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, 1999
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 27, 2000: $163,639,570.
The number of shares outstanding of the registrant's Common Stock as of March
27, 2000: 25,248,611.
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 17,
2000 are incorporated by reference into Part III of this report.
PART I
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
2000 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 under "Financial Condition and Results of Operations -
Factors That Could Affect Our Operations. 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 implement timely its centralized
distribution centers, the timing of customer projects, 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.
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this annual report.
ITEM 1. DESCRIPTION OF BUSINESS
GeneralGeneral
Anicom, Inc. ("Anicom" or the "Company") is a North American leader in
the sale and distribution of multimedia technology products consisting of fiber
optics, communications related wire, cable and computer network and connectivity
components. Anicom provides products that "interconnect the Internet" serving as
a vital link for the flow of information that allows people and companies to
transact business online. 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.
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
1
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.
The growing market for the distribution of multimedia technology
products, such as communications related wire, cable, fiber optics and computer
network and connectivity components, 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 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. Management believes that the replacement of existing cable with
fiber optic cable represents a significant opportunity for the Company. Anicom
sells multimode, 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. Anicom also sells single
mode, multifiber cables for use in long line telecom and data connections to the
CLEC, ISP and RBOC 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 that will involve
the use of fiber optic cable, copper cable or wires manufactured to
specifications. At the same time, the proliferation of electronic commerce and
advances in networking technology have resulted in increased demand for digital
networks and mobile data access to the internet, private intranets, local area
networks, wide area networks, e-mail, and other on-line data services and
systems that utilize the products offered by Anicom. The growth of these types
of systems has resulted in a separate purchasing process for electronic data
transmission cable and components. Anicom coordinates with systems integrators,
contractors, end users and network cable manufacturers in determining
specifications of the cable and connectivity products required for a particular
system.
Sound, Security, Fire, Alarm and Energy Management Systems
The demand for the multimedia technology 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, original equipment manufacturers ("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
2
multimedia technology products offered by Anicom. The systems installed 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.
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 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.
Sales and Marketing
Anicom is committed to making it easier and more cost effective for its
customers to acquire fiber optics, wire, cable, and computer network and
connectivity products. Anicom has established strong customer relationships
through an extensive and experienced sales and marketing force of approximately
530 people operating throughout North America.
Anicom currently has created eight 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
operating income and short-term and long-term sales and marketing efforts in
their respective territory.
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 systems 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 customize packaging services, just in time delivery,
technical support, material management services, 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
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. 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 salespersons who have developed this degree of knowledge.
E-business is an important part of Anicom's sales, customer service and
marketing strategy. Our website allows our customers to access product,
technical information, shipping status and many other features that make
transactions simple and efficient. During 2000, we expect to expand the volume
of electronic business that we conduct with our customers and suppliers by
increasing our e-business capabilities.
Anicom identifies potential customers through telemarketing efforts,
responses to direct marketing materials, periodic advertisements in trade
journals, industry trade shows and inquiries to its web site and from working
3
closely with our supply partners that provide leads and new product
announcements. 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 product solutions to our customers.
Anicom rewards its sales and marketing force through a base salary and
an incentive-based bonus program. Under this program, Anicom and each sales
associate establish quantifiable performance goals each year. 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 vendor relationships are important to Anicom's
success, and Anicom focuses sharply on establishing and maintaining such
relationships. Management believes that Anicom is not dependent on any
particular supplier. Anicom offers a large number of products manufactured by a
variety of vendors. We have a centralized purchasing group which coordinates
manufacturers shipments to the distribution centers and other 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. However, to meet customer requirements and
provide value as a materials management agent, Anicom may be required at a point
in time to increase its investment in inventory. In connection with the Metricom
arrangement discussed below, Anicom did increase its inventory levels during
1999 in anticipation of the rollout of this project in the late first quarter of
2000. Exclusive of the Metricom arrangement, 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 other than to further expand the depth and breadth of product
offerings. Anicom's Vice President of Purchasing, who has over 16 years of
industry experience, leads the Company's inventory management programs. 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.
In 1999, management decided to eliminate the number of lower margin
product offerings as well as began a supplier selection program while reducing
the number of part numbers maintained in inventory. The Anicom Platinum Alliance
Program finds its core foundation in the simple shared belief that our
customer's needs of tomorrow must be planned and sourced today. Anicom continues
to take the necessary steps to apply solid sourcing techniques through a
supplier selection program that identifies our alliance partners who will help
Anicom meet or exceed our customer's expectations. The key to our continued
success will lie in our ability to listen to our customers and react with
excellent customer service. As a result, management reduced the number of active
vendors and part numbers from approximately 1,500 and 67,000, respectively, in
June of 1999 to approximately 900 and 50,000, respectively, by December 31,
1999. In connection with the implementation of this strategy, the Company
incurred charges for certain inventory write-downs.
4
Management Information Systems
The Company's information technology 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 Anicom's
sales and distribution locations.
This system provides management a platform capable of managing a
company substantially larger than Anicom's current size. This system will allow
Anicom to maximize productivity and integrate acquired operations, 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
represents less than 5% of total net sales for each of the last 3 years.
In November of 1999, Anicom entered into an agreement to sell wire,
cable, radios, antennas and related connectivity products to Metricom, Inc.
("Metricom") in connection with the deployment of Metricom's high speed mobile
wireless data access network. In addition, Anicom will provide Metricom logistic
and material management services.
In December of 1999, Anicom agreed to supply advanced fiber optic cable
to Gateway Telephone of Canada ("Gateway") for its high-speed North American
wide Broadband network. Gateway is the first independent Multi-Service Carrier
Network in North America and its ribbon fiber deployment is the largest in
Canada.
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.
5
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)", "L.I.P.S.(R)"
"Interconnect the Internettm" and "The Distribution Solution for Voice, Video,
Data and Powertm". Anicom's policy is to file for trademark and trade name
protection for its trademarks and trade names.
Employees
As of March 1, 2000, Anicom employed 1,088 persons. Anicom believes
that it has good relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
As of March 1, 2000, Anicom is operating out of 61 different locations
throughout North America. Most of the locations at which Anicom conducts its
business consist of a sales office and a warehouse, except for its locations in
Rosemont, Illinois; Lexington, North Carolina; Wausau, Wisconsin; and Woodridge,
Illinois, which do not include any warehouse space. In addition, Anicom is
obligated for 4 locations which are being phased out as a part of Anicom's 1999
restructuring.
As of March 1, 2000, Anicom's aggregate executive office and sales
office space was approximately 262,000 square feet and its aggregate warehouse
space was approximately 953,000 square feet. Of this total, 254,000 square feet
of executive and sales office space is being utilized in the conduct of day to
day operations while 868,000 square feet of warehouse space is being used.
Anicom is actively seeking to sublease or negotiate buyouts where practicable
for the excess space not utilized in its day to day operations.
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, 1999.
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:
1999 1998
----------------------- ------------------------
High Low High Low
---------- --------- ---------- ----------
1st quarter $10.000 $6.310 $16.750 $13.625
2nd quarter $10.813 $8.063 $16.063 $12.875
3rd quarter $10.875 $4.625 $15.125 $6.750
4th quarter $5.375 $3.875 $10.750 $6.250
As of March 24, 2000, the approximate number of record holders of Anicom's
Common Stock was 2,098.
Anicom has not paid cash dividends or distributions on its Common Stock
during 1999 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. These historical results are not necessarily
indicative of the results to be expected in the future.
Year ended December 31,
---------------------------------------------------------------------------------
1999 (1) 1998 (1) 1997 (2) 1996 1995
------------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
Selected Statement of Income Data:
Net sales $ 536,721 $ 470,279 $ 243,664 $ 115,993 $ 29,358
============= =========== =========== =========== ===========
Net income (loss) available to common
stockholders $ (10,420) $ 7,374 $ 4 $ 2,622 $ 764
============= =========== =========== =========== ===========
Net income per common share:
Basic $ (0.41) $ 0.31 $ -- $ 0.20 $ 0.14
============= =========== =========== =========== ===========
Diluted $ (0.41) $ 0.30 $ -- $ 0.19 $ 0.14
============= =========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic 25,113 23,918 17,476 13,384 5,408
============= =========== =========== =========== ===========
Diluted 25,113 24,816 17,476 13,580 5,658
============= =========== =========== =========== ===========
As of December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ----------- ----------- ----------- -----------
Selected Balance Sheet Data:
Total assets $ 383,697 $ 353,221 $ 215,457 $ 87,954 $ 41,169
============= =========== =========== =========== ===========
Long term obligations and convertible
redeemable preferred stock $ 151,570 $ 109,604 $ 8,549 $ 3,952 $ 597
============= =========== =========== =========== ===========
1. See Note 9 in the Consolidated Financial Statements.
2. See Note 10 in the Consolidated Financial Statements.
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:
1999 1998 1997
------------ ------------ ------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.8 77.7 76.8
------------ ------------ ------------
Gross profit 20.2 22.3 23.2
Operating expenses and other:
Selling 10.5 9.3 10.7
General and administrative 10.1 8.5 9.7
Restructuring charge 1.1 -- --
Acquisition integration charge -- 1.1 --
Reengineering costs -- -- 2.3
------------ ------------ ------------
Income (loss) from operations (1.8) 3.4 .6
Interest expense, net 1.3 .6 .3
------------ ------------ ------------
Income (loss) before income taxes (3.0) 2.8 .4
Income tax provision (benefit) (1.2) 1.2 .3
------------ ------------ ------------
Net income (loss) (1.8) 1.6 .1
Less: Dividend on preferred stock -- -- (.1)
------------ ------------ ------------
Net income available to common
stockholders (1.9)% 1.6% --%
============ ============ ============
- ------------------
Note: Percentages may not sum due to rounding.
Results of Operations
Year ended December 31, 1999 compared to year ended December 31, 1998
Net sales for the year ended December 31, 1999 increased by 14% to
$536.7 million when compared to net sales of $470.3 million in 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 ("TW") in December 1997.
For the year ended December 31, 1999, gross profit increased by $3.7
million or approximately 3.5% to $108.4 million versus $104.7 million for 1998.
This increase, resulting primarily from increased revenues, was significantly
offset by costs associated with Anicom's third quarter 1999 companywide
restructuring, which included costs associated with accelerating the
implementation of its distribution centers. As part of the restructuring, the
Company consolidated its 75 North American locations into 61 facilities,
downsized 12 other locations, reduced its workforce of 1,200 by about 10
percent, and reduced the number of part numbers maintained in inventory reduced
the number of lower margin product offerings and began a supplier selection
program (cumulatively referred to as the "Plan"). Principally as a result of the
Plan and in addition to the restructuring charges discussed below, the Company
incurred approximately $4.8 million in one-time charges during 1999, which
increased cost of goods sold for inventory writedowns and reductions in vendor
rebates due. Management believes in 2000 the Company will realize more
efficiencies and cost containment in 2000 out of its integrated operations as a
result of the Plan which should result in greater profitability.
9
As a percentage of net sales, gross profit for the year ended December
31, 1999 decreased as gross margins reflected the impact of lower historical
gross profit margins at certain of our more recently acquired companies which
have historically had lower margin product offerings and the costs associated
with the Plan as discussed above. Management continues to work to mitigate the
impact of these historically lower gross margins at acquired companies by
increasing premium products offered by all of its locations, eliminating lower
margin product lines, beginning a supplier selection program, and by continuing
to leverage its purchasing volume with its vendor partners. At the same time,
the Company has entered into arrangements with Metricom and Gateway that provide
for lower gross margins than historical levels. To the extent that Anicom is
able to generate significant sales from these arrangements, such sales may
result in higher gross profits but lower gross margins.
Selling expenses increased by $12.8 million for the year ended December
31, 1999 when compared to the same period in 1998. This increase 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. Additionally,
selling expenses were impacted by additional provisions for bad debts and other
factors associated with the Plan that are discussed above. Selling expenses
increased from 9.3% of net sales in 1998 to 10.5% of net sales in 1999. This
increase resulted from additional provisions for bad debts and other factors
associated with the Plan, along with the impact of lower than expected sales
volume experienced in the second and third quarters of 1999 attributable to
certain TW locations.
General and administrative expenses increased from $39.9 million for
the year ended December 31, 1998 to $54.0 million for the year ended December
31, 1999. General and administrative expenses for 1999 increased from 8.5% of
net sales in 1998 to 10.1% of net sales in 1999. These increases resulted from
redundant expenditures incurred as a result of implementing the Plan and the
realization of a full year of expenses in 1999 related to acquisitions the
Company completed during the first nine months of 1998.
In connection with the Plan, the Company consolidated and downsized
locations, reduced its workforce and began a supplier selection program. During
the third quarter of 1999, costs associated with terminating or abandoning
leases and related leasehold improvements, offering severance to associates
whose positions were eliminated, bank fees associated with taking a charge for
the Plan and other costs associated with notes receivable from suppliers were
incurred. These costs totaled $6.1 million and are categorized as a
restructuring charge on the income statement (see Note 9 in the Consolidated
Financial Statements).
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 of 1999.
For the year ended December 31, 1999, net interest expense increased to
$6.7 million from $2.7 million 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 and anticipated 2000
project business, including the Metricom and Gateway arrangements.
The Company recognized a benefit for income taxes of $6.5 million for
the year ended December 31, 1999 compared to a provision of $5.6 million for
1998. The change is a result of the Company incurring a loss before income taxes
as a result of costs associated with the Plan and other matters discussed above.
10
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 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 included $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.
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.
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
to 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
11
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 $0.31 and $0.30 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.
Liquidity and Capital Resources
In December 1999, the Company entered into a Multicurrency Credit
Agreement (the "Facility") with its then current bank group and other lenders,
which resulted in a 25% increase in available borrowings to $150 million from
the $120 million available under its previous revolving credit facility (the
"Prior Facility"). 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 certain of the Company's
financial ratios, as defined. The Facility expires in July 2001 with extensions
available at the option of the Company and the lenders through July 2003. The
Facility contains certain financial covenants, including minimum tangible net
worth and EBITDA, interest coverage, leverage and debt to earnings ratios. The
Facility is secured by the Company's receivables and inventory, with eligible
advance rates of 85% and 60%, respectively. Prior to the closing of the
Facility, Anicom obtained a waiver of compliance related to the plan for the
Prior Facility dated September 30, 1999.
Management believes that cash flows from operations and borrowings
available under the Facility will be sufficient to fund current operations. The
Company does not currently have any significant long-term capital requirements
that it believes cannot be funded from these sources. 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.
As of December 31, 1999, Anicom had working capital of approximately
$168.8 million as compared to $136.1 million as of December 31, 1998. At
December 31, 1999, amounts outstanding under the Facility were approximately
$125.1 million.
During the year ended December 31, 1999 cash flows from operating
activities used $33.7 million of cash compared to $33.9 million used during
1998. This increase relates primarily to changes in working capital components,
anticipated tax refunds resulting from the Company's 1999 loss and the impact of
amounts accrued and not yet paid related to the Plan.
For the year ended December 31, 1999 cash flows from investing
activities used $4.5 million compared to approximately $30.7 million during
1998. During 1998, Anicom completed the acquisitions of Yankee Electronics,
Optical Fiber Components, Superior Cable and Supply Company and Texcan Cables
Limited, Texcan Cables, Inc. and Texcan Cables International, Inc. (collectively
referred to as "Texcan"). Cash paid for these acquisitions accounted for the
majority of cash used for investing activities during 1998. During the second
quarter 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.
12
During the year ended December 31, 1999 cash flows from financing
activities provided approximately $37.5 million compared to providing $66.5
million during the same period in 1998. The change relates to a reduction in
additional borrowings to fund acquisition activity and increased working capital
requirements when compared to the prior year.
In September 1999, Anicom's Board of Directors authorized a share
repurchase program that will allow the Company to repurchase up to 10 percent of
the Company's outstanding common stock over a 24-month period, subject to
certain restrictions. During the fourth quarter of 1999, Anicom acquired 344,000
shares of its outstanding common stock for prices between $4.13 and $4.84 per
share.
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 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.
Year 2000 Readiness and Related Risks As of the date of this report,
all of our mission-critical systems have been tested for Year 2000 compliance
and we have not experienced any significant Year 2000 problems with our own
mission-critical systems or any mission-critical third parties systems. Many
currently installed computer systems, software programs and embedded data chips
are programmed using a two-digit date field and are therefore unable to
distinguish dates beyond the 20th Century. A failure to identify and correct any
mission-critical internal or third-party Year 2000 processing problems could
have a material adverse operational or financial consequence to us. Anicom
established a Year 2000 Project Team that developed a process for addressing the
Year 2000 issue including performing an inventory, an assessment, remediation
procedures (to the extent necessary) and testing procedures of all
mission-critical information systems and equipment that contain embedded
technology, as well as obtaining assurances from all mission-critical third
parties as to their own Year 2000 preparedness. Although we have not experienced
any significant Year 2000 problems to date, we plan to continue to monitor the
situation closely. We cannot be sure that we will be completely successful in
our efforts to address the Year 2000 issue or that problems arising from the
Year 2000 issue will not cause a material adverse effect on our operating
results or financial condition. We believe, however, that our most reasonably
likely worst-case scenario would relate to problems with the systems of third
parties rather than with our internal systems. We are limited in our efforts to
address the Year 2000 issue as it relates to third parties and rely solely on
the assurances of these third parties as to their Year 2000 preparedness. As
part of our broader contingency planning, we also developed business continuity
plans to address each critical process and activity that we believe would cause
a significant disruption to operations if not functional. Despite these efforts,
we cannot guarantee that the contingency plan will adequately address all
circumstances that may disrupt operations or that such planning will prevent
circumstances that may cause a material adverse effect on our operating results
or financial condition.
Factors That Could Affect Our Operations
Investing in the shares offered by Anicom, Inc. involves a high degree
of risk. In addition to other information contained in this Form 10-K or
incorporated by reference into this filing, you should consider carefully the
following factors before deciding to purchase the shares of the Company.
Statements in this Form 10-K that are not historical facts are forward-looking
13
statements. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. A number of factors could
cause the Company's future results to be different from those expressed in any
forward-looking statements made by the Company. Some of these factors are listed
below.
Risks Associated with Integrating Acquired Companies
As of December 31, 1999, the Company operated in over 60 locations,
many of which were locations of companies which we had acquired. We are
continuing to integrate some of these acquired facilities into our existing
distribution system. Our ability to expand successfully into these and other new
geographical markets is dependant on a number of factors, including the
following:
o economic and business conditions affecting customers o
competition
o availability of sufficient capital
o availability of sufficient inventory to meet customer demand
o ability to obtain suitable sales officers and/or warehouse
facilities
o ability to attract and retain qualified personnel
As a result of these factors, we cannot assure you that we will be able to take
advantage of these geographical markets on a timely or profitable basis or that
we will be able to manage these operations effectively. Furthermore, these
factors, among others, create difficulties in integrating acquired locations
into our existing distribution system. Therefore, we cannot assure you that we
will be able to manage these operations effectively, that we will be able to
maintain or accelerate our recent growth or that we will be able to operate
profitably.
Risks Associated with Canadian Operations
Anicom has significant operations in Canada. Accordingly, we will be
influenced by the political, economic and other factors affecting Canada. These
factors include, without limitation, taxation policies, changing federal and
provincial political conditions, compliance with a variety of Canadian laws and
unexpected changes in regulatory requirements. One or more of these factors
could adversely affect the Company's business, results of operations and
financial condition. Also, we now receive a portion of our cash flow in Canadian
dollars. Changes in the exchange rate between the Canadian and U.S. currencies
could adversely affect the Company's business, results of operations and
financial condition.
Capital Needs for Expansion
We may require additional capital if we continue to grow. The Company
may raise this capital through public or private equity offerings or financings.
However, such capital may not be available or, if available, may not be
available on acceptable terms. The Company's inability to raise funds could
restrict our growth. In addition, existing ownership interests may be diluted if
funds are raised by issuing additional equity securities.
Effective Implementation of Platinum Service Distribution Centers
During 1999, we implemented the Platinum Service Distribution Centers
in an effort to lower costs by reducing redundancy in our distribution system.
This new system of distribution centers allowed us to consolidate our
distribution network, reducing the total number of our North American locations
from 75 to 61. While we expect that we will be able to improve customer service
from these centralized locations, we cannot assure you that we will be able to
effectively meet customer demand from this new distribution network. If our new
distribution network proves ineffective or fails to justify our investment in
it, our gross profits and gross margins may be reduced.
14
Timing of Performance and Payment under Certain Contracts
In 1999, we entered into contracts to supply cable nationwide to
Metricom for its rollout of a wireless mobile information network, and to
Gateway, for its high-speed wide broadband network. In order to purchase the
inventory necessary to meet the supply requirements under these contracts, we
borrowed significant funds from our lenders, incurring increased interest
expense. Large infrastructure projects such as those described above can face
periodic delays for a variety of reasons, including zoning and other regulatory
problems, construction delays and other developments that are outside our and
our customers' control. If a project is delayed, we may be forced to carry
inventory longer than anticipated and incur larger than expected interest
expense. Therefore, if a customer experiences significant delays on a project of
the scale described above, we may have increased interest expense and delays in
our revenue recognition which would adversely affect our earnings during those
quarters in which the project delays occur.
Risks Associated With Shares Eligible for Future Sale
Anicom has shares of Common Stock registered for resale under active
Registration Statements on Form S-3 and S-8. The perception that sales of such
shares could occur, or the actual sale of a substantial number of shares, could
adversely affect the market price of the Common Stock.
Pursuant to its Amended and Restated Certificate of Incorporation, the
Company has the authority to issue additional shares of Common Stock and shares
of one or more series of preferred stock. The Company may issue shares on the
authority of the Board of Directors without stockholder approval. If the Company
issues additional Common Stock or preferred stock, the voting power and rights
of the outstanding shares of Common Stock could be diluted. In addition, the
possibility of issuing additional shares of preferred stock may deter a change
of control.
As of December 31, 1999, there were outstanding options to purchase
5,163,000 shares of Common Stock, at a weighted average price of approximately
$7.99 per share, issued to employees, former employees, directors and
consultants pursuant to the Company's stock incentive plans. In addition, we
have reserved 1,403,508 shares of Common Stock for issuance upon conversion of
the Series B Preferred Stock. The Company has registration statements on Form
S-8 in effect covering an aggregate of 4,450,000 of the shares issuable under
its stock incentive plans.
We may issue additional capital stock or other forms of convertible or
exchangeable securities to raise capital in the future. In order to attract and
retain key personnel, we also may issue additional securities, including stock
options, in connection with our employee benefit plans. During the terms of
these options, the holders may exercise the options in order to benefit from a
rise in the market price of the Common Stock. The exercise of such options may
adversely affect the market value of the Common Stock. Also, the existence of
these options may adversely affect the terms on which we can obtain additional
equity financing.
15
Highly Competitive Market
The market for the distribution of multimedia wiring products is highly
competitive and fragmented. To compete successfully, we believe we will need to
continue to:
o offer a broad range of technologically advanced products o
provide competitive pricing while maintaining its margins
o provide prompt delivery of products
o deliver responsive customer service
o establish and maintain strong relationships with suppliers and
customers
o attract and retain highly qualified personnel
We face substantial competition from several national and regional distributors
and from manufacturers who sell directly to end-users for certain large-scale
projects. We may be required to lower our prices to maintain or increase market
share in light of competitive pressures from current or future competitors. Such
measures may adversely affect the Company's business, results of operations and
financial condition.
Risks Associated with Inventory
We must identify the right product mix and maintain sufficient
inventory on hand to meet customer orders. We may not be able to identify and
offer products necessary to remain competitive, or we may suffer losses related
to product obsolescence. Further, there is no assurance that we will achieve and
maintain sufficient inventory levels to meet our customers' needs or that we
will not have to take inventory write-offs in the future.
Dependence on Management and Key Personnel
We are highly dependent upon the services of certain members of senior
management. We have entered into employment agreements with a number of key
executive officers. Our success is also dependent upon its ability to attract
and retain highly qualified management, marketing and sales personnel. If we are
not able to continue to attract and retain qualified management and other key
personnel, our ability to sustain our growth strategy and profitable results may
be adversely affected.
Possible Volatility of Stock Price
Changes in quarterly operating results and earnings could lead to
significant fluctuations in the market price of the Common Stock. Estimates by
analysts, general conditions in the industries in which the Company's customers
compete and other events or factors could also lead to fluctuations in the
market price of the Common Stock.
We Cannot Be Sure That The Year 2000 Problem Will Not Affect Our Business
Thus far, we have had no significant problems related to Year 2000
issues associated with the computer systems, software, other property and
equipment we use. However, we cannot guarantee that the Year 2000 problem will
not adversely affect our business, operating results or financial condition at
some point in the future.
16
ITEM 7A. 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 in 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 December 31, 1999 was $125.1 million. Based on
this balance, a hypothetical 10% increase in LIBOR would result in an increase
in annual interest expense of approximately $1,060,000. 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.
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-25 of this Form
10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE None.
17
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 2000 Annual Meeting of Stockholders (the "2000 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference
from the section of the 2000 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 2000 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 2000 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, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Schedule
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.
18
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) Asset Purchase Agreement by and among Anicom, Inc.,
Anicom Multimedia Wiring Systems Incorporated, Texcan
Cables, Inc., Texcan Cables International, Inc., and
Texcan Cables Limited, dated as of September 21, 1998
3.1(2) Restated Certificate of Incorporation of Anicom.
3.2(3) Restated Bylaws of Anicom.
4.1(3) Specimen Stock Certificate representing Common Stock.
10.1(2) 1996 Stock Incentive Plan, as Amended.
10.2(2) Form of Employment Agreement between Anicom and
Donald Welchko.
10.3(2) 1998 Associate Stock Purchase Plan
10.4(2) Form of Employment Agreement between Anicom and Scott
C. Anixter.
10.5(2) Form of Employment Agreement between Anicom and Carl
E. Putnam.
10.6(3) Form of Employment Agreement between Anicom and
Robert L. Swanson.
10.7(3) Shareholders Agreement.
10.8(3) Form of Tax Indemnification Agreement.
10.9(4) Stockholders' Agreement, dated May 23, 1997 among
Anicom, Scott C. Anixter and each of the purchasers
listed on the signature page thereto.
10.10(5) Form of Amended and Restated 1995 Directors Stock
Option Plan.
10.11 Amendment to the Amended and Restated 1995 Director
Stock Option Plan.
10.12(6) Anicom 401(k) Savings Plan
10.13 Multicurrency Credit Agreement, dated as of December
17, 1999, among Anicom, Harris Trust and Savings Bank
and Bank One, NA.
21(2) List of Subsidiaries.
23.1 Consent of Independent Accountants.
27 Financial Data Schedule.
- ------------------
(1) Previously filed as an exhibit to Anicom's quarter ly report
on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference.
(2) Previously filed as an Exhibit to Anicom's annual report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
(3) Previously filed as an Exhibit to Anicom's Registration
Statement on Form SB-2, registration no. 33-87736C and
incorporated herein by reference thereto.
(4) Previously filed as an Exhibit to Anicom's current report on
Form 8-K, dated May 30, 1997, and incorporated herein by
reference.
(5) 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.
(6) 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 1999
None
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, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 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.
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 18 of this Form 10-K present fairly, in
all material respects, the financial position of Anicom Inc. at December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 18 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 auditing
standards generally accepted in the United States, 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
March 30, 2000
Anicom, Inc.
Consolidated Balance Sheets
As of December 31, 1999 and 1998
(in thousands, except per share data)
1999 1998
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,928 $ 2,589
Accounts receivable, less allowance for doubtful
accounts of $2,703 and $4,140, respectively 113,729 106,043
Inventory 105,488 87,250
Deferred income taxes 4,670 3,176
Other current assets 18,247 14,273
---------------- --------------
Total current assets 244,062 213,331
Property and equipment, net 11,005 9,963
Goodwill, net of accumulated amortization of
$7,376 and $3,740, respectively 127,701 128,280
Deferred income taxes 579 --
Other assets 350 1,647
---------------- --------------
Total assets $ 383,697 $ 353,221
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,485 $ 58,205
Accrued expenses 3,423 10,429
Restructuring liabilities 3,663 1,477
Acquisition liabilities 1,512 5,687
Deferred income taxes -- 222
Long-term debt, current portion 195 1,227
---------------- --------------
Total current liabilities 75,278 77,247
Long-term debt, net of current portion 125,359 85,516
Restructuring liabilities, noncurrent 2,562 1,021
Acquisition liabilities, noncurrent 3,581 2,845
Other liabilities 68 222
---------------- --------------
Total liabilities 206,848 166,851
---------------- --------------
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;
24,796 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 -- --
Treasury stock, 344 and 0 shares, respectively (1,560) --
Additional paid-in capital 155,900 155,653
Retained earnings 177 10,597
Cumulative Translation Adjustment 2,315 103
---------------- --------------
Total stockholders' equity 156,849 166,370
---------------- --------------
Total liabilities and stockholders' equity $ 383,697 $ 353,221
================ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Anicom, Inc.
Consolidated Statements of Operations
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except per share data)
1999 1998 1997
-------------- -------------- -----------------
Net sales $ 536,721 $ 470,279 $ 243,664
Cost of sales 428,347 365,613 187,098
-------------- -------------- -----------------
Gross profit 108,374 104,666 56,566
-------------- -------------- -----------------
Operating expenses:
Selling 56,536 43,702 25,948
General and administrative 53,994 39,924 23,547
Restructuring charge (Note 8) 6,067 -- --
Legal settlement (Note 15) 1,352 -- --
Acquisition integration charge (Note 8) -- 5,156 --
Reengineering costs (Note 9) -- -- 5,584
-------------- -------------- -----------------
Total operating expenses 117,949 88,782 55,079
-------------- -------------- -----------------
Income (loss) from operations (9,575) 15,884 1,487
Other income (expense):
Interest income 142 111 225
Interest expense (6,862) (2,853) (762)
-------------- -------------- -----------------
Total other income (expense) (6,720) (2,742) (537)
-------------- -------------- -----------------
Income (loss) before income taxes (16,295) 13,142 950
Income tax provision (benefit) (6,475) 5,600 650
-------------- -------------- -----------------
Net income (loss) (9,820) 7,542 300
Less: dividends on preferred stock 600 168 296
-------------- -------------- -----------------
Net income (loss) available to common stockholders $ (10,420) $ 7,374 $ 4
============== ============== =================
Earnings per common share:
Basic $ (0.41) $ 0.31 $ --
============== ============== =================
Diluted $ (0.41) $ 0.30 $ --
============== ============== =================
Weighted average common shares outstanding:
Basic 25,113 23,918 17,476
============== ============== =================
Diluted 25,113 24,816 17,476
============== ============== =================
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, 1999, 1998 and 1997
(in thousands)
Convertible Addi Other
Preferred Stock Common Stock -tional Comprehensive Treasury Stock
------------------ ----------------- Paid-In Retained Income Stockholders' --------------------
Shares Amount Shares Amount Capital Earnings (Loss) Equity Shares Amount
------- ------- ------ ------- -------- -------- --------- ----------- ------ ---------
Balance,
January 1, 1997 15,561 7 56,465 3,387 59,859
Net income 300 300
Proceeds from 26,155
issuance of
Convertible
preferred
stock, net of
offering costs 27 $26,155
Dividends
issued to
Convertible
preferred
stockholders in
common stock 29 296 (296)
Conversion of
convertible
Preferred stock
to common stock (27) (26,155) 3,130 3 26,152
Proceeds from
issuance of
Common stock,
net of offering
costs 2,900 3 36,131 36,134
Issuance of
common stock
for acquisitions 1,646 2 21,627 21,629
Exercise of stock
options
and warrants 27 72 72
------- ------- ------ ------- -------- -------- --------- ----------- ------ ---------
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 1,732 2 14,579 14,581
for acquisitions
Exercise of stock
options 58 331 331
and warrants
Dividends on
convertible
Redeemable
preferred stock,
Series B (168) (168)
------- ------- ------ ------- -------- -------- --------- ----------- ------ ---------
Balance, December
31, 1998 -- -- 25,083 17 155,653 10,597 103 166,370
Net loss (9,820) (9,820)
Foreign currency
translation
adjustments 2,212 2,212
----------
Total
comprehensive
loss (7,608)
Exercise of stock
options
and warrants 57 -- 247 247
Dividends on
convertible
Redeemable
preferred stock,
Series B (600) (600)
Acquisition of
Treasury Stock (344) (1,560) 344 $(1,560)
------- ------- ------ ------- -------- -------- --------- ----------- ------ ---------
Balance, December
31, 1999 $ -- 24,796 $ 17 $155,900 $ 177 $ 2,315 $ 156,849 344 $(1,560)
======= ======= ====== ======= ======== ======== ========= =========== ====== =========
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, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) available common stockholders $ (10,420) $ 7,374 $ 301
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and Amortization 6,415 4,005 2,163
Deferred income taxes (2,295) 359 615
Provision for doubtful accounts 3,934 2,406 2,183
Gain on sale of product lines -- (1,000) (483)
Loss on disposal of property and equipment -- -- 278
Increase (decrease) in cash attributable to change in assets
and liabilities:
Marketable securities -- -- 4,345
Accounts receivable (12,120) (27,409) (8,885)
Inventory (19,063) (8,827) (12,710)
Other assets (465) (8,615) (1,865)
Accounts payable 8,040 4,303 3,693
Accrued expenses (7,718) (6,478) (2,648)
------------- -------------- --------------
Net cash provided by (used in) operating activities (33,692) (33,912) (13,013)
------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (4,467) (3,493) (2,297)
Cash paid for acquired companies -- (29,908) (33,801)
Cash received on sale of product lines -- 2,700 200
------------- -------------- --------------
Net cash provided by (used in) investing activities (4,467) (30,701) (35,898)
------------- -------------- --------------
Cash flows from financing activities:
Proceeds from long-term debt 121,200 142,550 57,340
Payment of long-term debt and assumed bank debt (82,389) (76,129) (70,302)
Purchase treasury stock (1,560) -- --
Proceeds from equity offerings, net of offering costs -- -- 62,365
Other 247 94 --
------------- -------------- --------------
Net cash provided by (used in) financing activities 37,498 66,515 49,403
------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (661) 1,902 492
Cash and cash equivalents, beginning of year 2,589 687 195
------------- -------------- --------------
Cash and cash equivalents, end of year $ 1,928 $ 2,589 $ 687
============= ============== ==============
Supplemental cash flow information:
Cash paid for interest $ 6,927 $ 2,896 $ 695
============= ============== ==============
Cash paid for income taxes $ 2,730 $ 4,869 $ 4,098
============= ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
Anicom, Inc.
Notes to Consolidated Financial Statements
(dollars 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 fiber
optics, communications related wire, cable, 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
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 Series B Preferred Stock
can not be readily determinable 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 (Loss) Per Common Share
Basic earnings (loss) per common share is computed based on net income
(loss) available to common shareholders divided by the weighted average
common shares outstanding. Diluted earnings (loss) per common share is
computed based on net income (loss) 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.
Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information," requires that
management identify operating segments based on the way management
disaggregates the entity for making operating decisions. The Company
currently operates in a single business and geographic segment.
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 (loss) and earnings (loss) 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
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 1997 and 1998 financial
statements to conform to the 1999 presentation.
2. Property and Equipment
At December 31, property and equipment consisted of the following
components:
Category (useful life) 1999 1998
- ---------------------------------- ----------------- -----------------
Machinery, equipment and vehicles (5 yrs) $ 5,088 $ 5,142
Office equipment (5 yrs) 2,501 1,511
Computer equipment and software (5-7 yrs) 7,532 4,975
Leasehold improvements (life of lease) 2,654 1,938
----------------- ----------------
Total cost 17,775 13,566
Less: Accumulated depreciation (6,770) (3,603)
----------------- ----------------
Property and equipment, net $ 11,005 $ 9,963
================= ================
3. Long-Term Debt
In December 1999, the Company entered into a Multicurrency Credit
Agreement (the "Facility") with its then current bank group and other
lenders. This agreement resulted in a 25% increase in available
borrowings to $150,000 from the $120,000 available under its previous
revolving credit facility. 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
certain of the Company's financial ratios, as defined. The Facility
expires in July 2001 with extensions available at the option of the
Company and the lenders through July 2003. The Facility contains
certain financial covenants, including minimum tangible net worth and
EBITDA, interest coverage, leverage and debt to earnings ratios. The
Facility is collateralized by the Company's receivables and inventory,
with eligible advance rates of 85% and 60%, respectively.
Prior to entering into the Facility, the Company had a revolving credit
facility (the "Prior Facility). In November 1998, the Company entered
into an agreement with its lenders to increase the Prior Facility from
$100,000 to $120,000. The Prior Facility provided for borrowings of up
to $15,000 in currencies other than U.S. dollars. It provided for
various interest rate options, determined from time to time, based upon
the Company's interest coverage and leverage ratios, as defined. Prior
to the closing of the Facility, Anicom obtained a waiver of compliance
under the Prior Facility dated September 30, 1999.
F-9
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 13, 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:
1999 1998
------------ ------------
Amounts due under the Facility $ 125,100 $ 85,000
Noncollateralized loans payable to former shareholders of
acquired companies, each due in equal installments
6.55% note due March 12, 1999 -- 1,000
Prime rate note (8.50% at December 31, 1999), payable in
monthly installments through July 1, 2002 275 382
6.00% notes due May 30, 1997 to 1999 -- 84
Other 179 277
----------- -----------
125,554 86,743
Less current portion (195) (1,227)
------------ --------------
$ 125,359 $ 85,516
============ ==============
The following is a schedule of the aggregate maturities in each of the
three years ending December 31, 2000, and thereafter:
Amount
2000 $ 195
2001 125,207
2002 152
----------------
Total $ 125,554
================
4. 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. Executions 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.
F-10
Below is a summary of acquisition cost activity:
External Severance Lease Exit Tax Total
Consultants Costs Liabilities
and Other
----------- ----------- ---------- ---------- -----------
Balance, January 1, 1998 $ 478 $3,350 $2,195 $1,596 $7,619
Establish liabilities 3,350 33 1,322 2,807 7,512
Expenditures/adjustments (2,651) (2,996) (225) (727) (6,599)
----------- ----------- ---------- ---------- ----------
Balance, December 31, 1998 1,177 387 3,292 3,676 8,532
Expenditures/adjustments (1,146) (387) (609) (1,297) (3,439)
----------- ----------- ---------- ---------- ----------
Balance, December 31, 1999 $ 31 $ -- $ 2,683 $2,379 $5,093
=========== =========== ========== ========== ==========
5. Convertible Preferred Stock
In September 1998, in connection with the Texcan acquisition discussed
in Note 13, the Company issued 20,000 shares of Series B Convertible
Redeemable Preferred Stock, par value $.01 per share, which are
convertible, in the aggregate, into an additional 1,404,000 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 Percentage Number of Series B Preferred
of Conversion Price Shares to be Converted*
130% 6.667
160% 13.333
190% 20.000
* Number of shares less shares previously converted
Pursuant to an agreement dated May 20, 1997, the Company sold 27,000
shares of $.01 par value, Series A Convertible Preferred Stock (the
"Series A Preferred Stock") for $27,000. Net proceeds after related
costs and expenses were approximately $26,200.
The Series A 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 Series A
Preferred Stock were converted to shares of Common Stock.
F-11
6. Common Stock
Following approval by the Company's stockholders at its annual meetings
the number of authorized shares of common stock was increased to
60,000,000 in June 1997 and to 100,000,000 in June 1998.
In December 1997, the Company completed a private placement of
2,900,000 shares of its common stock. Net proceeds to the Company after
related costs and expenses were approximately $36,100.
7. Treasury Stock
During 1999, the Company's Board of Directors, believing that the
Company's common stock was undervalued at the time, authorized a share
repurchase program that will allow the Company to repurchase up to 10%
of its outstanding Common Stock valued within a specified price range
over a 24-month period.
During 1999, the Company reacquired shares of its Common Stock in the
open market. The Treasury Stock is carried at cost.
8. 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 then 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 then 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.
In October 1999, Anicom's Board of Directors approved a request made
during September 1999 by The State of Wisconsin Investment Board
permitting it to acquire up to 20% of Anicom's outstanding Common Stock
without triggering the Company's Rights Plan.
9. Restructuring, Acquisition Integration and Other One-Time Charges
During the third quarter of 1999, the Company's management and Board of
Directors approved a companywide restructuring plan, which included
accelerating the implementation of its distribution centers. As part of
the restructuring, the Company consolidated its 75 North American
locations
F-12
into 61 facilities, downsized 12 other locations and reduced its
workforce of approximately 1,200 by about 10 percent (cumulatively
referred to as the "Plan"). In connection with the Plan, the Company
recognized a restructuring charge of approximately $6,100.
Reductions in workforce under the Plan principally impacted warehouse
and administrative employees. Notice of workforce reductions was given
on September 30, 1999.
The Company incurred costs as a part of the implementation of the Plan
in addition to those costs categorized as restructuring. In the third
quarter of 1999, management decided to eliminate the number of lower
margin product offerings as well as the number of non-strategic vendors
and reduce the number of part numbers maintained in inventory. As a
result, the Company incurred during the third quarter of 1999,
approximately $4,800 in one-time charges increasing cost of goods sold
for actual and anticipated inventory write-downs and reductions in
vendor rebates. Other one-time charges during the third quarter of 1999
of $1,000 are reflected in the general and administrative category.
The Company incurred a one-time acquisition integration charge during
the third quarter of 1998 of approximately $5,156 in connection with a
plan to integrate its recent acquisitions (the "Acquisition Integration
Plan"). This charge related to the Acquisition Integration Plan
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.
In connection with exiting or downsizing locations, the Company is
actively seeking to sublease or negotiate buyouts where practicable. In
some instances the length of the remaining term, unfavorable market
conditions or location or the Company's inability to negotiate a
sublease or buyout under mutually agreeable terms may result in the
facility remaining idle until the expiration of the lease. Remaining
lease terms range from January 2000 to January 2007. The majority of
all site closings, downsizing or moves were completed by December 1999.
The full implementation of this portion of the Plan and the Acquisition
Integration Plan is estimated to be completed by June 2000.
F-13
A summary of the restructuring costs recognized under the Plan and the
Acquisition Integration Plan which are included in accrued expenses is
provided below:
Lease & Severance Other
Leasehold Acquisition Asset
Improvement Incentive Valuation
Abandonment Bonuses Charges Other Total
-------------- ----------- ------------ --------- -------- --------
Acquisition
Integration
Plan Charge $2,800 $271 $1,350 $ 735 $5,156
Expenditures (1,068) (115) (740) (735) (2,658)
-------------- ----------- ------------ -------- --------
Balance
December 31, 1998 1,732 156 610 -- 2,498
The Plan Charge 3,270 1,872 -- $625 300 6,067
Expenditures (9) (796) (610) (625) (300) (2,340)
-------------- ----------- ------------ --------- -------- --------
Balance
December 31, 1999 $4,993 $1,232 $-- $-- $-- $6,225
============== =========== ============ ========= ======== ========
10. Reengineering Costs
In the fourth quarter of 1997, the Company adopted a reengineering plan
(the "Reengineering 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 Reengineering 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 the costs of the Reengineering Plan:
Implementation of information technology system $ 1,536
Internal resource costs incurred during reengineering
development and implementation 1,159
Contract terminations and other location consolidation costs 2,889
-------------
$ 5,584
=============
As of December 31, 1999, no accrued amounts related to the
Reengineering Plan remain.
F-14
11. Income Taxes
The components of income (loss) before the provision (benefit) for
income taxes are as follows:
1999 1998 1997
------------- ------------- -------------
U.S. operations $(18,777 ) $ 12,603 $ 950
Foreign operations 2,882 539 --
------------- ------------- -------------
$(15,895 ) $ 13,142 $ 950
============= ============= =============
The provision (benefit) for income taxes for the years ended December
31, 1999, 1998 and 1997 is comprised of the following:
1999 1998 1997
--------------- -------------- -------------
Current:
Federal $ (3,832) $ 3,941 $ 35
State (762) 794 --
Foreign 134 66 --
--------------- -------------- -------------
(4,460) 4,801 35
--------------- -------------- -------------
Deferred:
Federal (1,656) 601 475
State (285) 113 140
Foreign 86 85 --
--------------- -------------- -------------
(1,855) 799 615
--------------- -------------- -------------
$ (6,315) $ 5,600 $ 650
=============== ============== =============
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, 1999, 1998 and 1997:
1999 1998 1997
------------ ------------ ------------
Computed income taxes at
federal statutory rate $ (5,563) $ 4,600 $ 323
State income taxes, net of
federal benefit (681) 590 91
Non-deductible amortization 345 312 120
Other nondeductible expenses 292 228 128
Nontaxable investment income -- -- (18)
Foreign taxes (788) (58) --
Other 80 (72) 6
------------ ------------ ------------
$ (6,315) $ 5,600 $ 650
============ ============ ============
F-15
11. Income Taxes, continued
At December 31, 1999 and 1998, deferred income tax assets and
liabilities consisted of the following components:
1999 1998
---------------- ----------------
Current deferred income tax asset (liability):
Accounts receivable $ 709 $ 237
Inventory 1,156 1,772
Acquisition liabilities, current 1,132 (377)
Reengineering costs 1,904 317
Other (231) 1,227
---------------- ----------------
4,670 3,176
---------------- ----------------
Long-term deferred income tax asset (liability):
Property and equipment (230) (106)
Intangibles (2,545) (1,891)
Gain on sale of product lines (216) (216)
Net Operating Loss 3,570
Acquisition liabilities, noncurrent -- 1,991
---------------- ----------------
579 (222)
---------------- ----------------
Net deferred income tax asset $ 5,249 $ 2,954
================ ================
At December 31, 1999, the Company has approximately $3,100 in net
operating loss carry forwards. The federal net operating loss carry
forwards of approximately $2,900 expires in the year 2019. The state
net operating loss carry forwards of approximately $500 expires in
years from 2002 through 2019.
12. Stock Options
In January 1995, the Company adopted the 1995 Stock Incentive Plan (the
"1995 Plan") and the Directors' Option Plan (the "Directors Plan")
which authorizes the granting of options to officers, key employees and
directors to purchase unissued common stock of the Company subject to
F-16
certain conditions, such as continued service. The 1995 Plan and the
Directors Plan initially authorized the granting of up to 1,200,000 and
100,000 options to purchase common stock, respectively.
In February 1996, the Company adopted the 1996 Employee Stock Incentive
Plan (the "1996 Plan"), which authorized the granting of an additional
1,200,000 options to purchase common stock of the Company. Stockholders
approved the adoption of the 1996 Plan in May, 1996.
Subsequent to the adoption of the 1996 Plan and the Directors Plan,
amendments were approved to increase the number of shares of stock
available for grant under the plans. Currently, the number of shares
reserved for issuance under the 1996 Plan and the Directors Plan are
3,800,000 and 500,000, respectively.
The option price of options granted under these plans is equal to the
fair market value on the date of grant. All outstanding options vest
ratably over periods ranging from three to five years.
F-17
12. Stock Options, continued
A summary of information related to these options for the years ended
December 31, 1999, 1998 and 1997 follows (shares in thousands):
1999 1998 1997
-------------------------- ---------------------- -------------------------
Shares Weighted Shares Weighted Shares Weighted
Average Average Average
Exercise Exercise Exercise
Price/Share Price/Share Price/Share
-------------------------- ---------------------- ---------- --------------
Outstanding, beginning of year 3,921 $9.24 2,186 $7.19 1,668 $7.10
Granted 1,338 4.80 1,756 9.97 545 13.73
Exercised/Canceled (96) 5.34 (21) 6.11 (27) 7.04
-------------------------- ---------------------- ---------- --------------
Outstanding, end of year 5,163 $8.13 3,921 $9.24 2,186 $7.19
========================== ====================== ========== ==============
Available for grant, end of year 321 329 1,080
============ ========= ==========
Price range at end of year $3.00 to $3.00 to $3.00 to
$16.87 $16.87 $16.87
============ ========= ==========
Price range for exercised $3.00 to $3.00 to $3.00 to
$8.50 $9.00 $8.75
------------ --------- ----------
Weighted-average fair value of
options granted during the year $ 916 $3,955 $2,239
============ ========= ==========
Weighted
Average Weighted Average
Remaining Exercise Price
Price per Share Number Number Contractual per Share
Outstanding Exercisable Life
- --------------- ----------------------------- ------------- ------------------
$3.00 to $ 4.50 1,524 272 8.9 years $ 4.28
$4.51 to $ 7.00 1,121 577 8.0 years 5.86
$7.01 to $ 9.00 948 613 6.7 years 8.67
$9.01 to $17.00 1,570 680 8.2 years 12.70
----------------------------- ------------------
5,163 2,142 $ 7.99
============================= ==================
F-18
12. Stock Options, 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% to
28%, and an expected option life of three to six years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that 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:
1999 1998 1997
--------------- --------------- ---------------
Net income (loss) $ (10,180) $ 7,542 $ 300
============== ============== ==============
Net income (loss), pro forma $ (11,096) $ 5,631 $ (1,939)
============== ============== ==============
Earnings per common share, as reported:
Basic $ (0.41) $ 0.31 $ --
============== ============== ==============
Diluted $ (0.41) $ 0.30 $ --
============== ============== ==============
Earnings (loss) per common share, pro forma:
Basic $ (0.44) $ 0.23 $ (0.11)
============== ============== ==============
Diluted $ (0.44) $ 0.23 $ (0.11)
============== ============== ==============
F-19
13. 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, the Company 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-20
13. Acquisitions, continued
("Connectivity") bank debt by the Company. In addition, the Company
entered into a supply agreement with Connectivity.
In March 1997, the Company 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.
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.
14. 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, 1999, 1998
and 1997:
1999 1998 1997
------------- ------------ -------------
Numerator:
Net income (loss) $ (9,820) $ 7,542 $ 300
Less: dividend on preferred stock (600) (168) (296)
------------ ----------- ------------
Net income (loss) available to common stockholders $ (10,420) $ 7,374 $ 4
============ =========== ============
Denominator:
Denominator for basic earnings per share - weighted
average common shares outstanding 25,113 23,918 17,476
Plus:
Effect of assumed conversion of
convertible preferred stock -- 388 --
Effect of employee stock options and warrants -- 510 --
------------ ----------- ------------
25,113 24,816 17,476
============ =========== ============
Earnings per share:
Basic $ (0.41) $ 0.31 $ --
============ =========== ============
Diluted $ (0.41) $ 0.30 $ --
============ =========== ============
F-21
15. Commitments and Contingencies
Employment Agreements
Subsequent to the end of the year, the Company entered into new
employment agreements with certain officers. In the event of a change
in control, as defined in these agreements, within five (5) years from
the date of the agreements, the Company is required to pay to each
executive a transaction bonus. The transaction bonuses under these
agreements would total $3,750. These transaction bonuses would become
due whether or not the executives are employed by the Company at the
time of the change in control. In addition, if an executive is
terminated without cause or quits for good reason, the Company will be
obligated to pay the executives two-thirds of the remaining base salary
and bonus due under the agreements and provide certain benefits to such
executives in exchange for each executive's covenant not to compete
against the Company for as long as five years. The total base salary
due to these executives in 2000 is $1,250.
Operating Leases
The Company leases certain warehouse and office facilities and
equipment under operating leases. Rental expense under the leases was
approximately $6,880, $5,521, and $3,216 for the years ended December
31, 1999, 1998 and 1997, 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, 1999 are as
follows:
Year Amount
- ------------------- ------------
2000 $6,681
2001 5,941
2002 4,905
2003 3,512
2004 1,886
Thereafter 5,655
------------
Total $28,580
===============
The Company is also obligated to pay certain taxes and assessments
relating to these leases. Certain leases contain renewal options.
Certain amounts for noncancelable leases that the Company has
obligations for are not occupied and are being charged against accrued
abandonment reserves discussed in Note 9.
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.
F-22
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 $225, $194,
and $113 in 1999, 1998 and 1997, respectively.
Litigation
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 $1,400.
The Company is subject to legal proceedings 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.
16. Supplemental Cash Flow Information
The following is a summary of the noncash investing and financing for
the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
--------------- --------------- ---------------
Acquisitions:
Fair value of assets acquired $ 1,732 $ 97,627 $ 108,591
Acquisition liabilities and costs (1,732) (7,802) (8,843)
Bank debt assumed (12,686) (16,818)
Other liabilities assumed (12,545) (27,164)
Convertible preferred stock issued (20,000) --
Common stock issued (14,581) (21,627)
-------------- ------------- --------------
Cash paid -- 30,013 34,139
Less: cash acquired -- (105) (338)
-------------- ------------- --------------
$ -- $ 29,908 $ 33,801
==============
Dispositions:
Value of assets disposed of, net of transaction costs $ 258 $ 5,627 $ 117
=============== =============== ===============
Short term receivable due $ 2,927
===============
Notes receivable accepted $ 400
===============
Conversion of Preferred Stock:
Conversion to Common Stock 27,000
===============
Payment of dividends in Common Stock 297
===============
F-23
17. Related Party Transaction
One of the Company's directors is the Chief Executive Officer of an
insurance brokerage company that is used by the Company.
18. Quarterly Operating Results (unaudited)
Anicom's unaudited quarterly operating results for 1999 and 1998 are as
follows:
Three Months Ended
-------------------------------------------------------------------------------------------------------
12/31/99 9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
---------- ---------- --------- -------- --------- --------- --------- ----------
Net sales $134,213 $133,522 $131,744 $137,242 $130,859 $124,071 $113,252 $102,099
========== ========== ========= ======== ========= ========= ========= ==========
Gross profit $ 28,020 $20,444 $29,430 $30,480 29,894 26,906 25,187 22,680
========== ========== ========= ======== ========= ========= ========= ==========
Operating
earnings
(loss) $ 191 $(18,684) $2,291 $6,627 5,253 830 5,150 4,652
========== ========== ========= ======== ========= ========= ========= ==========
Net income
(loss) $ (1,301) $(12,422) $780 $3,123 $ 2,150 $ (88) $2,813 $ 2,667
========== ========== ========= ======== ========= ========= ========= ==========
Earnings
(loss) per
share:
Basic $ (0.05) $(0.50) $0.03 $0.12 $0.08 $ -- $0.12 $0.12
========== ========== ========= ======== ========= ========= ========= ==========
Diluted $ (0.05) $(0.50) $0.03 $0.12 $0.08 $ -- $0.12 $0.11
========== ========== ========= ======== ========= ========= ========= ==========
F-24
Anicom, Inc.
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
----------- ------------ -----------
Allowance for Doubtful Accounts
Balance, beginning of year $4,140 $ 2,442 $ 980
Additions 3,698 2,406 2,183
Write-offs, net of recoveries (5,135) (708) (721)
---------- ---------- -----------
Balance, end of year $2,703 $4,140 $ 2,442
========== ========== ===========
Inventory Valuation Allowance
Balance, beginning of year $2,437 $ 2,276 $ 300
Additions 7,504 2,134 2,694
Write-offs (6,933) (1,973) (718)
---------- ---------- -----------
Balance end of year $3,008 $2,437 $ 2,276
========== ========== ===========
F-II
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 30th day of March, 2000.
ANICOM, INC.
By: /s/ SCOTT C. ANIXTER
----------------------------
Scott C. Anixter
Chairman of the Board
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
- --------------------------- ------------------------------ -----------------
Chairman of the
/s/ SCOTT C. ANIXTER Board and a Director March 30, 2000
- ---------------------------
Scott C. Anixter
/s/ ALAN B. ANIXTER Director March 30, 2000
- ---------------------------
Alan B. Anixter
President, Chief Executive
Officer and a Director
/s/ CARL E. PUTNAM (Principal Executive Officer) March 30, 2000
- ---------------------------
Carl E. Putnam
Senior Executive Vice President
Chief Financial Officer
and a Director (Principal
Financial and Accounting March 30, 2000
/s/ DONALD C. WELCHKO Officer)
- ---------------------------
Donald C. Welchko
/s/ WILLIAM ANIXTER Director March 30, 2000
- ---------------------------
William Anixter
/s/ PETER H. HUIZENGA Director March 30, 2000
- ---------------------------
Peter H. Huizenga
/s/ IRA J. KAUFMAN Director March 30, 2000
- ---------------------------
Ira J. Kaufman
/s/ THOMAS J. REIMAN Director March 30, 2000
- ---------------------------
Thomas J. Reiman
/s/ MICHAEL SEGAL Director March 30, 2000
- ---------------------------
Michael Segal
/s/ LEE B. STERN Director March 30, 2000
- ---------------------------
Lee B. Stern