SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 1999 Commission File Number: 0-19589
------------- -------
ARGUSS HOLDINGS, INC.
----------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 02-0413153
--------------------------------- -----------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
One Church Street, Suite 302, Rockville, Maryland 20850
- ------------------------------------------------- -----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 301-315-0027
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:
----- -----
As of July 19, 1999, there were 11,863,261 shares of Common Stock, $ .01 par
value per share, outstanding.
<PAGE>
ARGUSS HOLDINGS, INC.
INDEX
Part I - Financial Information: Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited)-
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations (Unaudited)-
Three Months and Six Months Ended June 30, 1999
and June 30, 1998 4
Consolidated Statements of Cash Flows (Unaudited)-
Six Months Ended June 30, 1999 and June 30, 1998 5
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 20
Part II - Other Information 20
Items 1 through 6
Signatures
Exhibits
2
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 1999 Dec. 31, 1998
------------- -------------
Assets
Current assets:
Cash $ 577,000 $ 1,809,000
Restricted cash from customer advances 6,888,000 978,000
Accounts receivable trade, net of allowance
for doubtful accounts of $362,000 and
$265,000 in 1999 and 1998, respectively 22,863,000 31,877,000
Costs and earnings in excess of billings 30,677,000 9,565,000
Inventories 298,000 413,000
Other current assets 1,662,000 1,233,000
Deferred tax assets 1,469,000 1,485,000
------------ ------------
Total current assets 64,434,000 47,360,000
Property, plant and equipment, net 34,857,000 29,858,000
Goodwill, net 73,798,000 71,728,000
Net assets of discontinued operations 4,562,000 4,914,000
------------ ------------
$177,651,000 $153,860,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion long-term debt $ 7,348,000 $ 11,372,000
Short-term borrowings 25,060,000 6,777,000
Accounts payable 13,569,000 12,343,000
Billings in excess of costs and earnings -- 748,000
Customer advances 13,840,000 7,000,000
Accrued expenses and other liabilities 9,528,000 6,117,000
Due to former Schenck Communications
shareholders -- 18,696,000
------------ ------------
Total current liabilities 69,345,000 63,053,000
------------ ------------
Long-term debt, excluding current portion 22,186,000 22,259,000
Deferred income taxes 3,510,000 3,675,000
------------ ------------
Total liabilities 95,041,000 88,987,000
------------ ------------
Stockholders' equity:
Common stock $.01 par value 119,000 109,000
Additional paid-in capital 76,878,000 61,327,000
Retained earnings 5,613,000 3,437,000
------------ ------------
Total stockholders' equity 82,610,000 64,873,000
------------ ------------
$177,651,000 $153,860,000
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 43,856,000 $ 30,435,000 $ 81,663,000 $ 49,625,000
Cost of sales, excluding depreciation 31,936,000 22,736,000 62,518,000 38,087,000
------------ ------------ ------------ ------------
Gross profit, excluding depreciation 11,920,000 7,699,000 19,145,000 11,538,000
Selling, general and administrative expenses 3,327,000 2,653,000 6,016,000 4,871,000
Depreciation 2,019,000 1,416,000 3,917,000 2,686,000
Goodwill amortization 1,056,000 651,000 2,004,000 1,305,000
------------ ------------ ------------ ------------
Operating income 5,518,000 2,979,000 7,208,000 2,676,000
------------ ------------ ------------ ------------
Other income (expense):
Interest income and other 159,000 120,000 192,000 171,000
Interest expense (1,099,000) (723,000) (1,953,000) (1,351,000)
------------ ------------ ------------ ------------
Income from continuing operations
before income tax expense 4,578,000 2,376,000 5,447,000 1,496,000
Income tax expense (2,194,000) (1,211,000) (2,906,000) (1,121,000)
------------ ------------ ------------ ------------
Income from continuing operations 2,384,000 1,165,000 2,541,000 375,000
------------ ------------ ------------ ------------
Discontinued operations:
Income (loss) from discontinued
operations net of tax benefit of $104,000
and $116,000 in 1999 and tax expense
of $1,000 and $11,000 in 1998,
respectively (156,000) 1,000 (182,000) 18,000
Loss on disposal of discontinued operations,
net of tax benefit of $101,000 and
$121,000 in 1999 (152,000) (182,000)
------------ ------------ ------------ ------------
Net income $ 2,076,000 $ 1,166,000 $ 2,177,000 $ 393,000
============ ============ ============ ============
Earnings per common share -- basic:
Income from continuing operations $ .20 $ .11 $ .22 $ .04
Loss from discontinued operations (.01) -- (.02) --
Loss on disposal of discontinued operations (.01) (.01)
------------ ------------ ------------ ------------
Earnings per common share $ .18 $ .11 $ .19 $ .04
============ ============ ============ ============
Earnings per common share -- diluted:
Income from continuing operations $ .18 $ .11 $ .20 $ .04
Loss from discontinued operations (.01) -- (.02) --
Loss on disposal of discontinued operations (.01) (.01)
------------ ------------ ------------ ------------
Earnings per common share $ .16 $ .11 $ .17 $ .04
============ ============ ============ ============
Weighted average shares outstanding:
-- basic 11,751,000 10,421,000 11,704,000 10,388,000
============ ============ ============ ============
-- diluted 13,044,000 11,103,000 12,816,000 11,041,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Cash flows from operating activities:
Net income $ 2,177,000 $ 393,000
(Income) loss from discontinued operations, net 182,000 (18,000)
Loss on disposal of discontinued operations, net 182,000 --
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities of continuing operations:
Depreciation 3,917,000 2,686,000
Goodwill amortization 2,004,000 1,305,000
Non cash stock compensation -- 1,101,000
Deferred income taxes -- 99,000
Changes in assets and liabilities:
Accounts receivable 9,886,000 (9,338,000)
Costs and earnings in excess of billings (20,182,000) (6,006,000)
Inventories 115,000 --
Other current assets (377,000) 780,000
Accounts payable 1,115,000 6,078,000
Billings in excess of costs and earnings (748,000) --
Accrued expenses and other liabilities 3,246,000 (121,000)
------------ ------------
Net cash flows provided by (used in) operating
activities of continuing operations 1,517,000 (3,041,000)
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (8,422,000) (7,258,000)
Additional payment to former Schenck
Communications shareholders (7,604,000) --
Purchase of telecom construction
companies, net (1,750,000) (13,799,000)
------------ ------------
Net cash used in investing activities of
continuing operations (17,776,000) (21,057,000)
------------ ------------
Cash flows from financing activities:
Proceeds from lines of credit 18,283,000 26,188,000
Net repayments of lines of credit (4,097,000) (2,552,000)
Issuance of common stock 841,000 713,000
------------ ------------
Net cash provided by financing activities
of continuing operations 15,027,000 24,349,000
------------ ------------
Net increase (decrease) in cash (1,232,000) 251,000
------------ ------------
Cash at beginning of period 1,809,000 1,189,000
------------ ------------
Cash at end of period $ 577,000 $ 1,440,000
============ ============
5
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Supplemental disclosures of cash paid for:
Interest $ 1,825,000 $ 1,437,000
Corporate income taxes 1,392,000 138,000
Supplemental disclosure of
investing and financing activities:
Fair value of assets acquired:
Accounts receivable 872,000 $ 5,710,000
Other current assets 36,000 375,000
Property and equipment 494,000 5,398,000
------------ ------------
Total non-cash assets 1,402,000 11,483,000
Liabilities (271,000) (3,620,000)
Long-term debt (111,000) (1,888,000)
------------ ------------
Net non-cash assets acquired 1,020,000 5,975,000
Cash acquired -- 1,725,000
------------ ------------
Fair value of net assets acquired 1,020,000 7,700,000
Excess of costs over fair value
of net assets acquired 2,767,000 27,373,000
------------ ------------
Purchase price $ 3,787,000 $ 35,073,000
============ ============
Common stock issued 2,037,000 $ 21,274,000
Cash paid 1,750,000 15,524,000
Cash acquired -- (1,725,000)
------------ ------------
Purchase price $ 3,787,000 $ 35,073,000
============ ============
(1) During the six months ended June 30, 1999, former Schenck Communications
shareholders received 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 accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
A) 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." ("Conceptronic"). The Company's other wholly owned
operating subsidiary is Arguss Communications Group, Inc. ("ACG") formerly White
Mountain Cable Construction Corp.
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 ("WMC"), Can-Am ("CA"), TCS ("TCS"), Schenck ("SC"), and Underground
Specialties ("US"). Conceptronic manufactures and sells highly advanced,
computer-controlled equipment used in the SMT circuit assembly industry.
On March 17, 1999, the Company announced the proposed spin-off of its
wholly owned subsidiary, Conceptronic, Inc., to a new entity. Also announced as
part of the spin-off transaction was the merger of Heller Industries, Inc.
("Heller") into the new entity. The Company has terminated negotiations with
Heller, and ceased plans to spin-off Conceptronic to shareholders. The Company
is currently pursuing other alternatives with interested parties. The Company
believes that the carrying amount of Conceptronic approximates its fair value.
Loss on disposal of discontinued operations reflects the estimated operating
loss, net of income tax benefit, for the period subsequent to June 30, 1999
through the date of disposition which the Company believes will occur during
1999.
B) BASIS FOR PRESENTATION
As permitted by the rules of the Securities and Exchange Commission
(the "Commission") applicable to quarterly reports on Form 10-Q, these notes are
condensed and do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the financial statements and
related notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the Commission on March 16, 1999.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments considered necessary to present fairly the
financial position of the Company as of June 30, 1999 and the results of
operations and cash flows for the periods presented. The Company prepares its
interim financial information using the same accounting principles as it does
for its annual financial statements.
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.
Certain amounts in the 1998 financial statements have been reclassified
for comparability with the 1999 presentation.
(C) EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income,
income from continuing operations, loss from discontinued operations and loss on
disposition of discontinued operations 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 and warrants and contingently issuable
7
<PAGE>
shares. Diluted earnings per common share are computed by dividing net income,
income from continuing operations, loss from discontinued operations and loss on
disposition of discontinued operations by the weighted average number of common
shares and all dilutive securities.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
-------------
Effect of Effect of Estimated
Stock Contingently
Options and Issuable
Basic Warrants Shares Diluted
----- -------- ------ -------
<S> <C> <C> <C> <C>
Income from
continuing operations $ 2,541,000 -- -- $ 2,541,000
------------ ------- ------- ------------
Loss from
discontinued operations (182,000) -- -- (182,000)
Loss on disposal of
discontinued operation (182,000) -- -- (182,000)
------------ ------- ------- ------------
Net income $ 2,177,000 -- -- $ 2,177,000
============ ======= ======= ============
Per share:
Income from
continuing operations $ .22 (.01) (.01) $ .20
Loss from
discontinued operations (.02) -- -- (.02)
Loss on disposal of
discontinued operations (.01) -- -- (.01)
------------ ------- ------- ------------
Net income $ .19 (.01) (.01) $ .17
============ ======= ======= ============
Weighted average shares
Outstanding 11,704,000 561,000 551,000 12,816,000
============ ======= ======= ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
-------------
Effect of Effect of Estimated
Stock Contingently
Options and Issuable
Basic Warrants Shares Diluted
----- -------- ------ -------
<S> <C> <C> <C> <C>
Income from
continuing operations $ 2,384,000 -- -- $ 2,384,000
------------ ------- ------- ------------
Loss from discontinued
operations (156,000) -- -- (156,000)
Loss on disposal of
discontinued operations (152,000) -- -- (152,000)
------------ ------- ------- ------------
Net income $ 2,076,000 -- -- $ 2,076,000
============ ======= ======= ============
Per share:
Income from
continuing operations $ .20 (.01) (.01) $ .18
Loss from
discontinued operations (.01) -- -- (.01)
Loss on disposal of
discontinued operations (.01) -- -- (.01)
------------ ------- ------- ------------
Net income $ .18 (.01) (.01) $ .16
============ ======= ======= ============
Weighted average shares
outstanding 11,751,000 593,000 700,000 13,044,000
============ ======= ======= ============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
-------------
Effect of Effect of Estimated
Stock Contingently
Options and Issuable
Basic Warrants Shares Diluted
----- -------- ------ -------
<S> <C> <C> <C> <C>
Income from
continuing operations $ 375,000 -- -- $ 375,000
Income from
discontinued operations 18,000 -- -- 18,000
------------ ------- ------- ------------
Net income $ 393,000 -- -- $ 393,000
============ ======= ======= ============
Per share:
Income from
continuing operations $ .04 $ .04
------------ ------- ------- ------------
Net income $ .04 -- -- $ .04
============ ======= ======= ============
Weighted average shares
outstanding 10,388,000 653,000 -- 11,041,000
============ ======= ======= ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998
-------------
Effect of Effect of Estimated
Stock Contingently
Options and Issuable
Basic Warrants Shares Diluted
----- -------- ------ -------
<S> <C> <C> <C> <C>
Income from
continuing operations $ 1,165,000 -- -- $ 1,165,000
Income from
discontinued operations 1,000 -- -- 1,000
------------ ------- ------- ------------
Net income $ 1,166,000 -- -- $ 1,166,000
============ ======= ======= ============
Per share:
Income from
continuing operations $ .11 -- -- $ .11
------------ ------- ------- ------------
Net income $ .11 -- -- $ .11
============ ======= ======= ============
Weighted average shares
outstanding 10,421,000 682,000 -- 11,103,000
============ ======= ======= ============
</TABLE>
D) CONTRACT ACCOUNTING
The retainage included in accounts receivable, representing amounts
withheld by contract with respect to ACG accounts receivable, was $3,529,000 and
$3,384,000 at June 30, 1999 and December 31, 1998, respectively. The Company
expects to collect substantially all the retainage within one year.
9
<PAGE>
June 30, December 31,
1999 1998
----------- ------------
Costs incurred on uncompleted contracts $51,049,000 $42,561,000
Estimated earnings 11,441,000 8,242,000
----------- -----------
62,490,000 50,803,000
Less: Billings to date 31,813,000 41,986,000
----------- -----------
$30,677,000 $ 8,817,000
=========== ===========
Included in accompanying balance sheets
under the following captions:
Costs and earnings in excess of billings $30,677,000 $ 9,565,000
=========== ===========
Billings in excess of costs and earnings $ -- $ 748,000
=========== ===========
E) ACQUISITIONS
During the six months ended June 30, 1999, the Company paid former SC
shareholders an additional $7.6 million in cash and 777,000 shares of the
Company's common stock in full satisfaction of their additional payments. In
1998, the Company acquired US. The US purchase agreement contains provisions for
additional payments by the Company to former US shareholders to be satisfied by
the Company's common stock and cash, if certain adjusted EBITDA thresholds for
the year ended July 31, 1999 are met. To meet EBITDA thresholds, the US division
must have adjusted EBITDA in excess of $2.1 million. Results in excess of the
adjusted EBITDA threshold serve as the basis to determine the amount of the
additional payment. The Company estimates that the additional payment will
aggregate approximately $11.8 million in cash and 760,000 shares of the
Company's common stock. Additional payments earned under the terms of the
agreements will be recorded as an increase in goodwill.
F) 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
corporate/other. Effective with the quarter ended March 31, 1999, the Company
removed manufacturing from its reportable segments because the Company is
reporting the manufacturing segment as discontinued operations. (See Note H to
Consolidated Financial Statements.) Summarized financial information for the
three months and six months ended June 30, 1998 has been restated to reflect the
revised reportable segments. The telecom construction segment is engaged in the
construction, reconstruction of telecommunications systems, cable television and
data systems, including providing aerial and underground construction and
splicing for 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
corporate/other segment provides managerial, capital markets and financial
reporting services to the Company.
The Company's reportable segments are organized in separate business
units with different management, technology and services. The respective
segments account for their respective businesses using the same accounting
policies used in the consolidated financial statements. Summarized financial
information concerning the Company's reportable segments net of inter-company
transactions is shown in the following table. The "Corporate/Other" column
includes the Company's unallocated corporate expenses.
10
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, 1999
-------------
Telecom
Construction Corporate/Other Total
------------ --------------- -----
<S> <C> <C> <C>
External sales $ 81,663,000 $ 81,663,000
Cost of sales, excluding
depreciation 62,518,000 62,518,000
------------- -------------
Gross profit, excluding
depreciation 19,145,000 19,145,000
Operating expenses,
excluding depreciation 6,013,000 $ 3,000 6,016,000
Goodwill amortization 2,004,000 2,004,000
Depreciation 3,917,000 3,917,000
Interest and other income (expense) 178,000 14,000 192,000
Interest expense (1,953,000) -- (1,953,000)
------------- ------------ -------------
Income before income tax
from continuing operations $ 5,436,000 $ 11,000 $ 5,447,000
============= ============ =============
Capital expenditures $ 8,420,000 $ 2,000 $ 8,422,000
============= ============ =============
Property, plant and equipment, net $ 34,832,000 $ 25,000 $ 34,857,000
============= ============ =============
Total assets $ 170,823,000 $ 2,266,000 $ 173,089,000(1)
============= ============ =============
Total liabilities $ 88,918,000 $ 6,123,000 $ 95,041,000
============= ============ =============
</TABLE>
(1) Segment information does not add to total assets because of $4,562,000 in
net assets of discontinued operations.
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, 1998
-------------
Telecom
Construction Corporate/Other Total
------------ --------------- -----
<S> <C> <C> <C>
External sales $ 49,625,000 $ 49,625,000
Cost of sales, excluding
depreciation 38,087,000 38,087,000
------------- -------------
Gross profit, excluding
depreciation 11,538,000 11,538,000
Operating expenses,
excluding depreciation 3,770,000 3,770,000
Goodwill amortization 1,305,000 1,305,000
Non cash stock compensation 1,064,000 37,000 1,101,000
Depreciation 2,686,000 2,686,000
Interest and other income 156,000 15,000 171,000
Interest expense (1,351,000) -- (1,351,000)
------------- ------------ -------------
Income before income tax expense
from continuing operations $ 1,518,000 $ (22,000) $ 1,496,000
============= ============ =============
Capital expenditures $ 7,258,000 $ 7,258,000
============= =============
Property, plant and equipment, net $ 21,828,000 $ 33,000 $ 21,861,000
============= ============ =============
Total assets $ 113,153,000 $ 738,000 $ 113,891,000(2)
============= ============ =============
Total liabilities $ 59,592,000 $ 2,207,000 $ 61,799,000
============= ============ =============
</TABLE>
(2) Segment information does not add to total assets because of $5,681,000 in
net assets of discontinued operations.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, 1999
-------------
Telecom
Construction Corporate/Other Total
------------ --------------- -----
<S> <C> <C> <C>
External sales $ 43,856,000 $ 43,856,000
Cost of sales, excluding
depreciation 31,936,000 31,936,000
------------- -------------
Gross profit, excluding
depreciation 11,920,000 11,920,000
Operating expenses,
excluding depreciation 3,327,000 3,327,000
Goodwill amortization 1,056,000 1,056,000
Depreciation 2,019,000 2,019,000
Interest and other income 154,000 5,000 159,000
Interest expense (1,099,000) -- (1,099,000)
------------- ------------ -------------
Income before income tax expense
from continuing operations $ 4,573,000 $ 5,000 $ 4,578,000
============= ============ =============
Capital expenditures $ 4,781,000 $ 2,000 $ 4,783,000
============= ============ =============
Property, plant and equipment, net $ 34,832,000 $ 25,000 $ 34,857,000
============= ============ =============
Total assets $ 170,823,000 $ 2,266,000 $ 173,089,000(1)
============= ============ =============
Total liabilities $ 88,918,000 $ 6,123,000 $ 95,041,000
============= ============ =============
</TABLE>
(1) Segment information does not add to total assets because of $4,562,000 in
net assets of discontinued operations.
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, 1998
-------------
Telecom
Construction Corporate/Other Total
------------ --------------- -----
<S> <C> <C> <C>
External sales $ 30,435,000 $ 30,435,000
Cost of sales, excluding
depreciation 22,736,000 22,736,000
------------- -------------
Gross profit, excluding
depreciation 7,699,000 7,699,000
Operating expenses,
excluding depreciation 1,963,000 1,963,000
Goodwill amortization 651,000 651,000
Non cash stock compensation 678,000 12,000 690,000
Depreciation 1,416,000 1,416,000
Interest and other income 111,000 9,000 120,000
Interest expense (723,000) -- (723,000)
------------- ------------ -------------
Income before income tax expense
from continuing operations $ 2,379,000 $ (3,000) $ 2,376,000
============= ============ =============
Capital expenditures $ 2,771,000 $ 2,771,000
============= =============
Property, plant and equipment, net $ 21,828,000 $ 33,000 $ 21,861,000
============= ============ =============
Total assets $ 113,153,000 $ 738,000 $ 113,891,000(2)
============= ============ =============
Total liabilities $ 59,592,000 $ 2,207,000 $ 61,799,000
============= ============ =============
</TABLE>
(2) Segment information does not add to total assets because of $5,681,000 in
net assets of discontinued operations.
12
<PAGE>
(G) BANK FINANCING
In March 1999, the Company increased its availability under credit
facilities with banks. The Company expanded the credit facility to $100 million
from approximately $50 million, and increased the number of banks participating
to six money center and regional banks. The Company pledged the capital stock of
its wholly owned subsidiaries and the majority of the Company's assets to secure
the credit facility. The Company intends to use the credit facility to provide
working capital to finance acquisitions and the purchase of capital assets and
for other corporate purposes. The credit facility has a $70 million revolving
credit feature, as well as a $30 million amortizing five-year term facility.
Amounts borrowed under the credit facility will bear interest as a relationship
to the London Interbank Offered Rate ("LIBOR"), plus 1.25% to 2.25% as
determined by the ratio of the Company's total funded debt to EBITDA. The
Company incurs commitment fees of .25% to .50% as determined by the ratio of the
Company's total funded debt to EBITDA on any unused borrowing capacity under the
credit facility.
In the ordinary course of business, the Company is exposed to floating
interest rate risk. In March 1999, the Company terminated interest rate swaps
entered into as a hedge against variable term loan interest rate risk. The
aggregate loss of approximately $330,000 on termination of the interest rate
swaps is being amortized over the remaining life of the related term loan which
was hedged.
To hedge the variable term loan interest rate risk for $30 million in
notional amount, five-year, term financing facility, the Company has entered
into an interest rate swap pursuant to which it pays fixed interest rates and
receives variable interest rates on the same notional amount. During the six
months ended June 30, 1999, the Company's payment under the interest rate swap
was $17,550. The Company had no receipts pursuant to the interest rate swap.
(H) DISCONTINUED OPERATIONS
On March 17, 1999, the Company announced the proposed spin-off of its
wholly owned subsidiary, Conceptronic, Inc., to a new entity. Also announced as
part of the spin-off transaction was the merger of Heller Industries, Inc.
("Heller") into the new entity. The Company has terminated negotiations with
Heller, and ceased plans to spin-off Conceptronic to shareholders. The Company
is currently pursuing other alternatives with interested parties. The Company
believes that the carrying amount of Conceptronic approximates its fair value.
Loss on disposal of discontinued operations reflects the estimated operating
loss, net of income tax benefit, for the period subsequent to June 30, 1999
through the date of disposition which the Company believes will occur during
1999.
The Company's consolidated financial statements have been restated to
reflect the categorization of Conceptronic as a discontinued operation.
Accordingly, the revenues, costs and expenses, assets and liabilities and cash
flows of Conceptronic have been excluded from the respective captions in the
Consolidated Balance Sheets, Consolidated Statements of Operations and
Consolidated Statements of Cash Flows and have been reported through the
estimated date of disposition as "Income from discontinued operations", net of
applicable income taxes, and as "Net assets of discontinued operations",
respectively.
Summarized financial information for the discontinued operations is as
follows:
For the six months ended:
June 30, 1999 June 30, 1998
------------- -------------
Net sales $ 7,951,000 $9,777,000
Income (loss) before income tax
expense (benefit) (298,000) 29,000
Net income (loss) ($ 182,000) $ 18,000
At June 30, 1999 At June 30, 1998
---------------- ----------------
Current assets $ 7,976,000 $9,036,000
Total assets 9,665,000 10,728,000
Current liabilities 3,986,000 4,090,000
Total liabilities 5,103,000 5,047,000
Net assets of discontinued operations $ 4,562,000(1) $5,681,000
(1) Includes effect of loss on disposal of discontinued operations.
13
<PAGE>
For the three months ended:
June 30, 1999 June 30, 1998
------------- -------------
Net sales $ 4,022,000 $4,728,000
Income (loss) before income tax
expense (benefit) (260,000) 2,000
Net income (loss) ($ 156,000) $ 1,000
(I) RELATED-PARTY TRANSACTIONS
During the three months ended June 30, 1999, the Company acquired
offices and equipment maintenance facilities from the former owners of CA and
SC, who are significant shareholders in Arguss, as well as employees of ACG. The
aggregate purchase price was $2,608,000, and was negotiated based on
independent, third party appraisals.
14
<PAGE>
ARGUSS HOLDINGS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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." ("Conceptronic"). The Company's other wholly owned
operating subsidiary is Arguss Communications Group ("ACG") formerly White
Mountain Cable Construction Corp. ACG operates through its divisions -- White
Mountain ("WM"), Can-Am ("CA"), TCS, Schenck ("SC"), and Underground Specialties
("US").
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. Conceptronic manufactures and sells highly
advanced, computer-controlled equipment used in the Surface Mount Technology
circuit assembly industry.
On March 17, 1999, the Company announced the proposed spin-off of its
wholly owned subsidiary, Conceptronic, Inc., to a new entity. Also announced as
part of the spin-off transaction was the merger of Heller Industries, Inc.
("Heller") into the new entity. The Company has terminated negotiations with
Heller, and ceased plans to spin-off Conceptronic to shareholders. The Company
is currently pursuing other alternatives with interested parties. The Company
believes that the carrying amount of Conceptronic approximates its fair value.
Loss on disposal of discontinued operations reflects the estimated operating
loss, net of income tax benefit, for the period subsequent to June 30, 1999
through the date of disposition which the Company believes will occur during
1999.
The Company's consolidated financial statements have been restated to
reflect Conceptronic as a discontinued operation. Accordingly, the revenues,
costs and expenses, assets and liabilities and cash flows of Conceptronic have
been excluded from the respective captions in the Consolidated Balance Sheets,
Consolidated Statements of Operations and Consolidated Statements of Cash Flows
and have been reported through the estimated date of disposition as "Income from
discontinued operations", net of applicable income taxes, and as "Net assets of
discontinued operations", respectively.
Summarized financial information for the discontinued operations is as
follows:
For the six months ended:
June 30, 1999 June 30, 1998
------------- -------------
Net sales $ 7,951,000 $9,777,000
Income (loss) before income tax
expense (benefit) (298,000) 29,000
Net income (loss) $ (182,000) $ 18,000
At June 30, At December 31,
1999 1998
----------- ---------------
Current assets $ 7,976,000 9,036,000
Total assets 9,665,000 10,728,000
Current liabilities 3,986,000 4,090,000
Total liabilities 5,103,000 5,047,000
Net assets of discontinued operations $ 4,562,000(1) $5,681,000
(1) Includes effect of loss on disposal of discontinued operations.
For the three months ended:
June 30, 1999 June 30, 1998
------------- -------------
Net sales $ 4,022,000 $4,728,000
Income (loss) before income tax
expense (benefit) (260,000) 2,000
Net income (loss) ($ 156,000) $ 1,000
15
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30, 1998.
The Company had consolidated net income of $2,076,000 for the quarter
ended June 30, 1999, compared to income of $1,166,000 for the quarter ended June
30, 1998 and income from continuing operations of $2,384,000 for the quarter
ended June 30, 1999, compared to income from continuing operations of $1,165,000
in the comparable period in 1998. The Company's results from continuing
operations were favorably impacted by the maturation of projects started during
1998 in Orlando, FL, Portland, OR and Denver CO.
Consolidated net sales in the second quarter of 1999 were approximately
$43,856,000, compared to approximately $30,435,000 for the second quarter of
1998, an increase of 44% due, in part, to the acquisition of US which accounted
for $9,738,000 or 32% of the net sales for the three months ended June 30, 1998.
Operations of ACG owned for at least one year had a net sales increase of
$3,683,000 or 12% for the quarter ended June 30, 1999. The Company believes that
internal growth should continue at the level achieved for the six months ended
June 30, 1999 with the start of the San Jose, CA contract and general increased
levels of activity at all ACG divisions.
Consolidated gross profit margin, excluding depreciation, was 27% of
sales in the second quarter of 1999, compared to 25% for the second quarter of
1998. The improvement in margins is due primarily to US, which had superior
margins in its long-haul business. Margins are also improving in the
aforementioned maturing projects in Orlando, FL, Portland, OR and Denver, CO.
The improvements in margins was offset, in part, by reduced levels of
construction activity in Alaska and customer delays in the roll-out of projects
in New England.
Consolidated selling, general and administrative expenses for the
second quarter of 1999 were $3,327,000 or 7.6% of net sales, compared to
$2,653,000 or 8.7% of net sales for the second quarter of 1998. The dollar
increase was largely due to US, which had $325,000 in selling, general and
administrative expenses for the quarter ended June 30, 1999, and general
increase in overall activity at ACG. The Company experienced reduced selling,
general and administrative expenses as a percentage of net sales because in the
second quarter of 1998 the Company had $678,000 of non-cash stock compensation,
compared to none in the second quarter of 1999.
Depreciation expense increased to $2,019,000 for the quarter ended June
30, 1999, compared to $1,416,000 for the quarter ended June 30, 1998 due
primarily to ACG which made significant equipment acquisitions during calendar
year 1998, and during the six months ended June 30, 1999. The equipment is
depreciated over sixty months. Further, US had $304,000 in depreciation for the
quarter ended June 30, 1999.
Goodwill amortization increased to $1,056,000 from $651,000 in the
comparable period one year ago due to SC, whose former shareholders realized an
additional payment of $18,696,000 in cash and stock in full satisfaction of
their additional payment. The additional payment earned under the terms of SC
purchase agreement was recorded as an increase in goodwill. The increased
goodwill is amortized over the remaining nineteen year amortization period,
which increased goodwill amortization during the quarter ended June 30, 1999 by
$246,000. In addition, US had $49,000 in goodwill for the quarter ended June 30,
1999.
Interest expense for the quarter ended June 30, 1999 was $1,099,000,
compared to $723,000 for the comparable period in 1998. The ACG interest expense
increased for the quarter ended June 30, 1999, due to US whose purchase was
partially financed through bank lines of credit, due to the additional payment
of $7.6 million to former SC shareholders and due to increased use of financing
lines for the capital assets purchases in support of ACG's revenue growth. (See
discussion of expanded bank credit facilities in LIQUIDITY and CAPITAL
RESOURCES.)
Income tax expense from continuing operations was $2,194,000 for the
quarter ended June 30, 1999, compared to $1,211,000 in income tax expense for
the quarter ended June 30, 1998. The effective income tax rate was 48% and 51%
for the three months ended June 30, 1999 and 1998, respectively. Goodwill
amortization, which is nondeductible for income tax purposes, impacts the
effective income tax rate creating an unusual relationship of the expected
effective tax rate to pretax income or loss. During the quarter ended June 30,
1999, the Company utilized a 39% effective income tax rate prior to giving
effect to the impact of nondeductible goodwill amortization on pretax income,
compared to a 40% estimated tax rate in the comparable period of one year ago.
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
The Company had a consolidated net income of approximately $2,177,000
for the six months ended June 30, 1999, compared to net income of $393,000 for
the six months ended June 30, 1998. The Company's results from continuing
16
<PAGE>
operations were favorably impacted by the maturation of projects started during
1998 in Orlando, FL, Portland, OR and Denver CO.
Consolidated net sales for the six months ended June 30, 1999 were
approximately $81,663,000, compared to approximately $49,625,000 for the
comparable period in 1998, an increase of 64% due primarily to the acquisition
of US, which accounted for $19,731,000 or 39% of the net sales for the six
months ended June 30, 1998. Operations of ACG owned for at least one year had a
net sales increase of $12,307,000 or 25% for the six months ended June 30, 1999.
Consolidated gross profit margin, excluding depreciation, was 23% of
sales for the six months ended June 30, 1999 compared to 23% for the six months
ended June 30, 1998. Improved margins from the Company's long-haul operations
and aforementioned maturing projects were offset by lower levels of construction
activity in Alaska and the northeastern United States.
Consolidated selling, general and administrative expenses for the six
months ended June 30, 1999 were $6,016,000 or 7.4% of net sales, compared to
$4,871,000 or 9.8% of net sales for the comparable period in 1998. The dollar
increase was largely due to the acquisition of US, which had $676,000 in
selling, general and administrative expenses for the six months ended June 30,
1998, as well as an increased level of activity at ACG. The Company experienced
reduced selling, general and administrative expenses as a percentage of net
sales because in the six months ended June 30, 1998, the Company has $1,101,000
in non cash stock compensation, compared to none in the six months ended June
30, 1999.
Depreciation expense increased to $3,917,000 for the six months ended
June 30, 1999, compared to $2,686,000 for the six months ended June 30, 1998 due
primarily to ACG, which made significant equipment acquisitions during the
calendar year 1998 and during the six months ended June 30, 1999. The capital
assets are depreciated over sixty months. Further, US had $565,000 in
depreciation for the six months ended June 30, 1999. Goodwill amortization
increased to $2,004,000 from $1,305,000 in the comparable period one year ago
due to the acquisition of US and the additional payment to SC.
Net interest expense for the six months ended June 30, 1999 was
$1,953,000, compared to $1,351,000 for the comparable period in 1998. This is
due to the acquisition of US, whose purchase was partially financed through bank
financing, due to the additional payment of $7.6 million to former SC
shareholders, and due to equipment financing lines for the above expanded
capital assets acquisition program. (See discussion of expanded bank credit
facilities in LIQUIDITY AND CAPITAL RESOURCES.)
Income tax expense increased to $2,906,000 for the six months ended
June 30, 1999 from $1,121,000 in the comparable period one year ago. The
effective income tax rate was 53% and 75% for the six months ended June 30, 1999
and 1998, respectively. Goodwill amortization, which is non-deductible for
income tax purposes, impacts the effective income tax rate creating an unusual
relationship of the expected effective tax rate to pretax income or loss. During
the six months ended June 30, 1999, the Company utilized a 39% effective income
tax rate prior to giving effect to the impact of nondeductible goodwill
amortization on pretax income, compared to a 40% effective tax rate in the
comparable period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
Effective August 1, 1998, the Company acquired US. The US purchase
agreement contains provisions for additional payments by the Company to former
US shareholders to be satisfied by the Company's common stock and cash, if
certain adjusted EBITDA thresholds for the year ended July 31, 1999 are met. To
meet EBITDA thresholds, US division must have adjusted EBITDA in excess of $2.1
million. Results in excess of the adjusted EBITDA threshold serve as the basis
to determine the amount of the additional payment. Additional payments earned
under the terms of the agreements are recorded as an increase in goodwill.
One-half of any 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. The
Company estimates that the additional payment will aggregate approximately $11.8
million in cash and 760,000 shares of the Company's common stock. The cash
portion will be paid in the fourth quarter of 1999 and funded by the revolving
line of credit.
During the six months ended June 30, 1999, former SC shareholders
received 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
funded the payment using its lines of credit.
17
<PAGE>
Consolidated net cash provided by operating activities from continuing
operations for the six months ended June 30, 1999 was $1,517,000, compared to a
use of cash of $3,041,000 for the six months ended June 30, 1998. The increase
in cash provided by operating activities from continuing operations is due
primarily to the increase in net income, as well as a reduction in the rate of
the growth in contract receivables when compared to the comparable period on
year ago. (Contract receivables include both accounts receivable and costs and
earnings in excess of billings). Net cash used for investing activities of
continuing operations for the six months ended June 30, 1999 was $17,776,000,
compared to $21,057,000 in the second quarter of 1998. The decrease in investing
activities in continuing operations is primarily due to the acquisition of
Longnecker for $1,750,000 in cash in 1999, compared with the acquisitions of CA
and SC for $13,799,000 in cash during the six months ended June 30, 1998. The
Company expended $7,604,000 in 1999 for the additional payment due to former SC
shareholders. Net cash flows provided by financing activities of continuing
operations was $15,027,000 for the six months ended June 30, 1999, compared to
net cash flows provided by financing activities of continuing operations of
$24,349,000 for the same period in 1998. The decrease in net cash flows from
financing activities of continuing operations reflects the impact of the
acquisition of CA and SC in the first quarter of 1998 whose cash amount exceeded
the aggregate cash expended to purchase Longnecker, and to make the additional
payment to former SC shareholders.
In March 1999 the Company increased its availability under credit
facilities with banks. The Company expanded the credit facility to $100 million
from approximately $50 million, and increased the number of banks participating
to six money center and regional banks. The Company pledged the capital stock of
its wholly owned subsidiaries and the majority of the Company's assets to secure
the credit facility. The Company will utilize the credit facility to provide
working capital, to finance acquisitions, to purchase equipment, and to fund
other corporate activities. The credit facility has a $70 million revolving
credit line, as well as a $30 million decreasing five-year term financing
facility. Amounts borrowed under the credit facility will bear interest as a
relationship to the London Interbank Offered Rate ("LIBOR"), plus 1.25% to 2.25%
as determined by the Company's ratio of funded debt to EBITDA. The Company
incurs commitment fees of .25% to .50% as determined by the ratio of the
Company's total funded debt to EBITDA on any unused borrowing capacity under the
credit facility.
The Company had $70 million in revolving lines of credit with
commercial banks of which $26,952,000 was drawn down as of June 30, 1999 to fund
the additional payment to former SC shareholders, the purchase of Longnecker,
capital equipment purchases and working capital. In the ordinary course of
business, the Company is exposed to variable interest rate risk. To hedge the
variable term loan interest rate risk for $30 million in notional amount,
five-year term, financing facility, the Company has entered into an interest
rate swap pursuant to which it pays a fixed interest rate and receives a
variable interest rate on the same notional amount. During the six months ended
June 30, 1999, the Company's payment under interest rate swap aggregated
$17,550. The Company had no receipts pursuant to the interest rate swap. In
March 1999, the Company terminated interest rate swaps entered into as a hedge
against variable-term loan interest rate risk. The aggregate loss of
approximately $330,000 on termination of the interest rate swaps is being
amortized over the remaining life of the related term loan which was hedged.
The Company continues to actively pursue acquisitions in the telecom
construction and other industries. In the event that one or more satisfactory
acquisition candidates are identified, the Company may seek to expand its
existing credit facilities or issue additional equity or subordinated debt.
The Company believes it has sufficient cash flow from operations, cash
on hand and availability under its credit line to meet its liquidity needs.
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 are slow to return to expected
production levels in the first quarter of 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
18
<PAGE>
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.
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 remediated Year 2000 compliance issues at certain of its divisions.
All ACG divisions are operating on the new integrated business system as of July
31, 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. The total cost with respect to
systems and other modifications to Company IT, non-IT and telecommunications
systems did not exceed $300,000, more than one-half of which was expended in
1998. The Company expended less than $100,000 on Year 2000 remediation during
the six months ended June 30, 1999.
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 were developed in the first
quarter of 1999 in response to the detailed evaluations.
The Company has completed all phases of its Year 2000 Project. 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 does not believe that such
disruption would have a materially adverse effect on its operations. Contingency
plans were developed in the first quarter of 1999 in response to the Company's
evaluation of Year 2000 business exposures. The Company believes that, with the
implementation of new business systems and 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. In March 1999, the Company
expanded its available liquidity through expanded bank financing facilities. The
Company believes that such expanded financing should mitigate the cash flow
impact of delays in collections of amounts due from customers.
In addition to its internal systems and external supplier and customer
relationships, the Company 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 June 30, 1999, the Company had no acquisition in progress.
Non-compliance with Year 2000 could have an adverse impact on valuations of
potential acquisitions or reduce the Company's program of making acquisitions.
FORWARD LOOKING STATEMENTS
Statements made in the quarterly 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 the Company'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 the
Company's filings with the Securities and Exchange Commission. Accordingly, the
actual results of the Company could differ materially from such forward-looking
statements.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is exposed to interest
rate risk. To reduce variable term loan interest rate risk, the Company has
entered into an interest rate swap in the same notional amount as its related
term loan debt with the same interest rate relationship base to LIBOR as that of
the Company's floating rate debt, and for the same term as the variable rate
debt. At June 30, 1999, the Company's variable rate term loan of $28,250,000 in
notional amount and maturing in more than 180 days was hedged through an
interest rate swap pursuant to which Arguss pays a weighted fixed interest rate
of 5.78%. The Company continues to be exposed to variable-term loan interest for
the bank's applicable margins ranging from 1.25% to 2.25% as determined by the
ratio of the Company's total funded debt to EBITDA.
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 the interest rate swap would
be repaid over the next five years thereby diminishing the impact of market
valuations on hedges.
ARGUSS HOLDINGS, INC.
PART II
Other Information
Items 1,2, 3, 4, 5 and 6: Not Applicable.
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
August 2, 1999 By: /s/ Rainer H. Bosselmann
-------------------------------------
Rainer H. Bosselmann
Chief Executive Officer
August 2, 1999 By: /s/ Arthur F. Trudel
-------------------------------------
Arthur F. Trudel
Principal Financial Officer and
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q FOR THE QUARTER ENDED JUNE 30,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 577,000
<SECURITIES> 0
<RECEIVABLES> 22,863,000
<ALLOWANCES> 0
<INVENTORY> 298,000
<CURRENT-ASSETS> 64,434,000
<PP&E> 34,847,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 177,651,000
<CURRENT-LIABILITIES> 69,345,000
<BONDS> 0
0
0
<COMMON> 76,997,000
<OTHER-SE> 5,613,000
<TOTAL-LIABILITY-AND-EQUITY> 177,651,000
<SALES> 81,663,000
<TOTAL-REVENUES> 81,663,000
<CGS> 62,518,000
<TOTAL-COSTS> 62,518,000
<OTHER-EXPENSES> 11,937,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,761,000
<INCOME-PRETAX> 5,447,000
<INCOME-TAX> 2,906,000
<INCOME-CONTINUING> 2,541,000
<DISCONTINUED> (182,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,177,000
<EPS-BASIC> .19
<EPS-DILUTED> .17
</TABLE>
