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: September 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 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 November 1, 2000, there were 14,254,813 shares of Common Stock, $ .01 par
value per share, outstanding.
<PAGE>
ARGUSS COMMUNICATIONS, INC.
INDEX
Part I - Financial Information: Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited) -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations (Unaudited) -
Three Months and Nine Months Ended September 30, 2000
and September 30, 1999 4
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2000 and
September 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)
Sept. 30, Dec. 31,
2000 1999
------------ ------------
Assets
Current assets:
Cash $ 2,882,000 $ 5,498,000
Restricted cash from customer advances 219,000 1,752,000
Accounts receivable trade, net of allowance
for doubtful accounts of $118,000 and
$108,000 in 2000 and 1999, respectively 70,462,000 37,775,000
Costs and earnings in excess of billings 21,449,000 6,825,000
Inventories 5,298,000 4,534,000
Other current assets 2,478,000 1,732,000
Deferred income taxes 1,829,000 1,829,000
------------ ------------
Total current assets 104,617,000 59,945,000
Property, plant and equipment, net 46,753,000 37,048,000
Goodwill, net 129,413,000 102,208,000
------------ ------------
$280,783,000 $199,201,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 7,357,000 $ 7,340,000
Short-term borrowings 77,064,000 35,000,000
Accounts payable 25,811,000 18,551,000
Billings in excess of costs and earnings 2,638,000 --
Customer advances 4,000 1,201,000
Accrued expenses and other liabilities 15,888,000 9,496,000
Due to former shareholders of acquired companies 995,000 650,000
------------ ------------
Total current liabilities 129,757,000 72,238,000
------------ ------------
Long-term debt, excluding current portion 14,512,000 19,423,000
Deferred income taxes 4,684,000 4,425,000
------------ ------------
Total liabilities 148,953,000 96,086,000
------------ ------------
Stockholders' equity:
Common stock $.01 par value 143,000 130,000
Additional paid-in capital 111,774,000 92,598,000
Common stock issuable to former shareholders
of acquired companies 995,000 500,000
Retained earnings 18,918,000 9,887,000
------------ ------------
Total stockholders' equity 131,830,000 103,115,000
------------ ------------
$280,783,000 $199,201,000
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ARGUSS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 78,532,000 $ 53,351,000 $ 200,685,000 $ 142,965,000
Cost of sales, excluding depreciation 56,261,000 39,642,000 147,573,000 107,456,000
------------- ------------- ------------- -------------
Gross profit, excluding depreciation 22,271,000 13,709,000 53,112,000 35,509,000
Selling, general and administrative expenses 5,794,000 3,904,000 16,270,000 11,990,000
Depreciation 3,016,000 2,195,000 8,127,000 6,219,000
Goodwill amortization 1,786,000 1,208,000 4,874,000 3,211,000
Non-cash stock compensation 193,000 -- 332,000 --
Engineering and development expenses 309,000 322,000 809,000 1,006,000
------------- ------------- ------------- -------------
Operating income 11,173,000 6,080,000 22,700,000 13,083,000
------------- ------------- ------------- -------------
Other income (expense):
Interest income and other 134,000 186,000 400,000 380,000
Interest expense (2,090,000) (1,113,000) (5,036,000) (3,168,000)
------------- ------------- ------------- -------------
Income before income taxes 9,217,000 5,153,000 18,064,000 10,295,000
Income taxes (4,609,000) (2,301,000) (9,032,000) (5,267,000)
------------- ------------- ------------- -------------
Net Income $ 4,608,000 $ 2,852,000 $ 9,032,000 $ 5,028,000
============= ============= ============= =============
Earnings per common share:
-basic $ .32 $ .24 $ .66 $ .43
===== ===== ===== =====
-diluted $ .31 $ .22 $ .63 $ .39
===== ===== ===== =====
Weighted average shares outstanding:
- basic 14,205,000 11,889,000 13,779,000 11,798,000
========== ========== ========== ==========
- diluted 14,908,000 13,169,000 14,343,000 12,935,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ARGUSS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Sept. 30,
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 9,032,000 $ 5,028,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 8,127,000 6,219,000
Goodwill amortization 4,874,000 3,211,000
Non-cash stock compensation 332,000 --
Changes in assets and liabilities:
Accounts receivable (20,994,000) (994,000)
Costs and earnings in excess of billings (14,058,000) (13,630,000)
Inventories 110,000 1,508,000
Other current assets (32,000) (367,000)
Accounts payable 370,000 2,886,000
Billings in excess of costs and earnings 2,638,000 (748,000)
Accrued expenses and other liabilities 6,060,000 6,166,000
------------ ------------
Net cash provided by (used in)
operating activities (3,541,000) 9,279,000
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (13,052,000) (11,224,000)
Additional payment to former shareholders
of acquired companies (799,000) (7,604,000)
Purchase of telecom services companies, net (17,166,000) (2,517,000)
------------ ------------
Net cash used in investing activities (31,017,000) (21,345,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from lines of credit 36,524,000 19,709,000
Repayments of long-term debt (6,004,000) (6,887,000)
Issuance of common stock 1,422,000 1,103,000
------------ ------------
Net cash provided by financing activities 31,942,000 13,295,000
------------ ------------
Net decrease in cash (2,616,000) 1,859,000
------------ ------------
Cash at beginning of period 5,498,000 1,819,000
------------ ------------
Cash at end of period $ 2,882,000 $ 3,678,000
============ ============
(continued)
5
<PAGE>
ARGUSS COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine Months Ended Sept. 30,
2000 1999
---- ----
Supplemental disclosures of cash paid for:
Interest $ 4,764,000 $ 2,774,000
Corporate income taxes 7,105,000 1,687,000
Supplemental disclosure of
investing and financing activities:
Fair value of assets acquired:
Accounts receivable $ 11,923,000 $ 1,154,000
Other current assets 714,000 52,000
Inventory 874,000 --
Property and equipment 4,780,000 792,000
------------ ------------
Total non-cash assets 18,291,000 1,998,000
Liabilities (6,866,000) (350,000)
Long-term debt (7,203,000) (111,000)
------------ ------------
Net non-cash assets acquired 4,222,000 1,537,000
Cash acquired 116,000 --
------------ ------------
Fair value of net assets acquired 4,338,000 1,537,000
Excess of costs over fair value
of net assets acquired 31,993,000 25,671,000
------------ ------------
Purchase price $ 36,331,000 $ 27,208,000
============ ============
Common stock issued $ 17,175,000 $ 2,037,000
Cash paid, net 17,166,000 2,517,000
Amounts due to former shareholders
of acquired companies 995,000 11,745,000
Common stock issuable to former
shareholders of acquired companies 995,000 10,909,000
------------ ------------
Purchase price $ 36,331,000 $ 27,208,000
============ ============
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, wireless 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 September 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 amortized over a twenty-year period. The Company continually
evaluates whether events or circumstances have occurred that indicate that the
remaining useful life of goodwill may warrant revision or that the remaining
balance may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company 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>
For the Three Months Ended September 30:
2000 1999
---- ----
Income Net Income Net
Per Share Shares Income Per Share Shares Income
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $ .32 14,205,000 $4,608,000 $ .24 11,889,000 $2,852,000
Effect of stock options
and warrants (.01) 665,000 -- (.01) 522,000 --
Effect of additional shares
to be issued for purchase
of telecom services
company -- 38,000 -- (.01) 758,000 --
----- ---------- ---------- ----- ---------- ----------
Diluted $ .31 14,908,000 $4,608,000 $ .22 13,169,000 $2,852,000
===== ========== ========== ===== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30:
2000 1999
---- ----
Income Net Income Net
Per Share Shares Income Per Share Shares Income
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $ .66 13,779,000 $9,032,000 $ .43 11,798,000 $5,028,000
Effect of stock options
and warrants (.03) 540,000 -- (.02) 498,000 --
Effect of additional shares
to be issued for purchase
of telecom services
company -- 24,000 -- (.02) 649,000 --
----- ---------- ---------- ----- ---------- ----------
Diluted $ .63 14,343,000 $9,032,000 $ .39 12,935,000 $5,028,000
===== ========== ========== ===== ========== ==========
</TABLE>
E) Contract Accounting
-------------------
The retainage included in accounts receivable, representing amounts
withheld by contract with respect to ACG accounts receivable, was $7,252,000 and
$3,973,000 at September 30, 2000 and December 31, 1999, respectively. The
Company expects to collect substantially all the retainage within one year.
Sept. 30, December 31,
2000 1999
------------- -------------
Costs incurred on uncompleted contracts $ 86,224,000 $ 90,798,000
Estimated earnings 23,201,000 15,338,000
------------- -------------
109,425,000 106,136,000
Less: Billings to date 90,614,000 99,311,000
------------- -------------
$ 18,811,000 $ 6,825,000
============= =============
Included in accompanying balance sheets
under the following caption:
Costs and earnings in excess of billings $ 21,449,000 $ 6,825,000
------------- -------------
Billings in excess of costs and earnings (2,638,000) --
------------- -------------
$ 18,811,000 $ 6,825,000
============= =============
F) Acquisitions
------------
The Company, through ACG, actively pursues acquisitions in the telecom
infrastructure services industry. During the first nine months of 2000, the
Company made four acquisitions. The combined purchase price was $17.2 million in
cash and 1,070,000 shares of the Company's common stock, plus the assumption of
$7.2 million 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. $32.0 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. The purchase
8
<PAGE>
agreement of a telecom infrastructure services company acquired during the third
quarter of 2000 contains provisions for an additional payment by the Company to
former shareholders to be satisfied by the Company's common stock and cash. The
additional payment, which will be paid during the fourth quarter of 2000, will
aggregate $995,000 in cash and 56,000 shares of the Company's common stock.
During the first nine months of 2000, the Company also made an additional
payment to the former shareholders of a telecom infrastructure services company,
acquired in 1999, of $799,000 in cash and 13,000 shares of the Company's common
stock in accordance with the provisions of the purchase agreement. Additional
payments earned under the terms of the agreements are recorded as an increase in
goodwill.
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
September 30, 2000
------------------
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
<S> <C> <C> <C> <C>
External sales $ 73,490,000 $ 5,042,000 -- $ 78,532,000
Cost of sales, excluding
depreciation 52,292,000 3,969,000 -- 56,261,000
-------------- -------------- -------------- --------------
Gross profit, excluding
depreciation 21,198,000 1,073,000 -- 22,271,000
Operating expenses,
excluding depreciation 4,644,000 1,150,000 -- 5,794,000
Depreciation 2,974,000 40,000 2,000 3,016,000
Goodwill amortization 1,786,000 -- -- 1,786,000
Non-cash compensation expense 79,000 -- 114,000 193,000
Engineering and development -- 309,000 -- 309,000
Interest and other income (125,000) (9,000) -- (134,000)
Interest expense 2,004,000 86,000 -- 2,090,000
-------------- -------------- -------------- --------------
Pretax income (loss) $ 9,836,000 ($ 503,000) ($ 116,000) $ 9,217,000
============== ============== ============== ==============
Capital expenditures $ 8,741,000 $ 2,000 -- $ 8,743,000
============== ============== ============== ==============
Property, plant and equipment, net $ 45,574,000 $ 1,164,000 $ 15,000 $ 46,753,000
============== ============== ============== ==============
Total assets $ 267,640,000 $ 10,712,000 $ 2,431,000 $ 280,783,000
============== ============== ============== ==============
Total liabilities $ 124,959,000 $ 9,158,000 $ 14,836,000 $ 148,953,000
============== ============== ============== ==============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999
------------------
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
<S> <C> <C> <C> <C>
External sales $ 49,139,000 $ 4,212,000 -- $ 53,351,000
Cost of sales, excluding
depreciation 36,784,000 2,858,000 -- 39,642,000
-------------- -------------- -------------- --------------
Gross profit, excluding
depreciation 12,355,000 1,354,000 -- 13,709,000
Operating expenses,
excluding depreciation 2,833,000 1,070,000 1,000 3,904,000
Depreciation 2,142,000 53,000 -- 2,195,000
Goodwill amortization 1,208,000 -- -- 1,208,000
Engineering and development -- 322,000 -- 322,000
Interest and other income (186,000) -- -- (186,000)
Interest expense 1,050,000 63,000 -- 1,113,000
-------------- -------------- -------------- --------------
Pretax income (loss) $ 5,308,000 ($ 154,000) ($ 1,000) $ 5,153,000
============== ============== ============== ==============
Capital expenditures $ 2,804,000 $ 18,000 -- $ 2,822,000
============== ============== ============== ==============
Property, plant and equipment, net $ 35,643,000 $ 1,279,000 $ 23,000 $ 36,945,000
============== ============== ============== ==============
Total assets $ 185,699,000 $ 9,113,000 $ 5,718,000 $ 200,530,000
============== ============== ============== ==============
Total liabilities $ 98,225,000 $ 6,046,000 $ 10,872,000 $ 115,143,000
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000
------------------
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
<S> <C> <C> <C> <C>
External sales $ 184,318,000 $ 16,367,000 -- $ 200,685,000
Cost of sales, excluding
depreciation 134,960,000 12,613,000 -- 147,573,000
-------------- -------------- -------------- --------------
Gross profit, excluding
depreciation 49,358,000 3,754,000 -- 53,112,000
Operating expenses,
excluding depreciation 12,546,000 3,724,000 -- 16,270,000
Depreciation 7,999,000 119,000 9,000 8,127,000
Goodwill amortization 4,874,000 -- -- 4,874,000
Non-cash compensation expense 141,000 -- 191,000 332,000
Engineering and development -- 809,000 -- 809,000
Interest and other income (384,000) (16,000) -- (400,000)
Interest expense 4,827,000 209,000 -- 5,036,000
-------------- -------------- -------------- --------------
Pretax income (loss) $ 19,355,000 ($ 1,091,000) ($ 200,000) $ 18,064,000
============== ============== ============== ==============
Capital expenditures $ 13,040,000 $ 10,000 $ 2,000 $ 13,052,000
============== ============== ============== ==============
Property, plant and equipment, net $ 45,574,000 $ 1,164,000 $ 15,000 $ 46,753,000
============== ============== ============== ==============
Total assets $ 267,640,000 $ 10,712,000 $ 2,431,000 $ 280,783,000
============== ============== ============== ==============
Total liabilities $ 124,959,000 $ 9,158,000 $ 14,836,000 $ 148,453,000
============== ============== ============== ==============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
------------------
Telecom
Services Manufacturing All Other Total
-------- ------------- --------- -----
<S> <C> <C> <C> <C>
External sales $ 130,802,000 $ 12,163,000 -- $ 142,965,000
Cost of sales, excluding
depreciation 99,302,000 8,154,000 -- 107,456,000
-------------- -------------- -------------- --------------
Gross profit, excluding
depreciation 31,500,000 4,009,000 -- 35,509,000
Operating expenses,
excluding depreciation 8,850,000 3,140,000 -- 11,990,000
Depreciation 6,059,000 159,000 1,000 6,219,000
Goodwill amortization 3,211,000 -- -- 3,211,000
Engineering and development -- 1,006,000 -- 1,006,000
Interest and other income (380,000) -- -- (380,000)
Interest expense 2,997,000 163,000 8,000 3,168,000
-------------- -------------- -------------- --------------
Pretax income (loss) $ 10,763,000 ($ 459,000) ($ 9,000) $ 10,295,000
============== ============== ============== ==============
Capital expenditures $ 11,095,000 $ 129,000 -- $ 11,224,000
============== ============== ============== ==============
Property, plant and equipment, net $ 35,643,000 $ 1,279,000 $ 23,000 $ 36,945,000
============== ============== ============== ==============
Total assets $ 185,699,000 $ 9,113,000 $ 5,718,000 $ 200,530,000
============== ============== ============== ==============
Total liabilities $ 98,225,000 $ 6,046,000 $ 10,872,000 $ 115,143,000
============== ============== ============== ==============
</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 $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
September 30, 2000, the market value of the swap, which expires with the
maturity of the debt on March 1, 2004, was $240,000. During the nine months
ended September 30, 2000, the Company's receipts under the interest rate swap
aggregated $136,000.
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, wireless 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 SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
The Company had earnings before interest expense, taxes, depreciation,
amortization and non-cash stock compensation (EBITDA) of $16,302,000 for the
three months ended September 30, 2000, compared to $9,669,000 for the same
period one year ago. For the three months ended September 30, 2000, EBITDA, as a
percentage of net sales (EBITDA margin), was 20.8%, compared to 18.1% for the
comparable period in 1999. ACG had EBITDA of $16,679,000 for the three months
ended September 30, 2000, compared to $9,708,000 for the same period in 2000.
ACG achieved an EBITDA margin of 22.7% for the three months ended September 30,
2000 and 19.8% for the three months ended September 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 net income of $4,608,000 for the three months ended
September 30, 2000, compared to $2,852,000 for the three months ended September
30, 1999. The Company's results were favorably impacted by improved performance
of telecom infrastructure projects located in New England and California.
Net sales for the three months ended September 30, 2000 were $78,532,000,
compared to $53,351,000 for the three months ended September 30, 1999, an
increase of 47%. Acquisitions contributed $16,723,000 to this increase.
Operations owned for at least one year had a net sales increase of $8,458,000 or
16% for the three months ended September 30, 2000.
Gross profit margin, excluding depreciation, was 28% of sales for the three
months ended September 30, 2000, compared to 26% for the three months ended
September 30, 1999. The improvement in margins is due to ACG, whose
aforementioned projects located in New England and California, as well as fiber
related projects, achieved greater sales volume and margins for the three months
ended September 30, 2000.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $5,794,000, compared to $3,904,000 for the three months
ended September 30, or 7% of net sales in both years. The increase in expense is
consistent with revenue growth. ACG has maintained selling, general and
administrative costs at 6% of net sales in both periods.
Depreciation expense increased to $3,016,000 for the three months ended
September 30, 2000, compared to $2,195,000 for the three months ended September
30, 1999 due primarily to ACG which made significant equipment acquisitions
during calendar year 1999, and during the nine months ended September 30, 2000.
Equipment is depreciated over sixty months. Depreciation expense from companies
acquired after September 30, 1999 was $401,000 during the three months ended
September 30, 2000.
Goodwill amortization, which is calculated using a twenty-year amortization
period, increased to $1,786,000 from $1,208,000 from the comparable period one
year ago due primarily to acquisitions made subsequent to September 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 $23.5 million and was recorded as an increase in goodwill. The
additional goodwill, amortized over the remaining amortization period, increased
goodwill amortization during the three months ended September 30, 2000 by
$140,000. The Company also recorded $40.1 million in additional goodwill since
September 30, 1999 related to five acquisitions. Amortization expense on the
goodwill related to these acquisitions was $438,000 for the three months ended
September 30, 2000.
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Interest expense for the three months ended September 30, 2000 was
$2,090,000, compared to $1,113,000 for the comparable period in 1999. ACG
interest expense increased for the three months ended September 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, and
additional working capital used, in support of ACG's revenue growth. Higher
interest rates related to the revolving credit line during the three months
ended September 30, 2000, compared to the three months ended September 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 $4,609,000 for the three months ended September 30,
2000, compared to $2,301,000 in income tax expense for the three months ended
September 30, 1999. The effective income tax rate was 50% and 45% for the three
months ended September 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 September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
The Company had earnings before interest expense, taxes, depreciation,
amortization and non-cash stock compensation (EBITDA) of $36,433,000 for the
nine months ended September 30, 2000, compared to $22,893,000 for the same
period one year ago. For the nine months ended September 30, 2000, EBITDA, as a
percentage of net sales (EBITDA margin), was 18.2%, compared to 16.0% for the
comparable period in 1999. ACG had EBITDA of $37,196,000 for the nine months
ended September 30, 2000, compared to $23,030,000 for the same period in 2000.
ACG achieved an EBITDA margin of 20.2% for the nine months ended September 30,
2000 and 17.6% for the nine months ended September 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 net income of $9,032,000 for the nine months ended
September 30, 2000, compared to $5,028,000 for the nine months ended September
30, 1999. The Company's results were favorably impacted by improved performance
of telecom infrastructure projects located in New England, fiber related
projects and engineering and design services.
Net sales for the nine months ended September 30, 2000 were $200,685,000,
compared to $142,965,000 for the nine months ended September 30, 1999, an
increase of 40% due, in part, to acquisitions. Acquisitions contributed
$31,534,000 to this increase. Operations owned for at least one year had a net
sales increase of $26,186,000 or 18% for the nine months ended September 30,
2000.
Gross profit margin, excluding depreciation, was 26% of sales for the nine
months ended September 30, 2000, compared to 25% for the nine months ended
September 30, 1999. The improvement in margins is due to ACG, whose telecom
infrastructure projects located in New England and fiber related projects had
improved margins for the nine months ended September 30, 2000.
Selling, general and administrative expenses for the nine months ended
September 30, 2000 were $16,270,000, compared to $11,990,000 for the nine months
ended September 30, 1999 or 8% of net sales in both years. The increase in
expense is consistent with revenue growth.
Depreciation expense increased to $8,127,000 for the nine months ended
September 30, 2000, compared to $6,219,000 for the nine months ended September
30, 1999 due primarily to ACG which made significant equipment acquisitions
during calendar year 1999, and during the nine months ended September 30, 2000.
The equipment is depreciated over sixty months. Depreciation expense from
companies acquired after September 30, 1999 was $714,000 during the nine months
ended September 30, 2000.
Goodwill amortization, which is calculated using a twenty-year amortization
period, increased to $4,874,000 from $3,211,000 from the comparable period one
year ago due primarily to acquisitions made subsequently to September 30, 1999,
and an additional payment made to former shareholders of an acquired company
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made in November 1999. The additional payment earned under the terms of the
purchase agreement was $23.5 million and was recorded as an increase in
goodwill. The additional goodwill, amortized over the remaining amortization
period, increased goodwill amortization during the nine months ended September
30, 2000 by $770,000. The Company also recorded $40.1 million in additional
goodwill since September 30, 1999 related to five acquisitions. Amortization
expense of the goodwill related to these acquisitions was $893,000 for the nine
months ended September 30, 2000.
Interest expense for the nine months ended September 30, 2000 was
$5,036,000, compared to $3,168,000 for the comparable period in 1999. The ACG
interest expense increased for the nine months ended September 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, and
additional working capital used, in support of ACG's revenue growth. Higher
interest rates related to the revolving credit line during the nine months ended
September 30, 2000, compared to the nine months ended September 30, 1999, also
contributed to higher interest expense, as relevant rates increased
approximately 50 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 $9,032,000 for the nine months ended September 30,
2000, compared to $5,267,000 in income tax expense for the nine months ended
September 30, 1999. The effective income tax rate was 50% and 51% for the nine
months ended September 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 nine months ended September 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 nine months ended September 30, 2000
was $3,541,000 compared with $9,279,000 of cash provided by operations for the
nine months ended September 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 nine months ended September
30, 1999.
Net cash used for investing activities for the nine months ended September
30, 2000 was $31,017,000, compared to $21,345,000 in the comparable period of
1999. Of the 2000 investing activities, $17,166,000 was used to make
acquisitions compared to $2,517,000 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, $13,052,000 was spent on capital equipment acquisitions compared to
$11,224,000 in 1999. The increase from 1999 reflects additional capital asset
purchases for an additional ACG facility in the Pacific Northwest, as well as
purchases to expand ACG revenue.
Net cash provided by financing activities was $31,942,000 for the nine
months ended September 30, 2000, compared to net cash provided by financing
activities of $13,295,000 for the comparable period in 1999. The financing
activity in 2000 reflects 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.
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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
September 30, 2000, the market value of the swap, which expires with the
maturity of the debt on March 1, 2004, was $240,000. During the nine months
ended March 31, 2000, the Company's receipts under the interest rate swap
aggregated $136,000.
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 on 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 $19,500,000 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 $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, 4 and 5: Not Applicable.
Item 6: Exhibits and Reports on form 8-K
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K:
none
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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.
November 1, 2000 By: /s/ Rainer H. Bosselmann
-----------------------------------------
Rainer H. Bosselmann
Chief Executive Officer
November 1, 2000 By: /s/ Arthur F. Trudel
-----------------------------------------
Arthur F. Trudel
Principal Financial Officer and Principal
Accounting Officer
17
