SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File Number 0-25364
ANICOM, INC.
(Name of registrant as specified in its charter)
Delaware 36-3885212
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6133 North River Road, Suite 1000, Rosemont, Illinois 60018-5171
(Address of principal executive offices) (Zip Code)
(847) 518-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share as of November 11, 1999 was 25,152,727.
<PAGE>
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
ANICOM, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, 1999 December 31,
ASSETS (Unaudited) 1998
----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 95 $ 2,589
Accounts receivable, less allowance for doubtful
accounts of $2,503 and $4,140, respectively 121,912 106,043
Inventory, primarily finished goods 103,539 87,250
Other current assets 23,949 17,449
-------- --------
Total current assets 249,495 213,331
Property and equipment, net 10,746 9,963
Goodwill, net of accumulated amortization of
$6,103 and $3,740, respectively 128,478 128,280
Other assets 586 1,647
-------- --------
Total assets $389,305 $353,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 89,329 $ 58,205
Accrued expenses, acquisition and other liabilities 24,728 18,836
Long-term debt, current portion 166 1,227
-------- --------
Total current liabilities 114,223 78,268
Long-term debt, net of current portion 91,869 85,516
Other liabilities 3,866 3,067
-------- --------
Total liabilities 209,958 166,851
-------- --------
Commitments and Contingencies
Convertible redeemable preferred stock,
series B, par value $.01 per share,
liquidation value $1,000 per share; 20 shares
authorized, issued and outstanding 20,000 20,000
-------- --------
Stockholders' equity:
Common stock, par value $.001 per share;
100,000 shares authorized, 25,139
and 25,083 shares issued and
outstanding, respectively 17 17
Preferred stock, series C,
par value $.01 per share;
50 shares authorized;
no shares issued and outstanding -- --
Preferred stock, undesignated,
par value $.01 per share;
903 shares authorized;
no shares issued and outstanding -- --
Additional paid-in capital 155,898 155,653
Retained earnings 1,524 10,597
Other comprehensive income 1,908 103
-------- --------
Total stockholders' equity 159,347 166,370
-------- --------
Total liabilities and stockholders' equity $389,305 $353,221
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
1
<PAGE>
ANICOM, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
---------------------- ----------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 133,522 $ 124,071 $ 402,517 $ 339,420
Cost of sales 113,078 97,165 322,162 264,647
--------- --------- --------- ---------
Gross profit 20,444 26,906 80,355 74,773
--------- --------- --------- ---------
Operating expenses:
Selling 17,380 11,311 42,814 30,861
General and administrative 15,681 9,607 39,883 28,123
Restructuring charge 6,067 -- 6,067 --
Acquisition integration charge -- 5,158 -- 5,158
Legal settlement -- -- 1,352 --
--------- --------- --------- ---------
Total operating expenses 39,128 26,076 90,116 64,142
--------- --------- --------- ---------
Income (loss) from operations (18,684) 830 (9,761) 10,631
Interest expense, net 1,734 776 4,692 1,443
--------- --------- --------- ---------
Income (loss) before income taxes (20,418) 54 (14,453) 9,188
Income tax provision (benefit) (7,996) 142 (5,939) 3,796
--------- --------- --------- ---------
Net income (loss) (12,422) (88) (8,514) 5,392
Less: dividend on preferred stock (150) (16) 450 (16)
--------- --------- --------- ---------
Net income (loss) available to
common stockholders $ (12,572) $ (104) $ (8,964) $ 5,376
========= ========= ========= =========
Earnings (loss) per common share:
Basic $ (0.50) $ -- $ (0.36) $ .23
========= ========= ========= =========
Diluted $ (0.50) $ -- $ (0.36) $ .22
========= ========= ========= =========
Weighted average common shares outstanding:
Basic 25,139 23,760 25,119 23,699
========= ========= ========= =========
Diluted 25,139 24,335 25,119 24,246
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
ANICOM, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
(Unaudited)
--------------------------
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (8,964) $ 5,392
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 4,423 2,704
Provision for doubtful accounts 3,232 (150)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (19,101) (35,523)
Inventory (16,787) (12,782)
Other assets (8,496) 1,296
Accounts payable 30,954 7,568
Accrued expenses 7,495 (5,643)
--------- ---------
Net cash provided by (used in) operating activities (7,244) (37,138)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (3,635) (1,655)
Cash paid for acquired companies -- (29,152)
Cash received on the sale of product lines 2,502 --
Other 642 --
--------- ---------
Net cash provided by (used in) investing activities (491) (30,807)
--------- ---------
Cash flows from financing activities:
Payment of long-term debt and assumed bank debt (67,659) (58,203)
Proceeds from long-term debt 72,900 125,521
Repayment of other debt and preferred dividends -- --
--------- ---------
Net cash provided by (used in) financing activities 5,241 67,318
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,494) (627)
Cash and cash equivalents, beginning of period 2,589 687
--------- ---------
Cash and cash equivalents, end of period $ 95 $ 60
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated unaudited financial statements
of Anicom, Inc. (the "Company" or "Anicom") do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein is unaudited, but in the opinion of management,
reflects all normal recurring adjustments necessary for a fair
presentation of the results for the interim periods. Reported interim
results of operations are based, in part, on estimates that may be
subject to year-end adjustment. The interim results of operations and
cash flows are not necessarily indicative of such results and cash
flows for the entire year.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
2. Nature of Business
Anicom specializes in the sale and distribution of multimedia
technology products including communications related wire, cable, fiber
optics and computer network and connectivity products. The Company
operates in a single business and geographical segment.
The Company sells to a wide array of customers, including contractors,
systems integrators, security/fire alarm companies, regional Bell
operating companies, distributors, utilities, telecommunications and
sound contractors, wireless specialists, construction companies,
universities, governmental agencies and companies involved in the
automotive, mining, marine, petro-chemical, paper and pulp and other
natural resource industries. The Company's customers are principally
located in North America.
3. Restructuring and Other One-Time Charges
During the third quarter of 1999, Anicom's management and Board of
Directors approved a companywide restructuring plan, which includes
accelerating the implementation of eight distribution centers. As part
of the restructuring, Anicom will consolidate its 75 North American
locations into 61 facilities, downsize 12 other locations and reduce
its workforce of approximately 1,200 by about 10 percent (cumulatively
referred to as the "Plan").
In connection with exiting or downsizing locations, Anicom will
actively seek to sublease or negotiate buyouts where practicable. In
some instances the length of the remaining term, unfavorable market
conditions or location or Anicom'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, downsizings or moves are expected to be completed by December
1999. The full implementation of this portion of the Plan is estimated
to be completed by June 2000. The date at which these facilities may be
sublet can not be estimated at this time.
Reductions in workforce principally impacted warehouse and
administrative employees. Notice of workforce reductions was given on
September 30, 1999. No portion of the severance accrual was paid as of
that date.
4
<PAGE>
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Restructuring and Other One-Time Charges (continued)
Costs incurred during the third quarter of 1999 as a part of the Plan
that are categorized as restructuring charges include the following:
(in thousands)
Lease termination and
leasehold improvement abandonments $ 3,270
Severance 1,872
Write-off of other assets 625
Other 300
---------------
Total restructuring charge $ 6,067
===============
As of September 30, 1999, none of the amount shown above was paid.
Anicom incurred costs as a part of the implementation of the Plan in
addition to those costs categorized as restructuring. In the third
quarter, 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 approximately $4.8 million in one-time charges
increasing cost of goods sold for actual and anticipated inventory
write-downs and anticipated reductions in vendor rebates. Other
one-time charges of $1 million are reflected in the general and
administrative category.
4. Legal Settlement
During the second quarter of 1999, the Company reached an agreement to
settle a civil lawsuit stemming from the March 1997 disposition of a
non-strategic cable assembly product line. In connection with the
settlement, the Company recognized a charge of approximately $1.4
million during the second quarter.
5
<PAGE>
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three and nine months ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 1998 1999 1998
(in thousands, except per share data)
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $(12,422) $ (88) $ (8,514) $ 5,392
Less: dividend on preferred stock (150) (16) (450) (16)
-------- -------- -------- --------
Net income available to common stockholders $(12,572) $ (104) $ (8,964) $ 5,376
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted average common shares outstanding 25,139 23,760 25,119 23,669
Plus:
Effect of assumed conversion of convertible
preferred stock -- 137 -- 47
Effect of dilutive employee stock options and warrants -- 438 -- 530
-------- -------- -------- --------
Denominator for diluted earnings per share - adjusted
weighted average common shares outstanding 25,139 24,335 25,119 24,246
-------- -------- -------- --------
Basic earnings (loss) per share $ (0.50) $ -- $ (0.36) $ .23
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.50) $ -- $ (0.36) $ .22
======== ======== ======== ========
</TABLE>
In computing earnings (loss) per share for 1999, the impact of the
Company's Series B Preferred Stock results in antidilution. As a result,
no adjustments are reflected in the determination of the denominator
above.
6
<PAGE>
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Comprehensive Income
The following table sets forth comprehensive income for the three and nine
months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
1999 1998 1999 1998
(in thousands)
<S> <C> <C> <C> <C>
Net income (loss) available to
common stockholders $(12,572) $ (104) $ (8,964) $ 5,376
Foreign currency translation adjustment (142) -- 1,805 --
-------- -------- -------- --------
Total comprehensive income (loss) $(12,714) $ (104) $ (7,159) $ 5,376
======== ======== ======== ========
</TABLE>
7. 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 $56,900,000 and consisted of 1,404,000 shares of
common stock; 20,000 shares of Series B Preferred Stock; and
approximately $27,000,000 in cash. In addition, Anicom repaid
approximately $12,000,000 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 $3,044,000 in cash and
common stock. In addition, the Company assumed and repaid approximately
$686,000 of bank indebtedness.
In March 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Yankee Electronics Inc. ("Yankee") and
Optical Fiber Components Inc. ("OFCI"). Yankee and OFCI are specialty
distributors of multimedia wire, cable and fiber optic cable and
accessories located in New Hampshire and Virginia, respectively. The
purchase price for these acquisitions consisted of $3,800,000 in cash
and common stock. In addition, the Company assumed approximately
$255,000 of Yankee and OFCI debt that was paid at closing.
All acquisitions have been recorded under the purchase method of
accounting. Accordingly, the results of operations of the acquired
businesses are included in the Company's consolidated results of
operations from the date of acquisition. The purchase price is
allocated to assets acquired and liabilities assumed based on the
estimated fair market value on the date of the acquisition.
7
<PAGE>
Anicom, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 current market price. If the
Company is acquired through a merger or other business combination
transaction, or 50% or more of the Company's assets or earning power is
sold, each Right will entitle the holder to purchase the surviving
company's common stock at 50% of the current market price. The Rights
will expire in ten years unless earlier redeemed or terminated. The
Company generally may amend the Rights or redeem the Rights at $0.01
per Right at any time prior to the time a person or group has acquired
15% of the Company's common stock.
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 percent of Anicom's outstanding
Common Stock without triggering Anicom's Rights Plan.
9. Supplemental Cash Flow Information
The following summarizes non-cash investing and financing activities
the nine months ended September 30, 1999 and 1998. Non-cash activity
related to acquisitions includes initial amounts estimated and any
subsequent changes to those initial estimates.
Nine Months Ended
September 30,
---------------------
Acquisitions: (in thousands)
Fair value of assets acquired $ 1,170 $ 84,875
Acquisition liabilities and costs (1,170) (4,779)
Liabilities assumed -- (16,117)
Convertible preferred stock issued -- (20,000)
Common stock issued -- (14,722)
-------- --------
Cash paid $ -- $ 29,257
Less: cash acquired -- (105)
-------- --------
Net cash paid for acquisitions $ -- $ 29,152
======== ========
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following table sets forth selected income statement data of Anicom
expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------- ----------------
1999 1998 1999 1998
Income Statement Data:
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 84.7 78.3 80.0 78.0
----- ----- ----- -----
Gross profit 15.3 21.7 20.0 22.0
----- ----- ----- -----
Operating expenses:
Selling expenses 13.0 9.1 10.6 9.1
General and administrative expenses 11.7 7.7 9.9 8.3
Restructuring charge 4.5 -- 1.5 --
Acquisition integration charge -- 4.2 -- 1.5
Legal settlement -- -- .3 --
----- ----- ----- -----
Income from operations (14.0) .7 (2.4) 3.1
Interest expense, net 1.3 .6 1.2 .4
----- ----- ----- -----
Income (loss) before income taxes (15.3) -- (3.6) 2.7
Income tax provision (benefit) (6.0) .1 (1.5) 1.1
----- ----- ----- -----
Net income (loss) (9.3) (.1) (2.1) 1.6
Less: Dividend on preferred stock (.1) -- (.1) --
----- ----- ----- -----
Net income (loss) available to common shareholders (9.4)% (.1)% (2.2)% 1.6%
===== ===== ===== =====
</TABLE>
- ------------------
Note: Percentages may not sum due to rounding.
Results of Operations for the Three and Nine Months Ended September 30, 1999
Compared to the Three and Nine Months Ended September 30, 1998
Net sales for the quarter ended September 30, 1999 increased to $133.5
million, an 8% increase over net sales of $124.1 million in the third quarter of
1998. Net sales for the first nine months of 1999 rose by 19% to $402.5 million
when compared to net sales of $339.4 million for the first nine months of 1998.
These increases are primarily attributable to acquisitions, which have led to
new customers, new products, and expanded market penetration. These results were
adversely impacted by declining sales levels at certain of the locations
acquired from TW Communication Corporation in December 1997.
Anicom's gross profit for the quarter ended September 30, 1999
decreased by $6.5 million or approximately 24% to $20.4 million versus $26.9
million for the same period of 1998. This decrease is attributed to costs
associated with Anicom's companywide restructuring, which includes accelerating
the implementation of eight distribution centers. As part of the restructuring,
the Company will consolidate its 75 North American locations into 61 facilities,
downsize 12 other locations, reduce its workforce of approximately 1,200 by
about 10 percent, and reduce the number of part numbers maintained in inventory,
the number of lower margin product offerings and the number of non-strategic
vendors (cumulatively referred to as the "Plan"). Principally as a result of the
Plan, Anicom incurred approximately $4.8 million in
9
<PAGE>
one-time charges increasing cost of goods sold for actual and anticipated
inventory writedowns and anticipated reductions in vendor rebates.
Anicom's gross profit for the nine months ended September 30, 1999
increased by $5.6 million or 7% to $80.4 million versus $74.8 million for the
nine months ended September 30, 1998. This increase resulted from Anicom's
acquired sales volume, offset by the costs associated with the Plan which is
discussed above.
As a percentage of net sales, gross profit for the three and nine month
periods ended September 30 decreased as gross margins reflected the impact of
lower historical gross profit margins at certain of the Company's recent
acquisitions which have historically had lower margin product offerings and the
costs associated with the Plan. 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, reducing the number of non-strategic vendors and by
continuing to leverage its purchasing volume with its vendor partners.
Selling expenses increased by $6.1 million and $12.0 million,
respectively, for the three and nine months ended September 30, 1999 when
compared to the same periods in 1998. These increases occurred in conjunction
with the Company's increase in net sales and the increase in sales headcount
that resulted from the Company's recent acquisitions. Additionally, selling
expenses were impacted by additional provisions for bad debts. Selling expenses
for the third quarter of 1999 increased from 9.1% of net sales in 1998 to 13.0%
of net sales in 1999. Selling expenses increased from 9.1% of net sales for the
nine months ended September 30, 1998 to 10.6% of net sales for the nine months
ended September 30, 1999. The third quarter increases are primarily attributable
to the factors associated with the Plan which are discussed above. On a year to
date basis, these third quarter factors, along with the impact of lower than
expected sales volume experienced in the second quarter of 1999, resulted in the
increase.
General and administrative expenses increased from $9.6 million for the
third quarter of 1998 to $15.7 million for the third quarter of 1999 and from
$28.1 million for the nine months ended September 30, 1998 to $39.9 million for
the nine months ended September 30, 1999. General and administrative expenses
for the third quarter of 1999 increased from 7.7% of net sales in 1998 to 11.7%
of net sales in 1999. General and administrative expenses increased from 8.3% of
net sales for the nine months ended September 30, 1998 to 9.9% of net sales for
the nine months ended September 30, 1999. For the third quarter and the nine
months ended September 30, 1999, these increases resulted from redundant
expenditures incurred as a result of implementing the Plan and the realization
of a full nine months of expenses in 1999 related to acquisitions the Company
completed during the first nine months of 1998.
In connection with the Plan, the Company will consolidate and downsize
locations, reduce its workforce and eliminate certain non-strategic vendors.
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 total $6.1 million and are categorized as a
restructuring charge on the income statement.
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 that is reflected in Anicom's results for the nine months ended
September 30, 1999.
In the third quarter of 1999, interest expense, net increased to $1.7
million from $776,000 for the third quarter of 1998. For the nine months ended
September 30, 1999, net interest expense increased to $4.7 million from $1.4
million for the same period in 1998. This is primarily a result of the Company's
increased borrowings under its credit facility to fund the cash consideration
and debt payoff related to acquisitions, and to meet the increased working
capital requirements associated with sales growth and anticipated project
business.
10
<PAGE>
The provision (benefit) for income taxes was $(8.0) million for the
third quarter of 1999 compared to $142,000 for the third quarter of 1998. The
provision (benefit) for income taxes was $(5.9) million for the nine months
ended September 30, 1999 compared to $3.8 million for the same period in 1998.
The change in both the third quarter and nine months ended September 30 is a
result of the Company incurring a loss before income taxes as a result of costs
associated with the Plan.
Liquidity and Capital Resources
Management believes that cash flows from operations and borrowings
available under its revolving credit facility (the "Facility") will be
sufficient to fund current operations, and its planned integrated growth
strategy. The Company does not currently have any significant long-term capital
requirements that it believes cannot be funded from these sources. However, in
connection with its acquisition and integrated growth strategy, the Company's
capital requirements may change based upon various factors, primarily related to
the timing of acquisitions and the consideration to be used as purchase price.
The Company continues to examine opportunities to raise funds through the
issuance of additional equity or debt securities through private placements or
public offerings and to increase its available line of credit.
In November 1998, the Company entered into an agreement with its
lenders to increase borrowings available under the Facility from $100 million to
$120 million. The Facility provides for borrowings of up to $15 million in
currencies other than U.S. dollars. It also provides for various interest rate
options, determined from time to time, based upon the Company's interest
coverage and leverage ratios, as defined, and either the agent's Domestic Rate
less .25% to .50% or LIBOR plus .5% to 1.0%. The Facility expires in June 2001
with extensions available at the Company's option through June 2003. The
Facility contains certain financial covenants, including minimum tangible net
worth, current, interest coverage and debt to earnings ratios. Anicom obtained a
waiver of compliance under the Facility dated September 30, 1999.
As of September 30, 1999, Anicom had working capital of approximately
$135.3 million as compared to $135.1 million as of December 31, 1998. At
September 30, 1999, amounts outstanding under the Facility were approximately
$91.6 million.
During the nine months ended September 30, 1999 cash flows from
operating activities used $7.2 million of cash compared to $37.1 million used
during the same period in 1998. This change relates primarily to changes in
working capital components, anticipated tax refunds resulting from the Company's
third quarter loss and the impact of accruals related to the Plan.
For the nine months ended September 30, 1999 cash flows from investing
activities used $491,000 compared to using approximately $30.8 million during
the same period in 1998. During the first nine months of 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 the first nine months of 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 nine months ended September 30, 1999 cash flows from
financing activities provided approximately $5.2 million compared to providing
$67.3 million during the same period in 1998. The decrease relates to a
reduction in additional borrowings under the Facility in the first nine months
of 1999 compared to the same period in 1998. During 1998, borrowings under the
Facility were made to fund acquisition activity and increased working capital
requirements.
In September, 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.
11
<PAGE>
Inflation
Although the operations of Anicom are influenced by general economic
conditions, Anicom does not believe that inflation had a material effect on the
results of its operations during the first nine months of 1999.
Seasonality
In the fourth quarter, Anicom has historically experienced, and expects
to experience in future years, a modest decrease in the level of activity among
many of its customers around the Thanksgiving and Christmas holidays.
Year 2000 Readiness and Related Risks
The Year 2000 issue is the result of computer programs being unable to
interpret dates beyond the year 1999, which could cause a system failure or
other computer errors, leading to disruptions in operations. A task force has
been established by the Company that includes information systems, accounting
and legal personnel of the Company to assess the Company's state of readiness
and to implement an action plan to correct any deficiencies of the Company. To
date, the Company has identified the following areas to assess as to Year 2000
readiness: (1) distribution and financial information systems, (2) supplier,
third-party relationships and customers, and (3) physical facility systems. For
each of these areas, the Company has established the following procedures to
assess its Year 2000 readiness: (a) identifying systems potentially susceptible
to Year 2000 compliance issues, (b) developing and implementing corrective
actions and (c) testing to ensure compliance. Management believes that the
Company is devoting the necessary resources to identify and resolve any
significant Year 2000 issues in a timely manner.
DISTRIBUTION AND FINANCIAL INFORMATION SYSTEMS: As part of its
integrated growth strategy, Anicom completed the implementation of a new
information technology system in the fourth quarter of 1997. The information
system integrates sales, inventory control and purchasing, warehouse management,
financial control and internal communications while providing real-time
monitoring of inventory levels, shipping status and other key operational and
financial benchmarks at all of Anicom's sales and distribution locations. In
implementing this system, management received written confirmation from vendors
that the enterprise system software, hardware and network operating systems
included in this information system are Year 2000 compliant. Testing of these
systems has confirmed this conclusion.
Total costs incurred to purchase the necessary hardware, software,
licenses, consulting services and training associated with the installation,
modification and implementation of the system were approximately $3.6 million.
Of this amount, approximately $2.7 million was expensed with the remainder being
capitalized and depreciated over future periods. The Company does not anticipate
incurring any material additional costs with respect to Year 2000 readiness of
this information technology system.
Texcan's Canadian financial and distribution systems were upgraded to
become Year 2000 compliant during the first quarter of 1999 at a cost of
approximately $50,000. Testing of these systems has confirmed this conclusion.
SUPPLIERS, THIRD-PARTY RELATIONSHIPS AND CUSTOMERS: The Company relies
on third party suppliers for inventory, utilities, transportation and other key
supplies and services. Interruption of supplier operations due to Year 2000
issues could adversely affect the Company's operations. The Company's payroll
outsourcing service has confirmed that the systems used to process the Company's
payroll are Year 2000 compliant. The Company has evaluated the Year 2000
readiness of its other suppliers through a survey distributed in the fourth
quarter of 1998. Unsatisfactory
12
<PAGE>
responses or non-responses have been evaluated on a case by case basis in an
attempt to mitigate risk to the Company. At this time, the Company believes that
the impact of isolated occurrences resulting from any of its suppliers who have
not yet responded to its survey failing to be Year 2000 compliant would not be
materially adverse to the Company. These activities are intended to provide a
reasonable means of managing risk, but cannot eliminate the potential for
disruption due to third-party failure.
The Company does not currently have any formal information concerning
the Year 2000 readiness of its customers, and given the breadth and diversity of
its customer base, the Company has only made a formal inquiry of selected
customers. The Company believes that the impact of isolated occurrences
resulting from any of its customers failing to be Year 2000 compliant would not
be materially adverse to the Company. However, widespread interruptions to
customers serviced by the Company could result in reduced sales, increased
inventory or receivable levels and a reduction in cash flow.
The Company has not incurred, and does not believe it will incur,
material costs related to any inquiry as to the Year 2000 readiness of its
suppliers, other third party relationships and customers.
PHYSICAL FACILITY SYSTEMS: The Company has completed its evaluation of
the Year 2000 readiness of its physical facility systems, such as phone systems,
power, security systems, heating, ventilation and air conditioning systems, etc.
The Company expects to complete minor remedial action by the end of November
1999.
While the Company and many other companies believe their efforts to
address the Year 2000 issues will be successful in avoiding any material adverse
effect on the Company's results of operations or financial condition, it
recognizes that a most reasonably likely worst case Year 2000 scenario would
involve the failure of a third party or a component of the infrastructure,
including national banking systems, electrical power, transportation facilities,
communication systems and governmental activities, to conduct their respective
operations after 1999 such that the Company's ability to obtain and distribute
its products and services would be limited for a period of time. If this were to
occur, it would likely cause temporary financial losses and an inability to
provide products and services to customers, and there may be no practical
alternative to some of these resources available to the Company.
The Company has implemented contingency plans to be carried out in the
event of an external Year 2000 failure of vendors that are critical to normal
information systems business operations. These plans include both internal and
external resources and facilities for off-site computer processing and personnel
relocation in the event of power or data communication failure that results in
the inability to utilize an existing company facility.
The foregoing assessment of the impact of the Year 2000 issue on the
Company is based on management's estimates at the present time. The assessment
is based upon numerous assumptions as to future events. There can be no
assurance that these estimates and assumptions will provide accurate, and the
actual results could differ materially. To the extent that Year 2000 issues
cause significant delays in sales, increased inventory or receivable levels or
cash flow reductions, the Company's results of operations and financial
condition could be materially adversely affected.
13
<PAGE>
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
In compliance with the Safe Harbor Provision of the Private Securities
Litigation Reform Act of 1995, the Company notes the statements contained in
this quarterly report that are not historical facts may be forward-looking
statements that are subject to a variety of risks and uncertainties more fully
described in Anicom's filings with the Securities and Exchange Commission
including, without limitation, those described under "Risk Factors" in Anicom's
Registration Statement on Form S-3 (File No. 333-61715), in Anicom's Annual
Report on Form 10-K for the year ended December 31, 1998, and in this quarterly
report. Whenever possible, the Company has identified these forward looking
statements by words such as "believe," "feel," "anticipate," "expect" and
similar expressions used in this quarterly report as they relate to Anicom or
its management. Anicom wishes to caution readers of this quarterly report that
these risks and uncertainties could cause Anicom's actual results in 1999 and
beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, Anicom. These risks and uncertainties
include, without limitation, Anicom's limited operating history on which
expectations regarding its future performance can be based, general economic and
business conditions affecting the industries of Anicom's customers in existing
and new geographical markets, competition from, among others, national and
regional distributors that have greater financial, technical and marketing
resources and distribution capabilities than Anicom, the availability of
sufficient capital, Anicom's ability to identify the right product mix and to
maintain sufficient inventory to meet customer demand, Anicom's ability to
successfully acquire and integrate he operations of additional businesses and
Anicom's ability to operate effectively in geographical areas in which it has no
prior experience.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's Facility is priced on a floating rate basis at either a spread
over LIBOR or under the credit facility agent's Domestic Rate which is tied to
the U.S. Prime Rate. The rate used is subject to selection by the Company based
on the terms of the Facility. Accordingly, any movement in LIBOR or the Domestic
Rate will impact the Company's interest expense. The outstanding balance under
the Facility at September 30, 1999 was $91.6 million. Based on this balance, a
hypothetical 10% increase in LIBOR would result in an increase in annual
interest expense of approximately $676,000. 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.
14
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed with this report:
Exhibit No.
-----------
27 Financial data schedule
(b) Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANICOM, INC.
Dated: November 15, 1999 By:/S/ DONALD C. WELCHKO
---------------------------------
Donald C. Welchko
Senior Executive Vice President
and Chief Financial Officer
16
<PAGE>
ANICOM, INC.
INDEX TO EXHIBITS
Exhibit No.
27 Financial data schedule
17
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDING SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFRENCE TO SUCH FORM 10-Q.
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<NAME> ANICOM, INC.
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