SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 0-25364
ANICOM, INC.
(Name of registrant as specified in its charter)
Delaware 36-3885212
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6133 North River Road, Suite 1000, Rosemont, Illinois 60018-5171
(Address of principal executive offices) (Zip Code)
(847) 518-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share as of July 31, 1999 was 25,120,958.
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
ANICOM, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
June 30,
1999 December 31,
ASSETS (Unaudited) 1998
-------- --------
Current assets:
Cash and cash equivalents $ 6,009 $ 2,589
Accounts receivable, less allowance for doubtful
accounts of $3,909 and $4,140, respectively 132,625 106,043
Inventory, primarily finished goods 92,498 87,250
Other current assets 20,250 17,449
-------- --------
Total current assets 251,382 213,331
Property and equipment, net 10,233 9,963
Goodwill, net of accumulated amortization
of $5,351 and $3,740, respectively 128,314 128,280
Other assets 1,086 1,647
-------- --------
Total assets $391,015 $353,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 95,511 $ 58,205
Accrued expenses, acquisition and other liabilities 15,376 18,836
Long-term debt, current portion 176 1,227
-------- --------
Total current liabilities 111,063 78,268
Long-term debt, net of current portion 83,726 85,516
Other liabilities 4,088 3,067
-------- --------
Total liabilities 198,877 166,851
-------- --------
Commitments and Contingencies
Convertible redeemable preferred stock,
series B, par value $.01 per share,
liquidation value $1,000 per share; 20 shares
authorized, issued and outstanding 20,000 20,000
-------- --------
Stockholders' equity:
Common stock, par value $.001 per share;
100,000 shares authorized, 25,121
and 25,083 shares issued and
outstanding, respectively 17 17
Preferred stock, series C,
par value $.01 per share;
50 shares authorized;
no shares issued and outstanding -- --
Preferred stock, undesignated,
par value $.01 per share;
903 shares authorized;
no shares issued and outstanding -- --
Additional paid-in capital 155,871 155,653
Retained earnings 14,200 10,597
Other comprehensive income 2,050 103
-------- --------
Total stockholders' equity 172,138 166,370
-------- --------
Total liabilities and stockholders' equity $391,015 $353,221
======== ========
See Notes to Condensed Consolidated Financial Statements
1
ANICOM, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
------------------- -------------------
1999 1998 1999 1998
Net sales $131,744 $113,252 $268,986 $215,349
Cost of sales 102,314 88,065 209,076 167,482
-------- -------- -------- --------
Gross profit 29,430 25,187 59,910 47,867
-------- -------- -------- --------
Operating expenses:
Selling 13,310 10,302 25,533 19,550
General and administrative 12,477 9,735 24,107 18,516
Legal settlement 1,352 -- 1,352 --
-------- -------- -------- --------
Total operating expenses 27,139 20,037 50,992 38,066
-------- -------- -------- --------
Income from operations 2,291 5,150 8,918 9,801
Interest expense, net
1,479 461 2,957 667
-------- -------- -------- --------
Income before income taxes 812 4,689 5,961 9,134
Provision for income taxes 32 1,876 2,058 3,654
-------- -------- -------- --------
Net income 780 2,813 3,903 5,480
Less: dividend on preferred stock 152 -- 300 --
-------- -------- -------- --------
Net income available to common stockholders $ 628 $ 2,813 $ 3,603 $ 5,480
======== ======== ======== ========
Earnings per common share:
Basic $ .03 $ .12 $ .14 $ .24
======== ======== ======== ========
Diluted $ .03 $ .12 $ .14 $ .23
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 25,119 23,425 25,108 23,360
======== ======== ======== ========
Diluted 27,315 23,968 27,178 23,925
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
2
ANICOM, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands, except per share data)
For the Six Months Ended
June 30,
(unaudited)
------------------------
1999 1998
Cash flows from operating activities:
Net income $ 3,903 $ 5,480
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 2,887 1,545
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (26,582) (29,181)
Inventory (5,249) (8,443)
Other assets (5,272) 1,076
Accounts payable 40,404 13,577
Accrued expenses (3,386) (4,416)
-------- --------
Net cash provided by (used in) operating activities 6,705 (20,362)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,025) (1,117)
Cash paid for acquired companies -- (2,152)
Cash received on the sale of product lines 2,502 --
Other 642 --
-------- --------
Net cash provided by (used in) investing activities 119 (3,269)
-------- --------
Cash flows from financing activities:
Payment of long-term debt and assumed bank debt (45,741) (31,047)
Proceeds from long-term debt 42,900 54,400
Repayment of other debt and preferred dividends (563) --
-------- --------
Net cash provided by (used in) financing activities (3,404) 23,353
-------- --------
Net increase (decrease) in cash and cash equivalents 3,420 (278)
Cash and cash equivalents, beginning of period 2,589 687
-------- --------
Cash and cash equivalents, end of period $ 6,009 $ 409
======== ========
See Notes to Condensed Consolidated Financial Statements
3
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated unaudited financial statements
of Anicom, Inc. (the "Company" or "Anicom") do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein is unaudited, but in the opinion of management,
reflects all normal recurring adjustments necessary for a fair
presentation of the results for the interim periods. Reported interim
results of operations are based, in part, on estimates that may be
subject to year-end adjustment. The interim results of operations and
cash flows are not necessarily indicative of such results and cash
flows for the entire year.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
2. Nature of Business
Anicom 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.
3. Legal Settlement
During the second quarter of 1999, the Company reached an agreement to
settle a civil lawsuit stemming from the March 1997 disposition of a
non-strategic cable assembly product line. In connection with the
settlement, the Company recognized a charge of approximately $1.4
million during the second quarter.
4
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
4. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended June 30, 1999 and
1998:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1999 1998 1999 1998
Numerator:
Net income $ 780 $ 2,813 $ 3,903 $ 5,480
Less: dividend on preferred stock (152) -- (300) --
-------- -------- -------- --------
Net income available to common stockholders $ 628 $ 2,813 $ 3,603 $ 5,480
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted average common share outstanding 25,119 23,425 25,108 23,360
Plus:
Effect of assumed conversion of convertible
preferred stock 1,403 -- 1,403 --
Effect of dilutive employee stock options and warrants 793 543 667 565
-------- -------- -------- --------
Denominator for diluted earnings per share -
adjusted weighted average common shares outstanding 27,315 23,968 27,178 23,925
-------- -------- -------- --------
Basic earnings per share $ .03 $ .12 $ .14 $ .24
======== ======== ======== ========
Diluted earnings per share $ .03 $ .12 $ .14 $ .23
======== ======== ======== ========
5. Comprehensive Income
The following table sets forth comprehensive income for the three and six
months ended June 30, 1999 and 1998:
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
--------------- ---------------
1999 1998 1999 1998
Net income available
to common stockholders $ 628 $2,813 $3,603 $5,480
Foreign currency
translation adjustment 1,271 -- 1,947 --
------ ------ ------ ------
Total comprehensive income $1,899 $2,813 $5,550 $5,480
====== ====== ====== ======
5
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
6. Acquisitions
In September 1998, the Company purchased substantially all of the
assets and assumed certain liabilities of Texcan Cables Limited, Texcan
Cables, Inc. and Texcan Cables International, Inc. (collectively
referred to as "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, cable and fiber optic cable and
accessories 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.
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.
7. Stockholder Rights Plan
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") were distributed to stockholders of record
as of April 5, 1999, at the rate of one Right for each outstanding
share of the Company's common stock. Generally, the Rights will not be
triggered 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 shares 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.
6
8. Supplemental Cash Flow Information
The following summarizes non-cash investing and financing activities
the six months ended June 30, 1999 and 1998. Non-cash activity related
to acquisitions includes initial amounts estimated and any subsequent
changes to those initial estimates.
Six Months Ended June 30,
------------------------
1999 1998
Acquisitions:
Fair value of assets acquired $ 1,000 $ 12,008
Acquisition liabilities and costs (1,000) (1,421)
Liabilities assumed -- (4,252)
Common stock issued -- (4,078)
-------- --------
Cash paid $ -- $ 2,257
Less: cash acquired -- (105)
-------- --------
Net cash paid for acquisitions $ -- $ 2,152
======== ========
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following table sets forth selected income statement data of Anicom
expressed as a percentage of net sales for the periods indicated:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
Income Statement Data:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 77.7 77.8 77.7 77.8
------ ------ ------ ------
Gross profit 22.3 22.2 22.3 22.2
------ ------ ------ ------
Operating expenses:
Selling expenses 10.1 9.1 9.5 9.1
General and administrative expenses 9.5 8.6 9.0 8.6
Legal settlement 1.0 -- 0.5 --
------ ------ ------ ------
Income from operations 1.7 4.5 3.3 4.6
Interest expense, net 1.2 0.4 1.1 0.3
------ ------ ------ ------
Income before income taxes 0.6 4.1 2.2 4.2
Income taxes -- 1.7 0.8 1.7
------ ------ ------ ------
Net income 0.6 2.5 1.4 2.5
Less: Dividend on preferred stock 0.1 -- 0.1 --
------ ------ ------ ------
Net income available to common shareholders 0.5% 2.5% 1.3% 2.5%
====== ====== ====== ======
<FN>
- ------------------
Note: Percentages may not sum due to rounding.
</FN>
Results of Operations for the Three and Six Months Ended June 30, 1999 Compared
to the Three and Six Months Ended June 30, 1998
Net sales for the quarter ended June 30, 1999 increased to $131.7
million, a 16% increase over net sales of $113.3 million in the second quarter
of 1998. Net sales for the first six months of 1999 rose by 25% to $269.0
million when compared to net sales of $215.3 million for the first half of 1998.
These increases are primarily attributable to acquisitions, which have led to
new customers, new products, and expanded market penetration. These results were
adversely impacted by declining sales levels at certain of the locations
acquired from TW Communication Corporation in December 1997. In addition, the
Company also experienced delays in the shipment of certain orders and unexpected
scheduling delays on several large contracts.
Anicom's gross profit for the quarter ended June 30, 1999 increased by
$4.2 million or approximately 17% to $29.4 million versus $25.2 million for the
same period of 1998. Anicom's gross profit for the six months ended June 30,
1999 increased by $12.0 million or 25% to $59.9 million versus $47.9 million for
the six months ended June 30, 1998. This increase resulted from Anicom's
acquired sales volume. As a percentage of net sales, gross profit for the three
and six month periods ended June 30 increased slightly from 22.2% in 1998 to
22.3% in 1999. 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
8
gross margins by increasing the depth and breadth of products offered by all of
its locations and by continuing to leverage its purchasing volume with vendors.
Selling expenses increased by $3.0 million and $6.0 million,
respectively, for the three and six months ended June 30, 1999 when compared to
the same periods in 1998. These increases occurred in conjunction with the
Company's increase in net sales and the increase in sales headcount that
resulted from the Company's recent acquisitions. Selling expenses for the second
quarter of 1999 increased from 9.1% of net sales in 1998 to 10.1% of net sales
in 1999. Selling expenses increased from 9.1% of net sales for the six months
ended June 30, 1998 to 9.5% of net sales for the six months ended June 30, 1999.
These increases occurred as a result of lower than expected sales volume
experienced in the second quarter of 1999 due to the factors discussed above.
General and administrative expenses increased from $9.7 million for the
second quarter of 1998 to $12.5 million for the second quarter of 1999 and $18.5
million for the six months ended June 30, 1998 to $24.1 million for the six
months ended June 30, 1999. The Company's acquisitions during the first nine
months of 1998, led to these increases. General and administrative expenses for
the second quarter of 1999 increased from 8.6% of net sales in 1998 to 9.5% of
net sales in 1999. General and administrative expenses increased from 8.6% of
net sales for the six months ended June 30, 1998 to 9.0% of net sales for the
six months ended June 30, 1999. The Company has continued to reduce acquired
companies' overhead costs and further realize operating leverage from its
acquisition-based integrated growth strategy. However, as a percentage of sales
these costs increased during the second quarter due to the implementation of
centralized distribution centers which has resulted in redundant costs during
the transition to these centers.
During the second quarter of 1999, the Company reached an agreement to
settle a civil lawsuit stemming from the March 1997 disposition of its
non-strategic cable assembly product line. In connection with the settlement,
the Company recognized a charge of approximately $1.4 million during the second
quarter.
In the second quarter of 1999, net interest expense increased to $1.5
million from $461,000 for the second quarter of 1998. For the six months ended
June 30, 1999, net interest expense increased to $3.0 million from $667,000 for
the same period in 1998. This is primarily a result of the Company's increased
borrowings under its credit facility to fund the cash consideration and debt
payoff related to acquisitions, and to meet the increased working capital
requirements associated with sales growth experienced during the last three
quarters of 1998 and the first quarter of 1999.
The provision for income taxes was $32,000 for the second quarter of
1999 compared to $1.9 million for the second quarter of 1998. The provision for
income taxes was $2.1 million for the six months ended June 30, 1999 compared to
$3.7 million for the same period in 1998. The decrease is a result of the
decrease in income before income taxes. For the three months ended June 30, 1999
the provision for income taxes, as a percentage of income before income taxes,
decreased to 3.9% from 40% during the same period in 1998. For the six months
ended June 30, 1999 the provision for income taxes, as a percentage of income
before income taxes, decreased to 34.5% from 40% during the same period in 1998.
The decreased rate is principally a result of the company's current
international tax filing requirements.
Net income for the second quarter of 1999 was $780,000 compared to $2.8
million for the second quarter of 1998. Net income for the six months ended June
30, 1999 was $3.9 million as compared to $5.5 million for the same period in
1998. For the second quarter of 1999 basic and diluted earnings per common share
were $.03 per share, compared to $.12 per share, for the same periods in 1998.
For the six months ended June 30, 1999 basic and diluted earnings per common
share were $.14 per share, compared to $.24 and $.23 per share, respectively for
the same period in 1998. Diluted weighted average shares outstanding increased
approximately 14% for the quarter and six months ended June 30, 1999 from the
same periods in 1998.
9
Liquidity and Capital Resources
Management believes that cash flows from operations and borrowings
available under its revolving credit facility (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 November 1998, the Company entered into an agreement with its
lenders to increase borrowings available under 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.
As of June 30, 1999, Anicom had working capital of approximately $140.3
million as compared to $135.1 million as of December 31, 1998. At June 30, 1999,
amounts outstanding under the Facility were approximately $83.7 million.
During the six months ended June 30, 1999 cash flows from operating
activities provided $6.7 million of cash compared to $20.4 million used during
the same period in 1998. This increase relates primarily to increases in
accounts payable related to the timing of payments.
During the six months ended June 30, 1999 cash flows from investing
activities generated $119,000 compared to using approximately $3.3 million
during the same period in 1998. During the first half of 1998, Anicom completed
the acquisitions of Yankee Electronics, Optical Fiber Components and Superior
Cable and Supply Company. Cash paid for these acquisitions accounted for the
majority of cash used for investing activities during the first half of 1998.
During the first half of 1999 the Company received the remaining cash proceeds
from the 1998 disposition of the Broadband cable television product line and a
favorable purchase price adjustment from a previous acquisition which was offset
in part by investments in property and equipment.
During the six months ended June 30, 1999 cash flows from financing
activities used approximately $3.4 million compared to providing $23.4 million
during the same period in 1998. The decrease relates to a reduction in
borrowings under the Facility in the first half of 1999 compared to the first
half of 1998. During 1998, borrowings under the Facility were made to fund
increased working capital requirements and acquisition activity.
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 its operations during the first half of 1999.
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.
10
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. 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.
Texcan's Canadian financial and distribution systems were upgraded to
become Year 2000 compliant during the first quarter of 1999 at a cost of
approximately $50,000. Testing of these systems has confirmed this conclusion.
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 only 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.
11
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 third quarter of 1999 with remedial action planned for the
third and fourth quarter of 1999.
While the Company and many other companies believe their efforts to
address the Year 2000 issues will be successful in avoiding any material adverse
effect on the Company's results of operations or financial condition, it
recognizes that a most reasonably likely worst case Year 2000 scenario would
involve the failure of a third party or a component of the infrastructure,
including national banking systems, electrical power, transportation facilities,
communication systems and governmental activities, to conduct their respective
operations after 1999 such that the Company's ability to obtain and distribute
its products and services would be limited for a period of time. If this were to
occur, it would likely cause temporary financial losses and an inability to
provide products and services to customers, and there may be no practical
alternative to some of these resources available to the Company.
The 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 completed by the third 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.
12
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
In compliance with the Safe Harbor Provision of the Private Securities
Litigation Reform Act of 1995, the Company notes the statements contained in
this quarterly report that are not historical facts may be forward-looking
statements that are subject to a variety of risks and uncertainties more fully
described in Anicom's filings with the Securities and Exchange Commission
including, without limitation, those described under "Risk Factors" in Anicom's
Registration Statement on Form S-3 (File No. 333-61715), in Anicom's Annual
Report on Form 10-K for the year ended December 31, 1998, and in this quarterly
report. Whenever possible, the Company has identified these forward looking
statements by words such as "believe," "feel," "anticipate," "expect" and
similar expressions used in this quarterly report as they relate to Anicom or
its management. Anicom wishes to caution readers of this quarterly report that
these risks and uncertainties could cause Anicom's actual results in 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
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's Facility is priced on a floating rate basis at either a
spread over LIBOR or under the credit facility agent's Domestic Rate which is
tied to the U.S. Prime Rate. The rate used is subject to selection by the
Company based on the terms of the Facility. Accordingly, any movement in LIBOR
or the Domestic Rate will impact the Company's interest expense. The outstanding
balance under the Facility at June 30, 1999 was $83.7 million. Based on this
balance, a hypothetical 10% increase in LIBOR would result in an increase in
annual interest expense of approximately $528,000. The Company has not
historically used interest rate swaps, caps or other derivative financial
instruments for the purpose of hedging fluctuations in interest rates on its
floating rate debt. Consequently, increases in interest rates could have a
material adverse effect on the Company's future results.
Foreign Currency Exchange Rate Risk
A portion of the Company's sales are denominated in Canadian dollars
thereby creating an exposure to foreign currency exchange rate risk which could
have a material adverse effect on the Company's financial results. The Company
has not historically used forward foreign exchange contracts or other derivative
financial instruments for the purpose of hedging fluctuations in Canadian
dollars.
13
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Stockholders of the Company was held on
May 19, 1999.
1. The stockholders voted to elect four Class I
Directors to serve for three year terms expiring at
the Annual Meeting of Stockholders in 2002, with the
following vote:
Directors For Against Authority Broker
Withheld Non-Votes
------------------- ----------- ---------- ------------ -----------
Scott C. Anixter 20,026,768 - 1,186,428 -
Carl C. Putnam 20,026,788 - 1,186,408 -
Peter H. Huizenga 19,912,968 - 1,300,228 -
Lee B. Stern 20,026,788 - 1,186,408 -
The following directors' terms of office continued
after the meeting: Alan B. Anixter (term expiring in
2001), William R. Anixter (term expiring in 2001),
Ira J. Kaufman (term expiring in 2001), Donald C.
Welchko (term expiring in 2000), Michael Segal (term
expiring in 2000), and Thomas J. Reiman (term
expiring in 2000).
2. The stockholders also voted to approve an amendment
to the Anicom, Inc. 1996 Stock Incentive Plan (the
"Plan") to increase the number of shares of common
stock reserved for issuance under the Plan from
2,600,000 to 3,800,000, with the following vote:
For Against Authority Abstentions Broker
Withheld Non-Votes
- -------------- ----------- ---------- ------------- -----------
17,106,207 4,026,278 - 80,711 -
3. The stockholders also voted to approve an amendment to the
Amended and Restated Anicom, Inc. 1995 Directors Stock
Option Plan (the "Directors Plan") to increase the number
of shares of common stock reserved for issuance under the
Directors Plan from 450,000 to 500,000 with the following
vote:
For Against Authority Abstentions Broker
Withheld Non-Votes
- -------------- ----------- ---------- ------------- -----------
18,307,681 2,783,803 - 121,712 -
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed with this report:
Exhibit No.
-----------
27 Financial data schedule
(b) Reports on Form 8-K.
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANICOM, INC.
Dated: August 16, 1999 By:/S/ DONALD C. WELCHKO
-----------------------------------------
Donald C. Welchko
Vice President and Chief Financial Officer
16
ANICOM, INC.
INDEX TO EXHIBITS
Exhibit No.
-----------
27 Financial data schedule
17