SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 0-25364
ANICOM, INC.
(Name of registrant as specified in its charter)
Delaware 36-3885212
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6133 North River Road, Suite 1000, Rosemont, Illinois 60018-5171
(Address of principal executive offices) (Zip Code)
(847) 518-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share as of October 31, 1998: 25,026,855.
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
ANICOM, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 60 $ 687
Accounts receivable, less allowance
for doubtful accounts of
$3,384 and $2,442, respectively 120,086 65,125
Inventory, primarily finished goods 94,779 57,099
Other current assets 7,211 7,344
-------- --------
Total current assets 222,136 130,255
Property and equipment, net 8,652 5,771
Goodwill, net of accumulated amortization
of $3,103 and $1,605, respectively 123,457 76,869
Other assets 2,129 2,562
-------- --------
Total assets $356,374 $215,457
======== ========
See Notes to Condensed Consolidated Financial Statements
1
ANICOM, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
September 30, December 31,
1998 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 64,984 $ 47,740
Accrued expenses and acquisition liabilities 14,990 13,246
Long-term debt, current portion 1,760 1,773
-------- --------
Total current liabilities 81,734 62,759
Long-term debt, net of current portion 86,025 6,267
Other liabilities 4,423 2,282
-------- --------
Total liabilities 172,182 71,308
-------- --------
Commitments and Contingencies
Convertible redeemable preferred stock,
series B, par value $.01 per share,
liquidation value $1,000 per share;
20 and 0 shares authorized,
issued and outstanding, respectively 20,000 __
Stockholders' Equity:
Common stock, par value $.001 per share;
60,000 shares authorized,
25,027 and 23,293 shares
issued and outstanding, respectively 17 15
Preferred stock, undesignated,
par value $.01 per share;
953 and 973 shares authorized, respectively;
no shares issued and outstanding __ __
Additional paid-in capital 155,367 140,743
Retained earnings 8,783 3,391
Cumulative translation adjustment 25 __
-------- --------
Total stockholders' equity
164,192 144,149
-------- --------
Total liabilities and stockholders' equity $356,374 $215,457
======== ========
See Notes to Condensed Consolidated Financial Statements
2
ANICOM, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
----------------------- -----------------------
1998 1997 1998 1997
Net sales $ 124,071 $ 75,340 $ 339,420 $ 172,831
Cost of sales 97,165 57,205 264,647 132,161
--------- --------- --------- ---------
Gross profit 26,906 18,135 74,773 40,670
--------- --------- --------- ---------
Operating expenses and other:
Selling 11,311 8,024 30,861 18,213
General and administrative 9,607 6,951 28,123 16,098
Acquisition integration charge (See Note 7) 5,158 __ 5,158 __
--------- --------- --------- ---------
Total operating expenses and other 26,076 14,975 64,142 34,311
--------- --------- --------- ---------
Income from operations 830 3,160 10,631 6,359
--------- --------- --------- ---------
Other income (expense):
Interest income 14 45 60 214
Interest expense (790) (245) (1,503) (440)
--------- --------- --------- ---------
Total other income (expense) (776) (200) (1,443) (226)
--------- --------- --------- ---------
Income before income taxes 54 2,960 9,188 6,133
Provision for income taxes 142 1,124 3,796 2,331
--------- --------- --------- ---------
Net income (loss) (See Note 7) (88) 1,836 5,392 3,802
Less: dividend on preferred stock (16) (173) (16) (297)
--------- --------- --------- ---------
Net income (loss) available to common
stockholders (See Note 7) $ (104) $ 1,663 $ 5,376 $ 3,505
========= ========= ========= =========
Earnings per common share
and share equivalent:
Basic $ __ $ .09 $ .23 $ .21
========= ========= ========= =========
Diluted $ __ $ .09 $ .22 $ .21
========= ========= ========= =========
Weighted average common shares
and share equivalents outstanding:
Basic 23,760 17,647 23,669 16,417
========= ========= ========= =========
Diluted 24,335 19,795 24,246 17,818
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
3
ANICOM, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands, except per share data)
For the Nine Months Ended
September 30,
(unaudited)
-----------------------------
1998 1997
Cash flows from operating activities:
Net income $ 5,392 $ 3,802
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,206 1,544
Amortization 1,498 719
Gain on sale of product line __ (483)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Marketable securities __ 4,345
Accounts receivable (35,673) (13,116)
Inventory (12,782) (12,060)
Other assets 1,296 (86)
Accounts payable 7,568 15,622
Accrued expenses (5,643) (3,319)
--------- ---------
Net cash used in operating activities (37,138) (3,032)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (1,655) (2,736)
Cash paid for acquired companies (29,152) (28,732)
Other __ 200
--------- ---------
Net cash used in investing activities (30,807) (31,268)
--------- ---------
Cash flows from financing activities:
Payment of long-term debt and assumed bank debt (58,203) (27,749)
Proceeds from long-term debt 125,521 36,824
Proceeds from equity offerings, net of related costs __ 26,155
--------- ---------
Net cash provided by financing activities 67,318 35,230
--------- ---------
Net (decrease) increase in cash and cash equivalents (627) 930
Cash and cash equivalents, beginning of period 687 195
--------- ---------
Cash and cash equivalents, end of period $ 60 $ 1,125
========= =========
See Notes to Condensed Consolidated Financial Statements
4
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
1. Basis of Presentation and Accounting Policies
The accompanying condensed consolidated unaudited financial statements
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments necessary to present
fairly the financial position of Anicom, Inc. (the "Company" or
"Anicom") as of September 30, 1998 and December 31, 1997, the results
of its operations for the three and nine months ended September 30,
1998 and 1997 and its cash flows for the nine months ended September
30, 1998 and 1997. Reported interim results of operations are based, in
part, on estimates that may be subject to year-end adjustment. In
addition, these interim results of operations are not necessarily
indicative of those expected for the year.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 Form 10-K").
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
Foreign currency translation adjustments are generally excluded from
the Condensed Consolidated Statement of Income and are included in
cumulative translation adjustments in the Condensed Consolidated
Balance Sheet. Gains and losses resulting from foreign currency
transactions are included in Other income (expense).
2. Nature of Business
Anicom is a North American leader that specializes in the distribution
of multimedia wiring products for the transmission of voice, video,
data and power.
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 North America.
5
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
3. Earnings Per Common Share
The Company has adopted Financial Accounting Standards Board Statement
of Financial Standards No. 128, "Earnings Per Share" ("SFAS No. 128"),
effective December 31, 1997. SFAS No. 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 stockholders 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 and further assumes the conversion of the Company's
convertible preferred stock to common stock as of the date of issuance.
Earnings per common share for the three and nine months ended September
30, 1997 have been restated to conform to SFAS No. 128.
The following tables present a reconciliation of the numerators and
denominators of basic and diluted earnings per share for the periods
specified:
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Numerator:
Net income (loss) $ (88)* $ 1,836 $ 5,392* $ 3,802
Less: dividend on preferred stock (16) (173) (16) (297)
-------- -------- -------- --------
Net income (loss) available to common stockholders $ (104)* $ 1,663 $ 5,376* $ 3,505
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share - weighted
average common shares outstanding 23,760 17,647 23,669 16,417
Plus:
Effect of assumed conversion of
convertible preferred stock 137 1,591 47 1,010
Effect of employee stock options and warrants 438 557 530 391
-------- -------- -------- --------
24,335 19,795 24,246 17,818
======== ======== ======== ========
Earnings per share:
Basic $ __* $ .09 $ .23* $ .21
======== ======== ======== ========
Diluted $ __* $ .09 $ .22* $ .21
======== ======== ======== ========
* Amount includes the $5,158 one-time acquisition integration charge discussed
in Note 7.
6
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
4. Long-Term Debt
On November 6, 1998 the Company reached an agreement with its lenders
to increase its $100,000 revolving credit facility (the "Facility") to
$120,000 effective November 19, 1998. The Facility will provide for
borrowings of up to $15,000 in currencies other than U.S. dollars. It
also provides for various interest rate options, determined from time
to time, based upon the Company's interest coverage and leverage
ratios, as defined, and either the agent's Domestic Rate less .25% to
.50% or LIBOR plus .5% to 1.0%. The Facility expires in June 2001 with
extensions available at the Company's option through June 2003. The
Facility contains customary financial covenants, including minimum
tangible net worth, current, interest coverage and debt to earnings
ratios.
In connection with the acquisition of Texcan Cables Limited, Texcan
Cables, Inc. and Texcan Cables International, Inc. (collectively
referred to as "Texcan") described in Note 6, the Company entered into
a new $35,000 term facility as of September 21, 1998, with a Canadian
bank ("Canadian Bank Loan"). In consenting to the Canadian Bank Loan,
the Company's U.S. lenders agreed that the Canadian Bank Loan would be
treated as outstanding borrowings for purposes of the Facility. On
November 5, 1998, the Canadian Bank Loan was acquired with proceeds
from the Facility.
5. Preferred Stock
On September 21, 1998, in connection with the Texcan acquisition
discussed in Note 6, the Company issued 20 shares of Series B
convertible redeemable preferred stock, par value $.01 per share, which
are convertible, in the aggregate, into an additional 1,404 shares of
common stock (the "Series B Preferred Stock"). The Series B Preferred
Stock, contains a liquidation preference of $1,000 per share and earns
dividends at the rate of 3% of the liquidation preference per annum,
payable semi-annually. Series B Preferred Stockholders are not entitled
to any voting rights. The Series B Preferred Stock is redeemable at the
holder's or the Company's option after 3 years from the date of issue
for the liquidation preference value plus accrued and unpaid interest.
Mandatory redemption occurs on the fifth anniversary from the date of
issue. Conversion of the Series B Preferred Stock to common stock may
occur at anytime, in whole or in part, at the option of the holder. The
number of common shares to be issued upon conversion will be computed
by dividing the liquidation preference for each share of Series B
Preferred Stock by $14.25 ("Conversion Price"), rounded to the nearest
whole share. In addition, mandatory conversion may occur based on the
future trading price of the Company's common stock as follows:
Trading Price as a Number of Series B
Percentage of Preferred Shares to be
Conversion Price Converted*
130% 6.667
160% 13.333
190% 20
* Number of shares less shares previously converted.
7
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
6. Acquisitions
In September 1998, the Company purchased substantially all of the
assets and assumed certain liabilities of Texcan. Headquartered in
Vancouver, British Columbia, Texcan is a specialist in the distribution
of wire, cable, fiber optics and connectivity products. Texcan has 13
locations throughout Canada and seven locations in the United States.
The aggregate purchase price was approximately $56,900 and consisted of
1,404 shares of common stock; 20 shares of Series B Preferred Stock;
and approximately $27,000 in cash. In addition, Anicom repaid
approximately $12,000 of Texcan bank indebtedness upon closing.
In June 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Superior Cable & Supply, Inc.
("Superior"). Superior is a specialty distributor of multimedia wire
and cable products and has locations in Oklahoma, Arkansas, Louisiana
and Texas. The purchase price consisted of $ 3,044 in cash and common
stock. In addition, the Company assumed and repaid approximately $ 686
of bank indebtedness.
In March 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Yankee Electronics Inc. ("Yankee") and
Optical Fiber Components Inc. ("OFCI"). Yankee and OFCI are specialty
distributors of multimedia wire and cable located in New Hampshire and
Virginia, respectively. The purchase price for these acquisitions
consisted of $3,800 in cash and common stock. In addition, the Company
assumed approximately $255 of Yankee and OFCI debt that was paid at
closing.
In December 1997, the Company acquired TW Communication Corporation
("TW"). TW is a distributor of wire, cable, fiber optics and
installation supplies predominantly to the telecommunications, data and
cable television industries in the United States. The purchase price
for this acquisition consisted of $16,000 in cash and common stock. In
connection with the acquisition, the Company paid in full approximately
$13,600 of TW bank indebtedness.
In October 1997, the Company acquired certain assets and assumed
certain liabilities of Zack-DataCom, the voice and data division of
Zack Electronics, Inc. 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 common stock.
In July 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.
8
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
6. Acquisitions, continued
Anicom purchased all of the issued and outstanding common stock of
Security Supply, Inc. ("Security Supply") of New Orleans, Louisiana, in
March 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 in cash and common stock.
In February 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
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.
All of the foregoing 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 effective date of the 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.
9
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
6. Acquisitions, continued
The following pro forma condensed consolidated quarterly financial
information assumes that significant acquisitions and the May 1997 and
December 1997 issuance's of equity discussed in Notes 4 and 11,
respectively in the 1997 Form 10-K, and borrowings under the Facility,
discussed above, occurred on January 1, 1997. It further assumes that
the equity transaction discussed in Note 11 of the 1997 Form 10-K
resulted in the issuance of Common Stock, based on the conversion of
the Series A 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, 1997 nor are they
indicative of the results that may occur in the future.
Nine Months Ended
September 30,
1998 1997
Net sales $410,623 $363,535
======== ========
Operating income $ 13,182* $ 12,362
======== ========
Net income $ 6,531* $ 6,531
======== ========
Net income available to common stockholders $ 6,081* $ 7,286
======== ========
Earnings per common share:
Basic $ .25* $ .32
======== ========
Diluted $ .24* $ .32
======== ========
Weighted average common shares outstanding:
Basic 24,765 22,845
======== ========
Diluted 26,734 22,845
======== ========
* Amount includes the $5,158 one-time acquisition integration charge
discussed in Note 7.
10
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
7. Acquisition Integration Charge
The Company incurred a one-time acquisition integration charge during
the third quarter of 1998 of approximately $5,158. This charge includes
$2,800 for settlement of real estate obligations, the write-off of
leasehold improvements, and facility relocation costs; $1,350 one-time
acquisition incentive bonuses; and $1,008 related to severance and
other costs.
As of September 30, 1998, approximately $1,400 has been paid; the
remainder is accrued. The majority of the accrual remaining relates to
lease abandonment costs that are expected to be paid over the next
several quarters. All other amounts will be paid within the next few
months.
8. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). This statement, effective for the
Company's year ending December 31, 1998, 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 will adopt the provisions of SFAS 130 in the fourth quarter of
1998.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes
standards for the way companies are to report information about
operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Based on the Company's current operations, management does
not anticipate any additional disclosure being required by SFAS 131.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement revises employers' disclosures
about pension and other postretirement benefit plans, and will govern
the Company's disclosures related to its benefit plans beginning with
our December 31, 1998 annual financial statements.
During the second quarter of 1998, the FASB issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which will be
effective for the Company's fiscal year 2000. This statement
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments
imbedded in other contracts, be recorded in the balance sheet as either
an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. Management
is currently assessing the impact of SFAS 133.
11
ANICOM, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
9. Supplemental Cash Flow Information
The following summarizes non-cash investing and financing activities for
the period noted. Non-cash activity related to acquisitions includes
initial amounts estimated and any subsequent changes to those initial
estimates.
Nine Months Ended
September 30,
----------------------
1998 1997
Acquisitions:
Fair value of assets acquired $ 84,875 $ 54,113
Acquisition liabilities and costs (4,779) (4,274)
Liabilities assumed (16,117) (15,781)
Convertible preferred stock issued (20,000) -
Common stock issued (14,722) (5,058)
-------- --------
Cash paid 29,257 29,000
Less: cash acquired (105) (268)
-------- --------
Net cash paid for acquisitions $ 29,152 $ 28,732
======== ========
Dispositions:
Value of assets sold, net of transaction costs $ 117
========
Notes receivable accepted $ 400
========
Convertible Preferred Stock:
Conversion to common stock $ 27,000
========
Payment of convertible preferred
dividends in common stock $ 297
========
12
Item 2. 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:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
--------------- ---------------
1998 1997 1998 1997
Income Statement Data:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 78.3 75.9 78.0 76.5
----- ----- ----- -----
Gross profit 21.7 24.1 22.0 23.5
----- ----- ----- -----
Operating expenses and other:
Selling expenses 9.1 10.7 9.1 10.5
General and administrative expenses 7.7 9.2 8.3 9.3
Acquisition integration charge 4.2 -- 1.5 --
----- ----- ----- -----
Operating income .7 4.2 3.1 3.7
Interest (expense) (.6) (.3) (.4) (.3)
Interest income -- .1 -- .1
----- ----- ----- -----
Income before income taxes -- 3.9 2.7 3.5
Income taxes .1 1.5 1.1 1.3
----- ----- ----- -----
Net income (loss) (.1) 2.4 1.6 2.2
Less: Dividend on preferred stock -- (.2) -- (.2)
----- ----- ----- -----
Net income (loss) available to
common shareholders (.1)% 2.2% 1.6% 2.0%
===== ===== ===== =====
- -----------------
Note: Percentages may not sum due to rounding.
Results of Operations for the Three and Nine Months Ended September 30, 1998
Compared to the Three and Nine Months Ended September 30, 1997
Net sales for the third quarter of 1998 increased to a record $124.1 million, a
65% increase over net sales of $75.3 million in the third quarter of 1997. Net
sales for the first nine months of 1998 rose by 96% to a record $339.4 million
when compared to net sales of $173 million for the first nine months of 1997.
The significant increase occurred despite the impact of hurricanes Bonnie, Earl
and Georges on Anicom's 21 locations in the Southeast. This increase is
attributed to new customers, new products, expanded market penetration and
increased volume with existing customers, all of which have resulted from the
Company's acquisitions and internal growth.
13
Results of Operations for the Three and Nine Months Ended September 30, 1998
Compared to the Three and Nine Months Ended September 30, 1997, continued
Anicom's gross profit for the quarter ended September 30, 1998 increased by $8.8
million or approximately 48.4% to $26.9 million versus $18.1 million for the
same period of 1997. For the first nine months of 1998, gross profit increased
to $74.8 million from $40.7 million during the first nine months of 1997, an
increase of 84%. These increases resulted from Anicom's acquired sales volume
and internal growth.
As a percentage of net sales, gross profit for the three and nine month periods
ended September 30 declined from approximately 24.1% and 23.5%, respectively, in
1997 to approximately 21.7% and 22.0%, respectively, in 1998. 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 certain of the Company's recent acquisitions which have
historically had lower margin product offerings. Consequently, management
anticipates that gross margins reported for the remainder of 1998 will continue
to reflect the results of these acquisitions. Management believes that it will
partially mitigate the impact of these historically lower gross margins by
increasing the depth and breadth of product offerings maintained in stock at
these locations and by continuing to leverage our purchasing volume with
vendors.
Selling expenses for the third quarter improved from 10.7% of net sales in 1997
to 9.1% of net sales in 1998. For the first nine months of 1998, selling
expenses as a percentage of net sales were reduced to 9.1% from 10.5% for the
same period in 1997, as the Company began to realize operating leverage
resulting from its growth and acquisitions and conforming the selling incentive
programs of acquired companies with those of Anicom. Selling expenses increased
by $3.3 million and $12.6 million, respectively, for the three and nine months
ended September 30, 1998 in conjunction with the Company's increase in net sales
and the increase in sales headcount that resulted from the Company's
acquisitions in the fourth quarter of 1997 and the first nine months of 1998.
General and administrative expenses increased from $7.0 million and $16.1
million in the third quarter and first nine months of 1997, respectively, to
$9.6 million and $28.1 million, respectively, for the same periods in 1998. The
Company's acquisitions in the fourth quarter of 1997 and the first nine months
of 1998, led to these increases. As a percentage of net sales, general and
administrative expenses improved to 7.7% in the third quarter of 1998 from 9.2%
in the third quarter of 1997. For the first nine months of 1998, general and
administrative expenses as a percentage of net sales were reduced to 8.3% from
9.3% in 1997. This change is attributed 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.
The Company incurred a one-time acquisition integration charge during the third
quarter of approximately $5.2 million. This charge includes $2.8 million for
settlement of real estate obligations, the write-off of leasehold improvements,
and facility relocation costs; $1.4 million for one-time acquisition incentive
bonuses; and $1.0 million related to severance and other costs.
14
Results of Operations for the Three and Nine Months Ended September 30, 1998
Compared to the Three and Nine Months Ended September 30, 1997, continued
In the third quarter of 1998, interest expense increased to $790,000 from
$245,000 for the third quarter of 1997. For the nine months ended September 30,
1998, interest expense rose to $1.5 million from $440,000 for the same period in
1997. This is primarily a result of the Company's increased borrowings under the
Facility during the first nine months of 1998 to fund the cash consideration and
debt payoff of acquired companies and to meet the increased working capital
requirements associated with the sales growth experienced during this period.
For the three months ended September 30, 1998, the provision for income taxes as
a percentage of income before income taxes, increased when compared to the same
period in 1997. The increase is primarily attributable to the impact of
non-deductible meals and entertainment expenses and non-deductible goodwill
amortization on a lower income before tax amount. For the nine months ended
September 30, 1998, the provision for income taxes as a percentage of income
before income taxes, increased to 41% from 38% for the same period in 1997. The
increase is primarily attributable to the impact of non-deductible goodwill
related to certain acquisitions.
The following reported results for the three and nine months ended September 30,
1998 were despite the impact of hurricanes Bonnie, Earl and Georges in the third
quarter of 1998 on Anicom's 21 locations in the Southeast. Net Income for the
three months ended September 30, 1998, exclusive of the $5.2 million acquisition
integration charge, increased 87% to an all time high of $3.1 million, compared
to $1.7 million in the third quarter of 1997. For the three months ended
September 30, 1998, exclusive of the acquisition integration charge, basic and
diluted earnings per common share increased by more than 44% to $.13 per share,
up from $.09 per share for the same period in 1997. These increases were
reported despite an increase in diluted weighted average shares of approximately
23% from the same period in 1997. For the nine months ended September 30, 1998,
net income available to common stockholders, exclusive of the acquisition
integration charge, increased 145.1% to $8.6 million, up from $3.5 million
reported for same period in 1997. Net income, exclusive of the acquisition
integration charge, increased 126.4% to $8.6 million for the nine months ended
September 30, 1998 from $3.8 million for the same period in 1997.
Liquidity and Capital Resources
Management believes that cash flows from operations and borrowings under 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 that it believes cannot be funded from the
sources discussed below. 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.
15
Liquidity and Capital Resources, continued
On November 6, 1998 the Company reached an agreement with its lenders to
increase the Facility from $100 million to $120 million effective November 19,
1998. The Facility will provide for borrowings of up to $15 million in
currencies other than U.S. dollars. It also provides for various interest rate
options, determined from time to time, based upon the Company's interest
coverage and leverage ratios, as defined, and either the agent's Domestic Rate
less .25% to .50% or LIBOR plus .5% to 1.0%. The Facility expires in June 2001
with extensions available at the Company's option through June 2003. The
Facility contains customary financial covenants, including minimum tangible net
worth, current, interest coverage and debt to earnings ratios.
In connection with the acquisition of Texcan, the Company entered into a new $35
million term facility as of September 21, 1998, with a Canadian bank ("Canadian
Bank Loan"). In consenting to the Canadian Bank Loan, the Company's U.S. lenders
agreed that the Canadian Bank Loan would be treated as outstanding borrowings
for purposes of the Facility. On November 5, 1998, the Canadian Bank Loan was
acquired with proceeds from the Facility.
As of September 30, 1998, Anicom had working capital of approximately $140
million as compared to $67.5 million as of December 31, 1997. At September 30,
1998, amounts outstanding under the Facility and the Canadian Bank Loan were
approximately $88.0 million.
For the nine months ended September 30, 1998, operating activities used $37.1
million of cash compared to $3.0 million used during the same period in 1997.
This increase has resulted from the increase in sales and the investment in
receivables attributable to contractor business. Operating cash flow was also
used to fund acquisition-related activities, including expanding product
offerings to accommodate acquired locations, funding business integration
liabilities and working capital deficiencies of acquired companies. The
Company's investments in receivables and inventory were primarily funded by
borrowings under the Facility.
Investing activities utilized approximately $30.8 million in the nine months
ended September 30, 1998. During the first nine months of 1998, Anicom completed
the acquisitions of Texcan, Yankee, OFCI and Superior. Cash paid for these
acquisitions accounted for the majority of cash used for investing activities.
Cash flows from financing activities in the first nine months of 1998 totaled
$67.3 million compared to $35.2 million during the same period in 1997. During
the first nine months of 1998 the Company borrowed under the Facility to fund
increased working capital requirements and acquisition activity. The Company
also repaid approximately $13 million of debt assumed in acquisitions.
16
Year 2000 Readiness and Related Risks
The Year 2000 issue is the result of computer programs being unable to interpret
dates beyond the year 1999, which could cause a system failure or other computer
errors, leading to disruptions in operations. A task force has been established
by the Company that includes information systems, accounting and legal personnel
of the Company to assess the Company's state of readiness and to implement an
action plan to correct any deficiencies of the Company. To date, the Company has
identified the following areas to assess as to Year 2000 readiness: (1)
distribution and financial information systems, (2) vendor, third-party
relationships and customers, and (3) physical facility systems. For each of
these areas, the Company has established the following procedures to assess its
Year 2000 readiness: (a) identifying systems potentially susceptible to Year
2000 compliance issues, (b) developing and implementing corrective actions and
(c) testing to ensure compliance. Management believes that the Company is
devoting the necessary resources to identify and resolve any significant Year
2000 issues in a timely manner.
DISTRIBUTION AND FINANCIAL INFORMATION SYSTEMS: As part of its integrated growth
strategy, Anicom completed the implementation of a new information technology
system in the fourth quarter of 1997. This customized information technology
system builds upon the strengths inherent in Anicom's previous system while
allowing for the reengineering of certain business processes that were necessary
to accommodate the explosive growth Anicom has experienced. The new information
system 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. In
implementing this new system, management received written confirmation from
vendors that the enterprise system software, hardware and network operating
systems included in this information system are Year 2000 compliant.
Total costs incurred to purchase the necessary hardware, software, licenses,
consulting services and training associated with the installation, modification
and implementation of the new system were approximately $3.6 million. Of this
amount, approximately $2.7 million was expensed with the remainder being
capitalized and depreciated over future periods. The Company does not anticipate
incurring any material additional costs with respect to Year 2000 readiness of
this information technology system.
Since implementing the Company's new information technology system, the Company
has completed certain acquisitions that are in various stages of conversion to
the Company's current system. Management estimates that, with the exception of
Texcan, which was acquired in September 1998, all operations will be converted
to the Company's new information technology system no later than the first
quarter of 1999. Management believes the portion of the costs for this
conversion related to Year 2000 readiness is not material.
Texcan's financial and distribution systems are currently in the process of
being upgraded to become Year 2000 compliant and management estimates this will
be completed during the first quarter of 1999 at a cost of $30,000 to $50,000.
Texcan's systems will be converted to the Company's new information technology
system subsequent to the first quarter of 1999.
17
Year 2000 Readiness and Related Risks, continued
SUPPLIERS, THIRD-PARTY RELATIONSHIPS AND CUSTOMERS: The Company relies on third
party suppliers for inventory, utilities, transportation and other key supplies
and services. Interruption of supplier operations due to Year 2000 issues could
adversely affect the Company's operations. The Company's payroll outsourcing
service has confirmed that the systems used to process the Company's payroll are
year 2000 compliant. The Company has begun evaluating the Year 2000 readiness of
its other suppliers through a survey distributed in the fourth quarter of 1998.
Responses will be evaluated and second requests will be mailed for
non-responses. Unsatisfactory responses or non-responses from critical suppliers
will be evaluated on a case by case basis in an attempt to mitigate risk to the
Company. These activities are intended to provide a reasonable means of managing
risk, but cannot eliminate the potential for disruption due to third-party
failure.
The Company does not currently have any formal information concerning the Year
2000 readiness of its customers, and given the breadth and diversity of its
customer base, the Company is assessing whether a formal inquiry of its
customers is warranted. The Company believes that the impact of isolated
occurrences resulting from any of its customers failing to be Year 2000
compliant would not be materially adverse to the Company. However, widespread
interruptions to customers serviced by the Company could result in reduced
sales, increased inventory or receivable levels and cash flow reductions.
The Company has not incurred, and does not believe it will incur, material costs
related to any inquiry as to the Year 2000 readiness of its suppliers, other
third party relationships and customers.
PHYSICAL FACILITY SYSTEMS: The Company is continuing to evaluate the Year 2000
readiness of its physical facility systems, such as phone systems, power,
security systems, heating, ventilation and air conditioning systems, etc. The
Company expects to complete the assessment phase of its physical facility
systems during the first quarter of 1999 with remedial action planned for the
second and third quarter of 1999.
While the Company and many other Companies believe their efforts to address the
Year 2000 issues will be successful in avoiding any material adverse effect on
the Company's results of operations or financial condition, it recognizes that a
most reasonably likely worst case Year 2000 scenario would involve the failure
of a third party or a component of the infrastructure, including national
banking systems, electrical power, transportation facilities, communication
systems and governmental activities, to conduct their respective operations
after 1999 such that the Company's ability to obtain and distribute its products
and services would be limited for a period of time. If this were to occur, it
would likely cause temporary financial losses and an inability to provide
products and services to customers, and there may be no practical alternative to
some of these resources available to the Company.
The foregoing assessment of the impact of the Year 2000 issue on the Company is
based on management's estimates at the present time. The assessment is based
upon numerous assumptions as to future events. There can be no assurance that
these estimates and assumptions will provide accurate, and the actual results
could differ materially. To the extent that Year 2000 issues cause significant
delays in sales, increased inventory or receivable levels or cash flow
reductions, the Company's results of operations and financial condition could be
materially adversely affected.
18
Forward Looking Statements
In compliance with the Safe Harbor Provision of the Private Securities
Litigation Reform Act of 1995, the Company notes the statements contained in
this quarterly report that are not historical facts may be forward-looking
statements that are subject to a variety of risks and uncertainties more fully
described in Anicom's filings with the Securities and Exchange Commission
including, without limitation, those described under "Risk Factors" in Anicom's
Resale Prospectus dated August 21, 1998, in Anicom's Annual Report on Form 10-K
for the year ended December 31, 1997, and in this quarterly report. Whenever
possible, the Company has identified these forward looking statements by words
such as "believe," "feel," "anticipate," "expect" and similar expressions used
in this quarterly report as they relate to Anicom or its management. Anicom
wishes to caution readers of this quarterly report that these risks and
uncertainties 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 include, without limitation,
general economic and business conditions affecting the industries of Anicom's
customers in existing and new geographical markets, competition from national
and regional distributors, 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 operate effectively in geographical
areas in which it has no prior experience, political, economic and other factors
affecting Canada, the exchange rate between Canadian and U.S. currencies and the
factors described above under the caption "Year 2000 Readiness and Related
Risks."
19
Recent Accounting Pronouncements
Reference is made to Note 8 of the Consolidated Condensed Financial Statements.
PART II -- OTHER INFORMATION
Item 2. Changes in Securities
Pursuant to an Asset Purchase Agreement dated September 21,
1998 (the "Agreement"), the Company purchased certain assets
and assumed certain liabilities of Texcan Cables Limited,
Texcan Cables Inc., and Texcan Cables International, Inc. As
part of the purchase price, under the Agreement, the Company
issued 1,403,509 shares of common stock to Texcan Cables
Limited and 20,000 shares of Series B Convertible Redeemable
Preferred Stock to Texcan Cables Inc., which are convertible
into another 1,403,509 shares of common stock. The shares
issued pursuant to the Agreement were issued in reliance upon
Section 4(2) of the Securities Act of 1933, as amended, and
the rules promulgated thereunder, as a transaction by an
issuer not involving any public offering. An appropriate
legend was affixed to each of the share certificates issued.
Conversion of the Series B Preferred Stock to common stock may
occur at anytime, in whole or in part, at the option of the
holder. The number of common shares to be issued upon
conversion will be computed by dividing the liquidation
preference for each share of Series B Preferred Stock by
$14.25 ("Conversion Price"), rounded to the nearest whole
share. In addition, mandatory conversion may occur based on
the future trading price of the Company's common stock as
follows:
Trading Price as a Number of Series B
Percentage of Preferred Shares to be
Conversion Price Converted*
130% 6,667
160% 13,333
190% 20,000
* Number of shares less shares previously converted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed with this report:
Exhibit No.
-----------
2.1* Asset Purchase Agreement by and among Anicom, Inc., Anicom
Multimedia Wiring Systems Incorporated, Texcan Cables
Inc., Texcan Cables International, Inc., and Texcan Cables
Limited, dated as of September 21, 1998.
3 Amended and Restated Certificate of Incorporation
4.1* Certificate of Designations, Preferences and Rights of
Series B convertible preferred stock of Anicom, Inc.
4.2* Registration Rights Agreement by and between Anicom, Inc.,
Texcan Cables Inc. and Texcan Cables Limited, dated
September 21, 1998.
10 Term Credit Agreement, dated as of September 21, 1998,
between Anicom Multimedia Wiring Systems Incorporated and
Bank of Montreal.
27 Financial data schedule
* Incorporated by reference to Form 8-K filed on September 29, 1998.
(b) Reports on Form 8-K.
The following reports were filed on Form 8-K during the third quarter
of 1998:
Form 8-K, dated September 22, 1998 (Press Release)
Form 8-K, dated September 29, 1998 (Acquisition of Texcan Cables)
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANICOM, INC.
--------------------------------------
Registrant
Dated: November 16, 1998 By:/S/ DONALD C. WELCHKO
-----------------------------------
Donald C. Welchko
Vice President and Chief Financial Officer
21
ANICOM, INC.
INDEX TO EXHIBITS
Exhibit No.
-----------
2.1* Asset Purchase Agreement by and among Anicom, Inc., Anicom
Multimedia Wiring Systems Incorporated, Texcan Cables
Inc., Texcan Cables International, Inc., and Texcan Cables
Limited, dated as of September 21, 1998.
3 Amended and Restated Certificate of Incorporation
4.1* Certificate of Designations, Preferences and Rights of
Series B convertible preferred stock of Anicom, Inc.
4.2 * Registration Rights Agreement by and between Anicom, Inc.,
Texcan Cables Inc. and Texcan Cables Limited, dated
September 21, 1998.
10 Term Credit Agreement, dated as of September 21, 1998,
between Anicom Multimedia Wiring Systems Incorporated and
Bank of Montreal.
27 Financial data schedule