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, 1998
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)
Preferred Stock Purchase Rights
(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 9, 1999: $156,452,270.
The number of shares outstanding of the registrant's Common Stock as of March 9,
1999: 25,120,202.
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 19,
1999 are incorporated by reference into Part III of this report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Anicom, Inc. ("Anicom" or the "Company") is a North American leader in
the sale and distribution of multimedia technology products consisting of
communications related wire, cable, fiber optics and computer network and
connectivity components. Anicom provides products that "interconnect the
Internet" serving as a vital link to the ever-growing global communications
industry. The Company operates in a single business and geographic segment. The
products offered by Anicom generally fall into four categories: (i) voice and
data communications and fiber optics, (ii) sound, security, fire, alarm and
energy management systems, (iii) electronic cable, and (iv) industrial cable,
wiring and assemblies for automation, computers and robotics. 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. Since its
initial public offering in February 1995, the Company has grown from seven to
more than 75 locations across North America through internal growth and the
successful completion of 16 acquisitions.
The Company has assembled an experienced management team that collectively has
more than 200 years of experience in the sale and distribution of multimedia
technology 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 1986 and Chairman until 1988. During his career
at Anixter Bros., that company consummated more than forty corporate
acquisitions and by 1988, had grown to over $1.0 billion in annual net sales. In
addition, Anicom'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 management expects this growth to
continue 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. Virtually every commercial, industrial and residential enterprise is a
potential customer. By focusing on distribution, management believes it can
readily respond to the changing demands of the industries it serves and it is
not reliant upon the success of a particular product or product category. Many
of the products distributed by the Company are components utilized by
contractors and end-users in the installation or upgrading of highly technical
communications and power 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 technology 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 multimedia technology
components, such as related wire, cable, fiber optics and computer network and
connectivity products is highly fragmented, with few companies maintaining
greater than $100 million in annual net sales.
Products and Services
Voice and Data Communications and Fiber Optics
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 related connectivity products. 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, Internet access and building automation and safety
markets.
A large number of leading telecommunications, computer, computer
software and entertainment companies have committed significant resources to
developing plans for the delivery of 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 involve the use of fiber optic cable, copper cable
or wires manufactured to specifications. At the same time, the proliferation of
the World Wide Web on the Internet, 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.
In January 1999, Anicom became the exclusive distributor for NetWolves,
and their FoxBox product which offers a simple, more cost-effective
communication solution using only one device to access the Internet for the flow
of e-commerce over the World Wide Web.
Sound, Security, Fire, Alarm and Energy Management Systems
The demand for the multimedia technogy 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. 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. 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 technology 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.
2
Electronic and Industrial Cable
Anicom 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. These products include portable cords,
power cables, control and instrumentation cables, mining and welding cables,
armored and high voltage cables and building wire.
Integrated Growth Strategy
Anicom has implemented an integrated growth strategy focusing on
increasing revenue through (i) acquisitions and internal growth into targeted
regional markets with an expanded customer base and complimentary products, (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 regional markets. Anicom generally attempts to retain the management
and sales associates of the acquired company while seeking to increase its net
sales through the availability of a greater selection and depth of inventory.
Anicom seeks to improve its profitability by achieving economies of scale and
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.
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 550 people operating throughout North America. Anicom is engaged
in e-commerce and currently has a program in development called'A-trade' to
further amplify Anicom's sales on the Internet.
Anicom has created seven territories, each of which is managed by a
General Manager. The General Managers have an average of approximately 15 years
of experience in the sale and distribution of multimedia technology products.
Each General Manager is responsible for the management of short-term and
long-term sales and marketing efforts in their respective territory. In
addition, the General Managers are supported by a network of ten Regional
Managers who have an average of approximately 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.
In addition to providing multimedia technology products to customers on
a timely basis, Anicom provides value-added, specialized services to its
customers, including cutting and re-spooling services, technical support,
training, seminars and cable assemblies, in response to specific customer
requests. Anicom also has the ability to procure selected specialty items not
readily available to customers
3
or all of its competitors, 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
product 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
particular 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 other national and regional distributors
of multimedia technology products with which it competes.
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 by distributing promotional literature
and product catalogs to existing and potential customers. Sales and marketing
representatives initiate customer visits and 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 sales associate. In addition, Anicom
seeks to achieve Company-wide objectives and encourage a "team" concept by
rewarding its sales personnel through supplementary 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 establishing and 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. No vendor accounted for more than 10%
of Anicom's purchases during any of the past three years, and management
believes that Anicom is not dependent on any particular vendor. Management does
not believe that the loss of any one supplier would have a material adverse
impact on results of operations or financial condition because it generally
believes it can obtain competitive products of comparable quality from other
suppliers.
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 its 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
significant 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 industry 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.
Management 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
4
inherent in Anicom's previous systems while allowing for the reengineering of
certain business processes that were necessary to accommodate the significant
growth that Anicom has experienced since 1995. This 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 Anicom's sales and distribution
locations.
This system also improves management's ability to respond quickly and
efficiently to customer demands. 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 system
will allow Anicom to continue to 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.
Customers
The Company sells to a wide array of customers, including contractors,
systems integrators, security/fire alarm companies, regional Bell operating
companies, utilities, telecommunications and sound contractors, wireless
specialists, construction companies, universities, governmental agencies and
companies involved in the automotive, mining, marine, petro-chemical, paper and
pulp and other natural resource industries. The Company's customers are
principally located in North America. No customer accounted for more than 10% of
Anicom's net sales during any of the past three years, and management believes
that Anicom is not dependent on any particular customer. With Anicom's
increasing North American 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. Anicom's net sales outside of North America
represent less than 5% of total net sales for each of the last 3 years.
Competition
The market for multimedia technology 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 international, 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.
Employees
As of March 1, 1999, Anicom employed approximately 1,151 persons.
Anicom believes that it has good relations with its employees.
5
ITEM 2. DESCRIPTION OF PROPERTY
As of March 1, 1999, Anicom conducted its operations from 82 different
locations throughout North America, all of which are leased. Most of its
locations consist of a sales office and a warehouse, except for its locations in
Rosemont, Illinois; Lexington, North Carolina; Wausau, Wisconsin;
Charlottesville, Virginia; and Bloomington, Illinois, which do not include any
warehouse space.
Anicom's aggregate executive office and sales office space is
approximately 243,000 square feet and its aggregate warehouse space was
approximately 958,000 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 or decrease 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, 1998.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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:
1998 1997
-------------------- -----------------------
High Low High Low
------- -------- --------- -------
1st quarter 16-3/4 13-5/8 11 7-3/4
2nd quarter 16-1/16 12-7/8 12-1/2 7-7/8
3rd quarter 15-1/8 6-3/4 18-1/4 11-1/2
4th quarter 10-3/4 6-1/4 18-5/8 12-7/8
As of March 9, 1999, the approximate number of record holders of Anicom's Common
Stock was 2,239.
Anicom has not paid cash dividends or distributions on its common stock
during 1997 or 1998. 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.
7
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 PricewaterhouseCoopers
LLP, independent accountants. These historical results are not necessarily
indicative of the results to be expected in the future.
Year ended December 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
Selected Statement of Income Data:
Net sales $ 470,279 $ 243,664 $ 115,993 $ 29,358 $ 17,866
============= =========== =========== =========== ===========
Net income available to common stockholders $ 7,374(1) $ 4(2) $ 2,622 $ 764 $ 412
============= =========== =========== =========== ===========
Pro forma net income(3) $ 247
===========
Net income per common share:
Basic $ .31(1) $ -- (2) $ 0.20 $ 0.14 $ 0.17
============= =========== =========== =========== ===========
Diluted $ .30(1) $ -- (2) $ 0.19 $ 0.14 $ 0.17
============= =========== =========== =========== ===========
Pro forma net income per share(3) (unaudited):
Basic $ 0.10
===========
Diluted $ 0.10
===========
Weighted average number of shares outstanding:
Basic 23,918 17,476 13,384 5,408 2,400
============= =========== =========== =========== ===========
Diluted 24,816 17,476 13,580 5,658 2,400
============= =========== =========== =========== ===========
As of December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ----------- ----------- ----------- -----------
Selected Balance Sheet Data:
Total assets $ 353,221 $ 215,457 87,954 $ 41,169 $ 6,040
============= =========== =========== =========== ===========
Long term obligations $ 108,583 $ 8,549 3,952 $ 597 $ 2,760
============= =========== =========== =========== ===========
- ------------------
<FN>
(1) Amount includes the $5.2 million one-time acquisition integration charge
discussed in Note 10 to the consolidated financial statements.
(2) 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.
(3) 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.
</FN>
8
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:
1998 1997 1996
------- ------- -------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 77.7 76.8 75.4
------- ------- -------
Gross profit 22.3 23.2 24.6
Operating expenses and other:
Selling 9.3 10.7 11.3
General and administrative 8.5 9.7 9.9
Acquisition integration charge 1.1 -- --
Reengineering costs -- 2.3 --
------- ------- -------
Operating income 3.4 .6 3.4
Interest expense (.6) (.3) (.2)
Interest income -- -- .5
------- ------- -------
Income before income taxes 2.8 .4 3.7
Provision for income taxes 1.2 .3 1.4
------- ------- -------
Net income 1.6 .1 2.3
Less: Dividend on preferred stock -- (.1) --
------- ------- -------
Net income available to common stockholders 1.6% --% 2.3%
======= ======= =======
- ------------------
Note: Percentages may not sum due to rounding.
Results of Operations
Year ended December 31, 1998 compared to year ended December 31, 1997
Net sales for the year ended December 31, 1998 increased to a record
$470.3 million, a 93% increase over net sales of $243.7 million in 1997. 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, 1998, net income and diluted earnings per share
were $7.5 million or $0.30 per share compared to $300,000 or $0.00 per share in
1997. Results in 1997 include $5.6 million of 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.
Anicom's gross profit for the year ended December 31, 1998 increased by
$48.1 million or 84.9% to $104.7 million versus $56.6 million for the year ended
December 31, 1997. This increase resulted from Anicom's acquired sales volume
and internal growth. As a percentage of net sales, gross profit was 22.3% in
1998 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 certain of the
Company's recent acquisitions which have historically had lower margin product
offerings. Management continues to work to mitigate the impact of these
historically lower gross margins by increasing the depth and breadth of products
offered at these locations and by continuing to leverage our purchasing volume
with vendors.
9
Selling expenses as a percentage of net sales improved from 10.7% of
net sales in 1997 to 9.3% of net sales in 1998. These improvements resulted
primarily from the Company realizing operating leverage from its growth and
acquisitions and conforming the selling incentive programs of acquired companies
with those of Anicom. Selling expenses increased by $17.8 million for the year
ended December 31, 1998 in conjunction with the Company's increase in net sales
and the increase in sales headcount resulting from the Company's acquisitions
and internal growth.
General and administrative expenses as a percentage of net sales,
improved to 8.5% in 1998 from 9.7% in 1997. This improvement relates to the
continued reduction of acquired companies overhead costs as the Company further
realized operating leverage from its acquisition-based integrated growth
strategy. Negatively affecting the percentages are the costs associated with the
Company's broadband product line which were, in part, offset by a gain on the
December, 1998 disposition of these non-strategic assets. General and
administrative expenses increased from $23.6 million in 1997 to $39.9 million in
1998. The Company's acquisitions in the fourth quarter of 1997 and the first
nine months of 1998, led to these increases.
The Company incurred a one-time acquisition integration charge during
the third quarter of 1998 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.
In 1998 interest expense increased to $2.9 million compared to $762,000
in 1997. This is primarily a result of the Company's increased borrowings under
its credit facility during 1998 to fund the cash consideration and debt payoff
of acquired companies, and to meet the increased working capital requirements
associated with increasing the depth and breadth of product offering available
and sales growth experienced during this period.
The provision for income taxes increased to $5.6 million in 1998 from
$650,000 in 1997. The increase is a result of the increase in income before
income taxes. For the years ended December 31, 1998 and 1997, the provision for
income taxes, as a percentage of income before income taxes, decreased to 42.6%
from 68.4%. The decrease is primarily attributable to the impact of
non-deductible meals and entertainment expenses and non-deductible goodwill
amortization on a significantly higher income before income tax amount in 1998.
Net income for the year ended December 31, 1998 was $7.5 million or
1.6% of net sales as compared to $300,000 for the year ended December 31, 1997.
For the year ended December 31, 1998, basic and diluted earnings per common
share increased to $.31 and $.30 per share, respectively, up from $0.00 per
share for the year ended December 31, 1997. These increases were reported
despite an increase in diluted weighted average shares of approximately 37% from
the same period in 1997. Excluding the impact of acquisition related charges and
net losses incurred from non-strategic assets divested by the Company,
management believes that basic and diluted earnings per share would have been
$0.48 and $0.47 per share in 1998.
10
Year ended December 31, 1997 compared to year ended December 31, 1996
Net sales for the year ended December 31, 1997 increased to $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. 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 23.2% in
1997 compared to 24.6% in 1996. 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
acquisitions. TW Communications, which the Company acquired in December 1997,
has significant operations in the New York City market and carries different,
lower margin product offerings than Anicom has historically offered.
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 Electric Corp.,
acquired in July, 1997.
General and administrative expenses increased from $11.6 million in
1996 to $23.6 million in 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
11
by leveraging the capabilities inherent in the new information system and to
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 the Company's 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 6 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 in 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 $0.30 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.
12
Liquidity and Capital Resources
In November 1998, the Company entered into an agreement with its
lenders to increase its revolving credit facility (the "Facility") from $100
million to $120 million. The Facility provides 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 certain financial covenants, including minimum
tangible net worth, current, interest coverage and debt to earnings ratios.
Management believes that cash flows from operations and borrowings
available 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 line of credit.
In connection with the acquisition of Texcan Cables Limited, Texcan
Cables, Inc. and Texcan Cables International, Inc. (collectively referred to as
"Texcan"), the Company entered into a new $35 million term facility in September
1998, with a Canadian bank ("Canadian Bank Loan"). In November 1998, the
Canadian Bank Loan was acquired with proceeds from the Facility.
As of December 31, 1998, Anicom had working capital of approximately
$135.1 million as compared to $67.5 million as of December 31, 1997. At December
31, 1998, amounts outstanding under the Facility were approximately $85.0
million.
In 1998 operating activities used $33.9 million of cash compared to
$13.0 million used during 1997. This increase has resulted from the increase in
sales and the investment in receivables attributable to contractor and large
project business. Operating cash flow was also used to fund acquisition-related
activities, including expanding product offerings, 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 $30.7 million during 1998.
During 1998, Anicom completed the acquisitions of Yankee Electronics, Optical
Fiber Components, Superior Cable & Supply and Texcan. Cash paid for these
acquisitions accounted for the majority of cash used for investing activities.
Cash flows from financing activities in 1998 totaled $66.5 million
compared to $49.4 million in 1997. During 1998 the Company borrowed under the
Facility to fund increased working capital requirements and acquisition
activity. The Company also repaid approximately $12.7 million of debt assumed in
acquisitions with funds from the Facility.
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 1998.
13
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
During the second quarter of 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 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 No. 133.
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) supplier,
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 significant growth Anicom has
experienced. The 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 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. Testing of these systems has confirmed this conclusion.
Total costs incurred to purchase the necessary hardware, software,
licenses, consulting services and training associated with the installation,
modification and implementation of the 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.
14
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's Canadian operation, which was acquired in September 1998,
all operations will be converted to the Company's new information technology
system no later than the second quarter of 1999. Management believes that the
portion of the costs for this conversion related to Year 2000 readiness is not
material.
Texcan's Canadian 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 Canadian systems will be converted to the Company's
new information technology system subsequent to the second quarter of 1999.
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 are being 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 making a formal inquiry of selected customers.
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 a reduction in cash flow.
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 and second 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.
15
The Company is currently implementing contingency plans to be carried
out in the event of an external Year 2000 failure of vendors that are critical
to normal information systems business operations. Management estimates these
plans will be complete by the 3rd quarter of 1999. These plans include both
internal and external resources and facilities for off-site computer processing
and personnel relocation in the event of power or data communication failure
that results in the inability to utilize an existing company facility.
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.
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
The statements contained in Item 1 (Description of Business) and Item 7
(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
1999 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. 333-61715). 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
The Company is exposed to market risk from changes in foreign exchange rates.
The Company transacts certain of its business in Canadian dollars. These
transactions expose the Company to fluctuations in exchange rates, which could
impact the financial results of the Company.
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
PricewaterhouseCoopers LLP, appearing on pages F-1 through F-24 of this Form
10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
16
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 1999 Annual Meeting of Stockholders (the "1999 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference
from the section of the 1999 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 1999 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 1999 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 Report of
Independent Accountants, are included on pages F-1
through F-24 on this Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Schedules
The following consolidated financial statement schedule
is included on page F-25:
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.
17
3. Exhibits. The following exhibits are filed with the
report or incorporated herein by reference as set
forth below.
Exhibit No. Description
2.1(1) 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.
2.2(1) Stock Purchase Agreement, dated as of November 24, 1997,
between Anicom, Inc. and the Purchasers named therein.
2.3(2) 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
2.4(3) Series A Convertible Preferred Stock Purchase Agreement,
dated May 20, 1997 by and among the Company and the
purchasers listed on Exhibit A thereto.
3.1 Restated Certificate of Incorporation of Anicom.
3.2(4) Restated Bylaws of Anicom.
4.1(4) Specimen Stock Certificate representing Common Stock.
10.1(3) Stockholders' Agreement, dated May 23, 1997 among
Anicom, Scott C. Anixter and each of the purchasers
listed on the signature page thereto.
10.2 Long-Term Credit Agreement, dated as of November 4,
1998, between Anicom and Harris Trust and Savings Bank.
10.3 Short-Term Credit Agreement, dated as of November 4,
1998, between Anicom and Harris Trust and Savings Bank.
10.4(4) Shareholders Agreement.
10.5(4) Form of Tax Indemnification Agreement.
10.6 Form of Employment Agreement between Anicom and
Scott C. Anixter.
10.7 Form of Employment Agreement between Anicom and
Carl E. Putnam.
10.8(4) Form of Employment Agreement between Anicom and
Robert L. Swanson.
10.9(5) Form of 1995 Stock Incentive Plan as Amended and
Restated.
10.10(6) Form of Amended and Restated 1995 Directors Stock
Option Plan.
10.11(7) Form of Employment Agreement between Anicom and
Robert Brzustewicz.
10.12(7) Form of Employment Agreement between Anicom and
Glen Nast.
10.13 1996 Stock Incentive Plan, as Amended
10.14 Form of Employment Agreement between Anicom and
Donald Welchko.
10.15 Settlement Agreement and Mutual Release, dated April 20,
1998 by and among Robert Brzustewicz and Anicom.
10.16 Settlement Agreement and Mutual Release, dated April 20,
1998 by and among Glen Nast and Anicom.
10.17 1998 Associate Stock Purchase Plan.
10.18(9) Anicom 401(k) Savings Plan.
18
Exhibit No. Description
21 List of Subsidiaries.
23.1 Consent of Independent Accountants.
27 Financial Data Schedule.
- ------------------
(1) Previously filed as an Exhibit to Anicom's registration statement on
Form S-3, registration no. 333-41225, and incorporated herein by
reference.
(2) Previously filed as an Exhibit to Anicom's quarterly report on
Form 10-Q for the quarter ended September 30, 1998.
(3) Previously filed as an Exhibit to Anicom's current report on
Form 8-K, dated May 30, 1997, and incorporated herein by reference.
(4) Previously filed as an Exhibit to Anicom's Registration Statement on
Form SB-2, registration no. 33-87736C, and incorporated herein by
reference thereto.
(5) 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.
(6) 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.
(7) Previously filed as an Exhibit to Anicom's current report on Form 8-K,
dated March 12, 1996, and incorporated herein by reference.
(8) Previously filed as an Exhibit to Anicom's registration statement on
Form S-8, registration no. 333-68119, 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 1998:
Form 8-K, dated October 5, 1998 (Texcan Cables, Inc.
acquisition)
Form 8-K/A dated October 29, 1998, Amendment to Form
8-K, dated October 5, 1998 (Pro forma financial
information, Texcan Cables, Inc. acquisition)
Form 8-K/A dated November 20, 1998, Amendment to Form
8-K, dated October 5, 1998 (Financial Statements of
Businesses Acquired, Texcan Cables, Inc. acquisition)
19
Anicom, Inc.
Index to Consolidated Financial Statements and Financial Statement Schedule
Page(s)
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-24
The following consolidated financial statement schedule of
Anicom, Inc. is included in Item 14:
Schedule II - Valuation and Qualifying Accounts F-25
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 the Board of Directors of Anicom, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 17 of this Form 10-K, present fairly, in
all material respects, the financial position of Anicom, Inc. at December 31,
1998 and 1997, and the results of their operations and of their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 17 of this Form 10-K, presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Chicago, Illinois
February 17, 1999
F-2
Anicom, Inc.
Consolidated Balance Sheets
As of December 31, 1998 and 1997
(in thousands, except per share data)
1998 1997
-------- --------
Current assets:
Cash and cash equivalents $ 2,589 $ 687
Accounts receivable, less allowance
for doubtful accounts of
$4,140 and $2,442, respectively 106,043 65,125
Inventory 87,250 57,099
Deferred income taxes 3,176 2,478
Other current assets 14,273 4,866
-------- --------
Total current assets 213,331 130,255
Property and equipment, net 9,963 5,771
Goodwill, net of accumulated amortization of
$3,740 and $1,605, respectively 128,280 76,869
Deferred income taxes -- 835
Other assets 1,647 1,727
-------- --------
Total assets $353,221 $215,457
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 58,205 $ 47,740
Accrued expenses 12,927 7,909
Acquisition liabilities 5,687 5,337
Deferred income taxes 222 --
Long-term debt, current portion 1,227 1,773
-------- --------
Total current liabilities 78,268 62,759
Long-term debt, net of current portion 85,516 6,267
Other liabilities 3,067 2,282
-------- --------
Total liabilities 166,851 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;
100,000 and 60,000 shares authorized,
respectively; 25,083 and 23,293 shares
issued and outstanding, respectively 17 15
Preferred stock, undesignated,
par value $.01 per share;
973 shares authorized,
no shares issued and outstanding -- --
Additional paid-in capital 155,653 140,743
Retained earnings 10,597 3,391
Other comprehensive income 103 --
-------- --------
Total stockholders' equity 166,370 144,149
-------- --------
Total liabilities and stockholders' equity $353,221 $215,457
======== ========
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, 1998, 1997 and 1996
(in thousands, except per share data)
1998 1997 1996
--------- --------- ---------
Net sales $ 470,279 $ 243,664 $ 115,993
Cost of sales 365,613 187,098 87,442
--------- --------- ---------
Gross profit 104,666 56,566 28,551
--------- --------- ---------
Operating expenses:
Selling 43,702 25,948 13,068
General and administrative 39,924 23,547 11,547
Acquisition integration charge (Note 10) 5,156 -- --
Reengineering costs (Note 6) -- 5,584 --
--------- --------- ---------
Total operating expenses 88,782 55,079 24,615
--------- --------- ---------
Income from operations 15,884 1,487 3,936
--------- --------- ---------
Other income (expense):
Interest income 111 225 564
Interest expense (2,853) (762) (256)
--------- --------- ---------
Total other income (expense) (2,742) (537) 308
--------- --------- ---------
Income before income taxes 13,142 950 4,244
Provision for income taxes 5,600 650 1,622
--------- --------- ---------
Net income 7,542 300 2,622
Less: dividends on preferred stock (168) (296) --
--------- --------- ---------
Net income available to common stockholders $ 7,374 $ 4 $ 2,622
========= ========= =========
Earnings per common share:
Basic $ .31 $ -- $ .20
========= ========= =========
Diluted $ .30 $ -- $ .19
========= ========= =========
Weighted average common shares outstanding:
Basic 23,918 17,476 13,384
========= ========= =========
Diluted 24,816 17,476 13,580
========= ========= =========
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, 1998, 1997 and 1996
(in thousands)
Convertible
Preferred Stock Common Stock Additional Other Total
------------------ ------------------ Paid-In Retained Comprehensive Stockholders'
Shares Amount Shares Amount Capital Earnings Income Equity
------ --------- -------- -------- ---------- -------- --------- ----------
Balance, January 1, 1996 12,214 $ 6 $ 36,371 $ 764 $ 37,141
Net income 2,623 2,623
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)
-------- -------- --------- -------- ----------
Balance, December 31, 1996 15,561 7 56,465 3,387 59,859
Net income 300 300
Proceeds from issuance of
Convertible preferred
stock, net of offering 27 $ 26,155 26,155
costs
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
-------- -------- -------- -------- --------- -------- ----------
Balance, December 31, 1997 -- -- 23,293 15 140,743 3,391 144,149
----------
Net income 7,374 7,374
Foreign currency translation
Adjustments $ 103 103
----------
Total comprehensive income 7,477
Issuance of common stock
for acquisitions 1,732 2 14,579 14,581
Exercise of stock options
and warrants 58 331 331
Dividends on convertible
Redeemable preferred stock,
Series B (168) (168)
-------- -------- -------- -------- --------- -------- --------- ----------
Balance, December 31, 1998 -- -- 25,083 $ 17 $ 155,653 $ 10,597 $ 103 $ 166,370
======== ======== ======== ======== ========= ======== ========= ==========
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 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income $ 7,374 $ 301 $ 2,623
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and Amortization 4,005 2,163 924
Deferred income taxes 359 615 527
Gain on sale of product lines (1,000) (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
Accounts receivable (25,033) (6,702) (6,631)
Inventory (8,827) (12,710) (5,912)
Other assets (8,615) (1,865) (284)
Accounts payable 4,303 3,693 2,366
Accrued expenses (6,478) (2,648) (4,799)
--------- --------- ---------
Net cash (used in) provided by operating activities (33,912) (13,013) 9,127
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (3,493) (2,297) (1,105)
Cash paid for acquired companies (29,908) (33,801) (14,201)
Cash received on sale of product lines 2,700 200 --
--------- --------- ---------
Net cash used in investing activities (30,701) (35,898) (15,306)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from equity offerings, net of offering costs -- 62,365 15,054
Proceeds from long-term debt 142,550 57,340 4,190
Payment of long-term debt and assumed bank debt (76,129) (70,302) (12,884)
Other 94 -- 11
--------- --------- ---------
Net cash provided by financing activities 66,515 49,403 6,371
--------- --------- ---------
Net increase in cash and cash equivalents 1,902 492 192
Cash and cash equivalents, beginning of year 687 195 3
--------- --------- ---------
Cash and cash equivalents, end of year $ 2,589 $ 687 $ 195
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 2,896 $ 695 $ 81
========= ========= =========
Cash paid for income taxes $ 4,869 $ 4,098 $ 1,382
========= ========= =========
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 multimedia technology products including
communications related wire, cable, fiber optics and computer network
and connectivity products. The Company operates in a single business
and geographical segment.
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, mining, marine, petro-chemical, paper and pulp and other
natural resource industries. The Company's customers are principally
located in 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.
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 is estimated to be the
carrying value of these liabilities based upon borrowing rates
currently available to the Company for borrowings with similar terms.
The fair value of the Company's convertible redeemable preferred stock,
series B is estimated to approximate carrying value as such stock is
not traded in the open market and a market price is not readily
available.
Revenue Recognition
Sales and the related cost of sales are recognized upon the shipment of
products.
Earnings Per Common Share
Basic earnings per common share is computed based on net income
available to common shareholders divided by the weighted average common
shares outstanding. Diluted earnings per common share is computed 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 redeemable
preferred stock to common stock as of the date of issuance.
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 been 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
Foreign Currency Translation
All assets and liabilities are translated at current and historical
rates of exchange and operating transactions are translated at weighted
average rates during the year. The translation gains and losses are
accumulated as a component of stockholders' equity.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform to the 1998 presentation.
Recent Pronouncements
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.
2. Property and Equipment
At December 31, property and equipment consisted of the following
components:
1998 1997
-------- --------
Machinery, equipment and vehicles $ 5,142 $ 2,604
Office equipment 1,511 1,104
Computer equipment and software 4,975 2,944
Leasehold improvements 1,938 852
-------- --------
Total cost 13,566 7,504
Less: Accumulated depreciation and amortization (3,603) (1,733)
-------- --------
Property and equipment, net $ 9,963 $ 5,771
======== ========
F-9
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
3. Long-Term Debt
In November 1998, the Company entered into an agreement with its
lenders to increase its revolving credit facility (the "Facility") from
$100,000 to $120,000. The Facility provides 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 certain
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 9, the Company entered into
a new $35,000 term facility in September 1998, with a Canadian bank
("Canadian Bank Loan"). In November 1998, the Canadian Bank Loan was
acquired with proceeds from the Facility.
At December 31, long-term debt consisted of the following:
1998 1997
-------- --------
Amounts due under the Facility $ 85,000 $ 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 1,000 2,000
Prime rate note (7.50% at December 31, 1998),
payable in monthly installments
through July 1, 2002 382 489
6.00% notes due May 30, 1997 to 1999 84 167
6.00% note due October 27, 1998 -- 167
5.5% to 5.9% demand notes -- 368
Other 277 149
-------- --------
86,743 8,040
Less current portion (1,227) (1,773)
-------- --------
$ 85,516 $ 6,267
======== ========
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, 1999, and thereafter:
Amount
----------
1999 $ 1,227
2000 136
2001 128
2002 62
2003 85,190
----------
Total $ 86,743
==========
4. Convertible Redeemable Preferred Stock, Series B
In September 1998, in connection with the Texcan acquisition discussed
in Note 9, 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% 20.000
* Number of shares less shares previously converted
F-11
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
5. Common Stock
Following approval by the Company's stockholders at its annual meetings
the number of authorized shares of common stock was increased to 60,000
in June 1997 and to 100,000 in June 1998.
In December 1997, the Company completed a private placement of 2,900
shares of its common stock. Net proceeds to the Company after related
costs and expenses were approximately $36,100.
In September 1996, the Company completed a private placement of 2,423
shares of its Common Stock. Net proceeds to the Company after related
costs and expenses were approximately $15,100.
6. 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's
information technology systems 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 1,159
Development and implementation
Contract terminations and other location consolidation costs 2,889
------
$5,584
======
F-12
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
7. Income Taxes
The components of income before the provision for income taxes (in
thousands) are as follows:
1998 1997 1996
------- ------- -------
U.S. operations $12,603 $ 950 $ 4,244
Foreign operations 539 -- --
------- ------- -------
$13,142 $ 950 $ 4,244
======= ======= =======
The provision for income taxes for the years ended December 31, 1998,
1997 and 1996 is comprised of the following:
1998 1997 1996
------ ------ ------
Current:
Federal $3,941 $ 35 $ 879
State 794 -- 216
Foreign 66 -- --
------ ------ ------
4,801 35 1,095
------ ------ ------
Deferred:
Federal 601 475 442
State 113 140 85
Foreign 85 -- --
------ ------ ------
799 615 527
------ ------ ------
$5,600 $ 650 $1,622
====== ====== ======
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, 1998, 1997 and 1996:
1998 1997 1996
------- ------- -------
Computed income taxes
at federal statutory rate $ 4,600 $ 323 $ 1,443
State income taxes,
net of federal benefit 590 91 198
Non-deductible amortization 312 120 44
Other nondeductible expenses 228 128 73
Nontaxable investment income -- (18) (100)
Foreign taxes (58) -- --
Other (72) 6 (36)
------- ------- -------
$ 5,600 $ 650 $ 1,622
======= ======= =======
F-13
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
7. Income Taxes, continued
At December 31, 1998 and 1997, deferred income tax assets and
liabilities consisted of the following components:
1998 1997
------- -------
Current deferred income tax asset (liability):
Accounts receivable $ 237 $ (752)
Inventory 1,772 1,419
Acquisition liabilities, current (377) 762
Reengineering costs 317 792
Other 1,227 257
------- -------
3,176 2,478
------- -------
Long-term deferred income tax asset (liability):
Property and equipment (106) (73)
Intangibles (1,891) (770)
Gain on sale of product lines (216) (182)
Acquisition liabilities, noncurrent 1,991 1,860
------- -------
(222) 835
------- -------
Net deferred income tax asset $ 2,954 $ 3,313
======= =======
8. 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.
The Company amended the Directors Plan and the 1996 Plan to increase
the total number of shares of stock available for grant to 450 shares
and 2,600 shares, respectively in May, 1998.
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)
8. Stock Options and Warrants, continued
A summary of information related to these options for the years ended
December 31, 1998, 1997 and 1996 follows:
1998 1997 1996
---------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price/Share Shares Price/Share Shares Price/Share
------- ----------- ------- ------------ -------- -----------
Outstanding, beginning of year 2,186 $7.19 1,668 $7.10 365 $3.71
Granted 1,756 9.97 545 13.73 1,310 8.02
Exercised/Canceled (21) 6.11 (27) 7.04 (7) 3.00
------- ----------- -------- ------------ -------- ----------
Outstanding, end of year 3,921 $9.24 2,186 $7.19 1,668 $7.10
======= =========== ======== ============ ======== ===========
Available for grant, end of year 329 1,080 1,625
======= ======== ========
Price range at end of year $3.00 to $3.00 to $3.00 to
$16.87 $16.87 $9.00
======= ======== ========
Price range for exercised $3.00 to $3.00 to
$9.00 $8.75 $3.00
======= ======== ========
Weighted-average fair value of
options granted during the year $3,955 $2,239 $3,252
======== ======== ========
Weighted
Average Weighted
Remaining Average
Number Number Contractual Exercise Price
Price per Share Outstanding Exercisable Life per Share
- ------------------- ------------ ----------- ----------- --------------
$3.00 to $ 4.50 183 183 6.3 years $ 3.00
$4.51 to $ 7.00 1,111 372 8.8 years 5.92
$7.01 to $ 9.00 1,082 647 7.1 years 8.61
$9.01 to $17.00 1,545 173 8.9 years 12.88
----------- --------- --------------
3,921 1,375 $ 9.26
=========== ========= ==============
F-15
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
8. 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 4.2% 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 volatility 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:
1998 1997 1996
---------- --------- ---------
Net income $ 7,542 $ 300 $ 2,622
========== ========= =========
Net income (loss), pro forma $ 5,631 $ (1,939) $ (629)
========== ========= =========
Earnings per common share, as reported:
Basic $ .31 $ -- $ .20
========== ========= =========
Diluted $ .30 $ -- $ .19
========== ========= =========
Earnings (loss) per common share, pro forma:
Basic $ .23 $ (.11) $ (.05)
========== ========= =========
Diluted $ .23 $ (.11) $ (.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, 203 of these warrants have been exercised.
F-16
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
9. 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 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
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.
F-17
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
9. Acquisitions, continued
("Connectivity") bank debt by Anicom. In addition, the Company entered
into a supply agreement with Connectivity.
In March 1997, Anicom purchased all of the issued and outstanding
common stock of Security Supply, Inc. ("Security Supply") of New
Orleans, Louisiana. 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.
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
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.
In September 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.
In September 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.
In May 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.
In March 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.
F-18
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
9. Acquisitions, continued
In February 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.
The following pro forma consolidated financial information assumes that
the significant acquisitions and the 1997 issuances of equity discussed
in Notes 5 and 13, which were a significant source of the funds used in
certain of the acquisitions, occurred on January 1, 1997. It further
assumes that the equity transaction discussed in Note 13 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, 1997 nor are they indicative
of the results which may occur in the future.
1998 1997
----------- -----------
(unaudited)
Net sales $541,482 $481,377
=========== ==========
Operating income 18,435 (1) 8,347 (2)
=========== ==========
Net income 8,681 (1) 4,088 (2)
=========== ==========
Net income available to common stockholders 8,080 (1) 3,192 (2)
=========== ==========
Pro forma earnings per common share:
Basic $.32 (1) $.14 (2)
=========== ==========
Diluted $.32 (1) $.14 (2)
=========== ==========
Pro forma weighted average
common shares outstanding:
Basic 25,079 22,845
=========== ==========
Diluted 26,482 24,249
=========== ==========
(1) Amount includes the $5,158 acquisition integration charge discussed in
Note 10.
(2) Amount includes the $5,584 of Reengineering costs discussed in Note 6.
F-19
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
10. Acquisition Integration Charge
The Company incurred a one-time acquisition integration charge during
the third quarter of 1998 of approximately $5,156. 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 $1,006 related to severance and
other costs.
As of December 31, 1998, approximately $2,658 has been paid the
remainder is included in accrued liabilities. The majority of the
accrual remaining relates to lease abandonment costs that will be paid
through 2002 unless early terminations can be negotiated.
11. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for each of the years ended December 31, 1998, 1997
and 1996:
1998 1997 1996
------------- ------------ -------------
Numerator:
Net income $ 7,542 $ 300 $ 2,622
Less: dividend on preferred stock (168) (296) --
------------ ----------- ------------
Net income available to common stockholders $ 7,374 $ 4 $ 2,622
============ =========== ============
Denominator:
Denominator for basic earnings per share - weighted
average common shares outstanding 23,918 17,476 13,384
Plus:
Effect of assumed conversion of
convertible preferred stock 388 -- --
Effect of employee stock options and warrants 510 -- 196
------------ ----------- ------------
24,816 17,476 13,580
============ =========== ============
Earnings per share:
Basic $ .31 $ -- $ .20
============ =========== ============
Diluted $ .30 $ -- $ .19
============ =========== ============
12. 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 for these officers
if employment is terminated. The aggregate base salary payable to these
officers under the employment agreements in 1999 is approximately
$1,000. In the event of a change in control, the Company may become
obligated to make payments to certain of these officers of
approximately $5,500, plus an annuity, the present value of which, in
the aggregate, will not exceed 2% of the transaction value which
resulted in the change in control. In addition, these payments are
subject to gross-up for certain taxes.
F-20
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
12. Commitments and Contingencies, continued
Operating Leases
The Company leases certain warehouse and office facilities and
equipment under operating leases. Rental expense under the leases was
approximately $5,521, $3,216 and $1,419 for the years ended December
31, 1998, 1997 and 1996, 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, 1998 are as
follows:
Year Amount
----------- -------
1999 $ 6,758
2000 5,812
2001 4,759
2002 3,734
2003 2,393
Thereafter 4,613
-------
Total $28,069
=======
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. The Norfolk plan was terminated in 1998.
With the acquisition of TW, the Company has an additional 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. During 1998 the TW Plan was frozen and
all contributions were ceased. Participants in the TW Plan have been
given the opportunity to participate in the Anicom Plan. The Company is
in the process of terminating the TW Plan.
Total Company contributions to the plans were approximately $194, $113
and $104 in 1998, 1997 and 1996, respectively.
F-21
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
12. Commitments and Contingencies, continued
Other
The Company is subject to legal proceedings and arbitration claims
related to acquired businesses and product lines which have been
disposed of as well as 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.
13. 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
External Lease Exit Liabilities
Consultants Severance Costs and Other Total
------- ------- ------- ------- -------
Balance, January 1, 1997 $ 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
Establish liabilities 3,350 33 1,322 2,807 7,512
Expenditures (2,651) (2,996) (225) (727) (6,599)
------- ------- ------- ------- -------
Balance, December 31, 1998 $ 1,177 $ 387 $ 3,292 $ 3,676 $ 8,532
======= ======= ======= ======= =======
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-22
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
14. Supplemental Cash Flow Information
The following is a summary of the noncash investing and financing for
the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
------------- ------------- -------------
Acquisitions:
Fair value of assets acquired $ 97,627 $ 108,591 $ 53,266
Acquisition liabilities and costs (7,802) (8,843) (3,614)
Bank debt assumed (12,686) (16,818) (9,318)
Other liabilities assumed (12,545) (27,164) (20,456)
Convertible preferred stock issued (20,000) -- --
Common stock issued (14,581) (21,627) (5,537)
------------- ------------- -------------
Cash paid 30,013 34,139 14,341
Less: cash acquired (105) (338) (140)
------------- ------------ -------------
$ 29,908 $ 33,801 $ 14,201
============= ============= =============
Dispositions:
Value of assets sold, net of transaction costs $ 5,627 $ 117 $ 404
============= ============= =============
Short term receivable due $ 2,927
=============
Notes receivable accepted $ 400 $ 875
============= =============
Anicom common stock received $ 507
=============
Conversion of Preferred Stock:
Conversion to Common Stock $ 27,000
=============
Payment of dividends in Common Stock $ 297
=============
F-23
Anicom, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
15. 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. Another of the
Company's directors is the Chief Executive Officer of an insurance
brokerage company which is used by the Company.
16. Quarterly Operating Results (unaudited)
Three Months Ended
----------------------------------------------------------------
12/31/98 9/30/98 6/30/98 3/31/98
------------- -------------- ------------- -------------
Net Sales $130,859 $124,071 $113,252 $102,099
Gross profit 29,894 26,906 25,187 22,680
Operating earnings 5,253 830 (1) 5,150 4,652
Net income $ 2,150 $ (88) (1) $ 2,813 $ 2,667
Earnings per share:
Basic earnings per share $0.08 $ -- $0.12 $0.12
Diluted earnings per share $0.08 $ -- $0.12 $0.11
<FN>
(1) Amount includes the $5,158 acquisition integration charge discussed
in Note 10.
</FN>
17. Subsequent Event (unaudited)
During the first quarter of 1999 the Company adopted a stockholder
rights plan (the "Rights Plan"). Under the Rights Plan, preferred stock
purchase rights ("Rights") will be distributed to stockholders of
record as of March 31, 1999, at the rate of one Right for each
outstanding share of the Company's common stock. The Rights will not be
exercisable unless a person or group acquires 15% or more of the
Company's common stock or announces a tender offer upon consummation of
which such person or group would own 15% or more of the common stock.
Each Right, when exercisable, entitles the holder to purchase one share
of the Company's common stock at 50% of the current market price. If
the Company is acquired through a merger or other business combination
transaction, or 50% or more of the Company's assets or earning power is
sold, each right will entitle the holder to purchase the surviving
company's common stock at 50% of the current market price. The Rights
will expire in ten years unless earlier redeemed or terminated. The
Company generally may amend the Rights or redeem the Rights at $0.01
per Right at any time prior to the time a person or group has acquired
15% of the Company's common stock.
F-24
Anicom, Inc.
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
------- ------- -----
Allowance for Doubtful Accounts
Balance, beginning of year $ 2,442 $ 980 $ 120
Additions 2,406 2,183 939
Write-offs, net of recoveries (708) (721) (79)
------- ------- -----
Balance, end of year $ 4,140 $ 2,442 $ 980
======= ======= =====
Inventory Valuation Allowance
Balance, beginning of year $ 2,276 $ 300
Additions 2,134 2,694 $ 535
Write-offs (1,973) (718) (235)
------- ------- -----
Balance end of year $ 2,437 $ 2,276 $ 300
======= ======= =====
F-25
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 31st day of March, 1999.
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 March 31, 1999
- ---------------------- and Director
Scott C. Anixter (Principal Executive Officer)
/s/ ALAN B. ANIXTER Chairman of the Board March 31, 1999
- ----------------------
Alan B. Anixter
/s/ CARL E. PUTNAM President, March 31, 1999
- ---------------------- Chief Operating Officer
Carl E. Putnam and a Director
/s/ DONALD C. WELCHKO Vice President, March 31, 1999
- ---------------------- Chief Financial Officer
Donald C. Welchko and a Director
(Principal Financial and
Accounting Officer)
/s/ PETER HUIZENGA Director March 31, 1999
- ----------------------
Peter Huizenga
/s/ LEE B. STERN Director March 31, 1999
- ----------------------
Lee B. Stern