SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-19589
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ARGUSS HOLDINGS, INC.
(Exact name of Registrant issuer as specified in its Charter)
Delaware 02-0413153
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(State or other jurisdiction of (IRS Employer
Incorporation of Organization) Identification No.)
ONE CHURCH STREET, SUITE 302, ROCKVILLE, MARYLAND
(Address of Principal executive offices)
20850
(Zip Code)
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(301) 315 - 0027
(Issuer's telephone number including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
TITLE OF CLASS
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 as amended, during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of March 1, 1999, 10,878,555 shares of common stock, $ .01 par value
per share were outstanding. The aggregate market value of the shares of common
stock, held by non-affiliates, based upon the closing price for such stock on
March 1, 1999 was approximately $77,274,000.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement for its Annual Meeting of Stockholders
to be held May 14, 1999 is incorporated by reference into Part III hereof.
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PART I
Statements made in this report that are not historical or current facts
are "forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that actual results may differ substantially from such forward-looking
statements. Forward-looking statements may be subject to certain risks and
uncertainties, including, but not limited to, continued acceptance of Arguss
Holdings, Inc.'s products and services in the marketplace, uncertainties
surrounding new acquisitions, floating rate debt, risks of the construction
industry, including weather and an inability to plan and schedule activity
levels, doing business overseas and risks inherent in concentration of business
in certain customers. All of these risks are detailed from time to time in
Arguss Holdings, Inc.'s filings with the Securities and Exchange Commission.
Accordingly, the actual results of Arguss Holdings, Inc. (the "Company" or the
"Registrant" or "Arguss") could differ materially from such forward-looking
statements.
ITEM 1. BUSINESS
GENERAL
The Company was organized as a Delaware corporation on June 1, 1987.
The Registrant acquires businesses that provide services and products to high
growth industries. The Company currently owns companies that serve the
telecommunications industry and the circuit board manufacturing industry. The
Company has adopted an entrepreneurial management style, which stresses
operational reliance on the entrepreneurial partners who previously owned the
companies acquired. Employees are incentivized at all levels of responsibility
with stock options.
Prior to May 1997, the Company operated as a single entity under the
name "Conceptronic, Inc." On May 9, 1997, the shareholders of the Company
approved a plan providing for the internal restructuring of the Company whereby
the Company became a holding company, and its operating assets were held by
wholly owned subsidiaries. Accordingly, on May 9, 1997, the Company transferred
substantially all of its Conceptronic, Inc. operating assets to a newly formed,
wholly owned subsidiary of the Company, and the Company changed its name to
Arguss Holdings, Inc. The subsidiary then adopted the name "Conceptronic, Inc"
("Conceptronic"). The Company's other wholly owned operating subsidiary is
Arguss Communications Group, Inc. ("ACG").
The Company conducts its operations through its wholly owned
subsidiaries, ACG and Conceptronic. ACG is engaged in the construction,
reconstruction, maintenance, repair and expansion of communications systems,
cable television and data systems, including providing aerial, underground and
long-haul construction and splicing of both fiber optic and coaxial cable to
major telecommunications customers. ACG's operating divisions include White
Mountain Cable Construction ("WMC"), TCS Communications ("TCS"), Can-Am
Construction ("CA"), Schenck Communications ("SC"), Underground Specialties
("US") and Rite Cable Construction ("Rite"). Conceptronic manufactures and sells
highly advanced, computer-controlled equipment used in the surface mount
electronics circuit assembly industry ("SMT").
TELECOM CONSTRUCTION
Through its acquisitions in the telecom construction industry, the
Company seeks to evolve into a geographically diverse telecom construction
entity with a reputation for high quality and on-time performance. The Company
has diversified its customer base and believes it is included on the bid lists
of many of the major telecommunications firms. During 1998, the Company, through
ACG, actively pursued acquisitions in the telecom construction industry. The
Company acquired three cable construction companies -- CA, SC and US. The
aggregate purchase price was approximately $19.0 million in cash and 2,051,000
shares of the Company's common stock, plus the assumption of debt. Each of the
acquisitions was accounted for as a purchase, and the results of operations of
the acquired companies were included in the consolidated results of the Company
from their respective acquisition dates. At the date of the acquisitions, prior
to additional payments described below, approximately $31.3 million in goodwill
was recorded by the Company, which reflects the adjustments necessary to
allocate the individual purchase prices to the fair value of assets acquired and
liabilities assumed.
The SC and US agreements contain provisions for additional payments by
the Company to former SC and US shareholders to be satisfied by the Company's
common stock and cash, if certain
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adjusted EBITDA thresholds for the years ended December 31, 1998 and July 31,
1999, respectively, are met. To meet EBITDA thresholds, SC and US divisions must
have adjusted EBITDA in excess of $2.3 million and $2.8 million, respectively,
during the term of their earnout periods. Results in excess of the adjusted
EBITDA threshold serve as the basis to determine the amount of the additional
payment. SC has exceeded its EBITDA threshold at December 31, 1998. Any
additional payments earned under the terms of the agreements will be recorded as
an increase in goodwill.
Former SC shareholders will receive an additional $7.6 million in cash
and 777,000 shares of the Company's common stock in full satisfaction of their
conditional additional payments. At December 31, 1998, the Company accrued
$18,696,000 as a liability for the combined cash and value of shares payable.
Arguss will utilize bank debt to fund the cash payment to former SC
shareholders. One-half of the additional payment to former US shareholders will
be satisfied by the issuance of shares of common stock valued at the lesser of
$15.50 per share or the market value on July 31, 1999 with a minimum price of
$13.625
Through its strategy of evolving into a geographic and customer diverse
telecom construction company, ACG is able to exploit the rapidly accelerating
deployment of fiber optics throughout the United States. Telecommunications
companies are expanding rapidly due to deregulation within the industry coupled
with the increased demand for telecommunications services by both commercial and
non-commercial users. The Company is participating in the industry's expansion
through the construction of expanded capacity by deploying fiber optic cable,
replacing aging copper and coaxial infrastructure and upgrading the capacity of
existing infrastructure.
ACG intends to emphasize its high quality reputation, outstanding
customer base and highly motivated employees in competing for large national
contracts. ACG believes that a high quality and well maintained fleet of
vehicles and construction machinery and equipment is essential to meet
customers' needs for high quality and on-time service. ACG is committed to
invest in its repair and maintenance capabilities to maintain the quality and
life of its equipment. Additionally, ACG makes a substantial investment annually
in new vehicles and equipment.
The Company's telecom construction operations are expected to have
seasonally weaker results in the first and fourth quarters of the year, and may
produce stronger results in the second and third quarters. This seasonality is
primarily due to the effect of winter weather on outside plant activities in the
northern areas served by ACG, as well as reduced daylight hours and customer
budgetary constraints. Certain customers tend to complete budgeted capital
expenditures before the end of the year, and postpone additional expenditures
until the subsequent fiscal period.
ACG continues to actively pursue larger regional telecom construction
contracts with major telecommunications firms. The positive impact of major
contracts requires that ACG undertake extensive up front preparations with
respect to staffing, training and relocation of equipment. Consequently, ACG may
incur significant period costs in one fiscal period and realize the benefit of
contractual revenues in subsequent periods.
MANUFACTURING
Conceptronic designs, manufactures and markets specialized,
computer-controlled capital equipment used in SMT. The principal product lines
are conveyorized forced convection ovens and sophisticated computer-controlled
rework systems. Conceptronic targets its marketing efforts primarily to the
computer, automotive, military/aerospace, telecommunications and SMT contract
manufacturing industries. Traditionally, these industry segments utilize the
most advanced SMT manufacturing techniques and capital equipment in order to
remain competitive.
HOLDING COMPANY STRUCTURE
Arguss is a holding company with no operations other than an investment
in its operating subsidiaries. At December 31, 1998, there were no restrictions
with respect to dividends or other payments from the operating subsidiaries to
Arguss.
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CONSOLIDATED OPERATIONS
During 1998, ACG provided services to many of the national firms in the
telecommunications industry. Certain of ACG's more significant construction
relationships were with Media One, Tele-Communications, Inc. and Time Warner,
Inc. These customers accounted for approximately 56% of ACG's net sales in 1998.
Through acquisitions and internal growth, ACG expects that the number and mix of
customers, as well as the highly concentrated dependency upon several customers,
will change in the future.
For the year ended December 31, 1998, some of Conceptronic's larger
customers were Ford Motor Company, Chrysler Corporation and Motorola, Inc. Ford
Motor Company accounted for 10% of Conceptronic's net sales in 1998.
For the years ended December 31, 1998, 1997 and 1996, international
sales accounted for approximately 44%, 46% and 35% of Conceptronic's net sales,
respectively. Although Conceptronic has not experienced any significant problems
from its international sales due to volatile economic conditions, Conceptronic
could encounter greater delays or costs in enforcing contracts with customers
outside the United States, should disputes arise, and the ability of
Conceptronic to offer competitively priced products outside the United States
may be affected by currency fluctuations.
BACKLOG
At December 31, 1998, ACG had a backlog of estimated commitments of
$150 million to perform services in 1999 and later years, compared to $120
million at December 31, 1997. Of ACG's backlog, 80% is expected to be
constructed within the next twelve months. On December 31, 1998, Conceptronic
had purchase orders reflecting a backlog of $1,758,000, compared to a December
31, 1997 backlog of $2,200,000. Conceptronic's backlog at December 31, 1998 is
expected to be shipped within the next twelve months.
COMPETITION
ACG operates in a competitive and fragmented industry. ACG competes
with contractors ranging from small regional companies which service a single
market to larger firms servicing multiple regions, as well as large national and
multi-national contractors. ACG believes it competes favorably with the other
companies in the telecom construction industry.
Competition in the printed circuit board assembly equipment market is
substantial, particularly in the area of convection ovens. Conceptronic believes
that the technological superiority of its products, together with its
manufacturing philosophy and expertise, give it a competitive advantage in the
SMT assembly equipment industry. However, there can be no assurance that
Conceptronic will be able to compete effectively against its competitors in the
future.
The principal competitive factors in the printed circuit board assembly
equipment market are product performance, price, reliability and the ability to
meet customer's delivery schedules. Conceptronic believes that it competes
favorably with respect to each of these factors.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1998, 1997 and 1996, Conceptronic
expended approximately $1,096,000, $489,000 and $385,000 respectively, or
approximately 6.4%, 2.6% and 2.5% of its net sales for each respective year, on
research and product development. In 1998, expenditures primarily involved work
on a new line of ovens which incorporate a modular design to enhance efficiency
of manufacturing processes, as well as adaptability to customer configuration
requirements.
YEAR 2000 DATE CONVERSION
For discussion of Year 2000 Date Conversion, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
13.
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EMPLOYEES
As of December 31, 1998, the Company had 1,274 employees, all of whom
were full time. Approximately 40 of the Company's employees are represented by
labor organizations and the Company is not aware of any other activities seeking
organization. The Company considers its relationship with its employees to be
satisfactory.
ITEM 2. PROPERTIES
FACILITIES
ACG's corporate headquarters is located in an office facility in Epsom,
New Hampshire. The Company acquired a 9,000-sq. ft. maintenance facility in
1997, in connection with the acquisition of ACG. During 1997, ACG constructed a
10,000-sq. ft. office facility on an adjacent lot. ACG leases divisional
headquarters located in various regions of the United States. TCS has a 3,000
square foot office facility located in Palm Harbor, FL. CA is located in Costa
Mesa, CA in a 21,000 square foot combined office, warehouse and maintenance
facility. SC is headquartered in Woodinville, WA at a 13,000 square foot office
and maintenance facility. US leases a 6,000 square foot office and maintenance
facility in Mukilteo, WA. Although the Company expects these facilities, which
are in excellent condition, to be adequate for its current operations, Arguss is
exploring the possibility of combining the headquarters' operations of SC and US
which could require the purchase or lease of a new facility or expansion of an
existing facility. Since the study is at a preliminary stage, Arguss is unable
to estimate costs associated with the various consolidation options.
ACG's principal operations are conducted at local construction offices,
equipment yards and storage facilities. These facilities are temporary in nature
with most of ACG's services performed on customer premises or job sites. Because
equally suitable temporary facilities are available in all areas where ACG does
business, these facilities are not material to ACG's operations.
Conceptronic currently owns and operates a manufacturing facility in
Portsmouth, New Hampshire. This building, purchased in May 1992, has
approximately 42,800 square feet of manufacturing and office space. Management
expects this facility to provide adequate manufacturing capability for the
foreseeable future. (See Note 7 to Notes to Consolidated Financial Statements
for long term debt secured by this facility.)
ITEM 3. LEGAL PROCEEDINGS
The company is involved in the following action(s):
On December 13, 1991, the Company was served with a complaint from
Vitronics Corporation ("Vitronics"), one of the Company's competitors, alleging
patent infringement involving its reflow soldering ovens. Vitronics sought an
injunction, together with unspecified damages and costs. The claim was filed in
the United States Federal District Court, District of New Hampshire.
In August 1995, the U.S. District Court issued a directed verdict of
non-infringement in the Company's favor regarding method patent #4,654,502.
Additionally, a decision was reached on the apparatus patent #4,833,301 by a
jury, which found non-infringement on all past and current Conceptronic ovens.
Vitronics appealed the directed verdict on patent #4,654,502 and the United
States Court of Appeals for the First Circuit ("Court of Appeals") subsequently
reversed and remanded the case for further proceeding. In October 1997, the
Court of Appeals administratively dismissed the case.
In related actions, in April 1997, the United States Patent Office
("PTO") rejected certain claims of Vitronics' patent #4,654,502 as being
unpatentable. This decision by the PTO, if upheld on appeal, should terminate
the pending lawsuit. In December 1996, the Company named Vitronics and its
Chairman and CEO, James Manfield, in a lawsuit, filed in Superior Court of the
State of New Hampshire, citing malicious prosecution and abuse of process. The
suit claims that Vitronics, when it initiated the 1991 patent infringement case
against Conceptronic, knew or should have known that the suit was without merit,
and that claim 1 of U.S. Patent #4,883,301 was invalid, unenforceable, and as a
consequence, the patent was not infringed. In November 1997, Dover Industries
purchased Vitronics and succeeded in their interest.
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In the opinion of counsel, the ultimate outcome of this litigation
cannot presently be determined. Management of the Company believes Vitronics'
claim is without merit, and that the Company will ultimately prevail.
Accordingly, no provision has been made in the accompanying consolidated
financial statements for any potential liability that might result.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $ .01 par value per share, trades on The
NASDAQ National Market of The NASDAQ Stock Market under the symbol ARGX. For the
periods reported below, the following sets forth the high and low sales price
information for the common stock as reported by the National Association of
Securities Dealers Automated Quotation System (NASDAQ).
HIGH LOW
1998
First Quarter $18.50 $13.50
Second Quarter $19.125 $15.00
Third Quarter $18.75 $13.50
Fourth Quarter $20.50 $12.00
HIGH LOW HIGH LOW
1997 1996
First Quarter $8.625 $5.50 First Quarter $7.25 $5.25
Second Quarter $8.0625 $6.00 Second Quarter $7.00 $3.6875
Third Quarter $12.375 $7.50 Third Quarter $5.00 $3.00
Fourth Quarter $14.75 $10.00 Fourth Quarter $6.75 $3.75
The Company has not paid dividends to its stockholders since its
inception, and does not plan to pay dividends on its common stock in the
foreseeable future. The Company intends to retain any earnings to finance
growth.
The closing price of the Company's common stock on NASDAQ on December
31, 1998 was $18.75 per share. As of December 31, 1998, the Company had
approximately 300 stockholders of record for its common stock. The Company has
approximately 1,200 stockholders holding common stock in "Street Name."
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998(2)(3) 1997(1)(3) 1996 1995 1994
---------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $145,017,000 $ 53,284,000 $ 15,653,000 $ 15,028,000 $ 13,479,000
============ ============ ============ ============ ============
Depreciation $ 6,197,000 $ 1,243,000 $ 295,000 $ 329,000 $ 346,000
Goodwill amortization 2,754,000 946,000 -- -- --
Interest Expense 3,113,000 652,000 236,000 152,000 101,000
Income (Loss) Before
Income Taxes 6,698,000 2,803,000 103,000 412,000 (528,000)
Net Income (Loss) $ 2,995,000 $ 1,805,000 $ 88,000 $ 412,000 ($ 528,000)
============ ============ ============ ============ ============
Income (Loss) per
Share - Basic $ .28 $ .24 $ .04 $ .24 ($ .31)
============ ============ ============ ============ ============
- Diluted $ .26 $ .22 $ .04 $ .24 ($ .31)
============ ============ ============ ============ ============
Weighted Average
Number of Shares
- - Basic 10,575,000 7,674,000 2,033,000 1,700,000 1,700,000
============ ============ ============ ============ ============
- - Diluted 11,537,000 8,061,000 2,082,000 1,730,000 1,700,000
============ ============ ============ ============ ============
Total Assets $158,542,000 $ 59,035,000 $ 19,107,000 $ 7,815,000 $ 7,467,000
============ ============ ============ ============ ============
Current Portion of
Long Term Debt $ 11,429,000 $ 1,632,000 $ 48,000 $ 43,000 $ 45,000
============ ============ ============ ============ ============
Long Term Debt
Excluding Current
Portion $ 23,187,000 $ 6,995,000 $ 1,038,000 $ 1,087,000 $ 1,118,000
============ ============ ============ ============ ============
Cash Dividends
Per Common Share -0- -0- -0- -0- -0-
</TABLE>
NOTES TO SELECTED FINANCIAL DATA:
(1) Includes the results of operations of WMC (January 1, 1997), TCS
(September 1, 1997) and Rite (October 1, 1997) from their respective
dates of acquisition.
(2) Includes the results of operations of CA and SC (January 1, 1998) and
US (August 1, 1998) from their respective dates of acquisition.
(3) Includes non-cash stock option compensation expense of $2,204,000 and
$516,000, respectively, for the years ended December 31, 1998 and 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company (including the Notes thereto)
included elsewhere in this document.
PLAN OF OPERATIONS
The Company conducts its operations through its wholly owned
subsidiaries, Arguss Communications, Group, Inc. ("ACG"), formerly White
Mountain Cable Construction Corp., and Conceptronic, Inc. ("Conceptronic"). ACG
is engaged in the construction, reconstruction, maintenance, repair and
expansion of communications systems, cable television and data systems,
including providing aerial and underground construction and splicing of both
fiber optic and coaxial cable to major telecommunications customers. ACG
operates through its divisions - WMC, CA, TCS, Rite, SC and US. Conceptronic
manufactures and sells highly advanced, computer-controlled equipment used in
the surface mount technology ("SMT") circuit assembly industry.
GENERAL
During 1998, the Company actively pursued acquisitions in the telecom
construction industry. The Company acquired three telecom construction companies
- - CA, SC and US (collectively "Acquisitions") - for an aggregate purchase price
of $19.0 million in cash (including acquisition costs) and 2,051,000 shares of
the Company's common stock, plus the assumption of debt. Each of the
acquisitions was accounted for as a purchase, and the results of operations of
the acquired companies were included in the consolidated results of the Company
from their respective acquisition dates. The Company, as a result of the
acquisitions, recorded approximately, prior to additional payments described
below, $31.3 million in goodwill. This reflects the adjustments necessary to
allocate the individual purchase prices to the fair value of assets acquired and
liabilities assumed.
The SC and US purchase agreements contain provisions for additional
payments by the Company to former SC and US shareholders to be satisfied by the
Company's common stock and cash, if certain adjusted EBITDA thresholds for the
years ended December 31, 1998 and July 31, 1999, respectively, are met. To meet
EBITDA thresholds, SC and US divisions must have adjusted EBITDA in excess of
$2.3 million and $2.8 million, respectively, during the term of their earnout
periods. Results in excess of the adjusted EBITDA threshold serves as the basis
to determine the amount of the additional payment. SC has exceeded its EBITDA
threshold at December 31, 1998. Any additional payments earned under the terms
of the agreements will be recorded as an increase in goodwill.
Former SC shareholders will receive an additional $7.6 million in cash
and 777,000 shares of the Company's common stock in full satisfaction of their
additional payments. At December 31, 1998, the Company accrued $18,696,000 as a
liability for the combined cash and value of shares payable. Arguss will utilize
bank debt to fund the cash payment to former SC shareholders. One-half of the
additional payment to former US shareholders will be satisfied by the issuance
of shares of common stock valued at the lesser of $15.50 per share or the market
value with a minimum price of $13.625.
During 1997, the Company acquired three telecom construction companies
- - WMC, TCS and Rite - for an aggregate purchase price of $9.9 million in cash
(including acquisition costs) and 2,772,000 shares of the Company's common
stock. Each of the acquisitions was accounted for as a purchase, and the results
of operations of the acquired companies were included in the consolidated
results of the Company from their respective acquisition dates. The Company, as
a result of the acquisitions, recorded approximately $25.3 million in goodwill.
This reflects the adjustments necessary to allocate the individual purchase
prices to the fair value of assets acquired and liabilities assumed.
The Rite and TCS purchase agreements contained provisions for
additional payments by the Company to the Rite and TCS shareholders to be
satisfied by the issuance of the Company's common stock and cash, if certain
minimum adjusted EBITDA thresholds were met for the years ended September 30,
1998 and August 31, 1998, respectively. No additional payments were earned by
former TCS or Rite shareholders.
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RESULTS OF OPERATIONS
1998 COMPARED TO 1997
The Company had net income of $2,995,000 for the twelve months ended
December 31, 1998, compared to net income of $1,805,000 for the twelve months
ended December 31, 1997. The increase in net income was due primarily to the
profitable results of the telecom construction segment whose pretax income was
$7,538,000. (See Note 4 to Consolidated Financial Statements.)
Net sales for the twelve months ended December 31, 1998 increased
$91,733,000 or 172% to approximately $145,017,000 from approximately $53,284,000
for the twelve months ended December 31, 1997 due primarily to the Acquisitions
which had sales of $46,692,000, and also due to a strong combined sales increase
of $47,824,000 at WMC, Rite and TCS, which was offset, in part, by
Conceptronic's decrease in sales of $1,232,000. Conceptronic sales for 1998 were
below the levels achieved for 1997 due primarily to the industry-wide softening
of activity in the SMT circuit assembly business.
Gross profit margin, excluding depreciation, was 24% of sales for the
twelve months ended December 31, 1998, compared to 29% for the comparable period
in 1997. The decrease was due primarily to ACG. WMC incurred transition costs in
commencing a project in Charlotte, NC, as well as in terminating its involvement
in its Dallas, TX project. In addition, both TCS and CA were incurring
transition costs in commencing projects in Denver, CO and Portland, OR. Arguss
reallocated its telecom construction resources from Dallas, TX to other projects
which it believes have superior profit potential in the next twelve months.
Further, ACG has a lower overall gross profit percentage than does Conceptronic.
ACG, with average gross profit margin of 22% in 1998, now represents 88% of
consolidated sales compared to 65% in 1997. ACG believes that its margins should
improve as the telecom construction projects commenced in 1998 begin to mature.
Conceptronic maintained its margins at 33%.
Selling, general and administrative expenses for the twelve months
ended December 31, 1998 were $14,457,000, compared to $9,042,000 for the
comparable period one year ago. The increase was due largely to the
Acquisitions, which accounted for $4,527,000 in expenses, including non-cash
stock compensation of $1,642,000.
Depreciation expense increased to $6,197,000 for the twelve months
ended December 31, 1998, compared to $1,243,000 for the twelve months ended
December 31, 1997, due primarily to the Acquisitions which had $2,563,000 of
depreciation expense, and WMC and TCS who spent an aggregate of $6.6 million in
1997 and $10.3 million in 1998 on capital assets.
Goodwill amortization, using a 20-year estimated useful life, increased
by $1,808,000 for the twelve months ended December 31, 1998, from $946,000 for
the twelve months ended December 31, 1997, due primarily to the Acquisitions
which led to $1,447,000 in goodwill amortization. Rite and TCS, which were
acquired late in 1997, had $441,000 in goodwil amortization in 1998, compared to
$144,000 in 1997.
Net interest expense for the twelve months ended December 31, 1998 was
$2,707,000, compared to $559,000 for the comparable period one year ago. The
increase in amounts outstanding under bank credit facilities with respect to
financing of the Acquisitions, equipment acquisition lines, and the revolving
line of credit resulted in the increase in aggregate net interest expense. See
Liquidity and Capital Resources for a discussion of the Company's debt
facilities.
Income tax expense increased from $998,000 to $3,703,000 due to
increased pretax income at ACG. In addition, in the year ended December 31,
1997, the Company reversed $555,000 in valuation allowances recorded against
deferred tax assets which reduced income tax expense in 1997.
1997 COMPARED TO 1996
The Company had net income of $1,805,000 for the twelve months ended
December 31, 1997, compared to net income of $88,000 for the twelve months ended
December 31, 1996. The increase in net income was due primarily to the
profitable results of the telecom construction segment whose pretax income was
$3,151,000. (See Note 4 to Consolidated Financial Statements.)
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Net sales for the twelve months ended December 31, 1997 increased
$37,631,000 or 240% to approximately $53,284,000 from approximately $15,653,000
for the twelve months ended December 31, 1996 due primarily to the acquisition
of WMC, TCS and Rite which had sales of $34,776,000 and to Conceptronic's
increase in sales of $2,855,000 or 18%. Conceptronic sales for 1997 were
favorably impacted by increased bookings of 27% or $4,112,000 during the year.
The increase in Conceptronic sales resulted from concerted efforts to increase
market penetration in the SMT circuit assembly equipment industry.
Gross profit margin, excluding depreciation, was 29% of sales for the
twelve months ended December 31, 1997, compared to 33% for the comparable period
in 1996. The decrease was due primarily to WMC, which had approximately a 27%
gross profit margin for the twelve-month period in 1997, while Conceptronic
improved its margins to 34% through improved absorption of manufacturing costs
and by higher sales with a product mix which had favorable margins.
Selling, general and administrative expenses for the twelve months
ended December 31, 1997 were $9,042,000, compared to $3,628,000 for the
comparable period one year ago. The increase was due largely to the acquisition
of WMC, which accounted for $3,374,000 in expenses, as well as non cash stock
compensation of $516,000 related to acquisitions, an increase in costs at
Conceptronic for higher marketing and sales related expenses of $868,000 due to
greater volume of business, and increased infrastructure expenditures in
manufacturing and computer systems.
Depreciation expense increased to $1,243,000 for the twelve months
ended December 31, 1997, compared to $295,000 for the twelve months ended
December 31, 1996 due primarily to ACG which had $1,028,000 of depreciation
expense. Goodwill, which is being amortized over 20 years, increased to $946,000
for the twelve months ended December 31, 1997 because of the purchases of WMC,
TCS and Rite.
Net interest for the twelve months ended December 31, 1997 was
$559,000, compared to $180,000 for the comparable period of 1996. ACG net
interest expense was $451,000 for 1997. Conceptronic's expense for the twelve
months ended December 31, 1997 decreased by $28,000 to $152,000 due to reduced
amounts outstanding under its credit line.
Income tax expense increased from $15,000 to $998,000 due primarily to
the profitable operations of ACG. The effective income tax rate was reduced as a
result of the reversing of valuation allowances previously recorded against the
entire December 31, 1996 deferred tax asset of $555,000. Arguss achieved pre-tax
income of $412,000 in 1995 and $103,000 in 1996. Further, litigation costs,
which had been a significant expense to Arguss prior to 1997, were no longer
anticipated. The reversal of the valuation allowance in 1997 was based on the
foregoing, as well as the investment opportunity available as a result of
raising nearly $11,000,000 of equity capital in 1996 which permitted the
acquisition of WMC in 1997.
1996 COMPARED TO 1995
The Company had net income of approximately $88,000 for the year ended
December 31, 1996, compared to net income of approximately $412,000 for the year
ended December 31, 1995. The decrease was due to lower gross margins and higher
selling expenses partially offset by a reduction in legal costs. Net sales in
1996 were approximately $15,653,000, compared to approximately $15,028,000 in
1995, an increase of approximately 4%. The increase in net sales was primarily
attributable to increased market share in domestic and foreign rework systems
partially offset by a reduction in cleaner system sales.
Gross profit margin, excluding depreciation, for 1996 was approximately
33% of net sales, compared to approximately 37% for 1995. The reduction was due
to higher material costs associated with improvements required to meet customer
expectations in product performance and reliability. Selling, general and
administrative expenses for 1996 were approximately $3,628,000, compared to
approximately $3,115,000 for 1995. Increased expenditures for advertising,
product promotions, the opening of a new Asian regional sales office in Malaysia
and a 28% increase in the sales and marketing staff was offset by a decrease in
legal expenses from the Vitronics lawsuit.
Interest income for 1996 was approximately $56,000, compared to $6,000
for 1995. The increase represented one month's interest income on the proceeds
received from the November 1996
10
<PAGE>
private offering of Class A common stock. Interest expense for 1996 was
approximately $236,000, compared to approximately $152,000 for 1995, an increase
of approximately 56%. The interest expense represented the mortgage interest on
Conceptronic's manufacturing and office facility and Conceptronic's credit line.
The increase in interest expense for 1996 was attributed to increased amounts
outstanding under the credit line due to the need to fund working capital
requirements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for the twelve months ended December
31, 1998 improved to $4,898,000 from $2,334,000 for the twelve months ended
December 31, 1997, and from $438,000 used in operations in 1996. The positive
impact of the Acquisitions is reflected in the $5,484,000 positive cash flow
from operations that the Acquisitions provided during the twelve months ended
December 31, 1998. In 1997 the positive impact of the WMC acquisition with
$3,137,000 in cash flow from operations offset continued use of cash in
operations by Conceptronic. Net cash used for investing activities for the
twelve months ended December 31, 1998 was $35,369,000, compared to $17,096,000
and $96,000 in the comparable periods of 1997 and 1996. Of the 1998 investing
activities, $19,040,000 was used to purchase Acquisitions compared to $9,900,000
used in 1997 to purchase WMC, TCS and Rite. In 1998, $16,937,000 was spent on
capital equipment acquisitions compared to $7,196,000 in 1997 and $96,000 in
1996. The increase reflects the support of revenue growth of ACG which is
capital intensive. Net cash flow provided by financing activities was
$31,075,000 for the twelve months ended December 31, 1998, compared to net cash
flow provided by financing activities of $5,659,000 for the comparable period in
1997 and $10,842,000 in 1996. The increase in financing activity in 1998
reflects the proceeds from the Company's expanded working capital line, as well
as financing for the purchase of the Acquisitions and equipment acquisition
credit lines. In November 1996, Arguss completed the private placement for Class
A Common Stock with net proceeds of $11,730,000. The net proceeds of the private
placement were used in the 1997 acquisition of WMC, TCS and Rite ($9.9 million)
and for working capital. In connection with the private placement, stock options
were issued to non-employees as compensation to facilitate the private
placement, resulting in a non-cash charge to paid-in capital of $813,000.
The Acquisitions significantly impacted various balance sheet accounts
during 1998. Cash increased by $604,000 to $1,819,000 due primarily to the
Acquisitions, which provided positive cash flow from operations. Accounts
receivable increased $21,673,000 primarily due to increased revenues at WMC and
TCS and Acquisitions. Costs and earnings in excess of billings increased by
nearly $8.4 million due to increased construction activity at CA in the last
month of the year, and unbilled amounts for materials with a balance of
$5,555,000 related primarily to materials maintained for use on projects in
Denver, CO and Portland, OR. The materials are billed to the customer as they
are installed.
Customer advances increased to $7,000,000 at December 31, 1998 due to
advances from TCI to purchase construction equipment and materials for projects
in Denver, CO and Portland, OR.
ACG also experienced increases in accounts payable to $13,798,000 at
December 31, 1998 from $4,141,000 at December 31, 1997, due primarily to WMC,
TCS and the Acquisitions who had increased payables resulting from increased
telecom construction activity in the fourth quarter of 1998.
At December 31, 1998, Arguss accrued $18,696,000 for the additional
payment due to former SC shareholders for exceeding the adjusted EBITDA
threshold in connection with the SC purchase by Arguss. The accrued payment is
due in March 1999, and will be satisfied with 777,000 shares of Arguss common
stock and a cash payment of approximately $7.6 million which will be financed by
bank borrowings. Long-term debt increased $16,192,000 due primarily to financing
of the Acquisitions and expansion of ACG's capital equipment to support new
contract revenues.
At December 31, 1997, the acquisition of WMC significantly impacted
various balance sheet accounts. Cash declined by $9,103,000 to $1,215,000.
Accounts receivable increased by $10,739,000 due primarily to the consolidation
of WMC and increased sales activity at Conceptronic. Long-term debt increased
$5,957,000 due primarily to the acquisition and expansion of capital assets of
WMC.
The Company had $16,500,000 in revolving lines of credit with
commercial banks of which $8,038,000 was drawn down as of December 31, 1998 to
fund increased inventories and working capital.
On January 2, 1998, the Company expanded its credit facilities with
NationsBank, NA. In connection with its acquisition of CA and SC, the Company
entered into an aggregate of $15,016,000 in
11
<PAGE>
new acquisition financing facilities. The facilities have a five-year
amortization rate for repayment of the principal of the acquisition financing
facility, and include a balloon payment of approximately $4 million due in March
1999. During the twelve months ended December 31, 1998, the acquisition
financing bore an interest rate of LIBOR, plus 275 basis points. Because certain
cash flow objectives were achieved, there will be a reduction in rate to LIBOR,
plus 175 basis points for the remaining term of the loans.
In November 1998, the Company entered into a $3.5 million acquisition
financing in connection with the acquisition of US. The financing has a
five-year amortization rate for repayment of principal, and bears an interest
rate of LIBOR, plus 175 basis points.
During the twelve months ended December 31, 1998, the Company expanded
both its ACG revolving credit facility from $4 million to $15 million, and
equipment financing facility from $3.5 million to $13 million under the same
interest rates and covenants as the original lines of credit.
Further, the Company consummated a term loan to refinance existing
financing facilities at CA and SC. The proceeds of this line were $2,400,000,
are payable over 48 months, and bear an interest rate at LIBOR, plus 165 basis
points.
The Company continues to actively pursue acquisitions in telecom
construction. Subject to due diligence and other considerations, the Company's
commercial credit facilities for equipment financing, revolving lines of credit
and acquisition financing facilities may be expanded. In the event that one or
more satisfactory acquisition candidates are located, the Company may seek to
expand its existing credit facilities or issue additional equity.
The Company believes it has sufficient cash flow from operations, cash
on hand, and availability under its credit line to meet its liquidity needs for
the current operations. In addition, the Company will expand its credit
facilities with banks to finance its obligations to former SC shareholders.
Arguss is in the process of formalizing a $100 million syndicated bank financing
facility for which certain institutions have extended preliminary commitments
subject to due diligence and the negotiation of a comprehensive credit
agreement. Should the syndication effort be delayed, Arguss believes that it
will be able to attain temporary funding from existing bank relationships on an
interim basis.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into fixed interest rate exchange agreements
("Interest Rate Swaps") which it uses to manage interest rate risk arising from
the Company's debt. Interest Rate Swaps are accounted for as hedges, and,
accordingly, amounts receivable or payable under Interest Rate Swaps are
recognized as adjustments to interest expense. Gains and losses on early
terminations of Interest Rate Swaps are included in the carrying amount of the
related debt, and amortized as yield adjustments over the remaining term of the
derivative financial instruments. The Company does not use such instruments for
trading purposes.
In order to hedge its variable term loan interest rate risk, the
Company has entered into various Interest Rate Swaps pursuant to which it pays
fixed interest rates on $28,115,000 at approximately 7.42%, and receives
variable interest rates on the same notional amount. During the year ended
December 31, 1998, the Company's payments under Interest Rate Swaps were
$103,000. The Company had receipts of $3,000 pursuant to Interest Rate Swaps.
The Company's Interest Rate Swaps expire as follows:
INTEREST RATE SWAPS 12/31/98
EXPIRATION DATE INTEREST RATE NOTIONAL AMOUNT MARKET VALUE
- --------------- ------------- --------------- ------------
September 9, 2002 7.80% $ 4,250,000 ($ 94,000)
November 1, 2002 7.87% $ 2,499,000 ($ 56,000)
December 31, 2001 5.95% $ 2,400,000 ($ 31,000)
December 31, 2002 5.98% $10,000,000 ($190,000)
December 31, 2003 7.78% $ 3,668,000 ($ 90,000)
December 31, 2003 6.88% $ 3,500,000 $ 3,000
December 31, 2003 6.78% $ 7,000,000 $ 6,000
12
<PAGE>
Other parties to the agreements expose the Company to credit losses for
the periodic settlements of amounts due under the Interest Rate Swaps in the
event of non-performance. However, the Company does not anticipate that it will
incur any material credit losses because it does not anticipate non-performance
by the counter parties.
SEASONALITY
The Company's telecom construction operations are expected to have
seasonally weaker results in the first and fourth quarters of the year, and may
produce stronger results in the second and third quarters. This seasonality is
primarily due to the effect of winter weather on outside plant activities in the
northern areas served by ACG, as well as reduced daylight hours and customer
budgetary constraints. Certain customers tend to complete budgeted capital
expenditures before the end of the year, and postpone additional expenditures
until the subsequent fiscal period.
YEAR 2000 DATE CONVERSION
The Year 2000 issue relates to the inability of certain computer
software programs to properly recognize and process date-sensitive information
relative to the year 2000 and beyond. Without corrective measures, this issue
could cause computer applications to fail or to create erroneous results.
Incomplete or untimely resolution of the Year 2000 issue by the Company or by
its key vendors, customers suppliers or by other third parties could have a
materially adverse impact on the Company's business, operations or financial
condition in the future.
Conceptronic evaluated its Year 2000 compliance issues during the year
ended December 31, 1998. Conceptronic has undertaken the remediation of most of
its Year 2000 exposures and expects to complete remediation efforts during the
second quarter of 1999.
During 1998, ACG commenced the upgrading of its business information
systems through common integrated computer and software systems throughout ACG.
As a by-product of the implementation of the new integrated business reporting
system, ACG expects to remediate Year 2000 compliance issues at certain of its
divisions which were not already Year 2000 compliant. All ACG divisions are
expected to be operating on the new integrated business system during the second
quarter of 1999 with most ACG divisions completed during the first quarter of
1999.
In conjunction with its review of its Year 2000 compliance issues, the
Company has conducted an inventory of its information technology ("IT") and
manufacturing and telecom construction systems ("non-IT"), as well as its
telecommunications systems. ACG has addressed its Year 2000 compliance issue for
IT, non-IT and telecommunications systems. Conceptronic expects to complete
steps necessary to remediate significant Year 2000 compliance issues by the
second quarter of 1999. The total cost with respect to systems and other
modifications to Company IT, non-IT and telecommunications systems is not
expected to exceed $300,000, more than one-half of which was expended in 1998.
The Company has also identified and prioritized critical suppliers and
customers and communicated with them about their plans and progress in
addressing the Year 2000 problem. Detailed evaluations of the most critical
third parties have been completed. Contingency plans are being developed in the
first quarter of 1999 in response to the detailed evaluations.
Based upon currently available information, the Company expects that
all phases of its Year 2000 Project will be completed by the end of the second
quarter of 1999. With the completed and planned Year 2000 modifications to its
IT systems and non-IT systems and telecommunications systems, the Company
currently believes that the Year 2000 issue should not pose significant
operational problems to the Company. There can be no assurance, however, that
the systems of other parties upon which the Company's business relies,
including, but not limited to, the Company's key vendors, customers, suppliers
and other third parties will be converted on a timely basis. If the systems and
applications of key third parties are materially impacted by the Year 2000
issue, the Company could lose certain of its abilities to efficiently engage in
normal business activities which could have a material adverse effect on the
Company's business, financial condition or results of operations. Although some
business disruption in the Company's business may possibly occur as a result of
Year 2000 failures by third parties, the Company is not able at this time to
ascertain the extent of any such disruption. Contingency plans are being
developed in the first quarter of 1999 in response to the Company's evaluation
of Year 2000 business exposures. Arguss believes that, with the implementation
of new business systems and
13
<PAGE>
contingency planning with respect to key vendors and customers, as well as the
expansion of its bank credit facilities, the possibility of significant business
interruptions of normal operations should be reduced.
The Company believes that the most reasonably likely worst case
scenario which could occur with respect to Year 2000 is a delay in receiving
payments on accounts receivable from customers. Arguss is negotiating the
expansion of its liquidity through expanded bank financing facilities. The
Company believes that such expanded financing should mitigate delays in
collections of amounts due from customers.
In addition to its internal systems and external supplier and customer
relationships, Arguss has exposure to Year 2000 compliance issues with respect
to potential acquisitions. The Company includes Year 2000 compliance in its
evaluation of acquisition candidates, as well as in its due diligence in
progress. At December 31, 1998, the Company had no acquisition in progress.
Non-compliance with Year 2000 could have an adverse impact on valuations of
potential acquisitions or reduce Arguss' program of making acquisitions.
IMPACT OF INFLATION
The primary inflationary factor affecting the Company's operation is
increased labor costs. The Company's revenue is principally derived from
services performed under master contracts, which typically include provisions to
increase contract prices on an annual basis based on increases in the
construction price index. Accordingly, the Company believes that increases in
labor costs will not have a significant impact on its results of operations.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, Arguss is exposed to interest rate
risk. To reduce variable-term loan interest rate risk, the Company has entered
into interest rate swaps in the same notional amount as its related term loan
debt with the same interest rate relationship base to LIBOR as that of Arguss'
floating rate debt and for the same term as the variable rate debt. At December
31, 1998, Arguss' variable rate term loans aggregating $28,115,000 in notional
amount and maturing in more than 180 days was hedged through interest rate swaps
pursuant to which Arguss pays a weighted fixed interest rate of 7.42%.
Interest rate swaps are entered into as a hedge of underlying debt
instruments to effectively change the characteristics of the interest rate
without actually changing the debt instrument. For fixed rate debt, interest
rate changes affect the fair value, but do not impact earnings or cash flow.
Conversely for floating rate debt, interest rate changes generally do not affect
the fair market value, but do impact future earnings and cash flow. A one
percentage point decrease in interest rates would decrease the fair value of
interest rate swaps by approximately $300,000. The earnings and cash flow impact
for the next year resulting from a one percentage point increase in interest
rates would be neutral because of the cash flow received from the swaps. All of
the principal of the variable rate debt subject to interest rate swaps would be
repayed over the next five years thereby diminishing the impact of market
valuations on hedges.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 13 and the Index therein for a listing of the financial
statements included as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
<PAGE>
PART III
Items 10 to 13 are incorporated herein by reference to the Company's
definitive proxy statement for its 1999 Annual Meeting of Stockholders to be
held May 14, 1999, to be filed with the Securities and Exchange Commission
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following is a list of the financial statements that are filed
herewith:
PAGE
----
Independent Auditors' Report 19
Consolidated Balance Sheets at December 31, 1998 and 1997 20
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 21
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 22
Consolidated Statements of Cash Flow for the years ended December 31,
1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 25
(a) (2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is filed as a part of this
Report under "Schedule II". "Schedule II" - Valuation and Qualifying Accounts -
for the three years ended December 31, 1998. All other schedules called for by
Form 10-K are omitted because they are inapplicable or the required information
is shown in the financial statements, or notes thereto, included herein.
Schedule II
Arguss Holdings, Inc.
Valuation and Qualifying Accounts
Balance at Charged to Write-Offs Balance at
Beginning Bad Debt Charged to End of Year
of Year Expense Allowance -----------
------- ------- ---------
Allowance for
Doubtful Accounts
1998 $129,000 $ 221,000 $(85,000) $265,000
1997 65,000 69,000 (5,000) 129,000
1996 75,000 (17,000) 8,000 50,000
(a) (3) EXHIBITS
The following exhibits required to be filed herewith are attached or
incorporated by reference to the filings previously made by the Company as noted
below:
Exhibit No. Title
----------- -----
3(a) Certificate of Incorporation, as amended, incorporated by
reference as an Exhibit to the Company's Registration
Statement on Form S-18 (No. 33-36142-B).
3(a)(i) Certificate of Designation establishing Class A common stock
incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement Form S-8 (No. 333-19277).
15
<PAGE>
3(b) Bylaws, as amended, incorporated by reference as an Exhibit
to the Company's Registration Statement Form S-18 (No.
33-36142-B).
10(g) Equipment Lease between the Company and Eaton Financial
Corporation incorporated by reference as an Exhibit to the
Company's Registration Statement on Form S-18 (No.
33-36142-B).
10(p) Line of Credit Agreement dated May 1, 1995 between the
Company and the First National Bank of Boston incorporated by
reference as an Exhibit to the Company's Form 10-KSB for
1995.
10(q) Agreement and Plan of Merger, dated February 26, 1997, by and
between White Mountain Cable Construction Corp.,
Conceptronic, Inc. and White Mountain Acquisition Company,
Inc. incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K, dated March 5, 1997.
10(r) Guarantee Agreement dated March 5, 1997 by Conceptronic in
favor of Citizens Bank New Hampshire incorporated by
reference to Exhibit 10 to the Company's Current Report on
Form 8-K, dated March 5, 1997.
10(s) Purchase and Sale Agreement dated September 19, 1997 by and
between TCS Communications, Inc., Arguss Holdings, Inc. and
White Mountain Cable Construction Corp. incorporated by
reference to Exhibit 10.01 to the Company's Current Report on
Form 8-K, dated September 19, 1997.
10(t) Agreement and Plan of Merger dated January 2, 1998 by and
between Can-Am Construction, Inc. Arguss Holdings, Inc. and
White Mountain Cable Construction Corp. incorporated by
reference to Exhibit 10.01 to the Company's Current Report on
Form 8-K, dated January 2, 1998.
10(u) Agreement and Plan of Merger dated January 2, 1998 by and
between Schenck Communications, Inc., Arguss Holdings, Inc.
and White Mountain Cable Construction Corp. incorporated by
reference to Exhibit 10.02 to the Company's Current Report on
Form 8-K, dated January 2, 1998.
10(v) Agreement and Plan of Merger dated October 6, 1997 by and
between Rite Cable Construction, Inc., Arguss Holdings, Inc.
and White Mountain Cable Construction Corp. incorporated by
reference to Exhibit 10.03 to the Company's Current Report on
Form 8-K, dated January 2, 1998.
10(w) Financing and Security Agreement dated September 11, 1997 by
and among Arguss Holdings, Inc., White Mountain Cable
Construction Corp., Conceptronic and NationsBank, NA and
related promissory notes incorporated by reference as an
Exhibit to the Company's Form 10-KSB for 1997.
16
<PAGE>
10(x) First Amendment to Financing and Security Agreements dated
October 6, 1997 by Arguss Holdings, Inc., White Mountain
Cable Construction Corp., Conceptronic and NationsBank, NA
and related promissory notes incorporated by reference as an
Exhibit to the Company's Form 10-KSB for 1997.
10(y) Second Amendment to Financing and Security Agreement, dated
January 2, 1998, by and among Arguss Holdings, Inc., White
Mountain Cable Construction Corp., Conceptronic, Inc. and
NationsBank, NA, incorporated by reference to Exhibit 10(y)
to the Company's Form 10-QSB for the quarter ended March 31,
1998.
10(z) Third Amendment to Financing and Security Agreement dated May
11, 1998, by and among Arguss Holdings, Inc., White Mountain
Cable Construction Corp., Conceptronic, Inc. and NationsBank,
NA, incorporated by reference to Exhibit 10(z) to the
Company's Form-10QSB for the quarter ended March 31, 1998.
10(aa) Fourth Amendment to Financing and Security Agreement dated
May 26, 1998, by and among Arguss Holdings, Inc., White
Mountain Cable Construction Corp., Conceptronic, Inc. and
NationsBank, NA.
10(ab) Fifth Amendment to Financing and Security Agreement dated May
31, 1998, by and among Arguss Holdings, Inc., White Mountain
Cable Construction Corp., Conceptronic, Inc. and NationsBank,
NA.
10(ac) Sixth Amendment to Financing and Security Agreement dated
June 26, 1998, by and among Arguss Holdings, Inc., White
Mountain Cable Construction Corp., Conceptronic, Inc. and
NationsBank, NA, incorporated by reference to Exhibit 10(y)
to the Company's Form 10-QSB for the quarter ended June 30,
1998.
10(ad) Seventh Amendment to Financing and Security Agreement dated
October 16, 1998, by and among Arguss Holdings, Inc., White
Mountain Cable Construction Corp., Conceptronic, Inc. and
NationsBank, NA.
10(ae) Agreement and Plan of Merger dated September 4, 1998 by and
between Underground Specialties, Inc., Arguss Holdings, Inc.
and White Mountain Cable Construction Corp. incorporated by
reference to Exhibit 10.01 to the Company's current report on
Form 8-K dated September 4, 1998 and filed on September 18,
1998.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of the Registrant.
23.01 Consent of KPMG Peat Marwick LLP.
23.02 Consent of John Killion PC.
23.03 Consent of Perzel and Lara, PA, CPA.
23.04 Consent of Barrett & Co.
27 Financial Data Schedule.
(a) (4) REPORTS ON FORM 8-K
In a Report on Form 8-K dated January 2, 1998, the Company reported
under Item 2 "Acquisition or Disposition of Assets" the acquisition through a
wholly owned subsidiary of Can-Am Construction, Inc., Schenck Communications,
Inc. and Rite Cable Construction, Inc.
(a) Financial Statements of Businesses Acquired: Audited balance sheet of
Can-Am as of July 31, 1997, and related statements of income, retained
earnings and cash flow for the year then ended.
Unaudited, separate company financial information of Can-Am as of
September 30, 1997, and related statements of income and cash flow for
the nine months then ended. Audited balance sheet of Schenck as of
September 30, 1997 and related statements of income, retained earnings
and cash flow for the year then ended.
In a Report on form 8-K/A dated September 4, 1998, the Company reported
under Item 2 "Acquisition or Disposition of Assets" the acquisition by the
Company through a wholly owned subsidiary of Underground Specialties, Inc.
("US").
(a) Financial statements of business acquired: Audited balance sheets
of US as of July 31, 1998 and 1997 and related statements of income,
retained earnings and cash flow for the years then ended.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Arguss Holdings, Inc.
By: /s/ Rainer H. Bosselmann
------------------------------
Rainer H. Bosselmann
Chief Executive Officer
March 16, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
/s/ Rainer H. Bosselmann
------------------------------
Rainer H. Bosselmann
Principal Executive Officer and Director
March 16, 1999
/s/ Garry A. Prime
------------------------------
Garry A. Prime
Director
March 16, 1999
/s/ William A. Barker
------------------------------
William A. Barker
Director
March 16, 1999
/s/ James D. Gerson
------------------------------
James D. Gerson
Director
March 16, 1999
/s/ Richard S. Perkins, Jr.
------------------------------
Richard S. Perkins, Jr.
Director
March 16, 1999
/s/ John A. Rolls
------------------------------
John A. Rolls
Director
March 16, 1999
/s/ Peter L. Winslow
------------------------------
Peter L. Winslow
Director
March 16, 1999
/s/ H. Haywood Miller III
------------------------------
H. Haywood Miller III
Executive Vice President and Secretary
March 16, 1999
/s/ Arthur F. Trudel
------------------------------
Arthur F. Trudel
Principal Accounting Officer and
Principal Financial Officer
March 16, 1999
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Arguss Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Arguss
Holdings, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule as listed in Item 14(a)2 of this
report. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Arguss
Holdings, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
----------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
February 12, 1999
19
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
------
<TABLE>
<CAPTION>
Current assets: 1998 1997
---- ----
<S> <C> <C>
Cash $ 1,819,000 $ 1,215,000
Restricted cash from customer advances 978,000 --
Accounts receivable, trade, including retainage
of $3,384,000 and $1,884,000, respectively
net of allowance for doubtful accounts of $265,000
and $129,000 in 1998 and 1997, respectively 35,263,000 13,590,000
Costs and earnings in excess of billings 8,707,000 340,000
Inventories 5,657,000 4,344,000
Other current assets 1,399,000 1,585,000
Deferred tax asset 1,844,000 313,000
------------ -----------
Total current assets 55,667,000 21,387,000
------------ -----------
Property, plant and equipment 39,359,000 15,512,000
Less accumulated depreciation 8,212,000 2,238,000
------------ -----------
Property, plant and equipment, net 31,147,000 13,274,000
------------ -----------
Goodwill, net 71,728,000 24,374,000
------------ -----------
$158,542,000 $59,035,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 11,429,000 $ 1,632,000
Short-term borrowings 8,038,000 4,294,000
Accounts payable 13,798,000 4,141,000
Billings in excess of costs and earnings 748,000 --
Customer advances 7,000,000 --
Accrued expenses and other liabilities 7,098,000 4,212,000
Due to former Schenck Communications
shareholders 18,696,000
------------ -----------
Total current liabilities 66,807,000 14,279,000
------------ -----------
Long-term debt, excluding current portion 23,187,000 6,995,000
Deferred income taxes 3,675,000 791,000
------------ -----------
Total liabilities 93,669,000 22,065,000
------------ -----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
authorized 1,000,000
shares; no shares issued
Common stock, $.01 par value,
authorized 20,000,000 shares 109,000 85,000
Additional paid-in capital 61,327,000 36,443,000
Retained earnings 3,437,000 442,000
------------ -----------
Total stockholders' equity 64,873,000 36,970,000
------------ -----------
$158,542,000 $59,035,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 145,017,000 $ 53,284,000 $ 15,653,000
Cost of sales,
excluding depreciation 110,803,000 37,636,000 10,440,000
------------- ------------ ------------
Gross profit, excluding depreciation 34,214,000 15,648,000 5,213,000
Selling, general and
administrative expenses 14,457,000 9,042,000 3,628,000
Depreciation 6,197,000 1,243,000 295,000
Goodwill amortization 2,754,000 946,000 --
Engineering and development expenses 1,401,000 1,055,000 1,007,000
------------- ------------ ------------
Income from operations 9,405,000 3,362,000 283,000
------------- ------------ ------------
Other income (expense):
Interest income and other 406,000 93,000 56,000
Interest expense (3,113,000) (652,000) (236,000)
(2,707,000) (559,000) (180,000)
Income before income taxes 6,698,000 2,803,000 103,000
Income taxes 3,703,000 998,000 15,000
------------- ------------ ------------
Net income $ 2,995,000 $ 1,805,000 $ 88,000
============= ============ ============
Earnings per share
- basic $ .28 $ .24 $ .04
============= ============ ============
- diluted $ .26 $ .22 $ .04
============= ============ ============
Weighted average number
of shares outstanding
- basic 10,575,000 7,674,000 2,033,000
============= ============ ============
- diluted 11,537,000 8,061,000 2,082,000
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings/ Total
------------ Paid-in Accumulated Stockholders'
Shares Class A Amount Capital Deficit Equity
------ ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at
December
31, 1995 1,700,000 -- $ 17,000 $ 5,199,000 ($1,451,000) $ 3,765,000
Issuance of
common stock -- 4,000,000 40,000 10,878,000 -- 10,918,000
Net income -- -- -- -- 88,000 88,000
---------- ---------- -------- ----------- ----------- -----------
Balance at
December
31, 1996 1,700,000 4,000,000 57,000 16,077,000 (1,363,000) 14,771,000
---------- ---------- -------- ----------- ----------- -----------
Issuance of
common stock 2,819,000 -- 28,000 20,366,000 -- 20,394,000
Conversion of
Class A
common stock 4,000,000 (4,000,000) -- -- -- --
Net income -- -- -- -- 1,805,000 1,805,000
---------- ---------- -------- ----------- ----------- -----------
Balance at
December 31,
1997 8,519,000 -- 85,000 36,443,000 442,000 36,970,000
Issuance of
common stock 2,330,000 -- 24,000 24,884,000 -- 24,908,000
Net income -- -- -- -- 2,995,000 2,995,000
---------- ---------- -------- ----------- ----------- -----------
Balance at
December 31,
1998 10,849,000 -- $109,000 $61,327,000 $ 3,437,000 $64,873,000
========== ========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,995,000 $ 1,805,000 $ 88,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 6,197,000 1,243,000 295,000
Goodwill amortization 2,754,000 946,000 --
Non cash stock compensation 2,204,000 516,000 --
Deferred income taxes (291,000) 91,000 --
Changes in assets and liabilities:
Accounts receivable (12,273,000) (1,704,000) (87,000)
Costs and earnings in excess of billings (8,528,000) (340,000) --
Inventories (1,038,000) 79,000 (893,000)
Other current assets 1,429,000 (1,192,000) (203,000)
Accounts payable 10,692,000 (1,203,000) 310,000
Billings in excess of costs and earnings 758,000 -- --
Accrued expenses and other liabilities (1,000) 2,093,000 52,000
------------ ------------ ------------
Net cash provided by (used in)
operating activities 4,898,000 2,334,000 (438,000)
------------ ------------ ------------
Cash flows from investing activities:
Disposal of fixed assets 608,000 -- --
Additions to fixed assets (16,937,000) (7,196,000) (96,000)
Net purchase of construction companies (19,040,000) (9,900,000) --
------------ ------------ ------------
Net cash used by investing activities (35,369,000) (17,096,000) (96,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from lines of credit 35,970,000 14,111,000 (844,000)
Repayments of financing debt (6,239,000) (8,622,000) (44,000)
Issuance of common stock 1,344,000 170,000 11,730,000
------------ ------------ ------------
Net cash provided by financing activities 31,075,000 5,659,000 10,842,000
------------ ------------ ------------
Net increase (decrease) in cash 604,000 (9,103,000) 10,308,000
Cash, at beginning of year 1,215,000 10,318,000 10,000
------------ ------------ ------------
Cash, at end of year $ 1,819,000 $ 1,215,000 $ 10,318,000
============ ============ ============
Supplemental disclosures of cash paid for:
Interest $ 3,082,000 $ 651,000 $ 237,000
Corporate income taxes $ 3,504,000 $ 2,010,000 --
</TABLE>
23
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Supplemental disclosure of non cash investing and financing activities:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Non-cash stock option
compensation expense $ 2,204 $ 526
Charge to additional paid-in capital
with respect to stock options granted
in connection with the issuance of
common stock -- -- $ 813
Acquisitions accounted for under
purchase method of accounting:
Fair value of net assets acquired
Accounts receivable $ 9,513,000 $ 8,969,000
Inventory -- 290,000
Other current assets 491,000 978,000
Property and equipment 7,546,000 5,982,000
------------ ------------
Total non cash assets 17,550,000 16,219,000
Liabilities (6,437,000) (7,854,000)
Long-term debt (2,455,000) (3,375,000)
Net non cash assets acquired 8,658,000 4,990,000
Cash acquired 1,725,000 661,000
------------ ------------
Fair value of net assets acquired 10,383,000 5,651,000
Excess of costs over fair value of
net assets acquired 50,028,000 25,320,000
------------ ------------
Purchase price $ 60,411,000 $ 30,971,000
============ ============
Common stock issued and issuable $ 33,789,000 $ 20,222,000
Liability payable to former SC
shareholders 7,581,000 --
Cash paid 20,766,000 11,410,000
Cash acquired (1,725,000) (661,000)
------------ ------------
Purchase price $ 60,411,000 $ 30,971,000
============ ============
</TABLE>
In 1996, there were no acquisitions.
In 1997, cash paid net of cash acquired in the supplemental disclosure varies
from the statement of cash flow due to timing differences between the date of
beneficial ownership and legal closing date. The accompanying notes are an
integral part of these consolidated financial statements.
24
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) ORGANIZATION
Prior to May 1997, Arguss Holdings, Inc. (the "Company") operated as a
single entity under the name "Conceptronic, Inc." On May 9, 1997, the
shareholders of the Company approved a plan providing for the internal
restructuring of the Company whereby the Company became a holding company and
its operating assets were held by wholly owned operating subsidiaries.
Accordingly, on May 9, 1997, the Company transferred substantially all of its
Conceptronic, Inc. operating assets to a newly formed, wholly owned subsidiary
of the Company, and the Company changed its name to "Arguss Holdings, Inc." The
subsidiary then adopted the name "Conceptronic, Inc.". The Company's other
wholly owned operating subsidiary is Arguss Communications Group, Inc. ("ACG").
The Company conducts its operations through its wholly owned
subsidiaries - ACG and Conceptronic. ACG is engaged in the construction,
reconstruction, maintenance, repair and expansion of telecommunications systems,
cable television and data systems, including providing aerial and underground
construction and splicing of both fiber optic and coaxial cable to major
telecommunications customers. ACG operates through its divisions - White
Mountain Cable ("WMC"), Can-Am ("CA"), TCS Communications ("TCS"), Rite Cable
("Rite"), Schenck Communications ("SC"), and Underground Specialties ("US").
Conceptronic manufactures and sells highly advanced, computer-controlled
equipment used in the SMT circuit assembly industry.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and all of its wholly owned subsidiaries. All significant inter-company
accounts and transactions are eliminated in consolidation.
(b) REVENUE RECOGNITION
ACG recognizes revenue using the percentage of completion method based upon an
efforts expended method during the period services are performed using
contractual pricing schedules which detail unit prices for individual services
performed. Changes to total estimated costs and anticipated losses, if any, are
recognized in the period determined. Conceptronic recognizes revenue when
equipment manufactured is shipped.
(c) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. The cost of
maintenance and repairs is charged to earnings when incurred; major expenditures
for betterments are capitalized and depreciated.
(e) GOODWILL
Goodwill is amortized over a 20-year period. The Company continually evaluates
whether events or circumstances have occurred that indicate that the remaining
useful life of goodwill may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company estimates the undiscounted cash flow of the
business segment, net of tax, over the remaining life of the asset in
determining whether the asset is recoverable.
(f) INCOME TAXES
25
<PAGE>
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
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years 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. A
valuation allowance reduces deferred tax assets when it is more likely than not
that a portion of the deferred tax asset will not be realized.
(g) EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net earnings available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per common share reflect the
maximum dilution that would have resulted from the exercise of stock options,
warrants and contingently issuable shares. (See Note 10.) Diluted earnings per
common share are computed by dividing net income by the weighted average number
of common shares and all dilutive securities.
1998
----
Earnings Net
per Share Shares Income
--------- ------ ------
Basic $ .28 10,575,000 $2,995,000
Effect of stock options
and warrants (.01) 581,000 --
Effect of estimated
contingently issuable
shares (.01) 381,000 --
------- ---------- ----------
Diluted $ .26 11,537,000 $2,995,000
======= ========== ==========
1997
----
Earnings Net
per Share Shares Income
--------- ------ ------
Basic $ .24 7,674,000 $1,805,000
Effect of stock options
and warrants (.02) 387,000 --
------- ---------- ----------
Diluted $ .22 8,061,000 $1,805,000
======= ========== ==========
1996
----
Earnings Net
per Share Shares Income
--------- ------ ------
Basic $ .04 2,033,000 $ 88,000
Effect of stock options
and warrants -- 49,000 --
------- ---------- ----------
Diluted $ .04 2,082,000 $ 88,000
======= ========== ==========
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, short-term borrowing and
accounts payable approximate fair values due to the short maturity of these
instruments. The fair value of long-term debt approximates the carrying value
because there have not been any material changes in market conditions or
specific circumstances since the instruments were recorded.
The fair value of Interest Rate Swaps is determined monthly, based on the
interest rate movements in the cash markets. Amounts due under such swaps are
settled monthly in cash. The Company has neither
26
<PAGE>
received nor expended significant amounts with respect to monthly valuations.
(See Note 8 for a discussion of the Company's use of Interest Rate Swaps and
their fair value at December 31, 1998.)
(i) IMPAIRMENT OF ASSETS
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less selling cost. Adoption of
this Statement did not have a material impact on the Company's financial
position, results of operations or liquidity.
(j) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period, the fair value of all stock-based awards on the date of grant. SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(k) 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.
(l) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into fixed interest rate exchange agreements ("Interest
Rate Swaps") which it uses to manage interest rate risk arising from the
Company's debt. Interest Rate Swaps are accounted for as hedges; and
accordingly, amounts receivable or payable under Interest Rate Swaps are
recognized as adjustments to interest expense. Gains and losses on early
terminations of Interest Rate Swaps are included in the carrying amount of the
related debt and amortized as yield adjustments over the remaining term of the
derivative financial instruments. The Company does not use such instruments for
trading purposes.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses depends on the intended use of the derivative and its
resulting designations. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company will adopt SFAS No. 133
by January 1, 2000. Adoption of SFAS No. 133 is not expected to have a material
impact on the consolidated financial statements.
(m) RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenses incurred and expensed were $1,096,000,
$489,000 and $385,000, respectively, for the years ended December 31, 1998, 1997
and 1996. Such expenses are classified in engineering and development expenses
in the accompanying Consolidated Statements of Operations.
(n) RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been reclassified
for comparability with the 1998 presentation.
27
<PAGE>
(3) CONTRACT ACCOUNTING
The retainage included in accounts receivable which represents amounts
withheld by contract with respect to ACG accounts receivable was $3,384,000 and
$1,884,000 at December 31, 1998 and 1997, respectively. The Company expects to
collect substantially all the retainage within one year.
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
Costs incurred on uncompleted contracts $41,703,000 $1,908,000
Estimated earnings 8,242,000 549,000
----------- ----------
49,945,000 2,457,000
Less: Billings to date 41,986,000 2,117,000
----------- ----------
$ 7,959,000 $ 340,000
=========== ==========
Included in accompanying balance sheets
under the following captions:
Costs and earnings in excess of billings $ 8,707,000 $ 340,000
=========== ==========
Billings in excess of costs and earnings $ 748,000 --
=========== ==========
(4) SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the fourth quarter of 1998. SFAS No.
131 establishes standards for reporting information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and assessing performance.
The company's two reportable segments are - telecom construction and
equipment manufacturing. The telecom construction segment is engaged in the
construction, reconstruction, telecommunications systems, cable television and
data systems, including providing aerial and underground construction and
splicing of both fiber optic and coaxial cable to major telecommunications
customers. Because the construction of a telecom system is a fully integrated
undertaking, the Company does not capture individually each component of the
construction functions performed for revenue reporting purposes. The
manufacturing segment produces and distributes highly advanced,
computer-controlled equipment used in the SMT circuit assembly industry.
The Company's reportable segments are organized in separate business
units with different management, customers, technology and services. The
respective segments account for their respective businesses using the same
accounting policies as described in note 2 to consolidated financial statements.
Summarized financial information concerning the Company's reportable segments
net of intercompany transactions is shown in the following table. The "other"
column includes the Company's corporate and unallocated expenses.
28
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
Telecom Equipment
Construction Manufacturing Other Consolidated
------------ ------------- ----- ------------
<S> <C> <C> <C> <C>
External sales $ 127,740,000 $ 17,277,000 -- $ 145,017,000
Cost of sales, excluding
depreciation 99,256,000 11,547,000 -- 110,803,000
------------- ------------ ------------ -------------
Gross profit, excluding
depreciation 28,484,000 5,730,000 -- 34,214,000
Operating expenses
excluding depreciation 7,505,000 5,909,000 240,000 13,654,000
Goodwill amortization 2,754,000 -- -- 2,754,000
Non cash stock compensation 2,163,000 -- 41,000 2,204,000
Depreciation expense 5,980,000 207,000 10,000 6,197,000
------------- ------------ ------------ -------------
Total operating expense 18,402,000 6,116,000 291,000 24,809,000
------------- ------------ ------------ -------------
Interest and other income 355,000 11,000 40,000 406,000
Interest expense (2,899,000) (189,000) (25,000) (3,113,000)
------------- ------------ ------------ -------------
Pretax income (loss) 7,538,000 (564,000) (276,000) 6,698,000
Income taxes (benefit) 4,034,000 (221,000) (110,000) 3,703,000
------------- ------------ ------------ -------------
Net income $ 3,504,000 ($ 343,000) ($ 166,000) $ 2,995,000
============= ============ ============ =============
Capital expenditures $ 16,817,000 $ 120,000 -- $ 16,937,000
============= ============ ============ =============
Property, plant
and equipment, net $ 29,831,000 $ 1,289,000 $ 27,000 $ 31,147,000
============= ============ ============ =============
Total assets $ 128,036,000 $ 9,237,000 $ 21,269,000 $ 158,542,000
============= ============ ============ =============
Total liabilities $ 64,577,000 $ 4,682,000 $ 24,410,000 $ 93,669,000
============= ============ ============ =============
</TABLE>
29
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Telecom Equipment
Construction Manufacturing Other Consolidated
------------ ------------- ----- ------------
<S> <C> <C> <C> <C>
Net sales $ 34,776,000 $ 18,508,000 -- $ 53,284,000
Cost of sales, excluding
depreciation 25,391,000 12,245,000 -- 37,636,000
------------ ------------ ----------- ------------
Gross profit, excluding
depreciation 9,385,000 6,263,000 -- 15,648,000
Operating expenses
excluding depreciation 3,368,000 6,213,000 -- 9,581,000
Goodwill amortization 946,000 -- -- 946,000
Non cash stock compensation 441,000 -- 75,000 516,000
Depreciation expense 1,028,000 210,000 5,000 1,243,000
------------ ------------ ----------- ------------
Total operating expense 5,783,000 6,423,000 80,000 12,212,000
------------ ------------ ----------- ------------
Interest and other income 34,000 15,000 44,000 93,000
Interest expense (485,000) (167,000) -- (652,000)
------------ ------------ ----------- ------------
Pretax income (loss) 3,151,000 (312,000) (36,000) 2,803,000
Income taxes (benefit) 1,691,000 (679,000) (14,000) 998,000
------------ ------------ ----------- ------------
Net income (loss) $ 1,460,000 $ 367,000 ($ 22,000) $ 1,805,000
============ ============ =========== ============
Capital expenditures $ 6,967,000 $ 186,000 $ 39,000 $ 7,153,000
============ ============ =========== ============
Property, plant
and equipment, net $ 11,859,000 $ 1,376,000 $ 39,000 $ 13,274,000
============ ============ =========== ============
Total assets $ 47,205,000 $ 10,720,000 $ 1,110,000 $ 59,035,000
============ ============ =========== ============
Total liabilities $ 15,177,000 $ 5,554,000 $ 1,334,000 $ 22,065,000
============ ============ =========== ============
</TABLE>
The Company has customers whose sales represent a significant portion of segment
net sales. Telecom construction sales in 1998 to three of these customers
accounted for 56% and in 1997 sales to two of these customers aggregated 58%.
Equipment manufacturing sales to one customer was 10% and 12%, respectively, of
that segment's net sales in 1998 and 1997.
30
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(5) INVENTORIES
Inventories consist of the following:
December 31,
-----------------------------
1998 1997
---- ----
Raw materials $3,831,000 $2,314,000
Work in process 687,000 512,000
Finished goods 1,139,000 1,518,000
---------- ----------
$5,657,000 $4,344,000
========== ==========
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
------------ Estimated
1998 1997 useful lives
---- ---- ------------
Buildings $ 3,188,000 $ 2,420,000 31.5 years
Transportation equipment 17,168,000 5,854,000 5 years
Machinery and equipment 16,987,000 5,817,000 3-7 years
Office furniture and fixtures 2,016,000 1,421,000 4-7 years
----------- -----------
Property, plant and equipment $39,359,000 $15,512,000
=========== ===========
(7) SHORT TERM BORROWINGS
The Company has a $15,000,000 revolving line of credit secured by
accounts receivable for ACG ("ACG Line"), and a $1,500,000 revolving line of
credit secured by accounts receivable and inventory for Conceptronic
("Conceptronic Line"). Both lines of credit mature on May 31, 1999. The ACG Line
bears a floating interest rate in relation to 30-Day LIBOR and the Conceptronic
Line bears a floating interest rate at Prime. Other information regarding
current lines of credit for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Conceptronic Conceptronic
ACG Line Line ACG Line Line
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Amount outstanding at
December 31, 1998 $6,778,000 $1,260,000 $2,869,000 $1,425,000
Weighted average interest rate
at December 31, 1998 7.27% 7.75% 7.62% 8.5%
Weighted average borrowing
outstanding during the year $6,021,000 $1,146,000 $1,004,000 $ 913,000
Weighted average interest rate
during the year 7.39% 8.32% 7.5% 8.5%
Maximum outstanding
during the year $9,889,000 $1,500,000 $3,595,000 $1,500,000
</TABLE>
31
<PAGE>
(8) LONG-TERM DEBT
In connection with the acquisitions of CA, SC and US and the purchase
of transportation equipment, as well as construction machinery and equipment,
the Company entered into term loan agreements during both 1998 and 1997 with
NationsBank, N.A. The Company's term facilities bear interest as a relationship
to LIBOR. Information regarding the term loans is included in the table below:
<TABLE>
<CAPTION>
1998 1997
Equipment Acquisition Equipment Acquisition
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Long-Term Debt $ 16,732,000 $ 15,397,000 $ 7,218,000 --
Less: Current Portion (4,083,000) (6,715,000) (1,503,000) --
------------ ------------ -----------
Long-Term Debt
Excluding Current Portion $ 12,649,000 $ 8,682,000 $ 5,715,000
============ ============ ===========
Weighted Average
Interest Rate @ 12/31 7.16% 8.13% 7.58% --
Weighted Average
Borrowing Outstanding
Throughout the Year $ 13,547,000 $ 13,959,000 $ 3,972,000 --
Weighted Average
Interest Rate
During the Year 7.18% 8.32% 7.86% --
Maximum Outstanding
During the Year $ 17,752,000 $ 15,705,000 $ 7,329,000 --
Principal Paid
During the Year $ 2,789,000 $ 3,120,000 $ 296,000 --
</TABLE>
Minimum repayments of principal on the aggregate term loan facilities are as
follows for the years ending December 31:
1999 $10,798,000
2000 6,784,000
2001 6,784,000
2002 5,888,000
2003 1,875,000
-----------
Total $32,129,000
===========
32
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
In order to hedge its variable-term loan interest rate risk, the
Company has entered into various Interest Rate Swaps pursuant to which it pays
fixed interest rates on $28,115,000 at approximately 7.42%, and receives
variable interest rates on the same notional amount. During the year ended
December 31, 1998, the Company's payments under Interest Rate Swaps were
$103,000. The Company had receipts of $3,000 pursuant to Interest Rate Swaps.
The Company's Interest Rate Swaps expire as follows:
Interest Rate Swaps 12/31/98
------------------- --------
Expiration Date Interest Rate Notional Amount Market Value
- --------------- ------------- --------------- ------------
Sept. 9, 2002 7.80% $ 4,250,000 ($ 94,000)
Nov. 1, 2002 7.87% $ 2,499,000 ($ 56,000)
Dec. 31, 2001 5.95% $ 2,400,000 ($ 31,000)
Dec. 31, 2002 5.98% $10,000,000 ($190,000)
Apr. 30, 2003 7.78% $ 3,668,000 ($ 90,000)
Sep. 30, 2003 6.88% $ 3,500,000 $ 3,000
Sep. 30, 2003 6.78% $ 7,000,000 $ 6,000
Other parties to the agreements expose the Company to credit losses for
the periodic settlements of amounts due under the Interest Rate Swaps in the
event of non-performance. However, the Company does not anticipate that it will
incur any material credit losses because it does not anticipate non-performance
by the counter parties.
WMC headquarters and maintenance facility, with a net book value at
December 31, 1998 of $774,000, is subject to a mortgage with the outstanding
balance of $686,000 at December 31, 1998 included as $27,000 in the current
portion of long term debt and $659,000 in long term debt, excluding the current
portion. The mortgage bears an interest rate fixed for five years at 8.18% and
reset as a relationship to US Treasury securities for the remainder of the term
of the financing The total term of the financing is ten years. The maturities of
the above, long term debt for each of the five years subsequent to December 31,
1998 are as follows: 1999 - $27,000; 2000 - $29,000; 2001 - $31,000; 2002 -
$34,000; 2003 - $37,000; and $528,000 thereafter.
In connection with ACG's acquisition of SC, USI, TCS and Rite, ACG
assumed responsibility for financing related to vehicles and machinery. Such
borrowings, which will be substantially repaid over the next 24 months, are
included in the current portion of long-term debt ($547,000) and long-term debt,
excluding the current portion ($268,000).
Conceptronic's headquarters and manufacturing facility with a net book
value at December 31, 1998 of $997,000 is subject to the following long-term
debt:
December 31,
1998 1997
---- ----
Mortgage payable in monthly installments
of $3,083, plus interest at the prime
rate, plus 1.5% payable through
December 2002.
At December 31, 1998, the interest rate
was 9.25%. $514,000 $548,000
Subordinated mortgage payable to Granite
State Development Corporation in equal
monthly installments of $1,689, plus
annual interest at 7.06%, payable
through February 2013. 472,000 490,000
-------- --------
986,000 1,038,000
-------- --------
Less current portion of long-term debt (57,000) (52,000)
-------- --------
Long-term debt, excluding current portion $929,000 $986,000
======== ========
33
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
The aggregate maturities of the above long-term debt for each of the
five years subsequent to December 31, 1998, are as follows: 1999, $57,000; 2000,
$62,000; 2001, $68,000; 2002, $417,000; and 2003, $27,000, and $355,000
thereafter.
(9) INCOME TAXES
Income tax expense for the years ended December 31, 1998, 1997 and 1996
is as follows:
1998 1997 1996
---- ---- ----
CURRENT:
Federal $ 3,139,000 $ 826,000 $ --
State 958,000 300,000 15,000
----------- ----------- -------
4,097,000 1,126,000 15,000
----------- ----------- -------
DEFERRED:
Federal (696,000) (199,000) --
State 302,000 71,000 --
----------- ----------- -------
(394,000) (128,000) --
----------- ----------- -------
Total tax expense $ 3,703,000 $ 998,000 $15,000
=========== =========== =======
Total income tax expense was allocated as follows:
Years Ended December 31 1998 1997 1996
---- ---- ----
Income from Operations $ 3,703,000 $ 998,000 $15,000
Stockholders equity for
compensation expense for
tax purposes in excess of
amounts recognized for
financial statement
purposes (463,000) -- --
----------- ----------- -------
$ 3,240,000 $ 998,000 $15,000
=========== =========== =======
The actual income tax for the years ended December 31, 1998, 1997 and
1996, differs from the "expected" tax computed by applying the U.S. federal
corporate income tax rate of 34% to earnings before income tax as follows:
1998 1997 1996
---- ---- ----
Computed "expected" tax $ 2,282,000 $ 953,000 $35,000
Increase (decrease)
resulting from:
State income taxes, net 399,000 162,000 (3,000)
Goodwill amortization 936,000 322,000 --
Change in deferred tax
valuation allowance and
movement in tax reserves -- (555,000) (24,000)
Other 86,000 116,000 7,000
----------- ----------- -------
$ 3,703,000 $ 998,000 $15,000
=========== =========== =======
34
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, are as follows:
1998 1997
---- ----
Assets:
Inventory $ 377,000 $ 262,000
Allowance for doubtful
accounts 111,000 48,000
Stock options 1,068,000 --
Tax carryforward 288,000 3,000
----------- -----------
Total deferred tax assets 1,844,000 313,000
----------- -----------
Liabilities:
Property and equipment (2,249,000) (750,000)
Contract revenue (1,426,000) --
Other -- (41,000)
----------- -----------
Total deferred tax
liabilities (3,675,000) (791,000)
Less valuation allowance -- --
----------- -----------
Net deferred tax
liabilities ($1,831,000) ($ 478,000)
=========== ===========
(10) STOCK OPTION PLAN
The Company established a stock option plan (the "Plan") in July 1991
pursuant to which the Company's Board of Directors may grant stock options to
officers and key employees. The Plan as amended in May 1998 authorizes the grant
of options for up to 2,400,000 shares of common stock.
Stock options granted may be "Incentive Stock Options" ("ISOs") or
"Non-qualified Stock Options" ("NSOs"). ISOs have an exercise price equal to the
stock's fair market value at the date of grant, a ten-year term and vest and
become fully exercisable one year from the date of grant. NSOs may be granted at
an exercise price less than the stock's fair market value at the date of grant
for a five-year term and vest and become fully exercisable one year from the
date of grant.
In connection with the consummation of the private placement of the
shares of the Company's Class A common stock in November 1996, the Company
granted to an individual, 150,000 options at $3.00 per share which have a
five-year term and vest and became fully exercisable at the date of grant. Also
in connection with the private placement, the Company issued 100,000 options to
another individual at $3.00 per share, which have a ten-year term and vest and
became fully exercisable at the date of grant. The difference between the
exercise price and the fair market value at the date of the grant of $6.25,
multiplied by the number of options granted, has reduced additional paid in
capital by $813,000. In addition, in November 1996, the Company granted to a
certain director, 40,000 options at $3.00 per share, which have a ten-year term
and vest and became fully exercisable at the date of grant.
35
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
During 1998, the Board of Directors granted 400,000 NSOs to employees
of acquired entities and corporate employees. The NSOs were granted at the
following prices:
Grant Price Options
----------- -------
$ 8.00 120,000
9.75 100,000
13.00 130,000
15.50 50,000
During 1997, the Board of Directors granted 318,000 NSOs to employees
of acquired entities and 55,000 NSOs to new corporate staff. The NSOs were
granted at the following prices:
Grant Price Options
----------- -------
$ 4.75 50,000
5.50 153,000
6.40 100,000
8.50 50,000
9.50 5,000
13.875 15,000
The Company applies APB No. 25 and related interpretations for its
stock option plan. Accordingly, compensation expense is not recorded for stock
options granted at fair market value. For NSOs, compensation equal to the excess
of market value over exercise price at date of grant is deferred and amortized
to expense over the vesting period. The compensation cost charged for the
400,000 and 373,000 NSOs granted in 1998 and 1997, respectively, to employees of
ACG and corporate employees and 40,000 options granted to a director in 1996 set
out above was $2,204,000 for 1998, $516,000 for 1997 and $50,000 for 1996. 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 income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1998 1997 1996
---- ---- ----
Net income:
As reported $2,995,000 $1,805,000 $88,000
Pro forma 1,292,000 1,392,000 23,000
Basic earnings per share:
As reported $.28 $.24 $.04
Pro forma $.12 $.18 $.01
Diluted earnings per share:
As reported $.26 $.22 $.04
Pro forma $.11 $.17 $.01
Pro forma net income reflects only options granted in 1998, 1997, 1996
and 1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.
The per share weighted average fair value of ISOs granted in 1998, 1997
and 1996 was $9.96, $6.11 and $4.19, respectively, on the date of grant using
the Black-Scholes option-pricing model with the following respective weighted
average assumptions: dividend yield of 0%; expected volatility of .58 in 1998,
.077 in 1997 and .823 in 1996; risk free interest rate of 4.9% in 1998, 5.5% in
1997 and 6% in 1996; and expected life of 5 years in 1998 and 1997 and 2.8 years
in 1996.
36
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Stock option activity during the periods indicated is as follows:
No. of Weighted Average
Options Exercise Price
------- --------------
Balance at December 31, 1995 138,000 $ 3.46
Granted 298,000 3.09
---------
Balance at December 31, 1996 436,000 3.21
Granted 641,000 7.85
Exercised (55,000) 3.12
Forfeited (9,000) 5.75
---------
Balance at December 31, 1997 1,013,000 6.10
Granted 524,000 11.75
Exercised (279,000) 4.87
Forfeited (70,000) 8.59
---------
Balance at December 31, 1998 1,188,000 $ 9.15
=========
At December 31, 1998, the range of exercise prices, the number of
options outstanding and the weighted average remaining contractual life of these
options are as follows:
Weighted Average
Exercise Price No. of Options Remaining Life
-------------- -------------- --------------
$ 3.00 233,000 4.45
$ 3.88 8,000 6.70
$ 4.75 50,000 3.29
$ 5.50 125,000 3.22
$ 5.75 18,000 8.03
$ 6.40 61,000 2.82
$ 7.25 1,000 8.36
$ 8.00 147,000 3.52
$ 8.50 12,000 3.77
$ 9.50 5,000 2.61
$ 9.75 95,000 4.01
$13.00 135,000 4.19
$13.88 15,000 3.81
$15.50 206,000 9.66
$15.63 33,000 9.87
$17.63 7,000 4.38
$17.88 37,000 7.74
---------
1,188,000
=========
At December 31, 1998 and 1997, the number of options exercisable was
703,000 and 380,000, respectively, and the weighted average exercise price of
those options was $6.65, and $3.22, respectively.
37
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
In connection with its November 1996 private placement of common stock,
the Company issued to the placement agent warrants to purchase 100,000 shares of
common stock. The exercise price is $3.00 per share, and the warrants are
exercisable through November 2000.
(11) DEFINED CONTRIBUTION PLANS
The Company has 401-K Savings Plans covering employees of Conceptronic,
SC, US and TCS. WMC sponsors a profit sharing plan whereby WMC makes
discretionary annual contributions for its eligible employees. The Company's
expense for these defined contribution plans totaled $318,000, $296,000 and
$4,000, respectively, in 1998, 1997 and 1996.
(12) CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts receivable.
Conceptronic's export sales for the years ended December 31, 1998, 1997 and
1996, were approximately 5%,16% and 35% of consolidated net sales,
respectively.
ACG's three largest customers accounted for approximately 47% of
consolidated net sales, and Conceptronic's four largest customers accounted for
approximately 3% of consolidated net sales for the year ended December 31, 1998.
The Company does not believe that it is exposed to significant credit risk due
to the creditworthiness of its customers.
(13) ACQUISITIONS
During 1998, the Company acquired three cable construction firms - CA
and SC on January 1, 1998 and US on August 1, 1998 for an aggregate purchase
price of $19,040,000 in cash (including acquisition costs) and 2,051,000 shares
of the Company's common stock, plus the assumption of debt. Each of the
acquisitions was accounted for as a purchase, and the results of operations of
the acquired companies were included in the consolidated results of the Company
from their respective acquisition dates. The Company, as a result of the
acquisitions recorded, prior to additional payments described below,
approximately $31.3 million in goodwill. This reflects the adjustments necessary
to allocate the individual purchase prices to the fair value of assets acquired
and liabilities assumed.
The SC and US purchase agreements contain provisions for additional
payments by the Company to former SC and US shareholders to be satisfied by the
Company's common stock and cash, if certain adjusted EBITDA thresholds for the
years ended December 31, 1998 and July 31, 1999, respectively, are met. To meet
EBITDA thresholds, SC and US divisions must have adjusted EBITDA in excess of
$2.3 million and $2.8 million, respectively. Results in excess of the adjusted
EBITDA threshold serve as the basis to determine the amount of the additional
payment. SC has exceeded its EBITDA threshold at December 31, 1998. Any
additional payments earned under the terms of the agreements will be recorded as
an increase in goodwill.
Former SC shareholders will receive an additional $7.6 million in cash
and 777,000 shares of the Company's common stock in full satisfaction of their
additional payments. The Company accrued $18,696,000 as a liability for the
combined cash and shares payable at December 31, 1998. One-half of an additional
payment to former US shareholders would be satisfied by the issuance of shares
of common stock valued at the lesser of $15.50 per share or the market value
with a minimum price of $13.625.
During 1997, the Company acquired three cable construction companies -
ACG, TCS and Rite - for an aggregate of $9.9 million in cash (including
acquisition costs), and 2,772,000 shares of the Company's common stock. Each of
the acquisitions was accounted for as a purchase, and the results of
38
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
operations of the acquired companies were included in the consolidated results
of the Company from their respective acquisition dates. As a result of the
acquisitions, approximately $25.3 million in goodwill was recorded by the
Company, which reflects the adjustments necessary to allocate the individual
purchase prices to the fair value of assets acquired and liabilities assumed.
The following unaudited pro forma data summarize the results of
operations for the years ended December 31, 1998, 1997 and 1996 as if the
acquisitions of WMC, TCS and Rite had been completed on January 1, 1996 and the
acquisitions of CA, SC and US had been completed on January 1, 1997. The
unaudited pro forma data give effect to actual operating results prior to the
acquisition and adjustments to interest expense, goodwill amortization, stock
option expense, income taxes and number of weighted average shares outstanding.
These pro forma amounts do not purport to be indicative of the results that
would have been actually obtained if the aforementioned acquisitions had
occurred on January 1, 1997 and January 1, 1996, respectively, or that may be
obtained in the future.
<TABLE>
<CAPTION>
Pro Forma Data (Unaudited)
- --------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $162,084,000 $110,508,000 $59,941,000
============ ============ ===========
Gross profit excluding depreciation $ 40,000,000 $ 30,390,000 $16,698,000
============ ============ ===========
Operating expenses
excluding depreciation $ 17,559,000 $ 14,961,000 $ 9,113,000
Depreciation 6,546,000 4,249,000 1,609,000
Goodwill amortization 2,993,000 2,993,000 1,409,000
Pretax income 9,976,000 5,981,000 2,684,000
Net income $ 4,804,000 $ 2,391,000 $ 1,047,000
Earnings per share - basic $ .45 $ .23 $ .22
- diluted $ .41 $ .22 $ .22
Weighted average shares
outstanding - basic 10,716,000 10,538,000 4,804,000
- diluted 11,677,000 10,926,000 4,854,000
</TABLE>
39
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) COMMITMENTS
The Company, through its subsidiaries, has entered into various
non-cancelable operating leases for facilities, transportation equipment and
machinery and equipment. Total rent expense for all operating leases was
approximately $1,062,000, $290,000 and $5,000 for 1998, 1997 and 1996,
respectively. The following is a schedule of future minimum lease payments for
operating leases that had initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1998:
1999 $948,000
2000 848,000
2001 227,000
2002 120,000
2003 120,000
Thereafter 120,000
----------
$2,389,000
==========
(15) LEASE WITH RELATED PARTY
Arguss leases an office and equipment maintenance facility from the
former owner of CA who is a significant shareholder in Arguss, as well as an
employee of ACG. The lease is on a month-to-month basis. Payments under the
lease aggregated $120,000 during the year ended December 31, 1998.
(16) LITIGATION
On December 13, 1991, the Company was served with a complaint from
Vitronics Corporation ("Vitronics"), one of the Company's competitors, alleging
patent infringement involving its reflow soldering ovens. Vitronics sought an
injunction, together with unspecified damages and costs. The claim was filed in
the United States Federal District Court, District of New Hampshire.
In August 1995, the U.S. District Court issued a directed verdict of
non-infringement in the Company's favor regarding method patent #4,654,502.
Additionally, a decision was reached on the apparatus patent #4,833,301 by a
jury, which found non-infringement on all past and current Conceptronic ovens.
Vitronics appealed the directed verdict on patent #4,654,502 and the United
States Court of Appeals for the First Circuit ("Court of Appeals") subsequently
reversed and remanded the case for further proceeding. In October 1997, the
Court of Appeals administratively dismissed the case.
In related actions, in April 1997, the United States Patent Office
("PTO") rejected certain claims of Vitronics' patent #4,654,502 as being
unpatentable. This decision by the PTO, if upheld on appeal, should terminate
the pending lawsuit. In December 1996, the Company named Vitronics and its
Chairman and CEO, James Manfield, in a lawsuit, filed in Superior Court of the
State of New Hampshire, citing malicious prosecution and abuse of process. The
suit claims Vitronics, when it initiated the 1991 patent infringement case
against Conceptronic, knew or should have known, that the suit was without
merit, and that claim 1 of U.S. Patent #4,883,301 was invalid, unenforceable
and, as a consequence, the patent was not infringed. In November 1997, Dover
Industries purchased Vitronics and succeeded in their interest.
In the opinion of counsel, the ultimate outcome of this litigation
cannot presently be determined. Management of the Company believes Vitronics'
claim is without merit, and that the Company will ultimately prevail.
Accordingly, no provision has been made in the accompanying consolidated
financial statements for any potential liability that might result.
40
<PAGE>
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 (A) (B) FIRST SECOND THIRD FOURTH
- ------------ ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $24,239,000 $35,163,000 $45,908,000 $39,707,000
Gross profit, excluding
depreciation 5,448,000 9,349,000 11,365,000 8,052,000
Net income (loss) ($773,000) $1,166,000 $2,166,000 $436,000
Basic earnings (loss)
per share ($.07) $.11 $.20 $.04
Diluted earnings (loss)
per share ($.07) $.11 $.18 $.04
1997 (A) (B) FIRST SECOND THIRD FOURTH
- ------------ ----- ------ ----- ------
Net sales $8,976,000 $12,682,000 $14,168,000 $17,458,000
Gross profit, excluding
depreciation 2,462,000 4,431,000 4,558,000 4,197,000
Net income (loss) $618,000 $774,000 $610,000 ( $197,000)
Basic earnings (loss)
per share $.09 $.11 $.08 ($.02)
Diluted earnings (loss)
per share $.08 $.10 $.08 ($.02)
1996 (B) FIRST SECOND THIRD FOURTH
- -------- ----- ------ ----- ------
Net sales $3,931,000 $3,630,000 $4,072,000 $4,021,000
Gross profit, excluding
depreciation 1,284,000 1,053,000 1,309,000 1,567,000
Net income (loss) $59,000 ($320,000) $136,000 $214,000
Basic earnings (loss)
per share $.03 ($.19) $.08 $.07
Diluted earnings (loss)
per share $.03 ($.19) $.08 $.07
</TABLE>
(A) Arguss acquired the following telecom construction firms on their
respective dates of acquisition: WMC - 1/1/97; TCS - 9/1/97; Rite -
10/1/97; CA - 1/1/98; SC - 1/1/98; and US - 8/1/98.
(B) Gross profit is net of depreciation expense relating to cost of sales of
$5,840,000, $1,176,000 and $295,000, in the years ended December 31, 1998,
1997 and 1996, respectively.
(C) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings (loss) per share in
1997 and 1996 does not equal the total for the year.
(18) SUBSEQUENT EVENT (UNAUDITED)
In February 1999, the Company received preliminary commitments of an
aggregate $100 million in syndicated financing from six money center and
regional banks to expand by $50 million its available financing previously held
solely by NationsBank, N.A. The commitments are subject to due diligence and the
negotiation of a comprehensive credit agreement. The syndicated financing, which
is led by Bank of America, is scheduled to close in March 1999.
41
FOURTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT
----------------------------------------------------
THIS FOURTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this
"Agreement") is made as of the 26th day of May, 1998 by and among ARGUSS
HOLDINGS, INC., a Delaware corporation ("Arguss"), WHITE MOUNTAIN CABLE
CONSTRUCTION CORP., a Delaware corporation ("White Mountain"), CONCEPTRONIC,
INC., a Delaware corporation ("Conceptronic"; together with Arguss and White
Mountain, the "Borrowers" and each a "Borrower") and NATIONSBANK, N.A., a
national banking association, its successors and assigns (the "Lender").
RECITALS
--------
A. The Lender has made certain loans available to the Borrowers, which
Loans are governed by that certain Financing and Security Agreement by and among
the Borrowers and the Lender dated September 11, 1997, which Financing and
Security Agreement has been amended by that certain First Amendment to Financing
and Security Agreement dated October 6, 1997, by and among the Borrowers and the
Lender and by that certain Second Amendment to Financing and Security Agreement
dated as of January 2, 1998 by and among the Borrowers and the Lender, and by
that certain Third Amendment to Financing and Security Agreement dated as of May
11, 1998 by and among the Borrowers and the Lender (the Financing and Security
Agreement, as amended from time to time is hereinafter called, the "Financing
Agreement").
B. All capitalized terms used herein and not otherwise defined shall
have the meanings given to such terms in the Financing Agreement.
<PAGE>
C. The Borrowers have requested that the Lender temporarily increase
the principal amount of the Facility 3 Loan from Eight Million and No/100
Dollars ($8,000,000.00) to Ten Million Five Hundred Thousand and No/100 Dollars
($10,500,000.00) to finance certain shortfalls in working capital, and the
Lender has agreed, on the condition, among others, that this Agreement be
executed and delivered by the Borrowers.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrowers and the Lender
hereby agree as follows:
1. RECITALS. The parties hereto acknowledge and agree that the above
Recitals are true and correct in all respect and that the same are incorporated
herein and made a part hereof by reference.
2. FACILITY 3 LOAN. From and after the effective date hereof, Section
2.03(a) of the Financing Agreement is amended and restated in its entirety as
follows:
SECTION 2.03 THE FACILITY 3 LOAN. (a) The Lender agrees to
lend to the White Mountain Borrowers on a revolving basis from time to
time the maximum principal amount of Ten Million Five Hundred Thousand
and No/100 Dollars ($10,500,000.00) (the "Facility 3 Loan"). The joint
and several obligation of the White Mountain Borrowers to repay the
advances under the Facility 3 Loan shall be evidenced by the White
Mountain Borrowers' Facility 3 Note dated September 11, 1997, as
increased, amended and restated in its entirety by that certain Amended
and Restated Revolving Promissory Note dated October 6, 1997 from the
White Mountain Borrowers in favor of the Lender, and as further
increased, amended and restated in its entirety by that certain Second
Amended and Restated Revolving Promissory Note dated January 2, 1998
from the White Mountain Borrowers in favor of the Lender, and as
further increased, amended and restated in its entirety by that certain
Third Amended and Restated Revolving Promissory Note dated May 11, 1998
from the White Mountain Borrowers infavor of the Lender in the maximum
principal amount of Ten Million Five Hundred Thousand and No/100
Dollars ($10,500,000.00) (the "Facility 3 Note") payable to the Lender
in the form attached hereto as EXHIBIT A-4. The Facility 3 Note shall
bear interest and shall be repaid by the White Mountain Borrowers in
the manner and at the times set forth in the Facility 3 Note.
2
<PAGE>
3. REPLACEMENT NOTE. EXHIBIT A-4 to the Financing Agreement is being
replaced in its entirety with EXHIBIT A-4 attached hereto. The White Mountain
Borrowers shall execute and deliver to the Lender on the date hereof their Third
Amended and Restated Revolving Promissory Note in the form of EXHIBIT A-4
attached hereto and incorporated herein by reference (the "Replacement Facility
3 Note") in substitution for and not satisfaction of, the issued and outstanding
Facility 3 Note. The Replacement Facility 3 Note shall be the "Facility 3 Note"
for all purposes of the Financing Documents. The Note being substituted pursuant
to this Agreement shall be marked "Replaced" and returned to the White Mountain
Borrowers promptly after the execution and delivery of the Replacement Facility
3 Note to the Lender.
4. CONDITIONS PRECEDENT. This Agreement shall become effective on the
date the Lender receives the following document, which shall be satisfactory in
form and substance to the Lender:
(a) The Replacement Facility 3 Note issued and delivered by the
White Mountain Borrowers; and
(b) Such other information, instruments, opinions, documents,
certificates and reports as the Lender may deem necessary.
5. COUNTERPARTS. This Agreement may be executed in any number of
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
6. FINANCING DOCUMENTS; GOVERNING LAW; ETC. This Agreement is one of
the Financing Documents defined in the Financing Agreement and shall be governed
and construed in
3
<PAGE>
accordance with the laws of the State of Maryland. The headings and captions in
this Agreement are for the convenience of the parties only and are not a part of
this Agreement.
7. ACKNOWLEDGMENTS. The Borrowers hereby confirm to the Lender the
enforceability and validity of each of the Financing Documents. In addition, the
Borrowers hereby agree to the execution and delivery of this Agreement and the
terms and provisions, covenants or agreements contained in this Agreement shall
not in any manner release, impair, lessen, modify, waive or otherwise limit the
liability and obligations of the Borrowers under the terms of any of the
Financing Documents, except as otherwise specifically set forth in this
Agreement. The Borrowers issue, remake, ratify and confirm the representations,
warranties and covenants contained in the Financing Documents. Nothing in this
Agreement shall be deemed to waive any defaults existing under any of the
Financing Documents as of the date hereof.
8. MODIFICATIONS. This Agreement may not be supplemented, changed,
waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered under seal by the duly authorized representatives as of
the date and year first written above.
WITNESS/ATTEST: ARGUSS HOLDINGS, INC.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Chief Financial Officer
WITNESS/ATTEST: WHITE MOUNTAIN CABLE
CONSTRUCTION CORP.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Vice President
WITNESS/ATTEST: CONCEPTRONIC, INC.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Vice President
WITNESS: NATIONSBANK, N.A.
By:/s/ Maria Manos (SEAL)
- -------------------------- -----------------------------
Maria Manos
Vice President
5
FIFTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT
---------------------------------------------------
THIS FIFTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this
"Agreement") is made as of the 31st day of May, 1998 by and among ARGUSS
HOLDINGS, INC., a Delaware corporation ("Arguss"), WHITE MOUNTAIN CABLE
CONSTRUCTION CORP., a Delaware corporation ("White Mountain"), CONCEPTRONIC,
INC., a Delaware corporation ("Conceptronic"; together with Arguss and White
Mountain, the "Borrowers" and each a "Borrower") and NATIONSBANK, N.A., a
national banking association, its successors and assigns (the "Lender").
RECITALS
--------
A. The Lender has made certain loans available to the Borrowers, which
Loans are governed by that certain Financing and Security Agreement by and among
the Borrowers and the Lender dated September 11, 1997, which Financing and
Security Agreement has been amended by (i) that certain First Amendment to
Financing and Security Agreement dated October 6, 1997, by and among the
Borrowers and the Lender, (ii) by that certain Second Amendment to Financing and
Security Agreement dated as of January 2, 1998 by and among the Borrowers and
the Lender, (iii) by that certain Third Amendment to Financing and Security
Agreement dated as of May 11, 1998 by and among the Borrowers and the Lender,
and (iv) by that certain Fourth Amendment to Financing and Security Agreement
dated as of May 26, 1998 by and among the Borrowers and the Lender (the
Financing and Security Agreement, as amended from time to time is hereinafter
called, the "Financing Agreement").
<PAGE>
B. All capitalized terms used herein and not otherwise defined shall
have the meanings given to such terms in the Financing Agreement.
C. The Borrowers have requested that the Lender extend the maturity of
the Facility 4 Loan and the Lender has agreed, on the condition, among others,
that this Agreement be executed and delivered by the Borrowers.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrowers and the Lender
hereby agree as follows:
1. RECITALS. The parties hereto acknowledge and agree that the above
Recitals are true and correct in all respect and that the same are incorporated
herein and made a part hereof by reference.
2. FACILITY 4 LOAN. From and after the effective date hereof, Section
2.04(c) of the Financing Agreement is amended and restated in its entirety as
follows:
(c) The joint and several obligation of the Conceptronic
Borrowers to repay the advances under the Facility 4 Loan shall be
evidenced by the Conceptronic Borrowers' Facility 4 Revolving
Promissory Note dated September 11, 1997, as amended and restated in
its entirety by that certain Amended and Restated Revolving Promissory
Note dated as of May 31, 1998 (the "Facility 4 Note") payable to the
Lender in the form attached hereto as EXHIBIT A-5. The Facility 4 Note
shall bear interest and shall be repaid by the Conceptronic Borrowers
in the manner and at the times set forth in the Facility 4 Note.
3. REPLACEMENT NOTE. EXHIBIT A-5 to the Financing Agreement is being
replaced in its entirety with EXHIBIT A-5 attached hereto. The Conceptronic
Borrowers shall execute and deliver to the Lender on the date hereof their
Amended and Restated Revolving Promissory Note in the form of EXHIBIT A-5
attached hereto and incorporated herein by reference (the "Replacement Facility
4 Note") in substitution for and not satisfaction of, the issued and
2
<PAGE>
outstanding Facility 4 Note. The Replacement Facility 4 Note shall be the
"Facility 4 Note" for all purposes of the Financing Documents. The Note being
substituted pursuant to this Agreement shall be marked "Replaced" and returned
to the Conceptronic Borrowers promptly after the execution and delivery of the
Replacement Facility 4 Note to the Lender.
4. CONDITIONS PRECEDENT. This Agreement shall become effective on the
date the Lender receives the following document, which shall be satisfactory in
form and substance to the Lender:
(a) The Replacement Facility 4 Note issued and delivered by the
Conceptronic Borrowers; and
(b) Such other information, instruments, opinions, documents,
certificates and reports as the Lender may deem necessary.
5. COUNTERPARTS. This Agreement may be executed in any number of
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
6. FINANCING DOCUMENTS; GOVERNING LAW; ETC. This Agreement is one of
the Financing Documents defined in the Financing Agreement and shall be governed
and construed in accordance with the laws of the State of Maryland. The headings
and captions in this Agreement are for the convenience of the parties only and
are not a part of this Agreement.
7. ACKNOWLEDGMENTS. The Borrowers hereby confirm to the Lender the
enforceability and validity of each of the Financing Documents. In addition, the
Borrowers hereby agree to the execution and delivery of this Agreement and the
terms and provisions, covenants or agreements contained in this Agreement shall
not in any manner release, impair,
3
<PAGE>
lessen, modify, waive or otherwise limit the liability and obligations of the
Borrowers under the terms of any of the Financing Documents, except as otherwise
specifically set forth in this Agreement. The Borrowers issue, remake, ratify
and confirm the representations, warranties and covenants contained in the
Financing Documents. Nothing in this Agreement shall be deemed to waive any
defaults existing under any of the Financing Documents as of the date hereof.
8. MODIFICATIONS. This Agreement may not be supplemented, changed,
waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered under seal by the duly authorized representatives as of
the date and year first written above.
WITNESS/ATTEST: ARGUSS HOLDINGS, INC.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Chief Financial Officer
WITNESS/ATTEST: WHITE MOUNTAIN CABLE
CONSTRUCTION CORP.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Vice President
WITNESS/ATTEST: CONCEPTRONIC, INC.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Vice President
WITNESS: NATIONSBANK, N.A.
By:/s/ Maria Manos (SEAL)
- -------------------------- -----------------------------
Maria Manos
Vice President
5
SEVENTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT
-----------------------------------------------------
THIS SEVENTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this
"Agreement") is made as of the ___ day of October, 1998 by and among ARGUSS
HOLDINGS, INC., a Delaware corporation ("Arguss"), WHITE MOUNTAIN CABLE
CONSTRUCTION CORP., a Delaware corporation ("White Mountain"), CONCEPTRONIC,
INC., a Delaware corporation ("Conceptronic"; together with Arguss and White
Mountain, the "Borrowers" and each a "Borrower") and NATIONSBANK, N.A., a
national banking association, its successors and assigns (the "Lender").
RECITALS
--------
A. The Lender has made certain loans available to the Borrowers, which
Loans are governed by that certain Financing and Security Agreement by and among
the Borrowers and the Lender dated September 11, 1997 (the Financing and
Security Agreement, as amended from time to time is hereinafter called, the
"Financing Agreement").
B. All capitalized terms used herein and not otherwise defined shall
have the meanings given to such terms in the Financing Agreement.
C. The White Mountain Borrowers have entered into an Agreement and Plan
of Merger (together with any and all amendments, modifications, and supplements
thereto, restatements thereof, and substitutes therefor, the "Purchase
Agreement"), with the stockholders of Underground Specialties, Inc., a
Washington corporation ("Underground Specialties"), pursuant to which, White
Mountain will, among other things, acquire all of the outstanding stock of
Underground Specialties and merge Underground Specialties with White Mountain,
so that White Mountain is the sole surviving corporate entity (the "Purchase
Transaction") and the
<PAGE>
Borrowers have requested that the Lender make a term loan ("Facility 9 Loan") to
the White Mountain Borrowers in the principal amount of Three Million Five
Hundred Thousand and No/100 Dollars ($3,500,000.00) to finance the Purchase
Transaction and the Lender has agreed, on the condition, among others, that this
Agreement be executed and delivered by the Borrowers.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrowers and the Lender
hereby agree as follows:
1. RECITALS. The parties hereto acknowledge and agree that the above
Recitals are true and correct in all respect and that the same are incorporated
herein and made a part hereof by reference.
2. DEFINED TERMS. From and after the effective date hereof, the
definitions of "Loan", "Loans", "Note" and "Notes" set forth in Section 1.01 of
the Financing Agreement are hereby amended and restated in their entirety as
follows:
"Loan" means a Facility 1 Loan, a Facility 2 Loan, any
Facility 2 Term Loan, a Facility 3 Loan, a Facility 4 Loan, a Facility
5 Loan, a Facility 6 Loan, a Facility 7 Loan, a Facility 8 Loan, or any
Facility 8 Term Loan, a Facility 9 Loan, as the case may be, and
"Loans" mean the Facility 1 Loan, the Facility 2 Loan, each Facility 2
Term Loan, the Facility 3 Loan, the Facility 4 Loan, the Facility 5
Loan, the Facility 6 Loan, the Facility 7 Loan, the Facility 8 Loan,
any Facility 8 Term Loan and the Facility 9 Loan.
"Note" means the Facility 1 Note, the Facility 2 Note, each
Facility 2 Term Note, the Facility 3 Note, the Facility 4 Note, the
Facility 5 Note, the Facility 6 Note, the Facility 7 Note, the Facility
8 Note or each Facility 8 Term Note, the Facility 9 Note, as the case
may be, and "Notes" mean collectively the Facility 1 Note, the Facility
2 Note, each Facility 2 Term Note, the Facility 3 Note, the Facility 4
Note, the Facility 5 Note, the Facility 6 Note, the Facility 7 Note,
the Facility 8 Note, each Facility 8 Term Note, the Facility 9 Note,
and any other promissory note which may from time to time evidence the
Obligations.
2
<PAGE>
3. FACILITY 8 LOAN. From and after the effective date hereof, the
following Section is added immediately after Section 2.04.4 of the Financing
Agreement, as Section 2.04.5 of the Financing Agreement:
SECTION 2.04.5 THE FACILITY 9 LOAN. (a) The Lender agrees to
lend to the White Mountain Borrowers the principal amount of Three
Million Five Hundred Thousand and No/100 Dollars ($3,500,000.00) (the
"Facility 9 Loan"). The joint and several obligation of the White
Mountain Borrowers to repay the advances under the Facility 9 Loan
shall be evidenced by the White Mountain Borrowers' Facility 9 Note of
even date herewith (the "Facility 9 Note") payable to the Lender in the
form attached hereto as EXHIBIT A-10. The Facility 9 Note shall bear
interest and shall be repaid by the White Mountain Borrowers in the
manner and at the times set forth in the Facility 9 Note.
(b) The White Mountain Borrowers may prepay the principal sum
outstanding on the Facility 9 Loan only in accordance with the terms of
the Facility 9 Note. Sums borrowed and repaid may not be readvanced
under the Facility 9 Note.
(c) The proceeds of the Facility 9 Loan shall be used by the
White Mountain Borrowers for the purposes of financing the Purchase
Transaction, and, unless prior written consent of the Lender is
obtained, for no other purpose.
4. GRANT OF SECURITY INTEREST. White Mountain hereby assigns, pledges
and grants to the Lender, and agrees that the Lender shall have a perfected and
continuing security interest in, and lien on, all assets of Underground
Specialties' acquired by White Mountain, including, without limitation: (a)
Accounts, chattel paper, Equipment, General Intangibles, Motor Vehicles,
documents, instruments and Inventory, Leases (whether or not designated with
initial capital letters), as those (whether or not designated with initial
capital letters), as those terms are defined in the Uniform Commercial Code as
presently adopted and in effect in the State and shall also cover, without
limitation, any and all property specifically included in those respective terms
in this Agreement or in the Financing Documents; (b) returned, rejected or
repossessed goods, the sale or lease of which shall have given or shall give
rise to an Account or Chattel Paper;
3
<PAGE>
(c) insurance policies relating to the foregoing; (d) books and records in
whatever media (paper, electronic or otherwise) recorded or stored, with respect
to the foregoing and all Equipment and General Intangibles necessary or
beneficial to retain, access and/or process the information contained in those
books and records; and (e) cash and non-cash proceeds and products of the
foregoing.
5. FEES. In consideration of the Lender's agreement to make the
Facility 9 Loan pursuant to this Agreement, the Borrowers shall pay the Lender
on the date hereof a fee in the amount of one percent (1.0%) of the Facility 9
Loan. This fee is considered earned when paid and are not refundable.
6. CONDITIONS PRECEDENT. This Agreement shall become effective on the
date the Lender receives the following document, which shall be satisfactory in
form and substance to the Lender:
(a) The Facility 9 Note issued and delivered by the White Mountain
Borrowers.
(b) All documents and instruments (including, without limitation,
UCC-1 and UCC-3 statements) required to be filed, registered or recorded in
order to create, in favor of the Lender, a perfected first Lien in the
Collateral acquired as a result of the Acquisition of Underground Specialties
(subject only to the Permitted Liens) in form and in sufficient number for
filing, registration, and recording in each office in each jurisdiction in which
such filings, registrations and recordations are required, and (b) delivered
such evidence as the Lender may deem satisfactory that the Lender will have a
first Lien on such Collateral (including, but not limited to, lien searches) and
that all necessary filing fees and all recording and other similar fees,
4
<PAGE>
and all Taxes and other expenses related to such filings, registrations and
recordings will be or have been paid in full.
(c) A true correct and complete copy of the Purchase Agreement and
any and all other agreements, documents or instruments, previously, now or
hereafter executed and delivered by the Borrowers, or any other Person in
connection with the Purchase Agreement Transaction (the "Purchase Agreement
Documents"), together with a certificate signed by the Borrowers certifying that
the Purchase Agreement Documents furnished to the Lender are true, correct, in
full force and effect and the provisions thereof have not been in any way
modified, amended or waived.
(d) True and complete copies of the Articles of Merger between
Underground Specialties and White Mountain.
(e) The favorable opinion of counsel for the Borrowers
satisfactory to the Lender.
(f) A certificate addressed to the Lender, certified by the
principal financial officer of the Company, which shall indicate after the
completion of the Purchase Agreement Transaction the Borrowers' compliance with
all financial covenants, and shall detail the method of calculation of all such
financial covenants.
(g) Such other information, instruments, opinions, documents,
certificates and reports as the Lender may deem necessary.
7. EVENTS OF DEFAULT. In addition to the Events of Default enumerated
in the Notes, the Financing Agreement and/or any of the other Financing
Documents, the occurrence of any of the following events shall constitute an
event of default and shall entitle the Lender to exercise all
5
<PAGE>
rights and remedies provided in the Notes and the Financing Agreement, as well
as all other rights and remedies provided to the Lender under the terms of any
of the other Financing Documents as a result of the occurrence of the same:
(a) Any Borrower shall fail to comply with the terms of any
covenant or agreement contained herein; or
(b) Any information contained in any financial statement,
schedule, report or any other document heretofore or hereafter delivered by any
Borrower or any other party or parties to the Lender in connection with the
Loans proves at any time to be not in all respects true and accurate, or any of
the Borrowers, or any such other party or parties shall have failed to state any
material fact or any fact necessary to make such information not misleading, or
any representation or warranty contained herein, in any of the Financing
Documents, or in any other document, certificate or opinion heretofore or
hereafter delivered to the Lender in connection with the Loans, proves at any
time to be incorrect or misleading in any material respect.
5. SOLVENCY. The Borrowers represent that the fair saleable value of
each Borrower's assets (including goodwill minus disposition costs) exceeds the
fair value of its liabilities; no Borrower is left with unreasonably small
capital after the transactions contemplated by this Agreement; and each Borrower
is able to pay its debts (including trade debts) as they mature.
8. COUNTERPARTS. This Agreement may be executed in any number of
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
9. FINANCING DOCUMENTS; GOVERNING LAW; ETC. This Agreement is one of
the Financing Documents defined in the Financing Agreement and shall be governed
and construed in
6
<PAGE>
accordance with the laws of the State of Maryland. The headings and captions in
this Agreement are for the convenience of the parties only and are not a part of
this Agreement.
10. ACKNOWLEDGMENTS. The Borrowers hereby confirm to the Lender the
enforceability and validity of each of the Financing Documents. In addition, the
Borrowers hereby agree to the execution and delivery of this Agreement and the
terms and provisions, covenants or agreements contained in this Agreement shall
not in any manner release, impair, lessen, modify, waive or otherwise limit the
liability and obligations of the Borrowers under the terms of any of the
Financing Documents, except as otherwise specifically set forth in this
Agreement. The Borrowers issue, remake, ratify and confirm the representations,
warranties and covenants contained in the Financing Documents. Nothing in this
Agreement shall be deemed to waive any defaults existing under any of the
Financing Documents as of the date hereof.
11. MODIFICATIONS. This Agreement may not be supplemented, changed,
waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
[SIGNATURES ON FOLLOWING PAGE]
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered under seal by the duly authorized representatives as of
the date and year first written above.
WITNESS/ATTEST: ARGUSS HOLDINGS, INC.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Chief Financial Officer
WITNESS/ATTEST: WHITE MOUNTAIN CABLE
CONSTRUCTION CORP.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Vice President
WITNESS/ATTEST: CONCEPTRONIC, INC.
By:/s/ Arthur F. Trudel (SEAL)
- -------------------------- -----------------------------
Arthur F. Trudel
Vice President
WITNESS: NATIONSBANK, N.A.
By:/s/ Maria Manos (SEAL)
- -------------------------- -----------------------------
Maria Manos
Senior Vice President
8
ARGUSS HOLDINGS, INC.
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
For the Years Ended December 31
1998
----
Earnings Net
per Share Shares Income
--------- ------ ------
Basic $ .28 10,575,000 $2,995,000
Effect of stock options
and warrants (.01) 581,000
Effect of estimated
additional shares to be
issued for SC purchase (.01) 381,000 --
------- ---------- ----------
Diluted $ .26 11,537,000 $2,995,000
======= ========== ==========
1997
----
Earnings Net
per Share Shares Income
--------- ------ ------
Basic $ .24 7,674,000 $1,805,000
Effect of stock options
and warrants (.02) 387,000 --
------- ---------- ----------
Diluted $ .22 8,061,000 $1,805,000
======= ========== ==========
1996
----
Earnings Net
per Share Shares Income
--------- ------ ------
Basic $ .04 2,033,000 $ 88,000
Effect of stock options
and warrants -- 49,000 --
------- ---------- ----------
Diluted $ .04 2,082,000 $ 88,000
======= ========== ==========
ARGUSS HOLDINGS, INC.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1998
State of Names Used
Subsidiary Incorporation in Business
---------- ------------- -----------
Arguss Services Corp. Delaware Arguss Services
Arguss Communications
Group, Inc. Delaware Arguss Communications Group, Inc.
White Mountain Cable
Construction
TCS Communications
Can-Am Construction
Schenck Communications
Underground Specialties
Rite Cable Construction
Schenck of Alaska Schenck Communications
Conceptronic, Inc. Delaware Conceptronic
ACCOUNTANT'S CONSENT
The Board of Directors
Arguss Holdings, Inc.
We consent to incorporation by reference in the registration statements (No.
333-19277 and No. 333-27017) on Form S-8 and in the registration statements (No.
333-33083 and No. 333-62779) on Form S-3 of Arguss Holdings, Inc. of our report
dated February 12, 1999, relating to the consolidated balance sheets of Arguss
Holdings, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years then ended, which report appears in the December 31, 1998 annual report on
Form 10-K of Arguss Holdings, Inc.
/s/ KPMG Peat Marwick LLP
------------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
March 12, 1999
[LETTERHEAD OF JOHN KILLION, PC]
Exhibit 23.02
Consent of
JOHN KILLION, P.C.
Certified Public Accountant
We consent to the incorporation by reference of our audit report dated
January 30, 1997, filed as an exhibit to Arguss Holdings, Inc. (the "Company")
Form 8-K dated March 5, 1997 in the Company's Annual Report on Form 10-K for the
year ending December 31, 1998.
/s/ John J. Killion, Jr.
- ------------------------------
John J. Killion, Jr.
Concord, New Hampshire
March 12, 1999
Exhibit 23.03
Consent of:
Perzel and Lara, P.A., CPAs
We consent to the incorporation by reference of our report dated March 17,
1997, filed as an exhibit to the Arguss Holdings, Inc. (the "Company") Form 8-K
dated September 19, 1997 in the Company's Annual Report on Form 10-K for the
year ending December 31, 1998.
/s/ Patricia Perzel
- ------------------------
Patricia Perzel
Oldsmar, FL
March 12, 1999
[LETTERHEAD OF BARRETT & COMPANY]
March 12, 1999
Mr. Art Trudel
Arguss Holdings, Inc.
One Church Street, Suite 302
Rockville, MD 20850
Consent of:
Barrett & Company
Certified Public Accountants
16703 SE McGillivray Blvd., Suite 175
Vancouver, WA 98683-3418
We consent to the incorporation by reference of our report dated September 10,
1998, filed as an exhibit to the Arguss Holdings, Inc. (the "Company") Form 8-K
dated September 4, 1998, in the Company's Annual Report on Form 10-K for the
year ending December 31, 1998.
/s/ Lance A. Barrett
- ------------------------
Lance A. Barrett
Certified Public Accountant
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> $1,819,000 $1,215,000 $10,318,000
<SECURITIES> 0 0 0
<RECEIVABLES> 35,263,000 13,590,000 2,917,000
<ALLOWANCES> 0 0 0
<INVENTORY> 5,657,000 4,344,000 4,133,000
<CURRENT-ASSETS> 55,667,000 21,387,000 17,714,000
<PP&E> 39,359,000 15,512,000 2,525,000
<DEPRECIATION> (8,212,000) (2,238,000) (1,132,000)
<TOTAL-ASSETS> 158,542,000 59,035,000 19,107,000
<CURRENT-LIABILITIES> 66,807,000 14,279,000 3,298,000
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 61,436,000 36,528,000 16,134,000
<OTHER-SE> 3,437,000 442,000 (1,363,000)
<TOTAL-LIABILITY-AND-EQUITY> 158,542,000 59,035,000 19,107,000
<SALES> 145,017,000 53,284,000 15,653,000
<TOTAL-REVENUES> 145,017,000 53,284,000 15,653,000
<CGS> 110,803,000 37,636,000 10,440,000
<TOTAL-COSTS> 110,803,000 37,636,000 10,440,000
<OTHER-EXPENSES> 24,809,000 12,286,000 4,930,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 3,113,000 652,000 236,000
<INCOME-PRETAX> 6,698,000 2,803,000 103,000
<INCOME-TAX> (3,703,000) (998,000) 15,000
<INCOME-CONTINUING> 2,995,000 1,805,000 88,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,995,000 1,805,000 88,000
<EPS-PRIMARY> .28 .24 .04
<EPS-DILUTED> .26 .22 .04
</TABLE>
