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