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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-47608
ABLE TELCOM HOLDING CORP.
1000 HOLCOMB WOODS PARKWAY, SUITE 440
ROSWELL, GA 30076
DECEMBER 11, 2000
You are cordially invited to attend the 2000 Annual Meeting of Shareholders
of Able Telcom Holding Corp. Able will hold the meeting on December 22, 2000 at
the offices of Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, 31st
Floor, New York, New York 10022, at 9:00 a.m. Eastern Time.
This document is being furnished in connection with the solicitation of
proxies by the Board of Directors of Able to be used at the meeting. At the
meeting, the shareholders of Able will be asked to consider and vote upon a
number of proposals as set forth in this document, including an Agreement and
Plan and Merger dated August 23, 2000, as amended and restated effective
November 14, 2000 pursuant to which Able will merge with a wholly owned
subsidiary of Bracknell Corporation. Able would become a wholly owned subsidiary
of Bracknell and Bracknell would pay Able shareholders 0.6 shares of Bracknell
stock for each share of Able stock. Bracknell has applied to list the stock on
the Nasdaq National Market under the symbol BRKC.
Attending the annual meeting is limited to those persons who were
shareholders, or their authorized representatives, as of the record date of
November 13, 2000 and to Able's guests. If your shares are registered in your
name and you plan to attend the annual meeting, please mark the appropriate box
on the enclosed proxy card and you will be pre-registered for the annual
meeting. If your shares are held of record by a broker, bank or other nominee
and you plan to attend the meeting, you must also pre-register by returning the
registration card forwarded to you by your bank or broker.
The notice of the annual meeting and proxy statement/prospectus on the
following pages contain information concerning the business to be considered at
the annual meeting. Please give these proxy materials your careful attention. It
is important that your shares be represented and voted at the annual meeting,
regardless of the size of your holdings. Your vote is important. Whether you
plan to attend the annual meeting or not, please complete, date, sign and return
the enclosed proxy card promptly. If you attend the annual meeting and prefer to
vote in person, you may do so.
This proxy statement/prospectus is being mailed to shareholders of Able
beginning about December 11, 2000.
ABLE URGES YOU TO CAREFULLY READ THE "RISK FACTORS" SECTION BEGINNING ON
PAGE 15 FOR A DESCRIPTION OF THE RISKS THAT YOU SHOULD CONSIDER IN EVALUATING
THE MERGER.
The continuing interest of Able shareholders is gratefully acknowledged.
Able looks forward to seeing you at the annual meeting.
/s/ BILLY V. RAY, JR.
BILLY V. RAY, JR.
Chairman of the Board
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THE BRACKNELL COMMON STOCK TO BE ISSUED IN
THE MERGER OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER 11, 2000.
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ABLE TELCOM HOLDING CORP.
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NOTICE OF 2000 ANNUAL MEETING OF SHAREHOLDERS
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The 2000 Annual Meeting of the Shareholders of Able Telcom Holding Corp.
will be held on December 22, 2000 at the offices of Paul, Hastings, Janofsky &
Walker LLP, 399 Park Avenue, 31st Floor, New York, New York, 10022 at 9:00 a.m.
Eastern Time. At the 2000 Annual Meeting of Shareholders, Able will ask you to
vote on the following Proposals, each of which is independent of the others:
1. To approve an Agreement and Plan of Merger pursuant to which Able
will merge with a wholly owned subsidiary of Bracknell Corporation; Able
would become a wholly owned subsidiary of Bracknell and Bracknell would pay
Able shareholders 0.6 shares of Bracknell stock for each share of Able
stock;
2. To elect four Directors to serve until Able's next annual meeting
of shareholders or until their qualified successors are elected;
3. To approve amending Able's articles of incorporation to increase
the number of authorized shares of:
(A) Common Stock from 25 million to 100 million, and
(B) Preferred Stock from one million to five million;
4. To approve amending Able's articles of incorporation to change its
corporate name from "Able Telcom Holding Corp." to "The Adesta Group,
Inc.";
5. To ratify and approve the grant of 2,414,897 stock options to
certain of Able's officers and directors outside of its 1995 Stock Option
Plan. Issuance of these shares must be approved by the shareholders under
the Nasdaq rules;
6. To approve issuing up to 2,600,000 shares of Able common stock to
WorldCom if it exercises options and stock appreciation rights obtained
from Able when Able acquired the network construction and transportation
systems business from WorldCom. Issuance of these shares must be approved
by Able's shareholders under the Nasdaq rules;
7. To approve issuing shares of Able common stock in connection with
outstanding Series B securities issued to finance its acquisition of the
network construction and transportation business from WorldCom. This
proposal relates to 1,627,031 shares currently issuable to some holders of
Series B securities plus additional shares which may be required to be
issued pursuant to anti-dilution provisions contained in the Series B
warrants. Issuance of these shares, when combined with 1,875,960 shares of
common stock already issued to holders of Able Series B convertible
preferred stock, must be approved by Able's shareholders under the Nasdaq
rules;
8. To approve issuing shares of Able common stock to holders of its
Series C convertible preferred stock and warrants upon conversion or
exercise of those securities. This proposal relates to 4,700,000 shares
currently issuable under the Series C preferred stock and warrants plus
additional shares which may be required to be issued pursuant to
anti-dilution provisions contained in the preferred stock and warrants.
Issuance of these shares must be approved by Able shareholders pursuant to
the Nasdaq rules;
9. To approve issuing shares of Able common stock in connection with a
litigation settlement with Sirit Technologies, Inc. This proposal relates
to up to 5,011,511 shares currently issuable to Sirit plus additional
shares which may be required to be issued pursuant to preemptive rights and
anti-dilution rights held by Sirit. Issuance of these shares may be subject
to approval by Able's shareholders under the Nasdaq rules;
10. To ratify appointing Arthur Andersen LLP as Able's independent
accountants for the fiscal years ended October 31, 1999 and October 31,
2000; and
11. To transact any other business that may properly be presented at
the 2000 Annual Meeting of Shareholders or any adjournments or
postponements of the annual meeting.
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Able's board of directors has fixed the close of business on November 13,
2000 as the record date for determining Able's shareholders entitled to notice
of and vote at its annual meeting. A list of the shareholders entitled to vote
at the annual meeting may be examined by any of Able's shareholders at its
corporate offices at 1000 Holcomb Woods Parkway, Suite 440, Roswell, GA 30076.
The enclosed proxy is solicited by Able's board of directors. Please refer
to the accompanying proxy materials for further information with respect to the
business to be transacted at the annual meeting. Able's Board of Directors
requests that you complete, sign, date and return the enclosed proxy card
promptly. You are cordially invited to attend the annual meeting in person. The
return of the enclosed proxy card will not affect your right to revoke your
proxy or to vote in person if you do attend the annual meeting.
By Order Of the Board of Directors
/s/ BILLY V. RAY, JR.
BILLY V. RAY, JR.
Chairman of the Board
Roswell, Georgia
December 11, 2000
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE IN ORDER TO ASSURE THAT YOUR SHARES ARE REPRESENTED. NO POSTAGE IS
NEEDED IF THE PROXY CARD IS MAILED IN THE UNITED STATES. IF YOU EXECUTE A PROXY
CARD, YOU MAY STILL ATTEND THE MEETING, REVOKE YOUR PROXY AND VOTE YOUR SHARES
IN PERSON.
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TABLE OF CONTENTS
PAGE
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Proxy Statement for the Annual Meeting...................... 1
Proposal No. 1: Approval and Adoption of the Merger
Agreement................................................. 4
Summary..................................................... 4
Risk Factors................................................ 15
The Merger.................................................. 23
The Merger Agreement........................................ 46
Market Price Data........................................... 55
Dividend Policy............................................. 57
Bracknell -- Recent Developments............................ 58
Unaudited Pro Forma Consolidated Financial Statements....... 60
Bracknell Selected Historical Consolidated Financial Data... 74
Bracknell -- Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 76
Business -- Bracknell....................................... 83
Management -- Bracknell..................................... 99
Principal Shareholders -- Bracknell......................... 107
Certain Transactions -- Bracknell........................... 111
Able -- Selected Historical Consolidated Financial Data..... 112
Able -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 115
Able -- Quantitative and Qualitative Disclosures About
Market Risk............................................... 127
Business -- Able............................................ 128
Security Ownership of Certain Beneficial Owners and
Management................................................ 143
Description of Capital Stock -- Bracknell................... 146
Description of Capital Stock -- Able........................ 148
Comparative Rights of Able Shareholders and Bracknell
Shareholders.............................................. 152
Legal Matters............................................... 161
Experts..................................................... 162
Enforceability of Civil Liabilities Under United States
Federal Securities Laws................................... 163
Where You Can Find More Information......................... 163
Proposal No. 2: To Elect Four Directors to Serve Until the
Next Annual Meeting of Shareholders or Until Their
Qualified Successors are Elected.......................... 165
Report on Executive Compensation............................ 182
Proposal No. 3: To Ratify and Approve Amendments to Able's
Articles of Incorporation to Increase The Number of
Authorized Shares of (A) Common Stock From 25 Million to
100 Million (B) Preferred Stock From One Million to Five
Million................................................... 185
Proposal No. 4: To Amend Able's Articles of Incorporation to
Change Its Corporate Name From "Able Telcom Holding Corp."
to "The Adesta Group, Inc."............................... 189
Proposal No. 5: To Ratify and Approve the Grant of 2,414,897
Stock Options to Certain of Able's Officers and Directors
Outside of Able's 1995 Stock Option Plan. Issuance of
Shares Pursuant to These Options Must Be Approved by the
Shareholders Pursuant to NASDAQ Rules..................... 192
Proposal No. 6: To Approve Issuing Up to 2,600,000 Shares of
Able Common Stock to WorldCom if It Exercises Options and
Stock Appreciation Rights It Obtained from Able When Able
Acquired the Network Construction and Transportation
Systems Business from WorldCom. Issuance of These Shares
Must Be Approved by the Shareholders Pursuant to NASDAQ
Rules..................................................... 200
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PAGE
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Proposal No. 7: To Approve Issuing Shares of Able Common
Stock in Connection with Outstanding Series B Securities
Issued to Finance the Acquisition from WorldCom of the
Network Construction and Transportation Systems Business
from WorldCom. This Proposal Relates to 1,627,031 Shares
Currently Issuable under these Securities plus Additional
Shares which may be Required to be Issued Pursuant to
Anti-dilution Provisions Contained in the Warrants
Described. Issuance of these Shares, when Combined with
1,875,960 Shares of Common Stock Already Issued to Holders
of Able's Series B Preferred Stock, Must be Approved by
the Shareholders Pursuant to NASDAQ Rules................. 204
Proposal No. 8: To Approve Issuing Shares of Able's Common
Stock to Holders of Series C Convertible Preferred Stock
and Warrants Upon the Conversion or Exercise of those
Securities. The Proposal Relates to 4,700,000 Shares
Currently Issuable Under the Series C Preferred Stock and
Warrants Plus Additional Shares which may be Required to
be Issued Pursuant to Anti-dilution Provisions Contained
in the Preferred Stock and Warrants. Issuance of these
Shares must be Approved by the Shareholders Pursuant to
NASDAQ Rules.............................................. 208
Proposal No. 9: To Approve Issuing Shares of Able Common
Stock in Connection with a Litigation Settlement Between
Able and Sirit Technologies. The Proposal Relates to up to
5,011,511 Shares Currently Issuable to Sirit, Plus
Additional Shares which may be Required to be Issued
Pursuant to Preemptive and Anti-dilution Rights Held by
Sirit. Issuance of these Shares may be Subject to Approval
by the Shareholders Pursuant to NASDAQ Rules.............. 212
Proposal No. 10: Ratifying Able Appointing Arthur Andersen
LLP As Able's Independent Accountants..................... 215
Index to Financial Statements............................... F-1
APPENDICES
Appendix A-1 -- Amended and Restated Agreement and Plan of Merger
Appendix A-2 -- Opinion of The Robinson-Humphrey Company, LLC
Appendix A-3 -- Sections 607.1301, 607.1302 and 607.1320 of the Florida
Business Corporation Act.
Appendix B -- Business of Able (Pre-MFSNT Acquisition)
Appendix C -- Audited Financial Statements of the Network Technologies
Division of MFS Network Technologies, Inc.
Appendix D -- Charter of the Audit Committee of the Able Telcom Holding
Corp. Board of Directors
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PROXY STATEMENT FOR THE ANNUAL MEETING
The 2000 Annual Meeting of Shareholders of Able Telcom Holding Corp. will
be held on December 22, 2000 at the offices of Paul, Hastings, Janofsky & Walker
LLP, 399 Park Avenue, 31st Floor, New York, New York 10022 at 9:00 a.m. Eastern
Time, or at any adjournments or postponements of the annual meeting.
Able will begin sending these proxy materials, which include this proxy
statement/prospectus, the attached notice of annual meeting and the enclosed
proxy card on December 11, 2000 to all shareholders entitled to vote.
Shareholders who owned Able common stock at the close of business on November
13, 2000, the record date, are entitled to vote. On the record date, 16,374,504
shares of Able common stock were outstanding. The principal executive offices of
Able are located at 1000 Holcomb Woods Parkway, Suite 440, Roswell, GA 30076,
and the telephone number is (888) 547-1570.
This document gives you detailed information about the proposals to be
considered at the meeting. Able has provided the information concerning Able,
and Bracknell has provided the information concerning Bracknell. Please see
"Where You Can Find More Information" on page 163 for additional information
about Able and Bracknell on file with the United States Securities and Exchange
Commission.
WHY WERE THESE PROXY MATERIALS SENT?
These proxy materials were sent to you because Able's board of directors is
soliciting proxies from shareholders of Able common stock entitled to vote at
Able's annual meeting. This proxy statement/prospectus summarizes the
information you need to know to decide how to vote at the annual meeting,
including the information you need about Bracknell to decide on how to vote
regarding the merger.
WHY DIDN'T ABLE HOLD A 1999 ANNUAL MEETING?
In connection with the planned 1999 annual meeting, Able filed its initial
preliminary proxy materials with the Securities and Exchange Commission in March
1999. However, the Commission's staff raised a number of questions regarding
accounting and other disclosures that were made in the proxy materials and
related filings in connection with the acquisition of the network construction
and transportation systems business of MFS Network Technologies, Inc. from
WorldCom in 1998. Able was not able to resolve these questions until May 2000 so
it could not complete its proxy materials for the 1999 annual meeting. As a
result, the proposals submitted for shareholder approval at this 2000 annual
meeting include those Able initially intended to address at its 1999 annual
meeting that are still relevant, as well as new proposals.
WHY IS THE PROXY STATEMENT LONGER AND MORE COMPLEX THAN NORMAL?
This proxy statement/prospectus contains a full description of Bracknell
and the terms of the proposed merger to provide all the information you need to
vote on Proposal No. 1. If you vote in favor of the merger, Able will become a
subsidiary of Bracknell. However, even if you vote in favor of the merger,
because of various legal requirements or other rules applicable to Able, this
proxy statement/prospectus contains nine other proposals as to which Able needs
shareholder approval. Some of the proposals involve explanations of complex
transactions and legal requirements that have led to the proposals. For example,
under Nasdaq rules, certain transactions require Able to obtain the approval of
holders of a majority of its shares casting votes if it plans to issue new
shares of common stock that represent 20% or more of the shares of common stock
that were outstanding at the time Able agreed to issue the common stock. The
Nasdaq rules apply to the following types of transactions relevant to Proposals
Nos. 5, 6, 7, 8 and 9 of this proxy statement:
- transactions where the Able common stock is issued to acquire another
company;
- transactions where the Able common stock is 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
- transactions where an arrangement is made to issue Able common stock to
officers and directors under an arrangement that does not include other
employees, even if less than 20% of the outstanding common stock.
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At the time the transactions described in these proposals were approved by
the Able board, shareholder approval for the future issuance of the common stock
involved was required under the Nasdaq rules, but was not sought prior to Able
completing the transactions. Although Able's common stock has now been delisted
from the Nasdaq Stock Market, if the merger is not consummated, Able will
continue as a public company. If this occurs, the Able Board of Directors may at
some time in the future choose to seek relisting on Nasdaq. Any future listing
process would be simplified if Able has already sought the required shareholder
approval and thus corrected its previous failure to comply with the Nasdaq
rules.
The other proposals are being submitted for your approval because of
considerations of Florida law, Able's articles of incorporation and bylaws, and
contractual arrangements to which Able is bound.
HOW MANY VOTES ARE NEEDED FOR A QUORUM?
As of November 13, 2000, 16,374,504 shares of Able common stock were issued
and outstanding. The annual meeting will be held if a majority of Able's
outstanding common stock entitled to vote is represented at the annual meeting.
This means that 8,187,253 shares are required for a quorum. If you return the
proxy and/or attend the annual meeting in person, your shares of Able common
stock will be counted to determine whether a quorum exists, even if you wish to
abstain from voting on some or all matters introduced at the annual meeting. A
shareholder "abstains" from voting only if he or she actually returns a proxy
card marked "abstain". If you do not return a marked proxy card or attend in
person, you will not be counted as attending the meeting. Failing to return a
marked proxy card is not considered an "abstention". "Broker non-votes" also
count for quorum purposes. If you hold your common stock through a broker, bank,
or other nominee, generally the nominee may only vote the common stock which it
holds for you in accordance with your instructions. If a broker returns a proxy
card but indicates no authority to vote on a particular matter, it is called a
"broker non-vote."
If a quorum is not present or represented at the annual meeting, the
shareholders who do attend the annual meeting in person or who are represented
by proxy have the power to adjourn the annual meeting until a quorum is present
or represented. At any reconvened meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the original annual meeting.
HOW DOES A SHAREHOLDER VOTE BY PROXY?
Whether you plan to attend the annual meeting or not, Able urges you to
complete, sign and date the enclosed proxy card and return it promptly in the
envelope provided. No postage is needed if the proxy card is mailed in the
United States. If you properly fill in your proxy card and send it to us in time
to vote, your "proxy", one of the individuals named on your proxy card, will
vote your shares as you have directed. If you sign the proxy card but do not
make specific choices, your proxy will vote your shares for approval of each
proposal described in this document.
If any other matter is presented at the meeting, your proxy will vote in
accordance with his or her best judgment. At the time this proxy statement went
to press, Able knew of no matter which needed to be acted on at the annual
meeting, other than those discussed in this proxy statement.
MAY A PROXY BE REVOKED?
If you give a proxy, you may revoke it at any time before it is voted. You
may revoke your proxy in one of three ways. First, you may send in another proxy
card with a later date. Second, you may notify Able's Corporate Secretary in
writing before the annual meeting that you have revoked the instructions on your
proxy card. Third, you may vote in person at the annual meeting.
HOW DOES A SHAREHOLDER VOTE IN PERSON?
If you plan to attend the annual meeting and vote in person, Able will give
you a ballot when you arrive even if you sent in a proxy card. However, if your
shares are held in the name of your broker, bank or other
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nominee, you must bring an account statement or letter from the nominee
indicating that you are the beneficial owner of the shares on November 13, 2000
the record date.
WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSALS?
Proposal No. 1
Approval of the merger requires (i) the affirmative vote of the holders of
a majority of the outstanding shares of common stock and the Able Series E
preferred stock, voting together as a single class and (ii) the affirmative vote
of the holder of a majority of the Able Series C preferred stock and Able Series
E preferred stock, each voting as a separate class. Accordingly, abstentions
marked on the proxy card, broker non-votes, and failure to send in a proxy card,
will have the effect of a vote "AGAINST" Proposal No. 1.
Proposal Nos. 2, 3, 4 and 10
The Florida Business Corporation Act provides that the directors are
elected by a plurality of the votes cast (Proposal No. 2). Only Able common
stock has voting rights with respect to the election of directors. Proposal Nos.
3, 4 and 10 are approved if the votes cast in favor of the action exceed the
votes cast against the action. Abstentions marked on the proxy card and broker
non-votes will have no legal effect, because none of Proposal Nos. 2, 3, 4 or 10
specify that a particular percentage of the shareholders entitled to vote is
required.
Proposal No. 5
Proposal 5 has been approved by the Able board pursuant to its authority to
issue and modify options outside of Able's stock option plan. Proposal No. 5
requires approval under the Nasdaq rules. Also, because the Able board will be
the beneficiary of this proposal, it seeks shareholder approval to avoid the
appearance of a conflict of interest. Under the Florida Business Corporation
Act, a transaction is not void or voidable because of a conflict of interest if
holders of a majority of the outstanding shares of common stock, other than the
interested directors' shares, approve the transaction. Abstentions marked on the
proxy card, broker non-votes, and failure to send in a proxy card, will have the
effect of a vote "AGAINST" Proposal No. 5.
Proposal Nos. 6, 7, 8 and 9
The Nasdaq rules that are prompting these proposals require that holders of
a majority of the votes cast on a matter approve the proposals. Accordingly,
abstentions marked on the proxy card and broker non-votes, will have no legal
effect, because none of Proposals 6, 7, 8 or 9 specify that a particular
percentage of the shareholders entitled to vote is required.
IS VOTING CONFIDENTIAL?
Yes. proxy cards, ballots and voting tabulations that identify Able's
individual shareholders are confidential. Only the inspectors of election and
the employees and consultants associated with processing proxy cards and
counting the votes have access to your card. Additionally, all comments directed
to Able's management, whether written on the proxy card or elsewhere, remain
confidential, unless you ask that your name be disclosed.
HOW DOES A SHAREHOLDER OBTAIN A COPY OF ABLE'S ANNUAL REPORTS ON FORM 10-K?
Able has included a copy of its amended annual report on Form 10-K for the
fiscal year ended October 31, 1999 and its amended annual report on Form 10-K
for the fiscal year ended October 31, 1998, with these proxy materials. You may
also obtain a copy of each of these annual reports, and all other reports
electronically filed by Able via the Internet, by accessing the Securities and
Exchange Commission's EDGAR website at www.sec.gov/edaux/searches.html.
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Note: This proxy statement/prospectus is organized into two major sections.
The first section deals with approval and adoption of the merger agreement.
PROPOSAL NO. 1: APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT
At the meeting, the shareholders of Able will consider and vote upon the
approval and adoption of the merger agreement.
SUMMARY
This summary highlights selected information about the merger from this
document and may not contain all of the information that is important to you.
See "Where You Can Find More Information" on page 163.
THE COMPANIES
BRACKNELL CORPORATION
SUITE 1506
150 YORK STREET
TORONTO, ONTARIO M5H 3S5
CANADA
(416) 360-4105
Bracknell is a large and rapidly growing facilities infrastructure services
provider in North America, providing services to a broad range of technology,
telecommunications, commercial, industrial, and institutional customers. As a
facilities infrastructure services provider, Bracknell is focused on the design,
installation, integration, start-up, operation and maintenance of critical
infrastructure for buildings, industrial plants and processes, critical-use
facilities, such as telecommunications switch sites, and external wireless and
land-based telecommunications infrastructure. Critical infrastructure includes
those electrical, mechanical, telecommunications and other systems whose
incapacity or failure would have a devastating impact on the use and benefit of
the intended activity, such as electrical power systems, lighting systems,
low-voltage systems, such as fire alarm, security, communications and process
control systems, voice and data communications systems, HVAC, i.e., heating,
ventilation, air conditioning, refrigeration systems and piping systems, i.e.,
plumbing and process. Bracknell also provides services needed to support the
critical infrastructure and operation of customers' facilities, including site
based operations and maintenance, mobile maintenance and service, small
modification and retrofit projects, consulting, program development and
management for energy systems, and maintenance of facilities.
ABLE TELCOM HOLDING CORP.
1000 HOLCOMB WOODS PARKWAY
SUITE 440
ROSWELL, GEORGIA 30076
(770) 993-1570
Able was originally incorporated in 1987 as a Colorado corporation under
the name "Delta Venture Fund, Inc." It adopted its current name in 1989 and
became a Florida corporation in 1991. Able develops, builds and maintains
communications systems for companies and government authorities. Able has five
main organizational groups. Each group is comprised of subsidiaries of Able with
each group having local executive management functioning in a decentralized
operating environment. Able completed operational restructuring of its
subsidiaries during fiscal 1999. As a result, Able now has 17 subsidiaries, 14
of which are wholly owned. Able owns at least 80% of each of the remaining three
subsidiaries.
THE ABLE MEETING
Able Telcom Holding Corp. will hold its meeting on December 22, 2000 at the
offices of Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, 31st Floor,
New York, New York 10022 at 9:00 a.m. At the meeting, the shareholders of Able
will be asked to consider and vote upon a number of proposals as set forth in
this document, including the merger agreement pursuant to which Able will merge
with a wholly owned subsidiary of Bracknell Corporation. Able would become a
wholly owned subsidiary of Bracknell and Bracknell would pay Able shareholders
0.6 shares of Bracknell stock for each share of Able stock.
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As of November 13, 2000, the record date for the meeting, Able had
16,374,504 shares of common stock, $.001 par value, 5,000 shares of Series C
convertible preferred stock outstanding and 1,000 shares of Series E convertible
preferred stock outstanding.
Bracknell is not required to solicit proxies or written consents in
connection with the merger. This proxy statement/prospectus forms a part of the
registration statement on Form F-4 that Bracknell has filed with the Securities
and Exchange Commission to register the Bracknell common stock to be issued to
shareholders of Able in the merger.
THE MERGER
To understand the merger fully and for a more complete description of the
legal terms of the merger, you should read carefully this entire document and
the documents to which Able has referred you. The merger agreement is attached
as Appendix A-1 to this proxy statement/prospectus. Able encourages you to read
the merger agreement. It is the legal document that governs the merger.
Bracknell Corporation, an Ontario corporation, Bracknell Acquisition
Corporation, a Florida corporation and a wholly owned subsidiary of Bracknell,
and Able Telcom Holding Corp. have entered into the merger agreement dated
August 23, 2000, as amended and restated effective November 14, 2000. The merger
agreement provides for the merger of the subsidiary with and into Able pursuant
to which Able will be the surviving corporation and will become a wholly owned
subsidiary of Bracknell. The merger is conditional upon the completion of a
number of items, including regulatory and shareholder approval, Bracknell
financing, resolution of material litigation involving Able and the completion
of satisfactory due diligence.
Pursuant to the merger agreement, each share of Able common stock that is
outstanding when the merger occurs will be converted into the right to receive
0.6 shares of the common stock of Bracknell. Each share of Able Series C
preferred stock that is outstanding when the merger occurs will be converted
into the right to receive 540 shares of Bracknell common stock. In addition,
each share of Able Series E preferred stock that is outstanding when the merger
occurs will be converted into the right to receive the number of shares of
Bracknell common stock determined by dividing the aggregate face value of all
shares of Able Series E preferred stock by CDN$8.25 and then dividing that
quotient by the number of shares of Able Series E preferred stock issued and
outstanding at such time.
THE BOARD OF DIRECTORS OF ABLE HAS DETERMINED THAT THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY ARE REASONABLE, FAIR TO AND IN THE BEST
INTERESTS OF ABLE AND ITS SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS OF
ABLE APPROVE THE MERGER AGREEMENT AND THE MERGER.
Approval of Merger by Able Shareholders
Approval of the merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Able common stock and Able Series E
preferred stock, voting together as a single class. In addition, the Able Series
C preferred stock and the Able Series E preferred stock, may have a separate
class vote concerning approval and adoption of the merger. However, both the
holders of the Able Series C preferred stock and the Able Series E preferred
stock have entered into agreements with Able agreeing to vote in favor of the
merger. The officers and directors of Able own less than 2% of the outstanding
Able common stock entitled to vote. Accordingly, their vote will have little if
any impact on the outcome. To Able's and Bracknell's knowledge, officers and
directors of Bracknell do not own any shares of Able common stock entitled to
vote on the merger.
Opinion of Financial Advisor
The Robinson-Humphrey Company, LLC was retained by Able to deliver to the
Able board a written opinion to the effect that, as of the date of the opinion
and based upon and subject to various matters stated therein, the consideration
to be received in the merger was fair, from a financial point of view to the
shareholders of Able. The full text of the written opinion, dated November 15,
2000, which sets forth the
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assumptions made, matters considered and limitations on the review undertaken is
attached as Appendix A-2 to this proxy statement/prospectus and should be read
carefully in its entirety.
Accounting Treatment
The merger will be accounted for as a purchase under generally accepted
accounting principles. See "The Merger -- Accounting Treatment."
Federal Income Tax Consequences
The merger is intended to qualify, for federal income tax purposes, as a
"tax-free reorganization" so that, generally, no gain or loss would be
recognized by Able shareholders. It is a condition to consummation of the merger
that Able and Bracknell will have received an opinion of counsel to the effect
that the merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended. For a further
discussion of federal income tax consequences of the merger see "The Merger --
Material United States Federal Income Tax Consequences."
Interests of Specified Persons in the Merger
A number of directors and officers and employees of Able have interests in
the merger in addition to the interests of the shareholders of Able. These
persons will receive Bracknell stock options in exchange for their Able stock
options and, in some cases, will be entitled to severance payments and Bracknell
warrants in exchange for currently vested stock options if their employment is
terminated because of the merger. The Able board was aware of these interests
and considered them, among other matters, in approving the merger agreement and
the transactions contemplated thereby. See "The Merger -- Interests of Specified
Persons in the Merger."
Appraisal Rights of Able Shareholders
Under the Florida Business Corporation Act, holders of Able common stock
will have appraisal rights in connection with, or as a result of, the merger.
Accordingly, Able shareholders are entitled to require Able to purchase the
shares of Able held by them for cash at the fair value of those shares if the
merger is consummated provided specified procedures are followed. Failure to
take any necessary steps will result in a termination or waiver of the rights of
an Able shareholder to seek appraisal.
THE MERGER AGREEMENT
Conditions to the Merger
The completion of the merger depends upon satisfaction of a number of
conditions, including the continued accuracy in all material respects of each
party's representations and warranties, the performance by each party of its
obligations under the merger agreement, obtaining the requisite approval by the
shareholders of Able and the absence of any events or changes with respect to
either having, or which reasonably could be expected to have, a material adverse
effect on that party. Conditions to the merger may be waived by the company
entitled to assert the condition.
The completion of the merger is also subject to the expiration of the
relevant waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
Termination of the Agreement and Plan of Merger
The two companies can agree to terminate the merger agreement without
completing the merger, and either of them can terminate the merger agreement
under various circumstances, including if:
- the merger is not completed by February 1, 2001;
- a court or other governmental authority prohibits the merger;
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- the other has materially breached any representation, warranty or
obligation contained in the merger agreement; and
- the approval of the merger by the shareholders of Able has not been
obtained by February 1, 2001.
COMPARATIVE MARKET PRICE DATA
Bracknell common stock is traded on the Toronto Stock Exchange and is
listed under the symbol BRK. Able common stock was traded on the Nasdaq Stock
Market under the symbol ABTE. Effective October 10, 2000, the Able common stock
was delisted from the Nasdaq and currently trades on the OTC Bulletin Board. The
information shown in the table below presents the closing price per share for
Bracknell common stock and the closing sales price for Able common stock on
August 22, 2000, the last full trading day prior to the public announcement of
the proposed merger, and, applying these closing prices, the equivalent value
per share of Able common stock based upon an exchange ratio of 0.6 shares of
Bracknell common stock for each share of Able common stock. Given that the
consideration per share to be received in the merger is fixed in the merger
agreement, the equivalent value per share of Able common stock will fluctuate
from time to time with the market price of Bracknell common stock.
EQUIVALENT
VALUE PER
BRACKNELL ABLE ABLE SHARE
--------- ------- ----------
Market Price as of August 22, 2000.......................... Cdn$6.05 US$3.00 US$2.46
On December 8, the last full trading date prior to the date of this proxy
statement/prospectus, the closing price per share for Bracknell common stock and
the closing sale price for Able common stock were Cdn$10.34 and US$3.47,
respectively (resulting in an equivalent value per Able share of US$4.07 as of
such date). See "Market Prices of Bracknell Common Stock and Able Common Stock."
Holders of Bracknell common stock and Able common stock are urged to obtain
current market quotations for the shares of Bracknell common stock and Able
common stock.
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BRACKNELL SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth Bracknell's summary historical consolidated
financial data. The summary historical consolidated financial data as of and for
each of the three fiscal years ended October 31, 1997, 1998 and 1999 have been
derived from the audited consolidated financial statements that have been
audited by Arthur Andersen LLP and which have been prepared in accordance with
Canadian GAAP. Canadian GAAP differs in certain respects from U.S. GAAP. For a
discussion of the material differences between Canadian and U.S. GAAP as they
relate to Bracknell, you should review note 25 to the consolidated financial
statements included elsewhere in this proxy statement/prospectus. The summary
historical consolidated financial data as at and for each of the nine months
ended July 3l, 1999 and 2000 were derived from the unaudited interim
consolidated financial statements for these periods and have been prepared on
the same basis as the audited consolidated financial statements and, in the
opinion of management, contain all adjustments necessary for the fair
presentation of the results of operations for these periods. Operating results
for these nine-month periods are not necessarily indicative of the results of
operations for a full year. In the last twelve months, Bracknell has
significantly increased the scale and scope of its operations through the
acquisition and integration of several companies. Accordingly, the summary
historical consolidated financial data below are not necessarily indicative of
its financial position or results of operations in the future. You should read
the summary historical consolidated financial data in conjunction with the
historical consolidated financial statements included elsewhere in this proxy
statement/prospectus. See also "Bracknell -- Management's Discussion and
Analysis of Financial Condition and Results of Operations".
NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Canadian GAAP
Revenues.................................... $197,391 $273,373 $293,104 $199,469 $579,520
Cost of services............................ 171,799 243,637 255,296 175,872 486,724
-------- -------- -------- -------- --------
Gross margin................................ 25,592 29,736 37,808 23,597 92,796
Selling, general and administrative
expenses.................................. 18,055 21,918 24,905 16,532 52,893
Depreciation and amortization............... 591 1,102 1,596 1,072 3,125
Restructuring and other charges(1).......... -- -- 7,609 7,609 --
-------- -------- -------- -------- --------
Earnings (loss) from operations............. 6,946 6,716 3,698 (1,616) 36,778
-------- -------- -------- -------- --------
Net earnings (loss) from continuing
operations............................. $ 5,957 $ 6,396 $ 2,874 $ (452) $ 10,386
Net earnings from discontinued
operations............................. $ 469 $ 979 $ 917 $ 828 $ 1,789
-------- -------- -------- -------- --------
Net earnings.............................. $ 6,426 $ 7,375 $ 3,791 $ 376 $ 12,175
======== ======== ======== ======== ========
Net earnings per share
Basic.................................. $ 0.25 $ 0.28 $ 0.14 $ 0.02 $ 0.33
Fully diluted.......................... 0.24 0.27 0.14 0.02 0.31
U.S. GAAP
Net earnings (loss) from continuing
operations................................ $ 5,150 $ 4,376 $ 2,764 $ (452) $ 10,386
Net earnings (loss) from discontinued
operations................................ 528 235 (1,380) 828 4888
-------- -------- -------- -------- --------
Net earnings................................ $ 5,678 $ 4,611 $ 1,384 $ 376 $ 15,274
======== ======== ======== ======== ========
Net earnings (loss) per share
Basic..................................... 0.22 0.18 0.05 (0.06) 0.42
Diluted................................... 0.21 0.17 0.05 (0.06) 0.37
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NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OTHER DATA:
Other Canadian Financial Measure
Adjusted EBITDA(2).......................... $ 7,537 $ 7,818 $ 12,903 $ 7,065 $ 39,903
Other U.S. Financial Measures
Adjusted EBITDA(2).......................... $ 8,512 $ 8,356 $ 12,793 $ 6,955 $ 39,903
CASH FLOW INFORMATION
Canadian GAAP and U.S. GAAP
Operating activities........................ 3,241 9,632 4,618 (1,710) (43,134)
Financing activities........................ 709 (1,529) 41,817 2,316 138,597
Investing activities........................ 4,402 (6,423) (68,949) (8,421) (89,294)
AS AT OCTOBER 31, AS AT JULY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Canadian GAAP
Cash........................................ $ 21,485 $ 23,165 $ 651 $ 15,351 $ 6,820
Other current assets........................ 81,127 99,329 165,780 94,288 293,719
Total assets................................ 113,533 133,644 271,693 130,429 514,759
Current liabilities(3)...................... 59,788 74,244 108,334 62,340 152,106
Total debt (including short term debt)(4)... 2,048 343 60,487 2,078 224,711
Other liabilities........................... 648 457 7,393 5,759 2,429
Shareholders' equity........................ 51,049 58,600 95,479 60,253 135,513
U.S. GAAP
Total assets................................ 124,406 132,951 268,595 127,801 514,759
Shareholders' equity........................ 55,952 57,901 92,381 57,627 135,513
- ---------------
Notes:
(1) Approximately $5.3 million of restructuring and other charges result from
the retirement of former executives and management changes with the
remainder relating to the settlement of a dispute with a customer.
(2) Adjusted EBITDA is defined as earnings from continuing operations before
interest, income taxes, depreciation, amortization, goodwill charges and
restructuring and other charges. Adjusted EBITDA should not be construed as
a substitute for income from operations, net earnings or cash flow from
operations. Bracknell believes that, in addition to cash flow from
operations and net earnings, Adjusted EBITDA is a useful financial liquidity
measurement for assessing its ability to incur and service debt and to fund
capital expenditures. Adjusted EBITDA is not necessarily comparable to
similarly titled measures for other companies and does not necessarily
represent the amount of funds available for management's discretionary use.
Investors should consider such factors as Bracknell's level of annual
adjusted EBITDA in relation to total net indebtedness as at fiscal year end
and the related annual interest expense in evaluating adjusted EBITDA.
Management believes that Bracknell's level of adjusted EBITDA is sufficient
to meet its debt service and capital expenditure requirements.
(3) Current liabilities excludes short term debt.
(4) Total debt includes the short and long-term portions of outstanding banking
facilities, as well as capital leases.
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ABLE -- SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Able has provided you with a summary of its historical financial
statements. The following information should be read in conjunction with the
sections "Able -- Selected Historical Consolidated Financial Data" and
"Able -- Management's Discussion and Analysis of Financial Condition and Results
of Operations." Results of operations reflect the operating results of the
network construction and transportation business of MFS Network Technologies,
Inc. and other acquired businesses only from the respective dates of
acquisition. Able often refers to the MFS Network Technologies business
purchased as MFS Network or as MFSNT. Accordingly, results are not necessarily
comparable on a period-to-period basis. See the Consolidated Financial
Statements for Able, and the related notes to those statements, which are
included in this proxy statement/prospectus. The consolidated financial data for
the nine months ended July 31, 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
Able for such period. Due to seasonality and other market factors, the
consolidated historical results for the nine months ended July 31, 2000 are not
necessarily indicative of results for a full year.
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
----------------------------- -------------------
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Total revenue.............................. $86,334 $217,481 $418,565 $319,590 $359,143
Total costs and expenses................... 81,493 206,072 420,449 318,470 404,392
Income (loss) from operations.............. 4,841 11,409 (1,884) 1,120 (45,249)
Total other expenses....................... (964) (4,872) (12,678) (10,246) (38,682)
Net income (loss).......................... 2,857 2,514 (18,060) (12,399) (84,092)
Income (loss) applicable to common stock... 1,331 (5,840) (36,758) (30,070) (90,963)
Income (loss) applicable to common stock
per share:
Basic...................................... $ 0.16 $ (0.59) $ (3.12) $ (2.52) $ (6.08)
Diluted.................................... 0.16 (0.59) (3.12) (2.52) (6.08)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.................. $ 6,230 $ 13,544 $ 16,568 $ 15,649 $ 14,946
Total assets............................... 50,346 290,760 262,033 262,444 318,563
Total debt................................. 17,294 76,123 66,372 65,294 41,700
Total preferred stock...................... 6,713 11,325 16,322 15,096 21,449
Total shareholders' equity (deficit)....... 15,247 40,217 431 7,325 (57,299)
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SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
Bracknell prepared the summary unaudited pro forma consolidated financial
data for the fiscal year ended October 31, 1999, as at July 31, 2000 and for the
nine months ended July 31, 2000 based on the historical consolidated financial
statements and other financial statements included elsewhere in this proxy
statement/prospectus. For purposes of the pro forma preparation, historical
consolidated financial statements for Bracknell used in the unaudited pro forma
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, or U.S. GAAP. The financial statements
for the U.S. companies Bracknell acquired were prepared in accordance with U.S.
GAAP. The summary unaudited pro forma consolidated financial data are for
illustrative purposes only and are not necessarily indicative of what actual
results of operations and financial position would have been as of and for the
periods indicated, nor do they purport to represent future financial position
and results of operations. The unaudited pro forma consolidated statements of
operations have been prepared as if these transactions had occurred November 1,
1998 and have been carried through all periods presented. The unaudited pro
forma balance sheet data gives effect to the acquisition of Able as if such
events occurred on July 31, 2000. The following information should be read in
conjunction with "Bracknell -- Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Unaudited Pro Forma Consolidated
Financial Statements" and the historical consolidated financial statements and
accompanying notes included elsewhere in this proxy statement/ prospectus.
FISCAL YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, 1999 JULY 31, 2000
----------------- -----------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $1,124,782 $937,185
Cost of services............................................ 956,854 788,169
---------- --------
Gross margin................................................ 167,928 149,016
Selling, general and administrative expenses................ 100,661 90,113
Depreciation and amortization............................... 26,869 21,618
Restructuring and other charges(1).......................... 7,609 --
---------- --------
Earnings from operations.................................... 32,789 37,285
---------- --------
Earnings (loss) before discontinued operations............ $ (8,943) $(34,668)
========== ========
Net earnings (loss) per share
Basic..................................................... (0.14) (0.55)
Fully Diluted............................................. (0.14) (0.55)
OTHER FINANCIAL MEASURES
Adjusted EBITDA(2)(3)....................................... $ 67,275 $ 58,909
Cash interest expense(4).................................... 33,029 29,417
Ratio of Adjusted EBITDA to cash interest expense........... 2.0x 2.7x
Ratio of net debt to Adjusted EBITDA........................ 4.7x 4.1x
CASH FLOW INFORMATION
Operating activities........................................ (75,503) (53,800)
Financing activities........................................ 153,164 111,379
Investing activities........................................ (109,200) (94,358)
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AS AT JULY 31, 2000
-------------------
BALANCE SHEET DATA:
Cash........................................................ $ 18,146
Other current assets........................................ 471,481
Total assets................................................ 961,517
Current liabilities(5)...................................... 299,810
Total debts(6) (including short term debt).................. 314,758
Other liabilities........................................... 42,916
Other redeemable securities................................. 40,000
Shareholders' equity........................................ 246,033
- ---------------
Notes:
(1) Approximately $5.3 million of restructuring and other charges result from
the retirement of former executives and management changes with the
remainder relating to the settlement of a dispute with a customer.
(2) Adjusted EBITDA is defined as earnings from continuing operations before
interest, income taxes, depreciation, amortization, goodwill charges, income
from long-term investments and restructuring and other charges. Adjusted
EBITDA should not be construed as a substitute for income from operations,
net earnings or cash flow from operations. Bracknell believes that, in
addition to cash flow from operations and net earnings, adjusted EBITDA is a
useful financial liquidity measurement for assessing Able's ability to incur
and service debt and to fund capital expenditures. Adjusted EBITDA is not
necessarily comparable to similarly titled measures for other companies and
does not necessarily represent the amount of funds available for
management's discretionary use.
Investors should consider such factors as Bracknell's level of annual
adjusted EBITDA in relation to total net indebtedness as at fiscal year end
and the related annual interest expense in evaluating Adjusted EBITDA.
Management believes that Bracknell's level of adjusted EBITDA is sufficient
to meet its debt service and capital expenditure requirements.
(3) The pro forma consolidated statement of earnings include selling, general
and administrative costs that Bracknell expects to eliminate at the Sunbelt
and Able corporate facilities. These include salaries and bonuses for
redundant positions, legal and consulting costs with respect to
non-recurring activities and other administrative costs. These items
resulted in excess selling, general and administrative costs of $13,853 and
$13,341 for the year ended October 31, 1999 and the nine months ended July
31, 2000 respectively.
If Bracknell was successful in eliminating the redundant selling, general
and administrative costs this would have the pro forma effect of increasing
adjusted EBITDA by $13,853 and $13,341 to $81,128 and $72,250 for the year
ended October 31, 1999 and the nine months ended July 31, 2000 respectively.
The pro forma consolidated statement of earnings also include other expenses
incurred at Able relating to significant, one-time occurrences which do not
relate to the normal operations of the business.
For the nine months ended July 31, 2000, Able expensed $25,000 related to
the Sirit lawsuit settlement. The settlement related to Able's purchase of
one of its subsidiaries and is not considered to be in the course of normal
operations. Refer to note (11) of Able's unaudited interim consolidated
statements included elsewhere in this document for a full discussion of the
settlement.
Write-offs and losses on the operations and maintenance contract relating to
Able's investment in Kanas of $1,142 and $15,384 were recognized for the
year ended October 31, 1999 and the nine months ended July 31, 2000
respectively. Able held an equity investment in Kanas which had been held
for sale by Able. Kanas owned and was responsible for maintaining its
client's network. Following disputes with its client over the final
acceptance of the system, Kanas was notified that its contract was being
terminated in March 2000. As of July 31, 2000 all amounts relating to the
investment in Kanas have been written-off. Bracknell does not expect to
incur comparable expenses in future periods since all assets and liabilities
will be accounted for at their fair market value upon purchase accounting.
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These items resulted in other expenses of $1,142 and $40,384 for the year
ended October 31, 1999 and the nine months ended July 31, 2000 respectively.
If Bracknell was successful in eliminating the redundant selling, general
and administrative costs and was not to incur the other expenses described
above, this would have the pro forma effect of increasing net earnings
(decreasing net loss) by $14,995 and $53,725 to $6,052 and $19,057 for the
year ended October 31, 1999 and the nine months ended July 31, 2000
respectively. These adjustments have been derived without regard to the
economic effect of such adjustments on Bracknell's results of operations and
are provided for information purposes only. Pro forma effect has not been
given for these adjustments.
(4)
FISCAL YEAR NINE MONTHS
ENDED ENDED
OCTOBER 31, 1999 JULY 31, 2000
---------------- -------------
(DOLLARS IN THOUSANDS)
Interest and other income (expenses)....................... $(36,063) $(62,661)
Other income (expenses).................................... (4,848) 33,244
-------- --------
Interest expense........................................... $ 33,029 $ 29,417
======== ========
(5) Current liabilities excludes short term debt.
(6) Total debt includes borrowings under the operating facilities of the
Bracknell's senior credit facility, the outstanding portion of the Sunbelt
Seller Notes, advances owed to WorldCom and capital leases. Total debt
presented in the financial statements excludes any contingent earn-out
payments payable with respect to acquisitions. The acquisition agreements
provide for the potential payment of up to a maximum of $81.8 million.
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UNAUDITED COMPARATIVE PER SHARE DATA
Presented below is per common share data regarding the income and book
value of Bracknell and Able on both a historical and unaudited pro forma
combined basis. The unaudited pro forma combined per share information was
derived from the unaudited pro forma combined condensed financial statements
presented elsewhere.
You should read the information below in conjunction with the financial
statements and accompanying notes that are contained elsewhere in this proxy
statement/prospectus.
NINE MONTHS ENDED YEAR ENDED
JULY 31, 2000 OCTOBER 31, 1999
----------------- ----------------
BRACKNELL HISTORICAL
Income from continuing operations per common share
Basic.................................................... $ 0.28 $ 0.10
Fully diluted............................................ 0.25 0.10
Book value per common share................................ 3.32 3.06
PRO FORMA COMBINED
Loss from continuing operations per common share
Basic.................................................... (0.55) (0.14)
Fully diluted............................................ (0.55) (0.14)
Book value per common share................................ 3.96 --(1)
ABLE HISTORICAL
Loss from continuing operations per common share
Basic.................................................... (6.08) (2.86)
Fully diluted............................................ (6.08) (2.86)
Book value per common share................................ (3.51) 0.04
EQUIVALENT PRO FORMA COMBINED
Loss from continuing operations per common share
Basic.................................................... (0.33) (0.08)
Fully diluted............................................ (0.33) (0.08)
Book value per common share................................ 2.38 --(1)
The equivalent pro forma combined amounts are calculated by multiplying the
corresponding unaudited pro forma combined per share amounts by the exchange
ratio in the merger of 0.6 of a share of Bracknell common stock for each share
of Able common stock. No cash dividends were paid on the Bracknell common stock
or the Able common stock during the year ended October 31, 1999 or the nine
months ended July 31, 2000.
(1) A pro forma balance sheet is not required for the year ended October 31,
1999. Consequently, book value per share is not available for this period.
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RISK FACTORS
You should carefully consider the following risk factors and the other
information in this proxy statement/prospectus in evaluating whether to vote for
or against the approval and adoption of the merger agreement. In addition, this
proxy statement/prospectus also contains forward-looking statements that involve
risks and uncertainties. See "Forward-Looking Statements". Actual results could
differ materially from those anticipated in the forward-looking statements as a
result of various factors, including the risks described below and elsewhere in
this proxy statement/prospectus.
SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS -- BRACKNELL'S
SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT ITS FINANCIAL HEALTH, MAKE
BRACKNELL MORE VULNERABLE TO ADVERSE ECONOMIC CONDITIONS AND MAY CAUSE BRACKNELL
TO DEFAULT UNDER ITS LENDING AGREEMENT.
Bracknell's high level of indebtedness could have the following important
consequences:
- limiting its ability to obtain additional financing to fund its growth
strategy, working capital, capital expenditures, debt service
requirements or other purposes;
- limiting its ability to use operating cash flow in other areas of its
business because it must dedicate a substantial portion of these funds to
make principal payments and fund debt service;
- placing it at a competitive disadvantage compared to competitors with
less debt;
- increasing its vulnerability to adverse economic and industry conditions;
and
- increasing its vulnerability to interest rate increases because
borrowings under its senior credit facility are at variable interest
rates.
Bracknell's ability to satisfy its debt obligations, including any earn-out
payment obligations incurred as a result of its acquisitions (see
"Bracknell -- Recent Developments") will depend upon, among other things, its
future operating performance and its ability to refinance indebtedness when
necessary. Each of these factors is to a large extent dependent on economic,
financial, competitive and other factors beyond its control. If, in the future,
Bracknell cannot generate sufficient cash from operations to meet its
obligations (including any earn-out payment obligations incurred as a result of
its acquisitions), Bracknell will need to renegotiate the terms of its debt,
refinance its debt, obtain additional financing or sell assets. Bracknell may
not be able to generate sufficient cash flow, or be able to obtain funding,
sufficient to satisfy its debt service requirements or other obligations
(including any earn-out payment obligations incurred as a result of its
acquisitions).
As at July 31, 2000 on a pro forma as adjusted basis, Bracknell would have
had outstanding $335.0 million of consolidated indebtedness. Bracknell expects
to amend the senior credit facility to comprise a term facility and revolver of
an approximate combined amount of $350.0 million. Bracknell may require
substantial capital to finance its anticipated growth, so Bracknell may incur
additional debt in the future. However, Bracknell will be limited in the amount
Bracknell can incur by its existing and future debt agreements.
COVENANT RESTRICTIONS -- THE TERMS OF THE SENIOR CREDIT FACILITY IMPOSE
SIGNIFICANT RESTRICTIONS ON BRACKNELL'S ABILITY AND ITS SUBSIDIARIES' ABILITY TO
TAKE SPECIFIED ACTIONS.
The terms of the senior credit facility impose operating and financial
restrictions on Bracknell and its subsidiaries. These restrictions significantly
limit or prohibit, among other things, Bracknell's ability and its subsidiaries
ability to:
- incur additional indebtedness;
- repay indebtedness prior to stated maturities;
- sell assets;
- make investments;
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- engage in transactions with shareholders and affiliates;
- issue capital stock;
- create liens; or
- engage in mergers, consolidations, amalgamations or acquisitions.
These restrictions could also limit Bracknell's ability and its
subsidiaries' ability to effect future financings, make needed capital
expenditures, withstand a future downturn in its business or the economy in
general or otherwise conduct necessary corporate activities. Bracknell's ability
and its subsidiaries' ability to comply with the covenants and restrictions
contained in the senior credit facility may be affected by events beyond its
control, including prevailing economic and financial conditions. If Bracknell or
its subsidiaries fail to comply with these restrictions, it could lead to a
default under the terms of the senior credit facility notwithstanding its
ability and the ability of its subsidiaries to meet their respective debt
service obligations.
EVENTS OF DEFAULT -- BRACKNELL MAY BE UNABLE TO REPAY ITS INDEBTEDNESS UNDER ITS
SENIOR CREDIT FACILITY IF THERE IS AN EVENT OF DEFAULT.
In the event of a default, the lenders under the senior credit facility
could elect to declare all of the indebtedness outstanding under the senior
credit facility immediately due and payable, including accrued and unpaid
interest, and to terminate their commitments to fund under the senior credit
facility. If that occurs, a significant portion of Bracknell's and its
subsidiaries' other indebtedness may become immediately due and payable and
Bracknell cannot assure you that it and its subsidiaries would be able to make
those payments or borrow sufficient funds from alternative sources to make those
payments.
INTEGRATION OF ACQUIRED COMPANIES -- ANY DELAY OR INABILITY TO INTEGRATE
ACQUIRED BUSINESSES COULD IMPAIR BRACKNELL'S OPERATING RESULTS.
Bracknell has grown, and plans to continue to grow, by acquiring other
companies in its industry. Since June 30, 1999, Bracknell has acquired six
companies. Its future success is dependent on its ability to integrate its past
and future acquisitions into one enterprise with a common business and operating
plan. Bracknell must also monitor the performance of its acquired companies.
Bracknell's acquisitions involve a number of risks, including:
- failure of the acquired businesses to achieve the results Bracknell
expects, including increasing revenues, realizing cost savings and
implementing best practices;
- diversion of its management's attention from operational matters;
- its inability to retain key personnel of the acquired businesses;
- its inability to integrate the accounting, purchasing or marketing
methods of the acquired businesses on a timely basis;
- risks associated with unanticipated events or liabilities; and
- customer dissatisfaction or performance problems at the acquired
businesses.
Bracknell may not be successful in its efforts to integrate acquired
companies or to monitor their performance, including Able. If Bracknell is
unable to do so, or if Bracknell experiences delays or unusual expenses in doing
so, Bracknell's operating costs may be higher than anticipated and earnings may
be lower than anticipated which could have a material adverse effect on
Bracknell's business, financial condition and results of operations.
DEPENDENCE ON ACQUISITIONS FOR GROWTH -- IF BRACKNELL'S ACQUISITION STRATEGY IS
NOT ACHIEVED, ITS GROWTH WILL BE DIMINISHED AND IT MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
Bracknell's growth strategy includes future acquisitions. This strategy
requires that Bracknell identify acquisition targets and negotiate and close
acquisitions without disrupting its existing operations. If Bracknell
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cannot identify, acquire, integrate and profitably manage the businesses it
acquires, Bracknell may fail to achieve a minimum size necessary to compete
effectively within the local and national marketplace. Bracknell may also be
unable to make appropriate acquisitions because of competition for the
acquisition candidates. In pursuing acquisitions, Bracknell competes against
other facilities infrastructure services providers, some of which are larger
than Bracknell is and have greater financial and other resources than Bracknell
has. Bracknell competes for potential acquisitions based on a number of factors,
including price, terms and conditions, size and ability to offer cash, stock or
other forms of consideration. In addition, the negotiation of potential
acquisitions may require members of management to divert their time and
resources away from Bracknell's operations which could cause operations to
suffer and earnings to decline.
Bracknell's ability to arrange appropriate financing, including debt and
equity, are critical to the success of consummating future acquisitions.
Bracknell's ability to raise incremental debt financing will be restricted by
the terms of the senior credit facility. In addition, the availability of debt
or equity to finance future acquisitions will depend on the prevailing
conditions in the debt and equity capital markets. If Bracknell is unable to
arrange financing for future acquisitions, it will be unable to complete the
future acquisitions needed to grow its business.
ABSENCE OF COMBINED OPERATING HISTORY -- BRACKNELL'S OPERATIONS ARE
SUBSTANTIALLY LARGER NOW AS A RESULT OF RECENT ACQUISITIONS AND ITS PAST
PERFORMANCE WILL NOT NECESSARILY BE INDICATIVE OF ITS FUTURE PERFORMANCE.
The majority of Bracknell's operating companies formerly operated as
independent entities. As Bracknell continues to grow, its management group may
not be able to oversee the company and effectively implement its operating or
growth strategies. The combined financial results of the companies presented in
this proxy statement/prospectus cover periods during which they were not under
the same management and, therefore, may not be indicative of future financial or
operating results, and Bracknell may not achieve anticipated earnings.
OPERATING HAZARDS -- BRACKNELL'S OPERATIONS ARE SUBJECT TO NUMEROUS HAZARDS
WHICH MAY CREATE LIABILITIES FOR BRACKNELL NOT COVERED ADEQUATELY BY INSURANCE.
Bracknell's operations are subject to numerous hazards, including, but not
limited to, electrocutions, mechanical failures or transportation accidents.
These hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment and may result in suspension of
operations. Bracknell maintains insurance coverage in the amounts and against
the risks it believes are in accordance with industry practices, but this
insurance coverage does not cover all types or amounts of liabilities. Bracknell
insurance may not be adequate to cover all losses or liabilities that Bracknell
may incur in its operations. Bracknell may be unable to maintain insurance of
the types or at levels that are adequate or at reasonable rates.
RISKS ASSOCIATED WITH CONTRACTS -- A SIGNIFICANT PORTION OF BRACKNELL'S REVENUES
ARE, AND WILL CONTINUE TO BE, GENERATED BY FIXED PRICE CONTRACTS WHICH MAY
NEGATIVELY IMPACT EARNINGS IF COSTS INCURRED EXCEED ESTIMATED COSTS.
Under a fixed price contract, Bracknell must estimate the cost of
completing a project when it signs the contract. Bracknell's actual costs to
complete the project may be different from its original estimate. If Bracknell
has underestimated the costs for a project, it may lose money or make less of a
profit on a project than anticipated. Depending on the size of the project, an
inaccurate estimation of the costs may have a significant impact on Bracknell's
operating results and reduce earnings.
RISKS ASSOCIATED WITH MAKING CAPITAL EXPENDITURES BEFORE GENERATING
REVENUE -- BRACKNELL MUST MAKE SIGNIFICANT CAPITAL EXPENDITURES WHICH MAY NOT BE
RECOVERED FROM AGREEMENTS WITH ITS CUSTOMERS.
Bracknell's business relating to the development of telecommunications
networks requires it to incur significant initial expenditures relating to
construction and development prior to entering into agreements with customers to
obtain access to the network. These expenditures vary depending on the size of
the network and whether Bracknell encounters any construction-related
difficulties. Demand and market acceptance for
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recently introduced networks and services in this industry are subject to a high
level of uncertainty. Some customers may be reluctant to purchase access to the
telecommunications network prior to the network construction being complete. If
Bracknell fails to attract customers and secure agreements on acceptable terms,
it would be unable to recoup its aggregate construction and development costs,
which would result in a reduction of Bracknell's revenue and could result in
losses.
RISKS ASSOCIATED WITH BONDING -- BRACKNELL MAY NOT BE ABLE TO OBTAIN FUTURE WORK
IF IT CAN NOT MAINTAIN AND OBTAIN ADEQUATE SURETY BONDING.
Some contracts in the facilities services industry require performance or
payment bonds or other means of financial assurance to secure contractual
performance. If Bracknell were to become unable to obtain performance or payment
bonds in sufficient amounts or at acceptable rates, Bracknell's earnings and
growth may be reduced as it may be restricted in the number of contracts it can
enter into with its customers.
DEPENDENCE ON KEY PERSONNEL -- BRACKNELL'S BUSINESS MAY SUFFER IF IT DOES NOT
RETAIN ITS MANAGEMENT AND THE MANAGEMENT OF ANY COMPANY IT ACQUIRES.
Bracknell depends on its executive officers and senior management personnel
and on the key senior management of significant businesses it acquires.
Bracknell may not achieve anticipated earnings if these persons do not continue
in their roles and it is unable to attract and retain qualified replacements.
Bracknell may incur additional costs replacing employees who die or become
disabled as it does not maintain key-man insurance on its executive officers and
senior management personnel.
RISKS ASSOCIATED WITH BRACKNELL'S UNION WORKFORCE -- BRACKNELL'S OPERATIONS ARE
HIGHLY RELIANT ON A LARGE UNION WORKFORCE. ANY DISRUPTIONS IN ITS LABOR
RELATIONS WITH THIS WORKFORCE COULD ADVERSELY IMPACT ITS OPERATIONS, INCREASE
COSTS TO COMPLETE CONTRACTS AND REDUCE EARNINGS TO BRACKNELL.
As of April 28, 2000, approximately 96% of Bracknell's total field
workforce were members of the International Brotherhood of Electrical Workers or
other unions. Bracknell currently is a party to collective bargaining agreements
with all of the unions from which it obtains workers. However, these collective
bargaining agreements are subject to periodic renegotiations, with approximately
one-third of the agreements expiring each year. In the event that any of the
unions from which it obtains its workforce engage in a strike, a work slowdown
or any other form of protest, Bracknell's business could be adversely affected
through increased costs and reduced earnings on contracts.
In addition, a significant portion of Bracknell's revenues is derived from
contracts with customers who have unionized workforces. If Bracknell experiences
any negative labor relations with its union workforce, its relations with
customers that have unionized workforces could be negatively impacted.
In addition to Bracknell's relations with its workforce, negative relations
between service providers in other service trades and their workforce could
negatively impact Bracknell's ability to complete its portion of a project and
have a material adverse effect on its business, financial condition or results
of operations. Furthermore, if Bracknell's customers' employees engage in any
work stoppages, Bracknell's business could be adversely affected.
CONTRACTS AND ACCOUNTS RECEIVABLE -- BRACKNELL MAY BE UNABLE TO COLLECT ITS
ACCOUNTS RECEIVABLE.
A high percentage of Bracknell's current assets at any given time are
contracts and accounts receivable. If Bracknell is unable to collect these
amounts due to disputes with customers or a default by the parties owing
Bracknell these amounts, its cash flows and earnings may be reduced. As of July
31, 2000, Bracknell had $207.5 million of total contracts and accounts
receivable, representing 69.3% of total current assets. Bracknell has made
allowances for some disputes or defaults in its contracts and accounts
receivable, but allowances for doubtful accounts may not be adequate to cover
the amount of actual defaults.
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CONTRACTUAL DISPUTES WITH CUSTOMERS -- BRACKNELL MAY FACE CONTRACTUAL DISPUTES
WITH ITS CUSTOMERS AND BE UNABLE TO RECOVER ITS COSTS ON CONTRACTS.
In the normal course of business, Bracknell incurs costs for projects and
relies on payments from its customers to recover these costs. If Bracknell is
unable to recover these costs from its customers, its earnings may be reduced
and business would be negatively affected. Currently, one of Bracknell's
subsidiaries has a claim for wrongful termination of a contract valued at
approximately $39.6 million, which has resulted in litigation. The reason for
termination has not been particularized and therefore the ultimate outcome of
this matter cannot be predicted with certainty. Bracknell may not recover the
amounts outstanding under this contract and may incur additional costs as a
result of litigation (See "Business -- Bracknell -- Legal Proceedings"). The
contract in question was $30.9 million, however the original contract
contemplated scope changes and was written to include price per unit values in
order to allow for the total contract value to be amended based on the actual
quantity of work performed. On a cumulative basis Bracknell has recognized $39.6
million of revenues on the project. At the time of the termination, $14.9
million had been paid to Bracknell under the contract with undisputed
receivables outstanding of $9.1 million.
RISKS ASSOCIATED WITH PERCENTAGE OF COMPLETION ACCOUNTING -- BRACKNELL'S
REPORTED PROFITABILITY IS DEPENDENT UPON THE ACCURACY OF THE ESTIMATES OF THE
TOTAL COSTS OF ITS FIXED PRICE CONTRACTS.
Bracknell recognizes revenues and direct and indirect costs related to its
fixed price contracts based upon a ratio of its actual costs versus its
estimated total costs to complete specific projects. If Bracknell is unable to
accurately estimate the total costs to complete the services under these fixed
price contracts, it will be required to make significant adjustments to its
realized costs. If Bracknell is unable to identify any significant discrepancies
between its estimated costs and its actual costs on a timely basis, it could
experience a mismatch between the period it recognizes revenues and the period
it recognizes the related expenses. Such mismatches in revenue and expense
recognition could make it difficult for investors to properly analyze
Bracknell's results of operations.
CURRENCY AND EXCHANGE RISKS -- SOME OF BRACKNELL'S REVENUE WILL BE RECEIVED IN
CANADIAN DOLLARS. CHANGES IN CURRENCY EXCHANGE RATES COULD NEGATIVELY AFFECT
REPORTED EARNINGS AND VALUE OF CANADIAN ASSETS.
Bracknell has significant financial obligations which are denominated in
U.S. dollars. However, a substantial portion of its revenues is received in
Canadian dollars. To the extent that it receives revenues in currencies other
than U.S. dollars, Bracknell will be subject to fluctuations in exchange rates
which may negatively affect reported earnings and the value of Canadian assets,
and which could have a material adverse effect on its business, financial
condition or results of operations. A total of $152.9 million of its pro forma
revenues for the nine months ended July 31, 2000, or 16.3%, were invoiced in
Canadian dollars.
AMORTIZATION OF GOODWILL-BRACKNELL'S FUTURE EARNINGS WILL BE REDUCED BY
AMORTIZATION OF GOODWILL.
On a pro forma basis upon the closing of the merger, Bracknell will have
$323.6 million of goodwill resulting from the merger and prior acquisitions,
which is being amortized over a 20-year period. The goodwill amortization will
result in a $16.2 million per year reduction in Bracknell's earnings. Of the
aggregate pro forma goodwill, $104.4 million is attributable to the Able
transaction based on Able's net fair value as at July 31, 2000. To the extent
that Able incurs additional net losses between July 31, 2000 and the closing of
the transaction, this would have the effect of decreasing Able's net fair value
and would result in an increase to the final goodwill calculation.
WARRANTY CLAIMS -- BRACKNELL MAY FACE WARRANTY AND OTHER CLAIMS BECAUSE OF THE
FACILITIES INFRASTRUCTURE SERVICES IT PROVIDES WHICH MAY INCREASE COSTS AND
REDUCE EARNINGS.
The failure of Bracknell's facilities infrastructure services to perform to
customer expectations could give rise to warranty and other types of claims. Any
of these claims, even if not meritorious, could result in costly litigation or
divert management's attention and resources. Although Bracknell carries
liability insurance which it considers to be adequate, Bracknell's current
insurance coverage would likely be insufficient to protect it from all
liabilities that could be imposed under these types of claims. Any excess
warranty claims could
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increase costs and negatively affect earnings and have a material adverse effect
on Bracknell's business, financial condition and results of operations.
CYCLICAL NATURE OF NEW INSTALLATION MARKET -- DOWNTURNS IN THE CONSTRUCTION
INDUSTRY COULD CAUSE BRACKNELL'S REVENUES TO DECREASE.
In the future, a substantial portion of Bracknell's revenues will come from
the installation of systems in newly constructed facilities. The level of new
installation services is affected by changes in economic conditions and interest
rates. General downturns in new construction in the geographical regions or
industries for which Bracknell provides services could reduce revenues and have
a material adverse effect on its business, including financial condition and
results of operations.
TELECOMMUNICATIONS INDUSTRY -- A SIGNIFICANT PART OF BRACKNELL'S FUTURE STRATEGY
IS BASED UPON THE GROWTH IN DEMAND FOR FACILITIES INFRASTRUCTURE SERVICES FROM
THE TELECOMMUNICATIONS INDUSTRY. REDUCED DEMAND AND TECHNOLOGY DEVELOPMENTS IN
THE TELECOMMUNICATIONS INDUSTRY MAY REDUCE DEMAND FOR BRACKNELL'S SERVICES.
Bracknell plans to devote significant resources to grow its presence in the
telecommunications industry. Bracknell has developed its strategy in this area
based upon its belief that there will be significant demand for facilities
infrastructure services from the telecommunications industry. If there is a
downturn in the telecommunications industry, Bracknell's results of operations
and financial condition may be impaired.
RISKS ASSOCIATED WITH DEMAND -- THERE MIGHT NOT BE SUFFICIENT DEMAND FOR
BRACKNELL'S SERVICES.
The market for broadband services is characterized by rapidly changing
technology, evolving industry standards and frequent new service introductions.
If the commercial market for Internet access and other broadband services
develops more slowly than expected or if the construction and installation
services that Bracknell offers are not broadly accepted, Bracknell's revenues
will not grow as quickly as necessary to compete effectively in this market.
AVAILABILITY OF TECHNICIANS -- A SKILLED LABOR FORCE IS IMPORTANT TO BRACKNELL'S
EXPANSION OF ITS EXISTING BUSINESS. ANY INABILITY TO MAINTAIN AN ADEQUATE
SKILLED WORKFORCE MAY REDUCE EFFICIENCY OF OPERATIONS.
Bracknell's ability to provide high-quality facilities infrastructure
services on a timely basis requires an adequate supply of skilled technicians.
Accordingly, Bracknell's ability to increase its productivity and profitability
will be limited by its ability to attract, train and retain skilled technicians.
Bracknell may not be able to maintain an adequate skilled labor force necessary
to operate efficiently and to support its growth strategy, and its labor
expenses may increase as a result of a shortage in the supply of skilled
personnel. A shortage of skilled labor would require Bracknell to curtail
expansion of its existing business.
COMPETITION -- BRACKNELL FACES COMPETITION FROM OWNER-OPERATED COMPANIES, LARGE
PUBLIC COMPANIES AND UTILITIES FOR THE SERVICES IT PROVIDES. INCREASED
COMPETITION MAY REDUCE THE AMOUNT AND PROFITABILITY OF WORK BRACKNELL PERFORMS.
The facilities infrastructure services industry is very competitive and has
few barriers to entry. The industry is served by small, owner-operated private
companies and by larger companies operating nationwide, including unregulated
affiliates of electric and gas public utilities and HVAC equipment
manufacturers. Smaller competitors have lower overhead cost structures and may
be able to provide their services at lower prices than Bracknell can. Larger
competitors have greater financial resources, name recognition, access to
technology, experience in specialized markets or other competitive advantages
and may be willing to incur greater costs than Bracknell is willing to incur for
the same opportunities. In some geographic regions where Bracknell does not have
a local presence, it may not be able to effectively compete for business.
Consequently, Bracknell may encounter significant competition in its efforts to
execute its business strategy, which may reduce the amount and profitability of
work Bracknell performs.
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SEASONALITY AND FLUCTUATION OF QUARTERLY RESULTS -- BRACKNELL'S OPERATING
RESULTS VARY WITH THE SEASONS AND OTHER FACTORS.
Generally, during the winter months, demand for new installations is lower
due to weather conditions, holidays and Bracknell's customers' spending
patterns. In addition, quarterly results may be affected by:
- the timing of acquisitions;
- variations in profit margins on different projects; and
- regional economic conditions.
Accordingly, Bracknell's operating results for any particular quarter may
not be an indication of the results that can be expected for any other quarter
or for the entire year.
SIRIT LITIGATION -- AS A RESULT OF COURT PROCEEDINGS INSTITUTED BY SIRIT,
BRACKNELL MAY BE REQUIRED TO ISSUE ADDITIONAL COMMON SHARES TO SIRIT IN
CONNECTION WITH THE MERGER.
On November 13, 2000, Sirit Technologies, Inc. filed an emergency motion
against Able in the United States District Court for the Southern District of
Florida in which Sirit claims that it will be deprived of various alleged
entitlements under the settlement agreement entered into between Able and Sirit.
Sirit has asked the court to determine that Able is obliged to offer to Sirit
additional shares of common stock pursuant to the antidilution provisions of the
settlement agreement. Sirit has also asked the court to enjoin Able from
effectuating the merger with Bracknell unless and until Able issues the stock or
recognizes the alleged antidilution rights claimed by Sirit and enters into
appropriate agreements with Bracknell protecting those alleged rights. Based on
the claims specifically identified in Sirit's filings with the court, Bracknell
and Able believe that if Sirit is successful in its claims, Bracknell may be
required to issue Sirit a maximum of approximately 840,000 additional shares for
no consideration and a maximum of approximately 1,800,000 additional shares for
an amount of consideration determined by the court. These 2,640,000 Bracknell
shares would represent approximately 4.0% of the Bracknell shares that would be
outstanding immediately after the merger and would have a market value of
approximately $17,350,000 based on the current market price of the Bracknell
common stock.
GOVERNMENT REGULATIONS -- BRACKNELL IS SUBJECT TO GOVERNMENT REGULATION.
REGULATORY MATTERS COULD IMPACT OR INTERRUPT ITS ABILITY TO CONDUCT ITS
BUSINESS, RESTRICT SERVICES IT CAN PROVIDE AND INCREASE THE COST OF SERVICES.
Due to the nature of the facilities services industry, Bracknell's
operations are subject to a variety of federal, state, provincial, county and
municipal laws, regulations and licensing requirements, including labor,
employment, immigration, health and safety, consumer protection and
environmental regulations. If Bracknell fails to comply with applicable
regulations, it may be subject to substantial fines or revocation of its
licenses. Changes in the laws, regulations and licensing requirements which
govern Bracknell may constrain its ability to provide services to its customers
or increase the cost of these services. Increased costs may not be recoverable
under current contracts and competitive pricing conditions may constrain its
ability to adjust its billing rates to reflect increased costs due to these
changes. As a result, earnings may be negatively impacted.
STOCK PRICE VOLATILITY.
The common shares of Bracknell have experienced, and may continue to
experience, substantial price volatility, particularly as a result of variations
between Bracknell's actual or anticipated financial results and the published
expectations of analysts, and as a result of announcements by Bracknell and its
competitors. In addition, the stock markets have experienced extreme price
fluctuations that have affected the market price of many infrastructure service
companies in particular and that have often been unrelated to the operating
performance of these companies. In addition, a major adjustment in the capital
markets may adversely impact Bracknell's ability to proceed with future
acquisitions. These factors, as well as general economic and political
conditions, may have a material adverse effect on the market price of the
Bracknell common shares.
FORWARD LOOKING STATEMENTS
Bracknell and Able have made forward-looking statements in this document
that are subject to risks and uncertainties. Forward-looking statements include
the information concerning possible or assumed future
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results of operations of Bracknell and Able as well as statements preceded by,
followed by or that include the words "believes," "expects," "anticipates,"
"estimates," "projects," "intends" or similar expressions. You should understand
that important factors, in addition to those discussed elsewhere in this
document, could affect the future results of Bracknell and could cause those
results to differ materially from those expressed in any forward-looking
statements. These factors include:
- Unanticipated trends and conditions in the industry, including future
consolidation;
- Risks associated with the ability to compete in local markets;
- Risks associated with the ability to integrate acquired businesses;
- The importance of acquisitions for growth; and
- Risks associated with the ability to implement cost savings and
operational strategy.
There can be no assurances that any anticipated future results will be
achieved. As a result of the factors identified above and other factors,
Bracknell's and Able's actual results or financial or other condition could vary
significantly from the performance or financial or other condition set forth in
any forward-looking statements.
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THE MERGER
GENERAL
The discussion of the merger in this proxy statement/prospectus and the
description of the principal terms of the merger agreement are subject to and
qualified in their entirety by reference to the merger agreement, a copy of
which is attached hereto as Appendix A-1, to Appendix A-2, the opinion of the
financial advisor and to Appendix A-3, the Florida law concerning appraisal
rights, each of which is incorporated herein by reference.
Bracknell Corporation, an Ontario corporation, Bracknell Acquisition
Corporation, a Florida corporation and a wholly owned subsidiary of Bracknell,
and Able Telcom Holding Corp. have entered into the merger agreement dated
August 23, 2000 as amended and restated effective November 14, 2000. The merger
agreement provides for the merger of the Bracknell subsidiary with and into Able
pursuant to which Able will be the surviving corporation and will become a
wholly owned subsidiary of Bracknell. The merger is conditional upon the
completion of a number of items, including regulatory and shareholder approval,
Bracknell financing, resolution of material litigation involving Able, and the
completion of satisfactory due diligence.
Pursuant to the merger agreement, each share of Able common stock that is
outstanding when the merger occurs will be converted into the right to receive
0.6 shares of Bracknell common stock. Each share of Able Series C preferred
stock that is outstanding when the merger occurs will be converted into the
right to receive 540 shares of Bracknell common stock. In addition, each share
of Able Series E preferred stock that is outstanding when the merger occurs will
be converted into the right to receive the number of shares of Bracknell common
stock determined by dividing the aggregate face value of all shares of Able
Series E preferred stock by CDN$8.25 and then dividing that quotient by the
number of shares of Able Series E preferred stock issued and outstanding at such
time.
The Able common stock, the Able Series C preferred stock and the Able
Series E preferred stock will no longer be outstanding and will be cancelled and
retired and will cease to exist, and each certificate representing any shares of
Able common stock, Able Series C preferred stock or Able Series E preferred
stock will thereafter represent only the right to receive the merger
consideration.
Upon the consummation of the merger, the separate, corporate existence of
the merger subsidiary will cease, all of the rights, privileges, powers,
franchises, properties, assets, liabilities and obligations of the merger
subsidiary and of Able will be vested in Able, and Able will continue as the
surviving corporation and a wholly owned subsidiary of Bracknell.
THE BOARD OF DIRECTORS OF ABLE HAS DETERMINED THAT THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY ARE REASONABLE, FAIR TO AND IN THE BEST
INTERESTS OF ABLE AND ITS SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS OF
ABLE APPROVE THE MERGER AGREEMENT AND THE MERGER.
THE BOARD OF DIRECTORS OF BRACKNELL HAS DETERMINED THAT THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE REASONABLE, FAIR TO AND
IN THE BEST INTERESTS OF BRACKNELL AND ITS STOCKHOLDERS.
BACKGROUND OF THE MERGER
In May 2000, the court entered a judgment following jury verdict in the
litigation between Able and Sirit Technologies, Inc. requiring Able to pay $1.2
million in compensatory damages and $30 million in punitive damages. At that
time, Able did not have the ability to satisfy the judgment or to obtain the
bond that would be required by the court to stay execution of the judgment
pending appeal. During this time, Able had also experienced a number of other
materially adverse events, including:
- covenant and payment default under Able's senior credit facility,
- the company that underwrote Able's bonds refused to underwrite any
further payment or performance bonds for new projects unless adequate
cash collateral was available, which at that time was not available to
Able,
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- the initiation of delisting proceedings by Nasdaq with respect to Able's
common stock because of its failure to maintain a stock price of at least
$5.00 per share and its failure to hold an annual meeting since 1998,
- the default by an Able subsidiary under a material contract with the New
Jersey Turnpike Authority, and
- the default by Able of provisions of its Series C preferred stock
regarding the listing and registration of that stock.
In light of these various material developments and the entry of the Sirit
judgment, Able retained insolvency counsel to pursue strategic alternatives and
commenced settlement discussions with its banks, its bonding company, the New
Jersey Turnpike Authority, Sirit and the holders of the Series C preferred
stock. Therefore, at this point in time, Able was searching for a comprehensive
solution to the various issues it faced.
On May 25, 2000, in the offices of CIBC World Markets in New York City,
Billy Ray, the Chief Executive Officer of Able, Edwin Johnson, the President and
Chief Financial Officer of Able, and Michael Brenner, the Executive Vice
President and General Counsel of Able, were introduced to Paul Melnuk, the Chief
Executive Officer of Bracknell, and David Smith, the Vice President of Business
Development of Bracknell. The purpose of this meeting was to explore strategic
opportunities and relationships involving Able and Bracknell. At this meeting,
each of the participants discussed their professional background, their current
responsibilities and the strategies and markets of their respective companies.
Shortly after this initial meeting, Able and Bracknell entered into a
confidentiality agreement pursuant to which, among other things, each of them
agreed that any non-public information about the other company made available to
it would be held in strict confidence.
After the execution of this confidentiality agreement, each of Bracknell
and Able commenced their due diligence review. As part of the due diligence
process, representatives of Able and Bracknell held numerous and extensive
formal and informal in person and telephonic meetings, as described below, in
which the parties discussed current operational, financial, legal, accounting
and strategic issues, opportunities and objectives of both companies. In
addition, the parties discussed different terms of a proposed transaction
between the companies in which these issues, opportunities and objectives might
be resolved to the benefit of the shareholders of both companies.
From May 25, 2000 to June 26, 2000 Able and Bracknell commenced discussion
of a number of terms. Many of the terms at issue were raised not only by
Bracknell in its evaluation of a purchase of Able, but also by the settlement
agreement being negotiated at that time with Sirit. The proposed Sirit
settlement agreement required that the master services agreement between Able
and WorldCom be extended until July 1, 2006, whereas Bracknell requested that it
be extended for seven years from the closing of the proposed merger. Bracknell
also requested that the amended master services agreement provide for an
increase from 75% to 90% of the minimum volume of work that WorldCom is required
to provide to Able and that the minimum yearly revenue under this agreement be
increased to $200 million. In addition, the proposed Sirit settlement agreement
required WorldCom to convert all of its debt from Able into seven year term debt
whereas Bracknell required that WorldCom make an equity investment in the
combined entity equal to the debt it held in Able. Therefore, a significant
portion of these negotiations involved negotiations among Able, Bracknell and
WorldCom to achieve an amendment to the master services agreement along terms
that would be acceptable to both Sirit and Bracknell and to agree upon terms for
WorldCom to convert its Able indebtedness into equity of the combined entity.
On June 16, 2000, a meeting was held in the offices of WorldCom in Jackson,
Mississippi, between David Meyers, the Senior Vice President of WorldCom, Billy
Ray, the Chief Executive Officer of Able, Paul Melnuk, the Chief Executive
Officer of Bracknell, and Jonathan Taylor, the Executive Vice President of
Bracknell. The purpose of this meeting was to introduce to WorldCom the
potential merger transaction between Able and Bracknell, to explore strategic
opportunities and relationships involving Bracknell and Able, and to request the
commitment level of WorldCom to support a merger transaction. Although no
particular terms of the transaction were negotiated, Bracknell requested that
WorldCom continue to provide financial
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support to Able, and consider amending the master services agreement to provide
an increase from 75% to 90% of the minimum volume of work that WorldCom is
required to provide to Able and that the minimum yearly revenue under this
agreement be increased to $200 million.
On June 20, 2000, a meeting was held in the offices of CIBC World Markets
in New York City, between Billy Ray, the Chief Executive Officer of Able,
Michael Brenner, the Executive Vice President and General Counsel of Able, John
Naccarato, the Corporate Counsel and Secretary for Bracknell, and Jonathan
Taylor, the Executive Vice President of Bracknell. During this meeting, Able and
Bracknell continued discussion of a number of terms related to a combination of
the two companies which were reflected in the term sheet described below and as
to which negotiations continued until the signing of the merger agreement. At
this meeting, the parties negotiated a fixed exchange ratio of 0.6 Bracknell
common shares for every one Able common share. Able had initially requested an
exchange ratio of 1 for 1, and thereafter requested both maximum and minimum
exchange ratios, however, the proposed 0.6 for 1 exchange ratio was generally
believed to be fair by Able.
As negotiations progressed, on or about June 26, 2000, Bracknell submitted
to Able a proposed non-binding three party term sheet between Bracknell, Able
and WorldCom, Able's major customer and also its major creditor and shareholder,
outlining the material terms of a proposed stock for stock merger of the two
companies. This June 26 term sheet proposed an exchange ratio of 0.6 shares of
Bracknell common stock for each issued and outstanding share of Able common
stock, included requirements regarding the cancellation of all outstanding
options and warrants along the lines ultimately agreed to by the parties, and
included confidentiality, no shop and termination fee provisions similar to
those ultimately agreed upon by the parties. The term sheet also included a
number of conditions precedent to the merger closing, including: (a) the
requirement that a number of current agreements between Able and WorldCom,
including the master service agreement, be amended to provide for a five year
extension to the original term, with a further five year renewal option for
Able, and for an increase in the minimum limits of local metropolitan network
build-out to 90% and minimum yearly revenue to $200 million; (b) upon completion
of the proposed WorldCom/Sprint merger, WorldCom would then enter into
comparable master services agreements with Able covering other geographic
regions; (c) a best efforts obligation from WorldCom to provide Bracknell the
opportunity to provide its complete service offering to WorldCom and its
affiliates; and (d) the commitment from WorldCom to make a further investment in
Bracknell by way of a convertible debt or preferred equity security.
On June 27, 2000, a meeting was held by teleconference, between Billy Ray,
the Chief Executive Officer of Able, Michael Brenner, the Executive Vice
President and General Counsel of Able, John Naccarato, the Corporate Counsel and
Secretary for Bracknell, and Jonathan Taylor, the Executive Vice President of
Bracknell. During this meeting the parties negotiated the terms of the
non-solicitation covenants and breakup fees payable in the event either party
fails, other than for cause, to approve and consummate the merger. Negotiations
were held during this time regarding the payment of termination fees, including
the amount to be paid by Bracknell to Able in the case of a termination of the
transaction by Bracknell. These negotiations did not result in a change from the
originally proposed termination fee of $3 million for termination by Able under
specified circumstances and of $250,000 for termination under specified
circumstances by Bracknell.
On July 5, 2000, Able presented a revised term sheet to Bracknell, that was
substantively similar to the original proposal from Bracknell, but included
revisions to the process by which WorldCom would provide future working capital
advances to Able, and the provisions relating to the termination of the
transaction.
On July 7, 2000, executives from Able, Bracknell and WorldCom signed a
non-binding term sheet containing terms substantially similar to those first
proposed in the June draft term sheet. While the due diligence process
continued, preparation of definitive transaction documents was commenced by
Able's and Bracknell's counsel.
On August 2, 2000, a meeting was held in the offices of WorldCom in
Jackson, Mississippi, between David Meyers, the Senior Vice President of
WorldCom, Billy Ray, the Chief Executive Officer of Able, and Jonathan Taylor,
the Executive Vice President of Bracknell. The purpose of this meeting was to
discuss the various commitments sought by Bracknell from WorldCom in connection
with the merger agreement.
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On August 4, 2000, John Naccarato, the Corporate Counsel and Secretary for
Bracknell, and Michael Brenner, the Executive Vice President and General Counsel
of Able, had a telephone conference where they discussed the preparation of the
various definitive agreements contemplated in the merger transaction.
On August 17, 2000, John Naccarato, the Corporate Counsel and Secretary for
Bracknell, Jonathan Taylor, the Executive Vice President of Bracknell, Larry
Duvall, Director, OSP of WorldCom, and Tom Bosley, Senior Vice President
(Network Operations) of WorldCom, held a telephone conference to negotiate
further economic terms of the proposed amended master services agreement between
WorldCom and Able, including the minimum revenue obligations during the term. At
this meeting, the principal terms of the proposed amended master services
agreement were finalized, as reflected in the merger agreement.
Between August 21 and August 23, 2000, John Naccarato, the Corporate
Counsel and Secretary for Bracknell, Jonathan Taylor, the Executive Vice
President of Bracknell, and Reginald Chessom, the Vice President of WorldCom
Venture Fund, held various telephone conferences to negotiate the final terms of
the various WorldCom commitments sought by Bracknell, including the share
transfer restrictions, funding obligations of WorldCom in respect of Able
generally and in connection with specific contracts, and various indemnities
from WorldCom.
Additional negotiation of the details of the merger and related
documentation were completed on August 23, 2000 on which date the merger
agreement was signed. The entry into the merger agreement was announced by both
companies and WorldCom on August 24, 2000.
REASONS FOR THE MERGER
Able's Reasons
At a meeting held on August 23, 2000, the Able board concluded that the
merger was in the best interest of Able and its shareholders and determined to
recommend that the shareholders of Able vote in favor of the merger. The summary
set forth below briefly describes the material reasons, factors and information
taken into account by the Able board in reaching its conclusion.
In reaching its determination, the Able board consulted with Able's
management and legal and financial advisors, and carefully considered:
- Able's industry profile, including an analysis of Able's competitive
position in the telecommunications construction industry;
- Able's board's belief that the offer presented in the merger represents
an attractive opportunity for the shareholders to promptly receive fair
value in stock for their investment in light of Able's current and
prospective financial condition;
- The synergies that exist between Able and Bracknell which may increase
the revenue and reduce the relative expense of the combined companies,
thereby potentially increasing shareholder value;
- A review of various financial and other considerations, including Able's
probable value based on prior offers to acquire Able and on comparisons
to certain other similarly situated companies;
- The fact that the consideration to be provided to Able's shareholders
pursuant to the merger agreement will be provided in exchange for all of
Able's outstanding common stock and is stock in a public company, thereby
providing liquidity to Able's shareholders;
- The terms and conditions of the merger agreement, which Able's Board
believes are fair and reasonable given the financial situation and
prospects of Able;
- The provisions of the merger agreement that could have a detrimental
effect on third parties who might be interested in a proposed business
combination with Able. These provisions include the obligations of Able
to pay a termination fee of up to $3 million if the merger does not go
forward under specified circumstances including these described below. In
addition, Able has agreed not to solicit or engage in any negotiations
relating to or provide information with respect to any "change of
control" transaction
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except in the event Able receives an unsolicited proposal regarding a
business combination from a person or entity, in which event, in the
exercise of its fiduciary duties under applicable law, Able may commence
negotiations with this person or entity submitting the unsolicited
proposal. In that event, Bracknell will have the option to terminate the
merger agreement and be paid the termination fee described above and will
be entitled to exercise an option to purchase 10% of Able's stock. Able's
board recognizes these and other comparable terms were required by
Bracknell as a condition to entering into the merger agreement;
- Able's poor cash position and its need to raise additional capital;
- The fact that Able is in default under its senior credit facility;
- Able's potential inability to obtain surety bonds in connection with the
operation of its business because of its current financial position;
- The terms of Able's settlement agreement with Sirit Technologies, Inc.;
and
- The interests certain Able directors and officers may have in the merger
as a result of stock option ownership or severance provisions in their
employment agreements.
The foregoing summary of the information and factors considered by the Able
board is not intended to be exhaustive but includes material factors considered
by the Able board. Because of Able's financial condition, the Able board
concluded that each of the factors summarized, other than the factors relating
to the possible payment of a termination fee and the interests of officers and
directors in the merger, supported the board's conclusion.
In view of the complexity and wide variety of information and factors, both
positive and negative, considered by the Able board, it did not find it
practical to quantify, rank or otherwise assign relative or specific weights to
the factors considered. In addition, the Able board did not reach any specific
conclusion with respect to each of the factors considered, or any aspect of any
particular factor. Instead, the Able board conducted an overall analysis of the
factors described above, including discussion with Able's management and legal,
financial and accounting advisors. In considering the factors described above,
individual members of the Able board may have given different weight to
different factors.
After taking into consideration all the factors set forth above as a whole,
the Able board concluded that the factors supported its determinations to
approve the merger and that the merger was fair to, and in the best interest of,
Able and its shareholders and that Able should proceed with the merger.
Bracknell's Reasons
Bracknell's management believes that Able's capabilities complement
Bracknell's expertise in critical use telecom facilities and in deploying
network infrastructure within buildings. The merger also extends Bracknell's
business into new markets and brings a number of important new customers to
Bracknell. Bracknell believes that following the merger, Bracknell will have
full end-to-end infrastructure capabilities to serve the telecommunications
market. These capabilities cover the design, build, project management,
commissioning and maintenance of complete communication networks.
Adesta Communications, a subsidiary of Able which has its head office in
Omaha, is a leading network infrastructure services and development company
focused on the design, engineering, construction, maintenance, marketing and
development of fiber optic and other advanced communications networks. Adesta
will bring the ability to deploy outside fiber optic infrastructure to
Bracknell's core competencies inside a facility that include operating centers,
wiring connections inside buildings, turn-key wireless systems, voice and data
communications systems and critical use facilities. Bracknell's objective is to
leverage the companies' combined capability to sell more services to existing
customers and reduce dependence on any particular segment of the communications
market.
Customers in this market are also looking for suppliers to provide
comprehensive turn-key and complete life cycle services as their ambitious
growth plans require them to seek outside expertise. This leads Bracknell
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to provide complete maintenance and operations programs to support the
continuing operational demands of its customers. And while doing maintenance,
Bracknell believes there is potential for upgrade work in the critical use
facilities. Bracknell's customers currently include such companies as Telus,
AT&T Canada, WorldCom, Bell, Trivergent and Optiglobe. The acquisition of Able
will make the telecommunications category one of Bracknell's largest business
sectors. Ranked as the sixth largest broadband infrastructure services provider
in the United States, Able includes among its customers and partners WorldCom,
Enron, Qwest, AT&T, Williams Communications, McLeod USA, 360 Networks, PF Net,
Metromedia Fiber, Time Warner, Digital Teleport, Touch America, Allegiance and
others.
Able is also a key supplier to WorldCom, and an important aspect of this
transaction is an agreement for Bracknell to become a preferred supplier to
WorldCom and perform at least 75% of WorldCom's local network infrastructure
build-out for the next six years. The master services agreement between Able and
WorldCom guarantees minimum annual revenues of US $55 million from WorldCom,
with a minimum revenue commitment over the six-year term of the agreement of US
$390 million.
Able brings a number of core technologies and significant expertise to
Bracknell. It possesses specialized value-added experience in the turnkey
deployment of fiber optic networks, with key knowledge of engineering, design,
installation, project management and development in this area. Another key
competency, and a strong competitive advantage, is Able's expertise in the
assembly of rights-of-way routes for fiber installations. Able, through Adesta,
has already installed more than 2 million fiber miles of cable in seventy
metropolitan areas in the United States.
Bracknell believes that Adesta is uniquely positioned to obtain an
increasing percentage of this business because of its track record and its
experience, especially in the assembly of rights of way. As demand for bandwidth
grows, fiber deployment is accelerating, particularly in the local loop, which
is an Adesta key strength.
After the merger is completed, Bracknell intends to sell the non-core
divisions of Able, including the Construction Group (excluding the Patton
division) the Transportation Services Group and the International Services
Group. Currently, Bracknell does not have any binding arrangements or
understandings to sell these divisions.
OPINION OF ROBINSON-HUMPHREY
General
Pursuant to an engagement letter dated October 18, 2000, The
Robinson-Humphrey Company, LLC was retained by Able to render an opinion with
respect to the fairness, from a financial point of view, to Able shareholders of
the consideration to be received in the proposed transaction. On November 15,
2000, Robinson-Humphrey delivered its written opinion that, as of the date of
that opinion and based upon and subject to various considerations set forth in
the opinion, the consideration to be offered in the proposed transaction is fair
to the shareholders of Able from a financial point of view.
THE FULL TEXT OF THE OPINION OF ROBINSON-HUMPHREY WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED TO THIS DOCUMENT AS APPENDIX A-2 AND IS INCORPORATED HEREIN BY THIS
REFERENCE. THE DESCRIPTION OF THE ROBINSON-HUMPHREY OPINION SET FORTH BELOW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE ROBINSON-HUMPHREY
OPINION. ABLE SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
THE OPINION OF ROBINSON-HUMPHREY IS DIRECTED TO THE ABLE BOARD OF DIRECTORS
AND RELATES ONLY TO THE FAIRNESS OF THE PROPOSED CONSIDERATION FROM A FINANCIAL
POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE AT THE ABLE SHAREHOLDERS MEETING. THE CONSIDERATION TO BE RECEIVED BY ABLE
SHAREHOLDERS IN THE MERGER WAS DETERMINED ON THE BASIS OF NEGOTIATIONS BETWEEN
ABLE AND BRACKNELL AND WAS APPROVED BY THE ABLE BOARD.
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Material and Information Considered with Respect to the Merger
In arriving at its opinion, Robinson-Humphrey among other things:
- reviewed the merger agreement;
- reviewed publicly available information concerning Able and Bracknell
which Robinson-Humphrey believed to be relevant to its analysis;
- reviewed financial and operating data concerning Able and Bracknell
furnished to Robinson-Humphrey by Able and Bracknell, respectively;
- conducted discussions with members of management of Able and Bracknell
concerning their respective businesses, operations, present conditions
and prospects;
- conducted discussions with WorldCom concerning its relationship with both
Able and Bracknell;
- reviewed the trading histories of the common stock of both Able and
Bracknell from November 10, 1997 to November 15, 2000;
- reviewed the historical market prices and trading activity for the common
stock of both Able and Bracknell and compared them with those of selected
publicly traded companies which Robinson-Humphrey deemed relevant;
- compared the historical financial results and present financial condition
of Able and Bracknell with those of selected publicly traded companies
which Robinson-Humphrey deemed relevant;
- reviewed the financial terms, to the extent publicly available, of
selected comparable merger and acquisition transactions which
Robinson-Humphrey deemed relevant;
- performed financial analyses with respect to Able's and Bracknell's
projected future operating performance including discounted cash flow
analysis, market analysis of selected public companies and a pro forma
combination analysis;
- reviewed historical data relating to percentage premiums paid in mergers
of select publicly traded companies; and
- reviewed other financial statistics and undertook other analyses and
investigations and took into account those other matters as
Robinson-Humphrey deemed appropriate.
In rendering its opinion, Robinson-Humphrey assumed and relied upon the
accuracy and completeness of the financial and other information used by
Robinson-Humphrey in arriving at its opinion without independent verification.
With respect to the financial forecasts of Bracknell, including estimates of the
cost savings and other potential synergies anticipated to result from the
merger, Robinson-Humphrey has assumed that they have been reasonably prepared
and reflect the best currently available estimates and judgments of Bracknell's
management as to future financial performance of Bracknell. Robinson-Humphrey
was furnished with financial forecasts prepared by Able's management for fiscal
2001, 2002 and 2003. Robinson-Humphrey assumed and relied upon the accuracy and
completeness of these financial forecasts in arriving at its opinion without
independent verification. The financial forecasts were not prepared with a view
to public disclosure or compliance with the published guidelines of the SEC or
the guidelines established by the American Institute of Certified Public
Accountants regarding projections or forecasts.
These financial forecasts reflect numerous assumptions made by Able's
management with respect to industry performance, general business, economic,
market and financial conditions and other matters, all of which are difficult to
predict, and many of which are beyond Able's control. Included in these
assumptions is the specific assumption that the proposed merger with Bracknell
is not consummated. Under this scenario, these financial forecasts assume that
Able has the ability to continue as a going concern and has the ability to
obtain the financing required to fund its working capital and growth needs.
Management of Able does not
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believe that either of these assumptions is likely to occur or that the
projected results are likely to be realized if the merger is not completed. The
summary financial forecasts are as follows:
PROJECTED INCOME STATEMENTS FOR ABLE TELCOM HOLDING CORP.
ABLE MANAGEMENT BASE CASE (1)
(U.S. dollars in thousands)
FOR THE PROJECTED YEARS ENDING
OCTOBER 31,
------------------------------
2001 2002 2003
-------- -------- --------
Total revenue............................................... $594,591 $476,957 $497,204
Cost and expenses......................................... 456,238 371,138 387,454
-------- -------- --------
Gross margin................................................ 138,353 105,819 109,750
General and administrative................................ 76,581 59,491 62,648
-------- -------- --------
EBITDA...................................................... 61,772 46,329 47,102
D&A....................................................... 17,838 14,309 14,916
-------- -------- --------
EBIT........................................................ 43,934 32,020 32,186
Interest expense.......................................... 4,740 4,982 5,236
-------- -------- --------
EBT......................................................... $ 39,194 $ 27,038 $ 26,950
======== ======== ========
- ---------------
(1) Projections provided by Able management.
In arriving at its opinion, Robinson-Humphrey conducted only a limited
physical inspection of the properties and facilities of Able and Bracknell.
Robinson-Humphrey has not made or obtained any evaluations or appraisals of the
assets or liabilities of Able or Bracknell. Furthermore, Robinson-Humphrey was
not authorized to solicit, and did not solicit, any indications of interest from
any third party with respect to the purchase of all or a part of Able's
business.
The Robinson-Humphrey opinion is necessarily based upon market, economic
and other conditions as they existed and could be evaluated on, and on the
information made available to Robinson-Humphrey, as of the date of its opinion.
The financial markets in general and the markets for the common stock of Able
and Bracknell, in particular, are subject to volatility, and Robinson-Humphrey's
opinion did not purport to address potential developments in the financial
markets or the markets for the common stock of Able and of Bracknell after the
date of their opinion. Robinson-Humphrey assumed that the merger would be
consummated on the terms described in the merger agreement, without any waiver
of any material terms or conditions by Able or Bracknell.
In preparing its opinion, Robinson-Humphrey performed a variety of
financial and comparative analyses, including those described below. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, is not readily susceptible to summary description.
Accordingly, Robinson-Humphrey believes that its analyses must be considered as
an integrated whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and opinion. In its
analyses, Robinson-Humphrey made numerous assumptions with respect to Able,
Bracknell, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Able and Bracknell. The estimates contained in these analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, these analyses and estimates are
inherently subject to substantial uncertainty. The Able Board of Directors made
an independent evaluation of the merger in making their recommendation. The
following is a summary of the material
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financial and comparative analyses performed by Robinson-Humphrey in arriving at
the Robinson-Humphrey opinion.
ANALYSIS OF ABLE
Market Analysis of Selected Public Companies
Robinson-Humphrey reviewed and compared selected publicly available
financial data, market information and trading multiples for Able with other
selected publicly-traded companies in the telecommunications infrastructure
services industry which Robinson-Humphrey deemed comparable to Able. This group
of six publicly traded companies included:
TELECOMMUNICATIONS INFRASTRUCTURE SERVICES COMPANIES
- ----------------------------------------------------
- Arguss Communications, Inc. - MasTec, Inc.
- Dycom Industries, Inc. - Quanta Services, Inc.
- International Fibercom, Inc. - Viasource Communications, Inc.
For the selected public companies, Robinson-Humphrey compared, among other
things, firm value (defined as market capitalization plus debt less cash and
cash equivalents) as a multiple of latest twelve months revenues, latest twelve
months EBITDA, latest twelve months earnings before interest and taxes and
estimated calendar 2001 revenues and equity value as a multiple of latest twelve
months net income, estimated calendar 2001 net income and latest twelve months
book value. Robinson-Humphrey noted that Able incurred a net loss as well as
negative EBITDA and earnings before interest and taxes in the latest twelve
months, therefore valuations based on latest twelve months net income, EBITDA
and earnings before interest and taxes were not meaningful. Robinson-Humphrey
noted that Able has a negative book value, therefore valuations based on book
value were not meaningful. Robinson-Humphrey noted that there are no current
publicly available published estimates for Able's 2001 revenues and net income.
All multiples were based on closing stock prices as of November 10, 2000.
Revenue, EBITDA, earnings before interest and taxes, net income and book value
results for the comparable companies were based on historical financial
information available in public filings of the comparable companies. Revenue and
earnings per share estimates were based on First Call consensus estimates as of
November 8, 2000. First Call is an information provider that publishes a
compilation of estimates of projected financial performance for public companies
produced by equity research analysts at leading investment banking firms. The
following table sets forth the low, average and high multiples indicated by this
analysis for the comparable companies as of November 10, 2000:
LOW AVERAGE HIGH
----- ------- -----
Firm Value to:
Latest twelve months Revenues............................ .8x 1.6x 2.2x
Latest twelve months EBITDA.............................. 8.3 11.3 15.1
Latest twelve months earnings before interest and
taxes................................................. 11.2 14.7 20.8
Calendar 2001 Revenues................................... .5 1.0 1.6
Price to:
Latest twelve months Net Income.......................... 19.5x 23.3x 27.9x
Calendar 2001 Net Income................................. 13.9 16.2 21.3
Book Value............................................... 0.9 2.7 4.9
Based upon the multiples derived from this analysis and Able's historical
and projected results, Robinson-Humphrey calculated a range of implied equity
values for Able between $0.00 and $30.55 per share with a weighted average
implied equity value of $3.05 per share. Robinson-Humphrey noted that the value
per share of $4.28 to be received by Able shareholders in the merger based on
Bracknell's closing stock price on November 10, 2000 and the merger exchange
ratio was greater than this value and represented a premium of 40.3% above the
weighted average implied equity value per share.
Robinson-Humphrey noted that none of the companies used in the market
analysis of selected public companies was identical to Able and that,
accordingly, the analysis of comparable public companies necessarily involves
complex considerations and judgments concerning differences in financial and
operating
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characteristics of the companies reviewed and other factors that would affect
the market values of comparable companies.
Analysis of Selected Merger and Acquisition Transactions
Robinson-Humphrey reviewed and analyzed the consideration paid in 28
selected completed and pending mergers and acquisitions involving
telecommunications infrastructure services companies since February 18, 1997.
The transactions reviewed were:
EFFECTIVE DATE TARGET NAME ACQUIRER NAME
- -------------- ----------- -------------
Pending..................... Niels Fugal Dycom Industries, Inc.
05/26/2000.................. US Communications Inc. Arguss Communications Group
09/15/1999.................. Haines Construction Company Quanta Services, Inc.
08/13/1999.................. Crown Fibers Communications Quanta Services, Inc.
07/21/1999.................. North Sky Communications Quanta Services, Inc.
06/15/1999.................. West Coast Communications Quanta Services, Inc.
05/28/1999.................. GEM Engineering Co, Inc. Quanta Services, Inc.
05/14/1999.................. H. L. Chapman Pipeline Constructions Quanta Services, Inc.
04/15/1999.................. Tom Allen Construction Company Quanta Services, Inc.
03/31/1999.................. Ervin Cable Construction Dycom Industries, Inc.
03/31/1999.................. Apex Digital TV Dycom Industries, Inc.
03/03/1999.................. Western Directional Quanta Services, Inc.
02/16/1999.................. Northern Line Layers, Inc. Quanta Services, Inc.
02/12/1999.................. The Ryan Company Quanta Services, Inc.
02/12/1999.................. Dillard Smith Construction Company Quanta Services, Inc.
09/18/1998.................. Diversitec International Fibercom,
Inc.
09/16/1998.................. United Tech International Fibercom,
Inc.
09/08/1998.................. Underground Specialities Arguss Communications Group
09/01/1998.................. United Tech International Fibercom,
Inc.
04/07/1998.................. Cablecom Dycom Industries, Inc.
04/07/1998.................. Installation Technicians Dycom Industries, Inc.
01/02/1998.................. Can Am Construction Arguss Communications Group
01/02/1998.................. Schenck Communications Arguss Communications Group
12/03/1997.................. Southern Communications International Fibercom,
Inc.
10/06/1997.................. Rite Cable Construction Arguss Communications Group
09/22/1997.................. TCS Communications Arguss Communications Group
07/30/1997.................. Communications Construction Group Dycom Industries, Inc.
02/18/1997.................. Concepts In Communications International Fibercom,
Inc.
For the selected transactions, Robinson-Humphrey compared, among other
things, firm value as a multiple of latest twelve months revenues, latest twelve
months EBITDA, and latest twelve months earnings before interest and taxes and
equity value as a multiple of latest twelve months net income and book value.
Revenues, EBITDA, earnings before interest and taxes, net income and book values
were based on historical financial information available in public filings of
the target companies involved in the selected transactions. Robinson-Humphrey
noted that Able incurred a net loss, negative EBITDA and negative earnings
before interest and taxes in the latest twelve months and has a negative book
value, therefore valuations based on latest twelve months net income, latest
twelve months earnings before interest and taxes, latest twelve months EBITDA
and book value were not meaningful. The following table sets forth the low,
average and high multiples indicated by the selected mergers and acquisitions:
LOW AVERAGE HIGH
----- ------- -----
Firm Value to:
Latest twelve months Revenues............................. .1x .7x 1.8x
Latest twelve months EBITDA............................... 1.0 4.4 16.0
Latest twelve months earnings before interest and taxes... 1.2 5.1 28.7
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LOW AVERAGE HIGH
----- ------- -----
Price to:
Latest twelve months Net Income........................... 1.3x 5.5x 36.3x
Book Value................................................ 0.8 3.7 29.7
Based upon the multiples derived from this analysis and Able's historical
and projected results, Robinson-Humphrey calculated a range of implied equity
values for Able between $0.00 and $10.57 per share with a weighted average
implied equity value of $1.06 per share. Robinson-Humphrey noted that the value
per share of $4.28 to be received by Able shareholders in the merger based on
Bracknell's closing stock price on November 10, 2000 and the merger exchange
ratio was greater than this value and represented a premium of 296.3% above the
weighted average implied equity value per share.
Robinson-Humphrey noted that no company utilized in the analysis of
selected transactions is identical to Able. All multiples for the selected
transactions were based on public information available at the time of
announcement of such transaction, without taking into account differing market
and other conditions during the period during which the selected transactions
occurred.
Discounted Cash Flow Analysis
Able Management's Base Case
Robinson-Humphrey performed a discounted cash flow analysis of Able based
upon Able management's base case projected results for fiscal 2001 through
fiscal 2003 and Robinson-Humphrey's projections for fiscal 2004 and fiscal 2005
(calculated using constant growth rates and margins) to estimate the net present
equity value per share of Able. Robinson-Humphrey calculated a range of net
present equity values for Able based on its projected free cash flow (earnings
before interest and after taxes plus depreciation and amortization expense minus
capital expenditures and increases in working capital) for the fiscal years
ending October 31, 2001 through October 31, 2005, inclusive, using discount
rates ranging from 20% to 25% and terminal value multiples of fiscal year 2005
EBITDA ranging from 4.0x to 6.0x. The analysis indicated the following per share
equity valuations of Able:
DISCOUNTED PRESENT VALUE OF EQUITY PER SHARE
DISCOUNT --------------------------------------------
RATE 4.0X 5.0X 6.0X
- -------- -------- -------- --------
20.0%................................... $3.71 $4.71 $5.71
22.5%................................... 3.08 3.98 4.88
25.0%................................... 2.51 3.33 4.14
Based upon Able management's base case projected results, Robinson-Humphrey
calculated a range of implied equity values for Able between $2.51 and $5.71 per
share with a median implied equity value of $3.98 per share. Robinson-Humphrey
noted that the value per share of $4.28 to be received by Able shareholders in
the merger based on Bracknell's closing stock price on November 10, 2000 and the
merger exchange ratio was within this valuation range and represented a premium
of 7.5% above the median implied equity value per share.
Robinson-Humphrey Downside Case
Robinson-Humphrey performed a downside case discounted cash flow analysis
of Able based upon a 10% discount to the revenues and cost of sales presented in
management's projections for fiscal 2001 through fiscal 2003 and
Robinson-Humphrey's projections for fiscal 2004 and fiscal 2005 (calculated
using reduced growth rates and margins) to estimate the net present equity value
per share of Able. Robinson-Humphrey calculated a range of net present equity
values for Able based on its projected free cash flow (earnings before interest
and after taxes plus depreciation and amortization expense minus capital
expenditures and increases in working capital) for the fiscal years ending
October 31, 2001 through October 31, 2005, inclusive, using discount rates
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ranging from 20% to 25% and terminal value multiples of fiscal year 2005 EBITDA
ranging from 4.0x to 6.0x. The analysis indicated the following per share equity
valuations of Able:
DISCOUNTED PRESENT VALUE OF EQUITY PER SHARE
DISCOUNT --------------------------------------------
RATE 4.0X 5.0X 6.0X
- -------- -------- -------- --------
20.0%................................... $1.37 $2.10 $2.84
22.5%................................... 0.89 1.55 2.21
25.0%................................... 0.45 1.05 1.65
Based upon Able management's projected results as adjusted by
Robinson-Humphrey to represent a downside case, Robinson-Humphrey calculated a
range of implied equity values for Able between $0.45 and $2.84 per share with a
median implied equity value of $1.55 per share. The average implied equity value
per share of the median implied equity values of management's base case and
Robinson-Humphrey's downside case is $2.76. Robinson-Humphrey noted that the
value per share of $4.28 to be received by Able shareholders in the merger based
on Bracknell's closing stock price on November 10, 2000 and the merger exchange
ratio was within this valuation range and represented a premium of 55.1% above
the average implied equity value per share of the median implied equity values
of management's base case and Robinson-Humphrey's downside case.
Premiums Paid Analysis
Robinson-Humphrey analyzed the transaction premiums paid in all closed
mergers of publicly traded companies with transaction values between $50 and
$250 million, effected since January 1, 1999, based on the target company's
stock price one day, one week and four weeks prior to public announcement of the
transaction. This analysis indicated the following premiums paid in the selected
transactions:
PURCHASE PRICE PREMIUM
PRIOR TO ANNOUNCEMENT
--------------------------
1 DAY 1 WEEK 4 WEEKS
----- ------ -------
Average................................................... 33.3% 41.2% 50.8%
Median.................................................... 28.7 35.6 44.3
High...................................................... 384.8 379.0 674.2
Low....................................................... (94.9) (94.2) (95.3)
- ---------------
(1) Source: Securities Data Corporation as of November 10, 2000.
Based upon Able's closing stock prices one day, one week and four weeks
prior to the announcement of the merger, Robinson-Humphrey calculated a range of
implied equity values for Able between $3.47 and $4.49 per share with an average
implied equity value of $3.95 per share (calculated using median and average
implied equity values). Robinson-Humphrey noted that the value per share of
$4.28 to be received by Able shareholders in the merger based on Bracknell's
closing stock price on November 10, 2000 and the merger exchange ratio was
within this valuation range and represented a premium of 8.4% to the average
implied equity value per share.
Analysis of Bracknell
Market Analysis of Selected Public Companies
Robinson-Humphrey reviewed and compared publicly available financial data,
market information and trading multiples for selected publicly-traded companies
in the telecommunications infrastructure services industry and the electrical
infrastructure services industry which Robinson-Humphrey deemed comparable to
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Bracknell. This group of seven telecommunications infrastructure services
companies and four electrical infrastructure services companies included:
TELECOMMUNICATIONS INFRASTRUCTURE SERVICES COMPANIES
- ----------------------------------------------------
-- Arguss Communications, Inc. -- MasTec, Inc.
-- Able Telcom Holding Corp. -- Quanta Services, Inc.
-- Dycom Industries, Inc. -- Viasource Communications, Inc.
-- International Fibercom, Inc.
ELECTRICAL INFRASTRUCTURE SERVICES COMPANIES
- --------------------------------------------
-- Integrated Electrical Services -- Comport Systems USA, Inc.
-- Encompass Services Corp. -- EMCOR Group, Inc.
For the selected public companies, Robinson-Humphrey analyzed, among other
things, firm value as a multiple of latest twelve months revenues, latest twelve
months EBITDA, latest twelve months earnings before interest and taxes and
projected calendar 2001 revenues and equity value as a multiple of latest twelve
months net income, projected calendar 2001 net income and book value. All
multiples were based on closing stock prices as of November 10, 2000. Revenue,
EBITDA, earnings before interest and taxes, net income and book value results
for the comparable companies were based on historical financial information
available in public filings of the comparable companies. Revenue and net income
estimates were based on First Call consensus estimates as of November 10, 2000.
Based upon the multiples derived from this analysis and the historical and
projected results for Bracknell, Robinson-Humphrey calculated a range of implied
equity values for Bracknell between $3.65 and $19.04 per share, with a weighted
average implied equity value per share of $7.47.
Robinson-Humphrey noted that none of the companies used in the market
analysis of selected public companies was identical to Bracknell and that,
accordingly, the analysis of comparable public companies necessarily involves
complex considerations and judgements concerning differences in financial and
operating characteristics of the companies reviewed and other factors that would
affect the market values of comparable companies.
Analysis of Selected Merger and Acquisition Transactions
Robinson-Humphrey reviewed and analyzed the consideration paid in 28
selected completed and pending mergers and acquisitions involving
telecommunications infrastructure services companies since February 18, 1997 and
12 selected completed and pending mergers involving electrical infrastructure
services companies since October 15, 1998. The transactions reviewed were:
EFFECTIVE DATE TARGET NAME ACQUIRER NAME
- -------------- ----------- -------------
TELECOMMUNICATIONS INFRASTRUCTURE SERVICES COMPANIES
- ----------------------------------------------------------------------------------------------------
Pending............... Niels Fugal Dycom Industries Inc.
05/26/2000............ US Communications Inc. Arguss Communications Group
09/15/1999............ Haines Construction Company Quanta Services Inc.
08/13/1999............ Crown Fibers Communications Quanta Services Inc.
07/21/1999............ North Sky Communications Quanta Services Inc.
06/15/1999............ West Coast Communications Quanta Services Inc.
05/28/1999............ GEM Engineering Co, Inc. Quanta Services Inc.
05/14/1999............ H. L. Chapman Pipeline Constructions Quanta Services Inc.
04/15/1999............ Tom Allen Construction Company Quanta Services Inc.
03/31/1999............ Ervin Cable Construction Dycom Industries Inc.
03/31/1999............ Apex Digital TV Dycom Industries Inc.
03/03/1999............ Western Directional Quanta Services Inc.
02/16/1999............ Northern Line Layers, Inc. Quanta Services Inc.
02/12/1999............ The Ryan Company Quanta Services Inc.
02/12/1999............ Dillard Smith Construction Company Quanta Services Inc.
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EFFECTIVE DATE TARGET NAME ACQUIRER NAME
- -------------- ----------- -------------
09/18/1998............ Diversitec International Fibercom Inc.
09/16/1998............ United Tech International Fibercom Inc.
09/08/1998............ Underground Specialities Arguss Communications Group
09/01/1998............ United Tech International Fibercom Inc.
04/07/1998............ Cablecom Dycom Industries Inc.
04/07/1998............ Installation Technicians Dycom Industries Inc.
01/02/1998............ Can Am Construction Arguss Communications Group
01/02/1998............ Schenck Communications Arguss Communications Group
12/03/1997............ Southern Communications International Fibercom Inc.
10/06/1997............ Rite Cable Construction Arguss Communications Group
09/22/1997............ TCS Communications Arguss Communications Group
07/30/1997............ Communications Construction Group Dycom Industries Inc.
02/18/1997............ Concepts In Communications International Fibercom Inc.
ELECTRICAL INFRASTRUCTURE SERVICES COMPANIES
- ----------------------------------------------------------------------------------------------------
03/09/2000............ Sunbelt Integrated Trade Bracknell Corporation
02/23/2000............ Building One Services Corporation Encompass Services Corporation
10/18/1999............ Britt Rice Electric Inc. Integrated Electrical Service
09/30/1999............ Nationwide Electric Bracknell Corporation
06/19/1999............ Cardinal Contracting Corporation Encompass Services Corporation
05/14/1999............ Driftwood Electrical Contractors, Inc. Quanta Services Inc.
04/29/1999............ Putzel Electrical Contractors, Inc, Integrated Electrical Service
02/11/1999............ Air Systems Inc. Encompass Services Corporation
11/16/1998............ Shambaugh & Son Inc. Comfort Systems USA, Inc.
11/13/1998............ Trinity Contractors, Inc, Encompass Services Corporation
10/15/1998............ Continental Electrical Construction Co. Encompass Services Corporation
10/15/1998............ Stephen C. Pomeroy, Inc. Encompass Services Corporation
For the selected transactions, Robinson-Humphrey compared, among other
things firm value as a multiple of latest twelve months revenues, latest twelve
months EBITDA and latest twelve months earnings before interest and taxes and
equity value as a multiple of latest twelve months net income and book value.
Revenues, EBITDA, earnings before interest and taxes, net income and book values
were based on historical financial information available in public filings of
the target companies involved in the selected transactions. Based upon the
multiples derived from this analysis and the historical operating results for
Bracknell, Robinson-Humphrey calculated a range of implied equity values for
Bracknell of between $0.23 and $13.09 per share with a weighted average implied
equity value per share of $3.09.
Robinson-Humphrey noted that no company utilized in the analysis of
selected transactions is identical to Bracknell. None of the acquired companies
analyzed were publicly traded. All multiples for the selected transactions were
based on public information available at the time of announcement of such
transaction, without taking into account differing market and other conditions
during the period during which the selected transactions occurred.
Discounted Cash Flow Analysis
Robinson-Humphrey performed a discounted cash flow analysis of Bracknell
based upon management's projections for fiscal 2001 through fiscal 2004 and
Robinson Humphrey's projections for fiscal 2005 (calculated using a consistent
growth rate and constant margins) to estimate the net present equity value per
share of Bracknell. Robinson-Humphrey calculated a range of net present equity
values for Bracknell based on its projected free cash flow (earnings before
interest and after taxes plus depreciation and amortization expense minus
capital expenditures and increases in working capital) for the fiscal years
ending October 31, 2001 through October 31, 2005, inclusive, using discount
rates ranging from 15% to 20% and terminal value
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multiples of calendar year 2005 EBITDA ranging from 6.0x to 8.0x. The analysis
indicated the following per share equity valuations of Bracknell:
DISCOUNTED PRESENT VALUE OF EQUITY PER SHARE
DISCOUNT ---------------------------------------------
RATE 6.0X 7.0X 8.0X
-------- -------- -------- ---------
15.0%.................................. $8.36 $9.78 $11.20
17.5%.................................. 7.21 8.48 9.76
20.0%.................................. 6.18 7.33 8.48
Based upon Bracknell's projected results, Robinson-Humphrey calculated a
range of implied equity values for Bracknell between $6.18 and $11.20 per share
with a median implied equity value of $8.48 per share.
Pro Forma Combination Analysis
Robinson-Humphrey reviewed certain pro forma financial effects on Able and
Bracknell resulting from the merger for each of the projected fiscal years
ending October 31, 2001 through 2003. Robinson-Humphrey performed this analysis
using projections for Able and Bracknell and assumptions regarding expected
synergies provided by Able's and Bracknell's respective managements.
Robinson-Humphrey assumed that the merger would be accounted for under the
purchase method of accounting. The pro forma combination analysis assumes
expected synergies of $12.5 million per year.
INFORMATION REGARDING ROBINSON-HUMPHREY
The Able board of directors selected Robinson-Humphrey to render a fairness
opinion because Robinson-Humphrey is a nationally recognized investment banking
firm with substantial experience in transactions similar to the merger.
Robinson-Humphrey is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, secondary distributions of listed and unlisted
securities and private placements.
Pursuant to a letter agreement dated October 18, 2000, Able has agreed to
pay Robinson-Humphrey an opinion fee equal to $400,000 which was payable upon
delivery of the fairness opinion. The fees paid or payable to Robinson-Humphrey
are not contingent upon the contents of the opinion delivered or the closing of
the merger. In addition, Able has agreed to reimburse Robinson-Humphrey for its
reasonable out-of-pocket expenses, subject to specified limitations, and to
indemnify Robinson-Humphrey and certain related persons against certain
liabilities arising out of or in conjunction with its rendering of services
under its engagement, including certain liabilities under the federal securities
laws. In the ordinary course of its business, Robinson-Humphrey may actively
trade in the securities of Able and Bracknell for its own account and the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
ACCOUNTING TREATMENT
The merger will be accounted for as a purchase under U.S. generally
accepted accounting principles. Under this accounting method, assets and
liabilities of Able will be recorded at their fair value at the effective time,
with the excess of the purchase price over the net recorded value of the
tangible and identifiable intangible assets acquired being recorded as goodwill.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the opinion of Paul, Hastings, Janofsky
& Walker LLP, Able's tax counsel, with respect to the material current United
States federal income tax consequences of the merger generally applicable to
holders of Able stock who, pursuant to the merger, exchange their Able stock for
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Bracknell stock, assuming that the merger is effected pursuant to applicable
state law and as described in the merger agreement and in this proxy
statement/prospectus.
The following discussion is based on and subject to the Internal Revenue
Code, as amended, the regulations promulgated under the tax code, and existing
administrative rulings and court decisions, all as in effect on the date of this
proxy statement/prospectus and all of which are subject to change, possibly with
retroactive effect. This discussion also is based upon several assumptions,
limitations, representations and covenants, including those contained in the
merger agreement and in certificates of Bracknell, the merger subsidiary, and
Able.
In addition, this discussion assumes that Able shareholders hold their
shares of Able stock as a capital asset and does not address all the United
States federal income tax consequences that may be relevant to Able shareholders
in light of their particular circumstances or if Able shareholders are persons
subject to special rules, such as rules applicable to:
- banks and other financial institutions;
- tax-exempt organizations and pension funds;
- insurance companies;
- dealers or traders in securities;
- Able shareholders who received their Able stock through the exercise of
employee stock options or similar derivative securities or otherwise as
compensation;
- Able shareholders who are subject to the alternative minimum tax
provisions of the Internal Revenue Code;
- Able shareholders whose functional currency is not the United States
dollar;
- Able shareholders who are not citizens or residents of the United States;
and
- Able shareholders who held Able stock as part of a hedge, appreciated
financial position, straddle or conversion transaction.
This discussion does not address any consequences arising under the laws of
any state, locality or foreign jurisdiction. This discussion also does not
address the tax consequences of an exchange or conversion of options or warrants
for Able stock into options or warrants for Bracknell stock.
Completion of the merger is conditioned on the receipt by Bracknell and
Able of an opinion of Able's tax counsel stating that the merger will be treated
for U.S. federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the tax code. Counsel to Able has stated in writing to
Bracknell and Able its view that the discussion below fairly presents the
material current United States federal income tax consequences generally
applicable to the merger and the discussion represents its opinion. Accordingly,
Able's tax counsel is of the opinion that:
- the merger will qualify as a reorganization described in Sections
368(a)(1)(A) and 368(a)(2)(E) of the tax code;
- no gain or loss will be recognized by Bracknell or Able as a result of
the merger;
- except as otherwise provided by Section 367 of the tax code and the
Treasury regulations promulgated thereunder, discussed below, no gain or
loss will be recognized by Able shareholders upon the receipt of
Bracknell stock solely in exchange for Able stock in the merger, except
to the extent of cash received in lieu of a fractional share of Bracknell
stock;
- cash payments received by Able shareholders in lieu of a fractional share
of Bracknell stock will result in capital gain or loss measured by the
difference between the cash payment received and the portion of the
aggregate adjusted tax basis in the shares of Able stock surrendered that
is allocable to such fractional share. Such gain or loss will be
long-term capital gain or loss if the holding period of the Able
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stock deemed to have been exchanged for the fractional share of Bracknell
stock is more than one year at the effective time of the merger;
- assuming that tax code Section 367 does not apply, the aggregate tax
basis of the Bracknell stock received by an Able shareholder in the
merger will be the same as the aggregate adjusted tax basis of the Able
stock surrendered in exchange therefor, reduced by any tax basis
allocable to a fractional share for which cash is received; and
- assuming that tax code Section 367 does not apply, the holding period of
Bracknell stock received by each Able shareholder in the merger will
include the holding period of the Able stock surrendered in exchange
therefor.
This opinion is based upon the existing law and the continuing truth and
accuracy of the representations of Able, the merger subsidiary and Bracknell
described above, and is subject to a number of assumptions and qualifications,
including the assumption that the merger will be effected pursuant to applicable
state law and otherwise completed according to the terms of the merger
agreement. The tax opinion is not binding on the Internal Revenue Service or the
courts, and there can be no assurance that the Internal Revenue Service or the
courts will not take a contrary view. No ruling from the Internal Revenue
Service has been or will be sought. Future legislative, judicial or
administrative changes or interpretations could alter or modify the statements
and conclusions set forth herein, and any such changes or interpretations could
be retroactive and could affect the tax consequences of the merger to Bracknell,
Able, or the shareholders of Able.
A successful Internal Revenue Service challenge to the "reorganization"
status of the merger would result in an Able shareholder recognizing a gain or
loss with respect to each share of Able stock surrendered in the merger, equal
to the difference between the Able shareholder's adjusted tax basis in such
share and the fair market value, as of the effective time of the merger, of the
Bracknell stock received in exchange. In such event, an Able shareholder's
aggregate tax basis in the Bracknell stock received would equal its fair market
value as of the effective time of the merger, and the Able shareholder's holding
period for such stock would begin the day after the merger.
Even if the merger satisfies all the requirements for a tax-free
reorganization described in Section 368(a) of the tax code, the exchange of Able
stock for Bracknell stock pursuant to the merger will be a taxable exchange to
the extent that tax code Section 367(a)(1) applies. This section provides that
the transfer of appreciated property, including stock, by a U.S. person to a
foreign corporation in a transaction that would otherwise qualify as a
nonrecognition exchange shall be treated as a taxable transfer unless an
exception applies. Under the applicable Treasury regulations, the exchange of
Able stock for Bracknell stock pursuant to the merger will be treated as an
indirect transfer of the Able stock to Bracknell, a foreign corporation.
Consequently, unless all the conditions for the regulatory exception described
below are satisfied, this exchange will be taxable. As further described below,
an exception will be available for all Able shareholders who own less than 5% of
each of the total voting power and total value of the stock of Bracknell after
the merger.
The Treasury regulations issued under tax code Section 367 provide that
code Section 367(a)(1) will not apply to an exchange made pursuant to the
merger, and so the exchange will qualify as a nontaxable exchange under the
normal rules applicable to reorganizations described in Section 368(a) of the
tax code if each of the following conditions is satisfied;
(1) Able complies with certain reporting requirements contained in
the applicable Treasury regulations;
(2) In the transaction, Able shareholders that are U.S. persons
receive, in the aggregate, 50% or less of each of the total voting power
and total value of the stock of Bracknell;
(3) Immediately after the transaction, U.S. persons that either (i)
are officers or directors of Able, or (ii) were 5% shareholders of Able
prior to the merger, own, in the aggregate, 50% or less of each of the
total voting power and total value of the stock of Bracknell;
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(4) the Able shareholder either (i) owns, including actual
ownership and constructive ownership pursuant to certain attribution
rules set forth in the tax code, less than 5% of each of the total
voting power and total value of the stock of Bracknell after the merger,
or (ii) owns 5% or more of either the total voting power or total value
of the stock of Bracknell after the merger and enters into a five-year
gain recognition agreement with the Internal Revenue Service pursuant to
Treas. Reg. sec.1.367(a)-8; and
(5) the "active trade or business test" set forth in Treas. Reg.
sec.1.367(a)-3(c)(3) is satisfied. In general, the three elements of the
active trade or business test are (a) the transferee foreign corporation
must have been engaged in the active conduct of business outside the
United States for the entire 36 month period immediately preceding the
exchange of the U.S. target stock; (b) at the time of the exchange,
neither the transferors nor the transferee foreign corporation will have
the intention to substantially dispose of or discontinue such trade or
business; and (c) the "substantiality test" must be met under Treas.
Reg. sec.1.367(a)-3(c)(3)(iii). The substantiality test essentially
requires that the transferee foreign corporation must be equal to or
greater in value than the U.S. target corporation at the time of the
merger.
Able and Bracknell have stated, and will represent in connection with the
tax opinion described above, that each of the conditions set forth in clauses
(1), (2), (3) and (5) will be satisfied in connection with the merger.
Accordingly, tax code Section 367(a)(1) will not apply to any Able shareholder
that owns less than 5% of the stock of Bracknell after the merger. Thus, no gain
or loss will be recognized by any such Able shareholder as a result of the
exchange of Able stock for Bracknell stock pursuant to the merger.
If a U.S. shareholder of Bracknell receives a dividend on its Bracknell
stock, the dividend is subject to a Canadian withholding tax. Under the
U.S.-Canada tax treaty, the withholding tax rate for U.S. shareholders is 15%.
Depending on the particular circumstances of the U.S. shareholder, the
shareholder should be allowed to take either a credit against its U.S. income
tax liability or an income tax deduction for the Canadian tax withheld.
Tax matters are very complicated, and the tax consequences of the merger to
Able shareholders will depend on their particular situation. Able shareholders
are encouraged to consult their own tax advisor regarding the specific tax
consequences of the merger, including tax return reporting requirements, the
applicability of federal, state, local and foreign tax laws and the effect of
any proposed change in the tax laws.
OTHER AGREEMENTS
The Bracknell Option
Simultaneously with the execution of the merger agreement, Bracknell and
Able entered into a stock option agreement dated as of August 23, 2000. As an
inducement to enter into the merger agreement, Able has issued to Bracknell an
option to purchase that number of shares of the Able common stock equal to 10%
of the issued and outstanding shares of Able common stock determined on the date
of a termination of the merger agreement. The number of shares would be
calculated on a fully diluted basis taking into account all shares of Able
common stock which Able is obligated to issue upon exercise or conversion of
options, warrants or other convertible securities of Able, including the
Bracknell Option.
The Bracknell option may be exercised by Bracknell, in whole or in part, at
any time or from time to time, on or following the termination of the merger
agreement for any one of the following reasons:
- if a proposal to acquire Able is made by anyone other than Bracknell and
either Bracknell or Able terminate the merger agreement because the
shareholders of Able do not approve the merger by February 2, 2001;
- if a proposal to acquire Able is made by anyone other than Bracknell and
Bracknell terminates the merger agreement because Able has breached its
covenants concerning the solicitation of other acquisition proposals;
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- if Able terminates the merger agreement because it has entered into a
binding agreement for the acquisition of Able with anyone other than
Bracknell; or
- if Bracknell terminates the merger agreement because Able has entered
into a binding agreement for the acquisition of Able with anyone other
than Bracknell, or the Able board withdraws or adversely modifies its
approval or recommendation of the merger.
The Bracknell option may be exercised for a period of one year following
the termination of the merger agreement for the reasons set forth above. The
exercise price of the Bracknell option is $3.00 per share of Able common stock,
which is the closing price of the Able common stock on the day before the
signing of the merger agreement, as reported on the Nasdaq National Market
System. If the Bracknell option were to become exercisable and Bracknell were to
exercise the Bracknell option in full, Bracknell would own 10% of all the issued
and outstanding shares of Able common stock on a fully diluted basis.
WorldCom Agreements
In connection with the merger agreement, WorldCom Inc., a
telecommunications services company and a shareholder of Able, entered into the
commitment agreement dated as of August 23, 2000 and other related agreements
with Bracknell. WorldCom owns (i) 3,050,000 shares of Able common stock, (ii)
stock appreciation rights concerning 2,000,000 shares of Able common stock,
which, if approved pursuant to Proposal No. 6, will convert into options to
purchase 2,000,000 shares of Able common stock, (iii) stock appreciation rights
concerning 600,000 shares of Able common stock and (iv) 1,000 shares of Able
Series E preferred stock, which will convert into the right to receive the
number of shares of Bracknell common stock determined by dividing the aggregate
face value of the 1,000 shares of Able Series E preferred stock by CDN$8.25.
Under the terms of the commitment agreement, WorldCom has agreed to do the
following:
- exchange the 2,000,000 stock appreciation rights for a warrant to
purchase 1,200,000 shares of Bracknell common stock at a purchase price
of $11.66 per share, exercisable on or before January 2, 2002 and cancel
the 600,000 stock appreciation rights;
- make available to Able a working capital advance immediately after the
closing of the merger in an amount of $40 million through the purchase of
a new series of Bracknell preferred stock;
- make available to Able any amount of funding in excess of $20 million to
finance the completion of specified work in specified businesses;
- provide an indemnity to Bracknell and Able against various losses or
claims, including losses or claims under surety bonds for specified
contracts;
- restrict transfer of any shares of Bracknell common stock issued to
WorldCom in connection with the merger for a term of 18 months following
completion of the merger; and
- provide Bracknell with a reasonable opportunity to provide Bracknell's
complete service offering as a preferred vendor to WorldCom.
In connection with the commitment agreement, WorldCom has executed a
limited irrevocable proxy granting to three officers of Bracknell the right to
vote all of the shares of Able common stock and Able Series E preferred stock
owned by WorldCom in favor of the proposals to be voted on at the meeting. The
proxy granted by WorldCom will expire on the earlier of the effective time of
the merger or the termination of the merger agreement. In addition, WorldCom
agreed to convert $37 million of advances to Able into shares of Able Series E
preferred stock, which was accomplished effective October 4, 2000, and agreed
that it will not acquire any additional securities of Bracknell, without the
approval of Bracknell's board.
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In connection with the commitment agreement, a subsidiary of WorldCom and
Able entered into a revised and restated master services agreement relating to
services performed by Able for WorldCom that provides for the following:
- a new six year term, with good faith negotiations after four years to
extend the term of the contract;
- an increase in the minimum limits of local metropolitan network build-out
to 75% and minimum yearly revenue to $55 million, and minimum revenue
over the term to $390 million;
- no termination for convenience by WorldCom; and
- an opportunity by Able to self-perform traditionally subcontracted
services at market competitive rates.
Support Agreements
In connection with the merger agreement, Billy V. Ray, Able's Chief
Executive Officer and Chairman of the Board, Gideon Taylor, a former director
and officer, and Frazier Gaines, an officer of a subsidiary, and his wife
entered into support agreements with Able and Bracknell covering 863,638 shares
of Able common stock. Pursuant to the support agreements, the executives agreed,
among other things, to vote the shares of Able common stock they own or
beneficially control, in favor of the merger agreement and any related proposals
and against proposals inconsistent therewith. The support agreements prohibit
these executives from soliciting or encouraging other acquisition proposals
relating to Able. In connection with the support agreements, these executives
have executed a limited irrevocable proxy granting to specified officers of
Bracknell the right to vote all of the shares of Able common stock owned by them
in favor of the proposals to be voted on at the meeting. The proxy granted by
these officers will expire on the earlier of the effective time of the merger or
the termination of the merger agreement.
The holders of the Able Series C preferred stock have entered into a
support agreement with Able and Bracknell. The holders of the Able Series C
preferred stock are entitled to vote as a class on the merger agreement.
Pursuant to the support agreement, the holders of the Able Series C preferred
stock have agreed to vote the shares of Able Series C preferred stock in favor
of the merger agreement.
INTERESTS OF SPECIFIED PERSONS IN THE MERGER
A number of directors and officers and employees of Able have interests in
the merger in addition to the interests of the shareholders of Able, as
described below. The Able board of directors was aware of these interests and
considered them, among other matters, in approving the merger agreement and the
transactions contemplated thereby.
Interests of Billy V. Ray, Jr. Billy V. Ray, Jr. is the Chairman and Chief
Executive Officer of Able. His employment contract provides for a lump sum
payment equal to three times his annual base salary of $350,000 plus bonuses if
his employment is terminated voluntarily or involuntarily as a result of the
merger.
Interests of Edwin Johnson. Edwin Johnson is the President and Chief
Financial Officer of Able. His employment contract provides for a lump sum
payment equal to three times his annual base salary of $300,000 plus bonuses if
his employment is terminated voluntarily or involuntarily as a result of the
merger.
Interests of Michael Brenner. Michael Brenner is the Executive
Vice-President and General Counsel of Able. His employment contract provides for
a lump sum payment equal to three times his annual base salary of $200,000 plus
bonuses if his employment is terminated voluntarily or involuntarily as a result
of the merger.
The aggregate termination benefits potentially payable as a result of the
merger under the employment contracts of Billy V. Ray, Jr., Edwin Johnson and
Michael Brenner may be in excess of $5 million and include payment by Able of
any excise taxes that may be imposed on such payments. For a description of the
severance provisions of these employment agreements, see the discussion in
Proposal No. 2.
Termination and Severance Arrangements. The merger agreement provides
that, with respect to certain officers and employees of Able and its
subsidiaries identified by Bracknell, Able will enter into (i) severance
agreements on economic terms which are substantially similar to the severance
entitlements those employees
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have under their existing employment contracts, and (ii) retention agreements
which are reasonably satisfactory to Bracknell. As of October 3, 2000, no such
severance or retention agreements have been entered into.
Stock Options. A number of directors, officers and employees of Able and
its subsidiaries have been granted options to acquire Able common stock within
and outside Able's stock option plan. The terms of the employment contracts of a
number of these persons provide that their options would immediately vest in the
event of a change of control transaction such as the merger. However, the merger
agreement provides that with the exception of the Bracknell option, all
outstanding options, warrants and other rights to acquire Able common stock will
be terminated or converted into options or warrants to acquire Bracknell common
stock. After the merger, Able's existing stock option plan will be terminated.
The merger agreement also provides that Bracknell will grant options to acquire
Bracknell common stock, in acknowledgement of the cancellation, waiver or other
termination of existing options to acquire Able common stock, to the directors,
officers and employees of Able and its subsidiaries who held options to acquire
Able common stock as of August 23, 2000. After the effective time of the merger,
Bracknell will issue 0.6 of a replacement option for each cancelled Able option
held as of August 23, 2000. The exercise price of the replacement options will
be equal to 1.67 times the exercise price of the Able option being replaced. The
vesting schedule and expiration dates of the replacement options will be the
same as the Able option being replaced.
Pursuant to the terms of Able's stock option plan, Able will cancel all
outstanding options to acquire Able common stock under the option plan. In
exchange for this termination the holders of those options will be granted
replacement options on the terms discussed above. The replacement options will
be issued pursuant to the terms and conditions of Bracknell's existing stock
option plan. The replacement options will be granted subject to the approval of
Bracknell's board, the approval of the Bracknell shareholders of an increase in
the reserves under Bracknell's existing stock option plan and the approval of
The Toronto Stock Exchange. Outstanding options to acquire Able common stock
which were issued outside of Able's existing stock option plan can not be
unilaterally terminated by Able. Accordingly, Able intends to solicit the
consent of these option holders to the termination of the non-plan options.
However, replacement options will be issued to all holders of Able stock options
outside the plan, whether or not they consent to this termination. The
replacement options will be issued on the terms and conditions set forth above,
however, they will not be issued pursuant to Bracknell's stock option plan.
Option holders who do not consent to the termination of their options granted
outside the plan may have a claim against Able for the cancellation of these
options. Able does not believe that it is likely that a claim will be brought
against Able or that, if it is, any such claim could be material.
FEES PAYABLE TO FINANCIAL ADVISORS
Two advisors to Able, Platinum Advisory Services, Inc. and L. Dolcenea,
Inc., are entitled to receive various fees from Able in connection with the
merger and for past services. In payment in full of all of these fees, Able and
Bracknell have agreed to pay Platinum and Dolcenea, collectively, the following:
- a cash fee of $500,000;
- contingent upon the closing of the merger, a cash fee of $4 million and
208,333 shares of Bracknell common stock; and
- contingent upon the closing of the merger, if Platinum and Dolcenea would
have been entitled to fees in excess of $10 million under their contract
of engagement with Able, which provides for a maximum fee of $13 million,
a number of shares of Bracknell common stock having a value, when priced
at 120% of the closing share price on the date of closing of the merger,
equal to $4 million times a fraction equal to the excess of the fee which
would have been payable under the contract of engagement divided by $3
million.
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APPRAISAL RIGHTS
Holders of shares of Able common stock are entitled to appraisal rights
under Sections 607.1301, 607.1302 and 607.1320 of the Florida Business
Corporation Act. Sections 607.1301, 607.1302 and 607.1320 are reprinted in their
entirety as Appendix A-3 to this proxy statement/prospectus. All references in
Appendix A-3 and in this summary of rights of dissenting stockholders to a
"stockholder" or a "shareholder" are to the record holder or holders of the
dissenting shares of Able common stock. A person having a beneficial interest in
shares of Able common stock that are held of record in the name of another
person, such as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect whatever appraisal rights the beneficial owner may have.
The following discussion presents the material provisions of the Florida
law relating to appraisal rights, however it is not a complete statement of the
Florida law and is qualified in its entirety by reference to Appendix A-3. This
discussion and Appendix A-3 should be reviewed carefully by any holder who
wishes to exercise statutory appraisal rights or who wishes to preserve the
right to do so, as failure to comply with the procedures set forth herein or
therein will result in the loss of appraisal rights.
Shareholders generally have the right under Florida law to dissent to the
proposed merger agreement as set forth in the Florida Business Corporation Act
at Sections 607.1301 et seq. All shareholders of Able who wish to exercise their
dissenters rights (a) must notify Able in writing prior to the meeting of their
intention to demand payment for their shares if the merger occurs and (b) must
not vote in favor of the merger.
If the proposed merger is adopted by the shareholders of Able, the holders
of Able common stock who gave notice of their intent to demand payment for their
shares as described above and did not vote in favor of the merger must be given
notice of the approval of the merger within 10 days of approval being obtained.
The dissenting shareholders then have 20 days from the date notice of the
adoption of the merger is given in which to demand from the corporation the fair
market value of the shares. The dissenting shareholders must deposit their
certificates for certificated shares with the corporation simultaneously with
the filing of a demand. Failure to make demand for payment by any dissenting
shareholder bars the dissenting shareholder from objecting to the merger and
binds the shareholder to the merger. However, if demand for payment is made by a
dissenting shareholder within the prescribed time period as set forth above, the
dissent may not be withdrawn after an offer is made by the corporation for the
shares without the consent of the corporation, and all of the shareholder's
rights cease except for the right to obtain payment for the shares.
Within 10 days after the expiration of a shareholder's deadline to elect to
dissent or within 10 days after the merger is effected, whichever is later, but
in no case later than 90 days after shareholder approval of the merger, the
corporation must make a written offer to purchase the shares of the dissenting
shareholder at a specified, fair market value price. This notice must be
accompanied by a financial statement containing a current balance sheet and a
statement of operations. If the dissenting shareholder and the corporation agree
within 30 days of this offer, the dissenting shareholder must be paid within 90
days of the offer. If an agreement is not reached, the shareholder may assert
his or her appraisal rights under Florida law.
If the corporation fails to make an offer or a dissenting shareholder fails
to accept the offer, each within the time periods described above, then the
corporation must file a court action requesting the determination of the fair
market value of the shares within 30 days after written demand by a dissenting
shareholder received within 60 days of the effective date of the merger. If no
demand is made, the corporation may file this court action at its election
within the 60 day period. The court may also determine whether each dissenting
shareholder is entitled to payment. If the corporation fails to act, any
dissenting shareholder may file a court action on behalf of the corporation to
determine the appraised value of the shares. A copy of the petition may be filed
in any court within the county where the corporation's registered office is
located and a copy of the petition must be served upon each dissenter. The court
having jurisdiction may appoint one or more appraisers to review evidence and
recommend a fair value.
The corporation must pay each dissenting shareholder entitled to payment
within 10 days after the fair market value is determined by the court.
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RESALE RESTRICTIONS
The shares of Bracknell common stock to be issued to Able shareholders in
connection with the merger have been registered under the Securities Act.
Accordingly, other than resale restrictions imposed by agreements with WorldCom
and other specific Able securities holders, all shares of Bracknell common stock
received by Able shareholders in the merger will be freely transferable, except
that shares of Bracknell common stock received by persons who are deemed to be
"affiliates", as this term is defined under the Securities Act, of Able prior to
the merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act or Rule 144 in the
case of such persons who become affiliates of Bracknell or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Able or Bracknell generally include individuals or entities that control, are
controlled by, or are under common control with, Able or Bracknell and may
include executive officers and directors of Able or Bracknell as well as
principal stockholders of Able or Bracknell. This proxy statement/prospectus
does not cover resales of Bracknell common stock received by any person who may
be deemed to be an affiliate of Able.
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THE MERGER AGREEMENT
EFFECTIVE TIME
The merger agreement provides that the merger will become effective at the
time a certificate of merger is duly filed with the Secretary of State of the
State of Florida or at such later time as may be specified in the certificate of
merger. This filing, together with all other filings or recordings required by
Florida law in connection with the merger, will be made as soon as practicable
after the approval and adoption by the shareholders of Able of the merger
agreement and the satisfaction or, to the extent permitted under the merger
agreement, waiver of all conditions to the merger contained in the merger
agreement.
THE MERGER
At the effective time of the merger, the merger subsidiary will be merged
with and into Able at which time the separate existence of the merger subsidiary
will cease and Able will be the surviving corporation and a wholly owned
subsidiary of Bracknell. From and after the effective time, the surviving
corporation will possess all the assets, rights, privileges, powers and
franchises and be subject to all of the liabilities, restrictions, disabilities
and duties of Able and the merger subsidiary, as provided under Florida law.
Consideration to be Received in the Merger
At the effective time of the merger:
- each share of Able common stock held by Able as treasury stock or
outstanding and owned by Able, Bracknell or the merger subsidiary
immediately prior to the effective time of the merger will be canceled
and no payment shall be made with respect thereto;
- each share of the common stock of the merger subsidiary outstanding
immediately prior to the effective time of the merger will be converted
into one share of common stock of the surviving corporation;
- each share of Able common stock outstanding immediately prior to the
effective time of the merger, except for shares held by Able, Bracknell,
the merger subsidiary, or shareholders who have perfected their
dissenters rights will be converted into the right to receive 0.6 of a
fully paid and nonassessable share of Bracknell common stock; provided
that shareholders will receive cash in lieu of fractional shares of
Bracknell common stock as described in "Fractional Shares" below;
- each share of Able Series C preferred stock outstanding immediately prior
to the effective time, except for shares held by Able, Bracknell and the
merger subsidiary will be converted into the right to receive 540 shares
of Bracknell common stock;
- each share of Able Series E preferred stock outstanding immediately prior
to the effective time of the merger, except for shares held by Able,
Bracknell or the merger subsidiary, will be converted into the right to
receive the number of shares of Bracknell common stock determined by
dividing the aggregate face value of all shares of Able Series E
preferred stock by CDN$8.25 and then dividing that quotient by the number
of shares of Able Series E preferred stock issued and outstanding at the
effective time;
- the 2,000,000 stock appreciation rights owned by WorldCom will be
converted into warrants to purchase 1,200,000 shares of Bracknell common
stock at an exercise price of $11.66 per share; and
- the right to receive 1,057,031 shares of Able common stock held by one of
the former holders of the Able Series B preferred stock shall be
converted into 634,218 shares of Bracknell common stock.
Assuming that the merger was consummated on the record date, Bracknell
would issue an aggregate of 23.2 million shares of Bracknell common stock in the
merger.
Exchange of Shares
Before the effective time of the merger, Bracknell will appoint an exchange
agent reasonably acceptable to Able for the purpose of exchanging certificates
representing shares of Able common stock, Able Series C
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preferred stock and Able Series E preferred stock. As of the effective time,
Bracknell will deposit with the exchange agent, for the benefit of holders of
Able common stock, Able Series C preferred stock and Able Series E preferred
stock, as the case may be, certificates representing the shares of Bracknell
common stock issuable pursuant to the merger agreement in exchange for
outstanding shares of Able common stock, Able Series C preferred stock and Able
Series E preferred stock. Promptly after the effective time, Bracknell will, or
will cause the exchange agent to, send to each holder of Able common stock, Able
Series C preferred stock and Able Series E preferred stock, as the case may be,
at the effective time a letter of transmittal to be used in the exchange. ABLE
SHAREHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE
AGENT OR BRACKNELL.
Each holder of shares of Able common stock, Series C preferred stock and
Series E preferred stock that have been converted into a right to receive
Bracknell common stock upon surrender to the exchange agent of a certificate or
certificates representing these shares of Able common stock, Series C preferred
stock and Series E preferred stock, together with a properly completed letter of
transmittal, will be entitled to receive in exchange therefor that number of
whole shares of Bracknell common stock which that holder has the right to
receive pursuant to the merger agreement and cash in lieu of any fractional
shares of Bracknell common stock as contemplated by the merger agreement, and
the certificate or certificates for shares of Able common stock, Series C
preferred stock and Series E preferred stock so surrendered shall be canceled.
Until so surrendered, each Able stock certificate will, after the effective
time, represent for all purposes only the right to receive shares of Bracknell
common stock and cash in lieu of any fractional shares as described above.
If any shares of Bracknell common stock are to be issued to any person
other than the registered holder of the shares of Able common stock, Able Series
C preferred stock or Able Series E preferred stock represented by the
certificate or certificates surrendered in exchange therefor, it will be a
condition to that issuance that the certificate or certificates so surrendered
be properly endorsed or otherwise be in proper form for transfer and that the
person requesting such issuance shall pay to the exchange agent any transfer or
other taxes required as a result of that issuance.
After the effective time of the merger, there will be no further
registration of transfers of shares of Able common stock, Able Series C
preferred stock or Able Series E preferred stock. If, after the effective time,
certificates representing shares of Able common stock, Able Series C preferred
stock or Able Series E preferred stock are presented for transfer, they will be
canceled and exchanged for certificates representing Bracknell common stock and
cash, if applicable, pursuant to the terms of the merger agreement.
Any shares of Bracknell common stock made available to the exchange agent
pursuant to the provisions of the merger agreement that remain unclaimed by the
holders of shares of Able common stock, Able Series C preferred stock, or Able
Series E preferred stock six months after the effective time will, upon request,
be returned to Bracknell, and any Able holder who has not exchanged his shares
prior to that time will be entitled thereafter to look only to Bracknell to
exchange his shares. Notwithstanding the foregoing, Bracknell will not be liable
to any holder of shares of Able common stock, Able Series C preferred stock, or
Able Series E preferred stock for any amount paid, or any shares of Bracknell
common stock delivered, to a public official pursuant to applicable abandoned
property laws. Any shares of Bracknell common stock or other amounts remaining
unclaimed by shareholders of Able two years after the effective time of the
merger or any earlier date immediately prior to two years after the effective
time of the merger as these amounts would otherwise escheat to or become
property of any governmental entity, will, to the extent permitted by applicable
law, become the property of Bracknell free and clear of any claims or interest
of any person previously entitled thereto.
No dividends or other distributions on shares of Bracknell common stock
will be paid to the holder of any certificates representing shares of Able
common stock, Able Series C preferred stock or Able Series E preferred stock,
respectively, until these Able certificates are surrendered for exchange as
provided in the merger agreement. Upon this surrender, there will be paid,
without interest, to the person in whose name the certificates representing the
shares of Bracknell common stock into which the Able shares were converted are
registered, all dividends and other distributions paid in respect of that
Bracknell common stock on a date subsequent to, and in respect of a record date
after, the effective time.
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Fractional Shares
No fractional shares of Bracknell common stock will be issued in the
merger. All fractional shares of Bracknell common stock that a holder of shares
of Able common stock, Able Series C preferred stock or Able Series E preferred
stock would otherwise be entitled to receive as a result of the merger will be
aggregated, and, if a fractional share results from this aggregation, the Able
holder will be entitled to receive, in lieu thereof, an amount in cash
determined by multiplying the average of the daily closing sale prices per share
of Bracknell common stock on The Toronto Stock Exchange for the ten trading days
immediately prior to the effective time of the merger by the fraction of a share
of Bracknell common stock to which the Able holder would otherwise have been
entitled. Alternatively, Bracknell will have the option of instructing the
exchange agent to aggregate all fractional shares of Bracknell common stock,
sell these shares in the public market and distribute to each holder of shares
of Able common stock, Able Series C preferred stock and Able Series E preferred
stock entitled thereto a pro rata portion of the proceeds of that public sale.
No cash in lieu of fractional shares of Bracknell common stock will be paid to
any holder of shares of Able common stock, Able Series C preferred stock and
Able Series E preferred stock until certificates representing the shares of Able
common stock, Able Series C preferred stock and Able Series E preferred stock
are surrendered and exchanged in accordance with the merger agreement.
Stock Options, Warrants and Stock Appreciation Rights
The merger agreement provides that with the exception of the Bracknell
option, all outstanding options, warrants and other rights to acquire Able
common stock will be terminated or converted into options or warrants to acquire
Bracknell common stock. As of the date hereof, Able has outstanding options to
purchase 3,494,211 shares of Able common stock, which were granted to persons
who were officers, directors, employees or advisors of Able. Of those options,
2,364,897 were granted outside of the Able stock option plan and 1,129,314 were
granted under the Able stock option plan. In addition, Able has also issued
other warrants and other options to purchase 1,929,505 shares of Able common
stock as well as the Bracknell option.
In connection with the merger agreement, Bracknell has agreed to grant
options and warrants to acquire Bracknell common stock in acknowledgement of the
cancellation, waiver or other termination of existing options and warrants to
acquire Able common stock to existing holders of Able options and warrants.
After the effective time of the merger, Bracknell will issue 0.6 of a
replacement option or warrant for each cancelled Able option or warrant held as
of August 23, 2000. The exercise price of the replacement options and warrants
will be equal to 1.67 times the exercise price of the Able option or warrant
being replaced. The expiration dates of the replacement warrants will be the
same as the Able warrants being replaced. The vesting schedule and expiration
dates of the replacement options will be the same as the Able option being
replaced.
Pursuant to the terms of Able's stock option plan, Able will cancel all
outstanding options to acquire Able common stock under the option plan. In
exchange for this termination the holders of those options will be granted
replacement options on the terms discussed above. The replacement options will
be issued pursuant to the terms and conditions of Bracknell's existing stock
option plan. The replacement options will be granted subject to the approval of
the Bracknell board of directors, the approval of the Bracknell stockholders of
an increase in the reserves under Bracknell's existing stock option plan and the
approval of The Toronto Stock Exchange. Outstanding options to acquire Able
common stock which were issued outside of Able's existing stock option plan can
not be unilaterally terminated by Able. Accordingly, Able intends to solicit the
consent of these option holders to the termination of the non-plan options.
However, replacement options will be issued to all holders of Able stock options
outside the plan, whether or not they consent to this termination. The
replacement options will be issued on the terms and conditions set forth above;
however, they will not be issued pursuant to Bracknell's stock option plan.
Option holders who do not consent to the termination of their options granted
outside the plan may have a claim against Able for the cancellation of these
options. Able does not believe that it is likely that a claim will be brought
against Able or that, if it is, any such claim could be material.
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At the effective time, the 2,000,000 stock appreciation rights owned by
WorldCom will be converted into warrants to purchase 1,200,000 shares of
Bracknell common stock at an exercise price of $11.66 per share. The warrants
may be exercised at any time after issuance up to and including January 2, 2002.
Adjustment of Consideration
If at any time between the date of the merger agreement and the effective
time of the merger, any change in the outstanding shares of Bracknell common
stock shall occur, including by reason of any reclassification,
recapitalization, stock split or combination, exchange or readjustment of
shares, or any stock dividend thereon with a record date during this period, the
number of shares of Bracknell common stock to be issued and delivered in the
merger in exchange for each outstanding share of Able common stock, Able Series
C preferred stock and Able Series E preferred stock as provided in the merger
agreement shall be appropriately adjusted.
CONDITIONS TO THE MERGER
General Conditions
The obligations of Bracknell, Able and the merger subsidiary to complete
the merger are subject to the satisfaction on or before the closing date of each
of the following conditions:
- the merger agreement shall have been adopted by the requisite vote of the
stockholders of Able in accordance with Florida law;
- any applicable waiting period under the Hart-Scott-Rodino Act relating to
the merger shall have expired;
- no provision of any applicable law and no order of a court of competent
jurisdiction shall restrain or prohibit the consummation of the merger;
- the registration statement of which this proxy statement/prospectus is a
part shall have been declared effective and no stop order suspending the
effectiveness of the registration statement shall be in effect and no
proceedings for such purpose shall be pending before the SEC;
- the shares of Bracknell common stock to be issued in the merger and those
to be issued on the exercise of the replacement options shall have been
conditionally approved for listing on The Toronto Stock Exchange; and
- receipt of a satisfactory opinion of legal counsel to the effect that the
merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the tax code.
Conditions to Obligations of Bracknell
The obligations of Bracknell to complete the merger are subject to the
satisfaction on or before the closing date of each of the following conditions:
- Able shall have performed in all material respects all of its obligations
required to be performed by it under the merger agreement on or prior to
the closing date and the representations and warranties of Able contained
in the merger agreement shall be true in all material respects at and as
of the closing date as if made on and as of such date;
- WorldCom shall not be in breach of any term of its commitment agreement;
- the shareholders specified in the merger agreement shall have entered
into support agreements and shall not be in breach of those agreements;
- neither Able nor WorldCom shall be in breach of any term of the restated
master services agreement;
- Able shall not be in breach of the applicable terms of the settlement
agreement in connection with the litigation with Sirit Technologies,
Inc.;
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- Bracknell shall have obtained financing necessary to complete the
transactions contemplated by the merger agreement on terms reasonably
satisfactory to it;
- except as agreed in writing by Bracknell, all outstanding material
litigation of Able shall have been settled or otherwise resolved on terms
reasonably satisfactory to Bracknell;
- specified officers and employees of Able and its subsidiaries shall have
entered into, as applicable, (1) severance agreements on economic terms
which are substantially similar to the severance entitlements those
officers and employees have under their existing employment contracts
with Able or its subsidiaries, or (2) retention agreements which are on
terms reasonably satisfactory to Bracknell;
- all of the outstanding rights to acquire Able securities, excluding the
Bracknell option and any options held by WorldCom, shall have been
terminated or cancelled;
- specified shareholders shall have agreed in writing to accept Bracknell
common stock in lieu of any rights they may have had to receive Able
common stock as earn-out payments on terms reasonably satisfactory to
Bracknell;
- notwithstanding any of the representations and warranties of Able
contained in the merger agreement, as a result of Bracknell's due
diligence review of (a) each of the documents and materials required to
be made available pursuant to the merger agreement, and (b) any report
prepared by Bracknell's environmental consultants, or any other events or
circumstances which Bracknell becomes aware of, Bracknell shall not have
learned prior to the completion of the merger any information which, in
the reasonable judgement of Bracknell, individually, or in the aggregate,
constitutes or would reasonably be expected to constitute a material
adverse effect on Able or material adverse change concerning Able;
- notwithstanding any of the representations and warranties of Able
contained in the merger agreement, there shall not be, and there shall
not have occurred, any circumstances which, in the reasonable judgement
of Bracknell, have or would reasonably be expected to have, individually
or in the aggregate, a material adverse effect on Able or a material
adverse change concerning Able;
- Able shall have obtained from a qualified financial advisor, a written
opinion to the effect that the consideration to be received in the merger
is fair to Able's shareholders from a financial point of view, and Able
shall have provided a copy of that opinion to Bracknell;
- Bracknell shall have obtained from a qualified financial advisor, a
written opinion to the effect that the merger consideration to be
provided pursuant to the merger agreement is fair to Bracknell and its
stockholders from a financial point of view;
- Bracknell shall have received the necessary consents from its lenders to
enter into the transactions contemplated by the merger agreement, the
WorldCom commitment agreement and the restated WorldCom master services
agreement;
- no proceeding shall have been commenced by or against Able or an Able
significant subsidiary
- seeking to adjudicate it bankrupt or insolvent;
- seeking liquidation, dissolution, winding-up, reorganization,
arrangement, protection, relief or composition of it or any of its
property or debt or making a proposal with respect to it under any law
relating to bankruptcy, insolvency, reorganization, or compromise of
debts or other similar laws; or
- seeking appointment of a receiver, trustee, agent or custodian or other
similar official for it or for any substantial part of its properties
and assets;
- Bracknell shall have received opinions of counsel to Able and its
subsidiaries, dated the closing date, with respect to the validity,
binding effect and enforceability of the merger agreement and other
matters typically covered by an opinion in transactions such as the
merger; and
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- Bracknell shall have received a copy of the resolutions of the board of
directors of Able authorizing the merger, the issuance of the Bracknell
option and the other transactions contemplated by the merger agreement.
Conditions to Obligations of Able
The obligations of Able to complete the merger are subject to the
satisfaction on or before the closing date of each of the following conditions:
- Bracknell and the merger subsidiary shall have performed in all material
respects all of their respective obligations required to be performed by
them under the merger agreement at or prior to the closing date and the
representations and warranties of Bracknell and the merger subsidiary
contained in the merger agreement shall be true in all material respects
at and as of the closing date as if made on and as of such date;
- Able shall have received an opinion of counsel to Bracknell, dated the
closing date, with respect to the validity, binding effect and
enforceability of the merger agreement and other matters typically
covered by an opinion in transactions such as the merger; and
- Able shall have received copies of the resolutions of the Board of
Directors of Bracknell and the Board of Directors of the merger
subsidiary authorizing the merger.
Bracknell Financing Arrangements
The obligations of Bracknell to complete the merger are subject to
Bracknell obtaining financing necessary to complete the transactions
contemplated by the merger agreement on terms reasonably satisfactory to it.
Bracknell expects to amend its senior credit facility to comprise a term
facility and revolver of an approximate combined amount of $350.0 million.
However, at this time Bracknell does not have any commitments from its lenders
with respect to this amendment to its senior credit facility.
NON-SOLICITATION
Pursuant to the merger agreement, Able has agreed not to solicit, initiate
or encourage any other proposal for a merger or similar transaction, take-over
bid or sale of all or substantially all of the assets of Able or any subsidiary,
an acquisition proposal, participate in any discussions or negotiations
regarding, or furnish to any person any information in respect of, or take any
other action to facilitate, any acquisition proposal or any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any acquisition proposal. However nothing contained in the merger agreement
shall prohibit the Able board of directors from furnishing any information to,
or entering into discussions or negotiations with, any person that makes an
unsolicited bona fide acquisition proposal if, and only to the extent that:
- the Able shareholder meeting to approve the merger shall not have
occurred,
- the Able board of directors, after consultation with outside legal
counsel, determines in good faith that the failure to take such action
would be inconsistent with its fiduciary duties to Able's shareholders
under applicable law, as such duties would exist in the absence of any
limitation in the merger agreement,
- the Able board of directors determines in good faith that the acquisition
proposal is reasonably likely to lead to a transaction that, if accepted,
is reasonably likely to be consummated taking into account all legal,
financial, regulatory and other aspects of the proposal and the person
making the proposal, and believes in good faith, after consultation with
its financial advisor and after taking into account the strategic
benefits to be derived from the merger and the long-term prospects of
Bracknell and its subsidiaries, based on the information available to the
Able board of directors at the time, that the acquisition proposal would,
if consummated, result in a transaction more favorable to Able's
shareholders than the merger and
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- prior to taking the above action, Able (x) provides reasonable notice to
Bracknell to the effect that it is taking this action and (y) receives
from the person submitting the acquisition proposal an executed
confidentiality/standstill agreement in reasonably customary form and in
any event containing terms at least as stringent as those that exist
between Bracknell, WorldCom and Able pertaining to the merger.
TERMINATION
Termination by Bracknell or Able
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the closing notwithstanding any approval of the merger
agreement by the shareholders of Able:
- by mutual written consent of Bracknell and Able;
- by either Bracknell or Able in writing, if any one or more of the
conditions to its obligation to consummate the merger has not been
fulfilled by February 1, 2001;
- by either Bracknell or Able, if there shall be any applicable law that
makes consummation of the merger illegal or otherwise prohibited or if
any order of a court of competent jurisdiction shall restrain or prohibit
the consummation of the merger, and the order shall become final and
nonappealable;
- by either Bracknell or Able in writing, if shareholder approval for the
merger shall not have been obtained by February 1, 2001, by reason of the
failure to obtain the requisite vote at the Able shareholder meeting or
at any adjournment thereof;
- by Bracknell in writing, if (x) there has been a breach by Able of any
representation or warranty of Able contained in the merger agreement
which, in the reasonable judgment of Bracknell, would have or would be
reasonably likely to have a material adverse effect on Able, or (y) there
has been any material breach of any of the covenants or agreements of
Able set forth in the merger agreement, which breach is not curable or,
if curable is not cured within 30 days after written notice of the breach
is given by Bracknell to Able; provided that Able shall not have the
right to cure any breach after February 1, 2001;
- by Able in writing, if (x) there has been a breach by Bracknell of any
representation or warranty of Bracknell contained in the merger agreement
which would have or would be reasonably likely to have a material adverse
effect on Bracknell, or (y) there has been any material breach of any of
the covenants or agreements of Bracknell set forth in the merger
agreement, which breach is not curable or, if curable, is not cured
within 30 days after written notice of the breach is given by Able to
Bracknell; provided that Bracknell shall not have the right to cure any
breach after February 1, 2001;
- by Bracknell in writing, if there has been (x) a change, event or
occurrence on or before the date of termination which, in the reasonable
judgment of Bracknell, would constitute a material adverse change with
respect to Able, or (y) any change of law on or before the date of
termination shall have occurred which, in the reasonable judgment of
Bracknell has or will have a material adverse effect on Able, excluding
however, any change, condition, event or occurrence which affects the
industry of Able generally and also affects Bracknell; or
- by Able in writing, if there has been (x) a change, event or occurrence
on or before the date of termination which would constitute a material
adverse change with respect to Bracknell, or (y) any change of law on or
before the date of termination shall have occurred which, in the
reasonable judgement of Able has or will have a material adverse effect
on Bracknell, excluding however, any change, condition, event or
occurrence which affects the industry of Bracknell generally and also
affects Able.
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Termination by Able
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the closing by action of the Able board of directors in
writing, if
- Able is not in breach of its obligations listed under "Non-Solicitation"
above,
- the merger shall not have been approved by the Able shareholders,
- the Able board of directors authorizes Able, subject to complying with
the terms of the merger agreement, to enter into a binding written
agreement concerning a transaction contemplated under "Non-Solicitation"
above and Able promptly notifies Bracknell in writing that it intends to
enter into an agreement, attaching the most current version of the
agreement to such notice, and
- during the three business day period after Able's notice, (A) Able and
its financial and legal advisors have negotiated with, Bracknell to
attempt to make any commercially reasonable adjustments in the terms and
conditions of the merger agreement as would enable Able to proceed with
the merger, and (B) the Able board of directors shall have concluded
after considering the results of these negotiations, that any proposal
contemplated under "Non-Solicitation" above giving rise to Able's notice
continues to be a superior proposal.
Able may not effect a termination to affect a competing acquisition
proposal unless at the same time Able pays $3 million to Bracknell in
immediately available funds.
Termination by Bracknell
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the closing by Bracknell in writing, if either
- Able enters into a binding agreement for a superior proposal as
contemplated under "Non-Solicitation" above, or
- the Able board of directors shall have withdrawn or adversely modified
its approval or recommendation of the merger.
Effect of Termination
In the event that:
- a bona fide acquisition proposal shall have been made or any person shall
have publicly announced an intention, whether or not conditional, to make
a bona fide acquisition proposal in respect of Able or any of its
subsidiaries and thereafter the merger agreement is terminated by either
Bracknell or Able because Able shareholder approval has not been obtained
by February 1, 2001 or by Bracknell as a result of a material breach by
Able of any of the covenants set forth under "Non-Solicitation" above, or
- the merger agreement is terminated by Able pursuant to the terms
described under "termination by Able" above, or
- the merger agreement is terminated by Bracknell pursuant to the terms
described under "termination by Bracknell" above,
then on the date of such termination Able shall pay Bracknell a termination fee
of $3 million as liquidated damages in immediately available funds and the
Bracknell option shall become exercisable according to its terms. The Bracknell
option means the right of Bracknell to purchase that number of shares of Able
common stock equal to 10% of the issued shares of the Able common stock on a
fully diluted basis.
In the event that the merger agreement is terminated by Bracknell or Able
because Able shareholder approval has not been obtained by February 1, 2001 or
by Bracknell as a result of a material breach by Able of any of its
representations or warranties that would have material adverse effect on Able or
as a result of a material breach by Able of any of its covenants under the
merger agreement, other than the covenants set
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forth under "non-solicitation" above, then Able shall pay Bracknell a
termination fee of $3 million as liquidated damages in immediately available
funds on the date of termination.
AMENDMENTS AND WAIVERS
The merger agreement may be amended or any provisions thereof may be waived
prior to the effective time of the merger if the amendment or waiver is in
writing and signed, in the case of an amendment, by Able, Bracknell and the
merger subsidiary and, in the case of a waiver, by the party against whom the
waiver is to be effective. However,
- any waiver or amendment will be effective against a party only if the
board of directors of that party approves the waiver or amendment; and
- after the adoption of the merger agreement by the shareholders of Able,
no amendment or waiver may without the further approval of Able's
shareholders and each party's board of directors, alter or change (x) the
amount or kind of consideration to be received in exchange for any shares
of capital stock of Able, (y) any term of the certificate of
incorporation of the surviving corporation or (z) any of the terms or
conditions of the merger agreement if the alteration or change would
adversely affect the holders of any shares of capital stock of Able.
FEES AND EXPENSES
All costs and expenses incurred in connection with the merger agreement are
to be paid by the party incurring the cost or expense except as described below.
Bracknell will reimburse Able in immediately available funds for all of
Able's reasonable documented out-of-pocket expenses, up to a maximum of
$250,000, but in no event later than three business days after the termination
of the merger agreement, if Bracknell does not consummate the transactions
contemplated by the merger agreement unless a condition to Bracknell's
obligation to consummate the merger is not satisfied.
Able and Bracknell shall each pay one-half of all costs and expenses
related to printing, filing and mailing the registration statement as defined in
the merger agreement, and the proxy statement/prospectus and all commission and
other regulatory filing fees.
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MARKET PRICE DATA
MARKET PRICES OF BRACKNELL COMMON STOCK
AND ABLE COMMON STOCK
Bracknell common stock has been traded on The Toronto Stock Exchange since
November 30, 1979 and is listed under the symbol BRK. On November 3, 2000, there
were approximately 340 holders of record of Bracknell common stock.
Able common stock was traded on the Nasdaq National Market from February
28, 1994 to October 10, 2000 and was traded under the symbol ABTE. Effective
October 10, 2000, the Able common stock was delisted from the Nasdaq and
currently trades on the OTC Bulletin Board. On November 13, 2000, there were
approximately 391 holders of record of Able common stock.
The following table sets forth (1) the high and low market prices per share
of the Able common stock and its average monthly trading volume as reported on
Nasdaq through October 9, 2000 and thereafter reported on the OTC Bulletin Board
for the five most recent full financial years and (2) the high and low market
prices per share of the Bracknell common stock and its average monthly trading
volume as reported on The Toronto Stock Exchange for the five most recent full
financial years.
ABLE BRACKNELL AVERAGE MONTHLY
COMMON STOCK COMMON STOCK TRADING VOLUME
PRICES ($ U.S.) PRICES ($ CDN.) PER YEAR
--------------- --------------- ------------------------
HIGH LOW HIGH LOW ABLE BRACKNELL
----- ---- ----- ---- --------- ---------
Year Ended October 31, 1996..... 9.80 4.88 3.80 2.40 1,446,100 1,050,500
Year Ended October 31, 1997..... 10.63 7.13 5.00 2.58 1,432,500 1,548,500
Year Ended October 31, 1998..... 20.94 1.75 6.20 3.66 7,313,800 756,600
Year Ended October 31, 1999..... 12.94 5.13 7.20 4.80 6,689,500 713,100
Year Ended October 31, 2000..... 11.88 1.13 11.30 5.30 5,035,900 1,560,400
The following table sets forth (1) the high and low market prices per share
of Able common stock as reported on Nasdaq through October 9, 2000 and
thereafter reported on the OTC Bulletin Board for each of the quarters during
the fiscal years ended October 31, 1999 and October 31, 2000 and for the first
quarter of the fiscal year ending October 31, 2001 through November 15, 2000,
and (2) the high and low market prices per share of the Bracknell common stock
as reported on The Toronto Stock Exchange for each of the quarters during the
fiscal years ended October 31, 1999 and October 31, 2000 and for the first
quarter of the fiscal year ending October 31, 2001 through November 15, 2000.
ABLE BRACKNELL AVERAGE MONTHLY
COMMON STOCK COMMON STOCK TRADING VOLUME
PRICES (U.S. $) PRICES (CDN. $) PER QUARTER
---------------- ---------------- ---------------------
HIGH LOW HIGH LOW ABLE BRACKNELL
------ ------- ------- ------ --------- ---------
YEAR ENDED OCTOBER 31, 1999
First Quarter...................... 12.38 5.13 6.50 4.80 8,955,400 712,700
Second Quarter..................... 11.56 5.75 7.00 5.95 8,132,700 785,000
Third Quarter...................... 12.94 5.81 7.20 5.90 6,340,100 694,300
Fourth Quarter..................... 10.06 7.50 6.75 5.20 3,329,600 498,600
YEAR ENDED OCTOBER 31, 2000
First Quarter...................... 11.88 4.50 7.10 5.30 7,852,200 708,000
Second Quarter..................... 6.72 1.88 10.00 6.45 6,717,500 1,855,200
Third Quarter...................... 4.00 1.13 8.50 5.91 2,982,000 974,900
Fourth Quarter..................... 4.25 1.93 11.30 5.59 2,592,000 2,703,600
YEAR ENDING OCTOBER 31, 2001
(THROUGH NOVEMBER 30,
First Quarter (through 2000)
December 8, 2000)................ 4.00 2.97 11.80 9.25 2,338,200 2,614,460
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The following table sets forth (1) the high and low market prices per share
of the Able common stock and its monthly trading volume as reported on Nasdaq
through October 9, 2000 and thereafter reported on the OTC Bulletin Board for
the most recent six months and (2) the high and low market prices per share of
the Bracknell common stock and its monthly trading volume as reported on The
Toronto Stock Exchange for the most recent six months.
ABLE BRACKNELL
COMMON STOCK COMMON STOCK MONTHLY
PRICES ($ U.S.) PRICES ($ CDN.) TRADING VOLUME
---------------- --------------- ------------------------
HIGH LOW HIGH LOW ABLE BRACKNELL
----- ----- ----- ---- --------- ---------
Month Ended June 30, 2000........ 3.88 1.75 8.00 7.09 3,567,300 1,205,000
Month Ended July 31, 2000........ 4.00 2.00 7.30 6.25 2,158,900 844,900
Month Ended August 31, 2000...... 3.75 1.93 9.59 5.59 3,848,900 2,071,100
Month Ended September 30, 2000... 4.25 2.88 11.30 9.25 2,202,000 3,745,000
Month Ended October 31, 2000..... 3.41 2.00 11.00 9.75 1,725,000 2,294,600
Month Ended November 30, 2000.... 4.00 2.97 11.80 9.75 2,338,200 2,614,460
On August 22, 2000, the last full trading day prior to the public
announcement of the merger agreement, the closing price per share of Able common
stock as reported on Nasdaq was $3.00. On December 8, 2000, the closing price
per share of Able common stock as reported on the OTC Bulletin Board was US
$3.47. On August 22, 2000, the last full trading day prior to the public
announcement of the merger agreement, the closing sale price per share of
Bracknell common stock as reported on The Toronto Stock Exchange was Cnd. $6.05.
On December 8, 2000 the closing sale price per share of Bracknell common stock
as reported on The Toronto Stock Exchange was Cdn. $10.34.
EXCHANGE RATE
As of September 29, 2000, the Noon Buying Rate in New York City for the
Canadian dollar, as reported by the Federal Reserve Bank of New York, was U.S.
$1.00 = Cdn. $1.5070.
The following table presents, for each period indicated:
- the high and low exchange rates for one U.S. dollar expressed in Canadian
dollars;
- the average of those exchange rates on the last day of each month during
each period; and
- the exchange rate at the end of each period.
The exchange rates are based upon the noon buying rate determined by the
Federal Reserve Bank of New York.
THREE
MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------- -----------------------------------------------
2000 2000 1999 1998 1997 1996
------------- ------- ------- ------- ------- -------
(IN CANADIAN DOLLARS)
High................................. $1.5070 $1.5135 $1.5770 $1.4740 $1.3995 $1.3822
Low.................................. 1.4639 1.4417 1.4512 1.3690 1.3310 1.3285
Average.............................. 1.4890 1.4730 1.5123 1.4228 1.3684 1.3607
Period end........................... 1.5070 1.4798 1.4725 1.4717 1.3810 1.3657
The following table presents, for each period indicated:
- the high and low exchange rates for one Canadian dollar expressed in U.S.
dollars;
- the average of those exchange rates on the last day of each month during
each period; and
- the exchange rate at the end of each period.
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The exchange rates are based upon the noon buying rate determined by the
Federal Reserve Bank of New York.
THREE
MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------- ------------------------------------------
2000 2000 1999 1998 1997 1996
------------- ------ ------ ------ ------ ------
(IN U.S. DOLLARS)
High...................................... $.6831 $.6967 $.6891 $.7305 $.7513 $.7527
Low....................................... .6636 .6607 .6341 .6784 .7145 .7235
Average................................... .6716 .6789 .6612 .7028 .7308 .7349
Period end................................ .6635 .6758 .6791 .6795 .7241 .7322
HOLDERS OF ABLE COMMON STOCK AND BRACKNELL COMMON STOCK ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR THE SHARES OF ABLE COMMON STOCK AND BRACKNELL
COMMON STOCK.
DIVIDEND POLICY
No cash dividends have been declared on the Able common stock since Able
was organized or on the Bracknell common stock for the last 10 years.
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BRACKNELL -- RECENT DEVELOPMENTS
Recent Acquisitions
Bracknell has implemented an acquisition program designed to expand its
U.S. operations, increase the breadth of service offerings and accelerate the
focus on high margin, high growth sector through the acquisition of primarily
large, established companies. Since June 1999, Bracknell has completed six
acquisitions for a total consideration of approximately $250 million,
significantly increasing the scale and scope of operations. Bracknell completed
acquisitions of companies that:
- increased its focus on higher margin services and growth industries;
- had established relationships with customers;
- provided access to strategic U.S. markets including some of the fastest
growing regions in the U.S.;
- augmented its reputation for providing quality services; and
- expanded its strong management team.
On June 30, 1999, Bracknell acquired all the shares of Preferred Electric
Inc. for $5.9 million in cash. Preferred Electric provided facilities
infrastructure services for electrical systems specializing in the commercial
market segment. Based on the future financial performance of Preferred Electric,
former shareholders of Preferred Electric may be entitled to receive an earn-out
up to a maximum of $3.2 million, payable in cash over the next three years. For
the year ended December 31, 1998, Preferred Electric had revenues of $15.0
million.
On September 30, 1999, Bracknell acquired all the shares of Nationwide
Electric Inc. Nationwide provided a broad range of facilities infrastructure
services for electrical systems throughout North America. Prior to its
acquisition by Bracknell, Nationwide acquired and integrated six companies over
approximately two years. Bracknell paid a total consideration of approximately
$76.9 million for Nationwide, comprised of $45.6 million in cash, approximately
7.3 million Bracknell common shares and 385,822 warrants to purchase Bracknell
common shares. For the fiscal year ended March 31, 1999, Nationwide had revenues
of $102.5 million.
On February 14, 2000, Bracknell acquired all the shares of Sylvan
Industrial Piping, Inc., Sylvan Industrial Piping of Tennessee, Inc., and Sylvan
Industrial Piping of NJ, Inc. Sylvan had an expertise servicing the automotive
industry and became the first mechanical services provider to be awarded Q1
status by Ford. Q1 status is Ford's highest quality measure and allowed Sylvan
to be a preferred supplier. Bracknell paid $21.3 million in cash for Sylvan.
Based on the future financial performance of Sylvan, former shareholders of
Sylvan may be entitled to receive an earn-out up to a maximum of $5.0 million,
payable in cash over the next 3 years. For the year ended December 31, 1999,
Sylvan had revenues of $88.8 million, of which 75% was represented by customers
in the automotive industry.
On February 23, 2000, Bracknell acquired all the shares of Highlight
Construction Ltd., Highlight Antenna Services Ltd., Highlight Antenna and Tower
Services Ltd., Highlight Solutions, Inc., Highlight Towers Ontario Ltd., and
Vista Communications Technologies Ltd. Highlight provided wireless
infrastructure services in the rapidly expanding wireless communications
industry. Bracknell paid $2.1 million in cash for Highlight. Based on the future
financial performance of Highlight, former shareholders of Highlight may be
entitled to receive an earn-out up to a maximum of $0.7 million payable in cash
over the next three years and an additional amount up to $0.3 million depending
on the collection of accounts receivables. For the year ended December 31, 1999,
Highlight had revenues of $9.3 million.
On March 9, 2000, Bracknell acquired all of the shares of Sunbelt
Integrated Trade Services, Inc., Inglett and Stubbs Inc., Schmidt Electric
Company, Inc., Crouch Industries, LLC, Crouch Electric, Inc., Quality Mechanical
Contractors, Inc. and Pneu-Temp, Inc. Sunbelt generated a significant amount of
its revenues by providing specialized facilities infrastructure services to
customers in Bracknell's Telecommunications and Special Technology customer
categories. Bracknell paid a total consideration of approximately $127.0 million
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for Sunbelt, comprised of $77.0 million in cash and assumed debt and $50.0
million seller notes. The notes earned interest at a rate of 10.5% per annum
over the first 90 day term, and currently earn interest at a rate of 12.5% per
annum over the present 90 day term. The principal amount of the notes includes
approximately $10.0 million that will be escrowed as security for the indemnity
obligations of the Sunbelt stockholders. If the notes are not repaid in cash
upon the expiration of the term, then the note holders shall elect to either;
(a) extend the term for a further 90 days; or (b) in satisfaction of the notes,
convert the outstanding principal, excluding the amount to be escrowed and
increased by 50%, and interest into common shares of Bracknell at a price per
share being the lesser of $4.65 or the twenty day weighted average closing price
prior to expiration of the preceding term. Former shareholders of Sunbelt may
also be entitled to receive an earn-out up to a maximum of $72.6 million over
the next three years. The earn-out calculation is based on $4.25 for every $1.00
of Sunbelt's average yearly EBITDA as defined in the Purchase and Sale Agreement
over a three year period in excess of a per year average of $32.0 million. In
addition, the former shareholders of Sunbelt have the option to receive up to
half the earn-out in Bracknell common shares at a price of $4.65 per share.
Various employees of Sunbelt also received 285,000 options to acquire common
shares of Bracknell, which have accelerated vesting based on stock price
performance.
Holders of the Sunbelt notes representing $6.4 million of the total amount
outstanding have provided notice of reimbursement at the end of the current 90
day term. Bracknell may satisfy the notes from its US$50 million subordinated
loan facility. A commitment for the subordinated loan facility was obtained from
a Canadian chartered bank on March 6, 2000 in order to support the Sunbelt
notes. To date, the subordinated loan facility has not been drawn upon.
Recent Disposition
On May 26, 2000 Bracknell sold all of its shares in ProFac Facilities
Management Services, Inc. to SNC Lavalin Inc. Bracknell received C$17.5 million
in cash at closing and will receive an additional C$5.0 million in cash in
September 2001 if Bell Canada does not exercise its option to repurchase the
shares of ProFac's subsidiary, Nexacor Realty Management Services Inc.
Recent Financings
In March and April 2000, Bracknell completed an offering of 6.6 million of
its common shares with net proceeds of approximately C$42.7 million. Bracknell
used the proceeds of this equity offering to repay a portion of its obligations
under the Sunbelt seller notes described above.
On July 21, 2000, Bracknell and its wholly owned subsidiaries, Nationwide
Electric, Inc. and The State Group Limited, signed a second amended and restated
credit agreement with a group of lenders and Bracknell Limited Partnership, an
indirect wholly owned subsidiary of Bracknell, signed a credit agreement with
the same group of lenders. The agreements provided for an aggregate of $212.5
million senior credit facilities composed of Canadian and U.S. operating, term
and acquisition facilities. Bracknell fully utilized the availability under the
term and acquisition facilities to finance its acquisitions.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Bracknell's unaudited pro forma consolidated financial statements have been
prepared based on historical consolidated financial statements and other
financial statements included elsewhere in this proxy statement/ prospectus. For
purposes of the pro forma preparation, historical consolidated financial
statements for Bracknell have been prepared in accordance with U.S. GAAP. The
financial statements for the U.S. companies acquired have been prepared in
accordance with U.S. GAAP. Bracknell's unaudited pro forma consolidated
financial statements have been adjusted based upon currently available
information and assumptions that Bracknell believes are appropriate to give
effect to the following transactions:
- The acquisition of all of the shares of Preferred Electric, Nationwide,
Sylvan, Highlight and Sunbelt all as previously described under
"Bracknell -- Recent Developments";
- The repayment of approximately $29.0 million of the Sunbelt seller note
upon the issuance of 6.6 million shares of Bracknell common stock
(completed in March and April 2000);
- The disposition of ProFac; and
- The acquisition of Able.
The unaudited pro forma consolidated balance sheet has been prepared as if
these transactions had occurred as of the balance sheet date. The unaudited pro
forma consolidated statements of operations have been prepared as if these
transactions had occurred on November 1, 1998 and have been carried through all
periods presented.
The unaudited pro forma consolidated financial statements are for
illustrative purposes only and are not necessarily indicative of what actual
results of operations and financial position would have been as at and for the
periods indicated, nor do they purport to represent Bracknell's future financial
position and results of operations.
The unaudited pro forma consolidated financial statements do not reflect
any contingent earn-out payments payable with respect to completed acquisitions.
The acquisition agreements provide for the potential payment up to a maximum of
approximately $81.8 million of which $36.3 million may be paid in shares of
Bracknell common stock at the option of former Sunbelt shareholders.
The pro forma adjustments are based upon estimates, available information
and certain assumptions and may be revised as additional information becomes
available. The following information should be read in conjunction with
"Bracknell -- Recent Developments", and "Bracknell -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and accompanying notes included elsewhere in
this proxy statement/prospectus.
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BRACKNELL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT JULY 31, 2000
(IN THOUSANDS OF U.S. DOLLARS)
ACQUISITION ABLE
BRACKNELL(1) ABLE(2) ADJUSTMENTS SUBTOTAL DISPOSALS(3) TOTAL
------------ -------- ----------- -------- ------------ ---------
ASSETS
Cash and cash equivalents................. $ 6,820 $ 14,946 $ 2,000(5) 23,766 $ (5,620) $ 18,146
Contract and accounts receivables......... 207,520 88,948 (2,000)(5) 294,468 (25,216) 269,252
Costs and estimated earnings in excess of
billings on uncompleted contracts....... 72,355 67,651 -- 140,006 (38,311) 101,695
Inventory................................. 2,818 3,371 -- 6,189 (3,371) 2,818
Prepaid expenses and other assets......... 7,390 8,507 -- 15,899 (1,639) 14,259
Income taxes receivable................... 2,461 -- -- 2,461 -- 2,461
Assets held for sale...................... -- -- -- -- 80,996 80,996
-------- -------- -------- ------- -------- --------
Total current assets.............. 299,364 183,423 -- 482,788 6,840 489,627
Capital assets............................ 15,703 26,676 (8,995)(5) 33,384 (6,444) 26,940
Networks under development................ -- 55,424 -- 55,424 -- 55,424
Deferred income taxes..................... 1,034 -- -- 1,034 (270) 764
Other assets, net......................... 6,134 13,133 1,000(5) 20,267 (126) 20,141
Acquired contracts net.................... -- -- 45,000(5) 323,620 -- 45,000
Goodwill, net............................. 191,349 39,907 104,359(5) 45,000 -- 323,621
(11,994)(5)
-------- -------- -------- ------- -------- --------
Total assets...................... $513,584 $318,563 $129,370 961,517 $ -- $961,517
======== ======== ======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Borrowings under revolving credit
facilities.............................. $ 58,326 $ -- $ -- 58,326 $ -- $ 58,326
Current portion of long-term debt......... 38,420 37,033 (35,000)(5) 40,453 (1,653) 38,800
Accounts payable and other accrued
liabilities............................. 106,613 227,882 (68,000)(5) 246,495 (67,800) 178,695
(20,000)(5)
Billings in excess of cost and estimated
earnings on uncomplete contracts........ 43,370 5,474 -- 48,844 (848) 47,996
Deferred income taxes..................... 2,123 -- -- 2,123 -- 2,123
Liabilities held for sale................. -- -- -- -- 70,996 70,996
-------- -------- -------- ------- -------- --------
Total current liabilities......... 248,852 270,389 (123,000) 396,241 695 396,936
Long-term debt............................ 127,965 41,667 85,000(5) 217,632 -- 217,632
(37,000)(5)
Deferred income taxes..................... -- -- 18,000(5) 18,000 -- 18,000
Other long-term liabilities............... 1,254 42,357 -- 43,611 (695) 42,916
Total liabilities................. 378,071 354,413 (57,000) 675,484 -- 675,484
Other redeemable securities............... -- 21,449 (13,866)(5) 40,000 -- 40,000
(7,583)(5)
40,000(5)
SHAREHOLDERS' EQUITY
Common shares............................. 91,437 71,222 107,945(4) 199,382 -- 199,382
(71,222)(5) --
Contributed surplus....................... 229 4,898 2,575(4) 7,702 -- 2,804
(4,898)(5) (4,898)
Retained earnings (deficit)............... 47,233 (133,419) 133,419(5) 47,233 -- 47,233
Cumulative comprehensive income
(deficit)............................... (3,386) -- -- (3,386) -- (3,386)
-------- -------- -------- ------- -------- --------
Total shareholders' equity
(deficit)....................... 135,513 (57,299) 167,819 246,033 -- 246,033
-------- -------- -------- ------- -------- --------
Total liabilities and
shareholders' equity............ $513,584 $318,563 $129,370 961,517 $ -- $961,517
======== ======== ======== ======= ======== ========
61
67
BRACKNELL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
PRE ABLE SUBTOTAL ABLE ABLE
BRACKNELL(6) TRANSACTIONS(7) PREABLE ABLE(16) DISPOSALS(17) ADJUSTMENTS TOTAL
------------ --------------- -------- -------- ------------- ----------- ----------
Revenues................... $292,994 $549,950 $842,944 $418,565 $ (136,727) $ -- $1,124,782
Cost of services........... 255,296 458,297 713,593 365,060 (121,799) -- 956,854
-------- -------- -------- -------- ---------- ------- ----------
Gross margin............... 37,698 91,653 129,351 53,505 (14,928) -- 167,928
Selling, general and
administrative
expenses................. 24,905 51,504 76,409 41,042 (16,798) 8(4) 100,661
Depreciation and
amortization............. 2,182 11,860 14,042 11,832 (6,723) 250(19) 26,869
5,218(22)
2,250(23)
Restructuring and other
charges.................. 7,609 -- 7,609 -- -- 7,609
-------- -------- -------- ------- ---------- -------- ----------
Earning from operations.... 3,002 28,289 31,291 631 8,593 (7,726) 32,789
Income from long-term
investments.............. 23 -- 23 -- -- -- 23
Interest and other income
(expense)................ 1,327 (18,613) (17,286) (15,193) 2,359 (5,325)(20) (36,063)
1,814(18)
(2,432)(21)
-------- -------- -------- ------- ---------- -------- ----------
Earnings before provision
for income taxes......... 4,352 9,676 14,028 (14,562) 10,952 (13,669) (3,251)
Provision for income
taxes.................... 1,588 5,612 7,200 (138) (470) (900)(24) 5,692
-------- -------- -------- ------- ---------- -------- ----------
Net earnings (loss) before
minority interest,
extraordinary item and
discontinued
operations............... 2,764 4,064 $ 6,828 (14,424) 11,422 (12,769) (8,943)
Minority interest.......... -- -- -- (569) 569(22) -- --
-------- -------- -------- ------- ---------- -------- ----------
Earnings (loss) before
extraordinary item, and
discontinued
operations............... $ 2,764 $ 4,064 $ 6,828 $(14,993) $ 11,991 $(12,769) $ (8,943)
======== ======== ======== ======== ========== ======== ==========
Shares outstanding
(thousands)
Weighted average........... 27,003 40,364 62,575
Weighted average fully
diluted.................. 29,102 43,524 72,351
Earnings (loss) from
continuing operations per
share
Basic...................... $ 0.11 $ 0.17 $ (0.14)
Fully diluted.............. 0.11 0.16 (0.14)
62
68
BRACKNELL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 2000
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
PRE ABLE SUBTOTAL ABLE ABLE
BRACKNELL(6) TRANSACTIONS(7) PRE ABLE ABLE(16) DISPOSALS(17) ADJUSTMENTS TOTAL
------------ --------------- -------- -------- ------------- ----------- --------
Revenues................. $579,520 $124,596 $704,116 $359,143 $(126,074) $ -- $937,185
Cost of services......... 486,724 101,668 588,392 353,201 (153,424) -- 788,169
-------- -------- -------- -------- --------- -------- --------
Gross margin............. 92,796 22,928 115,724 5,942 27,350 -- 149,016
Selling, general and
administrative
expenses............... 52,893 11,205 64,098 42,049 (16,040) 6(4) 90,113
Depreciation and
amortization........... 8,656 2,680 11,336 9,142 (4,649) 188(19) 21,618
3,913(22)
1,688(23)
-------- -------- -------- -------- --------- -------- --------
Earning from
operations............. 31,247 9,043 40,289 (45,249) 48,039 (5,795) 37,285
Income from long-term
investments............ 74 -- 74 -- -- -- 74
Interest and other income
(expense).............. (11,496) (3,478) (14,974) (38,682) 523 (3,994)(20) (62,661)
(3,710)(18)
(1,824)(21)
-------- -------- -------- -------- --------- -------- --------
Earnings (loss) before
provision for income
taxes.................. 19,825 5,564 25,389 (83,931) 48,562 (15,323) (25,302)
Provision for income
taxes.................. 6,185 3,856 10,040 -- -- (675)(24) 9,366
-------- -------- -------- -------- --------- -------- --------
Net earnings (loss)
before minority
interest, extraordinary
item and discontinued
operations............. 13,640 1,709 15,349 (83,931) 48,562 (14,648) (34,668)
Minority interest........ -- -- -- (162) 162 -- --
-------- -------- -------- -------- --------- -------- --------
Earnings (loss) before
extraordinary items and
discontinued
operations............. $ 13,640 $ 1,709 $ 15,349 $(84,093) $ 48,724 $(14,648) $(34,668)
======== ======== ======== ======== ========= ======== ========
Shares outstanding
(thousands)
Weighted average......... 36,731 40,421 62,631
Weighted average fully
diluted................ 41,064 44,754 71,580
Earnings (loss) from
continuing operations
per share
Basic.................... $ 0.37 $ 0.38 $ (0.55)
Fully diluted............ 0.35 0.36 (0.55)
63
69
BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) Represents the historical assets and liabilities of Bracknell as included
in the unaudited interim consolidated balance sheet as at July 31, 2000 as
presented in U.S. GAAP. The acquisitions of Preferred, Nationwide,
Highlight, Sylvan and Sunbelt as well as the disposition of Profac have
been recognized in these balances since these transactions occurred prior
to July 31, 2000. Pro forma effect has been given for the inclusion of Able
elsewhere in the pro forma statements. Refer to Note (2).
To the extent that these companies are significant subsidiaries of
Bracknell, the required audited financial statements have been included
elsewhere in this registration statement.
(2) Represents the historical assets and liabilities of Able as included in the
unaudited interim consolidated balance sheet as at July 31, 2000.
(3) Subsequent to the completion of the merger, it is Bracknell's intent to
dispose of the Construction Group, excluding the Patton division, as well
as the Transportation Services Group and the International Services Group.
Adjustments have been made to exclude the results of operations. The assets
and liabilities from these divisions have been reclassified to Assets and
Liabilities held for sale.
(4) Acquisition adjustments reflect a number of transactions which are
anticipated in conjunction with the closing of the transaction. These
adjustments have been assumed as at July 31, 2000. The total purchase price
has been calculated as follows:
EQUIVALENT
ABLE SHARES BRACKNELL SHARES
----------- ----------------
Able Shares outstanding at October 31, 2000(i).............. 16,374,504 9,824,702
Shares issuable on Conversion of Able Series C preferred
stock(ii).............................................. 5,000 2,700,000
Shares issuable to Sirit upon approval of Able's
shareholders (iii)..................................... 4,074,597 2,444,758
Shares issuable to Palladin Group upon approval of Able's
shareholders(iv)....................................... 1,057,031 634,219
Bracknell shares issuable to WorldCom in exchange for Able
Series E preferred stock(v)............................ 6,607,143
------------
22,210,822
Bracknell share value(vi)................................... US$4.86
------------
107,945
Estimated fair value of options and warrants for Bracknell
shares(vii)............................................... 2,575
Estimated financial advisor, legal, accounting and other
costs(viii)............................................... 13,000
------------
Total purchase price........................................ $ 123,520
============
- ---------------
(i) Each share of Able common stock outstanding will be converted into
0.6 shares of Bracknell common stock. As of October 31, 2000,
16,374,504 Able common shares were issued and outstanding.
(ii) Each share of Able Series C preferred stock will be converted into
540 shares of Bracknell common stock.
(iii) In settlement of the Sirit litigation, Able is to issue 4,074,597 of
its common shares. These will be converted to Bracknell common stock
at the 0.6 conversion rate. The number of shares of Able
64
70
BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
common stock issuable to Sirit is fixed pursuant to the Sirit
settlement agreement. As set forth in Note 4(vi) and under
"Business-Able-Legal Proceedings", Sirit is disputing Able's
interpretation of the Sirit settlement agreement.
(iv) As part of the Sirit settlement, Able is also required to issue
1,057,031 shares of its common stock to the Palladin Group. These
will be converted to Bracknell common stock at the 0.6 conversion
rate.
(v) As part of the commitment agreement, WorldCom agreed to convert $37
million of advances to Able into shares of Able Series E preferred
stock. At the time of the merger, all Series E preferred stock will
be converted to 6,607,143 Bracknell common stock. The conversion rate
is determined by dividing the aggregate face value of the shares of
Series E preferred stock by CDN$8.25 or US$5.60 based on exchange
rates as at August 23, 2000.
(vi) At the time that the merger was announced, the 22,322,971 Bracknell
shares to be issued to consummate this transaction were fixed based
upon conditions of the merger agreement and the Sirit settlement
agreement. Accordingly, an average value of $4.86 was calculated,
using a three-day period before and after the merger was announced.
This calculation was made in accordance with EITF 99-12. This value
will be used to value the transaction unless there is a substantive
change in the number of shares issued. On November 13, 2000, Sirit
Technologies, Inc. filed an emergency motion against Able in which
Sirit claims that it will be deprived of certain alleged
entitlements under a settlement agreement entered into between Sirit
and Able on July 7, 2000. Refer to "Business-Able-Legal Proceedings"
for a further discussion of the claim and the risks involved. If
Able was not successful in defending this claim, this could result
in an additional 2,484,415 common shares in Bracknell being issued
as part of the merger based on exchange rates as at August 23, 2000.
The additional share issuance would have the effect of increasing
the purchase price by $12,074, increasing the net assets of Able by
$8971 for cash received on the exercise of options and increasing
goodwill by $3,103. The impact on the pro forma net income would be
a decrease of $155 annually and the basic loss per share amount
would decrease by approximately less than 2/10(th) of $0.01 and
3/10(th) of $0.01 for the year ended October 31, 1999 and the nine
months ended July 31, 2000 respectively.
(vii) Able stock options converted to Bracknell stock options have been
considered in the calculation of the purchase price in accordance
with APB 16. The pro forma valuations of the WorldCom and employee
stock options have been determined using the Black-Scholes model
utilizing assumptions and conditions as at October 31, 1999. These
assumptions will be re-examined upon the application of purchase
accounting. Also included in the initial calculation of the purchase
price is an adjustment for the value of vested and unvested stock
options with intrinsic value. As part of the acquisition, Bracknell
expects to issue 28,398 unvested options with an intrinsic value of
$23. Based on a vesting period of three years, this will result in
additional annual compensation expense of approximately $8.
(viii) Estimated transaction costs include $12 million in predetermined
contractual fees for advisors with the remainder allocated to legal,
accounting and other costs.
65
71
BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(5) Net book value of net assets acquired including purchase adjustments
Accumulated deficit(i)...................................... $(133,419)
Fair valuation of capital assets(ii)........................ (8,995)
Fair valuation of goodwill within divisions being
disposed(ii).............................................. (11,994)
Able common shares(i)....................................... 71,222
Able warrants(i)............................................ 4,898
Able securities subject to mandatory redemption(iii)........ 7,583
Severance accrual(iv)....................................... (8,000)
Extinguishment of Sirit obligation (v)...................... 20,000
Conversion of WorldCom note (vi)............................ 37,000
Conversion of Series C preferred stock (vii)................ 13,866
Satisfaction of loan made to a related party (viii)......... --
---------
Net fair value of net assets acquired....................... (7,839)
Purchase Price (Note 4)..................................... 123,520
---------
Excess of purchase price over net fair value of assets
acquired.................................................. $ 131,359
=========
Based on the transaction details noted above, the allocation of the excess of
purchase price over the fair value of the acquired assets has been allocated as
follows:
Acquired contracts (ix)..................................... $ 45,000
Related deferred income tax liability....................... (18,000)
Goodwill.................................................... 104,359
--------
$131,359
The allocation of a portion of the excess of purchase price over the fair market
value of the acquired assets to acquired contracts results in the recognition of
deferred income taxes at an assumed rate of 40%.
Management policy is to allocate the excess of purchase price over the fair
market value of acquired assets and specifically identifiable intangible assets
to goodwill. The current allocation is a preliminary estimate based on
management's available information. Bracknell anticipates that the final
purchase price allocation may differ from that presented in these pro forma
statements. Management does not anticipate the final allocation to be materially
different.
The goodwill created through the acquisition is being amortized over a 20 year
period on a straight line basis. The amortization is not tax deductible given
that this is a share purchase.
(i) The Able accumulated deficit, common shares and warrants represent the
shareholders' equity eliminated upon consolidation.
(ii) As described in Note (3), it is management's intention to dispose of the
Construction Group, excluding the Patton division, as well as the
Transportation Services Group and the International Services Group.
Management expects eventual proceeds on disposal to approximate $10
million. Management used expected proceeds on sale to determine the fair
value of the assets and liabilities of these divisions.
(iii) The Able securities subject to mandatory redemption include common shares
converted to Bracknell shares as described in Note 4(i) and warrants which
Bracknell has assumed it will retire for no consideration.
(iv) Severances totalling $8,000 are anticipated by Bracknell management and
have been considered in calculating the goodwill generated on the
transaction.
(v) As described in Note 4(iii), Able common shares will be issued to satisfy
the Sirit settlement obligation of $20,000 currently shown in accounts
payable and other accrued liabilities.
66
72
BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(vi) As described in (Note 4(v)), pursuant to it's commitment agreement,
WorldCom has agreed to convert its $37,000 of advances in exchange for
share consideration.
(vii) As described in Note (4(ii)), all shares of Able's Series C preferred
stock, having a book value of $13,866 at July 31, 2000 will be satisfied
through share consideration.
(viii) In August 2000, Able made a $2,000 loan to its Chief Executive Office and
Chairman, Billy V. Ray, Jr. The purpose of the loan was to provide funds
for Mr. Ray to purchase a certificate of deposit used as a pledge to
secure a performance bond on Able's behalf. Upon completion of the Able
merger, it is Bracknell's intent to satisfy all performance bond
requirements under its name. The loan extended to Mr. Ray will therefore
be reimbursed in full at that time. This has no net effect to the
transaction since the increase in cash is equally offset with a decrease
in receivables.
(ix) Based on a review of the contracts assumed through the acquisition,
management has allocated a portion of the excess of purchase price over
the fair market value of the acquired assets to the network development
right-of-way contracts. These contracts consist of the design,
engineering, construction and operation of fiber optic telecommunication
networks for specific routes around and between various U.S. cities.
Management's estimated value for these contracts is based on their
discounted future cash flow, net of tax. These contracts are typically
for periods of twenty years, with renewable options. This intangible
asset is being amortized over twenty years. The $45 million value is
based on a preliminary estimate by management, and will be subject to
final valuation after the Able transaction is consummated.
Financing obtained to complete the merger is as follows:
Additional borrowing from senior credit lenders........................ $ 85,000
Convertible preferred shares (x)....................................... 40,000
--------
125,000
Financing costs...................................................... (1,000)
--------
$124,000
--------
Financing obtained will be used as follows:
Repayment of Able's long term debt..................................... $ 35,000
Reduction of accounts payable and accrued liabilities.................. 68,000
Severance requirements................................................. 8,000
Transaction costs...................................................... 13,000
--------
$124,000
========
(x) In connection with the commitment agreement, WorldCom has agreed to
purchase redeemable convertible preferred shares of Bracknell for net
proceeds of $40 million. The preferred shares are not entitled to a
dividend and are non-voting. They are redeemable by Bracknell at the issue
price per share at any time. Subject to the reasonable approval of
Bracknell's lenders and starting six months after issuance, WorldCom may
require Bracknell to repay $10 million. At any time for one year from
issuance, at the election of WorldCom, the preferred shares are convertible
to Bracknell common shares at $8.75 per common share. The preferred shares
are mandatorily redeemable at the earlier of
- six years from closing of the Able transaction, or
- at the election of the holder, on or after the date on which Bracknell
received proceeds from a public debt or equity financing implemented
after the date of issue of the preferred shares sufficient to pay out
all other indebtedness which Bracknell is obligated to pay from such
proceeds, with the remaining proceeds.
67
73
BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(6) Represents the results of operations of Bracknell as included in the
consolidated statement of earnings for the year ended October 31, 1999 and
the unaudited interim statement of earnings for the nine months ended July
31, 2000.
The acquisitions of Preferred, Nationwide, Highlight, Sylvan and Sunbelt as
well as the disposition of Profac have been recognized subsequent to
acquisition and prior to disposal in these balances since these
transactions occurred prior to July 31, 2000. Pro forma effect has been
given for the results of operations from the beginning of the period to the
date of their acquisition and excluded for the period prior to disposal.
Refer to Note (7). Full period pro forma effect has been given for the
acquisition of Able elsewhere in the pro forma statements. Refer to Note
(16).
To the extent that these companies are significant subsidiaries of
Bracknell, the required audited financial statements have been included
elsewhere in this registration statement.
(7) The Pre Able Transactions column is made up of the following:
- The pro forma net earnings adjustment for the acquisitions as though
these had taken place at the beginning of the period. (Acquisitions)
- Acquisition adjustments relating to the acquisitions of Preferred,
Nationwide, Highlight, Sylvan and Sunbelt (Adjustments);
- The disposition of Profac and the ensuing use of proceeds (Disposition);
and
- The equity offering issued March 23, 2000 (Equity).
Adjustments have been booked to give pro forma effect as though each of
these transactions had taken place at the beginning of each period presented.
For the year ended October 31, 1999-
PRE ABLE
ACQUISITIONS(8)(25) ADJUSTMENTS DISPOSITION EQUITY TRANSACTIONS
------------------- ----------- ----------- ------ ------------
Revenues............... $549,950 $ -- $ -- $ -- $549,950
Cost of services....... 458,297 -- -- -- 458,297
-------- --------- ----- ------ --------
Gross margin........... 91,653 -- -- -- 91,653
Selling, general and
administrative
expenses............ 60,225 (8,721)(9) -- -- 51,504
Depreciation and
amortization........ 3,466 8,394(13) -- -- 11,860
Restructuring and other
charges............. -- -- -- -- --
-------- --------- ----- ------ --------
Earnings from
operations.......... 27,962 327 -- -- 28,289
Income from long-term
investments......... -- -- -- -- --
Interest and other
income (expense).... (4,238) (18,960)(10) 1,106(14) 3,479(15) (18,613)
-------- --------- ----- ------ --------
Earnings before
provision for income
taxes............... 23,724 (18,633) 1,106 3,479 9,676
Provision for income
taxes............... 3,034 (4,095)(11) 442(14) 1,392(15) 5,612
6,854(12)
(2,015)(13)
-------- --------- ----- ------ --------
Net earnings from
continuing
operations.......... $ 20,690 $ (19,377) $ 664 $2,087 $ 4,064
======== ========= ===== ====== ========
68
74
BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
For the nine months ended July 31, 2000-
ACQUISITIONS PRE ABLE
(8)(26) ADJUSTMENTS DISPOSITION EQUITY TRANSACTIONS
------------ ----------- ----------- ------ ------------
Revenues..................... $124,596 $ -- $ -- $ -- $124,596
Cost of services............. 101,668 -- -- -- 101,668
-------- ---------- ----- ------ --------
Gross margin................. 22,928 -- -- -- 22,928
Selling, general and
administrative expenses... 16,604 (5,399)(9) -- -- 11,205
Depreciation and
amortization.............. 672 2,009(13) -- -- 2,681
Restructuring and other
charges................... -- -- -- -- --
-------- ---------- ----- ------ --------
Earnings from operations..... 5,652 3,390 -- -- 9,042
Income from long-term
investments............... -- -- -- -- --
Interest and other income
(expense)................. 63 (5,573)(10) 645(14) 1,387(15) (3,478)
-------- ---------- ----- ------ --------
Earnings before provision for
income taxes.............. 5,715 (2,183) 645 1,387 5,564
Provision for income taxes... 345 1,231(11) 258(14) 555(15) 3,855
1,948(12)
(482)(13)
-------- ---------- ----- ------ --------
Net earnings from continuing
operations................ $ 5,370 $ (4,880) $ 387 $ 832 $ 1,709
======== ========== ===== ====== ========
(8) Represents the pro forma net earnings adjustment for the acquisitions of
Preferred, Nationwide, Highlight, Sylvan, and Sunbelt for the period from
the beginning of the period until their acquisition date. The Nationwide
results also give pro forma effect to the acquisitions of Neal Electric,
Neal Equipment and Southwest Systems Limited as though they had occurred
at the beginning of each period.
Highlight, Sylvan and Sunbelt each have December 31 year ends. For
purposes of preparation of the unaudited pro forma consolidated statement
of earnings for the year ended October 31, 1999, the individual statement
of earnings for the year ended December 31, 1999 have been used. Other
periods presented have been agreed to Bracknell's reporting periods.
(9) Certain of the acquisitions incurred selling, general and administrative
expenses which Bracknell does not expect to incur on an ongoing basis. The
components of these excess expenses for each of the pro forma periods are
as follows:
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, 1999 JULY 31, 2000
---------------- -----------------
Salaries and benefits(a)
Quality................................................... 216 183
Crouch.................................................... 279 219
Schmidt................................................... 3,635 421
Sylvan.................................................... 3,969 2,231
Highlight................................................. 422 --
Nationwide................................................ 200 --
Severance(b)
Sunbelt................................................... -- 2,345
----- -----
8,721 5,399
===== =====
69
75
BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(a) As private, owner-managed businesses, these companies paid salaries and
bonuses to their shareholders as part of tax minimization and other
strategies. Consulting fees were also paid which were for the benefit of
these shareholders as they explored share divestitures. As part of the
purchase agreements, certain former shareholders of these businesses
entered into multi-year employment agreements, which fixed their
contractual salaries. These pro forma adjustments represent the difference
between the salaries and benefits received during the above noted periods,
and those fixed under Bracknell employment agreements. It should be noted
that the responsibilities and duties of these former shareholders were not
diminished under Bracknell ownership and these costs have not been
replaced with other costs.
(b) During the period ended March 8, 2000, Sunbelt incurred a severance charge
of $2,345 related to the severance of its former Chief Executive Officer,
Chief Financial Officer and other members of senior management. These
severance expenses were directly related to the Bracknell transaction
since these individuals were redundant to Bracknell's management
structure, and their severance was a condition of the purchase agreement.
Following the transaction, Sunbelt became a subsidiary of Bracknell and
had no requirement for a senior management team. These positions have not
been replaced under Bracknell ownership.
OTHER ANTICIPATED SAVINGS
The acquisitions' pro forma inclusion also include other selling, general
and administrative costs that Bracknell expects to eliminate at the
Sunbelt corporate facilities. These include salaries and bonuses for
redundant positions, legal and consulting costs with respect to aborted
business strategies and other administrative costs. These items resulted
in excess selling, general and administrative costs of $4,964 and $2,727
for the year ended October 31, 1999 and the nine months ended July 31,
2000, respectively. Pro forma effect has not been given for these excess
selling, general and administrative costs.
(10) Reflects additional interest expense to be incurred with respect to the
acquisitions of Preferred, Nationwide, Highlight, Sylvan and Sunbelt and
the amendment of Bracknell senior credit facility. Significant assumptions
used were:
- Bracknell would have borrowed $103,000 against the acquisition portion
of the senior credit facility at the beginning of each period in order
to consummate the acquisitions of Highlight, Sylvan and Sunbelt.
- Bracknell would have borrowed $25,000 against the term portion of the
senior credit facility at the beginning of each period in order to
consummate the Nationwide acquisition. In the historical financial
statements, Bracknell borrowed this amount on September 30, 1999.
- All of the interest on the senior credit facility has been accrued at
9.5%.
- Bracknell used $6,000 of available cash to purchase Preferred. This cash
was otherwise generating interest income at approximately 4%.
- Bracknell used $22,000 of available cash to purchase Nationwide. This
cash was otherwise generating interest income at approximately 4%.
- The Sunbelt seller notes of $50,000 accrue interest at 10.5% for the
first 90 days and 12.5% thereafter.
- Bracknell originally capitalized costs of $3,488 with respect to the
senior credit facility. When the agreement was amended on February 28,
2000 this was considered a settlement of the original senior credit
facility, requiring the remaining unamortized balance of $3,254 to be
considered a settlement loss. For U.S. GAAP purposes the settlement loss
has been reflected as an extraordinary item. Amortization of the
original costs have been eliminated.
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BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, 1999 JULY 31, 2000
---------------- -----------------
Highlight, Sylvan and Sunbelt debt............ $ 9,785 $ 3,364
Nationwide debt............................... 2,177 --
Elimination of interest income earned......... 967 --
Sunbelt seller note........................... 6,000 2,209
Deferred financing costs...................... 31 --
------- -------
$18,960 $ 5,573
======= =======
(11) Reflects the income tax effect of the adjustments as described in Notes
(9) and (10) effected at an assumed tax rate of 40%.
(12) Reflects income taxes to be recognized on a pro forma basis for Preferred,
Sylvan and Sunbelt. Each of these companies did not have a U.S. federal
tax provision recorded based on their management structure but will be
taxable under Bracknell. An assumed tax rate of 40% has been applied.
(13) Reflects additional amortization of goodwill for the acquisitions of
Preferred, Nationwide, Highlight, Sylvan and Sunbelt as though each of
these acquisitions had taken place at the beginning of each period.
Amortization is taken evenly over twenty (20) years. Purchase price
adjustments are expected to be finalized by year end, these are not
expected to cause material differences from current figures. Goodwill for
the acquisitions of Highlight, Sylvan and Sunbelt at July 31, 2000 has
been calculated as follows:
AT JULY 31, 2000
----------------
Highlight................................................. $ 1,254
Sylvan.................................................... 10,999
Sunbelt................................................... 101,376
--------
$113,629
========
As noted in the audited consolidated financial statements of Bracknell for
the year ended October 31, 1999, the acquisitions of Nationwide and
Preferred resulted in goodwill of $72,806 and $3,674 respectively.
However, Nationwide had $30,608 of goodwill being amortized over 40 years
immediately preceding the acquisition by Bracknell. Therefore the
incremental goodwill to amortize on a pro forma basis is $42,198 plus
amortizing the original $30,608 over 20 years rather than 40 years. The
tax savings have been calculated assuming a 60% weighted average goodwill
deductibility and an assumed tax rate of 40%.
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1999 JULY 31, 2000
---------------- -----------------
Highlight, Sylvan and Sunbelt................ $ 5,681 $2,009
Nationwide................................... 2,590 --
Preferred.................................... 122 --
Tax savings.................................. (2,014) (482)
------- ------
$ 6,379 $1,527
======= ======
(14) On May 26, 2000, Bracknell entered into an agreement to sell its entire
50% interest in Profac Management Services Inc. to SNC Lavalin, Inc. for
consideration of C$17,500 in cash, or approximately $11,641. The proceeds
from disposition were used to retire outstanding debt. Interest savings
generated from having the net proceeds on sale applied against the
operating facilities under the senior
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BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
credit facility on November 1, 1998 are assumed to be at 9.5%. Income
taxes are assumed to be payable at a 40% income tax rate.
(15) Reflects the interest savings generated from having the partial payment of
$28,992 from the equity offering issued March 23, 2000 used to pay down a
portion of the Sunbelt notes. The interest savings from the retirement of
outstanding debt are assumed to be at 10.5% for the first three months and
at 12.5% thereafter. Income taxes are assumed to be payable at a 40% tax
rate.
(16) Represents the results of operations of Able included in the audited
consolidated statement of earnings for the year ended October 31, 1999 and
the unaudited interim statement of earnings for the nine months ended July
31, 2000.
(17) As mentioned in Note (3), subsequent to the completion of the merger, it
is Bracknell's intent to dispose of the Construction, Transportation and
International divisions. Adjustments have been made to exclude the
historical results of earnings as a result of the planned dispositions.
There has been no allocation of interest or other corporate costs to these
divisions.
(18) Able incurred expenses which Bracknell does not expect to incur on an
ongoing basis.
The stock appreciation rights are owned by WorldCom and will be eliminated
at the time of the merger pursuant to the merger agreement, which provides
for the cancellation of all Able securities. The stock appreciation rights
will be replaced through the issuance of Bracknell common shares to
WorldCom at the time of the merger. Consequently, on a pro forma basis,
these stock appreciation rights would not have been outstanding at any
time during the period and accordingly, the charge associated with them
has been eliminated as it would not have been incurred. Stock appreciation
rights valuation changes resulted in a charge (recovery) of $1,814 and
($3,710) for the year ended October 31, 1999 and the nine months ended
July 31, 2000 respectively.
OTHER ANTICIPATED SAVINGS
Able's results also include selling, general and administrative costs that
Bracknell expects to eliminate at the Able corporate facilities. These
include salaries and bonuses for redundant positions, professional and
legal fees with respect to non-recurring requirements and other
administrative costs. These items resulted in excess selling, general and
administrative costs of $8,889 and $10,614 for the year ended October 31,
1999 and the nine months ended July 31, 2000, respectively. Pro forma
effect has not been given for these excess selling, general and
administrative costs.
(19) Represents the amortization incurred for the $1,000 deferred financing
costs incurred on acquisition:
(20) Represents the net additional interest expense incurred as a result of the
merger. As described in Note (5), an additional $85,000 in senior credit
facility financing will be required by Bracknell at an average weighted
cost of debt of 11.0%. A portion of the additional financing obtained will
be used to retire Able's outstanding senior credit facility of $35,000
accruing interest at an average weighted cost of debt of 11.5%.
(21) Represents the amortization of the discounted WorldCom advance of $40,000
as described in Note (5). Imputed interest is calculated at a rate of 12%
based on the outstanding discounted debt.
(22) Reflects the amortization of goodwill for the acquisition of Able based on
the calculated goodwill as described in Note (5). Goodwill is amortized on
a straight line basis over a 20 year period.
(23) Reflects the amortization of the intangible asset as described in Note
(5)(viii). The intangible asset is amortized on a straight line basis over
a 20 year period.
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BRACKNELL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(24) Reflects the draw down of the deferred tax liability resulting from the
intangible asset as described in Note (5). The deferred tax liability is
being drawn down to match the deferred liability value on the remaining
intangible assets.
(25) For the year ended October 31, 1999, the acquisitions consist of
significant subsidiaries and other acquisitions, as discussed under Recent
Acquisitions, as follows:
NATIONWIDE NATIONWIDE SUNBELT OTHERS ACQUISITIONS
------------- -------------- ------------ ------- ------------
(FIVE MONTHS (TWO MONTHS
(SIX MONTHS FROM FROM
ENDED NOV. 1/98 TO JAN. 1/99 TO
SEPT. 30/99) MAR. 31/99) FEB. 28/99)
Revenues......................... $98,294 $98,874 $265,828 $86,954 $549,950
Cost of services................. 81,234 82,486 221,754 72,823 458,297
------- ------- -------- ------- --------
Gross margin..................... 17,060 16,388 44,074 14,131 91,653
Selling, general and
administrative expenses........ 11,950 10,830 25,342 12,103 60,225
Depreciation and amortization.... -- 1,405 1,358 703 3,466
------- ------- -------- ------- --------
Earnings from operations......... 5,110 4,153 17,374 1,325 27,962
Interest and other income
(expense)...................... (507) (2,254) (1,765) 288 (4,238)
------- ------- -------- ------- --------
Earnings before provision for
income taxes................... 4,603 1,899 15,609 1,613 23,724
Provision for income taxes....... 1,872 990 129 43 3,034
------- ------- -------- ------- --------
Net earnings..................... $ 2,731 $ 909 $ 15,480 $ 1,570 $ 20,690
======= ======= ======== ======= ========
(26) For the nine months ended July 31, 2000, the acquisitions consist of
significant subsidiaries and other acquisitions, as discussed under recent
acquisitions, as follows:
SUNBELT OTHER ACQUISITIONS
------------ ------- ------------
(NOV 1/99 TO
MAR 8/00)
Revenues................................................. $92,465 $32,131 $124,596
Cost of services......................................... 75,295 26,373 101,668
------- ------- --------
Gross margin............................................. 17,170 5,758 22,928
Selling, general and administrative expenses............. 12,633 3,971 16,604
Depreciation and amortization............................ 613 59 672
------- ------- --------
Earnings from operations................................. 3,924 1,728 5,652
Interest and other income (expense)...................... (116) 179 63
------- ------- --------
Earnings before provision for income taxes............... 3,808 1,907 5,715
Provision for income taxes............................... 257 88 345
------- ------- --------
Net earnings............................................. $ 3,551 $ 1,819 $ 5,370
======= ======= ========
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BRACKNELL SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth Bracknell's selected historical consolidated
financial data. The selected historical consolidated financial data as at and
for each of the five fiscal years ended October 31, 1995, 1996, 1997, 1998 and
1999 have been derived from Bracknell's audited historical consolidated
financial statements, which have been prepared in accordance with Canadian GAAP.
Canadian GAAP differs in certain respects from U.S. GAAP. For a discussion of
the material differences between Canadian and U.S. GAAP, as they relate to
Bracknell Corporation, you should review note 25 to the consolidated financial
statements included elsewhere in this proxy statement/prospectus. The selected
historical consolidated financial data as at and for each of the nine months
ended July 31, 1999 and 2000 were derived from the unaudited interim
consolidated financial statements for these periods and have been prepared on
the same basis as the audited historical consolidated financial statements and,
in the opinion of management, contain all adjustments necessary for the fair
presentation of the results of operations for such periods. You should read the
selected historical consolidated financial data in conjunction with the
consolidated financial statements and the notes thereto that are included
elsewhere in this proxy statement/prospectus. See also
"Bracknell -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Canadian GAAP
INCOME STATEMENT DATA:
Revenues...................................... $181,995 $198,655 $197,391 $273,373 $293,104 $199,469 $579,520
Cost of services.............................. 162,566 174,750 171,799 243,637 255,296 175,872 486,724
-------- -------- -------- -------- -------- -------- --------
Gross margin.................................. 19,429 23,905 25,592 29,736 37,808 23,597 92,796
Selling, general and administrative
expenses.................................... 13,614 15,680 18,055 21,918 24,905 16,532 52,893
Depreciation and amortization................. 627 621 591 1,102 1,596 1,072 3,125
Restructuring and other charges(1)............ -- -- -- -- 7,609 7,609 --
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from operations............... 5,188 7,604 6,946 6,716 3,698 (1,616) 36,778
Income (loss) from long-term investments...... 570 (27) (588) 294 23 14 74
Write-off of deferred financing fees.......... -- -- -- -- -- -- (3,254)
Interest and other income (expense)........... 552 396 3,339 4,315 1,327 (741) (11,496)
Provision for (recovery of) income taxes...... 2,903 3,861 3,535 4,641 1,677 (613) 7,271
Goodwill charges, net of tax.................. 156 202 205 288 497 204 4,445
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) from continuing
operations................................ $ 3,251 $ 3,910 $ 5,957 $ 6,396 $ 2,874 $ (452) $ 10,386
======== ======== ======== ======== ======== ======== ========
Net earnings from discontinued operations,
net of tax................................ $ 362 $ 310 $ 469 $ 979 $ 917 $ 828 $ 1,789
======== ======== ======== ======== ======== ======== ========
Net earnings per share
Basic....................................... $ 0.14 $ 0.16 $ 0.25 $ 0.28 $ 0.14 $ 0.02 $ 0.33
Fully diluted............................... 0.14 0.16 0.24 0.27 0.14 0.02 0.31
U.S. GAAP
INCOME STATEMENT DATA:
Revenues...................................... 204,501 224,776 222,124 289,548 292,994 199,469 579,520
Cost of services.............................. 182,669 197,728 193,297 257,983 255,296 175,872 486,724
-------- -------- -------- -------- -------- -------- --------
Gross margin.................................. 21,832 27,048 28,826 31,565 37,698 23,597 92,796
Selling, general and administrative expenses 15,299 17,742 20,314 23,211 24,905 16,532 52,893
Depreciation and amortization................. 880 932 896 1,472 2,182 1,276 8,656
Restructuring and other charges............... -- -- -- -- 7,609 7,609 --
-------- -------- -------- -------- -------- -------- --------
Earnings from operations...................... 5,653 8,375 7,616 6,882 3,002 (1,820) 31,247
Income from long-term investments............. 640 (31) (662) 311 23 14 74
Interest and other income..................... 792 632 2,172 2,096 1,327 741 (11,496)
-- --
-------- -------- -------- -------- -------- -------- --------
Earnings before provision for income taxes.... 7,086 8,976 9,126 9,290 4,352 (1,065) 19,825
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NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Provision for income taxes.................... 3,262 4,369 3,976 4,914 1,588 (613) 6,185
-------- -------- -------- -------- -------- -------- --------
Earnings from continuing operations before
extraordinary item.......................... 3,824 4,608 5,150 4,376 2,764 (452) 13,640
Extraordinary item............................ -- -- -- -- -- (3,254)
Earnings from continuing operations........... 3,824 4,608 5,150 4,376 2,764 (452) 10,386
Earnings from discontinued operations......... 407 351 528 235 (1,380) 828 4,888
-------- -------- -------- -------- -------- -------- --------
Net earnings.................................. 4,231 4,959 5,678 4,611 1,384 376 15,274
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data
Total Assets.................................. 114,268 113,260 124,406 132,951 268,595 127,801 514,759
Total Long term debt.......................... 1,079 948 710 457 47,705 57,627 135,513
Net earnings (loss) per share
Basic....................................... 0.16 0.19 0.22 0.18 0.05 (0.06) 0.42
Diluted..................................... 0.16 0.18 0.21 0.17 0.05 (0.06) 0.37
OTHER DATA:
Other Canadian Financial Measures
Adjusted EBITDA(2)............................ $ 5,815 $ 8,225 $ 7,537 $ 7,818 $ 12,903 $ 7,065 $ 39,903
Other U.S. Financial Measures
Adjusted EBITDA............................... 6,533 9,307 8,512 8,356 12,793 6,955 39,903
CASH FLOW INFORMATION
Operating activities.......................... (561) (1,953) 3,241 9,632 4,618 (1,710) (43,134)
Financing activities.......................... 946 372 709 (1,529) 41,817 2,316 138,597
Investing activities.......................... (1,741) (369) 4,402 (6,423) (68,949) (8,421) (89,294)
AS AT
AS AT OCTOBER 31, JULY 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Canadian GAAP
Cash............................................ $ 15,083 $ 13,133 $ 21,485 $ 23,165 $ 651 $ 15,351 $ 6,820
Other current assets............................ 72,179 72,989 81,127 99,329 165,780 94,288 293,719
Total assets.................................... 99,612 98,241 113,533 133,644 271,693 130,429 514,759
Current liabilities............................. 57,302 51,457 59,788 74,244 108,334 62,340 152,106
Total debt (including short term debt)(3)....... 946 1,318 2,048 343 60,487 2,078 224,711
Other liabilities............................... 941 822 648 457 7,393 5,759 2,429
Shareholders' equity............................ 40,423 44,644 51,049 58,600 95,479 60,253 135,513
U.S. GAAP
Total assets.................................... 114,268 113,260 124,406 132,951 268,595 127,801 514,759
Shareholders' equity............................ 46,369 51,468 55,952 57,901 92,381 57,627 135,513
- ---------------
Notes:
(1) Approximately $5.3 million of restructuring and other charges result from
the retirement of former executives and management changes with the
remainder relating to the settlement of a dispute with a customer.
(2) Adjusted EBITDA is defined as earnings from continuing operations before
interest, income taxes, depreciation, amortization, goodwill charges, income
from long-term investments and restructuring and other charges. Adjusted
EBITDA should not be construed as a substitute for income from operations,
net earnings or cash flow from operations. Bracknell believes that, in
addition to cash flow from operations and net earnings, adjusted EBITDA is a
useful financial liquidity measurement for assessing Bracknell's ability to
incur and service debt and to fund capital expenditures. Adjusted EBITDA is
not necessarily comparable to similarly titled measures for other companies
and does not necessarily represent the amount of funds available for
management's discretionary use.
Investors should consider such factors as Bracknell's level of annual
adjusted EBITDA in relation to total net indebtedness as at fiscal year end
and the related annual interest expense in evaluating adjusted EBITDA.
Management believes that Bracknell's level of adjusted EBITDA is sufficient
to meet its debt service and capital expenditure requirements.
(3) Total debt includes the short and long term portion of outstanding banking
facilities as well as capital leases.
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BRACKNELL -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis represents Bracknell's consolidated
financial condition and results of operations. You should read the following in
conjunction with Bracknell's audited consolidated financial statements and
unaudited interim consolidated financial statements and the notes thereto
included elsewhere in this proxy statement/prospectus.
OVERVIEW
Bracknell is a large and rapidly growing facilities infrastructure services
provider in North America, providing services to a broad range of technology,
telecommunications, commercial, industrial, and institutional customers. As a
facilities infrastructure services provider, Bracknell is focused on the design,
installation, integration, start-up, operation and maintenance of critical
infrastructure for buildings, industrial plants and processes, critical-use
facilities, such as telecommunications switch sites, and external wireless and
land-based telecommunications infrastructure. Critical infrastructure includes
those electrical, mechanical, telecommunications and other systems whose
incapacity or failure would have a devastating impact on the use and benefit of
the intended activity, such as electrical power systems, lighting systems,
low-voltage systems, such as fire alarm, security, communications and process
control systems, voice and data communications systems, HVAC, i.e., heating,
ventilation, air conditioning, refrigeration systems and piping systems, i.e.,
plumbing and process. Bracknell also provides services needed to support the
critical infrastructure and operation of customers' facilities, including site
based operations and maintenance, mobile maintenance and service, small
modification and retrofit projects, consulting, program development and
management for energy systems, and maintenance of facilities. Through its
skilled workforce and geographically diverse operations, Bracknell designs and
installs systems for new facilities, upgrades and retrofits existing systems and
provides long-term and on-call maintenance and repair. Bracknell has been
competing in the facilities infrastructure services industry for over 39 years.
Bracknell's historical consolidated financial statements include the
results of its wholly-owned subsidiaries. Bracknell reports its results in U.S.
dollars, although historically a significant portion of Bracknell's revenues and
expenses have been in Canadian dollars. To the extent Bracknell receives
revenues in currencies other than U.S. dollars, its results of operations may be
impacted by currency fluctuations.
Bracknell provides the majority of its services under contracts. Many of
its contracts are negotiated with customers with whom Bracknell enjoys a
long-standing business relationship or for whom Bracknell provides design and
other value-added services. Other contracts are awarded on the basis of
competitive bids.
Bracknell's services are priced either on a fixed price or a cost-plus
basis. Under a fixed price contract, Bracknell assigns a fixed cost for the
customer. Bracknell's ability to complete a project for less than the fixed
contract price determines its profit or loss. Fixed price contracts generally
expose Bracknell to the risk of cost overruns, and its ability to realize a
profit is highly dependent upon the ability to properly estimate the cost to
complete a project. Under a cost-plus contract, Bracknell generally contracts to
receive a certain percentage profit over the materials and labor costs of a
project. Cost-plus contracts expose Bracknell to less risk than fixed price
contracts.
Bracknell recognizes revenues and costs from fixed price contracts under
the percentage-of-completion method measured as the ratio of contract costs
incurred to date to estimated total contract costs for each contract. Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance such as indirect labor, supplies and tools. The
performance of these contracts requires periodic review and revision of
estimated final contract prices and costs. Effects of these revisions are
included in the periods in which the revisions are made. Losses on contracts are
recognized when they become evident.
Bracknell reports revenues and costs from cost-plus contracts as it incurs
direct material and labor costs and indirect costs related to contract
performance. Bracknell recognizes the full amount of revenues and costs related
to the contract. Bracknell recognizes revenues and costs from maintenance and
repair work as services
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are invoiced, with the exception of long-term service contracts, which Bracknell
recognizes ratably over the life of the contract.
Historically, interest expense has not been a significant component of
Bracknell's results of operations. However, in the future with Bracknell's
obligations under its senior credit facility, interest expense will become a
more significant component of its results of operations.
Selling, general and administrative expenses are expensed as incurred.
These expenses include remuneration of management personnel and the management
of subsidiaries, rent, utilities, travel and centralized costs such as
insurance, professional costs and clerical and administrative overhead.
Historical financial results include the results of the companies Bracknell
acquired in 1999 and 2000 from the date those acquisitions closed. Bracknell has
significantly increased the scale and scope of its operations through the
acquisition and integration of several companies. Accordingly, historical
financial results are not indicative of Bracknell's financial position or
results of operations in the future.
FOREIGN CURRENCY RISKS
On November 1, 1999, Bracknell adopted the practice of reporting in United
States dollars, to reflect the fact that a greater portion of its business
operations will be conducted in the United States. Bracknell's foreign currency
exposures give rise to market risk associated with exchange rate movements
against the Canadian dollar, Bracknell's functional currency for its operations
in Canada. As a result, fluctuations in foreign currencies may have an impact on
Bracknell's reported business and financial results and the value of its foreign
assets, which in turn may adversely affect reported earnings and the
comparability of period-to-period results of operations. Changes in currency
exchanged rates may affect the relative prices at which Bracknell and foreign
competitors sell products in the same market. In addition, changes in the value
of relevant currencies may affect the cost of items required in Bracknell's
operations.
Bracknell endeavors to minimize the impact of such currency fluctuations
through its ongoing commercial practices. In attempting to manage this foreign
exchange risk, Bracknell generally sources particular materials and labor of a
particular contract in the same currency as it receives the revenues for that
contract.
RESULTS OF OPERATIONS
The following table sets forth Canadian GAAP certain historical financial
data for the periods indicated (dollars in millions):
FISCAL YEAR ENDED OCTOBER 31, NINE MONTHS ENDED JULY 31,
------------------------------------------------ --------------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
Revenues......................... $197.4 100.0% $273.4 100.0% $293.1 100.0% $199.5 100.0% $579.5 100.0%
Cost of services................. 171.8 87.0 243.6 89.1 255.3 87.1 175.9 88.2 486.7 84.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin..................... 25.6 13.0 29.8 10.9 37.8 12.9 23.6 11.8 92.8 16.0
Selling, general and
administrative................. 18.1 9.1 21.9 8.0 24.9 8.5 16.5 8.3 52.9 9.1
Restructuring and other
charges........................ -- 0.0 -- 0.0 7.6 2.6 7.6 3.8 -- 0.0
Depreciation and amortization.... 0.6 0.3 1.1 0.4 1.6 0.5 1.1 0.6 3.1 0.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Earnings (loss) from
operations..................... $ 6.9 3.6% $ 6.8 2.5% $ 3.7 1.3% $ (1.6) (0.9)% $ 36.8 6.4%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
NINE MONTHS ENDED JULY 31, 2000 COMPARED WITH NINE MONTHS ENDED JULY 31, 1999
Revenues
Revenues increased to $579.5 million for the nine months ended July 31,
2000 compared to $199.5 million for the nine months ended July 31, 1999, an
increase of 190.5%. The increase in revenues was primarily due to the net
acquisitions completed in 1999 and 2000 which increased revenues $333.1 million
compared to the prior period. In addition, revenues from Bracknell's existing
facilities infrastructure services operations increased $46.9 million compared
to the prior period. Revenues from customers in the U.S. increased to $431.2
million, or 74.4% of total revenues from $43.7 million, or 21.9% for the prior
period.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $52.9 million for
the nine months ended July 31, 2000 compared to $16.5 million for the nine
months ended July 31, 1999, an increase of 220.6%. The increase in selling,
general and administrative expenses was primarily due to the acquisitions
completed in 1999 and 2000 which increased selling, general and administrative
expenses by $34.2 million. The remaining increase of $2.2 million in selling,
general and administrative expenses is primarily due to the additional resources
necessary to manage an expanded business across North America. Corporate office
expenses for the prior year were unusually low as a result of a large number of
vacant positions, which were filled in fiscal 2000.
Earnings from Operations
Earnings from operations increased to $36.8 million for the nine months
ended July 31, 2000 compared to a loss from operations of $1.6 million for the
nine months ended July 31, 1999 an increase of $38.4 million. The loss from
operations for the nine months ended July 31, 1999 included restructuring and
other charges of $7.6 million resulting from the retirement of former
executives, management changes and a legal settlement. Excluding these charges,
adjusted earnings from operations were $6.0 million for the nine months ended
July 31, 1999. As compared to the nine months ended July 31, 2000, this results
in an earnings from operations increase of $30.8 million or 513.3%. The increase
in earnings from operations was primarily due to the acquisitions completed in
1999 and 2000, which contributed an additional $29.0 million of earnings from
operations, and an increasing focus on providing higher margin, specialized
services from ongoing business units. Earnings from operations as a percentage
of revenues increased to 6.3% for the nine months ended July 31, 2000 compared
to (0.8%) and 3.0% for the nine months ended July 31, 1999 on an actual and
adjusted basis, respectively.
Restructuring and Other Charges
The restructuring and other charges of $7.6 million for the nine months
ended July 31, 1999 related to the retirement of former executives, management
changes and a legal settlement. Of the $7.6 million, $5.3 million related to the
retirement of former executives and management changes with the balance of $2.3
million resulting from the legal settlement.
Provision for Income Taxes
The effective income tax rate was 37.3% for the nine months ended July 31,
2000 compared to 57.6% for the nine months ended July 31, 1999. The full year
effective tax rate for fiscal 1999 was 39.6%. The effective income tax rate of
37.3% for the nine months ended July 31, 2000 is principally due to the
increased amount of business in lower rate jurisdictions principally the U.S.
The rate of provision for taxes in the nine months ended July 31, 2000 results
approximates the appropriate full year tax rate for Bracknell's current mix of
business. The effective income tax rate of 57.6% for the nine months ended July
31, 1999 results from the recovery of taxes at a higher estimated year end tax
rate than prior period tax accruals.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED WITH FISCAL YEAR ENDED OCTOBER 31,
1998
Revenues
Revenues increased to $293.1 million for the fiscal year ended October 31,
1999 compared to $273.4 million for the fiscal year ended October 31, 1998, an
increase of 7.2%. The increase in revenues was primarily due to the acquisitions
completed in 1999 which increased revenues $27.4 million compared to the prior
fiscal year. These increases were offset by a $7.7 million decrease in revenues
from existing facilities infrastructure services operations due to better job
selection to increase Bracknell's focus on providing higher margin, specialized
services and the completion in fiscal 1998 of several non-recurring projects.
Revenues from customers in the U.S. increased to $86.9 million, or 29.6% of
total revenues from $41.7 million, or 15.3% for the prior fiscal year.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $24.9 million for
the fiscal year ended October 31, 1999 compared to $21.9 million for the fiscal
year ended October 31, 1998, an increase of 13.7%. The increase in selling,
general and administrative expenses was primarily due to the acquisitions
completed in 1999 which increased selling, general and administrative expenses
by $3.3 million compared to the prior fiscal year.
Earnings from Operations
Earnings from operations decreased to $3.7 million for the fiscal year
ended October 31, 1999 compared to $6.8 million for the fiscal year ended
October 31, 1998, a decrease of 45.6%. Included in the 1999 results is a
one-time charge for restructuring and other charges of $7.6 million. Excluding
this one-time charge, earnings from operations were $11.3 million, an increase
of 68.7% compared to the prior fiscal year. The increase in earnings from
operations, excluding the one-time charge, was primarily due to the acquisitions
completed in 1999, which contributed an additional $1.5 million of earnings from
operations, and Bracknell's increasing focus on providing higher margin,
specialized services. Earnings from operations, excluding the one-time charge,
as a percentage of revenues increased to 3.9% for the fiscal year ended October
31, 1999 compared to 2.5% for the prior fiscal year.
Restructuring and Other Charges
The restructuring and other charges of $7.6 million for the year ended
October 31, 1999 (1998 -- nil) related to the retirement of former executives at
Bracknell, management changes at a subsidiary and the settlement of an
outstanding claim.
Provision for Income Taxes
The effective income tax rate was 37.7% for the fiscal year ended October
31, 1999 compared to 42.6% for the fiscal year ended October 31, 1998. The
decrease in the effective income tax rate was primarily due to the recognition
of previously available but unrecognized loss carryforwards of $2.6 million in
1998 from U.S. operations.
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED WITH FISCAL YEAR ENDED OCTOBER 31,
1997
Revenues
Revenues increased to $273.4 million for the fiscal year ended October 31,
1998 compared to $197.4 million for the fiscal year ended October 31, 1997, an
increase of 38.5%. The increase in revenues was primarily due to expansion into
the United States which increased revenues $28.7 million compared to the prior
fiscal year. In addition, the proportionate consolidation of National State
Construction Group Inc. increased revenues by $18.7 million compared to the
prior fiscal year. The balance of the increase, or $28.6 was growth in Canada
and the Bahamas. Revenues from customers in the U.S. increased to $41.7 million,
or 15.3% of total revenues from $13.0 million, or 6.6% for the prior fiscal
year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $21.9 million for
the fiscal year ended October 31, 1998 compared to $18.1 million for the fiscal
year ended October 31, 1997, an increase of 21.0%. The increase in selling,
general and administrative expenses was primarily due to an increase in
revenues. In addition, the proportionate consolidation of National State
Construction Group Inc. increased selling, general and administrative expenses
by $1.6 million compared to the prior fiscal year.
Earnings from Operations
Earnings from operations decreased to $6.8 million for the fiscal year
ended October 31, 1998 compared to $6.9 million for the fiscal year ended
October 31, 1997, a decrease of 1.5%. The decrease in earnings from
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operations was primarily due to stronger than expected industrial earnings in
1997 and lower than expected margins in 1998. Earnings from operations as a
percentage of revenues decreased to 2.5% for the fiscal year ended October 31,
1998 compared to 3.5% for the prior fiscal year.
Provision for Income Taxes
The effective income tax rate was 42.6% for the fiscal year ended October
31, 1998 compared to 37.9% for the fiscal year ended October 31, 1997. The
increase in the effective income tax rate was primarily due to previously
unrecorded capital and non-capital loss carryforwards utilized in 1997, the
impact of losses incurred in the U.S. in 1998 and the proportionately higher
amount of Canadian income which was taxed at a higher rate.
LIQUIDITY AND CAPITAL RESOURCES -- PRO FORMA FOR THE 2000 ACQUISITIONS
In connection with the acquisitions of Sunbelt, Highlight and Sylvan in
2000, Bracknell amended and restated its senior credit facility to provide it
with $67.5 million in operating facilities, $40.0 in million term facilities and
$105.0 million in acquisition facilities. Prior to the acquisitions, Bracknell
had approximately $72.0 million outstanding under the senior credit facility,
which consisted of $32.0 million drawn to finance working capital requirements
and $40.0 million to refinance borrowings under a previous senior credit
facility related to the Nationwide acquisition. Bracknell invested $153.0
million to acquire Sylvan, Highlight and Sunbelt, paying $103.0 million in cash
and issuing the Sunbelt seller notes to certain Sunbelt shareholders. The cash
portion was financed by drawing on the senior credit facility. Subsequent to the
acquisitions, the acquisition and term facilities of the senior credit facility
were fully drawn.
In March and April 2000, Bracknell completed an offering of 6.6 million of
Bracknell common shares at C$7.00 per common share with net proceeds of C$42.7
million. Bracknell used the proceeds of this equity offering to repay a portion
of the obligations under the Sunbelt seller note.
Bracknell expects to amend the senior credit facility following this
registration statement to comprise a term facility and revolver of an
approximate combined amount of $350.0 million.
Bracknell believes that its anticipated cash flows from operating
activities, together with availability under the operating facilities, will be
sufficient to finance working capital requirements and anticipated capital
spending requirements. Bracknell plans to finance future growth strategy,
including potential acquisitions, through borrowings under new term facilities
and by accessing the public and private debt and equity capital markets.
LIQUIDITY AND CAPITAL RESOURCES -- BRACKNELL CORPORATION
On November 19, 1999, Bracknell entered into the senior credit facility
with a syndicate of banks. At that time, the senior credit facility was composed
of operating, term and acquisition facilities totaling $192.5 million. Bracknell
utilized $25.0 million of its capacity under the senior credit facility to
finance the acquisition of Nationwide. In February, 2000, Bracknell amended and
restated its credit facility to provide Bracknell with operating, term and
acquisition facilities totalling $212.5 million. In July 2000, Bracknell
completed a second amendment and restatement of its senior credit facility. The
second amended and restated credit facility continues to provide for total
credit availability of $212.5 million, with similar conditions and covenants.
Prior to the beginning of its acquisition strategy in 1999, the amount of
capital Bracknell required to operate its business was relatively low.
Bracknell's business is primarily service based and therefore capital
expenditure requirements were also relatively low. Bracknell's primary capital
requirement was working capital which was primarily met through borrowings under
a working capital facility and cash flows from operations. Following the
acquisitions, Bracknell's primary capital requirements continue to be working
capital which is being met through borrowings under Bracknell's amended and
restated working capital facility and cash flows from operations.
Bracknell's acquisitions and operations are generally financed through the
use of a syndicated senior credit facility. The current agreement provides for a
$212.5 million senior credit facility composed of Canadian
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and U.S. operating, term and acquisition facilities. Borrowings under these
facilities are in the form of advances, accommodations, bankers acceptances, or
letters of credit; and currently bear interest at the London Inter Bank Offered
Rate ("LIBOR") plus 2.0% or the prime interest rate in effect for commercial
loans in Canada or the United States, as applicable, plus 1.0%. Interest can
vary between 1.75% to 3.25% for LIBOR or 0.75% to 2.25% for prime based on
Bracknell's ratio of total net debt to consolidated earnings before interest,
tax, depreciation and amortization. Changes in LIBOR, which is affected by
changes in interest rates in general, will affect the interest rate applicable
on our senior credit facility.
The senior credit facility has general and financial covenants that place
certain restrictions on Bracknell, including the making of payments (dividends
and distributions); and incurrence of certain liens; the sale of assets under
certain circumstances; certain transactions with affiliates; certain
consolidations, mergers and transfers; and the use of loan proceeds. In
addition, the senior credit facility limits the aggregate amount of additional
borrowings that can be incurred by Bracknell. As a matter of policy and under
the terms of the credit agreement, Bracknell is required to provide the lenders
with periodic budgets, financial statements and public reports and filings, and
Bracknell must meet specified thresholds with respect to profitability and debt
to net worth ratios.
Bracknell is exposed to market risks from changes in interest rates that
may impact its financial position. The senior credit facility makes interest
rate and foreign exchange rate hedging activities available to Bracknell.
Historically, and as of July 31, 2000, Bracknell has not used derivative
instruments or engaged in hedging activities.
NINE MONTHS ENDED JULY 31, 2000 COMPARED WITH NINE MONTHS ENDED JULY 31, 1999
Cash outflows from operating activities increased to $43.1 million for the
nine months ended July 31, 2000 compared to $1.7 million for the nine months
ended July 31, 1999, an increase of $41.4 million. The increase in outflows was
primarily due to increased working capital requirements.
Cash outflows from investing activities increased to $89.3 million for the
nine months ended July 31, 2000 compared to $8.4 million for the nine months
ended July 31, 1999, an increase of $80.9 million. The increase was primarily
due to the acquisitions of Sunbelt, Sylvan and Highlight.
Cash inflows from financing activities were $100.2 million for the nine
months ended July 31, 2000 compared to $0.8 for the nine months ended July 31,
1999, an increase of $99.4 million. The increase was primarily due to the
borrowings under Bracknell's senior credit facility.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED WITH FISCAL YEAR ENDED OCTOBER 31,
1998
Cash inflows from operating activities decreased to $4.6 million for the
year ended October 31, 1999 compared to $9.6 million for the year ended October
31, 1998, a decrease of $5.0 million. Excluding one-time non-operating items of
$2.0 million and $2.3 million in 1999 and 1998, respectively, cash inflows from
operating activities in 1999 were $6.6 million as compared to $7.3 million in
1998, a year-over-year decrease of $0.7 million. The non-operating item which
impacted cash flow from operations in fiscal 1999 was the funding of $2.0
million of restructuring and other charges. The non-operating items which
impacted cash flow from operating activities in fiscal 1998 included a one-time
interest income receipt of $1.3 million on an income tax settlement and a $1.0
million receipt from the settlement arising from a project at Toronto Pearson
Airport.
Bracknell's cash outflows from investing activities increased to $68.9
million for the year ended October 31, 1999 compared to $6.4 million for the
year ended October 31, 1998, an increase of $62.5 million. The increase in cash
outflows from investing activities in 1999 was primarily due to the acquisition
of Nationwide, and Preferred Electric, an increase in capital expenditures and
long-term investments and deferred start up costs.
Bracknell's cash inflows from financing activities increased to $41.8
million for the year ended October 31, 1999 compared to cash outflows of $1.5
million for the year ended October 31, 1998, an increase of $43.3 million. The
increase in cash inflows from financing activities in 1999 was primarily due to
an increase in borrowings from the senior credit facility.
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FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED WITH FISCAL YEAR ENDED OCTOBER 31,
1997
Cash inflows from operating activities increased to $9.6 million for the
year ended October 31, 1998 compared to $3.2 million for the year ended October
31, 1997, an increase of $6.4 million. The increase in cash inflows was
principally as a result of a reduced amount of investment in working capital.
Cash outflows from investing activities were $6.4 million for the year
ended October 31, 1998 compared to cash inflows of $4.4 million for the year
ended October 31, 1997, a decrease of $10.8 million. Excluding a one-time item
of $9.9 million for the fiscal year ended October 31, 1997, cash outflows from
operating activities would have been $5.5 million for the fiscal year ended
October 31, 1997 leading to year-over-year increase of $0.9 million. The
one-time item which impacted cash flows related to the proceeds on disposal of
Bracknell's investment in the Toronto Pearson Airport development project.
Cash outflows from financing activities were $1.5 million for the year
ended October 31, 1998 compared to cash inflows of $0.7 million for the fiscal
year ended October 31, 1997, an increase of $2.2 million. The increase of cash
outflows was primarily due to the increase in borrowings from the senior credit
facility.
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BUSINESS -- BRACKNELL
THE COMPANY
Bracknell is a large and rapidly growing facilities infrastructure services
provider in North America, providing services to a broad range of technology,
telecommunications, commercial, industrial, and institutional customers. As a
facilities infrastructure services provider, Bracknell is focused on the design,
installation, integration, start-up, operation and maintenance of critical
infrastructure for buildings, industrial plants and processes, critical-use
facilities, such as telecommunications switch sites, and external wireless and
land-based telecommunications infrastructure. Critical infrastructure includes
those electrical, mechanical, telecommunications and other systems whose
incapacity or failure would have a devastating impact on the use and benefit of
the intended activity, such as electrical power systems, lighting systems,
low-voltage systems, such as fire alarm, security, communications and process
control systems, voice and data communications systems, HVAC, i.e., heating
ventilation, air conditioning, refrigeration systems and piping systems, i.e.,
plumbing and process. Bracknell also provides services needed to support the
critical infrastructure and operation of customers' facilities, including site
based operations and maintenance, mobile maintenance and service, small
modification and retrofit projects, consulting, program development and
management for energy systems, and maintenance of facilities.
Its customers are in many different industries and include companies such
as America Online, Dell, Dofasco, E*Trade, Ford, MGM Grand, Microcell, Motorola,
Target, Toyota, TriVergent and Wells Fargo. Bracknell has developed strong
customer relationships due to its customer-focused organizational structure and
its ability to offer services on a North American basis.
Its strong corporate and operating management team has pursued and will
continue to pursue a growth strategy through internal expansion and selective
acquisitions. In addition to its growth initiatives, Bracknell's corporate and
operating management teams have implemented an operating and financial
performance improvement plan. Bracknell believes that this plan, in conjunction
with its acquisitions, increased Adjusted EBITDA margins 140.8% from the fiscal
year ended October 31, 1998 to the nine months ended July 31, 2000, while over
the same period revenues also grew on a pro forma basis.
Bracknell's growth strategy is targeted towards growing sectors of the
North American economy, including the telecommunications, internet and
technology sectors. The growth of telecommunications services and the internet,
and the increased use of technology, are accelerating demand for new
sophisticated facilities. Bracknell expects to see continuing growth in
facilities such as wireless infrastructure (mobile wireless and broadband fixed
wireless), switch sites, call and data centers, and other technologically
advanced, critical use facilities, all of which create demand for specialized
facilities infrastructure services.
Bracknell is a corporation existing under the Ontario Business Corporation
Act. The address of its principal executive offices are Suite 1506, 150 York
Street, Toronto, Ontario MSH 355 Canada, and its telephone number is (416)
360-4105.
In May 1965, Bracknell Corporation was incorporated under the laws of the
Province of Alberta, Canada, under the name Jorace Petroleums Ltd. The company
changed its name to Canadian Obas Oil Limited, then to Rupertsland Resources Co.
Ltd., then to Bracknell Resources Ltd. and then to Bracknell Corporation by
articles of amendment dated April 26, 1972, May 22, 1979, October 18, 1985 and
January 26, 1989, respectively. On May 17, 1989, Bracknell Corporation was
continued under the laws of the Province of Ontario, Canada, and on April 15,
1997 amalgamated with two of its wholly owned subsidiaries, T3LPCO-6 Investment
Inc. and 1045434 Ontario Inc.
Bracknell's originally competed in the oil and gas resources industries,
when it exited that business and acquired the electrical construction services
business of DFC Inc. and Dyncorp on December 1, 1988. In November 1993,
Bracknell restructured its businesses into distinct subsidiaries or associates.
As part of this reorganization, Bracknell transferred the electrical
construction services business carried on by The State Group division to its
wholly owned subsidiary, The State Group Limited. From February 1993 until late
1994, all construction management business was undertaken by TCS Total
Construction Solutions Inc. In 1997,
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TCS Total and Cablecom International Network Cabling Inc. were amalgamated with
State Group. Bracknell now provides all of its construction services in Canada
through State Group.
Between November 1992 and October 1996, all new facilities management
business was undertaken by Clientech Support Services Inc. In 1996, Clientech
Support sold substantially all of its assets to a wholly-owned subsidiary of
PROFAC Management Group Limited. On October 31, 1996, Clientech Support was
wound up into Bracknell. In 1997, Bracknell purchased an additional 8.8% of the
shares of PROFAC, bringing Bracknell's total interest in PROFAC to 50%.
Bracknell subsequently transferred its 50% ownership of PROFAC to Clientech
Management Services Inc. in order to facilitate the merger of PROFAC and CSL
Infrastructure Inc. In December 1997, PROFAC was merged with CSL Infrastructure
and continued under the name PROFAC Management Group Limited.
During the last 18 months, Bracknell has implemented an acquisition program
designed to expand its operations. Bracknell has completed the acquisition of
Preferred Electric, Nationwide Electric, Sylvan Industrial, Highlight
Construction and Sunbelt, as discussed under "Recent Developments" above.
Set forth below is a list of Bracknell's significant subsidiaries, their
jurisdiction of incorporation and the ownership interests of these subsidiaries.
SIGNIFICANT OPERATING SUBSIDIARIES
SUBSIDIARY JURISDICTION SHARE OWNERSHIP
- ---------- ------------ ---------------
The State Group Limited Ontario 100% of the outstanding share capital is
owned by Bracknell Corporation
Nationwide Electric, Inc. Delaware 100% of the outstanding share capital is
owned by Bracknell Corporation
The State Group International Limited Michigan 100% of the outstanding share capital is
owned by The State Group Limited
Preferred Electric, Inc. Illinois 100% of the outstanding share capital is
owned by The State Group (USA) Limited
Bracknell Telecommunications Services
Inc. Ontario 100% of the outstanding share capital is
owned by Bracknell Corporation
Parsons Electric Co. Minnesota 100% of the outstanding share capital is
owned by Parsons Electric Holdings, Inc.
Southwest Systems Limited Nevada 99% of the outstanding share capital is
owned by Eagle Electric Holdings,
Inc. -- Delaware, and 1% owned by Eagle
Electrical Systems, Inc.
Allison-Smith Company Georgia 100% of the outstanding share capital is
owned by Parsons Electric Holdings, Inc.
Henderson Electric Co. Inc. Delaware 100% of the outstanding share capital is
owned by Parsons Electric Holdings, Inc.
Neal Electric, Inc. California 100% of the outstanding share capital is
owned by Parsons Electric Holdings, Inc.
Sylvan Industrial Piping, Inc. Michigan 100% of the outstanding share capital is
owned by Parsons Electric Holdings, Inc.
Highlight Construction Ltd. Alberta 100% of the outstanding share capital is
owned by Bracknell Telecommunications
Services, Inc.
Sunbelt Integrated Trade Services, Inc. Delaware 100% of the outstanding share capital is
owned by Parsons Electric Holdings, Inc.
Quality Mechanical Contractors, Inc. Nevada 100% of the outstanding share capital is
owned by Sunbelt Integrated Trade
Services, Inc.
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SUBSIDIARY JURISDICTION SHARE OWNERSHIP
- ---------- ------------ ---------------
Inglett & Stubbs, Inc. Georgia 100% of the outstanding share capital is
owned by Sunbelt Integrated Trade
Services, Inc.
Crouch Electric, Inc. Texas 100% of the outstanding share capital is
owned by Sunbelt Integrated Trade
Services, Inc.
Crouch Industries LLC Texas 100% of the outstanding share capital is
owned by Sunbelt Integrated Trade
Services, Inc.
Schmidt Electric Company, Inc. Texas 100% of the outstanding share capital is
owned by Sunbelt Integrated Trade
Services, Inc.
THE INDUSTRY
The facilities infrastructure services industry provides customers with
essential building services, including the installation, telecommunications,
upgrade, retrofit, maintenance and repair of electrical, mechanical and HVAC
systems. In North America, Bracknell management estimates that the industry
generated aggregate revenues in excess of approximately $170 billion in 1997, of
which approximately 73% was from non-residential customers. The breakdown of the
overall market by service in 1997 was:
(pie chart)
Recurring revenues associated with upgrades, retrofit, maintenance, and
repair are increasing as a percentage of revenues from the facilities
infrastructure services industry as a whole.
According to the statistics of the U.S. Census Bureau from 1992 to 1997,
industry revenues expanded at a compound annual growth rate, or CAGR, of
approximately 11.8%. The industry has expanded due to a number of factors,
including:
- A growing trend towards outsourcing facilities infrastructure services
driven by the following:
Customer Cost Savings and Focus. As companies continue to focus on their
core competencies, they continue to outsource non-core services to third
party providers. Outsourcing to facilities infrastructure services
providers allows customers to focus on their core competencies and
generate cost savings as third party providers generally perform these
services on a more cost efficient basis.
Increased Complexity. Technological innovations have increased the
complexity and technological sophistication of installing and maintaining
a facility's systems. As facility infrastructures increasingly rely on
advanced technology, Bracknell believes that facility owners will be
unable or unwilling to dedicate the resources necessary to maintain the
technical proficiency required to efficiently and cost effectively
install, upgrade and maintain systems in their facilities. Therefore,
many facility owners will continue to turn to facilities infrastructure
services providers. In addition, facilities infrastructure services
providers have developed competencies in fast track installations on
these complex systems, which reduces their customers' time to market and
facilities down time.
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- Significant growth in demand for facilities infrastructure services
driven primarily by the following:
High Growth Industries. The rapid growth of the telecommunications and
internet industries has increased the demand for highly specialized
facilities infrastructure services related to wireless infrastructure,
switching sites, data centers, in-premises telecommunications systems and
other facilities, by both these industries and their customers. As a
result, facilities infrastructure services providers are now required to
develop increasingly specialized skill sets to meet the unique needs of
these growing industries and their customers. The growth in these
industries is being driven by increased demand for services,
deregulation, accelerated outsourcing and consolidation of
telecommunications and internet companies. Multimedia Telecommunications
Association, an industry trade organization, expects telecommunications
support services revenues to grow at approximately 13.7% per annum over
the next three years.
Technological Obsolescence. The increased speed of technological
development has made, and will continue to make, existing and future
facilities' systems and related components, such as electrical,
mechanical, and HVAC systems, obsolete in a shorter period of time.
Bracknell believes companies will have to continually re-invest in their
systems to maintain their competitive position which will increase demand
for retrofit and upgrade services.
Cost Efficiency. Companies have and will continue to replace older,
inefficient systems due to the aging installed base of facilities and the
cost savings associated with installing new and efficient systems. In
addition, many facility owners are instituting periodic maintenance
procedures to enhance performance, prolong the life of systems and
minimize downtime. The desire to decrease operating costs is increasing
the need for upgrade, retrofit and maintenance services.
Economic Strength. The overall strength of the North American economy
has contributed to an increase in demand for facilities infrastructure
services.
The industry is highly fragmented and is primarily comprised of a large
number of relatively small, independent businesses with limited service
offerings serving discrete local markets. In addition, there are a small number
of regional or national operators with multiple locations, who offer a wide
range of services.
The facilities infrastructure services industry is rapidly changing as
companies are providing greater depth and more consistent quality of services
across larger geographical areas. This reflects the needs of an increasingly
greater number of customers with multiple locations that are seeking to
rationalize their suppliers. These customers are searching for single source
suppliers to provide a wide range of services at multiple locations. The driving
factors include:
- Customer Consolidation. Consolidation is increasing among many of the
industry's markets, including real estate, telecommunications,
technology, commercial and industrial.
- Consistent Quality. Consistently high quality facilities infrastructure
services across all of a company's facilities will improve the
consistency and quality of the company's products and services, which
they require in order to remain competitive.
- Single Source Efficiencies. As companies reduce the number of suppliers,
they increase their efficiency and decrease administrative and operating
costs.
MARKETS SERVED
Bracknell's organizational structure is focused on serving four customer
categories across many geographical markets. Historically, companies in the
facilities infrastructure services industry were structured to provide specific
services or to serve specific geographical markets. Bracknell's customer
category focus helps it to better serve all of its customer's needs by deepening
its industry and customer understanding and by strengthening customer
relationships.
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Each of Bracknell's customer categories has a president and marketing and
accounting teams responsible for developing customer relationships and improving
the financial performance of its customer category. Bracknell targets customers
in the following four customer categories:
- Telecommunications: Bracknell's telecommunications category develops and
maintains relationships with customers in the telecommunications sector,
including mobile wireless providers, fixed wireless providers, incumbent
local exchange carriers, competitive local exchange carriers and long
distance service providers. Customers in this category require facilities
infrastructure services for their critical use facilities, such as switch
sites, co-location facilities and wireless communications towers.
Bracknell also designs, installs and maintains in-premises
telecommunications and computer networking systems for a variety of
facilities through its other customer categories.
- Special Technology: Bracknell's special technology category develops and
maintains relationships with customers that have specialized,
technology-intensive facilities, such as data centers and server farms.
Bracknell targets facilities and industries which it believes have an
increasing demand for facilities infrastructure services. Bracknell
customers in this category demand specialized services and are in the
Internet, high technology manufacturing, financial services, hotel and
gaming and water and wastewater industries.
- Industrial: Bracknell's industrial category develops and maintains
relationships with companies in the general industrial and process
industries. Industries in this category include automobile, steel, oil
and gas, power, pharmaceuticals, food and paper and forest products. The
primary drivers of demand in this category are economic growth, sector
growth and technological innovation. Bracknell generally designs,
installs, upgrades and maintains electrical and mechanical systems for
customers in this category, such as industrial piping systems and new
process and manufacturing equipment.
- Commercial: Bracknell's commercial category develops and maintains
relationships with a broad range of customers, including general
contractors and facility owners. Bracknell provides facilities
infrastructure services for its customers' commercial facilities,
including office buildings, medical centers, institutional buildings,
warehouses and distribution centers.
The following table sets forth the total revenues of Bracknell broken down
by geographic market for the periods indicated:
NINE MONTHS ENDED
SEPTEMBER 30, 2000 1999 1998 1997
------------------ -------- -------- --------
US$ (DOLLARS IN THOUSANDS)
Canada................................. $302,692 $200,878 $208,207 $180,883
US..................................... 189,657 86,920 41,684 12,958
Other.................................. 2,973 5,306 23,482 3,550
SEASONALITY; FLUCTUATION OF QUARTERLY RESULTS
The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Bracknell's future operating results
may be affected by various trends and factors which must be managed in order to
achieve favorable operating results.
Bracknell operates throughout a number of states in the U.S. and across
Canada. During the winter months, demand for new installations is lower due to
weather conditions, holidays, customers' budgetary constraints and preferences,
and the effect of winter weather on external activities. Bracknell's service
business is not generally affected by inclement or winter conditions. The
commercial, special technologies and industrial segments of Bracknell's business
are less subject to seasonal weather trends, as generally this work is performed
inside structures protected from the weather. The telecommunications segment may
experience some seasonal variation due to weather, particularly in relation to
the installation, repair and maintenance of external telecommunications
infrastructure such as towers.
In addition, quarterly results may be affected by the timing of
acquisitions, variations in profit margins on different projects, and regional
economic conditions. Accordingly, Bracknell's operating results from any
particular quarter may not be an indication of the results that can be expected
for any other quarter or for the entire year.
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REGULATION
Bracknell's operations are subject to a variety of federal, state,
provincial, county and municipal laws, regulations and licensing requirements,
including licensing requirements applicable to electricians or other trades,
building and electrical codes, regulations relating to consumer protection,
regulations relating to worker safety and protection of the environment, labor
and employment, immigration, health and safety regulations. If Bracknell fails
to comply with applicable regulations, it may be subject to substantial fines or
revocation of its licenses. Changes in the laws, regulations and licensing
requirements which govern Bracknell and its customers may constrain its ability
to provide services to its customers or increase the cost of these services. In
addition, competitive pricing conditions in its industry may constrain its
ability to adjust its billing rates to reflect increased costs due to these
changes.
COMPETITIVE STRENGTHS
Management believes that Bracknell possesses a number of competitive
strengths that position it as a leading provider of facilities infrastructure
services within its customer categories. These strengths provide Bracknell with
the ability to increase profitability and expand its business in the future.
Expertise in Providing Specialized Services
Bracknell has developed an expertise in providing value-added specialized
services which include the following:
- utilizing Bracknell's sophisticated internal capabilities to design a
facility's systems in conjunction with Bracknell's installation
capabilities, referred to as "design/build" or "design/assist";
- designing, installing and maintaining systems for critical use
facilities, such as switching sites, wireless telecommunications towers,
co-location facilities, data centers and server farms;
- designing, engineering, installing and maintaining complex systems within
facilities, such as surveillance and security systems, uninterruptible
power and surge suppression systems, in-premises telecommunications and
computer networking systems, building management and fire protection
systems, lightning protection systems, high voltage distribution, energy
efficiency systems and instrumentation and controls for water and
wastewater management systems;
- providing fast-track installations; and
- developing preventative and predictive maintenance programs.
Bracknell believes that its high level of expertise in providing
specialized services gives it a competitive advantage. In addition, Bracknell's
involvement in the design stage of a facility allows it to more efficiently
provide services throughout the life cycle of that facility. Bracknell believes
there is increasing demand for these specialized services and that it is well
positioned to increase its revenues from providing these services.
Strong Customer Relationships
Bracknell has developed strong customer relationships by becoming an
integral part of the management of its customers' facilities. As a result
Bracknell believes it has become a preferred supplier to many of its customers.
For the fiscal year ended October 31, 1999, Bracknell estimates that it derived
approximately 74.0% of its pro forma revenues from repeat customers. Bracknell's
development of strong customer relationships is the result of the following:
- consistently striving to deliver quality services. For example, Bracknell
is a Q1 electrical and mechanical supplier to Ford in North America and
received the 1999 Outstanding Business Award from Toyota;
- structuring its organization around serving customer needs rather than a
geographic region or service offering;
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- an entrepreneurial culture which is focused on providing customer service
and exceeding customer expectations and allowing local management to
develop client relationships; and
- Bracknell's ISO 9002 certification in 10 of its locations.
Bracknell believes its strong customer relationships and breadth of service
offerings have positioned it to become a single source provider to its customers
and to provide recurring services, including upgrades and maintenance,
throughout the life cycle of their facilities.
Comprehensive Service Capabilities Throughout North America
Bracknell operates throughout North America, and has provided services in
37 states and nine provinces during the last three years. Bracknell has served
and will continue to serve new geographic regions to better serve its customers.
Bracknell also provides services to key geographic markets, including among
others Atlanta, Austin, San Diego and Las Vegas, which have experienced strong
economic growth and have a high concentration of customers in the growing
technology and telecommunications sectors. Bracknell's ability to provide
comprehensive services in multiple locations positions it better than those of
its competitors who provide only a limited range of services in limited
locations. In addition, Bracknell's North American service capabilities limit
its exposure to cyclical downturns in any one geographic region.
Experienced Management Team
Bracknell has compiled both strong corporate and operating management
teams. Bracknell's corporate management team provides it with strong leadership
and significant experience in successfully implementing growth strategies and
achieving improved operating and financial performance in large, publicly traded
and decentralized corporations. Previous experience of Bracknell's senior
management includes:
- Paul Melnuk, Chief Executive Officer
-- Chief Executive Officer of Barrick Gold Corporation, a leading
international gold-mining company
-- Chief Executive Officer of Clark USA, a large oil refining and
marketing company
-- President and Chief Executive Officer of The Horsham Corporation, a
publicly-traded investment holding company August , 2000
- Frederick C. Green IV, Chief Operating Officer
-- President and Chief Executive Officer of Nationwide Electric, Inc.
-- Vice President of Fisher-Rosemount Group of Emerson Electric
-- Engagement Manager for McKinsey & Company
- John Amodeo, Chief Financial Officer
-- Senior Vice President Finance and Chief Financial Officer of Molson
Breweries
In addition, Bracknell's operating management team has an average of
approximately 30 years of industry experience and established reputations for
managing successful operations in local markets.
Experience in Acquisition Integration
Collectively, Bracknell's management team has gained significant experience
over the last three years by acquiring and integrating 12 companies in its
industry. Since 1999, Bracknell has completed six acquisitions for a total
consideration of approximately $250 million, significantly increasing the scale
and scope of its operations. Bracknell has a comprehensive process in place to
evaluate, consummate and integrate acquisitions. Bracknell believes it has
removed a significant amount of integration risk due to:
- an extensive and disciplined screening process;
- pre-acquisition due diligence with extensive involvement from corporate
and operating management and advisors;
- a focus on larger acquisitions with considerable management depth and
significant financial and operating controls in place;
- the early identification of cross-selling opportunities prior to closing
acquisitions;
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- its ability to retain key employees from acquired companies; and
- an integration process, directed by senior management which focuses on
implementing cost savings and operational control initiatives.
Bracknell believes that its significant experience with acquisitions and
its comprehensive acquisition and integration process will facilitate the
successful completion of ongoing initiatives and the successful integration of
future acquisitions.
Decentralized Operating Structure
Each market Bracknell serves has different operating characteristics and
requires knowledgeable local or regional management. Bracknell has a
decentralized operating structure that allows local management to retain
responsibility for day-to-day operations. Bracknell believes its structure
fosters an entrepreneurial atmosphere that maintains high levels of customer
service, provides useful information on regional trends and creates new business
opportunities and services. Bracknell's decentralized operations are supported
at the corporate level with substantial operational and financial controls,
coordinated marketing efforts and long-term strategic planning. Bracknell
provides incentives to local management through both equity participation and
cash-based incentive programs. Bracknell believes that its decentralized
operating structure allows it to capitalize on local brand names, market
knowledge and customer relationships, while continuing to execute its overall
operating strategy.
Skilled, Scaleable Workforce
Bracknell has a skilled, scaleable workforce comprised mostly of unionized
tradespeople. Bracknell believes that the most skilled workforce in the industry
comes from the trade unions due to the skill and training required for
membership. In addition, Bracknell believes trade unions provide the most
readily available workforce for its industry due to their large, geographically
diverse membership and organized structure. Bracknell supplements the high skill
level of its workforce with its own training programs. In the event of an
increase or decrease in personnel requirements, Bracknell can scale its
workforce up or down.
BUSINESS STRATEGY
Bracknell is pursuing a strategy to achieve its goal of becoming the most
recognized and profitable facilities infrastructure services provider in North
America. Bracknell is focused on growing its business and enhancing financial
performance. Key elements of Bracknell's strategy include:
Focusing on High Growth Industries and Higher Margin Services
Bracknell believes its telecommunications and special technology customer
categories represent a significant opportunity for growth. For example,
Multimedia Telecommunications expects telecommunications support services
revenues to grow at approximately 13.7% per annum over the next three years. The
growth in those industries is increasing their demand for the higher margin,
specialized services that Bracknell has an expertise in providing. Bracknell's
acquisitions have been and continue to be focused on companies serving these
high growth sectors and Bracknell believes it is well positioned to increase
revenues from specialized services and achieve higher EBITDA margins.
Maintaining its Commitment to Serving Customer Needs
Bracknell will continue to focus on serving its customer needs. Bracknell's
organization is structured around serving customer categories, which it believes
will further increase its ability to:
- generate increased revenues through selling more services to existing
customers, expanding local customer relationships to multiple locations
and executing specific programs to capture recurring revenues;
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- improve the efficiency with which it delivers common services to
customers in the same customer category; and
- market its services to a broader range of customers within its customer
categories.
Continuing to Improve Operating and Financial Performance
Bracknell has implemented an operating and financial performance
improvement strategy. As part of the strategy, Bracknell has implemented
detailed strategic and business planning and monthly and quarterly reviews for
all of its operations. Adjusted EBITDA margins improved to 6.9% for the nine
months ended July 31, 2000, compared to 2.9% and 4.4% for the fiscal years ended
October 31, 1998 and October 31, 1999, respectively. Bracknell's earnings from
operations were $36.8, $3.7 and $6.7 million for the nine months ended July 31,
2000, and the years ended October 31, 1999 and 1998 respectively. Operating,
financing and investing cash inflows or (outflows) for the nine months ended
July 31, 2000 were ($43.1), $100.2 and ($89.3) million respectively. Operating,
financing and investing cash inflows or (outflows) for the year ended October
31, 1999 were $4.6, $41.8 and ($68.9) million respectively. Operating, financing
and investing cash inflows or (outflows) for the year ended October 31, 1998
were $9.6, ($1.5) and ($6.4) million respectively. Bracknell believes that it
will continue to improve its Adjusted EBITDA margins. Key elements of the
performance improvement plan include the following:
- Materials procurement: Bracknell has recently developed a disciplined
materials procurement program, which will lower its materials costs.
Bracknell believes this program has begun to generate savings and will
generate additional savings once fully implemented across recently
acquired companies;
- Project Management: Bracknell believes there is a significant
opportunity to improve labor efficiency through better project
management, implementing best practices and providing better training and
planning processes; and
- Job Selection: Bracknell focuses on providing services for projects with
higher margins. Bracknell's job selection process includes corporate
reviews for projects in excess of $5 million.
In addition, Bracknell has implemented improved billing and collection
procedures to reduce its required investment in working capital.
Retaining and Motivating Key Personnel
Bracknell has designed compensation and reward systems to provide
incentives to motivate key employees. The incentives for corporate management
include performance-based stock options, which have accelerated vesting based on
common share price performance. Bracknell also has performance based stock
option and employment agreements with key management of acquired companies that
provide them with significant incentives to remain with Bracknell. In addition,
Bracknell often structures acquisition consideration to include earn-outs based
on operating and financial performance. It is Bracknell's objective to maintain
a highly trained and motivated workforce in order to continue to deliver quality
services. Bracknell offers its employees several incentives, including stock
options, comprehensive training, employee benefits, an employee share purchase
plan and modern tools and equipment.
Pursuing Strategic Growth Opportunities
Bracknell believes it can continue to grow revenues internally by focusing
on high growth industries, offering services on a North American basis and
becoming a single source provider to its customers. Revenues, excluding the
effect of acquisitions, grew 16.7% from the nine months ended July 31, 1999 to
the nine months ended July 31, 2000. Bracknell intends to augment its internal
growth by continuing to selectively acquire large and established companies that
have strong financial and operating controls in place, provide a strategic
opportunity to Bracknell, and have a management team with a similar strategic
focus that is committed to ensuring the successful integration and growth of the
business.
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In considering those operations of Able that Bracknell intends to maintain
as continuing operations, Bracknell's management believes that Able's
capabilities complement Bracknell's expertise in critical use telecom facilities
and in deploying network infrastructure within buildings. The merger also
provides Bracknell with a platform for new growth in the long haul and local
loop fiber optic deployment markets, and brings a number of important new
customers to Bracknell. Able's subsidiary, Adesta Communications, is
particularly considered by Bracknell to be a leading network infrastructure
services and development company, with a depth of management demonstrating a
strategic focus in the telecommunications marketplace, and a culture that is
consistent with the culture throughout Bracknell.
SERVICES
Through its skilled workforce and geographically diverse operations,
Bracknell designs and installs systems for new facilities, upgrades and
retrofits existing systems and provides long-term and on-call maintenance and
repair.
Electrical and Mechanical Systems
Bracknell provides a broad range of services for electrical and mechanical
systems:
- lighting and power systems;
- manufacturing and processing equipment;
- HVAC systems;
- plumbing and industrial process piping systems;
- pneumatic and electrical control systems; and
- general millwright and rigging.
New installation and upgrade and retrofit projects have historically begun
with a request for a bid from an owner or general contractor with respect to
design specifications. However, Bracknell is increasingly working closely with
its customers to incorporate its technical capabilities in the design of the
systems it installs. Through its project management and planning processes,
Bracknell schedules the installation of the required systems and generally
provides the materials it installs. In addition, in certain circumstances
Bracknell also pre-fabricates the materials to be used in the installation.
Maintenance and Repair Services
Bracknell supplies its maintenance services on both a long-term and on an
on-call basis. These services generally provide recurring revenues and
relatively higher margins that are independent of new installations. Bracknell
has entered into arrangements with certain customers whereby its personnel
remain on-site at the customer's premises to provide long-term maintenance
services. Bracknell believes that a continuous, on-site presence provides it
with a preferred position to obtain opportunities for upgrade or retrofit
projects from its customers.
Bracknell's on-call maintenance services are initiated when a customer
requests repair service or it calls the client to schedule periodic maintenance.
Service technicians are scheduled for the call or routed to the customer's
business by a dispatcher. Service personnel operate out of Bracknell's service
vehicles, which carry an inventory of equipment, tools, parts and supplies
needed to complete a variety of jobs. The technician assigned to a service call
travels to the business, interviews the customer, diagnoses the problem,
prepares and discusses a price quotation, and performs the service.
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Specialized Services
Bracknell offers specialized services that differentiate it from
competitors and that typically provide higher margins. Specialized services
include the following:
- utilizing its sophisticated internal capabilities to design a facility's
systems, in conjunction with its installation capabilities;
- designing, engineering, installing and maintaining electrical and
mechanical systems for critical use facilities, such as switching sites,
wireless communications infrastructure, co-location facilities, data
centers and server farms;
- designing, engineering, installing and maintaining complex systems within
facilities, such as surveillance and security systems, uninterruptible
power and surge suppression systems, in-premises telecommunications and
computer networking systems, building management and fire protection
systems, lightning protection systems, high voltage distribution, energy
efficiency systems and instrumentation and controls for water and
wastewater management systems;
- providing fast-track installations; and
- developing preventative and predictive maintenance programs.
Wireless Communications Infrastructure Services
Bracknell develops, installs and maintains wireless communications
infrastructure for wireless communications towers and building systems.
Bracknell also supplies a range of technical services, focused on the design,
installation, commissioning and maintenance of microwave equipment and systems.
Bracknell's expertise spans a range of wireless technologies, including
cellular, personal communication systems, local multi-point distribution
systems, multi-channel multi-point distribution systems, microwave, trunking and
wireless internet. Bracknell's broad range of wireless communications
infrastructure services is supported by significant experience which stems from
designing and building over 2,000 wireless sites, including installing wireless
sites for entire urban markets. Bracknell can build and service structures of up
to 900 feet in height. Bracknell can also design a wide range of wireless
facilities, including rooftop infrastructure and towers and has the capability
to provide stamped engineering drawings in most jurisdictions.
Switching Sites and Co-location Facilities
Bracknell provides a full range of facilities infrastructure services for
the critical use facilities of telecommunications companies. Bracknell
engineers, furnishes, installs and maintains network equipment and related
components for use in the switching sites and co-location facilities of
telecommunications companies. Bracknell also provides site location and
specialized services such as uninterruptible power and surge suppression systems
for these facilities.
In-premises Telecommunications and Computer Networking Systems
Bracknell provides interior wiring and data cabling services which include
the installation, engineering and maintenance of communications networks in a
variety of facilities. Bracknell's services include the establishment and
maintenance of computer operations, telephone systems, local area networks and
wide area networks, Internet access and systems for monitoring environmental
controls or security procedures.
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CUSTOMERS AND MARKETING
Bracknell has built a diverse customer base in each of its four customer
categories. Bracknell's customers are generally either the owners of the
facilities or general contractors that have been hired by the facility owners to
co-ordinate the installation, upgrade or maintenance of the facility. The
following are some of the end-user customers for which Bracknell performs its
services:
- In its Telecommunications category, Bracknell has provided services to:
AT&T, Clearnet, Microcell, Cable & Wireless, MCI Worldcom, Premier
Communications, TriVergent Communications and B.C.Telus.
- In its Special Technology category, Bracknell has provided services to:
AOL, E*Trade, Dell, Motorola, Intel, PSInet, Park Place Entertainment,
Caesars World and MGM Grand.
- In its Industrial category, Bracknell has provided services to: Ford,
General Motors, Toyota, DaimlerChrysler, Merck, Colgate-Palmolive,
Procter & Gamble and Dofasco.
- In its Commercial category, Bracknell has provided services to: Bell
South, Target, ADC Telecommunications, The Southern Company, Wells Fargo,
Nokia, Gateway, BF Goodrich Aerospace and Novartis.
Bracknell markets to its customers using its distinctive knowledge,
technical capabilities, reputation for service, staffing flexibility and
geographic reach. Bracknell is committed to developing long-term relationships
with customers and to becoming partners in the successful installation,
operation and maintenance of its customers' facilities, equipment and
infrastructure. Bracknell's goal is to be involved over the total life cycle of
the facility.
Bracknell has strong relationships with a number of large customers.
However, Bracknell's strategy is to maintain a high level of diversification in
its customer base. In fiscal 1999, no customer represented more than 7.0% of
Bracknell's revenues on a pro forma basis. The following is a list of
Bracknell's largest customers and their contribution to its 1999 pro forma
revenue, including Able:
CUSTOMER CUSTOMER CATEGORY REVENUE
- -------- ------------------ --------------
(IN THOUSANDS)
New Jersey Consortium................................ Able $78,515
WorldCom............................................. Able 61,636
Ford................................................. Industrial 57,277
Williams Communications, Inc......................... Able 49,621
America Online (AOL)................................. Special Technology 40,463
Dofasco.............................................. Industrial 27,960
AK Steel............................................. Industrial 21,019
E Trade.............................................. Special Technology 18,591
State Farm........................................... Special Technology 14,717
Park Place Ent. ..................................... Special Technology 13,744
Bracknell generates new business for installation, upgrade, retrofit,
repair and maintenance of facilities either through a pre-existing exclusive
arrangement, a competitive bidding process or a negotiated process. In a
competitive bidding process, the facilities are designed or redesigned by
engineers and architects working for the owner or the owner's agent. When the
design is completed, Bracknell submits a proposal for the project and,
generally, the lowest bidder is awarded the contract. The negotiated bid process
is generally conducted among a pre-selected group of service providers. The
service providers are usually selected based upon prior performance and
reputation. Although the chosen proposal under a negotiated bid process is
typically influenced by the proposed price, other factors, including design and
reputation, are taken into consideration.
Bracknell believes it is often able to ensure that it is included in a
negotiated bid process or is awarded an exclusive assignment by providing design
assistance to its customers before and during the development of the facility.
While price might still be a consideration when awarding a proposal, Bracknell
believes that it often gains an advantage in the process by providing design
assistance.
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Bracknell usually prices its services on either a fixed price or a
cost-plus basis. Under a fixed price contract, Bracknell sets a cost for the
project up-front based on a total cost or a per unit cost. Bracknell's ability
to complete the project for less than the fixed contract price determines its
profit or loss. Under a cost-plus contract, Bracknell generally contracts to
receive a certain percentage profit over the materials and labor costs of the
project. The cost-plus contract exposes Bracknell to less risk than a fixed
price contract.
COMPETITION
The facilities infrastructure services industry is highly fragmented and
competitive. Bracknell generally operates in segments of the industry where it
can add value to its customers' facilities and differentiate itself from its
competitors. Most of Bracknell's competitors are small, owner-operated companies
that typically service a limited geographic area. In the future, competition may
be encountered from new entrants, such as multi-trade or specialty contractors,
public utilities and other companies attempting to consolidate facilities
infrastructure services companies.
Bracknell generally competes based upon the quality, cost and timeliness of
its work, its safety record and the quality and expertise of its workforce.
Bracknell believes that its strong past performance in these areas has allowed
it to develop a strong reputation, upon which it is able to generate repeat and
new business. Bracknell is able to compete against many of its smaller
competitors based upon its ability to provide its customers with a full
portfolio of service offerings and its ability to perform work throughout North
America. In addition, Bracknell is able to compete for business from its
telecommunications and special technology customers based upon its ability to
execute significant and complex projects, and its experience in executing
similar projects in the past.
EMPLOYEES
Bracknell has approximately 760 office employees and approximately 4,750
field employees. The number of field employees fluctuates depending upon the
number and size of the projects undertaken at any particular time. Bracknell
does not anticipate any overall reductions in staff as a result of the
integration of recently acquired companies, although there may be some job
realignments and new assignments in an effort to eliminate overlapping and
redundant positions.
As of April 28, 2000, approximately 96% of Bracknell's field workforce was
unionized. Bracknell's subsidiaries that employ union labor are signatories to
master collective bargaining agreements, as well as to local agreements. The
majority of the collective bargaining agreements contain provisions which
prohibit work stoppages, slow-downs or strikes, even during specified
negotiation periods relating to agreement renewal, and provide for binding
arbitration dispute resolution in the event of prolonged disagreement. Bracknell
has not experienced any significant strikes, work stoppages or slow-downs in the
past five years. Collective bargaining agreements are typically for three-year
terms and expire at various times. These collective bargaining agreements have
varying terms and expiration dates. Given the number of trades under separate
collective bargaining agreements and the number of local bargaining units
throughout the United States and Canada, generally one third of the collective
bargaining agreements are under negotiation or set to expire within one year.
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EQUIPMENT AND FACILITIES
Bracknell owns and leases premises for administrative offices and
warehousing facilities. Bracknell currently owns three properties in Windsor,
Ontario, Saint John, New Brunswick and Surrey, British Columbia. All other
facilities are leased at market rates with adequate size and flexibility to
accommodate future growth.
LESSEE ADDRESS LESSOR
- ------ ------- ------
Bracknell Corporation 150 York St., Suite 1506, Medcan Health Management
Toronto, ON
The State Group Limited 1100 Invieta Dr., Unit 17, Dalemont Inc.
Oakville, ON
The State Group Limited 77 Bessemer Rd., London, ON Z Realty Co. Ltd.
The State Group Limited 11 Cushman Rd., St. Covello Carmine Annes
Catharines, ON
The State Group Limited 60 Martin Ross Ave., Toronto, Larry Levenstein
ON
The State Group Limited 583 Barton St. E., Stoney Carol & Antonietta Martella
Creek, ON
The State Group Limited 2150 Islington Ave., Monogram Place Investments
Etobicoke, ON
The State Group Limited Monogram Place Sign Neon Products
The State Group Limited Airport Ind. Pkwy., #800, Kiew Investment Corp.
Breslau
The State Group Limited 245 Strassburg Rd., Kitchener, Doyle Investments
ON
The State Group Limited 32131 Industrial Rd., Livonia, SIJL Development Co.
MI
The State Group Limited Evansville, IN Long Par Four Revocable Trust
The State Group Limited P.O. Box 4530, Evansville, IN Dan Buck Development
The State Group Limited 1574 Erin St., Winnipeg M. Kaufmann & M. Thompson
The State Group Limited 155 Leonard St., Regina TGS Management Services Ltd.,
In Trust, Sun Life Assurance
Co.
The State Group Limited 855 Industrial Ave., Ottawa, Commerce City Rental
ON
The State Group Limited 3430 -- 25 St. N.E., Calgary, Beutel Goodman Real Estate
AB
The State Group Limited 17620 -- 107 Ave., Edmonton, HMR Properties Inc.
AB
The State Group Limited 7945 Henri Bourassa, Montreal, Mayor Investment
QC
The State Group Limited 32 Voyager Crt., Etobicoke, ON Cole Investment Ltd.
The State Group Limited 1735 Boundary Place, Boundary Place
Vancouver, BC
The State Group Limited 2 -- 4 Cataraqui St., Unit ABNA Investments Ltd.
15B, Kingston, ON
The State Group Limited 2342 Wyecroft Rd., Oakville, B & D Wilkinson Holdings Inc.
ON
The State Group Limited 3895 Stadeview Cr., Unit 7, Erin Mills Development
Mississauga, ON Corporation
The State Group Limited 200 Wright Ave., Unit 1, Park Place Investments Ltd.
Dartmouth, NS
The State Group Limited 35 Goderich Rd., Unit 8, Stocktex International
Hamilton, ON
The State Group Limited 13800 State Road 57 North, Daylight Properties LLC
Evansville, IN
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LESSEE ADDRESS LESSOR
- ------ ------- ------
The State Group Limited 280 Woolrich St. South, Krew Investments Corporation
Breslean, ON
The State Group Limited 302-195 The West Mall, Oxford Properties Group Inc. &
Etobicoke, ON Patria Properties Inc.
The State Group Limited 3995 Stadeview Cres., Unit 7, The Erin Mills Development
Mississauga, ON Corporation
The State Group Limited 332 Jones Road North, Unit 7,
8 & 9, Stoney Creek, Ontario
Parsons Electric Co. 1140 Floyd Dr., Lexington, KY Henderson Family Enterprises
Parsons Electric 4502 Poplar Level Rd., Henderson Family Enterprises
Louisville, KY
Eagle Electrical Holdings, 4391 Creek Rd., Blue Ash, OH Henderson Family Enterprises
Inc.
Allison Smith Co. 2284 Marietta Blvd. N.W., Harmony Hills Partners, LP
Atlanta, GA
Parsons Electric Co. 5960 N.E. Main St., Fridley, Donald D. Dolen & Sharon A.
MN Dolan
Nationwide Electric, Inc. 333 South Seventh St., Suite Cosgrove, Flynn & Gaskins
(sub-lessee) 2800, Minneapolis, MN (sub-lessor)
Neal Electric, Inc. 13250 Kirkham Way, Poway, CA CWTN Associates, LLC
Neal Electric, Inc. 1235 Greenfield Dr., El Cajon, 1235 Greenfield Drive
CA Associates, LLC
Southwest Systems Ltd. 6265 South Valley View Dr., Koll Business Center, LLC
Suites L & M, Las Vegas, NV
Sylvan Industrial Piping of 317 Wilhagen Rd., Nashville, Thomas M. Morrissey
Tennessee, Inc. TN
Sylvan Industrial Piping of 1001 State St., Perty Ambey, John D. Morrissey
NJ, Inc. NJ Michael L. Morrissey
Sylvan Industrial Piping, Inc. 815 Auburn Ave., Pontiac, MI
Sylvan Industrial Piping, Inc. 211 Ridge Rd., Georgetown, SC
Bracknell Telecommunications 6300 Northwest Dr., Unit B, Canberra Packard Canada Ltd.
Services, Inc. (sub-lessee) Mississauga, ON
Highlight Construction Ltd. 11218/11220 -- 143 St., 394646 Alberta Ltd.
Edmonton
Highlight Construction Ltd. 20108 Logan Avenue, Langley, Joseph Tecklenborg
BC
Vista Communication 11208 -- 143 St., Edmonton 394646 Alberta Ltd.
Technologies Ltd.
Highlight Antenna & Tower 190 Hodsman Rd., Regina Larmer Properties, Inc.
Services Ltd.
Highlight Solutions, Inc. 24701 Halstead Rd., Farmington TJP Properties, LLC
Hills, MI
Highlight Solutions, Inc. 24711 Halstead Rd., Farmington TJP Properties, LLC
Hills, MI
Quality Mechanical 3175 Westwood Dr., Las Vegas, J&H Spilsbury Investments
Contractors, Inc. NV
Inglett & Stubbs, Inc. 5200 River View Rd., Mableton, River Cobb Associates, LLC
GA
Quality Mechanical Mesa Vista, Clark County, NV Nevada State Dept. of
Contractors, Inc. Transportation
Quality Mechanical 3135 Westwood Dr., Las Vegas, Jerry Spilsbury
Contractors, Inc. NV
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LESSEE ADDRESS LESSOR
- ------ ------- ------
Schmidt Electric Company, Inc. 9701 F.M. 1625, Creedmor, TX Bobby Schmidt
Crouch Electric, Inc. 1106 Smith Rd., Austin, TX Smith Road, LLC
Sunbelt Integrated Trade B-102, 6655 West Sahara Ave., North Wind of Las Vegas, LLC
Services Las Vegas, NV
Quality Mechanical Contractor, Highland Drive, Las Vegas, NV TBS Highland Properties
Inc.
Bracknell operates a fleet of owned and leased service trucks, vans and
support vehicles. Bracknell believes that these vehicles are generally
well-maintained and adequate for its present operations. New vehicles are
procured through a national fleet leasing vendor on financially advantageous
terms.
LEGAL PROCEEDINGS
Bracknell is, from time to time, a party to legal proceedings arising in
the normal course of business operations. Such proceedings often relate to bids
on construction contracts or employee matters. Bracknell is not party to any
legal proceedings the resolution of which it expects to have a material adverse
effect on its business, financial condition or results of operations.
On September 24, 1999, Bracknell entered into an agreement with NKK Steel
Engineering, Inc. relating to the installation of electrical and mechanical
systems for the construction of a continuous galvanizing process facility
located at the site of National Steel Corporation Great Lakes Division in
Ecorse, Michigan. On February 6, 2000, NKK Steel terminated this agreement. On
April 6, 2000, Bracknell filed a claim of lien against NKK Steel Engineering
Inc. for approximately $25 million representing portions due to Bracknell and
various subcontractors. Legal actions were commenced in May 2000 by both
Bracknell and NKK Steel in respect of the termination of the agreement but no
monetary amounts have been specified by either party. In NKK Steel's claim, they
allege, among other things, that Bracknell breached the agreement. In
Bracknell's proceedings, it claimed, among other things, that NKK Steel breached
the agreement, unjust enrichment, misrepresentation and violations under the
Michigan Building Contract Fund Act. Bracknell believes there is merit to its
claim for wrongful termination of the agreement and that it has substantive
defenses to NKK Steel's claim against it. Based on the advice of counsel and
Bracknell's investigations, Bracknell believes that the results of these
proceedings will not have a material adverse effect on Bracknell. See "Risk
Factors -- Costs and Estimated Earnings in Excess of Billings on Uncompleted
Contracts".
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MANAGEMENT -- BRACKNELL
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following chart summarizes some important information about the
directors and officers of Bracknell. The present term of each director will
expire immediately prior to the election of directors at the next annual meeting
of Bracknell shareholders.
NAME AGE POSITION
- ---- --- --------
Gilbert S. Bennett........................ 62 Chairman
Paul D. Melnuk............................ 46 Chief Executive Officer and Director
Frederick C. Green IV..................... 43 Executive Vice President and Chief Operating Officer
John D. Amodeo............................ 39 Executive Vice President and Chief Financial Officer
Jonathan J. Taylor........................ 38 Executive Vice President
John R. Naccarato......................... 33 Corporate Counsel and Secretary
Wade C. Lau............................... 39 Director
James W. Moir, Jr. ....................... 55 Director
Gregory J. Orman.......................... 31 Director
Allan R. Twa.............................. 53 Director
Michael Hanna............................. 48 Director
Jean Rene Halde........................... 52 Director
Gilbert S. Bennett. Mr. Bennett has been a director of Bracknell since
November 1994 and serves as Chairman of the Board. Currently, Mr. Bennett is
also Chairman of the Board of Canadian Tire Corporation, Limited. He also serves
as a director of Canadian Niagara Power Company Limited, Air Nova Limited,
Fortis Inc., and several private companies and is a member of the Board of
Governors of The University of Guelph. Mr. Bennett also provides business
consulting services.
Paul D. Melnuk. Mr. Melnuk has been a director of Bracknell since November
1994 and has been Bracknell's Chief Executive Officer since March 1999. Prior to
his present position, Mr. Melnuk was President and Chief Executive Officer of
Barrick Gold Corporation from 1998 to 1999 and President and Chief Executive
Officer of Clark USA Inc. from 1992 to 1998.
Fredrick C. Green IV. Mr. Green has been an Executive Vice President and
the Chief Operating Officer of Bracknell since September 1999. Prior to his
current employment, Mr. Green was the President and Chief Executive Officer of
Nationwide Electric, Inc. from 1998 to 1999, the President and Chief Executive
Officer of Product Safety Resources, Inc. from 1996 to 1998, the President and
Chief Operating Officer of Plum Building Systems, Inc. in 1996 and held several
executive roles with the Fisher-Rosemount Group of Emerson Electric from 1988 to
1996.
John D. Amodeo. Mr. Amodeo has been an Executive Vice President and the
Chief Financial Officer of Bracknell since August 1999. Prior to his current
employment, Mr. Amodeo was the Senior Vice President, Finance and Chief
Financial Officer of Molson Breweries from 1998 to 1999 and held other executive
positions at Molson from 1989 to 1998.
Jonathan J. Taylor. Mr. Taylor has been an Executive Vice President of
Bracknell and the President of Clientech Management Services, Inc. since April
1995. In addition, Mr. Taylor was the President and Chief Executive Officer of
ProFac Facilities Management Services Inc.
John R. Naccarato. Mr. Naccarato has been the Corporate Counsel and
Secretary of Bracknell since May 1999. Prior to his current employment, Mr.
Naccarato was the Assistant to the Corporate Secretary at Dofasco Inc. from June
1997 to May 1999.
Wade C. Lau. Mr. Lau has been a director of Bracknell since December 1999.
Mr. Lau is a Vice-President of Opus Properties LLC. Prior to his current
employment, Mr. Lau was Executive Managing Director of CB Richard Ellis from
1998 to 1999, Executive Vice President of CB Commercial Koll Management Services
from 1996 to 1998, and Executive Vice President of Shelard, Inc. from 1993 to
1996.
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James W. Moir, Jr. Mr. Moir has been a director of Bracknell since April
1997. Mr. Moir is a Professional Corporate Director. Mr. Moir retired on October
15, 1998 as President and Chief Executive Officer of Maritime Medical Care Inc.
(a health services corporation).
Gregory J. Orman. Mr. Orman has been a director of Bracknell since
September 1999. Mr. Orman is also the President of KLT Inc. Prior to his current
employment, Mr. Orman was President of KLT Energy Services from 1996 to 2000,
Chairman of Nationwide Electric, Inc. from 1998 to 1999, Chief Executive Officer
and President of Custom Energy LLC from 1997 -- 1999, and Chief Executive
Officer of Environmental Lighting Concepts from 1994 to 1997.
Allan R. Twa. Mr. Twa has been a director of Bracknell since August 1985.
Mr. Twa is also a partner with the law firm of Burnet, Duckworth & Palmer.
Michael Hanna. Mr. Hanna has been a director of Bracknell since March
2000. Mr. Hanna is currently a professional director and management consultant.
Mr. Hanna was the Chief Executive Officer and Chairman of Sunbelt from November
1998 to March 2000, when Sunbelt was acquired by Bracknell. Prior to that, Mr.
Hanna was the Executive Vice President of Louisiana-Pacific Corporation from
1996-1998 and the President of Associated Chemists Inc. from 1990-1996.
Jean Rene Halde. Mr. Halde has been a director of Bracknell since June
2000. Mr. Halde has been the President and CEO of Livingston Group Inc. since
January 1995. Livingston Group Inc. is a privately held holding company. From
1987 to 1994, Mr. Halde was President and CEO of Culinar Inc.
SUMMARY COMPENSATION
For the fiscal year ended October 31, 2000, Bracknell paid approximately
$1,984,970 to its executive officers and directors for services rendered in all
capacities.
DIRECTORS' COMPENSATION
With the exception of Mr. Bennett who, as Chairman of the Board, receives
$33,472 per annum, each director who is not a salaried employee of Bracknell or
any of its subsidiaries is entitled to be paid $10,042 per annum plus $669 per
meeting attended, including meetings of any committee of the board. In addition,
directors are eligible to receive discretionary grants of stock options pursuant
to Bracknell's stock option plan.
EXECUTIVE COMPENSATION
The following table sets out all annual and long-term compensation for
services in all capacities to Bracknell and its subsidiaries for the financial
years ended October 31, 2000, 1999 and 1998 in respect of each of the
individuals who were the Chief Executive Officer, and the four other most highly
compensated executive officers of Bracknell during the fiscal year ended October
31, 2000. Although compensation is paid in Canadian dollars, to be consistent
with Bracknell's practice of reporting in U.S. dollars, all amounts set out in
the Summary Compensation Table are stated in U.S. dollars.
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SUMMARY COMPENSATION TABLE(1)
LONG-TERM COMPENSATION
------------------------------------
AWARDS PAYOUTS
------------------------ ---------
ANNUAL COMPENSATION SECURITIES RESTRICTED LONG TERM
------------------------------------ UNDER SHARES OR INCENTIVE
OTHER ANNUAL OPTIONS/ RESTRICTED PLAN ALL OTHER
FISCAL SALARY BONUS COMPENSATION(3) SARS SHARE UNITS PAYOUTS COMPENSATION(4)
NAME AND PRINCIPAL POSITION YEAR (US$) (US$)(2) (US$) GRANTED (US$) (US$) (US$)
- --------------------------- ------ ------- -------- --------------- ---------- ----------- --------- ---------------
Paul D. Melnuk........... 2000 301,245 0 0 0 0 0 0
President and Chief 1999 201,380 163,342 0 600,000 0 0 10,775
Executive Officer(5) 1998 -- -- -- -- -- -- --
Jonathan Taylor.......... 2000 152,623 67,344(9) 0 0 0 0 0
Executive Vice President 1999 139,160 150,623 0 130,000 0 0 9,037
President, Clientech 1998 87,498 139,348 0 0 0 0 6,518
Management Services Inc.
John Naccarato........... 2000 117,851 -- 0 100,000 0 0 0
Corporate Counsel and 1999 39,817 78,453 0 40,000 0 0 4,369
Secretary(6) 1998 -- -- -- -- -- -- --
John Amodeo.............. 2000 152,623 -- 0 0 0 0 0
Executive Vice President 1999 37,553 60,116 0 200,000 0 0 9,037
and Chief Financial 1998 -- -- -- -- -- -- --
Officer(7)
Frederick C. Green IV(8).. 2000 200,000 0 0 0 0 0 0
Executive Vice President 1999 -- -- -- 150,000 -- -- --
Chief Operating Officer 1998 -- -- -- -- -- -- --
- ---------------
Notes:
(1) Compensation is paid in Canadian dollars. The rates of exchange used to
convert U.S. dollars to Canadian dollars are: 1998: 1.54; 1999: 1.49; 2000:
1.49.
(2) Bonuses for the fiscal year 2000 have not yet been determined.
(3) Perquisites and other personal benefits do not exceed the lesser of $33,472
(Cdn. $50,000) and 10% of the total of the annual salary and bonus for any
of the named executive officers.
(4) Amounts referred to in this column reflect the amounts contributed by
Bracknell to defined contribution pension plans, registered retirement
savings plans and life insurance premiums paid by Bracknell.
(5) Mr. Melnuk became an employee of Bracknell on March 1, 1999. The bonus
payment reflects that portion of the calendar year-end bonus of $244,343,
prorated to October 31, 1999.
(6) Mr. Naccarato became an employee of Bracknell on May 17, 1999. The bonus
payment reflects that portion of the calendar year-end bonus of $107,109,
prorated to October 31, 1999. In December, 1999, Mr. Naccarato was also
granted 100,000 performance options.
(7) Mr. Amodeo became an employee of Bracknell on August 1, 1999. The bonus
payment reflects that portion of the calendar year-end bonus of $100,415,
prorated to October 31, 1999.
(8) Mr. Green became an employee of Bracknell on September 30, 1999.
(9) Mr. Taylor received a special bonus on the sale of Profac Facilities
Management Services, Inc.
EMPLOYMENT AGREEMENTS
Paul D. Melnuk
Bracknell has entered into an employment agreement with Paul D. Melnuk
effective as of March 2, 1999. Under the terms of this agreement, Mr. Melnuk
receives a salary of $301,245 per annum and is entitled to a yearly cash
incentive bonus, at the discretion of the board, targeted at 100% of his salary.
Mr. Melnuk also received an initial grant of 300,000 stock options which will
vest in three equal tranches over three years. In addition, Mr. Melnuk has been
given an additional grant of 300,000 stock options which will vest in seven
years. Conditionally, these options will vest in three equal tranches over three
years, so long as Bracknell's shareholders experienced at least a 20% annual
return in each of the three years from the date of grant.
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Upon the termination of Mr. Melnuk's employment by the board other than for
cause, he will be entitled to receive 30 months total compensation in lieu of
notice, total compensation comprising base salary, benefits, and bonus equal to
the average cash incentive bonus received by Mr. Melnuk over the two preceding
years.
John D. Amodeo
Bracknell has entered into an employment agreement with John D. Amodeo,
effective as of August 1, 1999. Under the terms of this agreement, Mr. Amodeo
receives a salary of $150,623 per annum and is entitled to a yearly cash
incentive bonus, at the discretion of the board, targeted at 100% of his salary
for achieving expected levels of performance. Mr. Amodeo also received an
initial grant of 100,000 stock options which will vest in equal tranches over
three years, commencing on the date of employment. In addition, Mr. Amodeo has
been given an additional grant of 100,000 stock options which will vest in seven
years. Conditionally, these options will vest in three equal tranches over three
years, so long as Bracknell's shareholders experienced at least a 20% annual
return in each of the three years from the date of grant.
Upon the termination of Mr. Amodeo's employment other than for cause, he
will be entitled to receive 12 months total compensation in lieu of notice,
total compensation comprising base salary, benefits, and bonus equal to the
average cash incentive bonus received by Mr. Amodeo over the two preceding
years. If a change in control of Bracknell results in the termination of Mr.
Amodeo's employment, then Mr. Amodeo will be entitled to receive 24 months total
compensation in lieu of notice.
John R. Naccarato
Bracknell has entered into an employment agreement with John R. Naccarato,
effective as of January 1, 2000. Under the terms of this agreement, Mr.
Naccarato receives a salary of $117,151 per annum and is entitled to a yearly
cash incentive bonus, at the discretion of the board, targeted at 100% of his
salary for achieving expected levels of performance. Mr. Naccarato also received
an initial grant of 40,000 stock options which will vest in equal tranches over
three years, commencing on the date of employment. In addition, Mr. Naccarato
has been given an additional grant of 100,000 stock options, which will vest in
seven years. Conditionally, these options will vest in three equal tranches over
three years, so long as Bracknell's shareholders experienced at least a 20%
annual return in each of the three years from the date of grant.
Upon the termination of Mr. Naccarato's employment other than for cause, he
will be entitled to receive 12 months total compensation in lieu of notice,
total compensation comprising base salary, benefits, and bonus equal to the
average cash incentive bonus received by Mr. Naccarato over the two preceding
years. If a change in control of Bracknell results in the termination of Mr.
Naccarato's employment, then Mr. Naccarato will be entitled to receive 24 months
total compensation in lieu of notice.
Frederick Green IV
Bracknell has entered into an employment agreement with Frederick Green IV,
effective as of September 30, 1999. Under the terms of this agreement, Mr. Green
receives a salary of $200,000 per annum and is entitled to a yearly cash
incentive bonus, at the discretion of the board, targeted at 100% of his salary
for achieving expected levels of performance.
Mr. Green was previously employed as the President and Chief Executive
Officer of Nationwide, prior to its acquisition by Bracknell. As a result of the
change of control of Nationwide, Mr. Green is entitled to give notice of his
termination of employment up to September 30, 2000, following which he shall be
entitled to receive his compensation comprising salary and benefits through
April, 2001.
Mr. Green also received a grant of 150,000 stock options which will vest in
seven years. Conditionally, these options will vest in three equal tranches over
three years, so long as Bracknell's shareholders experienced at least a 20%
annual return in each of the three years from the date of grant.
Upon the termination of Mr. Green's employment other than for cause, he
will be entitled to receive 12 months total compensation in lieu of notice,
total compensation comprising base salary, benefits, and bonus equal to the
average cash incentive bonus received by Mr. Green over the two preceding years.
If a change in
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control of Bracknell results in the termination of Mr. Green's employment, then
Mr. Green will be entitled to receive 24 months total compensation in lieu of
notice.
Mr. Green received an interest-free loan from Nationwide in the amount of
$150,000, prior to the acquisition of Nationwide. The loan was provided pursuant
to Mr. Green's previous employment agreement under which he agreed to not
compete with Nationwide after expiration or termination of his employment.
STOCK OPTION AND PURCHASE PLANS
Stock Option Plan
Bracknell maintains a stock option plan which is administered by the board.
Eligibility for participation under the stock option plan is limited to
directors, officers and other key employees of Bracknell and its subsidiaries.
The number of common shares of Bracknell that may be optioned at any time is
limited to 4,280,344 in total and, with respect to any one participant in the
stock option plan, to 5% of the aggregate number of issued and outstanding
common shares, on a non-diluted basis, at such time. The exercise price in
respect to any option issued under the stock option plan is required to be fixed
by the board and may not be less than the closing price of the common shares on
the day prior to the day on which the option is granted.
Options issued under the stock option plan may be exercised during a period
determined by the board, which may not exceed ten years. All options granted
under the stock option plan are non-assignable. Other than in the circumstances
described below or as otherwise set out in the stock option plan, the stock
option plan provides that options terminate three months after (1) the
termination of the participant's employment for any reason, including by reason
of the death of a participant, and (2) in the case of a participant who is a
director of Bracknell, the date on which such participant ceases to be a
director. Options issued under the stock option plan expire immediately upon the
termination of the participant's employment by Bracknell, or, where applicable,
its subsidiary, for cause or upon the voluntary resignation of the participant.
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During the fiscal year ended October 31, 1999, the following options were
issued to the named executive officers to purchase common shares under the stock
option plan:
OPTION/SAR GRANTS DURING FINANCIAL YEAR 1999
% OF TOTAL MARKET VALUE OF
NUMBER OF OPTIONS/SARS SECURITIES
SECURITIES GRANTED TO UNDERLYING
UNDERLYING OPTIONS/ EMPLOYEES IN EXERCISE OR BASE OPTIONS/SARS ON THE
SARS GRANTED(1) FINANCIAL PRICE DATE OF GRANT
NAME (#) YEAR (C$/SECURITY) EXPIRATION DATE (C$/SECURITY)
- ---- -------------------- ------------ ---------------- ----------------- -------------------
Paul D. Melnuk......... 600,000(2) 40.7 C$6.05 March 2, 2009 C$6.05
President and Chief
Executive Officer
George Ploder.......... 50,000 3.4 $6.35 February 12, 2006 $6.35
Former President and
Chief Executive
Officer
Jonathan Taylor........ 130,000(3) 8.8 30,000 @ $6.35 February 12, 2006 $6.35
Executive Vice
President; President, 100,000 @ $6.45 June 28, 2009 $6.45
Clientech Management
Services Inc.
John Amodeo............ 200,000(4) 13.6 $6.45 June 28, 2009 $6.45
Executive Vice
President and Chief
Financial Officer
John Naccarato......... 40,000(5) 2.7 $6.10 April 26, 2009 $6.10
Corporate Counsel and
Secretary
- ---------------
(1) Unless otherwise noted, the number of stock options relates to conventional
stock options. In 1999, the Bracknell board established a plan to grant its
executives performance based stock options which will vest in seven years.
Conditionally, these options will vest over three years so long as the
shareholders of Bracknell experienced at least a 20% annual return in each
of the three years from the date of grant. If, in any of the three years,
the annual return of shareholders of Bracknell was not equal to or greater
than 20%, then the options to vest in that year will not vest until the next
year within the period so long as the shareholders of Bracknell experienced
a 20% or greater compounded return over the combined period. An aggregate of
366,666 performance options have vested to date.
(2) Includes a grant of 300,000 performance based stock options.
(3) Includes a grant of 100,000 performance based stock options.
(4) Includes a grant of 100,000 performance based stock options.
(5) In December, 1999, Mr. Naccarato received a grant of 100,000 performance
based stock options, subject to the approval of Bracknell's shareholders,
which was obtained at Bracknell's annual meeting on February 29, 2000,
issued at an exercise price of Cdn $6.05 per common share. The market value
of the securities underlying the options on the date of grant was Cdn $6.05.
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AGGREGATED OPTION/SAR EXERCISES
DURING FINANCIAL YEAR 1999
AND FINANCIAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS AT THE-MONEY OPTIONS/SARS
SECURITIES AGGREGATE OCTOBER 31, AT OCTOBER 31, 1999
ACQUIRED ON VALUE 1999 (#) (US$)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) (US$) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- --------- ----------- ------------- ----------- -------------
Paul D. Melnuk........................... 0 0 50,000 600,000 $110,457 0
President and Chief Executive Officer
George Ploder............................ 0 0 212,500 37,500 $441,826 0
Former President and Chief Executive
Officer
Jonathan Taylor.......................... 0 0 82,500 122,500 $165,685 0
Executive Vice President; President,
Clientech Management Services Inc.
John Naccarato........................... 0 0 10,000 30,000 0 0
Corporate Counsel and Secretary
John Amodeo.............................. 0 0 25,000 175,000 0 0
Executive Vice President and Chief
Financial Officer
- ---------------
(1) In-the-money options are those where the fair market value of the underlying
security exceeds the exercise price thereof. The value of in-the-money
options is determined in accordance with regulations of the Securities and
Exchange Commission by subtracting the aggregate exercise price of the
options from the aggregate year-end market value of the underlying security.
Employee Share Purchase Plan
On December 31, 1992, Bracknell established an employee share purchase plan
to facilitate investment by eligible employees in Bracknell's common shares and
to allow employees of Bracknell to participate in the appreciation thereof. Any
employee of Bracknell, or of any subsidiary or associate of Bracknell, who has
completed at least 12 months of service with Bracknell or, where applicable, the
relevant subsidiary or associate, is a resident of Canada and does not own or
control, directly or indirectly, 5% or more of the outstanding common shares of
Bracknell, is eligible for membership in the employee share purchase plan. The
requirements for service tenure and/or Canadian residency may be waived by the
Chief Executive Officer. Eligible employees may contribute up to 10% of their
wages by way of payroll deduction toward the purchase of common shares under the
employee share purchase plan. Under the terms of the employee share purchase
plan, the participant's employer is required to contribute $1 for every $2
contributed by the employee, up to a maximum employer contribution of 2% of the
participant's normal wages. All contributions made under the employee share
purchase plan are used by the trustee for the employee share purchase plan,
Montreal Trust Company of Canada, to purchase common shares on the open market
or, with the prior written approval of the board, by private purchase. All
common shares purchased on behalf of participants under the employee share
purchase plan are distributed to such participants at the end of each calendar
year. The employee share purchase plan is under review by Bracknell and may be
modified by the directors to ensure that it continues to meet current
administrative and tax standards and the objectives of the board in aligning
employees' interests with those of the shareholders of Bracknell.
Effective on April 1, 2000, Bracknell established a share purchase plan to
facilitate investment by eligible employees in Bracknell's common shares and to
allow employees of Bracknell to participate in the appreciation thereof. Any
employee of Bracknell, or of any subsidiary or associate of Bracknell, who has
satisfied 12 months of continuous service, as such term is defined in the share
purchase plan, with Bracknell or, where applicable, the relevant subsidiary or
associate, is a resident of the United States and does not own or control,
directly or indirectly, 5% or more of the outstanding common shares of
Bracknell, is eligible for
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membership in the share purchase plan. The requirements for service tenure
and/or U.S. residency may be waived by the Chief Executive Officer. Eligible
employees may contribute up to 10% of their wages by way of payroll deductions
toward the purchase of common shares under the share purchase plan.
Under the terms of the share purchase plan, the participant's employer is
required to contribute $1 for every $2 contributed by the employee, up to a
maximum employer contribution of 2% of the participant's normal wages. All
contributions made under the share purchase plan are used by the administrative
agent for the share purchase plan, CIBC Mellon Trust Company, to purchase common
shares on the open market. All common shares purchased on behalf of participants
under the share purchase plan vest automatically, and are retained in the
participant's individual account with the CIBC Mellon Trust Company. A
participant may cancel their participation in the share purchase plan, however
they must then wait twelve months prior to becoming eligible to again
participate in the share purchase plan.
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PRINCIPAL SHAREHOLDERS -- BRACKNELL
Set forth in the table below are the names of each director and their
respective shareholdings as of December 1, 2000 and the shareholdings of the
directors and executive officers as a group as of December 1, 2000.
NUMBER OF BRACKNELL
COMMON SHARES AND
OPTIONS BENEFICIALLY
OWNED, DIRECTLY OR
INDIRECTLY, OR OVER
WHICH CONTROL OR PERCENTAGE OF
NAME DIRECTION IS EXERCISED OWNERSHIP TERMS
- ---- ----------------------- ------------- -----
Gilbert S. Bennett....... 4,000 common shares
50,000 options * All such options are currently
exercisable for Cdn $2.70 per common
share and expire on January 19, 2002.
Wade C. Lau.............. 5,000 common shares
2,500 warrants
50,000 options * Common shares and standard share
purchase warrants (with an exercise
price of US $4.25 per common share
and are currently exercisable for a
period of 18 months from September
30, 1999) were issued to Mr. Lau in
connection with the Nationwide
transaction.
50,000 options are performance
options which have accelerated
vesting over three years in three
equal tranches only if the total
shareholder return is at least 20%
per year over the three years. These
options are exercisable for Cdn $7.35
and expire on June 13, 2010. 16,667
of these options are currently
exercisable.
Paul D. Melnuk........... 380,334 common shares
650,000 options 1.9% Donna L. Melnuk, Mr. Melnuk's
spouse, is the beneficial holder of
14,100 of these common shares.
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NUMBER OF BRACKNELL
COMMON SHARES AND
OPTIONS BENEFICIALLY
OWNED, DIRECTLY OR
INDIRECTLY, OR OVER
WHICH CONTROL OR PERCENTAGE OF
NAME DIRECTION IS EXERCISED OWNERSHIP TERMS
- ---- ----------------------- ------------- -----
50,000 of these options are currently
exercisable for Cdn $2.70 per common
share and expire January 19, 2002.
In connection with Mr. Melnuk's
appointment as President and Chief
Executive Officer, Mr. Melnuk was
granted 600,000 options. 300,000 of
these options will automatically vest
over three years in equal tranches
and the remaining 300,000 of these
options will vest over three years in
equal tranches only if the total
shareholder return is at least 20%
per year over the three years. All of
the options granted in connection
with Mr. Melnuk's appointment are
exercisable for Cdn $6.05 and expire
on March 2, 2006. 350,000 of these
options are currently exercisable.
James W. Moir, Jr........ 20,000 common shares
50,000 options * All such options are currently
exercisable for Cdn $3.90 per common
share and expire on June 2, 2004.
Gregory J. Orman......... 1,410,281 common shares
11,149 warrants 3.5% Common shares were issued to Reardon
Capital LLC, an entity controlled by
Mr. Orman, in connection with the
recently completed acquisition of
Nationwide Electric, Inc. on
September 30, 1999.
Standard share purchase warrants were
issued to Reardon Capital LLC, an
entity controlled by Mr. Orman, in
connection with the Nationwide
transaction with an exercise price of
US $4.25 per common share and are
currently exercisable for a period of
18 months from September 30, 1999.
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NUMBER OF BRACKNELL
COMMON SHARES AND
OPTIONS BENEFICIALLY
OWNED, DIRECTLY OR
INDIRECTLY, OR OVER
WHICH CONTROL OR PERCENTAGE OF
NAME DIRECTION IS EXERCISED OWNERSHIP TERMS
- ---- ----------------------- ------------- -----
Allan R. Twa............. 5,000 common shares
50,000 options * All such options are currently
exercisable for Cdn $2.70 per common
share and expire on January 19, 2002
Jean Rene Halde.......... 4,000 common shares
50,000 options * 50,000 options are performance
options which have accelerated
vesting over three years in three
equal tranches only if the total
shareholder return is at least 20%
per year over the three years. These
options are exercisable for Cdn $7.35
and expire on June 13, 2010. 16,667
of these options are currently
exercisable.
Michael Hanna............ 105,000 common shares
50,000 options * 50,000 options are performance
options which have accelerated
vesting over three years in three
equal tranches only if the total
shareholder return is at least 20%
per year over the three years. These
options are exercisable for Cdn $7.35
and expire on June 13, 2010. 16,667
of these options are currently
exercisable.
All directors and
executive officers as a
group (12 persons)..... 2,097,597 common shares
13,649 warrants
1,852,000 options 7.7% 1,092,665 of these options and all of
these warrants are currently
exercisable.
- ---------------
* Less than one percent.
Set forth in the table below are the names of shareholders who, to the
knowledge of Bracknell, beneficially owned more than 5% of any class of the
outstanding voting securities of Bracknell as of December 1, 2000.
NAME NUMBER OF SHARES PERCENT OF OWNERSHIP
- ---- ----------------------- --------------------
Fidelity Investments Canada(1)..................... 2,200,000 common shares 5.4%
Investors Group Inc.(2)............................ 3,250,000 common shares 8.0
Lincluden Management Ltd.(3)....................... 2,814,002 common shares 6.9
Philips Hager and North(4)......................... 2,504,000 common shares 6.1
- ---------------
(1) Fidelity Investments Canada is a mutual fund company owned by FMR Corp.
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(2) Investors Group Inc. is a public company providing personal financial
planning services, mutual funds, other investment products and financial
services. Investors Group Inc. is a member of the Power Financial
Corporation group of companies.
(3) Lincluden Management Ltd. is an investment management firm, managing
investment assets for segregated pension plans and mutual funds. Lincluden
is owned by United Asset Management, which is owned by Old Mutual plc.
(4) Philips Hager & North Investment Management Ltd. is a private company
providing investment management services, managing investment assets for
segregated pension plans, mutual funds, and other institutional clients.
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CERTAIN TRANSACTIONS -- BRACKNELL
Bracknell has, from time to time, entered into various transactions with
certain of its officers and directors and entities in which these parties have
an interest. Bracknell believes that these transactions have been on terms no
less favorable to Bracknell than could be obtained in a transaction with an
independent third party.
Mr. Gregory Orman, a director of Bracknell, who also controls Reardon
Capital LLC. Reardon Capital LLC, was issued 1,273,535 Series A preferred shares
and a warrant to purchase 286,125 shares by Bracknell in connection with the
acquisition of Nationwide Electric, Inc. These Series A preferred shares have
since been converted into common shares of Bracknell on a one for one basis. The
standard share purchase warrant was issued with an exercise price of $4.25 per
Bracknell common share and is exercisable in whole or in part for a period of 18
months from September 30, 1999. Reardon Capital LLC was also issued 1,273,535
common shares of Bracknell in connection with the acquisition of Nationwide
Electric, Inc. Currently, Reardon Capital LLC owns 1,410,281 common shares and a
warrant for 11,149 shares.
Mr. Wade Lau, a director of Bracknell, was issued 5,000 shares of Bracknell
common stock and a warrant to purchase 2,500 shares of Bracknell common stock in
connection with the acquisition of Nationwide Electric, Inc. The standard share
purchase warrant was issued with an exercise price of $4.25 per common share and
is exercisable in whole or in part for a period of 18 months from September 30,
1999.
Mr. Frederick Green IV, an officer of Bracknell, has been granted 282,000
stock options by Bracknell in connection with the acquisition of Nationwide
Electric, Inc. The stock options were issued with an exercise price of $4.25 per
common share, and vest from November, 1999 to November, 2003. In addition, Mr.
Green holds approximately a 3.9% interest in Reardon Capital LLC, as described
above. Mr. Green received an interest-free loan from Nationwide Electric, Inc.
in the amount of $150,000, prior to the acquisition of Nationwide Electric, Inc.
by Bracknell. The loan was provided pursuant to Mr. Green's previous employment
agreement under which he agreed to not compete with Nationwide Electric, Inc.
after expiration or termination of his employment. Such non-compete obligations
and the terms of the loan have been carried forward into Mr. Green's current
employment agreement with Bracknell.
Mr. Michael D. Hanna, a director of Bracknell and a former shareholder of
Sunbelt Integrated Trade Services, Inc. is entitled to receive approximately
8.5% of any earn-out consideration payable in connection with the acquisition by
Bracknell of Sunbelt Integrated Trade Services, Inc. and its subsidiaries. Mr.
Hanna may elect to receive 50% of his apportioned amount of the earn-out
consideration in the form of shares of Bracknell common stock calculated on the
basis of $4.65 per share.
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ABLE -- SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Able has provided you with a summary of its historical consolidated
financial statements. The following information should be read in conjunction
with "Able -- Management's Discussion and Analysis of Financial Condition and
Results of Operations." Results of operations reflect the operating results of
MFS Network and other acquired businesses only from the respective dates of
acquisition. Accordingly, results are not necessarily comparable on a
period-to-period basis. See the consolidated financial statements for Able, and
the related notes to those statements, which are included in this proxy
statement/prospectus. The financial data for the nine months ended July 31, 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 Able for such period. Due to seasonality and
other market factors, the consolidated historical results for the nine months
ended July 31, 2000 are not necessarily indicative of results for a full year.
YEAR ENDED OCTOBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
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........................................ 572 238 601 662 (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)
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YEAR ENDED OCTOBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
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
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------- ---------------------------
1999 2000 1999 2000
------------- ----------- ------------- -----------
(RESTATED)(1) (RESTATED)(1)
Revenue:
Construction and maintenance.............. $ 283,869 $ 359,143 $ 102,781 $ 120,402
Conduit sale.............................. 35,721 -- -- --
----------- ----------- ----------- -----------
Total revenue:.................... 319,590 359,143 102,781 120,402
Costs and expenses:
Construction and maintenance.............. 243,214 353,201 87,558 106,034
Costs of conduit.......................... 34,673 -- -- --
General and administrative................ 29,238 42,049 10,871 12,440
Impairment of intangible assets........... 2,465 -- -- --
Depreciation and amortization expense..... 8,880 9,142 2,897 3,509
----------- ----------- ----------- -----------
Total costs and expenses.......... $ 318,470 $ 404,392 $ 101,326 $ 121,983
=========== =========== =========== ===========
Income (loss) from operations............... $ 1,120 $ (45,249) $ 1,455 $ (1,581)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense, net..................... $ (6,758) $ (5,925) $ (2,070) $ (1,960)
Sirit settlement.......................... -- (25,000) -- (25,000)
Change in value of stock appreciation
rights................................. (1,896) 3,710 (3,792) --
Equity in losses/impairment of investment
in Kanas............................... -- (12,184) -- --
Other..................................... (1,592) 717 (1,037) 349
----------- ----------- ----------- -----------
Total other income (expense)...... $ (10,246) $ (38,682) $ (6,899) $ (26,611)
=========== =========== =========== ===========
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NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------- ---------------------------
1999 2000 1999 2000
------------- ----------- ------------- -----------
(RESTATED)(1) (RESTATED)(1)
Loss before income taxes, minority interest
and extraordinary item.................... $ (9,126) $ (83,931) $ (5,444) $ (28,192)
Provision for (benefit from) income taxes... (86) -- (52) --
----------- ----------- ----------- -----------
Loss before minority interest and
extraordinary item........................ (9,040) (83,931) (5,392) (28,192)
Minority interest........................... 292 161 93 111
----------- ----------- ----------- -----------
Loss before extraordinary item.............. (9,332) (84,092) (5,485) (28,303)
Extraordinary loss on early extinguishment
of debt................................... 3,067 -- -- --
----------- ----------- ----------- -----------
Net loss.................................... (12,399) (84,092) (5,485) (28,303)
Increase in default redemption value of
Series B preferred stock.................. (4,741) (1,404) (4,741) --
Redemption of 2,785 shares of Series B
preferred stock........................... (4,323) -- -- --
Issuance of additional Series C warrants.... -- (675) -- (675)
Liability of Preferred Stockholders......... -- (4,228) -- (4,228)
Modification of exercise price of Series B
preferred stock warrants.................. (1,894) -- -- --
Modification of conversion price of Series B
preferred stock........................... (6,430) -- -- --
Series C preferred stock dividends and
accretion................................. -- (564) -- (302)
Series B preferred stock dividends.......... (283) -- (39) --
----------- ----------- ----------- -----------
Loss applicable to common stock............. $ (30,070) $ (90,963) $ (10,265) $ (33,508)
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic..................................... 11,939,517 14,966,337 11,794,718 16,206,939
Diluted................................... 11,939,517 14,966,337 11,794,718 16,206,939
Loss applicable to common stock per share
Basic:
Loss before extraordinary item............ $ (2.26) $ (6.08) $ (0.87) $ (2.07)
Extraordinary loss on the early
extinguishment of debt................. (0.26) -- -- --
Loss applicable to common stock........... (2.52) (6.08) (0.87) (2.07)
Diluted:
Loss before extraordinary item............ (2.26) (6.08) (0.87) (2.07)
Extraordinary loss on the early
extinguishment of debt................. (0.26) -- -- --
Loss applicable to common stock........... (2.52) (6.08) (0.87) (2.07)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................. 15,649 14,946 15,649 14,946
Total assets...................... 262,444 318,563 262,444 318,563
Total debt........................ 65,294 41,700 65,294 41,700
Total preferred stock............. 15,096 21,449 15,096 21,449
Total shareholders' equity
(deficit)....................... 7,325 (57,299) 7,325 (57,299)
- ---------------
(1) The fiscal 1999 unaudited amounts have been adjusted from amounts originally
reported by the Company in quarterly filings with the Securities and
Exchange Commission. Refer to Note 4, "Quarterly Financial Data."
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ABLE -- 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 Able's operations, markets and profitability.
OVERVIEW
Able's unaudited operating results reflect the unaudited operating results
of Southern Aluminum & Steel Corporation and Specialty Electronic Systems, Inc.
only from the respective dates of acquisition. Combined selected financial
information of Southern Aluminum and Specialty Electronic during the three and
nine months ended July 31, 2000 were as follows:
FOR THE MONTHS
ENDED
JULY 31, 2000
----------------
THREE NINE
------ -------
Revenues.................................................... $5,254 $16,275
Costs of revenues........................................... 4,840 14,340
General and administrative expenses......................... 509 1,541
Depreciation and amortization............................... 32 91
Other expense............................................... 35 117
------ -------
Net income.................................................. $ (162) $ 186
====== =======
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 Able expects to achieve on
future contracts.
FOR THE THREE FOR THE NINE
MONTHS MONTHS FOR THE FISCAL YEARS
ENDED JULY 31, ENDED JULY 31, ENDED OCTOBER 31,
--------------- -------------- ---------------------
2000 1999 2000 1999 1999 1998
----- ------- ---- ------- --------- ---------
Billings on the COMSAT contracts................ $-- $1,754 $-- $ 7,310 $ 7,952 $11,327
Deferred revenue recognized..................... -- 739 -- 3,269 3,935 8,481
--- ------ --- ------- ------- -------
-- 2,493 -- 10,579 11,887 19,808
Direct contract costs........................... -- 1,727 -- 6,842 8,675 10,672
--- ------ --- ------- ------- -------
Gross margin from COMSAT contracts.............. $-- $ 766 $-- $ 3,737 $ 3,212 $ 9,136
=== ====== === ======= ======= =======
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The following table sets forth selected elements of the condensed
consolidated statements of operations as a percentage of revenues:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE FISCAL YEARS
JULY 31, JULY 31, ENDED OCTOBER 31,
------------- ------------- ---------------------
2000 1999 2000 1999 1999 1998 1997
----- ----- ----- ----- ----- ----- -----
Revenues:
Construction and maintenance.................... 100.0% 100% 100.0% 88.8% 91.5% 100.0% 100.0%
Conduit sales................................... -- -- -- 11.2 8.5 -- --
----- ----- ----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Construction and maintenance.................... 88.1 85.2 98.3 76.1 78.9 82.5 79.0
Costs of conduit................................ -- -- -- 10.8 8.3 -- --
General and administrative expense.............. 10.3 10.6 11.7 9.1 9.8 8.7 10.2
Impairment of intangible assets................. -- -- -- 0.8 0.6 -- --
Depreciation and amortization................... 2.9 2.8 2.6 2.8 2.8 3.5 5.2
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations..................... (1.3) 1.4 (12.6) 0.4 (0.4) 5.3 5.6
Other expenses, net............................... (22.2) (6.7) (10.8) (4.3) (3.9) (4.1) (2.3)
----- ----- ----- ----- ----- ----- -----
Net income (loss)................................. (23.5) (5.3) (23.4) (3.9) (4.3) 1.2 3.3
Income (loss) applicable to common stock.......... (27.8) (10.0) (25.3) (9.4) (8.8) (2.7) 1.5
----- ----- ----- ----- ----- ----- -----
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JULY 31, 2000 COMPARED WITH THE THREE AND NINE
MONTHS ENDED JULY 31, 1999
THE FOLLOWING DISCUSSION AND ANALYSIS RELATES TO ABLE'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2000 AND
1999. THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH ABLE'S CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
REVENUES
Construction and maintenance revenues were $120.4 million for the three
months ended July 31, 2000, compared to $102.8 million for the same three month
period of fiscal 1999 an increase of $17.6 million or 17.1 percent. Construction
and maintenance revenues were $359.1 million for the nine months ended July 31,
2000, compared to $283.9 million for the same nine month period of fiscal 1999
an increase of $75.2 million or 26.5 percent. Substantially all of the increase
is due to increased revenues from the WorldCom master services agreement and the
New Jersey Consortium contracts.
Estimated backlog at August 31, 2000, was as follows (in thousands):
OPERATIONS AND
CONSTRUCTION MAINTENANCE
ORGANIZATIONAL GROUP CONTRACTS CONTRACTS TOTAL
- -------------------- ------------ -------------- --------
Network Services................................... $427,881 $108,068 $535,949
Transportation Services............................ 59,046 100,254 159,300
Construction....................................... 120,183 56,007 176,190
-------- -------- --------
$607,110 $264,329 $871,439
======== ======== ========
Able expects to complete approximately 40 percent of the total backlog
within the next twelve months. Service contracts with many customers do not
specify the volume of services to be purchased, but instead, commit Able to
perform the services if requested by the customer and commit the customer to
obtain these services from Able if they are not performed internally. Many of
the contracts are multi-year agreements, ranging from less than one year to 20
years. Able includes the full amount of services projected to be performed over
the lives of the contract in backlog based on its historical relationships with
its customers and experience in procurements of this nature. Able's 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
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penalty, except, in some cases, Able 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 its customers could have a material adverse effect on Able's
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 Able's consolidated financial condition, there can be no
assurances that Able can obtain the bonding necessary to bid on and accept new
projects.
Conduit Sales -- Sales of conduit during the nine months ended July 31,
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 nine months ended July
31, 2000. However, during that period Able expended $55.4 million for "networks
under construction" that it expects 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 $106.0 million for the three months
ended July 31, 2000, compared to $87.6 million for the same three month period
of fiscal 1999, an increase of $18.4 million or 21.0 percent. Construction and
maintenance costs were $353.2 million for the nine months ended July 31, 2000,
compared to $243.2 million for the same nine month period of fiscal 1999, an
increase of $110.0 million or 45.2 percent.
Able's construction and maintenance margins were 11.9 percent and 1.7
percent for the three and nine months ended July 31, 2000, respectively,
compared to 14.8 percent and 14.3 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $12.4 million for the three months
ended July 31, 2000, compared to $10.9 million for the same three month period
of fiscal 1999, an increase of $1.5 million or 13.8 percent. General and
administrative expenses were $42.0 million for the nine months ended July 31,
2000, compared to $29.2 million for the same nine month period of fiscal 1999,
an increase of $12.8 million or 43.8 percent. The increase in general and
administrative expense during the nine months ended July 31, 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):
FOR THE THREE MONTHS ENDED JULY 31, FOR THE NINE MONTHS ENDED JULY 31,
--------------------------------------- ---------------------------------------
2000 1999 $ CHANGE % CHANGE 2000 1999 $ CHANGE % CHANGE
------- ------- -------- -------- ------- ------- -------- --------
Interest expense.......................... $(1,960) $(2,070) $ 110 5.3% $(5,925) $(6,758) $ 833 12.3%
Change in value of stock appreciation
rights.................................. -- 3,792 3,792 100.0 3,710 (1,896) 5,606 295.7
Equity in losses/impairment of investment
in Kanas................................ (25,000) -- (25,000) -- (12,184) -- (12,184) --
Benefit from (provision for) income
taxes................................... -- (52) 52 100.0 -- 86 (86) (100.0)
Minority interest......................... (111) (93) (18) (19.4) (161) (292) 131 44.9
Extraordinary loss on the early
extinguishment of debt.................. -- -- -- -- -- (3,067) 3,067 100.0
Other, net................................ 349 (1,037) 1,386 133.7 717 (1,592) 2,309 145.0
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123
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 July 31, 2000, Able had $35.0 million outstanding under its secured credit
facility, $4.5 million outstanding under the WorldCom note with an interest rate
of 11.5 percent per annum and $19.5 million outstanding under property taxes
payable that is net of imputed interest at 15 percent per annum.
The $37.0 million outstanding under the WorldCom Advance is non-interest
bearing and was converted to the WorldCom preferred stock subsequent to July 31,
2000 as described in Note 10, "Debt," to the accompanying condensed consolidated
financial statements.
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 Able common stock at the meeting
will not result in a cash charge to Able. The value of the WorldCom SARs will be
increased or decreased based on the intrinsic value of the WorldCom SARs
utilizing the price of Able 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, Able wrote off its
investment in Kanas during the nine months ended July 31, 2000.
Extraordinary Loss on the Early Extinguishment of Debt -- During the nine
months ended July 31, 1999, Able purchased all of its outstanding senior
subordinated notes with an outstanding principal balance of $10.0 million
resulting in an extraordinary loss from the early extinguishment of debt of $3.1
million. The senior subordinated notes were purchased with proceeds from an
advance from WorldCom.
LOSS APPLICABLE TO COMMON STOCK
Loss applicable to common stock was $33.5 million for the three months
ended July 31, 2000, compared to $10.6 million for the same three month period
of fiscal 1999, a decrease of $23.2 million or 225.0 percent. During the nine
months ended July 31, 2000, Able recorded approximately $5.2 million of charges,
dividends and accretion related to the Series B and C preferred stock.
Loss applicable to common stock was $91.0 million for the nine months ended
July 31, 2000, compared to $30.1 million for the same nine month period of
fiscal 1999, a decrease of $60.9 million or 202.3 percent. During the nine
months ended July 31, 2000, Able recorded approximately $6.9 million of charges,
dividends and accretion related to the Series B and C preferred stock.
Loss applicable to common stock for the three and nine months ended July
31, 1999, was adversely affected by charges of $4.8 million and 17.7 million,
respectively related to 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 operations through the acquisition of MFS Network on July
2, 1998. Revenues generated by MFS Network for the fiscal year ended October 31,
1999, totaled approximately $264.0 million and included sales of conduit
capacity of approximately $35.7 million.
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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 operations through the acquisition of MFS Network
on July 2, 1998. Cost of revenues incurred by MFS Network 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.
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 MFS Network on July 2, 1998. Construction and
maintenance margins generated by MFS Network 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, Able estimated the need for reserves for contract
losses with respect to MFS Network contracts of $40.5 million. These reserves
relate to specific MFS Network jobs identified as Loss Jobs. Revenues and costs
recognized in the 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. Able 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):
NETWORK TRANSPORTATION
SERVICES SERVICES TOTAL
-------- -------------- --------
Balance, July 2, 1998................................. $16,266 $ 24,234 $ 40,500
Amount utilized....................................... (8,237) (6,873) (15,110)
------- -------- --------
Balance, October 31, 1998............................. 8,029 17,361 25,390
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
======= ======== ========
- ---------------
(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
operations through the acquisition of MFS Network on July 2, 1998. General and
administrative expenses incurred by MFS Network 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
management structure necessary to support increased revenue in accordance with
Able's strategic objective; and iii) costs associated with ongoing efforts to
recapitalize Able.
Costs and expenses for fiscal 1999 included a provision of $5.0 million for
uncollectible receivables compared to a charge of approximately $.8 million for
the prior year. The increase, in part, reflects the increased scope of Able's
operations following the acquisition of MFS Network. However, most of the
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increase resulted from contract disputes and negotiated settlements that are
more fully described in Schedule II to the consolidated financial statements.
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 3.49
percent during fiscal year 1998 to 2.83 percent during fiscal year 1999 due to
an increase in revenues which did not require the same percentage increase in
capital assets to support operations.
IMPAIRMENT OF LONG-LIVED ASSETS
During the fiscal year ended October 31, 1999, Able closed Dial and Able
Integrated Systems that resulted in impairment of Dial goodwill of $1.3 million.
Able 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):
1999 1998 $ CHANGE % CHANGE
------ ------ -------- --------
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) 1,965 447
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 MFS Networks
on July 2, 1998 and accreted interest at 15 percent on property taxes payable
assumed in the acquisition of MFS Networks.
Extraordinary Loss
During the fiscal year ended October 31, 1999, Able purchased all of its
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 Able with proceeds from
the non-interest bearing advance from WorldCom.
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. Able is
presenting a proposal for shareholder approval for the conversion of the
WorldCom SAR into options for common stock as Proposal No. 6 in this proxy
statement/prospectus. If shareholder approval is received, the stock
appreciation rights will not result in cash
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payments by Able. 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 stock appreciation rights.
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 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 ABLE FOR THE FISCAL YEARS ENDED OCTOBER 31, 1998
AND 1997. THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH ABLE'S 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 operations through the acquisition of MFS Networks 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 MFS Networks, 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 78.95 percent to 82.54 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 $10.2 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 increased revenue in accordance with strategic objective of
growth through acquisitions, and an increase in costs resulting from the
acquisition of MFS Networks. For the fiscal year ended October 31, 1998, general
and administrative expenses relating to the operations of MFS Networks 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 5.25 percent to
3.49 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
operations.
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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 Able's 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 MFS Network. 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
Able's obtaining financing for a portion of the purchase price of MFS Network
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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of Able's unaudited quarterly
operating results for each of the eleven quarters in the period ended July 31,
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 proxy statement/prospectus and include all adjustments, consisting of
only normal recurring adjustments, necessary for a fair statement of such
information when read in conjunction with the consolidated financial statements
and notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period.
QUARTER ENDED
-------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1998 1998 1998 1998 1999 1999 1999
----------- --------- -------- ----------- ----------- --------- --------
Statement of Operations Data:
Revenue................................. $22,268 $34,552 $58,305 $102,356 $93,080 $123,729 $102,781
Income (Loss) from operations........... (1,164) 2,180 4,319 6,074 2,521 (2,857) 1,455
Income (Loss) before extraordinary
item................................... (927) 867 790 1,784 (5,318) 1,472 (5,485)
Net income (loss)....................... (927) 867 790 1,784 (5,318) (1,595) (5,485)
Income (Loss) applicable to common
stock.................................. (1,081) 838 (7,186) 1,589 (5,498) (14,306) (10,265)
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) (0.87)
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) (0.87)
Diluted:
Income (Loss) before extraordinary
item................................... (0.12) 0.09 (0.72) 0.16 (0.47) (0.96) (0.87)
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) (0.87)
QUARTER ENDED
------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1999 2000 2000 2000
----------- ----------- --------- --------
Statement of Operations Data:
Revenue................................. $98,975 $106,915 $131,826 $120,402
Income (Loss) from operations........... (3,003) (10,386) (33,282) (1,581)
Income (Loss) before extraordinary
item................................... (5,662) (9,334) (46,555) (28,303)
Net income (loss)....................... (5,662) (9,334) (46,555) (28,303)
Income (Loss) applicable to common
stock.................................. (6,689) (10,738) (46,717) (33,508)
Income (Loss) applicable to common stock
per share:
Basic:
Income (Loss) before extraordinary
item................................... (0.56) (0.84) (2.93) (2.07)
Extraordinary loss on early
extinguishment of debt................. -- -- -- --
Income (Loss) applicable to common
stock.................................. (0.56) (0.84) (2.93) (2.07)
Diluted:
Income (Loss) before extraordinary
item................................... (0.56) (0.84) (2.93) (2.07)
Extraordinary loss on early
extinguishment of debt................. -- -- -- --
Income (Loss) applicable to common
stock.................................. (0.56) (0.84) (2.93) (2.07)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $15.0 million at July 31, 2000 compared to
$16.6 million at October 31, 1999. The decrease in cash and cash equivalents of
$1.6 million during the nine months ended July 31, 2000
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resulted from cash from financing activities of $8.5 million, offset by cash
used in operating and investing activities of $4.4 million and $5.7 million,
respectively.
CASH FROM OPERATING ACTIVITIES
Cash used in operating activities during the nine months ended July 31,
2000 of $4.4 million consisted of the following:
Net loss.................................................... $(84,092)
Adjustments to reconcile net loss to net cash used in
operating activities, net of effects of acquisitions:
Depreciation and amortization............................. 9,142
Equity in loss/impairment of Kanas........................ 12,184
Change in value of stock appreciation rights.............. (3,710)
Accretion of property tax payable......................... 1,699
Sirit settlement.......................................... 20,000
--------
(44,777)
Changes in assets and liabilities, net of effects from
acquisitions:
Increase in accounts receivable........................... (8,873)
Decrease in costs and profits in excess of billings on
uncompleted contracts.................................. 2,326
Increase in other current assets.......................... (3,371)
Increase in networks under construction................... (53,593)
Increase in accounts payable and other current
liabilities............................................ 58,808
Increase in reserves for losses on uncompleted
contracts.............................................. 13,350
Increase in long-term deferred revenues................... 24,862
Other, net................................................ 6,887
--------
Cash used in operating activities........................... $ (4,381)
========
As discussed in Note 7, "Networks Under Construction," to the accompanying
unaudited condensed consolidated financial statements, the $53.6 million
increase in networks under construction related predominately to the ongoing
construction of the CDOT Network. Able expects to incur significant additional
amounts to complete the construction of the CDOT Network, with current estimates
for the costs of completion of approximately $80 million. Able's failure to
execute sufficient user agreements for the CDOT Networks could have a material
adverse effect on the carrying value of its investment.
Cash flows from operations during the nine months ended July 31, 2000, were
adversely affected by cash payments of $25.0 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 July 31, 2000, totaled $23.8 million. Funding of these
expected losses will require cash resources not presently available to Able.
CASH FROM INVESTING ACTIVITIES
Cash used in investing activities during the nine months ended July 31,
2000, of $5.7 million is due to net capital expenditures of approximately $6.3
million required to support increased operations, proceeds from the sales of
property and equipment of $0.5 million, and replacement of existing equipment
offset by cash acquired in the acquisition of Southern Aluminum and Specialty
Electronic of approximately $0.1 million.
CASH FROM FINANCING ACTIVITIES
Cash provided by financing activities during the nine months ended July 31,
2000 of $8.5 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 $1.3
million, respectively, offset by the redemption of the Series B preferred stock
and payments of debt of $11.6 million and $0.7 million, respectively.
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As discussed in Note 10, "Debt," to the accompanying unaudited condensed
consolidated financial statements, Able entered into an agreement with WorldCom
during the nine months ended July 31, 2000, whereby WorldCom agreed to convert
approximately $25.5 million of its $30.0 million WorldCom note into 3,050,000
shares of Able's common stock. The conversion was based on the January 8, 2000
closing price of Able'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.
During the three months ended July 31, 2000, WorldCom advanced Able an
additional $5.0 million to pay the cash portion of the Sirit Settlement (refer
to Note 11, "Contingencies" to the accompanying condensed consolidated financial
statements).
As discussed in Note 10, "Debt" to the accompanying unaudited condensed
consolidated financial statements, the following financing activities occurred
subsequent to July 31, 2000:
- The 4.5 million WorldCom Note was modified 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 was issued 1,000 shares of Able Series E preferred stock in
exchange for WorldCom Advances totaling $37.0 million.
FUTURE LIQUIDITY
In the opinion of Able's management, Able's working capital will not be
sufficient for its liquidity needs after the annual meeting. If the merger is
approved at the meeting and is completed shortly thereafter, Able's working
capital needs will be met through financing by Bracknell and WorldCom as
follows. WorldCom and Bracknell have agreed that for 18 months after the closing
of the merger, they shall make available to Able working capital financing with
WorldCom's advances to be matched dollar for dollar by Bracknell. WorldCom's
obligations are subject to an aggregate cap of $40 million. The WorldCom
advances made pursuant to this agreement will be due and payable on the earlier
of the sixth anniversary of the closing or December 31, 2006.
If the merger is not approved or is otherwise not completed, Able will
pursue other alternatives to meet its working capital needs, including seeking
to refinance its existing credit facility, seeking advances from customers and
pursuing capital investments from other sources. There can be no assurance that
any of these alternatives will provide sufficient funds to meet Able's working
capital needs.
There can be no assurance that Able will not experience adverse operating
results or other factors that could materially increase its cash requirements or
adversely affect its liquidity position.
GOING CONCERN
As described in Note 2, "Going Concern," to the accompanying condensed
consolidated financial statements, there is substantial doubt about Able's
ability to continue as a going concern. Able'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 discussed in Note 2, "Going Concern," to the accompanying
condensed consolidated financial statements.
SIRIT SETTLEMENT
As described under the heading "Legal Proceedings" below, Able had agreed
to issue to Sirit common shares equal to 19.99 percent of the outstanding shares
of Able, subject to shareholder approval and registration rights. However, Sirit
has elected to participate in the merger and will be entitled to receive the
same consideration as all other Able common shareholders, as if Sirit owned its
full entitlement to Able common shares, subject to a maximum value of $26.2
million. If the consideration provided to Sirit is in the
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form of securities, those securities will be valued, for the purposes of
calculating the $26.2 million limit, at their closing trading price on the date
the merger is completed.
OTHER LITIGATION
As described in Note 11, "Contingencies," to the accompanying condensed
consolidated financial statements, Able is the defendant in various legal
matters that individually or in aggregate could have a material adverse effect
on its future liquidity.
CREDIT FACILITY
As described in Note 10, "Debt," to the accompanying condensed consolidated
financial statements, Able has borrowed $35 million, the maximum available under
its existing credit facility, and is in default of the related covenants. As of
November 1, 2000, accrued and unpaid interest of $382,513.66 was outstanding on
the principal borrowed. Interest currently accrues at a default rate of 12.5%
per annum. The credit facility lenders have the right to demand payment and Able
has insufficient liquidity to pay such amounts, if called. Able has not yet been
successful in obtaining alternative financing and may have insufficient
liquidity to fund continuing operations.
PREFERRED STOCK
As described in Note 12, "Preferred Stock," to the accompanying condensed
consolidated financial statements, Able has certain outstanding securities
related to past preferred stock issuances that may require mandatory cash
redemption at premium prices if it fails to meet certain conditions. Those
securities, at their historical cost basis, are as follows:
Securities subject to mandatory cash redemption
common stock.............................................. $5,317
Series B exchange warrants................................ 807
Series C warrants......................................... 1,459
As also described in Note 12, "Preferred Stock," to the accompanying
unaudited condensed consolidated financial statements, Able has agreed to issue
the Palladin Group 1,057,031 shares of Able common stock prior to December 1,
2000; provided that Able 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.
CONTRACTS ACQUIRED FROM MFS NETWORK
Able has recorded reserves for losses on certain contracts assumed in the
MFS Network acquisition that are expected to use cash from operations of
approximately $22.0 million over the next two fiscal years. Able also assumed in
the MFS Network 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 MFS
Network in 1996 and 1997, began during fiscal 1999. Able 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. Able has 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. 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 Able's consolidated statement of condition and liquidity. In March 2000,
Able's obligations and responsibilities with respect to the Kanas operations and
maintenance agreement were terminated.
OTHER CONTRACT MATTERS
Some of Able'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
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a timely basis could result in delays and significant additional obligations to
Able that are currently not anticipated or reflected in its consolidated
financial statements.
BRACKNELL MERGER AGREEMENT
As discussed in Note 18, "Subsequent Events" to the accompanying unaudited
condensed consolidated financial statements, the merger with Bracknell is
conditioned on a number of events that must occur on a timely basis, including
Bracknell obtaining financing necessary to complete the transaction. If the
merger with Bracknell is consummated on a timely basis, Able believes that funds
will subsequently by made available to Able by Bracknell and WorldCom sufficient
to enable Able to continue its operations. However, there can be no assurance
that the merger will occur on schedule, or at all. If the merger is terminated,
Able may be subject to a termination fee of $3.0 million.
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ABLE -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Able is exposed to market risk from changes in interest rates on debt
obligations that impact the fair value of these obligations. Able's policy is to
manage interest rates through a combination of fixed and variable rate debt.
Currently, Able does not use derivative financial instruments to manage its
interest rate risk. The table below provides information about Able's risk
exposure associated with changing interest rates (amounts in thousands):
EXPECTED MATURITY DURING THE FISCAL YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER
--------- ----- ------ ------ ------ ----------
Variable rate debt:
Amount................................... $36,559 -- -- -- -- --
Average interest rate.................... 12.28% -- -- -- -- --
Fixed rate debt:
Amount................................... $ 380 $ 191 $ 57 $ 19 $ 19 $4,475
Average interest rate.................... 9.48% 9.43% 8.64% 8.50% 8.50% 8.05
Total:
Amount................................... $36,939 $ 191 $ 57 $ 19 $ 19 $4,475
Average.................................. 12.16% 9.43% 8.64% 8.50% 8.50% 8.05
The above presentation does not reflect the advances from WorldCom of $37.0
million, refer to Note 10, "Debt" to the accompanying condensed consolidated
financial statements, that were converted to a new preferred stock subsequent to
July 31, 2000. The above presentation reflects the terms of the WorldCom note,
refer to Note 10, "Debt" to the accompanying condensed consolidated financial
statements, as amended subsequent to July 31, 2000. The above presentation does
not reflect the present value of future property taxes payable over a period of
20 years. On the July 31, 2000, condensed consolidated balance sheet, the
long-term portion of this liability totaled $17.2 and is reflected as "Property
Taxes Payable," while the current portion totaled $2.3 million and is reflected
in "Accounts Payable and Accrued Liabilities." As of July 31, 2000, Able is in
default of certain provisions of the credit facility as described in Note 10,
"Debt" to the accompanying financial statements. As such, the credit facility is
immediately callable by the holder and is therefore classified as a current
maturity, fiscal year 2000, in the above expected maturity schedule. During the
default period, Able is required to pay a default penalty of two percent per
annum on all outstanding balances.
The fair value of Able's debt approximates its carrying value.
Although Able conducts business in foreign countries, the international
operations were not material to its 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 Able's results of operations
for the nine months ended July 31, 2000 and 1999. Accordingly, Able was not
subject to material foreign currency exchange rate risk from the effects that
exchange rate movements of foreign currencies would have on future costs or on
future cash flows which Able would receive from its foreign subsidiaries. To
date, Able 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.
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BUSINESS -- ABLE
GENERAL OVERVIEW
Able develops, builds and maintains communications systems for companies
and government authorities. Able has five main organizational groups. Each group
is comprised of subsidiaries of Able with each having local executive management
functioning in a decentralized operating environment. Able completed operational
restructuring of its subsidiaries during fiscal 1999. As a result, Able now has
seventeen subsidiaries, fourteen of which are wholly owned. Able owns at least
80% of the remaining three subsidiaries.
The services provided by each operating group are as follows:
ORGANIZATION GROUP SERVICE PROVIDED
------------------ ----------------
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.
In conjunction with Able's reorganization much of its executive management
has changed. Able has replaced several executives and group presidents and have
added other senior people to its executive staff.
As part of Able's ongoing efforts to strategically align the profitable
portions of its 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:
- Able assigned control of certain of its previously independent operating
subsidiaries, Patton and ATP, to the Construction Group.
- Able merged several of its previously independent operating subsidiaries
into currently profitable Construction Group subsidiaries.
- As a result of significant turnover and the deterioration of underlying
contracts, Able discontinued the operations of its 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
Able was incorporated in 1987 as "Delta Venture Fund, Inc.," a Colorado
corporation. Able adopted its current name in 1989 and changed its corporate
domicile to Florida in 1991. Able is presenting a proposal to shareholders at
its upcoming annual meeting to change its corporate name to "The Adesta Group,
Inc." Commencing in mid-1992 until mid-1994, 95 percent of its 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 its exposure to foreign markets, in 1994, Able expanded its business
focus by marketing its services in the southeastern United States, with the
acquisition of Florida-based Transportation Safety
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Contractors, Inc. and its affiliates. Transportation Safety Contractors, Inc.
installs and maintains traffic control signage, signalization and lighting
systems and performs outside plant telecommunication services. The majority of
Transportation Safety Contractors, Inc.'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, Able 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. in January
1999. In October 1996, Able acquired the common stock of Georgia Electric
Company, 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, Able acquired the common stock of Patton Management Company 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 its revenues by approximately
300 percent, Able acquired the network construction and transportation systems
business of MFS Network Technologies, Inc. from WorldCom, Inc. MFS Network 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 MFS Network acquisition,
Able, WorldCom and MFS Network entered into a master services agreement pursuant
to which Able 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 MFS Network 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, Able acquired the common stock of Southern Aluminum and
Steel Corporation and Specialty Electronic Systems, Inc., renamed SES of
Florida, Inc. which together provide expertise in design, installation and
project implementation of advanced highway communication networks and
Intelligent Transportation Systems.
In January 2000, Able established Adesta Ventures, Inc. which will own,
operate and maintain local and regional telecommunication networks as part of
its 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. Able's ability to grow Adesta Ventures and to implement its
business plan will be dependent on its ability to fund its capital expenditure
needs, either internally or through borrowings and the sale of equity. No
assurance can be given that Able will be able to meet Adesta Ventures' funding
needs on a timely basis or at all, on terms acceptable to it, or that Adesta
Ventures will ever be profitable.
ACQUISITION OF NETWORK CONSTRUCTION AND TRANSPORTATION SYSTEMS BUSINESS OF
WORLDCOM AND ISSUANCE OF SERIES B SECURITIES
In a transaction consummated on July 2, 1998, Able 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 Able's 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, Able granted an option to WorldCom to purchase up to 2,000,000
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shares of its 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, equivalent to up to 600,000 shares of common
stock, payable in cash, stock or a combination of both at Able's 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, Able entered into a master services
agreement with WorldCom to provide telecommunications infrastructure services to
it, which was recently amended to provide for a minimum purchase by WorldCom 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
businesses from WorldCom was cash. To generate a portion of the cash, Able
issued 4,000 shares of Series B convertible preferred stock and warrants to
purchase up to an aggregate of 1,000,000 shares of Able's 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 Able granted additional warrants to the Series
B investors. As of November 13, 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."
THE SERIES C SECURITIES
In February 2000, Able 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 Able's common stock at $10.75 a share, for aggregate
gross proceeds of $15 million. Able used a portion of this $15 million to
repurchase certain of its remaining shares of Series B convertible preferred
stock and the rest for general working capital purposes.
In connection with its settlement of the Sirit litigation, Able 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 Able's common stock at $6.00 per share and to purchase 375,000
shares of Able's 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."
ACQUISITION OF SOUTHERN ALUMINUM AND SPECIALTY ELECTRONIC
On November 5, 1999, Able acquired all of the outstanding common stock of
Southern Aluminum & Steel Corporation along with Specialty Electronic Systems,
Inc. Southern Aluminum has operations in Birmingham, Cape Canaveral and Atlanta
and has 40 years experience in surveillance systems, signalization, Intelligent
Transportation Systems and roadway lighting. Southern Aluminum provides
expertise in design, installation, and project implementation of advanced
highway communication networks. Specialty Electronic 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 Southern Aluminum and Specialty Electronic was 75,000
shares of Able's 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. Able recorded this transaction using the purchase method of accounting.
The pro forma effect on consolidated results of operations, from the acquisition
of Southern Aluminum and Specialty Electronic, is not material.
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The earn-out consideration for year one (ending October 31, 2000) will be
converted into Able's 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 Able's common stock by dividing the earn-out consideration by the
52-week average of the closing market price of Able's common stock for each
respective year.
The consideration is to be paid in shares of Able's 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 Able common stock issued and outstanding,
any and all consideration in excess of 19.9 percent of issued and outstanding
Able common stock shall be paid in cash or promissory notes, as mutually agreed
upon by Able 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, Southern Aluminum and Specialty Electronic 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
Able 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 Able provides network services, network development, transportation
services and construction. Abroad, principally in Venezuela, Able conducts
communication development activities. Each of these activities is discussed in
more detail below. In most of Able's business activities it faces competitors
that may be larger and may have substantially greater financing, distribution
and marketing resources than Able.
NETWORK SERVICES GROUP
Able's 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.
Able provides turnkey telecommunications infrastructure solutions through
the Telecommunications Systems Integration Division. As a telecommunications
systems integrator, Able provides "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.
Able's 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. Able provides outside plant telecommunications services primarily
under hourly and per unit basis contracts to local telephone companies. Able
also provides these services to long distance telephone companies, electric
utility companies, local municipalities and cable television multiple system
operators.
NETWORK DEVELOPMENT GROUP
Able's 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.
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TRANSPORTATION SERVICES GROUP
Able's 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, Able has and continues 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. Able 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
Able's 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 and data gathering
devices. Able also designs, develops, installs, maintains and operates
"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. Able also installs 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
Able's 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 Able has an 80% voting and ownership interest and a 50%
share of profits and losses.
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INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
Sales to unaffiliated customers, income (loss) from operations, and
identifiable assets pertaining to the groups in which Able operates are
presented below (in thousands).
FOR THE THREE MONTHS FOR THE NINE MONTHS FOR THE FISCAL YEARS ENDED
ENDED JULY 31, ENDED JULY 31, OCTOBER 31,
-------------------- ------------------- -----------------------------
2000 1999 2000 1999 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------
Sales to unaffiliated customers:
Network services................ $ 66,460 $ 63,960 $201,384 $198,903 $260,354 $ 62,243 $ --
Transportation services......... 18,424 8,403 64,553 27,254 39,394 24,455 --
Construction.................... 34,655 29,283 89,992 90,342 113,948 125,270 82,171
Communication development
(international)............... 863 1,135 3,214 3,091 4,869 5,329 4,163
-------- -------- -------- -------- -------- -------- -------
$120,402 $102,781 $359,143 $319,590 $418,565 $217,297 $86,334
======== ======== ======== ======== ======== ======== =======
Income (loss) from operations:
Network services................ $ 1,993 $ 2,202 $ 6,492 $ 9,758 $ 14,746 $ 6,272 $ --
Transportation services......... (2,927) (1,562) (48,650) (6,628) (10,618) 2,586 --
Construction.................... 567 2,414 (318) (1,273) (5,730) 1,718 4,824
Communication development
(international)............... 80 (45) (103) (234) 346 182 17
Unallocated corporate
overhead...................... (1,294) (1,554) (2,670) (503) (628) 651 --
-------- -------- -------- -------- -------- -------- -------
$ (1,581) $ 1,455 $(45,249) $ 1,120 $ (1,884) $ 11,409 $ 4,841
======== ======== ======== ======== ======== ======== =======
Identifiable assets:
Network services................ $187,776 $142,610 $189,776 $142,610 $139,460 $159,660 $ --
Transportation services......... 46,262 49,520 46,262 49,520 50,178 48,830 --
Construction.................... 75,986 64,425 75,986 64,425 66,667 71,941 44,751
Communication development
(international)............... 3,430 3,355 3,430 3,355 3,813 4,496 2,509
Corporate....................... 5,109 2,123 3,109 2,123 1,915 5,833 3,086
-------- -------- -------- -------- -------- -------- -------
$318,563 $262,033 $318,563 $262,033 $262,033 $290,760 $50,346
======== ======== ======== ======== ======== ======== =======
DEPENDENCE UPON KEY CUSTOMERS
Able derives a significant portion of its revenues from a few large
customers and is dependent on a variety of contracted arrangements with these
customers. Those customers are as follows:
PERCENTAGE OF TOTAL
REVENUES DURING
FOR THE MONTHS ENDED THE FISCAL YEARS ENDED
JULY 31, 2000 OCTOBER 31,
-------------------- -----------------------
CUSTOMER OPERATING GROUP THREE NINE 1999 1998 1997
- -------- ------------------ ------- ------- ----- ----- -----
New Jersey Consortium................... Transportation and
Network Services 35,217 79,511 18% 8% --%
WorldCom................................ Network Services 37,362 92,731 15 14 --
Williams Communications, Inc............ Network Services 1,505 3,940 12 -- --
Cooper Tire Company..................... Construction 3,810 11,087 3 6 15
Florida Power Corp...................... Construction 4,112 12,637 3 7 9
State of Illinois (ISTHA)............... Network Services 996 2,381 2 5 --
Able is party to multiple contracts with the New Jersey Consortium which
include 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 Able to (i) construct a fully integrated
electronic toll collection system; (ii) maintain the related customer service
center and violations processing center 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
the violations processing center operations and $40.0 million for fiber network
operations and maintenance billable over the duration of the agreements.
As of October 31, 1999, Able estimated that the electronic toll collection
construction segment of the New Jersey Consortium contracts would generate total
margins of approximately $2.6 million. Based upon an
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estimated completion percentage of 30 percent, Able had recorded job-to-date
margins of $0.8 million through October 31, 1999.
During the three months ended January 31, 2000, Able determined through its
ongoing analyses of the electronic toll collection construction segment of the
New Jersey Consortium contracts, i.e., excluding the violations processing
center 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, Able 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, Able 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 Able to meet performance criteria
and targeted completion deadlines, resulting in penalties and costs in excess of
original estimates. In addition, Able 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, Able 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 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 violations processing center and fiber maintenance contracts. If terminated,
Able would lose the opportunity to earn potential future profits from these
long-term service contracts.
At July 31, 2000, Able had billed and unbilled receivables of $4.5 million
and $14.7 million, respectively, related to WorldCom and $17.8 million and $20.8
million, respectively, related to the New Jersey Consortium.
The loss of any of the New Jersey Consortium contracts, WorldCom or any
other major customers would have a material adverse effect on Able's business,
financial condition and results of operations.
SUPPLIERS AND RAW MATERIALS
Able has no material dependence on any one supplier of raw materials.
CONSTRUCTION CONTRACTS
For construction contracts, Able obtains 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 or other governmental body provides a set of specifications for
the project. Able then estimates the total project cost based on input from
engineering, production and materials procurement personnel and submits a bid
along with a bid bond. For most government-funded projects, the scope of work
extends across many industry segments. In those cases, Able subcontracts its
expertise to a prime contractor. Able must submit performance bonds on
substantially all contracts obtained. Able's financial viability is dependent on
maintaining adequate bonding capacity and any loss of such could have a material
adverse effect on Able.
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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. Able 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, Able was 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, Able supplies 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 Able is not dependent upon any one
supplier for these materials. Able also purchases 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 Able to liquidated damages; however, the availability of these
materials, generally, has been adequate.
NETWORK DEVELOPMENT CONTRACTS
For development and construction of telecommunication networks Able
contracts 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 Able is responsible for obtaining right-of-way usage, Able
contracts with owners of rights of way. The development and project management
is done by Able's employees; construction is normally sub-contracted, and Able
normally provides the material used.
Certain projects are "co-development" projects, whereby Able undertakes
building out routes which include fiber-optic capacity for several customers.
When such projects are on right of way such as interstate highways, Able enters
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, Able manages such projects and
sub-contract the construction activity.
Many network development contracts are several years in duration.
SERVICE CONTRACTS
Able generally provides 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 Able 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. Able
is 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, Able's customers supply most of the
materials required, generally consisting of cable, equipment and hardware, and
Able supplies the expertise, personnel, tools and equipment necessary to perform
its services.
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SALES AND MARKETING
Able markets its systems integration services through a dedicated sales
group. Able's salespeople market directly to existing and potential customers,
including municipalities and other government authorities and telecommunications
companies. Able's 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, 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 duration, is protracted due to the scope
and complexity of the services provided.
Able markets its telecommunications services to local and long distance
telephone companies, utility companies, local municipalities and certain
corporations with particular communications needs. In addition, Able markets its
construction services to certain systems integrators. A dedicated sales force,
as well as members of each subsidiaries' senior management, actively market its
services. Additionally, Able markets its transportation construction services to
state and local departments of transportation, public/private toll authorities
and certain international authorities.
Major development projects in which Able retains an ownership interest
after completion, such as its current Colorado Department of Transportation
projects, are marketed in differing ways. Able contracts for access to the right
of way and, simultaneously, contact various carriers whom Able believes, based
upon its industry awareness, may have an interest in obtaining fiber capacity
for a particular route. As development and construction get underway Able
continues 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
Able's Telecommunications Systems Integration Division of the Network
Services Group competes for business in two segments: the traditional request
for proposal/bid based segment for the installation and integration of
infrastructure projects and a less traditional "project development" segment.
Able's largest competitors in the traditional request for proposal/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, Able assists the customer
in preparing a viable and customized project business plan that addresses the
customer's specific telecommunications needs, including budgetary and other
concerns. Able also has focused on "project development" opportunities
presenting ownership or participation opportunities that can generate recurring
revenues. Able believes that no other company provides this kind of complete,
turnkey project development service for these customers.
Able's 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.
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NETWORK DEVELOPMENT GROUP
The large metropolitan areas such as New York, Los Angeles, Chicago and
Atlanta, already have an incumbent local exchange carrier and multiple
competitive local exchange carriers 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 incumbent local exchange
carrier, one cable company and in some cases, facilities-based competitive local
exchange carriers each targeting a limited area of business. In most cases both
the cable company and the incumbent local exchange carrier have legacy
infrastructures with very limited capability to provide modern services.
TRANSPORTATION SERVICES GROUP
Able's 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 Able's.
COMMUNICATION DEVELOPMENT GROUP
Able's 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.
BACKLOG
Able's estimated backlog at August 31, 2000, was as follows (in thousands):
OPERATIONS AND
CONSTRUCTION MAINTENANCE
ORGANIZATIONAL GROUP CONTRACTS CONTRACTS TOTAL
- -------------------- ------------ -------------- --------
Network Services................................... $427,881 $108,068 $535,949
Transportation Services............................ 59,046 100,254 159,300
Construction....................................... 120,183 56,007 176,190
-------- -------- --------
$607,110 $264,329 $871,439
======== ======== ========
Able expects to complete approximately 40% of the total backlog within the
next twelve months. Service contracts with many customers do not specify the
volume of services to be purchased, but instead, commit Able to perform the
services if requested by the customer and commit the customer to obtain these
services from Able if they are not performed internally. Many of the contracts
are multi-year agreements, ranging from less than one year to 20 years. Able
includes the full amount of services projected to be performed over the lives of
the contract in backlog based on its historical relationships with its customers
and experience in procurements of this nature. Able's 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
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some cases, Able 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 its customers
could have a material adverse effect on Able's 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 Able's consolidated financial condition, there can be no
assurances that Able can obtain the bonding necessary to bid on and accept new
projects.
REGULATION
Able's operations are subject to various federal, state and local law and
regulations regarding the construction industry. These regulations may include:
- licensing requirements;
- bonding requirements;
- permit and inspection requirements applicable to construction projects,
- regulations regarding worker safety and environmental protection; and
- special bidding and procurement requirements on government projects.
In addition, Able's Adesta subsidiary serves as a contractor for the
federal government and is subject to certain security clearance regulations,
including the National Industrial Security Program. If Able is acquired by
Bracknell, a foreign person, Able and Adesta are required to seek clearance
under the National Industrial Security Program to continue to serve as a
government contractor.
Able was not required to make any material expenditures during the fiscal
year ended October 31, 2000 to maintain its compliance with applicable
regulations other than funds spent in the ordinary course of business to secure
any required bonds.
RESEARCH AND DEVELOPMENT: PROPRIETARY TECHNOLOGY AND RIGHTS
Able acquired proprietary software in the MFS Network acquisition including
applications at the lane, plaza, host, and customer service center levels within
a sophisticated electronic toll collection system architecture. Prior to the MFS
Network acquisition, MFS Network 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, Able 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, Able has
continued to refine the software.
With the exception of the continued refinements to the software described
above, Able does not engage in research and development and has had no research
and development policy during any of the last three years. No material funds
have been spent by Able on research and development in any of the last three
fiscal years or during the present fiscal year.
Able relies on a combination of contractual rights, patents, trade secrets,
know-how, trademarks, non-disclosure agreements, licenses and other technical
measures to establish and protect its proprietary rights and to protect its
proprietary applications and technologies. However, Able's business and
profitability are not dependent on any one patent or license. To the extent
necessary, Able intends to vigorously defend any and all rights it has, now or
in the future, in its proprietary applications and technologies. However, it has
can make no assurances that it will be successful in pursuing any of its rights
or, if successful, that it will be timely.
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EMPLOYEES
At August 30, 2000, Able 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
Able through an extensive network of contacts within the communications
industry. None of Able's employees are subject to collective bargaining
agreements.
PROPERTIES
Able's corporate offices are in Roswell, Georgia, where it occupies 6,600
square feet under a lease that expires July 31, 2004. Able also leases 5,110
square feet of office space under a lease that expires January 31, 2004 in West
Palm Beach, Florida. Able entered into a sublease on this property on September
29, 2000. Able leases 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. Able
leases 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. Able leases several field offices and numerous smaller offices. Able
also leases 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.
Able owns and operates a 10,000 square foot facility for operations based
in Chesapeake, Virginia. This property is subject to a mortgage. Able's
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. Able owns a 15,000 square
foot facility located on approximately three acres of land for operations in
Tampa, Florida. Able also owns a small facility in Birmingham, Alabama.
Able believes that its 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 Able currently does
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. Some of Able's 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 Able's financial position.
LEGAL PROCEEDINGS
On or about September 10, 1998, Shipping Financial Services Corp. filed a
lawsuit in the United States District Court for the Southern District of Florida
against Able, its then Chairman of the Board Gideon Taylor, then Chief Executive
Officer Frazier L. Gaines, Able'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 Shipping Financial case. The plaintiffs
assert claims under the federal securities laws against Able and four of Able's
officers that the defendants allegedly caused Able to falsely represent and
mislead the public with respect to:
- two acquisitions: the MFS Network acquisition and the acquisition of the
COMSAT contracts, and
- its 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. Able has moved
to dismiss the action and discovery is stayed during the pendency of this
motion. A hearing is scheduled on October 18, 2000 regarding Able's motion to
dismiss. In November, 2000, the parties entered a memorandum of understanding
regarding the settlement of this action. Pursuant to the memorandum of
understanding, the parties have agreed to settle the action for a payment of
$5.3 million on behalf of the defendants to the plaintiffs. The ultimate
settlement is conditioned on four items. First, the plaintiffs will take
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limited "confirmatory discovery" to ensure to the class that the settlement is a
reasonable resolution based on issues that influence the ultimate amount
recoverable in the event the action is not settled. Second, the settlement is
conditioned upon the closing of the merger by February 15, 2001. Third, the
settlement is conditioned on court approval. Fourth, the settlement is
conditioned on a maximum number of Able shareholders opting out of the
settlement. If more than a specified number of shareholders opt out of the
settlement, there will be no settlement. The number of shareholders will be
agreed upon at a later date. 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 Able and
Thomas M. Davidson, a former member of the Board of Directors. Sirit sued for
tortious interference, fraudulent inducement, negligent misrepresentation and
breach of contract in connection with the acquisition of Adesta Communications
and Adesta Transportation from WorldCom. In May 2000, the jury awarded Sirit
compensatory damages against Able 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, Able 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. The settlement provides for Able to issue Sirit and its
affiliates, subject to using Able's best efforts to obtain shareholder approval,
- 4,074,597 shares of Able's common stock, and
- an additional 936,914 shares of Able's 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 Able 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 September 30, 2000. Sirit
and Able are currently in a dispute based on Sirit's contentions
regarding the Series C preferred stock, as described below. Able believes
that Sirit will not have the right to receive the additional shares of
Able common stock referred to above.
Able also made a cash payment to Sirit of $5 million. The settlement
agreement required Able to use its best efforts to issue and register those
shares by November 30, 2000. Sirit subsequently agreed to extend this deadline
to December 22, 2000. Sirit has indicated, although Able disagrees, that its
agreement to extend this date has been withdrawn and that the November 30, 2000
deadline remains.
Sirit also has the right to buy additional shares from Able, if Able sells
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 Able common stock. However, this right will not apply if Able sells shares at
a price of at least $10.00 per share.
If the holders of its Series B warrants or Able's Series C preferred stock
are entitled to additional shares of Able's common stock or derivative
securities, Able 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 Able is required to make any cash payments to the holders of its Series
B warrants or Series C convertible preferred stock or warrants, including cash
penalties and redemption payments, Sirit will become entitled to additional
shares of Able common stock for no additional consideration. The number of
shares to which Sirit 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 would not be issued to Sirit
without Sirit's consent.
The settlement agreement also provides that if Able enters into an
agreement to merge with an unaffiliated entity, Sirit may elect to participate
in the transaction or otherwise continue with its rights under the settlement
agreement. In September 2000, Able agreed to extend the deadline for Sirit to
make the election described above. Sirit elected to participate in the merger on
October 2, 2000. As a result of Sirit's election to participate in the merger,
Able's obligation to issue to Sirit and register shares of Able common
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stock is held in suspense. The settlement agreement provides that if Sirit
elects to participate in the merger, it will be entitled to receive the same
consideration as all other holders of Able common stock, as if Sirit owned its
full entitlement to Able common stock pursuant to the settlement agreement,
subject to a maximum value of $26.2 million, unless Sirit were to receive its
shares of Able common stock before the completion of the merger. Further, if the
consideration provided to Sirit is in the form of securities, those securities
will be valued, for the purpose of calculating the $26.2 million limit, at their
closing trading price on the date the merger is completed.
If Able fails to satisfy its obligations under the settlement agreement,
Sirit may give notice that it intends to execute on a consent judgment for $20
million. Able would then have the option to cure the breach during a five
business day cure period or to pay the $20 million consent judgment before
execution is commenced.
The settlement agreement further provides that if the merger has not been
completed by the second election date, Sirit would again have the right to elect
whether to participate in the merger or otherwise continue with its rights under
the settlement agreement. Sirit subsequently agreed to change this date from
December 1, 2000 to December 23, 2000. Sirit has indicated, although Able
disagrees, that its agreement to change the second election date has been
withdrawn and that the second election date remains December 1, 2000. Able
expects that the merger will be completed before December 23, 2000.
If the merger is not completed by the second election date and Sirit elects
to continue its with its rights under the settlement agreement, Able could
satisfy its obligations under the settlement agreement by issuing, subject to
shareholder approval, shares of Able common stock in the amounts described above
to Sirit. If Able fails to issue and register these shares in a timely manner,
Able may be required to pay Sirit $20 million in cash pursuant to the consent
judgment.
If the merger agreement is terminated for any reason, Able could satisfy
its obligations under the settlement agreement by issuing, subject to
shareholder approval, shares of Able common stock in the amounts described above
to Sirit. If Able fails to issue and register these shares in a timely manner,
Able may be required to pay Sirit $20 million in cash pursuant to the consent
judgment.
On November 13, 2000, Sirit Technologies, Inc. filed an emergency motion
against Able in the United States District Court for the Southern District of
Florida in which Sirit claims that it will be deprived of various alleged
entitlements under the settlement agreement entered into between Sirit and Able.
Sirit has asked the court to determine that Able is obliged to offer to Sirit
additional Able common stock pursuant to the anti-dilution provisions of the
settlement agreement. Sirit has also asked the court to enjoin Able from
effectuating its merger with Bracknell unless and until Able issues the stock or
recognizes the alleged anti-dilution rights claimed by Sirit and enters into
appropriate agreements with Bracknell protecting those alleged rights. Bracknell
and Able believe that it is unlikely that an injunction will be granted and
therefore do not expect these proceedings to have a significant impact on the
proposed merger. Bracknell and Able believe that Sirit's claims are without
merit, and Able has informed Bracknell that Able intends to vigorously defend
the motion. A hearing on this motion took place on November 27, 2000. As a
result of that hearing, the court did not issue a finding on the merits of
Sirit's motion, but rather scheduled another hearing to take place on December
14, 2000 to determine whether Sirit would be irreparably harmed as a result of
the merger and whether there ought to be any declaratory action prior to the
merger, and if so, what action. Based on the claims specifically identified in
Sirit's filings with the Court, Bracknell and Able believe that in the event
that Sirit prevails on this motion, Bracknell has registered, as part of the
registration statement relating to this proxy statement/prospectus, and reserved
for issuance to Sirit sufficient shares to address Sirit's claims.
In 1997, Bayport Pipeline, Inc. filed a lawsuit against MFS Network seeking
a declaratory judgment concerning the rights and obligations of Bayport and MFS
Network 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.
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On February 28, 2000, the independent arbitrator ruled that Able owed
Bayport $4.1 million. Able 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. filed a lawsuit in the United
States District Court for the Southern District of California, (San Diego),
against MFS Network 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 MFS Network and US Public
Technologies concerning the Consortium Regional Electronic Toll Collection
Implementation Program in the state of New Jersey. In this lawsuit, US Public
Technologies seeks actual damages in excess of $8.5 million and unspecified
exemplary damages. In June 2000, discovery was extended to August 2000 and
dispositive motions were due October 10, 2000. No trial date has yet been set.
In 1999, Newbery Alaska, Inc. filed a demand for arbitration seeking
approximately $3.8 million. This dispute arises out of Newbery's subcontract
with MFS Network related to the fiber optic network constructed by MFS Network
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 prejudgment interest of approximately $0.027
million and post-judgment 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. Able is challenging the arbitrators award in Federal
District Court (Alaska) and intend to appeal the ruling, if necessary.
In 1998, Alphatech, Inc. filed a lawsuit in the U.S. District Court in
Massachusetts against MFS Network. 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 Unfair and Deceptive Acts and Practices Law, promissory estoppel,
quantum meruit, and unjust enrichment. Alphatech's claim is for in excess of $12
million. The court has denied Able's motion for summary judgment on breach of
contract claims and granted its motion for summary judgment on the unfair and
deceptive practices claim. The court has also granted Able's motion to exclude
Alphatech's expert evidence on lost profits damages and has granted additional
discovery for the potential remedy for Alphatech's misappropriation of trade
secrets claim. This case has been settled and dismissed with prejudice. The
parties have entered into a settlement agreement providing for payment of
$350,000 by MFS Network, payable upon the earlier of the closing of the merger
or February 1, 2001.
Able is subject to other lawsuits and claims for various amounts which
arise out of the normal course of its business. Able intends to vigorously
defend itself in these matters. Able does not believe that any of these suits
will have a material adverse effect on Able's financial position.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of September 30, 2000, the Able common stock
owned beneficially by (i) each of the executive officers, (ii) each of the
current directors, (iii) all executive officers and directors as a group, and
(iv) each person known by us to be the "beneficial owner" of more than five
percent of Able 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 own it directly, but also if you indirectly, through a relationship, a
position as a director or trustee, or a contract or understanding, share the
power to vote 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 executive officers
and directors listed have sole voting and investment power over his shares. As
of November 13, 2000, there were 16,374,504 shares of Able common stock issued
and outstanding and approximately 391 holders of record.
PRO FORMA BENEFICIAL
OWNERSHIP AFTER
MERGER
---------------------
SHARES PERCENTAGE PERCENT
BENEFICIALLY BENEFICIALLY NUMBER OF OF
NAME(1) CURRENT TITLE OWNED(2) OWNED SHARES CLASS
- ------- --------------------------- ------------ ------------ ---------- --------
Billy V. Ray, Jr.(3)(4).... Chief Executive Officer and 410,000 2.4% -- --
Chairman of the Board of
Directors
Edwin D. Johnson(3)(5)..... President and Chief 166,470 * 9,882 *
Financial Officer and a
Director
Frazier L. Gaines(6)....... Former Chief Executive 217,000 1.3% 82,200 *
Officer and Current
President -- Able Telcom
International
Charles A. Maynard(7)...... Chief Operating Officer 200,000 1.2% -- --
James E. Brands(8)......... Senior Executive Vice 100,000 * -- --
President
Michael Brenner(8)......... General Counsel and 100,000 * -- --
Executive Vice President
Edward Z. Pollock(9)....... Associate General Counsel 66,000 * 600 *
Robert Sommerfeld(10)...... President -- Adesta 100,000 * -- *
Communications
Philip A. Kernan, President -- Adesta
Jr.(11).................. Transportation 125,000 * -- --
J. Barry Hall(12).......... President -- Transportation 102,472 * 61,483 *
Safety Contractors, Inc.
Richard A. Boyle(13)....... President -- Patton 65,000 * -- --
Management Corp.
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PRO FORMA BENEFICIAL
OWNERSHIP AFTER
MERGER
---------------------
SHARES PERCENTAGE PERCENT
BENEFICIALLY BENEFICIALLY NUMBER OF OF
NAME(1) CURRENT TITLE OWNED(2) OWNED SHARES CLASS
- ------- --------------------------- ------------ ------------ ---------- --------
C. Franklin Director
Swartz(3)(14)............ 40,000 * -- --
H. Alec McLarty(15)(3)..... Director 11,610 * 966 *
Gerald Pye................. Director -0- -0- -- --
All Executive Officers and
Directors as a Group (15
persons)................. 1,684,082 9.9% 290,449 *
Gideon D. Taylor(16)....... Former Director and Officer 946,638 5.8% 435,983 *
WorldCom(17)............... 9,348,303 33.6% 9,672,730 15.0%
- ---------------
* Less than 1%.
(1) The address for each of Able's directors and executive officers is 1000
Holcomb Woods Parkway, Suite 440, Roswell, GA 30076.
(2) All of the options granted to officers and directors since December 1998
are subject to shareholder approval. See Proposal No. 5 regarding these
options. One of the conditions to the completion of the Merger is that Able
cancels or terminates all outstanding options to purchase shares of Able
common stock. Accordingly, in calculating the number of shares held in the
table above under "Pro Forma Beneficial Ownership After the Merger,"
options have been treated as if cancelled.
(3) Standing for reelection for director.
(4) Consists of 410,000 shares underlying stock options, subject to shareholder
approval pursuant to Proposal No. 5.
(5) Mr. Johnson owns 16,470 shares and options to purchase 150,000 shares,
subject to shareholder approval pursuant to Proposal No. 5.
(6) Includes 80,000 shares underlying stock options, which are immediately
exercisable subject to shareholder approval pursuant to Proposal No. 5,
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. Does
not include 100,000 shares underlying stock options to be granted to Mr.
Gaines if approved by the shareholders pursuant to Proposal No. 5.
(7) Consists of 200,000 shares underlying stock options, subject to shareholder
approval pursuant to Proposal No. 5.
(8) Consists of 100,000 shares underlying stock options, subject to shareholder
approval pursuant to Proposal No. 5.
(9) Mr. Pollock owns 1,000 shares and options to purchase 65,000 shares,
subject to shareholder approval pursuant to Proposal No. 5.
(10) Includes 35,000 shares underlying stock options granted under the Able 1995
stock option plan and 65,000 shares underlying stock options subject to
shareholder approval pursuant to Proposal No. 5.
(11) Consists of 125,000 shares underlying stock options subject to shareholder
approval pursuant to Proposal No. 5.
(12) Mr. Hall received these shares in payment of the October 31, 1999 portion
of an earn-out owed from Able's acquisition of the Georgia Electric
Company.
(13) Consists of 65,000 shares underlying stock options, subject to shareholder
approval pursuant to Proposal No. 5.
(14) Consists of 40,000 shares underlying stock options, subject to shareholder
approval pursuant to Proposal No. 5.
(15) These include 1,610 shares owned by Mr. McLarty's wife and 10,000 shares
underlying options, which are immediately exercisable subject to
shareholder approval pursuant to Proposal No. 5.
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(16) These include 21,619 shares owned by Mr. Taylor's wife, and 220,000 shares
underlying stock options, which are immediately exercisable subject to
shareholder approval pursuant to Proposal No. 5. Mr. Taylor's address is
265 Harper Road, Dry Fork, VA 24549.
(17) Includes 3,050,000 shares issued to WorldCom by converting debt into shares
at $8.375 per share on January 13, 2000; 2,600,000 shares issuable upon the
exercise of the option granted to WorldCom in 1998 which are issuable
subject to shareholder approval of Proposal No. 6 and currently are stock
appreciation rights concerning 2,600,000 shares of Able common stock and
3,696,303 shares issuable upon conversion of the Series E preferred stock.
WorldCom's address is 515 East Amite St., Jackson, Mississippi 39201. In
the event the merger is completed the stock appreciation rights concerning
600,000 shares of Able common stock will be cancelled and stock
appreciation rights concerning 2,000,000 shares of Able common stock will
be exchanged for warrants to purchase 1,200,000 shares of Bracknell common
stock. In addition, the Able Series E preferred stock will be converted
into the right to receive that number of shares of Bracknell common stock
determined by dividing the aggregate face value of all shares of Able
Series E preferred stock divided by Cdn $8.25.
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DESCRIPTION OF CAPITAL STOCK -- BRACKNELL
The following includes information concerning Bracknell's common shares,
based on Canadian law and a summary of the material provisions of the articles
of amalgamation, as amended and by-laws. For more detailed information, please
refer to the full articles of amalgamation, copies of which have been filed as
exhibits to the registration statement of which the proxy statement/prospectus
forms a part.
General
Bracknell's authorized capital stock consists of an unlimited number of
shares of Bracknell common stock and an unlimited number of preferred shares
issuable in series.
Common Stock
Each holder of shares of Bracknell common stock is entitled to one vote per
share, which may be given in person or by proxy, in the election of directors of
Bracknell and on all other matters submitted to a vote of Bracknell's
shareholders. The holders of shares of Bracknell common stock are entitled to
share pro rata in any dividends declared by Bracknell's board of directors out
of funds legally available therefor, subject to preferential rights of the
holders of the preferred shares. In the event of liquidation, dissolution or
winding up, of Bracknell or other distribution of assets of Bracknell, the
holders of shares of Bracknell common stock are entitled to receive all of
Bracknell's remaining assets, subject to the preferential right of the holders
of the preferred shares. There are no preemptive rights, and the Bracknell
common stock is not subject to redemption. All shares of Bracknell common stock
now outstanding and to be outstanding upon exercise of any options and warrants
are, and will be, fully paid and non-assessable. Shareholders do not have
cumulative voting rights for the election of directors.
There is no provision in Bracknell's articles or by-laws that would have
the effect of delaying, deferring or preventing a change in control in Bracknell
or that would operate only with respect to an extraordinary corporate
transaction involving Bracknell, such as a merger, reorganization, tender offer,
sale or transfer of substantially all of Bracknell's assets or liquidation.
However, certain special requirements apply to the acquisition by a non-Canadian
of control of a Canadian business.
Preferred Shares
The preferred shares may be issued from time to time in one or more series,
each series comprising the number of shares, designation, rights, privileges,
restrictions and conditions, including, without limitation, the rate or amount
of dividends or the method of calculating dividends, the dates of payment of
dividends, the retraction, redemption, purchase for cancellation, conversion
rights, if any, and/or voting rights, if any, and any sinking fund, share
purchase plan or other provisions, subject to regulatory approval, if
applicable, which the board of directors determines by resolution. The preferred
shares rank prior to the shares of Bracknell common stock with respect to
payment of dividends and distributions in the event of the liquidation,
dissolution or winding-up, whether voluntary or involuntary, of Bracknell. The
preferred shares of any series may also be given such other preferences, not
inconsistent with the Bracknell articles, over the shares of Bracknell common
stock and any other shares ranking junior to such preferred shares as may be
fixed by the directors. The preferred shares of any series may be made
convertible into shares of Bracknell common stock. Unless the directors
otherwise determine, or except as otherwise required by law, the holder of each
share of a series of preferred shares shall not be entitled to vote at any
meeting of shareholders.
Series A Preferred Shares
Bracknell authorized a series of preferred shares designated as 9.5%
convertible preferred shares Series A. Certain rights, privileges, restrictions
and conditions have attached to the Series A preferred shares in addition to the
rights, privileges, restrictions and conditions attached to the preferred
shares. Holders of the Series A preferred shares are entitled to a fixed,
preferential cumulative cash dividend of US $0.40375 per share per year. On or
after September 30, 2004, Bracknell may elect to redeem the Series A preferred
shares, in part or in full, for U.S. $4.25 per share, plus an amount equal to
all dividends accrued and unpaid. Bracknell may
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purchase for cancellation at any time all or from time to time any part of the
outstanding Series A preferred shares by private contract or by invitation for
tenders. The Series A preferred shares have no voting rights and upon
shareholder approval all outstanding Series A preferred shares may be converted
into common shares of Bracknell. In the event of the liquidation, dissolution or
winding-up of the Bracknell, whether voluntary or involuntary, or in the event
of any other distribution of assets of the Bracknell among its shareholders for
the purpose of winding up in its affairs, the holders of the Series A preferred
shares shall be entitled to receive from the assets of the Bracknell a sum equal
to US $4.25 for each Series A preferred share held by them respectively, plus an
amount equal to all dividends accrued and unpaid. No Series A preferred shares
have been issued to date.
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DESCRIPTION OF CAPITAL STOCK -- ABLE
Able is 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. Proposal No. 3 in this proxy statement/prospectus contains a
proposal by Able for an increase in the authorized capital stock to 100,000,000
shares of common stock and 5,000,000 shares of common stock.
For more detailed information, please refer to Able's amended and restated
articles of incorporation and bylaws.
Common Stock. As of September 30, 2000, Able 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 Able, the holders of common stock are entitled to
receive ratably the net assets of Able 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
will be, when issued, 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 Able may designate and issue in the future.
Preferred Stock. The board of directors has the authority, without further
action of Able's shareholders, to issue up to an 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 Able.
As of November 13, 2000, Able has 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 E 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 E preferred stock outstanding on November 13, 2000, the number of shares
of common stock unto which they are convertible and the percentage of Able's
outstanding shares of common stock they would represent if converted on such
date:
SHARES OF COMMON STOCK
SERIES OF PREFERRED STOCK NUMBER OF SHARES ISSUABLE UPON CONVERSION PERCENTAGE
- ------------------------- ---------------- ------------------------- ----------
Series C................ 5,000 3,750,000 18.6%(1)
Series E................ 1,000 3,696,304 18.4(1)
----- --------- ----
Total................... 6,000 7,446,304 31.3%(2)
===== ========= ====
- ---------------
(1) Assumes conversion of only the Series C or Series E, as the case may be.
(2) Assumes conversion of both the Series C and Series E.
Series C Convertible Preferred Stock. Able has 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 Able receives shareholder approval
of this conversion or December 1, 2000. Able must pay dividends accrued
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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 November 13, 2000, they would be entitled to
3,750,000 shares of common stock, calculated by taking the stated value of
$3,000, divided by the $4.00 conversion price, and multiplied by 5,000, the
number of Series C shares outstanding, or 18.6% of Able's 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 Able's common stock or if Able
issues 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
Able's issuing more shares of common stock than originally contemplated, Able's
then-existing holders of the common stock will face additional dilution.
Holder Redemption Rights. In addition to its redemption obligations if
Able does not timely register the common stock as described below, Able may be
required to redeem the Series C convertible preferred stock at the holders'
option. Able would have five business days to make the redemption payments.
Furthermore, if Able enters into a major transaction such as a merger, sale of
all or substantially all of its assets or a purchase, tender or exchange offer
accepted by holders of more than 30% of its outstanding shares of common stock,
the holders can require Able 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 September 30,
2000 was $15 million. This redemption payment would be required to be made
before consummation of the major transaction.
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. Able's 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. Able has until
November 30, 2000 to register these securities.
If Able fails to timely register the shares, the holders will have the
right after December 1, 2000 to require Able 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 its
common stock. As measured on September 30, 2000, the trading price of Able's
common 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 September 30, 2000.
For 90 days after the registration statement is effective, neither Able nor
any of its 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 Able's stock option plan; or
- options otherwise issued to its employees.
Amendment Negotiations. Able is currently negotiating with the holders of
Series C preferred stock to extend the registration and all related deadlines
described above to December 22, 2000.
Delinquent Payments. If Able fails to timely pay any redemption price or
any other penalty that Able is obligated to pay to holders of the Series C
convertible preferred stock, the holders can require Able to redeem all of the
Series C convertible preferred stock, all of the Series C warrants held by them,
and any shares of
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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 Able's
common stock. Based on the conversion value of the Series C convertible
preferred stock on July 17, 2000, the trading price of Able's 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.
Able also would be required to pay default interest at 2% per month for any
delinquent amounts.
Series E Convertible Preferred Stock. Able has designated and issued 1,000
shares of preferred stock as Series E convertible preferred stock. The Series E
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 E preferred stock
are not cumulative but must be paid if Able is liquidated or dissolved, there is
an acquisition of Able by another entity that results in a transfer of 50
percent or more of Able's outstanding voting power or there is a sale of all or
substantially all of Able's assets.
Voting Rights. Holders of Series E preferred stock are entitled to one
vote for each share of common stock into which the Series E preferred stock may
be converted on all matters on which holders of common stock are entitled to
vote other than the election of directors, voting as a class with the common
stock.
Conversion Rights. If holders of Series E preferred stock could convert to
common stock as of November 13, 2000, they would be entitled to 3,696,303 shares
of common stock, calculated by taking the stated value of $37,000 divided by a
$10.01 conversion price and multiplied by 1,000 which is the number of Series E
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 Able's common stock or if Able issues common stock or
convertible securities at a price less than the conversion price.
In addition, if there is a liquidation event, other than 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 E preferred stock would convert to
12,869,565 shares of common stock, calculated by taking the stated value of
$37,000 divided by $2.875, the adjusted conversion price based on the August 29,
2000 closing price, multiplied by 1,000, which is the number of Series E 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 Able issuing more shares of common stock than
originally contemplating, Able's 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 E 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 Able's Series C preferred stock, an amount equal to
$37,000 per share.
Company Redemption. Able may at its option at any time after August 23,
2004 redeem all of the outstanding Series E 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.
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Series B Securities. In 1998, Able issued 5,000 shares of Series B
preferred stock and related warrants to purchase its common stock. All of the
Series B preferred stock has been converted or redeemed. The following table
summarizes the issuances of common stock and warrants to the former holders of
Able's Series B preferred stock.
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
- ---------------
(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) Able has the right to redeem these warrants for $35.00 per share unless it
is in default under the warrants. Because Able has not yet registered the
underlying common stock, it currently does 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 Able's common stock on the date of exercise.
(5) If Able does not obtain shareholder approval to issue these shares before
December 1, 2000 although Able is negotiating an extension to December 23,
2000, Able 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 Able does not timely
register the shares or maintain its listing on Nasdaq or another approved
market. Specifically, if Able does not timely register the holders' shares, the
exercise price of the various warrants is reduced by 1% if Able's registration
is late by 1 to 30 days, and 1.5% for each 30-day period thereafter. If during
the registration period Able's common stock is delisted, Able owes 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 Able fails to make any
of these payments, the warrant exercise price is reduced by 30% and the holder
can require Able to redeem the common stock at 130% of their value, plus the
delinquent amounts.
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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 Able's common stock, or if Able issues common stock or
convertible securities at a price less than the exercise price or the fair
market value of Able's common stock.
THE WORLDCOM OPTION AND THE WORLDCOM SARS
GENERALLY
As part of the MFS Network acquisition, Able granted an option to WorldCom
to purchase up to 2,000,000 shares of the common stock at an exercise price of
$7.00 per share. Able also granted WorldCom an equity award in the form of stock
appreciation rights equivalent to 600,000 shares of common stock, payable in
cash, stock, or a combination of both at Able's option.
For a discussion of the terms of these securities, see Proposal No. 6 in
this proxy statement/prospectus.
COMPARATIVE RIGHTS OF ABLE SHAREHOLDERS AND BRACKNELL SHAREHOLDERS
Following the merger, the shareholders of Able, a Florida corporation, will
become shareholders of Bracknell, an Ontario corporation. The following is a
summary of the material differences between the current rights of Able
shareholders and Bracknell shareholders. These differences arise from
differences between the Florida Business Corporation Act and the Business
Corporations Act, Ontario, R.S.O. 1990, C.B. 16, as amended, and between
Bracknell's articles of incorporation and by-laws and the Able articles of
incorporation and by-laws. As Bracknell is a reporting issuer in Canada, it is
also subject to the securities legislation of each Canadian province and
territory, as amended from time to time, and the rules, regulations, blanket
orders and orders having application to Bracknell and forms made or promulgated
under the foregoing legislation, and the policies, bulletins and notices of
regulatory authorities administering such legislation. For a more detailed
description of the rights of shareholders of Able and shareholders of Bracknell
refer to the relevant provisions of Florida and Ontario law, the Able articles
and Able by-laws and the Bracknell articles and the Bracknell by-laws. For
information as to where the governing instruments of Able and Bracknell may be
obtained, see "Where You Can Find More Information."
SHAREHOLDER VOTING RIGHTS
Under Florida law, each shareholder is entitled to one vote per share, by
person or by proxy, on each matter submitted to a vote at a shareholder meeting
unless the articles of incorporation provide otherwise. The Able articles of
incorporation do not provide otherwise. In addition, the articles of
incorporation may provide for cumulative voting at all elections of directors of
the corporation. The Able articles and by-laws do not provide for cumulative
vote. A quorum for a meeting of shareholders consists of a majority of the votes
of shares of stock issued and outstanding and entitled to vote, unless otherwise
required by law.
Under Ontario law and the Bracknell articles of incorporation, holders of
common shares are entitled to one vote per share, either in person or by proxy,
on each matter to be voted on at shareholder meetings. Under Ontario law, unless
the by-laws otherwise provide, voting at a meeting of shareholders shall be by a
show of hands except where a ballot is demanded, either before or after the
vote, by a shareholder or proxyholder entitled to vote at the meeting. The
Bracknell by-laws provide for voting by a show of hands except where a ballot is
demanded. On a vote by a show of hands, every shareholder or proxyholder present
has one vote. On a vote by a ballot, every shareholder or proxyholder present
has one vote for each share registered in his or her
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name or in the name of the shareholder he or she represents. Accordingly, if no
shareholder or proxyholder requests to vote by ballot on a contentious matter at
a meeting of shareholders, those shareholders or proxyholders who attend the
meeting can control the vote despite the fact that they would not control the
vote if the vote had been taken by ballot.
Under Ontario law cumulative voting is only permitted in the election of
directors, if the articles of incorporation provide for it. The Bracknell
articles of incorporation do not provide for such cumulative voting. Under
Ontario law, unless the by-laws otherwise provide, the holders of a majority of
the shares entitled to vote at a meeting of shareholders, present in person or
by proxy, constitute a quorum. The quorum requirement in the Bracknell by-laws
for the transaction of business at a meeting of shareholders, other than the
appointment of the chairman of the meeting and the adjournment of the meeting,
is at least two persons holding or representing by proxy not less than 20% of
the shares entitled to vote at the meeting.
SPECIAL MEETING OF SHAREHOLDERS
Under Florida law, a special meeting of shareholders may be called only by
(1) the board of directors or by such person or persons as may be authorized by
the articles of incorporation or by-laws and (2) if 10% or more of all the votes
entitled to be cast on an issue proposed to be considered at the special meeting
demand in writing that a special meeting be held; provided, that the articles of
incorporation can make the threshold percentage as high as 50%. The Able by-laws
provide that a special meeting of shareholders may be called by the board of
directors or Chairman of the Board.
The Able articles of incorporation do not alter the percentage of
shareholders that can demand a special meeting. Under Florida law, notice of all
meetings of shareholders must be sent not less than 10 days and not more than 60
days before the meeting to each shareholder entitled to vote at the meeting.
Able's by-laws say that notice of meetings of shareholders must be sent not less
than 10 days and not more than 50 days before the meeting.
Under Florida law, if there is a quorum, a resolution is approved by the
shareholders if the votes cast favoring the action exceed the votes cast against
the action, unless the articles of incorporation or Florida law require a
greater number of affirmative votes. Able's articles of incorporation do not
provide for a greater number of affirmative votes. However, Florida law requires
absolute majority approval for amendments to the articles of incorporation
creating dissenters rights, mergers, share exchanges, sale of all or
substantially all of the company's assets and dissolution.
Under Ontario law, a special meeting of shareholders may be called by the
directors. Additionally, the holders of not less than 5 percent of the issued
shares of a corporation that carry the right to vote at a meeting sought to be
held may require the directors to call a meeting of shareholders. Bracknell is
an "offering corporation" within the meaning of Ontario law. Under Ontario law,
notice of all meetings of shareholders of an offering corporation must be sent
not less than 21 days and not more than 50 days before the meeting to each
shareholder entitled to vote at the meeting. Under Ontario law, the directors
may, by resolution, fix a time not exceeding 48 hours, excluding Saturdays and
holidays, preceding any meeting or adjourned meeting of shareholders before
which time proxies to be used at such meeting must be deposited, provided that
any period of time so fixed is specified in the notice of meeting. The presence
of the provision could make it more difficult for a shareholder not attending a
meeting of shareholders in person to vote or change its vote in the period
preceding the meeting. Florida law does not contain a similar provision.
Under Ontario law, the vote of shareholders required to pass a resolution
is typically a majority or two-thirds of the votes cast on the resolution,
depending upon the action being voted upon. A special resolution is a resolution
passed at a meeting by not less than two-thirds of the votes cast by the
shareholders entitled to vote on the resolution. Matters requiring approval by
special resolution include amendments to the articles of incorporation, adoption
of an amalgamation agreement, authorizing continuance in another jurisdiction,
adopting an arrangement, approving the sale, lease or exchange of substantially
all of the corporation's assets, approving certain "going private" transactions,
requiring voluntary winding up and authorizing the voluntary dissolution of the
corporation. Matters requiring approval by a majority of the votes cast include
confirmation,
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rejection or amendment of by-laws, election of directors, removal of directors,
appointment of auditors and fixing the remuneration of the auditors.
INSPECTION RIGHTS
Florida law allows any stockholder to inspect the shareholders list for a
meeting during regular business hours ten days prior to the meeting, during the
meeting and during any adjournment of the meeting. In addition, any stockholder
can inspect and copy, during regular business hours at the corporation's
principal office, the corporation's governing documents, such as articles of
incorporation, bylaws, resolutions of the board of directors establishing
securities and minutes of shareholders meetings, if the stockholder gives
written notice of his or her demand at least five days in advance. Any
stockholder can also inspect and copy, during regular business hours at a
reasonable location specified by the corporation, other minutes of the board of
directors or its committees, accounting records, shareholder records and any
other books and records of the corporation, if (1) the stockholder gives written
notice of his or her demand at least five days in advance, (2) the demand is
made in good faith and for a proper purpose, (3) the purpose is described and
the records to be inspected or copied are specified and (4) the records
specified are directly connected with the shareholder's purpose.
Under Ontario law, a shareholder of a corporation and the shareholder's
agents and legal representatives have the right to inspect copies of the
following during the usual business hours of the corporation, and to take
extracts therefrom free of charge: (1) the articles and by-laws of the
corporation, including any amendments, (2) minutes of meetings and resolutions
of shareholders, (3) a register setting out the names and residence addresses,
while directors, of all present and past directors, with the dates on which each
became or ceased to be a director, and (4) a securities register. Applicants who
are shareholders of an Ontario corporation, their agents and legal
representatives and, where the corporation is an offering corporation, any other
person, may require the corporation to furnish a shareholder list to the
applicant upon payment of a reasonable fee and delivery of a statutory
declaration as to the name and address of the applicant and to the effect that
the list will not be used except in connection with an effort to influence
voting by shareholders of the corporation, an offer to acquire shares of the
corporation or any other matter relating to the affairs of the corporation.
In addition, under Ontario law, a securityholder of a corporation and, in
the case of an offering corporation, the Ontario Securities Commission, may
apply to a court for an order directing that an investigation be made of a
corporation or of any affiliated corporation. Bracknell is an offering
corporation under Ontario law.
PRE-EMPTIVE RIGHTS
Unless the articles of incorporation expressly provide otherwise,
shareholders of a Florida corporation do not have pre-emptive rights. Able's
articles of incorporation do not provide for pre-emptive rights.
Under Ontario law if it is so provided in a corporation's articles, no
shares of a class or series shall be issued unless the shares have first been
offered to the shareholders of the corporation holding shares of that class or
series or of another class or series on such terms as are provided in the
articles. The Bracknell articles of incorporation do not provide for any such
pre-emptive rights.
DIVIDENDS AND REPURCHASE
Under Florida law, a corporation may not make a distribution, including,
but not limited to, the payment of cash dividends, to its shareholders if, after
giving effect to the distribution, the corporation would be unable to pay its
debts as they come due or its total assets would be less than the sum of its
total liabilities plus the amount required to satisfy outstanding liquidation
rights superior to the liquidation rights of those receiving the distribution.
Under Florida law, a corporation may acquire its own shares unless otherwise
provided in the articles or prohibited under the distribution restrictions.
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Unless the articles of incorporation provide otherwise, a Florida
corporation can also declare and issue share dividends to the shareholders. The
Able articles and by-laws do not further restrict distributions or share
dividends on the Able common stock.
Under Ontario law, subject to a corporation's articles, the directors may
declare and the corporation may pay a dividend by issuing fully paid shares of
the corporation or options or rights to acquire fully paid shares of the
corporation and, subject to the solvency test described in the following
sentence, a corporation may pay a dividend in money or property. The directors
are prohibited from declaring and the corporation is prohibited from paying a
dividend if there are reasonable grounds for believing that the corporation is
or, after the payment would be unable to pay its liabilities as they become due,
or the realizable value of the corporation's assets would thereby be less than
the aggregate of its liabilities and its stated capital of all classes. Ontario
law also permits a corporation, subject to its articles, to purchase or
otherwise acquire any of its issued shares or warrants, provided that no payment
to purchase or otherwise acquire its shares may be made unless, subject to
certain specified exceptions, the solvency test described above is satisfied at
the time of, and after, such payment.
AUTHORITY TO ISSUE SHARES
Florida law provides a corporation the authority to issue the number of
shares of its capital stock as are authorized in its articles of incorporation.
The Able articles currently authorize the corporation to issue 25,000,000
shares of common stock and 1,000,000 shares of preferred stock. Florida law
permits the board of directors to fix the preferences, limitations and relative
rights of series of authorized classes of stock without additional shareholder
approval. Any amendments to the articles of incorporation increasing or
decreasing the number of authorized shares, or affecting the rights of shares of
a series or class issued and outstanding, require a plurality vote in favor of
the amendment, unless dissenter's rights would be created, in which case a
majority of the votes entitled to be cast must approve the amendment.
Ontario law does not require that any maximum number of shares which a
corporation has the authority to issue be specified in its articles. The
Bracknell articles currently authorize the corporation to issue an unlimited
number of common shares, and an unlimited number of preferred shares, issuable
in series. The directors may fix the rights, privileges, restrictions and
conditions attaching to each series of preferred shares, including whether and
on what basis such shares are convertible into common shares. The directors may
also determine that one or more series of preferred shares have voting rights.
These preferred shares may be created and issued by the directors without a
shareholder vote.
AMENDMENTS TO GOVERNING INSTRUMENTS
Florida law provides that unless a corporation's articles of incorporation
provide otherwise, a board of directors may amend certain items of the
corporation's articles of incorporation without shareholder approval. Certain
amendments required to have shareholder approval must be recommended by the
board of directors and submitted to a vote at a meeting of shareholders, where
such amendments will be adopted if the votes cast in favor of the amendment
exceed the votes cast against the amendment, unless dissenter's rights would be
created, in which case a majority of the votes entitled to be cast must approve
the amendment. Florida law provides that the shareholders can amend or repeal
the by-laws. In addition, Florida law also provides that the bylaws can be
amended or repealed by the board of directors unless the articles of
incorporation or Florida law provide otherwise, or unless the shareholders in
amending or repealing bylaws provide that the board of directors cannot do so.
The Able articles of incorporation do not provide otherwise and the shareholders
have not taken that right away from the board of directors.
Under Ontario law, any change to the articles of incorporation must be
approved by special resolution of shareholders, other than a change in the
corporation's name from a number name to a name that is not a number name, and
other than, where the directors are authorized by the articles to divide any
class of unissued shares into series and to determine the designation, rights,
privileges, restrictions and conditions thereof, a change creating such series
and fixing such attributes, which changes may be authorized by resolution of the
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directors. The directors of Bracknell are authorized to amend the Bracknell
articles to create series of preferred shares, and to fix the attributes of such
shares, without any requirement for prior shareholder approval. If a proposed
amendment requires approval by special resolution, the holders of shares of a
class, or of a series of a class, if the proposed amendment would affect such
series differently from the other series of shares of such class, are entitled
to vote separately as a class, or series, if the proposed amendment affects the
class or series as specified in Ontario law, whether or not the class or series
otherwise carries the right to vote. Ontario law permits a corporation to
provide in its articles that a class or series shall not be entitled to vote
separately in the case of an amendment to increase or decrease the maximum
number of shares of a class or series or of a class or series having rights
equal or superior to that class or series, to effect an exchange,
reclassification or cancellation of all of the part of the shares of a class or
series, or to create a new class or series equal or superior to that class or
series. However, the Bracknell articles do not contain this provision.
Under Ontario law, the board of directors of a corporation may make and
amend by-laws provided that any such by-law or amendment must be confirmed at
the next meeting of shareholders by the affirmative vote of a majority of the
shareholders entitled to vote thereat. Any by-law or amendment is effective when
made by the board of directors but ceases to be effective if not confirmed by
the shareholders.
BOARD OF DIRECTORS
Florida law provides that the board of directors of a Florida corporation
shall consist of one or more directors as fixed by the articles of incorporation
or by-laws of the corporation. The Able by-laws provide that the board shall
consist of not less than one nor more than 21 directors, which number may be
increased or decreased from time to time by resolution of a majority of the
entire board then in office. Under Florida law, unless required by the articles
or by-laws, a director is not required to be a resident of Florida or a
shareholder of the corporation. The Able articles and by-laws do not require
that Able directors be Florida residents or shareholders. Although permitted
under Florida law, the terms of the Able Board of Directors are not staggered.
The board of directors of an Ontario corporation which is an offering
corporation must consist of at least three individuals, a majority of whom must
be resident Canadians. Ontario law also requires that at least one-third of the
directors of an offering corporation must not be officers or employees of the
corporation or any of its affiliates. Where the articles of a corporation do not
provide for the election of directors by cumulative voting, Ontario law permits,
but does not require, that directors may be elected at a meeting of shareholders
for different terms of up to three years. The Bracknell articles do not provide
for cumulative voting.
REMOVAL OF DIRECTORS
Florida law provides that, absent a provision in the articles of
incorporation permitting removal of directors only for cause, the directors may
be removed with or without cause if the number of votes cast to remove the
director exceeds the number of votes cast not to remove him or her. If a
corporation has cumulative voting, Florida law provides that a director is not
removed from the board if the votes cast against removal of the director would
be sufficient to elect the director at an election of the entire board under
cumulative voting. The Able articles do not provide for cumulative voting.
Under Ontario law, other than where cumulative voting applies for the
election of directors, the shareholders of a corporation may by ordinary
resolution at an annual or special meeting remove any director or directors from
office. Where the holders of any class or series of shares of a corporation have
an exclusive right to elect one or more directors, a director so elected may
only be removed by an ordinary resolution at a meeting of the shareholders of
that class or series.
VACANCIES ON THE BOARD OF DIRECTORS
Florida law provides that, unless the articles of incorporation provide
otherwise, a vacancy in the board of directors and newly created directorships
may be filled by the majority of directors then in office or by the shareholders
by a plurality vote. The Able articles of incorporation do not provide
otherwise. Florida law does not distinguish between non-classified and
classified boards in this respect. The Able board is not classified.
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The term of any director chosen to fill a vacancy expires at the next
shareholders' meeting at which directors are elected and when a successor is
elected and qualified.
Under Ontario law, a quorum of directors may fill a vacancy among the
directors, except for the following vacancies, which must be filled by the
shareholders: (1) a vacancy resulting from an increase in the number of
directors (otherwise than an increase in the board of directors pursuant to a
special resolution empowering the board to fix the number of directors within
the range set out in the articles if, after such appointment, the total number
of directors would not be greater than one and one-third times the number of
directors required to have been elected at the last annual meeting of
shareholders) or maximum number of directors, or (2) a vacancy resulting from
failure to elect the number of directors required to be elected at any meeting
of shareholders.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations incorporated or organized under both Florida and
Ontario law have fiduciary obligations to the corporation and, under Florida
law, to its shareholders. Pursuant to these fiduciary obligations, the directors
must act in accordance with the so-called duties of "due care" and "loyalty."
Under Florida law, the duty of care requires that the directors act with the
care an ordinarily prudent person in a like position would exercise under
similar circumstances. The duty of loyalty may be summarized as the duty to act
in good faith, not out of self-interest, and in a manner which the directors
reasonably believe to be in the best interests of the corporation. See "Director
Liability" below for a discussion of certain exculpation provisions permitted
under Florida law.
Ontario law provides that every director and officer of a corporation in
exercising his or her powers and discharging his or her duties, shall act
honestly and in good faith with a view to the best interests of the corporation,
and exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances. Every director and officer of a
corporation governed by Ontario law must comply with the provisions of that Act,
the regulations thereunder, and the articles and by-laws of such corporation. No
provision in a contract, the articles, the by-laws or any resolution relieves a
director or officer from the duty to act in accordance with Ontario law or the
regulations thereunder, or relieves him or her of liability for a breach of
either.
CONFLICT OF INTEREST OF DIRECTORS AND OFFICERS
Florida law provides that no contract or transaction between the
corporation and one or more of the directors, or between the corporation and any
other corporation, partnership, association, or other organization in which one
or more of the directors are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director is present at or participates in the meeting of the board of
directors which authorizes the contract or transaction or solely because his or
their votes are counted for such purpose, if:
(1) the fact of such relationship or interest is disclosed or known to
the board of directors or committee of directors which authorizes,
approves, or ratifies the contract or transaction by a vote or consent
sufficient for the purpose without counting the votes or consents of these
interested directors;
(2) the fact of such relationship or interest is disclosed or known to
the shareholders entitled to vote and they authorize, approve, or ratify
such contract or transaction by vote or written consent; or
(3) the contract or transaction is fair and reasonable as to the
corporation at the time it is authorized by the board, a committee of
directors, or the shareholders.
There is no corresponding provision for officers under Florida law.
Subject to specified exceptions, Ontario law restricts interested directors
from voting on any transactions in which such director has an interest.
Interested directors and officers must disclose in writing to the corporation or
request to have entered in the minutes of meetings of directors the nature and
extent of their interest. Ontario law provides that where a material transaction
is entered into with an interested director or
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officer, the interested director or officer is not accountable to the
corporation or the shareholders for any profit or gain from the transaction and
the transaction is neither void nor voidable by reason of that relationship or
by reason only that the director is present at or counted to determine the
presence of a quorum at the meeting of directors that authorized the transaction
if the director or officer disclosed his or her interest as required by Ontario
law and the transaction was reasonable and fair to the corporation at the time
it was approved. Ontario law also provides that an interested director or
officer, acting honestly and in good faith, is not accountable to the
corporation or its shareholders for any profit or gain realized from such
transaction by reason only of his or her holding the position of director or
officer and the transaction, if it was reasonable and fair to the corporation at
the time it was approved, is not by reason only of the director's or officer's
interest therein void or voidable, where the transaction is approved by a
special resolution at a special meeting of shareholders called for the purpose
and the nature and extent of the director's or officer's interest in the
transaction was disclosed to the shareholders in reasonable detail.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
Florida law contains provisions setting forth conditions under which a
corporation may indemnify its directors, officers, employees and agents. While
indemnification is permitted only if specified statutory standards of conduct
are met, Florida law generally provides for indemnification if the person acted
in good faith and in a manner the person 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 the conduct
was unlawful.
Although indemnification is permitted, Florida law allows a corporation,
through its articles of incorporation, by-laws, or other intracorporate
agreements, to make indemnification mandatory. The Able by-laws provide that
Able shall indemnify any and all persons who may serve or which have served at
any time as directors or officers, or which at the request of the Board of
Directors of Able may serve or at any time have served as directors or officers
of another corporation in which Able at such time owned or may own shares of
stock or of which it was or may be a creditor, and their respective heirs,
administrators, successors and assigns, against liability incurred by such
persons in connection with any proceeding, and against expenses actually and
reasonably incurred in connection therewith, in which they, or any of them are
made parties, or a party, or which may be asserted against them or any of them,
by reason of being or having been directors or officers of Able, or of such
other corporation, if such persons acted in good faith and in a manner they
reasonably believed to be in, or not opposed to the best interests of Able and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. Such indemnification is in addition to any
other rights to which those indemnified may be entitled under any laws, by-law,
agreement, vote of stockholders or otherwise. Able has executed indemnification
agreements with its officers and directors.
If a director is involved in an action other than one brought in the right
of the corporation, Florida law provides for indemnification for liability
incurred in connection with such proceeding. In the case of an action brought in
the right of a corporation, Florida law provides for indemnification against
expenses and settlement costs but limits such indemnity to the estimated cost of
litigating such action to its conclusion.
Ontario law permits indemnification of a director or officer, a former
director or officer or a person who acts or acted at the corporation's request
as a director or officer of a body corporate of which the corporation is or was
a shareholder or creditor, and his or her heirs and legal representatives, an
indemnifiable person, against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, reasonably incurred by
him or her in respect of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or having been
a director or officer of the corporation or body corporate, if: (1) he or she
acted honestly and in good faith with a view to the best interests of the
corporation, and (2) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. The Bracknell by-laws
provide for this indemnification.
Under Ontario law, a corporation may also, with the approval of the court,
indemnify an indemnifiable person in respect of an action by or on behalf of the
corporation or body corporate to procure a judgment in its
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favor, to which the person is made a party by reason of being or having been a
director or an officer of the corporation or body corporate, against all costs,
charges and expenses reasonably incurred by the person in connection with such
action if he or she fulfills the conditions set out in clauses (1) and (2)
above. In any event, an indemnifiable person is entitled to indemnity from the
corporation in respect of all costs, charges and expenses reasonably incurred by
him or her in connection with the defense of any civil, criminal or
administrative action or proceeding to which he or she is made a party by reason
of being or having been a director or officer of the corporation or body
corporate, if the indemnifiable person was substantially successful on the
merits in his or her defense of the action or proceeding and fulfills the
conditions set out in clauses (1) and (2) above. Nothing in the Bracknell
articles or by-laws limits the right of any person entitled to indemnification
to claim indemnification apart from the provisions of the Bracknell by-laws to
the extent permitted by Ontario law or Canadian Law.
DIRECTOR LIABILITY
Under Florida law, 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 or involves: (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.
Ontario law does not permit the limitation of a director's liability for
breach of fiduciary obligations to the corporation, whether through the articles
or otherwise.
SHAREHOLDERS' SUITS
Under Florida law, a shareholder may institute a lawsuit on behalf of the
corporation if that person was a shareholder of the corporation when the
transaction complained of occurred or subsequently became a shareholder through
transfer by operation of law from one who was a shareholder at that time. Prior
to filing the lawsuit, the shareholder must make a demand upon the corporation
to pursue corrective action. If the demand is refused or ignored, the lawsuit
goes forward. Otherwise, the board of directors may undertake an investigation
and may request the court to dismiss the proceeding if the independent directors
or a committee of independent directors determine in good faith after reasonable
investigation that the maintenance of the derivative suit is not in the best
interests of the corporation.
Under Ontario law, a complainant may apply to the court for leave to bring
an action in the name of and on behalf of a corporation or any of its
subsidiaries, or intervene in an action to which any such body corporate is a
party, for the purpose of prosecuting, defending or discontinuing the action on
behalf of the body corporate. A complainant means (1) a registered holder or
beneficial owner, or a former registered holder or beneficial owner, of a
security of a corporation or any of its affiliates; (2) a director or an officer
or a former director of officer of a corporation or of any of its affiliates; or
(3) any other person who, in the discretion of the court, is a proper person to
make such application. The complainant must give 14 days' notice to the
directors of the corporation or its subsidiary of his intention to apply to the
court to bring the action, and the court must be satisfied that the directors of
the corporation or its subsidiaries will not bring, diligently prosecute or
defend or discontinue the action, that the complainant is acting in good faith
and that it appears to be in the interests of the corporation or its
subsidiaries that the action be brought, prosecuted, defended or discontinued.
Where a complainant makes an application without having given the required
notice, Ontario law permits the court to make an interim order pending the
complainant giving the required notice, provided that the complainant can
establish that at the time of seeking the interim order it was not expedient to
give the required notice.
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Ontario law provides that the court in a derivative action may make any
order it thinks fit including, without limitation: (1) an order authorizing the
complainant or any other person to control the conduct of the action; (2) an
order giving directions for the conduct of the action; (3) an order directing
that any amount adjudged payable by a defendant in the action shall be paid, in
whole or in part, directly to the former and present securityholders of the
corporation or its subsidiary instead of to the corporation or its subsidiary;
and (4) an order requiring the corporation and its subsidiary to pay reasonable
legal fees and any other costs reasonably incurred by the complainant in
connection with the action. Additionally, under Ontario law, a court may order a
corporation or its subsidiary to pay the complainant's interim costs, including
reasonable fees and disbursements. Although the complainant may be held
accountable for the interim costs on final disposition of the complaint, it is
not required to give security for costs in a derivative action.
OPPRESSION REMEDY
Ontario law provides an oppression remedy that enables the court to make
any order, both interim and final, to rectify the matters complained of, if the
court is satisfied upon the application by a complainant (as defined below) or
by the Ontario Securities Commission in the case of an offering corporation,
that: (1) any act or omission of the corporation or an affiliate effects or
threatens to effect a result; (2) the business or affairs of the corporation or
an affiliate are, have been or are threatened to be carried on or conducted in a
manner; or (3) the powers of the directors of the corporation or an affiliate
are, have been or are threatened to be exercised in a manner that is oppressive
or unfairly prejudicial to, or unfairly disregards the interest of, any security
holder, creditor, director or officer of the corporation.
Because of the breadth of conduct which can be complained of and the scope
of the court's remedial powers, the oppression remedy is very flexible and is
sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation.
Florida law does not provide for a similar remedy.
REORGANIZATIONS, MERGERS, EXTRAORDINARY TRANSACTIONS
Florida law contains a provision which restricts many business combination
transactions with an interested stockholder for five years after the interested
stockholder has acquired 10% of the voting power of a corporation. Under Florida
law, if a business combination, including a merger, a disposition of
substantially all assets, an issuance of securities and other similar
transactions, occurs with a person who, together with its affiliates, owns 10%
or more of the outstanding capital stock of the subject corporation, a related
person, then the combination must be approved by two-thirds of the outstanding
capital stock entitled to vote for directors. However, the combination may occur
without such a vote if, among other exceptions, (i) a majority of disinterested
directors approves the transaction, (ii) the corporation has not had more than
300 stockholders of record during the 3 years prior to the announcement of the
proposed transaction, or (iii) the related person is the beneficial owner of at
least 90% of the outstanding voting shares of the corporation, exclusive of
shares acquired directly from the corporation in a transaction not approved by a
majority of disinterested directors.
Florida law also contains the Florida Control Share Act. The Florida
Control Share Act generally provides that shares acquired in a "control share
acquisition" will not possess any voting rights unless such voting rights are
approved by a majority of the corporation's disinterested shareholders. A
"control share acquisition" is an acquisition, directly or indirectly, by any
person of ownership of, or the power to direct the exercise of voting power with
respect to, issued and outstanding "control shares" of a publicly held Florida
corporation. "Control shares" are shares, which, except for the Florida Control
Share Act, would have voting power that, when added to all other shares owned by
a person or in respect to which such person may exercise or direct the exercise
of voting power, would entitle such person, immediately after acquisition of
such shares, directly or indirectly, alone or as a part of a group, to exercise
or direct the exercise of voting power in the election of directors within any
of the following ranges: (a) at least 20 percent but less than 33 1/3 percent of
all voting power, (b) at least 33 1/3 percent but less than a majority of all
voting power; or (c) a majority or more of all voting power.
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In order to effect a merger under Florida law, a corporation's board of
directors must adopt a plan of merger and recommend it to the corporation's
shareholders. Florida law requires that a majority of each class or series of
shares of the corporation must approve the plan, and must vote as separate
voting groups if the plan contains a provision which, if contained in a proposed
amendment to the corporation's articles of incorporation, would entitle such
class to vote as a class.
Ontario law provides that extraordinary corporate actions, like
amalgamations, any continuances, sales, leases or exchanges of all or
substantially all of the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions like liquidations,
dissolutions and arrangements, may be required to be approved by special
resolution. A special resolution to approve an extraordinary corporate action
may also be required to be approved separately by the holders of a class or a
series of shares.
Matters like take-over bids, issuer bids or self tenders, going-private
transactions and transactions with directors, officers, significant shareholders
and other related parties to which Bracknell is a party may also be subject to
regulation under Canadian provincial securities legislation and the rules and
administrative policies of Canadian provincial securities administrators.
DISSENT AND APPRAISAL RIGHTS
Under Florida law, a shareholder may exercise dissenter's rights in
connection with an amendment to the articles of incorporation which materially
and adversely affects the rights or preferences of shares held by the dissenting
stockholder, a disposition of all or substantially all of the corporation's
property and assets not in the usual course of business, a plan of merger in
which the stockholder may vote, and a plan of exchange involving the acquisition
of the corporation's shares if the stockholder is entitled to vote on the plan.
However, unless the articles of incorporation otherwise provide, these
provisions do not apply with respect to a plan of merger or share exchange or a
proposed sale or exchange of property, to the holders of shares of any class or
series which, on the record date fixed to determine the shareholders entitled to
vote at the meeting of shareholders at which such action is to be acted upon or
to consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
Ontario law provides that the shareholders of an Ontario corporation
entitled to vote on certain matters are entitled to exercise dissent rights and
to be paid the fair value of their shares in connection therewith. Ontario law
does not distinguish for this purpose between listed and unlisted shares. Such
matters include: (1) an amendment to its articles to add, remove or change
restrictions on the issue, transfer or ownership of shares of a class or series
of the shares of the corporation; (2) an amendment to its articles to add,
remove or change any restriction upon the business or businesses that the
corporation may carry on or upon the powers that the corporation may exercise;
(3) any amalgamation with another corporation (other than certain affiliated
corporations); (4) continuance under the laws of another jurisdiction; (5) the
sale, lease or exchange of all or substantially all its property other than in
the ordinary course of business; (6) a court order permitting a shareholder to
dissent in connection with an application to the court for an order approving an
arrangement proposed by the corporation; or (7) certain amendments to the
articles of a corporation which require a separate class or series vote. A
shareholder is not entitled to dissent if an amendment to the articles is
effected by a court order approving certain actions or by a court order made in
connection with an action for an oppression remedy.
LEGAL MATTERS
The validity of the shares of Bracknell common stock being offered hereby
is being passed upon for Bracknell by Torys, 237 Park Avenue, New York, New York
10017 and Suite 3000, Maritime Life Tower, 79 Wellington Street West, M5K 1N2,
Toronto, Canada.
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EXPERTS
Bracknell
The consolidated financial statements of Bracknell Corporation at October
31, 1999 and 1998 and for the years ended October 31, 1999, 1998 and 1997 and
the consolidated financial statements of Sunbelt Integrated Trade Services,
Inc., financial statements of Inglett & Stubbs, Inc. and financial statements of
Schmidt Electric Company, Inc., financial statements of Crouch Industries LLC
and financial statements of Pneu Temp, Inc. at March 8, 2000 and for the period
from January 1, 2000 to March 8, 2000, all included in this prospectus have been
audited by Arthur Andersen LLP, independent chartered accountants, as indicated
in their reports with respect thereto, and are included herein in reliance upon
authority of said firm as experts in accounting and auditing in giving said
reports.
The historical financial statements of Nationwide Electric, Inc., Sunbelt
Integrated Trade Services, Inc. and subsidiaries, Quality Mechanical Contractor,
Inc., Crouch Industries LLC and Pneu Temp, Inc. included elsewhere in the
Registration Statement, have been audited by Deloitte & Touche LLP, independent
auditors, to the extent and for the periods set forth in their reports appearing
herein and elsewhere in the registration statement, and are included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of Inglett & Stubbs, Inc. included in this proxy
statement/prospectus and in the registration statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their reports appearing elsewhere herein and in the
registration statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
The historical financial statements of Quality Mechanical Contractors, Inc.
and Schmidt Electric Company, Inc. to the extent and for the periods indicated
in their reports, have been audited by KPMG LLP, independent certified public
accountants, as stated in the reports appearing elsewhere herein and in the
registration statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
Able
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
herein 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 herein 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 Able nor anyone on Able's
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 Able's 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 Able during fiscal year 1998.
On September 7, 1998, Ernst & Young LLP, Able's former accountants,
resigned and, on October 12, 1998, Arthur Andersen LLP was appointed Able's
accountants. On September 2, 1998, prior to the resignation by Ernst & Young
LLP, Able sent out a request for proposals for the audit of its 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
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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 Able's
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 Able 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
- the lack of segregation of duties over the cash disbursements function,
- the failure to provide adequate documentation to support the business
purpose of certain significant transactions with related parties, and
- the lack of monitoring controls over operations of its foreign
subsidiaries.
The balance sheets of the Network Technologies Division of MFS Network
Technologies, Inc. (MFSNT) at December 31, 1997 and 1996, and the statements of
operations and cash flows for the years ended December 31, 1997, 1996 and 1995,
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.
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER UNITED STATES FEDERAL SECURITIES LAWS
Bracknell is incorporated under the laws of Ontario, Canada. A number of
directors, officers and controlling persons of Bracknell, as well as some of the
experts named in this proxy statement/prospectus, reside outside the United
States of America and all or a substantial portion of their assets and the
assets of Bracknell are located outside the U.S. As a result, it may be
difficult for you to effect service of process within the U.S. upon such
persons, other than Bracknell or to enforce against them judgments of courts of
the U.S. predicated upon civil liabilities under the U.S. federal securities
laws.
Bracknell has irrevocably appointed Torys, 237 Park Avenue, New York, New
York 10017, as its agent to receive service of process in actions against it
arising out of or in connection with the U.S. federal securities laws or out of
violations of such laws in any federal court or state court in New York,
relating to the transactions covered by this proxy statement/prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Able and Bracknell are each subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith, file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven
World Trade Center (13th Floor), New York, New York 10048. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This Web
site can be accessed at http://www.sec.gov. In addition, reports, statements or
other information that Bracknell files with any of the Canadian securities
authorities are also electronically
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available to the public from the Canadian system for electronic document
analysis and retrieval, the Canadian equivalent of the Securities and Exchange
Commission's electronic document gathering and retrieval system at
http://www.sedar.com. Bracknell's filings after the merger will not necessarily
be available on the Securities and Exchange Commission's website. However, the
filings will be available on the Canadian equivalent.
After the merger, Bracknell will file with the Securities and Exchange
Commission and continue to furnish its shareholders the same periodic reports
that are currently furnished to Bracknell shareholders as required by, and in
compliance with, Canadian law. Not all of Bracknell's filings will be
electronically available through EDGAR, but these filings will be available
through SEDAR.
Bracknell filed a registration statement on Form F-4 to register with the
Securities and Exchange Commission Bracknell common shares to be issued to Able
shareholders in the Merger. This proxy statement/prospectus is a part of the
Form F-4 and constitutes a prospectus of Bracknell. As allowed by Securities and
Exchange Commission rules, this proxy statement/prospectus does not contain all
the information you can find in Bracknell's registration statement or the
exhibits to the registration statement.
No person has been authorized to give any information or to make any
representations not contained herein, and any information or representation not
contained herein must not be relied upon as having been authorized by Able or
Bracknell. Neither the delivery hereof nor any distribution of the securities
being offered pursuant hereto shall, under any circumstances, create an
implication that there has been no change in the information set forth herein
since the date of this proxy statement/prospectus. This proxy statement/
prospectus does not constitute an offer or solicitation by anyone in any state
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
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PROPOSAL NO. 2:
TO ELECT FOUR DIRECTORS TO SERVE UNTIL THE NEXT ANNUAL MEETING OF
SHAREHOLDERS OR UNTIL THEIR QUALIFIED SUCCESSORS ARE ELECTED.
DIRECTORS
The following is a list of the persons nominated to be members of Able's
board of directors, their ages, the year in which each was elected a director
and, where applicable, the office held by the director. Each director elected
will hold office until the next annual meeting of shareholders, which, if the
merger is not completed, is expected to be held in May 2001, or until their
qualified successors have been duly elected. In the election, the four persons
who receive the highest number of votes actually cast will be elected. The
proxies named in the proxy card intend to vote for the election of the nominees
unless otherwise instructed. If you do not wish your shares to be voted for a
particular nominee, you must identify the exception in the appropriate space
provided on the proxy card, in which event the shares will be voted for the
other listed nominees. Able has no reason to believe that any nominee will be
unable or will refuse to serve. If the merger, Proposal No. 1, is approved and
the merger is completed, the following persons even if elected as directors of
Able at the meeting will cease to be directors of Able by operation of the
merger agreement.
NAME AGE SERVED AS A DIRECTOR SINCE
- ---- --- --------------------------
Billy V. Ray, Jr............................................ 42 1999
Chief Executive Officer and Chairman of the Board of
Directors
Edwin D. Johnson............................................ 44 2000
President, Chief Financial Officer and a Director
C. Frank Swartz............................................. 62 1998
Director
Alec McLarty................................................ 56 1999
Director
All directors are elected annually at Able's shareholders meeting and hold
office following election until their qualified successors are elected. Once
elected, the newly elected directors will determine who will serve as members of
Able's audit committee, compensation committee, and nominating committee. Any
member of Able's board who is not an employee of Able or any subsidiary and does
not beneficially own, within the meaning of Rule 13d-2 of the Securities
Exchange Act of 1934, as amended, more than five percent (5%) of any class of
Able's outstanding capital stock is a "Non-Affiliate Director". Mr. Swartz and
Mr. McLarty are "Non-Affiliate Directors".
The biographies of the persons nominated as Directors are as follows:
BILLY V. RAY, JR. has served as Able's Chief Executive Officer since
December 1, 1998. From December 1, 1998 to May 2000, Mr. Ray also served as
Able's 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 acting Chief Financial Officer from November 30, 1998 to February
2000. From October 1, 1998 to November 30, 1998, Mr. Ray was Able's 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 Able. Mr. Ray served as Able's 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 Able 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 MasTec, Inc., a telecommunications
infrastructure company. From January 1995 to March 1996, Mr. Johnson was a
private real estate consultant.
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C. FRANK SWARTZ has served as one of Able's directors since August 1998 and
as Chairman of the Board from November 30, 1998 to May 2000. Mr. Swartz has been
retired since November 1994. For the five years prior to November 1994, Mr.
Swartz was employed by GTE as the Director of Internal Support, based in
Caracas, Venezuela.
H. ALEC MCLARTY has served as one of Able's directors since March 1999. He
is the founder of Clarion Resources Communications Corporation, Clarion and has
served as the Chairman and Chief Executive Officer of Clarion since January
1996. Clarion is a multi-faceted company in the domestic and international
telecommunications industry providing services ranging from research and
development to international long distance services. In 1987, Mr. McLarty
founded Resurgens West, a telecommunications company and served as its President
until January 1996.
RESIGNATIONS DURING FISCAL YEARS 1998, 1999 AND 2000
During the fiscal year ended October 31, 1998, three of Able's 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 Able's 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 Able's wholly-owned subsidiary, Able
Telcom International. Robert Young resigned in May 1999 to devote more time to
his consulting business.
During the fiscal year ended October 31, 2000 two of Able's directors
resigned. 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 Venezuela.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Able's board met 14 times during the fiscal year ended October 31, 1998
and, during that time, never acted by unanimous written consent. Able's board
met 20 times during the fiscal year ended October 31, 1999 and, during that
time, never acted by unanimous written consent. Able's board met 13 times during
the fiscal year ended October 31, 2000 and, during that time, never acted by
unanimous written consent.
Able's Board has an audit committee, a compensation committee and a
nominating committee.
Audit Committee. The audit committee reviews the scope of the auditors'
engagement, including the remuneration to be paid, and reviews the independence
of the accountants. The audit committee, with the assistance of Able's Chief
Financial Officer and other appropriate personnel, reviews Able's annual
financial statements and the independent auditor's report, including significant
reporting and operational issues, corporate policies and procedures as they
relate to accounting and financial reporting and financial controls, litigation
in which Able is a party and use by Able's executive officers of expense
accounts and other non-monetary perquisites, if any. The audit committee may
direct its legal counsel or independent accountants to inquire into and report
to it on any matter having to do with its accounting or financial procedures or
reporting. The audit committee held two meetings during the fiscal year ended
October 31, 1998, three meetings during the fiscal year ended October 31, 1999
and two meetings during the fiscal year ended October 31, 2000. During fiscal
year 1998, the members of the audit committee consisted of C. Frank Swartz, who
also served as its Chairman, and Thomas Davidson. During fiscal years 1999 and
2000, the members of the audit committee consisted of C. Frank Swartz, who also
served as its Chairman, Billy V. Ray, Jr. and H. Alec McLarty. Applying the
definition of independence contained in the Nasdaq rules on audit committee
independence, two of the three members of Able's audit committee are
independent. Mr. Ray, the Chief Executive Officer of Able, does not qualify as
independent under these audit committee membership rules.
In June 2000, the board of directors adopted a formal written charter for
its audit committee. A copy of Able's audit committee charter is attached to
these proxy materials as Appendix D.
Compensation Committee. The compensation committee is responsible for
setting and approving the salaries, bonuses and other compensation for Able's
executive officers, establishing compensation programs
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and determining the amounts and conditions of all grants of awards under its
1995 stock option plan and grants of awards outside of that plan. The
compensation committee held two meetings during the fiscal year ended October
31, 1998, three meetings during the fiscal year ended October 31, 1999 and two
meetings during the fiscal year ended October 31, 2000. During the fiscal year
ended October 31, 1998, the compensation committee consisted of Thomas Davidson,
who served as its Chairman, C. Frank Swartz, and Gideon D. Taylor, who
subsequently resigned as one of its Directors on March 9, 1999. During the
fiscal years ended October 31, 1999 and 2000, the compensation committee
consisted of C. Frank Swartz, who also served as its Chairman during fiscal
1999, Billy V. Ray, Jr. and Alec McLarty who served as its Chairman during
fiscal 2000.
Nominating Committee. The nominating committee is responsible for
selecting those individuals who will stand for election to Able's board. The
nominating committee will consider all reasonable comments from shareholders
regarding proposed nominees for directors, as well as nominations for board
members recommended by shareholders. To date, the nominating committee has no
formal procedures for submitting comments or recommendations and has accepted
both written and oral comments, as well as names of proposed nominees prior to
the filing of a definitive proxy statement. Typically, once a recommendation has
been received, the committee will undertake due diligence as to the nominee's
background, will discuss the comments on the proposed nominee with the
shareholder submitting the candidate, and, if applicable, will meet with the
candidate before making a final determination as to whether to recommend the
proposed individual as a nominee for election to the board of directors. The
nominating committee held one meeting during the fiscal year ended October 31,
1998, two meetings during the fiscal year ended October 31, 1999 and one meeting
during the fiscal year ended October 31, 2000. During the fiscal year ended
October 31, 1998, the nominating committee consisted of Frazier L. Gaines, who
served as its Chairman, and C. Frank Swartz. During the fiscal years ended
October 31, 1999 and 2000, the nominating committee consisted of C. Frank
Swartz, who served as its Chairman, Billy V. Ray, Jr. and Alec McLarty.
With the exception of Gerald Pye, no director attended fewer than 75% of
the meetings of the board or any committee on which the director served during
the fiscal years ended October 31, 1998, 1999 and 2000.
COMPENSATION OF DIRECTORS
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,
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 was initially elected or appointed, at an exercise price equal to the
fair market value at the date of grant.
In April 1998, Able 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, see Proposal No. 5. employee directors receive
no additional fees or remuneration for acting in their capacity as one of its
directors.
On May 7, 1999 and as ratified on May 12, 2000, Able's board 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. However, the options grants are subject to shareholder approval. In
light of the proposed merger, Able is not presenting for approval the amendment
to the 1995 stock option plan necessary
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to allow these grants. If the merger is not consummated, this proposal will be
brought before the shareholders at a subsequent meeting.
NUMBER OF OPTIONS
POSITION FEES (ANNUALLY)
- -------- ------------------ -----------------
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
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, 1999 and 2000, the following options were granted to
Able's non-affiliate 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 its
directors who also serve or have served as Able's employees have received option
grants in their capacity as employees as is discussed elsewhere in this proxy
statement.
DATE OF
NUMBER INITIAL EXPIRATION
DIRECTOR OF SHARES GRANT PRICE GRANT(1) DATE
- -------- --------- ----------- ------------- ----------
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) 5.75 4/24/98 7/3/04
20,000(4) 5.75 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 6/9/02
10,000 2.50 8/1/00 8/1/03
Robert H. Young(8)............................... 10,000 6.25 5/7/99 5/8/01
Alec McLarty(7).................................. 10,000 8.75 7/29/99 7/29/02
- ---------------
(1) On December 31, 1998, in an effort to correct a number of ambiguities in the
minutes of the board of directors' meetings, regarding whether the options
were granted under Able's 1995 stock option plan, the purposes of the
grants, the number of shares available under that plan and how to reconcile
the terms of the grants with its 1995 stock option plan, Able's 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 and Mr. Sandulli
which met the requirements of the plan and were not subject to the other
ambiguities. 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, Able was required
to make the grants subject to shareholder approval to comply with the Nasdaq
rules.
(2) Mr. Davidson resigned from Able's board of directors in January 2000.
(3) Mr. Foster resigned from Able's board of directors on June 5, 1998.
(4) Non-qualified stock options granted pursuant to its 1995 stock option plan.
(5) Mr. Nelles resigned from Able's board of directors on May 5, 1998
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(6) Mr. Sandulli resigned from Able's board of directors on August 25, 1998.
(7) Mr. Swartz and Mr. McLarty are standing for reelection for Able's board of
directors.
(8) Mr. Young resigned from Able's board of directors in May 1999.
The options granted outside the stock option plan, including those in the
chart granted to Messrs. Davidson and Swartz, are subject to shareholder
approval and are described in detail in Proposal No. 5.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Able's executive officers, directors and 10% shareholders to file reports
regarding initial ownership and changes in ownership with the SEC. Executive
officers, directors and 10% shareholders are required by SEC regulations to
furnish Able with copies of all Section 16(a) forms they file. The information
regarding compliance with Section 16 is based solely on a review of the copies
of such reports furnished to Able by its executive officers, directors and 10%
shareholders. These forms include (1) Form 3, which is the Initial Statement of
Beneficial Ownership of Securities, (2) Form 4, which is a Statement of Changes
in Beneficial Ownership, and (3) Form 5, which is an annual statement of changes
in beneficial ownership, all of which, for fiscal year ended October 31, 1999,
were inadvertently filed late for each Section 16 individual required to file
the Form 5.
It is Able's General Counsel's intent to oversee the timely filing of the
Section 16 forms.
All executive officers, directors and 10% shareholders appear to have made
the required filings in a timely manner other than the following individuals who
were delinquent in filing forms or failed to file forms during the fiscal years
ended October 31, 1998, 1999 and 2000:
NAME OF INDIVIDUAL POSITION DELINQUENCY OR FAILURE
- ------------------ ------------------------------ ------------------------------
Billy V. Ray, Jr.............. Chief Executive Officer and Form 4's which should have
Chairman of the Board of been filed for the months of
Directors November 1997, July 1998 and
August 1998 were filed through
a Form 5 for October 1998. The
Form 5, however, was not filed
timely pursuant Section 16.
Form 5 for the fiscal year
ended October 31, 1999, should
have been filed by December
15, 1999, but was not filed
until January 21, 2000.
Frazier L. Gaines............. Former Chief Executive A Form 4 for the month of
Officer, and President -- Able September was not filed in a
Telcom International timely manner pursuant to
Section 16. Form 4s which
should have been filed for the
months of April and July 1998
were filed through a Form 5
for October 1998. However, the
Form 5 was not filed timely
pursuant to Section 16. Form 5
for the fiscal year ended
October 31, 1999, should have
been filed by December 15,
1999, but was not filed until
January 21, 2000.
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NAME OF INDIVIDUAL POSITION DELINQUENCY OR FAILURE
- ------------------ ------------------------------ ------------------------------
James E. Brands............... Senior Executive Vice Form 5 for the fiscal year
President ended October 31, 1999, should
have been filed by December
15, 1999, but was not filed
until January 21, 2000.
G. Vance Cartee............... Former Vice President of Form 5 for the fiscal year
Business Development ended October 31, 1999, should
have been filed by December
15, 1999, but was not filed
until January 21, 2000.
Michael A. Summers............ Former Chief Accounting Form 5 for the fiscal year
Officer ended October 31, 1999, should
have been filed by December
15, 1999, but was not filed
until January 21, 2000.
Edward Z. Pollock............. Associate General Counsel Form 5 for the fiscal year
ended October 31, 1999, should
have been filed by December
15, 1999, but was not filed
until January 21, 2000.
Stacy Jenkins................. Former President -- Adesta Form 5 for the fiscal year
Communications ended October 31, 1999, should
have been filed by December
15, 1999, but was not filed
until January 21, 2000.
Richard A. Boyle.............. President -- Patton Management A Form 3 which should have
Corp. been filed no later than April
10, 1998 was filed through a
Form 5 in October 1998.
However, the Form 5 was not
filed timely pursuant to
Section 16. Form 5 for the
fiscal year ended October 31,
1999, should have been filed
by December 15, 1999, but was
not filed until January 21,
2000.
C. Frank Swartz............... Director A Form 4 which should have
been filed in August 1998 was
filed through a Form 5 for
October 1998. However, the
Form 5 was not filed timely
pursuant to Section 16. Form 5
for the fiscal year ended
October 31, 1999, should have
been filed by December 15,
1999, but was not filed until
January 21, 2000.
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NAME OF INDIVIDUAL POSITION DELINQUENCY OR FAILURE
- ------------------ ------------------------------ ------------------------------
Alec McLarty.................. Director Form 4 for the month of May,
1999 was filed on Form 5 for
fiscal year 1999. Form 5 for
the fiscal year ended October
31, 1999, should have been
filed by December 15, 1999,
but was not filed until
January 27, 2000.
Gerald Pye.................... Director Form 5 for fiscal year ended
October 31, 1999 has not yet
been filed.
Jonathan A. Bratt(1).......... Director A Form 4 which should have
been filed for the month of
April 1998 was filed through a
Form 5 in October 1998. The
Form 5, however, was not filed
timely pursuant to Section 16.
Form 5 for the fiscal year
ended October 31, 1999, should
have been filed by December
15, 1999, but was not filed
until January 24, 2000.
Thomas M. Davidson(2)......... Director A Form 4 which should have
been filed in August 1998, was
filed through a Form 5 for
October 1998. However, the
Form 5 was not filed timely
pursuant to Section 16. Form 5
for the fiscal year ended
October 31, 1999, should have
been filed by December 15,
1999, but was not filed until
January 24, 2000.
- ---------------
(1) Mr. Bratt resigned from Able's board of directors in February 2000.
(2) Mr. Davidson resigned from Able's board of directors in January 2000.
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EXECUTIVE OFFICERS
Biographical information for Able's executive officers is presented below.
OFFICER'S NAME AGE OFFICE
- -------------- --- ------
Billy V. Ray, Jr............. 42 Chief Executive Officer and Chairman of the Board of
Directors
Edwin D. Johnson............. 44 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............ 51 President -- Adesta Communications
Philip A. Kernan, Jr......... 50 President -- Adesta Transportation
J. Barry Hall................ 52 President -- Transportation Safety Contractors, Inc.
Richard A. Boyle............. 46 President -- Patton Management Corp.
For a biography of Billy V. Ray, Jr., and of Edwin D. Johnson, see
"Directors".
FRAZIER L. GAINES was one of Able's Directors from August 1992 through
March 19, 1999 and has served as President of Able Telcom International, Inc.,
one of it's wholly owned subsidiaries, since June 1994. Mr. Gaines served as
Able's Interim President and Chief Executive Officer from March 1998 to November
1998. From 1992 to 1994, Mr. Gaines was Able's Chief Operating Officer.
CHARLES C. MAYNARD was named Chief Operating Officer of Able 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,
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, 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 Able's 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 Able 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 Able's 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.
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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. Prior to Able's 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 Able 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. From October 1996 to October 1999, Mr. Hall served both as President of
Transportation Safety Contractors, Inc. 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
Able's 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.
The Chief Executive Officer is elected by and serves at the discretion of
Able's Board of Directors. All other executive officers are appointed by the
Chief Executive Officer.
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EXECUTIVE COMPENSATION
The following table contains summary information for the years indicated of
compensation to (i) those persons serving as Able's Chief Executive Officer
during the 2000 fiscal year, (ii) the other four of Able's most highly
compensated executive officers who were serving as such at October 31, 2000, and
(iii) up to two additional individuals who had served as one of Able's executive
officers during the 2000 fiscal year but who were not executive officers at
October 31, 2000. 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 $100,000 or less for the 2000 fiscal year end. The persons named in
this table are collectively referred to as the "Named Executive Officers".
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
LONG TERM
COMPEN-
SATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- -----------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
COMPEN- OPTIONS(1)/ COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) SARS(#) SATION($)
- --------------------------- ---- --------- -------- --------- ----------- ----------
Billy V. Ray, Jr.(2)................. 2000 $333,962 $340,000 $12,646 250,000 $ --
Chief Executive Officer and 1999 203,792 200,000 24,000 150,000 --
Chairman of the Board of Directors 1998 48,462 0 -- 35,000 110,818
Edwin D. Johnson(3).................. 2000 149,231 -- 8,308 150,000 --
President and Chief
Financial Officer
James Brands(4)...................... 2000 223,750 20,000 2,538 -- --
Senior Executive Vice President 1999 46,154 -- 2,385 100,000 --
Charles Maynard(5)................... 2000 179,077 -- 13,731 200,000 --
Chief Operating Officer
Michael Brenner(6)................... 2000 98,462 -- 5,538 100,000 --
Executive Vice President and
General Counsel
Michael Arp(7)....................... 2000 180,217 30,000 -- -- --
Former Vice President and 1999 149,565 30,000 24,000 65,000 --
Former Acting President --
Georgia Electric Company and
Transportation Safety Contractors
Vance Cartee(8)...................... 2000 149,231 30,000 -- -- --
Former Vice President 1999 123,577 -- -- 100,000 --
- ---------------
(1) Includes options that have not yet been approved by shareholders.
(2) Mr. Ray has served as Able's 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 Able. From June 1997 to April 1998 he served as its Chief Financial
Officer. In fiscal 2000, other compensation includes auto allowance of
$7,846 and housing allowance of $4,800. 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 Able's consultant. In May 1999,
Mr. Ray also received subject to shareholder approval, an award of 50,000
shares of common stock.
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(3) Mr. Johnson has served as Able's President and Chief Financial Officer since
May 8, 2000. In fiscal 2000, Mr. Johnson's other compensation included an
auto allowance of $8,308.
(4) Mr. Brands has served as Able's Senior Executive Vice President since April
5, 1999. In 1999, Mr. Brands' other compensation included an auto allowance
of $2,385. In fiscal 2000, Mr. Brands' other compensation included an auto
allowance of $2,538.
(5) Mr. Maynard has served as Able's Chief Operating Officer since February 1,
2000. In fiscal 2000, Mr. Maynard's other compensation included an auto
allowance of $4,500 and a housing allowance of $9,231.
(6) Mr. Brenner has served as Able's Executive Vice President and General
Counsel since May 3, 2000. In fiscal 2000, Mr. Brenner's other compensation
included an auto allowance of $5,538.
(7) Mr. Arp is no longer employed by Able but will receive severance pay in the
amount of $15,000 monthly through December 2000. Mr. Arp joined Able in
January 1999. In fiscal 1999, Mr. Arp's other compensation included a $1,500
monthly housing allowance and a $5,000 auto allowance. Mr. Arp served as
Acting President of Georgia Electric Company and Transportation Safety
Contractors, Inc. from November 1999 to March 2000.
(8) Mr. Cartee is no longer employed by Able. Mr. Cartee served as President of
Adesta Transportation, Inc. from January 1999 to January 2000. In January
2000, Mr. Cartee became Able's Vice President.
THE ABLE TELCOM HOLDING CORP. 1995 STOCK OPTION PLAN, AS AMENDED
For several years Able has maintained the 1995 stock option plan. Able
originally authorized 550,000 shares of common stock to be issued under the
plan. In April 1998, Able's shareholders approved amending the plan to increase
the number of shares authorized under the plan by 750,000 to 1,300,000 shares.
If the merger is not completed, Able intends to amend its registration statement
on Form S-8 to register the additional 750,000 shares of common stock reserved
for issuance under the plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ---------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTION TERM
GRANTED FISCAL BASE PRICE EXPIRATION ----------------------
NAME (#)(1) YEAR(2) ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ ----------- ---------- --------- ---------
Billy V. Ray.............. 100,000 2.9% $ (3) 2/21/05 187,790(4) 212,500(4)
150,000 4.4 2.84 06/15/10 1,065,000 1,761,000
Edwin D. Johnson.......... 200,000 4.4 2.44 05/08/10 1,390,000 2,300,000
James Brands.............. 100,000 2.9 6.375 04/30/02 810,000 1,081,000
Charles Maynard........... 50,000 1.45 6.00 02/21/05 437,500 751,896
75,000 2.18 8.50 02/21/05 833,250 1,427,111
75,000 2.18 9.50 02/21/05 931,500 1,181,250
Michael Brenner........... 100,000 2.9 2.69 05/03/10 691,000 1,116,000
Michael Arp............... 40,000 1.2 5.75 12/31/03 49,566 106,749
25,000 .8 6.375 05/07/03 34,346 87,018
Vance Cartee.............. 40,000 1.2 5.75 12/31/01 49,566 106,749
25,000 .8 6.375 05/07/03 34,346 87,018
35,000 1.1 9.94 07/26/02 -- --
- ---------------
(1) Each option has anti-dilution provisions for stock splits, stock dividends
and similar events.
(2) Based on 3,447,654 options granted to employees during fiscal year 2000.
(3) The exercise price will equal fair market value on the date of approval by
the shareholders.
(4) Based on an assumed exercise price of $4.00 per share.
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OPTION EXERCISES AND PERIOD END VALUES
No options were exercised during the last fiscal year by the Named
Executive Officers. As of November 9, 2000, there were 465,000 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 Able's common stock. 150,000 of these options are
exercisable at $2.84 per share, 150,000 of these options are exercisable at
$2.44 per share, 100,000 of these options are exercisable at $2.69 and 65,000 of
these options are exercisable at $2.41. The closing price for its common stock
on November 9, 2000 was $3.97 per share.
The following table sets forth information regarding exercisable and
unexercisable stock options held as of October 31, 2000 by the named executive
officers.
AGGREGATE FISCAL YEAR-END OPTION VALUES
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
- ---- ----------- ------------- ----------- -------------
Bill V. Ray...................................... 293,500 116,500 $ 18,000 --
Edwin D. Johnson................................. 150,000 -- 78,000 --
James Brands..................................... 100,000 -- -- --
Charles Maynard.................................. 50,000 150,000 -- --
Michael Brenner.................................. 100,000 -- 30,000 --
Michael Arp...................................... 46,750 -- -- --
Vance Carter..................................... 58,417 -- -- --
EMPLOYMENT, CONSULTING AGREEMENTS AND ARRANGEMENTS
BILLY V. RAY, JR., Chief Executive Officer and Chairman of the Board of
Able, is party to an employment agreement, dated June 15, 2000 with Able. The
Ray employment agreement continues for a period ending three (3) years from any
date as of which the term of employment is being determined and provides that
Mr. Ray is to be paid a base salary of $350,000 per year, plus an automobile
allowance of $1500 per month and a housing allowance of $1800 per month, as well
as health and life insurance benefits. The Ray employment agreement also calls
for a formula bonus for each bonus period that begins on or after November 1,
2000 equal to the greater of the minimum annual bonus, which is $150,000 per
year, or the bonus determined pursuant to the formula established by the board
at the beginning of each bonus period that commences during the term. Pursuant
to the terms of the Ray employment agreement, Able has loaned $300,000 to Mr.
Ray, which is repayable in 3 equal annual installments on the first, second and
third anniversaries of the date on which the loan was made. Under the terms of
the Ray employment agreement, Able is required to pay Mr. Ray additional bonuses
as and when the loan payments are due (grossed up for federal, state and local
taxes). In addition, pursuant to the Ray employment agreement, Able granted Mr.
Ray options to purchase 150,000 shares of Able common stock, which vest
immediately and are exercisable at $2.84 per share, which was the closing price
for Able common stock on the effective date of the Ray employment agreement.
These options remain exercisable through June 15, 2010, whether or not Mr. Ray
continues to be employed by Able during that period. This grant was in addition
to (i) a grant dated February 21, 2000 to purchase 100,000 shares of Able common
stock at an exercise price equal to the fair market value of the Able common
stock on the date shareholders of Able approve this additional grant and which
will vest immediately on the date approval is received from the shareholders;
(ii) a grant dated May 7, 1999, pursuant to which Mr. Ray was granted options to
purchase 50,000 shares of Able 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; and (iii) a grant dated December 31, 1998 to
purchase 100,000 shares of Able 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 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 various
restrictive covenants by
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Mr. Ray, including a covenant not to compete with Able in its current business
for a period of three years following termination of his employment. In the
event that Mr. Ray's employment with Able is terminated by Able without cause or
by Mr. Ray for good reason, as those terms are defined in the Ray employment
agreement, Able is required to pay Mr. Ray (i) his base salary and bonuses
accrued through the date of termination; (ii) three times the sum of his base
salary and the formula bonus for the year in which such termination occurs,
assuming the formula bonus is equal to 100% of his base salary; and (iii)
additional bonuses equal to the remaining amounts due on the Loan grossed up for
federal, state and local taxes. In addition, in the event of a termination
pursuant to the preceding sentence, Able must continue to provide Mr. Ray with
the welfare benefits and car allowances he was receiving for a period three
years immediately following the date of termination.
EDWIN D. JOHNSON, President and Director is party to an employment
agreement, dated May 3, 2000 with Able. The Johnson employment agreement
continues for a period ending three (3) years from any date as of which the term
of employment is being determined and provides that Mr. Johnson is to be paid a
base salary of $300,000 per year, plus an automobile allowance of $1,500 per
month, as well as health and life insurance benefits. The Johnson employment
agreement also calls for a bonus of not less than $75,000 for the period ending
October 31, 2000, and for a formula bonus for each bonus period that begins on
or after November 1, 2000 equal to the greater of the minimum annual bonus,
which is $150,000 per year, or the bonus determined pursuant to the formula
established by the board at the beginning of each bonus period that commences
during the term. Pursuant to the terms of the Johnson employment agreement, Able
has loaned $300,000 to Mr. Johnson, which is repayable in 3 equal annul
installments on the first, second and third anniversaries of the date on which
the loan was made. Under the terms of the Johnson employment agreement, Able is
required to pay Mr. Johnson additional bonuses as and when the loan payments are
due (grossed up for federal, state and local taxes). In addition, pursuant to
the Johnson employment agreement, Able granted Mr. Johnson options to purchase
150,000 shares of Able common stock, which vest immediately and are exercisable
at $2.44 per share, which was the closing price for Able common stock on the
effective date of the Johnson employment agreement. These options remain
exercisable through May 8, 2010, whether or not Mr. Johnson continued to be
employed by Able during that period. The Johnson employment agreement also
contains various restrictive covenants by Mr. Johnson, including a covenant not
to compete with Able in its current business for a period of three years
following termination of his employment. In the event that Mr. Johnson's
employment with Able is terminated by Able without cause or by Mr. Johnson for
good reason, as those terms are defined in the Johnson employment agreement,
Able is required to pay Mr. Johnson (i) his base salary and bonuses accrued
through the date of termination; (ii) three times the sum of his base salary and
the formula bonus for the year in which such termination occurs (assuming the
formula bonus is equal to 100% of his base salary; and (iii) additional bonuses
equal to the remaining amounts due on the loan (grossed up for federal, state
and local taxes). In addition, in the event of a termination pursuant to the
preceding sentence, Able must continue to provide Mr. Johnson with the welfare
benefits and car allowances he was receiving for a period three years
immediately following the date of termination.
FRAZIER L. GAINES, President of Able Telcom International, Inc., is party
to an employment agreement, dated November 12, 1998 with Able. 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 Able 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 company 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 its board of
directors, which vest over a three year
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period, or immediately upon either a change in control or ownership of us. To
date, these options have not been approved by Able's 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 Able. 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, Mr. Maynard will be entitled to 90 days prior notice.
However, if Mr. Maynard's employment is terminated without cause, or in the
event of a substantial change in job responsibility, 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
Able's 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 Able. The Brands employment
agreement terminates on April 5, 2002, 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 Able's option, it 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.
MICHAEL BRENNER, General Counsel and Executive Vice President, is party to
an employment agreement, dated May 3, 2000 with Able. The Brenner employment
agreement continues for a period ending three (3) years from any date as of
which the term of employment is being determined, the term and provides that Mr.
Brenner is to be paid a base 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 bonus of not less than $50,000
for the period ending October 31, 2000, and for a formula bonus for each bonus
period that begins on or after November 1, 2000 equal to the greater of the
minimum annual bonus, which is $75,000 per year, or the bonus determined
pursuant to the formula established by the board at the beginning of each bonus
period that commences during the term. Pursuant to the terms of the Brenner
employment agreement, Able has loaned $200,000, the Loan to Mr. Brenner, which
is repayable in 3 equal annual installments on the first, second and third
anniversaries of the date on which the loan was made. Under the terms of the
Brenner employment agreement, Able is required to pay Mr. Brenner additional
bonuses as and when the loan payments are due, grossed up for federal, state and
local taxes. In addition, pursuant to the Brenner employment agreement, Able
granted Mr. Brenner options to purchase 100,000 shares of Able common stock,
which vest immediately and are exercisable at $2.69 per share, which was the
closing price for Able common stock on the effective date of the Brenner
employment agreement. These options remain exercisable through May 2, 2010,
whether or not Mr. Brenner continues to be employed by Able during that period.
The Brenner employment agreement also contains various restrictive covenants by
Mr. Brenner, including a covenant not to compete with Able in its current
business for a period of three years following termination of his employment. In
the event that Mr. Brenner's employment with Able is terminated by Able without
cause or by Mr. Brenner for good reason, as those terms are defined in the
Brenner employment agreement, Able is required to pay
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Mr. Brenner (i) his base salary and bonuses accrued through the date of
termination; (ii) three times the sum of his base salary and the formula bonus
for the year in which such termination occurs, assuming the formula bonus is
equal to 100% of his base salary; and (iii) additional bonuses equal to the
remaining amounts due on the loan grossed up for federal, state and local taxes.
In addition, in the event of a termination pursuant to the preceding sentence,
Able must continue to provide Mr. Brenner with the welfare benefits and car
allowances he was receiving for a period three years immediately following the
date of termination.
EDWARD POLLOCK, Associate General Counsel, is party to an employment
agreement, dated January 1, 1999 with Able. 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 Able's 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 Able, 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. 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. Shareholder approval is required for these options.
PHILIP A. KERNAN, JR., President of Adesta Transportation, is a party to an
employment agreement dated February 21, 2000 with Able. 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 Able's 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., is
party to an employment agreement dated October 12, 1996 with Transportation
Safety Contractors. 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 Able for a period of two years
following termination of his employment, unless Able terminates 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 Able 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 Able's.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended October 31, 2000, compensation for Able's
executive officers was determined by Able's compensation committee, consisting
of Messrs. C. Frank Swartz, H. Alec McLarty and Billy V.
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Ray, Jr. Mr. McLarty is Chairman of the Committee and he and Mr. Swartz are the
two non-employee members of the compensation committee. In addition to being a
director of Able, Mr. Ray is its 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, Able engaged Washington Equity Partners, as an advisor in
connection with the MFS Network acquisition. At the time of the engagement, Mr.
Thomas A. Davidson, a member of Able's board of Directors and a former member of
the compensation committee, who resigned as a director in January 2000, was
Managing Director of Washington Equity. In connection with the engagement, Able
agreed to pay Washington Equity a fee if Able consummated the financing of the
MFS Network acquisition through an investor contacted by Washington Equity. Able
also committed to reimburse Washington Equity 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 Washington Equity in April 1998 and WEP
assigned its rights in the agreement to Mr. Davidson. Mr. Davidson became one of
Able's directors in June 1998. On October 21, 1998, Able agreed with Mr.
Davidson to pay him $1,332,000 in satisfaction of amounts owing under its
agreement with Washington Equity. 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 Able in the Sirit lawsuit described in
Proposal No. 9. Under Able's indemnification obligations to Mr. Davidson as a
director and now a former director, Able has paid attorneys fees and costs for
the defense of this lawsuit. One counsel has represented Able and Mr. Davidson
so it is not possible to segregate amounts paid on his behalf from the amounts
paid on Able's behalf. However, Mr. Davidson has benefited materially from these
payments. Mr. Davidson paid the settlement amount related to claims against him
without Able's assistance.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On October 12, 1996, Able acquired all of the issued and outstanding
capital stock of Georgia Electric Company, which prior to the acquisition was
owned equally by Gerry W. and J. Barry Hall. Following the acquisition, Gerry
Hall was elected to Able's board of directors, and on June 12, 1997, was elected
Able's President and Chief Executive Officer. Gerry Hall resigned as Able's
President, Chief Executive Officer and a director on March 2, 1998. Barry Hall
is president of Able's subsidiary Transportation Safety Contractors Inc. The
purchase price for the Georgia Electric 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 Georgia Electric'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 Georgia Electric 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 Georgia Electric is sold by Able prior to the end
of fiscal year 2001, Able is 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 Able's President, CEO
and director had no relationship with the amendment to the Georgia Electric
acquisition agreement. The shares issued to the Halls for fiscal year 1998
totaled 508,398 and for fiscal year 1999 totaled 204,944. The Halls will not
receive any shares for fiscal year 2000.
Able has various agreements, and have entered into various transactions,
with WorldCom which beneficially owns 33.6% of Able outstanding stock as of
November 13, 2000. Among these agreements and transactions are the master
services agreement and debt obligations and the conversion of debt into Series E
preferred stock, described elsewhere in the prospectus. Able believes the terms
of these agreements are no less favorable to Able than would have been obtained
in arm's-length transactions.
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During fiscal 2000, Able loaned $300,000 to Edwin D. Johnson, its
President, $300,000 to Billy V. Ray, Jr., its Chief Executive Officer and
Chairman, and $200,000 to Michael Brenner, its General Counsel and Executive
Vice President. Each of these loans was made pursuant to provisions of the
employment agreements between Able and these individuals. The terms of these
loans require interest at prime to be paid annually and for the principle to be
repaid in three years by Messrs. Johnson and Brenner and in six years by Mr.
Ray.
In August 2000, Able made a $2,000,000 loan to Billy V. Ray, Jr., its 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
Able's behalf to secure a performance bond required in connection with Able's
performance under a newly awarded contract. The bonding agency required that a
third-party provide collateral for such bond and, in light of Able's need to
provide such collateral quickly, Mr. Ray agreed to post a Certificate of Deposit
if Able 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 Able's
Compensation Committee and with Mr. Thomas Davidson, one of Able's former
directors.
Notwithstanding anything to the contrary set forth in any of Able's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings, including the proxy materials, in
whole or in part, the following Report on Executive Compensation and the
Performance Graph shall not be deemed to be incorporated by reference into any
of those filings.
AUDIT COMMITTEE REPORT
The Audit Committee of the board of directors of Able reviewed and
discussed Able's audited financial statements for the fiscal year ending October
31, 1999 with Able's independent accountants, Arthur Andersen LLP, as filed in
Able's annual report on Form 10-K for the fiscal year ended October 31, 1999.
These discussions included the auditor's judgments about the quality, not just
acceptability, of Able's accounting principles as applied in its financial
reporting. Arthur Andersen, the Audit Committee and management of Able discussed
matters such as the clarity, consistency and completeness of the accounting
policies and disclosure and all matters required to be discussed by Statement on
Auditing Standards No. 61, Communication with Audit Committees.
The Audit Committee has received a letter from Arthur Andersen required by
Independence Standards Board Standard No. 1 disclosing all relationships between
Arthur Andersen and its related entities and Able. The Audit Committee and
Arthur Andersen discussed the auditor's independence. The Audit Committee also
reviewed and discussed Able's audited financial statements with management.
Based on the review and discussions described above, the Audit Committee
recommended to Able's board of directors that the audited financial statements
be included in the Form 10-K filed with the Securities and Exchange Commission
for the fiscal year ended October 31, 1999.
Respectfully submitted,
C. Frank Swartz
Billy V. Ray, Jr.
H. Alec McLarty
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REPORT ON EXECUTIVE COMPENSATION
During the fiscal year ended October 31, 2000, the Compensation Committee
was responsible for setting and approving the salaries, bonuses and other
compensation for Able's executive officers, establishing compensation programs,
and determining the amounts and conditions of all grants of awards under the
plan.
Compensation Objectives. The Compensation Committee believes that the
objectives of executive compensation are to attract, motivate and retain highly
qualified executives, to align the interests of these executives with those of
the shareholders and to motivate Able executives to increase shareholder value
by improving corporate performance and profitability. To meet these objectives,
Able's board of directors seeks to provide competitive salary levels and
compensation incentives that attract and retain qualified executives, to
recognize individual performance and achievements, as well as Able's performance
relative to its peers and to encourage ownership of Able stock.
Executive Salaries. Base salaries for executives are determined initially
by evaluating the responsibilities of the position, the experience of the
individual, internal comparability considerations, as appropriate, the
competition in the marketplace for comparable management talent and the
compensation practices among public companies the size of, or in businesses
similar to, Able. Salary adjustments are determined and normally made at
twelve-month intervals.
Annual Bonuses. Able has historically paid bonuses to executives who the
board of directors determines have contributed materially to Able's success
during the most recently completed fiscal year. The bonuses are intended to
enable Able's executives to participate in its success, as well as provide
incentives for future performance. Bonus compensation has typically been
determined as a percentage of the executive's salary based upon Able's pre-tax
net income as a whole or the pre-tax net income of the subsidiary which employs
the executive.
Compensation of the Chief Executive Officer. The compensation of Billy V.
Ray, Jr., Able's Chief Executive Officer, was adjusted during the year to better
reflect the accomplishments of Mr. Ray. The increases were based upon arm-length
negotiations between Mr. Ray and the remaining members of Able's Board of
Directors. In agreeing to increase Mr. Ray's compensation, the board of
directors sought to provide an appropriate incentive to Mr. Ray. The board of
directors believes that Mr. Ray's salary was appropriate for the Chief Executive
Officer of a public company the size of Able. See "Summary Compensation Table"
for information concerning Mr. Ray's compensation. The board of directors
approved the payment of a bonus to Mr. Ray of $200,000, based upon Able's
operating results and strategic accomplishments during fiscal year 1999 and of
$340,000 based upon his strategic accomplishments during fiscal year 2000. Mr.
Ray did not participate in discussion of nor did he vote on any issues relating
to his compensation.
Frazier Gaines served as Able's Chief Executive Officer from March 1998
through November 1998, excluding August 19-31, 1998, when he resigned to direct
his energies into Able Telcom International. During the fiscal year ended
October 31, 1999, Mr. Gaines was paid $15,000 as Chief Executive Officer for the
period of November 1 to November 30, 1998 when Mr. Gaines resumed his position
as President of Able Telcom International. Mr. Gaines received other
compensation that is more fully presented in the "Summary Compensation Table".
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Stock Options. The board of directors may grant to Able's employees
long-term incentives consisting of non-qualified stock options, incentive stock
options and stock options outside the plan. The plan provides for the
eligibility of all 2,100 employees, as well as non-affiliated directors,
consultants and advisors. During fiscal years 1999 and 2000, Able's board of
directors approved grants of stock options to all executive officers. See
"Executive Compensation -- Option Grants During the Fiscal Year Ended October
31, 1999 and 2000".
Respectfully Submitted,
Billy V. Ray, Jr., Chairman
C. Frank Swartz
Alec McLarty
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STOCK PERFORMANCE
The following performance graph compares the cumulative total return on
Able's common stock with the cumulative total return of the companies in the
Standard & Poor's 500 Index, the Nasdaq Telecommunications Stocks Index and a
self-determined peer group consisting of ANTEC Corporation; C-Cor Electronics,
Inc.; Comtech Telecommunications Corp.; Dycom Industries, Inc.; Internet
Communications Corp.; Lockheed Martin; MasTec, Inc.; NumereX Corp.; Porta
Systems Corp.; Tollgrade Communications Corp.; Verso Technologies, Inc.;
Wireless One Technologies, Inc.; and World Access, Inc. The cumulative total
return for each of the periods shown in the performance graph is measured
assuming an initial investment of $100 on October 31, 1995 and assuming dividend
reinvestment. No dividends have been paid on the common stock.
COMPARISON OF THE 59 MONTH CUMULATIVE TOTAL RETURN* AMONG ABLE TELCOM HOLDING
CORP., THE S&P 500 INDEX, SELF-DETERMINED PEER GROUPS AND THE
NASDAQ TELECOMMUNICATIONS STOCKS INDEX
ABLE TELCOM NASDAQ
HOLDING CORP. S & P 500 TELECOMMUNICATIONS PEER GROUP
------------- --------- ------------------ ----------
10/95 100.00 100.00 100.00 100.00
10/96 156.82 124.10 104.88 135.86
10/97 144.32 163.95 151.65 149.51
10/98 132.95 200.00 208.26 172.25
10/99 160.23 251.35 381.61 85.49
9/00 56.82 267.79 314.77 132.75
* $100 INVESTED ON 10/31/95 IN STOCK OR INDEX --
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING OCTOBER 31.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ELECTING THE SLATE OF FOUR
DIRECTORS TO SERVE UNTIL THE NEXT ANNUAL MEETING OF SHAREHOLDERS OR UNTIL THEIR
RESPECTIVE SUCCESSORS ARE ELECTED.
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PROPOSAL NO. 3:
TO RATIFY AND APPROVE AMENDMENTS TO ABLE'S ARTICLES OF INCORPORATION TO INCREASE
THE NUMBER OF AUTHORIZED SHARES OF
(A) COMMON STOCK FROM 25 MILLION TO 100 MILLION
(B) PREFERRED STOCK FROM ONE MILLION TO FIVE MILLION
CURRENT NUMBER OF AUTHORIZED COMMON AND PREFERRED SHARES
Able's articles of incorporation currently authorize 25 million shares of
common stock and five million shares of preferred stock. As of November 13,
2000, there were 16,374,504 shares of common stock issued and outstanding,
leaving approximately 8,600,000 additional shares available for issuance. There
are 5,000 shares of Series C preferred stock and 1,000 shares of Series E
preferred stock issued and outstanding, leaving 994,000 additional shares
available for issuance.
NUMBER OF AUTHORIZED COMMON SHARES NEEDED
As of September 30, 2000, on a fully diluted basis, if all Able's
securities exercisable or convertible into common stock were vested, and
exercised or converted, and Able complied with its obligations to Sirit to issue
common stock, as described in Proposal No. 9, Able would be required to issue
approximately 23 million shares. These securities include approximately
- 13,514,845 shares of common stock, covering the Sirit litigation and
including shares underlying convertible securities; and
- 9,557,200 shares of common stock underlying outstanding options, warrants
and stock appreciation rights.
This number of shares does not include the number of shares needed to
satisfy the following obligations:
- Any contractual obligations Able has to the Series B investors and the
Series C investors to reserve more than 100% of the shares that are
issuable upon conversion of their existing securities. If these shares
were included, Able would need approximately an additional 4,700,000
shares; and
- Contractual obligations to security holders, including Able's agreements
with the Series B investors, the Series C investors and Sirit, as
described at Proposal No. 9 and the terms of Able's Series E preferred
stock, which contain provisions requiring that Able issue additional
shares if it takes certain kinds of actions that would dilute the holders
ownership interests. For example, under the Series C and Series E
preferred stock, if Able subdivides its common stock by stock split or
stock dividend into a greater number of shares, the conversion price of
the Series C and Series E preferred stock must be proportionately
reduced. Thus, if Able effected a two for one split of its common stock,
the conversion price of the Series C and Series E preferred stock would
be divided in half and the number of shares issuable upon conversion of
the Series C and Series E preferred stock would be doubled. In light of
these anti-dilution provisions, Able could be required to issue a much
larger number of shares of common stock than that specified above.
REASONS FOR AUTHORIZING ADDITIONAL SHARES OF COMMON STOCK
By increasing Able's authorized shares of common stock from 25 million to
100 million, Able will have more than a sufficient number of shares to meet its
current obligations. As is demonstrated above, Able currently does not have a
sufficient number of shares of common stock to meet its obligations. Even if the
merger is consummated, Able must honor these obligations to issue Able common
stock so that it can then be converted to Bracknell common stock in the merger.
This means that Able has no stock available for future actions, including future
fundraising activities or acquisitions of the merger with Bracknell is not
consummated as currently planned. If Able does not have enough shares of common
stock to meet its current obligations, Able will be required to make substantial
cash payments which Able is currently unable to make and for which Able may have
difficulty obtaining financing. If Able does not receive approval to increase
its
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authorized common stock so that these obligations can be met and Able is
required to make cash payments, to the extent Able is unable to finance these
payments on favorable terms, Able's financial condition, cash flow and ability
to proceed with the funding of its operations will be materially affected.
Additionally, increasing Able's number of authorized shares will allow its
Board flexibility to act promptly in issuing stock to meet its future business
needs if the merger is not consummated, which may include:
- paying existing creditors,
- financing transactions to improve its financial and business position,
- stock splits or stock dividends,
- acquisitions and mergers,
- for employee benefit plans and
- other proper business purposes.
Furthermore, if additional shares are readily available, Able's board will
be able to act quickly without spending the time and incurring the expense of
soliciting proxies and holding additional shareholders' meetings. The board,
however, may issue additional shares of common stock and preferred stock without
action on the part of the shareholders only if the action is permissible under
Florida law, and only if the rules of the exchange on which the common stock is
listed permit those issuances. There are no additional costs or expenses due to
the State of Florida, where Able is incorporated, as a result of the increase in
authorized shares, other than the costs associated with the filing of an
amendment to its articles of incorporation.
PREFERRED SHARES
Able's Board is also seeking approval to increase the number of authorized
shares of preferred stock from one million shares to five million shares, on
terms which may be fixed by the board of directors without further shareholder
action. As of the record date, of the four series of preferred stock Able has
designated, 5,000 shares of its Series C preferred stock and 1,000 shares of its
Series E preferred stock is issued and outstanding. Therefore, Able has
remaining 994,000 shares of preferred stock which can be designated for issuance
in the future. Able's board of directors believes that an increase in the number
of shares of authorized preferred stock from one million to five million will
ensure that, in the case of the termination of the merger, a sufficient number
of shares is available for future activities, including additional fund raising
or use of preferred stock in acquisitions.
BOARD OF DIRECTORS RECOMMENDATION
For the above-described reasons, on March 4, 1999, and as ratified on May
12, 2000, Able's board unanimously adopted a resolution setting forth proposed
amendments to its articles of incorporation:
1. Authorizing amendments to the first paragraph of Article III of
Able's articles to increase the number of authorized shares of common
stock, par value $.001, from 25 million shares to 100 million shares;
preferred stock, par value $.10, from one million shares to five million
shares; and
2. Directing that the amendments be submitted to the shareholders for
their review, adoption and approval at Able's 2000 annual meeting of
shareholders.
EFFECT OF INCREASING THE AUTHORIZED SHARES
Each of the additional authorized shares of common stock may be issued at
any time and will have the same rights and privileges as the currently
authorized common stock. The additional authorized preferred stock may be issued
at any time by resolutions of a majority of Able's board in one or more series
with the designations, powers, preferences and rights, including without
limitation, dividend rights, conversion rights, voting rights, redemption terms
and liquidation preferences and other qualifications and limitations as Able's
board determines. Shareholders should keep in mind that the terms of any series
of preferred stock, which may include priority claims to assets and dividends
and special voting rights, could adversely affect the rights of
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holders of Able's common stock. Further, Able may use the additional authorized
shares to discourage others from attempting to gain control of Able by diluting
the voting power of shares outstanding or increasing the voting power of those
who support Able's board in opposing a takeover bid or a solicitation adverse to
Able's management Able deems not in its shareholders' best interests.
Assuming the amendments are approved, no further shareholder approval is
required for Able to issue authorized common stock or preferred stock, unless
required by law. You may vote separately to increase the number of authorized
shares of (i) common stock and (ii) preferred stock.
PROPOSALS
If only Proposal 3(A) described in this Proposal is approved, the first
paragraph of Article III of the Articles of Incorporation will read as follows:
ARTICLE III
The number of shares of stock that this Corporation is authorized to have
outstanding at any one time is:
ONE HUNDRED AND ONE MILLION (101,000,000) SHARES CONSISTING OF ONE
HUNDRED MILLION (100,000,000) SHARES OF COMMON STOCK HAVING A PAR VALUE OF
ONE TENTH OF A CENT ($.001) PER SHARE AND ONE MILLION (1,000,000) SHARES OF
PREFERRED STOCK HAVING A PAR VALUE OF TEN CENTS ($.10) PER SHARE.
If only Proposal 3(B) described in this Proposal is approved, the first
paragraph of Article III of the Articles of Incorporation will read as follows:
ARTICLE III
The number of shares of stock that this Corporation is authorized to have
outstanding at any one time is:
THIRTY MILLION (30,000,000) SHARES CONSISTING OF TWENTY FIVE MILLION
(25,000,000) SHARES OF COMMON STOCK HAVING A PAR VALUE OF ONE TENTH OF A
CENT ($.001) PER SHARE AND FIVE MILLION (5,000,000) SHARES OF PREFERRED
STOCK HAVING A PAR VALUE OF TEN CENTS ($.10) PER SHARE.
If shareholder approval is obtained for either Proposal 3(A) or Proposal
3(B) or for both Proposals, the amendments become effective once the amendment
is filed with the Secretary of State of the State of Florida, which is expected
to occur as soon as practicable after the shareholders approve the amendments.
WHAT IS THE EFFECT IF THE SHAREHOLDERS DO NOT APPROVE THESE PROPOSALS?
If the shareholders do not approve Proposal No. 3(A), Able will not be able
to meet its current contractual obligations to issue shares of common stock or
reserve shares of common stock for issuance. Accordingly, if the shareholders do
not approve Proposal 2(A), it will have the effect of votes against Proposal
Nos. 6, 7, 8 and 9, which describe contractual obligations that require Able to
issue shares of common stock or pay substantial amounts of cash which it
currently cannot afford.
Further, if the shareholders approve the merger with Bracknell but do not
approve Proposal No. 3(a) Able's ability to complete the merger may be affected.
It is a condition to closing of the merger for all Able obligations to issue
securities first be satisfied or otherwise terminated. If Able is not able to
satisfy these existing obligations, Bracknell can terminate the merger agreement
for Able's failure to satisfy a condition precedent.
In addition, if the merger is not consummated and the shareholders do not
approve either Proposal No. 3(A) or Proposal No. 3(B), Able will be severely
limited in its ability to use its securities as consideration for services and
for acquisitions. For example, Able will not be able to issue securities to
current or future employees pursuant to stock options and will be forced to
provide all bonuses in cash. Further, Able may not be able to use its securities
in acquisitions or to raise additional capital. As a result, Able's results of
operations, profitability and cash-flow could be adversely and materially
affected.
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AN OVERVIEW OF ABLE'S COMMON STOCK
The following summarizes the rights of holders of Able common stock:
Each holder of shares of common stock is entitled to one vote per
share on all matters to be voted on by Able's shareholders generally,
including the election of directors;
There are no cumulative voting rights;
The holders of Able's common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for the purpose, if any;
Upon Able's liquidation, dissolution or winding up, the holders of
shares of common stock will be entitled to share ratably in the
distribution of all of Able's assets remaining available for distributions
after satisfaction of all its liabilities and the payment of the
liquidation preference of any outstanding preferred stock; and
The holders of common stock have no preemptive or other subscription
rights to purchase shares of Able's stock, and are not entitled to the
benefits of any redemption or sinking fund provisions.
AN OVERVIEW OF ABLE'S PREFERRED STOCK
Able's articles of incorporation authorize its board of directors to create
and issue one or more series of preferred stock and determine the rights and
preferences of each series within the limits set forth in its articles of
incorporation and applicable law. Among other rights, the board may determine,
without further vote or action by Able's shareholders:
The number of shares constituting the series and the distinctive
designation of the series;
The dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of the series;
Whether the series will have voting rights in addition to the voting rights
provided by law and, if so, the terms of the voting rights;
Whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;
Whether or not the shares of the series will be redeemable or exchangeable,
and, if so, the dates, terms and conditions of redemption or exchange, as
the case may be;
Whether the series will have a sinking fund for the redemption or purchase
of shares of that series, and, if so, the terms and amount of the sinking
fund; and
The rights and liquidation value of the shares of the series in the event
of Able's voluntary or involuntary liquidation, dissolution or winding up
and the relative rights or priority, if any, of payment of shares of the
series.
Unless Able's Board provides otherwise, the shares of all series of
preferred stock will rank on a parity with respect to the payment of dividends
and to the distribution of assets upon liquidation. Able has no present intent
to issue any additional series of preferred stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVING AMENDMENTS TO
ABLE'S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF
(A) COMMON STOCK FROM 25 MILLION TO 100 MILLION
(B) PREFERRED STOCK FROM ONE MILLION TO FIVE MILLION
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PROPOSAL NO. 4:
TO AMEND ABLE'S ARTICLES OF INCORPORATION TO CHANGE ITS CORPORATE NAME FROM
"ABLE TELCOM HOLDING CORP." TO "THE ADESTA GROUP, INC."
As part of Able's agreements with WorldCom related to the MFS Network
acquisition, it was permitted to use the trade name "MFSNT" or any part of that
trade name only during the 18-month transition period immediately following the
acquisition. For example, effective February 2000, Able changed the name of MFS
Network Technologies, Inc. to Adesta Communications, Inc., and changed the name
of MFS Transportation Systems, Inc. to Adesta Transportation, Inc.
Although the current name "Able Telcom Holding Corp." does not include any
portion of the trade name MFS Network, management believes that it is important
that the parent holding company have a name that is similar to that of the
majority of its subsidiaries. This similarity in names will assist in market
identification of all of the members of the corporate family as well as help in
achieving a name brand recognition within Able's markets. Therefore, the board
of directors has recommended the change of Able's name to "The Adesta Group,
Inc." To effect this name change, Able is required to amend its articles of
incorporation. The articles of incorporation may be amended to change Able's
name only with shareholder approval.
WHY "ADESTA"?
The word "Adesta" is derived from the Latin word, adeo, which means to
unite or come together. Part of Able's mission is that through its subsidiaries,
its products and services are helping to unite the world through
state-of-the-art communications infrastructure. As such, Able believes that the
name "The Adesta Group, Inc." better reflects its mission.
THE PROPOSED NAME CHANGE
Able is asking its shareholders to approve amending the articles of
incorporation to change its corporate name from "Able Telcom Holding Corp" to
"The Adesta Group, Inc." To accomplish this name change, Able's board proposes
that Article I of Able's articles of incorporation be amended to read as
follows:
ARTICLE I NAME
THE NAME OF THE CORPORATION SHALL BE:
THE ADESTA GROUP, INC.
IF THIS PROPOSAL IS APPROVED, MUST SHAREHOLDERS TAKE ANY ACTIONS?
It will not be necessary for you to surrender your share certificates upon
approval of the proposed name change. Rather, when share certificates are
presented for transfer or other reasons, new share certificates bearing the name
"The Adesta Group, Inc." will be issued. Until that time, your share
certificates containing the old name will automatically be deemed to represent
that of the newly named company. Additionally, until the merger is completed or
if the merger is terminated, Able will continue to trade its common stock under
the symbol "ABTE".
ABLE'S BOARD'S ABILITY TO TERMINATE THIS PROPOSAL
Able recommends that the shareholders vote "FOR" amending its corporate
name. However, if, the Board decides completing the corporate name change
becomes inadvisable because a claim is made challenging the name change, or any
other circumstance exists which makes the name change inadvisable, the
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Board may terminate this proposal to amend Able's articles of incorporation. The
termination of this proposal may be effective either before or after approval of
the name change by the shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVING AMENDING
ABLE'S ARTICLES OF INCORPORATION TO CHANGE ITS CORPORATE NAME FROM "ABLE TELCOM
HOLDING GROUP" TO "THE ADESTA GROUP, INC."
EXPLANATORY NOTE FOR PROPOSAL NOS. 5 THROUGH 9
WHY SHAREHOLDER APPROVAL IS REQUIRED FOR PROPOSAL NOS. 5 THROUGH 9
Until recently Able's common stock was listed on the Nasdaq National
Market, and Able was required to comply with Nasdaq's listing rules. Proposals 5
through 9 are affected by three of those rules.
First, the rules provide that Able must get shareholder approval if it
grants stock, options or other rights to officers and directors outside a
broadly based plan that includes other employees.
Second, the rules provide that Able must get shareholder approval if it
issues common stock or securities convertible into or exercisable for common
stock in a private offering if
1. the price at which Able issues the common stock is less than the
greater of book or market value of the common stock, and
2. the number of shares issued equals 20% or more of the number of
shares of common stock outstanding or 20% or more of the voting power
outstanding before the transaction that gave rise to the issuance.
Third, the rules provide that Able must get shareholder approval if it
issues common stock in an acquisition of a business if the number of shares
issued equals 20% or more of the number of shares of common stock outstanding or
20% or more of the voting power outstanding before the transaction that gave
rise to the issuance.
Although Able's common stock was recently delisted from the Nasdaq National
Market, if the merger is not completed, Able may again seek listing in the
future. Therefore, to facilitate that process Able is seeking approval of each
of Proposal Nos. 5, 6, 7, 8 and 9, explained in detail below, to ensure that it
meets one or more of these criteria requiring shareholder approval.
WHAT HAPPENS IF A COMPANY DOES NOT COMPLY WITH NASDAQ RULES?
If a listed company does not maintain the criteria that Nasdaq requires,
Nasdaq may delist its stock from the Nasdaq National Market System. Able's stock
was delisted for failure to meet the Nasdaq's requirement that it hold an annual
shareholders meeting and because its stock price had fallen below that required
for a listed company. Although the delisting did not relate specifically to the
shareholder approval requirements described above, Able's continued failure to
comply with those rules could have also resulted in delisting. Since delisting,
Able's common stock has traded over-the-counter on the OTC Electronic Bulletin
Board.
WHAT IS THE EFFECT IF ABLE'S SHAREHOLDERS APPROVE EACH OF PROPOSAL NOS. 5
THROUGH 9?
If the shareholders approve each of Proposal Nos. 5, 6, 7, 8 and 9, Able
will be able to issue the shares described in those proposals. In the case of
Proposal Nos. 6, 7, 8 and 9, Able is contractually committed to either issue the
shares or compensate the holders by other means, such as with substantial cash
payments that Able cannot afford. Accordingly, if Able does not receive
shareholder approval, Able will suffer adverse consequences under those
contracts, as explained in more detail in its description of the specific
proposals.
Approval of Proposal Nos. 5, 6, 7, 8 and 9 would result in the issuance of
18,229,399 shares of common stock or securities convertible into or exercisable
for common stock. As of November 13, 2000, there were 16,374,504 shares of
common stock outstanding. Accordingly, if as of November 13, 2000, Able issued
all of
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the common stock provided for in Proposal Nos. 5, 6, 7, 8 and 9, the shares
issued would constitute 52.6% of its issued and outstanding shares of common
stock as of that date.
The table below shows the shares of common stock on an as converted or
exercised basis, which are proposed to be issued under each of Proposal Nos. 5,
6, 7, 8 and 9, and as a group. The percentages in the table are based on shares
outstanding on November 13, 2000. However, Proposal Nos. 6, 7, 8 and 9 each
would have resulted in a more than 20% issuance under Nasdaq rules when measured
at the time Able became contractually committed to issue those shares. The
specific details about Proposal Nos. 5, 6, 7, 8 and 9 follow this Explanatory
Note.
PERCENTAGE OF SHARES
OUTSTANDING AS OF
PROPOSAL NUMBER OF SHARES(1) AUGUST 17, 2000(2)
- -------- ------------------- --------------------
Proposal No. 5............................................ 2,414,897 12.9%
Proposal No. 6............................................ 2,600,000 13.7%
Proposal No. 7............................................ 3,502,991 19.5%
Proposal No. 8............................................ 4,700,000 22.3%
Proposal No. 9............................................ 5,011,511 19.9%
Total shares of common stock issuable if Proposal Nos. 5,
6, 7, 8 and 9 are approved.............................. 18,229,399 52.6%
- ---------------
(1) Proposal Nos. 7, 8 and 9 include shares of common stock issuable pursuant to
anti-dilution provisions contained in the Series C convertible preferred
stock and warrants and the Sirit settlement agreement, as described below.
That number of shares cannot be determined at this time. Accordingly, the
number of shares for Proposal Nos. 7, 8 and 9, the total number of shares,
and the related percentages, may be higher than reflected in the table.
(2) The number of shares outstanding for purposes of each calculation has been
adjusted to reflect the issuance of the shares contained in the related
proposal and, in the case of Proposal No. 9, all additional shares the
issuance of which are a precondition to the issuance of the shares described
in that proposal.
If Able were currently listed on Nasdaq, the shareholders did not approve
some or all of these proposals and Able were to nonetheless grant or issue the
securities described in Proposal Nos. 5 through 9, Able would be at risk of
having its common stock delisted. Because Able has been delisted, it is no
longer subject to the Nasdaq rules. Therefore, even if the shareholders do not
approve some or all of these proposals, Able intends to grant or issue the
securities described to the extent it is necessary to do so to avoid defaulting
under contractual obligations or otherwise incurring penalties.
Approval of Proposals Nos. 5 through 9 may result in the issuance of up to
52.6% of its outstanding common stock as of November 13, 2000. These shares
would be issued over time upon exercise of the options or conversion of the
other securities described in such proposals. These issuances will greatly
dilute the percentage ownership of its current common stock holders. Further,
these securities are in some instances issuable at prices that may be below its
market value at the time of issuance or for no additional consideration. The
issuance of these securities may substantially dilute the market value of shares
held by Able's current shareholders.
RELATIONSHIP BETWEEN PROPOSAL NO. 3(A) AND PROPOSAL NOS. 6, 7, 8 AND 9
Prior to approval of Proposal No. 3(A), Able's articles of incorporation
allow it to issue only 8.6 million additional shares of common stock. Most of
those additional shares are already required to be issued pursuant to existing
obligations. If each of Proposal Nos. 6, 7, 8 and 9 are approved by the
shareholders, the approvals would require Able to issue more shares of common
stock than are currently authorized under its articles of incorporation.
Accordingly, notwithstanding shareholder approval of Proposal Nos. 6, 7, 8 and
9, if the shareholders do not approve Proposal 3(A), Able will not be able to
issue all of the shares of common stock contemplated by Proposal Nos. 6, 7, 8
and 9 and Able will suffer the same adverse consequences as if Proposal Nos. 6,
7, 8 and 9 had not been approved by the shareholders, as described in the
following pages.
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PROPOSAL NO. 5
TO RATIFY AND APPROVE THE GRANT OF 2,414,897 STOCK OPTIONS TO CERTAIN
OF ABLE'S OFFICERS AND DIRECTORS OUTSIDE OF ABLE'S 1995 STOCK OPTION PLAN.
ISSUANCE OF SHARES PURSUANT TO THESE OPTIONS MUST BE APPROVED BY THE
SHAREHOLDERS PURSUANT TO NASDAQ RULES
REASONS FOR APPROVING ABLE'S ISSUING STOCK OPTIONS GRANTED TO ABLE'S OFFICER AND
DIRECTORS OUTSIDE THE STOCK OPTION PLAN.
Able's Board of directors approved the granting of an aggregate of
2,414,897 stock options to its executive officers and directors outside its 1995
stock option plan. Under Nasdaq rules these grants are subject to shareholder
approval. Able's board believes it is in Able's best interest to ratify its
granting these options to be issued to its executive officers and directors to
attract, retain, motivate and award key individuals who Able believes are
essential to its long-term growth and success and upon whose efforts and
judgment its success largely depends.
WHAT IS THE EFFECT OF SHAREHOLDER APPROVAL OF THIS PROPOSAL?
If Able's shareholders approve Proposal No. 5, to the extent that all of
the options that are the subject of this Proposal were exercised as of September
30, 2000, 2,414,897 additional shares would be issued, resulting in an
additional 12.9% of its outstanding shares of common stock as of November 13,
2000. No further shareholder action would be required once the shareholders
approve this Proposal. Assuming all the options were exercised for cash, Able
would receive approximately $11.0 million. Able intends to use any proceeds from
the exercise of these options for general corporate and working capital
purposes.
WHAT HAPPENS IF ABLE'S SHAREHOLDERS DO NOT APPROVE THIS PROPOSAL?
If Able's shareholders do not ratify Proposal No. 5, Able's board may
rescind the options described in Proposal No. 5. To the extent any individual
who was granted one of the options that is later rescinded objects, he could
seek other monetary compensation to offset any value with respect to the options
that were rescinded. If this were to occur, Able may be required to pay
additional compensation to certain of its executive officers and directors, as
opposed to receiving cash upon exercises of options. Further, any officer or
director who believes that Able made an unconditional promise to grant these
options could bring suit seeking damages for breach of promise. These additional
costs could affect Able's cash flow and profitability.
IF THIS PROPOSAL IS APPROVED, WHO WILL RECEIVE THE 2,364,897 OPTIONS?
The 2,414,897 options subject to this proposal relate to a variety of
options which have been granted to Able's officers and directors and to a lesser
degree, to Able's advisory board and a consultant since 1998, outside of its
1995 stock option plan. These options are granted outside of the plan because at
the time these options were granted, Able did not have a sufficient number of
shares under the plan to cover these grants, as well as grants to its other
employees. Therefore, Able granted options under the plan to its employees who
are not also officers or directors under the plan and qualified grants to
officers and directors, as well as its advisory board and a consultant, with a
requirement to seek additional shareholder approval. A brief description of the
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material terms of the stock option grants and a table summarizing the benefits
to be conferred on the listed recipients follows:
FAIR
OPTIONS VESTING EXERCISE MARKET EXPIRATION
NAME GRANTED GRANT DATE SCHEDULE VESTING DATE PRICE VALUE(1) DATE
- ---- --------- ---------- -------- ------------ -------- -------- ----------
Billy V. Ray, Jr.............. 10,000 12/31/98 10,000 12/31/98 $ 5.75 $ 5.75 12/31/00
Chief Executive Officer 100,000 12/31/98 100,000 12/31/98 $ 5.75 $ 5.75 12/31/01
and Chairman of the Board 50,000 5/7/99 17,000 5/7/99 $6.375 $ 6.375 5/7/03
of Directors................ -- -- 16,500 5/7/00 $6.375 $ 6.375 5/7/03
-- -- 16,500 5/7/01 $6.375 $ 6.375 5/7/03
100,000 2/21/00 100,000 (2) (3) 2/21/05
150,000 6/15/00 150,000 6/15/00 $ 2.84 $2.8438 6/15/10
Frazier Gaines(4)............. 80,000 12/31/98 80,000 12/31/98 $ 5.75 $ 5.75 12/31/00
Former Chief Executive 16,000 12/31/98 16,000 12/31/98 $ 5.75 $ 5.75 12/31/00
Officer 16,000 12/31/98 16,000 12/31/98 $ 5.75 $ 5.75 12/31/00
President -- Able Telcom 16,000 12/31/98 16,000 12/31/98 $ 5.75 $ 5.75 12/31/00
International 32,000 12/31/98 32,000 12/31/98 $ 5.75 $ 5.75 12/3/100
30,000 12/31/98 30,000 12/31/98 $ 5.75 $ 5.75 7/3/04
100,000 12/31/98 100,000 12/31/98 $ 5.75 $ 5.75 12/31/00
100,000 (5) 100,000 (2) (3) -- (6)
Edwin D. Johnson.............. 150,000 5/8/00 150,000 5/8/00 $ 2.44 $2.4375 5/8/10
President, Chief Financial
Officer and a Director
Charles A Maynard............. 200,000 2/21/00 50,000 2/11/00 $ 6.00 $4.8125 2/21/05
Chief Operating Officer -- -- 75,000 2/11/01 $ 8.50 $4.8125 2/21/05
-- -- 75,000 2/11/02 $ 9.50 $4.8125 2/21/05
James Brands.................. 100,000 4/1/99 75,000 4/5/99 $6.375 $ 6.375 4/30/02
Senior Executive Vice -- -- 25,000 4/21/00 $6.375 $ 6.375 4/30/02
President
Vance Cartee(7)............... 40,000 12/31/98 20,000 12/31/98 $ 5.75 $ 5.75 12/31/01
Vice President of Business -- -- 10,000 12/31/99 $ 5.75 $ 5.75 12/31/01
Development -- -- 10,000 12/31/00 $ 5.75 $ 5.75 12/31/01
25,000 5/7/99 8,500 5/7/99 $6.375 $ 6.375 5/7/03
-- -- 8,250 5/7/00 $6.375 $ 6.375 5/7/03
-- -- 8,250 5/7/01 $6.375 $ 6.375 5/7/03
35,000 7/26/99 11,667 7/26/99 $ 9.94 $9.9375 7/26/02
-- -- 11,667 7/26/00 $ 9.94 $9.9375 7/26/02
-- -- 11,666 7/26/01 $ 9.94 $9.9375 7/26/02
Michael Brenner............... 100,000 5/3/00 100,000 5/3/00 $ 2.69 $2.6875 5/3/10
General Counsel and
Executive Vice President
Edward Z. Pollock............. 40,000 12/31/98 20,000 12/31/98 $ 5.75 $ 5.75 12/31/01
Associate General Counsel -- -- 10,000 12/31/99 $ 5.75 $ 5.75 12/31/01
-- -- 10,000 12/31/00 $ 5.75 $ 5.75 12/31/01
25,000 5/7/99 8,500 5/7/99 $6.375 $ 6.375 5/7/03
-- -- 8,250 5/7/00 $6.375 $ 6.375 5/7/03
-- -- 8,250 5/7/01 $6.375 $ 6.375 5/7/03
Michael A. Summers(8)......... 40,000 6/1/99 15,000 6/1/99 $7.625 $ 7.625 6/1/03
Former Chief Accounting -- -- 15,000 6/1/00 $7.625 $ 7.625 6/1/03
Officer -- -- 10,000 6/1/01 $7.625 $ 7.625 6/1/03
Robert Sommerfield............ 65,000 8/4/00 65,000 8/4/00 $ 2.41 $ 2.41 8/4/10
President Adesta
Communications
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FAIR
OPTIONS VESTING EXERCISE MARKET EXPIRATION
NAME GRANTED GRANT DATE SCHEDULE VESTING DATE PRICE VALUE(1) DATE
- ---- --------- ---------- -------- ------------ -------- -------- ----------
Philip Kernan................. 125,000 2/21/00 25,000 2/1/00 $ 6.00 $4.8125 2/21/05
President -- Adesta -- -- 50,000 2/1/01 $ 8.50 $4.8125 2/21/05
Transportation.............. -- -- 50,000 2/1/02 $ 9.50 $4.8125 2/21/05
Michael Arp(9)................ 40,000 1/1/99 20,000 1/1/99 $ 5.75 $ 5.75 12/31/03
Former Acting President -- -- -- 10,000 1/1/00 5.75 5.75 12/3/103
GEC and TSCI -- -- 10,000 1/1/01 5.75 5.75 12/31/03
25,000 5/7/99 8,500 5/7/99 6.375 6.375 5/7/03
-- -- 8,250 5/31/99 6.375 6.375 5/7/03
-- -- 8,250 5/31/00 6.375 6.375 5/7/03
Richard Boyle................. 65,000 5/7/99 22,000 5/7/99 $6.375 $ 6.375 5/7/01
Patton Management -- -- 21,500 5/31/99 6.375 6.375 5/7/01
Corporation -- -- 21,500 5/31/00 6.375 6.375 5/7/01
C. Frank Swartz(10)........... 20,000 12/31/98 20,000 12/31/98 $ 5.75 $ 5.75 12/31/04
Director 10,000 8/1/00 10,000 8/1/00 2.50 2.50 8/1/03
10,000 6/9/99 10,000 6/9/99 6.75 6.75 6/9/02
20,000(11) 11/7/00 20,000 11/7/00 4.00 4.00 (12)
Alec McLarty(10).............. 10,000 9/29/99 10,000 3/10/00 $ 8.81 $8.8125 9/29/02
Director 20,000(11) 11/7/00 20,000 11/7/00 4.00 4.00 (12)
Jonathan Bratt(13)............ 30,000 12/31/98 30,000 12/31/98 $ 5.75 $ 5.75 7/3/04
Former Director 10,000(11) 11/7/00 10,000 11/7/00 4.00 4.00 (12)
Thomas Davidson(14)........... 20,000 12/31/98 20,000 12/31/98 $ 5.75 $ 5.75 12/31/04
Former Director 10,000 5/7/99 10,000 5/7/99 6.375 6.375 5/8/01
Robert Young(15).............. 10,000 5/7/99 10,000 5/7/99 $6.375 $ 6.375 5/8/01
Former Director
Gideon Taylor(16)............. 30,000 12/31/98 30,000 12/31/98 $ 5.75 $ 5.75 3/16/01
Former Officer and Director 120,000 12/31/98 120,000 12/31/98 5.75 5.75 3/16/01
70,000 12/31/98 70,000 12/31/98 5.75 5.75 3/16/01
Jay Dominguez................. 20,000 12/31/98 20,000 12/31/98 $ 5.75 $ 5.75 12/31/00
Former Officer
Allen Maines.................. 80,000 5/3/99 40,000 5/3/99 $ 6.75 $ 6.75 5/3/09
Advisory Board Chairman -- -- 10,000 11/3/99 9.00 9.00 5/3/09
-- -- 10,000 5/3/00 2.69 2.6875 5/3/09
-- -- 10,000 11/3/00 (17) 5/3/09
-- -- 10,000 5/3/01 (17) 5/3/09
Bobby Vick.................... 10,000 5/3/99 10,000 5/3/99 $ 6.75 $ 6.75 5/3/09
Advisory Board
Paul Lapides.................. 10,000 5/3/99 10,000 5/3/99 $ 6.75 $ 6.75 5/3/09
Advisory Board
Jeffrey Sonnenfeld............ 10,000 5/3/99 10,000 5/3/99 $ 6.75 $ 6.75 5/3/09
Advisory Board
Tyler Dixon................... 40,000 4/1/99 40,000 4/1/99 $6.375 $ 6.375 (18)
Consultant
Gaston Moons.................. 50,000 12/3/198 50,000 12/31/98 $ 5.75 $ 5.75 12/31/00
Total Options Granted......... 2,485,000
Total Options Subject to
Shareholder Approval(19).... 2,414,897
- ---------------
(1) Fair market value on date of grant.
(2) The vesting date will be the date of approval by shareholders.
(3) The exercise price will equal fair market value on the date of approval by
the shareholders.
(4) 210,000 of Mr. Gaines' stock options have been transferred to third
parties.
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(5) The grant date will be the date of approval by the shareholders.
(6) The expiration date will be three years from the date of approval by the
shareholders.
(7) Mr. Cartee resigned in July 2000, at that time 58,417 options had vested.
The additional options will not vest since Mr. Cartee is no longer an
employee of Able.
(8) Mr. Summers resigned in May 2000; at that time 30,000 options had vested.
The additional options will not vest since Mr. Summers is no longer an
employee of Able.
(9) Mr. Arp resigned in May 2000; at that time 46,750 options had vested. The
additional options will not vest since Mr. Arp is no longer an employee of
Able.
(10) Mr. Swartz and Mr. McLarty are standing for reelection for Able's board of
directors.
(11) Subject to approval by Bracknell.
(12) The effective time of the merger.
(13) Mr. Bratt resigned from Able's board of directors in February 2000.
(14) Mr. Davidson resigned from Able's board of directors in January 2000.
(15) Mr. Young resigned from Able's board of directors in May 1999.
(16) Mr. Taylor resigned as an officer and from Able's board of directors in
March 1999.
(17) The exercise price will equal fair market value on the date of approval by
the shareholders.
(18) These options must be exercised within two years of the expiration of Mr.
Dixon's agreement with Able dated March 31, 2000, or any extension or
renewal hereof, whichever last occurs.
(19) Total options granted minus 41,853 options which were granted to Mr. Cartee
but did not vest and were cancelled due to his resignation, 10,000 options
which were granted to Mr. Summers but did not vest and were cancelled due
to his resignation and 18,250 options which were granted to Mr. Arp but did
not vest and were cancelled due to his resignation.
The options listed in the above chart are the only options subject to
approval in this proposal No. 5. These options do not represent all the options
Able has granted during the relevant time period. Other options were granted
under Able's 1995 stock option plan, which are referenced in other portions of
this proxy statement.
WHY WEREN'T THESE OPTIONS GRANTED UNDER THE PLAN?
Able's board administers the grant of options outside its plan and selects
those officers and directors who are eligible for awards and the number of
shares subject to the awards. Able's board also sets the terms and conditions of
awards and determines what is necessary to administer granting the stock
options. These options were not issued under the 1995 stock option plan because
Able wanted to use the limited number of remaining shares available under the
plan for non-management employees so that Able could give them incentive stock
options, allowing them to benefit from more favorable tax treatment.
WHAT ARE THE ACCOUNTING CONSIDERATIONS?
Accounting rules require Able to record a compensation expense to the
extent the fair market value of the Able's common stock on the date its
shareholders approve this proposal exceeds the exercise price of the option. If
the option is fully vested on the date Able's shareholders approve this
proposal, the calculated compensation will be charged to expense immediately.
Otherwise, the calculated compensation will be charged to expense ratably over
the term of the option. Approximately 84% of the options described in Proposal
No. 5 will be fully vested on the date Able's shareholders approve this
proposal. Based upon fair market value of the Able common stock on November 13,
2000, Able would incur compensation expense of approximately $670,000 related to
the options described in Proposal No. 5. However, the price of Able common stock
will fluctuate over time so Able cannot now predict whether there will be a
compensation charge based on its price as of the date of shareholder approval.
Some compensation charge would apply if its price is $2.45 or greater as of that
date.
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The table below provides a range of possible compensation charges based
upon assumed market prices of the Able's common stock on the measurement date.
FAIR MARKET VALUE OF ABLE COMMON STOCK ON MEASUREMENT DATE
$2.41 OR LESS $3.00 $5.00 $6.00 $7.00
------------- ----- ------ ------ ------
(IN THOUSANDS)
Total Compensation Expense...................... $-- $185 $1,205 $1,953 $3,626
BENEFITS TO OFFICERS AND DIRECTORS IF THIS PROPOSAL NO. 5 IS APPROVED
All of Able's current officers and directors will personally benefit from
its shareholders approving Proposal No. 5 since each would receive options
described in this proposal. While each of Able's directors abstained from voting
for any grant of options from which he would personally benefit, each is
recommending that the shareholders vote for this entire proposal, which may be
considered to be a conflict of interest.
Further, under Florida law, a transaction will not be void or voidable
because of a conflict of interest if holders of a majority of the outstanding
shares of common stock, other than the interested directors' shares, approve the
proposals. However, Florida law requires a higher voting standard than Nasdaq
for approval.
The higher voting requirement for potential conflict of interest
transactions under Florida law will satisfy Nasdaq rules as well. Nevertheless,
because there are other ways to satisfy Florida law with respect to potential
conflict of interest transactions, if the lower voting standard of the Nasdaq
rules is met for Proposal No. 5, and the higher Florida law standard is not met,
Able may choose to deem Proposal No. 5 approved and satisfy the conflict of
interest requirements by other means.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" RATIFYING AND
APPROVING THE GRANT OF 2,414,897 STOCK OPTIONS TO CERTAIN OF ABLE'S OFFICERS AND
DIRECTORS OUTSIDE OF ABLE'S STOCK OPTION PLAN
EXPLANATORY NOTE RELATING TO PROPOSAL NOS. 6 AND 7
REGARDING ACQUISITION OF THE NETWORK CONSTRUCTION AND
TRANSPORTATION SYSTEMS BUSINESS FROM WORLDCOM
Proposal Nos. 6 and 7 are directly related to an acquisition Able completed
in June 1998. Able acquired the network construction and transportation systems
businesses from WorldCom, Inc. that were then operated under the name MFS
Network Technologies, Inc. Able has divided those businesses into its Adesta
Communications and Adesta Transportation subsidiaries.
What follows is a summary description of this acquisition to assist you in
deciding how to vote on Proposal Nos. 6 and 7.
THE BUSINESSES ACQUIRED
The network construction and transportation systems businesses of WorldCom
provided design, development, engineering, installation, construction, operation
and maintenance services for telecommunications 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.
Now, as Able's subsidiaries Adesta Communications and Adesta Transportation,
those business provide the same services to its clients. See Appendix B for
additional information concerning Able's business and the business of MFS
Network Technologies before the acquisition.
The address and telephone number of Adesta Communications and Adesta
Transportation is 1200 Landmark Center, Suite 1300, Omaha, Nebraska 68102-1841,
telephone number (888) 638-6866. Able's
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address and telephone number is 1000 Holcomb Woods Parkway, Suite 440, Roswell,
GA 30076, telephone number (770) 993-1570.
No federal or state regulatory approvals were required in connection with
the acquisition.
ACQUISITION OF NETWORK CONSTRUCTION AND TRANSPORTATION SYSTEMS
BUSINESS -- SUMMARY TERM SHEET
1. PURCHASER
Able Telcom Holding Corp.
2. SELLER
MFS Network Technologies, Inc., a wholly-owned subsidiary of MFS
Communications Company, Inc., a wholly-owned subsidiary of WorldCom.
3. ACQUISITION DATE
The acquisition was consummated on July 2, 1998 pursuant to a merger
agreement dated April 26, 1998 that was further amended on September 9, 1998.
4. ACQUISITION STRUCTURE
Able acquired all of the assets of the network construction and
transportation systems business of MFS Network that included the stock of MFS
Transportation Systems, Inc., MFS TransTech, Inc. and MFS Network Technologies
of the District of Columbia, Inc.
5. CONSIDERATION
a. Cash Purchase Price: $58.8 million of which $30 million was paid by the
issuance by Able of a promissory note to WorldCom, which initially bore
interest by 11.5% per annum. This note was subsequently satisfied in
part by the issuance of Able common stock and in part by the issuance of
Series E convertible preferred stock of Able.
b. WorldCom Option: Able granted, subject to shareholder approval, an
option to WorldCom to purchase up to 2,000,000 shares of Able'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".
The value of the WorldCom option was estimated at the date of grant at
$3.5 million.
On January 8, 1999, the Able and WorldCom agreed to convert the WorldCom
Option into 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 Able's common stock over
a base price of $7.00 per share. The stock appreciation rights may
revert back to the WorldCom option allowing for the exercise of all
2,000,000 shares if required shareholder approval of the options is
received.
c. WorldCom Phantom Stock Awards: Able granted the right to receive upon
satisfaction of certain conditions phantom stock awards, which are
referred to in this proxy as WorldCom SARs, equivalent of up to 600,000
shares of common stock, payable in cash, stock, or a combination of both
at its option. The WorldCom SARs are now exercisable only on the
following two days: 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 value of the WorldCom SARs was estimated at
the date of grant at $0.6 million.
d. Contingent Consideration: The MFS Network acquisition agreements, as
amended, provide that on November 30, 2000, Able shall pay to WorldCom
certain amounts, if positive: (i) the difference between $12.0 million
related to losses on MFS Network projects in existence on March 31, 1998
and recorded by MFS Network as of June 30, 1998, and the amount actually
lost on such contracts
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through November 30, 2000, and (ii) the difference between $5.0 million
and the aggregate costs incurred by us for defense of litigation, and
payments made in settlement or in payment of judgments with respect to
preacquisition litigation. The range of cash potentially payable to
WorldCom is from $0 to $17.0 million. Presently, Able does not expect to
owe WorldCom any amounts under these formulas.
6. MASTER SERVICES AGREEMENT
In conjunction with the acquisition, Able entered into a five-year
agreement with WorldCom to provide telecommunications infrastructure services to
WorldCom for a minimum of $40.0 million per year, provided that the aggregate
sum payable will be not less than $325.0 million, including a fee of 12 percent
of reimbursable costs under the agreement. If Able 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 amount required. Able agreed that WorldCom
will have met all of its obligations to the extent that payments reach an
aggregate of $500.0 million at any time during the five-year term. The agreement
had an initial term of five years, which was extended in July 2000 to July 1,
2006. The agreement has been amended as described under "The Merger -- Other
Agreements -- WorldCom Agreements." In fiscal year 1999, Able recognized
revenues of approximately $61.6 million and in fiscal year 1998, $30.0 million,
from the WorldCom master services agreement.
7. OTHER
ADDITIONAL ACQUISITION TERMS
Able was entitled to use the name "MFS Network Technologies" and any
variations of that name during the 18-month transition period commencing on July
2, 1998.
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
Able's issuance of a promissory note to WorldCom.
The purchase price for the acquisition consisted of the following
consideration (in millions):
Contract price.............................................. $58.8
Transaction related costs................................... 4.6
WorldCom Option............................................. 3.5
WorldCom Equity Award....................................... 0.6
-----
Total purchase price.............................. $67.5
=====
In conjunction with the acquisition, Able issued the securities to WorldCom
described in Proposal No. 6 and sold the securities described in Proposal No. 7
to third parties.
In addition to the securities issued to WorldCom and the WorldCom master
services agreement, on January 12, 2000, WorldCom converted approximately $25.5
million of the original $30.0 million note Able issued as part of the
acquisition, into 3,050,000 shares of its common stock. The conversion was based
on the January 8, 2000 closing price of its common stock of $8.375 per share.
The remainder of the original $30.0 million note, approximately $4.5 million
including capitalized note interest, was converted into an amended and restated
note. The new WorldCom note bears interest at 11.5 percent and will mature
February 1, 2001. This note, together with other indebtedness to WorldCom, was
subsequently exchanged for Series E preferred stock by WorldCom.
The obligations under the new WorldCom note are junior and fully
subordinated to those under Able's secured credit facility. No amounts may be
paid on the WorldCom note so long as any debt is outstanding
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under the secured credit facility. Subject to the subordination provisions and
after full payment of all amounts owed under the secured credit facility, the
WorldCom note may be prepaid as follows:
- By applying 8 percent of the payment WorldCom owes Able under the
WorldCom master services agreement,
- By paying to WorldCom a portion of certain proceeds received by Able upon
the sale of certain conduit assets, and
- By paying to WorldCom a portion of certain proceeds received from time to
time under maintenance contracts for certain conduit projects.
In addition, if Able does not repay the WorldCom Note in full by February
1, 2001, WorldCom also will be able to:
- Require Able to pay a 13.5 percent annual default rate of interest as
long as Able is in default,
- Reduce the minimum yearly and aggregate revenues Able would otherwise
receive under the WorldCom master services agreement, and
- Refuse to give Able additional work under the WorldCom master services
agreement while Able is in default.
REASONS FOR THE ACQUISITION
The acquisition was deemed beneficial to Able and its shareholders by its
board of directors for the following reasons:
- In order to expand in the domestic market, Able has pursued a strategy of
growth through strategic acquisitions since December 1995. In general,
this acquisition strategy was designed to decrease its exposure in
foreign markets. As a result of its acquisition strategy, Able acquired
seven businesses including the businesses of MFS Network Technologies.
The acquisition further increased Able's United States operations.
- The services provided by MFS Network Technologies were complementary to
the services provided by Able and its other subsidiaries prior to the
date of the acquisition.
- The WorldCom master services agreement provides a steady revenue stream
to Able for a number of years and allows its existing partners and
customers to bid on contracts with WorldCom.
- The acquisition increased Able's market share in the telecommunications
industry.
DETAILED FINANCIAL AND TRANSACTION INFORMATION
See Appendix B for
- selected financial data included in Able's (A) annual report on form 10-K
for fiscal year ended October 31, 1998, (B) amended annual report on form
10-K for the fiscal year ended October 31, 1999, and (C) current report
on form 8-K as filed July 16, 1998, as amended August 31, 1998, as
further amended October 2, 1998, and as further amended May 30, 2000; and
- Management's discussion and analysis of financial condition and results
of operations for Able and MFS Network Technologies. Copies of the form
1998 10-K, form 1999 10-K and MFS Network Acquisition 8-K are being
mailed with these proxy materials.
See Appendix C for
- financial statements for MFS Network; and
- combined pro forma financial information for Able and MFS Network.
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PROPOSAL NO. 6:
TO APPROVE ISSUING UP TO 2,600,000 SHARES OF ABLE COMMON STOCK TO
WORLDCOM IF IT EXERCISES OPTIONS AND STOCK APPRECIATION RIGHTS IT
OBTAINED FROM ABLE WHEN ABLE ACQUIRED THE NETWORK CONSTRUCTION AND
TRANSPORTATION SYSTEMS BUSINESS FROM WORLDCOM. ISSUANCE OF THESE
SHARES MUST BE APPROVED BY THE SHAREHOLDERS PURSUANT TO NASDAQ RULES.
WHAT ARE THE OPTIONS AND STOCK APPRECIATION RIGHTS CURRENTLY HELD BY WORLDCOM
AND HOW DID THEY ACQUIRE THEM?
In conjunction with Able's acquisition of the network construction and
transportation systems business of MFS Network Technologies, Inc. from WorldCom
in July 1998, Able granted WorldCom the following securities:
- an option to purchase up to 2,000,000 shares of Able's common stock, at
an exercise price of $7.00 per share.
- SAR awards equal to 600,000 shares of common stock, which when exercised,
would entitle WorldCom to receive in cash or common stock the difference
between $5.0938 per share, the then fair market value of Able's common
stock, and the market price of Able's common stock on the date WorldCom
exercises the SAR, up to a maximum of $15 million, $25.00 per share, in
cash or common stock at its discretion (the "Initial WorldCom SAR").
To finance a portion of the acquisition, Able also issued to third parties
4,000 shares of Series B convertible preferred stock and warrants to purchase up
to 1,000,000 shares of common stock at $19.80 per share. Nasdaq took the
position that the WorldCom option, the Initial WorldCom SAR, and these
additional security issuances to third parties should be integrated for purposes
of determining whether shareholder approval would be required under Nasdaq's
shareholder approval rules. The integration would have inadvertently caused Able
to violate the Nasdaq rules unless Able modified the WorldCom option, because
Able would have issued more than 20% of its outstanding common stock in
connection with the acquisition.
Because of the issues raised by the Nasdaq rules, unless and until Able
received shareholder approval of the WorldCom option, the WorldCom option has
been converted to additional SARs for 2,000,000 shares of common stock. If these
SARs were exercised, WorldCom would receive cash in the amount of the difference
between $7.00 per share and the market price of Able's common stock on the date
WorldCom exercises the SAR, multiplied by the number of shares subject to
exercise up to a maximum of 2,000,000 shares (the "Additional WorldCom SAR").
Able has also entered into an agreement with WorldCom describing the terms upon
which the initial WorldCom SAR would actually be granted to WorldCom, including
the receipt of shareholder approval.
WHAT IS THE EFFECT OF SHAREHOLDER APPROVAL OF THIS PROPOSAL?
If shareholders approve Proposal No. 6, the WorldCom option as modified
will again become an option and the modification converting it into additional
SARs will automatically terminate. Thus, WorldCom will own the WorldCom Options
and the Initial WorldCom SAR. If shareholders do not approve Proposal No. 6,
WorldCom will own the Initial WorldCom SAR and the Additional WorldCom SAR, but
they will not be payable at its option with stock and the Additional WorldCom
SAR. The following chart summarizes the terms of the securities held by WorldCom
and results of shareholder approval and nonapproval of Proposal No. 6.
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IF SHAREHOLDERS APPROVE PROPOSAL NO. 6
WORLDCOM OPTION INITIAL WORLDCOM SAR(1)
-------------------------------- -----------------------------
Type of Security............. Stock options Stock appreciation right
awards
Type of Property Issuable
Pursuant to Exercise of
Security................... 2,000,000 shares of common stock Cash, common stock, or any
combination, at Able's
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
Property Issuable........... Number of shares exercised by Difference between the
WorldCom exercise price and the fair
market value of Able common
stock on the date of exercise
of the SAR, subject to the
ceiling collar price
Exercise Period/Dates......... January 1, 2000 through July 1, 2000, July 2, 2001 or
January 2, 2002 July 2, 2002
Other Material Terms.......... Any stock issued pursuant to Any stock issued pursuant to
the SARs must be registered the SARs must be registered
with the SEC with the SEC
Maximum Consideration Payable
to Us....................... $14 million $0
Maximum Consideration Payable
to WorldCom................. 2,000,000 shares of common $15 million in cash, stock or
stock a combination
- ---------------
(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 Able common
stock was $10.0938 per share, then the value of the SARs exercised would be
equal to $5,000, calculated by taking fair market value of $10.0938 less the
exercise price of $5.0938 x 1000 shares.
(2) May be adjusted in the event of any capital restructuring such as stock
splits, recapitalization or reclassification of Able common stock.
(3) If the fair market value of Able common stock as of the date immediately
preceding its issuing the initial WorldCom SAR is greater than the exercise
price of $5.0938, then Able 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.
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IF SHAREHOLDERS DO NOT APPROVE PROPOSAL NO. 6
ADDITIONAL WORLDCOM SAR INITIAL WORLDCOM SAR
------------------------------- -------------------------------
Type of Security.................. Stock appreciation right awards Stock appreciation right awards
Type of Property Issuable Pursuant
to Exercise of Security......... Cash Cash
Aggregate Base Common Stock....... 2,000,000 shares 600,000 shares
Exercise Price(1)................. $7.00 per share $5.0938 per share(2)
Ceiling Collar Price, if any
(1)............................. None $32.0938 per share(2)
Determination of Amount of
Property Issuable............... Difference between the exercise Difference between the exercise
price and the fair market value price and the fair market value
of Able common stock on the of Able common stock on the
date of exercise of the stock date of exercise of the stock
appreciation rights appreciation rights, subject to
the ceiling collar price
Exercise Period/Dates............. On or after January 1, 2000 July 1, 2000, July 2, 2001 or
July 2, 2002
Other Material Terms.............. None None
Maximum Consideration Payable to
Us.............................. $0 $0
Maximum Consideration Payable to
WorldCom........................ Unlimited. If more than $10 $15 million in cash
million in any 12 month period,
Able can pay the excess with a
promissory note at 10% interest
per annum
- ---------------
(1) May be adjusted in the event of any capital restructuring such as stock
splits, recapitalization or reclassification of Able's common stock.
(2) If the fair market value of its common stock as of the date immediately
preceding its issuing the initial WorldCom SAR is greater than the exercise
price of $5.0938, then Able 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.
REASONS FOR APPROVING PROPOSAL NO. 6.
If Able's shareholders approve Proposal No. 6, the WorldCom option can
result in a payment from WorldCom to Able of up to $14 million and the Initial
WorldCom SAR may be payable in stock, rather than cash, at Able's option. The
maximum number of shares payable would be 2,600,000, which as of November 13,
2000 would be 13.7% of Able's outstanding common stock after issuance. Any cash
received upon the exercise of WorldCom options would be used to repay a portion
of its existing debt obligations to WorldCom, if any, and for general corporate
and working capital purposes. At worst, if WorldCom exercised all of its Initial
WorldCom SAR and chose to make payment in cash, Able would have to pay no more
than $15 million.
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On the other hand, if the shareholders do not approve Proposal No. 6, no
cash would be paid by WorldCom to Able upon exercise of their securities. If
Able does not issue the stock, Able will become obligated to pay a potentially
unlimited amount of cash and notes to WorldCom under the Initial Worldcom SAR
and the additional WorldCom SAR, depending on the fair market value of its
common stock when exercised. Able would have only 15 to 30 days to pay WorldCom
if it exercised these SARs. Any payments due to WorldCom could be significant,
depending on the number of SARs exercised and the then fair market value of
Able's common stock, and could severely diminish its existing cash flow, working
capital and availability under its credit facility, as well as adversely impact
its business and financial condition. Also, while its senior lender has approved
the grant of the SARs to WorldCom, it has not waived the right to call a default
in the event that any of the SARs are exercised for cash or for stock.
In addition, Able wants to encourage WorldCom to continue to hold an equity
position in Able, given the current, as well as contemplated, volume of business
conducted between WorldCom affiliates and Able. For instance, Able and WorldCom
have signed an eight-year master services agreement where Able is providing
telecommunications infrastructure services to WorldCom affiliates. This
agreement is expected to provide potential revenues to Able of more than $900
million over its eight year period.
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" APPROVING ABLE'S
ISSUING UP TO 2,600,000 SHARES OF ABLE'S COMMON STOCK TO WORLDCOM
IF IT EXERCISES OPTIONS AND STOCK APPRECIATION RIGHTS IT
OBTAINED FROM ABLE WHEN ABLE ACQUIRED THE NETWORK CONSTRUCTION
AND TRANSPORTATION SYSTEMS BUSINESS FROM WORLDCOM.
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PROPOSAL NO. 7
TO APPROVE ISSUING SHARES OF ABLE COMMON STOCK IN CONNECTION WITH OUTSTANDING
SERIES B SECURITIES ISSUED TO FINANCE THE ACQUISITION FROM WORLDCOM OF THE
NETWORK CONSTRUCTION AND TRANSPORTATION SYSTEMS BUSINESS FROM WORLDCOM. THIS
PROPOSAL RELATES TO 1,627,031 SHARES
CURRENTLY ISSUABLE UNDER THESE SECURITIES PLUS ADDITIONAL SHARES WHICH MAY BE
REQUIRED TO BE ISSUED PURSUANT TO ANTI-DILUTION PROVISIONS
CONTAINED IN THE WARRANTS DESCRIBED. ISSUANCE OF THESE SHARES, WHEN
COMBINED WITH 1,875,960 SHARES OF COMMON STOCK ALREADY ISSUED TO HOLDERS OF
ABLE'S SERIES B PREFERRED STOCK, MUST BE APPROVED BY THE SHAREHOLDERS PURSUANT
TO NASDAQ RULES.
BACKGROUND
A portion of the consideration for the acquisition of MFS Network
Technologies from WorldCom was paid in cash. To generate a portion of the cash
necessary to pay these amounts, Able issued 4,000 shares of Series B convertible
preferred stock and warrants to purchase up to an aggregate of 1,000,000 shares
of its common stock at an exercise price of $19.80. Able received $18.1 million
in net proceeds from issuing these securities and used the net proceeds to pay a
portion of the acquisition price to WorldCom and to pay approximately $4.6
million in other costs associated with the acquisition.
During the fiscal year ended October 31, 1998, the holders of the Series B
convertible preferred stock elected to convert 436 shares into common stock at
an average conversion price of approximately $2.18 per share. Able issued
1,007,927 shares of common stock in conversion of these shares. Able then
redeemed 2,785 shares of Series B convertible preferred stock for cash, leaving
779 shares of Series B convertible preferred stock outstanding.
Able also redeemed 630,000 of the warrants for $3.00 per share. The
exercise price for the remaining 370,000 warrants was reduced to $13.50 in
connection with the holders' waiving defaults under the terms of the Series B
convertible preferred stock. As additional consideration for the waiver, the
expiration date of the warrants was extended from June 30, 2003 to January 13,
2005. This warrant expiration will be extended one day for each day after July
17, 2000 until a registration statement covering the underlying shares is
declared effective. Under Nasdaq rules, Able cannot issue shares pursuant to
these warrants without shareholder approval.
In February 2000, Able redeemed the remaining 779 shares of Series B
convertible preferred stock by paying approximately $10.9 million in cash,
issuing 801,787 shares of common stock and issuing new warrants to purchase
66,246 shares of common stock at $.01 per share. The 66,246 warrants have since
been exercised to purchase 66,246 shares of common stock. Able also agreed to
issue an additional 1,057,031 shares of common stock and additional warrants to
purchase 200,000 shares of common stock at $10.125 per share, following
shareholder approval as required by Nasdaq rules. The 200,000 warrants will have
an expiration date of February 3, 2005 and will be extended one day for each day
after November 30, 2000 until a registration statement covering the underlying
shares is declared effective.
Able raised the cash portion of the redemption price by selling the Series
C convertible preferred stock and warrants discussed in Proposal No. 8.
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The following table summarizes the issuances of common stock and warrants
resulting from the transactions described above and relevant to Proposal No. 7.
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 UNDER
PROPOSAL No. 7............................................ 1,627,031
---------
Total shares of common stock issued and issuable
to Series B convertible preferred stockholders
after approval of Proposal No. 7................. 3,502,991
=========
- ---------------
(1) Subject to registration rights.
(2) Each of these warrants has a "cashless exercise" feature. A "cashless"
exercise means that a person exercising their securities 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) Able has the right to redeem these warrants for $35.00 per share unless Able
is in default under the warrants. Because Able has not yet registered the
underlying common stock, Able currently does 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 Able common stock on the date of exercise.
(5) If Able does not obtain shareholder approval to issue these shares, Able
must pay Palladin $4,228,124 instead of issuing the shares.
WHAT ARE THE REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES DESCRIBED IN
THIS PROPOSAL?
Holders of all of the shares and warrants described in this Proposal No. 7
have the right to have their common stock registered under the Securities Act of
1933 on Form S-1. Those shares and warrants are designated with footnote (1) in
the table above. Able has filed a registration statement with the SEC covering
those shares but have not completed the process for having this registration
statement declared effective. The holders have extended its registration
deadline to November 30, 2000 and Able is currently negotiating a further
extension to December 22, 2000.
Generally, the holders of the securities listed above have a right to cash
payments and other consideration if Able does not timely register the shares or
maintain its listing on Nasdaq or another approved market. Specifically, if Able
does not timely register the holders' shares, the exercise price of the various
warrants is reduced by 1% if its registration is late by 1 to 30 days, and 1.5%
for each 30-day period thereafter. If during the registration period its common
stock is delisted, Able owes 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. This penalty is currently accruing. If Able fails to make
any of these payments, the warrant exercise price is
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reduced by 30% and the holder can require Able to redeem the common stock at
130% of their value, plus the delinquent amounts.
INTEREST OF CERTAIN PERSONS
The 2,785 shares of Series B convertible preferred stock which Able
redeemed had been purchased from the original holders by Cotton Communications,
Inc. The sole shareholder, officer and director of Cotton was Tyler Dixon. Mr.
Dixon is a partner with the law firm of Raiford, Dixon & Thackston, LLP, to
which Able paid $125,000 and $297,000 in legal fees during fiscal 1998 and
fiscal 1999, respectively. He also serves as a consultant to Able.
Cotton received no cash consideration from Able in connection with the
redemption. As a convenience to Able, Able had provided Cotton with an advance
of funds to purchase those shares from the initial investors in connection with
the initial investors' waiving certain of its defaults under the Series B
convertible preferred stock. The consideration for the redemption of the shares
from Cotton was merely cancellation of the advance. However, Able also agreed to
continue using Mr. Dixon's legal services and Able waived any conflicts
associated with the legal services he performed in this regard.
REASONS FOR APPROVING PROPOSAL NO. 7
Able believes that it is in its shareholders' best interest for the Series
B investors to receive the 1,627,031 additional shares. These shares allowed
Able to acquire Adesta Communications and Adesta Transportation from WorldCom,
thus increasing its revenues by five-fold. These shares also allowed Able the
flexibility to defer certain obligations Able had to the Series B holders that
Able is unable to fulfill at the time. Finally, a portion of the rights
associated with these shares were given in consideration of the Series B
investors' cooperation in effecting the Sirit litigation settlement described in
Proposal No. 9.
If Proposal No. 7 is not approved and Able's common stock were listed on
Nasdaq, Able would not be able to issue the shares and warrants to the holders
without violating Nasdaq rules that could cause its stock to be delisted. Able
would be forced to either risk delisting, or fail to issue the shares under its
agreements with Series B investors. The consequences of not issuing the shares
include the penalties described above for failing to timely register the shares.
They also include a $4.2 million cash payment that Able would owe to some of the
Series B investors for failure to issue an aggregate of 1,057,031 shares of
common stock. This could materially and adversely affect Able's cash flow and
materially and adversely affect its operations because
- Able would immediately be obligated to pay this amount,
- any payments could severely diminish Able's existing cash flow, working
capital and availability under its credit facility, as well as adversely
impact its business and financial conditions, and
- it could result in a default under Able's senior credit facility.
However, because Able's stock was recently delisted, Able may issue these
securities even if the shareholders vote against this proposal. Issuing these
securities in such circumstances could make it more difficult for Able to seek
listing on Nasdaq in the future.
WHY DOESN'T THE PROPOSAL SPECIFY THE NUMBER OF SHARES TO BE ISSUED?
Under the current terms of the warrants described in this proposal, Able is
currently obligated to issue 570,000 shares of common stock. However, Able
cannot determine at this time how many additional shares may be issued upon
exercise of these warrants pursuant to certain anti-dilution provisions which
provide that the number of shares issuable upon exercise could be changed to
reflect stock splits, stock dividends, mergers or similar transactions and
reorganizations or reclassifications of its common stock. This could result in a
greater number of shares being issued upon their exercise.
Able cannot determine at this time what adjustments may be made under the
terms of these warrants. Accordingly, Able are seeking shareholder approval for
an indeterminate number of shares of common stock issuable as a result of these
adjustments. As with all additional issuances of common stock, these issuances
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pursuant to anti-dilution adjustments will cause additional dilution to the then
existing holders of the common stock.
WHAT IS THE EFFECT OF SHAREHOLDER APPROVAL OF THIS PROPOSAL?
Assuming Able's shareholders approve Proposal No. 7 and Able issues all
1,627,031 shares described in this proposal, along with the 1,875,960 shares
Able previously issued to the same holders, those holders would have received a
total of 3,502,991 shares of common stock. As of November 13, 2000, this would
have represented 29.6% of its outstanding common stock immediately after the
issuance.
Assuming all the warrants described in this Proposal No. 7 were exercised
for cash as of November 13, 2000, Able would receive proceeds of approximately
$6.9 million. Any cash received upon the exercise of those warrants would be
used to reduce Able's debt and for general corporate and working capital
purposes. However, holders of the warrants have the right to exercise those
warrants on a "cashless basis", as described above. Able would receive no
proceeds from warrants exercised on a cashless basis but the number of shares
issued would be less.
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" APPROVING ABLE'S ISSUING
SHARES OF ITS COMMON STOCK IN CONNECTION WITH OUTSTANDING SERIES B SECURITIES
ISSUED TO FINANCE THE ACQUISITION OF THE NETWORK CONSTRUCTION AND TRANSPORTATION
SYSTEMS BUSINESS FROM WORLDCOM.
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PROPOSAL NO. 8
TO APPROVE ISSUING SHARES OF ABLE'S COMMON STOCK TO HOLDERS OF
SERIES C CONVERTIBLE PREFERRED STOCK AND WARRANTS UPON THE
CONVERSION OR EXERCISE OF THOSE SECURITIES. THE PROPOSAL
RELATES TO 4,700,000 SHARES CURRENTLY ISSUABLE UNDER THE
SERIES C PREFERRED STOCK AND WARRANTS PLUS ADDITIONAL SHARES
WHICH MAY BE REQUIRED TO BE ISSUED PURSUANT TO ANTI-DILUTION
PROVISIONS CONTAINED IN THE PREFERRED STOCK AND WARRANTS.
ISSUANCE OF THESE SHARES MUST BE APPROVED BY THE SHAREHOLDERS
PURSUANT TO NASDAQ RULES.
BACKGROUND
In February 2000, Able 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
proceeds of $15 million to Able. Able used a portion of this $15 million to
repurchase certain of its remaining shares of Series B convertible preferred
stock and the rest for general working capital purposes.
In connection with its settlement of the Sirit litigation described in
Proposal No. 9, Able 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 warrants to purchase 375,000 shares of common stock at $8.00 per
share. The descriptions below of the Series C convertible preferred stock and
the warrants incorporate these modifications.
Series C Convertible Preferred Stock. The Series C convertible 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 of shareholder approval of this Proposal No. 8 and
Proposal No. 2(A), or December 1, 2000. Able 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 November 13, 2000, they would be entitled to
3,750,000 shares of common stock calculated by taking the stated value of
$3,000, divided by a conversion price of $4.00, and multiplied by 5,000, the
number of Series C shares outstanding, or 18.6% of its 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 its common stock, or if Able 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 be convertible at a price that is not now readily determinable. Because the
conversion price may be reduced, resulting in Able's issuing more shares of
common stock than originally contemplated, Able's then-existing holders of the
common stock will face additional dilution.
Holder Redemption Rights. In addition to its redemption obligations if
Able does not timely register the common stock as described below, Able may be
required to redeem the Series C convertible preferred stock if shareholders do
not approve this Proposal No. 8. See the discussion below under "What Happens if
Able's Shareholders Do Not Approve This Proposal?" Able would have five business
days to make the redemption payments.
Furthermore, if Able enters into a major transaction such as a merger, sale
of all or substantially all of its assets or a purchase, tender or exchange
offer accepted by holders of more than 30% of its outstanding shares of common
stock, the holders can require Able 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
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preferred stock on September 30, 2000 was $15 million. This redemption payment
would be required to be made before consummation of the major transaction.
The Warrants. Holders of the Series C convertible referred 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 Able common stock, or if Able issues common stock or
convertible securities at a price less than the exercise price or the fair
market value of its common stock.
WHAT ARE THE REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES DESCRIBED IN
THIS PROPOSAL?
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. Able's 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. Able currently has until November 30, 2000
to register these securities.
If Able does not timely register the holders' shares issuable upon
conversion of the Series C convertible preferred stock, the conversion price of
the Series C convertible preferred stock is reduced by 10% on December 1, 2000,
and an additional 1% for each 30-day period thereafter. If Able does not timely
register the holder's shares issuable upon exercise of the warrants, the
exercise price of the warrants is reduced by 1% on December 1, 2000, and 1.5%
for each 30-day period thereafter.
If Able fails to timely register the shares, the holders would also have
the right after December 1, 2000 to require Able 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 its
common stock. As measured on November 13, 2000, the trading price of Able common
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
November 13, 2000.
For 90 days after the registration statement is effective, neither Able nor
any of its 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 Able's stock option plan; or
- options otherwise issued to Able's employees.
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DELINQUENT PAYMENTS
If Able fails to timely pay any redemption price or any other penalty Able
is obligated to pay to holders of the Series C convertible preferred stock, the
holders can require Able 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 Able's
common stock. Based on the conversion value of the Series C convertible
preferred stock on November 13, 2000, the trading price of its 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 November 13, 2000.
Able also would be required to pay default interest at 2% per month for any
delinquent amounts.
WHY DOESN'T THE PROPOSAL SPECIFY THE NUMBER OF SHARES TO BE ISSUED?
Based on conversion prices as of November 13, 2000, the holders of Series C
convertible preferred stock are entitled to receive up to 4,700,000 shares of
common stock, 3,750,000 of which would arise from conversion of their Series C
convertible preferred stock and 950,000 of which would arise from exercise of
their warrants. However, the conversion price of the Series C convertible
preferred stock may be lowered upon stock splits, stock dividends, mergers or
similar transactions, and reorganizations or reclassifications of Able common
stock, or if Able issues common stock or convertible securities at a price less
than the conversion price. A lower conversion price would result in a greater
number of shares issued upon conversion. Similarly, the exercise price of the
warrants may be lowered upon the occurrence of similar events, with a
corresponding increase in the number of shares purchasable pursuant to those
warrants.
Able cannot determine at this time what adjustments may be made to the
conversion price and exercise price, if any. Accordingly, Able is seeking
shareholder approval for an indeterminate number of shares of common stock
issuable as a result of these adjustments. As with all additional issuances of
common stock, these issuances pursuant to anti-dilution adjustments will cause
additional dilution to the then existing holders of the common stock.
REASONS FOR APPROVING PROPOSAL NO. 8
Able believes that it is in its shareholders' best interest for the holders
of the Series C preferred stock and warrants to receive the 4,700,000 shares of
common stock upon conversion or exercise of their securities, plus an additional
number of shares of common stock issuable pursuant to the anti-dilution
provisions of those securities. The Series C securities were issued to redeem
some of Able's obligations to holders of Series B convertible preferred stock,
which obligations Able is unable to fulfill at the time. The holders of the
Series C preferred stock and warrants also cooperated with Able in effecting the
Sirit litigation settlement described in Proposal No. 9.
Shareholder approval of this Proposal No. 8 is the first step in the
process to eliminate the Series C convertible preferred stock and warrants
because it will allow the holders to convert and exercise their securities for
common stock. However, prior to conversion of the Series C convertible preferred
stock, Able will continue to be bound by the terms of that series, including its
obligation to have a registration statement declared effective by November 30,
2000. Even if the shareholders approve the issuance of shares of common stock
issuable upon conversion or exercise of the Series C securities, Able could
still be in default of its other obligations which would give the holders the
right to require Able to redeem the Series C common stock for cash, as described
above.
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WHAT IS THE EFFECT OF SHAREHOLDER APPROVAL OF THIS PROPOSAL?
Assuming its shareholders approve Proposal No. 8, the 4,700,000 shares of
common stock Able would issue pursuant to conversion of the Series C convertible
preferred stock and exercise of the warrants would represent 22.3% of Able's
outstanding common stock immediately after issuance, as of September 30, 2000.
The actual percentage may be higher or lower at the time Able issues the shares,
depending on the number of shares of common stock outstanding at the time and
depending on the effect, if any, of the anti-dilution provisions in the Series C
convertible preferred stock and the warrants. In the event that Able
shareholders approve the merger agreement under Proposal No. 1 and the merger is
completed the Series C preferred stock will not convert into Able common stock
but will instead convert into Bracknell common stock.
Assuming all the warrants to purchase 950,000 shares of common stock were
exercised as of September 30, 2000, Able would have received proceeds of
approximately $7.4 million. Any cash received upon the exercise of the warrants
would be used to reduce Able's debt and for general corporate and working
capital purposes.
WHAT HAPPENS IF ABLE'S SHAREHOLDERS DO NOT APPROVE THIS PROPOSAL?
If Able's shareholders do not approve Proposal No. 8, Able will not be able
to issue the common stock issuable upon conversion of the Series C preferred
stock and upon exercise of the warrants without violating Nasdaq rules and
risking the delisting of its stock. If Able does not issue the shares, it will
be required to pay the following cash amounts:
- a cash penalty of $450,000 for each 30 days Able delays issuing the
common stock upon conversion, based on the November 13, 2000 liquidation
value of the Series C convertible preferred stock, which liquidation
value is $15 million in the aggregate; and
- the cash redemption price of the shares of the Series C preferred stock,
redeemable at the holders' option after December 1, 2000, for the greater
of 120% of the liquidation value -- approximately $18.0 million as of
September 30, 2000 -- or a price based on a formula incorporating the
trading price of Able's common stock. Based on the conversion value of
the Series C convertible preferred stock on November 13, 2000, the
trading price of Able's common 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 on September 30, 2000;
Any cash payments would materially and adversely affect Able's cash flow
because:
- Able only has five business days to redeem the Series C preferred stock;
- the payments could be significant, depending on the amount, penalties,
number of shares to be redeemed, or other monetary obligations relating
to the Series C securities, and could severely diminish Able's existing
cash flow, working capital and availability under its credit facility, as
well as adversely impact its business and financial conditions; and
- could result in a default under Able's senior credit facility.
A redemption payment could also result in a default in one or more of
Able's other obligations, including its obligations to senior lenders under its
credit facility. Those defaults would have a material adverse impact on Able's
business, financial condition, results of operations and cash flow.
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" APPROVING ABLE'S ISSUING
SHARES OF ABLE'S COMMON STOCK TO HOLDERS OF SERIES C CONVERTIBLE PREFERRED STOCK
AND WARRANTS UPON THE CONVERSION OR EXERCISE OF THOSE SECURITIES.
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PROPOSAL NO. 9
TO APPROVE ISSUING SHARES OF ABLE COMMON STOCK IN CONNECTION WITH A LITIGATION
SETTLEMENT BETWEEN ABLE AND SIRIT TECHNOLOGIES. THE PROPOSAL RELATES TO UP TO
5,011,511 SHARES CURRENTLY ISSUABLE TO SIRIT, PLUS ADDITIONAL SHARES WHICH MAY
BE REQUIRED TO BE ISSUED PURSUANT TO PREEMPTIVE AND ANTI-DILUTION RIGHTS HELD BY
SIRIT. ISSUANCE OF THESE SHARES MAY BE SUBJECT TO APPROVAL BY THE SHAREHOLDERS
PURSUANT TO NASDAQ RULES.
BACKGROUND
In May 1998, Sirit Technologies, Inc. filed a lawsuit against Able and
Thomas M. Davidson, a former member of its board. Sirit sued for tortious
interference, fraudulent inducement, negligent misrepresentation and breach of
contract in connection with Able's acquisition of Adesta Communications and
Adesta Transportation from WorldCom. In May 2000, the jury awarded Sirit
compensatory damages against Able 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, Able 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. The settlement provides for Able to issue Sirit and its
affiliates, subject to using its best efforts to obtain shareholder approval,
- 4,074,597 shares of Able's 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 September 30, 2000. Sirit and Able are
currently in a dispute based on Sirit's contentions regarding the Series
C preferred stock, as described below. Able believes that Sirit will not
have the right to receive the additional shares of Able common stock
referred to above.
The settlement agreement required Able to use its best efforts to issue and
register those shares by November 30, 2000. Sirit subsequently agreed to extend
this deadline to December 22, 2000. Sirit has indicated, although Able
disagrees, that its agreement to extend this date has been withdrawn and that
the November 30, 2000 deadline remains.
The settlement agreement also provides that if Able enters into an
agreement to merge with an unaffiliated entity, Sirit may elect to participate
in the transaction or otherwise continue with its rights under the settlement
agreement. In September 2000, Able agreed to extend the deadline for Sirit to
make the election described above. Sirit elected to participate in the merger on
October 2, 2000. As a result of Sirit's election to participate in the merger,
Able's obligation to issue to Sirit and register shares of its common stock is
held in suspense. The settlement agreement provides that if Sirit elects to
participate in the merger, it will be entitled to receive the same consideration
as all other holders of Able's common stock, as if Sirit owned its full
entitlement to Able's common stock pursuant to the settlement agreement, subject
to a maximum value of $26.2 million, unless Sirit were to receive its shares of
Able's common stock before the completion of the merger. Further, if the
consideration provided to Sirit is in the form of securities, those securities
will be valued, for the purpose of calculating the $26.2 million limit, at their
closing trading price on the date the merger is completed.
If Able fails to satisfy its obligations under the settlement agreement,
Sirit may give Able notice that it intends to execute on a consent judgment for
$20 million. Able would then have the option to cure the breach during a five
business day cure period or to pay the $20 million consent judgment before
execution is commenced.
The settlement agreement further provides that if the merger has not been
completed by a certain date, Sirit would again have the right to elect whether
to participate in the merger or otherwise continue with its
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rights under the settlement agreement. Sirit subsequently agreed to change this
date from December 1, 2000 to December 23, 2000. Sirit has indicated, although
Able disagrees, that its agreement to change the second election date has been
withdrawn and that the second election date remains December 1, 2000. Able
expects that the merger will be completed before December 23, 2000.
If the merger is not completed by the second election date and Sirit elects
to continue with its rights under the settlement agreement, Able could satisfy
its obligations under the settlement agreement by issuing, subject to
shareholder approval, shares of its common stock in the amounts described above
to Sirit. If Able fails to issue and register these shares in a timely manner,
Able may be required to pay Sirit $20 million in cash pursuant to the consent
judgment.
If the merger agreement is terminated for any reason, Able could satisfy
its obligations under the settlement agreement by issuing, subject to
shareholder approval, shares of its common stock in the amounts described above
to Sirit. If Able fails to issue and register these shares in a timely manner,
Able may be required to pay Sirit $20 million in cash pursuant to the consent
judgment.
For the reasons described above, Able would issue its common stock to
Sirit, subject to shareholder approval, only if the merger is not completed by
the second election date and Sirit elects to continue with its rights under the
settlement agreement or if the merger agreement is terminated at any time.
ABLE'S OTHER MATERIAL OBLIGATIONS TO THE SIRIT PARTIES WITH RESPECT TO ABLE'S
SECURITIES AND MERGER CONSIDERATION
Preemptive Rights Upon Issuance of Securities to the Holders of Securities
described in Proposal Nos. 7 and 8. In addition to the shares Sirit would
receive if the Series C convertible preferred stock were converted to Able
common stock, the settlement agreement provides that if the holders of the
securities described in Proposal Nos. 7 and 8 are entitled to additional shares
of Able's common stock or derivative securities, Sirit would be entitled to
receive a pro rata portion so that Sirit would maintain the same percentage
ownership interest it had immediately prior to the issuance. Sirit would be
entitled to acquire those shares for the same consideration as is paid by the
holders of the securities described in Proposal Nos. 7 and 8.
Anti-dilution Rights Upon Issuance of Securities to Other Third
Parties. Under the settlement agreement, Sirit also is entitled to maintain its
percentage ownership of Able's outstanding shares of common stock upon issuance
of shares to parties other than those described in Proposal Nos. 7 and 8. Sirit
has a right to purchase additional securities pro-ratably and on the same terms
to maintain its percentage ownership. Sirit's anti-dilution right expires on the
earlier of the completion of the merger or two years after Able issues the Sirit
shares and does not apply to any shares Able issues where it receives value of
$10.00 per share or more.
Payments to Holders of Securities Described in Proposal Nos. 7 and 8. The
settlement agreement also provides that if Able is required to make any cash
payments to the holders of securities described in Proposal Nos. 7 and 8,
including cash penalties and redemption payments, Sirit would 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%, then
Sirit has the right to those shares, but they would not be issued to Sirit
without Sirit's consent.
WHY DOES THE PROPOSAL NOT SPECIFY THE NUMBER OF SHARES TO BE ISSUED?
Under the current terms of the settlement with Sirit, Able is currently
obligated to issue up to 5,011,511 shares of common stock, assuming that the
merger does not take place and the Series C convertible preferred are converted
into Able common stock. However, Able cannot determine at this time how many
additional securities may be issued to Sirit pursuant to its pre-emptive rights,
anti-dilution rights and rights associated with payments to holders of
securities described in Proposal Nos. 7 and 8. Accordingly, Able is seeking
shareholder approval for an indeterminate number of shares of common stock
issuable as a result of these issuances required by its settlement with Sirit.
As with all additional issuances of common stock, these
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issuances pursuant to anti-dilution adjustments would cause additional dilution
to the then existing holders of the common stock.
REASONS FOR APPROVING ABLE'S ISSUING THE SIRIT SHARES
If the merger is not completed by the second election date and Sirit elects
to continue with its rights under the settlement agreement or if the merger
agreement is terminated at any time, Able may satisfy its obligations under the
settlement agreement by issuing its common stock to Sirit. In that case, Able
would have a contractual obligation to the Sirit parties to use its best efforts
to seek shareholder approval so that no issues can be raised subsequently as to
whether the issuance required shareholder approval under the Nasdaq rules. If
Able does not issue the shares of common stock to Sirit or register the shares
in a timely manner, Able may be required to pay them $20.0 million in cash
pursuant to the consent judgment.
WHAT IS THE EFFECT IF PROPOSAL NO. 9 IS APPROVED?
The 5,011,511 shares of common stock to which Proposal No. 9 relates would
constitute 23.4% of Able's outstanding common stock on November 13, 2000
immediately after issuance of those shares. Those shares would be issued, at
Able's option, only if the merger is not completed by the second election date
and Sirit elects to continue with its rights under the settlement agreement or
if the merger agreement is terminated at any time.
WHAT IS THE EFFECT IF ABLE DOES NOT OBTAIN SHAREHOLDER APPROVAL?
If the merger is not completed by the second election date and Sirit elects
to continue with its rights under the settlement agreement, or if the merger
agreement is terminated at any time, and if Able does not obtain shareholder
approval, one of the requirements of the settlement agreement for the issuance
of the Sirit shares would not be satisfied. However, shareholder approval was
initially required to insure compliance with the Nasdaq rules, which no longer
apply to Able. Sirit may, as a result, be willing to waive the shareholder
approval requirement if it is not received. If Sirit is not willing to do so,
Able could be required to pay the judgment in cash. Able currently does not have
the funds available to pay the $20 million consent judgment that would be due
upon failure to issue and register the Sirit shares in a timely manner. Able may
not be able to obtain outside funding to pay the consent judgment. Assuming Able
could obtain the cash through outside funding, the repayment terms would likely
not be favorable to Able and would materially and adversely affect its
operations.
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" APPROVING ABLE ISSUING
SHARES OF ITS COMMON STOCK IN CONNECTION WITH A LITIGATION SETTLEMENT BETWEEN
ABLE AND SIRIT TECHNOLOGIES.
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PROPOSAL NO. 10
RATIFYING ABLE APPOINTING ARTHUR ANDERSEN LLP
AS ABLE'S INDEPENDENT ACCOUNTANTS
Able's Board of Directors has selected Arthur Andersen LLP to serve as
Able's independent accountants for the fiscal years ending October 31, 1999 and
October 31, 2000 and recommends that its shareholders vote to ratify its
appointment. Arthur Andersen representatives are expected to be present at the
annual shareholders meeting, will have the opportunity to speak if they wish,
and Able expects that they will be available to respond to appropriate
questions.
Arthur Andersen LLP has served as auditor of Able's consolidated financial
statements since it was engaged by Able on October 12, 1998. Ernst & Young LLP,
Able's previous auditor, resigned effective September 7, 1998. The reports of
Ernst & Young LLP on Able's financial statements for the 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 Able's financial
statements for each of the two years ended October 31, 1997 and 1996, and in the
subsequent interim periods, there were no disagreements with Ernst & Young on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to Ernst &
Young's satisfaction, would have caused it to make reference to the matter in
their reports.
Ernst & Young did inform Able of the existence of the following reportable
events, as defined in Item 304(a)(1)(v) of Regulation S-K of the Securities Act
of 1933, as amended:
In its 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
disbursement 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.
During the fiscal years ended October 31, 1997 and 1996 and during the
subsequent interim period prior to engaging Arthur Andersen LLP, neither Able
nor anyone on Able's 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
Able's financial statements. Previously, however, Arthur Andersen LLP was the
independent auditor for MFS Network Technologies, Inc. and Patton Management
Corporation, both of which were acquired by Able during fiscal year 1998.
Able's Board of Directors approves appointing Able's auditors annually and
subsequently submits the decision to the shareholders to ratify the appointment.
The Board's decision is based upon Able's audit committee's recommendations,
after reviewing the scope of the accountant's engagement, including the
remuneration to be paid, and after reviewing the accountant's independence.
VOTE REQUIRED
Able's by-laws and Florida law provide that this proposal is approved if
the votes cast in favor of the action exceed the votes cast against the action.
Abstentions marked on the proxy card and broker non-votes will have no legal
effect, because Proposal No. 10 does not specify that a particular percentage of
the shareholders entitled to vote is required. Failure to send in a proxy card
will affect the existence of a quorum but will not otherwise affect the vote.
However, if you send in your proxy card but do not make a choice on the proxy
card, you will be deemed to have voted "FOR" Proposal No. 10.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" RATIFYING THE
SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT ACCOUNTANTS
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OTHER BUSINESS
Able knows of no other business to be brought at the annual meeting. If,
however, any other business should be properly brought up before the annual
meeting, those persons named in the accompanying proxy card will vote proxies as
in their discretion they may deem appropriate, unless you direct them to do
otherwise in your proxy card.
OTHER MATTERS
SHAREHOLDER PROPOSALS
Any of Able's shareholders wishing to include proposals in the proxy
material in relation to the annual meeting of Able's shareholders to be held in
2001 must submit the same in writing so as to be received at its executive
offices on or before August 13, 2001. Proposals must also meet the other
requirements of the rules of the Securities and Exchange Commission relating to
shareholders' proposals.
If notice of a shareholder proposal that has not been submitted to be
included in Able's proxy statement is not received by Able on or before October
28, 2000 or the date which is 45 days before the date this proxy is mailed, the
persons named in the enclosed form of proxy will have discretionary authority to
vote all proxies with respect thereto in accordance with their best judgment. If
notice of the proposal is timely served, the persons named in the enclosed form
of proxy may not exercise their discretionary authority as to the proposal.
SOLICITATION OF PROXIES
The cost of solicitation of proxies for use at the annual meeting will be
borne by Able. Solicitations will be made primarily by mail or by facsimile, but
Able's employees may solicit proxies personally or by telephone. Able has
engaged the proxy soliciting firm of Corporate Investor Communications at an
estimated cost of $6,500, plus out-of-pocket expenses, to solicit proxies in
connection with the meeting.
OTHER INFORMATION
Able has included a copy of its amended annual report on Form 10-K for the
fiscal year ended October 31, 1999 with these proxy materials and Able's amended
annual report on Form 10-K for the fiscal year ended October 31, 1998. You may
also obtain a copy of each of these annual reports, and all other reports
electronically filed by Able via the internet, by accessing the Securities and
Exchange Commission's EDGAR website at www.sec.gov/edaux/searches.html.
By Order of the Board of Directors
/s/ BILLY V. RAY, JR.
BILLY V. RAY, JR.
Chairman of the Board
Roswell, Georgia
December 11, 2000
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BRACKNELL CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Bracknell Corporation
Report of Independent Chartered Accountants............... F-4
Comments by Independent Chartered Accountants for U.S.
readers on Canada-U.S. reporting difference............ F-4
Consolidated Balance Sheets as at October 31, 1999 and
1998................................................... F-5
Consolidated Statements of Net Earnings for the years
ended October 31, 1999, 1998 and 1997.................. F-6
Consolidated Statements of Retained Earnings for the years
ended October 31, 1999, 1998 and 1997.................. F-7
Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 1998 and 1997........................ F-8
Notes to Consolidated Financial Statements................ F-9
Bracknell Corporation
Unaudited Interim Consolidated Balance Sheet as at July
31, 2000 and October 31, 1999.......................... F-29
Unaudited Interim Consolidated Statements of Earnings for
the nine months ended July 31, 2000 and 1999........... F-30
Unaudited Interim Consolidated Cash Flow Statement for the
nine months ended July 31, 2000 and 1999............... F-31
Notes to Unaudited Interim Consolidated Financial
Statements............................................. F-32
Nationwide Electric, Inc. and Subsidiaries
Report of Independent Public Accountants.................. F-35
Consolidated Statements of Operations for the six-month
period ended September 30, 1999, year ended March 31,
1999, and period from September 23, 1997 (Date Of
Inception) to March 31, 1998........................... F-36
Consolidated Statements of Cash Flows for the six-month
period ended September 30, 1999, year ended March 31,
1999, and period from September 23, 1997 (Date Of
Inception) to March 31, 1998........................... F-37
Notes to Consolidated Financial Statements................ F-38
Sunbelt Integrated Trade Services, Inc. and Subsidiary
Report of Independent Chartered Accountants............... F-47
Independent Auditor's Report.............................. F-48
Consolidated Balance Sheets as at March 8, 2000, December
31, 1999 and 1998...................................... F-49
Consolidated Statements of Operations for the period from
January 1, 2000 to March 8, 2000, the year ended
December 31, 1999 and the period from May 21, 1998 to
December 31, 1998...................................... F-50
Consolidated Statements of Stockholders' Deficit for the
period from January 1, 2000 to March 8, 2000, the year
ended December 31, 1999 and the period from May 21,
1998 (Inception) to December 31, 1998.................. F-51
Consolidated Statements of Cash Flows for the period from
January 1, 2000 to March 8, 2000, the year ended
December 31, 1999 and the period from May 21, 1998
(Inception) to December 31, 1998....................... F-52
Notes to Consolidated Financial Statements................ F-53
Inglett & Stubbs, Inc.
Report of Independent Chartered Accountants............... F-70
Report of Independent Public Accountants.................. F-71
Balance Sheets as of March 8, 2000 and December 31, 1999
and 1998............................................... F-72
Statements of Operations for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999, 1998 and 1997.................................... F-73
Statements of Stockholders' Equity for the period from
January 1, 2000 to March 8, 2000 and the years ended
December 31, 1999, 1998 and 1997....................... F-74
Statements of Cash Flows for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999, 1998 and 1997.................................... F-75
Notes to Financial Statements............................. F-76
F-1
223
PAGE
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Quality Mechanical Contractors, Inc.
Independent Auditor's Report.............................. F-80
Statement of Income for the year ended December 31,
1998................................................... F-81
Statement of Cash Flows for the year ended December 31,
1998................................................... F-82
Notes to Financial Statements............................. F-83
Quality Mechanical Contractors, Inc.
Unaudited Condensed Statements of Income for the six
months ended December 31, 1998 and 1997................ F-91
Unaudited Condensed Statements of Cash Flows for the six
months ended December 31, 1998 and 1997................ F-92
Quality Mechanical Contractors, Inc.
Report of Independent Public Accountants.................. F-93
Balance Sheets as of June 30, 1998 and 1997............... F-94
Statements of Operations for the years ended June 30,
1998, 1997 and 1996.................................... F-95
Statements of Shareholders' Equity for the years ended
June 30, 1998, 1997 and 1996........................... F-96
Statements of Cash Flows for the years ended June 30,
1998, 1997 and 1996.................................... F-97
Notes to Financial Statements............................. F-98
Schmidt Electric Company, Inc.
Report of Independent Chartered Accountants............... F-109
Report of Independent Public Accountants.................. F-110
Balance Sheets as at March 8, 2000 and December 31, 1999
and 1998............................................... F-111
Statements of Operations for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999, 1998 and 1997.................................... F-112
Statements of Stockholders' Equity for the period from
January 1, 2000 to March 8, 2000 and the years ended
December 31, 1999, 1998 and 1997....................... F-113
Statements of Cash Flows for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999, 1998 and 1997.................................... F-114
Notes to Financial Statements............................. F-115
Crouch Industries, LLC
Report of Independent Chartered Accountants............... F-123
Independent Auditors' Report.............................. F-124
Balance Sheets as of March 8, 2000 and December 31, 1999
and 1998............................................... F-125
Statements of Operations for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999 and 1998.......................................... F-126
Statements of Members' Account for the period from January
1, 2000 to March 8, 2000 and the years ended December
31, 1999 and 1998...................................... F-127
Statements of Cash Flows for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999 and 1998.......................................... F-128
Notes to Financial Statements............................. F-129
Pneu-Temp, Inc.
Report of Independent Chartered Accountants............... F-136
Independent Auditors' Report.............................. F-137
Balance Sheets as of March 8, 2000 and December 31, 1999
and 1998............................................... F-138
Statements of Operations for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999 and 1998.......................................... F-139
Statements of Stockholders' Equity for the period from
January 1, 2000 to March 8, 2000 and the years ended
December 31, 1999 and 1998............................. F-140
Statements of Cash Flows for the period from January 1,
2000 to March 8, 2000 and the years ended December 31,
1999 and 1998.......................................... F-141
Notes to Financial Statements............................. F-142
F-2
224
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
------
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as at July 31, 2000
(Unaudited) and October 31, 1999.......................... F-148
Condensed Consolidated Statements of Operations (Unaudited)
for the three and nine months ended July 31, 2000 and
1999...................................................... F-149
Condensed Consolidated Statements of Cash Flows (Unaudited)
for nine months ended July 31, 2000 and 1999.............. F-150
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-151
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-180
Report of Independent Certified Public Accountants.......... F-181
Consolidated Balance Sheets -- October 31, 1999 and 1998.... F-182
Consolidated Statements of Operations -- Years Ended October
31, 1999, 1998 and 1997................................... F-183
Consolidated Statements of Shareholders' Equity -- Years
Ended October 31, 1999, 1998 and 1997..................... F-184
Consolidated Statements of Cash Flows -- Years Ended October
31, 1999, 1998 and 1997................................... F-186
Notes to Consolidated Financial Statements -- October 31,
1999...................................................... F-188
F-3
225
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Bracknell Corporation:
We have audited the consolidated balance sheets of BRACKNELL CORPORATION
(the "Company") as at October 31, 1999 and 1998 and the consolidated statements
of net earnings, retained earnings and cash flows for each of the years in the
three year period ended October 31, 1999. These consolidated 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 United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at October 31,
1999 and 1998 and the results of its operations and its cash flows for each of
the years in the three year period ended October 31, 1999 in accordance with
Canadian generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
December 10, 1999
(except with respect to the sale of PROFAC
as discussed in Notes 2 and 24 as to
which the date is May 19, 2000)
Toronto, Canada.
COMMENTS BY INDEPENDENT CHARTERED ACCOUNTANTS
FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the company's financial statements, such as the changes described in Note 2
to the consolidated financial statements. Our report dated December 10, 1999
(except with respect to the sale of PROFAC as discussed in Notes 2 and 24 as to
which the date is May 19, 2000) is expressed in accordance with Canadian
reporting standards which do not require a reference to such changes in
accounting principles in the report of independent chartered accountants when
the changes are properly accounted for and adequately disclosed in the financial
statements.
/s/ ARTHUR ANDERSEN LLP
December 10, 1999
Toronto, Canada
F-4
226
BRACKNELL CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
($U.S. IN THOUSANDS)
RESTATED (NOTE 24)
1999 1998
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 651 $ 23,165
Contract and accounts receivables (Note 4)................ 124,427 62,106
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 5)......................... 25,902 26,667
Inventory................................................. 655 562
Prepaid expenses and other assets......................... 5,016 2,002
Deferred income taxes (Note 12)........................... 779 --
Income taxes receivable................................... -- 1,316
Current assets of discontinued operations (Note 24)....... 9,001 6,676
-------- --------
Total current assets.............................. 166,431 122,494
Capital assets (Note 6)..................................... 9,239 2,911
Deferred income taxes (Note 12)............................. 1,514 1,804
Other assets, net (Note 7).................................. 5,074 194
Goodwill, net............................................... 77,767 2,080
Long-term assets of discontinued operations (Note 24)....... 11,668 4,161
-------- --------
Total assets...................................... $271,693 $133,644
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under revolving credit facilities (Note 10).... $ 19,935 $ 343
Current portion of long-term debt (Note 11)............... 240 --
Accounts payable and other accrued liabilities............ 73,339 41,397
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5)......................... 24,676 16,640
Income taxes payable...................................... 5,067 3,814
Deferred income taxes (Note 12)........................... -- 7,846
Current liabilities of discontinued operations (Note
24).................................................... 5,252 4,547
-------- --------
Total current liabilities......................... 128,509 74,587
Long-term debt (Notes 10 and 11)............................ 40,312 --
Other long-term liabilities................................. 1,309 428
Long-term liabilities of discontinued operations (Note
24)....................................................... 6,084 29
-------- --------
Total liabilities................................. 176,214 75,044
-------- --------
Commitments and contingencies (Note 20).....................
Shareholders' equity
Common shares (Note 15)................................... 53,235 27,233
Preferred shares (Note 15)................................ 5,412 --
Warrants (Note 15)........................................ 229 --
Retained earnings......................................... 35,158 31,367
Cumulative translation adjustment......................... 1,445 --
-------- --------
Total shareholders' equity........................ 95,479 58,600
-------- --------
Total liabilities and shareholders' equity........ $271,693 $133,644
======== ========
On behalf of the Board:
- --------------------------------------------- ---------------------------------------------
Gilbert S. Bennett Allan R. Twa
Director Director
The accompanying notes are an integral part of these financial statements.
F-5
227
BRACKNELL CORPORATION
CONSOLIDATED STATEMENTS OF NET EARNINGS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
($U.S. IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESTATED (NOTE 24)
1999 1998 1997
-------- -------- --------
Revenues.................................................... $293,104 $273,373 $197,391
Cost of services............................................ 255,296 243,637 171,799
-------- -------- --------
Gross margin................................................ 37,808 29,736 25,592
Selling, general and administrative expenses................ 24,905 21,918 18,055
-------- -------- --------
Earnings before interest, taxes, depreciation and
amortization and restructuring............................ 12,903 7,818 7,537
Depreciation and amortization............................... 1,596 1,102 591
Restructuring and other charges (Note 18)................... 7,609 -- --
-------- -------- --------
Earnings from operations.................................... 3,698 6,716 6,946
Income from long-term investments........................... 23 294 (588)
Interest and other income (Note 13)......................... 1,327 4,315 3,339
-------- -------- --------
Earnings from continuing operations before provision for
income taxes, and goodwill charges........................ 5,048 11,325 9,697
Provision for income taxes.................................. 1,677 4,641 3,535
-------- -------- --------
Earnings from continuing operations before goodwill
charges................................................... 3,371 6,684 6,162
Goodwill charges, net of $89 tax (1998 -- nil).............. 497 288 205
-------- -------- --------
Earnings from continuing operations......................... 2,874 6,396 5,957
Earnings from discontinued operations (Note 24)............. 917 979 469
-------- -------- --------
Net earnings................................................ $ 3,791 $ 7,375 $ 6,426
======== ======== ========
Earnings from continuing operations before goodwill charges
per share
Basic..................................................... $ 0.12 $ 0.25 $ 0.23
Fully diluted............................................. 0.12 0.24 0.23
Earnings from continuing operations per share
Basic..................................................... $ 0.11 $ 0.24 $ 0.23
Fully diluted............................................. 0.11 0.24 0.22
Net earnings per share
Basic..................................................... $ 0.14 $ 0.28 $ 0.25
Fully diluted............................................. 0.14 0.27 0.24
The accompanying notes are an integral part of these financial statements.
F-6
228
BRACKNELL CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
($U.S. IN THOUSANDS)
RESTATED (NOTE 24)
1999 1998 1997
------- ------- -------
Retained earnings, beginning of year........................ $31,367 $23,992 $17,566
Net earnings................................................ 3,791 7,375 6,426
------- ------- -------
Retained earnings, end of year.............................. $35,158 $31,367 $23,992
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-7
229
BRACKNELL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
($U.S. IN THOUSANDS)
RESTATED (NOTE 24)
1999 1998 1997
-------- ------- -------
Cash flows from operating activities
Earnings from continuing operations....................... $ 2,874 $ 6,396 $ 5,957
Items not affecting cash
Depreciation and amortization.......................... 1,596 1,102 591
Goodwill charges....................................... 586 288 205
Provision for deferred income taxes.................... (7,205) 2,501 2,506
Gain on sale of capital assets......................... (58) -- --
Income from long-term investments...................... (23) (294) 588
Amortization of lease inducement....................... (67) (65) (65)
-------- ------- -------
(2,297) 9,928 9,782
Changes in operating assets and liabilities, excluding
assets acquired and liabilities assumed in
acquisitions........................................... 6,915 (296) (6,541)
-------- ------- -------
4,618 9,632 3,241
-------- ------- -------
Cash flows from investing activities
Purchase of Nationwide, including assumed debt of
$14,375................................................ (61,859) -- --
Purchase of Preferred, net of cash of $349................ (5,553) -- --
Purchases of capital assets............................... (1,451) (1,816) (803)
Long-term investments and acquisitions.................... (163) (981) 5,314
Investment in discontinued operations..................... -- (3,500) --
Other..................................................... 77 (126) (109)
-------- ------- -------
(68,949) (6,423) 4,402
-------- ------- -------
Cash flows from financing activities
Borrowings under term facilities.......................... 25,179 --
Borrowings under revolving credit facilities.............. 19,592 -- 730
Repayments under revolving credit facilities.............. -- (1,705) --
Financing costs........................................... (2,284) -- (21)
Proceeds from the issuance of common stock................ 325 176
Repayment of term facility............................. (995) --
-------- ------- -------
41,817 (1,529) 709
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (22,514) 1,680 8,352
Net cash and cash equivalents, beginning of period.......... 23,165 21,485 13,133
-------- ------- -------
Net cash and cash equivalents, end of period................ $ 651 $23,165 $21,485
======== ======= =======
Cash payments for:
Interest.................................................. $ 223 $ 385 $ 120
Income taxes.............................................. 7,179 843 7,590
The accompanying notes are an integral part of these financial statements.
F-8
230
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999 AND 1998
(IN THOUSANDS OF U.S. DOLLARS)
RESTATED (NOTE 24)
1. BUSINESS AND ORGANIZATION
Bracknell Corporation, a corporation continued under the laws of Ontario,
is a leading North American facilities services company that provides a broad
range of essential technical and management services to ensure that buildings,
plant and equipment operate effectively. Bracknell serves customers in the
automotive, steel, technology, telecommunications, commercial, energy and pulp
and paper sectors in Canada, the U.S. and abroad.
Bracknell principally conducts its business through two 100% owned
subsidiary companies, The State Group Limited and Nationwide Electric, Inc. and
through its 50% owned investment in PROFAC Facilities Management Services Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated statements have been prepared in accordance with
Canadian generally accepted accounting principles.
BASIS OF PRESENTATION
The consolidated financial statements presented herein include the accounts
of the Company and wholly-owned subsidiaries acquired in business combinations
accounted for under the purchase method from their respective acquisition dates.
All significant intercompany transactions and accounts have been eliminated. The
Company uses the equity method of accounting for companies where it exercises
significant influence but in which less than a controlling interest is held. The
Company has reported its 50% investment in National-State Construction Group
Inc. (which was sold during 1999 -- see Note 3) using the proportionate
consolidation method. The Company has reported its 50% investment in PROFAC
Facilities Management Services Inc. as discontinued operations due to the sale
of this investment on May 19, 2000. See Note 24. Certain reclassifications have
been made to the prior year consolidated financial statements to conform with
the basis of presentation used in 1999.
Under Canadian GAAP, companies are required to consolidate those
subsidiaries over which they have continuous control of the determination for
the strategic operating, investing, and financing policies, to proportionately
consolidate investments in which they have joint control, and to equity account
for investment over which they have significant influence.
CHANGE IN REPORTING CURRENCY
The Company has historically prepared and filed its consolidated financial
statements in Canadian dollars. During fiscal 1999, the Company adopted the U.S.
dollar as its reporting currency for presentation of its consolidated financial
statements. With the recent acquisitions of Preferred and Nationwide and the
future growth prospects in the United States, a significant portion of the
Company's net earnings will be earned by its U.S. operations. Historical
consolidated results have been restated using a translation of convenience,
whereby all historical results have been reflected using the exchange rate in
effect on October 31, 1998 of $1 USD to $1.5429 CDN. Because of the
strengthening of the Canadian dollar and Bracknell's significant amount of
Canadian dollar assets prior to the Nationwide acquisition, the change in
reporting currency resulted in the Company recognizing a $1,000 foreign exchange
gain in 1999.
F-9
231
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bracknell's subsidiary operations in Canada are of a self-sustaining
nature. Cumulative gains or losses arising from the translation of the assets
and liabilities of these Canadian operations are recorded as a separate
component of shareholders' equity.
CHANGE IN ACCOUNTING METHOD
In 1999, the Company determined that it would change the method by which
income is recorded on major fixed price contracts. Previously, the Company used
a labour based percentage-of-completion method, whereas it now applies the
percentage-of-completion method measured by the ratio of contract costs incurred
to date to estimated total contract costs for each contract. Management
evaluated the underlying business factors affecting the measurement of progress
towards completion and determined that the total cost method more accurately
measures the overall progress on fixed price contracts. In addition, the change
results in consistent presentation of all Bracknell subsidiaries, given the
recent acquisitions of Preferred and Nationwide. The effect of this change
decreased net earnings by $52, $78 and $32 in 1999, 1998 and 1997 respectively,
and has been applied retroactively. The impact on years prior to 1997 was not
material.
USE OF ESTIMATES
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are securities held for cash management purposes having
maturities of three months or less from the date of purchase.
FINANCIAL INSTRUMENTS
The carrying value of short-term investments approximates their fair value
as determined by market quotes. All significant debt obligations carry variable
interest rates or interest rates that approximate market and their carrying
value is considered to approximate fair value. The carrying value of receivables
and other amounts arising out of normal contract activities, including
retentions, which may be settled beyond one year, is estimated to approximate
fair value.
INVENTORY
Inventory is valued at the lower of cost and net realizable value with cost
being determined on a first-in, first-out basis.
CAPITAL ASSETS
Capital assets are stated at cost less accumulated depreciation. Routine
repairs and maintenance are expensed as incurred; improvements are capitalized
at cost and are amortized over the remaining useful life of the related asset.
Depreciation is recorded using straight-line methods over the estimated useful
lives of the related assets which are as follows:
Buildings................................................... 20 years
Leasehold improvements...................................... Term of lease
Machinery and equipment..................................... 3-7 years
F-10
232
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill represents the excess of the purchase price paid over the fair
value of net tangible and specifically identifiable intangible assets acquired
and is amortized on a straight-line basis over 10 to 20 years. Goodwill is
written down when there has been a permanent impairment in the value of
unamortized goodwill. A permanent impairment in goodwill is determined by
comparison of the carrying value of unamortized goodwill with undiscounted
future earnings of the related business.
The Company presents goodwill amortization expense and goodwill impairment
charges (collectively referred to as "goodwill charges") on a net-of-tax basis.
CONTRACT ACCOUNTING
Contracts-in-progress are stated at the lower of actual cost incurred plus
accrued profits or net estimated realizable value of incurred costs, reduced by
progress billings. The Company records revenue from major fixed price contracts
under the percentage-of-completion method measured by the ratio of contract
costs incurred to date to estimated total contract costs for each contract.
Revenue from time and material and maintenance and repair service-type contracts
are recognized under the percentage of completion method. Contract costs include
all direct material and labour costs and those indirect costs related to
contract performance such as indirect labour, supplies, tools and provision for
warranty. Selling, general and administrative costs are charged to expense as
incurred. Costs for material incurred at the inception of a project which are
not reflective of effort are excluded from costs incurred for purposes of
determining revenue recognition and profits. The performance of such contracts
requires periodic review and revision of estimated final contract prices and
costs. Effects of these revisions are included in the periods in which the
revisions are made. Losses on contracts are recognized when they become evident.
Disputes arise in the normal course of the Company's business on projects
where the Company contests with customers or owners for additional funds because
of events such as delays or changes in contract specifications. Such disputes,
whether claims or unapproved changes in process of negotiation, are recorded at
the lesser of their estimated net realizable value or actual costs incurred and
only when realization is probable and can be reliably estimated. Claims against
the Company are recognized when loss is considered probable and reasonably
determinable in amount.
The Company makes investment in various business ventures in which
arrangements are made with participants in projects where the Company provides
bonding guarantees and cash advances for a share of the participants' project
income. Income obtained from such activities is recognized in the consolidated
statement of net earnings based on the percentage of completion of the related
project.
INCOME TAXES
The Company previously used the deferral method to account for income
taxes, but in 1999 adopted the liability method to account for income taxes.
Under this method, income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related to certain income and expenses recognized in different
periods for financial and income tax reporting purposes. Deferred tax assets and
liabilities represent the future tax consequences of those differences. Deferred
taxes are also recognized for operating losses and tax credits that are
available to offset future taxable income and income taxes, respectively. A
valuation allowance is provided if it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The change in accounting
policy had no effect on reported balances in the current or prior periods.
F-11
233
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities within Bracknell which are denominated in
currencies other than U.S. dollars have been translated at the rate of exchange
prevailing at the balance sheet date while other balance sheet items are
translated at historic rates. Revenue and expense items have been translated at
the rate of exchange in effect on the transaction dates. Realized as well as
unrealized foreign exchange gains and losses are included in income in the year
in which they occur.
DEFERRED START-UP COSTS
Costs incurred during the preproduction or start-up period of new
facilities are capitalized until commercial service levels are attainable. These
preproduction costs are classified as deferred start-up costs and amortized over
a period not to exceed five years commencing on completion of the preproduction
or start-up period. Management periodically assesses the realizability of these
preproduction costs with reference to service volumes, pricing arrangements, and
expected future operations.
DEBT ISSUE COSTS
Debt issue costs related to the Company's credit facility (see Note 10) are
included in other non-current assets and are amortized to interest expense over
the scheduled maturity of the debt. As of October 31, 1999, accumulated
amortization of debt issue costs was approximately $14.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The effective date of SFAS No. 133 was delayed
one year to fiscal years beginning after June 15, 2000, by SFAS No. 137.
Management does not believe the implementation of this accounting pronouncement
will have a material effect on its financial statements.
3. BUSINESS COMBINATIONS AND DIVESTITURES
On June 30, 1999, the Company acquired for cash all of the issued and
outstanding shares of Preferred Electric Inc. ("Preferred"). The purchase price
was $5,902 and was financed by cash on hand. Over the next two years, an
additional amount, to a maximum of $3,200, will be payable if certain
performance targets are met. Total assets acquired and liabilities assumed were
approximately $3,002 and $774, respectively. The acquisition has been accounted
for using the purchase method of accounting. Accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on their
anticipated fair values resulting in goodwill of approximately $3,674, which is
being amortized to expense over 20 years using the straight-line method. A final
allocation of the purchase price to net assets acquired is pending final
determination of the fair value of assets and liabilities.
The accompanying consolidated statements of net earnings reflect the
results of operations of Preferred from the date of acquisition through October
31, 1999.
On September 30, 1999, the Company acquired for cash and common and
preferred shares of the Company, all the issued and outstanding common stock of
Nationwide Electric, Inc.("Nationwide"). The total purchase price was $78,802,
of which $47,484 was paid in cash (which included $1,887 of transaction costs)
and the remainder was paid for with 6,041,638 Bracknell common shares ($25,677),
1,273,535 newly issued Bracknell convertible preferred shares ($5,412) and
warrants entitling the holders to purchase 385,822 of Bracknell's common shares
at $4.25 for 18 months ($229). The number of Bracknell common shares issued
F-12
234
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the shareholders of Nationwide was determined based upon a value of $4.25 per
share. Under the terms of the agreement, in the event that the common shares of
Bracknell do not, within 12 months of the date of the agreement, achieve an
average closing price in excess of $4.25 over a thirty day trading period, the
shareholders acquiring Bracknell stock are entitled to receive $0.25 per
Bracknell share held. Total assets acquired and liabilities assumed were
approximately $79,952 and $73,956, respectively. The acquisition has been
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based on
their anticipated fair values resulting in goodwill of approximately $72,806
which is being amortized to expense over 20 years using the straight-line
method. A final allocation of the purchase price to net assets acquired is
pending final determination of the fair value of assets and liabilities.
The accompanying consolidated statements of net earnings reflect the
results of operations of Nationwide from the date of the acquisition through
October 31, 1999.
During 1999, the Company sold its 50% interest in National-State
Construction Group Inc. for $1,360. Proceeds received from the National-State
transaction were $68 in cash and the remainder in the form of a note receivable
bearing interest at prime with the remainder payable as follows:
August 30, 2000............................................. $ 170
August 30, 2001............................................. 238
August 30, 2002............................................. 442
August 30, 2003............................................. 442
------
$1,292
======
The note is secured by the sold shares of National-State and an irrevocable
letter of guarantee. There was no gain or loss resulting from this transaction.
4. CONTRACT AND ACCOUNTS RECEIVABLES
Contract and accounts receivables consist of the following:
1999 1998
-------- --------
Current accounts............................................ $108,942 $ 44,884
Holdbacks................................................... 16,298 17,873
-------- --------
Subtotal.................................................... 125,240 62,757
Less: Allowance for doubtful accounts..................... (813) (651)
-------- --------
Contract receivables, net................................... $124,427 $ 62,106
======== ========
5. CONTRACTS IN PROGRESS
Costs and estimated earnings on uncompleted contracts are summarized as net
balances in process as follows:
1999 1998
-------- --------
Costs incurred on uncompleted contracts..................... $521,575 $279,836
Estimated earnings.......................................... 63,199 29,566
-------- --------
Total....................................................... 584,774 309,402
Less: Billings to date.................................... 583,548 299,375
-------- --------
Net under billings.......................................... $ 1,226 $ 10,027
======== ========
F-13
235
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net balances in process are classified on the balance sheet as follows:
1999 1998
-------- --------
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 25,902 $ 26,667
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (24,676) (16,640)
-------- --------
Total............................................. $ 1,226 $ 10,027
======== ========
6. CAPITAL ASSETS
Capital assets consist of the following:
1999
----------------------------------
ACCUMULATED
DEPRECIATION/ NET BOOK
COST AMORTIZATION VALUE
------- ------------- --------
Land................................................... $ 181 $ -- $ 181
Buildings.............................................. 1,698 75 1,623
Machinery and equipment................................ 18,121 10,887 7,234
Leasehold improvements................................. 1,429 1,228 201
------- ------- ------
$21,429 $12,190 $9,239
======= ======= ======
1998
----------------------------------
ACCUMULATED
DEPRECIATION/ NET BOOK
COST AMORTIZATION VALUE
------- ------------- --------
Land................................................... $ 173 $ -- $ 173
Buildings.............................................. 291 143 148
Machinery and equipment................................ 10,291 8,281 2,010
Leasehold improvements................................. 1,524 944 580
------- ------ ------
$12,279 $9,368 $2,911
======= ====== ======
7. OTHER ASSETS
Other assets consist of the following:
1999 1998
------ ----
Long-term investments....................................... $ 180 $194
Long-term portion of note receivable arising from sale of
National-State............................................ 1,122 --
Deferred financing charges and other, net................... 3,772 --
------ ----
$5,074 $194
====== ====
8. JOINT VENTURES
The Company engages in joint ventures for jointly controlled enterprises
and jointly controlled operations. These are reflected in the accounts using the
proportionate consolidation method.
F-14
236
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's proportionate share of the total assets, liabilities, and
results of operations of these joint ventures as at and for the years ended
October 31, 1999 and 1998, recorded in the consolidated financial statements of
the Company, are as follows:
1999 1998 1997
------ ------- -------
Current assets......................................... $4,693 $11,514 $ 5,908
Non current assets..................................... -- -- --
Current liabilities.................................... 1,549 1,574 11,821
Non current liabilities................................ -- -- --
Minority interest...................................... -- -- --
Revenues............................................... 196 -- 1,896
Gross profit/(loss).................................... 68 (259) 32
Net income/(loss)...................................... 23 (151) (33)
Cash flow from:
Operating.............................................. 1,365 -- 36
Investing.............................................. -- -- --
Financing.............................................. -- -- --
During 1999, the Company entered into an agreement with its joint venture
partner on the Cardinal Co-generation project, (which had been the subject of
significant claims both by and against the owner) whereby all risks and rewards
associated with the settlement of these claims would reside with the other joint
venture partner. As a result of entering into this agreement, the Company
recorded an additional loss of $2,343 in 1999 which has been reflected in
restructuring and other charges.
9. LEBANESE POSTAL SYSTEM SERVICES CONTRACT
During 1998, PROFAC, Bracknell's 50% jointly controlled enterprise, and
Canada Post Systems Management Limited ("CPSML") signed a contract with the
Lebanese Ministry of Post and Telecommunications for the rehabilitation,
reconstruction and operation of the Lebanese postal service. PROFAC and CPSML
formed a joint venture Lebanese operating company ("LibanPost") to rebuild the
postal system and carry out postal operations. As of October 31, 1999,
Bracknell, through PROFAC, had invested $10,000, of which $5,000 was financed
through a non-recourse Lebanese bank loan. Bracknell's share of PROFAC's
investment in LibanPost is pledged as collateral for the loan. As commercial
service levels have not yet been attained, net costs incurred during the
start-up period have been capitalized. Commercial service levels are expected to
be achieved by January, 2000. In addition, LibanPost has an agreement with a
Lebanese bank to maintain a minimum cash balance of $5,600 until October 21,
2001 and $1,600 thereafter to support the issuance of a bank guarantee. The
guarantee was issued to the Lebanese Ministry of Post and Telecommunications in
support of a performance obligation under the contract. On May 19, 2000, the
Company entered into an agreement to sell its entire interest in PROFAC. See
Note 24.
10. CREDIT FACILITY
As of October 31, 1999, Nationwide had a $40,000 credit facility with a
bank maturing on December 1, 2000, which was composed of a $25,000 revolving
credit facility and a $15,000 term facility. At October 31, 1999, $19,935 had
been drawn under the revolving credit facility at an interest rate of 7.16%. At
October 31, 1999, $15,000 had been borrowed under the term facility at an
interest rate of 7.18%. Subsequent to year end the $34,935 was repaid with funds
advanced from the new credit facility described below.
F-15
237
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In order to finance the acquisition of Nationwide, the Company was advanced
$25,000 against a proposed credit facility. Subsequent to year-end, the Company
finalized the $192,500 credit facility with a syndicate of banks maturing on
October 31, 2004, which is comprised of the following:
UTILIZED AT
AVAILABLE OCTOBER 31, 1999
--------- ----------------
Canadian Term Commitment................................... $ 25,000 $25,000
U.S. Term Commitment....................................... 15,000 15,000
Canadian Operating Commitment.............................. 12,500 --*
U.S. Operating Commitment.................................. 25,000 19,935
Acquisition Commitment..................................... 115,000 --
-------- -------
$192,500 $59,935
======== =======
- ---------------
* No actual cash drawn on this facility although letters of credit totaling $4.4
million were issued and outstanding.
The unused portion of the Canadian and U.S. acquisition facility will be
cancelled on April 30, 2000. Borrowings under these facilities currently bear
interest at LIBOR plus 2.0% or PRIME plus 1.0%, however can vary between 1.5% to
2.5% for LIBOR or 0.5% to 1.5% for PRIME based on the Company's ratio of total
net debt to consolidated earnings before interest, tax, depreciation and
amortization.
Fees associated with this credit facility of approximately $2,300 million
have been deferred and will be amortized over the term of the debt using the
effective yield method. Amounts drawn against the term and acquisition
facilities do not require any principal repayments prior to January 31, 2001.
Otherwise, repayments are due ratably in quarterly installments at the rate of
5% for the 12 quarters following January 31, 2001, increasing to 10% for the
remaining 4 quarters.
The acquisition facility may be used exclusively to finance acquisitions
permitted under the credit agreement. The operating facilities, which are
revolving credit facilities, may be used only for general corporate purposes and
not for acquisitions.
The overall credit facility is secured by all assets of the Company,
including the pledges of all shares of the Company's subsidiaries which
guarantee the repayment of all amounts due under the facility and the facility
restricts pledges of all material assets. The credit facility requires
compliance with usual and customary covenants for a credit facility of this
nature including the limitation on the payment of dividends on common shares and
the consent of the lenders for acquisitions that do not satisfy specified
criteria and financial covenants.
11. LONG-TERM DEBT
A summary of long-term debt is as follows:
1999 1998
------- ----
Term commitment (See Note 10)............................... $40,000 $--
Other....................................................... 552 --
------- ---
40,552 --
Less: Current portion....................................... (240) --
------- ---
Total............................................. $40,312 $--
======= ===
F-16
238
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate annual maturities of long-term debt during the following periods
are:
YEARS ENDING OCTOBER 31,
- ------------------------
2000........................................................ $ 240
2001........................................................ 8,060
2002........................................................ 8,060
2003........................................................ 8,060
2004........................................................ 16,060
2005 and thereafter......................................... 72
-------
$40,552
=======
Total interest expense on long-term debt was $812 in 1999 (nil in 1998).
12. INCOME TAXES
The provision for income taxes applicable to continuing operations consists
of the following:
1999 1998 1997
------- ------ ------
Current..................................................... $ 8,882 $2,211 $1,046
Deferred.................................................... (7,205) 2,430 2,488
------- ------ ------
$ 1,677 $4,641 $3,534
======= ====== ======
The Company's effective income tax rate has been determined as follows:
1999 1998 1997
----- ---- ----
Canadian statutory income tax rate.......................... 44.5% 44.5% 44.5%
Change in valuation allowance............................... (13.9) 3.1 (3.1)
Non-taxable capital gains................................... -- (2.9) (6.5)
Non-taxable foreign currency translation.................... (6.6) -- --
Other....................................................... 9.2 (3.7) 1.5
----- ---- ----
33.2% 41.0% 36.4%
===== ==== ====
The significant components of the current deferred tax asset (liability)
consist of the following:
1999 1998
------- -------
Contract accounting......................................... $(1,392) $(7,846)
Non-deductible reserves..................................... 2,035 --
Other....................................................... 136 --
------- -------
$ 779 $(7,846)
======= =======
The significant components of the long-term deferred tax asset consist of
the following:
1999 1998
------ ------
Tax loss carryforwards...................................... $ 78 $1,943
Book vs. tax, depreciation and amortization................. 956 794
Non-deductible reserves..................................... 480 --
------ ------
$1,514 $2,737
====== ======
Less: valuation allowance................................... $ -- $ (933)
------ ------
$1,514 $1,804
====== ======
F-17
239
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INTEREST AND OTHER INCOME, NET
Interest and other income consists of the following:
1999 1998 1997
------ ------ ------
Interest, net............................................... $ 354 $ 366 $ 307
Interest on tax reassessment................................ -- 1,329 --
Foreign exchange gains...................................... 414 1,655 428
Other....................................................... 559 965 2,604
------ ------ ------
$1,327 $4,315 $3,339
====== ====== ======
14. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries are involved in a number of employee
benefit plans, including both defined contribution and defined benefit plans.
Under the various defined contribution plans, the annual contributions
required by the Company are generally determined based on a percentage of
eligible wages, the level of the Company's return on sales and return on net
assets or at the discretion of the Board of Directors. Company contributions for
these plans were approximately $402 (1998 -- $366, 1997 -- $283) for The State
Group Limited and $611 for Nationwide and Preferred since their date of
acquisition.
Two of the Company's U.S. subsidiaries have multi-employer defined benefit
pension plans. Under these plans, certain liabilities can be imposed on the
Company if the Company withdraws from the plan or the plan terminates. Company
contributions for these plans were approximately $353 from the date of
acquisition to year end. The Company's contingent liability, if any, for its
share of any unfunded vested liabilities cannot be determined at this time.
15. SHARE CAPITAL
Authorized share capital consists of the following:
An unlimited number of no par value common shares.
An unlimited number of preferred shares issuable in series of which one
series is designated Series A. Series A preferred shares are cumulative,
redeemable, retractable, convertible preferred shares. The Company will, with
appropriate approval, convert each preferred share into one common share of
Bracknell. If the shares are not converted to common shares, they will have a
fixed cumulative dividend payable at an annual rate of 9.5% accruing from March
31, 2000. On or after September 30, 2004, Bracknell has the right to redeem the
preferred shares at $4.25 per share plus accrued and unpaid dividends. Bracknell
also has the opportunity to purchase the preferred shares for cancellation.
At October 31, 1999 common shares issued and outstanding consisted of
32,546,975 shares (1998 -- 26,373,000 shares). Preferred shares issued and
outstanding consisted of 1,273,535 issued at $4.25. In addition, the Company has
warrants outstanding entitling the holders to purchase 385,822 common shares at
$4.25 until March 31, 2001.
F-18
240
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. STOCK OPTION AND PURCHASE PLANS
The Company has reserved for issuance common shares for options granted to
certain officers, directors and key employees exercisable as follows:
1999 1998
--------- ---------
Number of options outstanding, beginning of year............ 1,085,000 1,088,750
Options granted............................................. 2,580,594 100,000
Options cancelled........................................... (101,500) (3,750)
Options exercised........................................... (132,500) (100,000)
--------- ---------
Number of options outstanding, end of year.................. 3,431,594 1,085,000
========= =========
Of the above options, 1,154,000 were exercisable at October 31, 1999.
Exercise prices range between C$2.70 and C$6.45 per share which were equal to
the market prices at the time the options were granted. These options expire
between January 2002 and September 2009. In addition, the Company has agreed to
issue, following shareholder approval, 1,104,594 additional options relating to
the acquisition of Nationwide which have been reflected above in options
granted.
17. RELATED PARTY TRANSACTIONS
The Company, in the ordinary course of business, performs work for its
joint ventures on normal commercial terms and provides cash and guarantee
facilities in accordance with joint venture participant arrangements.
The Company also provides and receives cash advances to and from affiliated
companies and business ventures. Advances made and cash distribution receipts
are mainly of a project nature and are interest free.
18. RESTRUCTURING AND OTHER CHARGES
The restructuring and other charges results from the retirement of former
executives and management changes at Bracknell and its wholly-owned subsidiary,
The State Group Limited in an amount of $5,266 with the remainder relating to
the settlement of the dispute on the Cardinal project (see Note 8).
19. OPERATING LEASES
The Company leases offices, warehouse facilities and field vehicles which
are classified as operating leases. Annual minimum lease payments under these
noncancellable operating leases during the following periods are:
YEARS ENDING OCTOBER 31,
- ------------------------
2000........................................................ $ 3,156
2001........................................................ 2,631
2002........................................................ 1,607
2003........................................................ 1,277
2004 and thereafter......................................... 2,980
-------
$11,651
=======
Rent expense under these leases was $868 in 1999 (1998 -- $805,
1997 -- $798)
F-19
241
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. COMMITMENTS, CONTINGENCIES AND CLAIMS
The Company is involved in claims and litigation primarily arising from the
normal course of business for the reimbursement of costs of additional work and
of additional costs incurred due to changed conditions. Any settlements or
awards will be recorded in the accounts as they are resolved or when the outcome
and amounts are determinable.
In the normal course of business, the Company is required to provide
performance bonds and/or payment bonds, in respect of certain contracts, which
guarantee payment for labour, material and services in the event of default by
the Company. The Company has executed an indemnity agreement in favour of the
surety of these bonds. In addition, the Company provides bonding for its various
joint venture and investment interests.
In October 1997, The Allison-Smith Company ("Allison"), a subsidiary of
Nationwide acquired in October 1998, was named as a defendant in a lawsuit
arising out of electrical work performed by Allison as a subcontractor. The
initial complaint filed against the general contractor for the project alleges
the system installed by Allison is defective. Allison denies any responsibility
for the claims on the basis that, among other things, installation was in
accordance with the approved plans and specifications of the project. Prior to
its acquisition by Nationwide, Allison entered into mediation in an effort to
settle the lawsuit. Based on a settlement offer made during mediation of such
lawsuit, Allison recorded a $1,200 liability. Such liability is reflected in the
consolidated balance sheets within other long-term liabilities. Under the Stock
Purchase Agreement entered into with Nationwide, former stockholders of Allison
have agreed to indemnify Nationwide for settlements reached in the above matter;
accordingly, Nationwide recorded an asset of $720 (which is net of associated
tax benefit) to reflect such indemnification.
21. SEGMENTED INFORMATION
Bracknell had two reportable segments; electrical, mechanical and other
technical services and facilities management services. Subsequent to year-end
the facilities management services segment was disposed of and has been
reflected as discontinued operations for all years presented. All of the
revenue, overhead, earnings, identifiable assets and capital expenditures are
attributable to the remaining business segment, which is electrical, mechanical
and other technical services.
1999 1998 1997
-------- -------- --------
Revenues By Geographic Segment:
Canada.................................................... $200,878 $208,207 $180,883
United States............................................. 86,920 41,684 12,958
Other..................................................... 5,306 23,482 3,550
1999 1998 1997
-------- -------- --------
Assets by Geographic segment:
Canada.................................................... $ 89,528 $118,270 $111,165
United States............................................. 177,258 11,485 2,368
Other..................................................... 4,907 3,889 --
22. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
Most entities depend on computerized systems and therefore are exposed to
the Year 2000 conversion risk, which, if not addressed, could affect an entity's
ability to conduct normal business operations. Management is addressing this
issue, however, given the nature of this risk, it is not possible to be certain
that all aspects of the Year 2000 issue affecting the Company and those with
whom it deals such as customers, suppliers or other third parties, will be fully
resolved without adverse impact on the Company's operation.
F-20
242
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SUBSEQUENT EVENTS
Subsequent to year end, the Company granted to certain employees, subject
to shareholder approval, 205,000 stock options. The exercise prices range
between C$5.85 and C$6.05 per share which were equal to the market prices at the
time the options were granted.
Also subsequent to year end, PROFAC, the Company's 50% owned subsidiary,
signed a Memorandum of Understanding with Bell Canada to acquire its wholly
owned subsidiary, NEXACOR Realty Management Inc. NEXACOR will continue to
provide facilities management and other real estate services to Bell under a
10-year outsourcing contract. The purchase price to PROFAC is approximately $25
million, with approximately $18 million due in 2000. PROFAC intends to finance
the acquisition through its own borrowing and cash flow.
24. DISCONTINUED OPERATIONS
On May 19, 2000, the Company entered into an agreement to sell its 50%
interest in PROFAC Facilities Management Services Inc. to SNC-Lavalin, Inc. for
consideration of C$17,500 in cash, or approximately $11,641. The Company will
receive an additional C$5,000 in cash upon the expiry of Bell Canada's option to
reacquire all of the shares of NEXACOR, which option expires on September 1,
2001. The previously released financial statements of the Company have been
restated to treat PROFAC as a discontinued operation. The assets and liabilities
of PROFAC have been separately identified on the balance sheet. PROFAC's
operating results for all years presented are reflected as "discontinued
operations." The statement of earnings for PROFAC was as follows:
1999 1998 1997
------- ------- -------
Revenue............................................... $23,343 $21,318 $13,042
Earnings before interest, taxes, depreciation
amortization and restructuring...................... 1,953 2,038 979
Interest and other income............................. 171 95 99
Income before taxes................................... 1,638 1,748 838
Provision for income taxes............................ 721 769 369
------- ------- -------
Earnings from discontinued operations................. 917 979 469
F-21
243
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
25. RECONCILIATION OF CANADIAN GAAP TO U.S. GAAP
The Company's consolidated financial statements have been prepared in
accordance with Canadian GAAP, which differs, in some respects, from U.S. GAAP.
Any differences in accounting principles as they pertain to the Company's
consolidated financial statements are immaterial except as follows:
YEAR ENDED OCTOBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Net earnings as reported.............................. $ 3,791 $ 7,375 $ 6,426
Description of items having the effect of increasing
reported income:
Translation of convenience(1)....................... -- 433 804
Description of items having the effect of decreasing
reported income:
Deferred start-up costs(2).......................... (3,828) (1,336) --
Deferred start-up costs, tax effect................. 1,531 534 --
Change in accounting policy(3)...................... (110) 78 32
Change in accounting policy, tax effect............. -- -- --
Foreign exchange losses(4).......................... -- (2,474) (1,584)
------- ------- -------
Net earnings under U.S. GAAP.......................... $ 1,384 $ 4,610 $ 5,678
------- ------- -------
Other comprehensive income:
Cumulative translation account(5)................... 1,445 (2,838) (1,168)
------- ------- -------
Comprehensive income.................................. $ 2,829 $ 1,772 $ 4,510
======= ======= =======
YEAR ENDED OCTOBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Earnings from operations as reported.................. $ 3,698 $ 6,716 $ 6,946
Description of items having the effect of increasing
reported income:
Translation of convenience(1)....................... -- 395 869
Change in accounting policy(3)...................... -- 78 32
Description of items having the effect of decreasing
reported income:
Change in accounting policy(3)...................... (110) -- --
Change in accounting policy, tax effect............. -- -- --
Reclassification of goodwill amortization(7)........ (586) (307) (231)
------- ------- -------
Earnings from operations under U.S. GAAP.............. $ 3,002 $ 6,882 $ 7,616
======= ======= =======
F-22
244
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED OCTOBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Earnings from continuing operations before income
taxes as reported................................... $ 5,048 $11,325 $ 9,697
Description of items having the effect of increasing
reported income:
Translation of convenience(1)....................... -- 668 1,212
Change in accounting policy(3)...................... -- 78 32
Description of items having the effect of decreasing
reported income:
Change in accounting policy(3)...................... (110) -- --
Change in accounting policy, tax effect............. -- -- --
Foreign exchange losses(4).......................... -- (2,474) (1,584)
Reclassification of goodwill amortization(7)........ (586) (307) (231)
------- ------- -------
Earnings from continuing operations before income
taxes under U.S. GAAP............................... $ 4,352 $ 9,290 $ 9,126
======= ======= =======
AS AT OCTOBER 31,
------------------
1999 1998
------- -------
Shareholders' Equity as reported............................ $95,479 $58,600
Adjustments to reflect U.S. GAAP:
Deferred start-up costs, net of tax(2).................... (3,099) (802)
Change in accounting policy, net of tax(3)................ -- 110
------- -------
Shareholders' Equity U.S. GAAP.............................. $92,380 $57,908
======= =======
F-23
245
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under U.S. GAAP, the statement of shareholders' equity is as follows:
CUMULATIVE TOTAL
COMMON PREFERRED CONTRIBUTED COMPREHENSIVE RETAINED SHAREHOLDERS'
STOCK STOCK SURPLUS INCOME EARNINGS EQUITY
------- --------- ----------- ------------- -------- -------------
Balance, October 31,
1996(6)................. $30,875 $ -- $ -- $ 312 $20,287 $51,474
Shares issued............. 21 -- -- -- -- 21
Shares redeemed........... (45) -- -- -- -- (45)
Net income................ -- -- -- -- 5,678 5,678
Cumulative translation
account................. -- -- -- (1,168) -- (1,168)
------- ------ ---- ------- ------- -------
Balance, October 31,
1997.................... 30,851 -- -- (856) 25,965 55,960
Shares issued............. 176 -- -- -- -- 176
Net income................ -- -- -- -- 4,610 4,610
Cumulative translation
account................. -- -- -- (2,838) -- (2,838)
------- ------ ---- ------- ------- -------
Balance, October 31,
1998.................... 31,027 -- -- (3,694) 30,575 57,908
Shares issued............. 26,002 5,412 -- -- -- 31,414
Warrants issued........... -- -- 229 -- -- 229
Net income................ -- -- -- -- 1,384 1,384
Cumulative translation
account................. -- -- -- 1,445 -- 1,445
------- ------ ---- ------- ------- -------
Balance, October 31,
1999.................... $57,029 $5,412 $229 $(2,249) $31,959 $92,380
======= ====== ==== ======= ======= =======
- ---------------
(1) As reported in Note 2, during 1999 the Company adopted the U.S. dollar as
its reporting currency for presentation of its consolidated financial
statements. In accordance with Cdn GAAP (EIC 11), historical consolidated
results were restated using a translation of convenience, whereby all
historical results were reflected using the exchange rate in effect on
October 31, 1998 of $1USD to $1.5429 Cdn. U.S. GAAP (SFAS 52) requires that
income statements be translated from the old reporting currency into the new
reporting currency using a weighted average exchange rate for the applicable
period and that the balance sheet be translated using the applicable period
end exchange rate, for all periods presented.
(2) Losses relating to the LibanPost start-up period had been deferred with the
intention of beginning amortizing the balance in fiscal 2000 in accordance
with Canadian GAAP. U.S. GAAP (SOP 98-5) requires that start-up costs be
expensed as incurred.
(3) Canadian GAAP requires that a change in accounting policy be applied
retroactively. U.S. GAAP requires all retroactive effects to be recorded the
year the change in accounting policy is applied.
(4) The restatement of prior period financial statements in accordance with SFAS
52 as described in (1) has resulted in foreign exchange movements relating
to the Company's corporate operations being charged to the income statement.
(5) The restatement of prior period financial statements in accordance with SFAS
52 as described in (1) has resulted in cumulative translation adjustments
representing the movement in exchange rates for the Company's
self-sustaining foreign subsidiaries.
(6) The opening balances of common stock and retained earnings under U.S. GAAP
differ from the balances under Canadian GAAP due to the differences in
foreign exchange translation. Canadian GAAP opening equity for the earliest
period was converted at a rate of 1.5429 while the average exchange rate at
the given time was used for U.S. GAAP.
F-24
246
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) Disclosure of earnings from operations before goodwill charges as well as
the reported per share information is prohibited under U.S. GAAP. The
goodwill amortization shown separately for Canadian GAAP has been
reclassified to depreciation and amortization for U.S. GAAP reconciliation
purposes.
All U.S. GAAP reconciling items are non-cash based and therefore have no
effect on the statement of cash flow information.
26. ADDITIONAL U.S. GAAP DISCLOSURES
(A) STOCK BASED COMPENSATION
For US GAAP, the Company accounts for the issuance of incentive stock
options pursuant to accounting standard APB No. 25 "Accounting for Stock Issued
to Employees". The intrinsic value method prescribed by APB No. 25 requires that
the Company recognize compensation expense as the amount by which the fair value
of the stock exceeds the exercise price of incentive stock options at the date
of grant. At the date of grant, none of the Company's incentive stock options
had an exercise price that was less than the fair value of the related stock.
Consequently pursuant to APB No. 25, the Company's consolidated financial
statements as presented herein conform in all material respects with US GAAP.
However, had the Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation" the Company's earnings and earnings per share would be as follows:
1999 1998 1997
------- ------ ------
Net earnings under U.S. GAAP................................ $ 1,384 $4,610 $5,678
Stock based compensation.................................... (1,574) (215) (349)
Tax effect.................................................. 560 90 129
------- ------ ------
Pro forma net earnings...................................... $ 370 $4,485 $5,458
======= ====== ======
Pro forma net earnings per share -- basic................... $ 0.01 $ 0.17 $ 0.21
Pro forma net earnings per share -- fully diluted........... 0.01 0.16 0.20
Because the SFAS 123 method of accounting has not been applied to options
granted prior to November 1, 1994, the resulting pro forma compensation costs
may not be representative of that expected in future years.
The Company may grant options for up to 2,628,000 shares under the stock
option plan ("SOP"). In addition, as described in Note (16), the Company has
agreed to issue, following shareholder approval, 1,104,594 additional options
relating to the acquisition of Nationwide. The Company has 3,431,594 outstanding
options as of October 31, 1999 under the SOP. The exercise price in respect to
any option issued under the SOP is required to be fixed by the board and may not
be less than the closing price of the common shares on the day prior to the day
on which the option is granted. Options issued under the SOP may be exercised
during a period determined by the board, which may not exceed ten years.
F-25
247
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity under the SOP is summarized below:
1999 1998 1997
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ---------- --------- ---------- --------- ----------
Options outstanding at beginning
of period...................... 1,085,000 $3.06 1,085,000 $2.90 860,000 $2.70
Granted.......................... 2,580,594 2.92 100,000 $4.50 240,000 4.08
Cancelled........................ 101,500 5.77 -- -- 3,750 2.70
Exercised........................ 132,500 3.64 100,000 2.70 11,250 2.70
--------- ---------- --------- ---------- --------- ----------
Options outstanding at end of
period......................... 3,431,594 $4.54 1,085,000 $3.06 1,085,000 $2.90
--------- ---------- --------- ---------- --------- ----------
Exercisable at end of period..... 1,505,149 $3.93 992,500 $2.91 681,250 $2.82
--------- ---------- --------- ---------- --------- ----------
Weighted average:
Fair value of options granted in
the period..................... $6.25 $3.12 $2.71
Risk-free interest rate.......... 5.36% 5.28% 5.89%
Expected dividend yield.......... 0.0% 0.0% 0.0%
Expected volatility rate......... 32.8% 32.8% 32.8%
Expected life of option.......... 8.0 years 7.0 years 7.0 years
(B) EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, ("Earnings per share") ("SFAS 128") which is effective for all periods
ending after December 15, 1997. SFAS 128 sets forth requirements for computing
basic and diluted earnings per share. Basic income per common share is computed
by dividing net income applicable to common stock by the weighted average number
of common shares and contingently issuable shares outstanding during the period.
1999 1998 1997
------- ------- -------
The computation of basic and fully diluted income per
share is as follows:
Net earnings attributable to common stock............... $ 1,384 $ 4,610 $ 5,678
Weighted average number of shares outstanding (in
thousands)........................................... 27,003 26,323 26,278
Basic net earnings per share............................ $ 0.05 $ 0.18 $ 0.22
Weighted average fully diluted number of shares
outstanding (in thousands)........................... 29,063 27,390 27,245
Fully diluted net earnings per share.................... $ 0.05 $ 0.17 $ 0.21
Additional earning per share disclosure in accordance with APB 30 is as
follows:
1999 1998 1997
----- ----- -----
EARNINGS PER SHARE -- BASIC
Earnings from continuing operations before change in
accounting policy......................................... 0.10 0.17 0.20
Earnings from discontinued operations....................... (0.05) 0.01 0.02
Cumulative effect of change in accounting policy............ 0.00 0.00 0.00
EARNING PER SHARE -- FULLY DILUTED
Earnings from continuing operations before change in
accounting policy......................................... 0.10 0.16 0.19
Earnings from discontinued operations....................... (0.05) 0.01 0.02
Cumulative effect of change in accounting policy............ 0.00 0.00 0.00
F-26
248
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the numerators and denominators used
in computing basic and fully diluted earnings per share.
PER SHARE
NUMERATOR DENOMINATOR AMOUNT
--------- ----------- ---------
For the years ended October 31, 1999
BASIC EPS
Income available to common stockholders................ $1,384 27,003 $0.05
=====
Effect of Dilutive Securities
Weighted average stock options outstanding............. 2,099
Purchase of stock for treasury from proceeds of
options.............................................. -- (39)
------ ------
DILUTED EPS
Income available to common stockholders + assumed
conversion........................................... $1,384 29,063 $0.05
====== ====== =====
For the year ended October 31, 1998
BASIC EPS
Income available to common stockholders................ $4,611 26,323 $0.18
=====
Effect of Dilutive Securities
Weighted average stock options outstanding............. 1,087
Purchase of stock for treasury from proceeds of
options.............................................. -- (20)
------ ------
DILUTED EPS
Income available to common stockholders + assumed
conversion........................................... $4,611 27,390 $0.17
====== ====== =====
For the year ended October 31, 1997
BASIC EPS
Income available to common stockholders................ $5,678 26,278 $0.22
=====
Effect of Dilutive Securities
Weighted average stock options outstanding............. 989
Purchase of stock for treasury from proceeds of
options.............................................. -- (22)
------ ------
DILUTED EPS
Income available to common stockholders + assumed
conversion........................................... $5,678 27,245 $0.21
====== ====== =====
(C) ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES
For the purpose of reporting under U.S. GAAP, companies are required to
consolidate controlled subsidiaries in which they have a majority (in excess of
50 percent) of the voting stock interest and continuous control over the
determination of the strategic operating, investing, and financing policies of
those subsidiaries, and are required to equity account for joint ventures and
for investments over which they have significant influence.
As disclosed in Note 8, the Company proportionately consolidates its joint
ventures under Canadian GAAP. In addition, the Company has one company in each
of the years shown which qualifies for proportionate consolidation but which
would be accounted for using the equity method under U.S. GAAP. In accordance
with SEC Release 33-7053, the Company has omitted the differences in
classification that result
F-27
249
BRACKNELL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from using proportionate consolidation in the reconciliation to U.S. GAAP. Refer
to Note 8 for the Company's proportionate share of the total assets,
liabilities, and results of operations of these joint ventures.
(D) PRO FORMA INFORMATION
The following unaudited pro forma consolidated results of operations for
the Company assume that the acquisitions of Preferred and Nationwide were
completed on November 1, 1997:
1999 1998
-------- --------
Revenues.................................................... $499,561 $477,405
Earnings from continuing operations......................... 6,837 11,635
Net earnings................................................ 7,754 12,614
Net earnings per share
Basic..................................................... 0.23 0.37
Fully diluted............................................. 0.22 0.36
These pro forma amounts represent the historical operating results of the
acquired business combined with those of the Company with appropriate
adjustments which give effect to interest expense and goodwill amortization
expense. These pro forma amounts are not necessarily indicative of the operating
results which would have occurred if Preferred and Nationwide had been operated
by current management during the periods presented.
(E) U.S. GAAP FINANCIAL INFORMATION
The application of the change in reporting currency results in differences
in the reported amounts in the financial statements. Supplemental information
regarding the Company's U.S. GAAP financial information is as follows:
FISCAL YEAR ENDED OCTOBER 31,
------------------------------
INCOME STATEMENT DATA 1999 1998 1997
- --------------------- -------- -------- --------
Revenues.................................................... 292,994 289,548 222,124
Cost of services............................................ 255,296 257,983 193,297
------- ------- -------
Gross margin................................................ 37,698 31,565 28,826
Selling, general and administrative expenses................ 24,905 23,211 20,314
Depreciation and amortization............................... 2,182 1,472 896
Restructuring and other charges............................. 7,609 -- --
------- ------- -------
Earnings from operations.................................... 3,002 6,882 7,616
Income from long-term investments........................... 23 311 (662)
Interest and other income................................... 1,327 2,096 2,172
------- ------- -------
Earnings before provision for income taxes.................. 4,352 9,290 9,126
Provision for income taxes.................................. 1,588 4,914 3,976
------- ------- -------
Earnings from continuing operations......................... 2,764 4,376 5,150
Earnings from discontinued operations....................... (1,380) 235 528
------- ------- -------
Net earnings................................................ 1,384 4,611 5,678
======= ======= =======
Pro forma net earnings(1)................................... 1,384 4,533 5,646
Balance Sheet Data(2)
Total Assets................................................ 268,595 132,951 124,406
Total Long term debt........................................ 47,705 457 710
(1) The pro forma net earnings gives effect to the change in accounting policy
as though it had occurred at the beginning of the earliest period presented.
Pro forma per share information has not been presented as the per share
information would not change.
(2) Full recasted balance sheets have not been presented as the same exchange
rate would have been used under both Canadian and US GAAP for conversion of
the 1998 and 1999 balance sheets.
F-28
250
BRACKNELL CORPORATION
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF U.S. DOLLARS)
JULY 31, 2000 OCTOBER 31, 1999(1)
------------- -------------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 6,820 $ 651
Contract and accounts receivables......................... 207,520 124,427
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 72,355 25,902
Inventory................................................. 2,818 655
Prepaid expenses and other assets......................... 5,134 5,016
Deferred Income taxes..................................... 3,431 779
Income taxes receivable................................... 2,461 --
Current assets from discontinued operations............... -- 9,001
-------- --------
Total current assets.............................. 300,539 166,431
Capital assets.............................................. 15,703 9,239
Deferred income taxes....................................... 1,034 1,514
Other assets................................................ 6,134 5,074
Goodwill, net............................................... 191,349 77,767
Long-term assets from discontinued operations............... -- 11,668
-------- --------
Total assets...................................... $514,759 $271,693
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under revolving credit facilities.............. $ 58,326 $ 19,935
Current portion of long-term debt and Sunbelt Notes....... 38,420 240
Accounts payable and other accrued liabilities............ 106,613 73,339
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 43,370 24,676
Income taxes payable...................................... -- 5,067
Deferred income taxes..................................... 2,123 --
Current liabilities from discontinued operations.......... -- 5,252
-------- --------
Total current liabilities......................... 248,852 128,509
Long-term debt.............................................. 127,965 40,312
Deferred income taxes....................................... 1,175
Other long-term liabilities................................. 1,254 1,309
Long-term debt from discontinued operations................. -- 6,084
-------- --------
Total liabilities................................. 379,246 176,214
-------- --------
Shareholders' equity
Common shares (Note 4).................................... 87,643 53,235
Preferred shares (Note 5)................................. -- 5,412
Warrants.................................................. 229 229
Retained earnings......................................... 47,333 35,158
Cumulative translation adjustment......................... 308 1,445
-------- --------
Total shareholders' equity........................ 135,513 95,479
-------- --------
Total liabilities and shareholders' equity........ $514,759 $271,693
======== ========
- ---------------
(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.
The accompanying notes are an integral part of these financial statements.
F-29
251
BRACKNELL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED JULY 31
2000 1999(1)
----------- -----------
(IN THOUSANDS OF U.S.
DOLLARS EXCEPT PER SHARE
AMOUNTS)
Revenues.................................................... $579,520 $199,469
Cost of services............................................ 486,724 175,872
-------- --------
Gross margin................................................ 92,796 23,597
Selling, general and administrative expenses................ 52,893 16,532
-------- --------
Earnings before interest, taxes, depreciation and
amortization.............................................. 39,903 7,065
Depreciation and amortization............................... 3,125 1,072
Restructuring and other charges............................. -- 7,609
-------- --------
Earnings (loss) from operations............................. 36,778 (1,616)
Income from long-term investments........................... 74 14
Interest and other income (expense)......................... (14,750) 741
-------- --------
Earnings before provision for income taxes, discontinued
operations and goodwill charges........................... 22,102 (861)
Provision for (recovery of) income taxes.................... 7,271 (613)
-------- --------
Earnings (loss) from continuing operations before goodwill
charges................................................... 14,831 (248)
Goodwill charges, net of tax of $1,086 (1999 -- nil)........ 4,445 204
-------- --------
Earnings (loss) from continuing operations.................. 10,386 (452)
Earnings from discontinued operations, net of tax........... 1,789 828
-------- --------
Net earnings...................................... $ 12,175 $ 376
======== ========
EARNINGS PER SHARE
Earnings (loss) from continuing operations before goodwill
charges
Basic..................................................... $ 0.40 $ (0.01)
Fully diluted............................................. $ 0.38 $ (0.01)
Earnings (loss) from continuing operations
Basic..................................................... $ 0.28 $ (0.02)
Fully diluted............................................. $ 0.27 $ (0.02)
Net earnings
Basic..................................................... $ 0.33 $ 0.02
Fully diluted............................................. $ 0.31 $ 0.02
- ---------------
(1) Restated to reflect discontinued operations.
The accompanying notes are an integral part of these financial statements.
F-30
252
BRACKNELL CORPORATION
UNAUDITED CONSOLIDATED CASH FLOW STATEMENT
FOR THE NINE MONTHS ENDED JULY 31
2000 1999
-------- -------
(IN THOUSANDS OF
U.S. DOLLARS)
Cash flows from operating activities
Net earnings (loss) from continuing operations............ $ 10,386 $ (452)
Items not affecting cash
Depreciation and amortization.......................... 3,125 1,072
Goodwill charges....................................... 5,531 204
Provision for deferred income taxes.................... 401 --
Loss on sale of capital assets......................... 127 --
Other amortization charges.............................
Write-off of deferred financing fees (Note 1).......... 3,254 --
Other.................................................. 664 63
-------- -------
23,488 887
Change in operating assets and liabilities, excluding assets
acquired and liabilities assumed in acquisitions.......... (66,622) (2,597)
-------- -------
(43,134) (1,710)
-------- -------
Cash flows from investing activities
Purchases of capital assets............................... (4,115) (1,536)
Purchase of Preferred Electric, net of cash............... -- (5,986)
Purchase of Sylvan, including assumed debt (Note 2)....... (21,495) --
Purchase of Sunbelt, net of cash assumed (Note 2)......... (71,143) --
Purchase of Highlight, including assumed debt (Note 2).... (2,599) --
Proceeds from the sale of assets.......................... 37 --
Investment in discontinued operations..................... -- (1,500)
Proceeds from the sale of discontinued operations......... 11,694 --
Other..................................................... (1,673) 601
-------- -------
(89,294) (8,421)
-------- -------
Cash flows from financing activities
Financing costs........................................... (3,988) --
Borrowings under credit facilities........................ 104,649 456
Net borrowings under revolving credit facilities.......... 38,391 1,536
Net proceeds from issuance of common stock................ 28,996 325
Repayment of long-term debt............................... (329) --
Repayment of Sunbelt Notes................................ (28,991) --
Other..................................................... (131) --
-------- -------
138,597 2,317
-------- -------
Net decrease in cash and cash equivalents................... 6,169 (7,814)
Net cash and cash equivalents, beginning of period.......... 651 23,165
-------- -------
Net cash and cash equivalents, end of period................ $ 6,820 $15,351
======== =======
Cash payments for:
Interest.................................................. $ 9,095 $ 233
-------- -------
Income taxes.............................................. $ 13,829 $ 8,345
======== =======
Non cash financing transactions:
Notes issued in lieu of cash for Sunbelt acquisition...... $ 50,000 $ --
-------- -------
Non cash equipment financing.............................. $ 180 $ --
======== =======
- ---------------
(1) Restated to reflect discontinued operations.
The accompanying notes are an integral part of these financial statements.
F-31
253
BRACKNELL CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2000
1. SENIOR CREDIT FACILITY
On February 28, 2000, the Company signed an amended and restated agreement
with a group of lenders for the Company's Senior Credit Facility. The amended
facility provides for total credit availability of $212,500, with conditions and
covenants similar to the original credit facility. As a result of amending and
restating the Senior Credit Facility, the Company charged financing fees of
$3,254 associated with the original facility to expense in the second quarter
which were previously being amortized over a five year period. Fees associated
with the amended and restated agreement in the amount of $1,267 will be
amortized over the remainder of the five year period of the facility.
2. ACQUISITION ACTIVITY
On February 14, 2000, the Company acquired all of the issued and
outstanding shares of Sylvan Industrial Piping, Inc., Sylvan Industrial Piping
of Tennessee, Inc. and Sylvan Industrial Piping of NJ, Inc. (collectively
"Sylvan"), for a cash purchase price of approximately $21,495. On February 23,
2000 the Company acquired all of the issued and outstanding shares of six
related companies (collectively "Highlight"), for a cash purchase price of
approximately $2,599. The final purchase price for each of the Sylvan and
Highlight acquisitions are subject to a working capital adjustment which are yet
to be determined. Both the Sylvan and Highlight acquisitions were financed
through advances against the Company's Senior Credit Facility.
On March 9, 2000, the Company acquired 100% of the shares of Sunbelt
Integrated Trade Services, Inc. ("Sunbelt"). Immediately following the
acquisition of Sunbelt, Sunbelt acquired all of the issued and outstanding
shares of Inglett & Stubbs Inc., Schmidt Electric Company, Inc., Crouch
Industries, LLC and Pneu-Temp, Inc. The purchase price was approximately
$129,297 (net of cash assumed of $8,154) of which $71,143 was paid in cash
through advances against the Senior Credit Facility, and the remaining $50,000
was satisfied through promissory notes (the "Sunbelt Notes"). The final purchase
price is subject to a working capital adjustment which is anticipated to be
determined during the third quarter. The Sunbelt Notes have an initial term of
six months, bearing interest at 10.5% per annum, increasing after the first 90
days to 12.5% until repaid. The Sunbelt Notes may also be extended for
additional 90-day terms or repaid in Bracknell common and convertible preferred
shares at the holder's option. The Sunbelt Notes are included in Current portion
of long-term debt. The net proceeds of the Equity Offering (see Note 4) were
used to repay a portion of the Sunbelt Notes plus accrued interest, resulting in
a principal balance outstanding of $21,009.
Subsequent to quarter end, on August 24, 2000, the Company announced plans
to acquire Able Telcom Holding Corp. in a stock-for-stock transaction. The
acquisition agreement is conditional upon the completion of a number of items
including regulatory and shareholder approval, financing and completion of
satisfactory due diligence. The Company will issue approximately 22 million
common shares and 1.2 million warrants in the transaction. The transaction is
expected to close by the end of 2000.
3. SUBORDINATED LOAN FACILITY
The Company signed a commitment letter with a Canadian chartered bank dated
March 6, 2000, for a proposed borrowing of up to $50,000 (the "Subordinated Loan
Facility") to support the Sunbelt Notes. The Subordinated Loan Facility will
mature in 364 days after the initial funding date and may be exchanged for
rollover securities for a term of nine years thereafter. The Subordinated Loan
Facility, which is currently not drawn, is reduced as the Sunbelt Notes are
repaid.
F-32
254
BRACKNELL CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
4. SHARE CAPITAL
At July 31, 2000 common shares issued and outstanding consisted of
40,546,760 shares (1999 -- 26,505,336 shares). In addition, the Company has
warrants outstanding entitling the holder to purchase 385,824 common shares at
$4.25 until March 31, 2001.
On March 31, 2000, the Company completed a public offering of 6.0 million
common shares in Canada at a price of C$7.00 per share. On April 13, 2000, the
underwriters exercised their full over-allotment option of 600,000 shares. After
underwriter fees and expenses of $2,466, the Company received net proceeds of
$28,996 which were used to repay a portion of the Sunbelt Notes.
5. CONVERSION OF CONVERTIBLE PREFERRED SHARES
On February 29, 2000, the shareholders approved the conversion of the
Company's 9.5% Convertible Preferred Shares, Series A into common shares of
Bracknell.
6. SALE OF PROFAC
On May 26, 2000, the Company completed the sale of its 50% equity interest
in PROFAC to its partner SNC Lavalin Group for $15,131, of which $3,437 is
dependent on certain conditions being meet in respect of the purchase of NEXACOR
by PROFAC. The Company received $11,694 cash at closing with the remaining
$3,437 due September 2001. In this period the Company recognized a pre-tax gain
on the sale of $4,035, and may record an additional pre-tax gain in excess of
$3,437 in September 2001. The results of PROFAC have been classified as a
discontinued operation.
2000 1999
------- -------
Revenues.................................................... $20,604 $17,544
Income (Loss) before taxes.................................. (1,913) 1,479
Provision for (recovery of) income taxes.................... (842) 651
------- -------
Income (Loss)............................................... (1,071) 828
Gain on disposal before taxes............................... 4,035 --
Provision for income taxes.................................. 1,175 --
------- -------
Net gain on disposal........................................ 2,860 --
------- -------
Earnings from discontinued operations, net of tax........... $ 1,789 $ 828
======= =======
7. CONTINGENCY
There is a dispute involving a claim for wrongful termination of a contract
at one of the Company's subsidiaries which has resulted in litigation. The
reason for termination has not been particularized and therefore the ultimate
outcome of this matter cannot be predicted with certainty. The contract in
question was $30.9 million, however the original contract contemplated scope
changes and was written to include price per unit values in order to allow for
the total contract value to be amended based on the actual quantity of work
performed.
On a cumulative basis Bracknell has recognized $39.6 million of revenues on
this project. At the time of the termination $14.9 million had been paid to
Bracknell under the contract with undisputed receivables outstanding of $9.1
million. Revenue has been recognized only to the extent of the actual contract
costs incurred, and as such no profit has been recognized.
Management has considered the accounting guidance when evaluating the
realization of the asset. All evidence supporting the claim is objective and
verifiable. Bracknell has maintained records including all extra
F-33
255
BRACKNELL CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
work orders, material and sub-contractor invoices and detailed payroll records.
Bracknell has obtained a legal opinion stating that there is reasonable basis to
support the claim. The Company believes that its claim for wrongful termination
has merit and that there are substantive legal defenses to any potential
counterclaims.
8. RECONCILIATION OF CANADIAN GAAP TO U.S. GAAP
The Company's interim consolidated financial statements have been prepared
in accordance with Canadian GAAP, which differs in some respects, from U.S.
GAAP. Any differences in accounting principles as they pertain to the Company's
interim consolidated financial statements are immaterial except as follows.
NINE MONTHS ENDED
-----------------
2000 1999
------- -------
Net earnings as reported.................................... $12,175 $ 376
Deferred start-up costs, net of tax......................... 3,099 (1,531)
------- -------
Net earnings (loss) under U.S. GAAP......................... $15,274 $(1,155)
======= =======
As at July 31, 2000, shareholders' equity is equivalent under both Canadian GAAP
and U.S. GAAP.
The Company's U.S. GAAP financial statements would appear as follows:
NINE MONTHS ENDED
-----------------
2000 1999
------- -------
Earnings (loss) from operations as reported................. $36,778 $(1,616)
Description of items having the effect of decreasing
reported income:
Reclassification of goodwill amortization(1)................ (5,531) (204)
------- -------
Earnings from operations under U.S. GAAP.................... $31,247 $(1,820)
======= =======
Earnings from continuing operations before income taxes and
goodwill charges as reported.............................. $22,102 $ (861)
Description of items having the effect of increasing
reported income:
Reclassification of extraordinary loss(2)................... 3,254
Description of items having the effect of decreasing
reported income:
Reclassification of goodwill amortization(1)................ (5,531) (204)
------- -------
Earnings from continuing operations before income taxes
under U.S. GAAP........................................... $19,825 $(1,065)
======= =======
(1) The presentation of goodwill charges net of tax below operating income is
not allowable under U.S. GAAP.
(2) The settlement loss on the credit facility is treated as an extraordinary
item under U.S. GAAP.
F-34
256
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Nationwide Electric, Inc.:
We have audited the accompanying consolidated statements of operations and
cash flows for the six-month period ended September 30, 1999, the year ended
March 31, 1999, and the period from September 23, 1997 (Date of Inception) to
March 31, 1998 of NATIONWIDE ELECTRIC, INC. and subsidiaries (the Company).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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, these consolidated financial statements present fairly, in
all material respects, the results of operations of Nationwide Electric, Inc.
and subsidiaries and their cash flows for the six-month period ended September
30, 1999, the year ended March 31, 1999, and the period from September 23, 1997
(Date of Inception) to March 31, 1998, in conformity with generally accepted
accounting principles in the United States of America.
Deloitte & Touche LLP
Independent Public Accountants
Minneapolis, Minnesota
December 8, 1999
(March 8, 2000 as to Note 11)
F-35
257
NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1999, YEAR ENDED MARCH 31, 1999,
AND PERIOD FROM SEPTEMBER 23, 1997 (DATE OF INCEPTION) TO MARCH 31, 1998
(IN U.S. DOLLARS)
PERIOD FROM
SIX-MONTH SEPTEMBER 23, 1997
PERIOD ENDED YEAR ENDED (DATE OF INCEPTION)
SEPTEMBER 30, MARCH 31, TO MARCH 31,
1999 1999 1998
-------------- ------------ -------------------
Contract revenues.................................. $98,294,326 $102,556,460 $4,304,818
Costs of services.................................. 81,233,685 85,789,553 3,601,651
----------- ------------ ----------
Gross profit....................................... 17,060,641 16,766,907 703,167
Selling, general, and administrative expenses...... 11,950,111 12,130,508 968,208
----------- ------------ ----------
Income (loss) from operations...................... 5,110,530 4,636,399 (265,041)
Interest and other income (expense):
Interest expense................................. (537,906) (683,581) (124,448)
Other income (expense), net...................... 30,803 (1,590,718) 42,990
----------- ------------ ----------
(507,103) (2,274,299) (81,458)
----------- ------------ ----------
Income (loss) before income taxes.................. 4,603,427 2,362,100 (346,499)
Income tax expense (benefit)....................... 1,872,126 964,500 (120,500)
----------- ------------ ----------
Net income (loss).................................. $ 2,731,301 $ 1,397,600 $ (225,999)
=========== ============ ==========
The accompanying notes are an integral part of these financial statements.
F-36
258
NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1999, YEAR ENDED MARCH 31, 1999,
AND PERIOD FROM SEPTEMBER 23, 1997 (DATE OF INCEPTION) TO MARCH 31, 1998
(IN U.S. DOLLARS)
PERIOD FROM
SEPTEMBER 23,
SIX-MONTH 1997 (DATE OF
PERIOD ENDED YEAR ENDED INCEPTION) TO
SEPTEMBER 30, MARCH 31, MARCH 31,
1999 1999 1998
------------- ------------ -------------
Cash flows from operating activities:
Net income (loss)......................................... $ 2,731,301 $ 1,397,600 $ (225,999)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................ 532,326 537,606 32,532
Amortization of intangible assets....................... 394,122 375,893 21,729
Provision for deferred income taxes..................... 34,784 (262,000) (120,500)
Interest on officer notes............................... (7,477) (5,393)
Changes in operating assets and liabilities, excluding
assets acquired and liabilities assumed in
acquisitions:
Contract receivables.................................. (10,213,448) (520,736) 1,453,415
Costs and estimated earnings in excess of billings.... (6,177,613) 77,901 (462,079)
Inventory............................................. 8,319 185,178 (26,943)
Prepaid expenses...................................... 627,390 (116,445) 154,667
Other assets, net..................................... (1,129,044) (31,596)
Loans to management shareholders, net................. 100,000 (41,828)
Accounts payable...................................... 1,169,922 990,794 132,283
Accrued expenses and other current liabilities........ 2,240,327 (256,985) (998,340)
Billings in excess of costs and estimated earnings.... 6,238,963 (543,314) (276,531)
------------ ------------ ------------
Net cash (used in) provided by operating
activities.......................................... (3,450,128) 1,786,675 (315,766)
Cash flows from investing activities:
Purchases of property and equipment....................... (1,112,026) (1,057,547) (29,663)
Purchase of Allison and Henderson, net of cash acquired... (13,703,131)
Purchase of Neal and Southwest, net of cash acquired...... (9,939,548)
Purchase of Parsons Electric Co........................... (11,000,000)
Purchase of employee noncompete agreements................ (200,000)
------------ ------------ ------------
Net cash used in investing activities............... (11,051,574) (14,760,678) (11,229,663)
Cash flows from financing activities:
Proceeds from the issuance of preferred stock............. 6,000,000 6,000,000
Payments to redeem preferred stock........................ (6,000,000)
Proceeds from the issuance of common stock................ 12,055,974 1,000,000
Capital contributions..................................... 100,000
Net borrowings (payments) under term facility............. 14,625,000 (8,600,000) 5,800,000
Net borrowings under revolving credit facility............ 9,500,000 5,500,000
Payments on debt.......................................... (3,512,898) (2,058,149) (308,318)
Dividends paid............................................ (256,001) (473,750)
Repurchase of common stock................................ (100,724)
------------ ------------ ------------
Net cash provided by financing activities........... 14,356,101 12,323,351 12,591,682
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents........ (145,601) (650,652) 1,046,253
Cash and cash equivalents, beginning of period.............. 395,601 1,046,253
------------ ------------ ------------
Cash and cash equivalents, end of period.................... $ 250,000 $ 395,601 $ 1,046,253
============ ============ ============
Cash payments for:
Interest.................................................. $ 500,875 $ 666,076 $ 65,552
============ ============ ============
Income taxes.............................................. $ 2,032,186 $ 979,099 $ --
============ ============ ============
Noncash financing transaction --
Dividends on preferred stock.............................. $ 256,001 $ 232,500 $ 37,500
============ ============ ============
Purchase of businesses, net of cash acquired:
Working capital, other than cash.......................... $ (4,879,686) $(12,057,388) $ (5,398,838)
Property, plant, and equipment............................ (1,956,647) (1,406,831) (1,363,643)
Cost in excess of net assets of companies acquired........ (14,811,108) (12,093,224) (4,266,107)
Other noncurrent assets................................... (13,458) (1,289,904) (233,560)
Long-term debt............................................ 4,646,366 1,867,466 262,148
Noncurrent liabilities.................................... 1,327,700
------------ ------------ ------------
(17,014,533) (23,652,181) (11,000,000)
Less common stock issued for assets acquired................ 7,074,985 9,949,050
------------ ------------ ------------
Net cash used to acquire businesses................. $ (9,939,548) $(13,703,131) $(11,000,000)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-37
259
NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1999, YEAR ENDED MARCH 31, 1999, AND
PERIOD FROM SEPTEMBER 23, 1997 (DATE OF INCEPTION) TO MARCH 31, 1998
(IN U.S. DOLLARS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
General. The consolidated statements of operations and cash flows
presented herein include the accounts of Nationwide Electric, Inc. (Nationwide
or the Company) and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
On June 4, 1998, Galt, Inc. was merged into Nationwide in exchange for
3,300,000 shares of common stock (including 990,000 shares Class A Nonvoting)
and 6,000 shares of Redeemable Preferred Stock. The merger was accounted for as
a reorganization of companies under common control whereby Nationwide was the
sole surviving entity as of that date. Parsons Electric Co. (Parsons) was
acquired on February 27, 1998 by Galt, Inc. The Allison Company (Allison) and
Henderson Electric Company, Inc. (Henderson) were both acquired on October 22,
1998 for a combination of cash and common stock of Nationwide. Neal Electric and
Neal Equipment (Neal) were acquired effective July 1, 1999. Southwest Systems
Limited (Southwest) was acquired effective September 1, 1999. Nationwide's
operating results include the operations of Allison, Henderson, Neal, and
Southwest from the date of each acquisition through September 30, 1999.
Through September 30, 1999, Nationwide is majority owned by KLT Energy
Services, Inc. (KLT), a deregulated subsidiary of Kansas City Power and Light
Company (KCPL) and Reardon Capital, LLC (Reardon). Galt, Inc. was also owned by
KLT and Reardon.
On October 1, 1999, Bracknell Corporation (Bracknell) acquired for cash and
shares of Bracknell's common and preferred stock all the issued and outstanding
common stock of Nationwide. The total purchase price was $78,802,491, of which
$47,483,560 was paid in cash (which included $1,886,716 of transaction costs)
and the remainder was paid for with 6,041,638 shares of Bracknell common shares
($25,676,961), 1,273,535 newly issued Bracknell convertible preferred shares
($5,412,524), and warrants entitling the holders to purchase 385,822 of
Bracknell's common shares at $4.25 for 18 months ($229,446). The number of
Bracknell common shares issued to the shareholders of Nationwide was determined
based upon a value of $4.25 per share. In addition, the former shareholders
holding purchased shares or preferred shares have the right to receive
additional cash or preferred shares (CVRs) in the event that Bracknell common
shares do not, within 12 months of the date of the acquisition, achieve an
average closing price in excess of $4.25 over a 30-consecutive-trading-day
period (the Share Price Average). Upon achieving the Share Price Average at any
time within the 12-month period, the CVRs are effectively cancelled. The
transaction is being accounted for using the purchase method of accounting, and
the operations of Nationwide are included in consolidated operations of
Bracknell as of the acquisition date. Excess of cost over net assets acquired in
the transaction was $72,305,798, which was recorded by Nationwide and is being
amortized on a straight-line basis over 20 years.
F-38
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NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A final allocation of the purchase price to net assets acquired is pending the
final determination of the fair value of assets and liabilities. In the
acquisition, the following assets were acquired and liabilities assumed:
Current assets.............................................. $ 72,255,432
Property, plant, and equipment.............................. 6,060,806
Other assets................................................ 1,737,640
Current liabilities......................................... (42,252,099)
Long-term liabilities....................................... (31,203,968)
Excess of cost over net assets acquired..................... 72,305,798
------------
78,903,609
Loans receivable from former Nationwide shareholders........ (101,118)
------------
Net purchase price paid..................................... $ 78,802,491
============
Nature of Operations. The Company's primary operations are commercial and
industrial electrical contracting with corporate offices in Minneapolis,
Minnesota and operating offices in Minneapolis; Atlanta, Georgia; Louisville and
Lexington, Kentucky; Cincinnati, Ohio; San Diego, California; and Las Vegas,
Nevada. The work is generally performed under fixed-price contracts. The length
of the Company's contracts vary, but generally are less than one year. The
Company's operations are primarily conducted within the states in which the
operating offices are located.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of expenses during the
period. Actual results could differ from those estimates.
Restricted Cash. The Company has withheld payment of $992,089 to the
former shareholders of companies which Nationwide had acquired prior to its
acquisition by Bracknell related to the terms of purchase agreements. The
Company anticipates paying these restricted cash accounts to such former
shareholders subsequent to the first anniversary of the acquisitions.
Contract Receivables. The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides allowances
for contract receivables it deems to be uncollectible based on management's best
estimates. Recoveries are recognized in the period they are received. The
ultimate amounts of contract receivables that become uncollectible could differ
from those estimated.
Credit Policy. In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The Company
principally deals with recurring customers, state and local governments, and
well-known local companies whose reputation is known to the Company. Advance
payments and progress payments are generally required for significant projects.
Credit checks are performed for significant new customers that are not known to
the Company. The Company generally has the ability to file liens against the
property if payment is not received on a timely basis. The Company has not
historically incurred significant credit losses.
Collective Bargaining Agreements. The Company is a party to various
collective bargaining agreements with certain employees. These agreements
require the Company to pay specified wages and provide certain benefits to its
union employees. These agreements will expire at various times through May 2003.
Property and Equipment. Property and equipment is stated at cost less
accumulated depreciation. Routine repairs and maintenance costs are expensed as
incurred; improvements are capitalized at cost and are
F-39
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NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortized over the remaining useful life of the related asset. Depreciation is
recorded using straight-line methods over the estimated useful lives of the
related assets which are as follows:
Leasehold improvements...................................... 10 years
Field equipment and tools................................... 5 to 7 years
Field vehicles and trailers................................. 5 years
Office furniture and equipment.............................. 5 to 7 years
Revenue and Cost Recognition. Revenue from contracts is recognized under
the percentage of completion method measured by the ratio of contract costs
incurred to date to estimated total contract costs for each contract.
Contract costs include all direct material and labor costs and those costs
related to contract performance such as indirect labor, supplies, and tools.
Selling, general, and administrative costs are charged to expense as incurred.
Costs for materials incurred at the inception of a project which are not
reflective of effort are excluded from costs incurred for purposes of
determining revenue recognition and profits.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those changes arising from
contract penalty provisions and final contract settlements, may result in
revisions to costs and income which are recognized in the period in which the
revisions are determined. An amount equal to contract costs attributable to
claims is included in revenues when realization is probable and the amount can
be reliably estimated. Revenues in excess of contract costs from claims are
recorded only when the amounts have been received.
Income Taxes. The Company uses the liability method to account for income
taxes. Under this method, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related to certain income and expenses recognized in
different periods for financial and income tax reporting purposes. Deferred
taxes are also recognized for operating losses and tax credits that are
available to offset future taxable income and income taxes, respectively. A
valuation allowance will be provided if it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
files a consolidated federal income tax return.
Long-Lived Assets. The Company reviews long-lived assets for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment is recognized to the extent that the sum
of undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. No impairment has been recognized
through September 30, 1999.
Goodwill. Goodwill represents costs in excess of the fair value of net
assets acquired and is amortized using the straight-line method over 40 years.
The Company periodically assesses the recoverability of intangibles based on its
expectations of future profitability and undiscounted cash flow of the related
operations. These factors, along with management's plans with respect to the
operations, are considered in assessing the recoverability of goodwill and other
purchased intangibles. If the Company determines, based on such measures, that
the carrying amount is impaired, the goodwill will be written down to its
recoverable value with a corresponding charge to earnings. Recoverable value is
calculated as the amount of estimated future cash flows for the remaining
amortization period. During the periods presented, no such impairment was
incurred.
Stock-Based Compensation. The Company accounts for stock-based
compensation under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees. Under this method, compensation cost is recorded
for the excess, if any, of the market price or fair value of the stock at the
grant date over the amount an employee must pay to acquire the stock.
F-40
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NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements. In June 1998, Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued. SFAS No. 133 established accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 2000. Management of the Company has not yet fully evaluated the
potential impact on the Company's financial statements of the adoption of SFAS
No. 133.
2. ACQUISITIONS
On February 27, 1998, the Company acquired for cash all of the issued and
outstanding stock of Parsons Electric Co. The total purchase price was
$11,000,000, of which $4,600,000 was financed by additional borrowings under
Parson's former line of credit. Total assets acquired and liabilities assumed
were approximately $18,400,000 and $11,900,000, respectively. The acquisition
has been accounted for using the purchase method of accounting. Accordingly, the
purchase price has been allocated to the assets acquired and liabilities assumed
based on their respective fair values resulting in goodwill of approximately
$4,300,000, which is being amortized to expense over 40 years using the
straight-line method. In addition, the Company entered in to noncompete
agreements with one employee and one former employee of Parsons. Payments of
$425,000 are being made under those agreements and are amortized on a
straight-line basis over 21 to 54 months.
The accompanying consolidated statements of operations reflect the results
of operations of Parsons from the date of acquisition through September 30,
1999.
On October 22, 1998, the Company acquired for cash and shares of the
Company's common stock all the issued and outstanding common stock of The
Allison Company. The total purchase price was $14,766,787, of which $10,130,244
was paid in cash and the remainder was paid for with 454,563 shares of
Nationwide common stock. The number of shares of Nationwide common stock issued
to the shareholders of Allison was determined based upon a fair value of $10.20
per share. Total assets acquired and liabilities assumed were approximately
$12,600,000 and $6,089,000, respectively. The acquisition has been accounted for
using the purchase method of accounting. Accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on their
respective fair values, resulting in goodwill of approximately $8,255,000 which
is being amortized to expense using the straight-line method. An additional
earn-out payment, which has been accounted for as contingent consideration, will
be made to the former officers-shareholders of Allison in an amount equal to 25%
of the amount by which the earnings of the subsidiary before interest and income
taxes for each of the twelve months ending June 30, 1999 and 2000 exceeds
$2,500,000.
On October 22, 1998, the Company acquired for cash and shares of the
Company's common stock all the issued and outstanding common stock of Henderson
Electric Company, Inc. The total purchase price was $11,545,078, of which
$6,232,571 was paid in cash and the remainder was paid for with 520,834 shares
of Nationwide common stock. The number of shares of Nationwide common stock
issued to the shareholders of Henderson was determined based upon a fair value
of $10.20 per share. Total assets acquired and liabilities assumed were
approximately $17,889,000 and $10,183,000, respectively. The acquisition has
been accounted for using the purchase method of accounting. Accordingly, the
purchase price has been allocated to the assets acquired and liabilities assumed
based on their respective fair values, resulting in goodwill of approximately
$3,839,000 which is being amortized to expense using the straight-line method.
Effective July 1, 1999, the Company acquired for cash and shares of the
Company's common stock all the issued and outstanding common stock of Neal
Electric and Neal Equipment. The total purchase price was $12,500,000, of which
$7,900,015 was paid in cash and the remainder was paid for with 383,332 shares
of Nationwide common stock. The number of shares of Nationwide common stock
issued to the shareholders of Neal was determined based upon a value of $12.00
per share. Total assets acquired and liabilities assumed were approximately
$12,742,000 and $9,214,000, respectively. The acquisition has been accounted for
using the purchase method of accounting. Accordingly, the purchase price has
been allocated to the assets acquired
F-41
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NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and liabilities assumed based on their respective fair values, resulting in
goodwill of approximately $8,972,000 which is being amortized to expense using
the straight-line method. An additional earn-out payment, which has been
accounted for as contingent consideration, will be made to the former
officers-shareholders of Neal in an amount equal to 50% of the after-tax
earnings of the subsidiary for each of the twelve months ended December 31, 1999
and 2000.
Effective September 1, 1999, the Company acquired for cash and shares of
the Company's common stock all the issued and outstanding ownership units of
Southwest Systems Limited. The total purchase price was $5,500,000, of which
$3,025,000 was paid in cash and the remainder was paid for with 206,250 shares
of Nationwide common stock. The number of shares of Nationwide common stock
issued to the shareholders of Southwest was determined based upon a value of
$12.00 per share. Total assets acquired and liabilities assumed were
approximately $3,709,000 and $4,049,000, respectively. The acquisition has been
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based on
their respective fair values, resulting in goodwill of approximately $5,840,000
which is being amortized to expense using the straight-line method. An
additional earn-out payment, which has been accounted for as contingent
consideration, will be made to the former officers-shareholders of Southwest in
an amount equal to 50% of the amount by which pretax earnings of the subsidiary
for each of the twelve months ending March 31, 2000, 2001, 2002, and 2003
exceeds $1,100,000. The cumulative maximum amount for all periods is $3,500,000.
3. JOINT VENTURES AND LABOR SUBCONTRACT AGREEMENT
The Company has a minority interest (33%) in a limited liability company
joint venture, which is accounted for in the accompanying statements of
operations under the proportionate consolidation method. This venture was formed
to provide certain construction contracting services to a large industrial
customer. All of the members participate in construction. Contract revenues and
gross profit recognized by the Company related to services on contracts of the
joint venture were $1,503,873 and $300,592, respectively, for the six-month
period ended September 30, 1999; $1,637,763 and $316,870, respectively, for the
year ended March 31, 1999; and $365,705 and $25,600 for period from September
23, 1997 to March 31, 1998. The Company's investment in the joint venture is
included in other assets.
As of September 30, 1999, the Company has a labor subcontract agreement,
formed to provide electrical contracting to a large industrial customer.
Contract revenues earned by the Company related to these services were
$4,542,029 and $680,099 for the six-month period ended September 30, 1999 and
the year ended March 31, 1999, respectively. The Company will share as part of
the labor subcontract agreement in 50% of the gross profit from the parties'
contract with the customer.
4. CREDIT FACILITY
As of September 30, 1999, the Company had a credit facility that was
composed of a revolving credit facility and a term facility. At September 30,
1999, revolving credit facility and the term facility bore interest at 7.16% and
7.18%, respectively.
F-42
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NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. OPERATING LEASES
The Company leases offices, warehouse facilities, and field vehicles which
are classified as operating leases.
Annual minimum lease payments under these noncancelable operating leases
for the fiscal years ending September 30 are as follows:
2000........................................................ $1,542,780
2001........................................................ 1,416,364
2002........................................................ 1,371,269
2003........................................................ 1,204,528
2004........................................................ 827,659
Thereafter.................................................. 2,094,100
----------
$8,456,700
==========
Rent expense under these leases was $569,000 for the six-month period ended
September 30, 1999, $590,000 for the year ended March 31, 1999, and $47,000 for
the period from September 23, 1997 to March 31, 1998.
6. INCOME TAXES
The Company's income tax expense (benefit) consists of the following:
PERIOD FROM
SEPTEMBER 23,
SIX-MONTH 1997 (DATE OF
PERIOD ENDED YEAR ENDED INCEPTION) TO
SEPTEMBER 30, MARCH 31, MARCH 31,
1999 1999 1998
------------- ---------- -------------
Current:
Federal........................................ $1,523,342 $1,014,000
State.......................................... 314,000 212,500
---------- ----------
Total current.......................... 1,837,342 1,226,500
Deferred:
Federal........................................ 27,814 (223,000) $(102,500)
State.......................................... 6,970 (39,000) (18,000)
---------- ---------- ---------
Total deferred......................... 34,784 (262,000) (120,500)
---------- ---------- ---------
$1,872,126 $ 964,500 $(120,500)
========== ========== =========
The difference between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
PERIOD FROM
SEPTEMBER 23,
SIX-MONTH 1997 (DATE OF
PERIOD ENDED YEAR ENDED INCEPTION) TO
SEPTEMBER 30, MARCH 31, MARCH 31,
1999 1999 1998
---------------- -------------- ---------------
Statutory federal rate, income...... $1,565,165 34% $803,088 34% $(117,810) (34)%
State tax, net of federal benefit... 203,646 5 141,712 6 (20,790) (6)
Other permanent differences......... 43,684 1 42,700 2 14,760 4
Other............................... 59,631 1 (23,000) (1) 3,340 1
---------- --- -------- --- --------- ---
$1,872,126 41% $964,500 41% $(120,500) (35)%
========== === ======== === ========= ===
F-43
265
NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTIONS
Effective with the acquisition by Bracknell, the Board of Directors
terminated the stock option plan and cancelled all outstanding options.
Subsequently, Bracknell provided the same economic value by issuing a
proportionate number of stock options in quantity and option price with the same
vesting terms to replace the cancelled options subject to shareholder approval.
1998 Stock Option Plan. The Board of Directors of the Company has adopted,
and the stockholders of the Company have approved, an Incentive Stock Option
Plan (ISO Plan) and a Non-Qualified Stock Option Plan (NQSO Plan)(together, the
Option Plans). The purpose of the Option Plans is to encourage the key employees
of the Company and its subsidiaries to participate in the ownership of the
Company and to provide additional incentive for such employees to promote the
success of its business through sharing in the future growth of such business.
An aggregate amount of 500,000 shares of common stock (1,000,000 shares in the
aggregate) may be granted under options pursuant to each of the ISO Plan and the
NQSO Plan (subject to certain extraordinary changes in capitalization).
Transactions relative to both plans are as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Options outstanding at March 31, 1998
Granted..................................................... 223,500 $12.00
Exercised options outstanding at March 31, 1999............. 223,500 12.00
Granted..................................................... 168,200 12.00
Exercised...................................................
------- ------
Options outstanding at September 30, 1999................... 391,700 $12.00
======= ======
The Company accounted for its Option Plans in accordance with APB Opinion
No. 25, which requires compensation cost to be recognized based on the excess,
if any, between the quoted market price of the stock at the date of grant and
the amount an employee must pay to acquire the stock. Under this method, no
compensation cost has been recognized for stock option awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value as prescribed by SFAS No. 123, the Company's
net earnings would have been reduced to the pro forma amounts indicated below:
SIX-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, MARCH 31,
1999 1999
------------- ----------
Net income, as reported..................................... $2,731,301 $1,397,600
Net income, pro forma....................................... 2,705,707 1,391,600
The weighted average fair value at date of grant for options granted during
1999 was $0.40 per share, which, for the purposes of this disclosure, is assumed
to be amortized over the respective vesting period of the grants. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for both
periods: dividend yield of 0%; risk-free interest rate of 5.1%; expected life of
5.5 years; and an expected volatility of 0%.
8. MAJOR CUSTOMERS AND CONCENTRATION OF RISK
For the periods presented herein, no single customer accounted for 10% or
greater of consolidated revenues or contract receivables.
F-44
266
NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company grants credit, generally without collateral, to its customers,
which are usually general contractors. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors.
However, management believes that its contract acceptance, billing, and
collection policies are adequate to minimize the potential credit risk.
9. EMPLOYEE BENEFIT PLANS
Parsons has a defined contribution pension plan and a contributory profit
sharing plan covering substantially all of its nonunion employees. An employee
becomes eligible for these plans after one year of service and must be 21 years
of age. Employer contributions required for the defined contribution pension
plan are 3% of eligible wages. Annual contributions to the contributory profit
sharing plan are at the discretion of the Board of Directors and were
approximately $357,000, $495,000, and $43,000 during the six-month period ended
September 30, 1999, the year ended March 31, 1999, and the period from the date
of acquisition to March 31, 1998, respectively.
Parsons also contributes to union-sponsored, multi-employer defined benefit
pension plans in accordance with negotiated labor contracts. The passage of the
Multi-Employer Pension Plan Amendments Act of 1980 (the Act) may, under certain
circumstances, cause Parsons to become subject to liabilities in excess of
contributions made under collective bargaining agreements. Generally,
liabilities are contingent upon the termination, withdrawal, or partial
withdrawal from the plans. As of September 30, 1999, Parsons has not undertaken
to terminate, withdraw, or partially withdraw from any of these plans. Under the
Act, liabilities would be based upon Parsons' proportionate share of each plan's
unfunded vested benefits. Parsons has not received information from the plans'
administrators to determine its share of unfunded vested benefits (in the event
the Company were to withdraw from the plan), if any. Parsons contributed
approximately $1,774,000, $2,865,000, and $200,319 during the six-month period
ended September 30, 1999, the year ended March 31, 1999, and the period from the
date of acquisition to March 31, 1998, respectively, to these multi-employer
union pension plans.
Allison has a 401(k) profit sharing plan covering substantially all
employees. Each year, participants may contribute up to 15% of pretax annual
compensation up to a maximum of $10,000. Discretionary matching amounts may be
contributed at Allison's option, but to date no contributions have been made.
Allison also sponsors a profit sharing plan for all employees providing for
benefits upon retirement. Contributions to the plan during the six-month period
ended September 30, 1999 and the period from October 22, 1998 (acquisition by
Nationwide) to March 31, 1999 were approximately $85,000, and $86,000,
respectively. Allison's contributions to the plan are made at the discretion of
Nationwide's Board of Directors.
Allison's union employees are covered by a retirement plan and a health and
welfare plan (collectively, the Plans) determined through collective bargaining
and administered by the union. Contributions made by Allison to the Plans were
approximately $557,000 and $1,005,000, respectively, during the six-month period
ended September 30, 1999 and the period from October 22, 1998 (acquisition by
Nationwide) to March 31, 1999.
Qualified executives, office employees, and qualifying nonunion
electricians of Henderson are included in a modified defined contribution plan.
Henderson's contributions under the plan are determined annually by Nationwide's
Board of Directors with the minimum allowable contribution being the greater of
3% of gross eligible wages or 25 cents per active hour of service. Union
employees are covered by a retirement plan determined through collective
bargaining and administered by the union. Contributions during the six-month
period ended September 30, 1999 were approximately $257,000 and $951,000,
respectively. Contributions made by Henderson to the plans during the period
from October 22, 1998 (acquisition by Nationwide) to March 31, 1999 were
approximately $50,000 and $710,000, respectively.
F-45
267
NATIONWIDE ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Neal has a profit sharing plan for all nonunion employees meeting age and
length of service requirements. The plan may be terminated by Neal at any time.
Neal contributed $58,000 during the period from July 1, 1999 (acquisition by
Nationwide) to September 30, 1999.
Neal's union employees are covered by union-sponsored multi-employer
pension plans. Under these union plans, Neal makes contributions based on the
hours worked by each eligible employee. Contributions to union plans were
$642,520 during the period from July 1, 1999 (acquisition by Nationwide) to
September 30, 1999. The Employee Retirement Income Security Act of 1974, as
amended, imposes certain liabilities upon employers who are contributors to
multi-employer plans if the employer withdraws from the plan or the plan
terminates. Neal's contingent liability, if any, for its share of any unfunded
vested liabilities under these laws cannot be determined at this time.
10. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine claims
incidental to the business of the Company. Although the ultimate outcome cannot
presently be determined with certainty, the Company believes, based in part upon
advice from its legal counsel, that the ultimate liability associated with such
claims, if any, will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
In October 1997, Allison was named as a defendant in a lawsuit arising out
of electrical work performed by Allison as a subcontractor. The initial
complaint filed against the general contractor for the project alleges the
system installed by Allison is defective. Allison denies any responsibility for
the claims on the basis that, among other things, installation was in accordance
with the approved plans and specifications of the project. Prior to its
acquisition by Nationwide, Allison entered into mediation in an effort to settle
the lawsuit. Based on a settlement offer made during mediation of such lawsuit,
Allison recorded a $1,200,000 liability in September 1998 in accordance with the
requirements of SFAS No. 5, Accounting for Contingencies. Under the Stock
Purchase Agreement entered into with Nationwide, former stockholders of Allison
have agreed to indemnify Nationwide for settlements reached in the above matter;
accordingly, Nationwide recorded an asset of $720,000 (which is net of
associated tax benefit) to reflect such indemnification.
11. SUBSEQUENT EVENTS
On February 15, 2000, Nationwide acquired all the outstanding stock of
Sylvan Industrial Piping, Inc. (Sylvan) for $21,250,000 in cash. The acquisition
does provide for an amount based on a defined level of earnings over the next
three years.
On February 29, 2000, Nationwide announced the achievement of a definitive
agreement regarding the purchase of all the outstanding stock of Sunbelt
Integrated Trade Services, Inc. (Sunbelt) for $77 million in cash and a $50
million promissory note. The acquisition does provide for an amount based on a
defined level of earnings over the next three years.
F-46
268
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Sunbelt Integrated Trade Services, Inc:
We have audited the accompanying consolidated balance sheet of SUNBELT
INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY (the "Company") as of March 8,
2000, and the related consolidated statements of operations, stockholders'
(deficit) equity, and cash flows for the period from January 1, 2000 to March 8,
2000. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with United States 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company at March 8, 2000,
and the results of its operations and its cash flows for the period from January
1, 2000 to March 8, 2000 in conformity with United States generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
April 28, 2000.
Toronto, Canada.
F-47
269
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Sunbelt Integrated Trade Services, Inc.
We have audited the accompanying consolidated balance sheets of SUNBELT
INTEGRATED TRADE SERVICES, INC. and Subsidiary (the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' (deficit) equity, and cash flows for the year ended December 31,
1999 and the period May 21, 1998 (inception) to December 31, 1998. 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 auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and 1998, and the results of its operations and its cash flows for the year
ended December 31, 1999 and the period May 21, 1998 (inception) to December 31,
1998 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 19 to the consolidated financial statements, on March
8, 2000, 100% of the issued and outstanding common stock of the Company was sold
for approximately US$42 million. The Company's shareholders received
approximately US$29 million and the balance of the proceeds were utilized to
repay the Senior Credit Facility, related party notes payable, line of credit
and the notes payable and to pay transaction costs.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 9, 2000
F-48
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SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 8, 2000, DECEMBER 31, 1999 AND 1998
(IN U.S. DOLLARS)
2000 1999 1998
----------- ----------- -----------
ASSETS
Current Assets
Cash and cash equivalents................................. $ 7,113,653 $ 780,686 $ 352,606
Investment securities, at fair value (Note 3)............. 1,040,335 1,015,789 --
Contract receivables, net of allowance for doubtful
accounts of $299,100 and $363,068 respectively (Note
4)...................................................... 10,683,724 11,373,264 --
Income tax receivable..................................... 915,046 915,046 --
Inventory................................................. 948,734 346,250 --
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 1,822,971 2,232,542 --
Deferred tax assets....................................... -- 155,717 --
Other current assets...................................... 48,482 98,294 28,687
----------- ----------- -----------
Total current assets............................... 22,572,945 16,917,588 381,293
Property and equipment, net of accumulated depreciation and
amortization of $666,178, $544,356 and $878 (Note 6)...... 1,728,808 1,843,658 39,223
Goodwill, net of accumulated amortization of $99,450 and
$80,918................................................... 3,784,592 3,803,124 --
Other assets................................................ 538,932 677,418 126,379
----------- ----------- -----------
$28,625,277 $23,241,788 $ 546,895
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities
Accounts payable, including $296,998 to a related party in
2000 and 1999........................................... $ 4,592,352 $ 2,884,726 $ 481,890
Accrued payroll and related expenses...................... 5,312,138 1,627,706 --
Accrued expenses.......................................... 3,008,142 1,117,124 53,042
Notes payable, senior credit facility, line of credit..... 13,150,000 13,350,000 975,000
Related party notes payable............................... 850,000 850,000 --
Current portion of other long-term debt and capital lease
obligations (Note 11)................................... 672,491 665,765 --
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 1,906,552 1,070,113 --
Current portion of incentive payment due to officer,
including accrued interest.............................. 788,515 761,417 450,000
----------- ----------- -----------
Total current liabilities.......................... 30,280,190 22,326,851 1,959,932
Other long-term debt and capital lease obligations (Note
11)....................................................... 479,544 505,365 --
Deferred tax liability...................................... -- 155,717 --
Incentive payment due to officer, net of $44,444 discount... -- -- 555,556
----------- ----------- -----------
Total liabilities.................................. 30,759,734 22,987,933 2,515,488
----------- ----------- -----------
Commitments and contingencies (Note 15)
Stockholders' (deficit) equity (Note 10)
Preferred stock, $.01 par value; authorized 10,000,000
shares; no shares issued and outstanding................ -- -- --
Common stock, $.0001 par value; authorized 100,000,000
shares; issued and outstanding 8,695,547, 5,723,015 and
1,918,400 shares, respectively.......................... 870 573 192
Additional paid-in capital................................ 6,672,897 4,053,867 518,844
Accumulated other comprehensive income (loss), net of
tax..................................................... 21,489 (3,057) --
Accumulated deficit....................................... (8,829,713) (3,361,238) (2,208,660)
----------- ----------- -----------
(2,134,457) 690,145 (1,689,624)
Notes receivable from officers, employees and former
employees for common stock................................ -- (436,290) (278,969)
Stockholders' (deficit) equity.............................. (2,134,457) 253,855 (1,968,593)
----------- ----------- -----------
$28,625,277 $23,241,788 $ 546,895
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
271
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000, THE YEAR ENDED
DECEMBER 31, 1999 AND THE PERIOD FROM MAY 21, 1998 TO DECEMBER 31, 1998
(IN U.S. DOLLARS)
2000 1999 1998
----------- ----------- -----------
Contract revenues earned................................ $ 7,537,712 $50,825,082 $ --
Cost of revenues earned................................. 6,385,232 39,482,783 --
----------- ----------- -----------
Gross profit............................................ 1,152,480 11,342,299 --
----------- ----------- -----------
Selling, general and administrative expenses............ 6,163,678 9,947,856 2,198,864
Depreciation and amortization........................... 145,201 697,485 878
----------- ----------- -----------
Operating income (loss)................................. (5,156,399) 696,958 (2,199,742)
Non-operating income (expense)
Interest expense...................................... (270,444) (2,065,515) (15,863)
Interest income....................................... 17,391 213,616 6,945
Gain (loss) on sale of property and equipment, net.... (7,773) 2,363 --
----------- ----------- -----------
(260,826) (1,849,536) (8,918)
----------- ----------- -----------
Loss before income tax provision........................ (5,417,225) (1,152,578) (2,208,660)
Income tax provision.................................... -- -- --
----------- ----------- -----------
Net loss...................................... $(5,417,225) $(1,152,578) $(2,208,660)
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
272
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN U.S. DOLLARS)
NOTES
RECEIVABLE
ISSUED FOR
ACCUMULATED OTHER TOTAL
COMMON STOCK ADDITIONAL COMMON STOCK COMPREHENSIVE STOCKHOLDERS'
------------------ PAID-IN ACCUMULATED TO OFFICERS AND INCOME (DEFICIT)
SHARES AMOUNT CAPITAL DEFICIT EMPLOYEES (LOSS) EQUITY
--------- ------ ---------- ----------- ---------------- ------------- -------------
Balances at May 21, 1998
(Inception).................. -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 1,226,250 shares of
common stock for cash upon
formation of the Company..... 1,266,250 127 25,473 -- -- -- 25,600
Issuance of 133,750 shares of
common stock to a former
officer as consideration for
consulting services.......... 133,750 13 66,862 -- -- -- 66,875
Issuance of 100,000 shares of
common stock as consideration
for legal services........... 100,000 10 49,990 -- -- -- 50,000
Issuance of 8,400 shares of
common stock to a former
officer for cash and as
consideration for services... 8,400 1 7,560 -- -- -- 7,561
Issuance of 410,000 shares of
common stock to officer,
former employees and officer
for notes and cash........... 410,000 41 368,959 -- (278,969) -- 90,031
Net loss.............. -- -- -- (2,208,660) -- -- (2,208,660)
--------- ---- ---------- ----------- --------- -------- -----------
Balances at December 31,
1998......................... 1,918,400 192 518,844 (2,208,660) (278,969) -- (1,968,593)
Comprehensive loss
Net loss..................... -- -- -- (1,152,578) -- -- (1,152,578)
Unrealized loss on investment
securities................. -- -- -- -- -- (3,057) (3,057)
Total comprehensive
loss................ -- -- -- -- -- -- (1,155,635)
Common stock issued to officer
for note receivable, less
cash received................ 50,000 5 44,995 -- (44,995) -- 5
Common stock issued from
exercise of stock options.... 2,500 -- 2,250 -- -- -- 2,250
Common stock issued to officer
for note receivable and as
partial satisfaction of
incentive payment due to
officer...................... 445,454 45 400,864 -- (112,326) -- 288,583
Common stock issued for
business acquired............ 3,306,661 331 2,975,664 -- -- -- 2,975,995
Warrants issued as
consideration for Senior
Secured Credit Facility
financing.................... -- -- 111,250 -- -- -- 111,250
--------- ---- ---------- ----------- --------- -------- -----------
Balances at December 31,
1999......................... 5,723,015 573 4,053,867 (3,361,238) (436,290) (3,057) 253,855
Comprehensive loss:
Net loss..................... -- -- -- (5,417,225) -- -- (5,417,225)
Unrealized gain on investment
securities................. -- -- -- -- -- 24,546 24,546
-----------
Total comprehensive
loss................ -- -- -- -- -- -- (5,392,679)
-----------
Common stock issued from
exercise of stock options and
warrants..................... 2,972,532 297 2,730,280 -- -- -- 2,730,577
Repurchase of warrants......... -- -- (111,250) (51,250) -- -- (162,500)
Collection of notes
receivable................... -- -- -- -- 436,290 -- 436,290
--------- ---- ---------- ----------- --------- -------- -----------
Balances at March 8, 2000...... 8,695,547 $870 $6,672,897 $(8,829,713) $ -- $ 21,489 $(2,134,457)
========= ==== ========== =========== ========= ======== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
273
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000, THE YEAR ENDED
DECEMBER 31, 1999 AND THE PERIOD FROM MAY 21, 1998 TO DECEMBER 31, 1998
(IN U.S. DOLLARS)
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities
Net loss.................................................. $(5,417,225) $(1,152,578) $(2,208,660)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization........................... 145,201 697,485 878
Amortization of deferred costs.......................... 138,000 141,250 122,336
Gain (loss) on sale of property and equipment, net...... 7,772 (2,363) --
Amortization of discount on incentive payment due to
officer.............................................. -- 44,444 --
Changes in operating assets and liabilities, net of
business acquired.......................................
Contract receivables, net............................... 689,540 3,719,775 --
Inventory............................................... (602,484) (178,257) --
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 409,571 (1,323,649) --
Income tax receivable................................... -- (774,253) --
Other current assets.................................... 49,812 (35,607) (83,854)
Accounts payable, including related party in 2000 and
1999................................................. 1,707,626 (3,135,418) 519,069
Accrued expenses........................................ 5,575,450 839,922 15,863
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ 836,439 (3,656,224) --
Incentive payment due to officer........................ 27,098 -- 1,005,556
----------- ----------- -----------
Net cash provided by (used in) operating activities......... 3,566,800 (4,815,473) (628,812)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment........................ (19,591) (137,753) (40,101)
Proceeds received from sale of property and equipment..... -- 31,850 --
Cash paid for business acquired, net of cash acquired..... -- (7,268,686) --
Deferred acquisition costs................................ (400,124) (71,212)
Proceeds received from note receivable, including related
party................................................... -- 4,762 --
Purchase of investment securities......................... -- (72,745) --
Other assets, net......................................... 486 37,050 --
----------- ----------- -----------
Net cash used in investing activities.............. (19,105) (7,805,646) (111,313)
Cash flows from financing activities
Proceeds from issuance of common stock.................... -- -- 117,731
Principal repayment of senior secured credit facility..... -- (10,000,000) --
Proceeds from senior secured credit facility and senior
credit facility......................................... -- 22,000,000 --
Net proceeds (payments) from line of credit............... (200,000) 200,000 --
Proceeds from related party notes payable................. -- 850,000 --
Proceeds from exercise of stock options................... 2,730,577 2,250 --
Proceeds from issuance of notes payable................... -- 175,000 975,000
Proceeds from other long-term debt and capital lease
obligations............................................. -- 35,166 --
Proceeds from shareholder loans........................... 436,290 -- --
Principal repayments of other long-term debt and capital
lease obligations....................................... (19,095) (182,217) --
Repurchase of warrants.................................... (162,500) -- --
Deferred financing costs.................................. -- (31,000) --
----------- ----------- -----------
Net cash provided by financing activities................... 2,785,272 13,049,199 1,092,731
----------- ----------- -----------
Net increase in cash and cash equivalents................... 6,332,967 428,080 352,606
Cash and cash equivalents, beginning of period.............. 780,686 352,606 --
----------- ----------- -----------
Cash and cash equivalents, end of period.................... $ 7,113,653 $ 780,686 $ 352,606
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
274
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATION
Sunbelt Integrated Trade Services, Inc. ("Sunbelt") was incorporated in the
State of Delaware on May 21, 1998. Sunbelt was organized to operate as a holding
company and acquire construction-related trade service contractors providing
electrical, plumbing and mechanical/HVAC services. As part of its long-term
growth strategy, Sunbelt acquired Quality Mechanical Contractors, Inc.
("Quality"), (collectively referred to as the "Company"), on February 18, 1999.
As a result, Quality became a wholly owned subsidiary of Sunbelt. Quality is a
heating, air-conditioning and plumbing contractor doing business primarily in
Southern Nevada.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sunbelt and its wholly-owned subsidiary.
As of December 31, 1998, the Company was a development stage company
wherein the Company's activities consisted primarily of financial planning,
raising capital, recruiting and training personnel and recruiting and acquiring
companies. The Company began its operations in February 1999 by acquiring its
first operating company. During the year ended December 31, 1999, the Company's
planned principal activities commenced. Therefore, the Company has emerged from
its development stage and the inception to date disclosures have not been
included in the accompanying consolidated financial statements.
OPERATING CYCLE
The Company's work is performed under cost-plus-fee contracts, fixed-price
contracts, and fixed-price contracts modified by incentive and penalty
provisions. The length of the contracts varies from one month to approximately
24 months.
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying consolidated balance
sheets, as they will be liquidated in the normal course of contract completion,
although this may require more than one year.
USE OF ESTIMATES
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term, highly liquid investments that
are both readily convertible into known amounts of cash and are so near their
maturity that they present insignificant risk of changes in value because of
changes in interest rates. At times, such investments may be in excess of the
Federal Depository Insurance Coverage limits. However, the Company does not
believe it is exposed to any significant credit risk on cash and cash
equivalents. For purposes of the consolidated statements of cash flows, the
Company considers such investments with an original maturity of three months or
less to be cash equivalents.
F-53
275
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT SECURITIES
The Company has classified its investment in the corporate loan fund as
available-for-sale. Accordingly, unrealized holding gains and losses have been
excluded from earnings and are reported as accumulated other comprehensive
income, in the accompanying consolidated statements of stockholders' deficit
until realized.
A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary results in a reduction in the carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Dividend and interest income are recognized
when earned.
INVENTORY
Inventory consists primarily of purchased materials and supplies used in
the ordinary course of business. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out ("FIFO") basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Equipment under capital leases
is stated at the present value of minimum lease payments. Depreciation and
amortization is provided in amounts sufficient to allocate the cost of the
depreciable or amortizable assets to operations over their estimated service
lives using the straight-line method.
Significant replacements and improvements are capitalized; other
maintenance and repairs are expensed. The cost and accumulated depreciation of
assets retired or otherwise disposed of are eliminated from the accounts and any
resulting gain or loss is credited or charged to income as appropriate.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. If an
impairment is identified, the amount of goodwill impairment, if any, is measured
based on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of the existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the year
in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
STOCK OPTION PLAN
On May 21, 1998 (inception), the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
F-54
276
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees", and
related interpretations ("APB 25"). The Company has elected to apply the
intrinsic-value based method of accounting prescribed by APB 25, which
recognizes compensation expense only if the current market price of the
underlying security exceeded the exercise price on the date of grant. The
Company has elected to continue to apply the provisions of APB 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
CONTRACT REVENUE RECOGNITION AND CONTRACT COSTS
Revenues from fixed-price and modified fixed-price construction contracts
are recognized on the percentage-of-completion method, measured by the
percentage of cost incurred to date to estimated total cost for each contract
(the "cost-to-cost method"). This method is used because management considers
costs incurred to be the best available measure of progress on these contracts.
Revenues from cost-plus-fee contracts are recognized on the basis of costs
incurred during the period plus the fee earned. The Company does not recognize
any gross profit amounts related to change order work performed until it is
known that the change orders have been approved by the customer. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as insurance, supplies,
tools and depreciation. Selling, general and administrative costs are charged to
expense as incurred.
Provisions for estimated losses on contracts in progress are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization is
reasonably assured.
COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and presentation of comprehensive income in a full set of financial
statements. The reporting and presentation of comprehensive income only requires
additional disclosures in the financial statements; it does not affect the
Company's financial position or results of operations. Comprehensive income
includes all changes in equity during a period except for those resulting from
investments by owners or distributions to owners. The Company has reported the
unrealized holding gain (loss) on investment securities as a component of
comprehensive loss, net of tax, in the accompanying consolidated statements of
stockholders' deficit until realized.
BUSINESS AND CREDIT CONCENTRATIONS
The majority of the Company's work is performed in Las Vegas, Nevada and
the surrounding area. Further, the majority of the Company's work is performed
on projects in the gaming industry.
Substantially all of the Company's receivables are obligations of companies
in the construction business. The Company does not require collateral or other
security on most of these accounts. The credit risk on these accounts is
controlled through credit approvals, lien rights and payment bonds issued on
behalf of general contractors and monitoring procedures. The Company reviews its
contract receivables and provides for allowances periodically.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated balance
sheets for contract receivables, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term
F-55
277
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturity of these financial instruments. The carrying amounts reported for the
Company's notes payable, other long-term debt and capital lease obligations,
senior credit facility and incentive payment due to officer approximate fair
value due to interest rates, which are comparable to current rates.
IMPAIRMENT RECOGNITION
Management periodically evaluates the carrying value of its long-lived
assets, whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. To the extent the estimated future cash flows
(undiscounted and without interest) attributable to the asset, less estimated
future cash outflows, are less than the carrying amount, an impairment loss is
recognized. The amount of impairment loss to be recorded is the difference
between the asset's carrying value and its estimated fair market value.
Management believes no material impairment in long-lived assets exists at
December 31, 1999.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instruments;
they are subjective in nature and involve uncertainties and matters of judgement
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect these estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The effective date of SFAS No. 133 was delayed
one year to June 15, 2000, by SFAS No. 137. Management does not believe the
implementation of this accounting pronouncement will have a material effect on
its financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation.
2. ACQUISITION
On February 18, 1999, Sunbelt completed the acquisition of all the
outstanding shares of Quality, pursuant to a Stock Purchase Agreement, as
amended. The consideration paid consisted of approximately $10,000,000 in cash,
$2,975,995 in the Company's common stock and a $5,484,706 note payable. In the
event of the Company closing on a private equity funding of $30,000,000 or more,
and upon completion of an initial public offering, the Company is obligated to
pay Quality's former shareholders additional funds totaling approximately
$17,000,000 and $11,000,000, respectively. The acquisition has been accounted
for as a purchase and the results of operations of Quality have been included in
the consolidated financial statements beginning on February 28, 1999, as the
interim period between February 19, 1999 and February 28, 1999 was not material
to the financial position or results of operations. The following unaudited pro
forma information presents a summary of consolidated results of operations for
the year ended December 31, 1999 and the period from May 21, 1998 to December
31, 1998 of Sunbelt and Quality as if the acquisition had occurred at May 21,
1998, with pro forma adjustments to give effect to amortization of goodwill, net
increase in interest expense
F-56
278
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulting from the issuance of the Company's Senior Secured Credit Facility, and
certain other adjustments, together with the related income tax effects:
1999 1998
----------- -----------
Revenues.................................................... $52,595,000 $63,820,000
Net income.................................................. 528,000 180,000
The pro forma results are not necessarily indicative of what actually would
have occurred if Quality had been owned for the entire period presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from the combined operations.
The estimated values of assets acquired and liabilities assumed as of
February 18, 1998 and consideration paid is as follows:
1999
------------
Business acquisition, net of cash acquired:
Fair value of assets acquired, net of cash................ $ 25,327,617
Purchase price in excess of net assets.................... 3,884,042
Liabilities assumed....................................... (18,966,978)
Common stock issued....................................... (2,975,995)
------------
Net cash used to acquire Quality.................. $ 7,268,686
============
3. INVESTMENT SECURITIES
As of March 8, 2000 and December 31, 1999, gross unrealized holding gains
and losses on investment securities were as follows:
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING
COST GAIN LOSS FAIR VALUE
---------- ---------- ---------- ----------
2000
Investment securities Corporate loan
fund..................................... $1,018,846 $21,489 $ -- $1,040,335
========== ======= ====== ==========
1999
Investment securities Corporate loan
fund..................................... $1,018,846 $ -- $3,057 $1,015,789
========== ======= ====== ==========
4. CONTRACT RECEIVABLES
Contract receivables at March 8, 2000 and December 31, 1999 are summarized
as follows:
2000 1999
----------- -----------
Current amounts due on completed and in progress
contracts................................................. $ 8,230,855 $ 9,017,163
Retention................................................... 2,751,969 2,719,169
----------- -----------
10,982,824 11,736,332
Less allowance for doubtful accounts........................ (299,100) (363,068)
----------- -----------
$10,683,724 $11,373,264
=========== ===========
The Company is involved in three claims totaling approximately $5,300,000
relating to contract scope changes performed by the Company. The Company has
included in contract receivables, costs and estimated earnings in excess of
billings on uncompleted contracts, and contract revenues an amount equal to
contract costs attributable to certain of the claims aggregating approximately
$2,865,000 as management has
F-57
279
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined that realization is probable and was reliably estimated. Certain of
these claims arose from contracts for which revenues and costs were recorded in
prior years, however significant events occurred during the year ended December
31, 1999 resulting in the recording of these claims in that period.
5. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS
Costs and estimated earnings on contracts in progress at March 8, 2000 and
December 31, 1999 are summarized as follows:
2000 1999
------------ ------------
Costs incurred on contracts in progress................... $ 57,471,970 $ 51,915,065
Estimated earnings........................................ 11,732,656 10,787,969
------------ ------------
69,204,626 62,703,034
Less billings to date..................................... (69,288,207) (61,540,605)
------------ ------------
$ (83,581) $ 1,162,429
============ ============
Included in the accompanying consolidated balance sheets under the
following caption:
2000 1999
----------- -----------
Costs and estimated earnings in excess of billings on
contracts in progress..................................... $ 1,822,971 $ 2,232,542
Billings in excess of costs and estimated earnings on
contracts in progress..................................... (1,906,552) (1,070,113)
----------- -----------
$ (83,581) $ 1,162,429
=========== ===========
6. PROPERTY AND EQUIPMENT
Property and equipment at March 8, 2000 and December 31, 1999 and 1998
consists of the following:
ESTIMATED
2000 1999 1998 USEFUL LIFE
---------- ---------- ------- -----------
Machinery and equipment................... $1,647,051 $1,647,051 $ -- 2-10 years
Office furniture and equipment............ 433,456 426,952 40,101 5-7 years
Vehicles.................................. 212,143 213,643 -- 3-7 years
Leasehold improvements.................... 102,336 100,368 -- 5-10 years
---------- ---------- -------
2,394,986 2,388,014 40,101
Less accumulated depreciation and
amortization............................ (666,178) (544,356) (878)
---------- ---------- -------
$1,728,808 $1,843,658 $39,223
========== ========== =======
The Company is obligated under various capital leases for vehicles that
expire at various times during 2003. At March 8, 2000 and December 31, 1999, the
gross amount of vehicles and related accumulated amortization recorded under
capital leases were $212,143 and $12,542 and $89,797 and $15,431, respectively.
Amortization of assets under capital leases is included with depreciation
expense.
7. SENIOR SECURED CREDIT FACILITY
On February 18, 1999, the Company entered into a credit agreement with
NationsBank N.A. ("NationsBank") to provide the Company with $12,500,000 in
Senior Secured Credit Facilities (the "Senior Facility"). The Senior Facility
was comprised of a $10,000,000 term loan and a $2,500,000 revolving line of
credit with a carve out of $500,000 for standby letters of credit.
F-58
280
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Senior Facility provided for 125,000 warrants to purchase shares of
common stock of the Company, at an exercise price of $.01 per share. The Company
allocated a portion of the Senior Facility proceeds to additional paid-in
capital and deferred financing costs aggregating approximately $111,250, which
represents the fair value of the warrants. The deferred financing costs were
expensed and have been reported as interest expense in the accompanying
consolidated statements of operations when the Senior Facility was refinanced in
June 1999, see Note 10. During the period ended March 8, 2000, the Company
repurchased these warrants from NationsBank for $162,500. This transaction was
treated as an equity transaction with the original amount of $111,250 being
charged to Additional Paid in Capital and the balance being charged to
Accumulated Deficit.
8. REFINANCING TRANSACTION -- SENIOR CREDIT FACILITY
On June 25, 1999, the Company entered into a $12,000,000 Business Loan
Agreement (the "Credit Facility") with First Security Bank of Nevada ("First
Security") with principal and unpaid interest due December 1, 1999. The proceeds
were utilized to refinance the NationsBank Senior Facility and provide working
capital. As of December 31, 1999, the deferred financing costs of $150,741
capitalized in connection with the Credit Facility were amortized to interest
expense using the effective interest method. On December 1, 1999 the Company
negotiated an extension to the Credit Facility and Line of Credit which extends
the repayment of the principal and accrued interest until March 1, 2000. In
connection with the extension the Company was required to pay $50,000.
The Credit Facility provides for interest at .75% over the U.S. Bank of
Oregon's Index Rate (9.5% at March 8, 2000). The Credit Facility is secured by
the capital stock of the Company, as well as all present and future assets of
the Company. The Credit Facility is guaranteed by the majority shareholder of
the Company.
The Credit Facility contains certain covenants which include, but are not
limited to, the Company incurring additional senior debt, paying dividends,
maximum senior debt exceeding $16,000,000, total liabilities exceeding
$34,000,000, the Company's consolidated net worth, excluding notes payable of
$1,150,000 and related party notes payable of $850,000, of not less than
$8,900,000 and change in ownership provisions. At December 31, 1999 and March 8,
2000, the Company was not in compliance with certain of the debt covenants.
Subsequent to the period end the Credit Facility and accrued interest thereon
were paid in full upon consummation of the sale of the Company's common stock.
On June 25, 1999, Quality entered into a Loan Agreement ("Line of Credit")
with First Security which provides for a revolving line of credit up to
$4,000,000 to be utilized for working capital purposes and a carve out of
$500,000 to be utilized to cover Letters of Credit and equipment purchases. The
principal and unpaid interest were due December 1, 1999. On December 1, 1999 the
Company negotiated an extension to the Credit Facility and Line of Credit which
extends the repayment of the principal and accrued interest until March 1, 2000.
In connection with the extension the Company was required to pay $50,000. As of
March 8, 2000, there was no outstanding balance.
The Line of Credit provides for interest at .75% over the U.S. Bank of
Oregon's Index Rate (9.5% at March 8, 2000). Quality is eligible to borrow the
lesser of (i) $4,000,000 or (ii) 75% of the aggregate amount of eligible
contract receivables.
The Line of Credit contains certain general business covenants which
include, but are not limited to, incurring additional indebtedness and liens
except in the normal course of business, engaging in business activities
substantially different than those presently engaged and change of ownership
provisions. The Line of Credit is guaranteed by the majority shareholder of the
Company.
F-59
281
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Other long-term debt and capital lease obligations at March 8, 2000 and
December 31, 1999 are summarized as follows:
2000 1999
---------- ----------
Life insurance policy loans secured by cash surrender value
with an interest rate of 6-8% per annum................... $ 27,926 $ 27,926
Portfolio credit line with Smith Barney secured by
investment securities. No repayment schedule as long as
the value of the collateral meets the minimum
requirements. Interest is calculated monthly based on the
outstanding credit line at the Smith Barney base rate of
7.50% plus 0.75% (8.25% at March 8, 2000)................. 525,751 519,024
Note payable to retired employee (related party) due
September 2004. Monthly payments are $12,900 with interest
at 5.82% per annum........................................ 510,174 530,825
Notes payable secured by vehicles. Monthly payments are
approximately $940 with interest at 5.9% per annum, due
August 2001............................................... 15,391 17,119
Capital lease obligations secured by vehicles. Monthly
payments aggregate approximately $2,400 with an effective
interest rate of approximately 11.0% per annum due at
various times during 2003................................. 72,793 76,236
---------- ----------
1,152,035 1,171,130
Less current maturities..................................... (672,491) (665,765)
---------- ----------
Long-term portion........................................... $ 479,544 $ 505,365
========== ==========
The required aggregate principal payments as of March 8, 2000 are as
follows:
2000........................................................ $ 672,491
2001........................................................ 162,936
2002........................................................ 166,523
2003........................................................ 150,085
----------
$1,152,035
==========
10. STOCKHOLDERS' DEFICIT
COMMON STOCK
A former officer of the Company received 1,266,250 shares of the Company's
common stock for $25,600 in cash upon the formation of the Company. No
compensation expense was recorded because the Company determined that the fair
value of the stock was $0.02 per share.
The Company had an agreement with a former officer which allowed her to
purchase up to 600 shares of the Company's common stock per month at $.50 per
share. The Company was obligated to match the officer's purchase of shares of
common stock on a one-for-one basis. In 1998, this officer purchased 4,200
shares of the Company's common stock for $2,100. The Company matched this
purchase with 4,200 shares of its common stock and recorded compensation expense
of $5,461.
During the period May 21, 1998 (inception) to December 31, 1998 an officer
of the Company provided services for which she was issued 133,750 shares of the
Company's common stock valued at $66,875. The Company issued 100,000 shares of
its common stock to its former legal counsel for legal services valued at
$50,000. Such services totaling $116,875 were recorded based upon management's
estimate of the fair value of the services rendered.
F-60
282
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1998, an officer of the Company purchased 100,000 shares of
common stock at $.90 per share.
In October 1998, the Company issued 310,000 shares of common stock to three
employees, including a former officer, in exchange for notes receivable
aggregating $278,969. The notes bear interest at 8% per annum with principal and
accrued interest due in September 2000. The notes receivable are classified in
stockholders' (deficit) equity in the accompanying consolidated balance sheets.
The estimated fair value of the common stock was $.90 per share. Accrued
interest on the notes was approximately $29,237 at December 31, 1999. The notes
principal and interest were paid in full on March 8, 2000.
In January 1999, the Company issued 50,000 shares of common stock to an
officer of the Company in exchange for a note receivable of $44,995 which bears
interest at 8% per annum with principal and accrued interest due January 2001.
The note receivable has been classified in stockholders' (deficit) equity in the
accompanying consolidated balance sheets. The estimated fair value of the common
stock was $.90 per share. Accrued interest on the note was approximately $3,637
at December 31, 1999. The notes principal and interest were paid in full on
March 8, 2000.
In January 1999, the Company issued 445,454 shares of common stock to an
officer in exchange for a note receivable aggregating $112,326 and as partial
satisfaction of the incentive payment due to officer aggregating $288,583. The
note bears interest at 8% per annum with principal and accrued interest due
January 2004. The note receivable has been classified in stockholders' (deficit)
equity in the accompanying consolidated balance sheets. The estimated fair value
of the common stock was $.90 per share. Accrued interest on the note was
approximately $9,076 at December 31, 1999. The notes principal and interest were
paid in full on March 8, 2000.
In February 1999, the Company issued 3,306,661 shares of common stock for
the acquisition of Quality. The estimated fair value of the common stock was
approximately $0.90 per share.
STOCK OPTION PLANS
On July 31, 1998, the Company adopted a stock option plan (the "1998 Plan")
pursuant to which the Company's Board of Directors may grant stock options to
officers and employees. The 1998 Plan permits the granting of options to
individuals to purchase the Company's common stock at or greater than the fair
value at the time the options were granted. On January 18, 1999, the 1998 Plan
was amended to grant options to acquire up to 2,000,000 shares under the 1998
Plan.
The 1998 Plan permits the granting of incentive stock options as defined
under Section 422A of the Internal Revenue Code at an exercise price for each
option equal to the fair value of the Company's common stock on the date of
grant and expire ten years from the date of grant. As of March 8, 2000, the
Company has no options available under the 1998 Plan to grant to officers and
employees.
On January 18, 1999, the Company adopted a stock option plan (the "1999
Plan") pursuant to which the Company's Board of Directors may grant stock
options to officers and employees to promote the interests of the Company and
its stockholders by attracting and retaining employees and rewarding performance
goals. The 1999 Plan permits the granting of options to individuals to purchase
the Company's common stock at or greater than the fair value at the time the
options were granted. The Company was authorized to grant options to acquire up
to 10% of shares of common stock outstanding (572,302 at December 31, 1999). The
1999 Plan permits the granting of incentive stock options as defined under
Section 422A of the Internal Revenue Code at an exercise price for each option
equal to the fair value of the Company's common stock on the date of grant and
expire ten years from the date of grant. As of March 8, 2000, the Company had
127,254 options available under the 1999 Plan to grant to officers and
employees.
On January 18, 1999, the Company adopted a Executive Recruitment Plan (the
"Recruitment Plan") pursuant to which the Company's Board of Directors may grant
stock options to attract and retain senior
F-61
283
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
executive employees. The Recruitment Plan permits the granting of options to
individuals to purchase the Company's common stock at or greater than the fair
value at the time the options were granted. The Company was authorized to grant
options to acquire up to 800,000 shares under the Recruitment Plan. The
Recruitment Plan permits the granting of options as defined under Section 422A
of the Internal Revenue Code at an exercise price for each option equal to the
fair value of the Company's common stock on the date of grant and expire ten
years from the date of grant. As of March 8, 2000, the Company had no options
available under the Recruitment Plan to grant.
On January 18, 1999, the Company adopted a Non-Employee Directors Plan (the
"Directors Plan") pursuant to which the Company's Board of Directors may grant
stock options to non-employee directors, who are ineligible to participate in
the Company's 1999 Plan. The Directors Plan permits the granting of options to
individuals to purchase the Company's common stock at or greater than the fair
value at the time the options were granted. The Company was authorized to grant
options to acquire up to 500,000 shares under the Directors Plan. The Directors
Plan permits the granting of options as defined under Section 422A of the
Internal Revenue Code at an exercise price for each option equal to the fair
value of the Company's common stock on the date of grant and for a maximum of
ten years. As of March 8, 2000, the Company had 500,000 options available under
the Directors Plan to grant.
Stock option activity for the period May 21, 1998 (inception) to December
31, 1998, for the year ended December 31, 1999 and for the period January 1,
2000 through March 8, 2000 is summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
PRICE
SHARES PER SHARE
--------- ---------
Outstanding at May 21, 1998................................. -- $ --
Granted................................................... 1,520,000 0.90
Cancelled................................................. -- --
--------- -----
Outstanding at December 31, 1998............................ 1,520,000 0.90
Granted................................................... 1,726,546 2.63
Exercised................................................. (2,500) 0.90
Cancelled................................................. (249,500) 1.25
--------- -----
Outstanding at December 31, 1999............................ 2,994,546 2.10
Granted................................................... -- --
Exercised................................................. 2,419,546 0.90
Cancelled................................................. 575,000 3.42
--------- -----
Outstanding at March 8, 2000................................ -- $ --
========= =====
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its stock
options in the accompanying consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss for the period May 21,
1998 (Inception) to December 31, 1998, for the year ended December 31, 1999 and
for the period January 1, 2000 through March 8, 2000 would have been increased
to the pro forma amounts indicated below:
MARCH 8, DECEMBER 31, DECEMBER 31,
2000 1999 1998
---------- ------------ ------------
Net loss
As reported..................................... $5,417,225 $1,152,578 $2,208,660
Pro forma....................................... 5,417,225 1,580,179 2,752,952
F-62
284
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option is estimated on the date of grant using the
fair value method with the following assumptions used for 1998 and 1999 grants;
risk free interest rate at the date of grant of 6%, expected dividend yield of
0.0%, and expected life of 10 years.
11. RELATED PARTY TRANSACTIONS
Related Party Notes Payable -- On June 16, 1999, the Company entered into
Tranche A Loan Agreements ("Tranche A Notes") with four officers (including
three directors), and two owners of potential acquisition targets to provide
financing in the aggregate amount of $850,000. The Tranche A Notes require
interest on the outstanding and unpaid principal balance at a rate of 10% per
annum. Interest shall be paid semi-annually in arrears every six months. The
Tranche A Notes are due and payable at the earlier of (i) the date of
consummation of an underwritten public offering of the Company's common stock,
(ii) the date of consummation of the sale or transfer of more than 50% of the
Company's outstanding common stock, or (iii) the fifth anniversary of the date
of this Agreement. Subsequent to the period end the Tranche A Notes and accrued
interest thereon were paid in full.
The Company issued to the holders of the Tranche A Notes, 552,986 warrants
to purchase shares of the Company's common stock at an exercise price of $1.00
per share. At the time of issuance of the warrants, the assigned value, based
upon estimated fair value by the Company, was not material. All warrants were
exercised on March 8, 2000.
LEASES
The Company leases certain of its office space, production facilities and
certain equipment from a related party. These multiple lease agreements require
base monthly payments of $28,918 at March 8, 2000, and have been classified as
operating leases. These leases require the Company to provide insurance, repairs
and maintenance, and to pay real estate taxes on the leased property. These
leases expire in February 2004. Lease expense for the period from January 1,
2000 to March 8, 2000 and the year ended December 31, 1999, incurred under these
agreements was $60,836 and $289,180.
INCENTIVE PAYMENT DUE TO OFFICER
Under the conditions of the employment agreement dated October 19, 1998
with one of the Company's officers, the Company agreed to pay $1,050,000 as an
incentive to join the Company. As set forth in the employment agreement,
$450,000 was due and payable within 30 days, and the remaining $600,000 was to
be paid within 10 days after the earlier of (i) the date of the Company's
underwritten initial public stock offering, (ii) December 31, 1999, or (iii) the
officer's death or disability. For the year ended December 31, 1999, the Company
issued 320,648 shares of common stock aggregating $288,583 to the officer as
partial satisfaction of the $450,000 incentive payment due to the officer. The
estimated fair value of the Company's common stock was approximately $0.90 per
share. The remaining principal balance due to the officer of $161,417 accrues
interest at 8% per annum. At March 8, 2000 and December 31, 1999 the Company has
accrued interest of approximately $27,098 and $15,351 for the incentive payment
due to officer.
As of December 31, 1998, the $600,000 due to officer was recorded at the
present value utilizing a discount rate of 8% per annum. The discount of $44,444
was amortized to interest expense using the effective interest method for the
year ended December 31, 1999. The Company has classified the incentive payment
due to officer as a current obligation at March 8, 2000 and December 31, 1999.
Subsequent to period end the incentive payment due to officer was paid in full.
F-63
285
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES PAYABLE
Through a private placement, the Company issued units of securities at the
price of $25,000 each, some of which are to related parties. Each security
consists of a $25,000 promissory note ("Notes") and a warrant ("Warrants"). As
of December 31, 1998 and 1999 and March 8, 2000 the Notes outstanding were
$975,000, $1,150,000 and $1,150,000, respectively. The Notes bear interest at
the rate of 10% per annum and are due at the earlier of (a) the closing of an
initial public stock offering, or (b) December 31, 1999. An extension to this
due date was granted as of March 8, 2000. The total cumulative accrued interest
on the Notes at March 8, 2000 and December 31, 1999 was $150,986 and $129,247.
The warrants allow the holder to purchase 6,250 shares of the Company's common
stock at an exercise price of $5.00 per share. The total number of shares
available for purchase by the holders is 287,500. The assigned value of the
warrants at the date of issuance based upon the estimation of their fair value
by the Company was not material. Subsequent to the period end the principal and
accrued interest were paid in full.
During 1999 the note payable to a former shareholder of Quality in an
amount of $5,484,706, resulting from the acquisition, was satisfied with the
exchange of certain investments, notes receivable and a vehicle at the Company's
recorded book value.
OTHER
Note payable to retired employee due September 2004. Monthly payments are
$12,900 with interest at 5.82% per annum, see Note 9. Subsequent to the period
ended March 8, 2000, the amount was paid in full.
Included in accounts payable is approximately $297,000 due to an officer
and director of the Company. Subsequent to the period end amount was paid in
full.
See Note 10 for equity transactions with related parties.
12. INCOME TAXES
For the period May 21, 1998 (inception) to December 31, 1998, the year
ended December 31, 1999 and the period January 1, 2000 to March 8, 2000, the
Company generated net losses for both financial reporting and income tax
purposes; therefore, no current tax provision has been recorded.
A reconciliation of the Company's income tax provision as compared to the
tax provision calculated by applying the federal statutory rate (35%) to the
loss before income tax provision for the period May 21, 1998 (inception) to
December 31, 1998, the year ended December 31, 1999 and the period January 1,
2000 to March 8, 2000 are as follows:
MARCH 8, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------- ------------ ------------
Computed "expected" income tax benefit at 35%.... $(1,896,029) $(403,402) $(773,031)
Amortization of goodwill......................... 6,489 28,321 --
Non-deductible acquisition....................... -- 191,349 --
Non-deductible expenses for tax purposes......... 17,500 70,000 (7,572)
Other............................................ -- (350) --
Change in valuation allowance.................... 1,872,040 114,082 780,603
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
F-64
286
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets, liabilities and the valuation allowance are
as follows:
MARCH 8, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------- ------------ ------------
Deferred tax assets
Contract receivables, principally due to
allowance for doubtful accounts............... $ 104,685 $ 127,074 $ --
Net operating loss carryforwards................ 1,814,591 286,542 --
Capitalized start-up costs...................... 465,881 606,231 513,706
Accrued expenses not currently deductible....... 932,050 204,877 266,897
Unrealized loss on investment securities........ -- 1,070 --
----------- ----------- ---------
Total deferred tax assets....................... 3,317,207 1,225,794 780,603
Valuation allowance............................. (2,933,523) (1,070,077) (780,603)
----------- ----------- ---------
Net deferred tax assets......................... 383,684 155,717 --
----------- ----------- ---------
Deferred tax liabilities
Unrealized gain on investment securities........ 7,522 -- --
Property and equipment, principally due to
accelerated depreciation...................... 376,162 155,717 --
----------- ----------- ---------
Total deferred tax liabilities.................. 383,684 155,717 --
----------- ----------- ---------
Net deferred tax asset/liability................ $ -- $ -- $ --
=========== =========== =========
At March 8, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4,825,000 which are available to
offset future federal taxable income, if any, expiring in 2019.
F-65
287
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUPPLEMENTAL CASH FLOW DISCLOSURE
The following supplemental information is related to the consolidated
statements of cash flows. The Company recorded the following significant
non-cash investing and financing activities for the period May 21, 1998
(Inception) to December 31, 1998, the year ended December 31, 1999 and the
period January 1, 2000 to March 8, 2000:
MARCH 8, DECEMBER 31, DECEMBER 31,
2000 1999 1998
-------- ------------ ------------
Common stock issued to former officer and employees
for note receivable............................... $ -- $ -- $278,969
======== ========== ========
Warrants issued as consideration for Senior Secured
Credit Financing.................................. $ -- $ 111,250 $ --
======== ========== ========
Common stock issued for business acquired........... $ -- $2,975,995 $ --
======== ========== ========
Note payable issued for business acquired........... $ -- $5,484,706 $ --
======== ========== ========
Note payable issued for business acquired satisfied
with certain investments, notes receivable and
vehicle........................................... $ -- $5,484,706 $ --
======== ========== ========
Vehicles acquired through the issuance of capital
lease obligations................................. $ -- $ 89,797 $ --
======== ========== ========
Common stock issued to officer for note
receivable........................................ $ -- $ 44,995 $ --
======== ========== ========
Common stock issued as partial satisfaction of
incentive payment due to officer.................. $ -- $ 288,583 $ --
======== ========== ========
Common stock issued to officer for note
receivable........................................ $ -- $ 112,326 $ --
======== ========== ========
Unrealized (gain) loss in investment securities, net
of tax............................................ $(21,489) $ 3,057 $ --
======== ========== ========
The following summarizes cash paid for the period ended:
MARCH 8, DECEMBER 31, DECEMBER 31,
2000 1999 1998
-------- ------------ ------------
Interest............................................ $328,480 $1,584,175 $--
Income taxes........................................ -- -- --
14. SIGNIFICANT CUSTOMERS
Contract revenues earned for the period ended March 8, 2000 and the year
ended December 31, 1999 from major customers exceeding 10% of total contract
revenues earned are as follows:
AMOUNT PERCENTAGE
----------- ----------
2000
Customer A.................................................. $ 3,704,067 49.1%
=========== ====
1999
Customer B.................................................. $13,672,785 26.9%
=========== ====
F-66
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SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contract receivables for the period ended March 8, 2000 and the year ended
December 31, 1999 from major customers exceeding 10% of total contract
receivables are as follows:
AMOUNT PERCENTAGE
---------- ----------
2000
Customer B.................................................. $1,984,092 18.57%
Customer C.................................................. 1,664,402 15.58
---------- -----
$3,648,494 34.15%
========== =====
1999
Customer A.................................................. $1,165,347 11.3%
15. COMMITMENTS AND CONTINGENCIES
LEGAL ACTIONS
The Company is involved from time to time in various claims and legal
actions arising in the ordinary course of business. Management believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's consolidated results of operations or financial position.
SELF-INSURANCE
Quality Mechanical is a self-insured employer in the Nevada Workers
Compensation Program. The plan is administered by a licensed third party
administrator. Quality is indemnified for any loss for workers compensation
claims in excess of $300,000 and up to the statutory limit for each accident. In
addition, Quality is indemnified for any damages related to workers compensation
claims in excess of $300,000 and up to $1,000,000, for each accident. As of
March 8, 2000 and December 31, 1999, $159,914 and $175,511 for estimated future
claims is recorded in the accompanying consolidated balances sheet in accrued
expenses. Quality has provided a letter of credit in the amount of $500,000 as a
condition to participate in the self-insured program, which remains outstanding
as of March 8, 2000.
UNIONIZED LABOR FORCE
Approximately 50% of the Company's employees belong to Plumbers and
Pipefitters Local Number 525, whose contract expires in June 2001. Approximately
33% of the Company's employees belong to Sheetmetal Workers International Local
Number 88 whose contract also expires in June 2001.
DEFINED CONTRIBUTION 401(K) PROFIT-SHARING PLAN
Quality has a defined contribution profit sharing plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. The Plan provides
retirement benefits for nonunion employees meeting minimum age and service
requirements. Participants may contribute up to 10% of their gross wages,
subject to certain limitations. The Plan provides for discretionary matching
contributions, as determined by the Quality Board of Directors. The
discretionary amounts contributed to the Plan by the Quality Board of Directors
for the period March 1, 1999 to December 31, 1999 was approximately $71,900 and
$18,589 for the period January 1, 2000 through March 8, 2000.
UNION-ADMINISTERED BENEFIT PLANS
Quality makes contributions to union-administered health and welfare, local
and national pensions, and union benefit plans that cover approximately 83% of
Quality's employees. Governmental regulations impose certain requirements
relative to multi-employer plans. In the event of a plan termination or employer
withdrawal, an employer may be liable for a portion of the multi-employer plan's
unfunded vested benefits, if
F-67
289
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any. The Company has not yet received information from the plans' administrators
to determine its share of any unfunded vested benefits, if any. The Company does
not anticipate withdrawal from the plans, nor is it aware of any expected plan
termination's.
LEASES
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of March 8, 2000 are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
PERIOD ENDING MARCH 8,
2001........................................................ $ 30,039 $ 347,016
2002........................................................ 26,250 347,016
2003........................................................ 24,870 347,016
2004........................................................ 5,536 347,016
-------- ----------
Total minimum lease payments...................... 86,695 $1,388,064
==========
Amount representing interest at approximately 11.5%......... $(13,902)
Current installments of obligations under capital lease..... (22,618)
--------
Obligations under capital leases, excluding current
installments.............................................. $ 50,175
========
Capital lease obligations are included in the accompanying consolidated
balance sheets under the caption other long-term debt and capital lease
obligations, see Note 11.
Rental expense for operating leases was approximately $11,000, $455,000 and
$61,000 for the period May 21, 1998 (inception) to December 31, 1998, for the
year ended December 31, 1999, and for the period ended March 8, 2000
respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with officers and
several employees. The agreements generally provide for the employees to receive
a stated minimum salary, guaranteed bonus and stock options. The agreements
which contain renewal provisions expire from November 2000 through February
2002.
16. SUBSEQUENT EVENTS
SALE OF COMPANY'S COMMON STOCK
On March 9, 2000, 100% of the issued and outstanding common stock was sold
for approximately $42 million to Bracknell Corporation ("Bracknell") (subject to
adjustment for the amount by which the Company's working capital differs from a
stated base) in cash and notes. The Company's shareholders received
approximately $29 million and the balance of the proceeds were utilized to repay
the Senior Credit Facility, related party note payable line of credit, the notes
payable and to pay transaction costs. In addition, the agreement also calls for
payment of an additional $25 million in cash or stock of Bracknell, should the
aggregate earnings of the Company and several other companies being acquired
concurrently meet certain earnings targets over the three year period after
acquisition. In addition, the agreement also calls for payment of an additional
$25 million in cash or stock of Sunbelt's ultimate parent company, should the
aggregate earnings of the Company and several other companies being acquired
concurrently meet certain earnings targets over the three year period after
acquisition.
F-68
290
SUNBELT INTEGRATED TRADE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PURCHASE AGREEMENT
Subsequent to the period end the Stock Purchase Agreement with Quality was
amended to reflect an additional cash consideration paid to the former
shareholders of Quality of approximately $16,150,000.
F-69
291
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Inglett & Stubbs, Inc.:
We have audited the accompanying balance sheet of INGLETT AND STUBBS, INC.
(a Georgia Corporation) as of March 8, 2000 and the related statements of
operations, stockholders' equity and cash flows for the period from January 1,
2000 to March 8, 2000. The financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with United States 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Inglett & Stubbs, Inc. at March 8, 2000 and
the results of its operations and its cash flows for the period from January 1,
2000 to March 8, 2000 in conformity with United States generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
May 6, 2000.
Toronto, Canada.
F-70
292
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Inglett & Stubbs, Inc.
We have audited the accompanying balance sheets of Inglett & Stubbs, Inc.
(an S Corporation) as of December 31, 1999 and 1998 and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. 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 Inglett & Stubbs, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
/s/BDO SEIDMAN, LLP
February 22, 2000
(except for Note 7 which is as of March 9, 2000)
Atlanta, Georgia
F-71
293
INGLETT & STUBBS, INC.
BALANCE SHEETS
MARCH 8, 2000, DECEMBER 31, 1999 AND 1998
(IN U.S. DOLLARS)
2000 1999 1998
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 222,527 $ 7,811,879 $ 4,281,882
Receivables contracts, less allowance for doubtful
accounts of $90,000.............................. 21,671,246 24,240,296 20,964,941
Retainage.......................................... 4,527,702 3,938,197 2,830,294
Costs and estimated earnings in excess of billings on
uncomplete contracts (Note 2)...................... 5,807,112 3,076,818 3,288,288
Prepaid expenses...................................... 83,599 82,763 16,070
----------- ----------- -----------
32,312,186 39,149,953 31,381,475
Property and equipment, less accumulated depreciation
(Note 3).............................................. 739,904 703,681 583,122
----------- ----------- -----------
$33,052,090 $39,853,634 $31,964,597
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit (Note 5)............................... $ 250,000 $ -- $ --
Accounts payable...................................... 10,670,871 13,452,568 10,772,670
Accrued expenses...................................... 3,073,184 4,995,501 3,769,592
Distributions payable to stockholders................. 11,161,026 10,253,434 8,571,441
Billings in excess of costs and estimated earnings on
uncomplete contracts (Note 2)...................... 1,458,384 4,713,506 2,412,269
----------- ----------- -----------
$26,613,465 $33,415,009 $25,525,972
=========== =========== ===========
Commitments and contingencies (Notes 1, 4 and 5)
Stockholders' equity:
Common stock, $1 par -- shares authorized, 500,000;
16,906, 16,906 and 16,981 shares issued and
outstanding as at March 8, 2000, December 31, 1999
and 1998 respectively.............................. $ 16,906 $ 16,906 $ 16,981
Additional paid-in capital............................ 684,436 684,436 726,167
Retained earnings..................................... 5,737,283 5,737,283 5,695,477
----------- ----------- -----------
Total stockholders' equity.................... 6,438,625 6,438,625 6,438,625
----------- ----------- -----------
$33,052,090 $39,853,634 $31,964,597
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-72
294
INGLETT & STUBBS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2000 1999 1998 1997
----------- ------------ ----------- -----------
(IN U.S. DOLLARS)
Contract revenues earned................... $21,942,049 $137,377,242 $97,384,242 $41,835,202
Cost of revenues earned.................... 17,049,303 118,498,418 81,317,716 32,207,418
----------- ------------ ----------- -----------
Gross profit..................... 4,892,746 18,878,824 16,066,526 9,627,784
Selling, general and administrative
expenses................................. 1,610,578 6,371,127 5,287,552 4,162,244
----------- ------------ ----------- -----------
Operating income........................... 3,282,168 12,507,697 10,778,974 5,465,540
Interest income -- net..................... 49,207 205,163 188,418 375,494
----------- ------------ ----------- -----------
Income before state income taxes........... 3,331,375 12,712,860 10,967,392 5,841,034
State income tax provision................. 205,119 148,306 19,097 77,475
----------- ------------ ----------- -----------
Net income....................... $ 3,126,256 $ 12,564,554 $10,948,295 $ 5,763,559
=========== ============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-73
295
INGLETT & STUBBS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN U.S. DOLLARS)
ADDITIONAL
COMMON TREASURY PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
------- -------- ---------- ------------ ------------
Balances at December 31, 1996........ $16,746 $ -- $ 599,862 $ 5,108,640 $ 5,725,248
Cash distributions to
stockholders.................... -- -- -- (1,397,533) (1,397,533)
Accrued distributions to
stockholders.................... -- -- -- (4,079,765) (4,079,765)
Purchase of treasury stock......... (57,121) (57,121)
Issuance of common stock from
treasury........................ 57,121 57,121
Net income................. 5,763,559 5,763,559
------- -------- --------- ------------ ------------
Balances at December 31, 1997........ 16,746 599,862 5,394,901 6,011,509
Cash distributions to
stockholders.................... -- -- -- (2,076,278) (2,076,278)
Accrued distributions to
stockholders.................... -- -- -- (8,571,441) (8,571,441)
Issuance of common stock........... 235 126,305 -- 126,540
Net income................. -- -- 10,948,295 10,948,295
------- -------- --------- ------------ ------------
Balances at December 31, 1998........ 16,981 726,167 5,695,477 6,438,625
Cash distributions to
stockholders.................... -- -- (2,269,314) (2,269,314)
Accrued distributions to
stockholders.................... -- -- -- (10,253,434) (10,253,434)
Purchase of common stock........... (1,000) (589,000) -- (590,000)
Issuance of common stock........... 925 547,269 -- 548,194
Net income................. -- -- -- 12,564,554 12,564,554
------- -------- --------- ------------ ------------
Balances at December 31, 1999........ 16,906 684,436 5,737,283 6,438,625
Distribution to stockholders....... -- -- (3,126,256) (3,126,256)
Net income................. -- -- -- 3,126,256 3,126,256
------- -------- --------- ------------ ------------
Balances at March 8, 2000............ $16,906 $ $ 684,436 $ 5,737,283 $ 6,438,625
======= ======== ========= ============ ============
The accompanying notes are an integral part of these financial statements.
F-74
296
INGLETT & STUBBS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2000 1999 1998 1997
----------- ------------ ------------ ------------
(IN U.S. DOLLARS)
Operating activities:
Net income............................. $ 3,126,256 $ 12,564,554 $ 10,948,295 $ 5,763,559
Adjustments to reconcile net income to
cash provided by (used in) operating
activities
(Gain)/loss on disposition of
assets............................ (6,974) (9,286) 109,438 7,485
Depreciation........................ 164,856 316,385 280,648 251,298
Changes in operating assets and
liabilities
Receivables....................... 1,979,545 (4,383,258) (14,542,036) 520,755
Costs and estimated earnings in
excess of billings on
uncomplete contracts........... (2,730,294) 211,470 (1,253,367) 77,387
Prepaid expenses.................. (836) (66,693) (1,102) 80,089
Accounts payable.................. (2,781,697) 2,679,898 8,549,739 (5,848,093)
Accrued expenses.................. (1,922,317) 1,225,909 1,421,948 (103,082)
Billings in excess of costs and
estimated earnings on
uncomplete contracts........... (3,255,122) 2,301,237 1,448,184 (1,119,778)
----------- ------------ ------------ ------------
Cash provided by (used in) operating
activities............................. (5,426,583) 14,840,216 6,961,747 (370,380)
----------- ------------ ------------ ------------
Investing activities
Additions to property and equipment,
net................................. (203,263) (443,608) (317,007) (377,105)
Proceeds from sale of property and
equipment........................... 9,158 15,950 -- --
----------- ------------ ------------ ------------
Cash used in investing activities........ (194,105) (427,658) (317,007) (377,105)
----------- ------------ ------------ ------------
Financing activities:
Net proceeds from line of credit....... 250,000 -- -- --
Distributions paid to stockholders..... (2,218,664) (10,840,755) (6,156,043) (11,953,654)
Proceeds on issuance of common stock... -- 548,194 126,540 57,121
Purchase of treasury stock............. -- (590,000) -- (57,121)
----------- ------------ ------------ ------------
Cash used in financing activities........ (1,968,664) (10,882,561) (6,029,503) (11,953,654)
----------- ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................ (7,589,352) 3,529,997 615,237 (12,701,139)
Cash and cash equivalents beginning of
year................................... 7,811,879 4,281,882 3,666,645 16,367,784
----------- ------------ ------------ ------------
Cash and cash equivalents, end of year... $ 222,527 $ 7,811,879 $ 4,281,882 $ 3,666,645
=========== ============ ============ ============
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest............................... $ $ $ $
=========== ============ ============ ============
State income taxes..................... $ 155,119 $ 148,306 $ 19,907 $ 77,475
=========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-75
297
INGLETT & STUBBS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
GENERAL BUSINESS
Inglett & Stubbs, Inc., (the "Company") is a sub-contractor engaged in the
installation and servicing of electrical facilities primarily in the
southeastern part of the United States.
BASIS OF PRESENTATION
The financial statements and the notes thereto are prepared in accordance
with accounting principles generally accepted in the United States which do not
vary in material respects from accounting principles generally accepted in
Canada.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Equipment is depreciated
primarily on accelerated methods at the following rates:
Automobile and trucks....................................... 5 years
Equipment................................................... 5-7 years
Furniture and fixtures...................................... 7 years
INCOME FROM CONTRACTS
Income from fixed price contracts is reported on the
percentage-of-completion method. Under this method, the percentage of contract
revenue to be recognized currently is based on the ratio of costs incurred to
date to total estimated contract costs after giving effect to the most recent
estimates of cost to complete. Income from time and materials contracts and from
guaranteed maximum price contracts is reported based on the cost incurred to
date plus the applicable fee percentage. Income from small contracts (work
orders) and on service contracts is reported upon completion of the applicable
contracts.
Provisions for estimated losses on contracts in progress are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.
OPERATING CYCLE
The Company's work is performed under cost-plus-fee contracts, fixed-price
contracts, and fixed-price contracts modified by incentive and penalty
provisions. The length of the contracts varies from one month to approximately
24 months.
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying consolidated balance
sheets, as they will be liquidated in the normal course of contract completion,
although this may require more than one year.
RETIREMENT PLANS
The Company has a contributory, trusteed profit-sharing plan covering
substantially all non-union employees. The annual contribution to the plan is
determined by the Board of Directors and is not to exceed 15% of eligible
salaries. The Company's contribution to the plan was $50,300 for the period from
January 1, 2000 to March 8, 2000 and $262,300, $208,300 and $212,700 for the
years ended December 31, 1999, 1998 and 1997 respectively.
F-76
298
INGLETT & STUBBS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also contributes to a multi-employer pension plans jointly
administered by industry and union representatives. The Company's contributions
were approximately $1,594,000 for the period from January 1, 2000 to March 8,
2000 and approximately $7,857,400, $4,866,000 and $2,524,000 for the years ended
December 31, 1999, 1998 and 1997 respectively. All of the Company's field
employees are subject to a collective bargaining agreement.
TAXES ON INCOME
The Company has elected S Corporation status for income tax purposes and
the stockholders include the taxable income of the Company on their individual
tax returns. Accordingly, there is no provision for income taxes in the
financial statements. Had this election not been made, the Company's income tax
expense would have been approximately $1,250,000 for the period from January 1,
2000 to March 8, 2000 and $4,298,000, $4,220,000 and $1,660,000 for the years
ended December 31, 1999, 1998 and 1997 respectively. It is the Company's policy
to distribute to the stockholders, at a minimum amounts equaling the individual
income tax liability related to the Company's taxable income.
USE OF ESTIMATES
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Examples include estimated costs at completion and the
allowance for possible contract losses. Actual results could differ from those
estimates.
SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
For the purposes of the accompanying statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
The Company has accrued distributions of $11,161,026 at March 8, 2000 and
$10,253,434, $8,571,441 and $4,079,765 at December 31, 1999, 1998 and 1997
respectively, which have been charged to retained earnings and recorded as a
current liability.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments as fair value. The effective date of SFAS No. 133 was delayed
one year to June 15, 2000, by SFAS No. 137. Management does not believe the
implementation of this accounting pronouncement will have a material effect on
its financial statements.
CONCENTRATION OF CREDIT RISK
The Company's cash and cash equivalents in banks exceeds the federally
insured deposits limit by $548,340 March 8, 2000.
Major contracts with two customers account for 34% and 28% respectively, of
contracts in progress at March 8, 2000.
F-77
299
INGLETT & STUBBS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT RECOGNITION
Management periodically evaluates the carrying value of its long-lived
assets, whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. To the extent the estimated future cash flows
(indiscounted and without interest) attributable to the asset, less estimated
future cash outflows, are less than the carrying amount, an impairment loss is
recognized. The amount of impairment loss to be recorded is the difference
between the asset's carrying value and its estimated fair market value.
Management believes no material impairment in long-lived assets exists at March
8, 2000.
2. CONTRACTS IN PROGRESS
Contracts in progress at March 8, 2000, December 31, 1999 and 1998 is as
follows:
2000 1999 1998
------------ ------------ ------------
Costs incurred to date on incomplete
contracts.................................. $115,928,668 $124,601,796 $ 96,241,800
Estimated earnings recognized to date on
these contracts............................ 10,892,479 10,506,142 11,217,239
------------ ------------ ------------
126,821,147 135,107,938 107,459,039
Less applicable billings..................... 123,162,622 137,662,304 107,075,489
------------ ------------ ------------
Net amount before work orders................ 3,658,525 (2,554,366) 383,550
Work orders.................................. 690,203 917,678 492,469
------------ ------------ ------------
$ 4,348,728 $ (1,636,688) $ 876,019
============ ============ ============
Included in accompanying balance sheets under the following captions:
2000 1999 1998
----------- ----------- -----------
Costs and estimated earnings in excess of
billings on incomplete contracts........ $ 5,807,112 $ 3,076,818 $ 3,288,288
Billings on incomplete contracts in excess
of costs and estimated earnings......... (1,458,384) (4,713,506) (2,412,269)
----------- ----------- -----------
$ 4,348,728 $(1,636,688) $ 876,019
=========== =========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment at March 8, 2000, December 31, 1999 and 1998
consisted of the following:
2000 1999 1998
---------- ---------- ----------
Automobile and trucks........................ $1,492,158 $1,368,174 $1,087,626
Equipment.................................... 548,702 526,845 464,461
Furniture and fixtures....................... 61,679 57,977 36,714
---------- ---------- ----------
2,102,539 1,952,996 1,588,801
Less accumulated depreciation................ 1,362,635 1,249,315 1,005,679
---------- ---------- ----------
$ 739,904 $ 703,681 $ 583,122
========== ========== ==========
4. COMMITMENTS
LEASES
The Company leases its facilities, consisting of land and building, from a
partnership whose partners are stockholders of the Company under a lease
agreement expiring in December 2014. This lease calls for annual rental payments
of $216,000 to be paid on a monthly basis. During 1998 and 1997, the Company
leased a
F-78
300
INGLETT & STUBBS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
different facility from another partnership whose partners are stockholders of
the Company. Lease payments to those partnerships during the period from January
1, 2000 to March 8, 2000 and the years ended December 31, 1999, 1998 and 1997
amounted to $40,000, $236,000, $60,000 and $60,000 respectively.
GUARANTY
The Company has given a limited guaranty to the bank holding the mortgage
to the property that is currently being leased by the Company from a partnership
whose partners are stockholders of the Company. This guaranty is limited to
$431,000.
5. LINE-OF-CREDIT
The Company has a $3,000,000 unsecured line-of-credit agreement with a bank
that expires in July 2000. Borrowings under the line bear interest at the bank's
prime interest rate (8.5% percent at December 31, 1999). At March 8, 2000, there
was $250,000 of borrowings outstanding under this agreement. There were no
outstanding borrowings under the agreement at December 31, 1999 and 1998.
6. RELATED PARTY TRANSACTION
During 1999, the Company installed electrical facilities in a building
owned by a related partnership whose partners are stockholders of the Company.
The Company recognized approximately $273,000 of income from contracts and no
gross profit from this job.
7. SUBSEQUENT EVENT
On March 9, 2000, 100% of the issued and outstanding common stock was sold
for approximately $53 million to Sunbelt Integrated Trade Services, Inc.
("Sunbelt") (subject to adjustment for the amount by which the Company's
stockholders equity differs from a stated base) in cash and notes. In addition,
the agreement also calls for payment of an additional $23 million in cash or
stock of Sunbelt's ultimate parent company, should the aggregate earnings of the
Company and several other companies being acquired concurrently meet certain
earnings targets over the three year period after acquisition. Pursuant to the
purchase and sale agreement, certain accounts receivable of the Company were
assigned to the stockholders to fund the payments of the distributions payable
to the stockholders. As these assigned accounts receivable are collected the
distributions payable to the stockholders will be made. The stockholders of the
Company bear the risk of non-collection such that the distributions will be paid
only to the extent that the assigned receivables are collected.
F-79
301
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Quality Mechanical Contractors, Inc.
We have audited the accompanying statements of income and of cash flows of
Quality Mechanical Contractors, Inc. (the "Company") for the year ended December
31, 1998. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly, in all material
respects, the results of operations and cash flows of the Company for the year
ended December 31, 1998 in conformity with accounting principles generally
accepted in the United States of America.
(Signed) Deloitte & Touche LLP
Independent Public Accountants
Orlando, Florida
March 12, 1999
(except for note 11 for which the date is March 9, 2000)
F-80
302
QUALITY MECHANICAL CONTRACTORS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN U.S. DOLLARS)
-----------------
Contract revenues earned.................................... $90,163,388
Cost of revenues earned..................................... 77,069,251
-----------
Gross profit...................................... 13,094,137
Selling, general, and administrative expenses............... 4,681,093
-----------
Income from operations...................................... 8,413,044
-----------
Other income (expense):
Interest income........................................... 574,461
Interest expense.......................................... (93,733)
Other income -- net....................................... 11,220
-----------
Other income -- net....................................... 491,948
-----------
Income before income taxes.................................. 8,904,992
Provision for income taxes.................................. 3,171,859
-----------
Net income........................................ $ 5,733,133
===========
F-81
303
QUALITY MECHANICAL CONTRACTORS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN U.S. DOLLARS)
-----------------
Cash flows from operating activities:
Net income................................................ $ 5,733,133
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 322,768
Loss on sale of property and equipment................. 26,482
Loss on sale of partnership investment................. 115,746
Gain on sale of marketable securities.................. (134,782)
Deferred income taxes.................................. (86,756)
Net change in allowance for doubtful accounts.......... (9,823)
Changes in operating assets and liabilities -- net:
Contract receivables................................. 5,568,690
Income tax receivable................................ (516,192)
Inventory............................................ (44,317)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 1,263,908
Other assets......................................... (3,195)
Accounts payable and accrued expenses................ (2,020,336)
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (2,466,543)
Accrued union benefits............................... 285,606
Income taxes payable................................. (676,901)
-----------
Net cash provided by operating activities......... 7,357,488
-----------
Cash flows from investing activities:
Purchase of property and equipment........................ (687,488)
Proceeds from sale of property and equipment.............. 227
Purchase of marketable securities......................... (3,441,634)
Proceeds from sales of marketable securities.............. 2,018,234
Issuance of notes receivable.............................. (3,230,923)
Repayments of notes receivable............................ 1,502,149
Purchase of investment in real estate..................... (2,540,440)
-----------
Net cash used in investing activities............. (6,379,875)
-----------
Cash flows from financing activities:
Principal repayments of long-term debt.................... (285,423)
Proceeds from long-term debt.............................. 59,210
Purchase and retirement of common stock................... (145,000)
Proceeds from sale of common stock........................ 133,950
-----------
Net cash used in financing activities............. (237,263)
-----------
Net increase in cash and cash equivalents................... 740,350
Cash and cash equivalents, beginning of year................ 2,445,378
-----------
Cash and cash equivalents, end of year...................... $ 3,185,728
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 90,333
===========
Income taxes........................................... $ 4,450,000
===========
Noncash financing activities:
-----------
Vehicle acquired under note payable....................... $ 60,834
===========
F-82
304
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
(IN U.S. DOLLARS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. These consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America.
Nature of Operations. Quality Mechanical Contractors, Inc. (the "Company")
was organized in July 1972 as a heating, air conditioning and plumbing
contractor doing business in Southern Nevada.
Operating Cycle. The Company's work is performed under cost-plus-fee
contracts, fixed-price contracts, and fixed-price contracts modified by
incentive and penalty provisions. The length of the contracts varies from one
month to approximately 24 months.
Use of Estimates. The preparation of 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentrations. The majority of the Company's work is performed in the
City of Las Vegas, Nevada and the surrounding area. Further, the majority of the
Company's work is performed on projects in the gaming industry. See Note 10 for
discussion regarding major customers.
Substantially all of the Company's receivables are obligations of companies
in the construction business. The Company does not require collateral or other
security on most of these accounts. The credit risk on these accounts is
controlled through credit approvals, lien rights and payment bonds issued on
behalf of general contractors, limits and/or monitoring procedures. The Company
reviews its contract receivables and provides allowances periodically.
Contract Revenue Recognition and Contract Cost. Revenues from fixed-price
and modified fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost incurred to
date to estimated total cost for each contract (the "cost-to-cost method").
Revenues from cost-plus-fee contracts are recognized on the basis of costs
incurred during the period plus the fee earned, measured by the cost-to-cost
method. The cost-to-cost method is used because management considers expended
cost to be the best available measure of progress on these contracts. Profits on
contracts are recorded when progress reaches a point where cost and estimate
analysis and other evidence are sufficient to estimate results with reasonable
accuracy. The Company does not recognize any gross profit amounts related to
change order work performed until it is known that those change orders have been
approved by the customer. An amount equal to contract costs attributable to
claims is included in revenues when realization is probable and the amount can
be reliably estimated.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as insurance, supplies,
tools and depreciation. Selling, general and administrative costs are charged to
expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization is
reasonably assured.
F-83
305
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The asset, "Cost and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
Long-Lived Assets. Management periodically evaluates the carrying value of
its long-lived assets, whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. To the extent the estimated future
cash outflows (undiscounted and without interest) attributable to the asset,
less estimated future cash outflows, are less than the carrying amount, an
impairment loss is recognized. The amount of impairment loss to be recorded is
the difference between the asset's carrying value and its estimated fair market
value. Management believes no material impairment in long-lived assets exists at
December 31, 1998.
Comprehensive Income. On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. In 1998,
comprehensive income consisted of net income and unrealized gains on marketable
securities and is presented in the accompanying statement of stockholders'
equity. SFAS No. 130 requires additional disclosures in the financial
statements; it does not affect the Company's financial position or results of
operations.
Financial Instruments. The carrying amounts reported in the balance sheet
for cash and cash equivalents, contract receivables, notes receivable, accounts
payable and accrued expenses, and accrued union benefits approximate fair value
because of the immediate or short-term maturity of these financial instruments.
The carrying amounts reported for the Company's line of credit and long-term
debt approximate fair value due to interest rates, which are comparable to
current rates.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Cash and Cash Equivalents. Cash and cash equivalents are short-term,
highly liquid investments that are both readily convertible into known amounts
of cash and are so near their maturity that they present insignificant risk of
changes in value because of changes in interest rates. At times, such
investments may be in excess of the Federal Depository Insurance Company
coverage limits. However, the Company does not believe it is exposed to any
significant credit risk on cash and cash equivalents. For purposes of the
statement of cash flows, the Company considers such investments with a maturity
of three months or less to be cash equivalents.
Marketable Securities. The Company's marketable securities have been
classified as available-for-sale and stated at market value, with unrealized
gains and losses, net of income tax effects, excluded from income and reported
as a separate component of other comprehensive income and stockholders' equity.
Market value is determined by the most recently traded price of the security at
the balance sheet date. Net realized gains or losses are determined on the
specific identification cost method.
Unrealized gains and losses at December 31, 1998 are $39,208 and $8,397,
respectively. Realized gains totaled $134,782 for the year ended December 31,
1998 and are included in other income in the accompanying statement of income.
Inventory. Inventory consists primarily of purchased materials and
supplies. The inventory is valued at the lower of cost or market, with cost
determined on a first-in, first-out ("FIFO") basis.
F-84
306
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Notes Receivable. Notes receivable are recorded at cost, less the related
allowance for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. Impairment losses are included in the allowance for
doubtful accounts through a charge to bad debt expense. Cash receipts on
impaired notes receivable are applied to reduce the principal amount of such
notes until the principal has been recovered and are recognized as interest
income, thereafter.
Property, Equipment, and Depreciation. Property and equipment are stated
at cost. Equipment under capital leases is stated at the present value of future
minimum lease payments. Depreciation and amortization is provided in amounts
sufficient to allocate the cost of depreciable or amortizable assets to
operations over their estimated service lives using the straight-line method.
The estimated service lives are generally as follows:
Shop tools and equipment.................................... 5-10 years
Vehicles.................................................... 5-7 years
Office furniture and equipment.............................. 3-7 years
Leasehold improvements...................................... 5-10 years
Income Taxes. The Company accounts for income taxes under the asset and
liability method. Under this method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that the change in the rate is enacted.
2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at December 31, 1998
are summarized as follows:
Costs incurred on uncompleted contracts..................... $ 99,177,751
Estimated earnings.......................................... 13,741,246
-------------
112,918,997
Less billings to date....................................... (116,827,326)
-------------
$ (3,908,329)
=============
Included in the accompanying balance sheet are the following captions and
amounts:
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 1,353,358
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (5,261,687)
-----------
$(3,908,329)
===========
F-85
307
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES RECEIVABLE
Notes receivable outstanding at December 31, 1998 are summarized as
follows:
Unsecured notes receivable from employees. Maturities range
from 12 months to 120 months. Monthly payments are
required including interest at the rate of 9.75% to 10%
per annum................................................. $ 18,419
Notes receivable from a mortgage company; collateralized by
real estate. Monthly payments are required, including
interest at the rate of 13% to 14% per annum. The notes
mature in 1999............................................ 1,787,498
Contract receivable from a related party; collateralized by
real estate. Monthly payments are $7,142 with interest at
the rate of 6.75%......................................... 1,042,779
-----------
Total............................................. 2,848,696
Less current portion........................................ (1,807,337)
-----------
$ 1,041,359
===========
4. LINE OF CREDIT
The Company has a line of credit arrangement with a bank, under which it
may borrow, on an unsecured basis, up to an aggregate of $4,000,000 as of
December 31, 1998, with interest at the bank's prime rate plus 0.50%. An unused
commitment fee of 0.10% per annum is assessed quarterly on the average unused
loan balance. The line of credit available at December 31, 1998 was $3,783,000,
net of a $217,000 letter of credit issued as a condition to participate in a
self-insured workers compensation program. The line of credit is guaranteed by
the Company's majority stockholder. The line of credit contains a provision
restricting the payment of dividends without the prior written consent of the
lender. There were no borrowings outstanding under this arrangement at December
31, 1998.
The line of credit was terminated in connection with the sale of the
Company in February 1999 (see Note 11).
5. LONG-TERM DEBT
Long-term debt at December 31, 1998 is summarized as follows:
Life insurance policy loans collateralized by cash surrender
value of policies. Interest rate is 6-8%.................. $ 38,854
Notes payable collateralized by vehicles. Monthly payments
are $946 with interest at 5.9% per annum. Due August
2001...................................................... 27,946
Note payable collateralized by a vehicle. Monthly payments
for the first year are $1,507 and are reduced each year of
the four-year term. The interest rate is 6.2%. The final
payment of $1,275 is due February 2002.................... 46,098
F-86
308
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Note payable collateralized by equipment. Monthly principal
payments are $10,417. Interest is payable monthly at the
rate of 7.9%. The note is due January 31, 2002. Interest
is charged as a penalty on any accelerated principal
payments. The note payable is guaranteed by the majority
stockholder. The loan agreement contains various
covenants................................................. $ 375,000
Note payable to retired employee (related party) due
September 2004. Monthly payments are $12,900 with interest
at 5.82%.................................................. 660,608
----------
1,148,506
Less current portion........................................ (269,088)
----------
Total............................................. $ 879,418
==========
Maturities of long-term debt for years subsequent to December 31, 1998 are
summarized as follows:
1999........................................................ $ 269,088
2000........................................................ 277,140
2001........................................................ 281,872
2002........................................................ 143,569
2003........................................................ 137,983
Thereafter.................................................. 38,854
----------
$1,148,506
==========
6. EMPLOYEE BENEFIT PLANS
Defined Contribution 401(k) Profit-Sharing Plan. The Company has a defined
contribution profit sharing plan, which qualifies under Section 401(k) of the
Internal Revenue Code. The plan provides retirement benefits for nonunion
employees meeting minimum age and service requirements. Participants may
contribute up to 10% of their gross wages, subject to certain limitations. The
plan provides for discretionary matching contributions, as determined by the
Board of Directors, to be made by the Company. The discretionary amounts
contributed to the plan by the Company for the year ended December 31, 1998 were
$88,709. In addition, the Company elected to make profit sharing contributions
to the plan for the year ended December 31, 1998 of $63,000.
Union-Administered Benefit Plans. The Company makes contributions to
union-administered health and welfare, local and national pensions, and union
benefit plans that cover approximately 91% of the Company's employees. During
the year ended December 31, 1998, the Company contributed $2,517,504,
$2,631,111, and $1,099,685 to health and welfare plans, local and national
pensions, and union benefit plans, respectively. Governmental regulations impose
certain requirements relative to multi-employer plans. In the event of a plan
termination or employer withdrawal, an employer may be liable for a portion of
the multi-employer plan's unfunded vested benefits, if any. The Company has not
yet received information from the plans' administrators to determine its share
of any unfunded vested benefits, if any. The Company does not anticipate
withdrawal from the plans, nor is the Company aware of any expected plan
terminations.
7. INCOME TAXES
The provision (benefit) for income taxes for the year ended December 31,
1998 is summarized as follows:
Current federal............................................. $3,258,615
Deferred federal............................................ (86,756)
----------
Total provision for income taxes.................. $3,171,859
==========
F-87
309
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense differed from the amount computed by applying the U.S.
federal corporate income tax rate of 35% to income before income taxes for the
year ended December 31, 1998 as follows:
Computed "expected" tax expense............................. $3,116,747
Nondeductible expenses...................................... 55,112
----------
$3,171,859
==========
The accompanying financial statements do not include a provision for state
income tax as the Company's income is earned in Nevada, which does not have a
corporate income tax.
The tax effect of temporary differences between the income tax bases of
assets and liabilities and the financial statement reporting amounts, which
result in the recognition of deferred tax assets and liabilities, are as
follows:
Deferred tax assets -- current:
Allowance for doubtful accounts........................... $151,370
Accrued workers' compensation............................. 54,324
Accrued warranty expense.................................. 56,875
Allowance for loss contracts.............................. 109,295
--------
Total deferred tax assets -- current.............. $371,864
========
Deferred tax liabilities -- noncurrent:
Property and equipment principally due to differences in
depreciation........................................... $117,782
Installment sale of building.............................. 35,152
Unrealized gain on marketable securities.................. 10,784
--------
Total deferred tax liabilities -- noncurrent...... $163,718
========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods that the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences.
8. COMMITMENTS AND CONTINGENCIES
Legal Actions. The Company is involved in various legal actions that have
arisen in the ordinary course of business. While any litigation contains an
element of uncertainty, management is of the opinion that none of these matters
will have material adverse effect on the financial condition or results of
operations of the Company.
Self-Insurance. The Company is a self-insured employer in the Nevada
Workers Compensation Program. The plan is administered by a licensed third party
administrator. The Company is indemnified for any loss for workers compensation
claims in excess of $300,000 and up to the statutory limit for each accident. In
addition, the Company is indemnified for any damages related to workers
compensation claims in excess of $300,000 and up to $1,000,000 for each
accident. A $155,211 liability for estimated future claims expense is recorded
in accrued expenses in the accompanying balance sheet. The Company has provided
a letter of credit in the amount of $217,000 as a condition to participate in
the self-insured program, which remains outstanding as of December 31, 1998.
F-88
310
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Unionized Labor Force. Approximately 61% of the Company's employees belong
to Plumbers and Pipefitters Local Number 525, whose contract expires in June
2001. Approximately 30% of the Company's employees belong to Sheetmetal Workers
International Local Number 88, whose contract also expires in June 2001.
Leases. The following is a schedule of future minimum lease payments
required under operating leases, including those with related parties as more
fully described in Note 13, that have initial or remaining noncancelable lease
terms in excess of one year at December 31, 1998:
1999........................................................ $ 390,520
2000........................................................ 405,394
2001........................................................ 413,116
2002........................................................ 431,189
2003........................................................ 441,660
Thereafter.................................................. 1,507,849
----------
$3,589,728
==========
Rental expense for operating leases was approximately $390,000 for the year
ended December 31, 1998.
The Company leases their office space and production facilities from a
related party, as more fully described in Note 9. These leases have been
classified as operating leases.
Claims. The Company is currently in negotiations with respect to claims on
work previously performed. Such amounts, consisting of three claims, total
approximately $3,400,000 at December 31, 1998. The Company has recorded the
costs associated with this work and has not recognized revenue on the pending
claims. There are no assurances that the Company will prevail in these matters.
Executive Employment Agreements. The Company has entered into three
employment agreements, two with related parties, which expire in five years. The
terms of the agreements stipulate either party can terminate the agreement for
any reason by giving notice sixty-days prior to the renewal date. In connection
with the sale of the Company, as indicated in Note 11, these agreements have
been terminated.
Stock Purchase Agreement. In January 1993, the Company and certain
stockholders entered into a stock purchase agreement ("Agreement"). As set forth
in the Agreement, upon the death or total permanent disability of a stockholder,
the Company shall within ninety days proceed to purchase all of the said
stockholder's stock in the Company at fair value as determined by the Agreement.
It is the intent of the parties that the proceeds of any life insurance policies
pertaining to this Agreement shall be used to complete the purchase of said
stockholder's stock. In connection with the sale of the Company, as indicated in
Note 11, this agreement has been terminated.
9. TRANSACTIONS WITH A RELATED PARTY
The Company leases its office space, production facilities and certain
equipment from a related party. These multiple lease agreements require base
monthly payments of $32,050 at December 31, 1998, and have been classified as
operating leases. These leases require the Company to provide insurance, repairs
and maintenance, and to pay real estate taxes on the leased property. These
leases expire at various dates through July 2006. Lease expense for the year
ended December 31, 1998 incurred under these agreements was $384,600.
10. SIGNIFICANT CUSTOMERS
Revenues earned for the year ended December 31, 1998 include approximately
$82,000,000 from two significant customers, which represent approximately 88% of
total revenues earned.
F-89
311
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENT
In February 1999, the Company was sold to Sunbelt Integrated Trade
Services, Inc. ("Sunbelt") for cash and shares of Sunbelt common stock.
F-90
312
QUALITY MECHANICAL CONTRACTORS, INC.
UNAUDITED CONDENSED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------- -------
(IN THOUSANDS OF
U.S. DOLLARS)
Contract revenues earned.................................... $40,742 $34,607
Cost of revenues earned..................................... 36,905 30,299
------- -------
Gross profit................................................ 3,837 4,308
------- -------
Selling, general and administrative expenses................ 2,390 2,156
------- -------
Operating income............................................ 1,447 2,152
Non-operating income, net................................... 57 32
------- -------
Income before income tax provision.......................... 1,504 2,184
Income tax provision........................................ 526 764
------- -------
Net income.................................................. $ 978 $ 1,420
======= =======
F-91
313
QUALITY MECHANICAL CONTRACTORS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------- -------
(IN THOUSANDS OF
U.S. DOLLARS)
Net cash provided by operating activities................... $ 3,930 $ 4,051
Net cash used in investing activities....................... (5,360) (263)
Net cash provided by (used in) financing activities......... 22 (1,232)
------- -------
Net increase (decrease) in cash and cash equivalents........ (1,408) 2,556
Cash and cash equivalents, beginning of period.............. 4,594 (108)
------- -------
Cash and cash equivalents, end of period.................... $ 3,186 $ 2,448
======= =======
F-92
314
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Quality Mechanical Contractors, Inc.
We have audited the accompanying balance sheets of Quality Mechanical
Contractors, Inc. as of June 30, 1998 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended June 30, 1998. 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 United States 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 Quality Mechanical
Contractors, Inc. as of June 30, 1998 and 1997 and the results of its operations
and its cash flows for each of the years in the three-year period ended June 30,
1998 in conformity with United States generally accepted accounting principles.
/s/ KPMG LLP
Las Vegas, Nevada
December 31, 1998
F-93
315
QUALITY MECHANICAL CONTRACTORS, INC.
BALANCE SHEETS
JUNE 30, 1998 AND 1997
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,593,779 $ 8,499
Contract receivables, net................................. 14,264,446 12,811,824
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 971,933 2,537,425
Notes receivable, current portion:
Related party........................................... 15,190 43,912
Other................................................... 656,308 4,258
Other receivables....................................... 3,710 1,855
Income tax receivable..................................... -- 290,293
Deferred income taxes..................................... 338,990 236,420
----------- -----------
Total current assets................................ 20,844,356 15,934,486
----------- -----------
Contract receivable, retainage.............................. 842,015 --
Notes receivable, less current installments, net:
Related party............................................... 1,036,325 1,051,515
Other....................................................... 1,015,865 18,078
Investments................................................. 170,056 179,236
Property and equipment, at cost:
Leasehold improvements.................................... 226,660 192,860
Autos, trucks and trailers................................ 824,551 631,922
Office furniture and equipment............................ 572,693 487,223
Shop tools and equipment.................................. 2,158,760 1,649,921
----------- -----------
3,782,664 2,961,926
Less accumulated depreciation and amortization............ (2,051,966) (1,893,186)
----------- -----------
Total property and equipment........................ 1,730,698 1,068,740
----------- -----------
Other assets................................................ 186,310 193,121
----------- -----------
$25,825,625 $18,445,176
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................ $ -- $ 116,407
Line of credit............................................ -- 1,637,520
Current maturities of long-term debt and capital lease
obligations............................................. 265,577 95,898
Accounts payable.......................................... 2,970,874 5,263,707
Allowance for loss contracts.............................. 415,223 --
Accrued expenses.......................................... 1,749,985 1,428,141
Income tax payable........................................ 2,600,956 --
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 4,508,669 2,812,883
----------- -----------
Total current liabilities........................... 12,511,284 11,354,556
Long-term debt and capital lease obligations, less current
maturities................................................ 1,014,451 873,530
Deferred income taxes....................................... 148,982 96,622
----------- -----------
Total liabilities................................... 13,674,717 12,324,708
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, 50,000 shares authorized, 11,842 shares and
12,092 shares issued and outstanding, at $1.00 par
value................................................... 11,842 12,092
Additional paid-in capital................................ 308,279 453,029
Retained earnings......................................... 12,819,077 6,643,637
Treasury stock, 1,800 common shares, at cost.............. (988,290) (988,290)
----------- -----------
Total shareholders' equity.......................... 12,150,908 6,120,468
----------- -----------
$25,825,625 $18,445,176
=========== ===========
The accompanying notes are an integral part of these financial statements.
On behalf of the Board:
- ----------------------------------------------------- -----------------------------------------------------
Director Director
F-94
316
QUALITY MECHANICAL CONTRACTORS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
Contract revenues earned............................. $83,606,672 $53,434,549 $35,916,920
Cost of contract revenues earned..................... 70,211,252 48,607,207 31,137,737
----------- ----------- -----------
Gross profit............................... 13,395,420 4,827,342 4,779,183
Selling, general and administrative expenses......... 3,871,267 3,940,898 3,366,361
Depreciation expense................................. 271,807 225,170 182,536
----------- ----------- -----------
Income from operations............................. 9,252,346 661,274 1,230,286
----------- ----------- -----------
Other income (expense):
Interest income.................................... 261,560 131,490 123,308
Interest expense................................... (119,372) (92,834) (12,744)
Other income (expense), net........................ 1,843 49,296 (14,404)
----------- ----------- -----------
Other income (expense), net..................... 144,031 87,952 96,160
----------- ----------- -----------
Income before income taxes...................... 9,396,377 749,226 1,326,446
Provision for income taxes........................... 3,220,937 256,772 470,228
----------- ----------- -----------
Net income................................. $ 6,175,440 $ 492,454 $ 856,218
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-95
317
QUALITY MECHANICAL CONTRACTORS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS STOCK EQUITY
------ ------- ---------- ----------- --------- -------------
Balances at June 30, 1995...... 12,070 $12,070 $ 440,971 $ 5,294,965 $ -- $ 5,748,006
Net income..................... -- -- -- 856,218 -- 856,218
Issuance of common stock....... 22 22 12,058 -- -- 12,080
------ ------- --------- ----------- --------- -----------
Balances at June 30, 1996...... 12,092 12,092 453,029 6,151,183 -- 6,616,304
Net income..................... -- -- -- 492,454 -- 492,454
Purchase of 1,800 shares of
common stock................. -- -- -- -- (988,290) (988,290)
------ ------- --------- ----------- --------- -----------
Balances at June 30, 1997...... 12,092 12,092 453,029 6,643,637 (988,290) 6,120,468
Net income..................... -- -- -- 6,175,440 -- 6,175,440
Purchase and retirement of
common stock................. (250) (250) (144,750) -- -- (145,000)
------ ------- --------- ----------- --------- -----------
Balances at June 30, 1998...... 11,842 $11,842 $ 308,279 $12,819,077 $(988,290) $12,150,908
====== ======= ========= =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
F-96
318
QUALITY MECHANICAL CONTRACTORS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income............................................ $ 6,175,440 $ 492,454 $ 856,218
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on sale of property and equipment............. 2,918 10,420 2,620
Depreciation and amortization...................... 271,807 225,170 182,536
Deferred income taxes.............................. (50,210) (30,539) (40,009)
Allowance for loss contracts....................... 415,223 -- --
Changes in operating assets and liabilities:
Contract receivables............................. (2,294,637) (5,681,254) (2,319,849)
Net increase (decrease) in billings related to
costs and estimated earnings on uncompleted
contracts..................................... 3,261,278 (1,053,424) 372,129
Prepaid expenses................................. -- 28,203 (28,203)
Accounts payable................................. (2,292,833) 3,138,115 1,049,902
Accrued expenses................................. 321,844 544,154 (563,135)
Income tax payable/receivable.................... 2,891,249 (464,450) 709,351
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 8,702,079 (2,791,151) 221,560
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment.................... (964,275) (742,753) (218,259)
Proceeds from sale of property and equipment.......... 27,592 250 10,665
Issuance of note receivable........................... (1,750,000) (21,846) --
Other receivables, net................................ (1,855) 11,684 (2,804)
Collections of notes receivable....................... 144,075 -- 189,662
Sales (purchase) of marketable securities, net........ -- 907,133 (907,133)
Other assets, net..................................... 15,991 4,737 40,755
----------- ----------- -----------
Net cash provided by (used in) investing
activities.................................. (2,528,472) 159,205 (887,114)
----------- ----------- -----------
Cash flows from financing activities:
Principal repayments of long-term debt................ (288,967) (82,860) --
Proceeds from long-term debt.......................... 599,567 -- --
Bank overdraft........................................ (116,407) 116,407 --
Net (repayment of) proceeds from line of credit....... (1,637,520) 1,637,520 (300,000)
Purchase and retirement of common stock............... (145,000) -- --
Proceeds from sale of common stock.................... -- -- 12,080
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. (1,588,327) 1,671,067 (287,920)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 4,585,280 (960,879) (953,474)
Cash and cash equivalents at beginning of year.......... 8,499 969,378 1,922,852
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 4,593,779 $ 8,499 $ 969,378
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................... $ 125,527 $ 85,492 $ 25,449
=========== =========== ===========
Income taxes....................................... $ 381,380 $ 754,058 $ 350,000
=========== =========== ===========
Supplemental non-cash investing and financing
activities:
Note payable to related party in connection with
acquisition of Company's common stock.............. $ -- $ 988,290 $ --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-97
319
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(IN U.S. DOLLARS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Quality Mechanical Contractors, Inc. (the "Company") was organized in July
1972 as a heating, air conditioning and plumbing contractor doing business in
southern Nevada, United States. The Company's work is primarily performed under
fixed-price contracts, fixed-price contracts modified by incentive and penalty
provisions and cost plus contracts. The length of the contracts varies from one
month to approximately 24 months.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are both
readily convertible into known amounts of cash and are so near their maturity
that they present insignificant risk of changes in value because of changes in
interest rates. At times, such investments may be in excess of the Federal
Depository Insurance Coverage limits. However, the Company does not believe it
is exposed to any significant credit risk on cash and cash equivalents. The
Company's uninsured cash balances at June 30, 1998 were $4,470,614. For purposes
of the statement of cash flows, the Company considers such investments with a
maturity of three months or less to be cash equivalents.
NOTES RECEIVABLE
Notes receivable are recorded at cost, less the related allowance for
impaired notes receivable. Management, considering current information and
events regarding the borrowers' ability to repay their obligations, considers a
note to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the note
agreement. Impairment losses are included in the allowance for doubtful accounts
through a charge to bad debt expense. Cash receipts on impaired notes receivable
are applied to reduce the principal amount of such notes until the principal has
been recovered and are recognized as interest income, thereafter.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments.
Depreciation and amortization is provided in amounts sufficient to allocate
the cost of depreciable or amortizable assets to operations over their estimated
service lives using the straight-line method.
The estimated service lives are generally as follows:
Leasehold improvements...................................... 3-15 years
Autos, trucks and trailers.................................. 5 years
Office furniture and equipment.............................. 3-10 years
Shop tools and equipment.................................... 5 years
INCOME TAXES
The Company follows the asset and liability method in which deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
F-98
320
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
CONTRACT REVENUE RECOGNITION AND CONTRACT COSTS
Contract revenues are recognized on the percentage-of-completion method.
Under this method, the percentage of completion of each job is the proportion of
the costs incurred to date compared to current estimates of total cost. This
percentage is applied to the total contract price to determine the amounts of
revenue earned on fixed price contracts. Revenues from cost plus contracts are
recognized on the basis of costs incurred as set forth in the contract during
the period plus the fee earned. At the time a loss on a contract becomes known,
the entire amount of the estimated loss is recorded. The Company does not
recognize any gross profit amounts related to change order work performed until
it is known that those change orders have been approved by the customer. An
amount equal to contract costs attributable to claims is included in revenues
when realization is probable and the amount can be reliably estimated.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents contract billings in excess of revenues
recognized.
CONCENTRATION OF CREDIT RISK
As of June 30, 1998, substantially all of the Company's receivables are
obligations of companies in the construction business. The Company does not
require collateral or other security on most of these accounts. The credit risk
on these accounts is controlled through credit approvals, lien rights and
payment bonds issued on behalf of general contractors, limits and/or monitoring
procedures.
USE OF ESTIMATES
The financial statements have been prepared in accordance with United
States generally accepted accounting principles.
In conformity with United States generally accepted accounting principles,
management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of these financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
IMPAIRMENT RECOGNITION
Management periodically evaluates the carrying value of its long-lived
assets, whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. To the extent the estimated future cash inflows
(undiscounted and without interest) attributable to the asset, less estimated
future cash outflows, is less than the carrying amount, an impairment loss is
recognized. The amount of impairment loss to be recorded is the difference
between the assets carrying value and its estimated fair market value.
Management believes no material impairment in the value of long-lived assets
exists at June 30, 1998.
F-99
321
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
Balance Sheet Financial Instruments. The carrying amounts reported in the
balance sheets for cash and cash equivalents, contract receivables, accounts
payable and accrued expenses approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying amounts
reported for the Company's line of credit and long-term debt approximate fair
value due to interest rates which are comparable to current rates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income (SFAS No. 130). SFAS No. 130 requires companies to classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity sections of a
statement of financial position and is effective for financial statements issued
for fiscal years beginning after December 15, 1997. The Company is currently
assessing the impact on the accompanying financial statements and believes that
SFAS No. 130 will not result in comprehensive income different from net income
as reported in the accompanying financial statements. SFAS No. 130 is a
disclosure item only and will have no impact on the Company's financial position
or results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (SFAS No. 131). SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers and will supersede SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise. This new standard becomes effective for years
beginning after December 15, 1997. This is a disclosure item only and will have
no impact on the Company's financial position or results of operations.
Statement of Position 98-5, Reporting on Costs of Start-up Activities (SOP
98-5) requires the costs of start-up activities and organizational costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-5 is not expected to have a material
effect on the Company's financial position or results of operations.
F-100
322
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACT RECEIVABLES
Contract receivables at June 30, 1998 and 1997 are summarized as follows:
1998 1997
----------- -----------
Completed contracts:
Currently due............................................. $ 1,226,939 $ 8,652,577
Retainage................................................. 682,655 2,417
----------- -----------
Contracts in progress:
Currently due............................................. 9,436,792 1,281,604
Retainage................................................. 3,874,187 3,075,704
----------- -----------
15,220,573 13,012,302
Less allowance for doubtful accounts........................ (114,112) (200,478)
Less retainage due in October 1999.......................... (842,015) --
----------- -----------
$14,264,446 $12,811,824
=========== ===========
As of June 30, 1998, $6,150,211 or 40.7% of the accounts
receivable/retention balance is due from Perini Building Company on the Paris
Hotel and Casino Project. In addition, $3,514,483 or 23.3% is due from Lehrer
McGovern Bovis, Inc. on the Sands Tower Project. As of June 30, 1997, $5,438,552
or 42.4% of the accounts receivable/retention is due from Perini Building
Company primarily for the McCarren International Airport Satellite D Project.
The activity in the allowance for doubtful accounts for contract receivables for
the years ended June 30, 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
-------- -------- --------
Allowance for doubtful accounts at beginning of year... $200,478 $197,128 $209,673
Additions to (recoveries of) bad debt expense.......... (86,366) 3,350 (12,545)
-------- -------- --------
Allowance for doubtful accounts at end of year......... $114,112 $200,478 $197,128
======== ======== ========
3. NOTES RECEIVABLE
Notes receivable outstanding at June 30, 1998 and 1997 are summarized as
follows:
1998 1997
---------- ----------
Notes receivable from Del Mar Mortgage, Inc. is due at the
monthly rate of 9% per annum. The note is due on demand
and is unsecured.......................................... $1,000,000 $ --
Notes receivable from Del Mar Mortgage, Inc., secured by
real estate. Interest is due monthly at the rate of 13%
per annum. The notes mature in March 1999................. 650,000 --
Note receivable from J&M Spilsbury Investment Co. (a related
party through common ownership of shareholder of the
Company) Secured by real estate. Monthly payments are
7,142 with interest at the rate of 6.5% per annum......... 1,051,515 1,065,716
Notes receivable from employees. Maturities range from 12
months to 120 months. Monthly payments are required
including interest at the rate of 9.75% per annum......... 22,173 22,336
Notes receivable from shareholders. Due on demand with no
interest.................................................. -- 29,711
---------- ----------
2,723,688 1,117,763
Less current portion........................................ (671,498) (48,170)
---------- ----------
$2,052,190 $1,069,593
========== ==========
F-101
323
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to June 30, 1998, the $1,000,000 note receivable from Del Mar
Mortgage, Inc. was rolled into three separate notes secured by real estate. The
three notes receivable totaled $700,000, $150,000 and $150,000 with the interest
rate of 13%, 13% and 14%, respectively. The $700,000 note receivable matures in
August 1999 and the two $150,000 notes receivable mature in September 1999.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at June 30, 1998 and
1997 are summarized as follows:
1998 1997
----------- -----------
Costs incurred on uncompleted contracts..................... $64,483,332 $51,947,830
Estimated earnings.......................................... 9,927,811 3,847,841
----------- -----------
74,411,143 55,795,671
Less billings to date....................................... 77,947,879 56,071,129
----------- -----------
$(3,536,736) $ (275,458)
=========== ===========
Included in the accompanying balance sheets under the following captions:
1998 1997
----------- ----------
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 971,933 $2,537,425
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 4,508,669 2,812,883
----------- ----------
$(3,536,736) $ (275,458)
=========== ==========
5. INVESTMENTS
The Company owns a 19.42% limited partnership interest in Copperpointe,
Ltd. The partnership owns a commercial real estate development in Las Vegas,
Nevada. The Company is not liable for any additional capital contributions.
The Company owns a 9.055% interest in Emerald River Contractors, LLC. The
partnership owns undeveloped real estate in Laughlin, Nevada. The Company is
subject to partnership assessments to pay operating expenses. No assessments
were made during the years ended June 30, 1998, 1997 and 1996, respectively.
Both investments are carried on the cost method.
6. OTHER ASSETS
Other assets consists of the following at June 30, 1998 and 1997:
1998 1997
-------- --------
Cash surrender value of life insurance...................... $185,910 $187,930
Other....................................................... 400 5,191
-------- --------
$186,310 $193,121
======== ========
7. LINE OF CREDIT
The Company has a line of credit arrangement with a bank, under which it
may borrow, on an unsecured basis, up to an aggregate of $4,000,000 as of June
30, 1998, with interest at the bank's prime rate plus 0.5%
F-102
324
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9.5% at June 30, 1998). The line of credit expires October 1999. There were no
borrowings outstanding under this arrangement as of June 30, 1998. The line of
credit available at June 30, 1998 was $3,783,000, net of $217,000 letter of
credit issued as a condition to participate in self-insured workers compensation
program. The total balance outstanding under the line of credit was $1,637,520
at June 30, 1997. The line of credit is guaranteed by Jerry Spilsbury, a
majority shareholder.
The line of credit contains a provision restricting the payment of
dividends without the prior written consent of the lender.
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations are summarized as follows:
1998 1997
---------- --------
Life insurance policy loans secured by cash surrender value
of policies. Interest rate is 6-8%(note 6)................ $ 38,853 $ 63,998
Notes payable secured by vehicles. Monthly payments are $946
with interest at 5.9% per annum. Due August 2001.......... 32,715 --
Capital lease obligations payable secured by vehicle.
Monthly payments for the first year are $1,507 and are
reduced each year of the four-year term. The implicit
interest rate is 6.2%. The final payment of $1,275 is due
February 2002............................................. 53,150 --
Note payable with a financial institution secured by
equipment. Monthly principal payments are $10,417.
Interest is payable monthly at the rate of 7.9%. The note
is due January 31, 2002. Interest is charged as a penalty
on any accelerated principal payments. The note payable is
guaranteed by Jerry Spilsbury, majority shareholder. The
note payable contains restrictions on working capital,
tangible net worth, total liabilities to tangible net
worth, earnings before interest, taxes, depreciation and
amortization (EBITDA), change of ownership and lawsuits
brought against the Company............................... 437,500 --
Note payable to retired employee (related party) due
September 2004. Monthly payments are $12,900 with interest
at 5.82%(note 9).......................................... 717,810 905,430
---------- --------
1,280,028 969,428
Less current portion........................................ (265,577) (95,898)
---------- --------
$1,014,451 $873,530
========== ========
Maturities of long-term debt and capital lease obligations for years
subsequent to June 30, 1998 are summarized as follows:
1999........................................................ $ 265,577
2000........................................................ 273,097
2001........................................................ 281,068
2002........................................................ 211,294
2003........................................................ 146,435
Thereafter.................................................. 102,557
----------
$1,280,028
==========
F-103
325
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY
The Company sold 22 shares of common stock to two employees (related
parties) for cash aggregating $12,080 on June 30, 1996. The value of the stock
was $549.05 per share.
The Company purchased 1,800 shares of common stock from a retiring employee
(related party) on September 17, 1996. The cost of the stock was $549.05 per
share which will be paid over eight years. Monthly payments are $12,900
including interest at 5.82% per annum. The shares will be held as treasury stock
until they are paid in full.
The Company purchased 250 shares of common stock from a retiring member of
the Board of Directors (related party) for cash aggregating $145,000 on April
28, 1998. The cost of the stock was $580 per share.
10. INCOME TAXES
The provision for income tax expense for the years ended June 30, 1998,
1997 and 1996 is summarized as follows:
1998 1997 1996
---------- -------- --------
Current federal....................................... $3,271,147 $287,311 $510,237
Deferred federal...................................... (50,210) (30,539) (40,009)
---------- -------- --------
Total provision for income taxes............ $3,220,937 $256,772 $470,228
========== ======== ========
Actual income tax expense differed from the "expected" income tax expense
(computed by applying the United States federal corporate income tax rate of 35%
to income before income taxes) for the years ended June 30, 1998, 1997 and 1996
as follows:
1998 1997 1996
---------- -------- --------
Computed "expected" tax expense....................... $3,288,732 $262,229 $464,256
Nondeductible expenses................................ 28,417 2,993 20,979
Benefit of graduated tax rate......................... (96,212) (8,450) (15,007)
---------- -------- --------
$3,220,937 $256,772 $470,228
========== ======== ========
The accompanying financial statements do not include a provision for state
income tax as the Company's income is earned in Nevada, which does not have a
corporate income tax.
F-104
326
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences between the income tax bases of
assets and liabilities and the financial statement reporting amounts which
result in the recognition of deferred tax assets and liabilities are as follows:
1998 1997
-------- --------
Deferred tax assets:
Allowance for doubtful accounts........................... $ 39,939 $ 70,167
Accrued liability, workers compensation claims estimate... 97,723 112,003
Warranty accrual.......................................... 56,000 54,250
Allowance for loss contracts.............................. 145,328 --
-------- --------
Total deferred tax assets......................... $338,990 $236,420
======== ========
Deferred tax liabilities:
Property and equipment principally due to differences in
depreciation........................................... 113,535 61,092
Installment sale of building.............................. 35,447 35,530
-------- --------
Total deferred tax liabilities.................... 148,982 96,622
-------- --------
Net deferred tax asset............................ $190,008 $139,798
======== ========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods, which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences.
11. RELATED PARTY TRANSACTIONS
The Company leases its office space and production facilities from a
related party. These multiple lease agreements require base monthly payments of
$35,100 at June 30, 1998. These leases require the Company to provide insurance,
repairs and maintenance, and to pay real estate taxes on the leased property.
These leases expire at various dates through July 2006. Lease expense for the
years ended June 30, 1998, 1997 and 1996 incurred under these agreements was
$410,546, $349,008 and $334,248, respectively.
12. BACKLOG
The following is a reconciliation of backlog work to be performed under
signed contracts in existence at June 30, 1998:
Balance, June 30, 1997...................................... $ 20,074,000
Contract adjustments and new contracts...................... 122,097,672
Less contract revenue earned in 1998........................ (83,606,672)
------------
Balance, June 30, 1998...................................... $ 58,565,000
============
13. COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases their office space and production facilities from a
related party, as more fully described in Note 11. These leases have been
classified as operating leases.
F-105
327
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum lease payments required under
operating leases, including those with related parties as more fully described
in Note 11, that have initial or remaining noncancelable lease terms in excess
of one year at June 30, 1998:
1999........................................................ $ 404,160
2000........................................................ 379,259
2001........................................................ 387,852
2002........................................................ 344,136
2003........................................................ 362,460
Thereafter.................................................. 1,119,559
----------
$2,997,426
==========
Rental expense for operating leases was $432,405, $369,951 and $350,091 for
the years ended June 30, 1998, 1997 and 1996, respectively.
(b) Employees' Profit Sharing Plan
The Company has a defined contribution profit sharing plan, which
qualifies, under Section 401(k) of the Internal Revenue Code. The plan provides
retirement benefits for non-union employees meeting minimum age and service
requirements. Participants may contribute up to 10% of their gross wages,
subject to certain limitations. The plan provides for discretionary matching
contributions, as determined by the Board of Directors, to be made by the
Company. The discretionary amounts contributed to the plan by the Company for
the years ended June 30, 1998, 1997 and 1996 were $79,451, $72,793 and $59,298,
respectively. In addition, the Company elected to make profit sharing
contributions to the plan for the same years in the amount of $63,000, $16,089
and $65,985, respectively.
Approximately 91% of the Company's employees are covered by various union
sponsored, collectively bargained, multi-employer retirement plans. These plans
are not controlled or administered by the Company. Amounts charged to expense
are included in construction costs.
(c) Nevada Workers Compensation Program
The Company is a self-insured employer in the Nevada Workers Compensation
Program. The plan is administered by a licensed third party administrator. The
Company's liability is limited to $300,000 per occurrence by an insurance
policy. A provision for estimated future claims expense is recorded in the
accompanying financial statements. Estimated losses have exceeded actual losses
as of June 30, 1998 and 1997 by $279,128 and $320,000, respectively.
The Company was required to provide a letter of credit in the amount of
$217,000 as a condition to participate in the self-insured program, which
remains outstanding as of June 30, 1998.
(d) Significant Vendors and Customers
Significant vendors and customers are defined as those that account for
greater than 10% of the Company's purchases.
For the year ended June 30, 1998, one vendor accounted for 17.2% of the
Company's purchases. There were no significant vendors for the years ended June
30, 1997 and 1996. The Company believes that an interruption in supply from the
significant vendor referred to above would not have a material adverse impact on
the financial position or results of operations of the Company.
F-106
328
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant customers as a percentage of contract revenues for the years
ended June 30, 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Perini Building Company..................................... 58.0% 15.0% 10.0%
Lehrer McGovern Bovis Inc................................... 21.0 -- --
AF Construction............................................. -- 10.0 --
Tiberti Construction........................................ -- -- 24.0
---- ---- ----
79.0% 25.0% 34.0%
==== ==== ====
(e) Year 2000
In 1998, the Company initiated a plan ("Plan") to identify, assess and
remediate "Year 2000" issues within each of its significant computer programs
and certain equipment which contain micro-processors. The Plan is addressing the
issue of computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000, if a program or chip uses
only two digits rather than four to define the applicable year. The Company has
purchased a general ledger package, which is Year 2000 compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's operations, liquidity or financial
condition.
(f) Claims
The Company is currently in negotiations with respect to claims on work
previously performed aggregating approximately $3,000,000. The Company has
recorded the costs associated with this work and has not recognized revenue on
the pending claims. There are no assurances that the Company will prevail in
these matters.
(g) Executive Employment Agreement
The Company has entered into three employment agreements, two with related
parties, which expire in five years. The terms of the agreements stipulate
either party can terminate the agreement for any reason by giving notice
sixty-days prior to the renewal date.
(h) Stock Purchase Agreement
In January 1993, the Company and certain shareholders entered into a stock
purchase agreement ("Agreement"). As set forth in the Agreement, upon the death
or total permanent disability of a stockholder, the Corporation shall within
ninety days proceed to purchase all of said shareholder's stock in the
Corporation at fair value as determined by the Agreement. It is the intent of
the parties that the proceeds of any life insurance policies pertaining to this
Agreement shall be used to complete the purchase of said shareholder's stock.
(i) Legal
The Company is a party to various legal actions, which have arisen, in the
ordinary course of business. While any litigation contains an element of
uncertainty, management and its legal counsel are of the opinion
F-107
329
QUALITY MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
that none of these matters will have a material adverse effect on the financial
condition or results of operations of the Company.
14. SUBSEQUENT EVENT
Subsequent to June 30, 1998, the shareholders of the Company executed a
letter of intent to sell the issued and outstanding shares of the Company to
Sunbelt Integrated Trading Services, Inc. ("Sunbelt") for cash and shares of
common stock of Sunbelt.
F-108
330
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Schmidt Electric Company, Inc.:
We have audited the accompanying balance sheet of SCHMIDT ELECTRIC COMPANY,
INC. as of March 8, 2000 and the related statement of operations, stockholders'
equity and cash flow for the period from January 1, 2000 to March 8, 2000. The
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with United States 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Schmidt Electric Company, Inc. as of March
8, 2000 and the results of its operations and its cash flows for the period from
January 1, 2000 to March 8, 2000, in conformity with United States generally
accepted accounting principles.
/s/ Arthur Andersen LLP
May 5, 2000.
Toronto, Canada.
F-109
331
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Schmidt Electric Company, Inc.:
We have audited the accompanying balance sheets of Schmidt Electric
Company, Inc. as of December 31, 1999 and 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999. 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 United States 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 Schmidt Electric Company,
Inc. as of December 31, 1999 and 1998 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with United States generally accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
February 24, 2000
F-110
332
SCHMIDT ELECTRIC COMPANY, INC.
BALANCE SHEETS
MARCH 8, 2000, DECEMBER 31, 1999 AND 1998
2000 1999 1998
---------- ---------- ----------
ASSETS
Current Assets
Cash and cash equivalents................................ $ 593,212 $ 156,429 $ 792,205
Investment securities (Note 2)........................... -- 420,572 305,540
Contract receivables, less allowance for doubtful
accounts of $60,000 in 2000, 1999 and 1998 (Note 3)... 6,327,241 6,057,900 5,729,651
Other receivables........................................ 2,535 66,005 11,535
Inventory................................................ 200,000 371,265 11,138
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 4)........................ 576,931 529,386 331,271
Prepaid expenses......................................... 62,844 79,090 60,582
---------- ---------- ----------
7,762,763 7,680,647 7,241,922
Notes and accrued interest receivable from related parties
(Note 6)................................................. -- 125,000 336,447
Property and equipment, net (Note 5)....................... 662,906 757,766 685,887
Cash surrender value of officers' life insurance........... -- 150,311 111,896
Other assets............................................... -- 7,680 31,199
---------- ---------- ----------
$8,425,669 $8,721,404 $8,407,351
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of notes payable (Note 9)................ $ -- $ 19,242 $ 46,247
Line of credit (Note 8).................................. -- 1,125,000 --
Accounts payable......................................... 991,674 501,336 1,847,553
Accrued expenses (Note 7)................................ 1,664,322 1,723,046 510,626
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 4)........................ 297,735 141,390 487,663
---------- ---------- ----------
2,953,731 3,510,014 2,892,089
Notes payable, excluding current portion (Note 9).......... -- 15,134 36,132
---------- ---------- ----------
2,953,731 3,525,148 2,928,221
---------- ---------- ----------
Commitments and contingencies (Note 14)
Stockholders' equity:
Common stock, $1.00 par value; authorized 100,000 shares,
1,000 shares issued and outstanding................... 1,000 1,000 1,000
Retained earnings........................................ 5,470,938 5,007,786 5,405,692
Accumulated other comprehensive income (Note 2).......... -- 187,470 72,438
---------- ---------- ----------
5,471,938 5,196,256 5,479,130
---------- ---------- ----------
$8,425,669 $8,721,404 $8,407,351
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-111
333
SCHMIDT ELECTRIC COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000
AND YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2000 1999 1998 1997
---------- ----------- ----------- -----------
Contract revenues earned..................... $4,460,215 $39,716,996 $38,219,022 $25,400,766
Cost of revenues earned...................... 3,434,224 31,537,513 28,621,259 22,465,889
---------- ----------- ----------- -----------
Gross profit....................... 1,025,991 8,179,483 9,597,763 2,934,877
Selling, general and administrative expenses
(Note 11).................................. 307,684 2,794,986 1,354,752 1,113,307
Stockholders compensation.................... 24,180 2,919,528 4,179,150 799,370
---------- ----------- ----------- -----------
Operating income............................. 694,127 2,464,969 4,063,861 1,022,200
Non-operating income (Note 2)................ 74,562 2,293 8,607 6,463
---------- ----------- ----------- -----------
Income before state income taxes............. 768,689 2,467,262 4,072,468 1,028,663
State income tax provision................... 37,291 128,636 145,905 40,647
---------- ----------- ----------- -----------
Net income......................... $ 731,398 $ 2,338,626 $ 3,926,563 $ 988,016
========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-112
334
SCHMIDT ELECTRIC COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED
COMMON STOCK OTHER TOTAL
--------------- RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS INCOME EQUITY
------ ------ ----------- ------------- -------------
Balances at January 1, 1997.............. 1,000 $1,000 $ 693,511 $ -- $ 694,511
Comprehensive income
Net income............................. -- -- 988,016 -- 988,016
Unrealized gain on investment
securities.......................... -- -- -- 16,322 16,322
-----------
Comprehensive income..................... -- -- -- -- 1,004,338
Distributions to stockholders.......... -- -- (190,134) -- (190,134)
----- ------ ----------- --------- -----------
Balances at December 31, 1997............ 1,000 1,000 1,491,393 16,322 1,508,715
Comprehensive income
Net income............................. -- -- 3,926,563 -- 3,926,563
Unrealized gain on investment
securities.......................... -- -- -- 56,116 56,116
-----------
Comprehensive income..................... -- -- -- -- 3,982,679
Distributions to stockholders............ -- -- (12,264) -- (12,264)
----- ------ ----------- --------- -----------
Balances at December 31, 1998............ 1,000 1,000 5,405,692 72,438 5,479,130
Comprehensive income
Net income............................. -- -- 2,338,626 -- 2,338,626
Unrealized gain on investment
securities.......................... -- -- -- 115,032 115,032
-----------
Comprehensive income..................... -- -- -- -- 2,453,658
Distributions to stockholders............ -- -- (2,736,532) -- (2,736,532)
----- ------ ----------- --------- -----------
Balances at December 31, 1999............ 1,000 1,000 5,007,786 187,470 5,196,256
Comprehensive income
Net income............................. -- -- 731,398 -- 731,398
Unrealized loss on investment
securities.......................... (102,828) (102,828)
Realized gain on investment
securities.......................... -- -- -- (84,642) (84,642)
-----------
Comprehensive income..................... -- -- -- -- 543,928
Distributions to stockholders............ -- -- (268,246) -- (268,246)
----- ------ ----------- --------- -----------
Balances at March 8, 2000................ 1,000 $1,000 $ 5,470,938 $ -- $ 5,471,938
===== ====== =========== ========= ===========
The accompanying notes are an integral part of these statements.
F-113
335
SCHMIDT ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000
AND YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2000 1999 1998 1997
----------- ---------- ---------- -----------
Cash flows from operating activities:
Net income............................................ $ 731,398 $2,338,626 $3,926,563 $ 988,016
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization......................... 39,223 231,060 188,739 183,231
Bad debt expense...................................... -- 27,882 58,499 3,237
Gain on sale of investment securities................. (84,642) -- -- --
Loss (gain) on disposal of assets..................... 4,137 (1,243) -- 6,331
Accrued interest on notes receivable from related
parties............................................. -- -- (27,876) (68,571)
Changes in operating assets and liabilities
Contract receivables................................ (269,341) (356,131) (2,853,990) 1,945,817
Other receivables................................. 63,470 (54,470) 12,613 (24,148)
Inventory........................................... 171,265 (360,127) (6,138) (2,000)
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... (47,545) (198,115) (134,047) 283,111
Prepaid expenses.................................... 16,246 (18,508) (60,582) --
Cash surrender value of officers' life insurance and
other assets...................................... 157,991 (14,896) (76,032) 50,790
Accounts payable.................................... 490,338 (1,346,217) 90,187 (333,490)
Accrued expenses.................................... (58,724) 1,212,420 (92,933) 100,264
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 156,345 (346,273) (180,091) (1,656,757)
----------- ---------- ---------- -----------
Net cash provided by operating activities............... 1,370,161 1,114,008 844,912 1,475,831
----------- ---------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment.................... -- (305,554) (393,487) (229,445)
Purchase of investment securities..................... -- -- (233,102) --
Proceeds on sale of investment securities............. 317,744 -- -- --
Collection of related party notes receivable.......... 125,000 336,447 399,000 16,000
Advances under notes receivable to related party...... -- (125,000) -- --
Proceeds received on disposal of fixed assets......... 51,500 3,858 -- --
----------- ---------- ---------- -----------
Net cash provided by (used in) investing activities..... 494,244 (90,249) (227,589) (213,445)
----------- ---------- ---------- -----------
Cash flows from financing activities:
Distributions to stockholders......................... (268,246) (2,736,532) (12,264) (190,134)
Proceeds from (Repayment of) line of credit........... (1,125,000) 1,125,000 -- --
Principal repayments of notes payable................. (34,376) (48,003) (256,687) (1,460,872)
----------- ---------- ---------- -----------
Net cash used in financing activities................... (1,427,622) (1,659,535) (268,951) (1,651,006)
----------- ---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents.... 436,783 (635,776) 348,372 (388,620)
Cash and cash equivalents, beginning of year............ 156,429 792,205 443,833 832,453
----------- ---------- ---------- -----------
Cash and cash equivalents, end of year.................. $ 593,212 $ 156,429 $ 792,205 $ 443,833
=========== ========== ========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest.............................................. $ 9,863 $ 8,785 $ 59,177 $ 92,470
=========== ========== ========== ===========
State income taxes.................................... $ 106,234 $ 150,866 $ 40,647 $ 37,808
=========== ========== ========== ===========
Non-cash investing and financing activities
Property and equipment acquired through issuance of
notes payable....................................... $ -- -- $ 19,391 $ 83,308
=========== ========== ========== ===========
The accompanying notes are an integral part of these statements.
F-114
336
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Schmidt Electric Company, Inc. (the "Company") was organized in February
1984, as an electrical contractor. The Company installs and services electrical
equipment and wiring for industrial and commercial customers primarily in the
Austin, Texas market and believes that it operates as one business segment.
OPERATING CYCLE
The Company's work is typically performed under cost-plus fee contracts,
fixed-price contracts, or fixed-price contracts modified by incentive and
penalty provisions. The length of the contracts varies from one month to
approximately twenty-four months.
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying consolidated balance
sheets, as they will be liquidated in the normal course of contract completion,
although this may require more than one year.
USE OF ESTIMATES
The financial statements have been prepared in accordance with United
States generally accepted accounting principles. The preparation of financial
statements in conformity with United States 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 financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represents cash in banks or short-term, highly
liquid investments that are both readily convertible into known amounts of cash
and are so near their maturity that they present insignificant risk of changes
in value due to changes in interest rates. At times, such investments may be in
excess of the Federal Depository Insurance Coverage limits. However, the Company
does not believe it is exposed to any significant credit risk on cash and cash
equivalents. For purposes of the statement of cash flows, the Company considers
such investments with an original maturity of three months or less to be cash
equivalents.
INVESTMENT SECURITIES
The Company has classified its investment in marketable equity securities
as available-for-sale. Accordingly, unrealized holding gains and losses have
been excluded from earnings and are reported as accumulated other comprehensive
income in the statements of stockholders' equity until realized.
A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a new cost basis for the
security is established. Dividend and interest income are recognized when
earned.
INVENTORY
Inventory consists primarily of purchased materials and supplies used in
the ordinary course of business. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out ("FIFO") basis.
F-115
337
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided in amounts sufficient to allocate the cost of depreciable or
amortizable assets to operations over their estimated service lives using the
straight-line method.
INCOME TAXES
The Company has elected to be taxed under the provisions of Section 1366
(a) (S corporation) of the Internal Revenue Code. Under those provisions, the
federal taxable income or loss of the Company is included in the income tax
return of the stockholders. Accordingly, no income tax assets, liabilities, or
provisions for federal income taxes have been recorded in the accompanying
financial statements. However, the accompanying statements of operations
includes a provision for state income tax expense at the statutory rate of 4.5%
of federal taxable income.
CONTRACT REVENUE RECOGNITION AND CONTRACT COSTS
Revenues from fixed-price and modified fixed-price construction contracts
are recognized on the percentage-of-completion method, measured by the
percentage of cost incurred to date to estimated total cost for each contract
(the "cost-to-cost method"). Revenues from cost-plus fee contracts are
recognized on the basis of costs incurred during the period plus the fee earned.
Profits on contracts are recorded when progress reaches a point where cost and
estimate analysis and other evidence are sufficient to estimate results with
reasonable accuracy. The Company does not recognize any gross profit amounts
related to change order work performed until it is known that those change
orders have been approved by the customer. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable and
the amount can be reasonably estimated.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as insurance, supplies,
tools, depreciation and amortization. Selling, general and administrative costs
are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization is
reasonably assured.
The asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The liability "Billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130 "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
investment securities and is presented in the statements of stockholders'
equity. The statement requires only additional disclosures in the financial
statements; it does not affect the Company's financial position or results of
operations. Prior year financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
F-116
338
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS AND CREDIT CONCENTRATIONS
The majority of the Company's work is performed in Austin, Texas and the
surrounding area. Substantially all of the Company's receivables are obligations
of companies in the construction business. The Company does not require
collateral or other security on most of these accounts. The credit risk on these
accounts is controlled through credit approvals, lien rights, payment bonds
issued on behalf of general contractors and monitoring procedures.
IMPAIRMENT RECOGNITION
Management periodically evaluates the carrying value of its long-lived
assets, whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. To the extent the estimated future cash flows
(undiscounted and without interest) attributable to the asset, less estimated
future cash outflows, are less than the carrying amount, an impairment loss is
recognized. The amount of impairment loss to be recorded is the difference
between the asset's carrying value and its estimated fair market value.
Management believes no material impairment in long-lived assets exists at March
8, 2000, December 31, 1999 or 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This pronouncement, for which the effective
date was delayed by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Management does not believe the
implementation of this accounting pronouncement will have a material effect on
its financial statements.
2. INVESTMENT SECURITIES
As of December 31, 1999 and 1998 gross unrealized holding gains and losses
on investment securities were as follows:
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING
COST GAIN LOSSES FAIR VALUE
-------- ---------- ---------- ----------
1999
Investment securities: Corporate equity....... $233,102 $187,470 $-- $420,572
======== ======== === ========
1998
Investment securities: Corporate equity....... $233,102 $ 72,438 $-- $305,540
======== ======== === ========
In the period ended March 8, 2000, the Company sold its investment
securities for proceeds of $317,744 and realized a gain of $84,642 which is
included in non-operating income.
F-117
339
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACT RECEIVABLES
Contract receivables at March 8, 2000, December 31, 1999 and 1998 are
summarized as follows:
2000 1999 1998
---------- ---------- ----------
Billed on completed and in progress contracts...... $6,101,116 $5,551,125 $5,011,889
Retention.......................................... 286,125 566,775 777,762
---------- ---------- ----------
6,387,241 6,117,900 5,789,651
Less allowance for doubtful accounts............... (60,000) (60,000) (60,000)
---------- ---------- ----------
$6,327,241 $6,057,900 $5,729,651
========== ========== ==========
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at March 8, 2000,
December 31, 1999 and 1998 are summarized as follows:
2000 1999 1998
------------ ------------ ------------
Costs incurred on uncompleted contracts...... $ 27,357,257 $ 23,977,134 $ 7,605,657
Estimated earnings........................... 12,817,471 11,766,541 5,729,929
------------ ------------ ------------
40,174,728 35,743,675 13,335,586
Less billings to date........................ (39,895,532) (35,355,679) (13,491,978)
------------ ------------ ------------
$ 279,196 $ 387,996 $ (156,392)
============ ============ ============
Included in the accompanying balance sheets under the following captions:
2000 1999 1998
--------- --------- ---------
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 576,931 $ 529,386 $ 331,271
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (297,735) (141,390) (487,663)
--------- --------- ---------
$ 279,196 $ 387,996 $(156,392)
========= ========= =========
5. PROPERTY AND EQUIPMENT
Property and equipment at March 8, 2000, December 31, 1999 and 1998 consist
of the following:
ESTIMATED
2000 1999 1998 USEFUL LIFE
----------- ----------- ----------- -----------
Vehicles.............................. $ 1,094,126 $ 1,184,338 $ 1,102,494 3-5 years
Equipment............................. 729,620 729,620 627,379 5-7 years
Furniture and office equipment........ 167,479 167,479 137,093 5-7 years
Computer software..................... 43,793 43,793 42,519 3-5 years
----------- ----------- -----------
2,035,018 2,125,230 1,909,485
Less accumulated depreciation and
amortization........................ (1,372,112) (1,367,464) (1,223,598)
----------- ----------- -----------
$ 662,906 $ 757,766 $ 685,887
=========== =========== ===========
F-118
340
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES AND ACCRUED INTEREST RECEIVABLE FROM RELATED PARTIES
Notes and accrued interest receivable from related parties at December 31,
1999 and 1998 are summarized as follows:
1999 1998
-------- --------
Unsecured note receivable from Mustang Mesa Partnership (a
related party through common ownership of stockholder of
the Company) due on demand, including accrued interest of
$69,009 at December 31, 1998. Interest rate was 10% per
annum. The note was collected in 1999..................... $ -- $145,009
Unsecured note receivable from Mesa Construction Inc. (a
related party through common ownership of stockholder of
the Company) due on demand, including accrued interest of
$27,438 at December 31, 1998. Interest rate was 10% per
annum. The note was collected in 1999..................... 191,438
Unsecured note receivable from an officer and stockholder of
the Company due on demand. Non-interest bearing........... 125,000 --
-------- --------
$125,000 $336,447
======== ========
In the period ended March 8, 2000 the note from related party and accrued
interest were paid in full.
7. ACCRUED EXPENSES
Accrued expenses at March 8, 2000, December 31, 1999 and 1998 are
summarized as follows:
2000 1999 1998
---------- ---------- --------
Accrued compensation................................ $1,280,594 $1,321,823 $ 16,676
Union benefit assessments........................... 250,308 190,813 341,452
State income tax.................................... 58,645 127,588 150,865
Other accrued expenses.............................. 74,775 82,822 1,633
---------- ---------- --------
$1,664,322 $1,723,046 $510,626
========== ========== ========
8. LINE OF CREDIT
During 1999, the Company entered into a line of credit arrangement with a
financial institution, under which it may borrow up to an aggregate of
$1,750,000, with interest at the financial institution's base rate plus 1.0%.
The line of credit expires August 15, 2000. There were no borrowings outstanding
under the line of credit at March 8, 2000. Borrowings outstanding at December
31, 1999 were $1,125,000. The line of credit is collateralized by inventory,
contract receivables and the assignment of a $400,000 life insurance policy and
is guaranteed by the stockholders of the Company.
9. NOTES PAYABLE
Notes payable at December 31, 1999 and 1998 are summarized as follows:
1999 1998
-------- --------
Notes payable with a financial institution secured by
vehicles. Monthly payments aggregate approximately $2,700
with interest ranging from 5.9% to 11.1% per annum on the
individual notes.......................................... $ 34,376 $ 82,379
Less current portion........................................ (19,242) (46,247)
-------- --------
Notes payable, excluding current portion.................... $ 15,134 $ 36,132
======== ========
F-119
341
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. TRANSACTIONS WITH RELATED PARTIES
The Company leases its office and warehouse space from a stockholder at
mutually agreed upon amounts. The leases require the Company to provide
insurance, repairs and maintenance and to pay real estate taxes on the leased
property. The lease agreement expires June 2003. Lease expense was approximately
$2,500 for the period from January 1, 2000 to March 8, 2000 and $18,000 for each
of the years ended December 31, 1999, 1998 and 1997, respectively.
Mustang Mesa Partnership, in which a stockholder owns a 49% interest and a
1% indirect interest through Mesa Construction, Inc., had an unsecured note
receivable with an interest rate of 10% per annum due on demand aggregating
$145,009 including accrued interest of $69,009 at December 31, 1998. During
1999, the note and accrued interest was paid in full.
Mesa Construction, Inc., which is 50% owned by a stockholder had an
unsecured note receivable including interest at 10% due on demand aggregating
$191,438, including accrued interest of $27,438 at December 31, 1998. During
1999, the note and accrued interest were paid in full.
The Company held an unsecured note receivable non-interest bearing in the
amount of $125,000 at December 31, 1999 from an officer and stockholder of the
Company. The note was collected in January 2000.
11. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred incentive based compensation expenses of $1,552,300,
$343,400 and $259,500 during the years ended December 31, 1999, 1998 and 1997,
respectively, which have been included in selling, general and administrative
expenses in the accompanying statements of operations. In the period ended March
8, 2000, the Company did not incur any incentive based compensation.
12. SIGNIFICANT CUSTOMERS
Contract revenues earned for the period from January 1, 2000 to March 8,
2000 and the years ended December 31, 1999, 1998 and 1997 from major customers
(exceeding 10% of total contract revenues earned) are as follows:
2000 1999 1998 1997
----------------------- ------------------------- ------------------------- -------------------------
TOTAL TOTAL TOTAL TOTAL
AMOUNT OF PERCENTAGE AMOUNT OF PERCENTAGE AMOUNT OF PERCENTAGE AMOUNT OF PERCENTAGE
CONTRACT OF CONTRACT CONTRACT OF CONTRACT CONTRACT OF CONTRACT CONTRACT OF CONTRACT
REVENUES REVENUES REVENUES REVENUES REVENUE REVENUES REVENUES REVENUES
EARNED EARNED EARNED EARNED EARNED EARNED EARNED EARNED
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Customer A........... $ -- -- $ -- -- $ 8,026,547 21.3% $13,104,729 51.5%
Customer B........... -- -- -- -- -- -- 2,707,190 10.6%
Customer C........... 708,293 15.9% 11,705,428 29.5% 11,277,701 29.9% -- --
Customer D........... -- -- -- -- 4,756,247 12.6% -- --
Customer I........... 958,532 21.5% -- -- -- -- -- --
F-120
342
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contract receivables as of March 8, 2000, December 31, 1999 and 1998 from
major customers exceeding 10% of total contract receivables are as follows
2000 1999 1998
------------------------- ------------------------- -------------------------
TOTAL TOTAL TOTAL
AMOUNT OF PERCENTAGE AMOUNT OF PERCENTAGE AMOUNT OF PERCENTAGE
CONTRACT OF CONTRACT CONTRACT OF CONTRACT CONTRACT OF CONTRACT
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ----------- ----------- ----------- ----------- -----------
Customer C................... $1,833,461 29.3% $1,236,415 20.4% $ 861,400 15.0%
Customer E................... -- -- 1,779,992 31.1%
Customer F................... -- -- 660,907 11.5%
Customer G................... 715,651 11.8% -- --
Customer H................... 1,066,891 17.6% -- --
Customer I................... 2,251,210 35.2%
13. FINANCIAL INSTRUMENTS
The estimation of fair values is based on comparable transactions, quoted
market prices, and/or the immediate or short-term maturities of the Company's
financial instruments. Assets and liabilities that are reported in the balance
sheets at fair value or at a carrying amount that approximates fair value
included cash and cash equivalents, investment securities, contracts
receivables, other receivables, costs and estimated earnings in excess of
billings on uncompleted contracts, notes and accrued interest receivable from
related parties, cash surrender value of officers' life insurance, notes
payable, line of credit, accounts payable, accrued expenses, and billings in
excess of costs and estimated earnings on uncompleted contracts.
14. COMMITMENTS AND CONTINGENCIES
UNIONIZED LABOR FORCE
Approximately 85% of the Company's employees belong to Local 520 of the
International Brotherhood of Electrical Workers, whose contract expires in June
2000.
UNION-ADMINISTERED BENEFIT PLANS
The Company makes contributions to union-administered health and welfare,
local and national pensions, and union benefit plans that cover approximately
85% of the Company's employees. During the period ended March 8, 2000 and the
years ended December 31, 1999, 1998 and 1997, the Company contributed
approximately $182,942, $2,117,000, $3,031,000 and $1,838,000, respectively, to
such plans. Governmental regulations impose certain requirements relative to
multi-employer plans. In the event of a plan termination or employer withdrawal,
an employer may be liable for a portion of the multi-employer plan's unfunded
vested benefits, if any. The Company has not yet received information from the
plans' administrators to determine its share of any unfunded vested benefits, if
any. The Company does not anticipate withdrawal from the plans, nor is the
Company aware of any expected plan terminations.
LEASES
The Company has several noncancelable operating leases, primarily for
warehouse and office space which expire over the next five years. These leases
generally contain renewal options and require the Company to pay all executory
costs such as maintenance and insurance. Rental expense for operating leases for
the period from January 1, 2000 to March 8, 2000 and the years ended December
31, 1999, 1998 and 1997 was $2,500, $37,813, $51,587 and $59,678, respectively.
F-121
343
SCHMIDT ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of March 8, 2000 are
as follows:
2000........................................................ $77,333
2001 and thereafter......................................... 18,667
-------
$96,000
=======
LEGAL ACTIONS
The Company is involved from time to time in various claims and legal
actions arising in the ordinary course of business. Management believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's results of operations, financial position or liquidity.
15. SUBSEQUENT EVENTS
On March 9, 2000, 100% of the issued and outstanding common stock of the
Company was sold to Sunbelt Integrated Trade Services, Inc. ("Sunbelt") for
approximately $22 million (subject to adjustment for the amount by which the
Company's working capital differs from a stated base) in cash and notes. The
agreement also calls for payment of an additional $8 million in cash or stock of
Sunbelt's ultimate parent company, should the aggregate earnings of the Company
and several other companies being acquired concurrently meet certain earnings
targets over the three year period after acquisition. Coincident with the sale
of the common stock, certain fixed assets will a net book value of approximately
$325,000 were distributed to the stockholders.
Immediately preceding the acquisition by Sunbelt, the Company assigned its
rights to the cash surrender value of officers' life insurance policies to the
Company's stockholders.
F-122
344
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Crouch Industries, LLC:
We have audited the accompanying balance sheet of Crouch Industries, LLC
(the "Company") as of March 8, 2000 and the related statements of operations,
members' account, and cash flows for the period from January 1, 2000 to March 8,
2000. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with United States 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of March 8, 2000, and the
results of its operations and its cash flows for the period from January 1, 2000
to March 8, 2000 in conformity with United States generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
May 2, 2000
Toronto, Canada
F-123
345
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Crouch Industries, LLC:
We have audited the accompanying balance sheets of Crouch Industries, LLC
(the "Company") as of December 31, 1999 and 1998, and the related statements of
operations, members' account, 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 audits 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 the Company as of December
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with United States generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
March 3, 2000
Las Vegas, Nevada
F-124
346
CROUCH INDUSTRIES, LLC
BALANCE SHEETS
MARCH 8, 2000, DECEMBER 31, 1999 AND 1998
2000 1999 1998
---------- ---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 211,183 $ 896,799 $ 280,629
Contract receivables..................................... 4,366,009 2,452,842 5,010,785
Costs and estimated earnings in excess of billings on
contracts in progress................................. 934,752 1,019,316 466,759
Inventory................................................ 79,667 79,667 79,667
Prepaid expenses and other assets........................ 147,072 57,673 398,401
---------- ---------- ----------
Total current assets............................. 5,738,683 4,506,297 6,236,241
Property and equipment, net of accumulated depreciation.... 306,941 323,525 474,353
Deferred tax asset......................................... 46,784 46,784 34,511
---------- ---------- ----------
Total...................................................... $6,092,408 $4,876,606 $6,745,105
========== ========== ==========
LIABILITIES AND MEMBERS' ACCOUNT
Current liabilities:
Accounts payable......................................... $1,479,937 $1,047,210 $1,507,235
Accrued expenses......................................... 983,681 888,557 498,749
Billings in excess of costs and estimated earnings on
contracts in progress................................. 585,620 320,757 809,985
Notes payable............................................ 3,004,210 3,004,712 3,109,869
Line of credit........................................... -- -- 600,000
---------- ---------- ----------
Total current liabilities........................ 6,053,448 5,261,236 6,525,838
---------- ---------- ----------
Commitments and contingencies (Note 11)
Members' account:
Membership units; $1 per unit, 1,000,000 units issued and
outstanding........................................... 1,000,000 1,000,000 1,000,000
Accumulated deficit...................................... (961,040) (1,384,630) (780,733)
---------- ---------- ----------
Total members' account........................... 38,960 (384,630) 219,267
---------- ---------- ----------
Total...................................................... $6,092,408 $4,876,606 $6,745,105
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-125
347
CROUCH INDUSTRIES, LLC
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND THE
YEARS ENDED DECEMBER 31, 1999 AND 1998
2000 1999 1998
---------- ----------- -----------
Contract revenues earned................................. $4,528,056 $19,566,070 $34,246,164
Cost of revenues earned.................................. 3,611,409 17,215,434 31,371,763
---------- ----------- -----------
Gross profit................................... 916,647 2,350,636 2,874,401
Selling, general and administrative expenses............. 454,749 2,761,155 1,939,168
---------- ----------- -----------
Income (loss) from operations............................ 461,898 (410,519) 935,233
---------- ----------- -----------
Other income (expense):
Interest income........................................ 8,333 29,553 58,052
Interest expense....................................... -- (257,952) (285,661)
Other income, net...................................... (326) 23,174 25,475
---------- ----------- -----------
Total other income (expense), net.............. (38,308) (205,225) (202,134)
---------- ----------- -----------
Income (loss) before income tax.......................... 423,590 (615,744) 733,099
Income tax (benefit) expense............................. -- (11,847) 32,989
---------- ----------- -----------
Net income (loss)........................................ $ 423,590 $ (603,897) $ 700,110
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-126
348
CROUCH INDUSTRIES, LLC
STATEMENTS OF MEMBERS' ACCOUNT
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
TOTAL
MEMBERSHIP ACCUMULATED MEMBERS'
UNITS DEFICIT ACCOUNT
---------- ----------- ---------
Balances at January 1, 1998............................... $1,000,000 $(1,380,843) $(380,843)
Net income.............................................. -- 700,110 700,110
Distributions to members................................ -- (100,000) (100,000)
---------- ----------- ---------
Balances at December 31, 1998............................. 1,000,000 (780,733) 219,267
Net loss................................................ -- (603,897) (603,897)
---------- ----------- ---------
Balances at December 31, 1999............................. 1,000,000 (1,384,630) (384,630)
Net income.............................................. -- 423,590 423,590
---------- ----------- ---------
Balances at March 8, 2000................................. $1,000,000 $ (961,040) $ 38,960
========== =========== =========
The accompanying notes are an integral part of these financial statements.
F-127
349
CROUCH INDUSTRIES, LLC
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
THE YEARS ENDED DECEMBER 31, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net (loss) income..................................... $ 423,590 $ (603,897) $ 700,110
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 25,653 152,068 195,008
Deferred income taxes.............................. -- (12,273) 32,989
Loss on sale of property and equipment............. -- 3,582 --
Changes in operating assets and liabilities:
Contract receivables............................. (1,913,167) 2,557,943 1,248,061
Costs and estimated earnings in excess of
billings on contracts in progress............. 84,564 (552,557) 671,310
Inventory........................................ (27,651)
Prepaid expenses and other assets................ (89,399) 340,728 (187,484)
Accounts payable................................. 432,727 (460,025) (1,130,175)
Accrued expenses................................. 95,124 389,808 (1,605,902)
Billings in excess of costs and estimated
earnings on contracts in progress............. 264,863 (489,228) (2,133,695)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. (676,045) 1,326,149 (2,237,429)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................... (9,069) (13,972) (109,179)
Proceeds from sale of asset........................... -- 9,150
----------- ----------- -----------
Net cash used in investing activities......... (9,069) (4,822) (109,179)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of line of credit........................... -- (600,000) --
Principal repayments of notes payable................. (502) (105,157) (3,049,659)
Proceeds from line of credit.......................... -- -- 600,000
Proceeds from the notes payable....................... -- -- 3,100,000
Distributions to members.............................. -- -- (100,000)
----------- ----------- -----------
Net cash (used in) provided by financing
activities.................................. (502) (705,157) 550,341
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... (685,616) 616,170 (1,796,267)
Cash and cash equivalents, beginning of year............ 896,799 280,629 2,076,896
----------- ----------- -----------
Cash and cash equivalents, end of year.................. $ 211,183 $ 896,799 $ 280,629
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest........................................... $ 46,315 $ 255,524 $ 285,661
=========== =========== ===========
Income taxes....................................... $ $ 426 $
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-128
350
CROUCH INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND FOR THE YEARS
ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Crouch Industries, LLC (the "Company") is an
electrical contractor which derives its revenues from electrical installations
and repair, primarily of commercial buildings and industrial plants primarily in
the Austin, Texas market. On December 31, 1996, Crouch Industries, LLC became
the successor company of most of the assets and construction in progress from
Crouch Electric, Inc., which currently owns 99.9% of Crouch Industries, LLC. The
Company and Pneu-Temp, Inc. are a brother/sister company (five or fewer persons
own at least 80% of the voting value of shares of each of two or more entities,
and these same persons own more than 50% of the voting power of each entity).
Pneu-Temp is a plumbing, heating, ventilation, and cooling subcontractor,
providing services primarily on commercial and government projects primarily in
the Austin, Texas market.
Operating Cycle. The Company's work is performed under cost-plus-fee
contracts, fixed-price contracts, and fixed-price contracts modified by
incentive and penalty provisions. The length of the contracts varies from one
month to approximately 24 months.
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying balance sheets, as
they will be liquidated in the normal course of contract completion, although
this may require more than one year.
Use of Estimates. The preparation of 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 financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents are short-term,
highly liquid investments that are both readily convertible into known amounts
of cash and are so near their maturity that they present insignificant risk of
changes in value because of changes in interest rates.
Inventory. Inventory consists primarily of purchased materials and
supplies. The inventory is valued at the lower of cost or market, with cost
determined on a first-in, first-out ("FIFO") basis.
Property and Equipment. Property and equipment are recorded at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments. Depreciation is provided in amounts sufficient to allocate the cost of
the depreciable assets to operations over their estimated service lives using
the straight-line method.
Significant replacements and improvements are capitalized; other
maintenance and repairs are expensed. The cost and accumulated depreciation of
assets retired or otherwise disposed of are eliminated from the accounts and any
resulting gain or loss is credited or charged to income as appropriate.
Income Taxes. As a limited liability company, the Company is taxed as a
partnership and is not subject to federal income taxes. The net income of the
Company is taxed directly to the members. Therefore, no provision or liability
for federal income taxes has been included in the accompanying financial
statements. However, the accompanying statements of operations include a
provision for state income tax (benefit) expense. Deferred income taxes exist as
a result of temporary differences caused by the accrual of state income taxes
for financial reporting purposes.
F-129
351
CROUCH INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contract Revenue Recognition and Cost of Revenues. Revenues from
fixed-price and modified fixed-price construction contracts are recognized on
the percentage-of-completion method, measured by the percentage of cost incurred
to date to estimated total cost for each contract (the "cost-to-cost method").
This method is used because management consider costs incurred to be the best
available measure of performance of progress on these contracts. Revenues from
cost-plus-fee contracts are recognized on the basis of costs incurred during the
period plus the fee earned. The Company does not recognize any gross profit
amounts related to change order work performed until it is known that the change
orders have been approved by the customer. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable and
the amount can be reliably estimated.
Cost of revenues include all direct material and labor costs and those
indirect costs related to contract performance, such as insurance, supplies,
tools and depreciation. Selling, general and administrative costs are charged to
expense as incurred.
Provisions for estimated losses on contracts in progress are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization is
reasonably assured.
The asset "Costs and estimated earnings in excess of billings on contracts
in progress" represents revenues recognized in excess of amounts billed. The
liability "Billings in excess of costs and estimated earnings on contracts in
progress" represents billings in excess of revenues recognized.
Business and Credit Concentrations. The majority of the Company's work is
performed primarily in the Texas area. Substantially all of the Company's
receivables are obligations of companies in the construction business. The
Company does not require collateral or other security on most of these accounts.
The credit risk on these accounts is controlled through credit approvals, lien
rights and payment bonds issued on behalf of general contractors and monitoring
procedures. The Company reviews its contract receivables and provides for
allowances periodically. The Company believes that no allowance is necessary as
of March 8, 2000, December 31, 1999 and 1998.
Impairment Recognition. Management periodically evaluates the carrying
value of its long-lived assets, whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. To the extent the
estimated future cash flows (undiscounted and without interest) attributable to
the asset, less estimated future cash outflows, are less than the carrying
amount, an impairment loss is recognized. The amount of impairment loss to be
recorded is the difference between the assets carrying value and its estimated
fair market value. Management believes no material impairment in long-lived
assets exists at March 8, 2000, December 31, 1999 and 1998.
Financial Instruments. The carrying amounts reported in the accompanying
balance sheets for contract receivables, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for the Company's notes
payable and line of credit approximate fair value due to interest rates, which
are comparable to current rates.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instruments;
they are subjective in nature and involve uncertainties and matters of judgment
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect these estimates.
Reclassifications. Certain reclassifications have been made to prior year
financial statements to conform with the current year presentation.
F-130
352
CROUCH INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recently Issued Accounting Pronouncements. In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The effective date of SFAS No. 133 was
delayed one year to June 15, 2000, by SFAS No. 137. Management does not believe
the implementation of this accounting pronouncement will have a material effect
on its financial statements.
2. CONTRACT RECEIVABLES
Contract receivables at March 8, 2000, December 31, 1999 and 1998 are
summarized as follows:
2000 1999 1998
---------- ---------- ----------
Current amounts due on completed and in progress
contracts........................................ $3,894,312 $2,076,867 $3,966,033
Retention.......................................... 471,697 375,975 1,044,752
---------- ---------- ----------
$4,366,009 $2,452,842 $5,010,785
========== ========== ==========
3. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS
Costs and estimated earnings on contracts in progress at March 8, 2000,
December 31, 1999 and 1998 are summarized as follows:
2000 1999 1998
------------ ------------ ------------
Costs incurred on contracts in progress...... $ 8,963,133 $ 17,968,007 $ 28,454,663
Estimated earnings........................... 2,035,130 2,122,861 753,464
------------ ------------ ------------
10,998,263 20,090,868 29,208,127
Less billings to date........................ (10,649,131) (19,392,309) (29,551,353)
------------ ------------ ------------
$ 349,132 $ 698,559 $ (343,226)
============ ============ ============
Included in the accompanying balance sheets under the following captions:
2000 1999 1998
--------- ---------- ---------
Costs and estimated earnings in excess of billings
on contracts in progress.......................... $ 934,752 $1,019,316 $ 466,759
Billings in excess of costs and estimated earnings
on contracts in progress.......................... (585,620) (320,757) (809,985)
--------- ---------- ---------
$ 349,132 $ 698,559 $(343,226)
========= ========== =========
F-131
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CROUCH INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment at March 8, 2000, December 31, 1999 and 1998
consists of the following:
2000 1999 1998
----------- ----------- ----------
Machinery and equipment.......................... $ 651,089 $ 644,332 $ 630,361
Vehicles......................................... 468,088 468,088 500,913
Computer equipment............................... 301,162 298,850 298,850
----------- ----------- ----------
1,420,339 1,411,270 1,430,124
Less accumulated depreciation.................... (1,113,398) (1,087,745) (955,771)
----------- ----------- ----------
$ 306,941 $ 323,525 $ 474,353
=========== =========== ==========
5. ACCRUED EXPENSES
Accrued expenses at March 8, 2000, December 31, 1999 and 1998 consists of
the following:
2000 1999 1998
-------- -------- --------
Accrued payroll taxes and benefits..................... $592,155 $606,922 $ 40,014
Union benefit assessments.............................. 184,476 143,100 223,494
Provision for future losses on contracts in progress... -- -- 108,487
State tax and other accruals........................... 207,050 138,535 126,754
-------- -------- --------
$983,681 $888,557 $498,749
======== ======== ========
6. NOTES PAYABLE
Notes payable at March 8, 2000, December 31, 1999 and 1998 are summarized
as follows:
Note payable with Frost National Bank;
collateralized by accounts receivable and the
members' personal assets, due on December 30,
2000, with interest paid monthly at LIBOR plus 2%
(approximately 7.8% at March 8, 2000)............ $3,000,000 $3,000,000 $3,000,000
Note payable with Crouch Electric, Inc. (related
party); unsecured, payable on January 1, 1999,
with interest at 9% per annum.................... -- -- 100,000
Note payable with Xerox Corporation; collateralized
by equipment, due in monthly installments of $300
with interest of approximately 23% per annum and
a lump sum payment of $1,005 due June 12, 2000... 4,210 4,712 9,869
---------- ---------- ----------
Total.................................... $3,004,210 $3,004,712 $3,109,869
========== ========== ==========
7. LINE OF CREDIT
The Company has a $2,000,000 line of credit with Frost National Bank with
interest at the lender's prime rate (approximately 8.5%, 8.5% and 7.75% at March
8, 2000, December 31, 1999 and 1998, respectively), expiring on December 21,
2000. The Company had no borrowings outstanding under the line of credit at
March 8, 2000 and December 31, 1999. The Company had $600,000 outstanding under
the line of credit as of December 31, 1998. The obligation is collateralized by
the Company's assets and the members' personal life insurance policies.
F-132
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CROUCH INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Company sponsored a qualified defined benefit pension plan covering all
employees who were not members of a union. The Company's funding policy was to
contribute the maximum allowable under the Internal Revenue Service regulations.
On March 16, 1999, the Company amended the defined benefit pension plan to
cease benefit accruals and terminate the pension plan effective May 16, 1999. It
is the Company's intention to distribute any residual assets remaining, after
all liabilities have been satisfied, to the participants and beneficiaries. The
prepaid benefit cost was $337,546 and was expensed during 1999 as there is no
future benefit associated with the amount. This pension plan expense is included
with selling, general and administrative expenses on the statement of
operations.
The Plan's funded status at December 31, 1998 was as follows:
Benefit obligation.......................................... $1,263,814
Fair value of plan assets................................. 1,403,924
----------
Funded status............................................. $ 140,110
==========
Prepaid benefit cost...................................... $ 337,546
==========
Assumptions used in determining the plan year 1998 pension
cost:
Discount rate.......................................... 6.5%
Expected return on plan assets......................... 6.5%
Rate of compensation increase.......................... 2.5%
Additions to and distributions from the plan during the
plan year 1998:
Pension cost........................................... $ 287,323
==========
Employer contribution.................................. $ 465,245
==========
Benefits paid.......................................... $ 2,469
==========
9. TRANSACTIONS WITH RELATED PARTIES
The Company had a note receivable from Crouch Family Limited Partnership at
December 31, 1998 in the amount of $16,757. The note was paid in full in 1999.
The Company had a note payable (related party) at December 31, 1998 to
Crouch Electric, Inc., as more fully described in Note 6. The note was paid in
full in 1999.
The Company leases its office space from 1106 Smith Road, Ltd., a related
party. Lease payments were approximately $ 34,976, $209,856 and $207,000 for the
period January 1, 2000 to March 8, 2000 and for the years ended December 31,
1999 and 1998, respectively.
The Company and Pneu Temp, Inc. ("Pneu Temp"), a brother/sister company,
are also involved in the construction industry. The activity between the
entities is described below:
F-133
355
CROUCH INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company charged Pneu-Temp for the following items for the period from
January 1, 2000 to March 8, 2000, and during the years ended December 31, 1999
and 1998 with a receivable of $ 9,186, $7,800 and $232,854 as of March 8, 2000,
December 31, 1999 and 1998, respectively.
2000 1999 1998
------- -------- ----------
Subcontract work....................................... $ -- $289,572 $2,025,007
Materials.............................................. -- 34,570 24,983
Rent on tools and equipment............................ 2,976 4,238 19,553
Office space rent...................................... 1,769 10,614 11,430
Office services........................................ 11,545 48,449 31,947
------- -------- ----------
Total........................................ $16,290 $387,443 $2,112,920
======= ======== ==========
Pneu-Temp charged the Company for the following items during the period
from January 1, 2000 to March 8, 2000 and for the years ended December 31, 1999
and 1998 with a balance due of $13,630, $38,086 and $0 as of March 8, 2000,
December 31, 1999 and 1998, respectively:
Subcontract work........................................ $17,492 $113,450 $509,859
Rent on tools and equipment............................. -- 570 5,381
------- -------- --------
Total......................................... $17,492 $114,020 $515,240
======= ======== ========
10. SIGNIFICANT CUSTOMERS
Contract revenues earned for the period from January 1, 2000 to March 8,
2000, and the years ended December 31, 1999 and 1998 from three major customers
are as follows:
2000 1999 1998
--------------------- ----------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
CONTRACT CONTRACT CONTRACT
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- ---------- ---------- ---------- ---------- ----------
Customer A............ $643,118 14.2% $3,432,280 17.5% $4,164,948 12.2%
======== ===== ========== ===== ========== =====
Customer B............ $ -- 0.0% $3,403,046 17.4% $1,791,297 5.2%
======== ===== ========== ===== ========== =====
Customer C............ $ -- 0.0% $2,416,724 12.4% $ 395,771 1.2%
======== ===== ========== ===== ========== =====
11. COMMITMENTS AND CONTINGENCIES
Legal Actions. The Company is involved from time to time in various claims
and legal actions arising in the ordinary course of business. Management
believes that the ultimate outcome of these matters will not have a material
adverse effect on the Company's results of operations or financial position.
Leases. The Company leases its building and office space from 1106 Smith
Road, Ltd. (see Note 9). This lease is for a period of ten years and commenced
on January 1, 1997. In addition to the annual rental schedule outlined below,
the Company is obligated to pay its pro rata share of taxes, insurance and
common area maintenance. Total lease expense for the period from January 1, 2000
to March 8, 2000 and for the years ended December 31, 1999 and 1998 was
approximately $34,976, $209,856 and $207,000, respectively.
F-134
356
CROUCH INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of March 8, 2000 are
as follows:
2000........................................................ $ 205,200
2001........................................................ 205,200
2002........................................................ 205,200
2003........................................................ 220,800
2004........................................................ 220,800
Thereafter.................................................. 459,600
----------
$1,516,800
==========
Unionized Labor Force. Approximately 75% of the Company's employees belong
to the International Brotherhood of Electrical Workers Local Number 520, whose
contract expires on May 31, 2000.
Executive Employment Agreement. The Company entered into an employment
agreement with one employee effective August 1997 and continuing until December
31, 2003. The agreement specifies an annual salary of $60,000 and provides that
in the event the Company modifies its pension plan so that amounts to be
contributed on behalf of the employee for the term of the agreement are less
than the amounts that would have been contributed under the terms of the pension
plan in effect as of the date of the agreement, or if the pension plan is
discounted, the employee's salary shall be increased by the amount that would
have been contributed to the pension plan on behalf of the employee prior to
such change or discontinuation.
12. SUBSEQUENT EVENTS
On March 9, 2000, 100% of the issued and outstanding membership units of
the Company and 100% of the issued and outstanding shares of Pneu-Temp, Inc.
were sold to Sunbelt Integrated Trade Services, Inc. ("Sunbelt") for
approximately $10.0 million in cash and notes. The agreement also calls for
payment of an additional $ 4.1 million in cash or stock of Sunbelt's ultimate
parent company, to the Company and Pneu-Temp, Inc., should the aggregate
earnings of the Company and several other companies being acquired concurrently
meet certain earnings targets over the three year period after acquisition.
F-135
357
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Pneu-Temp, Inc.:
We have audited the accompanying balance sheet of Pneu-Temp, Inc. (the
"Company") as of March 8, 2000 and the related statements of operations,
stockholders' equity and cash flows for the period from January 1, 2000 to March
8, 2000. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with United States 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of March 8, 2000, and the
results of its operations and its cash flows for the period from January 1, 2000
to March 8, 2000 in conformity with United States generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
May 2, 2000
Toronto, Canada
F-136
358
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pneu-Temp, Inc.:
We have audited the accompanying balance sheets of Pneu-Temp, Inc. (the
"Company") as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' 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 audits 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 the Company as of December
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 3, 2000
Las Vegas, Nevada
F-137
359
PNEU-TEMP, INC.
BALANCE SHEETS
MARCH 8, 2000, DECEMBER 31, 1999 AND 1998
2000 1999 1998
---------- ---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 219,485 $ 351,447 $ 212,127
Contract receivables..................................... 763,697 1,126,683 1,978,647
Costs and estimated earnings in excess of billings on
contracts in progress................................. 291,262 292,526 221,565
Inventory................................................ 1,240 1,240 1,240
Prepaid expenses and other assets........................ 34,747 15,834 3,677
---------- ---------- ----------
Total current assets............................. 1,310,431 1,787,730 2,417,256
Property and equipment, net of accumulated depreciation.... 95,008 102,909 124,947
---------- ---------- ----------
Total............................................ $1,405,439 $1,890,639 $2,542,203
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 370,133 $ 507,224 $ 377,395
Accrued expenses......................................... 59,755 55,970 164,548
Billings in excess of costs and estimated earnings on
contracts in progress................................. 68,446 48,548 49,068
Current portion of notes payable......................... 5,800 6,065 49,620
Capital lease obligations................................ 1,007 8,478
---------- ---------- ----------
Total current liabilities........................ 504,134 618,814 649,109
Deferred tax liabilities................................... 73,692 73,692 64,188
Notes payable, less current portion........................ 6,452 7,161
---------- ---------- ----------
Total liabilities................................ 584,278 699,667 713,297
---------- ---------- ----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, no par value. Authorized 1,000,000 shares,
1,000 shares issued and 500 outstanding............... 500 500 500
Treasury stock, 500 shares, at cost...................... (6,509) (6,509) (6,509)
Retained earnings........................................ 827,170 1,196,981 1,834,915
---------- ---------- ----------
Total stockholders' equity....................... 821,161 1,190,972 1,828,906
---------- ---------- ----------
Total............................................ $1,405,439 $1,890,639 $2,542,203
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-138
360
PNEU-TEMP, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
2000 1999 1998
-------- ---------- -----------
Contract revenues earned................................... $691,656 $5,346,238 $10,022,453
Cost of revenues earned.................................... 572,537 4,755,450 8,211,719
-------- ---------- -----------
Gross profit..................................... 119,119 590,788 1,810,734
Selling, general and administrative expenses............... 175,818 421,234 258,198
-------- ---------- -----------
Income (loss) from operations.............................. (56,699) 169,554 1,552,536
-------- ---------- -----------
Other income (expense):
Interest income.......................................... 3,831 46,530 21,967
Interest expense......................................... (275) (4,338) (8,202)
Other, net............................................... (572) 8,184 11,214
-------- ---------- -----------
Total other income, net.......................... 2,984 50,376 24,979
-------- ---------- -----------
Income before income taxes................................. (53,715) 219,930 1,577,515
Income tax expense......................................... -- 9,504 68,760
-------- ---------- -----------
Net (loss) income.......................................... $(53,715) $ 210,426 $ 1,508,755
======== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-139
361
PNEU-TEMP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
COMMON STOCK TOTAL
--------------- TREASURY RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
------ ------ -------- ---------- --------------
Balances, January 1, 1998..................... 1,000 $500 $ -- $ 353,261 $ 353,761
Net income.................................. -- -- -- 1,508,755 1,508,755
Payments to acquire treasury stock.......... -- -- (6,509) -- (6,509)
Distributions to stockholders............... -- -- -- (27,101) (27,101)
----- ---- ------- ---------- ----------
Balances, December 31, 1998................... 1,000 500 (6,509) 1,834,915 1,828,906
Net income.................................. -- -- -- 210,426 210,426
Distributions to stockholders............... -- -- -- (848,360) (848,360)
----- ---- ------- ---------- ----------
Balances, December 31, 1999................... 1,000 500 (6,509) 1,196,981 1,190,972
Net loss.................................... -- -- -- (53,715) (53,715)
Distributions to stockholders............... -- -- -- (316,096) (316,096)
----- ---- ------- ---------- ----------
Balances,
March 8, 2000............................... 1,000 $500 $(6,509) $ 827,170 $ 821,161
===== ==== ======= ========== ==========
The accompanying notes are an integral part of these financial statements.
F-140
362
PNEU-TEMP, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
2000 1999 1998
--------- ---------- ----------
Cash flows from operating activities:
Net (loss) income........................................ $ (53,715) $ 210,426 $1,508,755
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization......................... 7,901 46,446 36,469
Deferred income taxes................................. -- 9,504 68,760
Changes in operating assets and liabilities:
Contract receivables.................................. 362,986 851,964 (19,719)
Costs and estimated earnings in excess of billings on
contracts in progress............................... 1,264 (70,961) (70,959)
Prepaid expenses and other assets..................... (18,913) (12,157) 12,180
Accounts payable...................................... (137,091) 129,829 (606,183)
Accrued expenses...................................... 3,785 (108,578) 109,113
Billings in excess of costs and estimated earnings on
contracts in progress............................... 19,898 (520) (722,210)
--------- ---------- ----------
Net cash provided by operating activities........ 186,115 1,055,953 316,206
--------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment...................... -- (6,045) (91,893)
--------- ---------- ----------
Cash flows from financing activities:
Repayments of notes payable and capital lease
obligations........................................... (1,981) (62,228) (61,295)
Distributions to stockholders............................ (316,096) (848,360) (27,101)
Payments to acquire treasury stock....................... -- -- (6,509)
--------- ---------- ----------
Net cash used in financing activities............ (318,077) (910,588) (94,905)
--------- ---------- ----------
Net increase in cash and cash equivalents.................. (131,962) 139,320 129,408
Cash and cash equivalents, beginning of year............... 351,447 212,127 82,719
--------- ---------- ----------
Cash and cash equivalents, end of year..................... $ 219,485 $ 351,447 $ 212,127
========= ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 275 $ 4,316 $ 8,186
========= ========== ==========
Income taxes.......................................... $ -- $ 2,512 $ 2,547
========= ========== ==========
Non-cash investing and financing activities:
Vehicles acquired through capital lease obligations... $ -- $ 18,363 $ 5,390
========= ========== ==========
The accompanying notes are an integral part of these financial statements.
F-141
363
PNEU-TEMP, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 8, 2000 AND
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Pneu-Temp, Inc. (the "Company") is a plumbing,
heating, ventilation, and cooling subcontractor, providing services primarily on
commercial and government projects primarily in the Austin, Texas market. The
Company and Crouch Electric LLC ("Crouch") are a brother/sister company (five or
fewer persons own at least 80% of the voting value of shares of each of two or
more entities, and these same persons own more than 50% of the voting power of
each entity). Crouch is an electrical contractor which installs and services
electrical equipment and wiring for industrial and commercial customers
primarily in the Austin, Texas market.
Operating Cycle. The Company's work is performed under cost-plus-fee
contracts, fixed-price contracts, and fixed-price contracts modified by
incentive and penalty provisions. The length of the contracts varies from one
month to approximately 24 months.
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying balance sheets, as
they will be liquidated in the normal course of contract completion, although
this may require more than one year.
Use of Estimates. The preparation of 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 financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents are short-term,
highly liquid investments that are both readily convertible into known amounts
of cash and are so near their maturity that they present insignificant risk of
changes in value because of changes in interest rates.
Inventory. Inventory consists primarily of purchased materials and
supplies. The inventory is valued at the lower of cost or market, with cost
determined on a first-in, first-out ("FIFO") basis.
Property and Equipment. Property and equipment are recorded at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments. Depreciation is provided in amounts sufficient to allocate the cost of
the depreciable assets to operations over their estimated service lives using
the straight-line method.
Significant replacements and improvements are capitalized; other
maintenance and repairs are expensed. The cost and accumulated depreciation of
assets retired or otherwise disposed of are eliminated from the accounts and any
resulting gain or loss is credited or charged to income as appropriate.
Income Taxes. The Company and its shareholders have elected under
Subchapter S of the Internal Revenue Code to have the Company's taxable income
or loss reported by its shareholders. Therefore, no provision or liability for
federal income taxes has been included in the accompanying financial statements.
However, the statements of operations includes a provision for state income tax
expense. Deferred income taxes exist as a result of temporary differences caused
by the accrual of state income taxes for financial reporting purposes.
Contract Revenue Recognition and Cost of Revenues. Revenues from
fixed-price and modified fixed-price construction contracts are recognized on
the percentage-of-completion method, measured by the percentage of cost incurred
to date to estimated total cost for each contract (the "cost-to-cost method").
This method is used because management considers expended costs to be the best
available measure of performance of progress on these contracts. Revenues from
cost-plus-fee contracts are recognized on the basis
F-142
364
PNEU-TEMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of costs incurred during the period plus the fee earned. The Company does not
recognize any gross profit amounts related to change order work performed until
it is known that the change orders have been approved by the customer. An amount
equal to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
Cost of revenues include all direct material and labor costs and those
indirect costs related to contract performance, such as insurance, supplies,
tools and depreciation. Selling, general and administrative costs are charged to
expense as incurred.
Provisions for estimated losses on contracts in progress are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization is
reasonably assured.
The asset "Costs and estimated earnings in excess of billings on contracts
in progress" represents revenues recognized in excess of amounts billed. The
liability "Billings in excess of costs and estimated earnings on contracts in
progress" represents billings in excess of revenues recognized.
Business and Credit Concentrations. The majority of the Company's work is
performed in Austin, Texas and the surrounding area. Substantially all of the
Company's receivables are obligations of companies in the construction business.
The Company does not require collateral or other security on most of these
accounts. The credit risk on these accounts is controlled through credit
approvals, lien rights and payment bonds issued on behalf of general
contractors, and monitoring procedures. The Company reviews its contract
receivables and provides allowances periodically. The Company believes that no
allowance is necessary as of March 8, 2000, December 31, 1999 and 1998.
Impairment Recognition. Management periodically evaluates the carrying
value of its long-lived assets, whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. To the extent the
estimated future cash flows (undiscounted and without interest) attributable to
the asset, less estimated future cash outflows, are less than the carrying
amount, an impairment loss is recognized. The amount of impairment loss to be
recorded is the difference between the assets carrying value and its estimated
fair market value. Management believes no material impairment in long-lived
assets exists at March 8, 2000, December 31, 1999 and 1998.
Financial Instruments. The carrying amounts reported in the accompanying
balance sheets for contract receivables, prepaid expenses and other assets,
accounts payable and accrued expenses approximate fair value because of the
immediate or short-term maturity of these financial instruments. The carrying
amounts reported for the Company's notes payable and capital lease obligations
approximate fair value due to interest rates, which are comparable to current
rates.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instruments;
they are subjective in nature and involve uncertainties and matters of judgement
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect these estimates.
Reclassifications. Certain reclassifications have been made to prior year
financial statements to conform with the current year presentation.
Recently Issued Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires an entity to recognize all derivatives
as either assets or liabilities in the
F-143
365
PNEU-TEMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statement of financial position and measure those instruments at fair value. The
effective date of SFAS No. 133 was delayed one year to June 15, 2000, by SFAS
No. 137. Management does not believe the implementation of this accounting
pronouncement will have a material effect on its financial statements.
2. CONTRACT RECEIVABLES
Contract receivables at March 8, 2000, December 31, 1999 and 1998 are
summarized as follows:
2000 1999 1998
-------- ---------- ----------
Current amounts due on completed and in progress
contracts......................................... $677,133 $1,061,968 $1,710,577
Retention........................................... 86,564 64,715 268,070
-------- ---------- ----------
$763,697 $1,126,683 $1,978,647
======== ========== ==========
3. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS
Costs and estimated earnings on contracts in progress at March 8, 2000,
December 31, 1999 and 1998 are summarized as follows:
2000 1999 1998
---------- ---------- ----------
Costs incurred on contracts in progress............ $1,738,536 $2,514,611 $4,927,865
Estimated earnings................................. 343,011 485,659 348,521
---------- ---------- ----------
2,081,547 3,000,270 5,276,386
Less billings to date.............................. (1,858,731) (2,756,292) (5,103,889)
---------- ---------- ----------
$ 222,816 $ 243,978 $ 172,497
========== ========== ==========
Included in the accompanying balance sheets under the following captions:
2000 1999 1998
-------- -------- --------
Costs and estimated earnings in excess of billings on
contracts in progress................................ $291,262 $292,526 $221,565
Billings in excess of costs and estimated earnings on
contracts in progress................................ (68,446) (48,548) (49,068)
-------- -------- --------
$222,816 $243,978 $172,497
======== ======== ========
4. PROPERTY AND EQUIPMENT
Property and equipment at March 8, 2000, December 31, 1999 and 1998
consists of the following:
2000 1999 1998
-------- -------- --------
Vehicles............................................... $174,960 $174,960 $152,006
Equipment and tools.................................... 109,628 109,628 108,173
Computer equipment..................................... 3,205 3,205 3,205
-------- -------- --------
287,793 287,793 263,384
Less accumulated depreciation.......................... (192,785) (184,884) (138,437)
-------- -------- --------
$ 95,008 $102,909 $124,947
======== ======== ========
The Company leases vehicles under capital leases with terms of 12 and 48
months. Under the terms of the leases, the Company is responsible for
maintenance, repair costs, insurance, and taxes on the leased equipment. The
historical cost of these assets at March 8, 2000, December 31, 1999 and 1998 was
$22,381
F-144
366
PNEU-TEMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$22,381 and $27,881, respectively. Related accumulated depreciation at March 8,
2000, December 31, 1999 and 1998 was $17,406, $16,694 and $11,091, respectively.
Minimum future lease payments on capital lease obligations in effect at
December 31, 1999 are $1,007, due in full in the year 2000.
5. ACCRUED EXPENSES
Accrued expenses at March 8, 2000, December 31, 1999 and 1998 consists of
the following:
2000 1999 1998
------- ------- --------
Accrued payroll taxes and benefits....................... $12,875 $ 9,634 $ 15,750
Union benefit assessments................................ 32,649 39,479 116,362
Others................................................... 14,231 27 4,588
Sales tax................................................ -- 6,830 27,848
------- ------- --------
$59,755 $55,970 $164,548
======= ======= ========
6. NOTES PAYABLE
Notes payable at March 8, 2000, December 31, 1999 and 1998 are
summarized as follows:
2000 1999 1998
------- ------- --------
Note payable with Frost National Bank; collateralized by
a vehicle, repaid in 1999, with interest paid monthly
at 8.75% per annum..................................... $ -- $ -- $ 1,412
Note payable with Frost National Bank; collateralized by
accounts receivable and equipment, repaid in 1999, with
interest paid monthly at prime plus .5%................ -- -- 45,656
Note payable with Frost National Bank; collateralized by
a vehicle, repaid in 1999, with interest paid monthly
at 9.0% per annum...................................... -- -- 2,552
Note payable with Frost National Bank; collateralized by
a vehicle, payable in monthly payments of $579 due
January 2002, with interest at 8.25% per annum......... 12,252 13,226 --
------- ------- --------
12,252 13,226 49,620
Less current portion..................................... (5,800) (6,065) (49,620)
------- ------- --------
$ 6,452 $ 7,161 $ --
======= ======= ========
The required aggregate principal payments as of March 8, 2000 are as
follows:
2000........................................................ $ 5,800
2001........................................................ 6,300
2002........................................................ 152
-------
$12,252
=======
7. TRANSACTIONS WITH RELATED PARTIES
The Company and Crouch, a brother/sister company, are also involved in the
construction industry. The activity between the entities is described below.
F-145
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PNEU-TEMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Crouch charged the Company for the following items during the period from
January 1, 2000 to March 8, 2000 and for the years ended December 31, 1999 and
1998 with a balance due of $9,186, $7,800 and $96,854 at March 8, 2000, December
31, 1999 and 1998, respectively.
2000 1999 1998
------- -------- ----------
Subcontract work....................................... $ -- $289,572 $2,025,007
Materials.............................................. -- 34,570 24,983
Rent on tools and equipment............................ 2,976 4,238 19,553
Office space rent...................................... 1,769 10,614 11,430
Office services........................................ 11,545 48,449 31,947
------- -------- ----------
Total........................................ $16,290 $387,443 $2,112,920
======= ======== ==========
The Company charged Crouch for the following items during the period from
January 1, 2000 to March 8, 2000 and for the years ended December 31, 1999 and
1998 with a receivable of $13,630, $38,086 and $0 at March 8, 2000, December 31,
1999 and 1998, respectively:
2000 1999 1998
------- -------- --------
Subcontract work........................................ $17,492 $113,450 $509,859
Rent on tools and equipment............................. -- 570 5,381
------- -------- --------
Total......................................... $17,492 $114,020 $515,240
======= ======== ========
8. SIGNIFICANT CUSTOMERS
Contract revenues earned for the period from January 1, 2000 to March 8,
2000 and for the years ended December 31, 1999 and 1998 from four major
customers are as follows:
2000 1999 1998
--------------------- ----------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
CONTRACT CONTRACT CONTRACT
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- ---------- ---------- ---------- ---------- ----------
Customer A............ $ 77,675 11.2% $1,170,250 21.9% $3,326,000 33.2%
======== ==== ========== ==== ========== ====
Customer B............ $114,650 16.5% $1,145,571 21.4% $2,834,000 28.3%
======== ==== ========== ==== ========== ====
Customer C............ $ -- -- $ 730,711 13.7% $ 480,313 4.8%
======== ==== ========== ==== ========== ====
Customer D............ $ -- -- $ 691,600 12.9% $ -- --
======== ==== ========== ==== ========== ====
9. COMMITMENTS AND CONTINGENCIES
Legal Actions. The Company is involved from time to time in various claims
and legal actions arising in the ordinary course of business. Management
believes that the ultimate outcome of these matters will not have a material
adverse effect on the Company's results of operations, financial position or
liquidity.
Unionized Labor Force. Approximately 35% of the Company's employees belong
to International Brotherhood of Electrical Workers Local Number 520, whose
contract expires in June 2000. Approximately 67 % of the Company's employees
belong to United Association of Journeymen and Apprentices of the plumbing and
Pipefitting Industry of the United States and Canada (AFL-CIO) Local Number 286,
whose contracts expire May 2002.
Leases. The Company subleases its building and office space on a
month-by-month basis from Crouch Industries, LLC ("Crouch") (see Note 7). In
addition to the monthly rent payments, the Company is obligated to pay its pro
rata share of taxes, insurance, and common area maintenance.
F-146
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PNEU-TEMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENT
On March 9, 2000, 100% of the issued and outstanding shares of the Company
and 100% of the issued and outstanding membership units of Crouch were sold to
Sunbelt Integrated Trade Services, Inc. ("Sunbelt") for approximately $10.0
million in cash and notes. The agreement also calls for payment of an additional
$4.1 million in cash or stock of Sunbelt's ultimate parent company, to the
Company and Crouch should the aggregate earnings of the Company and several
other companies being acquired concurrently meet certain earnings targets over
the three year period after acquisition.
F-147
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, OCTOBER 31,
2000 1999(1)
----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 14,946 $ 16,568
Accounts receivable, including retainage of $20,094 and
$16,158 and net of allowances for bad debts of $3,489 and
$3,514 at July 31, 2000 and October 31, 1999,
respectively............................................. 82,126 73,645
Receivable from cost sharing arrangement................... 6,822 --
Costs and profits in excess of billings on uncompleted
contracts................................................ 67,651 69,977
Prepaid expenses and other current assets.................. 11,880 5,853
--------- --------
Total current assets................................. 183,425 166,043
Property and equipment:
Land and buildings......................................... 3,801 3,801
Equipment, furniture and fixtures.......................... 48,653 43,989
--------- --------
52,454 47,790
Less -- Accumulated depreciation........................... (25,778) (19,987)
--------- --------
Property and equipment, net................................ 26,676 27,803
Other assets:
Goodwill, net of accumulated amortization of $5,786 and
$4,078 at July 31, 2000 and October 31, 1999,
respectively............................................. 39,907 41,222
Networks under construction................................ 55,424 1,831
Investment in Kanas........................................ -- 12,159
Other non-current assets................................... 13,131 12,975
--------- --------
Total other assets................................... 108,462 68,187
--------- --------
Total assets......................................... $ 318,563 $262,033
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt.......................... $ 37,033 $ 35,754
Accounts payable and accrued liabilities including
retainage of $23,823 and $11,618 at July 31, 2000 and
October 31, 1999, respectively........................... 125,468 66,617
Accruals for incurred job costs............................ 56,095 45,593
Reserves for losses on uncompleted contracts............... 21,970 8,620
Billings in excess of costs and profits on uncompleted
contracts................................................ 5,474 6,478
Notes payable to shareholders and employees................ 121 --
SIRIT Settlement obligation................................ 20,000 --
Liability to preferred stockholders........................ 4,228
Stock appreciation rights payable.......................... -- 3,710
--------- --------
Total current liabilities............................ 270,389 166,772
Long-term debt, non-current portion........................ 4,667 30,618
Advances from WorldCom..................................... 37,000 32,000
Property tax payable, non-current portion.................. 17,248 15,468
Long-term deferred revenues................................ 24,862 --
Other non-current liabilities and minority interest........ 247 422
--------- --------
Total liabilities.................................... 354,413 245,280
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
$429; 5,000 shares issued and outstanding at July 31,
2000....................................................... 13,866 --
Other securities subject to mandatory redemption:
Common stock (868,033 shares at July 31, 2000)............. 5,317 --
Series B Preferred Stock Exchange Warrants................. 807 --
Series C Preferred Stock Warrants.......................... 1,459 --
--------- --------
Total temporary equity............................... 21,449 16,322
--------- --------
Shareholders' Equity (Deficit):
Common stock, $.001 par value, authorized 25,000,000
shares; 15,477,509 and 11,891,338 shares issued and
outstanding, respectively................................ 15 12
Additional paid-in capital................................. 71,207 38,290
Common stock warrants...................................... 4,292 3,979
WorldCom Phantom Stock..................................... 606 606
Retained deficit........................................... (133,419) (42,456)
--------- --------
Total shareholders' equity (deficit)................. (57,299) 431
--------- --------
Total liabilities and shareholders' equity
(deficit)............................................ $ 318,563 $262,033
========= ========
- ---------------
(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-148
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------- ----------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(RESTATED)(1) (RESTATED)(1)
Revenue:
Construction and maintenance........................ $ 120,402 $ 102,781 $ 359,143 $ 283,869
Conduit sale........................................ -- -- -- 35,721
----------- ----------- ----------- -----------
Total revenue....................................... 120,402 102,781 359,143 319,590
Costs and expenses:
Construction and maintenance........................ 106,034 87,558 353,201 243,214
Costs of conduit sale............................... -- -- -- 34,673
General and administrative expense.................. 12,440 10,871 42,049 29,238
Impairment of intangible assets..................... -- -- -- 2,465
Depreciation and amortization expense............... 3,509 2,897 9,142 8,880
----------- ----------- ----------- -----------
Total costs and expenses..................... 121,983 101,326 404,392 318,470
----------- ----------- ----------- -----------
Income (loss) from operations......................... (1,581) 1,455 (45,249) 1,120
Other income (expense):
Interest expense, net............................... (1,960) (2,070) (5,925) (6,758)
SIRIT Settlement.................................... (25,000) -- (25,000) --
Change in value of stock appreciation rights........ -- (3,792) 3,710 (1,896)
Equity in losses/impairment of investment in
Kanas............................................. -- -- (12,184) --
Other............................................... 349 (1,037) 717 (1,592)
----------- ----------- ----------- -----------
Total other income (expense)................. (26,611) (6,899) (38,682) (10,246)
----------- ----------- ----------- -----------
Loss before income taxes, minority interest and
extraordinary item.................................. (28,192) (5,444) (83,931) (9,126)
Provision for (benefit from) income taxes............. -- (52) -- (86)
----------- ----------- ----------- -----------
Loss before minority interest and extraordinary
item................................................ (28,192) (5,392) (83,931) (9,040)
Minority interest..................................... 111 93 161 292
----------- ----------- ----------- -----------
Loss before extraordinary item........................ (28,303) (5,485) (84,092) (9,332)
Extraordinary loss on early extinguishment of debt.... -- -- -- 3,067
----------- ----------- ----------- -----------
Net loss.............................................. (28,303) (5,485) (84,092) (12,399)
Increase in default redemption value of Series B
Preferred Stock..................................... -- (4,741) (1,404) (4,741)
Redemption of 2,785 shares of Series B Preferred
Stock............................................... -- -- -- (4,323)
Issuance of additional Series C Warrants.............. (675) -- (675) --
Liability to preferred stockholders................... (4,228) -- (4,228) --
Modification of exercise price of Series B Preferred
Stock Warrants...................................... -- -- -- (1,894)
Modification of conversion price of Series B Preferred
Stock............................................... -- -- -- (6,430)
Series C Preferred Stock dividends and accretion...... (302) -- (564) --
Series B Preferred Stock dividends.................... -- (39) -- (283)
----------- ----------- ----------- -----------
Loss applicable to common stock....................... $ (33,508) $ (10,265) $ (90,963) $ (30,070)
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic................................................. 16,206,939 11,794,718 14,966,337 11,939,517
Diluted............................................... 16,206,939 11,794,718 14,966,337 11,939,517
Loss applicable to common stock per share:
Basic:
Loss before extraordinary item........................ $ (2.07) $ (0.87) $ (6.08) $ (2.26)
Extraordinary loss on early extinguishment of debt.... -- -- -- (0.26)
Loss applicable to common stock....................... (2.07) (0.87) (6.08) (2.52)
Diluted:
Loss before extraordinary item........................ (2.07) (0.87) (6.08) (2.26)
Extraordinary loss on early extinguishment of debt.... -- -- -- (0.26)
Loss applicable to common stock....................... (2.07) (0.87) (6.08) (2.52)
- ---------------
(1) The fiscal 1999 unaudited amounts have been adjusted from amounts originally
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-149
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
JULY 31,
--------------------------
2000 1999
-------- ------------
(IN THOUSANDS)
(UNAUDITED)
RESTATED (1)
Cash provided by (used in) operating activities............. $ (4,381) $ 7,110
Cash flows from Investing Activities:
Capital expenditures, net................................. (6,307) (4,252)
Proceeds from sale of property and equipment.............. 469 --
Cash acquired from acquisition of businesses.............. 122 --
-------- --------
Net cash used in investing activities.............. (5,716) (4,252)
Cash flows from Financing Activities:
Repayments of long-term debt and other borrowings......... (672) (12,555)
Proceeds from the issuance of long-term debt and other
borrowings.............................................. -- 131
Advances from WorldCom.................................... 5,000 32,000
Redemption of Series B Preferred Stock.................... (11,601) (18,677)
Repurchase of Series B Preferred Stock warrants........... -- (1,890)
Proceeds from the issuance of preferred stock and
warrants, net........................................... 14,400 (92)
Proceeds from the exercise of stock options............... 1,348 497
Dividends paid on preferred stock......................... -- (167)
-------- --------
Net cash provided by financing activities.......... 8,475 (753)
Change in cash and cash equivalents......................... (1,622) 2,105
Cash and cash equivalents, beginning of period.............. 16,568 13,544
-------- --------
Cash and cash equivalents, end of period.................... $ 14,946 $ 15,649
======== ========
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 12,711
Warrants issued to financial advisor for Series C
Preferred Stock offering................................ 313 --
Common stock issued to redeem Series B Preferred Stock.... 4,912 --
Warrants issued to redeem Series B Preferred Stock........ 1,213 --
Valuation of stock appreciation rights.................... 3,710 --
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 common stock options issued to
non-employees........................................... -- 131
SIRIT Settlement obligation............................... 20,000 --
Liability to preferred stockholders....................... 4,228 --
Issuance of additional Series C Warrants.................. 675 --
-------- --------
Cash paid for:............................................ --
Interest................................................ 3,269 1,993
Income taxes............................................ -- 4,364
- ---------------
(1) The fiscal 1999 unaudited amounts have been adjusted from amounts originally
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-150
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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 nine months ended July 31, 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 $87.0 million and a
shareholders' deficit of $57.3 million as of July 31, 2000.
(2) The Company incurred losses from operations of $45.2 million, net
losses of $84.1 million, and losses applicable to common stock of $91.0
million during the nine months ended July 31, 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 July 31, 2000, totaled $22.0 million. In addition,
the Company has accrued $10.8 million for legal claims at July 31, 2000,
which is included in "Accounts Payable and Accrued Liabilities" or
"Accruals for Incurred Job Costs" in the accompanying unaudited condensed
consolidated balance sheet. Funding of these expected obligations will have
a material adverse effect on the Company's future liquidity.
(5) In the past, the Company has missed deadlines and failed to meet
performance milestones under the New Jersey Consortium contracts (See Note
16 "Segment Information"). If the Company misses the future deadlines and
performance milestones, the Company will incur penalties, additional
revenue may be withheld from the Company and the Consortium may terminate
the contracts. Additionally, other Company contracts require payment of
liquidated damages if certain milestones are not achieved on schedule.
Failure by the Company to meet contract milestones for any reasons,
including
F-151
373
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the 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.
(6) As a result of the Company's present financial condition, the
Company has experienced difficulty obtaining bonds for new work. If the
Company is unable to obtain required bonding, it may be unable to compete
and successfully bid for new contracts which may have a material adverse
effect on its operations and financial position.
(7) 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.
(8) The Company has reached a settlement arrangement with SIRIT in
regards to the SIRIT litigation (See Note 11 "Contingencies") that requires
that the Company issue SIRIT 4,074,597 registered shares of the Company's
common stock by November 30, 2000. If registration and issuance of these
shares is not completed by November 30, 2000, SIRIT may enforce a Consent
Judgement against the Company for $20 million. As part of the SIRIT
settlement, certain changes were also made to provisions of some of the
Series B Preferred Stock agreements (See Note 12 "Preferred Stock"). The
Company is required to issue 1,057,031 registered shares to the Palladin
Group by November 30, 2000. If registration and issuance of these shares is
not completed by November 30, 2000, the Company may be required to pay the
Series B Preferred Stockholders $4.2 million. The Company has insufficient
liquidity, if required, to pay the above amounts.
(9) 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.
(10) The holders of the Series C Preferred Stock have certain
registration rights with respect to the shares of common stock underlying
the Series C Preferred Stock and the Series C Warrants. If a registration
statement is not declared effective by November 30, 2000, the Series C
Preferred Stockholders may require the Company to redeem their shares at a
premium redemption price. Mandatory redemption of other securities that are
presented in the accompanying unaudited condensed consolidated balance
sheet as of July 31, 2000 as "temporary equity" may also be required under
certain circumstances (See Note 12 "Preferred Stock"). The Company has
insufficient liquidity, if required, to redeem these securities.
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
F-152
374
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Note 10,
WorldCom advanced an additional $5.0 million to the Company (in connection
with the SIRIT Settlement), and subsequent to July 31, 2000, converted
aggregate advances of $37.0 million into the WorldCom 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, subject to shareholder approval and other conditions, to merge with
Bracknell Corporation. This transaction is expected 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.
(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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company's subsequent filings on Form 10-Q.
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 September 15,
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." Approval for issuing
shares to SIRIT is also required by November 30, 2000, or SIRIT may enforce a
Consent Judgement against the Company for $20.0 million. The Company 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 nine months ended July
31, 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
nine months ended July 31, 1999, are summarized below (in thousands, except per
share data):
AS REPORTED ADJUSTMENTS ADJUSTED
----------- ----------- --------
For the Three Months Ended July 31, 1999:
Revenues........................................... $102,562 $ 219 $102,781
Operating income (loss)............................ 6,546 (5,091) 1,455
Net income (loss).................................. 161 (5,646) (5,485)
Income (loss) applicable to common stock........... 122 (10,387) (10,265)
Income (loss) applicable to common stock per
share........................................... 0.01 (0.88) (0.87)
For the Nine Months Ended July 31, 1999:
Revenues........................................... $318,820 $ 770 $319,590
Operating income (loss)............................ 12,445 (11,326) 1,119
Net loss........................................... (379) (12,019) (12,398)
Loss applicable to common stock.................... (15,790) (14,279) (30,069)
Loss applicable to common stock per share.......... (1.28) (1.22) (2.50)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS)
{NET INCOME (LOSS) FOR APPLICABLE TO COMMON
THE MONTHS ENDED STOCK FOR THE MONTHS
JULY 31, 1999 ENDED JULY 31, 1999
---------------------- ---------------------
THREE NINE THREE NINE
--------- ---------- --------- ---------
Amounts previously reported.................... $ 161 $ (379) $ 122 $(15,790)
Adjustments:
WorldCom SAR obligation(1)................... (687) (1,772) (687) (1,772)
Improperly deferred costs(2)................. (2,778) (5,923) (2,778) (5,923)
Costs improperly charged against
reserves(3)............................... (1,514) (1,023) (1,514) (1,023)
Prior year accrual adjustment(4)............. -- (957) -- (957)
Equipment impairment loss(5)................. -- (1,146) -- (1,146)
Tax effects of all adjustments............... 309 998 309 998
Series B redemption and modification(6)...... -- -- (3,338) (857)
Series B liquidation value adjustment(7)..... -- -- (1,403) (1,403)
Other adjustments(8)......................... (92) (735) (92) (735)
Long-term service contracts adjustments(9)... (884) (1,461) (884) (1,461)
------- -------- -------- --------
Total adjustments.................... $(5,646) $(12,019) $(10,387) $(14,279)
------- -------- -------- --------
Restated amounts............................... $(5,485) $(12,398) $(10,265) $(30,069)
======= ======== ======== ========
- ---------------
(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) 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) The Series B Preferred Stock should have been reflected at its liquidation
value upon recharacterization as a default obligation in May 1999.
(8) Other adjustments made as a result of the year-end audit affected the
previously reported quarterly amounts as shown.
(9) 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 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
As of July 31, 2000, the Company has outstanding approximately $0.1 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.
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 25, 1998, the date when GEC assumed the COMSAT contracts, the
remaining amounts billable to the customers for these contracts totaled $17.0
million. The estimated costs to complete these contracts for COMSAT was from
$17.0 million to $27.3 million. GEC made the following entry to reflect the
assumption of the COMSAT contracts (amounts in thousands):
Consideration received:
Cash...................................................... $ 4,663
Accounts receivable....................................... 3,754
Equipment and other assets................................ 6,548
-------
Subtotal.................................................... 14,965
Accounts payable assumed.................................... (2,549)
-------
Deferred revenue (net amount received from COMSAT to
complete the contracts)................................... $12,416
=======
The following is a summary of revenues and costs associated with the COMSAT
contracts for the periods ended July 31, 1999 (amounts in thousands):
THREE NINE
MONTHS MONTHS
------ ------
Billings on the COMSAT contracts(1)......................... $1,754 $7,310
Deferred revenue recognized................................. 739 3,269
------ ------
2,493 10,579
Direct contract costs....................................... 1,727 6,842
------ ------
Gross margin from COMSAT contracts.......................... $ 766 $3,737
====== ======
- ---------------
(1) Billings on the COMSAT contracts include approved change order revenues
associated with these contracts but not anticipated when GEC assumed such
contracts.
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 July 31, 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 July 31, 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").
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. An additional 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $0.7 million and $2.4 million were
recognized for the three and nine months ended July 31, 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 July 31, 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 July 31, 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 July 31, 2000, no revenues, except for the fees of
$2.4 million discussed above, or direct costs of construction associated with
the CDOT Network have been recognized in determining the results of operations.
The Company expects to incur significant additional amounts to complete the
construction of the CDOT Networks and other networks currently under
construction. Failure of the Company to execute sufficient user agreements for
the CDOT Networks and other networks under construction could have a material
adverse effect on the carrying value of the Company's investment.
The status of the CDOT Network and other networks under construction at
July 31, 2000, was as follows:
CONSTRUCTION LONG-TERM PERCENT PERCENT OF TOTAL
COSTS DEFERRED REVENUES COMPLETE CAPACITY LEASED
------------ ----------------- -------- ----------------
I-70 West........................... $12,035 $ -- 23 25
I-70 East........................... 5,096 3,511 100 50
Denver Metro Loop................... 23,112 10,208 38 24
Other............................... 3,439 775
------- ------- --- --
Subtotal CDOT............. 43,682 14,494
Other (consisting of primarily five
projects)......................... 11,742 10,368
------- ------- --- --
$55,424 $24,862
======= ======= === ==
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 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.
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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Until March 2000, the Company was a 25 percent 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 March 31, 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 nine months ended July 31, 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.
On February 24, 2000, Alyeska declared Kanas to be in default under the
terms of their contract, asserting 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 percent equity interest of Adesta and each of the three other original
shareholders of Kanas to 5 percent. The equity infusion resulted in an implied
value of the Company's residual 5 percent interest in Kanas of less than
$100,000.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 Alyeska; 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 nine months ended
July 31, 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):
NETWORK SERVICES TRANSPORTATION
GROUP SERVICES GROUP TOTAL
---------------- ------------------ ------------------
2000 1999 2000 1999 2000 1999
------ ------- -------- ------- -------- -------
Balance, beginning of fiscal year....... $5,703 $ 8,029 $ 2,917 $17,361 $ 8,620 $25,390
Additions(1)............................ 141 -- 7,679 -- 7,820 --
Amount utilized......................... (393) (1,231) (3,896) (6,068) (4,289) (7,299)
------ ------- -------- ------- -------- -------
Balance, January 31..................... 5,451 6,798 6,700 11,293 12,151 18,091
Additions(1)............................ 627 -- 31,587 1,858 32,214 1,858
Amount utilized......................... (53) (1,250) (13,707) (1,044) (13,760) (2,294)
------ ------- -------- ------- -------- -------
Balance, April 30....................... 6,025 5,548 24,580 12,107 30,605 17,655
Additions(1)............................ -- -- 177 -- 177 --
Amount utilized......................... (158) (1,878) (8,654) (2,838) (8,812) (4,716)
Valuation adjustments(2)................ -- 3,415 -- (4,034) -- (619)
------ ------- -------- ------- -------- -------
Balance, July 31........................ $5,867 $ 7,085 $ 16,103 $ 5,235 $ 21,970 $12,320
====== ======= ======== ======= ======== =======
- ---------------
(1) Additions during the three and nine months ended July 31, 2000, related
primarily to the New Jersey Consortium Contracts
(2) The valuation adjustments recorded during the three months ended July 31,
1999, were the result of finalizing the purchase price allocation for
revised cost estimates on previously identified loss jobs at the date of
acquisition.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
At July 31, 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.
As a result of the amendment described in the following paragraph, the remaining
$4.5 million WorldCom Note is classified as long-term liability in the
accompanying unaudited condensed consolidated financial statements.
Subsequent to July 31, 2000, WorldCom 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
expected to be completed after that date. During the three months ended July 31,
2000, WorldCom advanced the Company an additional $5.0 million to pay the cash
portion of the SIRIT Settlement (refer to Note 11, "Contingencies").
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the WorldCom Advance has been converted to equity subsequent to
July 31, 2000, as described below, the aggregate balance of $37.0 million is
presented in the accompanying unaudited condensed consolidated financial
statements as a long-term liability.
Subsequent to July 31, 2000, in exchange for the $37.0 million in advances,
WorldCom was issued 1,000 shares of $.10 par value convertible preferred stock
(the "WorldCom Preferred Stock"). The WorldCom Preferred Stock is entitled to
dividends at 6 percent 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 percent or
more of the Company's voting power, or the sale of substantially all of the
Company's assets. The WorldCom Preferred Stock is convertible to common stock at
an initial conversion price of $10.01 per share. 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, the
conversion price will automatically be reset to the price per share received in
such transaction by holders of the Company's common stock. As described in Note
18, "Subsequent Events," the proposed sale to Bracknell provides for the direct
exchange of Bracknell common shares for the WorldCom Preferred Stock which
would, with respect to that transaction, reduce the effective conversion price
to approximately $3.38 per share.
OTHER DEBT
The following is a summary of other debt as of July 31, 2000 (in
thousands):
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....................................... 559
Other term debt............................................. 237
-------
Total SASCO and SES debt.......................... 1,796
Credit Facility............................................. 35,000
Remaining balance of WorldCom Note.......................... 4,456
Capital lease obligations................................... 448
-------
41,700
Less current portion........................................ 37,033
-------
Long-term debt.............................................. $ 4,667
=======
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 sought 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 16, 2000, a jury awarded SIRIT the amount of $1.2 million in
compensatory damages. In addition, punitive damages were assessed against the
Company 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.
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 $0.7 million
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 when the outstanding
Series C Preferred Stock is converted 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 percent interest, subject to the
impact (if any) of 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 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 to SIRIT
registered common stock by November 30, 2000 in accordance with
paragraph 2 above, 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.
During the three months ended July 31, 2000, the Company recorded a charge
of $25.0 million related to the SIRIT Settlement. This consisted 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
are satisfied, the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company believes the value of the anti-dilution
rights given to SIRIT will not be reasonably estimable at that time.
Consequently, if and when such rights arise from subsequent issuances of common
shares by the Company, an additional charge to earnings will be recognized for
the fair value of SIRIT's right to acquire additional shares, regardless of
whether such rights are exercised by SIRIT.
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. Discovery in this federal action has now been
completed and pre-trial conference is scheduled for November 2000. Trial is
currently expected between December 2000 and February 2001. Adesta has filed a
Motion for Summary Judgment to dismiss all of USPT's claims. The application is
expected to be listed for argument, hearing and disposition before November
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
summary judgment was held on August 10, 2000. The court ruling granted a partial
summary judgment motion for Adesta on the Massachusetts Chapter 93A Unfair
Deceptive Acts and Practices count and denied summary judgment on the remaining
counts. On August 11, 2000, the court issued a pretrial order and conference
order requiring submission of a pretrial memorandum by September 15, 2000 and
participation in a pretrial conference on October 2, 2000. The trial is to be
set in October 2000 or later.
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 moved for summary judgment. On August 31, 2000, the parties entered into a
settlement agreement, subject to approval of a Texas court. GEC's portion due
with respect to this settlement is $32,500.
American Traffic Systems, Inc. Versus Adesta Communications, Inc. Versus
Adesta Communications, Inc. On July 10, 2000, an independent arbitrator awarded
against Adesta in the amount of $1.6 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 amount of the award was
accrued by the Company during the three months ended July 31, 2000.
Other Litigation and Claims. The Company is subject to a number of 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 and bonds have not been
required for work done under the WorldCom Master Services Agreement.
As a result of the Company's present financial condition, the Company has
experienced difficulty obtaining bonding for new contracts. If the Company is
unable to obtain required bonding, it may be unable to compete and
satisfactorily bid for and accept new projects.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
ROSEGLEN GROUP PALLADIN GROUP TOTAL
--------------- --------------- ---------------
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
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. Using the $4.00 minimum price, the
maximum additional shares issuable would be determined as follows (total
value in thousands):
SHARES SHARE PRICE TOTAL VALUE
------- ----------- -----------
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
------- ----- ------
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 has recorded a current
liability and 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.
(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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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):
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 (refer to Note 14,
"Financial Advisory Services")......................... 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
nine months ended July 31, 2000........................ $ 1,404
========
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 percent 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 percent of the fair market value of such shares, or if
the Warrants have not been exercised, reduce the then exercise price by 30
percent. 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 percent for the first 30-day period after November 30, 2000, and an
additional 1.5 percent for each additional 30-day period thereafter until it is
effective.
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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
SERIES C STOCK SERIES C WARRANTS TOTAL
-------------- ----------------- -------
Gross proceeds.................................. $14,165 $835 $15,000
Cash paid to Financial Advisors (refer to Note
14, "Financial Advisory Services")............ (567) (33) (600)
Warrants issued to Financial Advisors (refer to
Note 14,
"Financial Advisory Services").................. (296) (17) (313)
------- ---- -------
Net consideration............................... $13,302 $785 $14,087
======= ==== =======
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 (refer to Note 14, "Financial Advisory Services").
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 percent of all outstanding common shares. That limitation may be increased
to 9.99 percent 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 the 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 or issuable 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 (as amended), the exercise period for the Series
C Warrants will be extended by 1.5 times the number of days after November 30,
2000 that the registration statement is not effective.
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 percent per annum on the stated value of
$3,000 per share. The Series C shares may be
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is declared effective or whether the Company
subsequently issues 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 percent 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:
SERIES C STOCK OTHER REGISTERABLE SECURITIES
-------------- -----------------------------
Triggering event Greater of 120 percent of Premium Redemption Price
Liquidation Value or the (defined below)
Conversion Benefit
Major transaction 120 percent of Liquidation No specific provisions exist
Value
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 percent of the Liquidation
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 percent 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 percent 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 percent 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.
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 October
31, 2000 the registration statement is not effective. However, exercisability is
limited if any holder and its affiliates would own more than 4.99 percent of the
outstanding shares of Common Stock. However, that restriction may be waived by
the holder up to 9.99 percent.
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.
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 recorded 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
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 percent 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 July 31, 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 1,925,000 common shares or more, and warrants for the purchase of
approximately 400,000 shares, that may be held by the RoseGlen 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 868,033 common shares and the 200,000
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.
The Company has classified the 868,033 common shares and the warrants as
temporary equity at July 31, 2000.
F-171
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SHAREHOLDERS' EQUITY
The following is a summary of the activity in shareholders' equity
(deficit) during the nine months ended July 31, 2000 (in thousands):
ADDITIONAL COMMON WORLDCOM
COMMON PAID-IN STOCK PHANTOM RETAINED
STOCK CAPITAL WARRANTS STOCK DEFICIT TOTAL
------ ---------- -------- -------- --------- --------
Balance, November 1, 1999........... $12 $38,290 $ 3,979 $606 $ (42,456) $ 431
Issuance of common stock for
acquisition of SASCO.............. -- 739 -- -- -- 739
Conversion of WorldCom Debt......... 3 25,541 -- -- -- 25,544
Redemption of Series B Preferred
Stock............................. 1 4,910 1,213 -- -- 6,124
Warrants issued in Series C
Preferred Stock Offering.......... -- -- 1,097 -- -- 1,097
Increase in default redemption value
of Series B Preferred Stock....... -- -- -- -- (1,404) (1,404)
Contribution of interest payable
from WorldCom..................... -- 3,483 -- -- -- 3,483
Issuance of shares for GEC
Earnout........................... -- 1,806 -- -- -- 1,806
Exercise of 66,246 Special Exchange
Warrants.......................... -- 406 (406) -- -- --
Exercise of stock options and
other............................. -- 1,348 -- -- -- 1,348
Issuance of additional Series C
Warrants.......................... -- -- 675 -- (675) --
Liability to preferred
stockholders...................... -- -- -- -- (4,228) (4,228)
Accretion and dividends on Series C
Preferred Stock................... -- -- -- -- (564) (564)
Net loss............................ -- -- -- -- (84,092) (84,092)
--- ------- ------- ---- --------- --------
Subtotal.......................... 16 76,523 6,558 606 (133,419) (49,716)
Reclassification of redeemable
common stock and warrants to
temporary equity.................. (1) (5,316) (2,266) -- -- (7,583)
--- ------- ------- ---- --------- --------
Balance, July 31, 2000.............. $15 $71,207 $ 4,292 $606 $(133,419) $(57,299)
=== ======= ======= ==== ========= ========
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
F-172
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
POTENTIALLY
DILUTIVE AVERAGE
SHARES STRIKE PRICE
----------- ------------
Potentially dilutive securities outstanding at July 31,
2000:
SIRIT Settlement (subject to shareholder approval) (refer
to Note 11, "Contingencies")(1)........................ 5,012 $ --
Series C Preferred Stock(2)............................... 3,750 4.00
Employee stock options (1,574 vested) (subject to
shareholder approval)(3)............................... 2,456 6.07
WorldCom Options (subject to shareholder approval)........ 2,000 7.00
Additional shares issuable to the Palladin group upon
shareholder approval (refer to Note 12, "Preferred
Stock")................................................ 1,057 --
Series C Preferred Stock Warrants (refer to Note 12,
"Preferred Stock")..................................... 950 7.79
Employee stock options (596 vested)....................... 734 6.56
Senior Subordinated Note Warrants......................... 410 8.25
Series B Preferred Stock Warrants......................... 370 13.25
Exchange Warrants issued to redeem Series B Preferred
Stock (refer to Note 12, "Preferred Stock")............ 200 10.13
Warrants issued to Financial Advisors related to the
Series C Preferred Stock (refer to Note 12, "Preferred
Stock" and Note 14, "Financial Advisory Services")..... 75 10.75
Series A Preferred Stock Warrants......................... 62 9.82
Employee stock grants (subject to shareholder approval)... 50 --
Subtotal outstanding at July 31, 2000....................... 17,126 3.88
------ ------
Potentially dilutive securities issued subsequent to July
31, 2000:
WorldCom Preferred Stock (4).............................. 3,696 10.01
Stock offered to settle litigation........................ 25 --
------ ------
Subtotal granted subsequent to July 31, 2000................ 3,721 9.94
------ ------
Total (5)......................................... 20,847 $ 4.97
====== ======
- ---------------
(1) SIRIT is to receive 19.99 percent 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.
(2) Based on a conversion price of $4.00 (as amended).
(3) 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 price
being $6.00, $8.50 and $9.00 respectively. As of July 31, 2000, one of those
individuals is no longer an employee of the Company, so options for 200,000
shares at a weighted average strike price of $9.00 will not vest. All of
these remaining options will expire on February 1, 2004.
In May 2000, 250,000 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.
F-173
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 2000, 150,000 options were granted to the Chief Executive Officer of the
Company. The options, if approved by the shareholders, will vest immediately
with an exercise price of $2.34. These options will expire in May 2010.
(4) The WorldCom Preferred 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 a sale of the Company), 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 WorldCom Preferred Stock would automatically convert to approximately
12.3 million shares, plus dividends would be payable to the WorldCom holders
at 6 percent per annum from the date of issue. The proposed sale of the
Company to Bracknell as described in Note 18, "Subsequent Events," provides
for the direct exchange of Bracknell common shares for the WorldCom
Preferred Stock which would, with respect to that transaction, reduce the
effective conversion price to approximately $3.38 per share, or, equate the
conversion of the WorldCom Preferred Stock to approximately 11.0 million
shares of the Company's common stock.
(5) The total excludes the Bracknell Option described in Note 18, "Subsequent
Events", to purchase shares of the Company's common stock, exercisable only
in the event the merger with Bracknell is terminated. If the Agreement is
terminated, the Bracknell Option will become immediately exercisable for a
period of one year at an exercise price of $3.00 per common share. The
number of shares Bracknell will have the right to purchase is equal to 10
percent of the number of issued and outstanding Company common shares
following such exercise on a fully diluted basis.
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.
If the Bracknell merger is consummated, WorldCom will waive its rights with
respect to these phantom stock awards.
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 percent 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.
F-174
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. FINANCIAL ADVISORY SERVICES
The Company incurred approximately $2.0 million in financial advisory fees
to two related firms, L. Dolcenea, Inc. and Platinum Advisory Services, Inc.
during the nine months ended July 31, 2000. Those fees were for the following
services (in thousands):
TOTAL INCURRED
--------------
Series B Conversion (refer to Note 12, "Preferred Stock")... $ 750
Series C Issuance (refer to Note 12, "Preferred Stock")..... 600
Fair value of warrants issued related to Series C
offering.................................................. 313
Compensation for settlement of past common stock warrant
disputes.................................................. 350
------
$2,013
======
Certain of these fees were paid during the fiscal year ended October 31,
1999. Subsequent to July 31, 2000, the Company paid these financial advisors
$0.3 million for financial advisory services. 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
Supplemental Compensation Arrangements. On March 31, 2000, the Board of
Directors approved supplemental compensation arrangements for six members of
management that would have provided for aggregate minimum payments to these
individuals of $4.8 million, in addition to the compensation provided for in
their employment agreements, upon a change of control of the Company or
termination of employment without cause. In Conjunction with the SIRIT
Settlement (Refer to Note 11, "Contingencies"), these supplemental compensation
arrangements were terminated.
Employment Contracts. The employment contracts of the Company's Chief
Executive Officer and two new executives hired in May 2000 provide for payment
of three years compensation in the event of a change in control of the Company
or termination of their employment without cause. The aggregate termination
benefits potentially payable under these contracts may be in excess of $5.0
million and include payment by the Company of any excise taxes that may be
imposed on such termination payments.
The employment contracts of these individuals also included loans to them
by the Company during fiscal year 2000 in the aggregate amount of $0.8 million.
So long as they employed by the Company, the loans will be repaid on the first,
second and third anniversary of the loans, through bonuses to these individuals
in amounts sufficient to pay principal and interest due on the loans, plus taxes
payable by the individuals with respect to the bonuses. The total estimated
future obligation of the Company under these bonus provisions is approximately
$1.5 million. At July 31, 2000, the Company had accrued and expensed
approximately $0.1 million related to this liability.
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 nine months ended July 31, 2000.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
Sales to unaffiliated customers:
Network Services.................................... $ 66,460 $ 63,960 $201,383 $198,903
Transportation Services............................. 18,424 8,403 64,553 27,254
Construction........................................ 34,655 29,283 89,992 90,342
Communication Development (International)........... 863 1,135 3,214 3,091
-------- -------- -------- --------
$120,402 $102,781 $359,142 $319,590
======== ======== ======== ========
Income (loss) from operations:
Network Services.................................... $ 1,993 $ 2,202 $ 6,492 $ 9,758
Transportation Services............................. (2,927) (1,562) (48,650) (6,628)
Construction........................................ 567 2,414 (318) (1,273)
Communication Development (International)........... 80 (45) (103) (234)
Unallocated Corporate Overhead...................... (1,294) (1,554) (2,670) (503)
-------- -------- -------- --------
$ (1,581) $ 1,455 $(45,249) $ 1,120
======== ======== ======== ========
Identifiable assets:
Network Services.................................... $187,776 $142,610 $189,776 $142,610
Transportation Services............................. 46,262 49,520 46,262 49,520
Construction........................................ 75,986 64,425 75,986 64,425
Communication Development (International)........... 3,430 3,355 3,430 3,355
Corporate........................................... 5,109 2,123 3,109 2,123
-------- -------- -------- --------
$318,563 $262,033 $318,563 $262,033
======== ======== ======== ========
The Company derives a significant portion of its revenues from a few large
customers. Those customers and their revenues for the three and nine months
ended July 31, 2000, are as follows:
FOR THE MONTHS
ENDED JULY 31, 2000
-------------------
CUSTOMER OPERATING GROUP THREE NINE
- -------- --------------- -------- --------
WorldCom................................. Network Services $37,362 $92,731
New Jersey Consortium.................... Transportation and Network Services 35,217 79,511
WorldCom Master Services Agreement. 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 would not be less than $325.0
million ("Aggregate Minimum"), including a fee of 12 percent of reimbursable
costs under the agreement. On August 24, 2000, a new WorldCom Master Services
Agreement was executed, extending through August 24, 2006. Under the new
agreement, WorldCom has agreed to award the Company 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.
F-176
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all revenues from WorldCom relate to the WorldCom Master
Services Agreement. At July 31, 2000, the Company had billed and unbilled
receivables of $4.5 million and $14.7 million, respectively, related to
WorldCom.
New Jersey Consortium Contracts. 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.
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
during the three months ended January 31, 2000, 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 negotiated 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 a resolution and estimated losses for the
construction portion of the contract were revised to $35.3 million, resulting in
a loss for the three months ended April 30, 2000, of $27.6 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 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.
During the three months ended July 31, 2000, the Company continued its work
on the project. The estimated losses for the construction portion of the project
were revised to $36.3 million, resulting in a loss for the three months of $1
million. The remaining loss expected to be incurred in completing the contract
and accrued at July 31, 2000 is $10.6 million.
At July 31, 2000, the Company had billed and unbilled receivables of $17.8
million and $20.8 million, respectively, related to the New Jersey Consortium.
F-177
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 EVENTS
BRACKNELL MERGER AGREEMENT
On August 24, 2000, the Company executed an Agreement and Plan of Merger
with Bracknell Corporation, an Ontario corporation ("Bracknell"). Bracknell is a
leading North American facilities services company that provides a broad range
of technical and management services to ensure that buildings, plant and
equipment operate effectively. Bracknell's common shares are traded on the
Toronto Stock Exchange. If the transaction is consummated, the Company will be
merged into a newly formed, wholly owned subsidiary of Bracknell. The merger
transaction is intended to qualify as a tax-free reorganization.
The merger consideration is to be 0.6 share of Bracknell common stock for
each share of the Company's common stock outstanding immediately prior to the
effective date of the merger. Bracknell has committed to cause the Bracknell
shares to be issued in the exchange to be listed on the Toronto Stock Exchange.
Provisions with respect to other outstanding equity securities of the Company
include the following:
- On the closing of the merger, the Series C Stock is to be exchanged for
540 Bracknell shares for each share of Series C stock.
- The WorldCom Option/SAR for 2,000,000 Company shares at $7.00 per share
is to be converted to a warrant for the purchase of 1,200,000 Bracknell
common shares at a price of $11.66 per share.
- The $37 million face value of the WorldCom Preferred Stock (refer to Note
10, "Debt") is to be exchanged for approximately 6.6 million Bracknell
common shares.
- The Company has committed to use its commercially reasonable best efforts
to cause holders of all other outstanding rights to acquire or receive
the Company's securities to consent to termination of their rights on
terms and conditions reasonably satisfactory to Bracknell.
The Agreement provides for the issuance by Bracknell of "Replacement
Options" to various directors, officers and employees of the Company who
terminate their Company options. The Replacement Options are to be on
substantially similar vesting and economic terms as the Company options
terminated. The Replacement Options will be subject to approval by Bracknell's
board and approval by Bracknell's shareholders to increase the number of shares
that may be issued under Bracknell's existing stock option plan.
F-178
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ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consummation of the merger is subject to satisfying a number of conditions,
including the following:
- The Company has committed to hold a stockholder meeting prior to October
31, 2000, to seek shareholder approval for a number of matters. In
particular, the Company needs shareholder approval to increase the
authorized capital stock of the Company to allow for issuance of common
shares as consideration for the Sirit Settlement and for the potential
issuance of shares subject to the Bracknell Option described below.
- The Bracknell shares to be issued in the Merger are to be registered with
the Securities and Exchange Commission. That registration statement must
be declared effective by the SEC before the merger can close. Bracknell
and the Company will prepare a Proxy Statement/Prospectus for
distribution to shareholders and the Company must schedule a second
shareholder meeting, not later than January 15, 2001, for approval of the
merger by the Company's shareholders.
- The Company has committed to use its commercially reasonable best efforts
to resolve material litigation against the Company as reasonably directed
by Bracknell.
- Bracknell must have obtained financing necessary to complete the
transactions contemplated by the Agreement on terms satisfactory to
Bracknell.
In connection with the Agreement, Bracknell was granted an option (the
"Bracknell Option") to purchase shares of the Company's common stock,
exercisable only in the event the Agreement is terminated. If the Agreement is
terminated, the Bracknell Option will become immediately exercisable for a
period of one year at an exercise price of $3.00 per common share. The number of
shares Bracknell will have the right to purchase is equal to 10 percent of the
number of issued and outstanding Company common shares following such exercise
on a fully diluted basis.
If the Merger is terminated because the Company's shareholders have not
approved the transaction by February 1, 2001, or because of a breach of the
Agreement by the Company, the Company may be required to pay Bracknell a
termination fee of $3 million.
In conjunction with the merger, Worldcom, a major stockholder and customer
of the Company, entered into an agreement with Bracknell to provide certain
financial inducements and other support for the transaction. Worldcom agreed to
and has subsequently converted $37 million in advances to the Company to
preferred stock and has agreed to accept Bracknell shares in exchange for this
preferred stock upon close of the transaction. Worldcom amended and extended its
Master Services Agreement with the Company on more favorable terms and
designated Bracknell as a preferred vendor for construction and management
projects within the scope of Bracknell's service offerings. Worldcom has also
agreed to provide limited financial assistance to the Company, if needed, in the
form of advances on the Master Services Agreement and has agreed to indemnify
Bracknell for certain potential claims against the Company.
Worldcom has given Bracknell a proxy to vote all of its shares, including
those voting rights granted in the WorldCom Preferred Stock agreement, in
relation to the Company's shareholder vote to approve the merger.
OTHER
In August 2000, the Company made a $2 million loan to the Company's Chief
Executive Officer. The purpose of the loan was to provide funds to the Chief
Executive Officer for the purchase of a Certificate of Deposit which was then
pledged on the Company's behalf to secure a performance bond required for a
newly awarded contract. The bonding agency required that a third-party provide
collateral for such bond and, in light of the Company's need to provide such
collateral quickly, the Chief Executive Officer agreed to post a Certificate of
Deposit if the Company loaned 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.
F-179
401
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-180
402
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-181
403
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, OCTOBER 31,
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
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, furniture 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 (DEFICIT)
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 to shareholders and employees............... -- 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
======== ========
See notes to consolidated financial statements.
F-182
404
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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
See notes to consolidated financial statements.
F-183
405
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998, AND 1997
ADDITIONAL SENIOR SERIES B WORLDCOM
COMMON COMMON PAID-IN NOTE PREFERRED WORLDCOM PHANTOM
SHARES $.001 PAR CAPITAL WARRANTS WARRANTS OPTIONS STOCK
------ --------- ---------- -------- --------- -------- --------
(IN THOUSANDS)
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...... -- -- -- -- -- -- 606
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 $606
====== === ======= ====== ====== ====== ====
UNREALIZED
LOSS ON RETAINED
INVESTMENTS, EARNINGS
NET OF TAXES (DEFICIT) TOTAL
------------ --------- -------
(IN THOUSANDS)
Balance, October 31,
1996...................... $(54) $(1,189) $11,599
Issuance of common stock 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
Issuance of common stock
for exercise of options... -- -- 2,071
Tax benefit from exercise
of 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
Issuance of common stock
for conversion 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... $ -- $(5,698) $40,217
==== ======= =======
See notes to consolidated financial statements.
F-184
406
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998, AND 1997
UNREALIZED
ADDITIONAL SENIOR SERIES B WORLDCOM LOSS ON RETAINED
COMMON COMMON PAID-IN NOTE PREFERRED WORLDCOM PHANTOM INVESTMENTS, EARNINGS
SHARES $.001 PAR CAPITAL WARRANTS WARRANTS OPTIONS STOCK NET OF TAXES (DEFICIT)
------ --------- ---------- -------- --------- -------- -------- ------------ ---------
(IN THOUSANDS)
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) -- -- -- -- -- (4,496)
Modification of
conversion price of
Series B Preferred
Stock.................. -- -- 6,430 -- -- -- -- -- (6,430)
Modification of
conversion price of
Series B Preferred
Stock Warrants......... -- -- -- -- 1,894 -- -- -- (1,894)
Repurchase of Series B
Preferred Stock
Warrants............... -- -- 2,669 -- (4,559) -- -- -- --
Increase to Series B
default redemption
value.................. -- -- (7,970) -- -- -- -- -- (5,878)
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.................. -- -- -- -- -- -- -- -- (18,060)
------ --- ------- ------ ------- ------- --- -- --------
Balance, October 31,
1999..................... 11,891 $12 $38,290 $1,244 $ 2,735 $ -- 606 $-- $(42,456)
====== === ======= ====== ======= ======= === === ========
TOTAL
--------
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........ (10,002)
Modification of
conversion price of
Series B Preferred
Stock.................. --
Modification of
conversion price of
Series B Preferred
Stock Warrants......... --
Repurchase of Series B
Preferred Stock
Warrants............... (1,890)
Increase to Series B
default redemption
value.................. (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)
--------
Balance, October 31,
1999..................... $ 431
========
See notes to consolidated financial statements.
F-185
407
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
OCTOBER 31,
----------------------------
1999 1998 1997
-------- -------- ------
(IN THOUSANDS)
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)
Redemption 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
======== ======== ======
See notes to consolidated financial statements.
F-186
408
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
FOR THE YEARS ENDED OCTOBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
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 --
See notes to consolidated financial statements.
F-187
409
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:
ORGANIZATIONAL GROUP SERVICE PROVIDED
- -------------------- ----------------
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.
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.
F-188
410
ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-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 about 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 effect 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.
F-189
411
ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
Net goodwill, at November 1, 1998........................... $31,374
Patton Management Company ("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
=======
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 by
approximately $1.1 million and $0.4 million, respectively, assumed in the 1998
acquisition of Patton.
(2) The Company terminated the operations 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.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
POTENTIALLY
DILUTIVE AVERAGE
SHARES STRIKE PRICE
----------- ------------
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 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
Warrants (Refer to Note 23)............................ 66 10.13
Shares in conjunction with 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 Notes
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
====== ======
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
equivalent of 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."
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In July 1999, the Company executed a teaming agreement with 186K.NET that
provides for a contingent equity swap. 186K.NET is a privately-owned start-up
company that provides data and communications facilities consulting services.
The swap provision was designed to enable each company to acquire an equity
interest in the other to promote the cooperative spirit of the teaming
agreement. The value of shares to be issued and received is to be equivalent and
is to be determined by taking 10% of the increase in the fair market value of
the Company or of 186K.NET, which ever is lower, from July 1999 to the date of
exercise. 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. Either the Company or 186K.NET can exercise the swap at
any time from July 2000 to July 2003 by giving six months prior notice to the
other party of its intent to exercise the swap. However, an exercise can only
occur if both companies experience an increase in fair market value; otherwise,
the value and number of shares that may by exchanged will be zero. Unless and
until the swap occurs, the Company has no opportunity for gain or loss with
respect to its rights and obligations under the swap provision and no accounting
is necessary. However, this arrangement could result in the issuance of
additional Company securities in the future for non-monetary consideration.
FAIR VALUE 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.
During the periods covered by the accompanying consolidated financial
statements, the Company did not engage in hedging or other transactions
involving derivatives. The Company does not anticipate early adoption of this
statement.
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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Senior 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 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
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 judgements with respect to preacquisition
litigation. The range of this contingent consideration potentially payable to
WorldCom is from $0 to $17.0 million. Presently, Company management expects to
pay no additional consideration to WorldCom for these matters. The purchase
price for MFSNT included the following consideration (in millions):
Contract price.............................................. $58.8
Transaction related costs................................... 4.6
WorldCom Option............................................. 3.5
WorldCom Phantom Stock Awards............................... 0.6
-----
Total purchase price........................................ $67.5
=====
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 obtained the information needed
to complete its valuations and finalized the allocation as set forth below (in
millions):
AS PREVIOUSLY FINAL
REPORTED ADJUSTMENTS ALLOCATION
------------- ----------- ----------
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
====== ===== ======
- ---------------
(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.
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 of up 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
F-196
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 which is being amortized 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 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 Company's acquisitions had taken place as of November 1, for each of the
following fiscal years ended October 31, (in thousands, except per share
amounts):
1998 1997
-------- --------
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)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. ACQUISITION OF COMSAT CONTRACTS:
On February 25, 1998, GEC acquired 12 contracts (the "COMSAT Contracts') with
the Texas Department of Transportation from CRSI Acquisition, Inc., a subsidiary
of COMSAT Corporation ("COMSAT"). The COMSAT Contracts were for the installation
of intelligent traffic management systems and the design and construction of
wireless communication networks. In exchange for assuming the obligations to
perform under the COMSAT Contracts, GEC received consideration from COMSAT of
approximately $15.0 million and assumed existing payables of approximately $2.6
million.
On February 25, 1998, the date when GEC assumed the COMSAT contracts, the
remaining amounts billable to the customers for these contracts totaled $17.0
million. The estimated costs to complete these contracts for COMSAT was from
$17.0 million to $27.3 million. GEC made the following entry to reflect the
assumption of the COMSAT contracts (amounts in thousands):
Consideration received:
Cash...................................................... $ 4,663
Accounts receivable....................................... 3,754
Equipment and other assets................................ 6,548
--------
Subtotal.................................................... 14,965
Accounts payable assumed.................................... (2,549)
--------
Deferred revenue (net amount received from COMSAT to
complete the contracts)................................... $(12,416)
========
The following is a summary of revenues and costs associated with the COMSAT
contracts for the fiscal years ended October 31 (amounts in thousands):
1999 1998
------- -------
Billings on the COMSAT contracts(1)......................... $ 7,952 $11,327
Deferred revenue recognized................................. 3,935 8,481
------- -------
11,887 19,808
Direct contract costs....................................... 8,675 10,672
------- -------
Gross margin from COMSAT contracts.......................... $ 3,212 $ 9,136
======= =======
- ---------------
(1) Billings on the COMSAT contracts include approved change order revenues
associated with these contracts but not anticipated when GEC assumed such
contracts.
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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. UNCOMPLETED CONTRACTS:
Uncompleted contracts consist of the following at October 31, (in thousands):
1999 1998
--------- --------
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
========= ========
Included in the accompanying balance sheets under the following headings at
October 31, (in thousands):
1999 1998
-------- --------
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
======== ========
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 sales
or left on the balance sheet as "costs and earnings 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- - 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
useable 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.
F-201
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prospective Accounting for Sales of IRU's. FIN 43 broadens the definition of
real estate and will likely require that some or all elements of fiber optic
networks (e.g., right-of-way and conduit) must now be defined as real estate and
revenue recognition criteria for the sale or lease of IRU's will be provided by
SFAS No. 66, "Accounting for Sales of Real Estate." SFAS 66 is a different
accounting model and is likely to result in the deferral and amortization of
both costs and revenues related to network assets that would have previously
been accounted for as described above. Among other requirements, SFAS 66
requires title to transfer to the buyer for up-front revenue recognition to be
appropriate. FIN 43 is effective for all sales of real estate with property
improvements or integral equipment entered into after June 30, 1999.
Consequently, none of the transactions entered into by MFSNT prior to July 2,
1998, or the conduit sale closed by the Company in April 1999 are subject to
those provisions. However, for transactions subsequent to June 30, 1999, the
Company will be required to apply the guidance of FIN 43.
Much of the conceptual basis for the IRU accounting historically followed by
MFSNT is that the arrangements for use of the conduit qualify for revenue
recognition as sales-type leases under SFAS No. 13. No part of the transaction
was viewed as a "real estate" transaction, so the legal transfer of title to the
"leased" assets was not considered determinative as to whether or not the
transactions could be recorded as sales versus operating leases.
9. 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 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 $8.9 million of
F-202
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
At 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):
NETWORK TRANSPORTATION
SERVICES SERVICES TOTAL
-------- -------------- --------
Balance, July 2, 1998....................................... $16,266 $ 24,234 $ 40,500
Amount utilized............................................. (8,237) (6,873) (15,110)
------- -------- --------
Balance, October 31, 1998................................... 8,029 17,361 25,390
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
======= ======== ========
- ---------------
(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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DEBT
The Company's debt consists of the following at October 31, (in thousands):
1999 1998
------- -------
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
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
======= =======
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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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:
2000........................................................ $35,754
2001........................................................ 30,321
2002........................................................ 75
2003........................................................ 19
2004........................................................ 19
Thereafter.................................................. 184
-------
$66,372
=======
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 on
November 30, 2000. To date, the Company has not received any additional advances
against the $15.0 million available.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 judgement 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.
In 1997, U.S. Public Technologies ("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 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 merit, and unjust enrichment.
Alphatech's claim is for $15 million. A hearing for a summary judgement 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 judgement. This matter is not set for
trial.
F-206
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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):
CAPITAL
YEARS ENDED OCTOBER 31, LEASES OPERATING LEASES
- ----------------------- ------- ----------------
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
======
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,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
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 percent).................................... 20.6
----- -----
Amount deemed paid for the beneficial conversion
privilege................................................. $(7.9) $(7.9)
Amount deemed paid for the Series B Preferred Stock......... $ 4.8
Because the Series B Preferred Stock was immediately convertible, the discount
attributable to the beneficial 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
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As summary of the above described transactions and their effects on equity and
income applicable to common shareholders is presented below (amounts in
$millions):
ADDITIONAL
PAID-IN CHARGED TO
SERIES B STOCK WARRANTS CAPITAL EARNINGS
-------------- -------- ---------- ----------
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)
===== ===== ===== ======
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 nonqualified 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 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 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):
1999 1998 1997
----------------------- ----------------------- ----------------------
OPTION PRICE OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------ -------------- ------ -------------- ------ -------------
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....... 1072 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
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
$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
The Board of Directors has committed to issue, subject of 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 expect per share amounts):
YEAR ENDED OCTOBER 31,
---------------------------
1999 1998 1997
-------- ------- ------
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
Subject to shareholder approval, the Board of Directors has approved a grant of
50,000 shares of the Company's 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 MFSNT fiber optic network construction projects were executed by
MFSNT prior to the July 1998 acquisition of MFNST 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
F-211
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1.0 million by the Company for various advisory services during the year
ended October 31, 1999, including services related to extensions of default
waivers under the Series B Convertible Preferred Stock. L. Dolcenea was also
paid $1.0 million by the Company in June 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 shares 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 employee's 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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
1999 1998 1997
-------- ------ ------
Domestic.................................................... $(18,285) $6,084 $3,304
Foreign..................................................... 656 453 573
-------- ------ ------
$(17,629) $6,537 $3,877
======== ====== ======
The provision (benefit) for income taxes is composed of the following for the
fiscal years ended October 31 (in thousands):
1999 1998 1997
------- ------ ----
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
======= ====== ====
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:
1999 1998 1997
----- ---- -----
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
----- ---- -----
F-213
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities result from differences in the timing of the
recognition of certain income and expense items from tax and financial reporting
purposes. The sources of these differences are as follows at October 31 (amounts
in thousands):
1999 1998
------- ------
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
======= ======
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 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 and at the time of this transaction. The Company's 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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SEGMENT INFORMATION:
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.
FOR THE FISCAL YEAR ENDED
OCTOBER 31,
-----------------------------
1999 1998 1997
-------- -------- -------
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
======== ======== =======
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company derives a significant portion of its revenues from a few large
customers. Those customers are as follows:
PERCENTAGE OF TOTAL
REVENUE FOR THE REVENUES DURING
FISCAL YEAR ENDED THE FISCAL YEARS
OCTOBER 31, ENDED OCTOBER 31,
----------------- ---------------------
CUSTOMER OPERATING GROUP 1999 1999 1998 1997
-------- --------------- ----------------- ----- ----- -----
New Jersey Consortium Transportation and Network $78,515 18% 8% --%
Services
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 --
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, 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 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 $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.
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.
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
AS REPORTED ADJUSTMENTS ADJUSTED
----------- ----------- --------
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)
F-217
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ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS) APPLICABLE TO
NET INCOME (LOSS) COMMON STOCK
--------------------------- --------------------------------
FIRST SECOND THIRD FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------- --------- ---------
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 amounts....................... $(5,318) $(1,595) $(5,485) $(5,498) $(14,306) $(10,265)
======= ======= ======= ======= ======== ========
- ---------------
Quarterly adjustments related to:
(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
F-218
440
ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- --------
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
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, 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.
F-219
441
ABLE TELCOM HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 to the WorldCom Conversion Agreement and the Series B and
Series C Transactions on the October 31, 1999, consolidated balance sheet is as
follows:
WORLDCOM
AS REPORTED CONVERSION SERIES B SERIES C PRO FORMA
----------- ---------- -------- -------- ---------
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
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-220
442
ABLE TELCOM HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD ACQUISITIONS EXPENSES DEDUCTIONS PERIOD
------------ ------------ ---------- ---------- ----------
Allowance for doubtful accounts:
October 31, 1999..................... $ 866 $ -- $5,044(A) $ 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..................... -- -- -- -- --
- ---------------
(A) The Company's policy is to increase the allowance for doubtful accounts
based upon a specific analysis of individual receivables, and to a lesser
extent, on historical experience. Once a specific receivable is "reserved" on
the general ledger, it continues to be reflected on the accounts receivable
subsidiary ledger until all collection efforts have failed, after which the
receivable is written off. Historically, the Company has not experienced any
significant recovery of receivables previously written off.
The $5.0 million increase in the allowance for doubtful accounts during fiscal
1999 was greater, as a percentage of operating revenues and as an aggregate
amount, than the Company's historical experience. The increase is attributable
to the following operating groups and jobs (in thousands):
Network Services............................................ $ 83
------
Transportation Services:
E-470..................................................... 774
Panama.................................................... 525
SR-91..................................................... 642
Argentina................................................. 210
Other..................................................... 279
------
Total Transportation Services..................... 2,430
------
Construction:
Texas Department of Transportation/COMSAT Corporation..... 1,401
Dial Communications, Inc. ("DIAL") -- Various jobs........ 600
Other..................................................... 530
------
Total Construction................................ 2,531
------
$5,044
======
Network Services Group. Charges to the reserve reflect normal experience in
collection of trade receivables.
F-221
443
Transportation Services Group. The need for an increase of $0.8 million for
E-470 became evident while negotiating a final settlement of that contract
during the last half of 1999. In this settlement the Company agreed to forebear
with respect to certain amounts owed in exchange for, among other things, a
release of the Company from any obligations to maintain software for the term of
the contract. Final resolution was achieved in March 2000 with no further
adjustments required. The increase of $0.5 million for Panama followed claims
and litigation by Panama in 1999 as to the adequacy of toll collection systems
installed by the Company during 1998 and 1999. The increase of $0.6 million
related to SR-91 was in response to customer claims that the Company had failed
to meet its contractual obligations under the existing operations and
maintenance contract, which the Company believed raised doubt as to
collectibility of certain accounts. These customer claims are still under
negotiation. The increase of $0.2 million for Argentina was to resolve a dispute
about the Company's performance under the construction contract. Other charges
to the reserve reflect normal experience in collecting trade receivables.
Construction Group. As consideration for the assumption of certain contracts
from COMSAT Corporation ("COMSAT") during fiscal 1998, the Company was assigned
approximately $3.8 million of receivables, predominately from the Texas
Department of Transportation. COMSAT indemnified the Company for any of these
receivables that were not collected, so long as the Company made a written claim
to COMSAT on or before one year after the closing date(i.e., February 25, 1999).
The Company subsequently determined that approximately $1.4 million of these
receivables were not collectible, and began negotiations with COMSAT prior to
the one-year deadline. Based on these negotiations, the Company did not file a
written claim with COMSAT. When the negotiations were terminated following the
expiration of the one-year indemnification period, the Company determined that
the cost of pursuing any claims it might still have against COMSAT would
outweigh any potential benefit or recovery. Management believes these
receivables will not be collected.
In conjunction with the closure of Dial during 1999, the company negotiated the
settlement of various related contracts and receivables resulting in a combined
increase in the allowance for doubtful accounts of $0.6 million. Other charges
to the reserve reflect normal experience in collecting trade receivables.
F-222
444
APPENDIX A-1
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF NOVEMBER 14, 2000,
AMONG
BRACKNELL CORPORATION,
BRACKNELL ACQUISITION CORPORATION,
AND
ABLE TELCOM HOLDING CORP.
445
TABLE OF CONTENTS
PAGE
------
ARTICLE I. DEFINITIONS...................................................... A-1-1
ARTICLE II. THE MERGER...................................................... A-1-7
Section 2.01 The Merger.................................................. A-1-7
Section 2.02 Conversion/Issuance of Shares............................... A-1-7
Section 2.03 Surrender and Payment....................................... A-1-8
Section 2.04 Adjustments................................................. A-1-9
Section 2.05 Fractional Shares........................................... A-1-9
Section 2.06 Dissenting Shares........................................... A-1-10
ARTICLE III. THE SURVIVING CORPORATION...................................... A-1-10
Section 3.01 Certificate of Incorporation................................ A-1-10
Section 3.02 Bylaws...................................................... A-1-10
Section 3.03 Directors and Officers...................................... A-1-10
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF ABLE.......................... A-1-10
Section 4.01 Corporate Existence and Power............................... A-1-10
Section 4.02 Corporate Authorization..................................... A-1-11
Section 4.03 Governmental Authorization.................................. A-1-11
Section 4.04 Non-Contravention........................................... A-1-11
Section 4.05 Capitalization.............................................. A-1-11
Section 4.06 Subsidiaries................................................ A-1-12
Section 4.07 SEC Filings................................................. A-1-12
Section 4.08 Financial Statements........................................ A-1-13
Section 4.09 Proxy Statement/Prospectus; Registration Statement.......... A-1-13
Section 4.10 Absence of Certain Changes.................................. A-1-13
Section 4.11 No Undisclosed Material Liabilities......................... A-1-14
Section 4.12 Real Property............................................... A-1-15
Section 4.13 Personal Property........................................... A-1-16
Section 4.14 Accounts Receivable......................................... A-1-16
Section 4.15 Contracts................................................... A-1-16
Section 4.16 Litigation.................................................. A-1-17
Section 4.17 Taxes....................................................... A-1-17
Section 4.18 Tax Free Merger............................................. A-1-17
Section 4.19 ERISA....................................................... A-1-18
Section 4.20 Environmental Matters....................................... A-1-19
Section 4.21 Intellectual Property....................................... A-1-20
Section 4.22 Employees................................................... A-1-20
Section 4.23 Intercompany Agreements..................................... A-1-20
Section 4.24 Certain Payments............................................ A-1-20
Section 4.25 Customers and Suppliers..................................... A-1-21
Section 4.26 Canadian Competition Act.................................... A-1-21
Section 4.27 Rights Plan................................................. A-1-21
Section 4.28 Compliance With Other Applicable Laws....................... A-1-21
Section 4.29 Insurance................................................... A-1-21
Section 4.30 Bonds....................................................... A-1-21
Section 4.31 Bankruptcy and Insolvency Proceedings....................... A-1-21
Section 4.32 Broker's Fees............................................... A-1-22
Section 4.33 Vote Required............................................... A-1-22
Section 4.34 Opinion of Financial Advisor................................ A-1-22
A-1-i
446
PAGE
------
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BRACKNELL AND SUBCO............
A-1-22
Section 5.01 Corporate Existence and Power............................... A-1-22
Section 5.02 Corporate Authorization..................................... A-1-22
Section 5.03 Governmental Authorization.................................. A-1-22
Section 5.04 Non-Contravention........................................... A-1-22
Section 5.05 Capitalization.............................................. A-1-23
Section 5.06 Canadian Securities Law and Bracknell Financial A-1-24
Statements..................................................
Section 5.07 Proxy Statement/Prospectus; Registration Statement.......... A-1-24
Section 5.08 No Undisclosed Material Liabilities......................... A-1-24
Section 5.09 Absence of Certain Changes.................................. A-1-25
Section 5.10 Litigation.................................................. A-1-25
Section 5.11 Taxes....................................................... A-1-25
Section 5.12 Tax Free Merger............................................. A-1-26
Section 5.13 Compliance With Other Applicable Laws....................... A-1-27
Section 5.14 Brokers..................................................... A-1-27
Section 5.15 Certain Payments............................................ A-1-27
Section 5.16 Interim Operations of Subco................................. A-1-27
Section 5.17 Authorization for Bracknell Common Stock.................... A-1-27
ARTICLE VI. COVENANTS OF ABLE............................................... A-1-27
Section 6.01 Conduct of Able............................................. A-1-27
Section 6.02 Stockholder Meeting......................................... A-1-28
Section 6.03 Access to Information....................................... A-1-28
Section 6.04 Other Offers................................................ A-1-29
Section 6.05 Notice of Certain Events.................................... A-1-30
Section 6.06 Affiliates.................................................. A-1-30
Section 6.07 Litigation.................................................. A-1-30
Section 6.08 Officers.................................................... A-1-30
Section 6.09 Certain Rights to Acquire Able Shares....................... A-1-31
Section 6.10 Bracknell Option............................................ A-1-31
Section 6.11 Employee Stock Options...................................... A-1-31
Section 6.12 Support Agreements.......................................... A-1-31
Section 6.13 Sale of Businesses.......................................... A-1-31
Section 6.14 WorldCom Series E Debt...................................... A-1-31
Section 6.15 Canadian Competition Act.................................... A-1-31
Section 6.16 Opinion of Financial Advisor................................ A-1-31
Section 6.17 Bankruptcy and Insolvency Proceedings....................... A-1-31
ARTICLE VII. COVENANTS OF BRACKNELL AND SUBCO............................... A-1-32
Section 7.01 Conduct of Bracknell and Subco.............................. A-1-32
Section 7.02 Access to Information....................................... A-1-32
Section 7.03 Obligations of Subco........................................ A-1-32
Section 7.04 Stock Exchange Listing...................................... A-1-32
Section 7.05 Notice of Certain Events.................................... A-1-32
Section 7.06 Financing Relating to the Merger............................ A-1-33
Section 7.07 Opinion of Financial Advisor................................ A-1-33
Section 7.08 Replacement Options......................................... A-1-33
ARTICLE VIII. COVENANTS OF BRACKNELL, SUBCO AND ABLE........................ A-1-33
Section 8.01 Commercially Reasonable Best Efforts........................ A-1-33
Section 8.02 Certain Filings............................................. A-1-33
Section 8.03 Public Announcements........................................ A-1-33
A-1-ii
447
PAGE
------
Section 8.04 Further Assurances.......................................... A-1-34
Section 8.05 Preparation of the Proxy Statement/Prospectus and A-1-34
Registration Statement......................................
ARTICLE IX. CONDITIONS TO THE MERGER........................................ A-1-34
Section 9.01 Conditions to the Obligations of Each Party................. A-1-34
Section 9.02 Additional Conditions Precedent to the Obligations of A-1-35
Bracknell...................................................
Section 9.03 Additional Conditions Precedent to the Obligations of A-1-36
Able........................................................
ARTICLE X. TERMINATION....................................................... A-1-37
Section 10.01 Termination by Bracknell or Able............................ A-1-37
Section 10.02 Termination by Able......................................... A-1-38
Section 10.03 Termination by Bracknell.................................... A-1-38
Section 10.04 Effect of Termination....................................... A-1-38
ARTICLE XI. MISCELLANEOUS................................................... A-1-39
Section 11.01 Notices..................................................... A-1-39
Section 11.02 Survival of Representations and Warranties.................. A-1-40
Section 11.03 Amendments; No Waivers...................................... A-1-40
Section 11.04 Fees and Expenses........................................... A-1-40
Section 11.05 Successors and Assigns...................................... A-1-40
Section 11.06 Governing Law............................................... A-1-41
Section 11.07 Counterparts; Effectiveness................................. A-1-41
Section 11.08 Entire Agreement............................................ A-1-41
Section 11.09 Exhibits and Schedules...................................... A-1-41
Section 11.10 Headings.................................................... A-1-41
Section 11.11 Severability of Provisions.................................. A-1-41
EXHIBITS
Exhibit A Form of Warrant.............................................
Exhibit B Form of Option..............................................
Exhibit C Support Agreement from Series C Stockholders................
Exhibit D Commitment Agreement........................................
Exhibit E Support Agreements with Directors and Officers..............
Exhibit F Amended and Restated Master Services Agreement..............
Exhibit G Form of Opinion -- Paul, Hastings, Janofsky & Walker LLP....
Exhibit H Form of Opinion -- Torys....................................
Exhibit I Terms of Series E Shares....................................
SCHEDULES
Schedule 2.02(e) Stock Appreciation Rights...................................
Schedule 2.02(g) Bracknell Common Stock to be Issued to the Palladin Group...
Schedule 2.02(h) Bracknell Common Stock to be Issued to the Series C
Stockholders................................................
Schedule 2.02(j) Able Warrants to be Converted into Bracknell Warrants.......
Schedule 4.04 Non-Contravention...........................................
Schedule 4.05(a)(i) Options Inside and Outside Able Stock Option Plan...........
Schedule 4.05(a)(ii) Additional Options, Warrants and Other Rights...............
Schedule 4.05(a)(iii) Stock or Rights to Acquire Stock to be Issued after August
23, 2000....................................................
Schedule 4.05(a)(iv) Phantom Stock and Stock Appreciation Rights.................
Schedule 4.05(b) Redemption Rights...........................................
Schedule 4.05(c) Stockholder Agreements......................................
Schedule 4.06(i) Subsidiaries................................................
Schedule 4.06(ii) Subsidiary Stock............................................
Schedule 4.06(iii) Ownership of Subsidiary Stock...............................
A-1-iii
448
Schedule 4.07(b) SEC Filings.................................................
Schedule 4.10 Absence of Certain Changes..................................
Schedule 4.10(m) Severances..................................................
Schedule 4.11 Liabilities.................................................
Schedule 4.12(a) Owned Real Property.........................................
Schedule 4.12(b) Leased Real Property........................................
Schedule 4.12(c) Easements...................................................
Schedule 4.12(d) Real Property subject to a Lease, Sublease, License or other
Agreement...................................................
Schedule 4.12(g) Title Policies..............................................
Schedule 4.13(b) Leased Personal Property....................................
Schedule 4.14 Accounts Receivable.........................................
Schedule 4.15(i) Material Contracts..........................................
Schedule 4.15(ii) Material Breaches of Contracts..............................
Schedule 4.16 Able Litigation.............................................
Schedule 4.17(i) Filing of Tax Returns.......................................
Schedule 4.17(ii) Tax Deficiencies............................................
Schedule 4.17(iii) Deferred Intercompany Transactions..........................
Schedule 4.17(iv) Tax Audits..................................................
Schedule 4.19(a) Employee Plans..............................................
Schedule 4.19(h) Severance Pay...............................................
Schedule 4.20 Environmental Matters.......................................
Schedule 4.21 Intellectual Property Claims................................
Schedule 4.22 Collective Bargaining/Labor Union Agreements................
Schedule 4.23 Intercompany Agreements.....................................
Schedule 4.28 Compliance with Laws........................................
Schedule 4.30 Bonds.......................................................
Schedule 4.32 Broker's Fees...............................................
Schedule 5.04 Non-Contravention...........................................
Schedule 5.05(a) Existing Options, Warrants or other Rights..................
Schedule 5.05(b) Capital Stock and Ownership Interests.......................
Schedule 5.08 Liabilities.................................................
Schedule 5.09 Absence of Certain Changes..................................
Schedule 5.10 Bracknell Litigation........................................
Schedule 5.11(i) Tax Returns.................................................
Schedule 5.11(ii) Tax Deficiencies............................................
Schedule 5.13 Compliance with Laws........................................
Schedule 5.14 Broker's Fees...............................................
Schedule 6.01(e) Permitted Issuance of Securities............................
Schedule 6.09 Former Stockholders of GEC, SASCO and SES...................
Schedule 9.02(c) Officers, Directors and other Signatories to Support
Agreements..................................................
A-1-iv
449
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of November 14,
2000, among Bracknell Corporation, an Ontario corporation ("Bracknell"),
Bracknell Acquisition Corporation, a Florida corporation and a wholly owned
subsidiary of Bracknell ("Subco"), and Able Telcom Holding Corp., a Florida
corporation ("Able").
WHEREAS, Bracknell, Subco and Able entered into the Agreement and Plan of
Merger, dated August 23, 2000 (the "Original Merger Agreement"), which provided
for the merger of Subco with and into Able;
WHEREAS, Bracknell, Subco and Able have agreed to amend and restate the
Original Merger Agreement, with effect as of and from the date of the Original
Merger Agreement;
WHEREAS, the Boards of Directors of Bracknell, Subco and Able each have
determined that it is in the best interests of their respective stockholders for
Subco to merge with and into Able (the "Merger") upon the terms and subject to
the conditions of this Agreement; and
WHEREAS, for U.S. federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Code (as defined below).
NOW, THEREFORE, the parties hereto, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, intending to be
legally bound, hereby covenant and agree that the Original Merger Agreement
shall be and is hereby amended and restated as hereinafter set forth:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the capitalized terms used in this
Agreement shall have the meanings set forth below:
"Able" shall have the meaning set forth in the preface above.
"Able Authorized Capital Stock" shall have the meaning set forth in Section
4.05(a).
"Able Employees" shall have the meaning set forth in Section 4.22.
"Able's Knowledge" means the actual knowledge, after making due inquiry, of
the following officers of Able and its Subsidiaries: Billy V. Ray, James Brands,
Michael Brenner, Edward Pollock, Robert Sommerfeld, Edwin Johnson, Barry Hall,
Philip Kiernan, Charles Maynard, Harold Alvord, Phillip Galpin and Richard
Boyle.
"Able Material Adverse Change" shall have the meaning set forth in Section
4.01.
"Able Material Adverse Effect" shall have the meaning set forth in Section
4.01.
"Able Preferred Stock" shall have the meaning set forth in Section 4.05(a).
"Able SEC Filings" shall have the meaning set forth in Section 4.07(a).
"Able Securities" means any equity, debt or other securities issued by
Able, or rights to acquire such securities.
"Able Shares" shall have the meaning set forth in Section 2.02(b).
"Able Significant Subsidiary" shall have the meaning set forth in Section
4.01.
"Able Stock Options" shall have the meaning set forth in Section 4.05(a).
"Able Stockholder Meeting" shall have the meaning set forth in Section
6.02.
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"Able Subsidiary Securities" means any equity, debt or other securities
issued by a Subsidiary of Able, or rights to acquire such securities.
"Able Warrants" shall have the meaning set forth in Section 2.02(j).
"Able 10-K" shall have the meaning set forth in Section 4.07(a).
"Accounts Receivable" means all accounts receivable, trade receivables,
notes receivable and other receivables, which in any case are payable as a
result of goods sold or services provided, or billed for, in connection with the
Business.
"Acquisition Proposal" shall have the meaning set forth in Section 6.04(a).
"Action" means any action, suit, arbitration, inquiry, proceeding or
investigation by or before any Governmental Authority or arbitrator.
"Affiliate" means, with respect to any Person, any other Person
controlling, controlled by, or under common control with such Person. For
purposes of this Agreement, the term "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with" as used with
respect to any Person) means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person whether through ownership of voting securities, by contract or otherwise.
"Agreement" means this Agreement together with the attached Appendices,
Schedules and Exhibits.
"Authorized Bracknell Capital Stock" shall have the meaning set forth in
Section 5.05(a).
"Benefit Arrangement" shall have the meaning set forth in Section 4.19(g).
"Bracknell" shall have the meaning set forth in the preface above.
"Bracknell Common Stock" shall have the meaning set forth in Section
2.02(b).
"Bracknell Disclosure Documents" shall have the meaning set forth in
Section 5.06(a).
"Bracknell Material Adverse Change" shall have the meaning set forth in
Section 5.01.
"Bracknell Material Adverse Effect" shall have the meaning set forth in
Section 5.01.
"Bracknell Option" shall have the meaning set forth in Section 6.10.
"Bracknell's Knowledge" means the actual knowledge, after making due
inquiry, of any of the following officers of Bracknell: Paul D. Melnuk, John D.
Amodeo, John Naccarato, Frederick Green, Jon Taylor, David Smith and the
President of each of Bracknell's customer categories as of the date hereof.
"Bracknell Stock Options" shall have the meaning set forth in Section
5.05(a).
"Bracknell Voting Debt" shall have the meaning set forth in Section
5.05(b).
"Bracknell Warrants" shall have the meaning set forth in Section 2.02(j).
"Business" means (a) with respect to Able or its Subsidiaries, all business
conducted by Able or any of its Subsidiaries prior to the Closing Date, and (b)
with respect to Bracknell and its Subsidiaries, all business conducted by
Bracknell or any of its Subsidiaries prior to the Closing Date.
"Canadian GAAP" means Canadian generally accepted accounting principles in
effect at the time and applied on a basis consistent with past periods.
"Closing" means the consummation of the Merger and the other transactions
contemplated hereby.
"Closing Date" shall have the meaning set forth in Section 2.01(c).
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time, and the rules and regulations promulgated thereunder.
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"Conversion Number" shall have the meaning set forth in Section 2.02(b).
"Dissenting Shares" shall have the meaning set forth in Section 2.06(a).
"Dolcenea" shall have the meaning set forth in Section 2.02(i).
"Dollars" or "$" means lawful currency of the U.S., unless otherwise
specified.
"Easement" shall have the meaning set forth in Section 4.12(c).
"Easement Contract" shall have the meaning set forth in Section 4.12(c).
"Effective Time" shall have the meaning set forth in Section 2.01(c).
"Employee Plans" shall have the meaning set forth in Section 4.19(a).
"Environment" means all air (including indoor air), surface water
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwater, drinking water supplies, land and soil (surface or
subsurface), any other environmental medium, all plant and animal life, biota
and all other natural resources.
"Environmental Claim" means any and all Actions, Orders, claims, Liens,
notices, notices of violation, investigations, complaints, requests for
information, proceedings or other communications (written or oral), whether
criminal or civil, pursuant to or relating to any applicable Environmental Law
by any Person (including any Governmental Authority or citizen's group) based
upon, alleging, asserting, or claiming any actual or potential (i) violation of
or liability under any Environmental Law, (ii) violation of or liability under
any Environmental Permit, or (iii) liability for investigation costs, cleanup
costs, removal costs, remediation costs, response costs, natural resource
damages, property damage, personal injury, fines or penalties arising out of,
based on, resulting from, or relating to the presence, Release, or threatened
Release in or into the Environment, of any Hazardous Materials at any location,
including any off-Site location to which Hazardous Materials or materials
containing Hazardous Materials were sent for handling, recycling, storage,
treatment or disposal.
"Environmental Cleanup Site" means any location which is listed or proposed
for listing on the National Priorities List, the Comprehensive Environmental
Response, Compensation and Liability Information System, or on any similar list
maintained by any jurisdiction of sites requiring investigation or cleanup, or
which is the subject of any pending or threatened Action related to or arising
from any alleged violation of any Environmental Law.
"Environmental Law" means any Law governing or relating to pollution,
protection of human health or the Environment, air emissions, water discharges,
hazardous or toxic substances, solid or hazardous waste, or occupational health
and safety, or any similar Law of foreign jurisdictions where Able or its
Subsidiaries do business, including without limitation the U.S. Federal Water
Pollution Control Act, the U.S. Clean Air Act, the U.S. Solid Waste Disposal Act
as amended by the Resource Conservation and Recovery Act (RCRA), the Hazardous
Materials Transportation Act (HMTA), the Federal Insecticide, Fungicide, and
Rodenticide Act (FIFRA), the U.S. Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), as amended by the Superfund Amendment
and Reauthorization Act (SARA), the U.S. Emergency Planning and Community
Right-To-Know Act (EPCRA), the U.S. Toxic Substances Control Act (TSCA), the
U.S. Safe Drinking Water Act (SDWA), and the U.S. Occupational Safety and Health
Act (OSHA), all as amended, and the rules and regulations thereunder as
interpreted by Governmental Authorities.
"Environmental Permit" means any Permit relating to any Environmental Law
and includes any and all Orders, consents, or settlements issued by or entered
into with a Governmental Authority under any Environmental Law.
"ERISA" shall have the meaning set forth in Section 4.19(a).
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
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"Exchange Agent" shall have the meaning set forth in Section 2.03(a).
"Exchange Filing Requirements" shall have the meaning set forth in Section
5.06(a).
"Florida General Corporation Law" means the general corporation laws of the
State of Florida.
"GAAP" means U.S. generally accepted accounting principles in effect at the
time and applied on a basis consistent with past periods.
"GEC" means Georgia Electric Company.
"Governmental Authority" means, with respect to any country, any federal,
state, provincial, or local government, any of its subdivisions, agencies,
authorities, commissions, boards, bureaus or other governmental entity, and any
federal, state, provincial or local court or tribunal and any arbitrator.
"Hazardous Material" means petroleum, petroleum hydrocarbons or petroleum
products, petroleum by-products, radioactive materials, asbestos or
asbestos-containing materials, gasoline, diesel fuel, pesticides, radon, urea
formaldehyde, lead or lead-containing materials, polychlorinated biphenyls, and
any other chemicals, materials, substances or wastes in any amount or
concentration which are categorized, classified, defined as or included in the
definition of "hazardous substances," "hazardous materials," "hazardous wastes,"
"toxic substances," "toxic pollutants," "pollutants," "regulated substances,"
"solid wastes," or "contaminants" under any Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the regulations promulgated thereunder.
"Intellectual Property" means trademarks, service marks, patents, patent
applications, software, registered copyrights and applications therefor,
together with trade secrets, know-how and other similar property whether
registered or unregistered.
"Intellectual Property Assets" shall have the meaning set forth in Section
4.21.
"Law" means, with respect to any country, any federal, state, provincial,
local or other statute, rule, regulation or ordinance, and any requirement or
obligation under common law.
"Lease" means any lease or sublease of real or personal property.
"Leased Personal Property" shall have the meaning set forth in Section
4.13(b).
"Leased Real Property" shall have the meaning set forth in Section 4.12(b).
"Liability" means any debt, obligation, duty or liability of any nature
(including any undisclosed, unfixed, unliquidated, unsecured, unmatured,
unaccrued, unasserted, contingent, conditional, inchoate, implied, vicarious,
joint, several or secondary liability), regardless of whether such debt,
obligation, duty or liability would be required to be disclosed on a balance
sheet prepared in accordance with GAAP or Canadian GAAP.
"Lien" means any lien, mortgage, deed of trust, security interest, charge,
pledge, retention of title agreement, easement, encroachment, condition,
reservation, covenant or other encumbrance affecting title or the use, benefit
or value of the asset in question.
"Material Contracts" shall have the meaning set forth in Section 4.15.
"Material Lease" means (i) all Leases relating to the Leased Real Property
and (ii) a Lease relating to Leased Personal Property involving a term of more
than one (1) year or rental obligations exceeding $100,000 per annum.
"Material Litigation" means any Action (involving Able or any of its
Subsidiaries) by any Person or by or before any Governmental Authority that
involves claims in excess of $1,000,000 or that could reasonably be expected to
result in an Able Material Adverse Change or an Able Material Adverse Effect.
"Merger" shall have the meaning set forth in the preface above.
"Merger Consideration" shall have the meaning set forth in Section 2.02(b).
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"Option Recipients" shall have the meaning set forth in Section 7.08.
"Order" means any order, judgment, injunction, decree, determination or
award of any Governmental Authority or arbitrator.
"Original Merger Agreement" shall have the meaning set forth in the preface
above.
"Other Applicable Law" means any Law applicable to the Business other than
an Environmental Law or a law relating to (a) Taxes or (b) ERISA.
"Owned Real Property" shall have the meaning set forth in Section 4.12(a).
"Permit" means any permit, license, certificate (including a certificate of
occupancy), registration, authorization, consent, or approval issued by a
Governmental Authority.
"Permitted Liens" means (a) Liens for Taxes that are not yet due and
payable or that are being contested in good faith by appropriate proceedings and
as to which adequate reserves have been established in accordance with GAAP or
Canadian GAAP, as the case may be, consistently applied, (b) workers',
repairmens' and similar Liens imposed by Law that have been incurred in the
ordinary course of business and consistent with past practice which in the
aggregate will not have an Able Material Adverse Effect or Bracknell Material
Adverse Effect, as the case may be, (c) Liens and other title defects,
easements, encroachments and encumbrances that do not, individually or in the
aggregate, materially impair the value or continued use of the property (as
currently used) to which they relate, (d) the rights of others to customer
deposits which in the aggregate will not have an Able Material Adverse Effect or
Bracknell Material Adverse Effect, as the case may be, (e) any of the Liens
described in the foregoing clauses (a) through (d) of this definition incurred
in the ordinary course of business and consistent with past practice, after the
date hereof which in the aggregate will not have an Able Material Adverse Effect
or Bracknell Material Adverse Effect, as the case may be, and (f) any Liens
relating to that certain Credit Agreement by and among Able, the Lenders (as
defined therein) from time to time parties thereto, and Bank of America N.A.
(successor to NationsBank N.A.), as amended from time to time, (g) Liens of
Governmental Authorities which are parties to rights of way or easement
agreements with Able or its Subsidiaries, except for any Liens which result from
a default under or breach by Able or its Subsidiaries of such agreements, and
(h) any Liens obtained by Able or its Subsidiaries that sureties may have
pursuant to surety bonds obtained by Able or its Subsidiaries, provided that
Able or its Subsidiaries are not in default under the contracts (or indemnity
agreements) that those bonds relate to.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof.
"Platinum" shall have the meaning set forth in Section 2.02(i).
"Proxy Statement/Prospectus" shall have the meaning set forth in Section
4.09.
"Real Property" shall have the meaning set out in Section 4.12(d).
"Registration Statement" shall have the meaning set forth in Section 4.09.
"Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing of a
Hazardous Material into the Environment.
"Replacement Options" shall have the meaning set forth in Section 7.08.
"Returns" means all returns, reports, declarations or other filings that
must be filed with any Governmental Authority with respect to Taxes.
"SASCO" means Southern Aluminum & Steel Corporation.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act Affiliate" shall have the meaning set forth in Section
6.06.
"Securities Act Affiliate Agreement" shall have the meaning set forth in
Section 6.06.
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"Securities Act of 1933" means the U. S. Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Series C Conversion Number" shall have the meaning set forth in Section
2.02(h).
"Series C Shares" shall have the meaning set forth in Section 2.02(h).
"Series C Stockholders" means Halifax Fund, L.P., The Gleneagles Fund
Company, Palladin Overseas Fund Limited, Palladin Partner I, L.P., Lancer
Securities (Cayman) Limited, PGEP III, LLC, and Quatro Fund Limited.
"Series E Conversion Number" shall have the meaning set forth in Section
2.02(d).
"Series E Shares" shall have the meaning set forth in Section 2.02(d).
"SES" means Specialty Electronic Systems, Inc.
"Sirit" means Sirit Technologies, Inc.
"Sirit Settlement" means the agreement dated July 7, 2000 between Able,
Sirit and certain other parties entered into to settle certain outstanding
litigation between them.
"Site" means any of the real properties currently or previously owned,
leased or operated by Able or its Subsidiaries for purposes of conducting their
Business, including the Owned Real Property and the Leased Real Property.
"Subco" shall have the meaning set forth in the preface above.
"Subco Common Stock" shall have the meaning set forth in Section 2.01(a).
"Subsidiary" of a party means any corporation or other organization,
whether incorporated or unincorporated, of which such party or any Subsidiary of
such party is a general partner or of which such party or one or more of its
Subsidiaries or such party and one or more of its Subsidiaries, directly or
indirectly, owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
Board of Directors or others performing similar functions with respect to such
corporation or other organization.
"Superior Proposal" shall have the meaning set forth in Section 6.04(a).
"Surviving Corporation" shall have the meaning set forth in Section
2.01(b).
"Tax" or "Taxes" means all federal, state, county, local and foreign taxes
(including, without limitation, income, profits, premium, estimated, excise,
sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital
levy, production, transfer, withholding, employment, unemployment compensation,
payroll related and property taxes and import duties), whether or not measured
in whole or in part by net income, and including deficiencies, interest,
additions to tax or interest, and penalties with respect thereto.
"Title Policies" shall have the meaning set forth in Section 4.12(g).
"TSE" shall have the meaning set forth in Section 2.05.
"U.S." means the United States of America.
"Violation" shall have the meaning set forth in Section 4.04.
"Voting Debt" shall have the meaning set forth in Section 4.05(b).
"WorldCom" means WorldCom, Inc. or one of its Subsidiaries, as the context
requires.
"WorldCom Equity Interest" shall have the meaning set forth in Section
2.02(e).
"WorldCom Series E Debt" shall have the meaning set forth in Section 6.14.
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ARTICLE II
THE MERGER
Section 2.01 The Merger.
(a) Immediately prior to the Effective Time, Bracknell shall
contribute the Merger Consideration to Subco in exchange for common stock
of Subco (the "Subco Common Stock").
(b) At the Effective Time, Subco shall be merged with and into Able in
accordance with the Florida General Corporation Law, whereupon the separate
existence of Subco shall cease, and Able shall be the surviving corporation
(the "Surviving Corporation").
(c) As soon as practicable after satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger, Subco and Able
will file a certificate of merger with the Secretary of State of the State
of Florida and make all other filings or recordings required by the Florida
General Corporation Law in connection with the Merger. The Closing will
take place at the offices of Torys, 237 Park Avenue, New York, New York
10017-3142, unless another place is agreed to in writing by the parties
hereto. The Merger shall become effective at such time as the certificate
of merger is duly filed with the Secretary of State of the State of Florida
or at such later time as is specified in the certificate of merger (the
"Effective Time"). The date of the Closing is referred to herein as the
"Closing Date".
(d) From and after the Effective Time, the Surviving Corporation shall
possess all the assets (except for the Merger Consideration which the Able
stockholders and others are entitled to receive), rights, privileges,
powers and franchises and be subject to all of the liabilities,
restrictions, disabilities and duties of Able and Subco, all as provided
under the Florida General Corporation Law.
Section 2.02 Conversion/Issuance of Shares. At the Effective Time:
(a) Each issued and outstanding share of Subco Common Stock, shall, by
virtue of the Merger and without any action on the part of Bracknell, Subco
or Able, be converted into one fully paid and non-assessable share of
common stock of the Surviving Corporation.
(b) Except as set forth in Section 2.06, each share of common stock,
par value $.001 per share, of Able ("Able Shares"), issued and outstanding
immediately prior to the Effective Time (other than (i) Able Shares held by
Able and (ii) Able Shares held by Bracknell or Subco) shall, by virtue of
the Merger and without any action on the part of Bracknell, Subco, Able or
any holder thereof, be converted into the right to receive 0.6 (the
"Conversion Number") of a fully paid and non-assessable common share of
Bracknell (the "Bracknell Common Stock"). The Bracknell Common Stock to be
issued pursuant to this Section 2.02(b), Section 2.02(d), Section 2.02(f),
Section 2.02(g), Section 2.02(h) and Section 2.02(i), together with the
warrants described in Section 2.02(e), is referred to herein as the "Merger
Consideration."
(c) Each Able Share held by Able, Bracknell or Subco shall be
cancelled and extinguished without any consideration therefor.
(d) Each of the Series E Convertible Preferred Shares, par value
$0.10, of Able (the "Series E Shares") issued and outstanding immediately
prior to the Effective Time (other than (i) Series E Shares held by Able
and (ii) Series E Shares held by Bracknell or Subco) shall be converted
into the right to receive the number of shares of Bracknell Common Stock
determined by dividing the aggregate face value of all Series E Shares by
$8.25 Canadian dollars and then dividing that quotient by the number of
Series E Shares issued and outstanding immediately before the Effective
Time (the "Series E Conversion Number"). For the purposes of this
calculation, the exchange rate between U.S. dollars and Canadian dollars
shall be the exchange rate published by the Bank of Canada at the close of
business on the day before the Closing Date.
(e) The stock appreciation rights described on Schedule 2.02(e) (or,
if such stock appreciation rights have been exchanged for options to
acquire Able Shares, such options) (the "WorldCom Equity Interest") shall
be converted into warrants to purchase 1,200,000 shares of Bracknell Common
Stock at
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an exercise price of $11.66 per share in cash. The terms of such warrants
shall otherwise be as set forth in Exhibit A.
(f) Bracknell shall issue to Sirit the number of shares of Bracknell
Common Stock that Sirit is entitled to receive under the terms of the Sirit
Settlement or as otherwise agreed by Bracknell and Sirit.
(g) In satisfaction of their entitlement to receive 1,057,031 Able
Shares pursuant to Amendment No. 1 to the Securities Exchange Agreement and
Related Registration Rights Agreement of Able Telcom Holding Corp., by and
among Able and the Persons listed on Schedule 2.02(g), dated July 7, 2000,
Bracknell shall issue an aggregate of 634,218 shares of Bracknell Common
Stock to the Persons and in the amounts set forth in Schedule 2.02(g).
(h) Each of the Series C Convertible Preferred Shares, par value
$0.10, of Able (the "Series C Shares") issued and outstanding immediately
prior to the Effective Time (other than (i) Series C Shares held by Able
and (ii) Series C Shares held by Bracknell or Subco) shall be converted
into the right to receive the number of shares of Bracknell Common Stock
determined by dividing $18,000,000 by $4.00, multiplying the result by 0.6,
and then dividing that product by the number of Series C Shares issued and
outstanding immediately before the Effective Time (the "Series C Conversion
Number").
(i) Bracknell shall issue to Platinum Advisory Services, Inc.
("Platinum") and L. Dolcenea, Inc. ("Dolcenea") the aggregate number of
shares of Bracknell Common Stock that they are entitled to receive pursuant
to the letter agreement between Able, Platinum and Dolcenea, dated October
18, 2000.
(j) The warrants to purchase Able Shares set forth in Schedule 2.02(j)
(the "Able Warrants") shall become warrants to purchase shares of Bracknell
Common Stock (the "Bracknell Warrants") subject to the following terms and
conditions: (i) each Bracknell Warrant shall be exercisable to purchase the
number of shares of Bracknell Common Stock equal to the number of Able
Shares the corresponding Able Warrant was exercisable to purchase
multiplied by 0.6; (ii) the exercise price of each Bracknell Warrant shall
be the exercise price of the corresponding Able Warrant multiplied by 1.67;
and(iii) as of the Effective Time, the unexpired term of each Bracknell
Warrant shall be equal to the unexpired term of the corresponding Able
Warrant.
Section 2.03 Surrender and Payment.
(a) Prior to the Effective Time, Bracknell shall appoint an agent
reasonably acceptable to Able (the "Exchange Agent") for the purpose of
exchanging certificates representing Able Shares, Series C Shares, and
Series E Shares. As of the Effective Time, Subco shall deposit with the
Exchange Agent for the benefit of the holders of Able Shares, Series C
Shares and Series E Shares, for exchange in accordance with this Section
2.03, through the Exchange Agent, certificates representing the shares of
Bracknell Common Stock issuable pursuant to Section 2.02 in exchange for
outstanding Able Shares, Series C Shares and Series E Shares. Promptly
after the Effective Time, Subco will send, or will cause the Exchange Agent
to send, to each holder of Able Shares, Series C Shares or Series E Shares
at the Effective Time a letter of transmittal for use in such exchange
(which shall specify that the delivery shall be effected, and risk of loss
and title shall pass, only upon proper delivery of the certificates
representing Able Shares, Series C Shares or Series E Shares to the
Exchange Agent).
(b) Each holder of Able Shares, Series C Shares or Series E Shares
that have been converted into a right to receive Bracknell Common Stock,
upon surrender to the Exchange Agent of a certificate or certificates
representing such Able Shares, Series C Shares or Series E Shares, together
with a properly completed letter of transmittal covering such Able Shares,
Series C Shares or Series E Shares, will be entitled to receive in exchange
therefor that number of whole shares of Bracknell Common Stock which such
holder has the right to receive pursuant to Section 2.02, and the
certificate or certificates for Able Shares, Series C Shares or Series E
Shares so surrendered shall be cancelled. Until so surrendered, each such
certificate shall, after the Effective Time, represent for all purposes,
only the right to receive upon such surrender a certificate representing
shares of Bracknell Common Stock and cash in lieu of any fractional shares
of Bracknell Common Stock as contemplated by this Section 2.03 and Section
2.05.
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(c) If any shares of Bracknell Common Stock are to be issued to a
Person other than the registered holder of Able Shares, Series C Shares or
Series E Shares represented by the certificate or certificates surrendered
in exchange therefor, it shall be a condition to such issuance that the
certificate or certificates so surrendered shall be properly endorsed or
otherwise be in proper form for transfer and that the Person requesting
such issuance shall pay to the Exchange Agent any transfer Tax or other
Taxes required as a result of such issuance to a Person other than the
registered holder of such Able Shares, Series C Shares or Series E Shares
or establish to the satisfaction of the Exchange Agent that such Tax has
been paid or is not payable.
(d) After the Effective Time, there shall be no further registration
of transfers of Able Shares, Series C Shares or Series E Shares. If, after
the Effective Time, certificates representing Able Shares, Series C Shares
or Series E Shares are presented to the Surviving Corporation, they shall
be cancelled and exchanged as provided for, and in accordance with the
procedures set forth, in this Article II.
(e) Any shares of Bracknell Common Stock made available to the
Exchange Agent pursuant to Section 2.03(a) that remain unclaimed by the
holders of Able Shares, Series C Shares or Series E Shares six months after
the Effective Time shall be returned to Bracknell, upon demand, and any
such holder who has not exchanged his Able Shares, Series C Shares or
Series E Shares in accordance with this Section prior to that time shall
thereafter look only to Bracknell to exchange such Able Shares, Series C
Shares or Series E Shares. Notwithstanding the foregoing, the Surviving
Corporation and Bracknell shall not be liable to any holder of Able Shares,
Series C Shares or Series E Shares for any amount paid, or any shares of
Bracknell Common Stock delivered, to a public official pursuant to
applicable abandoned property Laws. Any shares of Bracknell Common Stock or
other amounts remaining unclaimed by holders of Able Shares, Series C
Shares or Series E Shares two years after the Effective Time (or such
earlier date immediately prior to such time as such amounts would otherwise
escheat to or become property of any Governmental Authority) shall, to the
extent permitted by applicable Law, become the property of Bracknell free
and clear of any claims or interest of any Person previously entitled
thereto.
(f) No dividends or other distributions on shares of Bracknell Common
Stock shall be paid to the holder of any unsurrendered certificates
representing Able Shares, Series C Shares or Series E Shares until such
certificates are surrendered as provided in this Section. Upon such
surrender, there shall be paid, without interest, to the Person in whose
name the certificates representing the shares of Bracknell Common Stock
into which such Able Shares, Series C Shares or Series E Shares were
converted are registered, all dividends and other distributions paid in
respect of such Bracknell Common Stock on a date subsequent to, and in
respect of a record date after, the Effective Time.
Section 2.04 Adjustments. If at any time during the period between the
date of this Agreement and the Effective Time, any change in the outstanding
shares of Bracknell Common Stock, Able Shares, Series C Shares or Series E
Shares shall occur, including by reason of any reclassification,
recapitalization, stock split or combination, exchange or readjustment of
shares, or any stock dividend thereon with a record date during such period, the
Conversion Number, the Series C Conversion Number and the Series E Conversion
Number shall be appropriately adjusted.
Section 2.05 Fractional Shares. No fractional shares of Bracknell Common
Stock shall be issued in the Merger. All fractional shares of Bracknell Common
Stock that a holder of Able Shares would otherwise be entitled to receive as a
result of the Merger shall be aggregated and if a fractional share results from
such aggregation, such holder shall be entitled to receive, in lieu thereof, an
amount in cash determined by multiplying the average of the daily closing sale
prices per share of Bracknell Common Stock on The Toronto Stock Exchange (the
"TSE") for the ten trading days next preceding the Effective Time by the
fraction of a share of Bracknell Common Stock to which such holder would
otherwise have been entitled. Alternatively, the Surviving Corporation shall
have the option of instructing the Exchange Agent to aggregate all fractional
shares of Bracknell Common Stock, sell such shares in the public market and
distribute to holders of Able Shares a pro rata portion of the proceeds of such
sale; provided that Bracknell shall pay all transaction costs associated
therewith. No such cash in lieu of fractional shares of Bracknell Common Stock
shall be paid to
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any holder of Able Shares until certificates representing such Able Shares are
surrendered and exchanged in accordance with Section 2.03.
Section 2.06 Dissenting Shares.
(a) Notwithstanding any other provisions of this Agreement to the
contrary, Able Shares, Series C Shares or Series E Shares that are
outstanding immediately prior to the Effective Time and which are held by
Able stockholders who shall have not voted in favor of the Merger or
consented thereto in writing and who shall be entitled to and shall have
demanded properly in writing, appraisal for such shares in accordance with
the Florida General Corporation Law (collectively, the "Dissenting Shares")
shall not be converted into or represent the right to receive Bracknell
Common Stock. Such stockholders instead shall be entitled to receive
payment of the appraised value of such Able Shares, Series C Shares or
Series E Shares held by them in accordance with the provisions of the
Florida General Corporation Law, except that all Dissenting Shares held by
such stockholders, who shall have failed to perfect or who effectively
shall have withdrawn, forfeited, or lost their rights to appraisal of such
Able Shares, Series C Shares or Series E Shares under the Florida General
Corporation Law, shall thereupon be deemed to have been converted into and
to have become exchangeable for, as of the Effective Time, the right to
receive, without any interest thereon, Bracknell Common Stock in the manner
provided in Section 2.03 above.
(b) Able shall give Bracknell prompt notice of any demands for
appraisal received by it, withdrawals of such demands, and any other
instruments served pursuant to the Florida General Corporation Law and
received by Able and relating thereto. Able shall direct all negotiations
and proceedings with respect to demands for appraisal rights under the
Florida General Corporation Law and shall keep Bracknell informed regarding
the progress thereof.
ARTICLE III
THE SURVIVING CORPORATION
Section 3.01 Certificate of Incorporation. Effective immediately
following the Merger, the certificate of incorporation of Subco, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation of the Surviving Corporation until amended in accordance with
applicable Law; provided, however, that the certificate of incorporation of the
Surviving Corporation shall be amended to read: "The name of the corporation is
Able Telcom Holding Corp."
Section 3.02 Bylaws. Effective immediately following the Merger, the
bylaws of Subco in effect at the Effective Time shall be the bylaws of the
Surviving Corporation until amended in accordance with applicable Law.
Section 3.03 Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable Law, (i) the directors of Subco at the Effective Time shall be the
directors of the Surviving Corporation, and (ii) the officers of Subco at the
Effective Time shall be the officers of the Surviving Corporation.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ABLE
Able represents and warrants to Bracknell and Subco that:
Section 4.01 Corporate Existence and Power. Able and each of its
Subsidiaries is a corporation or other entity duly organized, validly existing
and in good standing under the Laws of its jurisdiction of incorporation or
organization, has all requisite power and authority to own, lease and operate
its properties and to carry on its Business as now being conducted, and is duly
qualified and in good standing to do business in each jurisdiction in which the
Business it is conducting, or the operation, ownership or leasing of its
properties, makes such qualification necessary, other than in such jurisdictions
where the failure to so qualify would not
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have an Able Material Adverse Effect. For purposes of this Agreement, an "Able
Material Adverse Change" or "Able Material Adverse Effect," means any change or
effect, either individually or in the aggregate, that is or may be reasonably
expected to be materially adverse to the Business, assets, liabilities,
properties, financial condition or results of operations of Able or an Able
Significant Subsidiary. For the purposes of this Agreement, an "Able Significant
Subsidiary" means a Subsidiary of Able which individually accounted for 10% or
more of the total revenues, net income, cash flows from operations or assets of
Able and its Subsidiaries on a consolidated basis in either of Able's previous
two fiscal years. Able has heretofore delivered to Bracknell true and complete
copies of Able's articles of incorporation and bylaws as currently in effect.
Section 4.02 Corporate Authorization. Able has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have, except for
any required approval by Able's stockholders in connection with the Merger, been
duly authorized by all necessary corporate action on the part of Able. Able's
Board of Directors has authorized Able to enter into this Agreement, has
determined that this Agreement is in the best interests of Able and its
stockholders and has recommended that Able's stockholders vote in favor of the
Merger and the other transactions contemplated hereby. This Agreement has been
duly executed and delivered by Able and constitutes a valid and binding
obligation of Able enforceable in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and
similar Laws now or hereafter in effect, affecting creditors' rights and
remedies and to general principles of equity.
Section 4.03 Governmental Authorization. No consent, approval, Order or
authorization of, or registration, declaration or filing with, or Permit from,
any Governmental Authority is required by or with respect to Able or any of its
Subsidiaries in connection with the execution, delivery and performance of this
Agreement by Able or the consummation of the Merger or other transactions
contemplated hereby, other than (i) compliance with the applicable requirements
of the HSR Act and the Exchange Act, and (ii) the filing of a certificate of
merger with the Secretary of State of the State of Florida, except where the
failure of any action to be taken by any Governmental Authority or filing to be
made would not have an Able Material Adverse Effect or prevent consummation of
the Merger or the other transactions contemplated hereby.
Section 4.04 Non-Contravention. The execution and delivery of this
Agreement by Able does not, and the consummation of the transactions
contemplated hereby by Able will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or the loss of a material benefit under, or the creation of a Lien on assets or
property or right of first refusal with respect to any asset or property (any
such conflict, violation, default, right of termination, cancellation or
acceleration, loss, creation or right of first refusal, a "Violation"), pursuant
to any provision of the articles of incorporation or bylaws of Able or any of
its Subsidiaries or, except as set forth on Schedule 4.04 hereto, or as to which
requisite waivers or consents have been obtained and assuming the consents,
approvals, authorizations or Permits and filings or notifications referred to in
Section 4.03 are duly and timely obtained or made, result in any Violation of
any loan or credit agreement, note, mortgage, indenture, Lease, Benefit
Arrangement or other agreement, obligation, instrument, Permit, concession,
franchise, Order or Law applicable to Able or any of its Subsidiaries or their
respective properties or assets, except for any Violations which would not have
an Able Material Adverse Effect.
Section 4.05 Capitalization.
(a) The entire authorized capital stock of Able consists of (i)
25,000,000 shares of common stock, par value $.001 per share, and (ii)
1,000,000 shares of preferred stock, par value $0.10 per share, issuable in
series ("Able Preferred Stock") (collectively, the "Able Authorized Capital
Stock"). Of the Able Authorized Capital Stock: 16,374,504 Able Shares,
5,000 Series C Shares and 1,000 Series E Shares are validly issued and
outstanding. Each of the aforesaid shares has been validly issued, is fully
paid and nonassessable, and has not been issued in violation of any
preemptive rights. Able has also granted options to purchase 3,564,314 Able
Shares (the "Able Stock Options") to the Persons (who are present or former
officers, directors, employees or advisors), at the exercise prices and in
the amounts listed on Schedule 4.05(a)(i), of which 2,435,000 were granted
outside of Able's Stock Option Plan and 1,129,314
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were granted under Able's Stock Option Plan. Able has also issued warrants
and other options to purchase 1,929,505 Able Shares to other Persons, at
the exercise prices and in amounts listed on Schedule 4.05(a)(ii). Except
as set forth in Schedules 4.05(a)(i) and 4.05(a)(ii) hereto, no options,
warrants or other rights to acquire, sell, or issue shares of capital stock
of Able are outstanding, and except as disclosed in Schedule 4.05(a)(iii),
between the date hereof and the Effective Time, no shares of capital stock
of Able and no such options, warrants or rights will be issued. Except as
set forth in Schedule 4.05(a)(iv), Able has not issued, granted or awarded
any phantom stock, stock appreciation rights, or any similar instruments to
any Person.
(b) No bonds, debentures, notes or other indebtedness having the right
to vote (or convertible into securities having the right to vote) on any
matters on which stockholders may vote ("Voting Debt") that were issued by
Able are outstanding. Except as set forth in this Section 4.05 and Schedule
4.05(b), there are outstanding (A) no shares of capital stock, Voting Debt
or other voting securities of Able, (B) no securities of Able or any
Subsidiary of Able convertible into or exchangeable for shares of capital
stock, Voting Debt or other voting securities of Able or any Subsidiary of
Able, and (C) no options, warrants, calls, rights (including preemptive
rights), commitments or agreements pursuant to which Able or any Subsidiary
of Able is obligated to issue, deliver, sell, purchase, redeem or acquire,
or cause to be issued, delivered, sold, purchased, redeemed or acquired,
additional shares of capital stock or any Voting Debt or other voting
securities of Able or of any Subsidiary of Able or obligating Able or any
Subsidiary of Able to grant, extend or enter into any such option, warrant,
call, right, commitment or agreement.
(c) Except as listed in Schedule 4.05(c), there are not as of the date
hereof and there will not be at the Effective Time any stockholder
agreements, voting trusts or other agreements or understandings to which
Able is a party or by which it is bound relating to the voting of any
shares of the capital stock of Able which will limit in any way the
granting of proxies by or on behalf of or from, or the casting of votes by,
Able stockholders with respect to the Merger. There are no restrictions on
the ability of Able to vote the stock of any of its Subsidiaries.
Section 4.06 Subsidiaries. Schedule 4.06(i) sets forth the name and
jurisdiction of incorporation or organization of each Subsidiary of Able. The
authorized and issued and outstanding shares of capital stock of each Subsidiary
of Able are set forth on Schedule 4.06(ii). Except as set forth in Schedule
4.06(iii), all of the outstanding capital stock of, or other ownership interests
in, each Subsidiary of Able is owned by Able, directly or indirectly, free and
clear of any Lien and free of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests).
Section 4.07 SEC Filings.
(a) Able has delivered to Bracknell (i) Able's annual report on Form
10-K for the fiscal year ended October 31, 1999 (amended May 26, 2000) (the
"Able 10-K"), (ii) its quarterly reports on Form 10-Q for its fiscal
quarters ended January 31, 2000 and April 30, 2000, as amended, (iii) its
current reports on Form 8-K dated May 30, 2000, June 7, 2000 and July 20,
2000, (iv) its proxy or information statements relating to meetings of, or
actions taken without a meeting by, the stockholders of Able held since
April 1998, and (v) all of its other reports, statements, schedules and
registration statements filed with the SEC since its initial public
offering, including without limitation, the Registration Statement on Form
S-1 (Registration Number 333-65991), as amended, and all materials
incorporated therein by reference (the filings referred to in clauses (i)
through (v) above and delivered to Bracknell prior to the date hereof being
hereinafter referred to as the "Able SEC Filings").
(b) As of its filing date or with respect to any proxy statements, as
of the date it was first mailed to Able stockholders, each such report or
statement filed pursuant to the Exchange Act complied as to form in all
material respects with the requirements of the Exchange Act, except as
disclosed in Schedule 4.07(b), and did not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to
make the statements made therein, in the light of the circumstances under
which they were made, not misleading.
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(c) Each such registration statement and any amendment thereto filed
pursuant to the Securities Act of 1933, as of the date such statement or
amendment became effective, complied as to form in all material respects
with the Securities Act of 1933 and did not contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
Section 4.08 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Able and
its consolidated Subsidiaries included in the Able 10-K and the quarterly
reports on Form 10-Q referred to in Section 4.07 fairly present, in conformity
with GAAP (except as may be indicated in the notes thereto), the consolidated
financial position of Able and its consolidated Subsidiaries as of the dates
thereof and their consolidated results of operations and cash flows for the
periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments, none of which, individually or in
the aggregate, would have an Able Material Adverse Effect).
Section 4.09 Proxy Statement/Prospectus; Registration Statement. None of
the information supplied by Able for inclusion in (a) the proxy statement
relating to the Able Stockholder Meeting (also constituting the prospectus in
respect of the Bracknell Common Stock to be exchanged for Able Shares in the
Merger) (the "Proxy Statement/Prospectus"), to be filed by Able and Bracknell
with the SEC, and any amendments or supplements thereto, or (b) the Registration
Statement on Form F-4 (the "Registration Statement") to be filed by Bracknell
with the SEC in connection with the Merger, and any amendments or supplements
thereto, will, at the respective times such documents are filed, and, in the
case of the Proxy Statement/Prospectus, at the time the Proxy
Statement/Prospectus or any amendment or supplement thereto is first mailed to
stockholders of Able, at the time of the Able Stockholder Meeting and at the
Effective Time, and, in the case of the Registration Statement, when it becomes
effective under the Securities Act of 1933, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. All documents that Able is responsible for filing with the
SEC in connection with the Merger will comply as to form in all material
respects with the applicable provisions of the Exchange Act, the Securities Act
of 1933 and state securities Laws.
Section 4.10 Absence of Certain Changes. Except as set forth on Schedule
4.10 since April 30, 2000, Able and its Subsidiaries have conducted their
business in all material respects in the ordinary course consistent with past
practices and there has not been:
(a) any event, occurrence or development or state of circumstances or
facts, which affects or relates to Able or any of its Subsidiaries, which
has had or would reasonably be expected to have an Able Material Adverse
Effect;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Able, or any
repurchase, redemption or other acquisition by Able or any of its
Subsidiaries of any outstanding shares of capital stock or other securities
of, or other ownership interests in, Able or any of its Subsidiaries;
(c) any amendment of any term of any outstanding security of Able or
any of its Subsidiaries;
(d) any incurrence, assumption or guarantee by Able or any of its
Subsidiaries of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with
past practices;
(e) any creation or assumption by Able or any of its Subsidiaries of
any Lien (other than a Permitted Lien) on any material asset;
(f) any making of any loan, advance or capital contributions to or
investment in any Person other than loans, advances or capital
contributions to or investments in wholly owned Subsidiaries made in the
ordinary course of business consistent with past practices;
(g) any material amendment or termination of any Material Contract or
Material Lease relating to the Business or any material capital
expenditure;
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(h) to Able's Knowledge, any claim or threatened claim against Able or
one or more of its Subsidiaries in respect of a Material Contract where the
liability of Able or one or more of its Subsidiaries exceeds, or could
reasonably be expected to exceed, $1,000,000;
(i) any material destruction, damage or other loss to any of the
assets of Able or any of its Subsidiaries that is not covered by insurance;
(j) any material sale, lease or other disposition of any of the assets
of Able or any of its Subsidiaries, other than assets sold, leased or
otherwise disposed of in the ordinary course of business consistent with
past practice which would not, in the aggregate, have an Able Material
Adverse Effect;
(k) any material purchase or lease of any assets by Able or any of its
Subsidiaries, other than assets purchased or leased in the ordinary course
of business consistent with past practice;
(l) any change in any method of accounting or accounting practice by
Able or any of its Subsidiaries, except for any such change required by
reason of a concurrent change in GAAP or to conform a Subsidiary's
accounting policies and practices to those of Able;
(m) except for contractual obligations existing on the date hereof or
disclosed on Schedule 4.10(m), any (i) grant of any severance or
termination pay to any director, officer or employee of Able, (ii) entering
into of any employment, deferred compensation or other similar agreement
(or any amendment to any such existing agreement) with any director,
officer or employee of Able or any of its Subsidiaries except in the
ordinary course of business consistent with past practice with persons who
are not executive officers, (iii) increase in benefits payable under any
existing severance or termination pay policies or employment agreements,
(iv) increase in compensation, bonus or other benefits payable to
directors, officers or employees of Able or any of its Subsidiaries, other
than in the ordinary course of business consistent with past practice, or
(v) acceleration of the exercisability or vesting of any options, as the
case may be;
(n) any labor dispute, other than individual grievances, or any
activity or proceeding by a labor union or representative thereof to
organize any employees of Able or any of its Subsidiaries, which employees
were not subject to a collective bargaining agreement at April 30, 2000 or
any lockouts, strikes, slowdowns, work stoppages or threats thereof by or
with respect to such employees;
(o) any actual or, to Able's Knowledge, threatened dispute between
Able or any of its Subsidiaries and any vendor or customer, other than
disputes which would not have or reasonably be expected to have,
individually or in the aggregate, an Able Material Adverse Effect;
(p) any actual or, to Able's Knowledge, threatened suspension or
cancellation of any Permit, other than those the suspension or cancellation
of which would not have or reasonably be expected to have, individually or
in the aggregate, an Able Material Adverse Effect;
(q) any amendment to Able's articles of incorporation or bylaws;
(r) any change in any Law applicable to Able or any of its
Subsidiaries, or in the interpretation or application thereof, which
individually or in the aggregate has had or would reasonably be expected to
have an Able Material Adverse Effect; or
(s) any agreement or commitment by Able or any of its Subsidiaries to
take any action described in this Section 4.10.
Section 4.11 No Undisclosed Material Liabilities. Except as described in
Schedule 4.11, there are no Liabilities of Able or any of its Subsidiaries, and
there is no existing condition, situation or set of circumstances which,
individually or in the aggregate, have or would reasonably be expected to have
an Able Material Adverse Effect, other than:
(a) Liabilities disclosed or provided for in Able's consolidated
balance sheet dated as of April 30, 2000 included in Able's quarterly
report on Form 10-Q for the fiscal quarter ended April 30, 2000;
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(b) Liabilities incurred in the ordinary course of business consistent
with past practices since April 30, 2000, which in the aggregate are not
material to Able or an Able Significant Subsidiary; and
(c) Liabilities under this Agreement.
Section 4.12 Real Property.
(a) A complete and accurate list and description of all real property
owned by Able or its Subsidiaries (other than Easements), in each case
which is used or useful in the conduct of the Business, is set forth in
Schedule 4.12(a) (the "Owned Real Property"). Able or one of its
Subsidiaries has good, valid and marketable title in fee simple to each
Owned Real Property free and clear of all Liens except Permitted Liens.
(b) A complete and accurate list and description of all the real
property leased to Able or its Subsidiaries (other than Easements), in each
case which is used or useful in the conduct of the Business (the "Leased
Real Property"), is set forth in Schedule 4.12(b). Except as set forth on
Schedule 4.12(b), all Material Leases are in writing and are valid,
effective, binding and in full force and effect. There has been no material
breach of, or default under, any Material Lease by Able or one of its
Subsidiaries or, to Able's Knowledge, any other Person, which breach or
default has not been cured or waived (and no event has occurred which, with
due notice or lapse of time or both, may constitute a breach or default),
and no party to any Material Lease has given Able or one of its
Subsidiaries written notice or made a claim with respect to any breach or
default under a Material Lease. A true and complete copy of each of the
Material Leases, as amended to date, has been furnished to Bracknell. Able
or one of its Subsidiaries is the lessee or sublessee under all Material
Leases or has succeeded (or will succeed prior to the Closing Date) to the
rights of the lessee under such Material Leases and owns the leasehold
interest created pursuant to such Leases free and clear of all Liens except
Permitted Liens. Able or one of its Subsidiaries validly occupies any
improvements located on the Leased Real Property in accordance with the
terms of the relevant Leases free and clear of all Liens except Permitted
Liens. All consents required under the Material Leases in connection with
the transactions contemplated by this Agreement have been, or as of the
Closing Date will be, obtained and furnished in writing to Bracknell.
(c) A complete and accurate list and description of all easements, the
beneficial interest of which is owned by Able or one of its Subsidiaries,
in each case which is used or useful in the conduct of the Business is
listed in Schedule 4.12(c) (the "Easements"). Schedule 4.12(c) also lists,
with respect to each Easement, all contracts or other agreements
(collectively, the "Easement Contracts") pursuant to which Able or one of
its Subsidiaries (i) acquired rights to the Easement, and/or (ii) granted
rights to others to use or access any wires, cables, or other conduit
located within the respective Easement areas. Able or one of its
Subsidiaries has good, valid, and marketable title in and to each Easement
free and clear of all Liens except Permitted Liens. Each Easement is valid,
effective and binding and in full force and effect. There has been no
material breach of any Easement or Easement Contract by Able or its
Subsidiaries or, to Able's Knowledge, any other Person, which breach has
not been cured or waived. A true and complete copy of each Easement
Contract, as amended to date, has been furnished to Bracknell. Able or one
of its Subsidiaries validly occupies and uses the Easements and any
improvements located on the Easements in accordance with the terms of the
Easement Contracts. All consents required under the Easements and Easement
Contracts in connection with the transactions contemplated by this
Agreement have been, or as of the Closing Date will be, obtained and
furnished in writing to Bracknell.
(d) Schedules 4.12(a), 4.12(b) and 4.12(c) describe all real property
owned or leased by Able or its Subsidiaries (the "Real Property"), and the
nature of the interest of Able or its Subsidiaries in those properties.
There is no real property (other than the Real Property) the use or
possession of which is necessary for Able or its Subsidiaries to carry on
the Business. Except as provided in Schedule 4.12(d), none of the Real
Property is subject to a Lease, sublease, license or other agreement
granting any Person any right to the use, occupancy or enjoyment thereof
(or any portion thereof), except where such Lease, sublease, license or
other agreement would not materially detract from the value of the
applicable property, materially impair the present and continued use,
operation or maintenance of the property subject thereto, or materially
impair the operations of Able or one of its Subsidiaries.
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(e) The buildings, driveways and all other structures and improvements
upon the Real Property are all within the boundary lines of the applicable
property or have the benefit of valid easements or other legal rights and
there are no encroachments thereon that would materially affect the use
thereof.
(f) All buildings, structures, improvements and fixtures owned, leased
or used by Able or its Subsidiaries in the conduct of the Business conform
in all material respects to all applicable building, zoning, health,
safety, environmental and other Laws, regulations, codes and rules adopted
by national and local associations and boards and insurance underwriters,
and all such buildings, structures, improvements and fixtures and the
electrical, plumbing, HVAC and other systems thereat are in good operating
condition and repair. There are no outstanding requirements or
recommendations by any insurance company which has issued a policy covering
any such property, or by any board of fire underwriters or other body
exercising similar functions, requiring or recommending any material
repairs or work to be done on any such property.
(g) Schedule 4.12(g) lists all policies of title insurance insuring
the interest of Able and its Subsidiaries in the Real Property (the "Title
Policies"). All of the Title Policies are in full force and effect and
neither Able nor any of its Subsidiaries have taken or will take any action
that would adversely affect the coverage afforded the insured thereunder.
Able will provide copies of each of the Title Policies and any related
surveys to Bracknell promptly after the date hereof. Able will cooperate
with Bracknell to obtain any new policies or amendments or endorsements to
the Title Policies as may reasonably be required by Bracknell.
Section 4.13 Personal Property.
(a) Subject to Permitted Liens, Able or its Subsidiaries have
marketable and indefeasible title to all personal property owned by Able or
its Subsidiaries and used in the conduct of the Business, other than (A)
property that has been disposed of in the ordinary course of business, (B)
property that has been disposed of in transactions disclosed to Bracknell
in writing prior to the date hereof, and (C) Leased Personal Property.
(b) Schedule 4.13(b) lists all of the Material Leases of leased
personal property used in the Business conducted by Able and its
Subsidiaries (the "Leased Personal Property"). All such Material Leases of
Leased Personal Property are valid and binding and in full force and
effect. There has been no material breach of any such Material Lease by
Able or its Subsidiaries or, to Able's knowledge, any other Person, which
breach has not been cured or waived.
Section 4.14 Accounts Receivable. Except as set forth on Schedule 4.14,
all Accounts Receivable of Able and its Subsidiaries reflected on the balance
sheet included in Able's Form 10-Q as of April 30, 2000 and all Accounts
Receivable of Able and its Subsidiaries generated after April 30, 2000 that are
reflected in the accounting records of Able and its Subsidiaries as of the
Closing Date represent or will represent valid obligations arising from sales
actually made or services actually performed or billed for in the ordinary
course of business. All Accounts Receivable not paid prior to the Closing Date
are current and collectible in the ordinary course of business, except to the
extent reflected in the reserve for doubtful accounts in the financial
statements include in Able's SEC Filings. The reserve for doubtful accounts
reflected in the financial statements included in Able's SEC Filings has been
determined consistent with past practices and in accordance with GAAP. Able and
its Subsidiaries have good and valid title to the Accounts Receivable free and
clear of all Liens except Permitted Liens.
Section 4.15 Contracts. Except for (i) purchase orders, invoices,
confirmations and similar documents involving the purchase or sale of goods or
services for less than $250,000 over a period of 12 months or less, (ii) Leases,
(iii) Benefit Arrangements, and (iv) contracts relating to intercompany
obligations, Schedule 4.15(i) sets forth a list of all of the following
contracts ("Material Contracts") (A) to which Able or any of its Subsidiaries is
a party or (B) by which any of the assets of Able or any of its Subsidiaries are
bound: (1) contracts pertaining to the borrowing of money; (2) contracts
creating Liens; (3) contracts creating guarantees; (4) contracts relating to
material employment or consulting services; (5) contracts relating to any single
capital expenditure in excess of $250,000 or aggregate capital expenditures in
excess of $500,000;
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(6) contracts for the purchase or sale of real property, any business or line of
business or for any merger or consolidation; (7) joint venture or partnership
agreements; (8) contracts that individually require by their respective terms
after the date hereof the payment or receipt of $250,000 or more; (9) any
agreement involving derivatives, hedging or futures under which the obligations
of Able or one of its Subsidiaries could reasonably be expected to exceed
$250,000; (10) any contract that limits the freedom of Able or its Subsidiaries
to compete in any line of business or to conduct business in any geographic
location; or (11) any contract for the purchase or sale of all or substantially
all of the assets or stock of any company or operating division. All Material
Contracts are valid and binding and in full force and effect. Except as
disclosed in Schedule 4.15(ii), there has been no material breach of any
contract by Able or its Subsidiaries or, to Able's Knowledge, any other Person,
which breach has not been cured or waived. Able will make available to Bracknell
true and complete copies of the Material Contracts.
Section 4.16 Litigation. Except as set forth on Schedule 4.16, there is
no Action by any Person or by or before any Governmental Authority that is
pending or, to Able's Knowledge, threatened by, against or affecting Able or its
Subsidiaries or any of their respective assets which would have or reasonably be
expected to have an Able Material Adverse Effect. Except as set forth on
Schedule 4.16, neither Able nor any of its Subsidiaries is subject to any Order
that would have an Able Material Adverse Effect.
Section 4.17 Taxes. Except as set forth on Schedule 4.17(i), Able and its
Subsidiaries have timely filed all Returns and reports required to be filed by
them on or before the date hereof, or requests for extensions to file such
Returns have been timely filed and granted and have not yet expired. All such
Returns are complete and accurate. Able and its Subsidiaries have paid, or have
set up an adequate reserve for the payment of, all Taxes due, whether or not
shown as due, on such Returns and have properly withheld and paid over to the
appropriate Governmental Authority all applicable withholding Taxes. The interim
balance sheet contained in Able's Form 10-Q for its fiscal quarter ended April
30, 2000 contains an adequate reserve for all Taxes accrued by Able and its
Subsidiaries through April 30, 2000. Except as set forth on Schedule 4.17(ii),
no deficiencies for any Taxes have been asserted, proposed or otherwise settled
or reserved against, Able has not received any notice of and has no reason to
believe that any deficiency for any Taxes will be proposed or threatened, and no
waivers of the time to assess any such Taxes are pending. There are no material
Liens for Taxes (other than Permitted Liens for current Taxes not yet due and
payable) on the assets of Able or any of its Subsidiaries. No election under
Section 341(f) of the Code has been or will be made to treat Able or any of its
Subsidiaries as a "consenting corporation" as defined in such Section 341(f).
Neither Able nor any of its Subsidiaries is a party to any agreement, contract
or arrangement that has resulted or could result in any disallowance of a
deduction for employee remuneration under Section 162(m) of the Code or that
would result, separately or in the aggregate, in any payment (whether or not in
connection with any termination of employment or otherwise) of any "excess
parachute payment" within the meaning of Section 280G of the Code. Except as set
forth on Schedule 4.17(iii), neither Able nor any of its Subsidiaries has been a
party to any deferred intercompany transaction pursuant to which it realized but
did not recognize a gain, and no excess loss account exists with respect to the
shares of stock of any member of the federal consolidated income tax group of
which Able is the common parent. Neither Able nor any of its Subsidiaries is or
has been a party to any Tax sharing agreement or has or could have any liability
for Taxes pursuant to Section 1.1502-6 of the regulations promulgated pursuant
to the Code for the Taxes of any Person other than a corporation that is
currently a member of the federal consolidated income Tax group of which Able is
the common parent. Able has no reason to believe that any of its net operating
loss carryforwards, foreign Tax credit carryforwards or other similar Tax
attributes would be reduced or disallowed by any taxing authority if its Returns
for the years in which such Tax attributes were created were audited. Except as
set forth on Schedule 4.17(iv), no audit of Able or any of its Subsidiaries by
any taxing authority is currently pending or threatened, and no issues have been
raised by any taxing authority in connection with any Returns of Able or any of
its Subsidiaries.
Section 4.18 Tax Free Merger.
(a) Following the Merger, the Surviving Corporation will hold at least
90 percent of the fair market value of the net assets, and at least 70
percent of the fair market value of the gross assets, held by Able prior to
the Merger. For purposes of this representation, amounts used by Able to
pay reorganization
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expenses and all redemptions, distributions and payments, in cash or
property, made by Able in connection with the Merger shall be included as
assets of Able prior to the Merger.
(b) Able has no plan or intention to issue additional shares of it
stock that would result in Bracknell losing control of Able within the
meaning of Section 368(c) of the Code. At the time of the Merger, Able will
not have outstanding any warrants, options, convertible securities, or any
other type of right pursuant to which any Person could acquire stock in
Able that, if exercised or converted, would affect Bracknell's acquisition
or retention of such control.
(c) There is no intercorporate indebtedness existing between Bracknell
and Able or between Subco and Able. Able is not an investment company as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. On the date of
the Merger, the fair market value of the assets of Able will exceed the sum
of its liabilities plus the liabilities, if any, to which its assets are
subject. Able is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(d) Able agrees to treat the Merger as a reorganization within the
meaning of Section 368(a) of the Code. This Agreement is intended to
constitute a "plan of reorganization" within the meaning of Section
1.368-2(g) of the income Tax regulations promulgated under the Code. Able
has not knowingly taken any action that would jeopardize the qualification
of the Merger as a reorganization within the meaning of Section 368(a) of
the Code. During the period from the date of this Agreement through the
Effective Time, unless all parties hereto shall otherwise agree in writing,
Able shall not knowingly take or fail to take any action which action or
failure would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code. Able shall
cause one or more of its responsible officers to execute and deliver
certificates to confirm the accuracy of certain relevant facts as may be
reasonably requested by counsel in connection with the preparation and
delivery of the Tax opinion described in Section 9.01(f).
Section 4.19 ERISA.
(a) "Employee Plans" shall mean each "employee benefit plan", as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974 ("ERISA"), which (i) is subject to any provision of ERISA and (ii) is
maintained, administered or contributed to by Able or any affiliate (as
defined below) and covers any employee or former employee of Able or any
affiliate or under which Able or any affiliate has any liability. Schedule
4.19(a) lists all Employee Plans. True and complete copies of such plans
(and, if applicable, related trust agreements) and all amendments thereto
have been furnished to Bracknell. For purposes of this Section, "affiliate"
of any Person means any other Person which, together with such Person,
would be treated as a single employer under Section 414 of the Code.
(b) No Employee Plan individually or collectively constitutes a
"defined benefit plan" as defined in Section 3(35) of ERISA.
(c) No Employee Plan constitutes a "multi-employer plan", as defined
in Section 3(37) of ERISA, and no Employee Plan is maintained in connection
with any trust described in Section 501(c)(9) of the Code. No Employee Plan
is subject to Title IV of ERISA. Neither Able nor any of its affiliates has
incurred, nor has reason to expect to incur, any liability under Title IV
of ERISA arising in connection with the termination of, or complete or
partial withdrawal from, any plan previously covered by Title IV of ERISA.
(d) Nothing done or omitted to be done and no transaction or holding
of any asset under or in connection with any Employee Plan has or will make
Able or any of its Subsidiaries or any officer or director of Able or any
of its Subsidiaries subject to any liability under Title I of ERISA or
liable for any Tax pursuant to Section 4975 of the Code that would have, or
reasonably be expected to have, individually or in the aggregate, an Able
Material Adverse Effect.
(e) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from Tax pursuant to Section 501(a) of the Code, and each Employee
Plan has
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been maintained in material compliance with its terms and with the
requirements prescribed by any and all statutes, Orders, final rules and
final regulations, including but not limited to ERISA and the Code, which
are applicable to such Employee Plan.
(f) There is no contract, agreement, plan or arrangement covering any
employee or former employee of Able or any affiliate that, individually or
collectively, could give rise to the payment of any amount that would not
be deductible pursuant to the terms of Section 280G of the Code.
(g) "Benefit Arrangement" shall mean each employment, severance or
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for compensation, bonus, profit-sharing, or
other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or
medical benefits, disability benefits, workers' compensation with the
exception of the stock options disclosed in Schedule 4.05(a)(i) or Schedule
4.05(a)(ii), supplemental unemployment benefits, severance benefits and
post-employment or retirement benefits (including compensation, health or
medical insurance or other benefits) which (i) is not an Employee Plan,
(ii) is entered into, maintained or contributed to, as the case may be, by
Able or any of its affiliates, and (iii) covers any employee or former
employee of Able or any of its affiliates. Copies or descriptions of the
Benefit Arrangements have been furnished to Bracknell. Each Benefit
Arrangement has been maintained in compliance with its terms and with the
requirements prescribed by any and all Laws that are applicable to such
Benefit Arrangement.
(h) Except as disclosed in Schedule 4.19(h), the transactions
contemplated hereby will not result in any liability for severance pay to
any employee or accelerate the exercisability, vesting or payment of any
options, warrants, stock appreciation rights, phantom stock awards or any
similar instruments, as the case may be, nor will any employee be entitled
to any payment solely by reason of such transactions.
(i) All contributions required to be made to trusts in connection with
any Employee Plan that would constitute a "defined contribution plan"
(within the meaning of Section 3(34) of ERISA) have been made in a timely
manner in compliance with applicable law and regulations;
(j) Other than claims in the ordinary course for benefits with respect
to the Employee Plans or Benefit Arrangements, there are no Actions, suits
or claims (including claims for income Taxes, interest, penalties, fines or
excise Taxes with respect thereto) pending with respect to any Employee
Plan or Benefit Arrangement, or any circumstances which might give rise to
any such Action, suit or claim (including claims for income Taxes,
interest, penalties, fines or excise Taxes with respect thereto);
(k) Except as disclosed in paragraphs (2) and (3) of Schedule 4.17(i),
all reports, returns and similar documents with respect to the Employee
Plans or Benefit Arrangements required to be filed with any governmental
agency have been so filed by the due date for such filings;
(l) Able has no obligation to provide health or other welfare benefits
to former, retired or terminated employees, except as specifically required
under Section 4980B of the Code or Section 601 of ERISA. Able has complied
with the notice and continuation requirements of Section 4980B of the Code
and Section 601 of ERISA and the regulations thereunder.
(m) Except as disclosed in writing to Bracknell prior to the date
hereof and subject to the provisions of Section 4.10(l), there has been no
amendment to, written interpretation or announcement (whether or not
written) by Able or any of its affiliates relating to, or change in
employee participation or coverage under, any Employee Plan or Benefit
Arrangement which in the aggregate would increase the per employee expense
of maintaining such Employee Plan or Benefit Arrangement above the level of
the expense incurred on a per employee basis in respect thereof for the six
months ended on April 30, 2000 except to the extent, with respect to all
employees, as would not have, or reasonably be expected to have,
individually or in the aggregate, an Able Material Adverse Effect.
Section 4.20 Environmental Matters. Except as set forth in Schedule 4.20,
and to the best of Able's Knowledge, (a) Able and its Subsidiaries have obtained
and maintain all Material Environmental Permits necessary operate their
Business; (b) Able and its Subsidiaries are and at all times have been in
material
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compliance with, and have not been and are not in violation of or liable under,
any Environmental Permit or any Environmental Law; (c) there are no past,
pending, or threatened Environmental Claims against Able or its Subsidiaries in
connection with the Business or any Site; (d) no Releases of Hazardous Materials
have occurred at, from, in, to, on or under any Site and no Hazardous Materials
are present in, on, about or migrating to or from any Site that could give rise
to an Environmental Claim against Able or its Subsidiaries; (e) neither Able,
its Subsidiaries, their predecessors have generated, recycled, discharged or
released any Hazardous Material, or transported or arranged for the treatment,
storage, handling, disposal or transportation of any Hazardous Material to any
off-Site location, which is reasonably likely to result in an Environmental
Claim against Able or its Subsidiaries; (f) no Site or any property to which
Able or any of its Subsidiaries has, directly or indirectly, transported or
arranged for the transportation of any Hazardous Material, is a current or
proposed Environmental Cleanup Site; (g) there are no Liens arising under or
pursuant to any Environmental Law on any Site and there are no facts,
circumstances or conditions that could restrict or encumber, or result in the
imposition of use restrictions under any Environmental Law with respect to the
ownership, occupancy, development, use or transferability of any Site currently
owned or operated by Able or its Subsidiaries; (h) there are no underground
storage tanks, active or abandoned, polychlorinated biphenyl containing
equipment, or asbestos or asbestos-containing materials at any Site; and (i)
Able and its Subsidiaries have provided Bracknell with all audits, assessments,
reports, reviews and investigations relating to Able and each of its
Subsidiaries, whether prepared internally or by external consultants, relating
to the existence or management of any issues or circumstances relevant to the
Environment, including without limitation any such documentation relating to any
Site.
Section 4.21 Intellectual Property. Able and its Subsidiaries own
sufficient right, title and interest in and to, or have valid licenses of
sufficient scope and duration for, all patents, patent rights, copyrights,
trademarks, service marks, trade names, software, trade secrets, confidential
information and other Intellectual Property material to the operation of the
Business as currently conducted or proposed to be conducted (the "Intellectual
Property Assets"). The Intellectual Property Assets are free and clear of all
Liens which would materially impair the ability of Able or its Subsidiaries to
use the Intellectual Property Assets in the Business currently conducted or
proposed to be conducted. Able has granted no third party any rights in and to
the Intellectual Property Assets except for rights which would not have an Able
Material Adverse Effect. Except as set forth on Schedule 4.21, none of the
Intellectual Property Assets owned or licensed by Able or its Subsidiaries
infringes upon or conflicts with, or to Able's Knowledge, is alleged to infringe
upon or conflict with, the Intellectual Property rights of any third party,
which infringement or alleged infringement could have an Able Material Adverse
Effect.
Section 4.22 Employees. Schedule 4.22 sets forth each collective
bargaining or other labor union agreement applicable to any employees of Able or
any of its Subsidiaries ("Able Employees"). No material work stoppage or
material labor dispute against Able or any of its Subsidiaries in connection
with the Business is pending or, to Able's Knowledge, threatened and, to Able's
Knowledge, except as set forth on Schedule 4.22, there is no related
organizational activity by any Able Employees. Neither Able nor any of its
Subsidiaries has, except as set forth on Schedule 4.22, received any written
notice of any unfair labor practice in connection with the Business, and no such
complaints are pending before the National Labor Relations Board or other
similar Governmental Authority.
Section 4.23 Intercompany Agreements. Schedule 4.23 lists each and every
contract between Able and any of its stockholders or, to Able's Knowledge, any
Affiliate of Able and any of its stockholders which is currently in effect.
Section 4.24 Certain Payments. Neither Able, nor any of its Subsidiaries,
directors, officers, agents, or employees, or any other Person associated with
or acting for or on behalf of Able or any of its Subsidiaries, has directly or
indirectly (i) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other payment to any Person, private or public, regardless
of form, whether in money, property or services (A) to obtain favorable
treatment in securing business, (B) to pay for favorable treatment or for
business secured, or (C) to obtain special concessions or for special
concessions already obtained for or in respect of Able or any of its
Subsidiaries, or (ii) established or maintained any fund or asset that has not
been
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appropriately recorded in the books and records of Able or its Subsidiaries,
which in the case of either clause (i) or (ii) would be in violation of Law.
Section 4.25 Customers and Suppliers. Since October 31, 1999, there has
been no termination (except by completion of performance) or cancellation of,
and no material modification or change in, any Material Contract with (i) any
customer or group of related customers which singly or, in the aggregate,
provided more than 2% of the consolidated gross revenues of Able and its
Subsidiaries for the fiscal year ended October 31, 1999, or (ii) any suppliers
to Able or its Subsidiaries which singly or in the aggregate constituted more
than 2% of the consolidated cost of services for such fiscal year.
Section 4.26 Canadian Competition Act. The aggregate value of the assets
in Canada of Able and its Subsidiaries, determined in accordance with the
Competition Act (Canada), does not exceed $35 million Canadian Dollars. The
aggregate gross annual revenues from sales in or from Canada generated by those
assets, determined in accordance with the Competition Act (Canada), does not
exceed $35 million in Canadian Dollars.
Section 4.27 Rights Plan. To Able's Knowledge, none of Able's
stockholders are acting jointly or in concert with each other or have any
agreement, arrangement, commitment or understanding (whether formal or informal
and whether or not in writing) with any other Able stockholder or with any other
Person acting jointly or in concert with any other Able stockholder for the
purpose of acquiring Bracknell Common Stock pursuant to the Merger. For the
purpose hereof, the phrase "jointly or in concert" shall be interpreted
consistent with Section 91 of the Securities Act (Ontario).
Section 4.28 Compliance With Other Applicable Laws. Able and its
Subsidiaries have in effect all Permits necessary for them to own, lease or
operate the properties and assets of Able and its Subsidiaries and to carry on
the Business as now conducted, and there has not occurred any default under any
Permit, except for the absence of Permits and for defaults under Permits that
have not had an Able Material Adverse Effect. Able and its Subsidiaries are in
compliance with all Other Applicable Law, except where failure to so comply
would not reasonably be expected to have an Able Material Adverse Effect. Except
as set forth in Schedule 4.28, no investigation or review by any Governmental
Authority with respect to Able or any of its Subsidiaries is pending or to
Able's Knowledge, threatened.
Section 4.29 Insurance. Able and each of its Subsidiaries maintains
insurance with responsible and reputable insurers in such amounts and covering
such risks and with such deductibles as are generally maintained by like
businesses, the failure of which to maintain would or would have reasonably be
expected to have an Able Material Adverse Effect. The coverage under each such
policy is in full force and effect and Able and each of its Subsidiaries is in
good standing under such policies, unless the lack of such coverage or good
standing would not have or would not reasonably be expected to have an Able
Material Adverse Effect. Neither Able nor any of its Subsidiaries has received
notice of, or has any knowledge of, any fact, condition or circumstance which
might reasonably form the basis of any claim against Able or any of its
Subsidiaries which is not fully covered by insurance (subject to deductibles)
maintained by any of them unless such fact, condition or circumstance could not
reasonably be expected to have an Able Material Adverse Effect.
Section 4.30 Bonds. Schedule 4.30 lists all surety bonds (including,
without limitation, performance bonds, bid bonds, payment bonds, labor and
materials bonds, lien bonds, warranty bonds, maintenance bonds and any
replacement bonds) with respect to which Able or any of its Subsidiaries has
liability or indemnification obligations for an amount greater than $250,000.
Section 4.31. Bankruptcy and Insolvency Proceedings. No proceeding
(including a private proceeding) has been commenced by or against Able or a
Subsidiary of Able (i) seeking to adjudicate it bankrupt or insolvent; (ii)
seeking liquidation, dissolution, winding-up, reorganization, arrangement,
protection, relief or composition of it or any of its property or debt or making
a proposal with respect to it under any Law relating to bankruptcy, insolvency,
reorganization, or compromise of debts or other similar Laws (including, without
limitation, any case under Chapter 7 or Chapter 11 of the United States
Bankruptcy Code or any similar proceeding under applicable state Law); or (iii)
seeking appointment of a receiver, trustee, agent or custodian or other similar
official for it or for any substantial part of its properties and assets.
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Section 4.32 Broker's Fees. Except as disclosed on Schedule 4.32, there
is no investment banker, broker, finder or other intermediary which has been
retained by or is authorized to act on behalf of Able, any of its stockholders
or any of its Subsidiaries who might be entitled to any fee or commission in
connection with the transactions contemplated by this Agreement.
Section 4.33 Vote Required. Except as contemplated by this Agreement, the
affirmative vote of the holders of a majority of the outstanding Able Shares and
Series E Shares, voting together as a single class, and the affirmative vote of
the holders of a majority of the outstanding Series C Shares, voting as a
separate class, at the Able Stockholder Meeting, are the only votes of the
holders of any classes or series of Able's capital stock necessary to approve
this Agreement and the transactions contemplated hereby.
Section 4.34 Opinion of Financial Advisor. Able has received from a
qualified financial advisor, a verbal opinion to the effect that, as of the date
hereof, the Conversion Number is fair to Able's Stockholders from a financial
point of view.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BRACKNELL AND SUBCO
Bracknell and Subco, jointly and severally, represent and warrant to Able
that:
Section 5.01 Corporate Existence and Power. Bracknell and each of its
Subsidiaries (including Subco) is a corporation duly organized, validly existing
and in good standing under the laws of its province or other jurisdiction of
incorporation or organization, has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted, and is duly qualified and in good standing to do business in each
jurisdiction in which the business it is conducting, or the operation, ownership
or leasing of its properties, makes such qualification necessary, other than in
such jurisdictions where the failure so to qualify would not have a Bracknell
Material Adverse Effect. For purposes of this Agreement, a "Bracknell Material
Adverse Change" or "Bracknell Material Adverse Effect" means any change or
effect, either individually or in the aggregate, that is or may be reasonably
expected to be materially adverse to the Business, assets, liabilities,
properties, financial condition or results of operations of Bracknell and its
Subsidiaries taken as a whole.
Section 5.02 Corporate Authorization. Bracknell and Subco have all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Bracknell
and Subco, other than the approval of Bracknell's stockholders, if required by
regulatory authorities or under applicable Law. This Agreement has been duly
executed and delivered by Bracknell and Subco and constitutes a valid and
binding obligation of Bracknell and Subco enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and similar Laws, now or hereafter in effect, affecting creditors'
rights and remedies and to general principles of equity.
Section 5.03 Governmental Authorization. No consent, approval, order or
authorization of, or registration, declaration or filing with, or Permit from
any Governmental Authority is required by or with respect to Bracknell or any of
its Subsidiaries in connection with the execution, delivery and performance of
this Agreement by Bracknell or the consummation of the Merger or the other
transactions contemplated hereby, other than (i) compliance with the applicable
requirements of the HSR Act, the Exchange Act and the Securities Act of 1933,
(ii) the filing of the certificate of merger with the Secretary of State of the
State of Florida, and (iii) the filing with, and approval by, the TSE of the
conditional listing application and satisfaction of the conditions contained
therein, except where the failure of any action to be taken by any Governmental
Authority or any filing to be made would not have a Bracknell Material Adverse
Effect or prevent consummation of the Merger or the other transactions
contemplated hereby.
Section 5.04 Non-Contravention. The execution and delivery of this
Agreement by Bracknell and Subco does not, and the consummation of the
transactions contemplated hereby by Bracknell and Subco will
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not result in any Violation pursuant to any provision of the certificate or
articles of incorporation or bylaws of Bracknell or any of its Subsidiaries or,
except as set forth on Schedule 5.04, or as to which requisite waivers or
consents have been obtained and assuming the consents, approvals, authorizations
or permits and filings or notifications referred to in this Section 5.04 are
duly and timely obtained or made, result in any Violation of any loan or credit
agreement, note, mortgage, indenture, Lease, Benefit Arrangement or other
agreement, obligation, instrument, Permit, concession, franchise, Order, or Law,
applicable to Bracknell or any of its Subsidiaries or their respective
properties or assets, except for any Violations which would not have a Bracknell
Material Adverse Effect.
Section 5.05 Capitalization.
(a) The entire authorized capital stock of Bracknell consists of an
unlimited number of common shares and an unlimited number of preferred
shares issuable in series (collectively the "Authorized Bracknell Capital
Stock"). Of the Authorized Bracknell Capital Stock: 40,731,148 shares of
Bracknell Common Stock and 0 preferred shares are validly issued and
outstanding (as of November 14, 2000). Bracknell has granted options to
purchase 4,185,594 shares of Bracknell Common Stock within the reserves of
Bracknell's stock option plan at a weighted average exercise price of $5.36
in Canadian dollars per share and has granted options to purchase 610,000
shares of Bracknell Common Stock outside the reserves of Bracknell's stock
option plan (subject to the approval of Bracknell's stockholders to
increase the reserves under the plan) at a weighted average exercise price
of $7.52 in Canadian dollars per share (collectively, the "Bracknell Stock
Options"). Bracknell has also issued warrants to purchase 385,824 shares of
Bracknell Common Stock at an exercise price of $4.25 per share. Each of the
aforesaid outstanding shares has been validly issued, is fully paid and
nonassessable, and has not been issued in violation of any preemptive
rights. Except as set forth on Schedule 5.05(a), no options, warrants or
other rights to acquire, sell or issue shares of capital stock of Bracknell
are outstanding, and between the date hereof and the Effective Time, (i) no
shares of capital stock of Bracknell and no such options, warrants or
rights will be issued, and (ii) none of such options shall vest or become
exercisable as a result of the Merger or change in ownership of Bracknell
Common Stock or change in composition of the Bracknell Board of Directors.
At the Effective Time, the holders of Able Shares and Series E Shares will
receive good and valid title to the shares of Bracknell Common Stock
(constituting the "Merger Consideration"), free and clear of all Liens and
with no proxies or restrictions on the voting or other rights pertaining
thereto.
(b) No bonds, debentures, notes or other indebtedness having the right
to vote (or convertible into securities having the right to vote) on any
matters on which stockholders of Bracknell may vote ("Bracknell Voting
Debt") were issued or outstanding. Except as set forth on Schedule 5.05(b),
all outstanding shares of capital stock or other ownership interests of the
Subsidiaries of Bracknell are owned by Bracknell or a direct or indirect
wholly owned Subsidiary of Bracknell, free and clear of all Liens. Except
as set forth in this Section 5.05, there are outstanding (i) no shares of
capital stock, Bracknell Voting Debt or other voting securities of
Bracknell, (ii) no securities of Bracknell or any Subsidiary of Bracknell
convertible into or exchangeable for shares of capital stock, Bracknell
Voting Debt or other voting securities of Bracknell or any Subsidiary of
Bracknell, or (iii) no options, warrants, calls, rights (including
preemptive rights), commitments or agreements to which Bracknell or any
Subsidiary of Bracknell is a party or by which it is bound obligating
Bracknell or any Subsidiary of Bracknell to issue, deliver, sell, purchase,
redeem or acquire, or cause to be issued, delivered, sold, purchased,
redeemed or acquired, additional shares of capital stock or any Bracknell
Voting Debt or other voting securities of Bracknell or any Subsidiary of
Bracknell or obligating Bracknell or any Subsidiary of Bracknell to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. Except as set forth on Schedule 5.05(b), there are no
restrictions on the ability of Bracknell to vote the stock of any of its
Subsidiaries.
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Section 5.06 Canadian Securities Law and Bracknell Financial Statements
(a) Bracknell is a reporting issuer under the Securities Act
(Ontario), is not on the list of defaulting reporting issuers maintained
under such Act, and will deliver to Able after the date hereof a true and
complete copy of each quarterly, annual or other form, report, filing or
document filed by Bracknell with the Governmental Authorities under the
Securities Act (Ontario), or under the rules, policies, listing agreements
or other requirements of the TSE or any other stock exchange on which any
of Bracknell's securities are listed and posted for trading ("Exchange
Filing Requirements"), since November 1, 1995, which are all the forms,
reports, filings or documents (other than preliminary material) that
Bracknell was required to file with the Governmental Authorities under the
Securities Act (Ontario), or pursuant to Exchange Filing Requirements,
since November 1, 1995. Bracknell will deliver to Able after the date
hereof, a true and complete copy of each quarterly, annual or other report
or filing filed by Bracknell with the Governmental Authorities under the
Securities Act (Ontario), or Exchange Filing Requirements, subsequent to
the date of this Agreement and prior to the Closing Date. All of such
forms, reports, filings or documents filed prior to the date of this
Agreement are hereinafter referred to as the "Bracknell Disclosure
Documents." Bracknell has not filed any confidential material change
reports still maintained on a confidential basis. Bracknell is in
compliance in all material respects with applicable securities Laws of
Ontario and other applicable jurisdictions. Except with respect to the
Merger, Bracknell is not required to file any form, report, filing or other
documents with the SEC.
(b) As of their respective filing dates, the Bracknell Disclosure
Documents complied in all material respects with the requirements of the
Securities Act (Ontario), other applicable Law, and Exchange Filing
Requirements. As of their respective filing dates, none of the Bracknell
Disclosure Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(c) As of their respective filing dates, the financial statements of
Bracknell and its consolidated Subsidiaries included in the Bracknell
Disclosure Documents complied as to form in all material respects with the
Securities Act (Ontario) and the rules and regulations of the Governmental
Authorities under the Securities Act (Ontario) with respect thereto, were
prepared in accordance with Canadian GAAP (except as disclosed in the notes
to such financial statements) and fairly present in accordance with
applicable requirements of Canadian GAAP (subject, in the case of the
unaudited financial statements, to normal year-end adjustments on a basis
comparable with past periods, the effect of which will not, individually or
in the aggregate, have a Bracknell Material Adverse Effect) the
consolidated financial position of Bracknell and its consolidated
Subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of Bracknell and its
consolidated Subsidiaries for the periods presented therein.
Section 5.07 Proxy Statement/Prospectus; Registration Statement. None of
the information supplied by Bracknell for inclusion in (a) the Proxy
Statement/Prospectus to be filed by Able and Bracknell with the SEC and any
amendments or supplements thereto or (b) the Registration Statement to be filed
by Bracknell with the SEC and any amendments or supplements thereto, will, at
the respective times when such documents are filed, and, in the case of the
Proxy Statement/Prospectus, at the time the Proxy Statement/Prospectus or any
amendment or supplement thereto is first mailed to stockholders of Able, at the
time of the Able Stockholder Meeting and at the Effective Time, and, in the case
of the Registration Statement, when it becomes effective under the Securities
Act of 1933, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. All
documents that Bracknell is responsible for filing with the SEC in connection
with the Merger will comply as to form in all material respects with the
applicable provisions of the Exchange Act, the Securities Act of 1933 and state
securities Laws.
Section 5.08 No Undisclosed Material Liabilities. Except as set forth in
Schedule 5.08, there are no Liabilities of Bracknell or any of its Subsidiaries
and there is no existing condition, situation or set of
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circumstances which, individually or in the aggregate, have or would reasonably
be expected to have a Bracknell Material Adverse Effect, other than:
(a) Liabilities disclosed or provided for in Bracknell's unaudited
consolidated balance sheet contained in Bracknell's Second Quarter Interim
Report for the three months ended April 30, 2000;
(b) Liabilities incurred in the ordinary course of business consistent
with past practices since April 30, 2000, which in the aggregate are not
material to Bracknell or its Subsidiaries taken as a whole; and
(c) Liabilities under this Agreement.
Section 5.09 Absence of Certain Changes. Except as set forth on Schedule
5.09 or as described in any of the Bracknell Disclosure Documents, since, April
30, 2000, Bracknell and its Subsidiaries have conducted their business in all
material respects in the ordinary course consistent with past practices and
there has not been:
(a) any event, occurrence or development or state of circumstances or
facts, which affects or relates to Bracknell, its Subsidiaries or the
industries in which any of them operate, which has had or would reasonably
be expected to have a Bracknell Material Adverse Effect;
(b) any material amendment or termination of any material contact or
material Lease relating to the Business other than in the ordinary course
of business and which would, in the aggregate, not have a Bracknell
Material Adverse Effect;
(c) any material destruction, damage or other loss to any of the
assets of Bracknell or any of its Subsidiaries that is not covered by
insurance and which would not, in the aggregate, have a Bracknell Material
Adverse Effect;
(d) any material sale, lease or other disposition of any of the assets
of Bracknell or any of its Subsidiaries, other than assets sold, leased or
otherwise disposed of in the ordinary course of business consistent with
past practice and which would not, in the aggregate, have a Bracknell
Material Adverse Effect;
(e) any material purchase or lease of any assets by Bracknell or any
of its Subsidiaries, other than assets purchased or leased in the ordinary
course of business consistent with past practice which would not, in the
aggregate, have a Bracknell Material Adverse Effect;
(f) any material increase in the compensation payable to any of the
employees of Bracknell or any of its Subsidiaries, except for increases in
the ordinary course of business and consistent with past practice and which
would, in the aggregate, not have a Bracknell Material Adverse Effect; or
(g) any agreement or commitment by Bracknell or any of its
Subsidiaries to take any action described in this Section 5.09.
Section 5.10 Litigation. Except as set forth on Schedule 5.10 there is no
Action by any Person or by or before any Governmental Authority that is pending
or, to Bracknell's Knowledge, threatened by, against or affecting Bracknell or
its Subsidiaries or any of their respective assets that would have a Bracknell
Material Adverse Effect. Except as set forth on Schedule 5.10, neither Bracknell
nor any of its Subsidiaries is subject to any Order that would have a Bracknell
Material Adverse Effect.
Section 5.11 Taxes. Except as set forth on Schedule 5.11(i), Bracknell
and its Subsidiaries have timely filed all Returns required to be filed by them
on or before the date hereof, except where failure to timely file would not have
a Bracknell Material Adverse Effect. All such Returns are complete and accurate
except where the failure to be complete or accurate would not have a Bracknell
Material Adverse Effect. Bracknell and its Subsidiaries have paid, or have set
up an adequate reserve for the payment of, all Taxes shown as due on such
Returns, except where the failure to do so would not have a Bracknell Material
Adverse Effect. Bracknell's Second Quarter Interim Report for the three months
ended April 30, 2000 contains an adequate reserve for all Taxes accrued by
Bracknell and its Subsidiaries through April 30, 2000. Except as set forth on
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Schedule 5.11(ii), no deficiencies for any Taxes have been asserted, proposed or
assessed against Bracknell or its Subsidiaries in writing that have not been
paid or otherwise settled or reserved against, except for deficiencies the
assertion, proposing or assessment of which would not have a Bracknell Material
Adverse Effect, and no waivers of the time to assess any such Taxes are pending
(other than for current Taxes not yet due and payable) on the assets of
Bracknell or any of its Subsidiaries.
Section 5.12 Tax Free Merger.
(a) Following the Merger, and as a result thereof, the Surviving
Corporation will hold at least 90 percent of the fair market value of the
net assets and at least 70 percent of the fair market value of the gross
assets held by Subco prior to the Merger (excluding the Merger
Consideration).
(b) Bracknell will acquire Able stock solely in exchange for Bracknell
voting stock, and in the Merger, shares of Able stock representing control
of Able, as defined in Section 368(c) of the Code, will be exchanged solely
for voting stock of Bracknell.
(c) Subco will have no liabilities assumed by the Surviving
Corporation, and will not transfer to the Surviving Corporation in the
Merger any assets subject to liabilities.
(d) There is no intercorporate indebtedness existing between Bracknell
and Able or between Subco and Able. Bracknell does not own, directly or
indirectly, nor has it owned during the past five years, directly or
indirectly, any stock of Able.
(e) Neither Bracknell nor Subco is an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(f) Prior to the Merger, Bracknell will be in control of Subco within
the meaning of Section 368(c) of the Code.
(g) Bracknell has no plan or intention as part of the plan of the
Merger to cause the Surviving Corporation to issue after the Effective Time
additional shares of stock that would result in Bracknell losing control of
the Surviving Corporation within the meaning of Section 368(c) of the Code,
or any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in the Surviving
Corporation that, if exercised or converted, would affect Bracknell's
acquisition or retention of control of the Surviving Corporation, as
defined in Section 368(c) of the Code.
(h) Bracknell has no plan or intention to reacquire any of the
Bracknell Common Stock issued in the Merger.
(i) Bracknell has no plan or intention to liquidate the Surviving
Corporation, to merge the Surviving Corporation with or into another
corporation or to sell or otherwise dispose of the Surviving Corporation
stock except for transfers of stock to a corporation controlled by
Bracknell.
(j) Bracknell will cause the Surviving Corporation to attach to a
timely filed U.S. income Tax Return for the taxable year in which the
Merger occurs the statement required by Section 1.367(a)-3(c)(6) of the
Treasury regulations issued under Section 367(a) of the Code.
(k) Following the Merger, the Surviving Corporation will continue
Able's historic business or use a significant portion of its historic
business assets in a business.
(l) Bracknell agrees to treat the Merger as a reorganization within
the meaning of Section 368(a) of the Code. This Agreement is intended to
constitute a "plan of reorganization" within the meaning of Section
1.368-2(g) of the income Tax regulations promulgated under the Code.
Neither Bracknell nor Subco has knowingly taken any action that would
jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code. During the period from the date of
this Agreement through the Effective Time, unless all parties hereto shall
otherwise agree in writing, neither Bracknell nor Subco shall knowingly
take or fail to take any action which action or failure would jeopardize
the qualification of the Merger as a reorganization within the meaning of
Section 368(a) of the Code. Bracknell shall cause one or more of its
responsible officers to execute and deliver certificates to
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confirm the accuracy of certain relevant facts as may be reasonably
requested by counsel in connection with the preparation and delivery of the
tax opinion described in Section 9.01(f).
(m) Following the Effective Time, Bracknell shall use its commercially
reasonable best efforts, and shall cause the Surviving Corporation to use
its commercially reasonable best efforts, to conduct its business and the
Surviving Corporation's business in a manner which would not jeopardize the
characterization of the Merger as a reorganization within the meaning of
Section 368(a) of the Code.
Section 5.13 Compliance With Other Applicable Laws. Bracknell and its
Subsidiaries have in effect all Permits necessary for them to own, lease or
operate the properties and assets of Bracknell and its Subsidiaries and to carry
on the Business as now conducted, and there has not occurred any default under
any Permit, except for the absence of Permits and for defaults under Permits
that have not had a Bracknell Material Adverse Effect. Bracknell and its
Subsidiaries are in compliance with all Other Applicable Law, except where
failure to so comply would not have a Bracknell Material Adverse Effect. Except
as set forth in Schedule 5.13, no investigation or review by any Governmental
Authority with respect to Bracknell or any of its Subsidiaries is pending, or to
Bracknell's Knowledge, threatened.
Section 5.14 Brokers. Except as disclosed in Schedule 5.14, no Person is
or will become entitled to receive any brokerage or finder's fee, advisory fee
or other similar payment for the transactions contemplated by this Agreement by
virtue of having been engaged by or acted on behalf of Bracknell or any of its
Subsidiaries.
Section 5.15 Certain Payments. Excluding any matters that have been
resolved, to Bracknell's Knowledge, neither Bracknell, nor any of its
Subsidiaries, directors, officers, agents, employees, or any other Person
associated with or acting for or on behalf of Bracknell or any of its
Subsidiaries, has directly or indirectly (i) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or services
(A) to obtain favorable treatment in securing business, (B) to pay for favorable
treatment in securing business, or (C) to obtain special concessions or for
special concessions already obtained, for or in respect of Bracknell or any of
its Subsidiaries, or (ii) established or maintained any fund or asset that has
not been appropriately recorded in the books or records of Bracknell or its
Subsidiaries, which in the case of either clause (i) or (ii) would be in
violation of Law.
Section 5.16 Interim Operations of Subco. Subco was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
Section 5.17 Authorization for Bracknell Common Stock. Prior to the
Closing Date, Bracknell will have taken all necessary action to permit it to
issue the number of shares of Bracknell Common Stock to be issued pursuant to
the terms of this Agreement. Shares of Bracknell Common Stock issued pursuant to
the terms of this Agreement will, when issued, be validly issued, fully paid and
nonassessable and no person will have any preemptive right of subscription or
purchase in respect thereof. Such shares of Bracknell Common Stock will be
conditionally listed on the TSE.
ARTICLE VI
COVENANTS OF ABLE
Able agrees that:
Section 6.01 Conduct of Able. Except as expressly contemplated by this
Agreement or as disclosed in writing by Able prior to the date of this
Agreement, from the date hereof until the Effective Time, Able and its
Subsidiaries shall conduct their business in the ordinary course consistent with
past practice and shall use commercially reasonable efforts to preserve intact
their business organizations and relationships with third parties and to keep
available the services of their present officers and employees. Except as
otherwise approved
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in writing by Bracknell or as expressly contemplated by this Agreement, and
without limiting the generality of the foregoing, from the date hereof until the
Effective Time:
(a) Able will not adopt or propose any change in its articles of
incorporation or bylaws;
(b) Able will not, and will not permit any of its Subsidiaries to,
merge or consolidate with any other Person (other than another wholly owned
Subsidiary) or acquire a material amount of stock or assets of any other
Person;
(c) Able will not, and will not permit any of its Subsidiaries to,
sell, lease, license or otherwise dispose of any material assets or
property except (i) pursuant to existing contracts or commitments, (ii) in
the ordinary course consistent with past practice, or (iii) transfers
between Able and/or its Subsidiaries;
(d) Able will not declare or pay any dividends or make any
distributions on its issued and outstanding capital stock;
(e) except as set forth in Schedule 6.01(e), Able will not, and will
not permit any of its Subsidiaries to, (i) issue, deliver or sell, or
authorize or propose the issuance, delivery or sale of, any Able Securities
or Able Subsidiary Securities, (ii) split, combine or reclassify any Able
Securities or Able Subsidiary Securities or (iii) except as required or
permitted by this Agreement, repurchase, redeem or otherwise acquire any
Able Securities or, any Able Subsidiary Securities;
(f) except as otherwise expressly permitted hereby, Able will not make
any commitment or enter into any contract or agreement material to Able and
its Significant Subsidiaries except in the ordinary course of business
consistent with past practice;
(g) Able will not, and will not permit any of its Subsidiaries to,
incur, assume or guarantee any further indebtedness (i) in an amount equal
to or less than $250,000 other than in the ordinary course of business
consistent with past practice and unless Able notifies Bracknell promptly
after any such obligation arises, or (ii) in an amount greater than
$250,000 (in any one transaction or a series of related transactions);
(h) Able will not, and will not permit any of its Subsidiaries to,
take or agree to or commit to take any action that would make any
representation and warranty of Able hereunder inaccurate in any material
respect at, or as of any time prior to, the Effective Time; and
(i) Able will not, and will not permit any of its Subsidiaries to,
agree or commit to do any of the foregoing.
Section 6.02 Stockholder Meeting. Able shall cause a meeting of its
stockholders to be duly called and held as soon as reasonably practicable, but
in no event later than December 31, 2000 (the "Able Stockholder Meeting"), for
the purpose of voting on the approval and adoption of this Agreement, the Merger
and the other transactions contemplated hereby, and any other item of business
required by or consented to in writing by Bracknell acting reasonably. The
directors of Able shall, unless otherwise required in accordance with their
fiduciary duties as advised by counsel, recommend approval and adoption of this
Agreement and the Merger by Able's stockholders. In connection with such
meeting, Able will, subject to the foregoing and Section 6.04, use its
commercially reasonable best efforts to obtain the necessary approvals by its
stockholders of the matters referred to above in this Section 6.02 and such
other matters as are required by the Florida General Corporation Law, and will
otherwise comply with all legal requirements applicable to such meetings.
Section 6.03 Access to Information. From the date hereof until the
Effective Time, Able will give Bracknell, its counsel, financial advisors,
environmental consultants, auditors and other authorized representatives access
to the offices, properties, books and records of Able and its Subsidiaries, will
furnish to Bracknell, its counsel, financial advisors, environmental
consultants, auditors and other authorized representatives such financial and
operating data and other information as such Persons may reasonably request and
will instruct Able's employees, counsel and financial advisors to cooperate with
Bracknell in its investigation of the business of Able and its Subsidiaries;
provided that no investigation pursuant to this Section shall affect any
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representation or warranty given by Able to Bracknell hereunder; and further
provided that, such access is at normal business hours and does not materially
interfere with the conduct of Able's Business.
Section 6.04 Other Offers.
(a) Able will not, nor will it permit any of its Subsidiaries to, nor
will it authorize or permit any officer, director or employee of, or any
investment banker, attorney, accountant or other advisor or representative
of, Able or any of its Subsidiaries to, directly or indirectly, (i)
solicit, initiate or encourage the submission of any Acquisition Proposal
(as defined below) or (ii) participate in any discussions or negotiations
regarding, or furnish to any person any information in respect of, or take
any other action to facilitate, any Acquisition Proposal or any inquiries
or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal; provided, however, that
nothing contained in this Section 6.04(a) shall prohibit the Able Board of
Directors from furnishing any information to, or entering into discussions
or negotiations with, any person that makes an unsolicited bona fide
Acquisition Proposal if, and only to the extent that (A) the Able
Stockholder Meeting shall not have occurred, (B) the Able Board of
Directors, after consultation with outside legal counsel, determines in
good faith that the failure to take such action would be inconsistent with
its fiduciary duties to Able's stockholders under applicable Law, as such
duties would exist in the absence of any limitation in this Agreement, (C)
the Able Board of Directors determines in good faith that such Acquisition
Proposal is reasonably likely to lead to a transaction that, if accepted,
is reasonably likely to be consummated taking into account all legal,
financial, regulatory and other aspects of the proposal and the person
making the proposal, and believes in good faith, after consultation with
its financial advisor and after taking into account the strategic benefits
to be derived from the Merger and the long-term prospects of Bracknell and
its Subsidiaries, based on the information available to the Able Board of
Directors at the time, that such Acquisition Proposal would, if
consummated, result in a transaction more favorable to Able's stockholders
than the Merger (any such more favorable Acquisition Proposal being
referred to herein as a "Superior Proposal"), and (D) prior to taking such
action, Able (x) provides reasonable notice to Bracknell to the effect that
it is taking such action and (y) receives from the Person submitting such
Acquisition Proposal an executed confidentiality/standstill agreement in
reasonably customary form and in any event containing terms at least as
stringent as those contained in the Term Sheet between Bracknell and
WorldCom and Able. "Acquisition Proposal" means an inquiry, offer or
proposal regarding any of the following (other than the transactions
contemplated by this Agreement) involving Able or any of its Subsidiaries:
(w) any merger, consolidation, share exchange, recapitalization, business
combination or other similar transactions; (x) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of all or substantially all
the assets of Able and its Subsidiaries, taken as a whole, in a single
transaction or series of related transactions; (y) any tender offer or
exchange offer for 20% or more of the outstanding Able Shares or the filing
of a registration statement under the Securities Act of 1933 in connection
therewith; or (z) any public announcement of a proposal, plan or intention
to do any of the foregoing or any agreement to engage in any of the
foregoing.
(b) Able shall notify Bracknell of any Acquisition Proposal
(including, the material terms and conditions thereof and the identity of
the Person making it) as promptly as practicable (but in no case later than
24 hours) after its receipt thereof, and shall thereafter inform Bracknell
on a prompt basis of the status of any discussions or negotiations with
such third party, and any material changes to the terms and conditions of
such Acquisition Proposal, and shall promptly give Bracknell a copy of any
information delivered to such Person which has not previously been reviewed
by Bracknell.
(c) Able has ceased and terminated, and has caused its Subsidiaries
and Affiliates, and their respective officers, directors, employees,
investment bankers, attorneys, accountants and other agents and
representatives to cease and terminate, any existing activities,
discussions or negotiations with any parties conducted heretofore in
respect of any possible Acquisition Proposal. Able shall take all necessary
steps to promptly inform the individuals or entities referred to in the
first sentence of Section 6.04(a) of the obligations undertaken in this
Section 6.04.
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(d) The Able Board of Directors will not withdraw or modify, or
propose to withdraw or modify, in a manner adverse to Bracknell, its
approval or recommendation of the Merger unless the Able Board of
Directors, after consultation with outside legal counsel, determines in
good faith that the failure to take such action would be inconsistent with
its fiduciary duties to Able's stockholders under applicable Law; provided,
however, that the Able Board of Directors may not approve or recommend an
Acquisition Proposal (and in connection therewith, withdraw or modify its
approval or recommendation of the Merger) unless such an Acquisition
Proposal is a Superior Proposal (and Able shall have first complied with
its obligations set forth in Section 10.02 and the time referred to in the
last sentence of Section 10.02 has expired) and unless it shall have first
consulted with outside legal counsel, and have determined that the failure
to take such action would be inconsistent with its fiduciary duties to
Able's stockholders.
(e) Nothing contained in this Section 6.04 shall prohibit Able from
taking and disclosing to its stockholders a position contemplated by Rule
14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or from making
any disclosure to Able's stockholders which, in the good faith reasonable
judgment of the Able Board of Directors, after consultation with outside
legal counsel, is required under applicable Law; provided, however, that
except as otherwise permitted in this Section 6.04, Able does not withdraw
or modify, or propose to withdraw or modify, its position in respect of the
Merger or approve or recommend, or propose to approve or recommend, an
Acquisition Proposal.
(f) Notwithstanding anything contained in this Agreement to the
contrary, any action by the Able Board of Directors permitted by, and taken
in accordance with, this Section 6.04 shall not constitute a breach of this
Agreement by Able. Nothing in this Section 6.04 shall (i) permit Able to
terminate this Agreement (except as provided in Article X hereof) or (ii)
affect any other obligations of Able under this Agreement.
Section 6.05 Notice of Certain Events. Able shall promptly notify
Bracknell in writing of:
(i) any notice or other communication from any Person alleging that
the consent of such Person (or another Person) is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any Governmental
Authority or regulatory agency or authority in connection with the
transactions contemplated by this Agreement; and
(iii) any Actions, suits, claims, investigations or proceedings
commenced or, to Able's Knowledge threatened against, relating to or
involving or otherwise affecting Able or any of its Subsidiaries which,
if pending on the date of this Agreement, would have been required to
have been disclosed pursuant to Section 4.16 or Section 6.17 or which
relate to the consummation of the transactions contemplated by this
Agreement.
Section 6.06 Affiliates. To ensure that the issuance of Bracknell Common
Stock in the Merger complies with the Securities Act of 1933, prior to the
Effective Time, Able shall cause to be delivered to Bracknell a list identifying
each Person who might at the time of the Able Stockholder Meeting be deemed to
be an "affiliate" of Able for purposes of Rule 145 under the Securities Act of
1933 (each, a "Securities Act Affiliate"). Able shall use its commercially
reasonable best efforts to obtain from each Person who is identified as a
possible Securities Act Affiliate prior to the Effective Time an agreement (a
"Securities Act Affiliate Agreement") providing that such person (i) has not
made and will not make any disposition of Able Shares in the 30 day period prior
to the Effective Time and (ii) will not offer to sell, or otherwise dispose of
any Bracknell Common Stock issued to such person in the Merger in violation of
the Securities Act of 1933.
Section 6.07 Litigation. Able shall use its commercially reasonable best
efforts to resolve all Material Litigation as reasonably directed by Bracknell.
Section 6.08 Officers. Able shall use its commercially reasonable best
efforts to cause the officers and employees of Able and its Subsidiaries
identified in writing by Bracknell after the date hereof to enter into, as
applicable, (i) severance agreements on economic terms which are substantially
similar to the severance
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entitlements those officers and employees have under their existing employment
contracts with Able or its Subsidiaries, and (ii) retention agreements which are
reasonably satisfactory to Bracknell.
Section 6.09 Certain Rights to Acquire Able Shares. Able shall use its
commercially reasonable best efforts to cause the holders of all outstanding
rights to acquire Able Shares set forth on Schedule 2.02(j), to consent, if
necessary, to the conversion of those rights in the manner set forth in Section
2.02(j). Able shall use its commercially reasonable best efforts to cause the
former stockholders of GEC, SASCO and SES set forth in Schedule 6.09 to consent
to accept Bracknell Common Stock in lieu of any rights they may have had to
receive Able Shares on terms and conditions reasonably satisfactory to
Bracknell.
Section 6.10 Bracknell Option. Able shall take all necessary action to
cause an increase in the authorized number of Able Shares and the reservation of
a sufficient number of authorized and unissued Able Shares to permit the
issuance to Bracknell of that number of Able Shares that Bracknell is entitled
to acquire at any time upon the exercise of the option in the form of Exhibit B
which was granted to Bracknell as of the date hereof (the "Bracknell Option").
Able shall not take any action which would prevent the exercise of the Bracknell
Option or the issuance of the number of Able Shares that Bracknell is entitled
to acquire upon the exercise of the Bracknell Option at any time.
Section 6.11 Employee Stock Options. Able shall use its commercially
reasonable best efforts to cause the directors and officers of Able and its
Subsidiaries listed on Schedule 4.05(a)(i)(2) to consent to the conversion of
the Able Stock Options as provided for in Section 7.08.
Section 6.12 Support Agreements. Able shall use its commercially
reasonable best efforts to (i) cause the Series C Stockholders to enter into
support agreement in the form attached as Exhibit C and (ii) cause Gideon Taylor
and Frazier Gaines to enter into the support agreements in the form attached as
Exhibit E.
Section 6.13 Sale of Businesses. Able shall use its commercially
reasonable best efforts to cooperate with Bracknell to facilitate transactions,
if available, involving the sale, assignment, transfer or other disposition of
certain businesses conducted by Able or its Subsidiaries as directed by
Bracknell.
Section 6.14 WorldCom Series E Debt. Able shall use its commercially
reasonable best efforts to effect the conversion, on or prior to the record date
for the Able Stockholder Meeting, of $37,000,000 of indebtedness owing from Able
to WorldCom pursuant to an amended and restated Finance Agreement between
WorldCom and Able, dated as of April 1, 1999 (the "WorldCom Series E Debt") into
Series E Shares with an aggregate face value of $37,000,000. The Series E Shares
shall be issued only if the terms and conditions of the Series E Shares are
those which are set out in Exhibit I.
Section 6.15 Canadian Competition Act. Able shall notify Bracknell
promptly if (i) the aggregate value of the assets in Canada of Able and its
Subsidiaries, determined in accordance with the Competition Act (Canada),
exceeds $35 million Canadian dollars; or (ii) the aggregate gross annual
revenues from sales in or from Canada generated by those assets, determined in
accordance with the Competition Act (Canada), exceed $35 million Canadian
dollars.
Section 6.16 Opinion of Financial Advisor. Able shall obtain from a
qualified financial advisor, prior to the finalization of the Proxy
Statement/Prospectus, a written opinion of a type customary in transactions
similar to those contemplated hereby, regarding whether the Conversion Number is
fair to Able's stockholders from a financial point of view. Able shall provide a
copy of such opinion to Bracknell promptly after it becomes available.
Section 6.17 Bankruptcy and Insolvency Proceedings. Without Bracknell's
prior written consent, Able shall not, and shall not permit any of its
Subsidiaries to, institute any proceeding (i) seeking to adjudicate Able or any
of its Subsidiaries bankrupt or insolvent, or (ii) seeking liquidation,
dissolution, winding-up, reorganization, arrangement, protection, relief or
composition of its property or debt or making a proposal with respect to it
under any Law relating to bankruptcy, insolvency, reorganization or compromise
of debts or other similar Laws (including, without limitation, any case under
Chapter 7 or Chapter 11 of the United States Bankruptcy Code or any similar
proceeding under applicable state Law). Able shall promptly provide written
notice to Bracknell if any Person commences a proceeding against Able or any of
its
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Subsidiaries described under clause (i) or (ii) of this Section 6.20 or seeks to
appoint a receiver, trustee, agent, custodian or other similar official for Able
or any of its Subsidiaries or for any substantial part of their properties and
assets.
ARTICLE VII
COVENANTS OF BRACKNELL AND SUBCO
Bracknell and Subco agree that:
Section 7.01 Conduct of Bracknell and Subco. Except as expressly
contemplated by this Agreement, from the date hereof until the Effective Time,
Bracknell and its Subsidiaries shall conduct their business in the ordinary
course consistent with past practice and shall use their commercially reasonable
best efforts to preserve intact their business organizations and relationships
with third parties and to keep available the services of their present officers
and employees. Except as otherwise approved in writing by Able or as expressly
contemplated by this Agreement, and without limiting the generality of the
foregoing, from the date hereof until the Effective Time:
(a) Bracknell and Subco will not adopt or propose any change in their
certificates of incorporation or bylaws;
(b) Bracknell will not, and will not permit any of its Subsidiaries
to, take or agree or commit to take any action that would make any
representation and warranty of Bracknell or Subco hereunder inaccurate in
any material respect at, or as of any time prior to, the Effective Time;
and
(c) Bracknell will not, and will not permit any of its Subsidiaries
to, agree or commit to do any of the foregoing.
Section 7.02 Access to Information. From the date hereof until the
Effective Time, Bracknell will give Able, its counsel, financial advisors,
auditors and other authorized representatives access to the offices, properties,
books and records of Bracknell and its Subsidiaries, will furnish to Able, its
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such Persons may
reasonably request and will instruct Bracknell's employees, counsel and
financial advisors to cooperate with Able in its investigation of the business
of Bracknell and its Subsidiaries; provided that no investigation pursuant to
this Section shall affect any representation or warranty given by Bracknell to
Able hereunder; and provided further that, such access is at normal business
hours and does not materially interfere with the conduct of Bracknell's
Business.
Section 7.03 Obligations of Subco. Bracknell will take all action
necessary to cause Subco to perform its obligations under this Agreement and to
consummate the Merger on the terms and conditions set forth in this Agreement.
Section 7.04 Stock Exchange Listing. Bracknell shall use its commercially
reasonable best efforts to cause the shares of Bracknell Common Stock to be
issued in the Merger and those to be issued upon the exercise of the Replacement
Options to be conditionally approved for listing on the TSE prior to the
Effective Time.
Section 7.05 Notice of Certain Events. Each of Bracknell and Subco shall
promptly notify Able in writing of:
(a) any notice or other communication from any Person alleging that
the consent of such Person (or another Person) is or may be required in
connection with the transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental Authority
or regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) any Actions, suits, claims, investigations or proceedings
commenced or, to the best of its knowledge threatened against, relating to
or involving or otherwise affecting it or any of its Subsidiaries
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which, if pending on the date of this Agreement, would have been required
to have been disclosed pursuant to Section 5.10 or which relate to the
consummation of the transactions contemplated by this Agreement.
Section 7.06 Financing Relating to the Merger. Bracknell shall use
commercially reasonable best efforts to obtain the financing necessary to
complete the transactions contemplated by this Agreement on terms satisfactory
to it.
Section 7.07 Opinion of Financial Advisor. Bracknell shall use
commercially reasonable efforts to obtain from a qualified financial advisor, an
opinion of a type customary in transactions similar to those contemplated
hereby, regarding whether the Merger Consideration to be provided pursuant to
this Agreement is fair to Bracknell and its stockholders from a financial point
of view. Bracknell shall provide a copy of such opinion to Able promptly after
it becomes available.
Section 7.08 Replacement Options. Bracknell will use its commercially
reasonable best efforts to grant options to acquire Bracknell Common Stock (the
"Replacement Options"), in substitution or exchange for the existing Able Stock
Options, to the directors, officers and employees of Able and its Subsidiaries
listed on Schedule 4.05(a)(i)(1) and Schedule 4.05(a)(i)(2) (the "Option
Recipients") who hold Able Stock Options as of the date hereof. The Replacement
Options will be granted with the following terms and conditions: (i) the
Replacement Options shall be exercisable to purchase the number of shares of
Bracknell Common Stock that the corresponding Able Stock Options were
exercisable to purchase multiplied by 0.6; (ii) the exercise price of the
Replacement Options shall be the exercise price(s) of the corresponding Able
Stock Options multiplied by 1.67; and (iii) the unexpired term and vesting
schedule of the Replacement Options will be the same as that of the Able Stock
Options (as if the Merger had not taken place). The Replacement Options will be
granted subject to the approval of the Bracknell Board of Directors, the
approval of the Bracknell stockholders of an increase in the reserves under
Bracknell's existing stock option plan and the approval of the TSE. In the case
of the Able Stock Options issued pursuant to the Able stock option plan, the
Replacement Options will be issued pursuant to the terms and conditions of
Bracknell's existing stock option plan. In the case of the Able Stock Options
issued outside of the Able stock option plan, Bracknell may elect to grant the
Replacement Options inside of Bracknell's existing stock option plan or outside
of that plan.
ARTICLE VIII
COVENANTS OF BRACKNELL, SUBCO AND ABLE
The parties hereto agree that:
Section 8.01 Commercially Reasonable Best Efforts. Subject to the terms
and conditions of this Agreement, each party will use its commercially
reasonable best efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable under applicable
Laws to consummate the transactions contemplated by this Agreement.
Section 8.02 Certain Filings. Bracknell and Able shall cooperate with one
another (a) in connection with the preparation of the Registration Statement and
Proxy Statement/Prospectus, and (b) in determining whether any action by or in
respect of, or filing with, any Governmental Authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any Material Contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (c) in seeking any such actions,
consents, approvals or waivers or making any such filings, furnishing
information required in connection therewith or with the Registration Statement
and Proxy Statement/Prospectus and seeking timely to obtain any such actions,
consents, approvals or waivers.
Section 8.03 Public Announcements. Bracknell and Able will consult with
each other before issuing any press release or making any public statement with
respect to this Agreement and the transactions contemplated hereby and, except
as may be required by applicable Law or any listing agreement with any
applicable securities exchange or interdealer quotation system, will not issue
any such press release or make any such public statement prior to such
consultation.
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Section 8.04 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of Able or Subco, any deeds,
bills of sale, assignments or assurances and to take and do, in the name and on
behalf of Able or Subco, any other actions and things to vest, perfect or
confirm of record or otherwise in the Surviving Corporation any and all right,
title and interest in, to and under any of the rights, properties or assets of
Able acquired or to be acquired by the Surviving Corporation as a result of, or
in connection with, the Merger.
Section 8.05 Preparation of the Proxy Statement/Prospectus and
Registration Statement. Bracknell and Able shall promptly prepare and file with
the SEC a preliminary version of the Proxy Statement/Prospectus and will use
their commercially reasonable best efforts to respond to the comments of the SEC
in connection therewith and to furnish all information required to prepare the
definitive Proxy Statement/Prospectus. After receiving comments from the SEC,
Bracknell shall promptly file with the SEC the Registration Statement containing
the Proxy Statement/Prospectus. Each of Bracknell and Able shall use its
commercially reasonable best efforts to have the Registration Statement declared
effective under the Securities Act of 1933 as promptly as practicable after such
filing. Bracknell shall also take any action (other than qualifying to do
business in any jurisdiction in which it is not now so qualified or filing a
general consent to service of process in any jurisdiction) required to be taken
under any applicable state securities Laws in connection with the issuance of
Bracknell Common Stock in the Merger and Able shall furnish all information
concerning Able and the holders of Able Shares as may be reasonably requested in
connection with any such action. Promptly after the effectiveness of the
Registration Statement, Able will cause the Proxy Statement/Prospectus to be
mailed to its stockholders, and if necessary, after the definitive Proxy
Statement/Prospectus shall have been mailed, promptly circulate amended,
supplemented or supplemental proxy materials and, if required in connection
therewith, resolicit proxies.
ARTICLE IX
CONDITIONS TO THE MERGER
Section 9.01 Conditions to the Obligations of Each Party. The obligations
of Bracknell, Able and Subco to consummate the Merger are subject to the
satisfaction on or before the Closing Date of each of the following conditions:
(a) this Agreement shall have been adopted by the requisite vote of
the stockholders of Able in accordance with the Florida General Corporation
Law;
(b) any applicable waiting period under the HSR Act relating to the
Merger shall have expired;
(c) no provision of any applicable Law and no Order of a court of
competent jurisdiction shall restrain or prohibit the consummation of the
Merger;
(d) the Registration Statement shall have been declared effective and
no stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before the SEC;
(e) the shares of Bracknell Common Stock to be issued in the Merger
and those to be issued on the exercise of the Replacement Options shall
have been conditionally approved for listing on the TSE;
(f) Bracknell and Able shall have received an opinion from Paul,
Hastings Janofsky & Walker, LLP, counsel to Able, or other recognized tax
counsel, based upon certain assumptions and factual representations of
Able, Bracknell and Subco reasonably requested by such counsel, dated the
Closing Date, to the effect that the Merger will be treated for U.S.
federal income Tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, in form and substance reasonably satisfactory
to Able and Bracknell; and
(g) this Agreement shall not have been terminated pursuant to Article
X.
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Section 9.02 Additional Conditions Precedent to the Obligations of
Bracknell. The obligations of Bracknell to consummate the Merger and complete
the transactions contemplated hereby shall be also subject to the fulfillment,
or waiver by Bracknell, on or before the Closing Date, of each of the following
additional conditions:
(a) Able shall have performed in all material respects all of its
obligations hereunder required to be performed by it on or prior to the
Closing Date, the representations and warranties of Able contained in this
Agreement shall be true in all material respects at and as of the Closing
Date as if made on and as of such date, and Bracknell shall have received a
certificate signed by an executive officer of Able to the foregoing effect;
(b) WorldCom shall not be in breach of any term of the Commitment
Agreement in the form attached as Exhibit D;
(c) Gideon Taylor and Frazier Gaines shall have entered into support
agreements in the form attached as Exhibit E and shall not be in breach of
those agreements;
(d) the Series C Stockholders shall have entered into support
agreements with Able in the form attached as Exhibit C and shall not be in
breach of those agreements;
(e) neither Able nor WorldCom Network Services, Inc. shall be in
breach of any term of the Amended and Restated Master Services Agreement in
the form attached as Exhibit F;
(f) Able shall not be in breach of the applicable terms of the Sirit
Settlement;
(g) Bracknell shall have obtained financing necessary to complete the
transactions contemplated by this Agreement on terms reasonably
satisfactory to it;
(h) except as agreed in writing by Bracknell, all outstanding Material
Litigation shall have been settled or otherwise resolved on terms
reasonably satisfactory to Bracknell;
(i) the officers and employees of Able and its Subsidiaries identified
by Bracknell pursuant to Section 6.08 shall have entered into, as
applicable, (i) severance agreements on economic terms which are
substantially similar to the severance entitlements those officers and
employees have under their existing employment contracts with Able or its
Subsidiaries, and (ii) retention agreements which are on terms reasonably
satisfactory to Bracknell;
(j) all of the outstanding rights to acquire Able securities,
excluding the Able Warrants and the Bracknell Option, if any, shall have
been terminated or cancelled;
(k) the former stockholders of GEC, SASCO and SES set forth in
Schedule 6.09 shall have agreed in writing to accept Bracknell Common Stock
in lieu of any rights they may have had to receive Able Shares on terms
reasonably satisfactory to Bracknell;
(l) holders of no more than 5% of the Able Shares outstanding
immediately prior to the Closing Date shall have complied with all
requirements for perfecting stockholders' rights of appraisal as set forth
under the Florida General Corporation Law with respect to such shares;
(m) notwithstanding any of the representations and warranties of Able
contained herein (and the information set out in any of the corresponding
schedules), as a result of Bracknell's due diligence review of (a) each of
the documents and materials required to be made available pursuant to
Article IV and Section 6.03, (b) any document or material referenced in any
Schedule, and (c) any report prepared by Bracknell's environmental
consultants, or any other events or circumstances which Bracknell becomes
aware of, Bracknell shall not have learned prior to the Effective Time any
information which, in the reasonable judgement of Bracknell, individually,
or in the aggregate, constitutes or would reasonably be expected to
constitute an Able Material Adverse Effect or an Able Material Adverse
Change;
(n) notwithstanding any of the representations and warranties of Able
contained herein (and the information set out in any of the corresponding
schedules), there shall not be, and there shall not have occurred, any
circumstance, event, condition, change or development or any set of
circumstances, events,
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conditions, changes or developments, which, in the reasonable judgement of
Bracknell, has or have or would reasonably be expected to have,
individually or in the aggregate, an Able Material Adverse Effect or an
Able Material Adverse Change;
(o) on or prior to the record date for the Able Stockholder Meeting,
the WorldCom Series E Debt shall have been converted into Series E Shares
with an aggregate face value of $37,000,000;
(p) Bracknell shall have obtained the requisite approval from its
stockholders to enter into this Agreement if such approval is required by
any regulatory authority or under applicable Law;
(q) Able shall have obtained from a qualified financial advisor, a
written opinion of a type customary in transactions similar to those
contemplated hereby, to the effect that the Conversion Number is fair to
Able's stockholders from a financial point of view, and Able shall have
provided a copy of such opinion to Bracknell;
(r) Bracknell shall have obtained from a qualified financial advisor,
an opinion of a type customary in transactions similar to those
contemplated hereby, to the effect that the Merger Consideration to be
provided pursuant to this Agreement is fair to Bracknell and its
stockholders from a financial point of view.
(s) Bracknell shall have received the necessary consents to enter into
the transactions contemplated hereby and by the Commitment Agreement and
the Amended and Restated Master Services Agreement pursuant to the Second
Amended and Restated Credit Agreement, dated as of July 21, 2000 between
Bracknell, Nationwide Electric, Inc. and The State Group Limited as
borrowers, certain financial institutions as lenders and Royal Bank of
Canada as administrative agent;
(t) no proceeding (including a private proceeding) shall have been
commenced by or against Able or an Able Significant Subsidiary (i) seeking
to adjudicate it bankrupt or insolvent; (ii) seeking liquidation,
dissolution, winding-up, reorganization, arrangement, protection, relief or
composition of it or any of its property or debt or making a proposal with
respect to it under any Law relating to bankruptcy, insolvency,
reorganization, or compromise of debts or other similar Laws (including,
without limitation, any case under Chapter 7 or Chapter 11 of the United
States Bankruptcy Code or any similar proceeding under state Law); or (iii)
seeking appointment of a receiver, trustee, agent or custodian or other
similar official for it or for any substantial part of its properties and
assets;
(u) Bracknell shall have received the opinion of Paul, Hastings,
Janofsky & Walker, LLP, counsel to Able, dated the Closing Date, addressed
to Bracknell, substantially in the form of Exhibit G, and an opinion
relating to the Subsidiaries of Able substantially in the form of Exhibit G
by counsel to Able reasonably satisfactory to Bracknell;
(v) Bracknell shall have received a copy of the resolutions of the
Board of Directors of Able authorizing the Merger, the issuance of the
Bracknell Option and the other transactions contemplated hereby, which copy
shall be certified by an executive officer of Able.
Section 9.03 Additional Conditions Precedent to the Obligations of
Able. The obligations of Able to consummate the Merger and complete the
transactions contemplated hereby shall also be subject to the fulfillment, or
waiver by Able, on or before the Closing Date, of each of the following
additional conditions:
(a) Bracknell and Subco shall have performed in all material respects
all of their respective obligations hereunder required to be performed by
them at or prior to the Closing Date, the representations and warranties of
Bracknell and Subco contained in this Agreement shall be true in all
material respects at and as of the Closing Date as if made on and as of
such date, and Able shall have received a certificate signed by an
executive officer of each of Bracknell and Subco to the foregoing effect;
(b) Able shall have received the opinion of Torys, counsel to
Bracknell, dated the Closing Date, addressed to Able, substantially in the
form of Exhibit H; and
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(c) Able shall have received copies of the resolutions of the Board of
Directors of Bracknell and the Board of Directors of Subco authorizing the
Merger, which copies shall be certified by an executive officer of
Bracknell and Subco, respectively.
ARTICLE X
TERMINATION
Section 10.01 Termination by Bracknell or Able. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Closing
(notwithstanding any approval of this Agreement by the stockholders of Able):
(a) by mutual written consent of Bracknell and Able;
(b) by either Bracknell or Able in writing, if any one or more of the
conditions to its obligation to consummate the Merger has not been
fulfilled by February 1, 2001 (provided that the right to terminate this
Agreement under this clause shall not be available to any party whose
failure to fulfill any of its obligations under this Agreement has been the
cause of or resulted in the non-fulfillment of one or more of the
conditions referred to above by such date);
(c) by either Bracknell or Able, if there shall be any applicable Law
that makes consummation of the Merger illegal or otherwise prohibited or if
any Order of a court of competent jurisdiction shall restrain or prohibit
the consummation of the Merger, and such Order shall become final and
nonappealable;
(d) by either Bracknell or Able in writing, if the stockholder
approval referred to in Section 9.01(a) shall not have been obtained by
February 1, 2001, by reason of the failure to obtain the requisite vote at
the Able Stockholder Meeting or at any adjournment thereof;
(e) (i) by Bracknell in writing, if (x) there has been a breach by
Able of any representation or warranty of Able contained in this Agreement
which, in the reasonable judgement of Bracknell, would have or would be
reasonably likely to have an Able Material Adverse Effect, or (y) there has
been any material breach of any of the covenants or agreements of Able set
forth in this Agreement, which breach is not curable or, if curable is not
cured within 30 days after written notice of such breach is given by
Bracknell to Able; provided that Able shall not have the right to cure any
such Breach after February 1, 2001; or
(ii) by Able in writing, if (x) there has been a breach by
Bracknell of any representation or warranty of Bracknell contained in
this Agreement which would have or would be reasonably likely to have a
Bracknell Material Adverse Effect, or (y) there has been any material
breach of any of the covenants or agreements of Bracknell set forth in
this Agreement, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by Able to
Bracknell; provided that Bracknell shall not have the right to cure any
such Breach after February 1, 2001; or
(f) (i) by Bracknell in writing, if there shall have been after the
date hereof (x) a change, event or occurrence on or before the date of such
termination which, in the reasonable judgement of Bracknell, would
constitute an Able Material Adverse Change, or (y) any change of Law on or
before the date of such termination shall have occurred which, in the
reasonable judgement of Bracknell has or will have an Able Material Adverse
Effect, excluding however, any change, condition, event or occurrence which
affects the industry of Able generally and also affects Bracknell; or
(ii) by Able in writing, if there shall have been after the date
hereof (x) a change, event or occurrence on or before the date of such
termination which would constitute a Bracknell Material Adverse Change,
or (y) any change of Law on or before the date of such termination shall
have occurred which, in the reasonable judgement of Able has or will
have a Bracknell Material Adverse Effect, excluding however, any change,
condition, event or occurrence which affects the industry of Bracknell
generally and also affects Able.
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Section 10.02 Termination by Able. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Closing by action of the
Able Board of Directors in writing, if (i) Able is not in breach of
Section 6.04, (ii) the Merger shall not have been approved by the Able
stockholders, (iii) the Able Board of Directors authorizes Able, subject to
complying with the terms of this Agreement, to enter into a binding written
agreement concerning a transaction that constitutes a Superior Proposal and Able
promptly notifies Bracknell in writing that it intends to enter into such an
agreement, attaching the most current version of such agreement to such notice,
and (iv) during the three business day period after Able's notice, (A) Able
shall have negotiated with, and shall have caused its respective financial and
legal advisors to negotiate with, Bracknell to attempt to make such commercially
reasonable adjustments in the terms and conditions of this Agreement as would
enable Able to proceed with the transactions contemplated hereby, and (B) the
Able Board of Directors shall have concluded, after considering the results of
such negotiations, that any Superior Proposal giving rise to Able's notice
continues to be a Superior Proposal. Able may not effect such termination unless
contemporaneously therewith Able pays to Bracknell in immediately available
funds the fees required to be paid pursuant to Section 10.04. Able agrees (x)
that it will not enter into a binding agreement referred to in clause (iii)
above until at least the day following the third business day after it has
provided the notice to Bracknell required thereby, and (y) to notify Bracknell
promptly if its intention to enter into a written agreement referred to in its
notification shall change at any time after giving such notification.
Section 10.03 Termination by Bracknell. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Closing by Bracknell in
writing, if either (i) Able enters into a binding agreement for a Superior
Proposal, or (ii) the Able Board of Directors shall have withdrawn or adversely
modified its approval or recommendation of the Merger.
Section 10.04 Effect of Termination.
(a) If this Agreement is terminated pursuant to Sections 10.01, 10.02,
or 10.03, this Agreement shall become void and of no effect with no
liability on the part of any party hereto, except that (i) the agreements
contained in Section 11.04 and Section 10.04 shall survive the termination
hereof, and (ii) the parties shall be liable for any willful breaches
hereof.
(b) In the event that (i) a bona fide Acquisition Proposal shall have
been made or any person shall have publicly announced an intention (whether
or not conditional) to make a bona fide Acquisition Proposal in respect of
Able or any of its Subsidiaries and thereafter this Agreement is terminated
by either Bracknell or Able pursuant to Section 10.01(d) or by Bracknell
pursuant to Section 10.01(e) as a result of a material breach by Able of
any of the covenants set forth in Section 6.04 hereof, or (ii) this
Agreement is terminated by Able pursuant to Section 10.02, or (iii) this
Agreement is terminated by Bracknell pursuant to Section 10.03, then on the
date of such termination Able shall pay Bracknell a termination fee of
$3,000,000 as liquidated damages in immediately available funds and the
Bracknell Option shall become exercisable according to its terms.
(c) In the event that this Agreement is terminated by Bracknell or
Able pursuant to Section 10.01(d) or by Bracknell pursuant to Section
10.01(e) (other than as described in clause 10.04(b)(i) and other than as a
result of a breach of Section 6.08 by Able), then Able shall pay Bracknell
a termination fee of $3,000,000 as liquidated damages in immediately
available funds on the date of such termination.
(d) Able acknowledges that the agreements contained in Sections
10.04(b) and (c) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, Bracknell and Subco
would not have entered into this Agreement; accordingly, if Able fails to
promptly pay the amount due pursuant to Section 10.04(b) or (c), and, in
order to obtain such payment, Bracknell commences a suit which results in a
judgment against Able for the fee set forth in Section 10.04(b) or (c),
Able shall pay to Bracknell its costs and expenses (including attorneys'
fees) in connection with such suit, together with interest from the date of
termination of this Agreement on the amounts owed at the rate of 8.5% per
annum.
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ARTICLE XI
MISCELLANEOUS
Section 11.01 Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile, telex or similar
writing) and shall be given, if to Bracknell or Subco, to:
Paul D. Melnuk
President and Chief Executive Officer
Bracknell Corporation
150 York Street, Suite 1506
Toronto, Ontario M5H 3S5 CANADA
Telephone: (416) 956-0100
Facsimile: (416) 362-3290
and to:
John R. Naccarato, Esq.
Corporate Counsel and Secretary
Bracknell Corporation
150 York Street, Suite 1506
Toronto, Ontario M5H 3S5 CANADA
Telephone: (416) 956-0104
Facsimile: (416) 362-3290
with a copy to:
Philip J. Brown, Esq.
Torys
Suite 3000 Maritime Life Tower
P.O. Box 270
Toronto-Dominion Centre
Toronto, Ontario
CANADA
M5K 1N2
Telephone: (416) 865-8238
Facsimile: (416) 865-7380
if to Able, to:
Michael Brenner, Esq.
Executive Vice President and General Counsel
Able Telcom Holding Corp.
1643 N. Harrison Parkway
Sunrise, FL 33323
Telephone: (954) 838-5070
Facsimile: (888) 387-7606
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with a copy to:
Wayne Shortridge, Esq.
Paul, Hastings, Janofsky & Walker, LLP
660 Peachtree Street, N.E.
Suite 2400
Atlanta, GA 30308
Telephone: (404) 815-2214
Facsimile: (404) 815-2358
or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice, request
or other communication shall be effective (i) if given by facsimile, when such
facsimile is transmitted to the facsimile number specified in this Section and
the appropriate confirmation is received or (ii) if given by any other means,
when delivered at the address specified in this Section.
Section 11.02 Survival of Representations and Warranties. The
representations and warranties and agreements contained herein and in any
certificate or other writing delivered pursuant hereto shall not survive the
Effective Time, except Section 6.04, Section 7.05, Section 7.08 and Article II.
Section 11.03 Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived prior to
the Closing if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by Bracknell, Subco and Able or, in
the case of a waiver, by the party against whom the waiver is to be
effective; provided that (i) any waiver or amendment shall be effective
against a party only if the Board of Directors of such party approves such
waiver and (ii) after the adoption of this Agreement by the stockholders of
Able, no such amendment or waiver shall, without the further approval of
such stockholders and each party's Board of Directors, alter or change (x)
the amount or kind of consideration to be received in exchange for any
shares of capital stock of Able, (y) any term of the certificate of
incorporation of the Surviving Corporation, or (z) any of the terms or
conditions of this Agreement if such alteration or change would adversely
affect the holders of any shares of capital stock of Able.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single
or partial exercise thereof preclude any other or further exercise thereof
or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
Section 11.04 Fees and Expenses.
(a) Except as otherwise provided in this Section, all costs and
expenses incurred in connection with this Agreement shall be paid by the
party incurring such cost or expense.
(b) Bracknell agrees promptly to reimburse Able in immediately
available funds for all of Able's reasonable documented out-of-pocket
expenses (up to a maximum of $250,000), but in no event later than three
business days after the termination of this Agreement, in the event that
Bracknell does not consummate the transactions contemplated by this
Agreement other than as a result of a condition to Bracknell's obligation
to consummate the Merger not being satisfied.
(c) Able and Bracknell shall each pay one-half of all costs and
expenses related to compliance with the requirements of the HSR Act,
printing, filing and mailing the Registration Statement and the Proxy
Statement/Prospectus and all SEC and other regulatory filing fees.
Section 11.05 Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
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Section 11.06 Governing Law. This Agreement shall be construed in
accordance with and governed by the Law of the State of Florida.
Section 11.07 Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
Section 11.08 Entire Agreement. This Agreement and the Term Sheet
Agreement dated July 7, 2000 between Bracknell, Able and WorldCom constitute the
entire agreement between the parties with respect to the subject matter hereof
and supersede all prior agreements, understandings and negotiations, both
written and oral, between the parties with respect to the subject matter of this
Agreement. No representation, inducement, promise, understanding, condition or
warranty not set forth herein has been made or relied upon by either party
hereto. Neither this Agreement nor any provision hereof is intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder
except for the provisions of Article I, which are intended for the benefit of
Able's stockholders.
Section 11.09 Exhibits and Schedules. The Exhibits and Schedules are a
part of this Agreement as if fully set forth herein. All references herein to
Sections, Exhibits and Schedules shall be deemed references to such parts of
this Agreement, unless the context shall otherwise require.
Section 11.10 Headings. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.
Section 11.11 Severability of Provisions. If any provision or any portion
of any provision of this Agreement shall be held invalid or unenforceable, the
remaining portion of such provisions and the remaining provisions of this
Agreement shall not be affected thereby. If the application of any provision or
any portion of any provision of this Agreement to any Person or circumstance
shall be held invalid or unenforceable, the application of such provision or
portion of such provision to Persons or circumstances other than those as to
which it is held invalid or unenforceable shall not be affected thereby.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
BRACKNELL CORPORATION
By:
-----------------------------------------
Title
ABLE TELCOM HOLDING CORP.
By:
-----------------------------------------
Title
BRACKNELL ACQUISITION CORPORATION
By:
-----------------------------------------
Title
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APPENDIX A-2
[ROBINSON-HUMPHREY LETTERHEAD]
November 15, 2000
Board of Directors
Able Telcom Holding Corp.
1000 Holcomb Woods Parkway, Suite 440
Roswell, Georgia 30076
Gentlemen:
We understand that Able Telcom Holding Corp. (the "Company"), Bracknell
Corporation (the "Parent") and Bracknell Acquisition Corporation (the "Merger
Sub"), a wholly-owned subsidiary of Bracknell Corporation, have entered into an
Agreement and Plan of Merger dated August 23, 2000 (the "Agreement"). Under the
terms of the Agreement, the Company will merge with the Merger Sub, with the
Company being the surviving corporation of such merger, and the Company will
become a wholly-owned subsidiary of the Parent. By virtue of the merger, the
Company's shareholders will receive 0.6 shares of Parent's common stock for each
share of the Company's common stock outstanding (the "Consideration"). The terms
and conditions of the proposed transaction are more fully set forth in the
Agreement.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness to the Company's shareholders, from a
financial point of view, of the Consideration to be offered in the proposed
transaction.
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed the Agreement;
2. Reviewed certain publicly available information concerning the Company
and the Parent which we believe to be relevant to our analysis;
3. Reviewed certain financial and operating data concerning the Company
and the Parent furnished to us by the Company and the Parent,
respectively;
4. Conducted discussions with members of management of the Company and the
Parent concerning their respective businesses, operations, present
conditions and prospects;
5. Conducted discussions with WorldCom, Inc. concerning its relationship
with the Company and Parent;
6. Reviewed the trading history of the Company's and the Parent's common
stock from November 10, 1997 to November 15, 2000;
7. Reviewed the historical market prices and trading activity for the
common stock of both the Company and the Parent and compared them with
those of certain publicly traded companies which we deemed relevant;
8. Compared the historical financial results and present financial
condition of the Company and the Parent with those of certain publicly
traded companies which we deemed relevant;
(ROBINSON-HUMPHREY LETTERHEAD)
492
9. Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions which we deemed
relevant;
10. Performed certain financial analyses with respect to the Company's and
the Parent's projected future operating performance;
11. Reviewed certain historical data relating to percentage premiums paid
in mergers of publicly traded companies; and
12. Reviewed such other financial statistics and undertook such other
analyses and investigations and took into account such other matters as
we deemed appropriate.
We have relied upon the accuracy and completeness of the financial and
other information provided to us by the Company and the Parent in arriving at
our opinion without independent verification. With respect to the financial
forecasts for the Company and the Parent, we have assumed that the assumptions
provided by each respective management team have been reasonably prepared and
reflect the best currently available estimates and judgment of the Company's and
the Parent's management. In arriving at our opinion, we conducted only a limited
physical inspection of the properties and facilities of the Company and the
Parent. We have not made or obtained any evaluations or appraisals of the assets
or liabilities of the Company or the Parent. Furthermore, we were not authorized
to solicit, and did not solicit, any indications of interest from any third
party with respect to the purchase of all or a part of the Company's business.
Our opinion is necessarily based upon market, economic and other conditions as
they exist on, and can be evaluated as of, the date of this letter.
The Company has agreed to indemnify us for certain liabilities arising out
of the rendering of this opinion. In the ordinary course of our business, we may
actively trade in the common stock of the Company and the Parent for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that the Consideration to be offered in the Agreement is fair to the
shareholders of the Company from a financial point of view.
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, LLC
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APPENDIX A-3
PROVISIONS OF THE FLORIDA BUSINESS CORPORATION ACT
REGARDING THE RIGHTS OF DISSENTING SHAREHOLDERS
DISSENTERS' RIGHTS
607.1301 DISSENTERS' RIGHTS; DEFINITIONS. -- The following definitions apply to
sec.sec. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the value of the
shares as of the close of business on the day prior to the shareholders'
authorization date, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the shareholders'
vote authorizing the proposed action was taken, the date on which the
corporation received written consents without a meeting from the requisite
number of shareholders in order to authorize the action, or, in the case of
a merger pursuant to sec. 607.1104, the day prior to the date on which a
copy of the plan of merger was mailed to each shareholder of record of the
subsidiary corporation.
HISTORY. -- sec. 118, ch. 89-154.
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT. --
(1) Any shareholder of a corporation has the right to dissent from, and obtain
payment of the fair value of his or her shares in the event of, any of the
following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its parent
under sec. 607.1104, and the shareholders would have been entitled to
vote on action taken, except for the applicability of sec. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation, other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or
exchange pursuant to sec. 607.1202, including a sale in dissolution but
not including a sale pursuant to court order or a sale for cash
pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholders within 1
year after the date of sale;
(c) As provided in sec. 607.0902(11), the approval of a control-share
acquisition;
(d) Consummation of a plan of share exchange to which the corporation is a
party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder is
entitled to vote on the amendment and if such amendment would adversely
affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of his
or her shares;
2. Altering or abolishing the voting rights pertaining to any of his or
her shares, except as such rights may be affected by the voting
rights of new shares then being authorized of any existing or new
class or series of shares;
3. Effecting an exchange, cancellation, or reclassification of any of
his or her shares, when such exchange, cancellation, or
reclassification would alter or abolish the shareholder's voting
rights or alter his or her percentage of equity in the corporation,
or effecting a reduction or cancellation of accrued dividends or
other arrearages in respect to such shares;
A-3-1
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4. Reducing the stated redemption price of any of the shareholder's
redeemable shares, altering or abolishing any provision relating to
any sinking fund for the redemption or purchase of any of his or her
shares, or making any of his or her shares subject to redemption when
they are not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of the
shareholder's preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of the shareholder's
preferred shares; or
7. Reducing any stated preferential amount payable on any of the
shareholder's preferred shares upon voluntary or involuntary
liquidation; or
(f) Any corporate action taken, to the extent the articles of incorporation
provide that a voting or nonvoting shareholder is entitled to dissent
and obtain payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in paragraph (1)(e)
has the right to dissent only as to those of his or her shares which are
adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares registered in his
or her name. In that event, the shareholder's rights shall be determined as
if the shares as to which he or she has dissented and his or her other
shares were registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section does
not apply with respect to a plan of merger or share exchange or a proposed
sale or exchange of property, to the holders of shares of any class or
series which, on the record date fixed to determine the shareholders
entitled to vote at the meeting of shareholders at which such action is to
be acted upon or to consent to any such action without a meeting, were
either registered on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or held of record by not
fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his or her shares
under this section may not challenge the corporate action creating his or
her entitlement unless the action is unlawful or fraudulent with respect to
the shareholder or the corporation.
HISTORY. -- sec. 119, ch. 89-154; sec. 5, ch. 94-327; sec. 31, ch. 97-102.
607.1320 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS. --
(1) (a) If a proposed corporate action creating dissenters' rights under sec.
607.1302 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights and be accompanied by a copy of sec.sec. 607.1301,
607.1302, and 607.1320. A shareholder who wishes to assert dissenters'
rights shall:
1. Deliver to the corporation before the vote is taken written notice of
the shareholder's intent to demand payment for his or her shares if
the proposed action is effectuated, and
2. Not vote his or her shares in favor of the proposed action. A proxy
or vote against the proposed action does not constitute such a notice
of intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under sec.
607.1302 is effectuated by written consent without a meeting, the
corporation shall deliver a copy of sec.sec. 607.1301, 607.1302, and
607.1320 to each shareholder simultaneously with any request for the
shareholder's written consent or, if such a request is not made, within
10 days after the date the corporation received written consents
without a meeting from the requisite number of shareholders necessary
to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the corporation
shall give written notice of such authorization or consent or adoption of
the plan of merger, as the case may be, to each shareholder who filed a
notice of intent to demand payment for his or her shares pursuant to
paragraph (1)(a) or, in
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the case of action authorized by written consent, to each shareholder,
excepting any who voted for, or consented in writing to, the proposed
action.
(3) Within 20 days after the giving of notice to him or her, any shareholder
who elects to dissent shall file with the corporation a notice of such
election, stating the shareholder's name and address, the number, classes,
and series of shares as to which he or she dissents, and a demand for
payment of the fair value of his or her shares. Any shareholder failing to
file such election to dissent within the period set forth shall be bound by
the terms of the proposed corporate action. Any shareholder filing an
election to dissent shall deposit his or her certificates for certificated
shares with the corporation simultaneously with the filing of the election
to dissent. The corporation may restrict the transfer of uncertificated
shares from the date the shareholder's election to dissent is filed with
the corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and
shall not be entitled to vote or to exercise any other rights of a
shareholder. A notice of election may be withdrawn in writing by the
shareholder at any time before an offer is made by the corporation, as
provided in subsection (5), to pay for his or her shares. After such offer,
no such notice of election may be withdrawn unless the corporation consents
thereto. However, the right of such shareholder to be paid the fair value
of his or her shares shall cease, and the shareholder shall be reinstated
to have all his or her rights as a shareholder as of the filing of his or
her notice of election, including any intervening preemptive rights and the
right to payment of any intervening dividend or other distribution or, if
any such rights have expired or any such dividend or distribution other
than in cash has been completed, in lieu thereof, at the election of the
corporation, the fair value thereof in cash as determined by the board as
of the time of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken in the
interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a court
has been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such shareholder is
not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which shareholders may
file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than
90 days from the shareholders' authorization date), the corporation shall
make a written offer to each dissenting shareholder who has made demand as
provided in this section to pay an amount the corporation estimates to be
the fair value for such shares. If the corporate action has not been
consummated before the expiration of the 90-day period after the
shareholders' authorization date, the offer may be made conditional upon
the consummation of such action. Such notice and offer shall be accompanied
by:
(a) A balance sheet of the corporation, the shares of which the dissenting
shareholder holds, as of the latest available date and not more than 12
months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month period
ended on the date of such balance sheet or, if the corporation was not
in existence throughout such 12-month period, for the portion thereof
during which it was in existence.
(6) If within 30 days after the making of such offer any shareholder accepts
the same, payment for his or her shares shall be made within 90 days after
the making of such offer or the consummation of the proposed action,
whichever is later. Upon payment of the agreed value, the dissenting
shareholder shall cease to have any interest in such shares.
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(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30
days thereafter, then the corporation, within 30 days after receipt of
written demand from any dissenting shareholder given within 60 days after
the date on which such corporate action was effected, shall, or at its
election at any time within such period of 60 days may, file an action in
any court of competent jurisdiction in the county in this state where the
registered office of the corporation is located requesting that the fair
value of such shares be determined. The court shall also determine whether
each dissenting shareholder, as to whom the corporation requests the court
to make such determination, is entitled to receive payment for his or her
shares. If the corporation fails to institute the proceeding as herein
provided, any dissenting shareholder may do so in the name of the
corporation. All dissenting shareholders (whether or not residents of this
state), other than shareholders who have agreed with the corporation as to
the value of their shares, shall be made parties to the proceeding as an
action against their shares. The corporation shall serve a copy of the
initial pleading in such proceeding upon each dissenting shareholder who is
a resident of this state in the manner provided by law for the service of a
summons and complaint and upon each nonresident dissenting shareholder
either by registered or certified mail and publication or in such other
manner as is permitted by law. The jurisdiction of the court is plenary and
exclusive. All shareholders who are proper parties to the proceeding are
entitled to judgment against the corporation for the amount of the fair
value of their shares. The court may, if it so elects, appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers shall have such power and authority
as is specified in the order of their appointment or an amendment thereof.
The corporation shall pay each dissenting shareholder the amount found to
be due him or her within 10 days after final determination of the
proceedings. Upon payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares.
(8) The judgment may, at the discretion of the court, include a fair rate of
interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the corporation, but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties
to the proceeding, to whom the corporation has made an offer to pay for the
shares, if the court finds that the action of such shareholders in failing
to accept such offer was arbitrary, vexatious, or not in good faith. Such
expenses shall include reasonable compensation for, and reasonable expenses
of, the appraisers, but shall exclude the fees and expenses of counsel for,
and experts employed by, any party. If the fair value of the shares, as
determined, materially exceeds the amount which the corporation offered to
pay therefor or if no offer was made, the court in its discretion may award
to any shareholder who is a party to the proceeding such sum as the court
determines to be reasonable compensation to any attorney or expert employed
by the shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed value
thereof or pursuant to payment of the judgment entered therefor, as
provided in this section, may be held and disposed of by such corporation
as authorized but unissued shares of the corporation, except that, in the
case of a merger, they may be held and disposed of as the plan of merger
otherwise provides. The shares of the surviving corporation into which the
shares of such dissenting shareholders would have been converted had they
assented to the merger shall have the status of authorized but unissued
shares of the surviving corporation.
HISTORY. -- sec. 120, ch. 89-154; sec. 35, ch. 93-281; sec. 32, ch. 97-102.
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APPENDIX B
(a) Additional information concerning the business of the Company and of
MFSNT
BUSINESS OF THE COMPANY (PRE-MFSNT ACQUISITION)
Prior to the MFSNT Acquisition, Able specialized in designing, installing,
maintaining and providing system integration services for advanced voice, data
and video communications networks. Able's customers included, and still include,
domestic and international telephone operating companies, government entities,
and mid- to large- size corporations. Able provided its customers with a number
of complementary services within the telecommunication infrastructure, traffic
management systems, automated manufacturing systems and utility network areas.
Able developed the ability to assemble a large, trained workforce, offer a
turn-key service mix and satisfy requirements for capital, bonding, technical,
administrative and financial pre-qualifications which allowed the Company to bid
on large projects and compete on both a national and international level.
Able conducted its business through three main operating groups: (1)
Telecommunication Services, (2) Traffic Management Services, and (3)
Communications Development. Each operating group contained subsidiaries that
relied on local managerial talent supported by centralized corporate control.
These groups are briefly summarized below.
Telecommunications Services consisted of network 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 aerial or
underground) and ancillary equipment for digital voice, data and video
transmissions provided primarily to local telephone companies, although
work has been performed for long distance telephone companies, electric
utility companies, local municipalities and cable television multiple
system operators in the United States, as well as electric utility grids
and water and sewer utilities. "Inside plant" services (also known as
premise wiring) consist of engineering, design, installation and
integration of telecommunication networks and delivery systems for voice,
data and video providing connectivity and networking to offices for large
private businesses, including banks, universities and hospitals.
Traffic Management Services consisted of designing, installing and
maintaining traffic control and signalization devices (i.e., stoplights,
crosswalk signals, drawbridge and railroad track signals and gate systems
traffic detection and data gathering devices). This operating group also
designed, installed and maintained "intelligent highway" communication
systems that involve the interconnection of data and video systems, fog
detection devices, remote signalization or computerized signage in order to
monitor and communicate traffic conditions such that real-time responses to
dynamic changes in traffic patterns and climate conditions can be made.
Communications Development activities consisted of management of
Able's joint venture arrangements in Latin America, primarily Venezuela,
which were formed to provide telecommunication installation and maintenance
services to privatized local telephone companies. In 1996, these activities
were expanded to include marketing to Latin American telephone companies of
"Neurolama," an internally developed proprietary telephone call record and
data collection system.
Able's strategy was to capture an increased share of the market for
outsourced network installation, maintenance and system integration and through
increased marketing efforts by broadening the range of services it offers to
customers. This strategy includes both (i) growth through acquisition and (ii)
internal growth of existing and complementary lines of business.
COMPANY STRUCTURE
Able was incorporated in 1987 as "Delta Venture Fund, Inc.", a Colorado
Corporation. Able adopted its current name in 1989 and changed its corporate
domicile to Florida in 1991. Commencing in mid-1992 until mid-1994, 95 percent
of the Company's revenues and profits were derived from telecommunications
services
B-1
498
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 its exposure to foreign markets, in
1994, Able expanded its business focus by marketing its 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, the Company acquired the common stock of H.C. Connell, Inc.
("Connell") 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, Able 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 December 1996, Able acquired the common
stock of Dial Communications, Inc. ("Dial") of Tallahassee, Florida. At that
time, Dial provided outside and inside plant telecommunication services to the
regional Bell operating company, other local and long distance telephone
companies, private businesses and universities. Able has subsequently
discontinued Dial's operations. In April 1998, Able 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.
BUSINESS OF THE COMPANY (POST-MFSNT ACQUISITION)
GENERAL OVERVIEW
The following discussion of Able's business includes those aspects of
Able's operations acquired in the MFSNT Acquisition. For a better understanding
of those aspects of Able's business attributable to MFSNT, see the description
of the business of MFSNT set forth under the heading "Business of MFSNT".
Able, and its subsidiaries, develops, builds and maintains communications
systems for companies and governmental authorities. The Company has five
organizational groups. Each group is comprised of subsidiaries of the Company
with each having local executive management functioning under a decentralized
operating environment. The Company completed operational restructuring of its
subsidiaries during fiscal year 1999. As a result, the Company now has 14 active
subsidiaries, 11 of which are wholly-owned.
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The service provided by each group is as follows:
ORGANIZATIONAL GROUP SERVICE PROVIDED
-------------------- ----------------
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.
COMPANY STRUCTURE
In July 1998, in a transaction that increased Able's revenues by
approximately 300 percent, the Company acquired the network construction and
transportation systems business of MFS Network Technologies, Inc. ("MFSNT") from
MCI WorldCom, Inc. ("WorldCom"). MFSNT was then divided into two entities, 1)
the network construction business became MFS Network Technologies, Inc. and 2)
the transportation systems business became MFS Transportation Systems, Inc. As
part of the MFSNT acquisition, the Company, WorldCom and MFSNT entered into a
Master Services Agreement (the "WorldCom Master Services Agreement") pursuant to
which the Company agreed to provide telecommunication infrastructure services to
WorldCom on a cost-plus 12 percent basis for a minimum of $40.0 million per
year. The aggregate sum payable to the Company for the five-year contract is
guaranteed to be no less than $325.0 million, subject to certain adjustments. To
achieve these established minimums, WorldCom has agreed to award the Company at
least 75 percent of all WorldCom's outside plant work related to its local
network projects up to $500.0 million and the Company has agreed to accept and
perform work orders from WorldCom for as much as $130.0 million of services
during each year of the five-year contract. The Company has also agreed that
WorldCom will have met all of its commitments to the Company, to the extent that
payments made to the Company reach an aggregate of $500.0 million at any time
during the five-year term of the contract.
In July 1999, the Company entered into a teaming agreement with 186K.Net,
Co. (the "186K Agreement"), a technology firm and hosting facility, to combine
their respective expertise in infrastructure engineering/design and high-end
Internet technology to deliver high-speed Internet connectivity,
telecommunications and systems integration solutions. Under the 186K Agreement,
the Company will focus on infrastructure build-outs and 186K.Net, Co. will focus
on the delivery of high-end Internet services. Included in the 186K Agreement is
a deferred value added equity swap that would allow either party to benefit by
an increase in market capitalization value over a three year period (refer to
Exhibit 2.6 for more detail).
In November 1999, the Company acquired the common stock of Southern
Aluminum and Steel Corporation ("SASCO") and Specialty Electronic Systems, Inc.
("SES") which together provide expertise in design, installation and project
implementation of advanced highway communication networks and Intelligent
Transportation Systems.
In January 2000, Able established Able ICP, Inc. ("Able ICP") which will
own, operate and maintain local and regional telecommunication networks as part
of Able's Network Development Group. Able ICP is a development company that is
expected to require significant capital expenditures related to network
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construction and which is not expected during fiscal 2000 to generate
significant net income or earnings before interest, depreciation, taxes and
amortization. The Company's ability to grow Able ICP and to implement its
business plan will be dependent on the Company's ability to fund its capital
expenditure needs, either internally or through borrowings and the sale of
equity. No assurance can be given that the Company will be able to meet Able
ICP's funding needs on a timely basis, or at all, on terms acceptable to the
Company, or that Able ICP will ever be profitable. In March 2000, the name "Able
ICP, Inc." was changed to "Adesta ICP, Inc."
In compliance with a contractual obligation with WorldCom, effective
February 2000, all subsidiaries bearing "MFS" as part of their name were
changed. 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. In conjunction with
these name changes, this proxy statement includes a proposal to shareholders to
change the name of the Company to "The Adesta Group, Inc."
SERVICES, MARKETS AND CUSTOMERS
Able conducts five distinct types of business activities, four of which are
primarily conducted in the United States and one of which is conducted abroad.
Domestically, Able provides network services, network development,
transportation services and construction. Abroad, principally in Venezuela, the
Company conducts communication development activities. Each of these activities
is discussed in more detail below. In most of Able's business activities it
faces competition that may be larger and may have substantially greater
financing, distribution and marketing resources than Able.
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.
Able provides turn-key telecommunications infrastructure solutions through
the Telecommunications Systems Integration Division. As a telecommunications
systems integrator, Able provides "one-stop" capabilities that include project
development, design, engineering, construction management, and on-going
maintenance and operations services for telecommunications networks. The
projects include the construction of fiber optic networks that provide advanced
digital voice, data and video communications and wireless infrastructure
deployment.
The 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. Additionally, Able provides maintenance and installation of electric
utility grids and water and sewer utilities. The Company provides outside plant
telecommunications services primarily under hourly and per unit basis contracts
to local telephone companies. Able also provides these services to long distance
telephone companies, electric utility companies, local municipalities and cable
television multiple system operators.
Network Development Group. The Network Development Group was established
subsequent to October 31, 1999, 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 Tier 3 cities (those with populations
between 100,000 and 250,000).
Transportation Services Group. The Transportation Services Group provides
"one-stop" electronic toll and traffic management solutions for intelligent
transportation system infrastructure projects, including project
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development and management, design, development, integration, installation,
engineering, construction and systems operation and maintenance. Additionally,
Able has and continues 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 car's type, combined with the user's account information, as the car
passes a tolling station and immediately debits the appropriate toll from the
user's account. In addition, significant support systems must be developed to
maintain electronic toll and traffic management accounts, and process
violations. Able 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.
Construction Group. The Company's Construction Group installs and
maintains traffic control and signalization devices. These services include the
design and installation of signal devices (such as stoplights, crosswalk signals
and other traffic control devices) for rural and urban traffic intersections,
drawbridge and railroad track signals, gate systems and traffic detection and
data gathering devices. The Company also designs, develops, installs, maintains
and operates "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. The Company also
installs 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. The Company's Communications Development
Group operates primarily in Venezuela. These activities consist of management of
joint venture arrangements, which were formed to provide telecommunications
installation and maintenance services to privatized local phone companies. These
joint ventures are in the form of subsidiaries in which Able has an 80% voting
and ownership interest and a 50% share of profits and losses. In 1996, the
Communications Development Group expanded its communications development
activities to include the marketing to Central and South American telephone
companies of NeuroLAMA, an internally developed proprietary telephone call
record and data collection system. Significant capital expenditures will be
required to install NeuroLAMA in South America.
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INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
Sales to unaffiliated customers, income (loss) from operations, and
identifiable assets pertaining to the Groups in which the Company operates are
presented below (in thousands):
FOR THE FISCAL YEAR ENDED OCTOBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
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
======== ======== =======
INDUSTRY OVERVIEW
Telecommunications Infrastructure. The International Telecommunications
Union estimates that between 1996 and 2000, telecommunications infrastructure
investment will exceed $50.0 billion in the United States and $600.0 billion
worldwide. In addition, Able believes that utility and telecommunications
companies, including regional Bell operating companies ("RBOCs"), competitive
local exchange carriers ("CLECs") and inter-exchange carriers ("IXCs"), which
still conduct a significant portion of their construction work in-house, will
outsource more infrastructure construction in the future in response to rapid
deregulation and competitive pressures to reduce costs and focus on the
operations and marketing of their telecommunications services.
The Telecommunications Act of 1996 (the "Telecommunications Act") created a
structural change in the telecommunications industry by removing the barriers to
entry that the RBOCs and IXCs had previously enjoyed. The Telecommunications Act
established less restrictive regulations for CLECs and other telecommunications
companies to compare with the RBOCs. As a result, the RBOCs must allow competing
telecommunications companies, under the performance party principle, to compete
in their markets. This has led to intense competition among all players in the
telecommunications and data/information transfer and services industries. Prices
for services and equipment have been falling, and new technologies and services
are being offered. In addition, the battle to attract and retain customers has
led to higher levels of customer service.
These conditions have forced the RBOCs to compete for customers. As a
result, more money is being dedicated to construction and upgrades of fiber
optic and coaxial networks and other assets by many participants in the
telecommunications and data/information transfer industries. RBOCs are searching
for
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ways to reduce costs and become more efficient. Internal operations such as
network installation are increasingly being outsourced to companies such as
Able.
The infrastructure and network services segment of the communications
industry is poised for significant growth, due to the changing regulatory
environment and rapid advancements in technology, which require increases in
bandwidth to carry voice, video and data. These trends are resulting in a
significant need for rapid replacement and upgrade of existing communications
infrastructure and network systems. In addition, new entrants to the
telecommunications industry are increasingly turning to experienced,
full-service communications infrastructure and network integrators for
assistance and support.
It has been forecasted that significant growth will occur within the
international market for telecommunications infrastructure. In many emerging and
developing areas such as South America, the Pacific Rim and Africa, the
infrastructure required to support telecommunications on a widespread local
level is incomplete or nonexistent. The telecommunications infrastructure that
currently exists is typically analog-based. For developing countries, the main
focus is to establish or expand their telecommunications infrastructure rather
than convert and upgrade existing lines. The lack of telecommunications
infrastructure in developing economic areas creates an opportunity to provide
turn-key telecommunications infrastructure project managerial services. Able
expects not only to selectively bid on new opportunities, but also further
develop existing telecommunications infrastructure projects.
Transportation Systems. The market for traffic management and,
specifically, intelligent transportation services, is significant and growing
due to federal and state legislation to create economically efficient and
environmentally safe transportation systems. The Intermodal Surface and
Transportation Efficiency Act of 1996 will provide $217.0 billion to state
departments of transportation over the next six years and is expected to
significantly increase spending on advanced transportation infrastructure. In
addition, the deployment of intelligent highway systems, as well as
telecommunications infrastructure along the highway rights-of-way, offer new
revenue sources for the responsible government agencies. Intelligent
transportation services include electronic toll collection, highway fiber optic
network, computerized traffic signal and other traffic management tools.
SUPPLIERS AND RAW MATERIALS
Able has no material dependence on any one supplier of raw materials.
BACKLOG
The Company's estimated backlog at January 31, 2000, was as follows:
OPERATIONS AND
CONSTRUCTION MAINTENANCE
ORGANIZATIONAL GROUP CONTRACTS CONTRACTS TOTAL
- -------------------- ------------ -------------- ----------
Network Services................................. $408,000 $179,000 $ 587,000
Transportation Services.......................... 140,000 120,000 260,000
Construction..................................... 151,000 33,000 184,000
-------- -------- ----------
$699,000 $332,000 $1,031,000
======== ======== ==========
The Company expects to complete approximately 40% of the total backlog
within the next fiscal year. Due to the nature of the Company's contractual
commitments, in many instances its customers do not commit to the volume of
services to be purchased under a contract but, rather, commit the Company to
perform these services if requested by the customer and commit to obtain these
services from it if they are not performed internally. Many of the contracts are
multi-year agreements, ranging from less than one year to 20 years. The Company
includes the full amount of services projected to be performed over the life of
the contract in backlog due to its historical relationships with its customers
and experience in procurements of this nature. Contract backlog of $500 million
is under performance bonds and the Company may be subject to liquidated damages
for failure to perform in a timely manner. The Company's backlog may fluctuate
and does not necessarily indicate the amount of future sales. A substantial
amount of its order backlog can be canceled at
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any time without penalty, except, in some cases, the Company 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 its customers could have a material adverse
effect on its 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.
DEPENDENCE UPON KEY CUSTOMERS
The Company derives a significant portion of its revenues from a few large
customers. Those customers are as follows:
PERCENTAGE OF
TOTAL
REVENUE REVENUES DURING
FOR THE THE FISCAL
FISCAL YEAR YEARS ENDED
ENDED OCTOBER 31,
OCTOBER 31, ------------------
CUSTOMER OPERATING GROUP 1999 1999 1998 1997
- -------- --------------- ----------- ---- ---- ----
New Jersey Consortium.......................... Transportation and
Network Services $78,515 18% 7% --%
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 2 9
State of Illinois (ISTHA)...................... Network Services 11,680 2 8 12
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, 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 estimated gross value of the New Jersey
Consortium Contracts is in excess of $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 in the contracts. The Company is not currently incurring
additional penalties related to the New Jersey Consortium Contracts.
At October 31, 1999, the Company had billed and unbilled receivables of
$18.3 million and $20.4 million related to the New Jersey Consortium, $10.9
million and $8.7 million related to WorldCom and $6.2 million and $1.1 million
related to Williams Communications, Inc., respectively.
Able believes that a substantial portion of its total revenues and
operating income will continue to be derived from a concentrated group of
customers, in particular the New Jersey Consortium and WorldCom. 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.
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 a contract may result in the loss of the contract and subject
the Company to litigation and various claims, including liquidated damages.
Construction Contracts. For construction contracts, the Company obtains
fixed price or cost plus contracts for projects, either as a prime 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 to qualified contractors. The Company then
estimates the total project cost based
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on input from engineering, production and materials procurement personnel. Able
then submits a bid along with a bid bond. For most government-funded projects,
the scope of work extends across many industry segments. In such cases, the
Company subcontracts its expertise to a prime contractor. Able must submit
performance bonds on substantially all contracts obtained. The financial
viability of the Company is dependent on maintaining adequate bonding capacity
and any loss of such would have a material adverse effect on the Company.
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 for the default by a contractor, reduction or modification
of contracts or subcontracts, changes in governmental policies, and the
imposition of budgetary constraints. The Company's contracts with governmental
agencies provide specifically that such contracts are cancelable for the
convenience of the government. Contract duration is dependent upon the size and
scope of the 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 milestones. During fiscal 1999, Able was 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, Able supplies 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. Generally, the supply and costs of these materials has been and is
expected to continue to be stable, and the Company is not dependent upon any one
supplier for these materials. The Company also purchases 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 the Company to liquidated damages; however, the availability of these
materials, generally, has been adequate.
Service Contracts. The Company generally provides 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 Able the right to perform certain
services at negotiated prices in a specified geographic area during the contract
period or pre-qualify the Company 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. Able is 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, the Company's customers supply most of the materials required, generally
consisting of cable, equipment and hardware, and the Company supplies the
expertise, personnel, tools and equipment necessary to perform its services.
SALES AND MARKETING
Able markets its systems integration services through a dedicated sales
group. Its salespeople market directly to existing and potential customers,
including municipalities and other government authorities, telecommunications
companies and utility companies. Able's 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 is usually 12 to 24 months in duration, is protracted due to the
scope and complexity of the services provided.
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Able markets its telecommunications construction services to local and long
distance telephone companies, utility companies, local municipalities and
certain corporations with particular communications needs. In addition, the
Company markets its construction services to certain systems integrators. A
dedicated sales force, as well as members of each subsidiary's senior
management, actively market Able's services in their defined geographic regions.
Additionally, Able markets transportation construction services to state and
local departments of transportation, public/private toll authorities and certain
international authorities.
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. Able's 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 memberships and other
financing models unique to the industry. These customers often must choose
between building their own networks or using an existing telecommunication
service provider's network. Once a customer has decided to build its own
network, the Company assists the customer in preparing a viable and customized
project business plan that addresses the customer's specific telecommunications
needs, including budgetary and other concerns. Able also has focused on "project
development" opportunities presenting ownership or participation opportunities
that can generate recurring revenues. The Company believes that no other company
presently provides these kind of complete, turnkey project development service
for these customers. Able can make no assurances, however, that other systems
integration companies will not develop the expertise, experience and resources
to provide services that achieve greater market acceptance or that are superior
in both price and quality to Able's services, or that it will be able to
maintain its competitive position.
The Telecommunications Construction Division competes for business with
several competitors on a much larger scale. 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, Inc.
Network Development Group. The competitive environments within the large
metropolitan areas (called Tier 1 cities), 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 Tier 3 cities that the Network Development Group is
targeting typically have the ILEC, one cable company, and in some cases
facilities based CLECs targeting a limited area of businesses. 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 competitors in the North American market are Lockheed Information
Management Co., a division of Lockheed Martin, and Syntonic Technology, Inc.,
doing business as Transcore ("Transcore").
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 Lockheed Martin, Traffic
Control Devices of Florida and MasTec, Inc. The Construction Group's smaller
competitors are High Power of Florida, MICA Corporation of Texas and Fishback &
Moore. A number of these competitors may be larger, may have substantially
greater financial, distribution and marketing resources, and may have more
established reputations than Able.
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Communications Development Group. The Communications Development Group
competes for business in the international market, primarily in South America.
Presently, 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 sized private companies that compete for business generally in a limited
geographic area. In Brazil, the market consists of a myriad of smaller companies
competing for a growing but limited market, which forces margins down.
EMPLOYEES
As of January 31, 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
The Company's corporate offices are in Roswell, Georgia, where it occupies
6,600 square feet under a lease that expires July 31, 2004. The Company also has
5,110 square feet of office space under a lease that expires January 31, 2004 in
West Palm Beach, Florida which is presently available for sublet. The Company
leases 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. The Company leases 6,400 square
feet of space in Fairbanks, Alaska, for a network operations center. The Company
leases 6,800 square feet of office space in Fort Lauderdale, Florida, under a
lease which expires September 30, 2003, which facility is presently available
for sublet. The Company leases several field offices and numerous smaller
offices. The Company also leases 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.
The Company owns (subject to a mortgage) and operates a 10,000 square foot
facility for operations based in Chesapeake, Virginia. The Company's 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. Able also owns a 15,000 square foot
facility located on approximately three acres of land for operations in Tampa,
Florida.
SEASONALITY
The Company operates throughout the United States and its results of
operations are not significantly impacted by seasonal changes.
LEGAL PROCEEDINGS
In May 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. Mr. Davidson resigned in January 2000. 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 May
2000, Able was determined to owe SIRIT $1.2 million in compensatory damages and
$31.0 million in punitive damages. Able believes that the jury award is both
without merit and excessive and is intending to pursue all its legal rights,
including an appeal of the jury award.
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
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related financing of those acquisitions. SFSC seeks certification as a class
action on behalf of itself and all other similarly situated investors 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. On February 24, 2000, the
arbitrator ruled that MFSNT owed Bayport $4.1 million, which is consistent with
amounts previously accrued by the Company. The arbitrator's award is binding;
however, the Company is disputing the calculation of the award, which it
believes in error. Additionally, the Company may appeal the award in future
legal proceedings.
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, tortious 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 had 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.
RESEARCH AND DEVELOPMENT; PROPRIETARY TECHNOLOGY AND RIGHTS
The Company acquired proprietary software from MFSNT in the MFSNT
Acquisition, including applications at the lane, plaza, host, and customer
service center levels within a sophisticated electronic toll collection system
architecture. However, Able 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. See "Business of MFSNT -- Research and
Development; Proprietary Technology and Rights" for a discussion of the
Company's proprietary technology and rights (acquired in that acquisition).
Neurolama. The Communications Development Group has incurred in excess of
$1.0 million of costs developing its proprietary software, NeuroLAMA. NeuroLAMA
is a telephone call record and data collection system. NeuroLAMA helps telephone
companies increase revenues by decreasing fraud, eliminating misoper-
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ation, and increasing efficiency through their analog telecommunications
systems. NeuroLAMA's quality, reliability and uniqueness of design are proving
far superior to any competing system. The Communications Development Group
estimates that roughly 250 million analog lines worldwide could benefit from the
implementation of NeuroLAMA. The software is being marketed throughout South
America. Currently, the Communications Development Group has not capitalized any
costs related to this software.
Able relies on a combination of contractual rights, patents, trade secrets,
know-how, trademarks, non-disclosure agreements, licenses and other technical
measures to establish and protect the Company's proprietary rights to protect
its proprietary applications and technologies. To the extent necessary, Able
intends to vigorously defend any and all rights Able has, now or in the future,
in its proprietary applications and technologies. However, the Company can make
no assurances that it will be successful in pursuing any of its rights or, if
successful, that it will be timely.
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the Nasdaq National Market System (NMS) under
the trading symbol "ABTE". The following table sets forth the high and low sale
prices for the Common Stock for each fiscal quarter indicated below.
SALE PRICE RANGE
------------------
HIGH LOW
-------- -------
Year Ended October 31, 1997
1st Quarter............................................... $ 9.625 $ 7.250
2nd Quarter............................................... 9.000 7.375
3rd Quarter............................................... 9.000 7.125
4th Quarter............................................... 10.625 7.5625
Year Ended October 31, 1998
1st Quarter............................................... $ 10.75 $ 6.375
2nd Quarter............................................... 13.1875 7.0625
3rd Quarter............................................... 20.9375 8.625
4th Quarter............................................... 10.625 1.75
Year Ended October 31, 1999
1st Quarter............................................... $ 12.374 $5.0625
2nd Quarter............................................... 11.5625 6.625
3rd Quarter............................................... 7.125 5.8125
4th Quarter............................................... 10.0625 7.500
Year Ended October 31, 2000
1st Quarter............................................... $ 11.875 $ 4.50
2nd Quarter............................................... 6.72 4.75
On February 4, 2000, there were approximately 412 shareholders of record of
the Company's Common Stock.
No cash dividends have been declared by the Company on its Common Stock
since its inception and the Company has no present intention to declare or pay
cash dividends on the Common Stock in the forseeable future. The Company intends
to retain any earnings, which it may realize in the foreseeable future to
finance its operations. The terms of the Company's $35.0 million secured
revolving credit facility, the Series C Preferred Stock and the WorldCom Note
restrict or prohibit the Company's ability to declare or pay dividends on shares
of Common Stock. Holders of Series C Preferred Stock are generally entitled to
receive cumulative quarterly dividends at a rate of 5.9 percent per year. On
February 4, 2000, the Company redeemed and retired all remaining shares of
Series B Preferred Stock by payment of $10,851,062 in cash and the issuance of
801,785 in restricted common shares that were issued at or above market price
and further Able issued 267,000 Warrants to acquire its Common Stock at varying
prices. Also, on February 4, 2000, Able privately placed 5,000 shares of Series
C Preferred Stock with a small group of investors at $3,000 per share. The sale
of the Series C shares includes the issuance of Warrants to purchase up to
200,000 shares at prices substantially
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above market. See "Management's Discussion of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Consolidated Audited
Financial Statements of the Company" incorporated by reference to the Company's
Annual Report of Form 10-K for the fiscal year ended October 31, 1999, as filed
February 22, 2000, as amended March 1, 1999 and as further amended May 26, 2000.
Management expects that, except for the dividends required to be paid or
payable to the holders of the Series B Preferred Stock, Able will retain its
earnings, if any, to finance operations. Thus, Able does not expect to pay
dividends to holders of Common Stock for the foreseeable future.
For Selected Financial Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations, see 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, and as further amended on May 23, 2000, and the Company's
Annual Report on Form 10-K for the year ended October 31, 1999, as filed
February 22, 2000, as amended May 23, 2000, a copy of which has been provided
along with these Proxy Materials.
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 as of October
31, 1998 (amounts in thousands):
EXPECTED MATURITY
1999 2000 2001 2002 2003 THEREAFTER
------- ------- ------- -------- -------- ----------
Fixed rate debt.................. $15,047 $18,225 $ 1,021 $ 935 $ 872 $21,081
Average interest rate............ 12.40% 13.00% 13.64% 13.61% 13.57% 13.54%
Variable rate debt............... $ -- $ -- $35,000 $ -- $ -- $ --
Average interest rate............ -- -- 7.69% -- -- --
The Company has cash flow exposure due to interest rate changes for its
fixed debt obligations. The Company's $35.0 million credit facility with
NationsBank has been declared in default obligating the Company to pay a default
penalty of 2% per annum. 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 October 31, 1998
and October 31, 1999. Additionally, foreign currency transaction gains and
losses were not material to the Company's results of operation for the fiscal
years ended October 31, 1998 and October 31, 1999. Accordingly, the Company was
not subject to material foreign currency exchange rate risks 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.
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BUSINESS OF MFSNT
Much of the information provided herein related to MFSNT is as of, or
before, July 2, 1998 (the acquisition date).
GENERAL OVERVIEW
MFS Network Technologies (MFSNT) provides systems integration for advanced
telecommunications networks and is engaged in the development, design, project
management, construction, operation and maintenance of communications systems
throughout the United States. MFSNT conducts its business through two divisions:
(i) MFS Network Systems, a communications network systems integrator, and (ii)
MFS Transportation Systems, which provides intelligent transportation and
traffic management services. MFSNT manages the integration of a variety of
equipment and software systems from multiple vendors, selecting those components
most suitable for each individual bid or project.
MFS Network Systems believes that it has remained at the forefront of the
telecommunications network industry through the development of advanced
telecommunications systems in partnership with public authorities and private
corporations. MFSNT believes that it has the ability to engage large
telecommunications projects, evidenced by work completed for WorldCom, resulting
in $500 million in revenues and the deployment of 500,000 fiber miles in 43
cities, as well as the successful completion of a full-scale, state-wide
fiberoptic telecommunications network for the Iowa state government, in addition
to numerous other similar projects.
Its clients include federal, state and local government agencies,
telecommunications service providers, regional and state transportation and
transit agencies, public utilities and private industry in the United States and
abroad. MFSNT's wholly owned subsidiary, MFS Transportation Systems, located in
Mt. Laurel, NJ provides systems integration for intelligent transportation
systems applications, primarily electronic toll and traffic management.
COMPANY STRUCTURE
MFSNT was formed in 1988 as a subsidiary of Peter Kiewit Sons', Inc. In
December 1996, MFSNT was purchased by WorldCom. In July 1998, WorldCom sold
MFSNT to the Company.
SERVICES, MARKETS AND CUSTOMERS
MFSNT conducts two distinct types of business activities which are
primarily conducted in the United States. These business activities include its
(i) Network Systems Group and (ii) Transportation Systems Group.
Network Systems Group. MFSNT's Network Systems Group provides
telecommunications network services for large-scale telecommunications'
projects. This group provides turn-key telecommunications infrastructure
solutions by providing "one-stop" capabilities that include project development,
design, engineering, construction management, and on-going maintenance and
operations services for telecommunications networks. MFSNT's projects include
the construction of fiber optic networks that provide advanced digital voice,
data and video communications and wireless infrastructure deployment.
Transportation Systems Group. The Transportation Systems Group provides
full-service general contracting services for large-scale projects which
includes providing "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,
MFSNT develops 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 car's
type, combined with the user's account information as the car passes a tolling
station and immediately debits the appropriate toll from the user's account. In
addition, significant support systems must be developed
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to maintain electronic toll and traffic management accounts and process
violations. MFSNT developed Automatic Vehicle Identification technology jointly
with Texas Instruments and used it in many of its electronic toll and traffic
management projects. The Transportation Systems Group markets its services to
state and local government transportation departments.
Industry Overview (See discussion above under "Business of the Company
(Post-MFSNT Acquisition) -- Industry Overview).
SUPPLIERS AND RAW MATERIALS
MFSNT has no material dependence on any one supplier of raw materials.
BACKLOG
MFSNT includes all services projected to be performed over the life of each
executed contract in backlog at the date of determination due to MFSNT's
historical relationship with its customers and experience in the procurements of
this nature. As of June 30, 1998 backlog was approximately $647.7 million,
approximately $70.7 million (10.9 percent) of which was attributable to WorldCom
Network. MFSNT expects to complete approximately 33 percent of this backlog
within the next fiscal year As of June 30, 1997, MFSNT's backlog was
approximately $367.7 million, approximately $60.2 million (16.4 percent) of
which was attributable to WorldCom Network. Due to the nature of MFSNT's
contractual commitments, in many instances its customers do not commit to the
volume of services to be purchased under the contract, but rather commit MFSNT
to perform these services if requested by the customer and obtain these services
from MFSNT if they are not performed internally. Many of the contracts are
multi-year agreements, and MFSNT includes the full amount of services projected
to be performed over the life of the contract. At June 30, 1998 contract backlog
of approximately $495.5 million is under performance bonds and MFSNT may be
subject to liquidated damages for failure to perform in a timely manner. MFSNT's
backlog may fluctuate and does not necessarily indicate the amount of future
sales. A substantial amount of MFSNT's order backlog can be canceled at any time
without penalty, except, in some cases, the recovery of MFSNT's 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 MFSNT's customers could have a material adverse effect on its
business, operating results and financial condition. In addition, there can be
no assurance as to the customer's requirements during a particular period or
that such estimates at any point in time are accurate.
CONTRACTS
The Company has and will continue to execute various contracts which may
require MFSNT to, among other items, maintain specific financial parameters,
meet specific milestones and post adequate collateral generally in the form of
performance bonds. Failure by MFSNT to meet its obligations under these
contracts may result in the loss of the contract and subject MFSNT to litigation
and various claims, including liquidated damages.
Telecommunication and Related Services. MFSNT generally provides
telecommunication, cable television, electric utility and manufacturing system
services (i.e., non-governmental business) under comprehensive master service
contracts that either give MFSNT the right to perform certain services at
negotiated prices in a specified geographic area during the contract period or
pre-qualify MFSNT 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. MFSNT is typically compensated on an hourly
or per unit basis or, less frequently, at a fixed price for services performed.
Contract duration either is for a specified term, usually one to three years, or
dependent on the size and scope of the project. In most cases, MFSNT's customers
supply most of the materials required for a particular project, generally
consisting of cable, equipment and hardware and MFSNT supplies the expertise,
personnel, tools and equipment necessary to perform its services.
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Traffic Management and General Utility Services. For traffic management
and general utility services (i.e., government funded business), MFSNT generally
obtains fixed price contracts for projects, either as a prime contractor or as a
subcontractor, on a competitive bid basis. Typically, for prime contracts, DOT
or other governmental body provides to qualified contractors a set of
specifications for the project. MFSNT then estimates the total project cost
based on input from engineering, production and materials procurement personnel.
A bid is then submitted by MFSNT along with a bid bond. For most government
funded projects, the scope of work extends across many industry segments. In
such cases, MFSNT subcontracts its expertise to a prime contractor. MFSNT must
submit performance bonds on substantially all contracts obtained. MFSNT believes
its relations with its bonding company are good and that its bonding capacity is
adequate. However, the financial viability of MFSNT is dependent upon
maintaining adequate bonding capacity and any loss of such would have a material
adverse effect on MFSNT.
Contract duration is dependent upon the size and scope of the project.
Contracts generally set forth date-specific milestones and provide for severe
liquidated damages for failure to meet the milestones by the specified dates.
The failure to complete the contract backlog on time could have a material
adverse impact upon the financial condition of MFSNT. MFSNT is typically paid
based on completed units. Retainage is normally held on contracts (usually 5
percent to 10 percent of the contract amount), until approximately 90 days after
the services are rendered and accepted by the customer. The majority of the
contracts are bonded/guaranteed as to payment by the DOT upon performance by
MFSNT.
SALES AND MARKETING
MFSNT markets its systems integration services through its in-house sales
group, marketing directly to existing and potential customers, including
municipalities and other government authorities, telecommunications companies
and utility companies. Its salespeople work with those responsible for project
development and funding to facilitate network design and funding procurement.
Typically, the sales process for systems integration projects entails: (i)
developing a list of qualified bidders and the establishment of a bid schedule;
(ii) distributing and responding to RFPs; and (iii) awarding contracts 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 is usually 12 to 24 months in
duration, is protracted due to the scope and complexity of the services
provided.
COMPETITION
Network Systems Group. The Network Systems Group competes for business in
two segments: (i) the traditional RFP/bid based segment for the installation and
integration of infrastructure projects and (ii) a less traditional "project
development" segment. MFSNT's largest competitors in the traditional RFP/bid
based segment are telecommunications service providers. The Network Systems
Group has identified and pursued the "project developments" 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 memberships and other financing models unique to the industry
These customers often must choose between building their own networks or using
an existing telecommunications service provider's network. Once a customer has
decided to build its own network, MFSNT assists the customer in preparing a
viable and customized project business plan that addresses the customer's
specific telecommunications needs, including budgetary and other concerns. MFSNT
also has focused on "project development" opportunities presenting ownership or
participation opportunities that can generate recurring revenues. Management
believes that no other company presently provides these kind of complete
turn-key project development services for these customers. There can, however,
be no assurance that other systems integration companies will not develop the
expertise, experience and resources to provide services that achieve greater
market acceptance or that are superior in both price and quality to MFSNT's
services, or that MFSNT will be able to maintain its competitive position.
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Transportation Systems Group. The Transportation Systems Group believes
its major competitors in the North American market are Lockheed Information
Management Co., a division of Lockheed Martin and Synatonic Technology, Inc.,
doing business as Transcore ("Transcore"), a division of SAIC Corporation.
EMPLOYEES
As of June 30, 1998, MFSNT had approximately 1200 employees. None of
MFSNT's employees is represented by a labor union and management considers
relations with key and other employees to be good.
PROPERTIES
The Network Systems Group corporate offices are located in Omaha, Nebraska,
where it occupies 33,571 square feet under a lease that expires September 30,
1999. The Transportation Systems Group corporate offices are located in Mt.
Laurel, New Jersey, where it occupies 40,111 square feet under a lease that
expires February 28, 2003. There are also leases of 6,400 square feet of space
in Fairbanks, Alaska for a network operations center and MFSNT leases several
field offices and numerous smaller offices. There are also leases on a
short-term or cancelable basis for temporary equipment yards or storage
locations in various areas as necessary to enable efficient performance of
service contracts.
RESEARCH AND DEVELOPMENT; PROPRIETARY TECHNOLOGY AND RIGHTS
MFSNT has various proprietary software including applications at the lane,
plaza, host, and customer service center levels within a sophisticated
electronic toll collection system architecture. MFSNT has 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.
Lane System Applications. The lane system application is designed to be
modular in nature to allow and accommodate tolling operations in various
configurations in accordance with a customer's specific needs and operational
requirements. The lane controller application is the head of the lane system. It
runs on a standard PC and under a real-time operating environment. The lane
controller controls the various in-lane equipment items and gathers data from
the in-lane sensors to provide transaction records for each vehicle that travels
through a toll lane. The lane controller coordinates and controls revenue
collection events and transactions. The lane controller also interacts with and
can recognize individual vehicles as well as cars that evade toll collection.
The transaction data created at the lane level is sent to the plaza computer
system for further processing. The lane controller also has the unique
capability of operating in a completely autonomous mode if communications to the
plaza system are disrupted.
Plaza System Applications. The plaza system is the central repository of
the transaction data received from each toll lane. The data is stored in a
relational database and is then used for reporting and tracking purposes.
Traffic reports, revenue reports and collector performance reports are among
several reports that can be generated from the plaza system. A real-time plaza
supervisor system allows client personnel to monitor traffic and collection
events (as well as equipment and security status) as each event actually occurs.
The data received at the lane plaza system level is forwarded to the host system
for further processing and review.
Host System Applications. The primary role of the host application is to
provide the client with the capability to generate system-wide reports for
traffic and revenue, as well as provide audit and reconciliation capabilities.
The host system also acts as the primary interface to the customer service
center ("CSC") system and is the "conduit" for electronic toll transactions and
patron account information. The host application also controls the download of
information to the plaza and lane systems, such as toll schedules, employee
identification information, patron account status, time synchronization and
other information required for daily operation of the system.
CSC System Applications and Services. MFSNT provides numerous CSC systems
and services, including hardware and software system applications and CSC
staffing, operations and management. The CSC application is a highly reliable
and robust, user friendly, efficient, and fully auditable software
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application. Able's system incorporates automated internal controls for audit
and reconciliation purposes and also employs a flexible design to accommodate
potential changes to customer policies, procedures, and/or operations.
Video Transaction Data Multiplexer ("VTDM") Product. The VTDM system is a
patented product that compiles video and data based records for every vehicle
that travels through a monitored lane. The VTDM provides auditors, toll
supervisors and other customer service personnel with the unique capability to
record, review, and analyze lane event data in an efficient and cost-effective
manner. This system can also be used for problem resolution relating to system
and/or toll collector performance. The VTDM system provides information (lane
event data) in the form of video and transaction event text (text-over-video
display). Cameras and videocassette recorders are used to visually record lane
activity on a 24-hour basis.
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
Prior to the MFSNT Acquisition, MFSNT was a division of a public company,
WorldCom, Inc. Therefore, there was no market price for the common stock of
MFSNT. Subsequent to the MFSNT Acquisition, MFSNT was a wholly-owned subsidiary
of the Company.
SELECTED FINANCIAL DATA
The following is a summary of MFSNT's financial statements and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations". The financial statements of MFSNT include
the accounts of i) Network Technologies Division of MFS Network Technologies,
Inc.; ii) MFS Transportation Systems, Inc.; iii) MFS TransTech, Inc.; and iv)
MFS Network Technologies of the District of Columbia, Inc. (collectively
referred to as the "Division"). The financial data for the six months ended July
2, 1998 and June 30, 1997 include, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of the Division
for such periods. Due to seasonality and other market factors, the historical
results for the six months ended July 2, 1998 are not necessarily indicative of
results for a full year (amounts in thousands):
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------
JULY 2, 1998 JULY 30, 1997 1997 1996 1995 1994 1993
REVENUES ------------ ------------- -------- -------- -------- -------- --------
Affiliated entity........................ $ 36,703 $ 34,078 $100,902 $ 56,238 $112,693 $ 86,791 $ 45,652
Third party.............................. 63,826 108,011 264,015 165,867 61,146 32,500 70,290
-------- -------- -------- -------- -------- -------- --------
100,529 142,089 364,917 222,105 173,839 119,291 115,942
Cost of revenues........................... 136,075 136,294 363,453 206,225 155,826 103,171 96,778
-------- -------- -------- -------- -------- -------- --------
Gross margin (loss)........................ (35,546) 5,795 1,465 15,880 18,013 16,120 19,164
Operating expenses......................... 11,814 14,830 25,066 23,754 22,806 18,607 17,245
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).................... (47,359) (9,035) (23,601) (7,874) (4,793) (2,487) 1,919
Other income (expense)..................... 16 (11) (23) (102) 231 138 148
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $(47,344) $ (9,046) $(23,624) $ (7,976) $ (4,562) $ (2,349) $ 2,067
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
(at end of period):
Cash and cash equivalents................ $ 6 $ 179 $ -- $ 300 $ -- $ 22 $ 2,634
Total assets............................. 180,905 155,128 230,200 135,078 97,604 68,515 52,843
Advances from parent..................... 119,389 95,143 142,968 76,648 58,310 26,415 8,816
Contributions and accumulated deficit.... (72,760) (9,043) (25,417) (1,792) 6,116 10,746 13,275
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
elements of the Division's statements of operations as a percentage of its
revenues:
FOR THE YEARS ENDED
FOR THE SIX MONTHS ENDED DECEMBER 31,
---------------------------- -----------------------
JULY 2, 1998 JULY 30, 1997 1997 1996 1995
------------ ------------- ----- ----- -----
Revenue:
Affiliated entity................... 36.5% 24.0% 27.7% 25.3% 64.8%
Third party......................... 63.5 76.0 72.3 74.7 35.2
----- ----- ----- ----- -----
Total revenues.............. 100.0 100.0 100.0 100.0 100.0
Cost of revenues...................... 135.4 95.9 99.6 92.9 89.6
Operating expenses.................... 11.7 10.4 6.9 10.7 13.1
Other (income) expense................ -- -- -- -- --
----- ----- ----- ----- -----
Net loss.................... (47.1)% (6.3)% (6.5)% (3.6)% (2.7)%
===== ===== ===== ===== =====
REVENUES -- AFFILIATED ENTITIES
Revenues from affiliated entities were $36.7 million and $34.1 million for
the six months ended July 2, 1998 and June 30, 1997, respectively, an increase
of $2.6 million or 7.6 percent. Revenues from affiliated entities were $100.9
million and $56.2 million for the years ended December 31, 1997 and 1996,
respectively, an increase of $44.7 million or 80.0 percent. Revenues from
affiliated entities were $56.2 million and $112.7 million for the years ended
December 31, 1996 and 1995, respectively, a decrease of $56.5 million or 50.l
percent.
Revenues from affiliated companies relate primarily to the network
infrastructure project needs of the Division's parent. Substantially all of
MFSNT's revenue from affiliated entities is from cost reimbursable contracts
that include an 8.7 percent general and administrative fee.
REVENUES -- THIRD PARTY
Revenues from third parties were $63.8 million and $108.0 million for the
six months ended July 2, 1998 and June 30, 1997, respectively, a decrease of
$44.2 million or 40.9 percent. The decrease related primarily to decreases in
revenue in the Division's network systems group of $56.9 million partially
offset by revenue increases of $12.7 in the Division's transportation systems
group. The decrease in revenues from the Division's network systems group
resulted primarily from the Company's infrastructure projects with the New York
State Thruway Authority ("NYSTA") and Nortel which generated revenues of $26.0
million and $78.2 million during the six months ended July 2, 1998 and June 30,
1997, respectively. Substantially all of the increase in the revenues from the
Division's transportation systems group resulted from the New Jersey Consortium
project which was obtained in early 1998.
Revenues from third parties were $264.0 million and $165.9 million for the
years ended December 31, 1997 and 1996 respectively, an increase of $98.1
million or 59.1 percent. This increase is primarily due to the NYSTA project
that began in late 1996.
Revenues from third parties were $165.9 million and $61.1 million for the
years ended December 31, 1996 and 1995, respectively, an increase of $104.8
million or 171.5 percent. The increase consisted of $95.1 million and $9.7
million increases from the Divisions network systems and transportation systems
groups, respectively. The increase in the network systems group was due
primarily to infrastructure projects with Nortel and Kanas Telcom that began in
1996 and generated combined revenues of $89.6 million. The increase in the
transportation systems group was due primarily to toll collection and traffic
management projects with the Atlantic City Expressway and the Arizona Department
of Transportation which combined to increase revenue $9.5 million between 1996
and 1995.
B-20
517
COST OF REVENUES
Costs of revenues were $136.1 million and $136.3 million for the six months
ended July 2, 1998 and June 30, 1977, respectively, a decrease of $0.2 million
or less than 1.0 percent.
Costs of revenues were $363.5 million and $206.2 million for the years
ended December 31, 1997 and 1996, respectively, an increase of $157.3 million or
76.3 percent.
Costs of revenues were $206.2 million and $155.8 million of the years ended
December 31, 1996 and 1995, respectively, an increase of $50.4 million or 32.3
percent.
Changes in costs of revenues for all periods discussed generally correlate
to changes in revenues. Cost of revenues 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. Changes in job performance, condition and
the estimated profitability may result in changes in the estimates for project
costs and profits. Revised estimates are recognized in the period in which the
changes are determined. When the current estimates of total contract revenue and
contract cost indicates a loss, a provision for the entire loss on the contract
is made. At July 2, 1998 and December 31, 1997, reserves for losses on
uncompleted contracts totaled $39.9 million and $12.6 million, respectively.
OPERATING EXPENSES
Operating expenses were $11.8 million and $14.8 million for the six months
ended July 2, 1998 and June 30, 1997, respectively, a decrease of $3.0 million
or 20.3 percent.
Operating expenses were $25.1 million and $23.8 million for the years ended
December 31, 1997 and 1996, respectively, an increase of $1.3 million or 5.5
percent.
Operating expenses were $23.8 million and $22.8 million of the years ended
December 31, 1996 and 1995, respectively, an increase of $1.0 million or 4.4
percent.
Changes in operating expenses for all periods discussed generally correlate
to changes in revenue.
NET LOSS
Net loss was $47.3 million and $9.0 million for the six months ended July
2, 1998 and June 30, 1997, an increase of $38.3 million or 425.5 percent.
Net loss was $23.6 million and $8.0 million for the years ended December
31, 1997 and 1996, respectively, an increase of $15.6 million or 195.0 percent.
Net loss was $8.0 million and $4.6 million for the years ended December 31, 1996
and 1995, respectively, an increase of $3.4 million or 73.9 percent.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents -- Cash and cash equivalents were $0.0, $0.0 and
$0.3 million at July 2, 1998, December 31, 1997 and December 31, 1996,
respectively. The treasury and cash management functions of the Company are
performed by the Company. All net cash inflows are applied against advances. It
was the intent of WorldCom to support the Division until such time that the
Division could generate sufficient cash flows to fund its operations.
Cash from Operations -- Cash from operations were $24.0 million and $(16.2)
million during the six months ended July 2, 1998 and June 30, 1997,
respectively, an increase of $40.2 million or 248.1 percent. The change resulted
primarily from the liquidation during the six months ended July 2, 1998 of
current assets related to the NYSTA contract.
Cash from operations were $(62.4) million and $(19.7) million for the years
ended December 31, 1997 and 1996, respectively, a decrease of $42.7 million or
216.8 percent. The change related primarily from the accumulation during the
year ended December 31, 1997 of costs related to the NYSTA contract.
B-21
518
Cash from operations were $(19.7) million and $(29.8) million for the years
ended December 31, 1996 and 1995, respectively.
Cash from Investing Activities -- Cash from investing activities were $(0.4)
million and $(2.4) million for the six months ended July 2, 1998 and June 30,
1997, respectively, an increase of $2.0 million or 83.3 percent.
Cash from investing activities were $(4.2) million and $(2.1) million for the
years ended December 31, 1997 and 1996, respectively, a decrease of $2.1 million
or 100.0 percent.
Cash from investing activities were $(2.1) million and $(2.2) million for the
years ended December 31, 1996 and l995, respectively, an increase of $0.1
million or 4.5 percent. Investing activities generally relate to purchases of
network and equipment to support the infrastructure necessary to support the
network services and transportation services groups.
Cash from Financing Activities -- Cash from financing activities were $(23.6)
million and $18.5 million for the six months ended July 2, 1998 and June 30,
1997, respectively, a decrease of $42.1 million or 227.6 percent.
Cash from financing activities were $66.3 million and $22.1 million for the
years ended December 31, 1997 and 1996, respectively, an increase of $44.2
million or 200.0 percent.
Cash from financing activities were $22.1 million and $31.9 million for the
years ended December 31, 1996 and 1995, respectively, a decrease of $9.8 million
or 30.7 percent.
Financing activities for all periods discussed relate to advances from parent.
As discussed above, all net cash inflows are applied against advances from
parent. Likewise, it was the intent of the Company's parent to support the
Division until such time that the Division could generate sufficient cash flows
to fund its operations.
B-22
519
APPENDIX C
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MFS Network Technologies, Inc.:
We have audited the accompanying balance sheets of the Network Technologies
Division of MFS Network Technologies, Inc. as of December 31, 1997
(restated -- see Note 10) and 1996, and the related statements of operations and
cash flows for the years ended December 31, 1997 (restated -- see Note 10), 1996
and 1995. These financial statements are the responsibility of the Division'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 the Network Technologies
Division of MFS Network Technologies, Inc. as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for the years ended December
31, 1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
June 16, 1998 (except with
respect to the matter discussed
in Note 10, as to which the
date is June 7, 2000)
C-1
520
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
BALANCE SHEETS
JULY 2, 1998, DECEMBER 31, 1997 AND 1996
RESTATED
---------------------------
JULY 2, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(UNAUDITED) (AUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 5,902 $ -- $ 300,000
Accounts receivable --
Affiliated entities............................. 19,829,355 40,649,818 10,698,656
Third party..................................... 38,948,038 20,194,721 23,159,965
Costs and earnings in excess of billings on
uncompleted contracts --
Affiliated entities............................. 11,893,461 19,068,875 9,535,530
Third party..................................... 75,456,486 119,018,440 85,008,166
Other current assets............................... 523,736 2,898,233 395,394
------------ ------------ ------------
Total current assets....................... 146,656,978 201,830,087 129,097,711
Property and equipment, net.......................... 5,727,302 6,133,214 4,654,412
Network assets held for sale......................... 28,044,000 21,110,000 --
Restricted assets.................................... 347,481 746,245 984,869
Other noncurrent assets, net......................... 128,850 380,257 341,244
------------ ------------ ------------
Total assets............................... $180,904,611 $230,199,803 $135,078,236
============ ============ ============
LIABILITIES, CONTRIBUTIONS AND ACCUMULATED DEFICIT
Current Liabilities:
Accounts payable................................... $ 13,732,569 $ 25,259,641 $ 15,304,269
Accrued costs and billings in excess of revenue on
uncompleted contracts --
Affiliated entities............................. 8,041,172 12,360,457 4,426,092
Third party..................................... 48,537,638 42,545,113 39,825,275
Reserves for losses on uncompleted contracts....... 39,900,000 12,610,000 --
Accrued compensation............................... 1,464,551 836,131 598,405
Other current liabilities.......................... 600,118 647,146 68,530
------------ ------------ ------------
Total current liabilities.................. 112,276,048 94,258,488 60,222,571
Property taxes payable............................... 22,000,000 18,390,000 --
Advances from MFS Network Technologies, Inc.......... 119,388,930 142,967,895 76,648,131
Commitments and contingencies (Note 7)
Contributions and accumulated deficit:
Contributions from MFS Network Technologies,
Inc............................................. 11,755,694 11,755,694 11,755,694
Accumulated deficit................................ (84,516,061) (37,172,274) (13,548,160)
------------ ------------ ------------
Total contributions and accumulated
deficit.................................. (72,760,367) (25,416,580) (1,792,466)
------------ ------------ ------------
Total liabilities, contributions and
accumulated deficit...................... $180,904,611 $230,199,803 $135,078,236
============ ============ ============
The accompanying notes are an integral part of these balance sheets.
C-2
521
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JULY 2, 1998, JUNE 30, 1997,
DECEMBER 31, 1997, 1996 AND 1995
SIX MONTHS ENDED
--------------------------- YEARS ENDED DECEMBER 31,
RESTATED ------------------------------------------
JULY 2, JUNE 30, RESTATED
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
Revenue:
Affiliated entities...... $ 36,703,005 $ 34,077,636 $100,901,819 $ 56,237,902 $112,692,674
Third party.............. 63,826,308 108,011,172 264,015,450 165,867,327 61,145,581
------------ ------------ ------------ ------------ ------------
Total revenue.... 100,529,313 142,088,808 364,917,269 222,105,229 173,838,255
Cost of revenues........... 136,075,030 136,294,198 363,452,515 206,225,389 155,826,296
------------ ------------ ------------ ------------ ------------
(35,545,717) 5,794,610 1,464,754 15,879,840 18,011,959
Operating expenses......... 11,813,772 14,830,436 25,066,129 23,754,195 22,806,053
------------ ------------ ------------ ------------ ------------
Operating loss............. (47,359,489) (9,035,826) (23,601,375) (7,874,355) (4,794,094)
Other income (expense),
net...................... 15,701 (10,706) (22,739) (101,630) 231,355
------------ ------------ ------------ ------------ ------------
Net loss......... $(47,343,788) $ (9,046,532) $(23,624,114) $ (7,975,985) $ (4,562,739)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
C-3
522
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JULY 2, 1998, JUNE 30, 1997,
DECEMBER 31, 1997, 1996 AND 1995
SIX-MONTHS ENDED
--------------------------- YEARS ENDED DECEMBER 31,
RESTATED ------------------------------------------
JULY 2, JUNE 30, RESTATED
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
Cash flows from operating activities:
Net loss........................... $(47,343,788) $ (9,046,532) $(23,624,114) $ (7,975,985) $ (4,562,739)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities --
Depreciation and amortization.... 1,358,000 1,342,345 2,684,691 1,869,993 1,628,908
Reserves for losses on
uncompleted contracts.......... 27,290,000 -- 12,610,000 -- --
Increase in property tax
payable........................ 3,610,000 -- 18,390,000 -- --
Changes in assets and
liabilities --
Accounts receivable and other
assets...................... 4,693,050 (2,546,525) (29,488,757) (4,522,767) (10,046,771)
Accounts payable and other
liabilities................. (11,527,072) 798,920 10,771,714 4,939,109 5,246,045
Costs and earnings in excess of
billings on uncompleted
contracts................... 50,737,368 (16,712,465) (43,543,619) (35,611,529) (18,594,198)
Accrued costs and billings in
excess of revenue on
uncompleted contracts....... 1,673,240 9,702,293 10,654,203 21,885,223 (3,201,681)
Construction of network assets
held for sale............... (6,934,000) -- (21,110,000) -- --
Restricted assets.............. 398,764 238,624 238,624 (280,191) (207,332)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities................ 23,955,562 (16,223,340) (62,417,258) (19,696,147) (29,737,768)
Cash flows from investing activities:
Purchases of network and
equipment........................ (952,000) (2,492,812) (4,163,493) (2,068,478) (2,192,752)
Additions to deferred costs and
other............................ 581,392 100,162 (39,013) (11,764) 13,236
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities................ (370,696) (2,392,650) (4,202,506) (2,080,242) (2,179,516)
Cash flows from financing activities:
Advances (repayments) from MFS
Network Technologies, Inc........ (23,578,964) 18,494,835 66,319,764 22,076,389 31,894,895
------------ ------------ ------------ ------------ ------------
Net cash from provided by
(used in) financing
activities................ (23,578,964) 18,494,835 66,319,764 22,076,389 31,894,895
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 5,902 (121,155) (300,000) 300,000 (22,389)
Cash and cash equivalents, beginning
of period.......................... -- 300,000 300,000 -- 22,389
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of
period............................. $ 5,902 $ 178,845 $ -- $ 300,000 $ --
============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
C-4
523
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 2, 1998 (UNAUDITED), JUNE 30, 1997 (UNAUDITED),
DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION
The financial statements include the accounts of the following entities:
Network Technologies Division of MFS Network Technologies, Inc. (NT)
MFS Transportation Systems, Inc. (TSI)
MFS TransTech, Inc. (TT)
MFS Network Technologies of the District of Columbia, Inc. (DC)
Collectively, these entities are known as the Division. NT, TSI and DC are
wholly owned by MFS Network Technologies, Inc. (MFSNT). TSI owns 85 percent of
TT. The basis of the 15% minority interest has been reduced to zero due to TT's
significant losses for the periods ended July 2, 1998, June 30, 1997, December
31, 1997, 1996 and 1995. As of January 1, 1995, MFSNT was a wholly owned
subsidiary of MFS Communications Company, Inc. (MFSCC). During 1995, MFSCC
completed a restructuring in which it contributed its subsidiaries to MFSNT.
This transaction has been accounted for at historical cost in a manner similar
to the pooling of interest method. During 1996, MFSCC became a wholly owned
subsidiary of WorldCom, Inc. (WorldCom). All significant accounts and
transactions by and between the entities included in the Division have been
eliminated.
The Division operates as a systems integrator and project developer for
large-scale, facilities-based communications networks and Intelligent
Transportation Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting for Construction Contracts
The Division uses the percentage of completion method of accounting to
account for revenues and costs, measured by the percentage of budget completed
to date to the total budget. Provision is made for the entire amount of future
estimated determinable losses on contracts in progress; claims for additional
contract compensation, however, are not reflected in the accounts until the year
in which such claims are allowed. Revisions in cost and profit estimates during
the course of the work are reflected in the accounting period in which the facts
which require the revision become known. It is possible that cost and profit
estimates will be revised in the near term.
In accordance with industry practice, amounts realizable and payable under
contracts which may extend beyond one year are included in current assets and
liabilities.
Substantially all of the Division's revenue from affiliates is from cost
reimbursable contracts. Revenues from those contracts are recognized on the
basis of costs incurred during the period, plus the overhead fee earned.
The Division has entered into two related agreements with a significant
customer. One contract relates to construction services and the other contract
relates to materials purchasing whereby the Division purchases
C-5
524
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
certain materials for the customer and passes those through at cost. The
materials contract was entered into in conjunction with the construction
contract, therefore, the costs associated with materials are shown as contract
costs and revenue is recognized to the extent of those costs. The revenues and
related costs were $36.1 million, $40.0 million, $57.3 million, $0 for the
periods ended June 30, 1997, December 31, 1997, 1996 and 1995, respectively.
These amounts are included in the accompanying financial statements as
construction revenues and cost of revenues.
Credit risk is minimal with public (government) owners since the Division
ascertains that funds have been appropriated by the governmental project owner
prior to commencing work on public projects. Most public contracts are subject
to termination at the election of the government. However, in the event of
termination, the Division is entitled to receive the contract price on completed
work and reimbursement of costs, plus a reasonable profit, on uncompleted work.
Credit risk with private owners is minimized because of statutory mechanics
liens, which give the Division high priority in the event of lien foreclosures
following financial difficulties of private owners.
Fixed Assets
Fixed assets are stated at cost. Depreciation on leasehold improvements is
provided by the straight-line method over estimated useful lives ranging from 10
to 31.5 years, and depreciation on all other fixed assets is provided on
accelerated methods over the estimated useful lives of the respective assets
ranging from 3 to 8 years. Upon sale or retirement of property and equipment,
the related cost and accumulated depreciation are removed from the accounts, and
any gain or loss is recognized.
Income Taxes
The Division is included in the combined income tax returns of WorldCom for
the years ended December 31, 1997 and 1996, and in the combined income tax
return of MFSCC for the year ended December 31, 1995. There is no tax sharing
agreement between the Division and WorldCom or MFSCC, respectively; therefore,
the Division calculates its tax provision on a separate-entity basis. The
accompanying financial statements do not reflect a tax benefit since it is more
likely than not that the deferred tax asset will not be realized.
RESTRICTED ASSETS
Restricted assets consist of government securities held for owners in lieu
of retainage. These government securities are carried at cost which approximates
fair market value.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Division considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
3. ACCOUNTS RECEIVABLE
Accounts receivable includes retainage which has been billed but is not due
until after the services are rendered and accepted by the customer. Retainage
totaled $4.5 million, $5.0 million and $2.8 million at July 2, 1998, December
31, 1997 and 1996, respectively.
C-6
525
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
--------------------------
JULY 2, 1998 1997 1996
------------ ----------- -----------
Furniture, fixtures and office equipment.... $ 6,817,519 $ 6,059,631 $ 4,336,901
Vehicles.................................... 4,556,658 4,436,769 2,821,138
Leasehold improvements...................... 1,066,251 1,042,972 1,056,620
Testing and construction equipment.......... 865,062 754,992 829,013
Other....................................... 517,768 723,068 423,261
----------- ----------- -----------
13,823,258 13,017,432 9,466,933
Less -- Accumulated depreciation............ (8,095,956) (6,884,218) (4,812,521)
----------- ----------- -----------
$ 5,727,302 $ 6,133,214 $ 4,654,412
=========== =========== ===========
5. LEASES
The Division is leasing premises under various noncancellable operating
leases which, in addition to rental payments, require payments for insurance,
maintenance, property taxes and other executory costs related to the leases.
Certain leases provide for adjustments in lease cost based upon adjustments in
the Consumer Price Index and increases in the landlord's management costs. The
lease agreements have various expiration dates and renewal options through 2003.
Future minimum payments by year and in the aggregate, under the
noncancellable operating leases with initial or remaining terms of one year or
more consisted of the following at July 2, 1998 and December 31, 1997:
JULY 2, 1998 DECEMBER 31, 1997
------------ -----------------
1998...................................................... $ 798,822 $1,714,000
1999...................................................... 1,259,651 1,176,000
2000...................................................... 503,836 504,000
2001...................................................... 436,000 436,000
2002...................................................... 436,000 436,000
Thereafter................................................ 109,000 109,000
Rent expense related to noncancellable operating leases for the periods
ended July 2, 1998, June 30, 1997, December 31, 1997, 1996 and 1995,
respectively, was approximately $860,800, $896,700, $1,800,000, $1,429,700 and
$862,000.
6. RELATED-PARTY TRANSACTIONS
Employees of the Division are eligible to participate in the WorldCom
employee benefit plans.
WorldCom manages and performs the treasury functions for the Division.
WorldCom's intention is to support the Division until such time that the
Division can generate sufficient cash flows to fund its operations.
C-7
526
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENT AND CONTINGENCIES
The Division is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Division's financial position or results of operations.
The Division has an agreement with the minority stockholders of TT, under
which the Division obtains permanent exclusive and permanent nonexclusive
licenses for certain toll system patents for an aggregate license fee of
$6,000,000 to be paid in installments through February 1999. At July 2, 1998 and
December 31, 1997, the remaining installment payments totalled $333,000 and
$1,083,000, respectively. The Division paid approximately $750,000, $1,417,000,
$1,000,000 and $1,000,000 under this agreement during the periods ended July 2,
1998, December 31, 1997, 1996 and 1995, respectively.
8. SIGNIFICANT CUSTOMERS
A significant portion of the Company's business, excluding affiliated
entities, was derived from three major customers in 1997, two major customers in
1996 and two major customers in 1995. Revenues from these customers totaled
approximately $224.6 million, $89.6 million and $39.4 million, or 61%, 40% and
23% of revenues in years ended December 31, 1997, 1996 and 1995, respectively.
9. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Division incurred and recognized
during the period ended July 2, 1998, approximately $25 million of losses on
four contracts that were in process as of year-end. Division management
represented that these losses were not anticipated at December 31, 1997, and
related to matters and events occurring subsequent thereto. As a result, the
losses were not reflected in the 1997 financial statements prepared by the
Division.
In July 1998, Able Telcom Holding Corp. (Able) executed an agreement with
WorldCom to acquire the Division for the net book value of the Division at March
31, 1998, as defined in the agreement, plus $10 million. Able subsequently
negotiated a significant reduction in the purchase price. The accompanying
financial statements of the Division for both the year ended December 31, 1997,
and the period ended July 2, 1998, have been restated by Able to reflect the
adjustments described in Note 10 which, in the opinion of Able's management, are
necessary to have those financial statements be in accordance with generally
accepted accounting principles.
10. RESTATEMENT OF FINANCIAL STATEMENTS
Able closed the acquisition of the Division on July 2, 1998, with the
stipulation that it could continue its due diligence assessment and could reopen
negotiation of the purchase price. In September 1998, the cash and notes portion
of the purchase price was reduced from the previously estimated amount of $101.4
million to $58.8 million. The adjusted price paid, including consideration
delivered to the seller in the form of Able equity instruments valued at $4.1
million, was approximately $24.9 million less than the net assets reflected on
the Division's July 2, 1998, unaudited balance sheet.
On November 10, 1999, Able met with the Staff of the Securities and
Exchange Commission. One of the issues discussed with the Staff was the need to
restate the pre-acquisition financial statements of the Division. These
financial statements had been prepared by the predecessor owner. The Staff
informed Able that it had a responsibility to restate the financial statements,
if necessary, to be in accordance with what Able believed represented generally
accepted accounting principles. The potential restatement involved the
preacquisition audited financial statements of the Division for the year ended
December 31, 1997, and the unaudited financial statements for the period from
January 1, 1998 through July 2, 1998.
C-8
527
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As part of the preparation and audit of the October 31, 1999 financial
statements of Able, Able initiated a review of the preacquisition financial
statements of the Division. Management of Able has determined that certain
adjustments to the preacquisition financial statements of the Division for the
year ended December 31, 1997 and the period from January 1, 1998 through July 2,
1998 are appropriate. The adjustments prepared by Able and reflected in the
accompanying restated financial statements of the Division are described in more
detail below. The adjustments include the correction of accounting errors
discovered during the 1999 audit process and amounts identified in Able's review
of the preacquisition financial statements of the Division and are based on
facts and circumstances that existed at the time those financial statements were
prepared.
The effects of the restatements on the previously filed financial
statements of the Division included in prior Able filings is shown below (in
thousands):
DECEMBER 31, JULY 2,
1997 1998
------------ --------
Net loss -- as previously reported.......................... $ (8,317) $(21,515)
Record additional "reserves for losses on uncompleted
contracts"(1).......................................... -- (28,200)
Record loss accruals in 1997(2)........................... (5,293) 5,293
Record subcontractors' claims accrual in 1997(3).......... (4,306) 4,306
Adjust receivables for discounted amount and based on
percent complete(4).................................... (4,417) (560)
Record legal costs in period incurred(5).................. (1,000) (400)
Record write-down of conduit network assets held for
sale(6)................................................ -- (6,559)
Record adjustments related to the NYSTA contract(7)....... (291) 291
-------- --------
Net loss -- as adjusted..................................... $(23,624) $(47,344)
======== ========
- ---------------
(1) Able has restated loss reserves on the Division's July 2, 1998, unaudited
balance sheet to equal the finalized amount of the loss reserves recognized
by Able in purchase accounting and confirmed by post acquisition activity in
completing loss jobs.
(2) Able reviewed evidence that two electronic toll collection jobs were
forecast to generate losses on completion of as much $13.1 million and $5.3
million, respectively, as of December 31, 1997. However, through December
31, 1997, losses recognized were only approximately $13.2 million for the
two jobs. Additional losses were not accrued, apparently because the
Division believed the losses would be mitigated through change orders,
claims and additional revenues generated through those jobs. Those potential
additional revenues were not realized. The guidance for consideration of
unpriced change-orders and contractor claims is provided in paragraphs 62
and 65 of SOP 81-1. Able has restated the loss reserves to accrue for those
unrecognized losses at December 31, 1997. It is Able's policy to not
consider additional revenues that might result from change-orders or claims
until the change-order is approved and signed.
(3) The claims relate to work performed by subcontractors to the Division on
certain jobs. Most of the work performed by these subcontractors occurred in
1997. These claims were filed in 1997 or prior to July 2, 1998. Because
these claims relate to work performed in 1997 and the claims originated in
1997, Able has restated the Division's financial statements to accrue, at
December 31, 1997, the amounts that such claims have been, or are expected
to be settled.
(4) Able determined that the Division had included in unbilled receivables
(costs and profits in excess of billings) the gross amount of future user
fees to be received over twenty years from two users of the NYSTA network
(see Note 8 to the financial statements included in the Able's 1999 Form
10-K). The fees are payable in installments and should have been recorded at
their discounted present value. Consequently, Able recorded an adjustment 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. Able
believes this was an accounting error as reflected in
C-9
528
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the financial statements of the Division as of and for the year ended
December 31, 1997. Therefore, Able has restated the financial statements of
the Division to reflect the correction of this error at December 31, 1997.
(5) Able has also restated its own operating results for the first three
quarters of fiscal 1999 (see Note 22 to the financial statements included in
Able's 1999 Form 10-K). The restatement included adjustments for costs to
operate the New Jersey Consortium Violation Processing Center that were
determined to have been improperly deferred. It was determined that
approximately $1.4 million of those costs were incurred before the
acquisition of the Division and should have been expensed in the
pre-acquisition financial statements of the Division. The $1.4 million was
for legal fees and other pre-contract costs related to the award of the
contract to the Division. Able has restated the financial statements of the
Division to expense these costs when incurred in 1997 or early 1998.
(6) The financial statements prepared by the Division reflected NYSTA conduit
network constructed by the Division and held for sale at approximately $34.6
million. This adjustment reduces the carrying value of that asset to the
approximate net amount realized by Able on its subsequent sale.
(7) This amount is the net effect of adjustments related to the NYSTA contract
to more appropriately value, as of December 31, 1997, the conduit network
held for sale, the related accrual for property taxes, and the reserve for
loss on that contract.
The following entries summarize the effects of the above restatement
adjustments on the previously reported balance sheets of the Division as of
December 31, 1997, and July 2, 1998:
DECEMBER 31, 1997
- -----------------
Network assets.............................................. $21,110
Accumulated deficit......................................... 15,307
Reserves for losses on uncompleted contracts.............. 12,610
Property taxes payable.................................... 18,390
Costs and earnings in excess of billings on uncompleted
contracts.............................................. 5,417
JULY 2, 1998 (UNAUDITED)
- ------------------------
Network assets.............................................. $28,044
Accumulated deficit......................................... 41,136
Reserves for losses on uncompleted contracts.............. 39,900
Property taxes payable.................................... 22,000
Costs and earnings in excess of billings on uncompleted
contracts.............................................. 7,280
C-10
529
ABLE TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1998
7/31/98 3/31/98 -
ABLE 5 MOS
HISTORICAL PATTON PRO FORMA
(RESTATED) HISTORICAL ADJUSTMENTS SUB TOTAL
---------- ---------- ----------- ---------
Revenues.......................................... $ 115,125 $ 9,339 -- $124,464
Costs of revenues................................. 90,222 8,825 -- 99,047
General and administrative........................ 14,703 889 -- 15,592
Depreciation and amortization..................... 4,865 501 12(A) 5,378
---------- ------- ---- --------
Total costs and expenses................ 109,790 10,215 12 120,017
---------- ------- ---- --------
Income (loss) from operations..................... 5,335 (876) (12) 4,447
Other (income) expense, net:
Interest expense................................ 2,092 574 (57)(B) 2,609
Interest and dividend income.................... -- -- -- --
Other (income) expense.......................... 1,046 (366) 78(C) 758
---------- ------- ---- --------
Total other (income) expense, net....... 3,138 208 21 3,367
Minority interest................................. 610 -- -- 610
---------- ------- ---- --------
Income (loss) before income taxes................. 1,587 (1,084) (33) 470
Income tax expense (benefit)...................... 857 (142) (13)(D) 702
---------- ------- ---- --------
Net income (loss)................................. 730 (942) (20) (232)
Preferred stock dividends and discount
attributable to beneficial conversion privilege
of preferred stock.............................. 8,158 -- -- 8,158
---------- ------- ---- --------
Net income (loss) applicable to common stock...... $ (7,428) $ (942) $(20) $ (8,390)
========== ======= ==== ========
Earnings per common share -- basic................ $ (0.77)
Earnings per common share -- diluted.............. $ (0.77)
Basic weighted average shares..................... 9,660,921
Diluted weighted average shares................... 9,660,921
C-11
530
ABLE TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
11/1/97 -
6/30/98
MFSNT PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMPANY
(RESTATED) (RESTATED) (RESTATED)
---------- ----------- ----------
Revenues.................................................. $162,085 -- $ 286,549
Costs of revenues......................................... 193,010 -- 292,057
General and administrative................................ 11,939 -- 27,531
Depreciation and amortization............................. 2,146 $ 877(F) 8,401
-------- ------- ----------
Total costs and expenses........................ 207,095 877 327,989
-------- ------- ----------
Income (loss) from operations............................. (45,010) (877) (41,440)
Other (income) expense, net:
Interest expense........................................ -- 3,421(E) 6,030
Interest and dividend income............................ (15) -- (15)
Other (income) expense.................................. 6 -- 764
-------- ------- ----------
Total other (income) expense, net............... (9) 3,421 6,779
Minority interest......................................... -- -- 610
-------- ------- ----------
Income (loss) before income taxes......................... (45,001) (4,298) (48,829)
Income tax expense (benefit).............................. -- (702)(G) --
-------- ------- ----------
Net income (loss)......................................... (45,001) (3,596) (48,829)
Preferred stock dividends and discount attributable to
beneficial conversion privilege of preferred stock...... -- 533(E) 8,691
-------- ------- ----------
Net income (loss) applicable to common stock.............. $(45,001) $(4,129) $ (57,520)
======== ======= ==========
Earnings per common share -- basic........................ $ (5.95)
Earnings per common share -- diluted...................... $ (5.95)
Basic weighted average shares............................. 9,660,921
Diluted weighted average shares........................... 9,660,921
NOTES:
(A) Incremental depreciation of $12,000 attributable to property, plant and
equipment acquired from Patton and recorded at fair value.
(B) Elimination of the amortization of debt discount of $57,000 for Patton
related to debt repaid by Able.
(C) Elimination of $78,000 in amortization of deferred financing costs related
to debt repaid by Able, offset by the amortization of goodwill related to
the acquisition of Patton.
(D) Income tax benefit of $13,000 resulting from pro forma adjustments A, B,
and C based on a rate of 38%.
(E) Assumes the Company financed the cash purchase price of MFSNT of $63.4
million ($67.5 million less equity valued at $4.1 million) in the following
ways (in thousands):
NET PROCEEDS
------------
Series B Preferred Stock(1)................................. $18,110
WorldCom Note(2)............................................ 30,000
Secured Credit Facility(3).................................. 15,290
-------
$63,400
=======
- ---------------
(1) Assumes the $20.0 million Series B Preferred Stock was issued for net
proceeds of $18.1 million on November 1, 1996, resulting in pro forma
adjustments thru July 2, 1998, for dividends at 4 percent or $533,000. A
beneficial conversion charge of $7.9 million related to the issuance of the
Series B Preferred
C-12
531
ABLE TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
Stock was recognized at the date of issue and is reflected in the historical
financial statements of the Company for the nine months ended July 2, 1998.
(2) Assumes the 11.5 percent $30.0 million WorldCom Note was issued for net
proceeds of $30.0 million on November 1, 1997, resulting in a pro forma
adjustment for the period from January 1, 1998 to July 2, 1998, to interest
expense of $2.3 million.
(3) Assumes the remainder of the cash purchase price of $15.3 million was
financed through the Company's Secured Credit Facility with a stated
interest rate of 9.5 percent and an estimated effective interest rate of
11.0 percent, resulting in a pro forma adjustment for the period from
January 1, 1998 to July 2, 1998, to interest expense of $1.1 million.
(F) The MFSNT goodwill of $26.3 million is being amortized over 20-years
resulting in annual amortization expense of $1.3 million. The pro forma
adjustment for the period from January 1, 1998 to July 2, 1998 is
approximately $0.9 million.
(G) As a result of significant pro forma losses, a pro forma adjustment is
necessary to eliminate income tax expense.
C-13
532
ABLE TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
10/31/97 10/31/97
ABLE PATTON PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS
---------- ---------- -----------
Revenues............................................... $ 86,334 $30,456 $ --
Costs of revenues...................................... 68,181 26,375 --
General and administrative............................. 8,781 2,415 --
Depreciation and amortization.......................... 4,532 1,246 63(K)
---------- ------- -----
Total costs and expenses..................... 81,494 30,036 63
---------- ------- -----
Income (loss) from operations.......................... 4,840 420 (63)
Other expenses (income):
Interest expense..................................... 1,565 775 (129)(L)
Interest and dividend income......................... (449) -- --
Other (income) expense............................... (153) (172) 187(M)
---------- ------- -----
Total other expense, net..................... 963 603 58
Minority interest...................................... 292 6 --
---------- ------- -----
Income (loss) before income taxes...................... 3,585 (189) (121)
Income tax expense (benefit)........................... 727 135 (46)(N)
---------- ------- -----
Net income (loss)...................................... 2,858 (324) (75)
Preferred stock dividends and discount attributable to
beneficial conversion privilege of preferred stock... 1,526 -- --
---------- ------- -----
Net income (loss) applicable to common stock........... $ 1,332 $ (324) $ (75)
========== ======= =====
Earnings per common share -- basic..................... $ 0.16
Earnings per common share -- diluted................... $ 0.16
Basic weighted average shares.......................... 8,504,972
Diluted weighted average shares........................ 8,504,972
C-14
533
ABLE TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
12/31/97
MFSNT PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMPANY
SUB TOTAL (RESTATED) (RESTATED) (RESTATED)
--------- ---------- ----------- ----------
Revenues................................... $116,790 $364,917 $ -- $ 481,707
Costs of revenues.......................... 94,556 363,452 -- 458,008
General and administrative................. 11,196 22,381 -- 33,577
Depreciation and amortization.............. 5,841 2,685 1,315(P) 9,841
-------- -------- -------- ----------
Total costs and expenses......... 111,593 388,518 1,315 501,426
-------- -------- -------- ----------
Income (loss) from operations.............. 5,197 (23,601) (1,315) (19,719)
Other expenses (income):
Interest expense......................... 2,211 -- 5,132(O) 7,343
Interest and dividend income............. (449) -- -- (449)
Other (income) expense................... (138) 23 -- (115)
-------- -------- -------- ----------
Total other expense, net......... 1,624 23 5,132 6,779
Minority interest.......................... 298 -- -- 298
-------- -------- -------- ----------
Income (loss) before income taxes.......... 3,275 (23,624) (6,447) (26,796)
Income tax expense (benefit)............... 816 -- (816)(Q) --
-------- -------- -------- ----------
Net income (loss).......................... 2,459 (23,624) (5,631) (26,796)
Preferred stock dividends and discount
attributable to beneficial conversion
privilege of preferred stock............. 1,526 -- 8,709(O) 10,235
-------- -------- -------- ----------
Net income (loss) applicable to common
stock.................................... $ 933 $(23,624) $(14,340) $ (37,031)
======== ======== ======== ==========
Earnings per common share -- basic......... $ (4.35)
Earnings per common share -- diluted....... $ (4.35)
Basic weighted average shares.............. 8,504,972
Diluted weighted average shares............ 8,504,972
NOTES:
(K) Incremental depreciation of $63,000 attributable to recording property,
plant and equipment acquired from Patton and recorded at fair value.
(L) Elimination of the amortization of debt discount of $129,000 for Patton
that related to debt repaid by Able.
(M) Elimination of $187,000 in amortization of deferred financing costs related
to debt repaid by Able, offset by the amortization of goodwill related to
the acquisition of Patton.
(N) Income tax benefit of $46,000 resulting from proforma adjustments K, L, and
M based on a rate of 38%.
(O) Assumes the Company financed the cash purchase price of MFSNT of $63.4
million ($67.5 million less equity valued at $4.1 million) in the following
ways (in thousands):
C-15
534
ABLE TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
NET PROCEEDS
------------
Series B Preferred Stock(1)................................. $18,110
WorldCom Note(2)............................................ 30,000
Secured Credit Facility(3).................................. 15,290
-------
$63,400
=======
- ---------------
(1) Assumes the $20.0 million Series B Preferred Stock was issued for net
proceeds of $18.1 million on November 1, 1996, resulting in pro forma
adjustments during fiscal year 1997 for dividends at 4 percent or $800,000
and a beneficial conversion charge of $7.9 million recognized at the date of
issue.
(2) Assumes the 11.5 percent $30.0 million WorldCom Note was issued for net
proceeds of $30.0 million on November 1, 1996, resulting in a pro forma
adjustment during fiscal year 1997 to interest expense of $3.5 million.
(3) Assumes the remainder of the cash purchase price of $15.3 million was
financed through the Company's Secured Credit Facility with a stated
interest rate of 9.5 percent and an estimated effective interest rate of
11.0 percent, resulting in a pro forma adjustment during fiscal year 1997 to
interest expense of $1.7 million.
(P) The MFSNT goodwill of $26.3 million is being amortized over 20-years
resulting in annual amortization expense of $1.3 million.
(Q) As a result of significant pro forma losses, a pro forma adjustment is
necessary to eliminate income tax expense.
C-16
535
ABLE TELCOM HOLDING CORP.
AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
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 of Patton have been included in the Company's consolidated
statements of operations since the date of acquisition.
On July 2, 1998, the Company acquired the Network Technologies Division of
MFS Network Technologies, Inc. ("MFSNT") from a subsidiary of WorldCom, Inc. The
acquisition was accounted for as a purchase and the operations of MFSNT have
been included in the consolidated financial statements of the Company
prospectively from the date of acquisition.
As described in Item 2. of this Form 8-K/A-3, the purchase price for MFSNT
included the following consideration (in millions):
Contract price.............................................. $58.8
Transaction related costs................................... 4.6
WorldCom Option............................................. 3.5
WorldCom Phantom Stock Awards............................... 0.6
-----
Total purchase prices............................. $67.5
=====
The Company's consolidated balance sheet as of October 31, 1998, reflected
the preliminary allocation of the purchase price to the assets acquired and the
liabilities assumed based on initial estimates of their fair values. During the
year ended October 31, 1999, (see Note 5 to the financial statements included in
Able's 1999 Form 10-K) the Company obtained the information needed to complete
its valuation and finalized the allocation as set forth below (in millions):
AS
PREVIOUSLY FINAL
REPORTED ADJUSTMENTS ALLOCATION
---------- ----------- ----------
Accounts receivable.................................... $ 47.0 $(1.4) $ 45.6
Costs and profits in excess of billings on uncompleted
contracts............................................ 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....................................... (13.7) (0.5) (14.2)
Billings in excess of costs on uncompleted contracts
and accrued job costs incurred....................... (56.6) -- (56.6)
Reserves for losses on uncompleted contracts........... (40.5) 0.6 (39.9)
Accrued restructuring costs............................ (2.0) 0.3 (1.7)
Property taxes payable................................. (15.0) -- (15.0)
Other accrued liabilities.............................. (7.4) (3.8) (11.2)
------ ----- ------
Total allocated purchase price............... $ 67.5 $ -- $ 67.5
====== ===== ======
C-17
536
ABLE TELCOM HOLDING CORP.
AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The accompanying restated pro forma combined statements of operations
include pro forma adjustments that are based on the final allocation of the
MFSNT purchase price.
The accompanying restated pro forma combined statements of operations have
been prepared assuming the purchase of MFSNT and Patton occurred as of November
1, 1996. As described in footnote 10 to the restated historical financial
statements of MFSNT included in this Form 8-K/A-3, those financial statements
have been restated by the Company. The related amounts for MFSNT included in the
pro forma combined financial statements included herein have likewise been
restated as indicated below:
EIGHT-MONTHS ENDED YEAR ENDED
6/30/98 MFSNT HISTORICAL 12/31/97 MFSNT HISTORICAL
----------------------------------- -----------------------------------
PREVIOUSLY PREVIOUSLY
REPORTED ADJUSTMENTS ADJUSTED REPORTED ADJUSTMENTS ADJUSTED
---------- ----------- -------- ---------- ----------- --------
Revenues................................ $162,645 $ (560) $162,085 $369,334 $ (4,417) $364,917
Costs of revenues..................... 168,141 24,869 193,010 353,562 9,890 363,452
General and administrative............ 11,539 400 11,939 21,381 1,000 22,381
Depreciation and amortization......... 2,146 0 2,146 2,685 0 2,685
-------- -------- -------- -------- -------- --------
Total costs and expenses....... 181,826 25,269 207,095 377,628 10,890 388,518
-------- -------- -------- -------- -------- --------
Income (loss) from operations........... (19,181) (25,829) (45,010) (8,294) (15,307) (23,601)
Other (income) expense, net
Interest expense...................... -- 0 -- -- 0 --
Interest and dividend income.......... (15) 0 (15) -- 0 --
Other (income) expense................ 6 0 6 23 0 23
-------- -------- -------- -------- -------- --------
Total other (income) expense,
net.......................... (9) 0 (9) 23 0 23
Minority interest....................... -- 0 -- -- 0 --
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes....... (19,172) (25,829) (45,001) (8,317) (15,307) (23,624)
Income tax expense (benefit)............ -- 0 -- -- 0 --
-------- -------- -------- -------- -------- --------
Net income (loss)....................... (19,172) (25,829) (45,001) (8,317) (15,307) (23,624)
Preferred stock dividends and discount
attributable to beneficial conversion
privilege of preferred stock.......... -- 0 -- -- 0 --
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to common
stock................................. $(19,172) $(25,829) $(45,001) $ (8,317) $(15,307) $(23,624)
======== ======== ======== ======== ======== ========
C-18
537
APPENDIX D
AUDIT COMMITTEE OF THE
ABLE TELCOM HOLDING CORP. BOARD OF DIRECTORS
CHARTER
1. STATEMENT OF POLICY
The function of the Audit Committee is to assist the Board of Directors in
fulfilling its oversight responsibilities by reviewing the financial reports and
other financial information provided by the Corporation to any governmental
body, the public or others, the Corporation's systems of internal controls
regarding financial reporting that management and the Board have established;
and the Corporation's auditing, accounting and financial reporting processes
generally. Consistent with this function, the Audit Committee should encourage
continuous improvement of, and should foster adherence to the Corporation's
financial reporting policies, procedures and practices at all levels. The Audit
Committee's primary duties and responsibilities are to:
[ ] Serve as an independent and objective party to monitor the
Corporation's financial reporting process and internal control
system;
[ ] Review and appraise the audit efforts of the Corporation's
independent auditors and internal audit department; and
[ ] Provide an open avenue of communication among the independent
accountants, financial and senior management, the internal
auditing department, and the Board of Directors.
The Audit Committee will fulfill these responsibilities by carrying out the
activities enumerated in Section 3 and 4.
2. COMPOSITION
The Audit Committee shall be comprised of three or more directors, as
determined by the Board, each of whom shall be independent directors, as soon as
such individuals are duly qualified members of the Board but in no event later
than June 13, 2001, and free from any relationship that, in the opinion of the
Board, would interfere with the exercise of his or her independent judgment as a
member of the Committee. All members of the Committee shall have a working
familiarity with basic finance and accounting practices, and at least one member
of the committee shall have accounting or related financial management
expertise. Committee members may enhance their familiarity with finance and
accounting by participating in educational programs conducted by the Corporation
or an outside consultant. The Board of Directors, in its business judgment,
shall determine that the members of the audit committee satisfy the three
foregoing criteria.
In addition, each member of the audit committee must satisfy the
independence requirements of the Nasdaq Stock Market.
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board and shall serve until their successors shall
be duly elected and qualified. Unless a Chair is elected by the full Board, the
members of the Committee may designate a Chair by majority vote of the full
Committee membership.
3. MEETINGS
The Committee shall meet at least four times annually, or more frequently
as circumstances dictate. As part of its job to foster open communication, the
Committee should meet at least annually with management, the director of the
internal auditing department and the independent auditors in separate executive
sessions to discuss any matters that the Committee or the other participants
believe should be discussed privately. In addition, the Committee or its Chair
should meet with the independent auditors and management quarterly to review the
Corporation's financials consistent with Section 4 below. The Committee shall
maintain minutes or
D-1
538
other records of meetings and activities of the Audit Committee which shall be
submitted to the Board of Directors.
4. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
Documents/Reports Review
a. Review and update this Charter periodically, at least annually, as
conditions dictate and report the results of its review to the Board;
b. Review the Corporation's annual financial statements and any
reports or other financial information to be submitted to any governmental
body, the public, or others, including any certification, report, opinion
or review rendered by the independent auditors;
c. Review the regular internal reports to management prepared by the
internal auditing department and management's response; and review and
concur in the appointment, replacement, reassignment, or dismissal of the
director of internal audit.
d. Review with financial management and the independent auditors a
draft of the 10-Q in substantially final form, and the 10Q prior to its
filing [or prior to the release of earnings]. The Chair of the Committee
may represent the entire Committee for purposes of this review.
Independent Accountants
The Corporation's outside independent auditors are ultimately accountable
to the Board of Directors and the Audit Committee. The Board of Directors,
in consultation with the Audit Committee has the ultimate authority to
select, evaluate, recommend that shareholders ratify the selection of and,
where in its business judgment appropriate, replace the outside independent
auditors.
e. Recommend to the Board of Directors the selection of the
independent accountants, considering independence and effectiveness and
approve the fees and other compensation to be paid to the independent
auditors. Arrange for the independent auditor to be available to the full
Board of Directors at least annually to help provide a basis for the board
to recommend to the stockholders ratification of the appointment of the
independent auditors.
f. The chair of the Committee shall be responsible for obtaining and
providing to the other members of the Committee, on at least an annual
basis, a written statement from the Corporation's independent auditors to
the committee delineating all of the relationships between the auditors and
the Corporation, including a representation from the auditor that the
statement is consistent with the Independent Standards Board's Standard No.
1. The Committee is responsible, on an annual basis, for engaging in a
dialogue with the Corporation's independent outside auditors, with respect
to any relationships or services disclosed in the foregoing statement that
the Committee deems may impact the objectivity and independence of the
auditors and, if the Committee deems appropriate, for recommending that the
Board of Directors of the Corporation take appropriate action to assure the
independence of the auditors.
g. Periodically consult with the independent auditors out of the
presence of management about internal controls over financial reporting
including computerized information system controls and security and the
fullness and accuracy of the organization's financial statements.
h. Inquire of management, the director of internal audit and the
independent auditors about significant risks or exposures and assess the
steps management has taken to minimize such risk to the company.
i. Consider, in consultation with the independent auditors and the
director of internal audit, the audit scope and plan of the internal
auditors and the independent auditors.
j. Review with the director of internal auditing and the independent
auditors the coordination of audit efforts to assure coverage, reduction of
redundant efforts, and the effective use of audit resources.
D-2
539
Financial Reporting Processes
k. In consultation with the independent auditors and the internal
auditors, review the integrity of the organization's financial reporting
processes, both internal and external.
l. Consider the independent auditors judgment about the quality and
appropriateness of the Corporation's accounting principles as applied in
its financial reporting. Discuss with the Corporation's independent
auditors their views about the quality and acceptability of the
Corporation's accounting principles as applied to its financial reporting,
including such matters as the consistency of the Corporation's accounting
policies, their application and related disclosures. The discussion should
include items that the auditors believe may have a significant impact on
the representational faithfulness, verifiability and neutrality of the
accounting information included in the Corporation's financial statements,
such as selection of new, or changes in, accounting policies; estimates,
judgments and uncertainties; unusual transactions; and accounting policies
relating to significant financial statement items, including the timing of
transactions and the periods in which they are recorded.
m. Consider and approve, if appropriate, major changes to the
Corporation's auditing and accounting principles and practices as suggested
by the independent auditors, management, or the internal audit department.
n. Establish regular and separate systems of reporting to the Audit
Committee by each of management, the independent auditors and the internal
auditors regarding any significant judgments made in management's
preparation of the financial statements and the view of each as to the
appropriateness of such judgments.
o. Review policies and procedures with respect to officers' expense
accounts and perquisites, including their use of corporate assets, and
consider the results of any review of these areas by the internal auditor
or the independent auditors.
p. Review with counsel legal regulatory matters that may have a
material impact on the financial statements, related to the Corporation's
compliance with financial reporting policies, and programs and reports
received from regulators.
q. Following completion of the annual audit, review separately with
each of management, the independent auditors and the internal audit
department any significant difficulties encountered during the course of
the audit, including any restrictions on the scope of work or access to
required information.
r. Review any significant disagreement among management and the
independent auditors or the internal audit department in connection with
the preparation of the financial statements.
s. Review the independent auditor, the internal audit department and
advise management as to the extent to which changes or improvements in
financial or accounting practices, as approved by the Audit Committee, have
been implemented. (This review should be conducted in an appropriate amount
of time subsequent to implementation of changes or improvements, as decided
by the Committee.)
t. Report actions to the Board of Directors with such recommendations
as the Committee may deem appropriate.
u. The Audit Committee shall have the power to conduct or authorize
investigations into any matters within the Committee's scope of
responsibilities. The Committee shall be empowered to retain independent
counsel, accountants, or others to assist it in the conduct of any
investigation.
v. The Committee will perform such other functions as assigned by law,
the Corporation's charter or by-laws, or the Board of Directors.
w. Review the procedures established by the Corporation that monitor
the compliance by the Corporation with its loan and indenture financial
covenants and restrictions.
D-3
540
ABLE TELCOM HOLDING CORP.
PROXY AND VOTING INSTRUCTION
2000 ANNUAL MEETING OF SHAREHOLDERS -- DECEMBER 22, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Billy V. Ray, Jr. and Michael Brenner, or any
of them, as a Proxy or with full power of substitution, to represent the
undersigned at the 2000 Annual Meeting of Shareholders (the "Annual Meeting") of
Able Telcom Holding Corp. (the "Company") to be held at the offices of Paul,
Hastings, Janofsky & Walker LLP, 399 Park Avenue, 31st Floor, New York, New York
10022 on December 22, 2000 at 9 a.m. Eastern Time, and at all adjournments or
postponements thereof, and to vote all the shares of Common Stock, $.001 par
value per share, held of record by the undersigned at the close of business on
November 13, 2000, with all the power that the undersigned would possess if
personally present, as designated on the reverse side. Your vote is important to
us. Feel free to direct your comments to the Corporate Secretary at (770)
993-1570. Shares will be voted as specified. The undersigned also hereby revokes
previous Proxies and acknowledges receipt of the Company's Notice of Annual
Meeting and Proxy Statement.
The Board recommends a vote FOR Items 1-10. IF YOU DO NOT SPECIFY HOW YOU
INTEND TO VOTE, THIS PROXY WILL BE VOTED "FOR" EACH PROPOSAL. The proxies or
substitutes may vote accordingly in their discretion upon any other business
that may properly come before the Annual Meeting or any adjournments or
postponements of the Annual Meeting.
1. Approval of the Merger Agreement
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Election of the Directors
Nominees for Directors
Billy V. Ray, Jr. Edwin D. Johnson
Alec McLarty C. Frank Swartz
[ ] FOR all the nominees listed above [ ] WITHHOLD AUTHORITY to vote for the [ ]
nominees listed above
[ ] FOR all the nominees listed above,
except as follows
List Exceptions:
3. Amending the Articles of Incorporation
A. to increase the number of authorized shares of Common Stock from 25 million
to 100 million.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
B. to increase the number of authorized shares of Preferred Stock from one
million to five million.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Amending the Articles of Incorporation to change its corporate name for
"ABLE TELCOM HOLDING CORP." to "THE ADESTA GROUP, INC."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Ratifying and approving the issuance of stock options granted to certain of
our officers and directors.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Approving issuing 2,600,000 shares of Common Stock upon the exercise of
certain options and stock appreciation rights granted to WorldCom, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. Approving issuing shares of Common Stock upon exercising certain Series B
warrants.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
8. Approving issuing shares of Common Stock upon converting shares of our
Series C Convertible Preferred Stock and exercising certain warrants issued
in our Series C offering.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
9. Approving issuing shares to Sirit Technologies, Inc. under our settlement
agreement with them.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
10. Ratifying the appointment of Arthur Andersen LLP as the Company's
independent accountants for the fiscal years ended October 31, 1999 and
October 31, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
NOTE: Please sign this Proxy Card as your name appears hereon, including the
title "Executor," "Trustee," etc., if it is appropriate. If a joint account,
each joint owner should each sign. If stock is held by a corporation, this Proxy
Card should be executed by a proper officer thereof.
PLEASE DATE AND SIGN THIS PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE.
Dated: -----------------
, 2000
-----------------------------
Shareholder
-----------------------------
Co-owner, if applicable
[ ] I intend to attend the
Annual Meeting.