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
DECEMBER 31, 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.)
15378 Avenue of Science, San Diego, California 92128-3407
(858) 716-3400
(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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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 January 31, 2003, the number of outstanding shares of the
registrant's Class A common Stock, $.01 par value per share, was 4,034,500 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:
Condensed Consolidated Balance Sheets at
December 31, 2002 (unaudited) and September 30, 2002............ 2
Condensed Consolidated Statements of Operations
Three Months Ended December 31, 2002 (unaudited) and 2001....... 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 2002 (unaudited) and 2001....... 4
Notes to the Condensed Consolidated Financial Statements, unaudited.. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 25
Item 4. Controls and Procedures.................................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 27
Item 6. Exhibits and Reports on Form 8-K......................................... 27
SIGNATURES............................................................................... 29
Exhibit 99.1 Certification of Chief Executive Officer ................................ 30
Exhibit 99.2 Certification of Chief Financial Officer................................. 31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Reorganized Company
___________________________________
December 31, September 30,
(in thousands) 2002 2002
_____________ _____________
Assets (Unaudited)
Current assets:
Cash and cash equivalents........................................... $ 11,798 $ 15,561
Receivable on sale of Swiss subsidiaries - current portion.......... 13,233 ---
Accounts receivable, net............................................ 32,350 33,990
Inventories, net.................................................... 3,208 3,474
Prepaid expenses and other.......................................... 4,873 6,442
Assets of discontinued operations................................... --- 12,027
_____________ _____________
Total current assets.................................................... 65,462 71,494
Property and equipment, net............................................. 20,333 21,448
Reorganization value in excess of identifiable net assets............... 73,227 73,227
Intangible assets, net.................................................. 10,317 10,813
Receivable on sale of Swiss subsidiaries - long-term portion............ 1,234 ---
Other assets............................................................ 2,881 3,101
_____________ _____________
$ 173,454 $ 180,083
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of senior secured revolving credit facility......... $ 24,175 $ 29,975
Accounts payable.................................................... 8,461 9,797
Accrued compensation, benefits and withholdings..................... 12,981 16,294
Deferred revenue.................................................... 7,023 7,117
Accrued income taxes................................................ 2,277 1,900
Other accrued liabilities........................................... 8,849 9,305
Liabilities of discontinued operations.............................. --- 4,241
_____________ _____________
Total current liabilities............................................... 63,766 78,629
_____________ _____________
Long-term liabilities:
Unfunded accumulated benefit obligation............................. 6,233 6,233
Other long-term liabilities......................................... 3,501 3,387
_____________ _____________
Total long-term liabilities............................................. 9,734 9,620
_____________ _____________
Stockholders' equity:
Preferred stock..................................................... --- ---
Common stock........................................................ 40 40
Additional paid-in capital.......................................... 96,975 96,942
Accumulated other comprehensive loss................................ (2,861) (2,836)
Retained earnings (deficit)......................................... 5,800 (2,312)
_____________ _____________
Total stockholders' equity.............................................. 99,954 91,834
_____________ _____________
$ 173,454 $ 180,083
============= =============
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized Company Predecessor Company
___________________ ___________________
(in thousands, except per share amounts) Three months ended Three months ended
December 31, 2002 December 31, 2001
___________________ ___________________
(Unaudited)
Revenues:
Services........................................................... $ 42,825 $ 55,098
Equipment and supply sales......................................... 10,146 12,926
___________________ ___________________
52,971 68,024
___________________ ___________________
Cost of revenues:
Services........................................................... 28,994 36,630
Equipment and supply sales......................................... 6,591 9,874
___________________ ___________________
35,585 46,504
___________________ ___________________
Gross profit........................................................... 17,386 21,520
Costs and expenses:
Engineering, research and development.............................. 1,852 1,680
Selling, general and administrative................................ 13,996 15,643
Amortization of intangible assets.................................. 496 2,896
Restructuring credits.............................................. --- (1,032)
___________________ ___________________
Operating income from continuing operations............................ 1,042 2,333
___________________ ___________________
Other income (expense):
Interest income.................................................... 69 155
Interest expense and fee amortization.............................. (763) (3,114)
Other.............................................................. (62) 265,108
___________________ ___________________
(756) 262,149
___________________ ___________________
Income (loss) from continuing operations before reorganization items,
and income taxes .................................................. 286 264,482
Reorganization items................................................... --- 13,328
___________________ ___________________
Income from continuing operations before income taxes.................. 286 277,810
Provision for income taxes............................................. 558 450
___________________ ___________________
(Loss) income from continuing operations............................... (272) 277,360
Gain on sale of discontinued operations, net of taxes.................. 8,384 ---
___________________ ___________________
Net income............................................................. $ 8,112 $ 277,360
=================== ===================
Basic and diluted per share data:
Basic and diluted net loss from continuing operations.............. $ (0.07)
Gain on sale of discontinued operations, net of taxes.............. 2.08
___________________
Basic and diluted net income....................................... $ 2.01
___________________
Shares used in computing basic and diluted net income per share........ 4,037
===================
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Predecessor
Company Company
__________________ __________________
(in thousands) Three months ended Three months ended
December 31, 2002 December 31, 2001
__________________ __________________
(Unaudited)
Cash flows from operating activities:
Net income......................................................... $ 8,112 $ 277,360
Adjustments to reconcile net income to net
cash provided by operating activities:
Other income due to 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
Gain on sale of discontinued operations.......................... (8,384) ---
Depreciation and amortization.................................... 3,973 7,194
Non-cash settlement of facility lease contract................... --- 349
Amortization of debt fees, premiums, and discounts............... 172 92
Non-cash compensation............................................ 33 ---
Change in assets and liabilities:
Accounts and other receivables................................. 1,640 3,092
Inventories.................................................... 266 739
Prepaid expenses and other assets.............................. 1,516 332
Accounts payable, accrued expenses and other liabilities....... (6,665) (3,733)
Accrued interest............................................... --- (387)
__________________ __________________
Net cash provided by operating activities..................... 663 5,009
__________________ __________________
Cash flows from investing activities:
Purchases of property and equipment................................ (798) (1,075)
Proceeds from sale of discontinued operations, net................. 1,717 ---
__________________ __________________
Net cash provided by (used in) investing activities........... 919 (1,075)
__________________ __________________
Cash flows from financing activities:
Principal payments on revolving line of credit, net................ (5,800) (2,000)
__________________ __________________
Net cash used in financing activities......................... (5,800) (2,000)
__________________ __________________
Effect of exchange rate changes on cash and cash equivalents........... 455 637
__________________ __________________
(Decrease) increase in cash and cash equivalents....................... (3,763) 2,571
Cash and cash equivalents at beginning of period....................... 15,561 24,308
__________________ __________________
Cash and cash equivalents at end of period............................. $ 11,798 $ 26,879
================== ==================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest............................................... $ 572 $ 1,434
================== ==================
Cash paid for income taxes........................................... $ 57 $ 459
================== ==================
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
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, 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
senior subordinated notes, related accrued interest of $52.3 million, 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 (see Note 4).
New Common Stock was distributed to the holders of the notes as well as to
holders of the previously existing Common Stock.
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.
The U.S. Bankruptcy Court issued its final decree on September 27, 2002 closing
the Chapter 11 case. There are no remaining claims or unrecorded obligations
related to the bankruptcy proceedings.
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 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. 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 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, 2002 and the statements of operations and cash flows for the three
months ended December 31, 2001, have not been audited, but in the opinion of
management, include all adjustments (consisting of normal recurring adjustments,
the Fresh Start adjustments described in Note 3 and the sale of Switzerland
adjustments described in Note 5) 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, 2002,
included in our fiscal 2002 Annual Report on Form 10-K. 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 after reorganization at December 31, 2001 was determined
based on the consideration of many factors and resulted in a reorganization
value (over the fair value of identifiable net assets) of $73.2 million, as
adjusted, and is reported as "Reorganization value in excess of identifiable net
assets". Although the asset will not be subject to future amortization (in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets"), it will be subject to, at a minimum,
annual impairment testing.
In developing the assumptions underlying the enterprise valuation, management
considered 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. 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 December 31, 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......................................... (1,983)
=================
$ 10,317
=================
The income due to extinguishment of debt, net of taxes, for the period ended
December 31, 2001, is calculated as follows:
(dollars 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)
______________
Other income due to 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 income due
to 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
(dollars in thousands; unaudited) December 31, 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 December 31, 2001, Anacomp and Fleet National Bank, as agent, and its
syndicate of lenders (collectively, "the Bank Group") entered into an Amended
and Restated Revolving Credit Agreement. The credit agreement provides for a
current commitment of $39.1 million, with a $32.9 million sublimit for direct
borrowing and a $6.2 million letter of credit sublimit. The credit commitment
will be further reduced by future periodic scheduled amounts and by 85% of the
net proceeds from the sale of the Switzerland subsidiaries. The facility is
available for new borrowings when borrowings are below the direct borrowing
sublimit.
Effective December 19, 2002, we signed an amendment to the revolving credit
agreement. The amendment modifies certain financial covenants to accommodate the
sale of our Switzerland operations and current business plans. Other changes to
the agreement included a permanent reduction to the credit facility commitment
of $10.0 million, a decrease in future quarterly commitment reductions, and
provisions for acquisitions and/or divestitures under specified conditions.
At December 31, 2002, the outstanding revolving credit borrowings were $24.2
million (plus outstanding standby letters of credit of $6.2 million). During the
three-month period ended December 31, 2002, we made net cash payments totaling
$5.8 million and have $8.7 million of borrowing capacity, after the effect of
other commitment reductions during the quarter.
The maturity date of the amended facility is June 30, 2003, with an extension to
December 31, 2003 upon the receipt of the proceeds from the sale of the
Switzerland subsidiaries. The receipt of the proceeds ($11.8 million) is
expected to occur in March of 2003. Upon receipt of the net proceeds, we will be
required to permanently reduce the borrowing sublimit of the credit facility
commitment and reduce the outstanding borrowings by 85% of the net sale
proceeds, or $10.0 million. The credit facility commitment was permanently
reduced by $0.8 million upon the initial receipt of proceeds from the sale in
October 2002.
The credit agreement 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 4.25%
for the FBB portion and 7.25% for the excess portion at December 31, 2002. At
December 31, 2002, the FBB was $13.5 million and the excess of borrowings over
the FBB was $10.7 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.
Under the current facility as amended, the facility commitment and the direct
borrowings sublimit will be permanently reduced in the future as follows:
o $1.125 million on March 31, 2003;
o $1.25 million on June 30, 2003;
o $1.25 million on September 30, 2003 (assuming that the maturity date is
extended as planned).
Note 5. Sale of Switzerland and Other Operations
We completed a sale of our Switzerland subsidiaries and operations on October
18, 2002. The acquiring company assumed operational responsibility effective
October 1, 2002.
Under the terms of the sale agreement, we sold all of the outstanding shares of
our two Swiss subsidiaries, Cominformatic AG and Anacomp Technical Services AG,
to edotech Ltd. (a UK company) at a sales price of CHF 26.7 million (Swiss
francs).
The sales price is payable as follows: CHF 4.6 million, or approximately $3.1
million, which was received at closing; CHF 18.2 million upon completion of the
Cominformatic share exchange, no later than six months from the date closing;
CHF 1.1 million on or before April 18, 2003; and CHF 2.8 million on or before
April 18, 2004 upon expiration of certain indemnification claim periods. The
costs of the sale are estimated to be $2.1 million. Effectively all of the net
proceeds (i.e. sales price less sale costs) will be used to reduce the revolving
credit facility balance outstanding and 85% of such proceeds will permanently
reduce the total borrowing commitment under the terms of the senior secured
revolving credit facility.
The assets and liabilities of the Swiss operations have been classified
separately as "Assets of discontinued operations" and "Liabilities of
discontinued operations" in the Condensed Consolidated Balance Sheet as of
September 30, 2002. The net assets of the disposed operating units were
summarized as follows:
September 30,
(dollars in thousands) 2002
_____________________________________________ _____________
Cash.................. ...................... $ 2,749
Accounts and notes receivable................ 2,288
Inventories.................................. 1,067
Property, plant and other accrued
Liabilities................................ 5,227
Other assets................................. 696
Accounts payable and other accrued
Liabilities................................ (4,241)
_____________
Total net assets $ 7,786
=============
In the third quarter of fiscal 2002, we sold two smaller operating units. The
results of the Switzerland and other operations reported below for the three
months ended December 31, 2001 have not been segregated as discontinued
operations in the Condensed Consolidated Statements of Operations as they were
not material to the operating results of Anacomp in total.
Swiss Operating
Results
__________________
Three Months Ended
(dollars in thousands) December 31, 2001
_____________________________ __________________
Revenues $ 7,505
Income before taxes 869
Income taxes 60
__________________
Net income $ 809
==================
Note 6. Income Taxes
Our provision for income taxes consists of the following:
Reorganized Company Predecessor Company
___________________ ___________________
Three months ended Three months ended
(in thousands) December 31, 2002 December 31, 2001
___________________________________ ___________________ ___________________
Federal............................ $ --- $ ---
State.............................. 10 10
Foreign............................ 548 440
___________________ ___________________
$ 558 $ 450
=================== ===================
Due to our reorganization, we have Cancellation of Debt ("COD") income estimated
to be $265.3 million. As a result, we were 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 adjustments
were 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 $41.8 million in order to fully offset the
net deferred tax asset. At December 31, 2002, our most significant deferred tax
assets and liabilities relate to temporary differences for COD and net operating
losses. These timing differences were realized, offset and reversed with no
impact on the net value of the deferred tax asset at December 31, 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. 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 have left the company. The
severance payments will be completed by the second quarter of fiscal 2003. The
restructuring charges also include approximately $0.5 million for the closure of
a data center for which payments will continue until the lease expires in July
2004. Of the $0.5 million, $69 thousand represents a non-cash charge to write
off the net book value of leasehold improvements located in the closed data
center.
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 December 31, 2002, the remaining liability
related to international facility costs is expected to be paid by the end of
December 2003.
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, 2002 to December 31, 2002 (in thousands):
Fiscal Year 2002 Restructuring
__________________________________________________________________________________________
Payments and
September 30, 2002 Deductions December 31, 2002
____________________________ __________________ _______________ _________________
Employee Separations $ 233 $ (187) $ 46
Facility Closing 325 (43) 282
__________________ _______________ _________________
$ 558 $ (230) $ 328
================== =============== =================
Fiscal Year 2000 Restructuring
__________________________________________________________________________________________
Payments and
September 30, 2002 Deductions December 31, 2002
____________________________ __________________ _______________ _________________
Facility Closing $ 77 $ (17) $ 60
Contract Obligations 126 --- 126
__________________ _______________ _________________
$ 203 $ (17) $ 186
================== =============== =================
Inventories consist of the following:
Reorganized Company
_______________________________________
(in thousands) December 31, 2002 September 30, 2002
_________________________________________________________________ __________________ __________________
Finished goods, including purchased film....................... $ 1,961 $ 1,766
Consumable spare parts and supplies............................ 1,247 1,708
__________________ __________________
$ 3,208 $ 3,474
================== ==================
Note 9. Defined Benefit Plan
We have a retirement plan in place for our United Kingdom subsidiary that
qualifies as a defined benefit plan. The plan provides benefits based primarily
on years of service and employee compensation levels. The plan covers
approximately 619 participants, including 89 current employees, 484 former
employees with vested rights to future benefits, and 46 retirees and
beneficiaries receiving benefits. Funding policy for the plans is to contribute
amounts sufficient to meet minimum funding requirements as set forth in employee
benefit and tax laws plus additional amounts as we may determine to be
appropriate.
As of September 30, 2002, the UK pension plan was under funded by $6.2 million
(using September 30, 2002 currency exchange rates) based upon a projected
benefit obligation of $21.5 million, accumulated benefit obligation of $19.3
million, and the fair value of plan assets totaling $13.1 million. The under
funded liability of $6.2 million is classified as a long-term liability on the
Condensed Consolidated Balance Sheet. These actuarial projections were prepared
assuming a discount rate of 6.25%, a weighted average expected long-term rate of
return on plan assets of 7.5% per year and weighted average annual compensation
increases of 4%.
Almost all of the plan participants are inactive. As a result, we are amortizing
the unfunded liability over the 25-year remaining life expectancy of the
inactive participants as required by Financial Accounting Standard (FAS) No. 87,
"Employers' Accounting for Pensions." In the three months ended December 31,
2002, amortization of unfunded accumulated benefit obligation expense was $48
thousand and is reflected in "Selling, general and administrative" expense in
the Condensed Consolidated Statement of Operations and as amortization in the
Comprehensive Income table in Note 11 as prescribed by FAS No. 87.
Note 10. Foreign Currency Contracts
On October 15, 2002, we entered into three Swiss Franc (CHF) forward contracts
to protect the value of the expected cash receipts from the sale of our
Switzerland operations. The contracts protect Anacomp against an exchange rate
above 1.5425. The first forward contract was written in the amount of CHF 18.2
million and expired on January 29, 2003. At expiration, the forward option was
replaced with another short-term option for the same amount, which provides
$11.8 million in U.S. dollar proceeds on March 3, 2003.
The second forward contract was written in the amount of CHF 2.1 million and
expires on April 15, 2003. We receive full exchange benefits for a lower rate on
CHF 1.0 million of the contract and the remaining CHF 1.1 million will be
converted at 1.5425. The minimum U.S. dollar proceeds received would be $1.4
million if the buyer releases all funds.
The third forward contract was written in the amount of CHF 1.8 million and
expires on April 15, 2004. We receive full exchange benefits for a lower rate on
50% of the contract and the remaining 50% will be converted at 1.5425. The
minimum U.S. dollar proceeds received would be $1.2 million if the buyer
releases all funds.
The Other Expense category of our Condensed Consolidated Statement of Operations
includes the recognition of $43 thousand of expense from currency fluctuations
related to the Swiss receivable, the forward contracts and sale costs.
Note 11. Comprehensive income
Comprehensive income consists of the following components:
Reorganized Company Predecessor Company
___________________ ___________________
Three months ended Three months ended
(in thousands) December 31, 2002 December 31, 2001
___________________________________________ ___________________ ___________________
Net income................................. $ 8,112 $ 277,360
Change in foreign currency translation..... (73) 639
Amortization of unfounded accumulated
benefit obligation...................... 48 ---
___________________ ___________________
Comprehensive income....................... $ 8,087 $ 277,999
=================== ===================
Note 12. Income or Loss Per Share
Basic income or loss per share is computed based upon the weighted average
number of shares of Anacomp's common stock outstanding during the period. For
the three months ended December 31, 2002, potentially dilutive securities
included 783,077 outstanding warrants to purchase Class B Common Stock, which
were issued as part of the reorganization. These warrants were excluded from
diluted income per share as they were anti-dilutive using the treasury stock
method. Basic and diluted net income amounts for the three months ended December
31, 2001 have not been presented as they are not comparable to subsequent
periods due to the implementation of Fresh Start Reporting (see Note 3).
Note 13. 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." As a result of the changes whereby a component of an
entity can qualify for discontinued operations presentation, the sale of our
Switzerland subsidiary, effective October 1, 2002 (see Note 5) required such
presentation whereas under APB 30 it would not have qualified. We have not
separately disclosed the results of operations of our Switzerland subsidiaries
in the Statement of Operations for the three months ended December 31, 2001, as
required by SFAS No. 144 as the related amounts were not material.
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.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. The Company adopted SFAS No. 142 beginning January 1, 2002
upon application of Fresh Start Reporting (See Note 3). As a result of the
implementation of Fresh Start Reporting, all goodwill on the books at December
31, 2001 was eliminated. Under SFAS No. 142, purchased goodwill and intangible
assets with indefinite lives are no longer amortized, but instead are tested for
impairment at least annually. Accordingly, the Company does not amortize
goodwill and intangible assets with indefinite lives as of January 1, 2002.
Intangible assets with finite lives, primarily customer contracts, customer
relationships and proprietary technology will be amortized over their useful
lives.
The following table reconciles our net income to net income adjusted for the
amortization of intangible assets and goodwill. Due to our net loss tax position
in prior years, no tax benefit was realized from this expense.
Reorganized Company Predecessor Company
____________________ ____________________
Three months ended Three months ended
December 31, December 31,
(in thousands) 2002 2001
______________________________________________ ____________________ ____________________
Net income as reported $ 8,112 $ 277,360
Goodwill amortization --- 2,629
____________________ ____________________
Net income excluding effect of goodwill
amortization $ 8,112 $ 279,989
==================== ====================
We completed our annual goodwill impairment test as of September 30, 2002 and
found there to be no indicators of impairment.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and
64, Amendment of FASB SFAS No. 13, and Technical Corrections." Part of this
statement rescinds FASB SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". As a result, gains and losses from extinguishments of
debt should be classified as extraordinary items only if they meet the criteria
of Accounting Principles Board Opinion No. 30. The provision of the Statement
related to the rescission of SFAS 4 shall be applied in fiscal years beginning
after May 15, 2002. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. As a result, we have reclassified the previously reported
$265.3 million extraordinary gain on extinguishments of debt to Other, under the
Other income (expense) heading in the Condensed Consolidated Statement of
Operations for the three months ended December 31, 2001.
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 and services;
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, 2002 and Form
S-1/A filed on June 12, 2002.
Overview and Recent Events
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 with the U.S. Bankruptcy Court for the Southern District of
California. Under the plan we eliminated $310 million of senior subordinated
notes, related accrued interest of $52.3 million and the related annual interest
expense of $34 million. New Common Stock was distributed to the holders of the
notes as well as to holders of the previously existing Common Stock. The U.S.
Bankruptcy Court confirmed the plan of reorganization on December 10, 2001, and
we emerged from bankruptcy effective December 31, 2001. The U.S. Bankruptcy
Court issued its final decree on September 27, 2002 closing the Chapter 11 case.
There are no remaining claims or unrecorded obligations related to the
bankruptcy proceedings.
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 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 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 fees are fixed or determinable;
o collection of the resulting receivable is deemed probable and the risk of
concession is deemed remote; and
o we have no other significant obligations.
For contracts with multiple obligations, we unbundle the respective components
to determine revenue recognition using vendor-specific objective evidence
(VSOE). In instances where VSOE is not determinable, all of the related revenue
is deferred and amortized over the contract period.
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. 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. 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.
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 $32.4 million, net of allowance for doubtful accounts of $2.6
million, as of December 31, 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 December
31, 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 that 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 December 31, 2002,
we have an estimated EPA liability for cleanup costs for the aforementioned
locations and other sites totaling $1.2 million. 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
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 December 31, 2002 was $0, net of a valuation allowance of
approximately $41.8 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
$108 million as of December 31, 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 (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 $73.2 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"). The asset is subject to reduction
for current income tax expense that utilizes pre-reorganization generated
deferred tax assets. The utilization of these deferred tax assets are reflected
as a reduction of the "Re-organization value in excess of identifiable net
assets" value.
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 three months ended December 31, 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. In addition, in the first quarter of fiscal year 2003 we
completed the sale our Switzerland operations and in the third quarter of fiscal
year 2002 we sold two smaller operating units. These units were not material to
our consolidated results and are, therefore, not reported as discontinued
operations in the first quarter of fiscal year 2002.
General. We reported net income of $8.1 million for the three months ended
December 31, 2002, primarily as a result of the sale in October 2002 of our
Switzerland subsidiaries. In the three months ended December 31, 2001, we
reported net income of $277 million, primarily as a result of other income of
$265.3 million resulting from the cancellation of the Company's subordinated
notes, related accrued interest and reorganization items (positive $13.3
million). Both MVS and Web presentment revenues grew at a double-digit rate over
the prior year revenue. However, COM based revenues continued to decline in the
three months ended December 31,2002, in line with historical trends. Our cash
flows from continuing operations for the three months ended December 31, 2002
totaled $0.7 million, which, in addition to our September 30, 2002 cash on hand
and initial net proceeds from the sale of our Switzerland subsidiaries, enabled
us to reduce our outstanding credit facility balance by $5.8 million during the
three months ended December 31, 2002.
Revenues. Our revenues totaled $53.0 million in the three months ended
December 31, 2002, a decrease of 22%, or $15.0 million, from $68.0 million in
the three months ended December 31, 2001.
We define our product lines as follows:
MVS - Multi-Vendor Services where Anacomp acts as a third party maintainer,
providing support services such as on-site maintenance, help desk and depot
repair, laser printer maintenance and associated hardware sales.
Web - Transmitted ingestion, storage, delivery and internet browser-based access
to documents. Also includes license sales and maintenance for the Adesso
software that is our Web platform in the US.
CD/Digital - CD based document management services, scanning, professional
services and digital software sales.
COM/ Other Output Services - Our Computer Output Microfilm and laser printer
document management services.
COM Professional Services - Our maintenance services for Computer Output
Microfilm and other micrographic products.
Equipment/Supplies - Computer Output Microfilm original and duplicate film,
chemistry and hardware sales.
Three Months Ended December 31,
_______________________________
Percentage
Product Line 2002 2001 Change change
------------ ---- ---- ------ ------
MVS $ 8,117 $ 6,513 $ 1,604 24.6%
Web Presentment 4,783 3,176 1,607 50.6
CD/Digital 7,329 14,573 (7,244) (49.7%)
COM/Other Output Services 19,158 25,521 (6,363) (24.9%)
COM Professional Services 5,538 7,165 (1,627) (22.7%)
Equipment/Supplies 8,046 11,076 (3,030) (27.4%)
________ ________ __________
Total $ 52,971 $ 68,024 $ (15,053) (22.1%)
======== ======== ==========
In fiscal year 2002, we committed to a plan to sell our Switzerland operations
and we sold two smaller operating units. The results of the operations of those
units are not material to our operating results in the three months ended
December 31, 2001. Our revenues for the three months ended December 31, 2001,
excluding those operations sold in fiscal year 2002, would have been as follows:
MVS $6,459; Web Presentment $3,048; CD/Digital $8,513; COM/Other Output Services
$24,954; COM Professional Services $6,886; Equipment/Supplies $10,659, for total
revenue of $60,519.
The $1.6 million, or 24.6%, increase in MVS revenues over the prior year
three-month period reflects the continued increase in new OEM agreements and the
resulting continued growth in our Multi-Vendor Services (services provided for,
and sales of, products manufactured by other companies) offerings. This year's
MVS revenues represent 59% of maintenance related revenues (MVS plus COM
Professional Services). In the prior year three-month period MVS represented
only 48% of maintenance related revenues.
Web presentment revenues increased $1.6 million, or 50.6%, over the prior year
three month period ended December 31, 2001. This reflects the addition of new
customers and additional revenue from established customers as they have
increased the number of their applications utilizing our Web services.
CD/Digital revenue declined $7.2 million, or 49.7%, from prior year revenue.
This decrease was primarily the result of the sale of our Switzerland and other
operations in fiscal year 2002. CD/Digital revenue from these operations totaled
$6.1 million in the three-months ended December 31, 2001. The remainder of the
decline is the result of lower per unit pricing as the CD service has become
less specialized and more of a commodity and as customers have opted for
in-house on-line solutions.
COM/Other Output Services revenue declined $6.4 million, or 24.9%, from the
prior year three-month period. This decline reflects the decreased volumes
processed in our data centers and continues the trend experienced in prior
years. We expect that COM revenues will continue to decline in future fiscal
years.
COM Professional Services revenues declined $1.6 million, or 22.7%, from the
prior year. This decline reflects the continued decrease in the number of COM
units in operation worldwide. We expect that the number of COM units in use
worldwide will continue to decline as organizations choose to outsource the
functions to service centers, such as those operated by us, or elect to utilize
other options such as CD or on-line software systems.
Equipment and supplies revenue declined $3.0 million, or 27.4%, from the prior
year. This decrease was largely the result of the decline in demand for and use
of COM units.
Gross Margins. Our gross margin as a percentage of revenues increased
slightly from 31.6% ($21.5 million) for the three months ended December 31, 2001
to 32.8% ($17.4 million) for the three months ended December 31, 2002. We were
able to maintain the gross margin percentage of revenues through cost savings
resulting from our recent and prior restructuring activities, which included the
consolidation and downsizing of facilities and reductions in our work force.
Engineering, Research and Development. Engineering, research and
development expenditures increased $0.2 million, or 10.2%, over the prior year.
These costs represented 3.5% and 2.5% of total revenues for the three months
ended December 31, 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 from $15.6
million for the three months December 31, 2001 to $14.0 million for the three
months ended December 31, 2002. The $1.6 million, or 10.6%, decrease resulted
primarily from the sale of Switzerland, which had $1.3 million of related
expenses in the prior year period.
Amortization of Intangible Assets. Amortization of intangible assets
decreased 82.9%, from $2.9 million for the three months ended December 31, 2001,
to $0.5 million for the three months ended December 31, 2002. The prior year
period amortization expense represented the amortization of goodwill related to
acquisitions in prior years. All goodwill assets from the Predecessor Company
were eliminated in conjunction with Fresh Start Reporting. Fiscal year 2003
amortization expense reflects the amortization of identifiable intangible assets
valued as part of Fresh Start Reporting.
Reorganization Items. Reorganization items in the three months ended
December 31, 2001, 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.
Other. We recognized other income due to extinguishment of debt totaling
$265.3 million for the three-month period ended December 31, 2001 as a result of
our bankruptcy proceedings and subsequent emergence from Chapter 11 proceedings
on December 31, 2001. The remainder of expense in both periods is related
primarily to currency exchange gains and losses.
Interest Expense and Fee Amortization. Interest expense decreased to $0.8
million for the three months ended December 31, 2002 from $3.1 million for the
three months ended December 31, 2001. Prior year expense included interest
(approximately $1.7 million) on our senior subordinated notes up to October 19,
2001, the date we filed Chapter 11 bankruptcy. The remainder of expense from
both periods is related primarily to interest on the senior secured revolving
credit facility.
Provision for Income Taxes. The provision for income taxes of $0.6 million
and $0.5 million for the three months ended December 31, 2002 and 2001,
respectively, related primarily to earnings of foreign subsidiaries.
Gain on Sale of Discontinued Operations. In the three months ended December
31, 2002, we realized a gain of $8.4 million on the sale of our Switzerland
subsidiaries. This sale was effective October 1, 2002. The Switzerland
operations were not material to our consolidated results prior to December 31,
2001. As a result the statements of operations for the three months ended
December 31, 2001 do not segregate the Switzerland operations as discontinued.
Liquidity and Capital Resources
Our legacy business (COM) has declined in recent years and is forecasted 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 service
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 December 31, 2001, Anacomp and Fleet National Bank, as agent, and its
syndicate of lenders (collectively, "the Bank Group") entered into an Amended
and Restated Revolving Credit Agreement. The credit agreement provides for a
current commitment of $39.1 million, with a $32.9 million sublimit for direct
borrowing and a $6.2 million letter of credit sublimit. The credit commitment
will be further reduced by future periodic scheduled amounts and by 85% of the
net proceeds from the sale of the Switzerland subsidiaries. The facility is
available for new borrowings when borrowings are below the direct borrowing
sublimit.
Effective December 19, 2002, we signed an amendment to the revolving credit
agreement. The amendment modifies certain financial covenants to accommodate the
sale of our Switzerland operations and current business plans. Other changes to
the agreement included a permanent reduction to the credit facility commitment
of $10.0 million, a decrease in future quarterly commitment reductions, and
provisions for acquisitions and/or divestitures under specified conditions.
At December 31, 2002, the outstanding revolving credit borrowings were $24.2
million (plus outstanding standby letters of credit of $6.2 million). During the
three-month period ended December 31, 2002, we made net cash payments totaling
$5.8 million and have $8.7 million of borrowing capacity, after the effect of
other commitment reductions during the quarter.
The maturity date of the amended facility is June 30, 2003, with an extension to
December 31, 2003 upon the receipt of the proceeds from the sale of the
Switzerland subsidiaries. The receipt of the proceeds ($11.8 million) is
expected to occur in March of 2003. Upon receipt of the net proceeds, we will be
required to permanently reduce the borrowing sublimit of the credit facility
commitment and reduce the outstanding borrowings by 85% of the net sale
proceeds, or $10.0 million. The credit facility commitment was permanently
reduced by $0.8 million upon the initial receipt of proceeds from the sale in
October 2002.
The credit agreement 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 4.25%
for the FBB portion and 7.25% for the excess portion at December 31, 2002. At
December 31, 2002, the FBB was $13.5 million and the excess of borrowings over
the FBB was $10.7 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.
Under the current facility as amended, the facility commitment and the direct
borrowings sublimit will be permanently reduced in the future as follows:
o $1.125 million on March 31, 2003;
o $1.25 million on June 30, 2003;
o $1.25 million on September 30, 2003 (assuming that the maturity date is
extended as planned).
As of February 10, 2003, the outstanding revolving credit borrowings were $25.7
million and borrowing capacity was $7.2 million.
Our credit facility currently matures on June 30, 2003. It will automatically
extend to December 31, 2003, upon payment to the bank of the Switzerland
subsidiary sale proceeds that we expect to receive in March of 2003. No later
than December 31, 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 prior to that date, although, there can be no assurances
that such financing will be available on terms acceptable to us, if at all.
We had positive working capital of $1.7 million at December 31, 2002, compared
to negative working capital of $7.1 million at September 30, 2002. The positive
working capital at December 31, 2002 resulted from our receivable for the
remaining proceeds due from the sale of our Switzerland subsidiaries, which
includes a gain of $8.4 million. The working capital deficiency at September 30,
2002, was primarily related to the current period classification of our $30.0
million revolving credit facility, due June 30, 2003, as current.
Net cash provided by continuing operations was $0.7 million for the three months
ended December 31, 2002, compared to $5.0 million in the comparable prior year
period. The prior period amount includes approximately $1.4 million contributed
by discontinued operations. The current year amount was negatively impacted by
our December 2002, $3 million prefunding of a payroll liability which was due in
early January 2003.
Net cash provided by investing activities was $0.9 million in the current
three-month period, compared to cash used in investing activities of $1.1
million in the comparable prior year period. The current year period included
the net cash proceeds from the initial payment due from the sale of our
Switzerland subsidiaries. Expenditures in both years were primarily for
purchases of equipment.
Net cash used in financing activities was $5.8 million during the current
three-month period, compared to $2.0 million used in financing activities in the
prior year period. In both periods, cash was used to pay down the revolving
credit facility.
Our cash balance totaled $11.8 million at December 31, 2002 compared to $15.6
million at September 30, 2002. Approximately 67% of the December 31, 2002 cash
balance is located at our foreign subsidiaries compared to approximately 49% at
September 30, 2002. Our use of excess cash as additional payments against our
credit facility and the prefunding of a domestic payroll 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 Class A or Class B Common Stock (collectively,
"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.
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 pay downs 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.
Our revenues could 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 pay downs) 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 generated operating income from continuing operations in
the nine months ended September 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 XFP2000(R) 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 long term archival 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 27% in 2002 from fiscal year 2001 revenues. Overall, COM
revenues represented 66% of our revenues for the twelve-month period ended
September 30, 2002, 71% of our fiscal year 2001 revenues, 77% 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
27% in 2002 from fiscal year 2001 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
400 Anacomp service professionals, 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 28% of our
total revenue for the twelve-month period ended September 30, 2002 and 30% of
our total revenue in fiscal year 2001. 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 product lines may divert
resources and limit our ability to successfully expand our operations and
implement our business plan.
We anticipate that our MVS and Web presentment product lines will be able to
grow as a result of our reorganization. Our growth in the future anticipates
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 17% of our total revenue,
for fiscal year 2002. 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 30% and 33% for the three-month periods ended December 31, 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 6% during the three months
ended December 31, 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 $24.2 million
outstanding under our facility on December 31, 2002. If interest rates were to
increase 2%, annual interest expense would increase approximately $0.5 million
based on the $24.2 million outstanding balance.
Foreign Exchange Options
We completed a sale of our Switzerland subsidiaries and operations on October
18, 2002 to edotech Ltd. (a UK company) at a sales price of CHF 26.7 million
(Swiss francs) or approximately $17.9 million (U.S. dollars). CHF 4.6 million of
the sales price was paid at closing. However, the remaining sales price was
deferred and is payable as follows: CHF 18.2 million upon completion of the
Cominformatic share exchange, no later than six months from the closing date;
CHF 1.1 million on or before April 18, 2003; and CHF 2.8 million within the next
18 months upon expiration of certain indemnification claim periods.
We are exposed to various foreign currency exchange rate risks that arise in the
normal course of business. Our functional currency is the U.S. dollar. We have
international operations resulting in receipts and payments in currencies that
differ from the functional currency of Anacomp. In connection with the sale of
our Switzerland subsidiaries, we entered into forward contracts to hedge the
related receivables. All forward contract entered into by us were entered into
for the sole purpose of hedging existing currency exposure, not for speculation
or trading purposes. Currently, we are using forward contracts only to hedge
balance sheet exposure. The contracts are in Swiss Francs, and have maturities
of March 29, 2003, April 15, 2003 and April 15, 2004. When hedging balance sheet
exposure, all gains and losses on forward contracts are recognized other income
and expense in the same period as the gains and losses on remeasurement of the
foreign currency denominated assets. We entered into these foreign exchange
forward contracts within a few days of the sale, therefore difference between
the change in the fair value of the asset and the change in value in the
contracts that must be recognized in the financial statements is immaterial.
Item 4. Controls and Procedures
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we evaluated the effectiveness of the design and operations of our
disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as
amended, within the 90 day period prior to the filing date of this report.
Based on their evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls and
procedures were effective as of that date.
(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.
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.
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 October 24, 2002, we filed a Form 8-K to announce the sale of all
of our Switzerland subsidiaries and operations.
(2) On November 1, 2002, we filed a Form 8-K to provide additional
information regarding the sold Switzerland subsidiaries and
operations.
(3) On November 27, 2002 we filed two Form 8-K's to provide non-material
information that was inadvertently omitted from the October 24, 2002
and November 1, 2002 filings).
(4) On December 24, 2002 we filed a Form 8-K to announce the relocation of
our headquarters and the date of the annual shareholders meeting.
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 and
Chief Financial Officer
Date: February 13, 2003
CERTIFICATION
I, Jeffrey R. Cramer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anacomp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003 /s/Jeffrey R. Cramer
-------------------------------
Jeffrey R. Cramer
Chief Executive Officer
CERTIFICATION
I, Linster W. Fox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anacomp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/Linster W. Fox
---------------------------------
Linster W. Fox
Chief Financial Officer
INDEX TO EXHIBITS
The following exhibits are filed with this Quarterly Report on Form 10-Q or
incorporated herein by reference to the listed document previously filed with
the Securities and Exchange Commission (the "SEC"). Previously documents that
were not filed with the SEC are noted with an asterisk (*):
2. Plan of Reorganization dated August 29, 2001.(1)
3.1 Amended and Restated Articles of Incorporation of the Company as of
December 31, 2001.(2)
3.2 Amended and Restated Bylaws of the Company as of April 25, 2002.(3)
4.1 Shareholders Rights Plan.(4)
4.2 Amendment to the Shareholders Rights Plan dated December 17, 2002. (5)
4.3 Warrant Agreement by and between the Company and Mellon Investor
Services LLC dated December 31, 2001.(2)
10.1 Part-Time Employment Agreement dated November 12, 2002, between the
Company and Edward P. Smoot. (*)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Chief Executive
Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Chief Financial
Officer.
________________________
(1) Incorporated by reference to the Company's Form 8-K filed on September 20,
2001 and October 29, 2001.
(2) Incorporated by reference to the exhibits to the registration statement of
Form 8-A filed by the Company on January 9, 2002.
(3) Incorporated by reference to the Company's Form 10-Q/A for the quarterly
period ended June 30, 2002.
(4) Incorporated by reference to an exhibit to the Company's Form 8-K filed on
September 21, 2002.
(5) Incorporated by reference to an exhibit to the Company's Form 10-K for the
year ended September 30, 2002.
SIGNATURES
EXHIBIT 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jeffrey R. Cramer, Chief Executive Officer of Anacomp, Inc. (the
"Registrant"), do hereby certify in accordance with 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my
knowledge:
(1) the Quarterly Report on Form 10-Q of the Registrant, to which this
certification is attached as an exhibit (the "Report"), fully complies
with the requirements of section 13(a) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
Dated: February 13, 2003 /s/Jeffrey R. Cramer
-----------------------------
Jeffrey R. Cramer
Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Linster W. Fox, Chief Financial Officer of Anacomp, Inc. (the "Registrant"),
do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
(1) the Quarterly Report on Form 10-Q of the Registrant, to which this
certification is attached as an exhibit (the "Report"), fully complies
with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
Dated: February 13, 2003 /s/Linster W. Fox
-------------------------------
Linster W. Fox
Chief Financial Officer