method accounting to this investment based on the
guidance of EITF Issue 90-06, "Accounting for Certain Events Not Addressed in
EITF 87-11 Relating to an Acquired Operating Unit to be Sold."
Through January 31, 2000, the Company recorded equity in losses of Kanas and
amortized the difference between the carrying value of the Kanas investment and
its equity in the net assets of Kanas over 19 years which was the remaining
goodwill life related to the acquisition of Adesta. The amount of loss the
Company recorded during the six months ended April 30, 2000, against the
carrying value of the asset was approximately $0.2 million, while the associated
amortization of the difference in carrying value was approximately $0.2 million.
WorldCom was and continues to be the guarantor of the payment obligations of
Kanas under its credit agreement. In conjunction with the acquisition of Adesta,
the Company agreed to indemnify WorldCom under its guarantee. The debt under the
Kanas credit agreement at October 31, 1999 was approximately $87.5 million which
was payable in full on September 15, 2000.
The Company learned on February 25, 2000 that, on February 24, 2000, Alyeska
declared Kanas to be in default under the terms of their contract. Alyeska
asserted that Kanas did not have the right to cure the default and notified
Kanas that the contract was terminated. Adesta did not receive any notice of
default from Kanas nor did it receive any request regarding the indemnification
agreement with WorldCom.
During March 2000, Kanas sold newly-issued shares to WorldCom that reduced the
25% equity interest of Adesta and each of the three other original shareholders
of Kanas to 5%. The equity infusion resulted in an implied value of the
Company's residual 5% interest in Kanas of less than $100,000.
During May 2000, Kanas and Adesta executed an agreement that provides the
following:
(1) Adesta remains liable for any and all claims that Kanas or third
parties (including, without limitation, Alyeska and subcontractors) may
have against Adesta arising out of the services performed by Adesta for
Kanas.
(2) As consideration for Adesta's transfer of assets provided in item (3)
below, Adesta has no payment obligation in respect of damages, loss,
liability or expense, exclusive of the fees and expenses of Adesta's
own attorneys and
F-12
<PAGE> 78
other professional fees (collectively the "Losses") arising from
alleged defects in the Alyeska Network, unless and until the aggregate
amount of such Losses incurred by Kanas exceeds $18.0 million.
(3) As consideration for Kanas' release of Adesta in accordance with item
(2) above, Adesta (i) transferred to Kanas its rights to $15.8 million
of claims against Aleyska; and (ii) transferred inventory and equipment
with a book value of approximately $0.3 million to Kanas.
(4) As additional consideration, the Company was released from its
indemnification related to WorldCom's guarantee of the Kanas credit
facility and WorldCom forgave $3.5 million of accrued interest due on
the WorldCom Note (see Note 10, "Debt"). Because of WorldCom's
ownership interest in the Company, the forgiveness of interest was
credited to equity as a contribution to capital.
As a result of the events described above, during the three months ended April
30, 2000, the Company (i) recognized an impairment of its interest in Kanas of
approximately $11.9 million, equal to its carrying amount; (ii) recorded a loss
of $0.3 million related to the transfer of inventory and equipment and (iii)
wrote-off approximately $0.4 million of receivables from Kanas that will not be
collected.
9. RESERVES FOR LOSSES ON UNCOMPLETED CONTRACTS
The following is a summary of the reserves for losses on uncompleted contracts
(amounts in thousands):
<TABLE>
<CAPTION>
Network Services Group Transportation Services Group Total
----------------------- ----------------------------- -----------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of fiscal
year $ 5,703 $ 8,029 $ 2,917 $ 17,361 $ 8,620 $ 25,390
Additions (1) 141 -- 4,744 -- 4,885 --
Amount utilized (393) (1,231) (961) (6,068) (1,354) (7,299)
-------- -------- -------- -------- -------- --------
Balance, January 31 5,451 6,798 6,700 11,293 12,151 18,091
Additions (1) 627 -- 18,885 1,858 19,512 1,858
Amount utilized (53) (1,250) (1,005) (1,044) (1,058) (2,294)
-------- -------- -------- -------- -------- --------
Balance, April 30 $ 6,025 $ 5,548 $ 24,580 $ 12,107 $ 30,605 $ 17,655
-------- -------- -------- -------- -------- --------
</TABLE>
(1) Additions during the three and six months ended April 30, 2000, related
primarily to the New Jersey Consortium Contracts. Additions and amounts
utilized exclude previously unprojected losses incurred during each
period (refer to Note 16, "Segment Information").
10. DEBT
CREDIT FACILITY
On June 11, 1998, the Company obtained a $35.0 million three-year senior secured
revolving credit facility ("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 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
Credit Facility contains certain financial covenants that require, among other
conditions, that the Company maintain certain minimum ratios, minimum fixed
charge coverage, and interest coverage, as well as limitations on total debt and
dividends to shareholders. The 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 Credit Facility was amended to include (i)
the Company's acquisition of Adesta 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.
F-13
<PAGE> 79
At April 30, 2000 and October 31, 1999, the Company is in default of certain
provisions of the Credit Facility. As such, the Credit Facility is immediately
callable by the holder and is therefore classified as a current liability in the
accompanying consolidated balance sheets. During the default period, the Company
is required to pay a default penalty of two percent per annum over the contract
rate on all outstanding balances and is required to make interest payments
monthly.
WORLDCOM NOTE
On January 11, 2000, the Company entered into an agreement with WorldCom whereby
WorldCom converted approximately $25.5 million of its $30.0 million WorldCom
Note into 3,050,000 shares of the Company's Common Stock. The conversion was
based on the January 8, 2000 closing price of the Company's Common Stock at
$8.375 per share. The remainder of the original WorldCom Note, approximately
$4.5 million, was converted into an amended and restated 11.5 percent
subordinated promissory note due February 2001. As described in Note 8,
"Investment in Kanas (Held for Sale),' and Note 10, "Debt," WorldCom agreed in
May 2000 to forgive approximately $3.5 million of accrued interest on the
WorldCom Note, which was recorded by the Company as a credit to paid in capital.
Subsequent to April 30, 2000, WorldCom has agreed to extend the terms of the
$4.5 million promissory note to a seven-year, 8 percent note. As amended, this
note is subordinate to the Credit Facility, will expire in 2007 and is not
prepayable.
WORLDCOM ADVANCE
In February 1999, WorldCom advanced the Company $32 million ("WorldCom Advance")
as an advance against amounts otherwise payable by WorldCom under the WorldCom
Master Services Agreement. The WorldCom Advance is subordinate to the Credit
Facility, bears no interest, and includes a stated repayment date of November
30, 2000. However, payments under the WorldCom Advance were further subordinated
to liabilities associated with certain construction projects that are now
expected to be completed in March 2001. Consequently, the implied maturity date
is currently March 2001 and the WorldCom Advance is presented in the
accompanying balance sheet as of April 30, 2000 as a current liability.
Subsequent to April 30, 2000, WorldCom advanced the Company an additional $5.0
million to pay the cash portion of the SIRIT Settlement (refer to
Note 11, "Contingencies").
Effective August 23, 2000, in exchange for the $37.0 million in advances,
WorldCom was issued 1,000 shares of $.10 par value Series D Convertible
Preferred Stock ("Series D Stock"). The Series D Stock is entitled to dividends
at 6% per annum based on the Liquidation Price of $37,000 per share. Dividends
are to be payable only if and when declared by the Board of Directors and are
not cumulative. However, dividends will nevertheless be deemed declared and
payable upon the occurrence of a Liquidation Event. A Liquidation Event is
defined as an acquisition of the Company that transfers 50% or more of the
Company's voting power, or the sale of substantially all of the Company's
assets. The Series D Stock is convertible to common stock at an initial
conversion price of $10.01 per share. However, the conversion price is subject
to adjustment if new securities (i.e., other than those outstanding at August
23, 2000, and employee options) are issued at an effective price less than the
conversion price. In particular, in the event of a Liquidation Event (such as
the proposed sale to Bracknell described in Note 18), the conversion price will
automatically be reset to the price per share received in such transaction by
holders of the Company's common stock.
The pro forma effects of this subsequent event are presented in Note 19, "Pro
Forma Financial Information."
OTHER DEBT
The following is a summary of other debt as of April 30, 2000 (in thousands):
<TABLE>
<S> <C>
Revolving line of credit; aggregate commitment amount of $1.3 million; priced at 1 percent above
the bank's floating prime rate; secured by the assets of SASCO and guaranteed by the former
shareholders of SASCO $ 1,000
Revolving line of credit; aggregate commitment amount of $0.5 million; priced at
1 percent above the bank's floating prime rate; secured by the assets of
SES and guaranteed by SASCO
459
Other term debt 256
-------
Total SASCO and SES debt 1,715
Credit Facility 35,000
Remaining balance of WorldCom Note 4,456
Capital lease obligations 604
-------
41,775
Less current portion 41,043
-------
Long-term debt $ 732
-------
</TABLE>
F-14
<PAGE> 80
11. CONTINGENCIES
LITIGATION
SIRIT TECHNOLOGIES, INC. VERSUS ABLE TELCOM HOLDING CORP. AND THOMAS M. DAVIDSON
- In 1998, SIRIT filed a lawsuit in the United States District Court for the
Southern District of Florida, against the Company and Thomas M. Davidson (a
former director of the Company). SIRIT asserted claims against the Company for
tortuous interference, fraudulent inducement, negligent misrepresentation and
breach of contract in connection with the Company's agreement to purchase the
shares of Adesta and seeks injunctive relief and compensatory damages in excess
of $100.0 million. The Company agreed to indemnify Thomas M. Davidson related to
any loss suffered by him in this matter.
On May 16, 2000, a jury awarded SIRIT the amount of $1.2 million in compensatory
damages. In addition, punitive damages were assessed against Able in the amount
of $30.0 million and $1.3 million against Thomas M. Davidson. The Company
submitted a "motion for remittitur and judgement as a matter of law" to the
court and planned to appeal the judgement, if not altered or amended by the
court as requested in the remittitur. Among other things, the motion asserted
that Sirit failed to prove essential elements of its claims and further, that
Florida law limits punitive damages to three times compensatory damages. On the
same date, Sirit moved for a new trial on the issue of compensatory damages. The
court scheduled June 19, 2000, for hearing the post-trial motions and stayed
execution of the judgement through June 20, 2000.
The accompanying unaudited condensed consolidated financial statements as of
April 30, 2000 do not reflect any liability from this litigation. In spite of
the SIRIT jury verdict, the Company believed there were significant
uncertainties and insufficient information regarding the ultimate outcome of the
SIRIT litigation, and therefore, the SIRIT liability, if any, was not reasonably
estimable prior to the filing date (June 19, 2000) of the Company's Form 10-Q
for the quarterly period ended April 30, 2000.
SIRIT SETTLEMENT - It was subsequently concluded that settlement of the SIRIT
litigation was necessary in order for the Company to move forward with financing
alternatives under consideration. As a result, on July 7, 2000, the Company
executed a settlement with SIRIT (the "SIRIT Settlement"). The terms of the
SIRIT Settlement generally provide for the following:
1. Cash Settlement - Able paid SIRIT $5.0 million cash as consideration
for entering into the Settlement. Mr. Davidson also paid SIRIT $650,000
cash and he will not be reimbursed by the Company.
2. Equity Settlement - Able also agreed to issue to SIRIT common shares
equal to 19.99 percent of the outstanding shares of Able. The number of
shares to be issued totals approximately 4,074,597 (subject to certain
anti-dilution provisions), subject to shareholder approval and
registration rights. The value of 4,074,597 common shares of the
Company, based upon the closing market price on July 7, 2000, was $12.2
million.
In addition, SIRIT is entitled to receive, for no additional
consideration, 936,914 additional common shares upon conversion of the
outstanding Series C Preferred Stock to common. The Series C has a face
value of $15 million and, as adjusted by the Settlement Agreement, is
convertible to common at $4.00 per share. Upon conversion of the Series
C Stock to 3,750,000 shares of common stock, SIRIT would receive the
additional shares to maintain its 19.99% interest, subject to the
impact (if any) of the shares issued pursuant to the following
paragraph.
SIRIT was also granted anti-dilution rights for a two-year period
commencing when the initial 19.99 percent of outstanding shares have
been issued, which issuance cannot occur unless and until shareholder
approval is obtained. Upon any issuance of common shares at a price
less than $10.00 per share during the two-year period, SIRIT would have
the right to buy additional shares of the Company's common stock. The
number of shares SIRIT could buy would be sufficient to maintain its
percentage interest immediately before each such issuance and at the
same price per share received by the Company upon such issuance. SIRIT
would have 30 days from each such issuance to exercise this right.
3. Cash in Lieu of Equity. In the event Able fails to deliver SIRIT
registered common stock by November 30,
F-15
<PAGE> 81
2000 in accordance with paragraph 2, SIRIT can execute a $20.0 million
consent judgement against Able (i.e. demand a cash payment of $20.0
million). The consent judgement was also executed on July 7, 2000.
The Company expects to record, during the quarterly period ended July 31, 2000,
a charge of $25.0 million related to the SIRIT Settlement. This will consist of
the $5 million of cash paid and a liability for $20.0 million equal to the
consent judgment. If and when the conditions for issuance of equity securities
to SIRIT is satisfied, the Company will record those securities in equity at
their then fair value. Any difference between the aggregate fair value of the
shares issued and the $20 million liability will be recognized as an adjustment
to the original charge for the litigation settlement. The anti-dilution rights
may result in further contingent charges to earnings to the extent of any
intrinsic value to SIRIT, if and when such rights occur and are exercised by
SIRIT.
The pro forma effects of this subsequent event are presented in Note 19, "Pro
Forma Financial Information."
SHIPPING FINANCIAL SERVICES CORP. VERSUS ABLE TELCOM HOLDING CORP. AND CERTAIN
COMPANY OFFICERS - In 1998, Shipping Financial Services Corp. ("SFSC") filed a
lawsuit in the United States District Court for the Southern District of Florida
against the Company, and certain of its officers. SFSC asserts claims under the
federal securities laws against the Company and four of its officers that the
defendants allegedly caused the Company to falsely represent and mislead the
public with respect to two acquisitions, COMSAT and Adesta, and the ongoing
financial condition of the Company as a result of the acquisitions and the
related financing of those acquisitions. SFSC seeks certification as a class
action on behalf of itself and all others similarly situated and seeks
unspecified damages and attorneys' fees. The class period for the SFSC lawsuit
is all persons who purchased the Company's common stock between December 4, 1997
and December 1, 1999.
BAYPORT PIPELINE, INC. VERSUS ADESTA COMMUNICATIONS, INC. - In 1997, Bayport
Pipeline, Inc. ("Bayport") filed a lawsuit against Adesta seeking a declaratory
judgment concerning the rights and obligations of Bayport and Adesta under a
Subcontract Agreement that was entered into on May 1, 1997 related to the NYSTA
contract. The matter was referred to arbitration in January 1999. The total
amount sought was not less than $5.5 million and subsequent to October 31, 1999,
was increased to $19 million.
On February 24, 2000, the independent arbitrator ruled that Adesta owed Bayport
$4.1 million, which is consistent with amounts previously accrued by the
Company. The Company has appealed the award in Federal District Court (Northern
District of Texas) and is subject to statutory interest from the date of the
award in the event the award is not overturned.
U.S. PUBLIC TECHNOLOGIES, INC. VERSUS ADESTA COMMUNICATIONS, INC. - In 1997,
U.S. Public Technologies, Inc. ("USPT") filed a lawsuit in the United States
District Court for the Southern District of California, (San Diego), against
Adesta for breach of contract, breach of an alleged implied covenant of good
faith and fair dealing, tortuous interference, violation of the California
Unfair Competition Act, promissory estoppel and unjust enrichment in connection
with a Teaming Agreement between Adesta and USPT concerning the Consortium
Regional Electronic Toll Collection Implementation Program in the state of New
Jersey. In this lawsuit, USPT seeks actual damages in excess of $8.5 million and
unspecified exemplary damages. On April 4, 2000, the magistrate judge extended
the discovery deadline until May 31, 2000, set July 14, 2000, as the deadline
for Adesta to file its expert report, and set the pretrial for October 2, 2000.
NEWBERRY ALASKA, INC. VERSUS ADESTA COMMUNICATIONS, INC. - In 1999, Newberry
Alaska, Inc. ("Newberry") filed a demand for arbitration seeking approximately
$3.8 million. This dispute arises out of Newberry's subcontract with Adesta
related to the fiber optic network constructed by Adesta for Kanas. Newberry's
claims are for the balance of the subcontract, including retainage and disputed
claims for extras based on alleged deficiencies in the plans and specifications
and various other alleged constructive change orders. In June 2000, the
arbitrator awarded Newberry $2.7 million plus fees of approximately $0.3 million
and interest on the award of 8 percent until payment to Newberry is made.
Interest on the award through June 2000, totals approximately $0.3 million. The
Company is challenging the arbitrators award in Federal District Court (Alaska)
and intends to appeal the ruling, if necessary. The amount of the award, fees
and interest is not materially different than amounts previously accrued by the
Company.
F-16
<PAGE> 82
ALPHATECH, INC. VERSUS ADESTA COMMUNICATIONS, INC. AND ADESTA TRANSPORTATION,
INC. - In 1998, Alphatech, Inc. ("Alphatech") filed a lawsuit in the U.S.
District Court in Massachusetts. This suit alleges ten counts, including breach
of Teaming Agreements on the E-470 project and the New Jersey Regional
Consortium project, breach of implied duty of good faith and fair dealing on
both projects, misappropriation of trade secrets, deceit, violation of
Massachusetts General Laws Chapter 93A, promissory estoppel, quantum meruit, and
unjust enrichment. Alphatech's claim is for $15 million. A hearing for a summary
judgment is scheduled in the summer of 2000.
T.A.M.E. CONSTRUCTION, INC. VERSUS GEORGIA ELECTRIC COMPANY - In 1998, T.A.M.E.
Construction, Inc. ("TAME") sued for breach of contract, promissory estoppel,
discrimination and defamation related to certain contracts performed by GEC.
TAME alleges that it was wrongfully terminated as a subcontractor. TAME claims
contract damages in the amount of $250,000, punitive damages for discrimination
of $1,000,000 and defamation damages of an additional $1,000,000. GEC has moved
for summary judgment. This matter is not set for trial.
AMERICAN TRAFFIC SYSTEMS, INC. VERSUS ADESTA COMMUNICATIONS, INC. - Subsequent
to April 30, 2000 (on July 10, 2000), an independent arbitrator awarded against
Adesta in the amount of $1.5 million related to a dispute between Adesta and
American Traffic Systems, Inc. ("ATS"). The dispute arose out of a subcontract
agreement between Adesta and ATS for development of the violations processing
software for the New Jersey Consortium Contracts (refer to Note 16, "Segment
Information"). Because of what it considered to be ATS' ongoing failures to
deliver software within contractual guidelines, Adesta terminated the
subcontract in February 1999. Arbitration between the parties thereafter ensued
resulting in the aforementioned award. The accompanying unaudited condensed
consolidated financial statements do not reflect any liability that may result
from such award. The Company is currently evaluating its remedies with regard to
this award.
OTHER LITIGATION AND CLAIMS - The Company is subject to a number of shareholder
and other lawsuits and claims for various amounts that arise out of the normal
course of its business. The Company intends to vigorously defend itself in these
matters. The disposition of all pending lawsuits and claims is not determinable
and may have a material adverse effect on the Company's financial position.
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 obligations under these contracts may result in the loss of
the contracts and subject the Company to litigation and various claims,
including liquidated damages. WorldCom continues to provide performance bonds on
certain contracts acquired in the acquisition of Adesta.
12. PREFERRED STOCK
REDEMPTION OF SERIES B CONVERTIBLE PREFERRED STOCK - On February 4, 2000, the
Company reacquired and retired the remaining Series B Stock outstanding. The
Series B Stock was originally issued to and held by two groups of accredited
investors, the RoseGlen group and the Palladin group. The exchange/redemption
transaction is summarized as follows:
<TABLE>
<CAPTION>
RoseGlen Group Palladin Group Total
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of Series B Shares retired 375 404 779
Cash paid by Company (in thousands) $ 5,032 $ 5,819 $ 10,851
Common shares issued 500,000 (a) 301,787 801,787
Exchange Warrants issued 100,000 shares 100,000 shares 200,000 shares
Exercise price per share (b) $ 10.127 $ 10.127 $ 10.127
Special Exchange Warrants issued None 66,246 shares 66,246 shares
Exercise price per share (c) n/a $ .01 $ .01
</TABLE>
The exchange agreements with RoseGlen and Palladin were amended on July 7, 2000,
as indicated below, in connection with the SIRIT Settlement.
(a) The Original agreements provided that additional shares may be issuable
to the Palladin group if the average price of the Company's common
stock for the 100 trading days after February 4, 2000 (June 27, 2000)
is less than $7.79 per share. The average price was to be calculated
using the 50 low trading prices for each pair of two consecutive
trading days and was approximately $3.54. However, the average price so
calculated for this purpose may not be less than $4.00. Assuming the
$4.00 minimum price applied, the maximum additional shares issuable
would be determined as follows (total value in thousands):
<TABLE>
<CAPTION>
Shares Share Price Total Value
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares issued 301,787
Shares underlying Special Exchange Warrants 66,246
-------------------------------------------------------------------------------------------------------------
Total shares 368,033 $7.79 $2,867
-------------------------------------------------------------------------------------------------------------
Lowest average price (same total value) 716,744 $4.00 $2,867
-------------------------------------------------------------------------------------------------------------
Incremental shares issuable to Palladin group 348,711
-------------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE> 83
If the incremental shares cannot be issued because of failure to obtain
shareholder approval, the holders may require the Company to pay them
cash equal to the number of incremental shares so calculated times
$12.125 (i.e., 348,711 shares times $12.125, or $4.2 million).
In conjunction with the SIRIT Settlement (Refer to Note 11,
"Contingencies"), this provision was modified such that the Company has
agreed to issue to the Palladin group 1,057,031 incremental shares of
the Company's common stock prior to December 1, 2000; provided that the
Company's shareholders have approved such issuance. In the event the
shareholders have not approved such issuance, the Palladin group may
demand a cash payment of $4.2 million.
In conjunction with this modification, the Company expects to record a
charge to income applicable to common stock of $4.2 million during the
three months ended July 31, 2000. If and when shareholder approval is
obtained for issuance of the incremental shares, the charge will be
adjusted to the fair market value of those shares at the date of
approval. The pro forma effects of this subsequent event are presented
in Note 19, "Pro Forma Financial Information."
(b) May be exercised on a "cashless" basis. Exercisable through February 3,
2005, as extended by 1.5 days for every day between November 30, 2000
(as amended) and February 3, 2005 that a registration statement
covering the underlying shares is not effective.
(c) May be exercised on a "cashless" basis. Exercise period is for 30 days
beginning with the date the average price discussed in (a) above is
determined.
The RoseGlen group also continues to hold Initial Warrants for the purchase of
370,000 shares of common stock that were issued as part of the Series B offering
in June 1998. The exercise price of the Initial Warrants is $13.25 per share
(refer to Note 14, "Preferred Stock," to the Consolidated Financial Statements
included in the Company's Form 10-K for the year ended October 31, 1999), but
they may be exercised on a "cashless" basis. The Initial Warrants are
exercisable through June 30, 2003, as extended by 1.5 days for every day between
December 27, 1998 and June 30, 2003 that a registration statement covering the
underlying shares is not effective.
A charge to loss applicable to common stock was made for the quarter ended
January 31, 2000, determined as follows (amounts in thousands):
<TABLE>
<S> <C>
Cost to redeem the Series B Stock -
Cash paid to Series B Shareholders $ 10,851
Value of 801,787 shares of common stock issued 4,912
Black Scholes value of warrants to purchase 266,246 common shares 1,213
Fees paid to financial advisors 750
---------------------------------------------------------------------------------------------------------------------
Total cost of redemption 17,726
Accumulated default redemption value recorded through October 31, 1999 (16,322)
---------------------------------------------------------------------------------------------------------------------
Increase in default redemption value recognized during the six months ended April 30, 2000 $ 1,404
---------------------------------------------------------------------------------------------------------------------
</TABLE>
If the 500,000 common shares issued to the RoseGlen group and the 100,000 shares
issuable under their Exchange Warrants are not registered and listed with Nasdaq
by May 4, 2000, then the Company must pay the holders 3% of the aggregate market
value of those shares for each 30-day period thereafter until the shares are
listed. In conjunction with the SIRIT Settlement (refer to Note 11,
"Contingencies"), the registration date has been amended to November 30, 2000.
If the Company fails to pay any default payments when due, the holders may
require the Company to purchase their common stock and warrant shares on demand
at a price equal to 130% of the fair market value of such shares or if the
Warrants have not been exercised, reduce the then exercise price by 30%.
Further, if the registration statement is not effective by November 30, 2000 (as
amended), the exercise price of the Exchange Warrants will be reduced by 1% for
the first 30-day period after November 30, 2000, and an additional 1.5% for each
additional 30-day period thereafter until it is effective.
F-18
<PAGE> 84
THE SERIES C OFFERING - On February 4, 2000, the Company issued 5,000 shares of
Series C Convertible Preferred Stock ("Series C Stock") and warrants exercisable
for 200,000 shares of common stock ("Series C Warrants") for aggregate
consideration of $15.0 million. Approximately $10.9 million of the proceeds was
used to redeem the Series B Stock, approximately $1.0 million was used to pay
transaction costs, and the remainder was used for working capital. The net
consideration was allocated to the Series C Stock and the Series C Warrants as
follows (in thousands)
<TABLE>
<CAPTION>
Series C Stock Series C Warrants Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross proceeds $14,165 $835 $15,000
Cash paid to financial advisor (567) (33) (600)
Warrants issued to financial advisor (296) (17) (313)
-----------------------------------------------------------------------------------------------------
Net consideration $13,302 $785 $14,087
-----------------------------------------------------------------------------------------------------
</TABLE>
As described below, the Series C investors were issued additional Series C
Warrants for the purchase of 750,000 shares of common stock in connection with
the July 7, 2000 amendment.
The Series C Warrants and the financial advisor warrants were valued using a
Black Scholes model. The Series C Stock net valuation of $13.3 million will be
accreted to the initial Liquidation Value of $15 million over five years until
maturity as a charge against income available to common shareholders.
Transaction costs included $1.7 million of fees to financial advisors. These
fees consisted of $0.8 million in cash related to redemption of the Series B
Stock, $0.6 million in cash related to the Series C offering, and the fair value
of warrants for the purchase of 75,000 shares of common stock, with terms the
same or similar to the terms of the Series C Exchange Warrants, issued to the
financial advisors.
The individual holders may convert the Series C Stock to common stock at any
time. However, generally, a holder and its affiliates may own not more than
4.99% of all outstanding common shares. That limitation may be increased to
9.99% under certain circumstances. If any Series C Stock remains outstanding and
not converted to common stock by February 4, 2005, subject to extensions of 1.5
days for each day after November 30, 2000 (as amended) the registration
statement described below is not effective, then all such Series C Stock will
automatically convert to common shares at the conversion price then in effect.
Through September 30, 2000, the Series C investors had the right to purchase
additional Series C Stock for an aggregate of $15.0 million, at $3,000 per
share, having the rights, designations and preferences then in effect for the
Series C Stock. The September 30 date could have been extended if the
registration statement was not effective when required. Pursuant to the July 7,
2000 amendment, the Series C investors waived this right to purchase additional
Series C shares.
REGISTRATION RIGHTS - The Series C holders and the former Series B holders have
registration rights with respect to the following Registerable Securities:
- the shares of common stock underlying the Series C Stock and the Series
C Warrants, and
- 1,858,818 common shares and Exchange Warrants for the purchase of
266,246 common shares issued to the Series B holders for cancellation
of the remaining Series B Stock.
If a registration statement for the Registerable Securities is not effective by
November 30, 2000 the exercise period for the Series C Warrants will be extended
by 1.5 times the number of days after November 30, 2000 (as amended) that the
registration statement is not effective.
F-19
<PAGE> 85
LIQUIDATION VALUE AND CONVERSION PRICE - The Series C Shares have a preference
in liquidation equal to the Liquidation Value. The Liquidation Value is equal to
the stated value of $3,000 per share plus unpaid default interest through the
date of determination, plus any accrued dividends. Dividends are cumulative and
accrue daily at 5.9% per annum on the stated value of $3,000 per share. The
Series C shares may be converted to common stock at any time based on the
Liquidation Value divided by the conversion price then in effect. The initial
conversion price is $9.35. However, starting on August 4, 2000, and then on the
fourth day of the month at the end of each following six month period (Reset
Dates) the conversion price may be reduced to equal:
- the average closing bid price of the common stock for the ten
consecutive trading days preceding the applicable Reset Date; however,
the conversion price will never be increased from the conversion price
then in effect, and
- if any recalculation results in a conversion price of less than $4.00,
generally, the conversion price will thereafter be $4.00; the
conversion price would have been reset to the $4.00 floor on August 4,
2000; however, the July 7, 2000 amendment reduced the conversion price
to $4.00 as of that date and provided for no further reductions,
regardless of when the registration statement may be declared effective
or whether the Company may subsequently issue securities at less than
$4.00 per equivalent common share.
MANDATORY REDEMPTION - The holders of the Registerable Securities may require
the Company to redeem their shares in the event of a Triggering Event or a Major
Transaction. A Triggering Event will have occurred upon any of the following:
- if the registration statement is not declared effective on or prior to
November 30, 2000 (as amended);
- after declared effective, if the effectiveness of the registration
statement lapses for any reason or is unavailable for more than five
consecutive days or ten days in any calendar year; and
- delisting or suspension from listing of the Company's common stock from
Nasdaq for a period of five consecutive days or for an aggregate of at
least ten days in any 365-day period.
A Major Transaction would include:
- a merger or business combination in which the voting power of the
Company's shareholders in the surviving entity or entities is
insufficient to elect a majority of the Board of Directors;
- the sale or transfer of all or substantially all of the Company's
assets; or
- a purchase, tender or exchange offer made to and accepted by the
holders of more than 30% of the Company's outstanding shares of common
stock.
The redemption price for the Series C Stock and other Registerable Securities
would be as follows:
F-20
<PAGE> 86
<TABLE>
<CAPTION>
Series C Stock Other Registerable Securities
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Triggering event Greater of 120% of Liquidation Value or the Premium Redemption Price (defined below)
Conversion Benefit
Major transaction 120% of Liquidation Value No specific provisions exist
</TABLE>
The Conversion Benefit is equal to the product of:
- the number of shares of common stock issuable on conversion, and
- the greater of the closing bid price on the trading day immediately
preceding the Triggering Event, or the closing bid price on the date
the holder requests redemption.
In addition to the right of redemption, simultaneous with or after a Triggering
Event occurs, the Company may be required to pay in cash to each holder default
interest equal to 3% of the Liquidation Value of the Series C Stock for each
subsequent 30-day period until redeemed. Such interest not paid timely will
increase the Liquidation Value of the Series C Stock.
PREMIUM REDEMPTION PRICE - If the Company fails to pay any default payment or
honor any penalty or similar amounts when due, the holders may require the
Company to purchase, within five days of demand, all or a portion of the Series
C Stock or other registerable securities they hold at the Premium Redemption
Price. That price is to be the greater of (i) 1.2 times the product of the
number of equivalent common shares to be redeemed and the conversion price, or
(ii) the Conversion Benefit.
Mandatory redemption at 120% of Liquidation Value is also provided if conversion
by a holder of any Series C Stock for common shares could result in the Company
being delisted from the Nasdaq National Market for issuing in excess of 20% of
the Company's outstanding common stock without shareholder approval. The
Company's proxy statement will include a proposal to obtain such shareholder
approval.
RESTRICTIONS IMPOSED BY THE SERIES C STOCK -- Holders of Series C Stock have no
voting rights, except as required by law. However, the Series C holders may
impose significant restrictions on certain activities of the Company.
So long as at least 20% of the Series C Stock or Warrants remain outstanding,
the Company can not declare or pay any dividends or make any distributions to
holders of common stock, or purchase or acquire for value, directly or
indirectly, any of the Company's equity securities.
Until 90 days after the registration statement has been declared effective,
neither the Company, nor any of its subsidiaries, may issue any equity
securities, except for currently outstanding convertible securities, shares
issued under the stock option plan, and other options to employees.
Further, unless agreed to by the Series C holders, prior to February 4, 2001, or
such additional time if the registration statement is not effective by November
30, 2000 (as amended), the Company may not issue or grant any convertible
securities for which the rate of conversion is not fixed, or any option, warrant
or other right to purchase Company securities for which exercise is contingent
upon, or whose price is determined with respect to, the market price of the
common stock.
SERIES C INVESTORS' RIGHT OF FIRST REFUSAL-- The Company agreed not to sell or
issue any securities, other than in connection with an employee stock purchase
or similar plan or an acquisition of another company, unless first offered to
the Series C investors. This right does not apply to (i) transactions between
the Company and WorldCom, and certain pre-existing investment discussions, (ii)
strategic investments in the Company or in any of its subsidiaries by an
industry joint venture partner, industry supplier, or one or more of their
customers, or (iii) a public or private secondary offering for net proceeds of
at least $20.0 million.
F-21
<PAGE> 87
THE SERIES C WARRANTS -- The Series C Warrants are exercisable through February
3, 2005, subject to extension of 1.5 days for every day after November 30, 2000
(as amended) the registration statement is not effective. However,
exercisability is limited if any holder and its affiliates would own more than
4.99% of the outstanding shares of Common Stock. However, that restriction may
be waived by the holder up to 9.99%.
The exercise price is initially $10.75 per share. The exercise price and number
of common shares issuable upon exercise of the Series C Warrants are subject to
proportional adjustments in the event of stock splits, stock dividends, and
similar transactions that would effect the holders' proportionate interest in
the Company. In addition, except for previously existing securities, if at any
time prior to February 4, 2001, the Company issues common stock or convertible
securities at a purchase or conversion price per share less than the greater of
(i) the exercise price or, (ii) the fair market value of the common stock at the
time, then the exercise price will be reduced concurrently by applying a
prescribed formula intended to compensate the holders for the dilution resulting
from such issuance.
WARRANTS ISSUED IN CONJUNCTION WITH SIRIT SETTLEMENT - In conjunction with the
SIRIT Settlement (refer to Note 11, "Contingencies"), the Company agreed,
subject to shareholder approval, to issue the holders of the Series C Stock
additional warrants to purchase 375,000 shares of the Company's common stock at
$6.00 per share and to purchase 375,000 shares of common stock at $8.00 per
share, exercisable through July 7, 2002. During the quarter ended July 31, 2000,
the Company expects to record a charge to income applicable to common stock of
approximately $0.7 million, representing the Black Scholes value of these
warrants as of July 7, 2000. The pro forma effects of this subsequent event are
presented in Note 19, "Pro Forma Financial Information."
FUTURE PRICED SECURITIES -- The Series C Stock and the Series C Warrants are
"future-priced securities" in that the total number of common shares actually
issuable cannot be presently determined because the conversion rate and the
exercise price are subject to change, depending on whether certain future events
do or do not occur. It is possible that the Series C securities could result in
issuance of more than 20% of the outstanding common shares to the Series C
investors, at less than market value, which would require shareholder approval
in accordance with Rule 4460(i)(1)(C) of the NASD. Consequently, the Company
will submit a proposal to its shareholders to request such approval.
If Shareholder approval is not obtained, the Company believes that the holders
of the Series C securities may be entitled to require the Company to redeem all
of the shares of the Series C Stock for an aggregate redemption price of at
least $18.3 million as of April 30, 2000. Such amount will increase at the rate
of 120 percent of dividends and default interest, if any, that accumulate with
respect to the Series C Stock. The Company may also be required to redeem
approximately 1,859,000 common shares or more, and warrants for the purchase of
approximately 466,000 shares, that may be held by the RoseGlenn and Palladin
groups for amounts not presently determinable. Payment of any redemption amounts
would materially and adversely affect the Company's liquidity because of the
short time frame to pay for such redemption (five business days upon a
Triggering Event).
In addition, depending on the number of shares of Series C Stock to be redeemed,
such redemption could severely diminish the Company's existing cash, working
capital and availability under a credit facility. Payment upon demand for
redemption would also result in default of one or more of the Company's other
obligations, including its obligations to senior lenders under the Credit
Facility. Such defaults would have a material adverse impact on the Company's
business, financial condition, results of operations and cash flow.
Shareholder approval, however, would not negate other Triggering Events,
including the obligation to have the registration statement declared effective
by November 30, 2000 (as amended). Even if shareholder approval is obtained, the
Company could still be in default of other obligations described above,
resulting in additional monetary penalties as well as redemption of the
Registerable Securities at the Premium Redemption Price.
CLASSIFICATION OF COMMON SECURITIES WITH MANDATORY REDEMPTION PROVISIONS - As
discussed above, certain common securities issued in conjunction with the
February 4, 2000, Series B Stock redemption and Series C Stock issuance are
subject to mandatory redemption provisions if certain future contingent events
occur. Those securities include the 801,787 common shares and the 266,646
Palladin exchange warrants issued in conjunction with the Series B Stock
redemption and the 200,000 warrants issued in conjunction with the Series C
Stock offering.
13. SHAREHOLDERS' EQUITY
The following is a summary of the activity in shareholders' equity (deficit)
during the six months ended April 30, 2000 (in thousands):
F-22
<PAGE> 88
<TABLE>
<CAPTION>
Series B Warrants
Additional Senior Preferred Issued to WorldCom
Common Paid-in Note Stock Financial Phantom Retained
Stock Capital Warrants Warrants Advisor Stock Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1999 $ 12 $38,290 $1,244 $2,735 $ -- $ 606 $(42,456) $ 431
Issuance of common stock for
acquisition of SASCO -- 739 -- -- -- -- -- 739
Conversion of WorldCom Debt 3 25,541 -- -- -- -- -- 25,544
Increase in default redemption value of
Series B Preferred Stock -- -- -- -- -- -- (1,404) (1,404)
Redemption of Series B Preferred Stock -- 2,532 -- -- -- -- -- 4,911
Issuance of Series B Preferred Warrants -- -- -- -- -- -- -- --
Issuance of Series C Preferred Warrants -- -- -- -- 313 -- -- 313
Contribution of interest payable from
WorldCom -- 3,483 -- -- -- -- -- 3,483
Exercise of stock options and other -- 1,250 -- -- -- -- -- 1,250
Accretion and dividends on Series C
Preferred Stock -- -- -- -- -- -- (262) (262)
Net loss -- -- -- -- -- -- (55,789) (55,789)
------------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 2000 $ 15 $71,835 $1,244 $2,735 $ 313 $ 606 $(99,911) $(23,163)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The difference between the Company's weighted basic average shares outstanding
and diluted shares outstanding is due to the dilutive effect of stock options
and convertible securities. There are no significant differences in the
numerators for the Company's computations of basic and diluted earnings per
share for any period presented. The effect of securities that could dilute basic
earnings per share would be antidilutive for all periods presented. The Company
has potentially dilutive securities that could have a dilutive effect in the
future. Those securities and their potentially dilutive effects are as follows
(dilutive shares in thousands):
<TABLE>
<CAPTION>
Potentially
Dilutive Average
Shares Strike Price
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Potentially dilutive securities outstanding at April 30, 2000:
Series C Preferred Stock (1) 3,750 $ 4.00
WorldCom Options (subject to shareholder approval) 2,000 7.00
Employee stock options (subject to shareholder approval) (2) 2,146 6.07
Employee stock options (621,000 vested) 841 6.56
Senior Subordinated Note Warrants 410 8.25
Series B Preferred Stock Warrants 370 13.25
Additional shares that may be issuable to the Palladin group (refer to Note 12,
"Preferred Stock") 348 --
GEC Earnout (shares issued May 4, 2000) 205 --
Exchange Warrants issued to redeem Series B Preferred Stock (refer to Note 12,
"Preferred Stock") 200 10.13
Series C Preferred Stock Warrants (refer to Note 12, "Preferred Stock") 200 10.75
Warrants issued to financial advisors related to the Series C Preferred Stock
(refer to Note 12, "Preferred Stock") 75 10.75
Special Exchange Warrants issued to redeem Series B Preferred Stock Warrants 66 0.01
Series A Preferred Stock Warrants 62 9.82
Employee stock grants (subject to shareholder approval) 50 --
--------------------------------------------------------------------------------------------------------------------------------
Subtotal outstanding at April 30, 2000 10,723 5.73
--------------------------------------------------------------------------------------------------------------------------------
Potentially dilutive securities issued subsequent to April 30, 2000:
SIRIT Settlement (subject to shareholder approval) (refer to Note 11,
"Contingencies")(3) 5,012 --
Series D Preferred Stock(4) 3,696 10.01
Increase in additional shares issuable to the Palladin group (subject to shareholder
approval) (refer to Note 12, "Preferred Stock") 709 --
Additional Series C Warrants (subject to shareholder approval) 750 7.00
Employee stock options (subject to shareholder approval)(5) 250 2.54
Stock offered to settle litigation 25 --
--------------------------------------------------------------------------------------------------------------------------------
Subtotal granted subsequent to April 30, 2000 10,442 4.11
--------------------------------------------------------------------------------------------------------------------------------
Total 21,165 $ 4.93
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-23
<PAGE> 89
(1) Based on a conversion price of $4.00 (as amended).
(2) In February 2000 the Company granted options to purchase a total of
525,000 to three new employees of the Company. The options, if approved
by shareholders, will vest as follows: 125,000 as of February 1, 2000;
200,000 on February 1, 2001; and 200,000 on February 1, 2002 with the
exercise prices being $6.00, $8.50 and $9.00 respectively. These
options will expire on February 1, 2004.
(3) SIRIT is to receive 19.99% of common shares outstanding as of the date
shareholder approval is obtained, and has general anti-dilution rights
to maintain that percentage interest for a period of two years.
Consequently, the number of shares issuable to SIRIT may exceed the
number of shares shown in the table.
(4) The Series D Stock issued to WorldCom effective August 23, 2000, has a
stated conversion price of $10.01 per share. However, in the event of a
Liquidation Event (such as the proposed sale to Bracknell described in
Note 18), the conversion price will automatically be reset to the price
per share received in such transaction by holders of the Company's
common stock. For example, the closing price of the Company's common
stock on August 30, 2000, was $3.00. If common shareholders received
that amount per share in a sale transaction, the Series D Stock would
automatically convert to approximately 12.3 million shares, plus
dividends would be payable to the Series D holders at 6% per annum from
the date of issue.
(5) In May 2000, options were granted to two new employees of the Company.
The options, if approved by shareholders, will vest immediately with
exercise prices ranging from $2.44 to $2.69. These options will expire
in May 2010.
In connection with the acquisition of Adesta, the Company granted to WorldCom
rights to receive upon satisfaction of certain conditions, including shareholder
approval, phantom stock awards for up to 700,000 shares of common stock, payable
in cash, stock, or a combination of both at the Company's option.
The Company is committed to issue shares of common stock as contingent
consideration earned by the sellers of Georgia Electric Company through 2001.
Common stock issued to date as contingent consideration earned for the years
ended October 31, 1998 and 1997 was 628,398 shares and 204,448 shares,
respectively. Contingent consideration earned for the year ended October 31,
1999, amounted to $1.8 million and was accrued at October 31, 1999, in accounts
payable and accrued liabilities. Approximately 205,000 shares were issued in May
2000. The Company has made a similar commitment related to the acquisition of
SASCO and SES (refer to Note 5, "Acquisitions"). The number of shares that may
be issued as earn-out consideration under these commitments in the future is not
presently determinable.
The Company has executed an equity swap agreement with 186K.NET. Either the
Company or 186K.NET can exercise the swap at any time from July 2000 to July
2003. Upon exercise, the Company has committed to issue shares of its common
stock to 186K.NET in exchange for common shares of 186K.NET of equivalent value
at the date of exercise. The value of the shares to be issued and received is to
be determined by the lower of 10% of the increase in the fair market value of
the Company or of 186K.NET from July 1999 to the date of exercise. 186K.NET is a
privately-owned start-up company that provides data and communications
facilities consulting services.
14. FINANCIAL ADVISORY SERVICES
The Company incurred approximately $1.5 million in financial advisory fees to
two related firms, L. Dolcenea, Inc. and Platinum Advisory Services, Inc. during
the six months ended April 30, 2000. Those fees were for the following services
(in thousands):
F-24
<PAGE> 90
<TABLE>
<CAPTION>
Paid Prior to Accrued at
April 30, 2000 April 30, 2000 Total Incurred
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series B Conversion (refer to Note 12, "Preferred Stock") $ 750 $ -- $ 750
Series C Issuance (refer to Note 12, "Preferred Stock") 600 -- 600
Fair value of warrants issued related to Series C offering 313 -- 313
Compensation for settlement of past common stock warrant disputes
300 50 350
------------------------------------------------------------------------------------------------------------------------------
$1,963 $ 50 $2,013
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain of these fees were paid during the fiscal year ended October 31, 1999.
The Company may be committed to pay these advisors additional amounts related to
future transactions for which the advisors may claim compensation.
15. COMPENSATION ARRANGEMENTS
On March 31, 2000, the Board of Directors approved supplemental compensation
arrangements for six members of management in addition to the compensation
provided for in their employment agreements. Upon a change of control or the
termination of each individual's employment without cause, the aggregate minimum
amount payable to these individuals would be $4,750,000. The payments would be
based on units equivalent to shares of Company common stock. A total of 475,000
units were granted. The minimum payment is based on $10.00 per unit, but if
greater, would be based on the per share value of a change in control
transaction or the prior day closing price of the Company's common stock in the
event of termination without cause. The plan also includes 175,000 units
reserved for future executives of the Company but not yet granted. In
Conjunction with the SIRIT Settlement (Refer to Note 11, "Contingencies"), these
supplemental compensation arrangements were terminated.
EMPLOYMENT CONTRACTS -- The employment contracts of two new executives hired in
May 2000 provide for full payment of the three-year compensation without
mitigation. Salaries of these individuals were set at an aggregate amount of
$550,000 per year.
In June 2000, a new three-year employment agreement was executed with the
Company's Chief Executive Officer. The new contract provides for annual cash
compensation of $500,000, allowances of approximately $40,000 per year, and the
grant of stock options as disclosed in the Company's Proxy Statement. In the
event the CEO is terminated without cause, he will be paid out the full
remainder of his contract without any duty to mitigate.
The above contracts also authorized loans made by the Company to these three
executives in the aggregate amount of $800,000.
16. SEGMENT INFORMATION
The Company manages and analyzes the operations of the Company in four separate
groups, Network Services Group, Transportation Services Group, Construction
Group and Communications Development Group. The Company has established the
Networks Development Group, which had no significant income or expenses during
the three and six months ended April 30, 2000.
<TABLE>
<CAPTION>
For the Three Months For the Six Months Ended
Ended April 30, April 30,
----------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers:
Network Services $ 72,369 $ 86,420 $ 134,923 $ 134,942
Transportation Services 29,699 29,201 46,129 40,902
Construction 28,221 7,151 55,337 39,009
Communication Development (International) 1,537 957 2,352 1,956
----------------------------------------------------------------------------------------------------------------------------
$ 131,826 $ 123,729 $ 238,741 $ 216,809
----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Network Services $ (551) $ 7,601 $ 4,499 $ 11,277
Transportation Services (32,665) (5,915) (45,723) (4,493)
Construction 777 (2,244) (885) (2,258)
Communication Development (International) 13 13 (183) (152)
Unallocated Corporate Overhead (856) (2,312) (1,376) (4,710)
----------------------------------------------------------------------------------------------------------------------------
$ (33,282) $ (2,857) $ (43,668) $ (336)
----------------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Network Services $ 185,617 $ 151,939 $ 185,617 $ 151,939
Transportation Services 38,685 47,918 38,685 47,918
Construction 72,314 63,865 72,314 63,865
Communication Development (International) 3,270 3,468 3,270 3,468
Corporate 3,965 5,678 3,965 5,678
----------------------------------------------------------------------------------------------------------------------------
$ 303,851 $ 272,868 $ 303,851 $ 272,868
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE> 91
The Company derives a significant portion of its revenues from a few large
customers. Those customers and their revenues for the three and six months ended
April 30, 2000, are as follows:
<TABLE>
<CAPTION>
For the Months Ended April 30, 2000
-------------------------------------------------------------------------------------------------------------------------
Customer Operating Group Three Six
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WorldCom Network Services $29,506 $55,368
New Jersey Consortium Transportation and Network Services 25,716 44,294
Florida Power Corp. Construction 4,589 8,525
Cooper Tire Company Construction 3,727 7,277
</TABLE>
In conjunction with the acquisition of Adesta, the Company entered into a
five-year agreement with WorldCom to provide telecommunications infrastructure
services to WorldCom (the "WorldCom Master Services Agreement") for a minimum of
$40.0 million per year ("Annual Minimum"), provided that the aggregate sum
payable to Adesta shall be not less than $325.0 million ("Aggregate Minimum"),
including a fee of 12 percent of reimbursable costs under the agreement. On
August 24, 2000, the terms of the WorldCom Master Services Agreement was
extended through August 24, 2006. Under the modified WorldCom Master Service
Agreement, WorldCom has agreed to award Adesta a minimum volume of 75 percent of
all outside plant work related to WorldCom's local network projects but in no
event will the Annual Minimum be less than $55.0 million and the Aggregate
Minimum less than $390.0 million.
Adesta is party to multiple contracts with the New Jersey Consortium ("New
Jersey Consortium Contracts") which includes the New Jersey Turnpike Authority,
New Jersey Highway Authority, Port Authority of New York and New Jersey, South
Jersey Transportation Authority, and the State of Delaware Department of
Transportation. The New Jersey Consortium Contracts generally provide for Adesta
to (i) construct a fully integrated electronic toll collection ("ETC") system;
(ii) maintain the related Customer Service Center ("CSC") and Violations
Processing Center ("VPC") for periods of up to 10 years; and (iii) construct and
maintain a supporting fiber optic network. The estimated future gross revenues
from the New Jersey Consortium Contracts are projected to be at least $167
million, including estimated minimum revenues of $51.4 million for VPC
operations and $40.0 million for fiber network operations and maintenance
billable over the duration of the agreements.
As of October 31, 1999, the Company estimated that the electronic toll
collection (ETC) construction segment of the New Jersey Consortium Contracts
would generate total margins of approximately $2.6 million. Based upon an
estimated completion percentage of 30 percent, the Company had recorded
job-to-date margins of $0.8 million through October 31, 1999.
During the three months ended January 31, 2000, the Company determined through
its ongoing analyses of the ETC construction segment of the New Jersey
Consortium Contracts (i.e., excluding the VPC and fiber network construction and
long-term service contracts) that costs to be incurred were expected to exceed
amounts billable by approximately $7.7 million. The change from October 31,
1999, related primarily to changes in estimated costs associated with changing
design specifications and certain near-term milestones. The loss recognized in
the January quarter was approximately $8.2 million, including costs incurred in
the quarter, reversal of previously recognized profit, and a loss reserve
accrual of $4.7 million for the remaining projected loss.
During the three months ended April 30, 2000, the Company continued negotiation
of a comprehensive amendment that was executed on June 1, 2000. While the scope
of work for the remainder of the project was clarified, significant concessions
were made by the Company to arrive at resolution and estimated losses for the
construction portion of the contract were revised to $35.3 million, resulting in
a loss for the quarter of $27.6 million. The remaining loss expected to be
incurred in completing the contract and accrued at April 30, 2000 was $17.1
million.
The loss was partially attributable to vagaries in the original contract
language that made it extremely difficult for the Company to meet performance
criteria and targeted completion deadlines, resulting in penalties and costs in
excess of original estimates. In addition, the Company was forced to engage
subcontractors on a time and materials or cost-plus basis and experienced
significant overruns in an attempt to meet its contractual obligations. The June
2000 amendment reduced the scope of the contract, provided previously undefined
benchmarks, provided a revised and extended schedule for completion of the
project and resolved various claims between the parties. At the same time, the
Company negotiated a revised agreement with its primary subcontractor,
comprising the majority of remaining contract costs, from time and materials to
a fixed price. While these agreements reduced the uncertainty
F-26
<PAGE> 92
of some of the remaining costs on the project, they also eliminated the
opportunity to recover certain previously incurred costs.
The revised schedule includes several significant milestone dates. If not met,
the Consortium will have the right to terminate the contracts, including the VPC
and fiber maintenance contracts. If terminated, the Company would lose the
opportunity to earn potential future profits from these long-term service
contracts.
At April 30, 2000, the Company had billed and unbilled receivables of $26.1
million and $14.4 million, respectively, related to WorldCom and $15.1 million
and $15.8 million, respectively, related to the New Jersey Consortium.
The loss of the New Jersey Consortium, WorldCom or any other major customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.
17. FINANCING COMMITMENT
The Company previously reported in its Form 10-Q for the quarterly period ended
January 31, 2000, that on March 15, 2000, it had received financing commitments
from investors which would have allowed the Company to repay its existing Credit
Facility of $35 million through new financing of approximately $56 million. The
transaction would have provided for funding of an initial $35 million for
certain current and future Network and Right-of Way development projects.
The Company was subsequently notified that, as a result of certain unrelated
activities and the uncertainties created by the SIRIT verdict, one of the major
investors did not expect to proceed with the proposed financing.
18. SUBSEQUENT EVENT
On August 24, 2000, the Company executed an agreement to merge with Bracknell
Corporation ("Bracknell") of Toronto in a stock-for-stock transaction with a
conversion rate of .6 shares of Bracknell for each share of Able stock (the
"Bracknell Merger"). The Bracknell Merger is subject to certain conditions,
including shareholder approval and is expected to close in December 2000 or
early in calendar 2001.
19. PRO FORMA FINANCIAL INFORMATION
The pro forma effects of the SIRIT Settlement (refer to Note 11, "Contingencies"
and Note 12, "Preferred Stock") and the conversion of the WorldCom Advance to
Series D Preferred Stock on the April 30, 2000 consolidated balance sheet is
presented below:
<TABLE>
<CAPTION>
Series B&C
Modifications
Resulting
from the
As SIRIT SIRIT WorldCom Pro Forma
Reported Settlement Settlement Conversion
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $ 11,441 $ -- $ -- $ -- $ 11,441
Current Assets 181,940 -- -- -- 181,940
Total Assets 303,851 -- -- -- 303,851
Current liabilities 280,206 25,000(a) 4,228(b) (41,456)(c) 267,978
Long-term debt 732 -- -- 4,456 (c) 5,188
Total liabilities 308,973 25,000(a ) 4,228(b) (37,000)(c) 301,201
Preferred stock 13,665 -- -- 37,000 50,665
Temporary equity 20,573 -- 674 -- 21,247
Total shareholders' deficit (25,695) (25,000)(a) (4,902)(b) 37,000 (c) (18,597)
</TABLE>
F-27
<PAGE> 93
(a) Refer to Note 11, "Contingencies." Current liabilities are increased
by $5.0 million advanced to the Company by WorldCom and paid to SIRIT.
An additional current liability of $20.0 million is reflected for the
remainder of the "Consent Judgment" due SIRIT. If shareholder approval
is obtained and shares issuable to SIRIT are registered prior to
November 30, 2000, the $20.0 million liability will be satisfied by
issuing common stock to SIRIT.
(b) Refer to Note 12, "Preferred Stock." The $4.2 million represents the
maximum cash payment the Company may be required to make to the
Palladin Group if the issuance of 1,057,031 shares to them is not
approved by the shareholders and the shares are not registered by
November 30, 2000. If the required approval and registration is
achieved, the liability will be satisfied by issuing the common shares.
These pro forma disclosures do not include the effect of the additional
warrants given to the Series C Preferred Stock holders, because they
have no net effect on "Total Shareholders' Deficit." The warrants' fair
value of $674,000 will be recorded as an increase to temporary equity
(Additional Series C Warrants) and $674,000 will be an increase to
retained deficit for the charge to "Loss Applicable to Common Stock."
(c) Refer to Note 10, "Debt." In August 2000, WorldCom agreed to convert
$4.5 million of short-term notes payable to long-term debt and $37.0
million of advances to Series D Stock.
F-28
<PAGE> 94
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Able Telcom Holding Corp.:
We have audited the accompanying consolidated balance sheets of Able Telcom
Holding Corp. (a Florida Corporation) and subsidiaries as of October 31, 1999
and 1998 and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Able Telcom Holding Corp. and
subsidiaries as of October 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company incurred
significant operating losses during the fiscal year ended October 31, 1999.
Significant payments were also made, both during and subsequent to October 31,
1999, to redeem the Series B Preferred Stock and to reduce obligations for loss
contracts assumed in 1998 in the acquisition of MFS Network Technologies, Inc.
The Company has borrowed the maximum available under its existing Credit
Facility and is in default of the related covenants. The lender has the right to
demand payment and the Company has insufficient liquidity to pay such amounts,
if called. The Company has not yet been successful in obtaining alternative
financing and may have insufficient liquidity to fund its continuing operations.
Consequently, there is substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are described
in Note 3. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in the index to the consolidated financial statements is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Omaha, Nebraska
February 11, 2000
F-29
<PAGE> 95
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors of
Able Telcom Holding Corp.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Able Telcom Holding Corp. and
subsidiaries for the year ended October 31, 1997. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Able Telcom Holding Corp. and subsidiaries for the year ended
October 31, 1997, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
West Palm Beach, Florida
January 19, 1998
F-30
<PAGE> 96
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Currents Assets:
Cash and cash equivalents............................................................ $ 16,568 $ 13,544
Accounts receivable, including retainage of $16,158 and $10,182 and net of allowances
for bad debts of $3,514 and $866 at October 31, 1999 and 1998, respectively.. 73,645 64,159
Costs and profits in excess of billings on uncompleted contracts..................... 71,808 105,478
Prepaid expenses and other current assets............................................ 5,853 2,641
-------- --------
Total current assets......................................................... 167,874 185,822
Property and equipment:
Land and buildings................................................................... 3,801 4,473
Equipment, furnitures and fixtures................................................... 43,989 42,522
-------- --------
47,790 46,995
Less - Accumulated depreciation...................................................... (19,987) (14,921)
-------- --------
Property and equipment, net.......................................................... 27,803 32,074
Other assets:
Goodwill, net of accumulated amortization of $4,078 and $2,162 at
October 31, 1999 and 1998, respectively...................................... 41,222 31,374
Assets held for sale................................................................. -- 38,750
Investment in Kanas.................................................................. 12,159 --
Other non-current assets............................................................. 12,975 2,740
-------- --------
Total other assets........................................................... 66,356 72,864
-------- --------
Total assets................................................................. $262,033 $290,760
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term-debt.................................................... $ 35,754 $ 14,438
Accounts payable and accrued liabilities including retainage of $11,618 and $10,374
at October 31, 1999 and 1998, respectively................................... 66,617 61,229
Accruals for incurred job costs...................................................... 45,593 51,111
Billings in excess of costs and profits on uncompleted contracts..................... 6,478 6,328
Reserves for losses on uncompleted contracts......................................... 8,620 25,390
Notes payable shareholders/directors................................................. -- 1,182
Stock appreciation rights payable.................................................... 3,710 --
-------- --------
Total current liabilities.................................................... 166,772 159,678
Long-term debt, non-current portion.................................................. 30,618 61,685
Advance from WorldCom................................................................ 32,000 --
Property tax payable, non-current portion............................................ 15,468 15,118
Other non-current liabilities and minority interest.................................. 422 2,737
-------- --------
Total liabilities.................................................................... 245,280 239,218
Commitments and contingencies.................................................................
Series B Preferred Stock, $.10 par value; stated at aggregate accumulated redemption value at
October 31, 1999; 4,000 shares authorized;
779 and 3,564 shares issued and outstanding.......................................... 16,322 11,325
-------- --------
Shareholders' Equity:
Common stock, $.001 par value, authorized 25,000,000 shares; 11,891,338 and
11,065,670 shares issued and outstanding, respectively............................. 12 11
Additional paid-in capital........................................................... 38,290 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 deficit..................................................................... (42,456) (5,698)
-------- --------
Total shareholders' equity........................................................... 431 40,217
-------- --------
Total liabilities and shareholders' equity........................................... $262,033 $290,760
======== ========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE> 97
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED OCTOBER 31,
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Construction and maintenance................................. $382,844 $217,481 $86,334
Conduit sale................................................. 35,721 -- --
---------- --------- ---------
Total revenue................................................ 418,565 217,481 86,334
Costs and expenses:
Construction and maintenance................................. 330,387 179,505 68,164
Costs of conduit sale........................................ 34,673 -- --
General and administrative expense........................... 41,041 18,967 8,797
Depreciation................................................. 9,644 6,638 4,124
Amortization................................................. 2,189 962 408
Impairment of long-lived assets.............................. 2,515 -- --
---------- --------- ---------
Total costs and expenses..................................... 420,449 206,072 81,493
---------- --------- ---------
Income (loss) from operations........................................... (1,884) 11,409 4,841
Other income (expense):
Interest expense............................................. (9,512) (5,534) (1,565)
Change in value of stock appreciation rights ................ (1,814) -- --
Equity in losses of investment in Kanas...................... (591) -- --
Other........................................................ (761) 662 601
---------- --------- ---------
Total other income (expense)................................. (12,678) (4,872) (964)
---------- --------- ---------
Income (loss) before income taxes, minority interest
and extraordinary item....................................... (14,562) 6,537 3,877
Provision for (benefit from) income taxes............................... (138) 3,405 727
---------- --------- ---------
Income before minority interest and extraordinary item.................. (14,424) 3,132 3,150
Minority interest....................................................... (569) (618) (293)
---------- --------- ---------
Income (loss) before extraordinary item................................. (14,993) 2,514 2,857
Extraordinary loss on the early extinguishment
of debt, net of tax of zero in 1999.......................... (3,067) -- --
---------- --------- ---------
Net income (loss)....................................................... (18,060) 2,514 2,857
Beneficial conversion privilege of preferred stock...................... -- (8,013) (1,266)
Repurchase of Series B Preferred Stock.................................. (4,496) -- --
Modification of conversion price of Series B Preferred Stock............ (6,430) -- --
Modification of exercise price of Series B Preferred Stock Warrants..... (1,894) -- --
Increase in default redemption value of Series B Preferred Stock........ (5,878) -- --
Preferred stock dividends............................................... -- (341) (260)
---------- --------- ---------
Income (loss) applicable to common stock................................ ($36,758) ($5,840) $1,331
========== ========= =========
Weighted average shares outstanding:
Basic........................................................ 11,776,072 9,907,060 8,504,972
Diluted...................................................... 11,776,072 9,907,060 8,504,972
Income (loss) per share (see Note 2):
Basic:
Income (loss) applicable to common stock before
extraordinary item................................... ($2.86) ($0.59) $0.16
Extraordinary loss....................................... (0.26) -- --
Income (loss) applicable to common stock................. (3.12) (0.59) 0.16
Diluted:
Income (loss) applicable to common stock before
extraordinary item................................... ($2.86) ($0.59) $0.16
Extraordinary loss....................................... (0.26) -- --
Income (loss) applicable to common stock................. (3.12) (0.59) 0.16
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE> 98
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Additional Series B
------------------ Paid-in Senior Preferred WorldCom
Shares $.001 Par Capital Note Warrants Warrants Options
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996 8,203 $ 9 $12,833 $ -- $ -- $ --
Issuance of common stock in
connection with acquisition 109 -- 620 -- -- --
Issuance of common stock for services 2 -- 12 -- -- --
Issuance of common stock for exercise of
options 262 -- 732 -- -- --
Compensation recognized on stock options -- -- 338 -- -- --
Issuance of common stock for conversion of
convertible preferred stock 5 -- 34 -- -- --
Changes in unrealized loss on investments -- -- -- -- -- --
Convertible preferred dividends paid -- -- -- -- -- --
Embedded dividend recognized on convertible
preferred shares -- -- -- -- -- --
Tax benefit from exercise of options -- -- 527 -- -- --
Net income -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1997 8,581 9 15,096 -- -- --
Issuance of common stock for GEC earnout 204 -- 1,278 -- -- --
Compensation expense for below
market options -- -- 93 -- -- --
Issuance of common stock for
exercise of options 352 -- 2,071 -- -- --
Tax benefit from exercise of options -- -- 516 -- -- --
Dividends on Series A preferred stock -- -- -- -- -- -
Embedded dividend recognized on Series
A Preferred Stock -- -- -- -- -- --
Issuance of common stock for conversion
of Series A Preferred Stock 921 1 6,817 -- -- --
Valuation of subordinated note warrants -- -- -- 1,244 -- --
Valuation of Series B Preferred Stock Warrants -- -- -- -- 5,400 --
Embedded dividend recognized on Series
B Preferred Stock -- -- 7,909 -- -- --
Valuation of WorldCom options -- -- -- -- -- 3,490
Valuation of WorldCom phantom stock awards -- -- -- -- -- --
Issuance of common stock for conversion
of Series B Preferred Stock 1,008 1 1,384 -- -- --
Dividends on Series B Preferred Stock -- -- -- -- -- --
Net income -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1998 11,066 11 35,164 1,244 5,400 3,490
Conversion of the WorldCom Option to SARs -- -- 1,594 -- -- (3,490)
Issuance of common stock for GEC earnout 628 1 4,595 -- -- --
Series B Preferred Stock Transactions:
Repurchase of Series B Preferred Stock -- -- (5,506) -- -- --
Modification of conversion price of Series B
Preferred Stock -- -- 6,430 -- -- --
Modification of conversion price of Series B
Preferred Stock Warrants -- -- -- -- 1,894 --
Repurchase of Series B Preferred Stock Warrants -- -- 2,669 -- (4,559) --
Increases to Series B default redemption value -- -- (7,970) -- -- --
Issuance of common stock in settlement of
notes payable to directors 118 -- 828 -- -- --
Issuance of common stock for
exercise of options 79 -- 355 -- -- --
Value of options granted to non--employees -- -- 131 -- -- --
Net loss -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1999 11,891 12 38,290 1,244 2,735 --
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized Loss Retained
WorldCom on Investments Earnings
Phantom Stock Net of Taxes (Deficit) TOTAL
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, October 31, 1996 $-- $ (54) $ (1,189) 11,599
Issuance of common stock to directors in
connection with acquisition -- -- -- 620
Issuance of common stock for services -- -- -- 12
Issuance of common stock for exercise of
options -- -- -- 732
Compensation recognized on stock options -- -- -- 338
Issuance of common stock for conversion of
convertible preferred stock -- -- -- 34
Changes in unrealized loss on investments -- 54 -- 54
Convertible preferred dividends paid -- -- (260) (260)
Embedded dividend recognized on convertible
preferred shares -- -- (1,266) (1,266)
Tax benefit from exercise of options -- -- -- 527
Net income -- -- 2,857 2,857
---------------------------------------------------------------------------------------------------------------
Balance, October 31, 1997 -- -- 142 15,247
Issuance of common stock for GEC earnout -- -- -- 1,278
Compensation expense for below
market options -- -- -- 93
Issuane of common stock for
exercise of options -- -- -- 2,071
Tax benefit associated with stock options -- -- -- 516
Dividends on Series A preferred stock -- -- (79) (79)
Embedded dividend recognized on Series
A Preferred Stock -- -- (104) (104)
Issuance of common stock for conversion
of Series A Preferred Stock -- -- -- 6,818
Valuation of subordinated note warrants -- -- -- 1,244
Valuation of Series B Preferred Stock Warrants -- -- -- 5,400
Embedded dividend recognized on Series
B Preferred Stock -- -- (7,909) --
Valuation of WorldCom options -- -- -- 3,490
Valuation of WorldCom phantom stock awards 606 -- -- 606
Issuance of common stock for conversion
of of Series B Preferred Stock -- -- -- 1,385
Dividends on Series B Preferred Stock -- -- (262) (262)
Net income -- -- 2,514 2,514
---------------------------------------------------------------------------------------------------------------
Balance, October 31, 1998 606 -- (5,698) 40,217
Conversion of the WorldCom Option to SARs -- -- -- (1,896)
Issuance of common stock for GEC earnout -- -- -- 4,596
Series B Preferred Stock Transactions:
Repurchase of Series B Preferred Stock -- -- (4,496) (10,002)
Modification of conversion price of Series B
Preferred Stock -- -- (6,430) --
Modification of conversion price of Series B
Preferred Stock Warrants -- -- (1,894) --
Repurchase of Series B Preferred Stock Warrants -- -- -- (1,890)
Increases to Series B default redemption value -- -- (5,878) (13,848)
Issuance of common stock in settlement of
notes payable to directors -- -- -- 828
Issuance of common stock for --
exercise of options -- -- -- 355
Value of options granted to non-employees -- -- -- 131
Net loss -- -- (18,060) (18,060)
---------------------------------------------------------------------------------------------------------------
Balance, October 31, 1999 606 -- (42,456) 431
---------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-33
<PAGE> 99
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED OCTOBER 31,
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(18,060) $2,514 $2,857
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities, net of
effects of acquisitions:
Extraordinary loss on early extinguishment of debt 3,067 -- --
Depreciation 9,644 6,638 4,532
Amortization 2,189 962 --
Deferred income taxes (265) 717 727
Minority interest 569 618 293
Impairment of long-lived assets 2,515 -- --
Equity in losses of investment in Kanas 591 -- --
Change in value of stock appreciation rights 1,814 -- --
Gain on sale of assets held for sale (1,048) -- --
Accretion of property tax payable 2,284 -- --
Compensation recognized for conversion of stock options -- 93 338
Reduction in revenue for litigation -- -- (433)
Gain on disposal of property and equipment (234) -- --
Issuance of options to non-employees 131 -- --
Other - net 4 156 10
-------- ------ ------
3,201 11,698 8,324
Changes in assets and liabilities, net of effects from
acquisitions:
Change in accounts receivable (10,886) 2,694 1,002
Change in costs and profits in excess of
billings on uncompleted contracts 25,000 (16,987) (4,661)
Change in other current assets (2,947) 2,334 431
Change in other assets 327 1,247 (280)
Change in accounts payable and accrued liabilities 4,750 17,383 (199)
Change in accruals for incurred job costs (9,318) -- --
Change in billings in excess of costs and
profits on uncompleted contracts 150 569 (927)
Change in reserves for losses on uncompleted contracts (16,170) (15,110) --
Change in other non-current liabilities (2,658) 2,789 230
-------- ------ ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (8,551) 6,617 3,920
-------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (8,438) (9,966) (4,487)
Net proceeds from sale of property and equipment 2,103 90 96
Proceeds from sale of assets held for sale 27,048 -- --
Sales of investments -- -- 567
Cash acquired in acquisitions -- 4,661 404
Cash paid for acquisitions -- (8,681) (3,000)
Cash invested in escrow account (7,182) -- --
-------- ------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 13,531 (13,896) (6,420)
-------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit -- 50,518 (4,626)
Payment of shareholder / director loans (354) (2,925) (250)
Borrowings from shareholder / director -- 2,050 --
Proceeds from long-term debt 667 10,000 11,014
Proceeds from debt to finance acquisition -- 10,000 3,000
Advances from WorldCom 32,000 -- --
Repayments on long-term debt (13,485) (74,388) (9,272)
Distributions to minority interests (226) (502) (293)
Repurchase of Series B Preferred Stock Warrants (1,890) -- --
Redemption of Series B Preferred Stock (18,857) -- --
Proceeds from the issuance of Preferred Stock, net -- 18,110 5,418
Proceeds from the exercise of stock options -- 2,071 732
Proceeds from issuance of common stock for options 355 -- --
Dividends paid (166) (341) (260)
-------- ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,956) 14,593 5,463
-------- ------ ------
Increase in cash and cash equivalents 3,024 7,314 2,963
Cash and cash equivalents at beginning of year 13,544 6,230 3,267
-------- ------ ------
Cash and cash equivalents at end of year $ 16,568 $13,544 $ 6,230
======== ======= =======
Supplemental disclosures of cash flow information:
Valuation of detachable warrants -- $ 6,644 $ --
Discount on preferred stock -- 7,909 --
Conversion of Series B Preferred Stock -- 1,385 --
Conversion of Series A Preferred Stock -- 6,818 --
Valuation of below market options on acquisition -- 4,096 --
Issuance of common stock for services -- -- 11
Compensation recognized on below market options -- 93 338
Common stock issued in accordance with GEC earnout provisions 4,596 1,278 621
Common stock issued in exchange for note payable to director 828 -- --
Valuation of modification of conversion price of
Series B Preferred Stock Warrants 1,894 -- --
Conversion of WorldCom Options to SARs 1,896 -- --
Valuation of modification of
conversion of Series B Preferred Stock 6,430 -- --
Increases to Series B Preferred Stock default redemption value 13,848 -- --
Increases to goodwill for:
Accrued GEC earnout payments 1,806 (4,596) (1,278)
Recognition of deferred taxes for Patton
acquisition 1,460 -- --
Reallocation of MFSNT purchase price 9,773 -- --
Cash paid for:
Interest 3,689 4,226 1,684
Income taxes 4,643 29 --
</TABLE>
See notes to consolidated financial statements
F-34
<PAGE> 100
ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999
1. THE COMPANY:
Able Telcom Holding Corp. ("Able" or the "Company") develops, builds and
maintains communications systems for companies and governmental authorities. The
Company is headquartered in Atlanta, Georgia, and operates its subsidiaries
throughout the United States. The Company also has limited activities in South
America. The Company has five main organizational groups:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
ORGANIZATIONAL GROUP SERVICE PROVIDED
--------------------------------------------------------------------------------
<S> <C>
Network Services ................. Design, development, engineering,
installation, construction, operation and
maintenance services for telecommunications
systems.
--------------------------------------------------------------------------------
Network Development............... Established subsequent to October 31, 1999,
to own, operate and maintain local and
regional telecommunication networks.
--------------------------------------------------------------------------------
Transportation Services........... Design, development, integration,
installation, construction, project
management, maintenance and operation of
automated toll collection systems.
--------------------------------------------------------------------------------
Construction...................... Design, development, installation,
construction, maintenance and operation of
electronic traffic management and control
systems, and road signage.
--------------------------------------------------------------------------------
Communications Development........ Design, installation and maintenance
services to foreign telephone companies in
South America.
--------------------------------------------------------------------------------
</TABLE>
Each group is comprised of subsidiaries of the Company with each having local
executive management functioning under a decentralized operating environment.
The Company's customers primarily include local and long distance telephone
companies, utilities and local, state and federal governments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements are prepared on an accrual
basis and include the accounts of the Company and its subsidiaries, including
MFS Network Technologies, Inc., Georgia Electric Company, Patton Management
Corporation, Transportation Safety Contractors, Inc., Able Telecommunications &
Power, Inc. and Able Telcom International, Inc., Able Telcom CA and Able Telcom
Do Brasil, LTDA.
Minority shareholders of Able Telcom CA are entitled to share in 50 percent of
the earnings and losses of Able Telcom CA. The Company's share of ownership and
voting control is 80 percent. During the fiscal years ended October 31, 1999,
1998 and 1997, minority interests of $0.6 million, $0.6 million and $0.3
million, respectively, are reflected in the accompanying consolidated statements
of operations.
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 effective July 2, 1998. Revenues and expenses of
businesses acquired in purchase transactions are included in the consolidated
results of operations since the date of acquisition. All material intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES AND SIGNIFICANT RISKS
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The Company's construction and service activities are highly technical and its
contracts are complex. Some contracts have or will require several years to
complete. Work awarded to the Company is often the result of competitive bidding
and many of the Company's significant contracts are based on a fixed price
rather than cost-
F-35
<PAGE> 101
plus or time and materials. Initial cost estimates supporting the Company's bids
are necessarily based on facts and circumstances known at the time the estimates
are made. Estimates of projected contract costs must be continuously updated
over the period of contract performance. Contracts with governmental agencies
may include onerous requirements that adversely affect the cost and efficiency
of the Company's performance. High-profile public works can present difficulties
in obtaining final acceptance of completed work because of local political
considerations. Disputes regarding the scope of the work are not uncommon and
change order requests often require protracted negotiations and concessions on
the part of the Company. Unsatisfactory performance of subcontractors or failure
of installed equipment to function in accordance with contract specifications
may also adversely affect the Company's ultimate profitability. Most contracts
pose risks for both the quality and timeliness of performance. Many contracts
include liquidating or liquidated damage clauses to penalize the Company for
failure to meet contractual deadlines.
Considerable judgment must be applied to reasonably evaluate the potential
outcomes of issues that arise during the contract performance period and the
effect their resolution will have on the ultimate margins or losses that may be
realized by the Company. Consequently, the estimates that support the Company's
revenue recognition and cost accrual decisions have a very significant impact on
the results of operations reported by the Company.
CASH AND CASH EQUIVALENTS
The Company considers all unrestricted highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided for using
the straight-line and accelerated methods over the estimated useful lives of the
assets that generally range from three to ten years.
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 November 1, 1998 is as follows (amounts
in thousands):
<TABLE>
<S> <C>
Net goodwill, at November 1, 1998 $31,374
Patton Management Corporation ("Patton") (1) 1,460
Dial Communications, Inc. ("Dial") (2) (1,319)
Georgia Electric Company ("GEC") (3) 1,806
MFSNT (4) 9,773
Amortization (1,872)
-------------------------------------------------------------------------------
Net goodwill, at October 31, 1999 $41,222
-------------------------------------------------------------------------------
</TABLE>
As discussed in Note 5 "Acquisitions," adjustments made to goodwill during the
fiscal year ended October 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) The Company terminated the operation of Dial and wrote-off the related
goodwill.
(3) The increase is for contingent earn-out consideration associated with
the 1996 acquisition of GEC.
(4) Goodwill was increased by approximately $9.8 million for adjustments to
the MFSNT purchase price allocation.
Amortization expense was $1.9 million, $1.0 million, and $0.4 million for the
fiscal years ended October 31, 1999, 1998 and 1997, respectively.
F-36
<PAGE> 102
IMPAIRMENT OF LONG-LIVED ASSETS
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. As described in Note 5,
"Acquisitions", the Company wrote-off $1.3 million of Dial goodwill during the
year ended October 31, 1999. In addition, the Company also wrote-off $1.2
million of equipment during the year ended October 31, 1999.
SELF-INSURED CLAIMS LIABILITY
The Company retains the risk, up to certain limits, for automobile, workers'
compensation, and employee group health claims. As of July 1, 1999, the Company
switched its self-insured automobile and workers' compensation policies to a
premium based, fully-insured policy, but continues to self-insure the employee
group health claims. A liability for unpaid claims and the associated claim
expenses, including incurred but not reported claims, is determined and
reflected in the consolidated financial statements as an accrued liability. The
self-insured claims liability includes estimates of incurred but not reported
claims of $1.6 million and $1.1 million at October 31, 1999 and 1998,
respectively. The determination of such claims and expenses and the
appropriateness of the related liability is continually reviewed and updated.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under Accounting Principles
Board Opinion No. 25, ("APB No. 25") "Accounting for Stock Issued to Employees,"
and related interpretations, and follows the disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123. "Accounting for Stock-Based
Compensation." Refer to Note 15, "Stock Options and Other Stock Awarded to
Employees."
REVENUE RECOGNITION
Construction and Installation Contracts. Revenues recognized equal contract
costs incurred plus a percentage of the projected margin that will be earned on
each contract over the entire contract term. Measurements of cumulative progress
to completion approximate the cost-to-cost method. Contract costs include all
direct material and labor costs, as well as those indirect costs relating to the
contract such as indirect labor, supplies and equipment costs. Subcontractor
work completed and other costs not yet invoiced to the Company or processed for
payment are accrued at each balance sheet date as "Accruals For Incurred Job
Costs." Claims from sub-contractors are individually evaluated based upon the
merit of the claim, and if necessary, accruals for such claims are established.
Generally, the customer makes the determination of substantial contract
completion.
Changes in job performance, conditions and estimated costs result in changes in
the estimates for project profits unless change orders can be negotiated and
accepted by the customer. The cumulative effect of revised estimates are
recognized in the period in which the changes are determined. When the current
estimates of total contract revenue and contract costs indicate a loss ("Loss
Jobs"), a provision for the entire estimated loss on the contract is made.
Service Contracts. Service contracts consist primarily of recurring contracts
with telecommunication companies to maintain networks and grids; municipalities
to maintain electronic traffic management and control systems; and utility
companies to maintain utility facilities. Revenues from these contracts are
recognized at the time the services are rendered and accepted by the customer in
accordance with the provisions of the related contracts. Costs associated with
these contracts are incurred and recognized as the services are performed.
Losses on service contracts are recognized as incurred.
Change Orders. The Company begins to recognize revenues associated with change
orders once they have been approved by the customer.
F-37
<PAGE> 103
Segmentation. Each of the Company's contracts are evaluated to determine the
appropriate level of segmentation, if any, for revenue recognition purposes.
Contracts that include construction and installation elements and a long-term
service commitment are appropriately segmented and the long-term service
contract is separately accounted for as described above.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements or tax returns. In estimating future tax
consequences, the Company considers all expected future events other than
enactment of or changes in the tax law or rates. The Company files consolidated
federal income tax returns.
INCOME (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is determined by dividing net income (loss) from
continuing operations available to common shareholders by the weighted average
number of common shares outstanding during each period. Diluted earnings per
share includes the effects of potentially issuable Common Stock, but only if
dilutive. The treasury stock method, using the average price of the Company's
Common Stock for the period, is applied to determine dilution from options and
warrants. The if-converted method is used for convertible securities. Because of
reported losses, there are no differences between basic and diluted per share
amounts for the Company for 1999 or 1998.
The Company has potentially dilutive securities that could have a dilutive
effect in the future. Those securities and their potentially dilutive effects
are as follows (dilutive shares in thousands):
<TABLE>
<CAPTION>
Potentially
Dilutive Average
Shares Strike Price
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Potentially dilutive securities outstanding at October 31, 1999:
WorldCom Options (subject to shareholder approval) (Refer to Note 5) 2,000 $ 7.00
Employee stock options (subject to shareholder approval) (Refer to Note 15) 1,604 6.14
Employee stock options (572,000 vested) (Refer to Note 15) 992 6.59
Shares issued to redeem Series B Convertible Preferred Stock in February
2000 (Refer to Note 23) 802 6.13
Senior Subordinated Note Warrants (Refer to Note 11) 410 8.25
Series B Preferred Stock Warrants (Refer to Note 14) 370 13.25
GEC Earnout (Refer to Note 5) 205 --
Series A Preferred Stock Warrants (Refer to Note 14) 62 9.82
Employee stock grants (subject to shareholder approval) (Refer to Note 15) 50 --
------------------------------------------------------------------------------------------------------------------------
Subtotal outstanding at October 31, 1999 6,495 6.80
------------------------------------------------------------------------------------------------------------------------
Potentially dilutive securities issued subsequent to October 31, 1999:
Conversion of WorldCom debt to equity (Refer to Note 23) 3,050 8.38
Warrants issued to redeem Series B Preferred Stock (Refer to Note 23) 200 10.13
Series C Convertible Preferred Stock (Refer to Note 23) 1,604 9.35
Series C Preferred Stock Warrants (Refer to Note 23) 200 10.75
Warrants issued to redeem Series B Preferred Stock (Refer to Note 23) 66 10.13
Shares issued for the acquisition of SASCO/SES (Refer to Note 23) 75 --
Warrants issued to financial advisors related to the Series C Convertible
Preferred Stock (Refer to Note 17) 75 10.72
Stock issued to settle litigation 25 --
------------------------------------------------------------------------------------------------------------------------
Subtotal issued subsequent to October 31, 1999 5,295 $8.73
------------------------------------------------------------------------------------------------------------------------
Total 11,790 $7.67
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The conversion price of the Series C Preferred Stock may be reset to a floor of
$4.00 per share. If reset to the floor, conversion would result in the issuance
of 3.75 million common shares.
The Company has also granted to WorldCom rights to receive upon satisfaction of
certain conditions, including shareholder approval, phantom stock awards for up
to 700,000 shares of common stock, payable in cash, stock, or a combination of
both at the Company's option. Refer to Note 5, "Acquisitions."
F-38
<PAGE> 104
As described in Note 5, "Acquisitions", the Company is committed to issue shares
of common stock as contingent consideration earned by the sellers of Georgia
Electric Company through 2001. Common stock issued to date as contingent
consideration earned for the years ended October 31, 1998 and 1997 was 628,398
shares and 204,448 shares, respectively. Contingent consideration earned for the
year ended October 31, 1999, amounted to $1.8 million and is accrued at that
date in accounts payable and accrued liabilities. Approximately 205,000 shares
will be issued in fiscal 2000. The Company has made a similar commitment
subsequent to October 31, 1999, related to the acquisition of SASCO and SES
(refer to Note 23). The number of shares that may be issued as earn-out
consideration under these commitments in the future is not presently
determinable.
The Company has also executed a deferred value added equity swap agreement with
186K.NET. Either the Company or 186K.NET can exercise the swap at any time from
July 2000 to July 2003. Upon exercise, the Company has committed to issue shares
of its common stock to 186K.NET in exchange for common shares of 186K.NET of
equivalent value at the date of exercise. The value of the shares to be issued
and received is to be determined by the lower of 10% of the increase in the fair
market value of the Company or of 186K.NET from July 1999 to the date of
exercise. 186K.NET is a privately-owned start-up company that provides data and
communications facilities consulting services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable
(generally unsecured), accounts payable and notes payable approximate fair value
due to the short maturity of the instruments and the provision for what
management believes to be adequate reserves for potential losses. The fair
values of lines-of-credit and long-term debt approximate their carrying amount
since the currently effective rates reflect market rates for debt of similar
credit quality.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities," (amended by SFAS No. 137,
"Accounting for Derivative Instrument and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133"). This statement revises the
accounting for the recognition and measurement of derivatives and hedging
transactions and is effective for fiscal years beginning after June 15, 2000.
The Company does not anticipate the early adoption of this statement and has not
determined the impact it will have on the consolidated financial statements.
FIN 43. In June 1999, the FASB issued Interpretation No. 43, "Real Estate
Sales." The prospective effects of FIN 43 are addressed in Note 8, "Network
Assets Held For Sale."
RECLASSIFICATIONS
Certain items in the 1998 and 1997 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
3. GOING CONCERN:
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company incurred losses
from operations of $1.9 million, net losses of $18.1 million, and losses
applicable to common stock of $36.8 million during the fiscal year ended October
31, 1999. Significant payments were also made, both during and subsequent to
October 31, 1999, to redeem the Series B Preferred Stock and to reduce
obligations for loss contracts assumed in 1998 in the acquisition of MFSNT. The
Company has borrowed the maximum available under its existing Credit Facility
(refer to Note 11, "Debt") and is in default of the related covenants. While the
Company is current with respect to amounts due under the Credit Facility, the
lender has the right to demand payment and the Company has insufficient
liquidity to pay such amounts, if called. The Company has not
F-39
<PAGE> 105
yet been successful in obtaining alternative financing and may have insufficient
liquidity to fund its continuing operations. Consequently, there is substantial
doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to (a) generate
sufficient cash flow to meet its obligations on a timely basis, (b) obtain
additional financing as may be required, and (c) ultimately sustain
profitability.
Management's plans in regard to these matters are as follows:
(1) As part of the Company's ongoing efforts to strategically align the
profitable portions of its business and as a result of significant turnover
and the deterioration of underlying contracts, the Company closed Dial
Communications, Inc. ("Dial") and Able Integrated Systems, Inc. ("AIS")
during the fiscal year ended October 31, 1999, which together used cash
flows from operations of approximately $7.4 million and $3.8 million during
the fiscal years ended October 31, 1999 and 1998.
(2) As discussed in Note 11, "Debt," and Note 23, "Subsequent Events,"
approximately $25.5 million of the Company's indebtedness to WorldCom was
converted to common stock of the Company subsequent to October 31, 1999.
(3) As discussed in Note 14, "Preferred Stock," and Note 23, "Subsequent
Events," approximately $6.3 million of the accrued redemption value of the
Company's Series B Preferred Stock was paid by issuing common stock and
warrants of the Company subsequent to October 31, 1999. Concurrently, the
remaining Series B Preferred Stock redemption obligation of approximately
$10.0 million was paid with cash funded through the issuance of $15.0
million of Series C Preferred Stock.
(4) The Company is attempting to obtain a new credit facility with another
financial institution and is pursuing additional financing through
discussions with independent investors.
4. REVIEW BY THE SECURITIES AND EXCHANGE COMMISSION:
The Company is working to resolve questions by the staff of the Securities and
Exchange Commission ("SEC") regarding certain accounting and other disclosures
made by the Company in connection with the acquisition of MFSNT (the "MFSNT
Acquisition") from WorldCom effective July 2, 1998. As a result of the ongoing
review by the SEC, the Company's Annual Report on Form 10-K for the year ended
October 31, 1998, filed February 24, 1999, as amended March 1, 1999 (as amended,
the "1998 10-K") may be further amended by the Company following completion of
the SEC's review. Additionally, because the Company's Notice of Annual Meeting,
Proxy Statement and Proxy (collectively the "1998 Proxy") for the year ended
October 31, 1998 incorporates the 1998 10-K, the SEC has also not completed its
review of the 1998 Proxy and Able has not been able to hold a shareholder
meeting since April 1998. Once the SEC's reviews have been completed, Able
expects to hold an Annual Meeting.
While the MFSNT Acquisition closed on July 2, 1998, subsequent negotiations with
WorldCom resulted in a $41.9 million reduction in purchase price. The reduction
related primarily to projected losses on contracts assumed by Able from MFSNT.
The allocation of the purchase price, as reported in the Company's 1998 10-K,
established additional reserves for losses on assumed contracts that exceeded
reserves reflected in the unaudited balance sheet of MFSNT ($11.7 million) as of
July 2, 1998, by $28.8 million. The net assets reported by MFSNT at July 2, 1998
exceeded the adjusted purchase price by approximately the same amount.
The SEC's principal questions have centered on the following:
(1) The allocation of the $28.8 million in additional loss accruals to the
proper preacquisition period in the financial statements of MFSNT.
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<PAGE> 106
Resolution of these issues may result in the restatement of MFSNT's
preacquisition financial statements and related pro forma disclosures
included in Able's prior SEC filings.
(2) The appropriate accounting for obligations to perform under long-term
network operation and maintenance agreements acquired as part of the MFSNT
Acquisition. Refer to Note 22, "Unaudited Quarterly Financial Data", for an
explanation of the Company's accounting for long-term operation and
maintenance contracts.
(3) The Company's accounting for its investment in Kanas. Refer to Note 9,
"Investment in Kanas (Held For Sale)," for an explanation of the Company's
accounting for Kanas.
(4) The Company's accounting for the sale during the current year of the NYSTA
conduit. Refer to Note 8, "Network Assets Held For Sale," for an
explanation of the Company's accounting for the NYSTA conduit sale.
The SEC has not yet agreed with the Company that such accounting for the
above issues is appropriate and may require the Company to further change
its accounting for these matters.
5. ACQUISITIONS:
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 $12.0 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, and (ii) the difference between $5.0 million and the
aggregate costs incurred by Able for defense of litigation, and payments made in
settlement or in payment of judgments 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 for these matters. The purchase price
for MFSNT included the following consideration (in millions):
<TABLE>
<S> <C>
Contract price $58.8
Transaction related costs 4.6
WorldCom Option 3.5
WorldCom Phantom Stock Awards 0.6
--------------------------------------------------------------
Total purchase price $67.5
--------------------------------------------------------------
</TABLE>
The consolidated balance sheet as of October 31, 1998, reflects the Company's
preliminary allocation of the purchase price to the assets acquired and the
liabilities assumed based on initial estimates of their fair values. During the
fiscal year ended October 31, 1999, the Company
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<PAGE> 107
obtained the information needed to complete its valuations and finalized the
allocation as set forth below: (in millions)
<TABLE>
<CAPTION>
As Previously Final
Reported Adjustments Allocation
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable (1) $ 47.0 $ (1.4) $ 45.6
Costs and profits in excess of billings on uncompleted contracts (2) 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 16.5 9.8 26.3
Accounts payable (3) (13.7) (0.5) (14.2)
Billings in excess of costs and profits on uncompleted contracts (56.6) -- (56.6)
Reserves for losses on uncompleted contracts (4) (40.5) 0.6 (39.9)
Accrued restructuring costs (5) (2.0) 0.3 (1.7)
Property taxes payable (15.0) -- (15.0)
Other accrued liabilities (6) (7.4) (3.8) (11.2)
-----------------------------------------------------------------------------------------------------------------------
Total allocated purchase price $ 67.5 $ -- $ 67.5
-----------------------------------------------------------------------------------------------------------------------
<FN>
(1) 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.
(2) 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 8, "Network Assets Held For
Sale."
(3) 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.
(4) 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.
(5) 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.
(6) 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.
</FN>
</TABLE>
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 issuance limitation through "cashless" exercise, 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 1, 2000, July 2, 2001, or July 2, 2002. 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
Phantom Stock Awards may be adjusted to be based on up to 700,000 shares and the
base price may be increased, but the maximum payment per share will not change.
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.
The Phantom Stock Awards will be settled on a net basis and are payable in cash
or stock at the Company's option. In accordance with EITF 96-13, the Phantom
Stock Awards were initially measured at fair market value and reported as
permanent equity. Subsequent changes in fair value of the Phantom Stock Awards
will not be recognized. If the Phantom Stock Awards are ultimately settled in
a manner that requires that the Company deliver cash, the amount of cash paid
will be reported as a reduction of contributed capital.
Subsequent to the agreement to issue the Phantom Stock Awards, WorldCom agreed
not to exercise the Phantom Stock Awards until: (1) the registration statement
filed by the Company with respect to resale of shares of Common Stock issuable
upon conversion of the Series B Preferred Stock shall have been declared
effective, and (2) the Company shall obtain the consent or waiver of its
lenders under its secured credit facility permitting the Company to issue the
Phantom Stock Awards. Since it was considered remote that the Company would not
satisfy the above conditions, the Phantom Stock Awards were included in the
MFSNT purchase price.
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 required shareholder approval of the options is received. The
conversion of the WorldCom Option to SARs was treated as the reacquisition of
the WorldCom Option in exchange for a cash-settled obligation indexed to changes
in the fair market value of the Company's stock. The intrinsic value of the SARs
at the date of exchange of approximately $1.9 million was charged to equity and
reflected as a current liability. The liability will
F-42
<PAGE> 108
be adjusted at each balance sheet date for increases or decreases in the
intrinsic value, with an offsetting charge or credit to income, until the SARs
are paid, or if approved by the shareholders, converted back to an Option. The
exercise period for the SARs granted commenced on July 1, 1999, and ends on
January 2, 2002. As of October 31, 1999, the intrinsic value of the stock
appreciation rights liability was $3.7 million. Changes in the valuation of the
SARs have resulted in non-cash charges of $1.8 million during the year ended
October 31, 1999.
In conjunction with the acquisition of MFSNT, the Company entered into a
five-year agreement with WorldCom to provide telecommunications infrastructure
services to WorldCom (the "WorldCom Master Services Agreements") 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 percent of
reimbursable costs under the agreement ("Aggregate Sum"). 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 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. During the fiscal years ended October 31, 1999 and 1998, the
Company recognized revenues of approximately $61.6 million and $30.3 million,
respectively, from the WorldCom Master Services Agreement.
In compliance with a contractual obligation with WorldCom, effective February
2000, the names of all subsidiaries were changed to eliminate "MFS." MFS Network
Technologies, Inc. changed its name to Adesta Communications, Inc. ("Adesta
Communications"), MFS Transportation Systems, Inc. changed its name to Adesta
Transportation, Inc. ("Adesta Transportation") and MFS TransTech, Inc. changed
its name to TransTech, Inc.
PATTON MANAGEMENT CORPORATION
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. The acquisition was accounted for using the purchase
method of accounting. Goodwill of approximately $4.3 million (as adjusted) was
recorded and is being amortized on a straight-line basis over 20 years. The
results of operations are included in the consolidated statements of operations
since the date of acquisition.
DIAL COMMUNICATIONS, INC.
On December 2, 1996, Able acquired all the outstanding common stock of Dial. As
consideration, the Company paid $3.0 million in cash, issued 108,489 shares of
common stock (fair value of $0.6 million) and issued a $0.9 million promissory
note with a three-year term. The acquisition was accounted for using the
purchase method of accounting. The results of operations are included in the
consolidated statements of operations since the date of acquisition. Goodwill of
$1.5 million was recorded in this transaction for amortization over 20 years
using the straight-line method.
As part of the Company's ongoing efforts to strategically align the profitable
portions of its business and as a result of significant turnover and the
deterioration of underlying contracts, the Company terminated the operations of
Dial during the fiscal year ended October 31, 1999. For the year ended October
31, 1999, Dial had negative contract margins of $1.6 million and losses before
income taxes of $8.4 million which included a $1.3 million write-off of
goodwill.
GEORGIA ELECTRIC COMPANY
On October 12, 1996, the Company, through a wholly owned subsidiary, acquired
all of the outstanding common stock of Georgia Electric Company ("GEC"). As
initial consideration, the Company paid $3.0 million in cash. Under the terms of
the earn-out provision of the acquisition agreement, the Company will issue
shares of common stock over a five-year period beginning in fiscal 1997,
contingent upon the operating performance of GEC and the market value of the
Company's stock. Such amounts will be accounted for as purchase price
adjustments. The acquisition was accounted for using the purchase method of
accounting. The results of operations are included in the consolidated
statements of operations since the date of acquisition.
The Company increased goodwill by $1.8 million, $4.6 million and $1.3 million
for the years ended October
F-43
<PAGE> 109
31, 1999, 1998 and 1997, respectively, as a result of additional purchase price
due to the former owner of GEC under the terms of the earn-out provisions of the
acquisition agreement. The goodwill is being amortized over 20 years from the
acquisition date, using the straight-line method. Corresponding amounts are
reflected as accounts payable and accrued liabilities in the consolidated
balance sheets pending the issuance of the Company's common stock.
Pro Forma Financial Information (Unaudited)
Unaudited pro forma financial information for the Company is presented below as
if the acquisitions of MFSNT and Patton had taken place as of November 1, for
each of the following fiscal years ended October 31, (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $388,905 $481,707
Net loss (44,497) (26,796)
Loss applicable to common stock (53,384) (37,031)
Basic loss applicable to common stock per share (5.39) (4.35)
</TABLE>
The reserves for losses on uncompleted MFSNT contracts established by the
Company through purchase accounting of $28.8 million have been included as
losses in the 1998 pro forma information.
This 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 dates assumed.
6. ASSUMPTION OF COMSAT CONTRACTS:
On February 25, 1998, 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):
<TABLE>
<S> <C>
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)
-------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of revenues and costs associated with the COMSAT
contracts for the fiscal years ended October 31 (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Billings on the COMSAT contracts (1) $ 7,952 $11,327
Deferred revenue recognized 3,935 8,481
--------------------------------------------------------------------------
Total revenues recognized 11,887 19,808
Direct contract costs 8,675 10,672
--------------------------------------------------------------------------
Gross margin from COMSAT contracts $ 3,212 $ 9,136
--------------------------------------------------------------------------
</TABLE>
(1) Billings on the COMSAT contracts also include approved change order
revenues associated with these contracts but not anticipated when GEC
assumed such contracts.
F-44
<PAGE> 110
At October 31, 1999, all of the COMSAT Contracts were substantially complete.
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.
7. UNCOMPLETED CONTRACTS:
Uncompleted contracts consist of the following at October 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 212,590 $ 116,073
Earning recognized on uncompleted contracts 36,704 29,086
--------------------------------------------------------------------------
Total 249,294 145,159
Less billings to date (229,557) (97,120)
--------------------------------------------------------------------------
Net $ 19,737 $ 48,039
--------------------------------------------------------------------------
</TABLE>
Included in the accompanying consolidated balance sheets under the following
headings at October 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Costs and profits in excess of billings on
uncompleted contracts $ 71,808 $ 105,478
Billings in excess of costs and profits on
uncompleted contracts (6,478) (6,328)
Accruals for incurred job costs (45,593) (51,111)
-------------------------------------------------------------------------
Net $ 19,737 $ 48,039
-------------------------------------------------------------------------
</TABLE>
8. 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 year ended October 31,
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
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<PAGE> 111
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 October 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 $3.8 million at
October 31, 1999. Interest income from amortization of the discount was
approximately $0.2 million for the year ended October 31, 1999.
While MFSNT and the Company have sold IRU's that constitute virtually all the
usuable 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 $2.3 million and $0.8 million for the years ended
October 31, 1999 and 1998, respectively.
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,
F-46
<PAGE> 112
"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. 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.
While Kanas provided MFSNT with notice of substantial completion in December
1998, the owner of the Alyeska Network has yet to give Kanas final acceptance of
the system and significant outstanding claims exist among the parties. As
described in Note 4, "Review By the Securities and Exchange Commission," Note 5,
"Acquisitions," and Note 10, "Reserves For Losses on Uncompleted Contracts,"
reserves were provided in purchase accounting for estimated amounts payable by
the Company to complete the project and settle outstanding claims. While MFSNT
has outstanding claims against Alyeska for work it believes was outside the
scope of the contract of at least $15.8 million, no recognition has been given
to those claims in the accompanying consolidated financial statements as
resolution of those matters remains uncertain. The construction costs incurred
by MFSNT significantly exceeded the revenues recognizable under the contract
terms.
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 has
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. To date, 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
described in Note 2, "Summary of Significant Accounting Policies," and Note 4,
"Review By the Securities and Exchange Commission," these operating losses are
being recognized as incurred.
As of October 31, 1999, the unaudited financial statements of Kanas reflected
total assets, liabilities and net deficit of $80.1 million, $87.8 million and
$7.7 million, respectively. The deficit includes approximately $8.9 million of
network depreciation. Management has been informed that as of October 31, 1999,
Kanas was current with respect to payment of interest on its debt, but it was in
technical default of loan covenants and has been assessed interest at a default
rate.
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.
However, 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.
Consequently, effective one year from the date of acquisition, the Company began
to apply equity method accounting to this
F-47
<PAGE> 113
investment based on the guidance of EITF Issue 90-06, "Accounting for Certain
Events Not Addressed in EITF 87-11 Relating to an Acquired Operating Unit to be
Sold."
In addition to equity in losses of Kanas, the Company is amortizing the
difference between the carrying value of the Kanas investment and its net equity
of Kanas over 19 years which is the remaining goodwill life related to the
acquisition of MFSNT. The amount of loss the Company recorded against the
carrying value of the asset was approximately $0.4 million, while the associated
amortization of the difference in carrying value was $0.2 million.
During the construction of the Alyeska Network, which was completed in December
1998, Kanas was a development-stage company. The Company has received no
dividends from Kanas.
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 October 31, 1999
was approximately $87.5 million.
10. 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 relate
to specific MFSNT jobs identified as Loss Jobs. Revenues and costs recognized in
the Company's consolidated statement of operations related to these identified
Loss Jobs subsequent to the acquisition date have resulted in no net margin as
all losses were recorded against the reserve balance. The Company utilized the
reserves for losses on uncompleted contracts only on those jobs identified as
Loss Jobs at the date of acquisition. The following is a summary of the reserves
for losses on uncompleted contracts (amounts in thousands):
<TABLE>
<CAPTION>
Network Transportation
Services Services Total
-------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Valuation adjustments (1) 2,463 (3,082) (619)
Amount utilized (4,789) (11,362) (16,151)
-------------------------------------------------------------------------------
Balance, October 31, 1999 $ 5,703 $ 2,917 $ 8,620
-------------------------------------------------------------------------------
</TABLE>
(1) The valuation adjustments recorded during the fiscal year ended October 31,
1999, were the result of final projected cost estimates on previously
identified Loss Jobs unavailable at the date of acquisition.
11. DEBT:
The Company's debt consists of the following at October 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility with bank that is currently in default which gives the lender the
right to accelerate payment, maturing November 2000, interest payment dates and rates vary
(9.61 percent at October 31, 1999, including default interest of 2 percent and 7.69 percent
at October 31, 1998), secured by the Company's existing and future restricted subsidiaries $35,000 $35,000
</TABLE>
F-48
<PAGE> 114
<TABLE>
<S> <C> <C>
Note payable to WorldCom maturing November 2000, interest is payable quarterly at an annual
rate of 11.5 percent. Subsequent to October 31, 1999, $25.5 million was converted to common
stock. Refer to Note 23, "Subsequent Events." 30,000 30,000
Senior Subordinated Notes, repaid during fiscal year 1999, original agreement provided for
annual payments of $5.0 million January 6, 2004 and 2005, 12.0 percent interest per annum, in
arrears, paid semi-annually -- 10,000
Notes payable 303 860
---------------------------------------------------------------------------------------------------------------------
65,303 75,860
Capital leases 1,069 1,350
---------------------------------------------------------------------------------------------------------------------
66,372 77,210
Less discount on Senior Subordinated Notes -- (1,087)
---------------------------------------------------------------------------------------------------------------------
66,372 76,123
Less current portion 35,754 14,438
---------------------------------------------------------------------------------------------------------------------
Long-term debt, non-current portion $30,618 $61,685
---------------------------------------------------------------------------------------------------------------------
</TABLE>
CREDIT FACILITIES
On June 11, 1998, the Company obtained a $35.0 million three-year senior secured
revolving credit facility ("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 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
Credit Facility contains certain financial covenants which require, among other
conditions, that the Company maintain certain minimum ratios, minimum fixed
charge coverage, interest coverage, as well as limitations on total debt and
dividends to shareholders. The 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 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. At
October 31, 1998, and thereafter, the Company was in violation of certain of the
covenants in the Credit Facility, which were subsequently waived through
November 1, 1999.
At October 31, 1999, the Company is in technical default of certain provisions
of the Credit Facility. As such, the Credit Facility is immediately callable by
the holder and is therefore classified as a current liability in the
accompanying October 31, 1999, consolidated balance sheet. During the default
period, the Company is required to pay a default penalty of two percent per
annum on all outstanding balances.
WORLDCOM NOTE
In conjunction with the acquisition of MFSNT, the Company executed a $30.0
million promissory note to WorldCom ("WorldCom Note"). Subsequent to October 31,
1999, the Company entered into an agreement with WorldCom to convert
approximately $25.5 million of the WorldCom Note into the Company's Common
Stock. The Company issued a note for the difference between the $30.0 million
and $25.5 million with interest at 11.5 percent per annum due February 2001.
Refer to Note 23, "Subsequent Events."
SENIOR SUBORDINATED NOTES
Effective January 6, 1998, the Company issued $10.0 million of unsecured 12
percent Senior Subordinated Notes due January 6, 2005 (the "Senior Subordinated
Notes") with detachable warrants to purchase 409,505 shares of common stock at a
price of $8.25 per share, which were valued at approximately $1.2 million
resulting in a corresponding discount applicable to the Senior Subordinated
Notes.
In February 1999, the Company repurchased the Senior Subordinated Notes for
approximately $11.6 million using part of the proceeds from the WorldCom Advance
described in Note 12, "WorldCom Advance." The purchase of
F-49
<PAGE> 115
Senior Subordinated Notes resulted in an extraordinary loss on the early
extinguishment of debt of approximately $3.0 million, net of tax of zero.
AGGREGATE MATURITIES
The aggregate maturities of long-term debt and capital leases for years
subsequent to October 31, 1999, are as follows:
<TABLE>
<S> <C>
2000 $35,754
2001 30,321
2002 75
2003 19
2004 19
Thereafter 184
-----------------------------------------------------------
$66,372
-----------------------------------------------------------
</TABLE>
12. WORLDCOM ADVANCE:
In February 1999, WorldCom advanced the Company $32.0 million ("WorldCom
Advance") as an advance against amounts otherwise payable by WorldCom to the
Company pursuant to the WorldCom Master Services Agreement. The proceeds of the
WorldCom Advance were used to facilitate the purchase of 2,785 shares, or
approximately 78% of the outstanding shares of Series B Preferred Stock (refer
to Note 14, Preferred Stock), and the purchase of the outstanding Senior
Subordinated Notes.
The WorldCom Advance bears no interest and is subordinate to the Credit
Facility. Payments under the WorldCom Advance were further subordinated to
liabilities associated with certain construction projects that are expected to
be completed during fiscal 2001.
The WorldCom Advance agreement also provides for additional advances to the
Company through November 30, 1999, of up to $15.0 million against amounts
otherwise payable pursuant to the WorldCom Master Services Agreement. These
additional advances are non-interest bearing and, subject to the subordination
agreements described above, include a stated date for repayment to WorldCom of
November 30, 2000. To date, the Company has not received any additional advances
against the $15.0 million available.
13. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In 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 subsequently became a member of the Company's Board of
Directors. SIRIT asserts claims against the Company for tortuous interference,
fraudulent inducement, negligent misrepresentation and breach of contract in
connection with the Company's agreement to purchase the shares of MFSNT and
seeks injunction relief and compensatory damages in excess of $100.0 million.
In 1998, Shipping Financial Services Corp. ("SFSC") filed a lawsuit in the
United States District Court for the Southern District of Florida against the
Company, and certain of its officers. SFSC asserts claims under the federal
securities laws against the Company and four of its officers that the defendants
allegedly caused the Company to falsely represent and mislead the public with
respect to two acquisitions, COMSAT and MFSNT, and the ongoing financial
condition of the Company as a result of the acquisitions and the related
financing of those acquisitions. SFSC seeks certification as a class action on
behalf of itself and all others similarly situated and seeks unspecified damages
and attorneys' fees.
In 1997, Bayport Pipeline, Inc. ("Bayport") filed a lawsuit against MFSNT
seeking a declaratory judgment concerning the rights and obligations of Bayport
and MFSNT under a Subcontract Agreement that was entered into on May 1, 1997
related to the NYSTA contract. The matter was referred to arbitration in January
1999. The total amount sought was not less than $5.5 million and subsequent to
October 31, 1999, was increased to $19 million.
F-50
<PAGE> 116
In 1997, U.S. Public Technologies, Inc. ("USPT") filed a lawsuit in the United
States District Court for the Southern District of California, (San Diego),
against MFSNT for breach of contract, breach of an alleged implied covenant of
good faith and fair dealing, tortuous interference, violation of the California
Unfair Competition Act, promissory estoppel and unjust enrichment in connection
with a Teaming Agreement between MFSNT and USPT concerning the Consortium
Regional Electronic Toll Collection Implementation Program in the state of New
Jersey. In this lawsuit, USPT seeks actual damages in excess of $8.5 million and
unspecified exemplary damages. Discovery has not yet commenced in this lawsuit.
In 1999, Newbery Alaska, Inc. ("Newbery") filed a demand for arbitration seeking
approximately $3.8 million. This dispute arises out of Newbery's subcontract
with MFSNT related to the fiber optic network constructed by MFSNT for Kanas.
Newbery's claims are for the balance of the subcontract, including retainage and
disputed claims for extras based on alleged deficiencies in the plans and
specifications and various other alleged constructive change orders. The parties
are currently conducting discovery. Arbitration hearings on this matter should
take place in the spring or summer of 2000.
In 1998, Alphatech, Inc. ("Alphatech") filed a lawsuit in the U.S. District
Court in Massachusetts. This suit alleges ten counts, including breach of
Teaming Agreements on the E-470 project and the New Jersey Regional Consortium
project, breach of implied duty of good faith and fair dealing on both projects,
misappropriation of trade secrets, deceit, violation of Massachusetts General
Laws Chapter 93A, promissory estoppel, quantum meruit, and unjust enrichment.
Alphatech's claim is for $15 million. A hearing for a summary judgment is
scheduled in May 2000.
In 1998, T.A.M.E. Construction, Inc. ("TAME") sued for breach of contract,
promissory estoppel, discrimination and defamation related to certain contracts
performed by GEC. TAME alleges that it was wrongfully terminated as a
subcontractor. TAME claims contract damages in the amount of $250,000, punitive
damages for discrimination of $1,000,000 and defamation damages of an additional
$1,000,000. GEC has moved for summary judgment. This matter is not set for
trial.
The Company is subject to a number of shareholder and other lawsuits and claims
for various amounts which arise out of the normal course of its business. The
Company intends to vigorously defend itself in these matters. The disposition of
all pending lawsuits and claims is not determinable and may have a material
adverse effect on the Company's financial position.
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
obligations under these contracts may result in the loss of the contract and
subject the Company to litigation and various claims, including liquidated
damages. WorldCom continues to provide performance bonds on certain contracts
acquired in the acquisition of MFSNT.
LEASED PROPERTIES
As of October 31, 1999, the Company leased office space and equipment under
various noncancellable long-term operating lease arrangements. Rental expense
for operating leases amounted to approximately $2.3 million, $2.4 million and
$0.8 million for the fiscal years ended October 31, 1999, 1998 and 1997,
respectively.
During fiscal year 1999, the Company leased certain equipment under capitalized
lease agreements, which have been included in Property and Equipment. Cost and
accumulated amortization of such assets as of October 31, 1999, totaled $3.2
million and $1.8 million, respectively.
Future minimum lease payments required under operating and capital leases with
initial terms in excess of one year are as follows (in thousands):
F-51
<PAGE> 117
<TABLE>
<CAPTION>
YEARS ENDING OCTOBER 31, CAPITAL LEASES OPERATING LEASES
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 707 $ 3,549
2001 488 2,573
2002 60 1,938
2003 -- 1,386
2004 -- 811
Thereafter -- --
-----------------------------------------------------------------------------------------------------------------------
Total minimum lease payments $1,255 $10,257
-----------------------------------------------------------------------------------------------------------------------
Present value of net minimum lease payments $1,069
Less current installments or obligations under capital leases 707
-----------------------------------------------------------------------------------------------------------------------
Obligations under capital leases, excluding current installments $ 362
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
14. PREFERRED STOCK:
SERIES A PREFERRED
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 percent for
conversions after December 20, 1997) of the average closing bid price of a share
of common stock for three days preceding the date of conversion. The Company
recognized the discount attributable to the beneficial conversion privilege of
approximately $1.3 million by accreting the amount from the date of issuance,
December 20, 1996, through the last date the discount rate increase could occur,
December 20, 1997, as an adjustment of net income attributable to common
shareholders. This accretion adjustment, which also represents the adjustment
needed to accrete to the redemption value of the Preferred Stock, resulted in a
charge to retained earnings and accompanying credit to the Preferred Stock. The
Preferred Stock accrued dividends at an annual rate of five percent and was
payable quarterly in arrears in cash or through a dividend of additional shares
of Preferred Stock.
During fiscal 1998, all remaining Series A Preferred Stock was converted into
common stock pursuant to the terms thereof and the related number of warrants
was reduced to 62,000, due to either conversion or forfeiture.
SERIES B PREFERRED
Effective June 30, 1998, the Company completed a private placement transaction
of 4,000 shares of $0.10 par value, non-voting Series B Convertible Preferred
Stock bearing an annual dividend rate of four percent (the "Series B Preferred
Stock") and warrants to purchase 1,000,000 shares of the Company's common stock
at a then exercise price of $19.80 per share (the "Series B Preferred Stock
Warrants"). The net proceeds from the transaction, after transaction costs of
$1.9 million, totaled $18.1 million. The Series B Preferred Stock Warrants are
exercisable for a five-year period commencing June 30, 1998, and were assigned a
value of $5.4 million on the date of the transaction.
The Series B Preferred Stock was convertible immediately into shares of the
Company's common stock at 97 percent of the trading price of the common stock,
determined by a prescribed calculation, immediately preceding the conversion
date. The conversion amount of each share of Series B Preferred Stock was equal
to its face value of $5,000, plus any unpaid dividends thereon. The proceeds
from the Series B offering were allocated as follows (in millions):
<TABLE>
<S> <C> <C>
Gross offering proceeds (face value of preferred stock) $20.0
Offering costs (1.9)
Value of Series B Preferred Stock warrants issued (5.4)
----------------------------------------------------------------------------------------------------------
Amount attributable to preferred stock and beneficial conversion privilege 12.7 $12.7
Value of common stock issuable on conversion (face value divided by 97%) -- 20.6
----------------------------------------------------------------------------------------------------------
Amount deemed paid for the beneficial conversion privilege (7.9) $(7.9)
----------------------------------------------------------------------------------------------------------
Amount deemed paid for Series B Preferred Stock $ 4.8
----------------------------------------------------------------------------------------------------------
</TABLE>
Because the Series B Preferred Stock was immediately convertible, the discount
attributable to the beneficial
F-52
<PAGE> 118
conversion privilege was fully amortized at the date of issue and reflected as a
reduction in income applicable to common stock for the year ended October 31,
1998.
In September 1998, 436 shares of the Series B Preferred Stock were converted to
approximately 1.0 million shares of the Company's common stock.
The terms of the Series B Preferred Stock provided that if certain events of
default occurred, the holders could require the Company to redeem their shares
for cash at a premium price. During the first quarter of fiscal 1999, the
Company was deemed to be in technical violation of the Series B Preferred Stock
due to its failure to have a registration statement declared effective by
December 27, 1998, covering the common stock underlying the Series B Preferred
Stock and Warrants. During the first quarter of fiscal 1999, the holders of the
Series B Preferred Stock notified the Company of their intent to exercise their
redemption rights, however, the notice was subsequently deferred. The carrying
value of the Series B Preferred Stock was excluded from shareholders' equity at
October 31, 1998.
In February 1999, the Company purchased 2,785 shares of the Series B Preferred
Stock from the original holders for $18.9 million. The transaction was treated
as a repurchase of the shares and the related beneficial conversion feature. The
excess of the amount paid over the carrying value of the preferred stock and the
intrinsic value of the beneficial conversion privilege was recognized as an
additional loss applicable to common stock of approximately $4.5 million. The
holders of the remaining shares agreed to either waive all outstanding defaults
under the remaining Series B Preferred Stock or refrain from exercising any
remedies with respect to any such outstanding defaults until May 18, 1999.
During such period of time, the Company agreed to use its best efforts to have a
registration statement declared effective. Subsequent to May 18, 1999, the
Company received further extensions. As of October 31, 1999, the Company has not
been successful in getting a registration statement declared effective related
to the remaining Series B Preferred Stock.
In connection with the repurchase of the Series B Preferred Stock shares in
February 1999, the Company agreed to a modification of the conversion price with
respect to the remaining 779 shares of Series B Preferred Stock. The conversion
price was changed to a fixed amount of approximately $3.50 per share, which was
further reduced by 1.5 percent per month until a registration statement was
declared effective. The modification of the conversion price of the remaining
779 shares of Series B Preferred Stock resulted in a charge to income applicable
to common stock of approximately $6.4 million in the second quarter of fiscal
1999.
In February 1999, the Company also agreed to certain modifications in the
conversion price of the Series B Preferred Stock Warrants. The conversion price
of warrants to purchase 370,000 shares of the Company's common stock was reduced
to $13.25 per share and the conversion price of warrants to purchase 630,000
shares of the Company's common stock was reduced to $13.50 per share. The
modification of the conversion prices of the Series B Preferred Stock Warrants
resulted in a charge to income applicable to common stock of approximately $1.9
million in the second quarter of fiscal 1999. The charge was determined based on
valuation of the Series B Preferred Stock warrants immediately before the
modification and immediately after the modification using a Black Scholes
pricing model.
In May 1999, the Company repurchased the warrants to purchase 630,000 shares of
the Company's common stock for approximately $1.9 million, which amount was
approximately $2.7 million less than the previous valuations of those warrants
that was made when the warrants were issued and modified.
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 October 31, 1999, the calculated redemption
price was approximately $16.3 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.
F-53
<PAGE> 119
A summary of the above described transactions and their effects on equity and
income applicable to common stock is presented below (amounts in $millions):
<TABLE>
<CAPTION>
Additional
Series B Paid-in Charged to
Stock Warrants Capital Earnings
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proceeds from Series B offering $ 12.7 $ 5.4 $ 7.9 $ (7.9)
Conversion of 436 Series B shares (1.4) -- 1.4 --
----------------------------------------------------------------------------------------------------------------
Balances at October 31, 1998 11.3 5.4 9.3 (7.9)
---------
Repurchase of 2,785 Series B shares (8.9) -- (5.5) (4.5)
February 1999 modifications of terms-
Additional embedded dividend -- -- 6.4 (6.4)
Additional warrant valuation -- 1.9 -- (1.9)
Repurchase of 630,000 warrants for $1.9 million -- (4.6) 2.7 --
May 1999 recharacterization of Series B Stock as put
liability 13.9 -- (8.0) (5.9)
---------
Total charged to earnings, year ended October 1999 (18.7)
----------------------------------------------------------------------------------------------------------------
Balances at October 31, 1999 $ 16.3 $ 2.7 $ 4.9 $ (26.6)
----------------------------------------------------------------------------------------------------------------
</TABLE>
As described in Note 23, "Subsequent Events," the Company repurchased the
remaining Series B Preferred Stock in February 1999. At October 31, 1999, the
original warrants to purchase 370,000 shares of the Company's common stock
remain outstanding.
15. STOCK OPTIONS AND OTHER STOCK AWARDED TO EMPLOYEES:
In fiscal 1996, the Company's shareholders adopted a stock option plan for the
issuance of up to 550,000 shares which included provisions for both incentive
and non-qualified stock options (the "Stock Option Plan") and which expires on
September 19, 2005. On April 24, 1998, the Company's shareholders amended the
Stock Option Plan to increase the aggregate number of shares of Common Stock
issuable under the Stock Option Plan from 550,000 to 1,300,000. The Company
intends to file a registration statement under the Securities Act of 1933 to
register these 750,000 additional shares of Common Stock reserved for issuance
under the Stock Option Plan.
Stock options are generally granted with an exercise price equal to the fair
market value of the Common Stock as of the date of grant. All outstanding
options have an option term ranging from 3 to 10 years with an average
outstanding life of 4.8 years as of October 31, 1999. Vesting terms range from
immediately vested to three year vesting terms. Stock options are summarized
below (shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
Option Price Option Price Option Price
Shares Per Share Shares Per Share Shares Per Share
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 664 $6.20-$14.00 372 $6.00-$7.81 160 $5.75-$6.88
Grants 1,134 5.75-9.94 592 5.34-14.00 323 6.00-7.81
Exercises (79) 5.75-7.25 (212) 5.34-7.81 (72) 6.00-6.88
Cancellations (647) 5.75-14.00 (88) 6.38-7.81 (39) 5.88-7.81
-----------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 1,072 5.75-9.94 664 6.20-14.00 372 6.00-7.81
-----------------------------------------------------------------------------------------------------------------------
Options exercisable, end of year 652 5.75-9.94 91 6.20-14.00 95 6.00-7.81
-----------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the
year $ 6.61 $ 8.56 $ --
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-54
<PAGE> 120
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Weighted
Average Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.75-$5.75 780 4.81 $5.75 507 $5.75
6.00- 7.25 90 5.31 7.04 67 6.97
7.43- 8.75 67 8.73 8.05 32 7.57
9.94- 9.94 135 2.73 9.94 46 9.94
--------------------------------------------------------------------------------------------------
$5.75-$9.94 1,072 4.84 $6.59 652 $6.34
--------------------------------------------------------------------------------------------------
</TABLE>
The Board of Directors has committed to issue, subject to shareholder approval,
approximately 1.6 million options with strike prices ranging from $5.75 to $8.00
to directors, officers and consultants. The Company may report significant
compensation expense at or subsequent to the date of shareholder approval, if
and when obtained, for any excess of the fair market value at that date over the
strike prices of these options. The Company will occasionally issue options to
consultants. The expense related to options granted to consultants was
approximately $0.1 million in 1999 based on the fair value of the services or
the options in accordance with SFAS No. 123.
The Company accounts for stock options in accordance with APB No. 25. SFAS 123
requires supplemental disclosure of stock-based compensation determined based on
the fair value of options as of the date of grant. The compensation so
determined is recognized for pro forma purposes over the vesting period of the
options. For the purpose of determining the pro forma amounts shown below, the
fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for options granted in 1999, 1998 and 1997, respectively; risk-free
interest rates of 5.97 percent, 5.40 percent, 5.65 percent; dividend yield of
zero percent for each year; expected lives of 1.5 years, two to six years and
two years; volatility of .59, .549-.561 and .463. Had compensation expense been
recognized in accordance with SFAS No. 123 the Company's income (loss)
applicable to common stock would approximate the pro forma amounts shown below
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) applicable to common stock:
As reported (36,758) (5,840) 1,331
Pro forma (38,302) (7,303) 1,121
Diluted income (loss) applicable to
common stock per share:
As reported $ (3.10) $ (0.59) $ 0.16
Pro forma (3.23) (0.74) 0.13
</TABLE>
Subject to shareholder approval, the Board of Directors has approved a grant of
50,000 shares of common stock to the Company's Chief Executive Officer ("CEO")
at no cost to him. The Board has also approved the payment by the Company of
taxes that will be payable by the CEO with respect to the grant. When and if
shareholder approval is received, the Company will recognize compensation
expense, the amount of which may be significant, for the fair market value of
the shares, on the date of shareholder approval, and cash paid to tax protect
the CEO.
16. FIBER MARKETING RIGHTS:
The following fiber optic network construction projects were executed by MFSNT
prior to the July 1998 acquisition of MFSNT and contain continuing fiber
marketing rights:
Bay Area Rapid Transit (San Francisco Bay Area) ("BART"). The network was fully
constructed at the date of acquisition and the Company has no ownership rights.
It does have a right to market excess capacity on the system and is entitled to
receive commissions from BART based on a percentage of any resulting user fees
received by BART. During the years ended October 31, 1999 and 1998, commissions
of approximately $0.4 million and $0.3 million were earned by the Company under
this arrangement.
Illinois State Toll Highway Authority ("ISTHA"). This conduit network was under
construction at the date of acquisition and the Company has no ownership rights.
The Company does have marketing rights and is entitled to a percentage of user
fees successfully negotiated on behalf of ISTHA. The Company can also separately
negotiate with users for installation of fiber and electronic equipment. During
the years ended October 31, 1999 and 1998, the Company earned commissions of
$2.0 million and $1.2 million. Revenues from separate installation contracts
with the users were approximately $10.1 million and zero during the fiscal years
ended October 31, 1999 and 1998, respectively.
17. FINANCIAL ADVISORY SERVICES:
Two related firms, L. Dolcenea, Inc. and Platinum Advisory Services, Inc., were
paid approximately $1.0 million by the Company
F-55
<PAGE> 121
for various advisory services during the year ended October 31, 1999, including
services related to extensions of default waivers under the Series B Preferred
Stock. L. Dolcenea, Inc. was also paid $1.0 million by the Company in July 1998
related to the original issuance of the Series B Preferred Stock. The services
billed to the Company include assistance with negotiation of a proposed
settlement with SIRIT (Refer to Note 13, "Commitments and Contingencies"),
involvement with potential business acquisitions, obtaining officers and
directors' liability insurance for the Company and proposals for the issuance of
additional securities by the Company with terms similar to the Series B and
Series C Preferred Stock. Amounts paid include both amounts designated as
retainers and success fees. The Company may be committed to pay these advisors
additional amounts or issue warrants to them for the purchase of the Company's
common stock related to future transactions for which the advisors may claim
compensation.
These advisors were paid an additional $1.7 million in February 2000, at the
time of conversion and redemption of the remaining outstanding Series B
Preferred stock and issuance of the Series C Preferred Stock. These advisors
also received 75,000 warrants to acquire the Company's common stock. Refer to
Note 23, "Subsequent Events"
18. DEFINED CONTRIBUTION RETIREMENT PLAN AND POST-EMPLOYMENT OBLIGATIONS:
The Company sponsors a defined contribution retirement plan covering
substantially all employees of the Company. Participants may contribute up to
fifteen percent of their annual salaries, subject to certain limitations, as
pre-tax salary deferral. The Company makes certain matching and service related
contributions to the plan that totaled approximately $0.7 million during the
fiscal year ended October 31, 1999.
During the fiscal year ended October 31, 1999, the Company executed deferred
compensation arrangements with two former directors that provide for payments to
them of $60,000 to $75,000 per year plus fringe benefits for the number of years
equal to the years of service, subject to a minimum of ten years. During the
fiscal year ended October 31, 1999, the Company incurred expense of
approximately $0.8 million related to these arrangements and paid benefits to
one former employee of $0.1 million. The present value of these future
obligations, $0.8 million, was accrued as of October 31, 1999.
19. INCOME TAXES:
An analysis of the components of income (loss) before income taxes and minority
interest is presented below for the fiscal years ended October 31 (amounts in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(18,285) $6,084 $3,304
Foreign 656 453 573
----------------------------------------------------------------
$(17,629) $6,537 $3,877
----------------------------------------------------------------
</TABLE>
The provision (benefit) for income taxes is composed of the following for the
fiscal years ended October 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (540) $ 1,937 $ --
State 402 751 --
--------------------------------------------------------------------------------
(138) 2,688 --
--------------------------------------------------------------------------------
Deferred:
Federal 4,003 792 657
State 149 (75) 70
Change in valuation allowance (4,152) -- --
--------------------------------------------------------------------------------
-- 717 727
--------------------------------------------------------------------------------
Total provision (benefit) for income taxes $ (138) $ 3,405 $727
--------------------------------------------------------------------------------
</TABLE>
The difference between the provision (benefit) for income taxes computed at the
statutory federal income tax rate and the financial statement provision
(benefit) for income taxes is summarized as follows for the fiscal year ended
October 31:
F-56
<PAGE> 122
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Expected statutory amount (34.0)% 34.0% 34.0%
Change in valuation allowance 26.4 -- --
Non-deductible goodwill 4.7 4.0 4.0
Foreign operations, net 3.0 4.0 (20.0)
State income taxes 1.5 7.0 0.2
Other (2.4) 3.0 3.8
--------------------------------------------------------------------------
Actual tax provision (benefit) (0.8)% 52.0% 22.0%
--------------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities result from differences in the timing of the
recognition of certain income and expense items for tax and financial reporting
purposes. The sources of these differences are as follows at October 31 (amounts
in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets (liabilities):
Allowance for doubtful accounts $ 1,243 $ 312
Accrued liabilities 1,029 --
Other (25) 747
------------------------------------------------------------------------------
2,247 1,059
------------------------------------------------------------------------------
Non-current deferred tax assets (liabilities):
Property and equipment (3,183) (755)
Net operating loss (NOL) carryforwards 2,806 --
Stock appreciation rights payable 744 --
Accrued liabilities 389 --
Other 204 (39)
------------------------------------------------------------------------------
960 (794)
------------------------------------------------------------------------------
Net deferred tax asset prior to valuation allowance 3,207 265
Valuation allowance (3,207) --
------------------------------------------------------------------------------
$ -- $ 265
------------------------------------------------------------------------------
</TABLE>
At October 31, 1997, the Company had NOL carryforwards for Federal income tax
purposes of approximately $3.3 million. These NOL carryforwards were fully
utilized in fiscal year 1998. During fiscal 1999, the Company had a NOL for
income tax purposes of approximately $9.7 million, approximately $2.0 million of
which will be carried back to fiscal 1998 and the remainder of approximately
$7.7 million will be carried forward and will expire in 2019. A valuation
allowance of $3.2 million has been recognized at October 31, 1999, due to the
uncertainty that the Company will realize the income tax benefit from its net
deferred tax assets.
20. RELATED-PARTY TRANSACTIONS:
In payment of certain finders fees associated with the acquisition of MFSNT, the
Company issued a three-year, 10 percent note for $1.3 million to a third party
who subsequently became a member of the Company's Board of Directors. At October
31, 1998, the outstanding balance of this note was $1.2 million and is reflected
in current liabilities in the accompanying consolidated balance sheet. During
the year ended October 31, 1999, the Company issued 118,000 shares of Common
Stock to the Director in payment of the then remaining balance of the note of
$0.8 million.
In November 1997, a subsidiary of the Company assumed the obligations of Ten-Ray
Utility Construction, Inc. ("Ten-Ray"), a North Carolina corporation, as
contractor under two network construction contracts and paid the costs Ten-Ray
had accrued under the contracts of approximately $0.1 million. On January 30,
1998, the Company purchased from Ten-Ray certain construction equipment used in
connection with the contracts. The purchase price for the equipment was the
satisfaction of Ten-Ray's bank loans secured by the equipment in the amount of
$0.3 million, including principal and interest, which in the opinion of the
executives of the subsidiary was not more than the fair market value of the
equipment at the time of this transaction. The Company's then Chief Financial
Officer, beneficially owned approximately 7.7 percent of the voting stock of
Ten-Ray and had personally guaranteed the equipment loans to the bank.
21. SEGMENT INFORMATION:
F-57
<PAGE> 123
The Company currently operates primarily in two industry segments: network
services and transportation services. Transportation services are conducted
primarily in the United States with small projects in South America, Canada and
Asia, while telecommunication network services are conducted both in the United
States and Latin America. The Company manages and analyzes the operations of the
Company in four separate groups, Network Services Group, Transportation Services
Group, Construction Group and Communications Development Group. Subsequent to
October 31, 1999, the Company established the Network Development Group. Refer
to Note 1, "The Company," for descriptions of services provided by each
operating group. The Company's international operations are primarily within the
Communications Development Group and are immaterial to the Company's
consolidated operations.
<TABLE>
<CAPTION>
For the Fiscal Year Ended October 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
Network Services $ 260,354 $ 62,243 $ --
Transportation Services 39,394 24,639 --
Construction 113,948 125,270 82,171
Communication Development (International) 4,869 5,329 4,163
------------------------------------------------------------------------------------
$ 418,565 $217,481 $86,334
------------------------------------------------------------------------------------
Income (loss) from operations:
Network Services $ 14,746 $ 6,272 $ --
Transportation Services (10,618) 2,586 --
Construction (5,730) 1,718 4,824
Communication Development (International) 346 182 17
Unallocated Corporate Overhead (628) 651 --
------------------------------------------------------------------------------------
$ (1,884) $ 11,409 $ 4,841
------------------------------------------------------------------------------------
Identifiable assets:
Network Services $ 139,460 $159,660 $ --
Transportation Services 50,178 48,830 --
Construction 66,667 71,941 44,751
Communication Development (International) 3,813 4,496 2,509
Corporate 1,915 5,833 3,086
------------------------------------------------------------------------------------
$ 262,033 $290,760 $50,346
------------------------------------------------------------------------------------
</TABLE>
The Company derives a significant portion of its revenues from a few large
customers. Those customers are as follows:
<TABLE>
<CAPTION>
Revenue for the Percentage of Total Revenues
Fiscal Year During The Fiscal Years Ended
Ended October 31,
Customer Operating Group October 31, 1999 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New Jersey Consortium Transportation and Network Services $78,515 18% 8% --
WorldCom Network Services 61,636 15% 14% --
Williams Communications, Inc. Network Services 49,621 12% -- --
Cooper Tire Company Construction 13,050 3% 6% 15%
Florida Power Corp. Construction 13,514 3% 7% 9%
State of Illinois (ISTHA) Network Services 11,680 2% 5% --
</TABLE>
MFSNT is party to multiple contracts with the New Jersey Consortium ("New Jersey
Consortium Contracts") which includes the New Jersey Turnpike Authority, New
Jersey Highway Authority, Port Authority of New York and New Jersey, South
Jersey Transportation Authority and the State of Delaware Department of
Transportation. The New Jersey Consortium Contracts provide for, among other
items, MFSNT to construct and maintain a fully integrated automated toll
collection system and supporting fiber optic network. The gross revenues the
Company has or expects to receive from the New Jersey Consortium Contracts are
estimated to be approximately $280.0 million. During the fiscal year ended
October 31, 1999, the Company incurred net losses related to the New Jersey
Consortium Contracts of approximately $4.0 million, including penalties of
approximately $4.9 million associated with the failure to meet certain
milestones provided for in the contracts. The Company is not currently incurring
additional penalties related to the New Jersey Consortium Contracts. However,
scheduled minimum payments due the Company for operation of the violations
processing center have been deferred until certain work is completed by the
Company and accepted by the Consortium and may not be recouped as minimum
payments.
At October 31, 1999, the Company had billed and unbilled receivables of
approximately $18.3 million and $20.4 million relating to the New Jersey
Consortium, $10.9 million and $8.7 million relating to WorldCom and $6.2
million and $1.1 million relating to Williams Communications, Inc.,
respectively.
F-58
<PAGE> 124
The loss of the New Jersey Consortium, WorldCom or any other such customers
could have a material adverse effect on Able's business, financial condition and
results of operations.
22. UNAUDITED QUARTERLY FINANCIAL DATA (amounts in thousands except per
share data)
The fiscal 1999 quarterly unaudited amounts have been adjusted from amounts
previously reported by the Company in their 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 each of the quarterly periods during fiscal 1999 are
summarized below (in thousands, except per share data):
<TABLE>
<CAPTION>
As Reported Adjustments Adjusted
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First quarter:
Revenues $ 91,777 $ 1,303 $ 93,080
Operating income (loss) 5,363 (2,842) 2,521
Net income (loss) (581) (4,737) (5,318)
Income (loss) applicable to common stock (761) (4,737) (5,498)
Income (loss) applicable to common stock per share (0.06) (0.41) (0.47)
Second quarter:
Revenues 124,481 (752) 123,729
Operating income (loss) 536 (3,393) (2,857)
Net income (loss) 41 (1,636) (1,595)
Income (loss) applicable to common stock (15,151) 845 (14,306)
Income (loss) applicable to common stock per share (1.29) 0.07 (1.22)
Third quarter:
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 .01 (0.88) (0.87)
Fourth quarter:
Revenues 98,975 -- 98,975
Operating income (loss) (3,003) -- (3,003)
Net income (loss) (5,662) -- (5,662)
Income (loss) applicable to common stock (6,689) -- (6,689)
Income (loss) applicable to common stock per share (0.56) -- (0.56)
</TABLE>
<TABLE>
<CAPTION>
NET INCOME (LOSS) APPLICABLE
NET INCOME (LOSS) TO COMMON STOCK
------------------------------------------------------------------------
FIRST SECOND THIRD FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amounts previously reported $ (581) $ 41 $ 161 $ (761) $ (15,151) $ 122
------------------------------------------------------------------------
Adjustments:
WorldCom SAR obligation (1) (1,906) 821 (687) (1,906) 821 (687)
Improperly deferred costs (2) (763) (2,382) (2,778) (763) (2,382) (2,778)
Costs improperly charged against reserves (3) (132) 623 (1,514) (132) 623 (1,514)
Prior year accrual adjustment (4) (957) -- -- (957) -- --
Equipment impairment loss (5) -- (1,146) -- -- (1,146) --
Tax effects of other adjustments (6) (118) 807 309 (118) 807 309
Series B redemption and modification (7) -- -- -- -- 2,481 (3,338)
Series B liquidation value adjustment (8) -- -- -- -- -- (1,403)
Other adjustments (9) (625) (18) (92) (625) (18) (92)
Long-term service contract adjustments (10) (236) (341) (884) (236) (341) (884)
------------------------------------------------------------------------
Total adjustments (4,737) (1,636) (5,646) (4,737) 845 (10,387)
------------------------------------------------------------------------
Restated Amount $(5,318) $(1,595) $(5,485) $(5,498) $(14,306) $(10,265)
------------------------------------------------------------------------
</TABLE>
Quarterly adjustments:
(1) The obligation under the WorldCom SARs (Note 5) 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) For the first three quarters, the Company deferred certain costs
relating to its operation of the Violation Processing Center for the
New Jersey Consortium that should have been expensed as incurred.
(3) Indirect costs were not consistently allocated to Transportation
Services Group jobs. In addition, costs were charged against reserves
for Loss Jobs that were not related to those jobs.
(4) A prior year consolidating adjustment to reduce accrued expenses was
inappropriately not reversed in the preparation of the 1999
consolidations.
(5) An impairment loss for certain equipment for one of the Company's
subsidiaries should have been recognized in the second quarter.
(6) The tax provision for all quarters has been restated, including
reversal of approximately $1.2 million tax benefit originally offset
against the extraordinary loss on the early extinguishment of debt.
(7) 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.
(8) The Series B Preferred Stock should have been reflected at its
liquidation value upon recharacterization as a default obligation in
May 1999 Refer to Note 14, "Preferred Stock"
(9) Other adjustments made as a result of the year-end audit affected the
previously reported quarterly amounts as shown.
(10) These adjustments recognize losses on long-term service contracts as
incurred as discussed more fully in the following paragraph.
LONG-TERM SERVICE CONTRACTS
During the third quarter, 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. The SEC
has not yet agreed with the Company that such accounting is appropriate and may
require the Company to further change its accounting policies for operations
and maintenance contracts.
Quarterly unaudited amounts for the fiscal years ended October 31, 1998 and 1997
are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Revenues $22,268 $34,552 $58,305 $102,356
Operating income (loss) (1,164) 2,180 4,319 6,074
Net income (loss) (927) 867 790 1,784
Income (loss) applicable to common stock (1,081) 838 (7,186) 1,589
Income (loss) applicable to common stock per share (0.12) 0.09 (0.72) 0.16
1997:
Revenues 18,326 20,871 21,984 25,153
Operating income (loss) 1,144 1,785 1,024 888
Net income (loss) 507 851 932 567
Income (loss) applicable to common stock 470 337 491 33
Income (loss) applicable to common stock per share 0.04 0.04 0.06 0.02
</TABLE>
F-59
<PAGE> 125
23. SUBSEQUENT EVENTS
WORLDCOM DEBT TO EQUITY CONVERSION
On January 11, 2000, WorldCom agreed to convert approximately $25.5 million of
its $30.0 million WorldCom Note into 3,050,000 shares of the Company's Common
Stock ("WorldCom Conversion Agreement"). The conversion was based on the January
8, 2000 closing price of the Company's Common Stock of $8.375 per share. The
remainder of the original WorldCom Note of approximately $4.5 million was
converted into an amended and restated 11.5 percent subordinated promissory note
due February 2001.
SERIES B AND SERIES C PREFERRED STOCK
In February 2000, the Company purchased the remaining Series B Preferred Stock
outstanding for a redemption price of approximately $16.8 million. The
consideration paid included cash of $10.9 million, 802,000 shares of the
Company's common stock, and warrants to purchase 267,000 shares of common stock.
The warrants are exercisable with respect to 200,000 shares at $10.13 per share.
The price for the remaining 67,000 shares will be established at the end of 100
trading days, using a market-based formula, but could be as low as $.01 per
share. To fund the Series B redemption, the Company issued a new class of Series
C Convertible Preferred Stock with detachable warrants ("Series C Stock") for
cash of $15.0 million.
The Series C Stock has a dividend rate of 5.9% and is convertible immediately at
$9.35 per common share. The conversion price is subject to change every six
months. If the common stock is trading below the previously adjusted conversion
price, the conversion price will be reduced, but not to less than $4.00 per
common share. Under certain terms and conditions, the Company may redeem the
Series C Stock beginning 60 days after a registration statement for the
underlying common shares is declared effective at a price of $15 million plus
10% for each full or partial six-month period elapsed until redemption. The
terms of the Series C Preferred Stock include certain punitive provisions in the
event of default, including interest to accrue at 3% per month. The Series C
Stock was issued with detachable warrants for the purchase of 200,000 shares of
the Company's common stock at a price of $10.75 per share. The Financial
Advisors (Note 17) also are entitled to warrants for 75,000 common shares at
$10.75 per share.
The pro forma effect of the WorldCom Conversion Agreement and the Series B and
Series C Transactions on the October 31, 1999, consolidated balance sheet is as
follows:
<TABLE>
<CAPTION>
WorldCom
As Reported Conversion Series B Series C Pro Forma
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $ 16,568 $ -- $(10,879) $ 14,400 $ 20,089
Current assets 167,874 -- (10,879) 14,400 171,395
Total Assets 262,033 -- (10,879) 14,400 265,554
Current liabilities 166,772 -- -- -- 166,772
Long-term debt 46,086 (25,500) -- -- 20,586
Preferred stock 16,322 -- (16,322) 13,637 13,637
Equity 431 25,500 5,443 763 32,137
</TABLE>
ACQUISITION
On November 5, 1999, the Company acquired all of the outstanding common stock of
Southern Aluminum & Steel Corporation ("SASCO") along with Specialty Electronic
Systems, Inc. ("SES"). SASCO has operations in Birmingham, Cape Canaveral and
Atlanta and has 40 years' experience in surveillance systems, signalization,
Intelligent Transportation Systems ("ITS") and roadway lighting. It provides
expertise in design, installation, and project implementation of advanced
highway communication networks. SES is a systems/integration company in the ITS
market, having designed, fabricated, installed and integrated ITS systems in 11
states from the East Coast to Ohio and Texas.
Consideration for SASCO and SES was 75,000 shares of common stock with a value
of approximately $0.7 million. In addition to the initial consideration, the
Company has provided an earn-out provision to the prior shareholders whereby
additional consideration will be given based on certain performance
measurements. The additional consideration can be earned over a four year
period. The Company intends to record this transaction using the purchase method
of accounting. The pro forma effect on consolidated results of operations, from
the acquisition of SASCO and SES, is not material.
The earn-out consideration for year one (ending October 31, 2000) shall be
converted into the Company's common stock by dividing the earn-out consideration
by $8. The earn-out consideration for year two through year four shall be
converted into the Company's common stock by dividing the earn-out consideration
by the 52-week average of the closing market price of the Company's common stock
for each respective year.
The consideration shall be paid in shares of the Company's common stock.
However, the cumulative shares issued (initial and earn-out) may never exceed
19.9 percent of the total Company common stock issued and outstanding. Should
the 19.9 percent threshold be reached, any additional consideration earned will
be paid in cash or promissory notes with interest calculated at a market rate,
as mutually agreed upon by the Company and the former shareholders, at the time
of payment.
F-60
<PAGE> 126
Able Telcom Holding Corp. and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Years ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Period Acquisitions Expenses Deductions Period
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
October 31, 1999 $866 $ -- $5,044 $2,396 $3,514
October 31, 1998 686 75 782 677 866
October 31, 1997 828 -- 160 302 686
Restructuring and other acquisition reserves:
October 31, 1999 1,541 -- -- 959 582
October 31, 1998 -- 4,997 -- 3,456 1,541
October 31, 1997 -- -- -- -- --
Reserves for litigation and claims:
October 31, 1999 4,014 -- -- 700 3,314
October 31, 1998 -- 5,000 -- 986 4,014
October 31, 1997 -- -- -- -- --
Reserves for losses on uncompleted contracts:
October 31, 1999 25,390 2,463 -- 19,233 8,620
October 31, 1998 -- 40,500 -- 15,110 25,390
October 31, 1997 -- -- -- -- --
</TABLE>
F-61
<PAGE> 127
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimated expenses (other than any discounts that may be
incurred by the Selling Shareholders) to be incurred in connection with the
offering described in this Registration Statement:
<TABLE>
<S> <C>
SEC Registration Fee (actual) $ 28,613
Accounting Fees and Expenses 250,000
Legal Fees and Expenses 500,000
Blue Sky Fees and Expenses (1)
Nasdaq Listing Fees (1)
Printing (1)
Miscellaneous (1)
Total $ (1)
</TABLE>
* Estimated
(1) To be filed by amendment.
The Company intends to pay all of the expenses of registration with respect to
the shares being offered hereby. The Selling Shareholders will pay their
respective expenses related to the sale of the shares offered hereby, including
any discounts, stock transfer taxes and independent legal fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 607.0850(1) of the Florida Business Corporation Act (the "FBCA") permits
a Florida corporation to indemnify any person who may be a party to any third
party proceeding by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, against liability incurred in
connection with such proceeding (including any appeal thereof) if he or she
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Section 607.0850(2) of the FBCA permits a Florida corporation to indemnify any
person who may be a party to a derivative action if such person acted in any of
the capacities set forth in the preceding paragraph, against expenses and
amounts paid in settlement not exceeding, in the judgment of the board of
directors, the estimated expenses of litigating the proceeding to conclusion,
actually and reasonably incurred in connection with the defense or settlement of
such proceeding including appeals, provided that the person acted under the
standards set forth in the preceding paragraph. However, no indemnification
shall be made for any claim, issue or matter for which such person is found to
be liable unless, and only to the extent that, the court determines that,
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnification for
such expenses which the court deems proper.
Section 607.0850(4) of the FBCA provides that any indemnification made under the
above provisions, unless pursuant to a court determination, may be made only
after a determination that the person to be indemnified has met the standard of
conduct described above. This determination is to be made by a majority vote of
a quorum consisting of the disinterested directors of the board of directors, by
independent legal counsel, or by a majority vote of the disinterested
shareholders. The board of directors also may designate a special committee of
disinterested directors to make this determination.
Section 607.0850(3), however, provides that a Florida corporation must indemnify
any director or officer of a corporation who has been successful in the defense
of any proceeding referred to in Section 607.0850(1) or (2), or in the defense
of any claim, issue or matter therein, against expenses actually and reasonably
incurred by him or her in connection therewith.
Expenses incurred by a director or officer in defending a civil or criminal
proceeding may be paid by the corporation in advance of the final disposition
thereof upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it is ultimately determined that such director
or officer is not entitled to indemnification under Section 607.0850.
Section 607.0850 of the FBCA further provides that the indemnification
provisions contained therein are not exclusive and it specifically empowers a
corporation to make any other further indemnification or advancement of expenses
under any bylaw, agreement, vote of shareholders or disinterested directors or
otherwise, for actions in an official capacity and in other capacities while
holding an office. However, a corporation cannot indemnify or advance expenses
if a judgment or other final adjudication
II-1
<PAGE> 128
establishes that the actions of the director or officer were material to the
adjudicated cause of action and the director or officer (a) violated criminal
law, unless the director or officer had reasonable cause to believe his conduct
was not unlawful, (b) derived an improper personal benefit from a transaction,
(c) was or is a director in a circumstance where the liability under Section
607.0834 (relating to unlawful distributions) applies, or (d) engages in willful
misconduct or conscious disregard for the best interests of the corporation in a
proceeding by or in right of the corporation to procure a judgment in its favor
or in a proceeding by or in right of a shareholder.
Pursuant to (i) the Registration Rights Agreement with respect to the shares of
common stock underlying the Series B Preferred Stock and the Series B Warrants,
(ii) the Warrant Agreement with respect to the John Hancock Warrants, and (iii)
the Merger Agreement, the Selling Shareholders have agreed to indemnify the
Company and its affiliates, officers, directors, and controlling persons,
against certain liabilities, including liabilities arising under the Securities
Act.
The Company's Bylaws provide that the Company shall indemnify the Company's
officers and directors against liability resulting from their service as an
officer or director of the Company, and the Company has entered into
indemnification agreements with its officers and directors, the form of which
is filed as an exhibit to this Registration Statement.
Reference is also made to the undertaking made with respect to indemnification
matters involving the Company's directors, officers and controlling persons, set
forth in Item 17(c) below.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All of the following sales of unregistered securities were sold pursuant to an
exemption under Section 4(2) of the Securities Act of 1933, as amended, or
pursuant to Regulation D thereunder, as transactions by an issuer not
involving any public offering.
SERIES B PREFERRED STOCK
On June 30, 1998, the Company issued 4,000 shares of its Series B Convertible
Preferred Stock, par value $.10 per share. The Series B Preferred Stock was sold
at a price of $5,000 per share to accredited investors, as such term is defined
in Rule 501(a) under the Securities Act, for aggregate consideration of $20.0
million.
On June 30, 1998, as part of the Company's offering of its Series B Preferred
Stock, the Company issued to the holders thereof warrants to purchase in the
aggregate 1,000,000 shares of common stock, par value $.001 per share, to the
purchasers of the Series B Preferred Stock, for aggregate consideration to us of
$18.1 million. The warrants are immediately exercisable for a five year period
at a price of $19.80 per share, subject to certain adjustment as provided in the
warrant agreement.
During fiscal year 1998, the holders of Series B Preferred Stock converted
436 shares into 1,007,927 shares of common stock at a conversion price of
$2.18 per share.
In February 2000 we redeemed 779 shares of Series B Preferred Stock by issuing
801,787 shares of common stock, issuing warrants to purchase 66,246 shares of
common stock with an exercise price of $.01 per share, and paying cash. We also
agreed to issue 1,057,031 shares of common stock and warrants to purchase
200,000 shares of common stock with an exercise price of $10.125 per share,
also as part of the redemption price. These latter shares and warrants were
sold subject to receiving shareholder approval at our upcoming annual meeting.
In July 2000, we issued 66,246 shares of common stock upon the exercise of
outstanding warrants. We received aggregate consideration of $662.46 from the
holders.
SENIOR NOTES
On January 6, 1998, the Company sold $10.0 million in principal amount of its
12% Senior Subordinated Notes Due January 6, 2005 to a single accredited
investor.
As part of the Company's offering of the Senior Notes, the Company issued to the
holders thereof warrants to purchase in the aggregate 409,505 shares of common
stock. The warrants are exercisable at an exercise price of $8.25 per share.
The warrants were issued for no additional consideration.
SERIES A PREFERRED STOCK
In the last 3 months of 1997, we issued 921,000 shares of common stock to two
purchasers in conversion of 500 shares of Series A Convertible Preferred Stock
previously issued in 1997, at a conversion price of $7.40 per share.
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STOCK OPTIONS
From time to time, the Company has issued and will continue to issue to certain
of the Company's employees, officers, directors, consultants and advisors
options to purchase common stock. As of August 30, 2000, options under the Stock
Option Plan to purchase 734,000 shares of common stock remain exercisable at
various exercise prices. The Company has registered on a Form S-8 registration
statement 550,000 shares of common stock for sale pursuant to the exercise of
options granted under the Stock Option Plan. In addition, the Company has issued
to employees options to purchase 2,189,897 shares of common stock outside the
Stock Option Plan that remain exercisable at various exercise prices. These
options issued outside the Stock Option Plan are subject to shareholder approval
at the Company's upcoming annual meeting.
THE WORLDCOM OPTION
As part of the MFSNT acquisition, we granted an option to WorldCom to purchase
up to 2,000,000 shares of the Company's common stock at an exercise price of
$7.00 per share.
THE WORLDCOM EQUITY AWARD
We also granted WorldCom an equity award in the form of stock appreciation
rights which is equivalent to 600,000 shares of common stock, payable in cash,
stock, or a combination of both at the Company's option. The exercise price for
these stock appreciation rights is $5.0938 per share. The issuance of the stock
appreciation rights was part of the consideration for the MFSNT acquisition.
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SERIES C PREFERRED STOCK
In February 2000, the Company sold 5,000 shares of Series C Convertible
Preferred Stock and warrants to purchase 200,000 shares of common stock
exercisable at $10.75 per share. The aggregate consideration was $15.0 million.
The securities were sold to a small group of accredited investors affiliated
with each other. The Series C Preferred Stock has a conversion price of $4.00
per share.
In consideration of assistance with settling the Sirit litigation in February
2000, the Company issued the Series C holders additional warrants to purchase
375,000 shares of common stock at $6.00 per share and 375,000 shares of common
stock at $8.00 per share.
SERIES D PREFERRED STOCK
In August 2000, we issued 1,000 shares of Series D Convertible Preferred Stock
to WorldCom to pay off $37.0 million in debt owed to Worldcom. The Series D
Preferred Stock has a conversion price of $10.01 per share.
OTHER SALES 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.
In August 2000, we agreed to issue 5,011,511 shares of common stock to Sirit
Technologies, Inc. in settlement of a $31.2 million judgment Sirit obtained
against us. Issuance of these shares is subject to shareholder approval at our
upcoming annual meeting.
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ITEM 16. EXHIBITS.
<TABLE>
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EXHIBIT NO. DESCRIPTION
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<S> <C>
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)
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 February 16, 1999(12)
2.5.10 Modification to the WorldCom Option and WorldCom Equity Award,
dated March 15, 1999 between the Company and WorldCom,
modifying certain terms and extending the exercise period of
the WorldCom Option (16)
2.5.11 Amended and Restated Master Services Agreement by and between
MCI WorldCom Network Services, Inc. and Able Telcom Holding
Corp. dated as of August 24, 2000.
2.5.12 Second Amended and Restated Subordinated Promissory Note
between Able Telcom Holding Corp. and Worldcom Network
Services, Inc. dated as of August 24, 2000
2.6 Agreement and Plan of Merger dated as of August 23, 2000 among
Bracknell Corporation, Bracknell Acquisition Corporation and
Able Telcom Holding Corp.
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<TABLE>
<S> <C>
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)
3.1.2 Articles of Amendment to the Articles of Incorporation of
Able Telcom Holding Corp.
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)
4.15 Securities Purchase Agreement by and between the Sellers (as
defined) and Cotton Communications, Inc. dated February 17,
1999(12)
4.15.1 Letter Agreement dated February 17, 1999 from Cotton
Communications, Inc. to John Hancock Mutual Life Insurance
Company(17)
4.15.2 Letter Agreement dated February 17, 1999 from Cotton
Communications, Inc. to Able Telcom Holding Corp.(17)
4.15.3 Termination Agreement dated March 22, 1999 by and between
Able Telcom Holding Corp. and Cotton Communications, Inc.(17)
4.16 Series B Convertible Preferred Stock Exchange Agreement by and
between Able Telcom Holding Corp. and the Palladin Group dated
February 4, 2000(17)
4.16.3 Letter Agreement dated February 17, 1999 from the Palladin
Group to Able Telcom Holding Corp.(17)
4.16.4 Letter dated March 19, 1999 from Able Telcom Holding Corp.
to the Palladin Group associated with the termination of
Financing Agreement dated February 17, 1999(17)
4.17 Form of First Common Stock Purchase Warrants in connection
with Series B Convertible Preferred Stock Exchange
Agreement with the Palladin Group(17)
4.18 Form of Second Common Stock Purchase Warrants in connection
with Series B Convertible Preferred Stock Exchange Agreement
with the Palladin Group(17)
4.19 Series B Convertible Preferred Stock Exchange Agreement by
and between Able Telcom Holding Corp. and the RoseGlen
Group dated February 4, 2000(17)
4.19.1 Amendment No. 1 to Securities Exchange Agreement and Related
Registration Rights Agreement of Able Telcom Holding Corp.
[RGC International Investors, LDC], dated July 7, 2000.(20)
4.20 Form of Common Stock Purchase Warrants in connection with
Series B Convertible Preferred Stock Exchange Agreement
with the RoseGlen Group(17)
4.21 Registration Rights Agreement associated with Series B
Convertible Preferred Stock Exchange Agreement(17)
4.21.1 Amendment No. 1 to Securities Exchange Agreement and Related
Registration Rights Agreement of Able Telcom Holding Corp.,
dated July 7, 2000.(20)
4.22 Series C Convertible Preferred Stock Purchase Agreement(17)
4.22.1 Amendment No. 1 to Able Telcom Holding Corp. Series C
Convertible Preferred Stock Purchase Agreement and Related
Agreements, dated July 7, 2000.(20)
4.23 Form of Common Stock Purchase Warrants in connection with
Series C Convertible Preferred Stock Purchase Agreement(17)
4.24 Registration Rights Agreement associated with Series C
Convertible Preferred Stock Purchase Agreement(17)
5.1 Opinion regarding legality of common stock*
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)
10.29 Employment Agreement with Jesus G. Dominguez, dated April 27,
1998(13)
10.30 Employment Agreement with Stacy Jenkins, dated July 16, 1998(13)
</TABLE>
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<TABLE>
<S> <C>
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 Telecom Holding Corp.,
NationsBank N.A., and the Several Lenders from Time to Time
Parties thereto, dated as of June 30, 1998**
10.33 Employment Agreement with Billy V Ray, Jr., dated October 1,
1998(12)
10.34 Employment Agreement with Curtis A. "Butch" Dale, dated August
17, 1998(14)
10.35 Financial Advisor and Placement Engagement Letter, dated April
3, 1998, between Washington Equity Partners and Able Telcom
Holding Corp.(14)
10.36 Employment Agreement with G. Vance Cartee, dated January 4,
1999(12)
10.37 Employment Agreement with Edward Pollock, dated January 1,
1999(12)
10.38 Employment Agreement with Frazier L. Gaines, dated November
12, 1998(12)
10.39 Employment Agreement with Gideon D. Taylor, dated December 7,
1998(12)
10.40 Employment Agreement with Rick Boyle, dated April 1, 1998(12)
10.41 Financing Agreement between Able Telcom Holding Corp. and
Cotton Communications, Inc. dated February 17, 1999 (without
exhibits)(12)
10.41.1 Termination Agreement between Able Telecom Holding Corp. and
Cotton Communications, Inc. dated March 22, 1999**
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**
10.45 Consulting Agreement and Employment Agreement with James E.
Brands, dated March 15, 1999**
10.46 Employment Agreement with Billy V. Ray, Jr., dated
June 15, 2000
10.47 $2,000,000 Promissory Note between Billy V. Ray, Jr. and Able
Telcom Holding Corp., dated August 18, 2000.
10.48 Form of Indemnification Agreement between Able Telcom Holding
Corp. and certain officers and directors
10.49 Employment Agreement with Thomas Montgomery, dated
February 21, 2000(18)
10.50 Employment Agreement with Charles Maynard, dated February 21,
2000(18)
10.51 Employment Agreement with Philip Kernan, dated February 21,
2000(18)
10.52 Employment Agreement with Edwin D. Johnson, dated May 3,
2000(19)
10.53 Employment Agreement with Michael Brenner, dated May 3,
2000(19)
10.54 Settlement Agreement, between the Sirit Parties and the Able
Parties, dated July 7, 2000.(20)
11 Computation of Per Share Earnings(7)
16.1 Letter regarding change in certifying accountants(15)
21 Subsidiaries of Able Telcom Holding Corp.(13)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Counsel (included with Exhibit 5.1)
</TABLE>
-------------------
* To be filed by amendment
** Previously filed
(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.
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<PAGE> 134
(5) Incorporated by reference from an exhibit to the Company's Current
Report on Form 8-K (File No. 0-21986), dated October 12, 1996, as filed
with the Commission on October 25, 1996.
(6) Incorporated by reference from an exhibit to the Company's Annual
Report on Form 10-K (File No. 0-21986) for the fiscal year ended
October 31, 1997, as filed with the Commission on February 13, 1998, as
amended by 10-K/A, as filed with the commission on March 20, 1998.
(7) Incorporated by reference from Note 5 to the Condensed Consolidated
Financial Statements (Unaudited) filed herewith.
(8) Incorporated by reference from an exhibit to the Company's Current
Report on Form 8-K (File No. 0-21986), dated December 2, 1996, as filed
with the Commission on December 13, 1996, as amended by Form 8-K/A-1,
dated February 11, 1997, as filed with the Commission on February 11,
1997.
(9) Incorporated by reference from an exhibit to the Company's Quarterly
Report on Form 10-Q (File No. 0-21986), for the quarter ended April 30,
1998, as filed with the Commission on June 14, 1998.
(10) Incorporated by reference from an exhibit to the Company's Current
Report on Form 8-K (File No. 0-21986), dated July 2, 1998, as filed
with the Commission on July 16, 1998.
(11) Incorporated by reference from an exhibit to the Company's Current
Report on Form 8-K/A (File No. 0-21986), dated July 2, 1998, as filed
with the Commission on August 3, 1998.
(12) Incorporated by reference from an exhibit to the Company's Annual
Report on Form 10-K/A (File No. 0-21986), for the fiscal year ended
October 31, 1998, as filed with the Commission on March 1, 1999.
(13) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (File No. 0-21986), for the quarter ended July 31,
1998, as filed with the Commission on September 21, 1998, as amended by
Form 10-Q/A, as filed with the Commission on October 13, 1998.
(14) Incorporated by reference to an exhibit to the Company's Form S-1 (File
No. 333-65991), as filed with the Commission on October 22, 1998.
(15) Incorporated by reference from an exhibit to the Company's Current
Report on Form 8-K (File No. 0-21986), dated September 7, 1998, as
filed with the Commission on September 14, 1998.
(16) Incorporated by reference to an exhibit to the Company's Form 10-Q, as
filed with the Commission on September 14, 1999.
(17) Incorporated by reference to an exhibit to the Company's Annual Report
on Form 10-K (File No. 0-21986), for the fiscal year ended October 31,
1999, as filed February 22, 2000, as amended May 26, 2000.
(18) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (File No. 0-21986), for the quarter ended January
31, 2000, as filed April 12, 2000.
(19) 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,
2000, as filed June 1, 2000.
(20) Incorporated by reference to an exhibit to the Company's Current Report
on Form 8-K (File No. 0-21986), dated July 7, 2000, as filed with the
Commission on July 20, 2000.
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ITEM 17. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in this
Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this Registration Statement
or any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registration has duly caused the Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned thereunto duly authorized, in the
City of Roswell, State of Georgia, on August 31, 2000.
ABLE TELCOM HOLDING CORP.
BY: /s/ BILLY V. RAY, JR.
-------------------------------------
BILLY V. RAY, JR.,
President and Chief Executive Officer
<TABLE>
<CAPTION>
Signatures Title Date Signed
<S> <C> <C>
/s/ Billy V. Ray, Jr. Chief Executive Officer, Chairman
------------------------------- and a Director
Billy V. Ray, Jr. (Principal Executive Officer) August 31, 2000
/s/ Edwin D. Johnson President, Chief Financial Officer
------------------------------- and a Director
Edwin D. Johnson (Chief Financial and Principal
Accounting Officer) August 31, 2000
/s/ C. Frank Swartz Director August 31, 2000
-------------------------------
C. Frank Swartz
/s/ H. Alec McLarty Director August 31, 2000
-------------------------------
H. Alec McLarty
------------------------------- Director
Gerald Pye
</TABLE>
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