SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-25364
ANICOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3885212
(State of incorporation) (IRS Employer Identification No.)
6133 North River Road, Suite 1000, Rosemont, Illinois 60018-5171
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 518-8700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (for the purpose of this calculation only, the registrant's directors
and executive officers are deemed affiliates), based on the closing price of the
registrant's Common Stock on March 16, 1998: $282,075,206.
The number of shares outstanding of the registrant's Common Stock as of
March 16, 1998: 23,294,408
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the issuer's Notice of Annual Meeting of Stockholders and
Proxy Statement for its Annual Meeting of Stockholders to be held on May 20,
1998 are incorporated by reference into Part III of this report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Anicom, Inc. ("Anicom" or the "Company") specializes in the sale and
distribution of communications related wire, cable, fiber optics and computer
network and connectivity products. The products offered by Anicom generally fall
into five categories: (i) voice and data communications and fiber optics, (ii)
sound, security, fire, alarm and energy management systems, (iii) electronic
cable, (iv) industrial cable, wiring and assemblies for automation, computers
and robotics, and (v) cable television. The fastest growing products for the
Company are in voice and data communications and fiber optics, including an
assortment of transmission media (copper and fiber optic cable), components
(blocks, brackets, jacks, patch cords, patch panels, connectors and stackable
hubs), related hardware and cable assemblies. From its initial public offering
in February 1995 to December 31, 1997, the Company grew from 7 to more than 50
locations through internal expansion and the successful completion of 12
acquisitions.
Anicom is a national leader in the sale and distribution of multimedia
wiring products. The Company has assembled an experienced management team and,
in the fourth quarter of 1997, completed a significant investment in the
implementation of an information technology and distribution system which is
year 2000 compliant and, in management's opinion, capable of supporting Anicom's
integrated growth strategy. The five person management team that formed and has
grown Anicom collectively has more than 100 years of experience in the sale and
distribution of multimedia wiring products. The Company's Chairman of the Board,
Alan B. Anixter, and Board member William R. Anixter, were the co-founders of
Anixter Bros., Inc., ("Anixter Bros.") an international specialist in the
distribution of wire, cable and related products. Alan B. Anixter served as the
Chairman and Chief Executive Officer of Anixter Bros., until 1988. During his
career at Anixter Bros., that company consummated more than 40 corporate
acquisitions and by 1988, had grown to over $1.0 billion in annual net sales. In
addition, the Company's Chairman and Chief Executive Officer, Scott C. Anixter,
previously was a director of Anixter Bros. while the Company's President, Carl
E. Putnam, previously was a Regional Vice President of Anixter Bros. The Company
believes that the extensive industry experience of its management team and sales
personnel has enabled it to establish and maintain strong relationships with
major vendors and customers and that such experience will continue to serve as a
valuable asset in the implementation of Anicom's integrated growth strategy.
Background
Several of the industries serviced by Anicom have experienced
significant growth in recent years and are expected to continue to grow at a
rapid pace. As these industries continue to evolve, management believes that the
demand for products offered by the Company will also continue to grow. By
focusing on distribution, management believes that it can readily respond to the
changing demands of the industries it serves and is not reliant upon the success
of a particular product or product category. The products distributed by the
Company are components utilized by contractors and end-users in the installation
or upgrading of highly technical communications systems. As such, the Company's
products often are subject to strict technical specifications. The degree to
which products adhere to these technical specifications, such as class of cable
or specific connector impedance specifications, is a significant factor in
differentiating among products. Accordingly, distributors primarily distinguish
themselves by the depth and breadth of products offered and their knowledge of
these products. Anicom's sales personnel, who average approximately ten years of
experience in the sale and distribution of multimedia wiring products, work with
Anicom's customers and vendors to match products to the technical specifications
supplied by its customers. Management believes that this level of service is
important in attracting and retaining customers as well as distinguishing itself
as a provider of products, service and value.
1
The growing market for the distribution of communications related wire,
cable, fiber optics, cable television and computer network and connectivity
products is highly fragmented, with few companies maintaining greater than $50
million in annual net sales. Anicom's integrated growth strategy focuses on (i)
increasing revenue through acquisitions and internal growth into targeted
geographical markets; (ii) expanding product offerings, improving market share
and providing superior customer service and (iii) continuing to achieve
profitability in existing and acquired operations through the implementation of
financial and operational controls.
Voice and Data Communications and Fiber Optics
Anicom's customer base consists of a wide array of businesses,
including contractors, systems integrators, security/fire alarm companies,
regional Bell operating companies, distributors, utilities, telecommunications
and sound contractors, cable television installers, wireless specialists,
construction companies, universities and governmental agencies. These customers
utilize the products offered by Anicom in a multitude of existing applications.
In addition, a large number of leading telecommunications, computer, computer
software and entertainment companies have committed significant resources to
developing plans for the delivery of broadband communications services which are
expected to increase the use of protocols including Ethernet(R) and Fast
Ethernet(R) networks, as well as asynchronous transfer mode ("ATM") technology.
New systems and technology such as these are anticipated to involve the use of
fiber optic cable, copper cable or wires manufactured to specifications
different from those currently in use. At the same time, the proliferation of
personal computers and advances in networking technology have resulted in
increased demand for interconnected local area network ("LAN") and wide area
network ("WAN") systems that utilize the products offered by Anicom. The growth
of these types of networks has resulted in a separate purchasing process for
electronic data transmission cable and components utilized in these networks.
Anicom coordinates with end-users, systems integrators and network cable
manufacturers in determining specifications of the cable and connectivity
products required for a particular network.
Sound, Security, Fire, Alarm and Energy Management Systems
The demand for the multimedia wiring products offered by Anicom for use
in these types of systems has increased in recent years as a result of
technological advances in commercial building automation, greater concern
regarding the safety features of commercial buildings and the increased demand
for residential security systems. The growth in this market generally is
regarded as the result of increased concern about crime, as well as the result
of technological advances that have allowed manufacturers to improve reliability
and features while lowering the installed costs of such systems. Similarly,
publicly and privately owned buildings, such as office buildings, stadiums,
hospitals and correctional facilities, also continue to use more sophisticated
computer, security, communications and sound systems that incorporate the types
of multimedia wiring products offered by Anicom. The systems used by contractors
and systems integrators in these types of facilities not only offer greater
building automation and more sophisticated communication systems but also are
designed to meet the increasingly stringent safety requirements imposed by local
and national building codes.
Cable Television
Industry sources estimate that U.S. cable systems pass 97% of U.S.
television households and in excess of 68% of those households are cable
subscribers. Cable operators compete to provide subscribers with greater
programming selections, interactive entertainment and educational services,
competitive access services, and switched voice, data and other two-way
telephone communication services. In addition, the entrance of telephone
companies into the cable industry, the consolidation of cable and telephone
companies, new wireless technologies and direct broadcast satellite services are
expanding the variety of products and services available in this market.
2
Anicom was able to enhance its presence in the CATV distribution
business with its acquisition of TW Communications Corporation ("TW") in
December 1997. Anicom is selling to cable television installation contractors
and multisystem cable operators many of the same multimedia wiring products
distributed by Anicom to other markets. Similarly, many of the products used by
cable companies have applications in the voice, data and security markets. The
ability to provide a full line of products to a wide range of customers is
crucial to the success of any supplier to the cable television market. The
market is highly competitive, and is based on performance, quality, service,
technical and administrative support, and product differentiation.
Electronic and Industrial Cable
Anicom also offers wire and cable products for use in a wide variety of
electrical and electronic systems. Anicom sells these products to contractors,
end-users, systems integrators and original equipment manufacturers ("OEMs").
The wire and cable products are used in the manufacturing of electrical and
electronic equipment, as well as the replacement of wire and cable in existing
systems. Anicom also sells and distributes wire and cable products for
industrial use in the automotive, mining, marine, petro-chemical, paper and pulp
and other natural resource industries.
The Acquisition Strategy
Anicom has implemented an integrated growth strategy focusing on
increasing revenue through (i) acquisitions and internal growth into targeted
geographical markets, (ii) expanding product offerings, improving market share
and providing superior customer service, and (iii) continuing to improve
profitability in existing and acquired operations through the implementation of
financial and operational controls.
Generally, Anicom seeks to acquire established, high-quality companies
in targeted geographical markets. Anicom also may pursue companies with
substantially greater revenues than those of the Company. Anicom generally
expects to retain the management and sales personnel of the acquired company
while seeking to increase its net sales through the availability of a greater
selection and depth of inventory and to improve its profitability by achieving
economies of scale through the use of the Company's integrated inventory and
information systems. Anicom believes that management's industry experience and
Anicom's inventory and information systems make it an attractive acquirer,
particularly for those companies whose owners desire to remain involved in
day-to-day operations. As consideration for future acquisitions, Anicom plans to
continue to use various combinations of cash, securities and notes.
The Products and Services
Anicom offers a wide selection of communications related wire, cable,
fiber optics and computer network and connectivity products supplied by over 400
manufacturers. Anicom focuses on carrying quality, name brand products that meet
or exceed industry standards. The products offered by Anicom generally fall into
five categories: (i) voice and data communications and fiber optics, (ii) sound,
security, fire, alarm and energy management systems, (iii) electronic cable,
(iv) industrial cable, wiring and assemblies for automation, computers and
robotics, and (v) cable television.
The fastest growing products for Anicom are in voice and data
communications and fiber optics. Management estimates that less than 25% of the
voice and data transmission systems currently in existence utilize fiber optic
cable, and management believes that the replacement of existing cable with fiber
optic cable represents a significant opportunity for the Company. Anicom sells
single, duplex and multifiber cables for internal and external data
communication use in the computer network, computer interconnect and building
automation and safety markets.
3
The Company also offers custom and standard cables, both shielded and
unshielded, to transmit data for LAN and WAN systems. Anicom offers a wide
variety of electronic multiconductor cables for the computer, security,
instrumentation and interconnection markets, wire and cable constructions (such
as a variety of shielded and unshielded twisted pairs), and ancillary products
such as blocks, brackets, jacks, patch cords, patch panels, connectors,
stackable hubs, and related hardware and cable assemblies.
The Company carries a wide selection of wire, cable, fiber optics and
related computer network and connectivity products used in sound, security,
alarm and energy management systems and signaling equipment for fire and
life-safety systems. These products include many of the same components used in
voice and data communication. Anicom sells these products to low voltage
contractors, OEMs and commercial end-users.
Anicom also sells and distributes wire and cable products for use in a
wide variety of electrical and electronic systems. Anicom sells these products
to contractors, end-users, systems integrators and OEMs. Anicom also sells and
distributes wire and cable products for industrial use, including portable
cords, power cables, control and instrumentation cables, mining and welding
cables, armored and high voltage cables and building wire.
Anicom offers a variety of multimedia products (such as cable televison
wire, cable, connectors, wall plates, safety products, tools, etc.) to the cable
television market. Many of these products also have applications in the voice,
data and security markets. Anicom currently sells these products to cable
television installation contractors and multisystem operators.
In addition to providing multimedia wiring products to customers on a
timely basis, Anicom provides value-added, specialized services to its
customers, including cutting and re-spooling services, technical support and
cable assemblies, in response to specific customer requests. One of Anicom's
more popular value-added features is Exacpac(R), which marks packages of wire or
cable in one foot increments beginning at the base of the package. This feature
allows the end-user to monitor the remaining length of wire or cable in a
package without having to keep track of the length of wire or cable used. Anicom
also has the ability to procure selected specialty items not readily available
to customers, and, through its experienced sales personnel, Anicom is able to
offer its customers technical assistance and support in the selection of
appropriate products. Each significant product category has a dedicated project
manager who is responsible for obtaining the latest information on product
offerings and distributing the information throughout the sales force. In
addition, certain of Anicom's more experienced sales personnel have developed
extensive knowledge in specific product categories (e.g., fiber optics).
Anicom's sales personnel are trained to seek out assistance from those relevant
product managers or salespersons who have developed this degree of knowledge.
Management believes that Anicom more aggressively seeks to capitalize on this
expertise and experience than some of the larger, national and regional
distributors of multimedia wiring products with which it competes.
Sales and Marketing
Anicom is committed to making it easier and more cost effective for its
customers to acquire wire, cable, fiber optics and computer network and
connectivity products. Anicom has established strong customer relationships
through an extensive and experienced sales and marketing force of approximately
400 people operating nationally.
As a result of the Company's business reengineering plan, Anicom has
created four territories, each of which is managed by a General Manager. The
General Managers have an average of approximately fifteen years of experience in
the sale and distribution of multimedia wiring products. Each General Manager is
responsible for the management of short-term and long-term sales and
4
marketing efforts in his geographic area. In addition, the General Managers are
supported by a network of eight Regional Managers who have an average of ten
years experience in the industry.
The sales and marketing force is responsible for establishing and
maintaining long-term relationships with customers and industry referral
sources, soliciting new business from prospective customers and responding to
incoming inquiries and orders. Anicom monitors customer satisfaction through
internal controls and regular interaction with its customers.
Anicom identifies potential customers through telemarketing efforts,
responses to direct marketing materials, periodic advertisements in trade
journals, industry trade shows and inquiries to its internet web site. Anicom
also receives numerous referrals from customers and vendors. Anicom periodically
provides product and service information to its customers by distributing
promotional literature and product catalogs to existing and potential customers.
Sales and marketing representatives follow-up on customer inquiries through
further distribution of Anicom's informational materials and on-site visits.
Once a customer relationship has been established, Anicom focuses on identifying
opportunities to market a broader array of products to the customer.
Anicom rewards its sales and marketing force through an incentive-based
bonus program. Under this program, quantifiable performance goals are
established each year by Anicom and each employee. In addition, Anicom seeks to
achieve Company-wide objectives and encourage a "team" concept by rewarding its
sales personnel through supplementary discretionary bonuses based on
Company-wide or location-based goals.
Suppliers and Inventory
Management believes that Anicom is not dependent on any particular
supplier. Anicom offers a large number of products manufactured by a variety of
vendors. Management believes that vendor relationships are important to Anicom's
success, and Anicom focuses sharply on maintaining such relationships.
Purchasing decisions generally are made at Anicom's headquarters in the Chicago
area and manufacturers are instructed to ship inventory to the sales and
warehouse locations (or, in some cases, directly to customers) specified by
Anicom. Management believes that Anicom has a good working relationship with its
existing suppliers. Management believes that Anicom could obtain competitive
products of comparable quality from other suppliers and does not believe that
the loss of any one supplier would have a material adverse impact on Anicom's
results of operations or financial condition.
Anicom's objective is to provide its customers with a continuity of
supply and delivery scheduling that responds to their needs without requiring
excessive levels of inventory. Management also can generate real-time
information on inventory levels using this on-line system. While the depth and
breadth of products offered has increased over the last three years, the
emphasis on strict inventory control has allowed the Company to maintain its
order completion rate and to support its increasing sales levels without
increases in relative inventory levels. The Company's inventory management
programs are led by the Vice President of Purchasing who has over 15 years of
experience. The inventory control measures impose strict controls on the
discretion of Anicom's sales personnel and focus on continuing improvement of
the forecasting and monitoring models used. Anicom has not experienced any
significant inventory obsolescence.
The Management Information Systems
During the fourth quarter of 1997, Anicom completed the implementation
of a new information technology system. This custom-designed information
technology system builds upon the strengths inherent in Anicom's previous system
while allowing for the reengineering of certain business processes which were
necessary to accommodate the explosive growth that Anicom has experienced in the
5
last two years. The new information system, which is year 2000 compliant,
integrates sales, inventory control and purchasing, warehouse management,
financial control and internal communications while providing real-time
monitoring of inventory levels, shipping status and other key operational and
financial benchmarks at all of Anicom's sales and distribution locations.
This system improves management's ability to respond quickly and
efficiently to customer demands. All of Anicom's locations are networked into
the information technology system and integrated with Anicom's centralized
processing system. This system will allow management to continue to execute
their integrated growth strategy by providing a platform capable of managing a
company substantially larger than Anicom's current size. This new system will
allow Anicom to continue to quickly integrate the operations of its acquisitions
and maximize productivity which management believes translates into a lower
effective cost to customers. This system also contributes to Anicom's ability to
increase sales productivity by enabling the sales force to provide customers
with personalized service drawing on information contained in the database, and
allows the Company's sales force to provide technical product information in
marketing the products offered by Anicom.
The Company does not anticipate incurring any material additional costs
with respect to the initial implementation of its information technology system,
which is currently year 2000 compliant. The Company's payroll outsourcing
service has confirmed that the systems used to process the Company's payroll are
year 2000 compliant. The Company is in the process of determining whether its
customers and suppliers are year 2000 compliant.
Customers
Anicom's customer base consists of a wide array of businesses,
including auto manufacturers, contractors, systems integrators, security/fire
alarm companies, regional Bell operating companies, distributors, utilities,
telecommunications and sound contractors, cable television installers, wireless
specialists, construction companies, universities and governmental agencies. No
customer accounted for more than 10% of Anicom's net sales during the past three
years, and management believes that Anicom is not dependent on any particular
customer. With Anicom's increasing national presence and inventory selection,
management will continue to focus more of its efforts on the development of
sales to a larger number of national customers.
Competition
The market for multimedia wiring products is highly competitive and
fragmented. To compete successfully, management believes that the Company will
need to continue to distribute a broad range of technologically advanced
products, provide competitive pricing while maintaining its margins, provide
prompt delivery of products, deliver responsive customer service, establish and
maintain strong relationships with suppliers and customers, and attract and
retain highly qualified personnel. Anicom faces substantial competition from
several national and regional distributors, some of which have greater
financial, technical and marketing resources and distribution capabilities than
the Company and from manufacturers who sell directly to end-users for certain
large-scale projects.
Trade Names
Anicom maintains a number of registered trademarks and trade names in
connection with its business activities, including "Anicom(R)", "Exacpac(R),"
"Anicom MultiMedia Wiring Systems(R)" "RAPI-Change(R)," "Northern Wire &
Cable(R)," "NorthFlex(R)," "CFC(R)," "TW CommCorp(R)" and "L.I.P.S.(R)" Anicom's
policy is to file for trademark and trade name protection for its trademarks and
trade names.
6
Employees
As of March 26, 1998, Anicom employed approximately 790 persons. Anicom
believes that it has good relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
As of March 16, 1998, Anicom conducted its operations from 53 different
locations in 23 states, all of which are leased. Each of its locations consists
of a sales office and a warehouse, except for its locations in Rosemont,
Illinois; Lexington, North Carolina; Wausau, Wisconsin and one of its offices in
Troy, Michigan which do not include any warehouse space.
Anicom's aggregate executive office and sales office space as of March
16, 1998 is approximately 248,000 square feet and its aggregate warehouse space
is approximately 740,000 square feet. Generally, Anicom maintains short term
leases for its sales offices and warehouses, with options to renew, where
possible. Anicom believes that its facilities are adequate for its present
foreseeable needs in these geographical markets; however, the Company will
continue to increase space as the need arises. Management believes that adequate
replacement space is readily available in each market.
ITEM 3. LEGAL PROCEEDINGS
Anicom is not a party to any material legal proceeding nor, to Anicom's
knowledge, is any material legal proceeding threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during Anicom's
fiscal quarter ended December 31, 1997.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 25, 1996, the number of authorized shares of common stock
was increased from 10,000,000 to 30,000,000 following approval of such action by
the Company's stockholders at a special meeting. Following such action, a
2-for-1 stock split effected in the form of a 100% stock dividend was declared
for holders of record as of October 1, 1996, payable October 7, 1996. All
periods and sales prices presented have been restated to retroactively reflect
the 100% stock dividend.
Anicom's Common Stock is traded on the Nasdaq National Market under the
symbol "ANIC." The following table sets forth, for the periods indicated, the
range of high and low last sale prices for the Common Stock as reported on the
Nasdaq National Market:
1997 1996
------------------- -------------------
High Low High Low
------- ------- ------- ------
1st quarter 11 7 3/4 7 5/8 4 3/8
2nd quarter 12 1/2 7 7/8 10 1/8 6 3/8
3rd quarter 18 1/4 11 1/2 9 1/8 6 9/16
4th quarter 18 5/8 12 7/8 10 1/8 7 7/8
As of March 16, 1998, the approximate number of record holders of
Anicom's Common Stock was 1,523.
Anicom has not paid cash dividends or distributions on its capital
stock during 1996 or 1997. Anicom anticipates that it will retain any future
earnings to finance the continuing growth and development of its business.
Accordingly, Anicom does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The payment of any future dividends will be at
the discretion of Anicom's Board of Directors and will depend upon, among other
things, future earnings, the success of Anicom's development activities, capital
requirements, restrictions in financing arrangements, the general financial
condition of Anicom and general business conditions. At present, Anicom's
ability to declare or pay dividends is limited under its bank line of credit,
which provides that Anicom may not declare or pay any dividends on its Common
Stock if at the time of such declaration or payment, any event of default shall
have occurred or be continuing.
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ITEM 6. SELECTED FINANCIAL DATA
The data set forth below is derived from the Consolidated Financial
Statements of the Company, which have been audited by Coopers & Lybrand, L.L.P.,
independent accountants. These historical results are not necessarily indicative
of the results to be expected in the future.
Year ended December 31,
--------------------------------------------------
1997 1996 1995 1994
----------- ---------- --------- ---------
(in thousands, except per share data)
Selected Statement of Income Data:
Net sales $ 243,664 $ 115,993 $ 29,358 $ 17,866
=========== ========== ========= ==========
Net Income $ 4(3) $ 2,623 $ 764 $ 412
=========== ========== ========= ==========
Pro forma net income(1) $ 247
==========
Net income per common share(2):
Basic $ -- (3) $ 0.20 $ 0.14 $ 0.17
=========== ========== ========= ==========
Diluted $ -- (3) $ 0.19 $ 0.14 $ 0.17
=========== ========== ========= ==========
Pro forma net income per share(1)(2) (unaudited):
Basic $ 0.10
==========
Diluted $ 0.10
==========
Weighted average number of shares outstanding(2):
Basic 17,476 13,384 5,408 2,400
=========== ========== ========= ==========
Diluted 17,476 13,580 5,658 2,400
=========== ========== ========= ==========
As of December 31,
------------------------------------------------
1997 1996 1995 1994
----------- ---------- --------- ----------
Selected Balance Sheet Data:
Total assets $ 215,457 $ 87,954 $ 41,169 $ 6,040
=========== ========== ========= ==========
Long term obligations $ 8,549 $ 3,952 $ 597 $ 2,760
=========== ========== ========= ==========
<FN>
_______________________________
(1) Prior to the Company's initial public offering in 1995, the Company was an
S Corporation and not subject to Federal (and some State) corporate income
taxes. The results for the year ended December 31, 1994 are adjusted to
reflect a pro forma tax provision as if the Company were subject to
corporate income taxes for such period.
(2) Earnings per share has been restated in accordance with FAS No. 128,
"Earnings Per Share."
(3) During 1997, the Company incurred approximately $5.6 million for the costs
related to the development and implementation of the business process
reengineering plan, implementing a new information technology system,
writing off all capitalized costs associated with the Company's previous
system, terminating certain contractual obligations that resulted from a
1996 acquisition, consolidating redundant facilities and the internal
resource costs related to the implementation of the new system and the
business process reengineering plan.
</FN>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth selected income statement data of Anicom
expressed as a percentage of net sales for the periods indicated:
1997 1996 1995
------ ------ ------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 76.8 75.4 76.3
------ ------ ------
Gross profit 23.2 24.6 23.7
Operating expenses and other:
Selling 10.7 11.3 10.4
General and administrative 9.7 9.9 9.6
Reengineering costs 2.3 -- --
------ ------ ------
Operating income .6 3.4 3.7
Interest expense (.3) (.2) (.2)
Interest income -- .5 .9
------ ------ ------
Income before income taxes .4 3.7 4.3
Provision for income taxes .3 1.4 1.7
------ ------ ------
Net income .1 2.3 2.6
Less: Dividend on preferred stock (.1) -- --
------ ------ ------
Net income available to common stockholders -- % 2.3% 2.6%
====== ====== ======
__________________________________
Note: Percentages may not sum due to rounding.
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996
Net sales for the year ended December 31, 1997 increased to a record
$243.7 million, a 110.1% increase over net sales of $116.0 million in 1996. The
significant increase is primarily attributable to acquisitions coupled with
internal growth, which has led to new customers, new products, increased market
share, expanded market penetration and increased volume with existing customers.
For the year ended December 31, 1997, net income and earnings per share were
$300,000 or $0.00 per share compared to $2.6 million or $0.20 (Basic earnings
per common share) and $0.19 (Diluted earnings per common share) in 1996. This
change is principally attributable to costs associated with the Company's
implementation of a business process reengineering plan which was centered
around a new information technology system, that is year 2000 compliant and
provides the capacity necessary to continue the Company's integrated growth
strategy into the next millennium. Details of the Company's reengineering plan
are discussed below.
Anicom's gross profit for the year ended December 31, 1997 increased by
$28.0 million or 97.9% to $56.6 million versus $28.6 million for the year ended
December 31, 1996. This increase resulted from Anicom's acquired sales volume
and internal growth. As a percentage of net sales, gross profit was 24.6% in
1996 compared to 23.2% in 1997. The gross margin improvements that resulted from
the economic efficiencies created by Anicom's increased purchasing volume were
offset by the impact of lower historical gross profit margins of recent
acquisitions. TW, which the Company acquired in December 1997 has significant
operations in the New York City market and carries different,
10
lower margin product offerings than Anicom has historically offered.
Consequently, management anticipates that 1998 gross margins may be less than
those reported for 1997. Management anticipates partially mitigating the impact
of TW's historically lower gross margins by increasing the depth and breadth of
product offerings maintained in stock at these locations, continuing to leverage
our purchasing volume with common vendors and working to develop mutually
beneficial arrangements with vendors new to Anicom.
Selling expenses increased by $12.9 million for the year ended December
31, 1997 in conjunction with the Company's increase in net sales and the
increase in sales headcount that resulted from the Company's acquisitions and
internal growth. Selling expenses as a percentage of net sales improved from
11.3% of net sales in 1996 to 10.7% of net sales in 1997. These improvements
resulted from the Company realizing operating leverage from its growth and
acquisitions and conforming the selling incentive programs of companies acquired
in 1996 with those of Anicom. These improvements were, in part, offset by
differences in the selling incentive programs in place at Energy, acquired in
July 1997. As currently structured, Anicom's selling incentive program calls for
increasing payouts as individual targets are achieved and surpassed. Management
has found this program to be an effective tool to incent internal growth.
General and administrative expenses increased from $11.6 million in
1996 to $23.6 million 1997. The Company's acquisitions in the last half of 1996
and 1997, non-recurring costs related to a product line sold during the first
quarter of 1997 and non-recurring post acquisition integration costs accounted
for the majority of the increase in general and administrative expenses. As a
percentage of net sales, general and administrative expenses improved to 9.7%
for the year ended December 31, 1997 from 9.9% in the year prior. These
improvements were attributable to increases in net sales outpacing required
expenses for general and administrative costs as the Company further realized
operating leverage from its acquisition-based, integrated growth strategy.
In the 22-month period from March, 1996 to December, 1997, the Company
completed nine acquisitions. The revenues for these entities in the last fiscal
year prior to acquisition by Anicom totalled approximately $282.0 million. Of
these nine acquisitions, three were completed within the last six months of 1997
and have accounted for approximately $153.7 million or 54.5% of the acquired
revenue. As the Company developed plans to implement the integration of these
businesses into the Anicom information technology system, it became clear that
the capacity of the existing system would be severally strained and that
improved efficiencies could be realized by evaluating each of the Company's
significant business processes. This realization, along with the need to upgrade
the Company's systems to year 2000 compliance, resulted in management
undertaking a significant business-reengineering program.
In the fourth quarter, the Company implemented a complete reengineering
plan, designed to further improve operating efficiencies within the organization
by leveraging the capabilities inherent in the new information system and
provide the additional information system capacity to continue the Company's
integrated growth strategy.
In November, 1997, the Emerging Issues Task Force released Issue No.
97-13 Accounting for Costs Incurred in Connection with a Consulting Contract or
an Internal Project That Combines Business Process Reengineering and Information
Technology Transformation ("EITF 97-13"). EITF 97-13 provides authoritative
guidance on how companies are to account for third-party or internally generated
costs associated with business process reengineering and information technology
transformation.
After considering the status of the system implementation project and
the impact of EITF 97-13, management decided to accelerate the conversion to the
new platform to mid-December, historically
11
the slowest portion of the year, to slow down sales in an effort to minimize any
distraction to our customers and to confine the costs to the fourth quarter of
1997. During 1997, the Company incurred approximately $5.6 million for the costs
related to the development and implementation of the business process
reengineering plan, implementing a new information technology system, writing
off all capitalized costs associated with the Company's previous system,
terminating certain contractual obligations that resulted from a 1996
acquisition, consolidating redundant facilities and the internal resource costs
related to the implementation of the new system and the business process
reengineering plan. See Note 5 to the Consolidated Financial Statements included
elsewhere herein.
Interest income decreased to $225,000 in 1997 from $564,000 in 1996.
During the first and third quarters of 1996, the Company earned interest income
on invested funds raised in common stock offerings. In the second and third
quarters of 1997, the Company earned interest on funds raised in its May private
placement of convertible preferred stock. The variance noted is the result of
the amounts and periods of time these funds were invested prior to their use.
In 1997, interest expense increased to $762,000 from $256,000 for 1996.
The increase is due to the Company borrowing against its credit facility for its
acquisition of Energy and funding increases in working capital required
principally by acquired locations.
The provision for income taxes decreased to $650,000 in 1997 from $1.6
million 1996. The decrease is a result of the decrease in income before income
taxes. For the years ended December 31, 1997 and 1996, the provision for income
taxes as a percentage of income before income taxes, increased to 68.4% from
38.2%. The increase is primarily attributable to the impact of non-deductible
meals and entertainment expenses and non-deductible goodwill amortization on a
significantly lower income before income tax amount.
Net income for the year ended December 31, 1997 was $300,000 as
compared to $2.6 million or 2.3% of net sales for the year ended December 31,
1996 as a result of the reengineering costs incurred and the impact of slowing
down sales in December 1997 to accommodate the acceleration of the information
system implementation. Excluding the impact of sacrificed sales in December and
the one time, non-recurring accounting charges, management believes that net
earnings for 1997 would have been approximately $.30 per share.
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Standards No. 128 Earnings Per
Share. There are no basic or diluted earnings per common share based on the
level of net income and common shares outstanding for the year ended December
31, 1997. In 1996, basic earnings per common share were $.20 and diluted
earnings per common share were $.19.
Year ended December 31, 1996 compared to year ended December 31, 1995
For the year ended December 31, 1996, the Company established record
net sales, net income and earnings per share ("EPS"). On a comparable basis with
1995, net sales increased by more than 295% to $116.0 million, net income
increased approximately 243% to $2.6 million, basic EPS increased 43% to $0.20
per share and diluted EPS increased 36% to $0.19 per share. These improvements
follow record 1995 results of $29.4 million in net sales, net income of $764,000
and basic and diluted EPS of $0.14 per share (based on over 40% fewer weighted
average shares outstanding).
The increase in net sales is primarily attributable to acquisitions
completed in the fourth quarter of 1995 and throughout 1996. The remainder of
the improvement is attributable to the Company's expanding breadth and depth of
product offerings which lead to increased market share, expanded market
penetration and increased volume with many existing customers.
12
For the year ended December 31, 1996, Anicom's gross profit as a
percentage of net sales increased to 24.6% compared to the 23.7% level achieved
in 1995. The improvement is principally a result of economic efficiencies
achieved from increased purchasing volume with vendors and centralizing the
purchasing function. These factors, combined with the acquired sales volume,
resulted in gross profit increasing more than fourfold to $28.6 million in 1996
as compared to $7.0 million in 1995.
Selling expenses increased from $3.1 million or 10.4% of net sales in
1995 to $13.1 million or 11.3% of net sales in 1996. The Company's acquisitions
in 1996 resulted in an increase in sales headcount and other variable selling
expenses. For 1996, the change in selling expenses as a percentage of net sales
resulted from the historically higher selling expenses of Northern; however,
selling expense as a percentage of net sales has decreased in each quarter
subsequent to the Northern acquisition.
General and administrative expenses increased from $2.8 million in 1995
to $11.6 million in 1996. The Company's acquisitions in 1996 resulted in an
increase in general and administrative expenses. As a percentage of net sales,
general and administrative expenses increased to 9.9% from 9.6% in 1995 due
primarily to amortization of goodwill resulting from acquisitions, non-recurring
acquisition and integration expenses, increased warehousing and distribution
costs primarily associated with industrial cable (a product line the Company
acquired in its acquisition of Northern) and increased costs associated with
Anicom's successful implementation of its integrated growth strategy net of
gains on the sale of product lines.
Interest income increased by approximately $308,000 or 120% to $565,000
in 1996 from $256,000 in 1995 as the Company invested the funds raised in its
November 1995 follow-on offering and its September 1996 private placement of
equity pending use of such funds to finance acquisitions and working capital
requirements.
In 1996, interest expense rose by $183,000 to $256,000. The increase
was a result of interest incurred on debt issued in certain acquisitions
completed during 1996 and other debt assumed in acquisitions.
The provision for income taxes increased to $1.6 million in 1996 from
$764,000 in 1995 as a result of the $3.0 million increase in income before
taxes. As a percentage of income before income taxes, the provision decreased to
38.2% in 1996 from 39.2% in 1995. This decrease was primarily attributable to
income earned on tax-exempt securities.
Liquidity and Capital Resources
As of December 31, 1997, Anicom had working capital of approximately
$67.5 million as compared to $33.4 million at December 31, 1996. Anicom also has
a $50 million unsecured revolving credit facility (the "Facility") with a
syndicate of lenders, including Harris Trust and Savings Bank, LaSalle National
Bank and The First National Bank of Chicago. The Facility provides various
annual interest rate options, determined from time to time, based upon the
Company's leverage ratio, as defined as either the agent's Domestic Rate less
.50% to .25% or LIBOR plus .50% to 1.00%. The Facility expires in July, 2000 and
can be extended at the Company's option to July, 2002 and contains customary
financial covenants, including minimum tangible net worth, interest coverage,
debt to earnings and current ratios. The Facility replaced the Company's
previous $10 million unsecured revolving credit facility. At December 31, 1997,
the amount outstanding under the Facility was $4.7 million at an interest rate
of 8.0% per annum.
Management believes that existing cash, cash equivalents, cash flows
from operations and draws on the Facility will be sufficient to fund current
operations, and its planned integrated growth strategy. The Company does not
currently have any significant long-term capital requirements which it believes
13
cannot be funded from the sources discussed above. However, in connection with
its acquisition and integrated growth strategy, the Company's capital
requirements may change based upon various factors, primarily related to the
timing of acquisitions and the consideration to be used as purchase price. The
Company continues to examine opportunities to raise funds through the issuance
of additional equity or debt securities through private placements or public
offerings and to increase its available lines of credit.
For the year ended December 31, 1997, operating activities used $13.0
million of cash compared with the $9.1 million provided during 1996. The
significant change between years is principally a result of the classification
of the Company's net marketable securities activity. This activity consists of
investing funds raised in financing activities until their liquidation in
connection with the Company's acquisition and integrated growth strategy.
Excluding the impact of marketable securities, Anicom used $17.4 million of cash
in operating activities during the year ended December 31, 1997 compared with
the use of $12.1 million during 1996. The largest use of cash in operations
resulted from acquisition related activities, including expanding product
offerings at acquired locations, and funding working capital deficiencies of
acquired companies and business acquisition liabilities. Investments in
receivables and inventory were funded, in part, by an increase in accounts
payable in both periods. Funding in both 1997 and 1996 was provided by private
placements of equity and borrowings under the facilities.
Investing activities utilized approximately $35.9 million in 1997. Cash
paid for the five acquisitions in 1997 accounted for the majority of cash used
for investing activities. The remainder represents funds used to expand the
Company's facilities to accommodate growth and the capitalized information
systems costs.
Cash flows from financing activities in 1997 totaled $49.4 million. The
net proceeds from the sale of Preferred Stock in May 1997 were approximately
$26.2 million and the net proceeds from a private placement of 2.9 million
shares of common stock in December 1997 were approximately $36.1 million.
Additionally, the Company paid approximately $13.6 million of bank debt
assumed in the TW acquisition, $3.5 million of bank debt assumed in the Carolina
Cable acquisition and $1.0 million of debt issued in connection with a 1996
acquisition. During both periods, the Company drew against and made repayments
on its revolving credit facilities.
Inflation
Although the operations of Anicom are influenced by general economic
conditions, Anicom does not believe that inflation had a material effect on the
results of the operations during 1997.
Seasonality
In the fourth quarter, Anicom has historically experienced, and expects
to experience in future years, a modest decrease in the level of activity among
many of its customers around the Thanksgiving and Christmas holidays.
Impact of Not Yet Effective Rules
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS No. 130"), was issued in June 1997. SFAS No. 130
requires the reporting of comprehensive income in a financial statement that is
presented with the same prominence as other financial statements. The Company's
financial statements are prepared in accordance with SFAS No. 130.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS No. 131"), was issued
in June 1997. This statement,
14
effective for financial statements for periods beginning after December 15,
1997, requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Based on the
Company's current operations, management does not anticipate any additional
disclosure being required by SFAS No. 131.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132"),
effective for fiscal years beginning after December 15, 1997, standardizes the
disclosure requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligation and fair values of
plan assets and eliminates certain disclosures that are no longer useful. The
Company has not yet determined the impact of this statement on its financial
statements.
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
The statements contained in Item 1 (Description of Business) and Item 6
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) that are not historical facts may be forward-looking statements.
Whenever possible, the Company has identified these forward-looking statements
by words such as "believes", "expects", "anticipates" and similar expressions.
Anicom cautions readers that these forward-looking statements are subject to a
variety of risks and uncertainties that could cause Anicom's actual results in
1998 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, Anicom. These risks and uncertainties are
more fully described in Anicom's filings with the Securities and Exchange
Commission including, without limitation, those described under "Risk Factors"
in the Company's Registration Statement on Form S-3 (File No. 333-41225). These
risks and uncertainties include, without limitation, Anicom's limited operating
history on which expectations regarding its future performance can be based,
general economic and business conditions affecting the industries of Anicom's
customers in existing and new geographical markets, competition from, among
others, national and regional distributors that have greater financial,
technical and marketing resources and distribution capabilities than Anicom, the
availability of sufficient capital, Anicom's ability to identify the right
product mix and to maintain sufficient inventory to meet customer demand,
Anicom's ability to successfully acquire and integrate the operations of
additional businesses and Anicom's ability to operate effectively in
geographical areas in which it has no prior experience.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is included in the Company's
consolidated financial statements, together with the report thereon of Coopers &
Lybrand, L.L.P., appearing on pages F-1 through F-26 of this Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference
from the sections captioned "PROPOSAL NO. 1--ELECTION OF DIRECTORS" and
"EXECUTIVE OFFICERS" of the definitive Proxy Statement to be filed in connection
with the Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference
from the section of the 1998 Proxy Statement captioned "EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference
from the section of the 1998 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference
from the sections of the 1998 Proxy Statement captioned "CERTAIN TRANSACTIONS."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following consolidated financial statements and notes
thereto, and the related independent auditors' report, are
included on pages F-1 through F-25 on this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Schedules
The following consolidated financial statement schedule is
included on page F-26:
Schedule II -- Valuation and Qualifying Accounts
All other financial statement schedules are omitted because
such schedules are not required or the information required
has been presented in the aforementioned financial
statements.
16
3. Exhibits. The following exhibits are filed with the
report or incorporated herein by reference as set forth
below.
Exhibit No. Description
-------------------- ------------------------------------------------------
2.1** Agreement and Plan of Merger, dated as of July 18,
1995, among Anicom, Pinnacle Wire & Cable, Inc.,
Raymond J. Costello and Robert A. Holous.
2.2*** Stock Purchase Agreement, dated September 19, 1995,
among Anicom, Morgan Hill, Inc. and Kenneth Jay
Burgess.
2.3**** Asset Purchase Agreement, dated as of March 4, 1996,
among Anicom, Inc., Northern Wire & Cable, Inc., and
Copperhead Acquisition Corp.
2.4***** Agreement and Plan of Reorganization, by and among
Anicom, Inc., Anicom-Southeast, Inc., Norfolk Wire &
Electronics, Inc., and Ronald A. Hurley, Robert H.
Jennings, Stephen M. Mobley and Vonda M. Hall, dated
as of August 30, 1996.
2.5******** Agreement and Plan of Merger dated as of November 24,
1997 between Anicom,Inc., TWC Acquisition Corporation,
TW Communications Corporation, Edward Goodstein and
Carl G. Palazzolo.
2.6******** Stock Purchase Agreement dated as of November 24, 1997
between Anicom, Inc. and the Purchasers named therein.
3.1* Restated Certificate of Incorporation of Anicom.
3.2* Restated Bylaws of Anicom.
3.3****** Certificate of Amendment of Certificate of
Incorporation of Anicom.
4.1* Specimen Stock Certificate representing Common Stock.
10.1* Credit Agreement, dated June 30, 1993, between Anicom
and Harris Trust and Savings Bank, as amended.
10.2* Commercial Lease Agreement, dated April 30, 1993,
between Anicom and Harris Trust and Savings Bank.
10.3******* Form of 1995 Stock Incentive Plan as Amended and
Restated.
10.4******* Credit Agreement, dated as of February 6, 1996,
between Anicom and Harris Trust and Savings Bank.
10.6* Shareholders Agreement
10.8* Form of Tax Indemnification Agreement
10.9* Form of Employment Agreement between Anicom and Scott
C. Anixter.
10.10* Form of Employment Agreement between Anicom and Carl
E. Putnam.
10.11* Form of Employment Agreement between Anicom and Robert
L. Swanson.
10.12****** Form of Amended and Restated 1995 Directors Stock
Option Plan
10.13**** Form of Employment Agreement between Anicom and Robert
Brzustewicz.
10.14**** Form of Employment Agreement between Anicom and Glen
Nast.
10.15**** Non-Negotiable Note issued to Northern Wire & Cable,
Inc.
10.16**** Guaranty by Anicom to Northern Wire & Cable, Inc.
10.18******* 1996 Stock Incentive Plan
10.17******* Form of Employment Agreement between Anicom and Donald
Welchko
17
Exhibit No. Description
-------------------- ------------------------------------------------------
21 List of Subsidiaries.
23.1 Consent of Independent Accountants
27 Financial Data Schedule
_________________________
* Previously filed as an Exhibit to Anicom's Registration Statement on
Form SB-2, registration no. 33-87736C and incorporated herein by
reference thereto.
** Previously filed as an Exhibit to Anicom's current report on Form 8-K,
dated August 10, 1995 and incorporated herein by reference.
*** Previously filed as an Exhibit to Anicom's current report on Form 8-K,
dated October 16, 1995 and incorporated herein by reference.
**** Previously filed as an Exhibit to Anicom's current report on Form 8-K,
dated March 12, 1996 and incorporated herein by reference.
***** Previously filed as an Exhibit to Anicom's current report on Form 8-K,
dated August 30, 1996 and incorporated herein by reference.
****** Previously filed as an Exhibit to Anicom's quarterly report on Form
10-QSB, for the quarter ended September 30, 1996 and incorporated
herein by reference.
******* Previously filed as an Exhibit to Anicom's annual report on Form
10-KSB, for the quarter ended December 31, 1996 and incorporated
herein by reference.
******** Previously filed as an exhibit to Anicom's registration statement on
Form S-3, registration no. 333-41225, and incorporated herein by
reference.
(b) Reports on Form 8-K. The following Reports on Form 8-K or
Form 8-K/A were filed during the last quarter of 1997:
Form 8-K, dated December 12, 1997 (TW Communication Corporation)
18
Anicom, Inc.
Index to Consolidated Financial Statements and Financial Statement Schedule
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-25
The following consolidated financial statement schedule of
Anicom, Inc. is included in Item 14:
Schedule II - Valuation and Qualifying Accounts F-26
All other schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission are not required under the
related instructions and are inapplicable and, therefore, have been omitted.
F-1
Report of Independent Accountants
To the Stockholders and Board of Directors of Anicom, Inc.
We have audited the accompanying consolidated balance sheets of Anicom, Inc. as
of December 31, 1997 and 1996 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. In addition, we have audited the related financial
statement schedule. These financial statements and the related financial
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the related financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting policies used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Anicom,
Inc. as of December 31, 1997 and 1996 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand, L.L.P.
Chicago, Illinois
March 30, 1998
F-2
Anicom, Inc.
Consolidated Balance Sheets
As of December 31, 1997 and 1996
(in thousands, except per share data)
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 687 $ 195
Marketable securities -- 4,345
Accounts receivable, less allowance for doubtful
accounts of $2,442 and $980, respectively 65,125 26,972
Inventory 57,099 23,453
Deferred income taxes 2,478 1,557
Other current assets 4,866 1,016
-------- --------
Total current assets 130,255 57,538
Property and equipment, net 5,771 2,820
Goodwill, net of accumulated amortization of
$1,605 and $478, respectively 76,869 26,771
Deferred income taxes 835 --
Other assets 1,727 825
-------- --------
Total assets $215,457 $ 87,954
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,740 $ 20,727
Accrued expenses 7,909 613
Acquisition liabilities 5,337 1,205
Long-term debt, current portion 1,773 1,598
-------- --------
Total current liabilities 62,759 24,143
Long-term debt, net of current portion 6,267 3,013
Deferred income taxes -- 165
Other liabilities 2,282 774
-------- --------
Total liabilities 71,308 28,095
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share;
60,000 and 30,000 shares authorized,
respectively; 23,293 and 15,561 shares
issued and outstanding, respectively 15 7
Preferred stock, undesignated,
par value $.01 per share;
973 and 1,000 authorized,respectively;
no shares issued and outstanding -- --
Additional paid-in capital 140,743 56,465
Retained earnings 3,391 3,387
-------- --------
Total stockholders' equity 144,149 59,859
-------- --------
Total liabilities and stockholders' equity $215,457 $ 87,954
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Anicom, Inc.
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share data)
1997 1996 1995
--------- --------- ---------
Net sales $ 243,664 $ 115,993 $ 29,358
Cost of sales 187,098 87,442 22,404
--------- --------- ---------
Gross profit 56,566 28,551 6,954
--------- --------- ---------
Operating expenses:
Selling 25,948 13,068 3,058
General and administrative 23,547 11,547 2,822
Reengineering costs 5,584 -- --
--------- --------- ---------
Total operating expenses 55,079 24,615 5,880
--------- --------- ---------
Income from operations 1,487 3,936 1,074
--------- --------- ---------
Other income (expense):
Interest income 225 564 256
Interest expense (762) (256) (73)
--------- --------- ---------
Total other income (expense) (537) 308 183
Income before income taxes 950 4,244 1,257
Provision for income taxes 650 1,622 492
--------- --------- ---------
Net income 300 2,622 765
Less: dividends on preferred stock (296) -- --
--------- --------- ---------
Net income available
to common stockholders $ 4 $ 2,622 $ 765
========= ========= =========
Earnings per common share:
Basic $ -- $ .20 $ .14
========= ========= =========
Diluted $ -- $ .19 $ .14
========= ========= =========
Weighted average
common shares outstanding:
Basic 17,476 13,384 5,408
========= ========= =========
Diluted 17,476 13,580 5,658
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Anicom, Inc.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Convertible
Preferred Stock Common Stock Additional Total
-------------------- -------------------- Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
-------- -------- -------- -------- -------- -------- --------
Balance, January 1, 1995 2,400 $ 1 $ 156 $ 157
Distribution to former
Subchapter S shareholders $ (7) (156) (163)
Proceeds from issuance of
common stock, net of
offering costs 9,660 5 35,578 35,583
Issuance of common stock
for acquisitions 154 800 800
Net income 764 764
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995 12,214 6 36,371 764 37,141
Proceeds from issuance of
common stock, net of
offering costs 2,423 1 15,053 15,054
Issuance of common stock
for acquisitions 872 5,537 5,537
Exercise of stock options
and warrants 107 11 11
Receipt and cancellation of
common stock received in
sale of product line (55) (507) (507)
Net income 2,623 2,623
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 15,561 7 56,465 3,387 59,859
Proceeds from issuance of
convertible preferred stock,
net of offering costs 27 $ 26,155 26,155
Dividends issued to
convertible preferred
stockholders in common stock 29 296 (296)
Conversion of convertible
preferred stock to
common stock (27) (26,155) 3,130 3 26,152
Proceeds from issuance of
common stock, net of
offering costs 2,900 3 36,131 36,134
Issuance of common stock
for acquisitions 1,646 2 21,627 21,629
Exercise of stock options
and warrants 27 72 72
Net income 300 300
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1997 -- $ -- $ 23,293 $ 15 $140,743 $ 3,391 $144,149
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Anicom, Inc.
Consolidated Statements of Cash Flows
For the years ended December 1997, 1996 and 1995
(in thousands)
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income $ 301 $ 2,623 $ 764
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,037 441 120
Amortization 1,126 483 27
Deferred income taxes 615 527 (11)
Gain on sale of product lines (483) (878) --
Loss on disposal of property and equipment 278 -- --
Increase (decrease) in cash attributable
to change in assets and liabilities:
Marketable securities 4,345 21,191 (25,536)
Accounts receivable (6,702) (6,631) (1,729)
Inventory (12,710) (5,912) (1,937)
Other assets (1,865) (284) (166)
Accounts payable 3,693 2,366 (1,861)
Accrued expenses (2,648) (4,799) (56)
-------- -------- --------
Net cash (used in) provided by operating activities (13,013) 9,127 (30,385)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,297) (1,105) (395)
Cash paid for acquired companies (33,801) (14,201) (1,434)
Other 200 -- --
-------- -------- --------
Net cash used in investing activities (35,898) (15,306) (1,829)
-------- -------- --------
Cash flows from financing activities:
Proceeds from equity offerings, net of offering costs 62,365 15,054 35,576
Proceeds from long-term debt 57,340 4,190 727
Payment of long-term debt and assumed bank debt (70,302) (12,884) (3,926)
Other -- 11 (163)
-------- -------- --------
Net cash provided by financing activities 49,403 6,371 32,214
-------- -------- --------
Net increase in cash and cash equivalents 492 192 --
Cash and cash equivalents, beginning of year 195 3 3
-------- -------- --------
Cash and cash equivalents, end of year $ 687 $ 195 $ 3
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 695 $ 81 $ 54
======== ======== ========
Cash paid for income taxes $ 4,098 $ 1,382 $ 592
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Anicom, Inc. and Subsidiaries (the "Company") specializes in the sale
and distribution of communications related wire, cable, fiber optics
and computer network and connectivity products.
The Company sells to a wide array of customers, including contractors,
systems integrators, security/fire alarm companies, regional Bell
operating companies, distributors, utilities, telecommunications and
sound contractors, wireless specialists, construction companies,
universities, governmental agencies and companies involved in the
automotive, cable television, mining, marine, petro-chemical, paper and
pulp and other natural resource industries. The Company's customers are
principally located throughout the United States of America and other
parts of North America. The Company generally sells to its customers on
an unsecured basis.
Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements consist of Anicom,
Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Inventory
Inventory, which primarily consists of finished goods, is stated at the
lower of cost or market. Cost is determined by the weighted average
method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over five
years or the terms of the lease for leasehold improvements, generally
three to seven years. Major renewals and improvements are capitalized.
Expenditures for maintenance and repairs are expensed as incurred. Upon
retirement or other disposition of property, the cost and related
accumulated depreciation are removed from the accounts and any gain or
loss is recognized.
F-7
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
1. Nature of Business and Summary of Significant Accounting Policies,
continued
Goodwill
Goodwill arising from business combinations is amortized using the
straight-line method over forty years. The Company's evaluation of the
recoverability of goodwill includes consideration of operating
performance and undiscounted cash flows of the acquired business units.
Income Taxes
The Company applies the asset and liability approach to accounting for
income taxes. Deferred tax assets and liabilities are established for
the expected future tax consequences of temporary differences between
the financial statement and tax bases of assets and liabilities, using
enacted tax rates.
The Company's S Corporation status was terminated as of January 1,
1995. A cash distribution of $163 was paid to the Subchapter S
Shareholders of the Company in 1995, representing tax payments due with
respect to the taxable income of the Company prior to the termination
of its S Corporation status.
Financial Instruments
The fair value of cash and cash equivalents is assumed to approximate
the carrying value of these assets due to the short duration of these
assets. The fair value of the Company's debt (current and long-term) is
estimated to be the carrying value of these liabilities based upon
borrowing rates currently available to the Company for borrowings with
similar terms.
Revenue Recognition
Sales and the related cost of sales are recognized upon the shipment of
products.
Earnings Per Common Share
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"), effective December 31, 1997. SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per
share. The computation of basic earnings per common share is computed
based on net income available to common shareholders divided by the
weighted average common shares outstanding. The computation of diluted
earnings per common share is based on net income divided by weighted
average common shares and potentially dilutive securities such as stock
options and warrants.
Stock-Based Compensation
The Company applies the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting
for its stock-based employee compensation arrangements and discloses
pro forma net income and earnings per share information in its
footnotes as if the fair value method suggested in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") had applied.
F-8
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
1. Nature of Business and Summary of Significant Accounting Policies,
continued
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to
their 1997 presentation.
Recent Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
This statement, effective for fiscal years beginning after December 15,
1997, requires the Company to report components of comprehensive income
in a financial statement that is displayed with the same prominence as
other financial statements. The Company's financial statements are
prepared in accordance with SFAS No. 130.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." ("SFAS No. 131"). This statement, effective for
financial statements for periods beginning after December 15, 1997,
requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Based
on the Company's current operations, management does not anticipate any
additional disclosure being required by SFAS No. 131.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement, effective for fiscal years
beginning after December 15, 1997, standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligation and fair
values of plan assets and eliminates certain disclosures that are no
longer useful. The Company has not yet determined the impact of this
statement on its financial statements.
2. Property and Equipment
At December 31, property and equipment consisted of the following
components:
1997 1996
----------- -----------
Machinery, equipment and vehicles $ 2,604 $ 847
Office equipment 1,104 928
Computer equipment and software 2,944 1,330
Leasehold improvements 852 411
------------ ------------
Total cost 7,504 3,516
Less: Accumulated depreciation and amortization (1,733) (696)
------------ ------------
Property and equipment, net $ 5,771 $ 2,820
=========== ===========
F-9
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
3. Long-Term Debt
On July 3, 1997, the Company replaced its previous unsecured $10,000
revolving credit facility with a $50,000 unsecured revolving credit
facility (the "Facility") with a syndicate of lenders, including Harris
Trust and Savings Bank, LaSalle National Bank and The First National
Bank of Chicago. The Facility provides various interest rate options,
determined from time to time, based upon the Company's leverage ratio,
as defined and either the agent's Domestic Rate less .50% to .25% or
LIBOR plus .50% to 1.00%. The interest rate at December 31, 1997 was
8%. The Facility also contains customary financial covenants, including
minimum tangible net worth and current, interest coverage and debt to
earnings ratios. The Facility has an original termination date of July
3, 2000 which can be extended at the Company's option to no later than
July 3, 2002.
At December 31, long-term debt consisted of the following:
1997 1996
------- -------
Amounts due under the Facility $ 4,700
Noncollateralized loans payable to former shareholders of
acquired companies, each due in equal installments (except as noted):
6.55% note due March 12, 1999 2,000 $ 3,000
Prime rate note (8.5% at December 31, 1997), payable in 489 596
monthly installments through July 1, 2002
6.00% notes due May 30, 1997 to 1999 167 251
6.00% note due October 27, 1998 167 333
6.75% note due July 28, 1997 -- 200
5.5% to 5.9% demand notes 368 --
Other 149 231
------- -------
8,040 4,611
Less current portion (1,773) (1,598)
------- -------
$ 6,267 $ 3,013
======= =======
F-10
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
3. Long-Term Debt, continued
The following is a schedule of the aggregate maturities in each of the
five years ending December 31, 1998, and thereafter:
Amount
---------------
1998 $ 1,773
1999 1,244
2000 138
2001 122
2002 4,763
---------------
Total $ 8,040
===============
4. Common Stock
On June 10, 1997, the number of authorized shares of Common Stock was
increased from 30,000 to 60,000 following approval of such action by
the Company's stockholders at its annual meeting. This increase will
provide additional authorized but unissued shares of Common Stock to be
used for general corporate purposes, future acquisitions and equity
financings.
On September 25, 1996, the number of authorized shares of Common Stock
was increased from 10,000 to 30,000 following approval of such action
by the Company's stockholders at a special meeting. Following such
action, a 2-for-1 stock split effected in the form of a 100% stock
dividend was declared for holders of record as of October 1, 1996,
payable October 7, 1996.
On December 4, 1997, the Company completed a private placement of 2,900
shares of its common stock at $13.00 per share. Net proceeds to the
Company after related costs and expenses were approximately $36,100.
On September 16, 1996, the Company completed a private placement of
2,423 shares of its Common Stock at $6.50 per share. Net proceeds to
the Company after related costs and expenses were approximately
$15,100.
On November 27, 1995, the Company completed a follow-on public offering
of 6,000 shares of its common stock at $4.50 per share. On November 29,
1995, the underwriters exercised their over-allotment option to
purchase 900 shares of the Company's common stock. Net proceeds to the
Company, after underwriting discounts and other offering costs and
expenses were approximately $28,600.
F-11
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
4. Common Stock, continued
On March 1, 1995, the Company completed an initial public offering of
2,400 shares of its common stock at $3.00 per share. On March 15, 1995,
the underwriters exercised their over-allotment option to purchase 360
additional shares of the Company's common stock. Net proceeds to the
Company after underwriting discounts and other offering costs were
approximately $7,000. In connection with the offering, the Company
reincorporated in the State of Delaware.
5. Reengineering Costs
In the fourth quarter of 1997, the Company adopted a reengineering plan
(the "Plan") designed to provide additional system capacity to continue
the Company's integrated growth strategy, further improve operating
efficiencies within the organization and to make the Company Year 2000
compliant. Non-recurring charges related to the Plan include costs
related to developing and implementing a business process reengineering
plan, implementing a new information technology system, writing off all
capitalized costs associated with the Company's previous system,
terminating contracts associated with certain 1996 acquisitions,
consolidating redundant facilities and internal resource costs related
to the implementation of the new information technology system and
business process reengineering.
The following table summarizes these costs:
Implementation of information technology system $ 1,536
Internal resource costs
incurred during reengineering
development and implementation 1,459
Contract terminations and other
location consolidation costs 2,589
---------
$ 5,584
=========
F-12
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
6. Income Taxes
The provision for income taxes for the years ended December 31, 1997,
1996 and 1995 is comprised of the following:
1997 1996 1995
------- ------- -------
Current:
Federal $ 35 $ 879 $ 421
State 216 82
------- ------- -------
35 1,095 503
Deferred:
Federal 475 442 (9)
State 140 85 (2)
------- ------- -------
615 527 (11)
------- ------- -------
$ 650 $ 1,622 $ 492
======= ======= =======
The following is a reconciliation of the provision for income taxes
computed at the federal statutory rate to the provision for income
taxes reported for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
------- ------- -------
Computed income taxes at federal statutory rate $ 323 $ 1,443 $ 427
State income taxes, net of federal benefit 91 198 60
Non-deductible amortization 120 44 26
Other nondeductible expenses 128 73 25
Nontaxable investment income (18) (100) (46)
Other 6 (36)
------- ------- -------
$ 650 $ 1,622 $ 492
======= ======= =======
F-13
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
6. Income Taxes, continued
At December 31, 1997 and 1996, deferred income tax assets and
liabilities consisted of the following components:
1997 1996
------- -------
Current deferred income tax asset:
Accounts receivable $ (752) $ 43
Inventory 1,419 401
Acquisition liabilities, current 762 1,117
Reengineering costs 792
Other 257 (4)
------- -------
2,478 1,557
------- -------
Long-term deferred income tax asset (liability):
Property and equipment (73) (127)
Intangibles (770) (309)
Gain on sale of product lines (182) (51)
Acquisition liabilities, noncurrent 1,860 322
------- -------
835 (165)
------- -------
Net deferred income tax asset $ 3,313 $ 1,392
======= =======
7. Stock Options and Warrants
In January 1995, the Company adopted the 1995 Stock Incentive Plan (the
"1995 Plan") and the Directors' Option Plan (the "Directors Plan")
which authorize the granting of options to officers, key employees and
directors to purchase unissued common stock of the Company subject to
certain conditions, such as continued service. The 1995 Plan and the
Directors Plan authorized the granting of up to 1,200 and 100 options
to purchase common stock, respectively. The option price of options
granted under either of these plans is equal to the fair market value
on the date of grant.
In February 1996, the Company adopted the 1996 Employee Stock Incentive
Plan (the "1996 Plan") which authorized the granting of an additional
1,200 options to purchase common stock of the Company. The adoption of
the 1996 Plan was approved by stockholders in May 1996.
The Company amended the Directors Plan and the 1996 Plan to increase
the total number of shares of stock available for grant to 200 shares
and 1,800 shares, respectively in May 1996. This amendment was approved
by stockholders in September 1996.
All outstanding options vest ratably over periods ranging from three to
five years.
F-14
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
7. Stock Options and Warrants, continued
A summary of information related to these options for the years ended
December 31, 1997, 1996 and 1995 follows:
1997 1996 1995
--------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price/Share Shares Price/Share Shares Price/Share
--------- ---------- --------- ----------- --------- -----------
Outstanding, beginning of year 1,668 $ 7.10 365 $ 3.71 -- --
Granted 545 13.73 1,310 8.02 365 $ 3.71
Exercised/Canceled (27) 7.04 (7) 3.00 -- --
-------- --------- ------- --------- ------- -------
Outstanding, end of year 2,186 $ 7.19 1,668 $ 7.10 365 $ 3.71
======== ========= ======= ========= ======= =======
Available for grant, end of year 1,080 1,625 935
======== ======= =======
Price range at end of year $3.00 to $3.00 to $3.00 to
$16.87 $9.00 $4.50
========= ======= =======
Price range for exercised $3.00 to
$8.75 $3.00 $ --
========= ======= =======
Weighted-average fair value of
options granted during the year $ 2,239 $ 3,252 $ 463
========= ======= =======
Weighted
Average Weighted
Remaining Average
Number Number Contractual Exercise
Price per Share Outstanding Exercisable Life Price/Share
------------------- ------------ ----------- ---------------- ----------------
$3.00 to $ 4.50 351 159 7.4 years $ 3.71
$4.51 to $ 7.00 321 120 8.1 years 6.12
$7.01 to $ 9.00 976 250 8.6 years 8.63
$9.01 to $17.00 538 97 9.7 years 13.79
------------ ----------- ----------------
2,186 626 $ 7.19
============ =========== ================
F-15
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
7. Stock Options and Warrants, continued
SFAS No. 123 requires the Company to disclose pro forma net income and
earnings per share determined as if the Company had accounted for
stock-based compensation awards granted after December 31, 1994 under
the fair value method described in that statement. For purposes of this
disclosure, the fair value of options under SFAS No. 123 were estimated
at each grant date using a Black-Scholes option pricing model, the most
commonly used model, and the following assumptions: risk-free interest
rates from 5.7% to 7.2%, a dividend yield of zero, a volatility factor
of the expected market price of the Company's common stock of 26%, and
an expected option life of three to five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. The Company's employee stock
options have characteristics significantly different from those of
traded options, including vesting requirements and restrictions on
transfer. Because of these differences and the impact of the Company's
limited history, lack of comparable public companies, the Company's
rapid growth and the significant appreciation in stock price since its
initial public offering, management believes that the Black-Scholes
model may not provide a reliable measure of the fair value of the
Company's employee stock options.
The Company's results as reported and its pro forma results using the
valuation model discussed above are as follows:
1997 1996 1995
--------- --------- ---------
Net income $ 300 $ 2,622 $ 765
========= ========= =========
Net income (loss), pro forma $ (1,939) $ (629) $ 302
========= ========= =========
Earnings per common share, as reported:
Basic $ -- $ .20 $ .14
========= ========= =========
Diluted $ -- $ .19 $ .14
========= ========= =========
Earnings (loss) per common share, pro forma:
Basic $ (.11) $ (.05) $ .06
========= ========= =========
Diluted $ (.11) $ (.05) $ .05
========= ========= =========
In connection with the initial public offering, the Company issued
warrants to purchase up to 240 shares of common stock at an exercise
price of $3.60 to the representatives of the underwriters. These
warrants are exercisable for a five year period commencing on February
22, 1996. To date, 162 of these warrants have been exercised.
In connection with an acquisition, warrants to purchase 36 shares of
common stock were issued at an exercise price of $5.50. These warrants
become exercisable ratably over a three year period beginning October
2, 1996.
F-16
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
8. Acquisitions
On December 4, 1997, TW Communication Corporation ("TW") was acquired
when a wholly-owned subsidiary of the Company was merged into TW,
resulting in TW becoming a wholly-owned subsidiary of the Company. TW
is a distributor of wire, cable, fiber optics and installation supplies
predominantly to the telecommunications, data and cable television
industries primarily in the United States. The total purchase price
consisted of $3,000 in cash, and 874 shares of the Company's common
stock. In connection with the acquisition, the Company paid in full
approximately $13,600 of TW bank indebtedness.
On October 17, 1997, the Company acquired certain assets of
Zack-DataCom, the voice and data division of Zack Electronics, Inc.
("Zack") of San Jose, California, a leader in the sale and distribution
of multimedia low voltage products. The purchase price was $4,700
payable in cash and stock.
On July 11, 1997, the Company acquired Energy Electric Cable, a
division of Connectivity Products, Inc. ("Energy"). Energy is a
national specialist in the sale and distribution of multimedia wiring
products based in Auburn Hills, Michigan. The purchase price consisted
of $12,000 in cash and Common Stock and the pay down of $17,000 of
Connectivity Products, Inc. ("Connectivity") bank debt by Anicom. In
addition, the Company entered into a supply agreement with
Connectivity.
Anicom purchased all of the issued and outstanding common stock of
Security Supply, Inc. ("Security Supply") of New Orleans, Louisiana, on
March 21, 1997. Security Supply is a distributor of alarm, security and
life safety products in Louisiana and surrounding states. The purchase
price was approximately $2,000 payable in cash and common stock.
On February 28, 1997, the Company acquired substantially all of the
assets and assumed certain liabilities of Carolina Cable & Connector,
Inc. ("Carolina Cable") of Raleigh, North Carolina. Carolina Cable is a
specialist in the sale and distribution of wire and cable, fiber optics
and computer network and connectivity products. Carolina Cable has
seven locations in the Carolinas and Tennessee. The purchase price
consisted of $3,500 in cash and common stock. In addition, the Company
assumed approximately $3,500 of Carolina Cable indebtedness which was
paid in full at closing.
On September 3, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of Western Wire and Alarm
Products, Inc. ("Western") of Denver, Colorado, a specialist in the
sale and distribution of security devices and wire. The purchase price
was $300 payable in cash and common stock. In connection with the
acquisition, the Company paid in full $50 of Western's bank
indebtedness.
F-17
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
8. Acquisitions, continued
On September 1, 1996, the Company acquired Norfolk Wire & Electronics
Inc. ("Norfolk"), through the purchase of all issued and outstanding
shares of common stock. Norfolk's operations consisted principally of
the sale and distribution of voice and data wire, cable and ancillary
products. In addition to its four locations in the state of Virginia,
Norfolk had locations in Tinton Falls, New Jersey and Gaithersburg,
Maryland. The purchase price was $8,000 payable in cash and common
stock. At the closing, the Company paid in full approximately $2,600 of
Norfolk bank indebtedness.
On May 30, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Southern Alarm Supply Co., Inc.
("Southern") of Nashville, Tennessee, a specialist in the sale and
distribution of security devices and wire. The purchase price was $350
payable in cash and common stock.
On March 12, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Northern Wire & Cable, Inc.
("Northern"), a specialist in the sale and distribution of wire, cable,
fiber optics and connectivity products for structured wiring, power
cables, cable connector assemblies for automation, computers and
robotics and value-added services for the industrial management and
technology market. Northern had branches in Troy, Michigan; Cleveland,
Ohio; Atlanta, Georgia; Tampa, Florida; and Las Vegas, Nevada. The
purchase price was $13,600 payable in cash, notes and common stock. In
connection with the acquisition, the Company assumed approximately
$5,600 of Northern bank indebtedness which was paid in full at closing.
On February 22, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of Medisco, Inc. ("Medisco") of
Indianapolis, Indiana, a distributor of wire and cable products. The
purchase price was $837 payable in cash.
All acquisitions have been recorded under the purchase method of
accounting. Accordingly, the results of operations of the acquired
businesses are included in the Company's consolidated results of
operations from the date of acquisition. The purchase price is
allocated to assets acquired and liabilities assumed based on the
estimated fair market value on the date of the acquisition.
F-18
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
8. Acquisitions, continued
The following pro forma consolidated financial information assumes that
the Northern, Norfolk, Energy and TW acquisitions and the issuances of
equity discussed in Notes 4 and 11, which were a significant source of
the funds used in certain of the acquisitions, occurred on January 1,
1996. It further assumes that the equity transaction discussed in Note
11 resulted in the issuance of common stock, based on the conversion of
the Preferred Stock to Common Stock approximately four months after its
issuance. The results do not purport to be indicative of what would
have occurred had the acquisitions been made on January 1, 1996 nor are
they indicative of the results which may occur in the future.
1997 1996
---------- ----------
(unaudited)
Net sales $358,523 $286,373
========== ==========
Operating income 2,843* 7,469
========== ==========
Net income 1,538* 4,682
========== ==========
Pro forma earnings per common share:
Basic $.07* $.21
========== ==========
Diluted $.07* $.21
========== ==========
Pro forma weighted average common
shares outstanding:
Basic 22,834 22,565
========== ==========
Diluted 23,591 22,760
========== ==========
* During 1997, the Company incurred approximately $5.6 million
for the costs related to the development and implementation
of the business process reengineering plan, implementing a
new information technology system, writing off all
capitalized costs associated with the Company's previous
system, terminating certain contractual obligations that
resulted from a 1996 acquisition, consolidating redundant
facilities and the internal resource costs related to the
implementation of the new system and the business process
reengineering plan.
F-19
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Weighted Avg.
Net Income Shares Per Share
(Numerator) (Denominator) Amounts
------------- ------------- -----------
Year ended December 31, 1997:
Basic EPS:
Income available to common stockholders $ 4 17,476 $ -
============= ============= ===========
Effect of dilutive options
Diluted EPS:
Income available to common stockholders
plus assumed conversions $ 4 17,476 $ -
============= ============= ===========
Year ended December 31, 1996:
Basic EPS:
Income available to common stockholders $ 2,623 13,384 $ .20
============= ============= ===========
Effect of dilutive options 196
=============
Diluted EPS:
Income available to common stockholders
plus assumed conversions $ 2,623 13,580 $ .19
============= ============= ===========
Year ended December 31, 1995:
Basic EPS:
Income available to common stockholders $ 764 2,704 $ .28
============= ============= ===========
Effect of dilutive options 125
=============
Diluted EPS:
Income available to common stockholders
plus assumed conversions $ 764 2,829 $ .27
============= ============= ===========
F-20
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
10. Commitments and Contingencies
Employment Agreements
The Company has entered into employment agreements with certain
officers. In the event of a change in control, as defined, the
employment agreements provide for severance payments if employment is
terminated. The aggregate base salary payable to these officers under
the employment agreements in 1998 is $1,026. In the event of a change
in control, the Company may become obligated to make payments to these
officers of up to approximately $3,250.
Operating Leases The Company leases certain warehouse and office
facilities and equipment under operating leases. Rental expense under
the leases was approximately $3,216 , $1,419 and $364 for the years
ended December 31, 1997, 1996 and 1995, respectively. Approximate
minimum annual lease payments required on noncancelable leases having
initial or remaining lease terms in excess of one year as of December
31, 1997 are as follows:
Year Amount
------------------ -------------
1998 $ 4,897
1999 4,526
2000 3,619
2001 3,019
2002 2,323
Thereafter 4,893
-------------
Total $ 23,277
=============
The Company is also obligated to pay certain taxes and assessments
relating to these leases. Certain leases contain renewal options.
Retirement Plan
The Company maintains a defined contribution retirement plan (the
"Anicom Plan"). Employer contributions under the plan are limited to
25% of employee contributions up to 4% of compensation.
Subsequent to the acquisition of Norfolk, the Company gained an
additional defined contribution retirement plan (the "Norfolk Plan")
which required Company contributions of 25% up to a maximum of 4% of
employee compensation. Effective September, 1997, no further
contributions to the Norfolk Plan are allowed. Participants in the
Norfolk Plan have been given the opportunity to participate in the
Anicom Plan. Management anticipates the termination of the Norfolk Plan
by the end of 1998.
F-21
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
10. Commitments and Contingencies, continued
Retirement Plan, continued
With the acquisition of TW, the Company has a third defined
contribution plan (the "TW Plan"). The TW Plan allows employee
contributions of up to 15% of compensation. The TW Plan does not
require employer contribution.
Total Company contributions to the plans were approximately $113, $104
and $20 in 1997, 1996 and 1995, respectively.
Other
The Company is subject to legal proceedings and claims related to
acquired businesses and those that arise in the ordinary course of
business. In the opinion of management, the amount of any liability
with respect to these actions will not materially affect the financial
position or results of operations of the Company.
F-22
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
11. Other Financial Information
Acquisition liabilities
In connection with each of the Company's acquisitions, management
evaluates acquired operations and develops a plan to integrate these
operations into Anicom's existing structure. In connection with the
integrations, the Company may complete limited workforce reductions or
exit acquired lease agreements. As a part of the determination of
purchase price for acquired companies, liabilities are established for
these costs as well as external deal costs and other costs specific to
each acquisition. In each case, management establishes a plan specific
to the acquisition as soon as practicable after closing. Execution of
the plans are typically completed within a year after closing. Payment
of liabilities established may take place over several years depending
upon the agreed upon settlement.
Below is a summary of acquisition cost activity:
Tax
Lease Liabilities
External Exit and
Consultants Severance Costs Other Total
------- ------- ------- ------- -------
Balance, January 1, 1996 $ -- $ -- $ -- $ -- $ --
Establish liabilities 1,077 1,686 614 237 3,614
Expenditures (944) (867) (176) (59) (2,046)
------- ------- ------- ------- -------
Balance, December 31, 1996 133 819 438 178 1,568
Establish liabilities 1,882 3,091 2,043 1,827 8,843
Expenditures (1,537) (560) (286) (409) (2,792)
------- ------- ------- ------- -------
Balance, December 31, 1997 $ 478 $ 3,350 $ 2,195 $ 1,596 $ 7,619
======= ======= ======= ======= =======
Convertible preferred stock
Pursuant to an agreement dated May 20, 1997, the Company sold 27 shares
of $.01 par value, Series A Convertible Preferred Stock (the "Preferred
Stock") for $27,000. Net proceeds after related costs and expenses were
approximately $26,200.
The Preferred Stock was convertible into Common Stock if certain
closing market price levels for the Company's Common Stock were
achieved. As of September 23, 1997, all of the shares of Preferred
Stock were converted to shares of Common Stock.
F-23
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
11. Other Financial Information, continued
Product lines
On December 31, 1996, the Company sold its copper and fiber optic
cutting and splicing kit product line and its low voltage cable and
fiber optic connector product line in two separate transactions.
On March 7, 1997, the Company sold its third assembled product line.
The Company recognized a pre-tax gain on these sales which is reflected
in general and administrative expense in the statements of income.
In connection with the sales, the Company accepted notes for a portion
of the purchase price. These notes are included in other assets.
F-24
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
12. Supplemental Cash Flow Information
The following is a summary of the noncash investing and financing for
the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
--------- --------- ---------
Acquisitions:
Fair value of assets acquired $ 108,591 $ 53,266 $ 5,283
Acquisition liabilities and costs (8,843) (3,614)
Bank debt assumed (16,818) (9,318) (426)
Other liabilities assumed (27,164) (17,456) (1,726)
Long-term debt issued -- (3,000) (800)
Common stock issued (21,627) (5,537) (897)
--------- --------- ---------
Cash paid 34,139 14,341 1,434
Less: Cash acquired (338) (140)
========= ========= =========
$ 33,801 $ 14,201 $ 1,434
========= ========= =========
Dispositions:
Value of assets sold, net of transaction costs $ 117 $ 404
========= =========
Notes receivable accepted $ 400 $ 875
========= =========
Anicom common stock received $ 507
=========
Assets acquired through capital lease $ 76
=========
Conversion of Preferred Stock:
Conversion to Common Stock $ 27,000
=========
Payment of dividends in Common Stock $ 297
=========
13. Other Related Party Transactions
One of the Company's directors is a Managing Director of an investment
banking firm which served as a placement agent for the Company's
private placement in December 1997 and as one of the underwriters of
the Company's follow-on offering in November 1995.
14. Subsequent Events (Unaudited)
In March 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Yankee Electronics Inc. and Optical
Fiber Components Inc. Yankee Electronics Inc. and Optical Fiber
Components Inc. are located in New Hampshire and Virginia,
respectively. The purchase price consists of $3,800 in cash and common
stock. In addition, the Company will assume approximately $500 of
Yankee Electronics Inc. and Optical Fiber Components Inc. combined
debt.
F-25
Anicom, Inc.
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
------- ------- -------
Allowance for Doubtful Accounts
Balance, beginning of year $ 980 $ 120 $ 47
Additions 2,183 939 83
Write-offs, net of recoveries (721) (79) (10)
------- ------- -------
Balance, end of year $ 2,442 $ 980 $ 120
======= ======= =======
Inventory Valuation Allowance
Balance, beginning of year $ 300 $ - $ -
Additions 2,694 535
Write-offs (718) (235)
------- ------- -------
Balance, end of year $ 2,276 $ 300 $ -
======= ======= =======
F-26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 30th day of March, 1998.
ANICOM, INC.
By: /s/ SCOTT C. ANIXTER
-----------------------------------------
Scott C. Anixter
Chairman and Chief Executive Officer
This report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------- ----------------------------------------------------------- -----------------
/s/ SCOTT C. ANIXTER Chairman, Chief Executive Officer
- ------------------------------- and Director (Principal March 30, 1998
Scott C. Anixter Executive Officer)
/s/ ALAN B. ANIXTER Chairman of the Board March 30, 1998
- -------------------------------
Alan B. Anixter
/s/ CARL E. PUTNAM President, Chief Operating Officer March 30, 1998
- -------------------------------
Carl E. Putnam
/s/ DONALD C. WELCHKO Vice President, Chief Financial Officer and a Director March 30, 1998
- ------------------------------- (Principal Financial and Accounting Officer)
Donald C. Welchko
/s/ MICHAEL SEGAL Director March 30, 1998
- -------------------------------
Michael Segal
/s/ LEE B. STERN Director March 30, 1998
- -------------------------------
Lee B. Stern
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
21 Subsidiaries
23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule