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, 2000 Commission File Number: 0-19589
------------- -------
ARGUSS COMMUNICATIONS, INC.
----------------------------------------------------------
(formerly "Arguss Holdings, Inc.")
(Exact name of Registrant as specified in its Charter)
Delaware 02-0413153
--------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation of organization)
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 August 4, 2000, there were 14,143,686 shares of Common Stock, $ .01 par
value per share, outstanding.
1
<PAGE>
ARGUSS COMMUNICATIONS, INC.
INDEX
Part I - Financial Information: Page
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited) -
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations (Unaudited)-
Three Months and Six Months Ended June 30, 2000
and June 30, 1999 4
Consolidated Statements of Cash Flows (Unaudited)-
Six Months Ended June 30, 2000 and June 30, 1999 5
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosure about
Market Risk 15
Part II - Other Information 16
Items 1 through 6
Signatures
Exhibits
2
<PAGE>
ARGUSS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 2000 Dec. 31, 1999
------------- -------------
Assets
Current assets:
Cash $ 230,000 $ 5,498,000
Restricted cash from customer advances 227,000 1,752,000
Accounts receivable trade, net of allowance
for doubtful accounts of $94,000 and
$263,000 in 2000 and 1999, respectively 59,890,000 37,775,000
Costs and earnings in excess of billings 17,460,000 6,825,000
Inventories 5,527,000 4,534,000
Other current assets 2,488,000 1,732,000
Deferred income taxes 1,829,000 1,829,000
---------- ----------
Total current assets 87,651,000 59,945,000
Property, plant and equipment, net 45,023,000 37,048,000
Goodwill, net 127,480,000 102,208,000
------------------- ----------------------
$ 260,154,000 $ 199,201,000
=================== ======================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 7,407,000 $ 7,340,000
Short-term borrowings 72,010,000 35,000,000
Accounts payable 19,873,000 18,551,000
Billings in excess of costs and earnings 2,067,000 -
Customer advances 19,000 1,201,000
Accrued expenses and other liabilities 13,236,000 9,496,000
Due to former shareholders of acquired companies - 650,000
------------------- ----------------------
Total current liabilities 114,612,000 72,238,000
------------------- ----------------------
Long-term debt, excluding current portion 16,378,000 19,423,000
Deferred income taxes 4,684,000 4,425,000
------------------- ----------------------
Total liabilities 135,674,000 96,086,000
------------------- ----------------------
Stockholders' equity:
Common stock $.01 par value 142,000 130,000
Additional paid-in capital 110,028,000 92,598,000
Common stock issuable to former shareholders of
acquired companies - 500,000
Retained earnings 14,310,000 9,887,000
------------------- ----------------------
Total stockholders' equity 124,480,000 103,115,000
------------------- ----------------------
$ 260,154,000 $ 199,201,000
=================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ARGUSS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
Net sales $ 67,109,000 $47,880,000 $122,153,000 $89,614,000
Cost of sales, excluding depreciation 48,364,000 34,752,000 91,312,000 67,814,000
---------- ---------- ----------- ----------
Gross profit, excluding depreciation 18,745,000 13,128,000 30,841,000 21,800,000
Selling, general and administrative expenses 5,371,000 4,586,000 10,476,000 8,384,000
Depreciation 2,744,000 2,072,000 5,110,000 4,023,000
Goodwill amortization 1,661,000 1,056,000 3,087,000 2,003,000
Non-cash stock compensation 136,000 - 139,000 -
Engineering and development expenses 264,000 356,000 501,000 684,000
---------- ---------- ---------- ----------
Operating income 8,569,000 5,058,000 11,528,000 6,706,000
---------- ---------- ---------- ----------
Other income (expense):
Interest income and other 64,000 157,000 266,000 191,000
Interest expense (1,719,000) (1,155,000) (2,948,000) (2,058,000)
--------- --------- --------- ---------
Income before income taxes 6,914,000 4,060,000 8,846,000 4,839,000
Income taxes (3,138,000) (1,984,000) (4,423,000) (2,662,000)
--------- --------- --------- ---------
Net Income 3,776,000 2,076,000 4,423,000 2,177,000
--------- --------- --------- ---------
Earnings per common share:
-basic $.27 $.18 $.33 $.19
==== ==== ==== ====
-diluted $.26 $.16 $.32 $.17
==== ==== ==== ====
Weighted average shares outstanding:
- basic 13,881,000 11,751,000 13,465,000 11,704,000
=========== ========== =========== ==========
- diluted 14,553,000 13,044,000 13,968,000 12,816,000
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ARGUSS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended June 30,
2000 1999
---- ----
Cash flows from operating activities:
Net income $4,423,000 $ 2,177,000
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation 5,110,000 4,023,000
Goodwill amortization 3,087,000 2,003,000
Non-cash stock compensation 139,000 -
Changes in assets and liabilities:
Accounts receivable (13,528,000) 10,046,000
Costs and earnings in excess of billings (10,292,000) (20,182,000)
Inventories (177,000) (29,000)
Other current assets (712,000) (745,000)
Accounts payable 3,246,000) 1,211,000
Billings in excess of costs and earnings 2,067,000 (748,000)
Accrued expenses and other liabilities 3,472,000 3,486,000
----------- -----------
Net cash provided by (used in) operating
activities (9,657,000) 1,242,000
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (4,309,000) (8,553,000)
Additional payment to former shareholders of
acquired companies (799,000) (7,604,000)
Purchase of telecom services companies, net (16,055,000) (1,750,000)
Net cash used in investing activities ----------- -----------
(21,163,000) (17,907,000)
---------- -----------
Cash flows from financing activities:
Proceeds from lines of credit 28,787,000 18,698,000
Net repayments of lines of credit (3,728,000) (4,054,000)
Issuance of common stock 493,000 841,000
---------- ------------
Net cash provided by financing activities 25,552,000 15,485,000
---------- ------------
Net decrease in cash (5,268,000) (1,180,000)
---------- ------------
Cash at beginning of period 5,498,000 1,819,000
---------- ------------
Cash at end of period $ 230,000 $ 639,000
========== ============
(continued)
</TABLE>
5
<PAGE>
ARGUSS COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended June 30,
2000 1999
---- ----
Supplemental disclosures of cash paid for:
Interest $ 2,571,000 $ 1,825,000
Corporate income taxes 4,083,000 1,392,000
Supplemental disclosure of
investing and financing activities:
Fair value of assets acquired:
Accounts receivable $8,586,000 $ 872,000
Other current assets 44,000 36,000
Inventory 816,000 -
Property and equipment 4,354,000 494,000
----------- ----------
Total non-cash assets 13,800,000 1,402,000
Liabilities (4,943,000) (271,000)
Long-term debt (5,034,000) (111,000)
----------- ----------
Net non-cash assets acquired 3,823,000 1,020,000
Cash acquired 116,000 -
----------- ----------
Fair value of net assets acquired 3,939,000 1,020,000
Excess of costs over fair value
of net assets acquired 28,323,000 2,767,000
----------- ----------
Purchase price $32,262,000 $3,787,000
=========== ==========
Common stock issued $16,207,000 $2,037,000
Cash paid 16,171,000 1,750,000
Cash acquired (116,000) -
------------ ----------
Purchase price $32,262,000 $3,787,000
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ARGUSS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
A) Organization
The Company conducts its operations through its wholly owned
subsidiaries, Arguss Communications Group, Inc. ("ACG") and Conceptronic, Inc.
("Conceptronic"). ACG is a leading provider of telecommunications infrastructure
services including project management, design, engineering, construction and
maintenance for Internet, telecommunications and broadband service providers.
Conceptronic manufactures and sells highly advanced, computer-controlled
equipment used in the surface mount electronics circuit assembly industry
("SMT"). In May 2000, the Company changed its name from Arguss Holdings, Inc, to
Arguss Communications, Inc.
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, 1999, filed with the Commission on March 16, 2000.
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, 2000 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 services 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 1999 financial statements have been reclassified
for comparability with the 2000 presentation.
C) Goodwill
Goodwill is calculated using a twenty-year amortization 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 uses the
estimated undiscounted cash flow of the business enterprise over the remaining
life of the asset in determining whether the asset is recoverable.
D) Earnings per Share
Basic earnings per common share are computed by dividing net income
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 shares. Diluted earnings per common share are
computed by dividing net income by the weighted average number of common shares
and all dilutive securities.
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended June 30:
2000 1999
---- ----
Income Net Income Net
per Share Shares Income per Share Shares Income
--------- ------ ------- --------- ------ ------
Basic $.27 13,881,000 $3,776,000 $ .18 11,751,000 $2,076,000
Effect of stock options
and warrants (.01) 672,000 - (.01) 593,000 -
Effect of additional shares
to be issued for purchase
of telecom services
company - - - (.01) 700,000 -
---- ---------- ---------- ----- ----------- -----------
Diluted $.26 14,553,000 $3,776,000 $ .16 13,044,000 $2,076,000
==== ========== ========== ===== =========== ===========
For the Six Months Ended June 30:
2000 1999
---- ----
Income Net Income Net
per Share Shares Income per Share Shares Income
--------- ------ ------- --------- ------ ------
Basic $.33 13,465,000 $4,423,000 $ .19 11,704,000 $2,177,000
Effect of stock options
and warrants (.01) 503,000 - (.01) 561,000 -
Effect of additional shares
to be issued for purchase
of telecom services
company - - - (.01) 551,000 -
---- ---------- ---------- ----- ----------- -----------
Diluted $.32 13,968,000 $4,423,000 $ .17 12,816,000 $2,177,000
==== ========== ========== ===== =========== ===========
</TABLE>
E) Contract Accounting
The retainage included in accounts receivable, representing amounts
withheld by contract with respect to ACG accounts receivable, was $4,444,000 and
$3,973,000 at June 30, 2000 and December 31, 1999, respectively. The Company
expects to collect substantially all the retainage within one year.
June 30, 2000 December 31, 1999
------------- ------------------
Costs incurred on uncompleted contracts $63,885,000 $90,798,000
Estimated earnings 14,384,000 15,338,000
----------- -----------
78,269,000 106,136,000
Less: Billings to date 62,876,000 99,311,000
----------- -----------
$15,393,000 $ 6,825,000
=========== ===========
Included in accompanying balance sheets
under the following caption:
Costs and earnings in excess of billings $17,460,000 $ 6,825,000
-----------
Billings in excess of costs and earnings (2,067,000) -
----------- ------------
$15,393,000 $ 6,825,000
=========== ============
F) Acquisitions
The Company, through ACG, actively pursues acquisitions in the telecom
infrastructure services industry. During the first six months of 2000, the
Company made three acquisitions. The combined purchase price was approximately
$16 million in cash and 1,015,000 shares of the Company's common stock, plus the
assumption of debt. The acquisitions were accounted for as purchases, and the
results of operations of the acquired companies are included in the consolidated
results of the Company from effective dates of acquisition. Approximately $28.3
8
<PAGE>
million of goodwill was recorded by the Company in connection with the
acquisitions, which reflects the adjustments necessary to allocate the
individual purchase price to the fair value of assets acquired and liabilities
assumed. During the first six months of 2000, the Company also made an
additional payment to former shareholders of an acquired telecom services
company of $799,000 in cash and 13,000 shares of the Company's common stock in
accordance with the provisions of the purchase agreement.
G) Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" 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 services and
manufacturing. The Company conducts its operations through its wholly owned
subsidiaries, Arguss Communications Group, Inc. ("ACG") and Conceptronic, Inc.
("Conceptronic"). ACG is a leading provider of telecommunications infrastructure
services including project management, design, engineering, construction and
maintenance for Internet, telecommunications and broadband service providers.
Conceptronic manufactures and sells highly advanced, computer-controlled
equipment used in the surface mount electronics circuit assembly industry
("SMT").
Because the telecom system projects are fully integrated undertakings,
the Company does not capture individually each component of the service
functions performed for revenue reporting purposes. The manufacturing segment
manufactures and sells highly advanced, computer-controlled equipment used in
the SMT circuit assembly industry. The "All Other" column includes the Company's
corporate and unallocated expenses.
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.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000
<S> <C> <C> <C> <C>
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
External sales $ 61,257,000 $ 5,852,000 - $ 67,109,000
Cost of sales, excluding
depreciation 43,966,000 4,398,000 - 48,364,000
------------ ------------ ------------
Gross profit, excluding
depreciation 17,291,000 1,454,000 - 18,745,000
Operating expenses,
excluding depreciation 4,139,000 1,234,000 (2,000) 5,371,000
Depreciation 2,702,000 40,000 2,000 2,744,000
Goodwill amortization 1,661,000 - - 1,661,000
Non-cash compensation expense 59,000 - 77,000 136,000
Engineering and development - 264,000 - 264,000
Interest and other income (60,000) (4,000) - (64,000)
Interest expense 1,663,000 56,000 - 1,719,000
------------ ------------ ----------- -------------
Pretax income (loss) $ 7,127,000 ($136,000) ($77,000) $ 6,914,000
============ ============ =========== =============
Capital expenditures $ 1,830,000 $ 5,000 - $ 1,835,000
============ ============ =========== =============
Property, plant and equipment,
net $ 43,803,000 $ 1,201,000 $ 19,000 $ 45,023,000
============ ============ =========== =============
Total assets $246,383,000 $11,321,000 $ 2,450,000 $260,154,000
============ ============ =========== =============
Total liabilities $115,534,000 $ 9,265,000 $10,875,000 $135,674,000
============ ============ =========== =============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
<S> <C> <C> <C> <C>
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
External sales $ 43,858,000 $ 4,022,000 - $ 47,880,000
Cost of sales, excluding
depreciation 31,937,000 2,815,000 - 34,752,000
------------ ----------- ----------- ------------
Gross profit, excluding
depreciation 11,921,000 1,207,000 - 13,128,000
Operating expenses,
excluding depreciation 3,175,000 1,258,000 153,000 4,586,000
Depreciation 2,019,000 53,000 - 2,072,000
Goodwill amortization 1,056,000 - - 1,056,000
Engineering and development - 356,000 - 356,000
Interest and other income (153,000) (1,000) (3,000) (157,000)
Interest expense 1,099,000 56,000 - 1,155,000
------------ ----------- ----------- ------------
Pretax income (loss) $ 4,725,000 ($ 515,000) ($150,000) $ 4,060,000
============ =========== =========== ============
Capital expenditures $ 4,783,000 $ 129,000 - $ 4,912,000
============ =========== =========== ============
Property, plant and equipment, net $ 34,832,000 $ 1,314,000 $ 25,000 $ 36,171,000
============ =========== =========== ============
Total assets $156,986,000 $ 9,664,000 $ 2,266,000 $168,916,000
============ =========== =========== ============
Total liabilities $ 72,088,000 $ 5,345,000 $ 8,871,000 $ 86,304,000
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000
<S> <C> <C> <C> <C>
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
External sales $110,828,000 $11,325,000 - $122,153,000
Cost of sales, excluding
depreciation 82,668,000 8,644,000 - 91,312,000
------------ ----------- ----------- ------------
Gross profit, excluding
depreciation 28,160,000 2,681,000 - 30,841,000
Operating expenses,
excluding depreciation 7,908,000 2,574,000 (6,000) 10,476,000
Depreciation 5,026,000 79,000 5,000 5,110,000
Goodwill amortization 3,087,000 - - 3,087,000
Non-cash compensation expense 62,000 - 77,000 139,000
Engineering and development - 501,000 - 501,000
Interest and other income (259,000) (7,000) - (266,000)
Interest expense 2,823,000 124,000 1,000 2,948,000
--------- ----------- ----------- ------------
Pretax income (loss) $ 9,513,000 ($590,000) ($77,000) $ 8,846,000
=========== =========== =========== ============
Capital expenditures $ 4,299,000 $ 8,000 $ 2,000 $ 4,309,000
=========== =========== =========== ============
Property, plant and equipment,
net $ 43,803,000 $ 1,201,000 $ 19,000 $ 45,023,000
============ =========== =========== ============
Total assets $246,383,000 $11,321,000 $ 2,450,000 $260,154,000
============ =========== =========== ============
Total liabilities $115,534,000 $ 9,265,000 $10,875,000 $135,674,000
============ =========== =========== ============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
<S> <C> <C> <C> <C>
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
External sales $ 81,663,000 $ 7,951,000 - $ 89,614,000
Cost of sales, excluding
depreciation 62,518,000 5,296,000 - 67,814,000
------------ ------------ ----------- ------------
Gross profit, excluding
depreciation 19,145,000 2,655,000 - 21,800,000
Operating expenses,
excluding depreciation 5,819,000 2,367,000 198,000 8,384,000
Depreciation 3,917,000 106,000 - 4,023,000
Goodwill amortization 2,003,000 - - 2,003,000
Engineering and development - 684,000 - 684,000
Interest and other income (177,000) - (14,000) (191,000)
Interest expense 1,953,000 105,000 - 2,058,000
------------ ------------ ----------- ------------
Pretax income (loss) $ 5,630,000 ($ 607,000) ($184,000) $4,839,000
============ ============ =========== ============
Capital expenditures $ 8,422,000 $ 131,000 2,000 $ 8,553,000
============ ============ =========== ============
Property, plant and equipment,
net $ 34,832,000 $ 1,314,000 $ 25,000 $ 36,171,000
============ ============ =========== ============
Total assets $156,986,000 $ 9,664,000 $ 2,266,000 $168,916,000
============ ============ =========== ============
Total liabilities $ 72,088,000 $ 5,345,000 $ 8,871,000 $ 86,304,000
============ ============ =========== ============
</TABLE>
H) Bank Financing
In March 2000, the Company increased its availability under credit
facilities with banks. The Company expanded the revolving credit facility to
$150 million from $100 million. The Company continues to pledge 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, the purchase of capital assets
and for other corporate purposes. The credit facility also contains a $30
million, in original notional amount, amortizing five-year term facility. Under
the provisions of the credit agreement, borrowings are limited to a multiple of
the Company's adjusted EBITDA. Amounts borrowed under the line bear interest
either as a relationship to the London Interbank Offered Rate ("LIBOR"), plus
1.25% to 2.25%, or to the Prime Rate plus up to 1.00%, as determined by the
ratio of the Company's total funded debt to EBITDA. The Company also incurs a
commitment fee on the unused portion of the loan at a rate of up to 0.50%, as
determined by the ratio of the Company's total funded debt to EBITDA. The
revolving line of credit has an initial term maturing on March 19, 2003, and is
renewable for up to one additional year.
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 that
was hedged.
To hedge the variable-term loan interest rate risk for $30 million in
original notional amount, five-year, term financing facility, the Company has
entered into an interest rate swap pursuant to which it pays fixed interest at a
rate of 5.78% and receives variable interest on the same notional amount. At
June 30, 2000, the market value of the swap, which expires with the maturity of
the debt on March 1, 2004, was approximately $434,000. During the six months
ended June 30, 2000, the Company's receipts under the interest rate swap
aggregated approximately $78,000.
11
<PAGE>
ARGUSS COMMUNICATIONS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The Company conducts its operations through its wholly owned
subsidiaries, Arguss Communications Group, Inc. ("ACG") and Conceptronic, Inc.
("Conceptronic"). ACG is a leading provider of telecommunications infrastructure
services including project management, design, engineering, construction and
maintenance for Internet, telecommunications and broadband service providers.
Conceptronic manufactures and sells highly advanced, computer-controlled
equipment used in the surface mount electronics circuit assembly industry
("SMT"). In May 2000, the Company changed its name from Arguss Holdings, Inc, to
Arguss Communications, Inc.
Three Months Ended June 30, 2000, Compared to Three Months Ended June 30, 1999
The Company had consolidated earnings before interest expense, taxes,
depreciation, amortization and non-cash stock compensation (EBITDA) of
$13,174,000 for the three months ended June 30, 2000, compared to $8,343,000 for
the same period one year ago. For the three months ended June 30, 2000, EBITDA,
as a percentage of consolidated net sales (EBITDA margin), was 19.6%, compared
to 17.4% for the comparable period in 1999. ACG had EBITDA of $13,212,000 for
the three months ended June 30, 2000, compared to $8,899,000 for the same period
in 2000. ACG achieved an EBITDA margin of 21.6% for the three months ended June
30, 2000 and 20.3% for the three months ended June 30,1999. ACG's strong EBITDA
margin performance was combined with continued strong revenue growth and
improved gross margin results as discussed below
The Company had consolidated net income of $3,776,000 for the three
months ended June 30, 2000, compared to $2,076,000 for the three months ended
June 30, 1999. The Company's results were favorably impacted by improved
performance of telecom infrastructure projects located in New England and
California.
Consolidated net sales for the three months ended June 30, 2000 were
approximately $67,109,000, compared to approximately $47,880,000 for the three
months ended June 30, 1999, an increase of 40%. Acquisitions contributed
$11,924,000 to this increase. Operations owned for at least one year had a net
sales increase of $7,305,000 or 15% for the three months ended June 30, 2000.
Consolidated gross profit margin, excluding depreciation, was 28% of
sales for the three months ended June 30, 2000, compared to 27% for the three
months ended June 30, 1999. The improvement in margins is due to ACG, whose
aforementioned projects located in New England achieved greater sales volume and
margins for the three months ended June 30, 2000.
Consolidated selling, general and administrative expenses for the three
months ended June 30, 2000 were $5,371,000 or 8% of net sales, compared to
$4,586,000 for the three months ended June 30, 1999 or 9.5% of net sales.
Conceptronic reduced selling, general and administrative expenses through cost
controls concurrent with an increase in revenues. ACG has maintained selling,
general and administrative costs at 6% of net sales in both periods.
Depreciation expense increased to $2,744,000 for the three months ended
June 30, 2000, compared to $2,072,000 for the three months ended June 30, 1999
due primarily to ACG which made significant equipment acquisitions during
calendar year 1999, and during the six months ended June 30, 2000. Equipment is
depreciated over sixty months. Depreciation expense from companies acquired
after June 30, 1999 was $290,000 during the three months ended June 30, 2000.
Goodwill amortization, which is calculated using a twenty-year
amortization period, increased to $1,661,000 from $1,056,000 from the comparable
period one year ago due primarily to acquisitions made subsequent to June 30,
1999 and an additional payment made to former shareholders of an acquired
company made in November 1999. The additional payment earned under the terms of
the purchase agreement was approximately $23 million and was recorded as an
increase in goodwill. The increased goodwill, amortized over the remaining
amortization period, increased goodwill amortization during the three months
ended June 30, 2000 by $299,000. The Company also recorded approximately $36
million in additional goodwill since June 30, 1999 related to four acquisitions.
Amortization expense on the goodwill related to these acquisitions was $363,000
for the three months ended June 30, 2000.
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Interest expense for the three months ended June 30, 2000 was
$1,719,000, compared to $1,155,000 for the comparable period in 1999. ACG
interest expense increased for the three months ended June 30, 2000, due
primarily to the purchase of, and additional payments to, telecom service
companies which were partially financed through bank lines of credit and due to
increased use of financing lines for the capital assets purchased in support of
ACG's revenue growth. Higher interest rates related to the revolving credit line
during the three months ended June 30, 2000, compared to the three months ended
June 30, 1999, also contributed to higher interest expense, as relevant rates
increased approximately 100 basis points from the period in 1999 to 2000. (See
discussion of expanded bank credit facilities in Liquidity and Capital
Resources.)
Income tax expense was $3,138,000 for the three months ended June 30,
2000, compared to $1,984,000 in income tax expense for the three months ended
June 30, 1999. The effective income tax rate was 45% and 48% for the three
months ended June 30, 2000 and 1999, 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. During the three months ended June 30, 2000 and 1999, the Company
utilized a 39% effective income tax rate prior to giving effect to the impact of
nondeductible goodwill amortization on pretax income.
Six Months Ended June 30, 2000, Compared to Six Months Ended June 30, 1999
The Company had consolidated earnings before interest expense, taxes,
depreciation, amortization and non-cash stock compensation (EBITDA) of
$20,130,000 for the six months ended June 30, 2000, compared to $12,923,000 for
the same period one year ago. For the six months ended June 30, 2000, EBITDA, as
a percentage of consolidated net sales (EBITDA margin), was 16.5%, compared to
14.4% for the comparable period in 1999. ACG had EBITDA of $20,511,000 for the
six months ended June 30, 2000, compared to $13,502,000 for the same period in
2000. ACG achieved an EBITDA margin of 18.5% for the six months ended June 30,
2000 and 16.5% for the six months ended June 30,1999. ACG's strong EBITDA margin
performance was combined with continued strong revenue growth and improved gross
margin results as discussed below
The Company had consolidated net income of $4,423,000 for the six
months ended June 30, 2000, compared to $2,177,000 for the six months ended June
30, 1999. The Company's results were favorably impacted by improved performance
of telecom infrastructure projects located in New England and California.
Consolidated net sales for the six months ended June 30, 2000 were
approximately $122,153,000, compared to approximately $89,614,000 for the six
months ended June 30, 1999, an increase of 36% due, in part, to acquisitions.
Acquisitions contributed $15,284,000 to this increase. Operations owned for at
least one year had a net sales increase of $17,255,000 or 19% for the six months
ended June 30, 2000.
Consolidated gross profit margin, excluding depreciation, was 25% of
sales for the six months ended June 30, 2000, compared to 24% for the six months
ended June 30, 1999. The improvement in margins is due to ACG, whose telecom
infrastructure projects located in New England had improved margins for the six
months ended June 30, 2000.
Consolidated selling, general and administrative expenses for the six
months ended June 30, 2000 were $10,476,000, compared to $8,384,000 for the six
months ended June 30, 1999 or approximately 9% of net sales in both years. The
increase in expense is consistent with revenue growth.
Depreciation expense increased to $5,110,000 for the six months ended
June 30, 2000, compared to $4,023,000 for the six months ended June 30, 1999 due
primarily to ACG which made significant equipment acquisitions during calendar
year 1999, and during the six months ended June 30, 2000. The equipment is
depreciated over sixty months. Depreciation expense from companies acquired
after June 30, 1999 was $344,000 during the six months ended June 30, 2000.
Goodwill amortization, which is calculated using a twenty-year
amortization period, increased to $3,087,000 from $2,003,000 from the comparable
period one year ago due primarily to acquisitions made subsequently to June 30,
1999, and an additional payment made to former shareholders of an acquired
company made in November 1999. The additional payment earned under the terms of
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the purchase agreement was approximately $23 million and was recorded as an
increase in goodwill. The increased goodwill, amortized over the remaining
amortization period, increased goodwill amortization during the six months ended
June 30, 2000 by $597,000. The Company also recorded approximately $36 million
in additional goodwill since June 30, 1999 related to four acquisitions.
Amortization expense of the goodwill related to these acquisitions was $490,000
for the six months ended June 30, 2000.
Interest expense for the six months ended June 30, 2000 was $2,948,000,
compared to $2,058,000 for the comparable period in 1999. The ACG interest
expense increased for the six months ended June 30, 2000, due primarily to the
purchase of, and additional payments to, telecom service companies which were
partially financed through bank lines of credit and due to increased use of
financing lines for the capital assets purchased in support of ACG's revenue
growth. (See discussion of expanded bank credit facilities in Liquidity and
Capital Resources.)
Income tax expense was $4,423,000 for the six months ended June 30,
2000, compared to $2,662,000 in income tax expense for the six months ended June
30, 1999. The effective income tax rate was 50% and 55% for the six months ended
June 30, 2000 and 1999, 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. During the six months ended June 30, 2000 and 1999, the Company utilized
a 39% effective income tax rate prior to giving effect to the impact of
nondeductible goodwill amortization on pretax income.
Liquidity and Capital Resources
Net cash used by operations for the six months ended June 30, 2000 was
$9,657,000 compared with $1,242,000 of cash provided by operations for the six
months ended June 30, 1999. The increase in cash used in operating activities is
due to the increased revenue generated by a greater volume of ACG projects that
caused an increase in accounts receivable and costs and earnings in excess of
billings. In addition, ACG improved its timely collection of 1999 accounts
receivable prior to December 31, 1999 compared to the prior year when ACG
collected many of its 1998 receivables in the six months ended June 30, 1999
Net cash used for investing activities for the six months ended June
30, 2000 was $21,163,000, compared to $17,907,000 in the comparable period of
1999. Of the 2000 investing activities, $16,055,000 was used to make
acquisitions compared to $1,750,000 in 1999 when one acquisition was made. In
2000, pursuant to the provisions of the purchase agreements, $799,000 was paid
to former shareholders of acquired companies, compared to $7,604,000 in 1999. In
2000, $4,309,000 was spent on capital equipment acquisitions compared to
$8,553,000 in 1999. The decrease from 1999 reflects a timing difference in the
capital asset purchases. The Company has budgeted a similar level of expenditure
for 2000 as for 1999, when the Company had approximately $13.5 million in
capital expenditures.
Net cash provided by financing activities was $25,552,000 for the six
months ended June 30, 2000, compared to net cash provided by financing
activities of $15,485,000 for the comparable period in 1999. The financing
activity in 2000 reflects that the proceeds from the Company's credit line in
2000 used for acquisitions.
In March 2000, the Company increased its availability under credit
facilities with banks. The Company expanded the revolving credit facility to
$150 million from $100 million. The Company continues to pledge 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 also contains a $30
million, in original notional amount, amortizing five-year term facility. Under
the provisions of the credit agreement, borrowings are limited to a multiple of
the Company's adjusted EBITDA. Amounts borrowed under the line bear interest
either as a relationship to the London Interbank Offered Rate ("LIBOR"), plus
1.25% to 2.25%, or to the Prime Rate plus up to 1.00%, as determined by the
ratio of the Company's total funded debt to EBITDA. The Company also incurs a
commitment fee on the unused portion of the loan at a rate of up to 0.50%, as
determined by the ratio of the Company's total funded debt to EBITDA. The
revolving line of credit has an initial term, maturing on March 19, 2003, and is
renewable for up to one additional year.
To hedge the variable-term loan interest rate risk for $30 million in
original notional amount, five-year, term financing facility, the Company has
entered into an interest rate swap pursuant to which it pays fixed interest at a
rate of 5.78% and receives variable interest on the same notional amount. At
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March 31, 2000, the market value of the swap, which expires with the maturity of
the debt on March 1, 2004, was approximately $316,000. During the six months
ended March 31, 2000, the Company's receipts under the interest rate swap
aggregated approximately $78,000.
At June 30, 2000 the Company has entered into two letters of intent to
purchase telecommunications services companies. The aggregate purchase price of
these two acquisitions will be approximately $8,000,000, plus the assumption of
debt. Half of that amount, or $8,000,000, will be paid in cash and half will be
satisfied by issuance of the Company's common stock. The Company will finance
the cash portion of the purchase price utilizing the existing lines of credit.
The Company expects to close these purchases by the end of the third quarter
2000. At June 30, 2000, the Company had $48,000,000 available under its existing
credit facility.
The Company's telecom infrastructure services 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.
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. In June 2000, the Financial
Accounting Standards Board issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment of FASB
Statement No. 133". As amended, SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 by January 1, 2001. Adoption of SFAS No. 133 is not expected to
have a material impact on the consolidated financial statements.
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.
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, term and
interest rate relationship to LIBOR as the Company's $21,250,000 variable-rate
term loan. Arguss pays a fixed interest rate of 5.78% pursuant to the interest
rate swap. The Company continues to incur interest expense for the bank's
applicable margins ranging from 1.25% to 2.25% above LIBOR 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 $316,000. The earnings and cash flow impact
for the next year resulting from a one percentage point increase 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 four years thereby diminishing the impact of market
valuations on hedges.
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ARGUSS COMMUNICATIONS, INC.
PART II
Other Information
Items 1, 2, 3, and 5: Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders in Boston,
Massachusetts on May 18, 2000. The following sets forth matters submitted to a
vote of the stockholders at the annual meeting:
(a) Seven members were elected to the Board of Directors, each to serve
until the next annual meeting of the Company and until their respective
successors have been elected and qualified. The following seven individuals were
elected to the Board of Directors by the holders of common stock of the Company:
Rainer H. Bosselmann, DeSoto S. Jordan, Jr., Daniel A. Levinson, Richard S.
Perkins, Jr., Garry A. Prime, James W. Quinn and Peter L. Winslow.
Messrs. Bosselmann, Levinson, Perkins and Prime were elected by a vote
of 11,251,712 shares, with 160,849 votes withheld. Messrs. Jordan, Quinn and
Winslow were elected by a vote of 11,251,612 shares, with 160,949 votes
withheld.
(b) The stockholders ratified the appointment of KPMG LLP to audit the
financial statements of the Company and its subsidiaries for the year ending
December 31, 2000, by a vote of 11,402,514 shares of common stock, with 8,885
shares of common stock voting against and 1,162 shares of common stock
abstaining.
(c) The stockholders ratified the change of the name of the Company from
Arguss Holdings, Inc. to Arguss Communications, Inc. by a vote of 11,410,229
shares of common, with 1,000 shares of common stock voting against and 1,332
shares of common stock abstaining.
(d) The stockholders ratified the increase in the authorized number of
common shares of the Company from 20,000,000 to 30,000,000 by a vote of
11,247,325 shares of common, with 162,524 shares of common stock voting against
and 2,712 shares of common stock abstaining.
(e) The stockholders ratified the increase in the authorized number of
common shares available for issuance under the Company's stock option plan from
2,400,000 to 5,000,000 by a vote of 7,668,719 shares of common stock, with
703,926 shares of common stock voting against and 3,032,604 shares of common
stock abstaining.
Item 6: Exhibits and Reports on form 8-K
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K
In a Report on Form 8-K dated June 9, 2000, the Company reported under
Item 2 "Acquisition or Disposition of Assets," the acquisition by the Company,
through a wholly owned subsidiary, of U.S. Communications, Inc ("USC").
Financial statements of business acquired: Audited balance sheet of USC as
of December 31, 1999 and related statements of income and retained earnings
and cash flow for the year ended December 31, 1999.
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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 Communications, Inc.
August 4, 2000 By: \\ Rainer H. Bosselmann
-----------------------------------
Rainer H. Bosselmann
Chief Executive Officer
August 4, 2000 By: \\ Arthur F. Trudel
-----------------------------------
Arthur F. Trudel
Principal Financial Officer and
Principal Accounting Officer
