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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Date of earliest event reported: July 2, 1998
(Amending Form 8-K/A filed on August 3, 1998, which amended Form 8-K
filed on July 16, 1998)
ABLE TELCOM HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 0-21986 65-0013218
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) FILE NUMBER) IDENTIFICATION NO.)
1601 FORUM PLACE
SUITE 1110
WEST PALM BEACH, FLORIDA 33401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(561) 688-0400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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ABLE TELCOM HOLDING CORP.
FORM 8-K/A-2
CURRENT REPORT
EXPLANATORY NOTE
Able Telcom Holding Corp. ("Registrant" or "Company") is amending its Form 8-K/A
filed on August 3, 1998 (date of report July 2, 1998) (i) to discuss the
agreement between WorldCom Network Services, Inc. and the Registrant dated
September 9, 1998, (ii) to discuss certain terms of the Company's Series B
Convertible Preferred Stock, and (ii) to add the financial statements of MFS
Network Technologies and related Pro Forma Financial Information which is
included in Item 7 herein.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 2, 1998, the Company acquired all of the outstanding common
stock of MFS Network Technologies, Inc. ("MFSNT") from MFS
Communications Company, Inc. ("MFSCC"), a subsidiary of WorldCom, Inc.
("WorldCom"). The transaction was structured as a merger of a
newly-organized, wholly-owned subsidiary of the Registrant with MFSNT,
in which the subsidiary was the surviving corporation (the "Merger").
Under the terms of the Agreement and Plan of Merger dated April 26,
1998, as amended (the "Plan of Merger"), the purchase price was equal
to the shareholders' equity of MFSNT as of March 31, 1998, subject to
certain adjustments, including adding back the cumulative advance by
MFSCC (or its affiliates) to MFSNT, plus $10.0 million. The purchase
price at that time was projected to be approximately $101.4 million,
plus Company stock options, as described more fully below.
On September 9, 1998, the Registrant and WorldCom Network Services,
Inc. ("WorldCom Network"), a wholly owned subsidiary of WorldCom, as
assignee from MFSCC, entered into an agreement amending various terms
of the Merger (the "September Agreement"). The September Agreement,
among other things, finalized the cash portion of the purchase price of
MFSNT at approximately $58.8 million (which was determined by
negotiation among the parties without reference to the original
purchase price formula). The cash portion of the purchase price is
subject to additional amounts payable as contingent consideration on
December 29, 2000 which relate to the resolution of certain
pre-acquisition contingencies for pending litigation, claims,
assessments and losses on certain projects. Additionally, the general
terms and conditions of the grant of stock options (as previously
granted pursuant to the Plan of Merger) and a phantom stock award or
other equity participation award to be granted was also addressed, as
described more fully below.
Of the cash portion of the purchase price, the Company has paid $38.8
million to date, which funds were obtained in part from operations and
the Company's line of credit. Additionally, a portion was paid with
certain of the proceeds from a private offering (the "Offering") which
closed on June 30, 1998 (the "Closing Date") of (i) 4,000 shares of the
Company's Series B Convertible Preferred Stock, par value $0.10
("Series B Preferred Stock"), which bear annual dividends of 4%, and
(ii) warrants to purchase up to an aggregate of 1,000,000 shares of the
Company's common stock at $19.80 per share for a period of five years
from the date of grant.
Proceeds from the Offering totaled $20.0 million which were used to pay
a portion of the purchase price, as well as other costs associated with
the Merger. In general, the conversion amount of each share of Series B
Preferred Stock is convertible into shares of the Company's common
stock, commencing on June 30, 1998 at 97% at the lesser of the (i)
average of the low trading prices for any three days during the
twenty-two (22) trading days immediately preceding the conversion date,
or (ii) the low trading price on the day immediately preceding the
conversion date, subject to a minimum equal to 95% of such conversion
price. The conversion amount of each share of Series B Preferred Stock
is equal to $5,000 plus any unpaid dividends thereon. Unless waived by
a holder on not less than 61 days prior written notice, no holder may
convert an amount which would result in such holder's and its
affiliates beneficial ownership exceeding 4.99% of the then outstanding
common stock of the Company.
The holders of the Series B Preferred Stock and the Warrants (the
"Series B Securities") are entitled to certain registration rights to
register the common stock underlying the Series B Securities pursuant
to the Securities Act of 1933, as amended. In the event that such
underlying common stock is not registered with the Securities and
Exchange Commission by late October 1998, is not listed with the
securities exchange and/or markets on which the common stock is then
listed, within a definitive period of time, or various other covenants
are not complied with, then certain penalties may be incurred to
certain or all of the holders of the Series B Preferred Stock and/or
Warrants, including, among other things, a reduction in the conversion
and/or exercise price of the applicable securities and/or additional
monetary payments. Unless waived, the Company expects to have
difficulty in timely complying with certain of its obligations relating
to the Series B Securities, including accomplishing the filing of a
registration statement of the Series B Securities by late October.
Additionally, under certain circumstances, including if the
registration statement that includes the shares of common stock
underlying the Series B Securities is not declared effective within 180
days of the Closing Date, or the Company is delisted under certain
circumstances from any securities exchange, or any representation or
warranty by the Company to holders was not true and correct, then the
holders of the Series B Securities, in whole or in part, have the
option to require the Company to redeem their securities at premium
prices. Although the Company intends to use its best efforts to comply
with all provisions of its documents with the holders of the Series B
Securities, the failure of which would provide such redemption right
exercise, there can be no assurance that it will be able to do so, in
part, because certain of such matters are dependent upon the efforts or
approval of others (such as the Securities and Exchange Commission with
respect to the effectiveness of the aforementioned registration
statement). To the extent the holders of the Series B Securities become
entitled to exercise a redemption right and seek to require the
redemption of their shares, such exercise could materially increase the
cash requirements of the Company, could result in a default under the
terms of its Senior credit facility and, to the extent replacement
financing is not available on commercially reasonable terms (if at
all), would likely have a material adverse impact on the Company.
Furthermore, so long as any Series B Security is outstanding, the
Company is prohibited from declaring or paying any dividends (other
than to holders of Series B Preferred Stock) or purchasing any equity
security of the Company.
2
As part of the September Agreement, the promissory note previously
issued to MFSCC in connection with the Merger in the principal amount
of $86.4 million will be replaced by a new promissory note between the
Registrant and WorldCom Network in the principal amount of $30.0
million (the "New Note"). The principal amount of the New Note
represents $20.0 million associated with the remaining cash portion of
the purchase price of MFSNT by the Company and $10.0 million related to
an estimated advance from receivables of MFSNT, subject to certain
adjustments. The New Note matures on December 15, 2000 (the "Maturity
Date") and bears interest at 11.5% annually, payable quarterly as of
September 1, 1998. The principal amount of the New Note is to be
prepaid by applying a portion of certain fees (i) due to the Registrant
by WorldCom and (ii) received by the Registrant in connection with the
lease and installation of certain conduit projects. The New Note may be
repaid in part or in full without penalty.
Pursuant to the Merger, the Company granted options to WorldCom to
purchase up to 2,000,000 shares of common stock of the Company
commencing July 2, 1998 and ending six months after the payment of the
initial promissory note, as amended by the September Agreement to
extend the exercise period. The exercise price per share is $7.00,
except that the holder may elect to exercise the option, in whole or in
part, on a "cashless" basis under which the holder will receive shares
of common stock with a market value equal to the difference between the
common stock's then market value and $7.00, subject to a 1,817,941
share limitation. MFSCC will be entitled to designate a representative
to serve on the Company's Board of Directors as long as MFSCC retains
shares of common stock aggregating at least 5.0% of the then
outstanding shares. Furthermore, pursuant to the September Agreement,
the Registrant agreed to issue to WorldCom Network a phantom stock
award or other equity participation award relating to 600,000 shares of
the Company's common stock, payable in cash, stock or a combination
thereof at the Company's option and which is exercisable with respect
to the following three days: July 2, 1999, July 2, 2000, or July 2,
2001. WorldCom will be entitled to receive any appreciation of the
common stock over a base price of $5-3/32 per share, but not more than
$30-3/32 per share.
The September Agreement also modified certain other provisions
including, among other things, (i) extending the term of the stock
pledge agreement (whereby the stock of MFSNT was pledged as security
for certain of the Registrant's obligations to WorldCom), (ii)
indemnifying WorldCom Network and its affiliates from litigation
matters, exclusive of certain litigation matters arising out of MFSNT's
operations, and (iii) executing mutual releases between the parties.
The final terms and conditions of the September Agreement, including
the provisions thereof relating to a grant of a phantom stock award or
other equity participation award, are expected to be more fully set
forth in certain additional agreements in the near future and may be
modified to conform with other agreements of the Company and various
third parties or require a consent or waiver from such third parties
(including its senior lender.) There can be no assurance, however, that
the Company will be able to so modify or conform the terms of the
September Agreement or obtain appropriate waivers or consents. The
failure to do so could have a material adverse effect on the financial
condition of the Company.
3
ABLE TELCOM HOLDING CORP.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements, pro forma financial information and exhibits
are filed as part of this Form 8-K/A-2:
(A) FINANCIAL STATEMENTS
Consolidated Financial Statements of MFS Network Technologies, Inc. and
its Subsidiaries
Report of Independent Public Accountants
Consolidated Balance Sheets as of July 2, 1998 (unaudited) and
December 31, 1997, 1996, and 1995 (audited)
Consolidated Statement of Operations for the Six Month Periods
Ended July 2, 1998 (unaudited) and June 30, 1997 (unaudited)
and for the Years Ended December 31, 1997, 1996, and 1995
(audited)
Consolidated Statement of Cash Flows for the Six Month Periods
Ended July 2, 1998 (unaudited) and June 30, 1997 (unaudited)
for the Years ended December 31, 1997, 1996, and 1995 (audited)
Notes to Consolidated Financial Statements
(B) PRO FORMA FINANCIAL INFORMATION
Pro forma Combined Statements of Operations (unaudited) for the Twelve
Months ended October 31, 1997
Pro forma Combined Statements of Operations (unaudited) for the Nine
Months ended July 31, 1998
4
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABLE TELCOM HOLDING CORP.
(REGISTRANT)
October 2, 1998 /S/ MARK A. SHAIN
-----------------------------------
Mark A. Shain
Chief Financial Officer
5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of
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 and 1996,
respectively, and the related statements of operations and cash flows for the
years ended December 31, 1997, 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,
respectively, and the results of its operations and its cash flows for the years
ended December 31, 1997, 1996 and 1995, respectively, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
June 16, 1998
NETWORK TECHNOLOGIES DIVISION OF
MFS NETWORK TECHNOLOGIES, INC.
BALANCE SHEETS--JULY 2, 1998, DECEMBER 31, 1997 AND 1996
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 82,736,486 124,435,440 85,008,166
Other current assets 523,736 2,898,233 395,394
------------ ------------ ------------
Total current assets 153,936,978 207,247,087 129,097,711
PROPERTY AND EQUIPMENT, net 5,727,302 6,133,214 4,654,412
RESTRICTED ASSETS 347,481 746,245 984,869
OTHER NONCURRENT ASSETS, net 128,850 380,257 341,244
------------ ------------ ------------
Total assets $160,140,611 $214,506,803 $135,078,236
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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
Accrued compensation 1,464,551 836,131 598,405
Other current liabilities 600,118 647,146 68,530
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Total current liabilities 72,376,048 81,648,488 60,222,571
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 (43,380,061) (21,865,274) (13,548,160)
------------ ------------ ------------
Total contributions and accumulated
deficit (31,624,367) (10,109,580) (1,792,466)
------------ ------------ ------------
Total liabilities, contributions and
accumulated deficit $160,140,611 $214,506,803 $135,078,236
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The accompanying notes are an integral part of these balance sheets.
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
DECEMBER 31,
JULY 2, JUNE 30, --------------------------------------------
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 64,386,308 108,011,172 268,432,450 165,867,327 61,145,581
------------ ------------ ------------ ------------ ------------
Total revenue 101,089,313 142,088,808 369,334,269 222,105,229 173,838,255
COST OF REVENUES 111,206,030 136,294,198 353,562,515 206,225,389 155,826,296
------------ ------------ ------------ ------------ ------------
(10,116,717) 5,794,610 15,771,754 15,879,840 18,011,959
OPERATING EXPENSES 11,413,772 14,830,436 24,066,129 23,754,195 22,806,053
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (21,530,489) (9,035,826) (8,294,375) (7,874,355) (4,794,094)
OTHER INCOME (EXPENSE), net 15,701 (10,706) (22,739) (101,630) 231,355
------------ ------------ ------------ ------------ ------------
NET LOSS $(21,514,788) $ (9,046,532) $ (8,317,114) $ (7,975,985) $ (4,562,739)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
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
DECEMBER 31,
JULY 2, JUNE 30, ---------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(21,514,788) $ (9,046,532) $ (8,317,114) $ (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
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 48,874,368 (16,712,465) (48,960,619) (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)
Restricted assets 398,764 238,624 238,624 (280,191) (207,332)
------------ ------------ ------------ ------------ ------------
Net cash from 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 (952,088) (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 from 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 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.
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
-2-
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 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,
- 3 -
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.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
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 365,062 754,992 829,013
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.
- 4 -
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.
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 approximately $25 million
of losses on four contracts that were in process as of year-end. These losses
were not anticipated at December 31, 1997, and relate to matters and events
occurring subsequent thereto. As a result, the losses are not reflected in the
accompanying 1997 financial statements.
In July 1998, Able Telcom Holdings 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 TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1998
7/31/98 11/1/97-2/24/98 3/31/98 -5 MOS
ABLE COMSAT PATTON PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
---------- ---------- ---------- -----------
Revenues $ 114,524 $ 10,842 $ 9,339
Costs of revenues 89,641 12,819 8,825
General and administrative 12,703 1,913 889
Depreciation and amortization 4,468 307 501 12 (A)
---------- ---------- ---------- -----------
Total Costs and Exenses 106,812 15,039 10,215 12
---------- ---------- ---------- -----------
Income (loss) from operations 7,712 (4,197) (876) (12)
Other (income) expense, net:
Interest expense 2,492 0 574 (57) (B)
Interest and dividend income (131) 0
Other (income) expense 296 (11) (366) 78 (C)
---------- ---------- ---------- -----------
Total other (income) expense, net 2,657 (11) 208 21
Minority interest 756 0 0
---------- ---------- ---------- -----------
Income (loss) before income taxes 4,299 (4,186) (1,084) (33)
Income tax expense (benefit) 1,670 (1,414) (142) (13) (D)
---------- ---------- ---------- -----------
Net income (loss) 2,629 (2,772) (942) (20)
Preferred stock dividends and discount
attributable to beneficial conversion
privilege of preferred stock 927 0 0
---------- ---------- ---------- -----------
Net income (loss) applicable to common stock $ 1,702 $ (2,772) $ (942) $ (20)
========== ========== ========== ===========
Earnings per common share - basic $ 0.18
Earnings per common share - diluted $ 0.18
Basic weighted average shares 9,660,921
Diluted weighted average shares 10,367,155
6/30/98
MFSNT PRO FORMA PRO FORMA
SUB TOTAL HISTORICAL ADJUSTMENTS COMPANY
--------- ---------- ----------- ---------
Revenues $ 134,705 $ 162,645 $ 297,350
Costs of revenues 111,285 168,141 279,426
General and administrative 15,505 11,539 27,044
Depreciation and amortization 5,288 2,146 $ (2,146)(I) 5,288
--------- ---------- ----------- -----------
Total Costs and Exenses 132,078 181,826 (2,146) 311,758
--------- ---------- ----------- -----------
Income (loss) from operations 2,627 (19,181) 2,146 (14,408)
Other (income) expense, net:
Interest expense 3,009 0 3,491 (F,G,H) 6,500
Interest and dividend income (131) (15) (146)
Other (income) expense (3) 6 3
--------- ---------- ----------- -----------
Total other (income) expense, net 2,875 (9) 3,491 6,357
Minority interest 756 756
--------- ---------- ----------- -----------
Income (loss) before income taxes (1,004) (19,172) (1,345) (21,521)
Income tax expense (benefit) 101 (8,280)(J) (8,179)
--------- ---------- ----------- -----------
Net income (loss) (1,105) (19,172) (6,935) (13,342)
Preferred stock dividends and discount
attributable to beneficial conversion
privilege of preferred stock 927 1,410 (E) 2,337
--------- ---------- ----------- -----------
Net income (loss) applicable to common stock $ (2,032) $ (19,172) $ (5,525) $ (15,679)
========= ========== =========== ===========
Earnings per common share - basic $ (1.62)
Earnings per common share - diluted $ (1.49)
Basic weighted average shares 9,660,921
Diluted weighted average shares 10,367,155
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 $12,000 resulting from pro forma adjustments A, B, and C
based on a rate of 38%.
(E)
Accrual of the cumulative dividend of $600,000 on the Series B Preferred Stock
at a rate of 4% per year and amortization of $810,000 of the valuation of the
Series B Preferred Stock Warrants.
(F)
Interest expense of $1,654,500 on the Secured Credit Facility based on a rate of
9.5% per annum.
(G)
Amortization of $111,000 in deferred financing costs incurred in connection with
the Secured Credit Facility.
(H)
Interest expense of $1,725,000 on the note to WorldCom for the acquisition of
MFSNT based on a rate of 11.5% per annum.
(I)
Reversal of depreciation expense of $2,146,000 on fixed assets acquired in the
Merger due to allocation of negative goodwill to fixed assets.
(J)
Income tax benefit of $8,280,000 to adjust consolidated loss to reflect a tax
rate of 38%.
ABLE TELCOM HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
10/31/97 12/31/97 10/31/97
ABLE COMSAT PATTON PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
---------- ---------- ---------- -----------
Revenues $ 86,334 $ 31,662 $30,456
Costs of revenues 68,181 34,884 26,375
General and administrative 8,781 5,575 2,415
Depreciation and amortization 4,532 885 1,246 63 (K)
---------- ---------- ---------- -----------
Total Costs and Expenses 81,494 41,344 30,036 63
---------- ---------- ---------- -----------
Income (loss) from operations 4,840 (9,682) 420 (63)
Other expenses (income):
Interest expense 1,565 0 775 (129) (L)
Interest and dividend income (449) 0
Other (income) expense (153) (67) (172) 187 (M)
---------- ---------- ---------- -----------
Total other expense, net 963 (67) 603 58
Minority interest 292 0 6
---------- ---------- ---------- -----------
Income (loss) before income taxes 3,585 (9,615) (189) (121)
Income tax expense (benefit) 727 (3,213) 135 (46) (N)
---------- ---------- ---------- -----------
Net income (loss) 2,858 (6,402) (324) (75)
Preferred stock dividends and discount
attributable to beneficial conversion
privilege of preferred stock 1,526 0 0
---------- ---------- ---------- -----------
Net income (loss) applicable to common stock $ 1,332 $ (6,402) $ (324) $ (75)
========== ========== ========== ===========
Earnings per common share - basic $ 0.16
Earnings per common share - diluted $ 0.16
Basic weighted average shares 8,429,733
Diluted weighted average shares 8,504,972
12/31/97
MFSNT PRO FORMA PRO FORMA
SUB TOTAL HISTORICAL ADJUSTMENTS COMPANY
--------- ---------- ----------- ---------
Revenues $ 148,452 $ 369,334 $ 517,786
Costs of revenues 129,440 353,563 483,003
General and administrative 16,771 21,381 38,152
Depreciation and amortization 6,726 2,685 (2,685) (S) 6,726
--------- ---------- ----------- ---------
Total Costs and Expenses 152,937 377,629 (2,685) 527,881
--------- ---------- ----------- ---------
Income (loss) from operations (4,485) (8,295) 2,685 (10,095)
Other expenses (income):
Interest expense 2,211 0 4,654 (P,Q,R) 6,865
Interest and dividend income (449) 0 (449)
Other (income) expense (205) 23 (182)
--------- ---------- ----------- ---------
Total other expense, net 1,557 23 4,654 6,234
Minority interest 298 0 298
--------- ---------- ----------- ---------
Income (loss) before income taxes (6,340) (8,318) (1,969) (16,627)
Income tax expense (benefit) (2,397) 0 (3,921) (T) (6,318)
--------- ---------- ----------- ---------
Net income (loss) (3,943) (8,318) 1,952 (10,309)
Preferred stock dividends and discount
attributable to beneficial conversion
privilege of preferred stock 1,526 0 2,499 (O) 4,025
--------- ---------- ----------- ---------
Net income (loss) applicable to common stock $ (5,469) $ (8,318) $ (547) $ (14,334)
========= ========== =========== =========
Earnings per common share - basic $ (1.70)
Earnings per common share - diluted $ (1.46)
Basic weighted average shares 8,429,733
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)
Accrual of the cumulative dividend of $800,000 on the Series B Preferred Stock
at a rate of 4% per year, amortization of $1,080,000 of the valuation of the
Series B Preferred Stock Warrants and expensing the embedded dividend of the
$619,000 attributable to the beneficial conversion privilege of the Series B
Preferred Stock based on the intrinsic value of the discount.
(P)
Interest expense of $2,206,000 of the Secured Credit Facility based on a rate of
9.5% per annum.
(Q)
Amortization of $148,000 in deferred financing costs incurred in connection with
the Secured Credit Facility.
(R)
Interest expense of $2,300,000 on the note to WorldCom for the acquisition of
MFST based on a rate of 11.5% per annum.
(S)
Reversal of depreciation expense of $2,685,000 on fixed assets acquired in the
Merger due to allocation of negative goodwill to fixed assets.
(T)
Income tax benefit of $3,921,000 to adjust consolidated loss to reflect a tax
rate of 38%.
ABLE TELCOM HOLDING CORP.
AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
On July 2, 1998, the Company acquired all of the outstanding common stock of MFS
Network Technologies, Inc. ("MFSNT") from MFS Communications Company, Inc.
("MFSCC"), a subsidiary of WorldCom, Inc. ("WorldCom"). The transaction was
structured as a merger of a newly-organized, wholly-owned subsidiary of the
Registrant with MFSNT, in which the subsidiary was the surviving corporation
(the "Merger").
Under the terms of the Agreement and Plan of Merger dated April 26, 1998, as
amended (the "Plan of Merger"), the purchase price was equal to the
shareholders' equity of MFSNT as of March 31, 1998, subject to certain
adjustments, including adding back the cumulative advance by MFSCC (or its
affiliates) to MFSNT, plus $10.0 million. The purchase price at that time was
projected to be approximately $101.4 million, plus Company stock options, as
described more fully below.
On September 9, 1998, the Registrant and WorldCom Network Services, Inc.
("WorldCom Network"), a wholly owned subsidiary of WorldCom, as assignee from
MFSCC, entered into an agreement amending various terms of the Merger (the
"September Agreement"). The September Agreement, among other things, finalized
the cash portion of the purchase price of MFSNT at approximately $58.8 million
(which was determined by negotiation among the parties without reference to the
original purchase price formula). The cash portion of the purchase price is
subject to additional amounts payable as contingent consideration on December
29, 2000 which relate to the resolution of certain pre-acquisition contingencies
for pending litigation, claims, assessments and losses on certain projects.
Additionally, the general terms and conditions of the grant of stock options (as
previously granted pursuant to the Plan of Merger) and a phantom stock award or
other equity participation award to be granted was also addressed, as described
more fully below.
Of the cash portion of the purchase price, the Company has paid $38.8 million to
date, which funds were obtained in part from operations and the Company's line
of credit. Additionally, a portion was paid with certain of the proceeds from a
private offering (the "Offering") which closed on June 30, 1998 (the "Closing
Date") of (i) 4,000 shares of the Company's Series B Convertible Preferred
Stock, par value $0.10 ("Series B Preferred Stock"), which bear annual dividends
of 4%, and (ii) warrants to purchase up to an aggregate of 1,000,000 shares of
the Company's common stock at $19.80 per share for a period of five years from
the date of grant.
Proceeds from the Offering totaled $20.0 million which were used to pay a
portion of the purchase price, as well as other costs associated with the
Merger. In general, the conversion amount of each share of Series B Preferred
Stock is convertible into shares of the Company's common stock, commencing on
June 30, 1998 at 97% at the less or of the (i) average of the low trading prices
for any three days during the twenty-two (22) trading days immediately preceding
the conversion date, or (ii) the low trading price on the day immediately
preceding the conversion date, subject to a minimum equal to 95% of such
conversion price. The conversion amount of each share of Series B Preferred
Stock is equal to $5,000 plus any unpaid dividends thereon. Unless waived by a
holder on not less than 61 days prior written notice, no holder may convert an
amount which would result in such holder's and its affiliates beneficial
ownership exceeding 4.99% of the then outstanding common stock of the Company.
The holders of the Series B Preferred Stock and the Warrants (the "Series B
Securities") are entitled to certain registration rights to register the common
stock underlying the Series B Securities pursuant to the Securities Act of 1933,
as amended. In the event that such underlying common stock is not registered
with the Securities and Exchange Commission by late October 1998, is not listed
with the securities exchange and/or markets on which the common stock is then
listed, within a definitive period of time, or various other covenants are not
complied with, then certain penalties may be incurred to certain or all of the
holders of the Series B Preferred Stock and/or Warrants, including, among other
things, a reduction in the conversion and/or exercise price of the applicable
securities and/or additional monetary payments. Unless waived, the Company
expects to have difficulty in timely complying with certain of its obligations
relating to the Series B Securities, including accomplishing the filing of a
registration statement of the Series B Securities by late October.
Additionally, under certain circumstances, including if the registration
statement that includes the shares of common stock underlying the Series B
Securities is not declared effective within 180 days of the Closing Date, or the
Company is delisted under certain circumstances from any securities exchange, or
any representation or warranty by the Company to the holders was not true and
correct, then the holders of the Series B Securities, in whole or in part, have
the option to require the Company to redeem their securities at premium prices.
Although the Company intends to use its best efforts to comply with all
provisions of its documents with the holders of the Series B Securities the
failure of which would provide such redemption right exercise, there can be no
assurance that it will be able to do so, in part, because certain of such
matters are dependent upon the efforts or approval of others (such as the
Securities and Exchange Commission with respect to the effectiveness of the
aforementioned registration statement). To the extent the holders of the Series
B Securities become entitled to exercise a redemption right and seek to require
the redemption of their shares, such exercise could materially increase the cash
requirements of the Company, could result in a default under the terms of its
Senior credit facility and, to the extent replacement financing is not available
on commercially reasonable terms (if at all), would likely have a material
adverse impact on the Company. Furthermore, so long as any Series B Security is
outstanding, the Company is prohibited from declaring or paying any dividends
(other than to holders of Series B Preferred Stock)or purchasing any equity
security of the Company.
As part of the September Agreement, the promissory note previously issued to
MFSCC in connection with the Merger in the principal amount of $86.4 million
will be replaced by a new promissory note between the Registrant and WorldCom
Network in the principal amount of $30 million (the "New Note"). The principal
amount of the New Note represents $20.0 million associated with the remaining
cash portion of the purchase price of MFSNT by the Company and $10.0 million
related to an estimated advance from receivables of MFSNT, subject to certain
adjustments. The New Note matures on December 15, 2000 (the "Maturity Date") and
bears interest at 11.5% annually, payable quarterly as of September 1, 1998. The
principal amount of the New Note is to be prepaid by applying a portion of
certain fees (i) due to the Registrant by WorldCom and (ii) received by the
Registrant in connection with the lease and installation of certain conduit
projects. The New Note may be repaid in part or in full without penalty.
Pursuant to the Merger, the Company granted options to WorldCom to purchase up
to 2,000,000 shares of common stock of the Company commencing July 2, 1998 and
ending six months after the payment of the initial promissory note, as amended
by the September Agreement to extend the exercise period. The exercise price per
share is $7.00, except that the holder may elect to exercise the option, in
whole or in part, on a "cashless" basis under which the holder will receive
shares of common stock with a market value equal to the difference between the
common stock's then market value and $7.00, subject to a 1,817,941 share
limitation. MFSCC will be entitled to designate a representative to serve on the
Company's Board of Directors as long as MFSCC retains shares of common stock
aggregating at least 5.0% of the then outstanding shares. Furthermore, pursuant
to the September Agreement, the Registrant agreed to issue to WorldCom Network a
phantom stock award or other equity participation award relating to 600,000
shares of the Company's common stock, payable in cash, stock or a combination
thereof at the Company's option and which is exercisable with respect to the
following three days: July 2, 1999, July 2, 2000, or July 2, 2001. WorldCom will
be entitled to receive any appreciation of the common stock over a base price of
$5-3/32 per share, but not more than $30-3/32 per share.
The September Agreement also modified certain other provisions including, among
other things, (i) extending the term of the stock pledge agreement (whereby the
stock of MFSNT was pledged as security for certain of the Registrant's
obligations to WorldCom), (ii) indemnifying WorldCom Network and its affiliates
from litigation matters, exclusive of certain litigation matters arising out of
NFSNT's operations, and (iii) executing mutual releases between the parties. The
final terms and conditions of the September Agreement, including the provisions
thereof relating to a grant of a phantom stock award or other equity
participation award, are expected to be more fully set forth in certain
additional agreements in the near future and may be modified to conform with
other agreements of the Company and various third parties or require a consent
or waiver from such third parties (including its senior lender.) There can be no
assurance, however, that the Company will be able to so modify or conform the
terms of the September Agreement, or obtain appropriate waivers or consents. The
failure to do so could have a material adverse effect on the financial condition
of the Company.
The acquisition of MFSNT was accounted for using the purchase method of
accounting, in accordance with Accounting Principles Board Opinion No. 16,
Business Combinations, whereby all assets acquired and liabilities assumed were
fair-valued, which resulted in negative goodwill totaling approximately $50.7
million, which was first allocated to fixed assets, reducing them to zero, with
the remainder reducing the value of certain ongoing projects. The results of
operations of MFSNT have been included since the date of acquisition.
The following summarizes the fair value of the assets acquired and the
liabilities assumed in connection with the acquisition of MFSNT on July 2, 1998
(in millions):
ALLOCATION OF
NEGATIVE FAIR VALUE
FAIR VALUE GOODWILL RECORDED
---------- -------- --------
Cash and cash equivalents............................................. $ 0.5 $ 0.5
Accounts receivable................................................... 46.3 46.3
Costs and profits in excess of billings on uncompleted contracts...... 82.6 82.6
Resalable conduit inventory........................................... 65.7 ($45.0) 20.7
Prepaid expenses and other current assets............................. 0.5 0.5
Property, plant and equipment......................................... 5.7 (5.7) --
Accounts payable...................................................... (13.7) (13.7)
Billings in excess of costs and profits on uncompleted contracts...... (42.3) (42.3)
Accrued liabilities................................................... (35.8) (35.8)
Note payable.......................................................... (58.8) (58.8)
Negative Goodwill................................................ (50.7) 50.7 --
In the opinion of management, all adjustments have been made that are necessary
to present fairly the unaudited pro forma financial statements.