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
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
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
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.
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.
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.
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.
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.
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.
PART II ITEM 5.
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.
ITEM 6.
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.
1. See Note 9 in the Consolidated Financial Statements.
2. See Note 10 in the Consolidated Financial Statements.
ITEM 7.
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.
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.
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
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.
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
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.
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.
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.
ITEM 7A.
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.
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 through of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
PART III
ITEM 10.
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.
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.
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.
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.
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 through 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:
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.
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
Anicom, Inc. Index to Consolidated Financial Statements and Financial Statement Schedule
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)
The accompanying notes are an integral part of these consolidated financial statements.
Anicom, Inc. Consolidated Statements of Operations For the years ended December 31, 1999, 1998 and 1997 (in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements
Anicom, Inc. Consolidated Statements of Stockholders' Equity For the years ended December 31, 1999, 1998 and 1997 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Anicom, Inc. Consolidated Statements of Cash Flows For the years ended December 31, 1999, 1998 and 1997 (in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
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.
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.
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.
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:
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.
Below is a summary of acquisition cost activity:
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.
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
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.
A summary of the restructuring costs recognized under the Plan and the Acquisition Integration Plan which are included in accrued expenses is provided below:
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.
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 ============ ============ ============
11. Income Taxes, continued
At December 31, 1999 and 1998, deferred income tax assets and liabilities consisted of the following components:
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
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.
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):
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 ============================= ==================
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:
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.
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:
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.
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:
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:
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