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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO____________
Commission File Number: 1-8328
Anacomp, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1144230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12365 Crosthwaite Circle, Poway, California 92064
(858) 679-9797
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant: (1) has 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
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of July 31, 2002, the number of outstanding shares of the registrant's
Class A common Stock, $.01 par value per share, was 4,030,000 and the number of
outstanding shares of the registrant's Class B common Stock, $0.01 par value per
share, was 4,034.
ANACOMP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at
June 30, 2002 and September 30, 2001................ 2
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2002 and 2001........... 3
Condensed Consolidated Statements of Operations
Nine Months Ended June 30, 2002 and 2001............ 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2002 and 2001............ 5
Notes to the Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 36
Item 2. Changes in Securities and Use of Proceeds................... 36
Item 6. Exhibits and Reports on Form 8-K............................ 36
SIGNATURES............................................................. 38
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Reorganized Predecessor
Company Company
____________ _____________
June 30, September 30,
(in thousands) 2002 2001
____________ _____________
Assets (Unaudited)
Current assets:
Cash and cash equivalents............................... $ 16,650 $ 24,308
Accounts receivable, net................................ 40,012 43,360
Inventories............................................. 4,093 4,937
Prepaid expenses and other.............................. 6,281 8,710
____________ _____________
Total current assets....................................... 67,036 81,315
Property and equipment, net................................ 29,401 33,141
Reorganization value in excess of identifiable net assets.. 73,792 ---
Goodwill................................................... --- 86,285
Intangible assets, net..................................... 11,308 ---
Other assets............................................... 3,785 7,077
____________ _____________
$ 185,322 $ 207,818
============ =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of senior secured revolving credit
facility............................................. $ 33,475 $ 55,075
10-7/8% senior subordinated notes payable............... --- 310,943
Accounts payable........................................ 10,423 15,424
Accrued compensation, benefits and withholdings......... 16,761 16,111
Deferred revenue........................................ 8,886 7,948
Accrued income taxes.................................... 978 5,625
Accrued interest........................................ 181 50,969
Other accrued liabilities............................... 12,582 13,508
____________ _____________
Total current liabilities.................................. 83,286 475,603
____________ _____________
Long-term liabilities..................................... 2,198 10,142
____________ _____________
Stockholders' equity (deficit):
Preferred stock......................................... --- ---
Common stock............................................ 40 146
Additional paid-in capital.............................. 96,885 111,324
Accumulated other comprehensive income (loss)........... 2,003 (4,912)
Retained earnings (accumulated deficit)................. 910 (384,485)
____________ _____________
Total stockholders' equity (deficit)....................... 99,838 (277,927)
____________ _____________
$ 185,322 $ 207,818
============ =============
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Reorganized Predecessor
Company Company
_____________ _____________
(in thousands, except per share amounts) Three months Three months
ended ended
June 30, 2002 June 30, 2001
_____________ _____________
Revenues:
Services............................................... $ 51,053 $ 57,395
Equipment and supply sales............................. 12,714 15,633
_____________ _____________
63,767 73,028
_____________ _____________
Cost of revenues:
Services............................................... 34,755 38,610
Equipment and supply sales............................. 9,446 11,796
_____________ _____________
44,201 50,406
_____________ _____________
Gross profit.............................................. 19,566 22,622
Costs and expenses:
Engineering, research and development.................. 2,037 2,032
Selling, general and administrative.................... 14,519 20,347
Amortization of intangible assets...................... 496 2,911
Restructuring charges (credits)........................ 2,081 (1,207)
_____________ _____________
Operating income (loss)................................... 433 (1,461)
_____________ _____________
Other income (expense):
Interest income........................................ 102 283
Interest expense and fee amortization.................. (1,051) (10,843)
Other.................................................. 523 (523)
_____________ _____________
(426) (11,083)
_____________ _____________
Income (loss) before income taxes......................... 7 (12,544)
Provision for income taxes................................ --- 209
_____________ _____________
Net income (loss)......................................... $ 7 $ (12,753)
============= =============
Basic and diluted per share data:
Basic and diluted net income........................... $ 0.00
=============
Shares used in computing basic and diluted net income per
share.................................................. 4,034
=============
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Reorganized
Company Predecessor Company
______________ ________________________________
(in thousands, except per share amounts) Six months ended Three months Nine months
ended ended ended
June 30, 2002 December 31, 2001 June 30, 2002
______________ ______________ ____________
Revenues:
Services............................................... $105,413 $ 55,098 $179,791
Equipment and supply sales............................. 25,997 12,926 55,581
______________ ______________ ____________
131,410 68,024 235,372
______________ ______________ ____________
Cost of revenues:
Services............................................... 70,440 36,630 117,626
Equipment and supply sales............................. 18,991 9,874 40,167
______________ ______________ ____________
89,431 46,504 157,793
______________ ______________ ____________
Gross profit.............................................. 41,979 21,520 77,579
Costs and expenses:
Engineering, research and development.................. 3,807 1,680 5,580
Selling, general and administrative.................... 31,214 15,643 66,641
Amortization of intangible assets...................... 992 2,896 8,818
Restructuring charges (credits)........................ 2,081 (1,032) (1,207)
______________ ______________ ____________
Operating income (loss)................................... 3,885 2,333 (2,253)
______________ ______________ ____________
Other income (expense):
Interest income........................................ 173 155 1,033
Interest expense and fee amortization.................. (2,255) (3,114) (33,065)
Other.................................................. 387 (221) (676)
______________ ______________ ____________
(1,695) (3,180) (32,708)
______________ ______________ ____________
Income (loss) before reorganization items, income taxes
and extraordinary gain on extinguishment of debt....... 2,190 (847) (34,961)
Reorganization items...................................... --- 13,328 ---
______________ ______________ ____________
Income (loss) before income taxes and extraordinary
gain on extinguishment of debt......................... 2,190 12,481 (34,961)
Provision for income taxes................................ 1,280 450 1,175
______________ ______________ ____________
Income (loss) before extraordinary gain on
extinguishment of debt................................. 910 12,031 (36,136)
Extraordinary gain on extinguishment of debt, net of
taxes.................................................. --- 265,329 ---
______________ ______________ ____________
Net income (loss)......................................... $ 910 $277,360 $(36,136)
============== ============== ============
Basic and diluted per share data:
Basic and diluted net income........................... $ 0.23
==============
Shares used in computing basic and diluted net income
per share.............................................. 4,034
==============
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Reorganized
Company Predecessor Company
_______________ ________________________________
(in thousands) Six months Three months Nine months
ended ended ended
June 30, 2002 December 31, 2001 June 30, 2001
_______________ _______________ ______________
Cash flows from operating activities:
Net income (loss)...................................... $ 910 $ 277,360 $ (36,136)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary gain on extinguishment of debt......... --- (265,329) ---
Adjustments of assets and liabilities to fair value.. --- (16,916) ---
Write off of deferred debt issuance costs and
unamortized premiums and discounts................ --- 2,216 ---
Depreciation and amortization........................ 9,123 7,194 23,732
Non-cash settlement of facility lease contract....... --- 349 ---
Non-cash charge included in restructuring charge..... 69 --- ---
Amortization of debt fees, premiums, and discounts... 344 92 1,050
Non-cash legal settlement charge..................... --- --- 1,502
Change in assets and liabilities:
Accounts and other receivables..................... 136 3,092 10,033
Inventories........................................ 105 739 1,337
Prepaid expenses and other assets.................. 1,356 332 1,067
Accounts payable, accrued expenses and other
liabilities...................................... (1,445) (3,733) (12,870)
Accrued interest................................... 168 (387) 24,940
_______________ _______________ ______________
Net cash provided by operating activities......... 10,766 5,009 14,655
_______________ _______________ ______________
Cash used in investing activities:
Purchases of property and equipment.................... (2,134) (1,075) (3,992)
_______________ _______________ ______________
Cash flows from financing activities:
Proceeds from liquidation of currency swap contracts... --- --- 763
Principal payments on revolving line of credit......... (19,600) (2,000) (1,575)
_______________ _______________ ______________
Net cash used in financing activities............. (19,600) (2,000) (812)
_______________ _______________ ______________
Effect of exchange rate changes on cash and cash
equivalents............................................ 739 637 (270)
_______________ _______________ ______________
Increase (decrease) in cash and cash equivalents.......... (10,229) 2,571 9,581
Cash and cash equivalents at beginning of period.......... 26,879 24,308 13,988
_______________ _______________ ______________
Cash and cash equivalents at end of period................ $ 16,650 $ 26,879 $ 23,569
=============== =============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest.................................. $ 1,356 $ 1,434 $ 5,579
=============== =============== ==============
Cash paid for income taxes.............................. $ 1,470 $ 459 $ 1,286
=============== =============== ==============
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Company Reorganization
Financial Restructuring and Reorganization
On October 19, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code, together with a prepackaged plan of
reorganization (the "Plan"), with the U.S. Bankruptcy Court for the Southern
District of California. The U.S. Bankruptcy Court confirmed the Plan on December
10, 2001, and we emerged from bankruptcy effective December 31, 2001.
The primary benefits of our bankruptcy were the elimination of $310 million of
debt and the related annual interest expense of approximately $34 million.
Additionally, our credit facility was amended such that we cured previous events
of default and we continue to have the ability to borrow under the credit
facility. Borrowings under the facility are subject to revised terms and
restrictions, and we are required to make mandatory quarterly payments that
reduce the borrowing base of the credit facility (see Note 4).
Under the Plan, our publicly traded 10-7/8% senior subordinated notes, related
accrued interest and existing Anacomp common stock (14,566,198 shares) were
canceled, and new common stock was issued. New Class A Common Stock was
distributed to the holders of the notes, as well as reserved for issuance as
incentive compensation to Anacomp personnel. New Class B Common Stock was issued
and distributed to holders of previously existing Anacomp common stock.
Pursuant to the reorganization, we are authorized to issue 40,000,000 shares of
Class A Common Stock, 787,711 shares of Class B Common Stock and 1,000,000
shares of preferred stock. Terms and conditions of the Class A and Class B
Common Stock are identical, including voting rights, dividends, when and if
declared, and liquidation rights, subject to any preference of preferred stock
as may be issued in the future. Class B Common Stock is also subject to
potential further dilution if additional shares of Class B Common Stock are
required to be issued in satisfaction of claims pursuant to the reorganization.
Preferred stock is authorized to be issued in one or more series with terms to
be established at the time of issuance by our Board of Directors.
In exchange for the notes totaling $310 million and related accrued interest
totaling $52.3 million, holders of the notes received 4,030,000 shares of new
Class A Common Stock.
For each share of common stock outstanding immediately prior to the emergence
from bankruptcy, common shareholders received .0002769 shares of new Class B
Common Stock. As a result, 4,034 shares of new Class B Common Stock were issued.
In addition, for each share of new Class B Common Stock issued, these
shareholders received 194.12 warrants. Each warrant is exercisable for a period
of five years for the purchase of one share of the new Class B Common Stock at
an exercise price of $61.54 per share. As a result, 783,077 warrants to purchase
Class B Common Stock were issued.
Holders of Class A Common Stock own 99.9% of our equity and those holding Class
B Common Stock own 0.1%.
Also, as a result of the Chapter 11 reorganization, the following occurred:
o all unexercised options were canceled;
o prior stock option plans were terminated;
o executory contracts were assumed or rejected;
o trade creditors were paid in the ordinary course of business and were not
impaired;
o members of a new Board of Directors were designated by the holders of the
subordinated notes;
o 403,403 shares of new Class A Common Stock were authorized for use in the
establishment of new stock option plans; and
o the senior secured revolving credit facility was amended (see Note 4).
Under bankruptcy law, an executory contract is an agreement between a debtor and
third party under which, as of the date of a debtor's Chapter 11 petition,
material performance on the agreement remains due from both the debtor and
non-debtor party, such that the failure of either side to perform its
obligations under the agreement would excuse the other party from further
performance. The Bankruptcy Code permits a Chapter 11 debtor to assume (i.e.
agree to continue to be bound both during the Chapter 11 case and following
emergence) or reject (breach and no longer be bound during the Chapter 11 case
or thereafter) any executory contract. We assumed all of our executory contracts
under our confirmed plan of reorganization except one, which was a
nonresidential lease of real property.
Substantially all claims that were filed in conjunction with the Chapter 11
proceedings have been disallowed by the court. The majority of the claims were
paid prior to or subsequent to our bankruptcy filing. The remainder related to
executory contracts assumed under the Plan, represent duplicate claims, claim
amounts that differ from our records or claims that were filed late or are
unsubstantiated. As a result, there are no unrecorded claims.
Business Unit Structuring
In May 2001, we announced our intention to sell all or parts of our European
document-management business, Document Solutions International (DSI).
Approximately $3.9 million was spent for restructuring, consulting and severance
expenses in fiscal year 2001 in preparation for a potential sale of DSI.
Revenues from DSI were $40.3 million, $11 million and $22.1 million, or 13%, 16%
and 17% of total Anacomp revenues in fiscal year 2001, in the three-month period
ended December 31, 2001 and in the six-month period ended June 30, 2002,
respectively.
A sale of all of DSI is not currently planned; however, we continue to exercise
our reasonable best efforts to complete a sale of portions of DSI. Any such
eventual sale is subject to approval by Fleet National Bank, as agent, and its
syndicate of lenders (collectively, "the Bank Group") and we will be required to
remit proceeds from any sale to pay down our senior credit facility (see Note
4). The execution, timing, likelihood and amount of net proceeds of any such
potential sale are uncertain and we are continuing the operations of DSI in its
normal course of business. Accordingly, it is not possible to predict with
accuracy the potential impact that a sale transaction involving portions of DSI
would have on future results; however, management expects that such a sale would
generate funds that would be used to pay down the outstanding credit facility
balance. Our International Technical Services business is not affected by this
potential transaction.
Note 2. Basis of Presentation
At December 31, 2001, as a result of our emergence from bankruptcy, we adopted
Fresh Start Reporting in accordance with AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code."
Fresh Start Reporting resulted in material changes to the Condensed Consolidated
Balance Sheet as of December 31, 2001, including adjustment of assets and
liabilities to estimated fair values, the valuation of equity based on the
reorganization value of the ongoing business, and the recording of an asset for
reorganization value in excess of the fair value of the separately identifiable
assets and liabilities (similar to goodwill).
The accompanying financial statements include historical information from prior
to December 31, 2001, the effective date we emerged from bankruptcy, and are
identified as financial statements of the Predecessor Company. The Condensed
Consolidated Balance Sheet and Statements of Operations as of and for the three
and six-month periods ended June 30, 2002, as well as the Statement of Cash
Flows for the six-month period ended June 30, 2002, represent the Reorganized
Company after adopting Fresh Start Reporting. Due to our reorganization and the
implementation of Fresh Start Reporting (see Note 3), the financial statements
for the Reorganized Company are not comparable to those of the Predecessor
Company.
The accompanying condensed consolidated financial statements include the
accounts of Anacomp and our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements, except for the balance sheet as of September 30, 2001,
have not been audited but, in the opinion of management, include all adjustments
(consisting of normal recurring accruals and the adjustments described in Notes
3 and 7) necessary for a fair presentation of our financial position, results of
operations and cash flows for all periods presented. These financial statements
should be read in conjunction with the financial statements and notes thereto
for the year ended September 30, 2001, included in our fiscal 2001 Annual Report
on Form 10-K (the financial statements contained in such report represent those
of the Predecessor Company and are not comparable to the Reorganized Company),
and our Form S-1/A dated June 12, 2002. Interim operating results are not
necessarily indicative of operating results for the full year or for any other
period.
Preparation of the accompanying condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the periods presented. Estimates have been prepared
on the basis of the most current available information and actual results could
differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Note 3. Fresh Start Reporting
Our enterprise value of $150 million before consideration of debt after
reorganization at December 31, 2001 was determined based on the consideration of
many factors and various valuation methods, including:
o discounted cash flow analysis;
o selected publicly-traded company market multiples;
o selected acquisition transaction multiples; and
o applicable ratios and valuation techniques believed by management to be
representative of our business and industry.
The cash flow valuation utilized five-year projections assuming a weighted
average cost of capital rate of approximately 13.5%. A terminal value was
determined using a multiple of our estimated fifth year earnings before
interest, other income, reorganization items, asset impairment and restructuring
charges, taxes, depreciation and amortization, and extraordinary items (referred
to as "EBITDA"), together with the net present value of the five-year projected
cash flows. The excess of the reorganization value over the fair value of
identifiable net assets of $73.8 million is reported as "Reorganization value in
excess of identifiable net assets" and will not be subject to future
amortization (similar to goodwill) in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" as
issued by the Financial Accounting Standards Board ("FASB").
For enterprise valuation purposes, we estimated our revenues and cash flows
through fiscal year 2006. We projected continued declines in Computer Output to
Microfiche ("COM") and COM-related revenues at a rate of approximately 20%
annually and growth in digital and multi-vendor services and product offerings.
Our projections also assumed the following:
o the elimination of our subordinated notes and related interest;
o continued reduction of costs through consolidation of facilities and
adjustments to our labor force to maintain COM gross margin levels;
o the completion of our bankruptcy and related legal and professional costs;
and
o our recent cost reduction activities and restructurings.
In developing the assumptions underlying the cash flow projections, management
considered such factors as historical results as well as its best estimates of
expected future market conditions based on information available as of December
31, 2001. Actual future events and results could differ substantially from
management's estimates, assumptions and projections including, but not limited
to, the matters discussed above. Unfavorable changes compared to our projections
used for Fresh Start Reporting purposes could result in future impairments of
our reorganization asset and identifiable intangible assets.
As a result of Fresh Start Reporting, identifiable intangible assets were valued
and consist of the following to be amortized over the useful lives indicated:
(dollars in thousands; unaudited) Life in Years June 30, 2002
__________________________________________________________ _____________ _____________
Customer contracts and related customer relationships..... 10 $ 7,600
Digital technology and intellectual property.............. 3 3,100
COM technology and intellectual property.................. 10 1,300
COM production software................................... 5 300
_____________
Total..................................................... 12,300
Less: accumulated amortization............................ (992)
=============
$ 11,308
=============
Based on the intangible asset values noted above, related amortization expense
will be approximately $2 million annually for the next three years.
The reorganization and the adoption of Fresh Start Reporting resulted in the
following adjustments to our unaudited Condensed Consolidated Balance Sheet as
of December 31, 2001:
Predecessor Reorganization and Fresh Start Reorganized
Company Adjustments Company
December 31, _______________________________ December 31,
(in thousands; unaudited) 2001 Debit Credit 2001
_____________________________ ____________ _____________ _______________ ____________
Assets
Total current assets........ $ 78,261 $ --- $ --- $ 78,261
Property and equipment, net. 30,565 2,483 (a) --- 33,048
Reorganization value in
excess of identifiable
assets.................... --- 73,792 (c) --- 73,792
Goodwill.................... 83,644 --- 83,644 (b) ---
Intangible assets........... --- 12,300 (d) --- 12,300
Other assets................ 8,179 --- 3,142 (e) 5,037
____________ _____________ _______________ ____________
$ 200,649 $ 88,575 $ 86,786 $ 202,438
============ ============= =============== ============
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion of
senior secured
revolving credit
facility................ $ 53,075 $ 43,825 (f) $ --- $ 9,250
10-7/8% senior
subordinated notes
payable................. 310,926 310,926 (g) --- ---
Accounts payable.......... 11,051 --- --- 11,051
Accrued compensation,
benefits and
withholdings............ 16,275 --- --- 16,275
Accrued income taxes...... 4,220 3,027 (h) --- 1,193
Accrued interest.......... 52,267 52,254 (i) --- 13
Other accrued liabilities. 22,642 1,075 (j) --- 21,567
____________ _____________ _______________ ____________
Total current liabilities... 470,456 411,107 --- 59,349
Long-term liabilities:
Long-term portion of
senior secured revolving
credit facility........... --- --- 43,825 (f) 43,825
Other long-term
liabilities............... 10,222 7,883 (k) --- 2,339
____________ _____________ _______________ ____________
Total long-term liabilities. 10,222 7,883 43,825 46,164
Stockholders' equity
(deficit):
Common stock.............. 146 146 (l) 40 (m) 40
Additional paid-in
capital.................. 111,324 111,324 (l) 96,885 (m) 96,885
Accumulated other
comprehensive loss...... (4,273) --- 4,273 (l) ---
Accumulated deficit....... (387,226) --- 387,226 (l) ---
____________ _____________ _______________ ____________
Total stockholders' equity
(deficit)................... (280,029) 111,470 488,424 96,925
____________ _____________ _______________ ____________
$ 200,649 $530,460 $532,249 $ 202,438
============ ============= =============== ============
Explanations of the above adjustment columns are as follows:
a) To adjust property and equipment to estimated fair value.
b) To reflect write off of excess of purchase price over net assets of
businesses acquired.
c) To establish the reorganization value in excess of identifiable assets. The
amounts are calculated below:
(in thousands; unaudited) Amount
________________________________________________ _____________
Senior secured revolving credit facility........ $ 53,075
New equity...................................... 96,925
_____________
Enterprise value................................ 150,000
Plus: fair value of identifiable liabilities.... 52,438
Less: fair value of identifiable assets......... (128,646)
_____________
Reorganization value in excess of
identifiable assets $ 73,792
=============
d) To establish separately identifiable intangible assets at estimated fair
value.
e) To write off deferred costs on senior subordinated debt canceled in
bankruptcy.
f) To reclassify portion of revolving credit facility from current to
long-term, consistent with principal repayment terms of the amended
facility agreement.
g) To write off the senior subordinated notes canceled in bankruptcy and
related unamortized premium and discount.
h) To adjust accrued income taxes to amounts currently payable.
i) To write off accrued interest related to the senior subordinated notes.
j) To adjust other accrued liabilities to estimated fair values.
k) To adjust other long-term liabilities to estimated fair values.
l) To eliminate stockholders' deficit of the Predecessor Company.
m) To reflect issuance of 4,030,000 shares of new Class A Common Stock and
4,034 shares of new Class B Common Stock at estimated fair value.
The extraordinary gain on extinguishment of debt, net of taxes, for the period
ended December 31, 2001, is calculated as follows:
(in thousands; unaudited) Amount
_______________________________________________ _____________
Carrying value of senior subordinated notes.... $ 310,000
Carrying value of related accrued interest..... 52,254
Issuance of new common stock................... (96,925)
_____________
Extraordinary gain on extinguishment of debt $ 265,329
=============
The holders of the senior subordinated notes received 99.9% of the new equity of
the Reorganized Company; therefore, the net equity of the Reorganized Company
was used as the basis for consideration exchanged in determining the
extraordinary gain on extinguishment of debt. There is no income statement tax
effect from the extinguishment of debt (see Note 6).
In accordance with Statement of Position 90-7, transactions of the Predecessor
Company resulting from the Chapter 11 reorganization are reported separately as
reorganization items in the accompanying Condensed Consolidated Statement of
Operations for the period ended December 31, 2001, and are summarized below:
Three Months
Ended
December 31,
(in thousands; unaudited) 2001
________________________________________________ ______________
Adjustment of assets and liabilities to fair
value......................................... $ 16,916
Write off of deferred debt issuance costs and
unamortized premiums and discounts............ (2,216)
Professional fees and other reorganization costs (1,023)
Settlement of facility lease contract........... (349)
______________
Reorganization items $ 13,328
==============
Note 4. Senior Secured Revolving Credit Facility
On August 24, 2001, we and the Bank Group executed a Summary of Terms and
Conditions regarding amendments to the senior secured revolving credit facility.
The amended facility, which became effective December 31, 2001, included a $58.9
million limit, with a $53.1 million sublimit for direct borrowing and a $5.8
million letter of credit sublimit. In accordance with the new agreement, the
$53.1 million direct borrowing sublimit was reduced to $48.3 million as of June
30, 2002 as a result of scheduled principal repayments, issuance of a new letter
of credit, and the sale of assets. The credit limit will be subject to further
reductions as the periodic scheduled principal repayments become due. The
facility is available for new borrowings when direct borrowings are reduced
below the credit limit.
At June 30, 2002, our outstanding balance was $33.5 million (plus outstanding
letters of credit of $6.2 million). During the quarter ended June 30, 2002, we
made cash payments totaling $7.9 million, which is $5.9 million greater than our
scheduled paydowns, resulting in $14.8 million of borrowing capacity, including
the effect of other commitment reductions.
The maturity date of the amended facility is June 30, 2003, with an extension to
December 31, 2003 if a sale of DSI occurs and results in $4 million net
proceeds, or we elect to increase the interest rate by 1% during the extension
period. Upon closing a sale of DSI, we would be required to make a payment to
the Bank Group to permanently reduce the credit facility. The payment would be
the greater of $4 million or 85% of the net sale proceeds as defined. Under the
amended facility, the direct borrowings limit will be permanently reduced by
future required principal repayments as follows:
o $3 million on September 30, 2002;
o $2.25 million on December 31, 2002 and March 31, 2003;
o $2.5 million on June 30, 2003; and
o $2.5 million on September 30, 2003 (if maturity date is extended).
If we were to only remit payments in total equal to the scheduled principal
repayments through maturity at June 30, 2003, the unpaid balance would be $39.1
million. Our credit facility expires on June 30, 2003, although we have options
to extend the maturity to December 31, 2003. In 2003, we will be required to
either repay any remaining principal or refinance the credit facility. We
believe we will be able to refinance the facility at that time, although there
can be no assurances that such financing will be available on terms acceptable
to us, if at all.
The amended facility bears interest at a base rate equal to the higher of a) the
annual rate of interest announced from time to time by Fleet National Bank as
its best rate, or b) one-half of one percent above the Federal Funds Effective
Rate, for the portion of the facility equal to a Formula Borrowing Base ("FBB").
The FBB equals 80% of eligible accounts, which include U.S. and Canadian
accounts receivable. The rate of interest is three percentage points higher than
the base rate for the facility balance outstanding in excess of the FBB.
Interest is due and payable monthly in arrears. The interest rate was 4.75% for
the FBB portion and 7.75% for the excess portion at June 30, 2002. At June 30,
2002, the FBB was $15.9 million and the excess of borrowings over the FBB was
$17.6 million.
The credit facility is secured by virtually all Anacomp assets and 65% of the
capital stock of our foreign subsidiaries. The facility contains covenants
relating to limitations on the following:
o capital expenditures;
o additional debt;
o open market purchases of our common stock;
o mergers and acquisitions; and
o liens and dividends.
The credit facility also is subject to minimum EBITDA, interest coverage and
leverage ratio covenants. In addition, we are required to remit to the Bank
Group the net proceeds of any capital asset sale.
In connection with the facility amendment, we paid a fee of $0.8 million that
has been capitalized, is included in "Other assets" in the accompanying
Condensed Consolidated Balance Sheet at June 30, 2002, and is being amortized
over the remaining term of the facility.
From July 1, 2002 to August 14, 2002 we made $1.8 million of additional
non-scheduled cash payments to reduce the outstanding facility balance to $ 31.7
million. As of August 14, 2002 we have $16.6 million of borrowing capacity until
the scheduled September 30, 2002 direct borrowing limit reduction of $3 million.
Note 5. Senior Subordinated Notes
The Predecessor Company had outstanding $310 million of publicly traded 10-7/8%
senior subordinated notes and related accrued interest of $52.3 million at
October 19, 2001. As detailed in Note 1, the notes and related accrued interest
were extinguished in the reorganization. The accompanying Condensed Consolidated
Statement of Operations for the period ended December 31, 2001 includes
approximately $1.7 million of interest expense on the notes through October 19,
2001, the date we filed for bankruptcy. Had interest on the senior subordinated
notes continued to accrue beyond the October 19, 2001 bankruptcy filing date, we
would have recognized an additional $6.9 million in interest expense through
December 31, 2001.
Note 6. Income Taxes
Our provision for income taxes consists of the following:
Reorganized
Company Predecessor Company
______________ _______________________________________
Six months Three months Nine months
ended ended ended
(in thousands) June 30, 2002 December 31, 2001 June 30, 2001
______________ __________________ ______________
Federal......................... $ 185 $ --- $ ---
State........................... 28 10 30
Foreign......................... 1,067 440 1,145
______________ __________________ ______________
$ 1,280 $ 450 $ 1,175
============== ================== ==============
Due to our reorganization, we have Cancellation of Debt ("COD") income estimated
to be $265.3 million. As a result, we will be required to reduce, for federal
income tax purposes, certain tax attributes, including net operating loss
carryforwards and property basis by the amount of the COD. These actual
adjustments will be determined at the end of our fiscal year ending September
30, 2002. A deferred tax liability has been recorded for COD, book intangible
assets and certain temporary differences. A deferred tax asset has been recorded
for tax goodwill in excess of book reorganization asset, certain temporary
differences, net operating losses and other tax basis carryforwards. We have
recorded a valuation allowance in the amount of $19 million in order to fully
offset the net deferred tax asset. At June 30, 2002, our most significant
deferred tax assets and liabilities relate to temporary differences for COD and
net operating losses. These timing differences are expected to be realized,
offset and reversed with no impact on the net value of the deferred tax asset at
September 30, 2002.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized in future years. Management periodically reviews the
need for valuation allowances based upon our results of operations.
Note 7. Restructuring Activities
In fiscal year 2002, we recorded a restructuring charge of $2.1 million related
to the reorganization of our operations from two business units to one entity.
We reorganized our workforce by combining the field organizations of Document
Solutions and Technical Services into one organization, establishing an
executive level position to oversee all sales and marketing activities and
implementing a single support group for our data centers, Web Presentment
operations, field services operations and process quality. The restructuring
charges included $1.6 million in employee severance and termination-related
costs for approximately 100 employees, all of whom will leave the company by
September 30, 2002. The severance payments will be completed by the second
quarter of fiscal 2003. The restructuring charges also include approximately
$0.4 million for the closure of a data center for which payments will continue
until the lease expires in July 2004. Of the $0.4 million, $69 thousand
represents a non-cash charge to write off the net book value of leasehold
improvements located in the closed data center. As a result of the
restructuring, we anticipate annual savings of approximately $7.1 million, or
approximately $0.6 million monthly. We anticipate the phase-in of cost savings
to begin in the fourth quarter of fiscal year 2002.
In the second and third quarters of 2000, we effected a reorganization of our
workforce in the United States and Europe along our lines of business,
reorganized parts of our corporate staff and phased out our manufacturing
operations. To accomplish the reorganization of our workforce and corporate
staff, we reassessed job responsibilities and personnel requirements in each of
our continuing business units and corporate staff. The assessment resulted in
substantial permanent personnel reductions and involuntary terminations
throughout our organization, primarily in our European operations and our
corporate and manufacturing staff. We recorded restructuring charges of $14.6
million related to these actions. Employee severance and termination-related
costs were for approximately 300 employees, all of whom have left the company;
we have paid all related severance. Other fees relate to professional fees
associated with negotiations to terminate facility leases and other costs
associated with implementation of our new business unit structure and the
reorganization of our business units into separate entities. We have also paid
these fees. In the first quarter of fiscal year 2002, we vacated our Japanese
facility, terminated substantially all related personnel and undertook other
procedures to wind down our Japanese subsidiary. As a result, we reversed
approximately $1 million of fiscal 2000 business restructuring reserves due to
favorable circumstances related to the shutdown. Our closure costs to vacate the
facility in Japan, costs to fulfill our contract obligations and severance and
related professional costs up to that time were less than we anticipated at the
time we recorded the accrual. As of June 30, 2002, the remaining liability
related to international facility costs is expected to be paid by the end of
December 2003, and remaining contractual obligation costs of the Japanese
subsidiary are expected to be paid by the end of September 30, 2002.
In fiscal 1998, we recorded restructuring charges of $8.5 million and reserves
of $15.2 million related to the First Image acquisition. This liability has been
fully paid as of June 30, 2002.
The restructuring reserves are included as a component of "Other accrued
liabilities" in the accompanying Condensed Consolidated Balance Sheets.
The following tables present the activity and balances of the restructuring
reserves from September 30, 2001 to June 30, 2002 (in thousands):
Fiscal Year 2002 Restructuring
____________________________________________________________________________________________
Payments and
Reorganized Company December 31, 2001 Adjustments Deductions June 30, 2002
_____________________ _________________ ____________ ______________ __________________
Employee Separations $ --- $ 1,638 $ (692) $ 946
Facility Closing --- 443 (69) 374
_________________ ____________ ______________ __________________
$ --- $ 2,081 $ (761) $ 1,320
================= ============ ============== ==================
Fiscal Year 2000 Restructuring
____________________________________________________________________________________________
Reorganized Company December 31, 2001 Adjustments Cash Payments June 30, 2002
_____________________ _________________ ____________ ______________ __________________
Facility Closing $ 120 $ --- $ (15) $ 105
Contract Obligations 170 --- (24) 146
_________________ ____________ ______________ __________________
$ 290 $ --- $ (39) $ 251
================= ============ ============== ==================
____________________________________________________________________________________________
September 30, December 31,
Predecessor Company 2001 Adjustments Cash Payments 2001
______________________ _________________ ____________ ______________ __________________
Employee Separations $ 269 $ (214) $ (55) $ ---
Facility Closing 281 (149) (12) 120
Contract Obligations 511 (307) (34) 170
Professional and Other 313 (313) --- ---
_________________ ____________ ______________ __________________
$ 1,374 $ (983) $ (101) $ 290
================= ============ ============== ==================
Fiscal Year 1998 Restructuring
____________________________________________________________________________________________
Reorganized Company December 31, 2001 Adjustments Cash Payments June 30, 2002
______________________ _________________ ____________ ______________ __________________
Facility Closing $ 160 $ --- $ (160) $ ---
_________________ ____________ ______________ __________________
160 --- $ (160) $ ---
================= ============ ============== ==================
September 30, December 31,
Predecessor Company 2001 Adjustments Cash Payments 2001
______________________ _________________ ____________ ______________ __________________
Facility Closing $ 276 $ (39) $ (77) $ 160
Other 10 (10) --- ---
_________________ ____________ ______________ __________________
$ 286 $ (49) $ (77) $ 160
================= ============ ============== ==================
Note 8. Inventories
Inventories consist of the following:
June 30, September 30,
2002 2001
(Reorganized (Predecessor
Company) Company)
(in thousands) (Unaudited)
__________________________________________________ _____________ _________________
Finished goods, including purchased film........ $ 2,406 $ 3,249
Consumable spare parts and supplies............. 1,687 1,688
_____________ _________________
$ 4,093 $ 4,937
============= =================
Note 9. Comprehensive income or loss
Comprehensive income (loss) consists of the following components:
Reorganized Predecessor
Company Company
______________ _______________
Three months Three months
ended ended
(in thousands) June 30, 2002 June 30, 2001
_____________________________ ______________ _______________
Net income (loss)............ $ 7 $ (12,753)
Foreign currency
translation adjustment..... 2,087 (281)
______________ _______________
Comprehensive income (loss).. $ 2,094 $ (13,034)
============== ===============
Reorganized
Company Predecessor Company
_______________ ____________________________________
Six months Three months Nine months
ended ended ended
(in thousands) June 30, 2002 December 31, 2001 June 30, 2001
_____________________________ _______________ __________________ ______________
Net income (loss)............ $ 910 $ 277,360 $ (36,136)
Realized gain on currency
swap contracts............. --- --- 763
Foreign currency
translation adjustment..... 2,003 --- (1,529)
_______________ __________________ ______________
Comprehensive income (loss).. $ 2,913 $ 277,360 $ (36,902)
=============== ================== ==============
Note 10. Income Per Share
Basic income per share is computed based upon the weighted average number of
shares of Anacomp's common stock outstanding during the period. For the six
months ended June 30, 2002, potentially dilutive securities include 783,077
outstanding warrants to purchase Class B Common Stock which were issued as part
of the reorganization. For the three and six-month periods ended June 30, 2002,
these warrants were excluded from diluted income per share as they were
anti-dilutive using the treasury stock method. Basic and diluted net loss for
periods prior to the six months ended June 30, 2002 have not been presented as
they are not comparable to subsequent periods due to the implementation of Fresh
Start Reporting (see Note 3).
Note 11. Recent Accounting Pronouncements
Pursuant to Statement of Position 90-7, Anacomp has implemented the provisions
of accounting principles required to be adopted within twelve months of the
adoption of Fresh Start Reporting as of December 31, 2001, including the
following standards, however excluding SFAS No. 146, which is not effective
until after December 31, 2002:
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and which
supercedes SFAS No. 121. SFAS No. 144 also reduces the threshold for
discontinued operations reporting to a component of an entity rather than a
segment of a business as required under Accounting Principles Bulletin No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The adoption of SFAS No. 144 on December 31, 2001 did
not have a material impact on our financial position or results of operations.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The principal difference between Statement 146 and Issue
94-3 relates to Statement 146's requirements for recognition of a liability for
a cost associated with an exit or disposal activity. Statement 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for an
exit cost as generally defined in Issue 94-3 was recognized at the date of an
entity's commitment to an exit plan. A fundamental conclusion reached by the
FASB in this Statement is that an entity's commitment to a plan, by itself, does
not create an obligation that meets the definition of a liability. Therefore,
this Statement eliminates the definition and requirements for recognition of
exit costs in Issue 94-3.
This Statement also establishes that fair value is the objective for initial
measurement of the liability. Severance pay under Statement 146, in many cases,
would be recognized over time rather than up front. The FASB decided that if the
benefit arrangement requires employees to render future service beyond a
"minimum retention period" a liability should be recognized as employees render
service over the future service period even if the benefit formula used to
calculate an employee's termination benefit is based on length of service. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. We
anticipate adopting SFAS No. 146 in the second quarter of fiscal year 2003 and
do not expect it to have a material impact on our financial position or results
of operations.
Note 12. Operating Segments
Our business is focused in the document management industry. We have managed our
business through two operating units:
o Document Solutions, provides document-management outsource services as
follows;
o COM - Computer Output to Microfiche services, and
o Digital - primarily includes Web Presentment services, CD
document services and integrated system solutions,
o Technical Services, provides equipment maintenance services for
Anacomp as well as third-party manufactured products, and provides
Computer Output to Microfiche systems and micrographic supplies;
o COM - sales of systems and micrographic supplies and professional
services for Anacomp manufactured systems, and
o Digital/renewal - includes maintenance and professional services
for third party manufactured products (multi-vendor service -
MVS).
The Central Services category consists of unallocated corporate expenses
including accounting, legal, risk management and insurance, human resources,
executive, investor relations and information resources organizations. Also
reported as Central Services are centralized operating costs for our operating
units including purchasing, logistics, and inventory management.
Effective October 1, 2001, we completed the integration of our former docHarbor
business unit into the Document Solutions group. Results for docHarbor
previously reported separately have been combined with Document Solutions.
Management evaluates operating unit performance based upon EBITDA (earnings
before interest, other income, reorganization items, asset impairment and
restructuring charges, taxes, depreciation and amortization, and extraordinary
items). Information about our operations by operating segment is as follows:
For the three months ended June 30:
Document Technical Central
(in thousands) Solutions Services Services Consolidated
_______________________ _____________ ______________ ______________ ______________
2002 (Reorganized Company)
Digital/renewal revenue $ 18,292 $ 6,885 $ --- $ 25,177
COM revenue 22,520 16,070 --- 38,590
Intersegment revenue --- 1,958 (1,958) ---
_____________ ______________ ______________ ______________
Total revenue 40,812 24,913 (1,958) 63,767
EBITDA 6,507 3,989 (3,495) 7,001
_____________________________________________________________________________________________
2001 (Predecessor Company)
Digital/renewal revenue $ 15,824 $ 5,894 $ --- $ 21,718
COM revenue 28,510 22,800 --- 51,310
Intersegment revenue --- 2,547 (2,547) ---
_____________ ______________ ______________ ______________
Total revenue 44,334 31,241 (2,547) 73,028
EBITDA 3,001 7,116 (5,007) 5,110
The following is a reconciliation of consolidated EBITDA to income (loss) before
income taxes:
Reorganized Predecessor
Company Company
For the three months ended June 30, 2002 2001
________________________________________ _____________ ____________
EBITDA.................................. $ 7,001 $ 5,110
Depreciation and amortization........... (4,488) (7,778)
Other income and expense, net........... (426) (11,083)
Restructuring (charges) credits......... (2,081) 1,207
Other................................... 1 ---
_____________ ____________
Income (loss) before income taxes........ $ 7 $ (12,544)
============= ============
For the nine months ended as noted:
Document Technical Central
(in thousands) Solutions Services Services Consolidated
_________________________ ___________ __________ _________ _____________
2002 (6 months ended June 30, 2002 - Reorganized Company)
Digital/renewal revenue $ 37,027 $ 13,343 $ --- $ 50,370
COM revenue 47,262 33,778 --- 81,040
Intersegment revenue --- 3,775 (3,775) ---
___________ __________ _________ _____________
Total revenue 84,289 50,896 (3,775) 131,410
EBITDA 14,553 7,815 (7,279) 15,089
__________________________________________________________________________________________
2002 (3 months ended December 31, 2001 - Predecessor Company)
Digital/renewal revenue $ 17,736 $ 6,552 $ --- $ 24,288
COM revenue 25,441 18,295 --- 43,736
Intersegment revenue --- 2,554 (2,554) ---
___________ __________ _________ _____________
Total revenue 43,177 27,401 (2,554) 68,024
EBITDA 7,538 4,911 (3,954) 8,495
2001 (9 months ended June 30, 2001 - Predecessor Company)
Digital/renewal revenue 48,823 16,500 --- 65,323
COM revenue 93,193 76,856 --- 170,049
Intersegment revenue --- 8,111 (8,111) ---
___________ __________ _________ _____________
Total revenue 142,016 101,467 (8,111) 235,372
EBITDA 18,262 25,143 (23,133) 20,272
The following is a reconciliation of consolidated EBITDA to income (loss) before
income taxes and extraordinary gain on extinguishment of debt:
Reorganized
Company Predecessor Company
_____________ __________________________________
Six months Three months Nine months
ended ended ended
June 30, 2002 December 31, 2001 June 30, 2001
_____________ _________________ ______________
EBITDA............................... $ 15,089 $ 8,495 $ 20,272
Depreciation and
amortization....................... (9,123) (7,194) (23,732)
Other income and expense,
net................................ (1,695) (3,180) (32,708)
Reorganization items................. --- 13,328 ---
Restructuring (charges)
credits............................ (2,081) 1,032 1,207
_____________ _________________ ______________
Income (loss) before income
taxes and extraordinary gain
on extinguishment of debt............ $ 2,190 $ 12,481 $ (34,961)
============= ================= ==============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report, including the following section regarding "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
constitutes "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Quarterly Report. Additionally, statements concerning future matters such
as our future plans and operations, sales levels, liquidity needs and other
statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this Quarterly Report reflect the good
faith and judgment of our management, such statements can only be based on facts
and factors of which we are currently aware. Consequently, forward-looking
statements are inherently subject to risks and uncertainties. Our actual
results, performance, and achievements may differ materially from those
discussed in or anticipated by the forward-looking statements. Factors that
could cause or contribute to such differences in results and outcomes include
without limitation those discussed under the heading "Risk Factors" below, as
well as those discussed elsewhere in this Quarterly Report. We encourage you to
not place undue reliance on these forward-looking statements, which speak only
as of the date of this Quarterly Report. We undertake no obligation to revise or
update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Quarterly Report. We
encourage you to carefully review and consider the various disclosures made in
this Quarterly Report, which attempt to advise interested parties of the risks
and factors that may affect our business, financial condition, results of
operations and prospects. Forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause our actual
results, performance or achievements, or industry results, to differ materially
from any future results, performance or achievements expressed or implied by
forward-looking statements. Risks, uncertainties and other important factors
include, among others:
o general economic and business conditions;
o industry trends and growth rates;
o industry capacity;
o competition;
o future technology;
o raw materials costs and availability;
o currency fluctuations;
o the loss of any significant customers or suppliers;
o changes in business strategy or development plans;
o litigation issues;
o successful development of new products;
o anticipated financial performance and contributions of our products
and services;
o availability, terms and deployment of capital;
o ability to meet debt service obligations;
o availability of qualified personnel;
o changes in, or the failure or inability to comply with, government
regulations; and
o other factors referenced in this report and in other public filings
including our Form 10-K for the year ended September 30, 2001 and Form
S-1/A filed on June 12, 2002.
Overview and Recent Events
Events Leading Up to Our Bankruptcy in 2001
Our business and revenues have declined in recent years. Two primary factors led
to the deterioration of our financial condition prior to our bankruptcy in 2001:
(a) an erosion of the core COM (Computer Output to Microfiche) business; and (b)
heavy investment in Web-based digital technology.
We have established ourselves as one of the world's leading providers of COM
equipment. In fiscal year 1999, 83% of our total revenues were COM-related and
totaled $368.6 million; subsequently, in fiscal years 2000 and 2001, COM
revenues declined to 71% and 69%, or $273 million and $211.2 million,
respectively, of our total revenues. Organizations increasingly want instant,
reliable access to information delivered via the Internet, intranet or
extranets, for use with desktop browsers. This trend is leading many
organizations to re-evaluate their document-management requirements, causing a
shift away from microfiche and into digital technology.
In response to this shift in technology, Anacomp made a significant commitment
to develop storage and retrieval solutions through acquisitions and heavy
investments in research and development. Our engineering, research and
development expenses totaled $7.2 million in fiscal year 2001, $10.1 million in
fiscal year 2000 and $10 million in fiscal year 1999. In August of 1999, we
purchased Litton Adesso Software, Inc. for $17 million and incurred
approximately $1.6 million of additional costs to further develop acquired
software as the technology platform for docHarbor, our Web-based product
offering. This emerging operation reported a negative EBITDA of $25 million in
fiscal 2000 and negative EBITDA of $9 million in fiscal 2001. Substantially all
of the funds invested in the docHarbor business unit were obtained by borrowing
against our Prepetition Credit Agreement (senior secured revolving credit
facility).
The combined impact of the declining COM revenues and increased costs related to
docHarbor created a liquidity crisis for us, which resulted in default on our
Prepetition Credit Agreement. Beginning October 1, 2000, we did not make
scheduled semi-annual $17 million interest payments to the holders of our $310
million outstanding notes (10-7/8% senior subordinated notes).
Our revenues, operating results, cash flows and liquidity were also negatively
impacted by a number of other factors during fiscal year 2001, including charges
for the settlement of legal matters, professional and advisory costs related to
the restructuring of our notes, and costs associated with preparations for a
potential sale of all or parts of our European document-management business,
known as Document Solutions International ("DSI").
We reported a loss of $47.5 million and positive cash flows from operations
totaling $18.5 million (including non-payment of accrued interest of
approximately $34 million) during fiscal year 2001. At September 30, 2001, we
had a working capital deficiency of $394.3 million (including $310 million in
senior subordinated notes that were classified as current and $51 million in
related accrued interest) and a stockholders' deficit amounting to $277.9
million.
Our 2001 Bankruptcy
On October 19, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code, together with a prepackaged plan of
reorganization (the "Plan") with the U.S. Bankruptcy Court for the Southern
District of California. The U.S. Bankruptcy Court confirmed the Plan on December
10, 2001, and we emerged from bankruptcy effective December 31, 2001.
The primary benefits resulting from our bankruptcy were the elimination of $310
million of debt and the related annual interest expense of approximately $34
million. Additionally, our credit facility was amended such that we cured
previous events of default and we continue to have the ability to borrow under
the credit facility. Borrowings under the facility are subject to revised terms
and restrictions, and we are required to make mandatory quarterly payments that
reduce the borrowing base of the credit facility.
Under the plan of reorganization, our publicly traded 10-7/8% senior
subordinated notes, accrued interest related to the notes, and our existing
common stock were canceled and exchanged for shares of our new common stock. New
Class A Common Stock was distributed to the holders of the notes. New Class B
Common Stock was distributed to holders of our existing common stock and is
subject to additional dilution, as provided for in the plan of reorganization.
Also as a result of the confirmation of our plan of reorganization, the
following occurred:
o all unexercised options were canceled and our prior stock option plans
were terminated;
o executory contracts were assumed or rejected;
o trade creditors were paid in the ordinary course of business and were
not impaired;
o a new slate of directors was appointed to the Board of Directors;
o a total of 403,403 shares of new Class A Common Stock were authorized
for use in the establishment of new stock option plans; and
o our senior secured revolving credit facility was amended.
Under bankruptcy law, an executory contract is an agreement between a debtor and
third party under which, as of the date of a debtor's Chapter 11 petition,
material performance on the agreement remains due from both the debtor and
non-debtor party, such that the failure of either side to perform its
obligations under the agreement would excuse the other party from further
performance. The Bankruptcy Code permits a Chapter 11 debtor to assume (i.e.,
agree to continue to be bound both during the Chapter 11 case and following
emergence) or reject (breach and no longer be bound during the Chapter 11 case
or thereafter) any executory contract. We assumed all of our executory contracts
under our confirmed plan of reorganization except one, a nonresidential lease of
real property.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and our results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts, inventories, intangible assets, income taxes,
restructuring and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies are as follows:
o revenue recognition;
o estimating valuation allowances and accrued liabilities, including the
allowance for doubtful accounts, inventory valuation and assessments
of the probability of the outcomes of our current litigation and
environmental matters;
o accounting for income taxes; and
o valuation of long-lived, intangible and reorganization assets.
Revenue Recognition. We record revenues from sales of products and services or
from leases of equipment under sales-type leases based on shipment of products
(and transfer of risk of loss), commencement of the lease, or performance of
services. Under sales-type leases, we record as revenue the present value of all
payments due under the lease, charge the cost of sales with the book value of
the equipment plus installation costs, and defer and recognize future interest
income over the lease term. We recognize operating lease revenues during the
applicable period of customer usage. We recognize revenue from maintenance
contracts ratably over the period of the related contract. Amounts billed in
advance of our performing the related services are deferred and recognized as
revenues as they are earned.
We recognize contract revenue for the development and implementation of document
services solutions under contracts over the contract period based on output
measures as defined by deliverable items identified in the contract. We make
provisions for estimated losses on contracts, if any, during the period when the
loss becomes probable and can be reasonably estimated.
In accordance with SOP 97-2, "Software Revenue Recognition," we recognize
revenues from software license agreements currently, provided that all of the
following conditions are met:
o a non-cancelable license agreement has been signed;
o the software has been delivered and there are no material
uncertainties regarding customer acceptance;
o collection of the resulting receivable is deemed probable and the risk
of concession is deemed remote; and
o no other significant vendor obligations exist
For contracts with multiple obligations, we unbundled the respective components
to determine revenue recognition using vendor-specific objective evidence.
Allowance for doubtful accounts, inventory valuations, litigation and
environmental matters. We must make estimates of the uncollectability of our
accounts receivable. When evaluating the adequacy of the allowance for doubtful
accounts, we specifically analyze accounts receivable as well as historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms. Our accounts receivable
balance was $40 million, net of allowance for doubtful accounts of $4.2 million,
as of June 30, 2002.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than management projects, we may
need to write down additional inventory.
We estimate ranges of liability related to pending litigation based on claims
for which we can determine the probability of loss and estimate the amount and
range of loss. When an estimate of loss is deemed probable we record our best
estimate of the expected loss or the minimum estimated liability related to
those claims, where there is an estimable range of loss. Because of the
uncertainties related to both the outcomes and ranges of loss on currently
pending litigation, we have not accrued for any litigation losses as of June 30,
2002. As additional information becomes available, we will assess the potential
liability related to our pending litigation and revise our estimates as
necessary. Such revisions in our estimates of the potential liability could
materially impact our results of operations and financial position.
Xidex Corporation, a company which we acquired in 1988, was designated by the
United States Environmental Protection Agency ("EPA") as a potentially
responsible party for investigatory and cleanup costs incurred by state and
federal authorities involving locations included on a list of EPA's priority
sites for investigation and remedial action under the federal Comprehensive
Environmental Response, Compensation, and Liability Act. At June 30, 2002, we
have an estimated EPA liability for cleanup costs for the aforementioned
locations and other sites totaling $1.2 million. During fiscal 2001,we recorded
a $1.0 million reduction to our EPA liability previously estimated and accrued
upon release from certain further clean-up activity. Remedial action required by
the EPA may exceed our current estimates and reserves and we may incur
additional expenses related to environmental clean-up.
Accounting for income taxes. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax liability together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. The net deferred tax
asset as of June 30, 2002 was zero, net of a valuation allowance of $19 million,
due to uncertainties related to our ability to utilize our net deferred tax
assets before they expire. The valuation allowance is based on our estimates of
taxable income by jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or we adjust these estimates in future periods we could
materially impact our financial position and results of operations.
The tax benefits of pre-reorganization net deferred tax assets will be reported
first as a reduction of the reorganization asset and then as a reduction to
non-current intangible assets arising from the reorganization, and finally as a
credit to stockholders' equity. These tax benefits will not reduce future income
tax expense for financial reporting purposes.
Valuation of long-lived, intangible and reorganization assets. We assess the
impairment of identifiable intangibles, long-lived assets and reorganization
value in excess of identifiable assets annually or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include the
following:
o significant underperformance relative to historical trends or
projected future operating results;
o significant changes in the manner of our use of our assets or the
strategy for our overall business, including potential asset
dispositions;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets and
reorganization value in excess of identifiable net assets may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk
inherent in our current business model. Net intangible assets, long-lived
assets, and reorganization value in excess of identifiable assets amounted to
$114.5 million as of June 30, 2002.
Our enterprise value of $150 million before consideration of debt after
reorganization at December 31, 2001 was determined based on the consideration of
many factors and various valuation methods, including:
o discounted cash flow analysis;
o selected publicly-traded company market multiples;
o selected acquisition transaction multiples; and
o applicable ratios and valuation techniques believed by management to
be representative of our business and industry.
The cash flows valuation utilized five-year projections assuming a weighted
average cost of capital rate of approximately 13.5%. A terminal value was
determined using a multiple of our estimated fifth year earnings before
interest, other income, reorganization items, asset impairment and restructuring
charges, taxes, depreciation and amortization, and extraordinary items (referred
to as "EBITDA"), together with the net present value of the five-year projected
cash flows. The excess of the reorganization value over the fair value of
identifiable net assets of $73.8 million is reported as "Reorganization value in
excess of identifiable net assets" and will not be subject to future
amortization (similar to goodwill) in accordance with Statement of Financial
Accounting Standards ("SFAS")No. 142, "Goodwill and Other Intangible Assets" as
issued by the Financial Accounting Standards Board ("FASB").
For enterprise valuation purposes, we estimated our revenues and cash flows
through fiscal year 2006. We projected continued declines in COM and COM-related
revenues at a rate of approximately 20% annually and growth in digital and
multi-vendor services and product offerings. Our projections also assumed the
following:
o the elimination of our subordinated notes and related interest;
o our continuing cost reduction through consolidation of facilities and
adjustments to our labor force to maintain COM gross margin levels;
o our recent cost reduction activities and restructurings; and
o the completion of our bankruptcy and related legal and professional
costs.
The assigned fair values of the Reorganized Company and its assets and
liabilities represent significant estimates that we made based on facts and
circumstances currently available. Valuation methodologies employed in
estimating fair values also require the input of highly subjective assumptions
and predictions of future events and operations. Actual future events and
results could differ substantially from management's current estimates and
assumptions. Unfavorable changes compared to our projections used for Fresh
Start Reporting purposes (which were based on our best estimates and information
available at that time) could result in future impairments of our reorganization
asset and identifiable intangible assets which could be material.
Results of Operations
The following results of operations information includes our historical
information from prior to December 31, 2001, the effective date we emerged from
bankruptcy and is identified as results of operations of Predecessor Company.
The results of operations for the six months ended June 30, 2002 represents the
Reorganized Company after adopting Fresh Start Reporting. Due to our
reorganization and the implementation of Fresh Start Reporting, the financial
information for the Reorganized Company is not comparable to the Predecessor
Company. To facilitate a meaningful comparison of Anacomp's quarterly and
year-to-date operating performance in fiscal years 2002 and 2001, the following
discussion of results of operations on a consolidated basis is presented on a
traditional comparative basis for all periods. However, the pro forma results of
operations presented below for the nine-month period ended June 30, 2002
combines the six-month period ended June 30, 2002 on a Reorganized Company basis
with the three-month period ended December 31, 2001 on a Predecessor Company
basis. These periods and bases of accounting are not comparable and we have
presented them separately in the accompanying Condensed Consolidated Statements
of Operations.
Three Months Ended Nine Months Ended
CONSOLIDATED RESULTS OF OPERATIONS June 30, June 30,
____________________________ ________________________
2002 2001 2002 2001
(Reorganized (Predecessor (Pro Forma (Predecessor
(in thousands, unaudited) Company) Company) Basis) Company)
_____________ ____________ __________ ___________
Revenues:
Services................................. $ 51,053 $ 57,395 $ 160,511 $ 179,791
Equipment and supply sales............... 12,714 15,633 38,923 55,581
_____________ ____________ __________ ___________
63,767 73,028 199,434 235,372
_____________ ____________ __________ ___________
Cost of revenues:
Services................................. 34,755 38,610 107,070 117,626
Equipment and supply sales............... 9,446 11,796 28,865 40,167
_____________ ____________ __________ ___________
44,201 50,406 135,935 157,793
_____________ ____________ __________ ___________
Gross profit................................ 19,566 22,622 63,499 77,579
Costs and expenses:
Engineering, research and development.... 2,037 2,032 5,487 5,580
Selling, general and administrative...... 14,519 20,347 46,857 66,641
Amortization of intangible assets........ 496 2,911 3,888 8,818
Restructuring charges (credits).......... 2,081 (1,207) 1,049 (1,207)
_____________ ____________ __________ ___________
Operating income (loss)..................... 433 (1,461) 6,218 (2,253)
_____________ ____________ __________ ___________
Other income (expense):
Interest income.......................... 102 283 328 1,033
Interest expense and fee amortization.... (1,051) (10,843) (5,369) (33,065)
Other.................................... 523 (523) 166 (676)
_____________ ____________ __________ ___________
(426) (11,083) (4,875) (32,708)
_____________ ____________ __________ ___________
Income (loss) before reorganization items,
income taxes and extraordinary gain on
extinguishment of debt................... 7 (12,544) 1,343 (34,961)
Reorganization items........................ --- --- 13,328 ---
_____________ ____________ __________ ___________
Income (loss) before income taxes and
extraordinary gain on extinguishment of
debt..................................... 7 (12,544) 14,671 (34,961)
Provision for income taxes.................. --- 209 1,730 1,175
_____________ ____________ __________ ___________
Income (loss) before extraordinary gain on
extinguishment of debt................... 7 (12,753) 12,941 (36,136)
Extraordinary gain on extinguishment of
debt, net of taxes....................... --- --- 265,329 ---
_____________ ____________ __________ ___________
Net income (loss)........................... $ 7 $(12,753) $ 278,270 $ (36,136)
============= ============ ========== ===========
Our revenues, operating results, cash flows and liquidity in the first nine
months of fiscal 2002 continue to be negatively impacted by an overall decline
in our COM business. For the nine months ended June 30, 2002, we reported net
income totaling $278.3 million. This was primarily due to reorganization items
of $13.3 million and the cancellation of debt and resulting extraordinary gain
of $265.3 million. Positive cash flows provided by operations were $15.8 million
for the nine months ended June 30, 2002. At June 30, 2002, we had negative
working capital of $16.3 million, and stockholders' equity of $99.8 million. The
negative working capital is the result of the current period reclassification of
our revolving credit facility balance, due June 30, 2003, from long-term to
current. Excluding this balance, our working capital at June 30, 2002 was
positive $17.2 million.
Effective December 31, 2001, we amended our senior secured revolving credit
facility including these terms:
o a $58.9 million limit, with a $53.1 million sublimit for direct
borrowing and a $5.8 million letter of credit sublimit;
o certain restrictions on our operations as well as scheduled principal
repayments;
o an interest rate that is subject to reduction as the periodic
scheduled principal repayments occur; and
o scheduled maturity of June 30, 2003, which may be extended to December
31, 2003 under certain conditions.
In May 2001, we announced our intention to sell all or parts of our European
document-management business, Document Solutions International (referred to as
DSI). Approximately $3.9 million was spent for restructuring, consulting and
severance expenses in fiscal year 2001 in preparation for a potential sale of
DSI. Revenues from DSI were $40.3 million, $11 million and $22.1 million, or
13%, 16% and 17% of total Anacomp revenues in fiscal year 2001, in the
three-month period ended December 31, 2001 and in the six-month period ended
June 30, 2002, respectively.
A sale of all of DSI is not currently planned; however, we continue to exercise
our reasonable best efforts to sell portions of DSI. Any such eventual sale is
subject to approval by the Bank Group and we will be required to remit proceeds
from any sale to pay down our senior credit facility. In the third quarter of
fiscal 2002, we sold portions of DSI generating proceeds of approximately $0.3
million. Other portions of DSI could also be sold; however, the execution,
timing, likelihood and amount of net proceeds of any such potential sale are
uncertain and we are continuing the operations of DSI in its normal course of
business. Accordingly it is not possible to predict with accuracy the potential
impact that a sale of portions of DSI would have on future results; however,
management expects that such a sale would generate funds that would be used to
pay down the outstanding credit facility balance. Our International Technical
Services business is not affected by this potential transaction.
Three Months Ended June 30, 2002 vs. Three Months Ended June 30, 2001
General. We reported net income of $7 thousand for the three months ended
June 30, 2002, compared to a net loss of $12.8 million for the three months
ended June 30, 2001. Net income in the current quarter reflects both the ongoing
benefits of completion of our financial restructuring, including the
cancellation of our senior subordinated notes along with related accrued
interest, as well as the continued decline in COM-related revenue and the cost
of restructuring charges incurred in this quarter. The prior period net loss
included interest expense of $10.8 million versus $1.1 million in the current
quarter, amortization of intangible assets of $2.9 million versus $0.5 million
in the current quarter, and a restructuring credit of $1.2 million compared to a
restructuring charge of $2.1 million in the current quarter. Also contributing
to the difference between the current quarter results and results from the prior
period is the continuing decline in COM-related services, systems and supplies.
Although COM still holds value for customers as a long-term storage medium, many
are finding more efficient solutions to their archive and storage needs through
our newer Web-based and other digital products and services.
Revenues. Our revenues of $63.8 million for the three months ended June 30,
2002, represent a decrease of 13% from the $73 million for the three months
ended June 30, 2001. The decrease was composed of a $12.7 million decline in
COM-related revenues offset in part by a $3.5 million increase in digital and
renewal revenues. We expect that COM revenues will continue to decline during
the remainder of this fiscal year as well as in future years and that digital
and renewal revenues will continue to grow.
Document Solutions revenues of $40.8 million represent a decrease of 8% from
$44.3 million in the prior year period. COM-related revenues were $22.5 million,
a decrease of 21% from $28.5 million in the prior year period. This decrease was
primarily due to decreased volume in our COM service centers. Overall, digital
and renewal revenues increased $2.5 million, or 16%, over the prior year period.
Web Presentment services revenues increased $1.5 million, or 63%, over the prior
year period as we continue to add new customers. CD Document services revenues
decreased $0.7 million, or 9%, from the prior quarter. The remaining increase in
digital and renewal revenues was due primarily to revenues from an international
image capture project.
Technical Services revenues of $23 million decreased 20% from the $28.7 million
in the prior year period. Compared to the prior year period, systems and
supplies revenue declined $4.6 million, or 32%, and COM-related professional
services revenues declined $2.2 million, or 26%, as a result of the continued
decline for and use of COM systems. This was partially offset by growth
(increase of $1.1 million, or 19%) in our multi-vendor service (MVS) revenues
(services provided for products manufactured by other companies) over the prior
year period. MVS professional services revenues exceeded COM professional
services revenues for the first time this quarter.
Gross Margins. Our gross margin decreased from $22.6 million for the three
months ended June 30, 2001, to $19.6 million for the three months ended June 30,
2002, but as a percentage of revenues remained steady at 31% for both periods.
Document Solutions gross margin, at 37% of revenues, increased from the 32%
reported for the prior year period; in dollars the Document Solutions gross
margin increased from $14.3 million in the prior quarter to $14.9 million in the
current quarter.
Technical Services gross margin as a percentage of revenues decreased from 29%
in the prior year to 20% for the quarter ended June 30, 2002, and in dollars
decreased from $8.4 million to $4.7 million. The decrease in Technical Services
gross margin from the prior year period was primarily the result of the current
year decline in COM-related professional services revenues.
We expect that our recent restructuring activities will reduce direct costs
(primarily labor-related) approximately $3.6 million annually, with a phase-in
of cost savings to begin in the fourth quarter of fiscal 2002.
Engineering, Research and Development. Engineering, research and
development expense remained essentially flat at $2.0 million for the three
months ended June 30, 2002 and 2001. These costs represented 3% of total
revenues for the three months ended June 30, 2002 and 2001. These expenses will
not necessarily have a direct or immediate correlation to revenues. We continue
to build and support our outsource service solutions base and corresponding
internet and digital technologies.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses decreased from $20.3 million for the three months ended June
30, 2001, to $14.5 million for the three months ended June 30, 2002. The prior
year expense included $2.3 million in legal, professional and severance costs
associated with preparations for a sale of DSI and $2.1 million in legal
professional and advisory costs related to the restructuring of our notes,
compared to only $0.3 million incurred in the current year period. The remainder
of the reduction in SG&A costs is primarily attributable to the benefits of the
integration of the former docHarbor business unit into the Document Solutions
business unit, begun in May 2001. We expect that our recent restructuring
activities will reduce SG&A costs approximately $3.5 million annually, with a
phase-in of cost savings to begin in the fourth quarter of fiscal 2002.
Amortization of Intangible Assets. Amortization of intangible assets
decreased from $2.9 million during the three months ended June 30, 2001 to $0.5
million in the current three-month period. Prior year amortization primarily
represented amortization of goodwill related to prior year acquisitions. The
remaining goodwill balance at December 31, 2001 was eliminated upon our adoption
of Fresh Start Reporting. The current period expense represents amortization of
intangible assets related to our technology, intellectual property, production
software, and customer contracts and relationships that have been recorded as
part of the reorganization and Fresh Start Reporting process. The
"Reorganization asset in excess of identifiable assets" of $73.8 million
recorded in Fresh Start Reporting is not an amortizing asset.
Restructuring Charges and Credits. In fiscal year 2002, we recorded a
restructuring charge of $2.1 million related to the reorganization of our
operations from two business units to one entity. The reorganization of the
workforce consisted of combining the field organizations of Document Solutions
and Technical Services into one organization, the establishment of an executive
level position to oversee all sales and marketing activities and a single
support group for our data centers, Web Presentment operations, field services
operations and process quality. The restructuring charges included $1.6 million
in employee severance and termination-related costs for approximately 100
employees, all of whom will leave the company by September 30, 2002. The
restructuring charges also include approximately $0.4 million for the closure of
a data center for which payments will continue until the lease expires in July
2004. Of the $0.4 million, $69 thousand represents a non-cash charge to write
off the net book value of leasehold improvements located in the closed data
center. As a result of the restructuring we anticipate annual savings of
approximately $7.1 million, or approximately $0.6 million monthly. We anticipate
the phase-in of cost savings to begin in the fourth quarter of fiscal year 2002.
In the third quarter of fiscal 2001, we reversed $1.2 million of business
restructuring reserves consisting of $0.9 million and $0.3 million from our 2000
and 1998 restructuring plans, respectively. Our 2000 restructuring plan
reversals included $0.4 million in facility closing costs and $0.5 million of
professional and other costs, consisting primarily of the following items.
In fiscal 2000, we accrued lease termination and exit costs for ten facilities
throughout the world. In England and Scotland, we were reimbursed for originally
accrued exit costs for this leased space that were reflected as a restructuring
credit in the third quarter of 2001 upon receipt of such reimbursement.
Our 2000 restructuring plan also called for one of our business units to exit a
United Kingdom facility, which we deemed to be inadequate for its operating
needs. Because of our deteriorating financial condition, our need to conserve
European cash and our inability to transfer working capital from the United
States to Europe under the terms of our Bank Group forbearance agreement, both
of which were subsequent to initiating our 2000 restructuring plan, we opted to
continue operating from this facility although the facility was not ideally
suited to our needs. This revision to our plan resulted in a benefit to our
original estimate of our restructuring costs and was recorded during the third
quarter of 2001.
In fiscal 2000, we planned to occupy substantially less space in our California
headquarters facility and estimated that a portion of the building space would
not be sublet, resulting in estimated lease losses. We were able to renegotiate
the lease prior to issuing our third quarter 2001 financial statements, with our
new lease obligation consisting only of occupied space. Accordingly, we reported
the favorable outcome in the third quarter of 2001.
Our 2000 restructuring plan estimated professional fees of approximately $1.4
million due to complex and varying legal requirements for personnel terminations
and plant closures at our multiple global facilities. We estimated these fees
based on our prior experience in exiting facilities and the comparatively
expensive cost, from a United States company perspective, of terminating
international personnel. As a result of our actual cost experience rates through
June 30, 2001, we revised our original estimate resulting in a credit to the
restructuring accrual of approximately $0.5 million.
Our 1998 restructuring plan had estimated employee separation costs based upon
notifications of classes of employees. Actual employee separation costs
completed in the third quarter of fiscal 2001 were lower than estimated, as
those personnel actually terminated had less experience and thus received less
severance than originally estimated by class.
Interest Expense. Interest expense decreased from $10.8 million for the
three months ended June 30, 2001, to $1.1 million for the three months ended
June 30, 2002. Prior year expense included three months of interest expense on
our senior subordinated notes. Current year interest expense is primarily
related to the senior secured revolving credit facility.
Provision for Income Taxes. There is no provision for income taxes in the
current three-month period. Additional foreign income tax expense for the
current three-month period was offset by reductions to the domestic income tax
provision. The provision for income taxes of $0.2 million for the quarter ended
June 30, 2001 related primarily to earnings of foreign subsidiaries.
Nine Months Ended June 30, 2002 vs. Nine Months Ended June 30, 2001
General. We reported net income of $278.3 million for the nine months ended
June 30, 2002, compared to a net loss of $36.1 million for the nine months ended
June 30, 2001. The current period income is attributable primarily to an
extraordinary gain of $265.3 million resulting from the cancellation of our
senior subordinated notes and related accrued interest and the benefit of $13.3
million in reorganization items recorded as part of the Fresh Start Reporting
process. Net loss for the nine months ended June 30, 2001 includes a substantial
interest expense component ($33.1 million versus $5.4 million in the current
nine-month period), $6.9 million in charges for the settlement of legal matters,
legal, professional and financial advisory costs related to the restructuring of
our subordinated notes, and amortization of intangible assets of $8.8 million
versus $3.9 million in the current period.
Revenues. Our revenues decreased 15% from $235.4 million for the nine
months ended June 30, 2001, to $199.4 million for the nine months ended June 30,
2002. The decrease was composed of a $45.3 million decline in COM-related
revenues offset in part by a $9.3 million increase in digital and renewal
revenues. We expect that COM revenues will continue to decline during the
remainder of this fiscal year as well as in future years.
Document Solutions revenues of $127.5 million declined 10% from the $142 million
in the prior year period. COM-related revenues of $72.7 million represented a
22% decrease from the prior year period $93.2 million. This decrease was
primarily due to decreased volume in our COM service centers. Overall, digital
and renewal revenues increased $5.9 million, or 12%, over the prior year period.
Web Presentment services revenues increased $3.7 million, or 57%, over the prior
year period. CD Document services revenue decreased $1 million, or 4%, from the
prior year period. The remaining increase in digital and renewal revenues was
due primarily to revenues from an international image capture project.
Technical Services revenues decreased 23% from the prior year period, from $93.4
million to $72 million. Compared to the prior year period, systems and supplies
revenues declined $18.4 million, or 36%, and COM-related professional services
revenues declined $6.6 million, or 25%, as a result of the continued decline for
and use of COM systems. This decline was partially offset by growth of $3.5
million, or 22%, in our multi-vendor service revenues over the prior year
period.
Gross Margins. Our gross margin as a percentage of revenue declined
slightly from 33% ($77.6 million) for the nine months ended June 30, 2001, to
32% ($63.5 million) for the nine months ended June 30, 2002.
Document Solutions gross margin, at 37% of revenues, increased from the 34%
reported for the prior year period; however, in dollars the Document Solutions
gross margin decreased from $48.2 million during the nine-month period ended
June 30, 2001, to $47.4 million in the current period.
Technical Services gross margin decreased from 32% in the prior year to 22% of
revenues for the nine months ended June 30, 2002, and in dollars decreased from
$29.4 million to $16.1 million. The decrease in Technical Services gross margin
from the prior year period was the result of the current year decline in COM
service-related revenues.
We expect that our recent restructuring activities will reduce direct costs
(primarily labor-related) approximately $3.6 million annually, with a phase-in
of cost savings to begin in the fourth quarter of fiscal 2002.
Engineering, Research and Development. Engineering, research and
development expense remained essentially flat at $5.5 million for the nine
months ended June 30, 2002 compared to $5.6 million in the prior year period.
These costs represented 3% and 2% of total revenues for the nine months ended
June 30, 2002 and 2001, respectively. These expenses will not necessarily have a
direct or immediate correlation to revenues. We continue to build and support
our outsource service solutions base and corresponding internet and digital
technologies.
Selling, General and Administrative. SG&A expenses decreased 30% from $66.6
million for the nine months ended June 30, 2001, to $46.9 million for the nine
months ended June 30, 2002. The prior year expense included $5.4 million for the
settlement of a litigation matter, $5.2 million in legal, professional and
severance costs associated with preparations for a sale of DSI and $3.5 million
in expenses for legal professional and advisory costs related to the
restructuring of our notes. Similar legal, professional and advisory costs in
fiscal year 2002, subsequent to the October 19, 2001 bankruptcy filing, were
reported separately as reorganization items and totaled $1 million. The
remainder of the reduction in SG&A costs is primarily attributable to the
benefits of the integration of the former docHarbor business unit into the
Document Solutions business unit, begun in May 2001. Our recent restructuring
activities are expected to reduce SG&A costs approximately $3.5 million
annually, with a phase-in of cost savings to begin in the fourth quarter of
fiscal 2002.
Amortization of Intangible Assets. Amortization of intangible assets
decreased from $8.8 million during the nine months ended June 30, 2001 to $3.9
million in the current nine-month period. Prior year amortization represented
primarily amortization of goodwill related to prior year acquisitions. The
remaining goodwill balance was eliminated upon our adoption of Fresh Start
Reporting. The current period expense represents only three months of goodwill
amortization (through December 31) of $2.9 million, plus $1 million in
amortization of intangible assets related to our technology, intellectual
property, production software, and customer contracts and relationships that
have been recorded as part of the reorganization and Fresh Start Reporting
process. Our "Reorganization asset in excess of identifiable assets" of $73.8
million is not an amortizing asset.
Restructuring Credits. In the third quarter of fiscal year 2002, we
recorded a restructuring charge of $2.1 million related to the reorganization of
our operations from two business units to one entity. The reorganization of the
workforce consisted of combining the field organizations of Document Solutions
and Technical Services into one organization, the establishment of an executive
level position to oversee all sales and marketing activities and a single
support group for our data centers, Web Presentment operations, field services
operations and process quality. The restructuring charges included $1.6 million
in employee severance and termination related costs for approximately 100
employees, all of whom will leave the company by September 30, 2002. The
restructuring charges also include approximately $0.4 million for the closure of
a data center for which the lease expires in July 2004. As a result of the
restructuring we anticipate annual savings of approximately $7.1 million, or
approximately $0.6 million monthly. We anticipate the phase-in of cost savings
to begin in the fourth quarter of fiscal year 2002.
In the first quarter of fiscal year 2002, we reversed $1 million of business
restructuring reserves primarily related to favorable circumstances related to
the shutdown of our Japanese subsidiary. Our closure costs to vacate our
facility in Japan, cost to fulfill our contract obligations and severance and
related professional costs up to that time were less than anticipated at the
time the accrual was recorded.
In the third quarter of fiscal 2001, we reversed $1.2 million of business
restructuring reserves consisting of $0.9 million and $0.3 million from our 2000
and 1998 restructuring plans, respectively. Our 2000 restructuring plan
reversals included $0.4 million in facility closing costs and $0.5 million of
professional and other costs, consisting primarily of the following items.
In fiscal 2000, we accrued lease termination and exit costs for ten facilities
throughout the world. In England and Scotland, we were reimbursed for originally
accrued exit costs for this leased space that were reflected as a restructuring
credit in the third quarter of 2001 upon receipt of such reimbursement.
Our 2000, restructuring plan also called for one of our business units to exit a
United Kingdom facility, which we deemed to be inadequate for its operating
needs. Because of our deteriorating financial condition, our need to conserve
European cash and our inability to transfer working capital from the United
States to Europe under the terms of our Bank Group forbearance agreement, both
of which were subsequent to initiating our 2000 restructuring plan, we opted to
continue operating from this facility although the facility was not ideally
suited to our needs. This revision to our plan resulted in a benefit to our
original estimate of our restructuring costs and was recorded during the third
quarter of 2001.
In fiscal 2000 we planned to occupy substantially less space in our California
headquarters facility and estimated that a portion of the building space would
not be sublet, resulting in estimated lease losses. We were able to renegotiate
the lease prior to issuing our third quarter 2001 financial statements, with our
new lease obligation consisting only of occupied space. Accordingly, we reported
the favorable outcome in the third quarter of 2001.
Our 2000 restructuring plan estimated professional fees of approximately $1.4
million due to complex and varying legal requirements for personnel terminations
and plant closures at our multiple global facilities. We estimated these fees
based on our prior experience in exiting facilities and the comparatively
expensive cost, from a United States company perspective, of terminating
international personnel. As a result of our actual cost experience rates through
June 30, 2001, we revised our original estimate resulting in a credit to the
restructuring accrual of approximately $0.5 million.
Our 1998 restructuring plan had estimated employee separation costs based upon
notifications of classes of employees. Actual employee separation costs
completed in the third quarter of fiscal 2001 were lower than estimated, as
those personnel actually terminated had less experience and thus received less
severance than originally estimated by class.
Interest Expense. Interest expense decreased to $5.4 million for the nine
months ended June 30, 2002 from $33.1 million for the nine months ended June 30,
2001. Current year expense included interest (approximately $1.7 million) on our
senior subordinated notes only up to October 19, 2001, the date we filed Chapter
11 bankruptcy. Prior year expense included a full nine months of interest
(approximately $25.5 million) on the notes. The remainder of expense from both
periods is related primarily to interest on the senior secured revolving credit
facility.
Reorganization Items. Reorganization items represent expenses and
adjustments resulting from our reorganization and consist of professional fees
incurred subsequent to our Chapter 11 filing totaling $1 million, fair value
adjustments made to assets and liabilities totaling $16.9 million and other
asset write-offs and settlements totaling $2.6 million (primarily related to our
extinguished debt) in Fresh Start Reporting.
Extraordinary Gain on Extingushment of Debt. Extraordinary gain on
extinguishment of debt, net of taxes, totaled $265.3 million for the nine-month
period ended June 30, 2002 as compared to none in the comparable prior year
period and resulted from our bankruptcy proceedings and emergence from Chapter
11 proceedings on December 31, 2001.
Provision for Income Taxes. In the current nine-month period, tax expense
totaling $1.7 million consists of $1.5 million related to earnings of foreign
subsidiaries and $0.2 million related to domestic operations. Increases in
foreign income tax for the current quarter were offset by reductions to the
domestic tax provision, resulting in no change in the overall income tax expense
for the quarter ended June 30, 2002. The provision for income taxes of $1.2
million for the nine months ended June 30, 2001 related primarily to earnings of
foreign subsidiaries.
Liquidity and Capital Resources
Our legacy business (COM) has declined in recent years and is forecast to
continue to decline as new technologies become available and are accepted in the
marketplace. Our ability to generate sufficient cash to fund operations and to
meet future bank requirements is dependent on successful and simultaneous
management of the decline in COM as well as the expansion of alternative
Document Solutions and Technical Services offerings. Other factors, such as an
uncertain economy, levels of competition in the document management industry,
and technological uncertainties will impact our ability to generate cash and
maintain liquidity. Although no assurances can be given, management believes
that the actions taken over the past two years, including new and enhanced
product and service offerings, company downsizing, cost control measures and the
debt restructuring from our bankruptcy have positioned us for a return to
profitability and maintenance of sufficient cash flows from operations to meet
our operating, capital and debt requirements in the normal course of business
for at least the next twelve months.
On August 24, 2001, Anacomp and Fleet National Bank, as agent, and its syndicate
of lenders (collectively, "the Bank Group") executed a Summary of Terms and
Conditions regarding amendments to the senior secured revolving credit facility.
The amended facility, which became effective December 31, 2001, included a $58.9
million limit, with a $53.1 million sublimit for direct borrowing and a $5.8
million letter of credit sublimit. In accordance with the new agreement, the
$53.1 million direct borrowing sublimit was reduced to $48.3 million as of June
30, 2002 as a result of scheduled principal repayments, issuance of a new letter
of credit, and the sale of assets. The credit limit will be subject to further
reductions as the periodic scheduled principal repayments become due. The
facility is available for new borrowings when direct borrowings are reduced
below the credit limit.
At June 30, 2002, our outstanding balance was $33.5 million (plus outstanding
letters of credit of $6.2 million). During the six months ended June 30, 2002,
we made cash payments totaling $19.6 million, which is $15.6 million greater
than our scheduled paydowns, resulting in $14.8 million of borrowing capacity
until the next scheduled September 30, 2002 direct borrowing limit reduction of
$3 million.
The maturity date of the amended facility is June 30, 2003, with an extension to
December 31, 2003 if a sale of DSI occurs and results in $4 million net
proceeds, or if we elect to increase the interest rate by 1% during the
extension period. Upon closing a sale of DSI, we would be required to make a
payment to the Bank Group to permanently reduce the credit facility. The payment
would be the greater of $4 million or 85% of the net sale proceeds as defined.
Under the amended facility, the direct borrowings limit will be permanently
reduced by future required principal repayments as follows:
o $3 million on September 30, 2002;
o $2.25 million on December 31, 2002 and March 31, 2003;
o $2.5 million on June 30, 2003; and
o $2.5 million on September 30, 2003 (if maturity date is extended).
If we were to only remit payments in total equal to the scheduled principal
repayments through maturity at June 30, 2003, the unpaid balance would be $39.1
million. Our credit facility expires on June 30, 2003, although we have options
to extend the maturity to December 31, 2003. In 2003, we will be required to
either repay any remaining principal or refinance the credit facility. We
believe we will be able to refinance the facility at that time, although there
can be no assurances that such financing will be available on terms acceptable
to the Company, if at all.
The amended facility bears interest at a base rate equal to the higher of a) the
annual rate of interest announced from time to time by Fleet National Bank as
its best rate, or b) one-half of one percent above the Federal Funds Effective
Rate, for the portion of the facility equal to the Formula Borrowing Base
("FBB"). The FBB equals 80% of eligible accounts, which include U.S. and
Canadian accounts receivable. The rate of interest is three percentage points
higher than the base rate for the facility balance outstanding in excess of the
FBB. Interest is due and payable monthly in arrears. The interest rate was 4.75%
for the FBB portion and 7.75% for the excess portion at June 30, 2002. At June
30, 2002, the FBB was $15.9 million and the excess of borrowings over the FBB
was $17.6 million.
The credit facility is secured by virtually all Anacomp assets and 65% of the
capital stock of our foreign subsidiaries. The facility contains covenants
relating to limitations on the following:
o capital expenditures;
o additional debt;
o open market purchases of Anacomp common stock;
o mergers and acquisitions; and
o liens and dividends.
There are also minimum EBITDA, interest coverage and leverage ratio covenants.
In addition, we are required to remit to the Bank Group the net proceeds of any
capital asset sale.
From July 1, 2002 to August 14, 2002 we made $1.8 million additional
non-scheduled cash payments to reduce the outstanding facility balance to $31.7
million. As of August 14, 2002 we have $16.6 million of borrowing capacity until
the scheduled September 30, 2002 direct borrowing limit reduction of $3 million.
We had negative working capital of $16.3 million at June 30, 2002, compared to
negative working capital of $394.3 million at September 30, 2001. The negative
working capital at June 30, 2002 results from the current period
reclassification of our $33.5 million revolving credit facility, due June 30,
2003, from long-term to current. The working capital deficiency at September 30,
2001 was primarily due to $310 million in notes, $51 million of related accrued
interest, and $55.1 million of borrowings under the senior secured revolving
credit facility. Excluding the credit facility balance, our working capital at
June 30, 2002 was a positive $17.2 million.
To facilitate comparison of cash flow activity, cash flows for the nine months
ended June 30, 2002 discussed below represents the combination of the
three-month period ended December 31, 2001 (Predecessor Company) and the
six-month period ended June 30, 2002 (Reorganized Company) presented in the
accompanying Condensed Consolidated Statements of Cash Flows.
Net cash provided by operating activities was $15.8 million for the nine months
ended June 30, 2002, compared to $14.7 million in the comparable prior year
period.
Net cash used in investing activities was $3.2 million in the current nine-month
period, compared to cash used in investing activities of $4 million in the
comparable prior year period. Expenditures in both years were primarily for
purchases of equipment.
Net cash used in financing activities was $21.6 million during the current
nine-month period, compared to $0.8 million provided by financing activities in
the prior period. In both periods, cash was used to pay down the revolving
credit facility, and the prior year amount also includes $0.8 million received
on liquidation of a currency swap contract.
Our cash balance totaled $16.7 million at June 30, 2002 compared to $24.3
million at September 30, 2001. Approximately 55% of the June 30, 2002 cash
balance is located at our foreign subsidiaries compared to approximately 50% at
September 30, 2001. Our use of excess cash as additional payments against our
credit facility resulted in the decrease of domestic cash on hand.
RISK FACTORS
You should carefully consider the following risk factors and all of the other
information included in this Quarterly Report in evaluating our business and our
prospects. Investing in our common stock involves a high degree of risk.
Additional risks and uncertainties may also materially adversely affect our
business and financial condition in the future. Any of the following risks could
materially adversely affect our business, operating results or financial
condition and could result in a complete loss of your investment.
We recently effectuated a financial restructuring pursuant to a prepackaged
Chapter 11 plan of reorganization, we have a history of net losses and we may
face liquidity issues in the future.
On October 19, 2001 we filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code and a prepackaged plan of reorganization.
The Bankruptcy Court confirmed the plan of reorganization on December 10, 2001
and we emerged from our bankruptcy proceedings effective December 31, 2001.
Pursuant to the financial restructuring, our formerly publicly traded 10-7/8%
Senior Subordinated Notes, accrued interest related to such notes, and our
previously existing common stock were canceled and exchanged for shares of our
new common stock. However, our completion of bankruptcy proceedings does not
assure our continued success. For example, the bankruptcy proceedings described
above are our second bankruptcy; we previously filed a plan of reorganization in
January 1996 and emerged from those proceedings in June 1996. If our financial
performance does not exceed our recent historical results, the price of our
common stock could decline and your investment could be materially adversely
affected. As part of our plan of reorganization, our lenders modified the terms
of our senior credit facility which encumbers substantially all of our assets.
This facility also includes mandatory periodic paydowns and covenant
restrictions concerning the commitment limits of this facility including levels
of collateral, financial covenants, and limitations on capital expenditures. Our
credit facility is scheduled to mature on June 30, 2003, or under certain
circumstances on December 31, 2003, at which time we will be required to renew,
refinance, or modify the credit facility with our lenders or locate alternative
financing. These restrictions and provisions could have an adverse impact on our
future liquidity and ability to implement our business plan.
We expect our revenues to continue to decrease over the next few years, which
could inhibit us from achieving or sustaining profitability or even prevent us
from continuing to operate.
Our accumulated deficit through December 31, 2001 has been eliminated as a
result of Fresh Start Reporting. However, we have not recorded sustained
profitable operating results for quite some time. To achieve sustained future
profitability we will need to generate and sustain planned revenues while
satisfying our payment obligations under the terms of our senior secured
revolving credit facility (including mandatory paydowns) and maintaining
reasonable cost and expense levels. We do not know when or if we will become
profitable on a sustained basis. If we fail to achieve consistent profitability
and generate sufficient cash flows, we will face liquidity and bank covenant
issues and our senior secured debt could become immediately due and payable on
demand. Even though we achieved profitability in the six months ended June 30,
2002, we may not be able to sustain or increase profitability on a quarterly or
an annual basis. Any failure on our part to achieve or sustain profitability
could cause our stock price to decline.
The development of alternate technologies in the document management industry is
decreasing the need for our micrographics services and products.
The document management industry is rapidly changing. The recent trend of
technological advances and attendant price declines in digital systems and
products is expected to continue. As a result, in certain instances, potential
micrographics customers have deferred, and may continue to defer, investments in
micrographics systems (including our XFP 2000 COM system) and the utilization of
micrographics service centers while evaluating the abilities of other
technologies. Additionally, the continuing development of local area computer
networks and similar systems based on digital technologies has resulted and will
continue to result in many of our customers changing their use of micrographics
from document storage, distribution and access to primarily archival use. We
believe that this is at least part of the reason for the declines in recent
years in both sales and prices of our duplicate film, readers and
reader/printers. Our service centers also are producing fewer duplicate
microfiche per original for customers, reflecting the shift towards using
micrographics primarily for storage. Revenues for our micrographics services and
products, including COM service revenues, COM system revenues, maintenance
service revenues and micrographics supplies revenues, have been adversely
affected for each of the past five fiscal years and will likely in the future be
substantially adversely affected by, among other things, the increasing use of
digital technology. COM revenues from services, system and supplies sales
declined 22.6% in 2001 from fiscal year 2000 revenues. Overall, COM revenues
represented 63% of our revenues for the nine-month period ended June 30, 2002,
69% of our fiscal 2001 revenues, 71% of 2000 revenues, 83% of 1999 revenues, 91%
of 1998 revenues and 95% of 1997 revenues. Additionally, the rapidly changing
document management industry has resulted in price competition in certain of our
businesses, particularly COM services. We have been and we expect to continue to
be impacted adversely by the decline in the demand for COM services, the
declining market for COM systems and the attendant reduction in supplies
revenues. We expect that our revenues for maintenance of COM systems will
continue to decline as a result of decreasing use and fewer sales of COM
systems. Additionally, the growth of alternate technologies has created
consolidation in the micrographics segment of the document management industry.
To the extent consolidation in the micrographics segment has the effect of
causing major providers of micrographics services and products to cease
providing such services and products, the negative trends in the segment, such
as competition from alternate technologies described above, may accelerate. If
we do not adapt to the rapid changes in the document management industry, our
business will suffer and your investment will be adversely affected.
Intense competition in the document management industry could prevent us from
increasing or sustaining our revenues and prevent us from achieving or
sustaining profitability.
The document management industry is becoming increasingly competitive,
especially in the market for Internet-based document management services. We
face, and will continue to face, competition from other document-management
outsource-service providers as well as from document-management software
providers who offer in-house solutions. Some of our competitors are leading
original equipment manufacturers with established client-relationships in our
target markets. Some of our competitors are significantly larger than we are and
have greater financial resources, greater name recognition and longer operating
histories than we have. Our competitors may be able to respond more quickly or
adjust prices more effectively to take advantage of new opportunities or
customer requirements. Increased competition could result in pricing pressures,
reduced sales, reduced margins or failure to achieve or maintain widespread
market acceptance, any of which could prevent us from increasing or sustaining
our revenues and achieving or sustaining profitability.
Fluctuation in our quarterly financial results may cause instability in our
stock price.
Our COM business has experienced and continues to experience trending decline;
however, the rate at which this decline will impact our operations is difficult
to predict. Additionally, we attempt to base our operating expenses on
anticipated revenue levels, and a substantial percentage of our expenses are
fixed in the short term. As a result, any delay in generating or recognizing
revenues could cause our operating results to be below expectations. Moreover,
the operating expenses from our growth initiatives may exceed our estimates. Any
or all of these factors could cause the price of our common stock to decline.
If we are unable to decrease our costs to match the decline in our revenues, we
may not be able to achieve or sustain profitability.
The decline in the demand for COM services, systems and maintenance and the
attendant reduction in supplies revenues have adversely affected our business.
Over the past several years, COM revenues from services, system and supplies
sales have been steadily decreasing as a percentage of our revenues and declined
23% in 2001 from fiscal year 2000 revenues. We expect that our revenues for
maintenance of COM systems will continue to decline as a result of decreasing
use and fewer sales of COM systems. We have taken steps such as facilities
consolidation and personnel reductions to reduce our cost structure and offset
the decrease in COM revenues. We intend to take additional measures as necessary
to continue to reduce our cost structure. If these measures are unsuccessful, we
will not realize profits from our COM business and your investment may be
adversely affected.
If our future results do not meet or exceed the projections and assumptions we
made for Fresh Start Reporting purposes, we may have to write down the values of
some of our assets.
On December 31, 2001, as a result of our emergence from bankruptcy, we adopted
Fresh Start Reporting. This resulted in material changes to our financial
statements including the recording of an asset for "reorganization value in
excess of identifiable net assets." We determined the value of our business and
accordingly, our reorganization asset by making certain projections and
assumptions based on historical results as well as our best estimates of
expected future market conditions. Unfavorable changes compared to our
projections used for Fresh Start Reporting purposes could result in future
impairments of our reorganization asset and our identifiable intangible assets.
If these assets were to be impaired, the value of your investment could decline.
If we are unable to make technological advancements and upgrades to our current
product and services offerings, we will lose market share.
In order to maintain and grow market share, we continually invest in offering
new customer solutions and in upgrading our storage and delivery systems and
infrastructure. We cannot assure you that we will be able to continue to develop
innovations in our software to stay abreast of client needs. We also cannot
assure you that we will be able to maintain or upgrade our infrastructure to
take advantage of new technology. Our future plans for growth and a return to
profitability would be detrimentally affected if we are unable to develop new
and innovative customer solutions or if we are unable to sustain our
infrastructure.
Litigation or third party claims of intellectual property infringement could
require us to spend substantial time and money and adversely affect our ability
to develop and commercialize products.
Third parties may accuse us of employing their proprietary technology without
authorization. In addition, third parties may obtain patents that relate to our
technologies and claim that our use of such technologies infringes these
patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize products and our
operating results.
The loss of key personnel or the inability to attract and retain additional
personnel could impair our ability to expand our operations.
We are highly dependent on the principal members of our management team and the
technical expertise of our personnel, especially in our Technical Services
business unit. The success of this business is based on our technical expertise
and proven ability to provide fast, expert, on-site service and support around
the clock. This service is provided in North America and Europe by approximately
500 highly trained Anacomp technicians, the loss of whose services might
adversely impact the achievement of our business objectives. Moreover, our
business operations will require additional expertise in specific industries and
areas applicable to products identified and developed through our technologies.
These activities will require the addition of new personnel, including
management and technical personnel as well as the development of additional
expertise by existing employees. Competition for experienced technicians may
limit our ability to attract or retain such technicians. If we are unable to
attract such personnel or to develop this expertise, we may not be able to
sustain or expand our operations in a timely manner or at all.
We face business, political and economic risks because a significant portion of
our sales is to customers outside of the United States.
Revenues from operations outside the United States accounted for 33% of our
total revenue for the nine-month period ended June 30, 2002 and 30% of our total
revenue in fiscal year 2001. Although we previously announced our intent to sell
all or parts of our European document management business, our success continues
to depend upon our international operations, and we expect that a significant
portion of our total future revenues will be generated from international sales.
Our international business involves a number of risks, including:
o our ability to adapt our products to foreign design methods and
practices;
o cultural differences in the conduct of business;
o difficulty in attracting and retaining qualified personnel;
o longer payment cycles for and greater difficulty collecting accounts
receivable;
o unexpected changes in regulatory requirements, royalties and
withholding taxes that restrict the repatriation of earnings;
o tariffs and other trade barriers;
o the burden of complying with a wide variety of foreign laws;
o political, economic or military conditions associated with current
worldwide conflicts and events;
o the exchange markets and our ability to generate, preserve and
repatriate proceeds and dividends to the parent company in the United
States; and
o to the extent that profit is generated or losses are incurred in
foreign countries, our effective income tax rate may be significantly
affected. Any of these factors could significantly harm our future
international sales and, consequently, our revenues and results of
operations and business and financial condition.
We use hazardous chemicals in our business and any claims relating to improper
handling, storage or disposal of these materials could be time consuming and
costly.
Our operations involve the use and sale of hazardous chemicals. Although we
believe that our safety procedures for handling and disposing comply with the
applicable standards, we cannot eliminate the risk of accidental contamination
or discharge and any resultant injury from these materials. Federal, state and
local laws and regulations govern the use, manufacture, storage, handling and
disposal of hazardous materials. In the event of an accident, we may be sued for
any injury or contamination that results from our use or the use by third
parties of these materials, and our liability may exceed our insurance coverage
and our total assets.
Disclosure of trade secrets could aid our competitors.
We attempt to protect our trade secrets by entering into confidentiality
agreements with third parties, our employees and consultants. However, these
agreements can be breached and, if they are, there may not be an adequate remedy
available to us. If our trade secrets become known we may lose our competitive
position.
If we are unable to adequately protect our intellectual property, third parties
may be able to use our technology, which could adversely affect our ability to
compete in the market.
Our success will depend in part on our ability to obtain protection for our
intellectual property. We will be able to protect our intellectual property
rights from unauthorized use by third parties only to the extent that our
software is copyrightable and business methods are patentable under applicable
intellectual property laws or are effectively maintained as trade secrets. The
laws of some foreign countries do not protect intellectual property rights to
the same extent as the laws of the United States and many companies have
encountered significant problems in protecting and defending such rights in
foreign jurisdictions. Furthermore, others may independently develop similar or
alternative technologies or design around our intellectual property protections.
In addition, our competitors may independently develop substantially equivalent
proprietary information or may otherwise gain access to our trade secrets.
Difficulties we may encounter managing our growth may divert resources and limit
our ability to successfully expand our operations and implement our business
plan.
We anticipate that our operations will be able to grow as a result of our
reorganization. Our growth in the future assumes potential acquisitions that may
place a strain on our administrative personnel and operational infrastructure
should such acquisitions occur. We cannot assure you that we will be able to
identify acquisition candidates, or be able to consummate acquisitions on terms
acceptable to us, if at all. Additionally, we cannot assure you that we will
have funds available for making acquisitions. Effectively managing growth will
also require us to improve our operational, financial and management controls,
reporting systems and procedures. We may not be able to successfully implement
improvements to our management information and control systems in an efficient
or timely manner and may discover deficiencies in existing systems and controls.
We rely on a few suppliers to provide us COM products that while in decline, are
essential to our operations.
Supplies and system sales represented approximately 49% of the total revenue
from our Technical Services Business Unit, or 21% of our total revenue, for
fiscal year 2001. The primary products in the supplies business of our Technical
Services Business Unit are silver halide original COM film and non-silver
duplicating microfilm. We obtain all of our silver halide products through an
exclusive multi-year supply agreement with a single provider and our duplicate
film products from two other providers. Any disruption in the supply
relationship between Anacomp and such suppliers could result in delays or
reductions in product shipment or increases in product costs that adversely
affect our operating results in any given period. In the event of any such
disruption, we cannot assure you that we could develop alternative sources of
raw materials and supplies at acceptable prices and within reasonable times.
Additionally, as the demand for COM services declines, the demand for COM
supplies falls as well. If the decline in COM supplies is greater than planned,
our profitability and liquidity would decline as well.
Our stock price may be volatile, and you may not be able to resell your shares
at or above the price you paid, or at all.
Since the effective date of our bankruptcy restructuring, our common stock has
had limited trading activity on the OTC Bulletin Board. We cannot predict the
extent to which investor interest in our stock will lead to the development of a
more active trading market, how liquid that market might become or whether it
will be sustained. The trading price of our common stock could be subject to
wide fluctuations due to the factors discussed in this risk factors section and
elsewhere in this report. In addition, the stock markets in general have
experienced extreme price and volume fluctuations. These broad market and
industry factors may decrease the market price of our common stock, regardless
of our actual operating performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Revenues generated outside of the United States, as a percentage of total
revenues, were 33% and 30% for the nine-month periods ended June 30, 2002 and
2001, respectively. Fluctuations in foreign exchange rates could impact
operating results through translation of our subsidiaries' financial statements.
Recent global economic events have caused exchange rates in general to rise over
the past several months, making foreign currencies more valuable in terms of the
U.S. dollar. For example, the Euro has risen almost 14% during the three months
ended June 30, 2002. Exchange rate changes of this magnitude can have a material
affect on our financial statement results, particularly with regard to the
accumulated other comprehensive income or loss account in the equity section of
the balance sheet.
Our revolving credit facility bears interest at variable rates and is therefore
affected by the general level of U.S. interest rates. We had $33.5 million
outstanding under our facility on June 30, 2002. If interest rates were to
increase 2%, annual interest expense would increase approximately $0.7 million
based on the $33.5 million outstanding balance.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Anacomp and its subsidiaries are potential or named defendants in several
lawsuits and claims arising in the ordinary course of business. While the
outcome of claims, lawsuits or other proceedings brought against us cannot be
predicted with certainty, management expects that any liability, to the extent
not provided for through insurance or otherwise, will not have a material
adverse effect on our financial condition or results of operations.
Substantially all claims that were filed in conjunction with the Chapter 11
proceedings have been disallowed by the court. The majority of the claims were
paid prior to or subsequent to our bankruptcy filing. The remainder related to
executory contracts assumed under the Plan, represent duplicate claims, claim
amounts that differ from our records or claims that were filed late or are
unsubstantiated. As a result, there are no unrecorded claims.
Item 2. Changes in Securities and Use of Proceeds
(a) As a part of the Plan confirmed by the Bankruptcy Court, Anacomp's
Articles of Incorporation and Bylaws were amended. The amendments were
adopted in part to create the rights and preference of the Class A
Common Stock and the Class B Common Stock.
(c) As part of the Plan, Anacomp issued a total of 4,030,000 shares of
Class A Common Stock to the holders of its 10-7/8% senior subordinated
notes and a total of 4,034 shares of Class B Common Stock and warrants
to purchase 783,077 shares of Class B Common Stock to the holders of
common stock outstanding as of the effective date of the Plan. Each
warrant is exercisable for a period of five years for the purchase of
one share of Class B Common Stock at an exercise price of $61.54 per
share. These issuances were exempt from the registration requirements
of the Securities Act by reason of the exemption provided for shares
issued in a bankruptcy reorganization.
Item 6. Exhibits and Reports on Form 8-K (exhibits incorporated by reference)
(a) Exhibits: For a list of exhibits filed with this quarterly report,
refer to the Index of Exhibits below.
(b) During the period covered by this report, we filed the following
reports on Form 8-K:
(1) On May 29, 2002, we filed a Form 8-K to announce a change in our
certifying accountant to Ernst & Young.
(2) On July 3, 2002, we filed a Form 8-K to announce a restructuring
charge in conjunction with a reorganization of our operations.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Articles of Incorporation of Anacomp as of
December 31, 2001. *
3.2 Amended and restated Bylaws of Anacomp as of December 31, 2001. *
10.1 Lease Agreement by and between Anacomp and Kilroy Realty, L.P., a
Delaware limited partnership dated June 14, 2002
10.2 Consulting Agreement by and between Anacomp and Steven G. Singer dated
May 7, 2002
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
* Incorporated by reference from the exhibits to the registration statement on
Form 8-A filed by Anacomp on January 9, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANACOMP, INC.
/s/ Linster W. Fox
________________________
Linster W. Fox
Executive Vice President,
Chief Financial Officer and Director
Date: August 14, 2002