UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2004.
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: 1-08328
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 July 31, 2004, the number of outstanding shares of the registrant's
Class A Common Stock, $.01 par value per share, was 4,039,900 and the number of
outstanding shares of the registrant's Class B Common Stock, $.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
June 30, 2004 (unaudited) and September 30, 2003................ 1
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2004 and 2003....................... 2
Unaudited Condensed Consolidated Statements of Operations
Nine Months Ended June 30, 2004 and 2003..................... 3
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2004 and 2003........................ 4
Notes to the Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 25
Item 4. Controls and Procedures.................................................. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 26
Item 2. Changes in Securities and Use of Proceeds................................ 26
Item 6. Exhibits and Reports on Form 8-K......................................... 26
SIGNATURES............................................................................... 27
Index to Exhibits........................................................................ 28
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
(in thousands) 2004 2003
____________ _____________
Assets (Unaudited)
Current assets:
Cash and cash equivalents........................................... $ 16,544 $ 18,390
Receivable on sale of Swiss subsidiaries............................ 251 1,262
Accounts receivable, net............................................ 27,928 29,847
Inventories, net.................................................... 3,217 3,174
Prepaid expenses and other.......................................... 3,581 4,798
____________ _____________
Total current assets.................................................... 51,521 57,471
Property and equipment, net............................................. 16,026 18,398
Reorganization value in excess of identifiable net assets............... 73,363 73,363
Intangible assets, net.................................................. 7,342 8,829
Other assets............................................................ 7,762 6,880
____________ _____________
$ 156,014 $ 164,941
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................... $ 8,154 $ 9,118
Accrued compensation, benefits and withholdings..................... 14,702 14,233
Deferred revenue.................................................... 9,203 7,784
Accrued income taxes................................................ 1,697 1,063
Other accrued liabilities........................................... 10,055 9,262
____________ _____________
Total current liabilities............................................... 43,811 41,460
____________ _____________
Long-term liabilities:
Senior secured revolving credit facility............................ --- 5,917
Unfunded accumulated benefit obligation............................. 14,545 13,296
Other long-term liabilities......................................... 2,533 3,125
____________ _____________
Total long-term liabilities............................................. 17,078 22,338
____________ _____________
Stockholders' equity:
Preferred stock..................................................... --- ---
Common stock........................................................ 40 40
Additional paid-in capital.......................................... 97,200 97,000
Accumulated other comprehensive loss................................ (273) (891)
(Accumulated deficit) retained earnings............................. (1,842) 4,994
____________ _____________
Total stockholders' equity.............................................. 95,125 101,143
____________ _____________
$ 156,014 $ 164,941
============ =============
See the accompanying Notes to the Condensed Consolidated Financial Statements.
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts) Three months ended Three months ended
June 30, 2004 June 30, 2003
___________________ __________________
Revenues:
Services........................................................... $ 37,348 $ 40,989
Equipment and supply sales......................................... 7,842 8,817
___________________ __________________
45,190 49,806
___________________ __________________
Cost of revenues:
Services........................................................... 24,910 28,119
Equipment and supply sales......................................... 5,259 6,317
___________________ __________________
30,169 34,436
___________________ __________________
Gross profit........................................................... 15,021 15,370
Costs and expenses:
Engineering, research and development.............................. 1,462 1,450
Selling, general and administrative................................ 13,053 11,809
Reversal of environmental liability................................ (145) ---
Amortization of intangible assets.................................. 496 496
Restructuring charge............................................... 3,970 1,152
___________________ __________________
Operating (loss) income................................................ (3,815) 463
___________________ __________________
Other income (expense):
Interest income.................................................... 45 45
Interest expense and fee amortization.............................. (167) (383)
Other.............................................................. (58) (79)
___________________ __________________
(180) (417)
___________________ __________________
(Loss) income before income taxes...................................... (3,995) 46
Provision for income taxes............................................. 550 676
___________________ __________________
Net loss............................................................... $ (4,545) $ (630)
=================== ==================
Basic and diluted per share data:
Basic and diluted net loss per share............................... $ (1.12) $ (0.15)
=================== ==================
Shares used in computing basic and diluted net loss per share.......... 4,044 4,039
=================== ==================
See the accompanying Notes to the Condensed Consolidated Financial Statements.
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts) Nine months ended Nine months ended
June 30, 2004 June 30, 2003
_________________ _________________
Revenues:
Services........................................................... $ 116,536 $ 126,852
Equipment and supply sales......................................... 24,943 28,706
_________________ _________________
141,479 155,558
_________________ _________________
Cost of revenues:
Services........................................................... 78,301 86,027
Equipment and supply sales......................................... 16,893 19,597
_________________ _________________
95,194 105,624
_________________ _________________
Gross profit........................................................... 46,285 49,934
Costs and expenses:
Engineering, research and development.............................. 4,321 4,883
Selling, general and administrative................................ 39,681 39,439
Reversal of environmental liability................................ (626) ---
Amortization of intangible assets.................................. 1,488 1,488
Restructuring charges.............................................. 6,277 1,152
_________________ _________________
Operating (loss) income from continuing operations..................... (4,856) 2,972
_________________ _________________
Other income (expense):
Interest income.................................................... 172 192
Interest expense and fee amortization.............................. (450) (1,777)
Other.............................................................. (340) (51)
_________________ _________________
(618) (1,636)
_________________ _________________
(Loss) income from continuing operations before income taxes........... (5,474) 1,336
Provision for income taxes............................................. 1,362 1,781
_________________ _________________
Loss from continuing operations........................................ (6,836) (445)
Gain on sale of discontinued operations, net of taxes.................. --- 8,184
_________________ _________________
Net (loss) income...................................................... $ (6,836) $ 7,739
================= =================
Basic and diluted per share data:
Basic and diluted loss from continuing operations.................. $ (1.69) $ (0.11)
Gain on sale of discontinued operations, net of taxes.............. --- 2.03
_________________ _________________
Basic and diluted net (loss) income................................ $ (1.69) $ 1.92
================= =================
Shares used in computing basic and diluted net (loss) income per share. 4,043 4,039
================= =================
See the accompanying Notes to the Condensed Consolidated Financial Statements.
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months ended Nine months ended
June 30, 2004 June 30, 2003
_________________ _________________
Cash flows from operating activities:
Net (loss) income.................................................. $ (6,836) $ 7,739
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Gain on sale of discontinued operations.......................... --- (8,184)
Depreciation and amortization.................................... 9,178 11,054
Amortization of debt fees, premiums, and discounts............... 170 516
Non-cash compensation............................................ 263 58
Non-cash restructuring charges................................... 662 ---
Changes in assets and liabilities:
Accounts and other receivables................................. 2,930 3,559
Inventories.................................................... (43) 512
Prepaid expenses and other assets.............................. (140) 2,666
Accounts payable, accrued expenses and other liabilities....... 175 (6,395)
_________________ _________________
Net cash provided by operating activities..................... 6,359 11,525
_________________ _________________
Cash flows from investing activities:
Purchases of property and equipment................................ (3,004) (2,067)
Payments to acquire product line assets and customer rights --- 500
Proceeds from sale of discontinued operations, net................. --- 14,106
_________________ _________________
Net cash (used in) provided by investing activities........... (3,004) 11,539
_________________ _________________
Cash flows from financing activities:
Principal payments on revolving line of credit, net................ (5,917) (21,812)
_________________ _________________
Net cash used in financing activities......................... (5,917) (21,812)
_________________ _________________
Effect of exchange rate changes on cash and cash equivalents........... 716 1,231
_________________ _________________
(Decrease) increase in cash and cash equivalents....................... (1,846) 2,483
Cash and cash equivalents at beginning of period....................... 18,390 15,561
_________________ _________________
Cash and cash equivalents at end of period............................. $ 16,544 $ 18,044
================= =================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest............................................... $ 388 $ 1,184
================= =================
Cash paid for income taxes........................................... $ 901 $ 1,003
================= =================
See the accompanying Notes to the Condensed Consolidated Financial Statements.
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Anacomp and its 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, 2003, have not been audited, but in the opinion of management
include all adjustments (consisting of normal recurring adjustments and an
adjustment to our estimated environmental liability) 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 fiscal year ended
September 30, 2003, included in our fiscal 2003 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.
We account for our employee stock option plans in accordance with APB Opinion
No. 25, under which compensation expense is recognized only to the extent the
exercise price of the option is less than the fair market value of a share of
stock at the date of grant (the intrinsic value method). Accordingly, we have
adopted the disclosure only requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure." Had employee compensation costs for these plans been determined
based on their fair value on their grant date in accordance with SFAS No. 123,
our net results would have been as follows (in thousands, except per share
amounts):
For the three months ended June 30:
2004 2003
___________ _________
Net loss as reported............................................... $ (4,545) $ (630)
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards granted since December
31, 2001, net of related tax effects .......................... (104) (161)
___________ _________
Pro forma net loss................................................. $ (4,649) $ (791)
=========== =========
Basic and diluted net loss per share:
As reported.................................................. $ (1.12) $ (0.15)
Pro forma.................................................... $ (1.15) $ (0.20)
For the nine months ended June 30:
2004 2003
___________ _________
Net (loss) income as reported...................................... $ (6,836) $ 7,739
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards granted since December
31, 2001, net of related tax effects .......................... (313) (482)
___________ _________
Pro forma net (loss) income........................................ $ (7,149) $ 7,257
=========== =========
Basic and diluted net (loss) income per share:
As reported.................................................. $ (1.69) $ 1.92
Pro forma.................................................... $ (1.77) $ 1.80
Note 2. 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 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 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 $73.1 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 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 June 30, 2004
_______________________________________________________________________ _______________ ______________
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......................................... (4,958)
==============
$ 7,342
==============
Note 4. Senior Secured Revolving Credit Facility
Effective November 24, 2003, we entered into a two-year revolving credit
agreement with Fleet National Bank and Union Bank of California. Effective March
26, 2004, we signed an amendment to the revolving credit agreement. The
amendment modified certain financial covenants to accommodate our current
restructuring activities (See Note 7) and business plans, reduced the maximum
commitment to $17.5 million and provides limited ability to purchase Anacomp
Class B Common Stock. The amended credit agreement ("amended credit facility")
provides for a standby letter of credit sublimit of up to $10.0 million.
Availability is limited to the lesser of (a) the maximum commitment of $17.5
million or (b) the borrowing base.
The amended credit facility bears interest at a base rate equal to the higher of
(a) the annual rate of interest announced from time to time by Fleet National
Bank as its best rate, or (b) one-half of one percent above the Federal Funds
Effective Rate, for the portion of the facility equal to the borrowing base. The
borrowing base equals 80% of eligible accounts, which include U.S. and Canadian
accounts receivable.
The amended credit facility is secured by virtually all Anacomp assets and 65%
of the capital stock of our foreign subsidiaries. The amended credit facility
contains covenants relating to limitations on the following:
o additional debt;
o permitted acquisitions; and
o liens and dividends.
The amended credit facility also is subject to a leverage ratio covenant,
minimum liquidity and limits on annual capital expenditures. In addition, we are
required to remit to the Bank Group the net proceeds of any significant capital
asset sale. Except as noted, the banks must approve any buyback or open market
purchases of our common stock.
On July 30, 2004, we signed a 5-year, $50.0 million senior secured credit
facility agreement with Wells Fargo Foothill, Inc. ("new credit facility"). The
larger new credit facility is comprised of a $25.0 million revolver and a $25.0
million acquisition facility. The new credit facility will provide for working
capital requirements and will fund acquisitions and stock buybacks. Subject to
certain conditions, up to $15.0 million of our shares can be repurchased under
the new credit facility.
Note 5. Sale of Switzerland and Other Operations
We completed a sale of our Switzerland operations and subsidiaries 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).
As of June 30, 2004, all proceeds had been received from the sale except for CHF
300,000. The CHF 300,000 is currently being held in escrow pending resolution of
an as yet unresolved contingency. Effectively, all of the net proceeds (i.e.
sales price less sale costs) received have been used to reduce the balance
outstanding under the terms of our 2002 Amended and Restated Revolving Credit
Agreement, as amended.
We recorded a gain on the sale of the Swiss operations that is shown separately
as "Gain on sale of discontinued operations, net of taxes" in the Condensed
Consolidated Statements of Operations for the nine months ended June 30, 2003.
Note 6. Income Taxes
Our provision for income taxes consists of the following:
Nine months ended Nine months ended
(in thousands) June 30, 2004 June 30, 2003
_________________________________________ _________________ _________________
Federal.................................. $ --- $ 388
State.................................... 45 40
Foreign.................................. 1,317 1,353
_________________ _________________
$ 1,362 $ 1,781
================= =================
Due to our reorganization, we had Cancellation of Debt ("COD") income of $265.4
million in fiscal year 2002. 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 $39.8 million in order to fully
offset the net deferred tax asset. At June 30, 2004, our most significant
deferred tax assets and liabilities related to temporary differences for the tax
basis of intangible assets. These timing differences were realized, offset and
reversed with no impact on the net value of the deferred tax asset at June 30,
2004.
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 and when
management determines that it is more likely than not that the utilization of
these assets will not occur before they expire.
Note 7. Restructuring Activities
We continue to experience revenue declines in Computer Output to Microfiche
(COM)/Other Output Services, CD/Digital, COM Professional Services, and
Equipment/Supplies product lines. Due to this ongoing trend, we initiated
significant changes in fiscal 2004 to align our cost structure and
infrastructure through the consolidation and downsizing of facilities and
adjustments to our worldwide workforce. We recorded restructuring charges of
$2.4 million in the second quarter of fiscal 2004 and $4.0 million in the third
quarter of fiscal 2004. Adjustments to our workforce (affecting approximately
101 employees) during the third quarter of fiscal 2004 resulted in a $0.7
million charge. In the second quarter of fiscal 2004 approximately 49 employees
were terminated and we recorded a charge of $1.9 million. All affected employees
were notified and have left the Company. The remaining accrued but unpaid
liability of $1.3 million, as of June 30, 2004, is expected to be paid by
November 2004. Also included in the third quarter $4.0 million restructuring
charge was $2.6 million of facility closure costs, including future lease
payments, leasehold improvements and operating equipment, and incremental travel
and relocation costs incurred as a result of our consolidation efforts. At June
30, 2004, $2.6 million of these amounts remained unpaid and we expect that
payments (non-cancelable facility lease payments) will continue through February
2008. Non-cash restructuring deductions were $0.7 million in the third quarter
and reflect leasehold improvements and excess and obsolete equipment from closed
data centers. These non-cash charges are included in the deductions column.
We recorded restructuring charges totaling $2.9 million in the third and fourth
quarters of fiscal 2003. Adjustments to our workforce in those periods
(affecting approximately 178 employees) totaled $2.5 million, and all affected
employees were notified and have departed the Company. The remaining accrued but
unpaid liability of $24,000, as of June 30, 2004, is expected to be paid by
December 31, 2004. Also included in the $2.9 million restructuring charge was
$0.4 million of facility closure costs, including incremental travel and
relocation costs incurred as a result of our consolidation efforts. At June 30,
2004, $0.1 million of this amount remained unpaid and we expect that payments
(non-cancelable facility lease payments) will continue through December 2007. In
the second quarter of fiscal 2004, we were able to negotiate an early
termination of one of our leased facilities included in the 2003 restructuring
charges and in the third quarter of fiscal 2004 we were able to negotiate a
favorable resolution to an international employee termination. These favorable
results resulted in reduced obligations, and we have therefore recorded a
favorable adjustment of $49,000 and $28,000 in the second and third quarters of
fiscal 2004, respectively.
The restructuring reserves are included as a component of "Other accrued
liabilities" in the accompanying Condensed Consolidated Balance Sheets. Lease
obligations payable more than twelve months from June 30, 2004 totaled $0.7
million, were considered long-term and are included as "Other long-term
liabilities" in the accompanying Condensed Consolidated Balance Sheets.
The following table presents the activity and balances of the fiscal 2004 and
fiscal 2003 restructuring reserves from September 30, 2003 to June 30, 2004 (in
thousands):
Employee Facility
Separations Closing Total
____________ _________ ________
Fiscal 2003 Restructuring
Liability, September 30, 2003........... $ 1,510 $ 253 $ 1,763
Cash payments........................... 1,458 121 1,579
Adjustments to expense.................. (28) (49) (77)
____________ _________ ________
Liability, June 30, 2004................ $ 24 $ 83 $ 107
============ ========= ========
Employee Facility
Fiscal 2004 Restructuring Separations Closing Total
____________ _________ ________
Liability, September 30, 2003........... $ --- $ --- $ ---
Charged to expense...................... 2,639 3,714 6,353
Non-cash amounts........................ --- 662 662
Cash payments........................... 1,309 418 1,727
____________ _________ ________
Liability, June 30, 2004................ $ 1,330 $ 2,634 $ 3,964
============ ========= ========
Summary of Restructuring Activities
Employee Facility
Separations Closing Total
____________ _________ ________
Liability, September 30, 2003........... $ 1,510 $ 253 $ 1,763
Charged to expense...................... 2,639 3,714 6,353
Non-cash amounts........................ --- 662 662
Cash payments........................... 2,767 539 3,306
Adjustments............................. (28) (49) (77)
____________ _________ ________
Liability, June 30, 2004................ $ 1,354 $ 2,717 $ 4,071
============= ========= ========
Note 8. Inventories
Inventories consist of the following:
(in thousands) June 30, 2004 September 30, 2003
_________________________________________________________________ _____________ __________________
Finished goods, including purchased film....................... $ 470 $ 593
Consumable spare parts and supplies............................ 2,747 2,581
_____________ __________________
$ 3,217 $ 3,174
============= ==================
Note 9. Defined Benefit Plan
We have retirement plans in place for our United Kingdom and Germany
subsidiaries that qualify as defined benefit plans. The plans provide benefits
based primarily on years of service and employee compensation levels. 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.
Plan assets are held in trust and consist primarily of equity securities. In
addition, our balance sheet includes assets with a fair value of $4.7 million
and $4.2 million as of June 30, 2004 and 2003, respectively, held specifically
to meet pension obligations in Germany. These additional assets do not
technically qualify as pension assets under U.S. GAAP definitions and are,
therefore, included as a component of "Other Assets" in the accompanying
Condensed Consolidated Balance Sheets.
The unfunded accumulated benefit obligation liability and other assets described
above are calculated as of September 30, 2003. The amounts reported on the June
30, 2004 Condensed Consolidated Balance Sheets primarily reflect the impact of
changes in exchange rates during that time.
As of June 30, 2004, the unfunded accumulated benefit obligation for both plans
in total was $14.5 million. The recent under funding of pension plans is
primarily due to decreases in actual investment returns, a decrease in the
assumed discount rates, and an increase in life expectancy. We evaluate our
actuarial assumptions on an annual basis. These assumptions are revised based on
an evaluation of long-term trends and market conditions in each country that may
have an impact on the cost of providing retirement benefits.
Components of the net periodic benefit cost were as follows:
Three months ended Three months ended
(in thousands) June 30, 2004 June 30, 2003
________________________________________ ___________________ ___________________
Service cost $ 254 $ 221
Interest cost 513 434
Expected return on plan assets (358) (312)
Recognized actuarial loss 80 76
___________________ ___________________
Net periodic benefit cost $ 489 $ 419
=================== ===================
Nine months ended Nine months ended
(in thousands) June 30, 2004 June 30, 2003
________________________________________ ___________________ ___________________
Service cost $ 764 $ 663
Interest cost 1,544 1,302
Expected return on plan assets (1,073) (936)
Recognized actuarial loss 239 228
___________________ ___________________
Net periodic benefit cost $ 1,474 $ 1,257
=================== ===================
Total employer contributions paid during the three and nine months ended June
30, 2004 were $0.2 million and $1.0 million, respectively. Additional employer
contributions of approximately $0.2 million are expected to be paid during the
remainder of fiscal 2004.
Note 11. Comprehensive (loss) income
Comprehensive (loss) income consists of the following components:
Three months ended Three months ended
(in thousands) June 30, 2004 June 30, 2003
___________________________________________ ___________________ __________________
Net loss................................... $ (4,545) $ (630)
Change in foreign currency translation..... (17) 1,044
Amortization of unfunded accumulated
benefit obligation...................... --- 48
___________________ __________________
Comprehensive (loss) income................ $ (4,562) $ 462
=================== ==================
Nine months ended Nine months ended
(in thousands) June 30, 2004 June 30, 2003
___________________________________________ ___________________ __________________
Net (loss) income.......................... $ (6,836) $ 7,739
Change in foreign currency translation..... 618 1,242
Amortization of unfunded accumulated
benefit obligation...................... --- 144
___________________ __________________
Comprehensive (loss) income................ $ (6,218) $ 9,125
=================== ==================
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 nine months ended June 30, 2004, potentially dilutive securities included
outstanding warrants to purchase 783,077 shares of Class B Common Stock, which
were issued as part of the reorganization. The shares subject to these warrants
were excluded from diluted income per share as they were anti-dilutive using the
treasury stock method.
Note 13. Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132(R), "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement revises Statement No. 132 in order to improve
financial statement disclosures for defined benefit plans. The standard requires
disclosure of more details about plan assets, obligations, cash flows, benefit
costs, and other relevant information. Disclosures in interim financial
statements are also expanded to require information about various elements of
pension and other postretirement benefit costs. This Statement is effective for
financial statements with fiscal years ending after December 15, 2003, and the
interim provisions are required for periods beginning after December 15, 2003.
The adoption of this Statement has not had a material impact on our results of
operations or financial condition.
In July 2003, the Emerging Issues Task Force ("EITF") finalized a consensus on
Issue No. 03-5, "Applicability of AICPA Statement of Position 97-2, Software
Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software" ("SOP 72"), effective for arrangements entered
into in the first reporting period (annual or interim) beginning after August
13, 2003. This Issue considers whether the provisions of SOP 97-2, particularly
the Vendor Specific Objective Evidence ("VSOE") requirements, apply to all
deliverables in an arrangement containing more-than-incidental software or only
to the software elements of the arrangement. The EITF concluded that in an
arrangement that includes software that is more than incidental to the products
or services as a whole, software as well as software-related elements (these
elements include non-software deliverables for which software deliverables are
essential to their functionality) are included within the scope of SOP 97-2. The
adoption of this consensus has not had a material effect on our results of
operations or financial condition.
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,"
contains "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995 and within the safe harbors 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," "may," "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, projections used for valuation purposes,
sales levels, consolidation and restructuring plans, liquidity needs,
expectations of business trends and product line revenue trends 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 estimates 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 and in our
other periodic reports filed with the SEC. 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 made in this report 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 and uncertainties. Risks, uncertainties and other important factors
include, among others:
o general economic and business conditions;
o industry trends and growth rates;
o liability resulting from theft or loss of customer data;
o competition;
o future technology;
o costs and availability of raw materials;
o currency fluctuations;
o the loss of any significant customers or suppliers;
o changes in business strategy or development plans;
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 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 our other public filings
with the Securities and Exchange Commission, including our Form 10-K for
the fiscal year ended September 30, 2003.
Overview and Recent Events
Anacomp is a global provider of information outsourcing services, maintenance
support, and imaging and print solutions. Anacomp was incorporated in Indiana in
1968 and has active international subsidiaries in Austria, Belgium, Canada,
France, Germany, Italy, the Netherlands, Scandinavia and the United Kingdom.
The majority of our business relates to managing customer documents, supporting
the devices these documents are captured, printed or stored on, and providing
supplies and service for the same. We attempt to service our existing and future
customers by "bundling" an expanded list of services (e.g. Web viewing, CD
Services, printing, scanning and long-term archival storage).
We are also one of the world's leading independent, vendor neutral providers of
Multi-Vendor Services (MVS), where we act as a third party maintainer, providing
support services such as on-site maintenance, call center/help desk service
and/or depot repair services, as well as laser printer maintenance and
associated hardware. We offer expert installation, maintenance and repair
services for a broad array of third party equipment, such as mass storage
devices and high-speed output systems. In addition, we provide systems and
related supplies and services to much of the installed base of COM imaging
systems worldwide through a combination of direct sales, telemarketing and
distributors. Anacomp was once the primary manufacturer for most of the base of
this installed COM equipment and today we provide "as new" systems to our
customers in North America, Japan and Europe. We also refurbish high-speed laser
printers and provide maintenance support for a number of these devices, as well
as selling associated supplies.
We continually monitor our legacy business volumes and intend to reduce the cost
of infrastructure when and where appropriate. In the second quarter of fiscal
2004, we initiated a plan to better align our infrastructure with major market
opportunities. In order to enhance our presence in these major markets, we have
been consolidating our smaller facilities into larger, Mega center locations and
have made related adjustments to our worldwide workforce. We plan on leveraging
our current data transmission capabilities to optimize the cost of delivering
legacy services. Our Mega centers will be positioned in areas where we believe
our future prospects are strongest and will enable us to service customers from
other geographic markets. Creating better span of control of our resources,
while aligning our sales resources around these centers is expected to help us
identify additional opportunities while reducing operating costs.
On July 30, 2004, we signed a 5-year, $50.0 million senior secured credit
facility agreement with Wells Fargo Foothill, Inc. ("new credit facility"). The
larger new credit facility is comprised of a $25.0 million revolver and a $25.0
million acquisition facility. The facility will provide for working capital
requirements and will fund acquisitions and stock buybacks. Subject to certain
conditions, up to $15.0 million of our shares can be repurchased under the new
credit facility.
Management's discussion and analysis presented below provides a narrative on our
financial performance and condition and is intended to provide information that
will assist in understanding our condensed consolidated financial statements,
the changes in certain key items in those financial statements from period to
period, and the primary factors that caused those changes, including how certain
accounting principles, policies and estimates affect such financial statements.
The discussion and analysis that follows should be read in conjunction with the
accompanying condensed consolidated financial statements and the related notes
appearing elsewhere in this report, and includes the following sections:
o Critical Accounting Policies and Estimates,
o Results of Operations,
o Liquidity and Capital Resources, and
o Off-balance Sheet Arrangements, Contractual Obligations and Commercial
Commitments.
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. A summary of our
significant accounting policies and estimates can be found in our fiscal 2003
Annual Report on Form 10-K.
Results of Operations
Three Months Ended June 30, 2004 vs. Three Months Ended June 30, 2003
General. We reported a net loss of $4.5 million for the three months ended
June 30, 2004 versus $0.6 million for the three months ended June 30, 2003.
Results for the third quarter of fiscal 2004 reflected a $4.0 million
restructuring charge compared to a $1.2 million restructuring charge in the same
quarter in the prior year. MVS revenues grew and Web Presentment revenues grew
substantially in the third quarter of fiscal 2004 over revenues for the
comparable period in the prior year. COM-based revenues, comprised of COM/Other
Output Services, COM/Professional Services, and Equipment and Supplies,
continued to decline in the three months ended June 30, 2004, in line with
historical trends. Due to the general weakening of the U.S. dollar, our total
net revenues for the third quarter of fiscal 2004 were favorably impacted by
foreign exchange rates as compared with the third quarter of fiscal 2003. The
impact of the foreign exchange benefit in the current period was approximately
2% of total net revenues as compared with the third quarter of last year.
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, call center/help desk or
depot repair, laser printer maintenance and associated hardware sales.
docHarbor Web Presentment - Electronic ingestion, storage, delivery and internet
browser-based access to documents. Also includes license sales and maintenance
for the docHarbor software that is our Web platform in the US.
CD/Digital - CD-based document management services, scanning and digital
software sales.
COM/Other Output Services - Our Computer Output to Microfilm and laser printer
document management services.
COM Professional Services - Our maintenance services for Computer Output to
Microfilm and other micrographic products.
Equipment/Supplies - Computer Output to Microfilm original and duplicate film,
chemistry and hardware sales.
(in thousands) Revenues for Three Months Ended June 30,
________________________________________
Percentage
Product Line 2004 2003 Change Change
____________ ____ ____ ______ ______
MVS $ 9,382 $ 9,020 $ 361 4%
docHarbor Web Presentment 6,519 4,309 2,210 51%
CD/Digital 5,405 7,038 (1,633) (23%)
COM/Other Output Services 13,478 16,928 (3,450) (20%)
COM Professional Services 4,159 5,170 (1,011) (20%)
Equipment/Supplies 6,247 7,341 (1,094) (15%)
----- ----- -------
Total $ 45,190 $ 49,806 $ (4,617) (9%)
======== ======== ========
MVS revenues increased $0.4 million, or 4%, over the prior year three month
period. This increase reflects the increase in new OEM agreements and the
resulting growth in our Multi-Vendor Services offerings. We have experienced
several years of continuous growth in MVS revenues, and we expect continued
growth in this area as we expand our service offerings to include call
center/help desk and depot repair capabilities. The relative makeup of total
professional services revenues (consisting of MVS and COM professional services)
continues to shift from COM to MVS. In the three months ended June 30, 2004, MVS
represented 69% of total professional services, compared to 64% in the prior
year three month period.
docHarbor Web Presentment revenues increased $2.2 million, or 51%, over the
prior year three month period. This increase 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. A large
Web Presentment customer (representing 22% of docHarbor Web Presentment revenue
in the third quarter of fiscal 2004) has indicated that it will not renew its
Web Presentment services agreement when it expires in September 2004. Although
we will be losing this customer, we expect continued revenue growth on an annual
basis in this product line resulting from increased customer awareness and
recognition, increased acceptance of outsourcing non-core business processes and
tighter regulations relating to financial reporting and record keeping. Over the
long term, we believe that pricing for this product may become more competitive.
CD/Digital revenues declined $1.6 million, or 23%, from the prior year three
month period. The decline was due primarily to the availability of alternative
Web-based or in-house solutions.
COM/Other Output Services revenues declined $3.5 million, or 20%, 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. This
decline also was and continues to be due primarily to the availability of
alternative technologies. We expect that COM revenues will continue to decline
in future periods.
COM Professional Services revenues declined $1.0 million, or 20%, from the prior
year three month period. This decline reflects the continued decrease in the
number of COM units in operation. We expect that the number of COM units in use
worldwide will continue to decline as organizations choose to outsource these
document management functions to service centers, such as those operated by us,
or elect to utilize other options such as CD or on-line solutions.
Equipment and supplies revenues declined $1.1 million, or 15%, from the prior
year three month period. This decrease was largely the result of the decline in
demand for and use of COM systems.
Gross Margins. Our gross margin, based on gross profits of $15.0 million
for the three months ended June 30, 2004 and $15.4 million for the three months
ended June 30, 2003, increased from 31% of total revenues for the quarter ended
June 30, 2003 to 33% of total revenues for the period ended June 30, 2004. The
increased gross margin percentage resulted from the benefits obtained from the
fiscal 2003 restructuring actions.
Engineering, Research and Development. Engineering, research and
development expenditures, amounted to $1.5 million for the three month period
ended June 30, 2004, and were unchanged from the comparable prior year period,
representing 3% of total revenues in both periods. Engineering, research and
development expenditures will increase in the next two quarters as we plan to
develop new features and functionalities for our docHarbor Web Presentment
services. Engineering, research and development expenses will not necessarily
have a direct or immediate correlation to revenues.
Selling, General and Administrative ("SG&A"). SG&A expenses increased from
$11.8 million for the three months ended June 30, 2003 to $13.1 million for the
three months ended June 30, 2004. Approximately $0.8 million of this increase
was from our international operations and reflects the weakening of the dollar
against foreign currencies by 8% compared to the prior year period.
Reversal of Environmental Liability. Based upon updated environmental
analysis and historical sampling data, we recorded a reduction to our EPA
liability of $0.1 million in the quarter ended June 30, 2004.
Amortization of Intangible Assets. Amortization of intangible assets was
constant at $0.5 million for the three months ended June 30, 2003 and June 30,
2004. The expense in each period reflects amortization of identifiable
intangible assets valued as part of Fresh Start Reporting.
Restructuring Charges. Net restructuring charges of $4.0 million were
recorded for the quarter ended June 30, 2004. These charges predominantly
related to the fiscal 2004 data center consolidation and reorganization of
related personnel on a worldwide basis. We currently estimate total fiscal 2004
restructuring charges of approximately $9.0 million. We expect to obtain savings
of over $9.0 million annually as a result of these actions compared to fiscal
2003 operational expenditure levels.
Interest Expense and Fee Amortization. Interest expense decreased to $0.2
million for the three months ended June 30, 2004 from $0.4 million for the three
months ended June 30, 2003. The decrease reflects the lower balance outstanding
on the senior secured revolving credit facility for the three months ended June
30, 2004.
Other. Other expense in both periods is related primarily to currency
exchange gains and losses.
Provision for Income Taxes. The provision for income taxes of $0.6 million
and $0.7 million for the three months ended June 30, 2004 and 2003,
respectively, related primarily to earnings of foreign subsidiaries. Certain
European subsidiaries generate taxable income and resultant income tax expense.
Other legal entities generate operating losses on which no income tax benefit is
recorded due to the uncertainty of future profits against which these benefits
could be used. These events create an unbalanced situation where income tax
expense is a disproportionate percentage of operating income or loss.
Nine Months Ended June 30, 2004 vs. Nine Months Ended June 30, 2003
General. We reported a net loss of $6.8 million for the nine months ended
June 30, 2004 versus net income of $7.7 million for the nine months ended June
30, 2003. The net loss for the nine months ended June 30, 2004 included $6.3
million in restructuring charges compared to restructuring charges of $1.2
million in the comparable prior year period. The prior year period's net income
included an $8.2 million gain on the sale of our Swiss subsidiaries. Both MVS
and Web Presentment revenues grew substantially over the prior year period
revenues. COM-based revenues continued to decline in the nine months ended June
30, 2004, in line with historical trends. Due to the general weakening of the
U.S. dollar, our total net revenues for the first nine months of fiscal 2004
were favorably impacted by foreign exchange rates as compared with the first
nine months of fiscal 2003. The impact of the foreign exchange benefit in the
current period was approximately 3% of total net revenues as compared with the
first nine months of last year.
(in thousands) Revenues for Nine Months Ended June 30,
_______________________________________
Percentage
Product Line 2004 2003 Change Change
____________ ____ ____ ______ ______
MVS $ 27,796 $ 25,375 $ 2,421 10%
docHarbor Web Presentment 18,445 13,805 4,640 34%
CD/Digital 17,694 21,703 (4,009) (19%)
COM/Other Output Services 43,961 54,863 (10,902) (20%)
COM Professional Services 13,405 15,976 (2,571) (16%)
Equipment/Supplies 20,178 23,836 (3,658) (15%)
______ ______ _______
Total $ 141,479 $ 155,558 $(13,880) (9%)
========= ========= =========
MVS revenues increased $2.4 million, or 10%, over the prior year nine month
period. This increase reflects the increase in new OEM agreements and the
resulting growth in our Multi-Vendor Services offerings. We have experienced
several years of continuous growth in MVS revenues, and we expect continued
growth in this area as we expand our service offerings to include call
center/help desk and depot repair capabilities. The relative makeup of total
professional services revenues (consisting of MVS and COM professional services)
continues to shift from COM to MVS. In the nine months ended June 30, 2004, MVS
represented 67% of total professional services, compared to 61% in the prior
year nine-month period.
docHarbor Web Presentment revenues increased $4.6 million, or 34%, over the
prior year nine month period. This increase 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. A large
Web Presentment customer (representing 25% of docHarbor Web Presentment revenue
in the first nine months of fiscal 2004) has indicated that it will not renew
its Web Presentment services agreement when it expires in September 2004.
Although we will be losing this customer, we expect continued revenue growth on
an annual basis in this product line resulting from increased customer awareness
and recognition, increased acceptance of outsourcing non-core business processes
and tighter regulations around financial reporting and record keeping. Over the
long term, we believe that pricing for this product may become more competitive.
CD/Digital revenues declined $4.0 million, or 19%, from the prior year nine
month period. The decline was due primarily to the availability of alternative
Web-based or in-house solutions.
COM/Other Output Services revenues declined $10.9 million, or 20%, from the
prior year nine month period. This decline reflects the decreased volumes
processed in our data centers and continues the trend experienced in prior
years. This decline also was and continues to be due primarily to the
availability of alternative technologies. We expect that COM revenues will
continue to decline in future periods.
COM Professional Services revenues declined $2.6 million, or 16%, from the prior
year nine month period. This decline reflects the continued decrease in the
number of COM units in operation. We expect that the number of COM units in use
worldwide will continue to decline as organizations choose to outsource these
document management functions to service centers, such as those operated by us,
or elect to utilize other options such as CD or on-line solutions.
Equipment and supplies revenues declined $3.7 million, or 15%, from the prior
year nine month period. This decrease was largely the result of the decline in
demand for, and use of, COM systems.
Gross Margins. Our gross margins, based on gross profits of $46.3 million
for the nine months ended June 30, 2004 and $49.9 million for the nine months
ended June 30, 2003, were 33% and 32% of total revenues, respectively. The
increased gross margin percentage resulted from the benefits obtained from the
fiscal 2003 restructuring actions.
Engineering, Research and Development. Engineering, research and
development expenditures decreased $0.6 million, or 12%, from the nine month
period ended June 30, 2003, and remained consistent at 3% of total revenues in
both periods. This decrease in spending was mainly the result of
restructuring-related actions taken in the third and fourth quarters of fiscal
2003. 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. Most of these
expenditures were in support of the docHarbor Web Presentment and CD/Digital
services and, to a lesser extent, COM products.
Selling, General and Administrative ("SG&A"). SG&A expenses increased from
$39.4 million for the nine months ended June 30, 2003 to $39.7 million for the
nine months ended June 30, 2004. During the second quarter of fiscal 2004, the
Company was involved in a proxy contest involving the election of directors and
as a result expended $0.4 million in connection with this proxy contest. The
Company's proposed directors were elected despite the proxy contest. SG&A
expenses for the nine months ended June 30, 2004 included a $2.7 million
increase in international expenses over the comparable prior year period. This
increase in part reflects the weakening of the US dollar against foreign
currencies of 13% in fiscal 2004 compared to the prior year.
Reversal of Environmental Liability. Based upon updated environmental
analysis and continued favorable site contamination test results, we recorded a
reduction to our EPA liability of $0.5 million in the first quarter, and $0.1
million in the third quarter of fiscal 2004.
Amortization of Intangible Assets. Amortization of intangible assets
remained at $1.5 million for the nine months ended June 30, 2003 and June 30,
2004. The expense in each period reflects amortization of identifiable
intangible assets valued as part of Fresh Start Reporting.
Restructuring Charges. Net restructuring charges of $2.3 million and $4.0
million were recorded in the second and third quarters, respectively, of fiscal
2004. We currently estimate total fiscal 2004 restructuring charges of
approximately $9.0 million. We expect to obtain savings of over $9.0 million
annually as a result of these actions compared to fiscal 2003 operational
expenditure levels. In addition, in the second quarter of fiscal 2004, we were
able to negotiate favorable settlements on a lease and employee termination
expensed in our fiscal 2003 restructuring, resulting in a $77,000 reduction to
the restructuring charge for the nine months ended June 30, 2004.
Interest Expense and Fee Amortization. Interest expense decreased to $0.5
million for the nine months ended June 30, 2004 from $1.8 million for the nine
months ended June 30, 2003. This decrease reflects the lower balance outstanding
on the senior secured revolving credit facility in the current year period.
Other. Other expense in both periods is related primarily to currency
exchange gains and losses.
Provision for Income Taxes. The provision for income taxes of $1.4 million
and $1.8 million for the nine months ended June 30, 2004 and 2003, respectively,
related primarily to earnings of foreign subsidiaries. Certain European
subsidiaries generate taxable income and resultant income tax expense. Other
legal entities generate operating losses on which no income tax benefit is
recorded due to the uncertainty of future profits against which these benefits
could be used. These events create an unbalanced situation where income tax
expense is a disproportionate percentage of operating income or loss.
Liquidity and Capital Resources
Our legacy business (COM) has declined in recent years and is forecasted to
continue to decline as new and alternate 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.
We believe the actions taken over the past two and a half years, including new
and enhanced product and service offerings, Company downsizing and cost control
measures will allow us to maintain 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.
In the nine months ended June 30, 2004, we generated cash flows from operations
of $6.4 million, compared to $11.5 million generated in the same period of the
prior fiscal year. Net cash from operations in the first nine months of fiscal
2004 primarily reflected our operating loss offset by non-cash charges for
depreciation, amortization, and compensation in the form of stock grants for our
outside directors and a decrease in accounts receivable. Cash payments of
restructuring related costs in fiscal 2004 were the primary reason for the
decline compared to the comparable period in fiscal 2003.
Net cash used in investing activities was $3.0 million for the nine months ended
June 30, 2004, compared to cash provided by investing activities of $11.5
million in the comparable prior year period. Expenditures in both years were
primarily for purchases of equipment. In the first quarter of fiscal 2004, we
invested approximately $0.7 million in our call center and central services
infrastructure. In the prior comparable year period we received $14.1 million in
cash proceeds from the sale of our Switzerland operations and subsidiaries.
Net cash used in financing activities was $5.9 million for the nine months ended
June 30, 2004, compared to $21.8 million used in financing activities in the
comparable prior year period. In both periods, cash was used to pay down the
revolving credit facility.
At June 30, 2004, there were no outstanding revolving credit borrowings. At June
30, 2004 there were outstanding standby letters of credit of $4.9 million.
Effective November 24, 2003, we entered into a two-year revolving credit
agreement with Fleet National Bank and Union Bank of California. Effective March
26, 2004, we signed an amendment to the revolving credit agreement. The
amendment modified certain financial covenants to accommodate our current
restructuring activities and business plans, reduced the maximum commitment to
$17.5 million and provides limited ability to purchase Anacomp Class B Common
Stock. The amended credit agreement ("amended credit facility") provides for a
standby letter of credit sublimit of up to $10.0 million. Availability is
limited to the lesser of (a) the maximum commitment of $17.5 million or (b) the
borrowing base.
The amended credit facility bears interest at a base rate equal to the higher of
(a) the annual rate of interest announced from time to time by Fleet National
Bank as its best rate, or (b) one-half of one percent above the Federal Funds
Effective Rate, for the portion of the facility equal to the borrowing base. The
borrowing base equals 80% of eligible accounts, which include U.S. and Canadian
accounts receivable.
The borrowing base for the amended credit facility was $10.7 million as of June
30, 2004, with borrowing base availability of $5.8 million.
The amended credit facility is secured by virtually all of Anacomp's assets and
65% of the capital stock of our foreign subsidiaries. The amended credit
facility contains covenants relating to limitations on the following:
o additional debt;
o permitted acquisitions; and
o liens and dividends.
The amended credit facility also is subject to a leverage ratio covenant,
minimum liquidity and limits on annual capital expenditures. In addition, we are
required to remit to the Bank Group the net proceeds of any significant capital
asset sale. The banks must approve any buyback of our common stock.
During the past year, our significant paydown of the outstanding balance on our
revolving credit facility, through both payments of cash generated through
operations and from proceeds received on the sale of our Switzerland
subsidiaries, as well as the reclassification of our amended credit facility
from current to long-term has substantially improved our working capital
position. Working capital was $7.7 million at June 30, 2004.
Our cash balance totaled $16.5 million at June 30, 2004 compared to $18.4
million at September 30, 2003. Approximately 49% of the June 30, 2004 cash
balance is located at our foreign subsidiaries compared to approximately 65% at
September 30, 2003.
On July 30, 2004, we signed a 5-year, $50.0 million senior secured credit
facility agreement with Wells Fargo Foothill, Inc. ("new credit facility"). The
larger new credit facility is comprised of a $25.0 million revolver and a $25.0
million acquisition facility. The new credit facility will provide for working
capital requirements and will fund acquisitions and stock buybacks. Subject to
certain conditions, up to $15.0 million of our shares can be repurchased under
the new credit facility. From time to time management considers asset
acquisitions, dispositions and stock buybacks on an opportunistic basis.
The Anacomp Board of Directors has authorized the Company to repurchase up to
$15.0 million of the Company's Class A common stock in open market and private
transactions, subject to the Company's assessment of market conditions and
buying opportunities. The repurchase program is effective August 5, 2004 and
terminates December 31, 2005.
Off-balance Sheet Arrangements, Contractual Obligations and Commercial
Commitments
We provide indemnification of varying scope and size to certain customers
against claims of intellectual property infringement made by third parties
arising from the use of our products and services. We evaluate estimated losses
for such indemnifications under SFAS No. 5, "Accounting for Contingencies," as
interpreted by FIN 45. We consider such factors as the degree of probability of
an unfavorable outcome and the ability to make a reasonable estimate of the
amount of loss when evaluating our indemnification obligations. To date, aside
from a patent infringement case settled in fiscal 2001, we have not encountered
material costs as a result of such obligations and have not accrued any
liabilities related to such indemnifications in our financial statements.
In the normal course of business, we occasionally enter into arrangements with
customers, suppliers or other parties that may result in material obligations or
commitments from a cash flow standpoint. The following table shows our material
contractual obligations and commercial commitments at June 30, 2004:
(in thousands) Amounts Due Within:
___________________
Description Total 1 year 2-3 years 4-5 years 6+ years
____________ ______ _______ _________ _________ ________
Standby letters of credit 4,851 --- 4,851 --- ---
Non-cancelable leases 47,799 9,610 15,623 12,030 10,536
Royalty payments (1) 750 750 --- --- ---
___ ___ ___ ___ ___
Total $53,400 $ 10,360 $ 20,474 $12,030 $ 10,536
======= ======== ======== ======= ========
___________________________
(1) This item is included with other accrued liabilities in our June 30, 2004
balance sheet.
RISK FACTORS
You should carefully consider the following risk factors and all of the other
information included in this Form 10-Q 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.
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 changing rapidly. 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 COM system) and the utilization of
micrographics service centers while evaluating the abilities of other
technologies. In addition, 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 23% in 2003 from fiscal year 2002 revenues. Overall, COM
revenues represented 60% of our revenues for the twelve-month period ended
September 30, 2003, 66% of our fiscal 2002 revenues, 71% of fiscal 2001
revenues, 77% of fiscal 2000 revenues, 83% of fiscal 1999 revenues, and 91% of
fiscal 1998 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.
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 was 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 and maintain 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
credit facility could become immediately due and payable on demand. Even though
we generated operating income from continuing operations before taxes in the
years ended September 30, 2003 and 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 loss or theft of customer data could cause us to be liable for significant
damages or cause harm to our reputation.
The laws concerning the privacy of consumer data have changed and companies are
being held more accountable for any loss, theft or misuse of such information.
Although our data centers, and the carriers that we use to ship data, have taken
many security measures, it is possible that customer data could be stolen, lost
or misused. Additionally, we use electronic transmission lines and computer
systems which could be hacked into by third parties. Any failure by Anacomp or
its carriers to protect data could cause us to be liable to our customers for
significant losses and could significantly harm our reputation in the
marketplace.
The development of alternative technologies in the document management industry
is decreasing the need for our CD Services.
The document management industry is continuing to change. The technological
advances and price declines in digital systems and products are expected to
continue. As a result, some of our CD services customers are choosing in-house
digital solutions and products or other service providers instead of our CD
service offerings. We believe that this is part of the reason for the recent
declines in our CD service revenues. Revenues from our CD services declined 6%
in fiscal 2002 and 20% in fiscal 2003 compared to the prior fiscal years.
Revenues for CD services have been adversely affected for the last two years and
will likely in the future be substantially adversely affected by, among other
things, the increasing use of other digital technologies. Additionally, the
rapidly changing document management industry has resulted in price competition
in the CD services business. We expect that our revenues for CD services will
continue to decline because of the availability of other technologies and the
effect of price competition. 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.
Restructuring of our operations could result in a loss of customers and impact
operating results.
We have implemented a plan to reduce costs in order to remain competitive within
our industry. This cost reduction plan involves, among other things, significant
headcount reductions, the exit of certain non-strategic facility locations, and
transfer customer work to new data centers. If we fail to successfully implement
our cost restructuring plan, including the transfer and retention of customers
to other data centers, the timely sublease or buyout of vacant facilities, and
fail to achieve our other long-term cost reduction goals, we may not reduce
costs quickly enough to become competitive within our industry, may lose
valuable institutional knowledge, bear the risk of additional costs and expenses
and incur a loss of customers, a diminishment in our operational functions,
which could result in negative consequences to our customer service and
operating results.
If we are unable to decrease our costs to match the decline in our revenues, we
may not be able to achieve or sustain profitability.
The decline in the demand for COM services, systems and maintenance and the
attendant reduction in supplies revenues have adversely affected our business.
Over the past several years, COM revenues from services, system and supplies
sales have been steadily decreasing as a percentage of our revenues and declined
23% in fiscal 2003 from fiscal year 2002 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 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.
A significant portion of our docHarbor Web Presentment product line revenues is
derived from a limited number of customers. This trend will continue until we
can diversify our customer base to reduce our reliance on these largest
customers.
Revenues from our docHarbor Web Presentment product line have grown by 20% or
more each year for the last four years. In general these limited number of
customers have increased their usage of docHarbor Web Presentment services. The
loss, however, of any individual customer could cause the rate of growth of
docHarbor Web Presentment revenues to decrease significantly from historical
trends and could cause a decline in revenues from this product line.
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.
Any failure by us to manage acquisitions, divestitures and other significant
transactions successfully could harm our financial results, business and
prospects.
As part of our business strategy, we frequently engage in discussions with third
parties regarding, possible acquisitions, strategic alliances, joint ventures,
divestitures and outsourcing transactions in order to further our business
objectives. In order to pursue this strategy successfully, we must identify
suitable candidates for these transactions, complete these transactions, and
manage post-closing issues such as the integration of acquired companies or
employees. Integration and other risks of acquisitions, strategic alliances,
joint ventures and outsourcing deals can be more pronounced for larger and more
complicated transactions, or if multiple transactions are pursued
simultaneously. However, if we fail to identify and successfully complete
transactions that further our strategic objectives, we may be required to expend
our resources to develop products, services and technology internally, which may
place us at a competitive disadvantage in relation to our peers.
Managing acquisitions, joint ventures, divestitures and outsourcing transactions
requires varying levels of management resources, which may divert our attention
from other business operations. These transactions may result in significant
costs, expenses and charges to earnings, including those related to severance
pay, employee benefit costs, asset impairment charges, charges from the
elimination of duplicative facilities and contracts, inventory adjustments,
legal, accounting and financial advisory fees, and, as a result, can adversely
affect our business.
If we are unable to update our information technology systems we may not be able
to adequately support our business operations.
Although we believe that our information technology systems provide adequate
support to our current business, we believe that we, like many companies, must
continue to improve the software and hardware technology that support our
business operations. The emergence of new technology industry standards or legal
requirements may render our current equipment and computer systems
infrastructure obsolete in the future. We are in the process of evaluating our
technology needs. The acquisition and implementation of new technologies,
software and equipment may require significant expense or capital investment,
which could reduce our operating margins and our operating results. Our failure
to anticipate and implement these changes could have an adverse effect on our
business.
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 31% of our
total revenues for the fiscal year ended September 30, 2003 and 28% of our total
revenues in fiscal 2002. 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.
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. Our current
credit facility includes covenant restrictions concerning a leverage ratio,
liquidity, and capital expenditures.
Fluctuation in our quarterly financial results may cause instability in our
stock price.
Our COM business continues to decline; however, the rate at which this decline
will impact our operations is difficult to predict. Additionally, while we
attempt to base our operating expenses on anticipated revenue levels, 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
affect our financial results and cause the price of our Common Stock to decline.
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 ensure that we will be able to continue to develop
innovations in our software to stay abreast of client needs. We also cannot
ensure 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
sustained 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. The success of our 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 412 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 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 docHarbor Web Presentment product lines will
continue to grow. 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, be able to consummate acquisitions
on terms acceptable to us, if at all or to integrate any acquisitions into our
other operations. 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 15% of our total revenues
for fiscal 2003. The primary products in the supplies business 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 one other provider. 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.
Our net deferred tax asset may have no future value should we experience an
Ownership Change as defined by the Internal Revenue Code.
We maintain a deferred tax asset for tax goodwill in excess of book
reorganization asset, certain temporary differences, net operating losses and
other tax basis carryforwards. We have also established a valuation allowance in
order to fully offset this net deferred tax asset. We have been advised that in
the event of an Ownership Change (as defined by Section 382 of the Internal
Revenue Code), our net deferred tax asset may have limited value and may be
unavailable for us to utilize for our benefit in future periods.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Revenues generated outside of the United States, as a percentage of total
revenues, were 35% and 31% for the nine-month periods ended June 30, 2004 and
2003, 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 over 13% compared to the U.S.
dollar during the nine months ended June 30, 2004. Exchange rate changes of this
magnitude can have a material effect 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.
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 conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on this
evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report.
(b) There was no change in our internal control over financial reporting
identified in connection with the evaluation conducted in subparagraph (a)
above that occurred during our fiscal quarter ended June 30, 2004 and which
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. Since there were no significant
deficiencies or material weaknesses in our internal control over financial
reporting, no corrective actions were taken.
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 2. Changes in Securities and Use of Proceeds
There were no repurchases of Common Stock made by the Company during the three
months ended June 30, 2004.
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 to Exhibits below.
(b) During the period covered by this report, we filed the following reports on
Form 8-K:
(1) On May 20, 2004, we filed a Form 8-K with respect to a press release
dated May 18, 2004 regarding results of operations for the second
quarter of fiscal 2004.
(2) On May 20, 2004, we filed a Form 8-K with respect to a press release
dated May 19, 2004 regarding an amendment to our shareholder rights
plan to accelerate the expiration date of such plan to August 31,
2004.
(3) On August 6, 2004, we filed a Form 8-K with respect to (i) a press
release dated August 5, 2004 announcing financial results for the
quarter ended June 30, 2004, (ii) a new $50 million credit facility
with Wells Fargo Foothill, and (iii) plans to repurchase up to $15
million in stock.
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: August 11, 2004
INDEX TO EXHIBITS
The following exhibits are filed with this Quarterly Report on Form 10-Q or
incorporated herein by reference to the listed documents previously filed with
the Securities and Exchange Commission (the "SEC").
- ---------- ----------------------------------------------------------------------------------------------------
2.1 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 January 13, 2004. (16)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
4.1 Shareholders Rights Plan. (4)
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4.2 Amendments to the Shareholders Rights Plan. (5)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
4.3 Warrant Agreement by and between the Company and Mellon Investor Services LLC dated December 31,
2002. (2)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
4.4 Amendment No. 1 to Rights Agreement dated August 10, 2004.*
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.1 Retirement/Part-Time Employment Agreement dated October 27, 1999, between the Company and William
C. Ater. (6)(8)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.2 Employment Agreement, effective August 21, 2000, between the Company and Jeffrey R. Cramer. (7) (8)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.3 Revolving Credit Agreement, dated as of June 15, 1998, among Anacomp, Inc., the various lending
institutions named therein and BankBoston, N.A. as agent. (9)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.4 Forbearance and Standstill Agreement, dated as of November 15, 2000, among Anacomp, Inc., the
various banks named therein, and Fleet National Bank as agent for the banks. (6)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.5 Amendment to the Forbearance and Standstill Agreement, dated as of December 15, 2000, between
Anacomp, Inc. and Fleet National Bank. (6)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.6 Amended and Restated Master Supply Agreement, dated October 8, 1993, by and among the Company, SKC
America, Inc. and SKC Limited. (10)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.7 First Cumulative Amendment to the Amended and Restated Master Supply Agreement, dated May 17,
1996, by and among the Company, SKC America, Inc. and SKC Limited. (11)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.8 Second Amended and Restated Master Supply Agreement, dated as of July 1, 1997, by and among the
Company, SKC America, Inc. and SKC Limited. (12)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.9 Second Amendment to Amended and Restated Revolving Credit Agreement and Restructure of Obligations
dated as of December 19, 2002, by and among the Company, the various banks named therein, and
Fleet National Bank as agent for the banks. (5)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.10 Lease Agreement by and between the Company and Kilroy Realty, LP., a Delaware limited partnership
dated June 14, 2002. (13)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.11 Consulting Agreement by and between the Company and Steven G. Singer dated May 7, 2002. (13)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.12 Employment Agreement and Amended Employment Agreement between the Company and Edward P. Smoot
dated November 12, 2002 and April 28, 2003, respectively.
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.13 Revolving Credit Agreement, dated as of November 21, 2003, by and among, Anacomp, Inc., Fleet
National Bank and Union Bank of California. (14)
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
10.14 First Amendment to Second Amended and Restated Revolving Credit Agreement, dated as of March 26,
2004, by and among, Anacomp, Inc., Fleet National Bank and Union Bank of California.*
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
31.1 Rule 13a - 14(a)/15(d) - 14(a) Certification of Chief Executive Officer.*
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
31.2 Rule 13a - 14(a)/15(d) - 14(a) Certification of Chief Financial Officer.*
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
32.1 Section 1350 Certification of Chief Executive Officer.*
- ---------- ----------------------------------------------------------------------------------------------------
- ---------- ----------------------------------------------------------------------------------------------------
32.2 Section 1350 Certification of Chief Financial Officer.*
- ---------- ----------------------------------------------------------------------------------------------------
__________________________
* Filed herewith.
(1) Incorporated by reference to the Company's Current Reports on Form 8-K
(File No. 1-08328) filed on September 20, 2001 and October 29, 2001.
(2) Incorporated by reference to the exhibits to the Registration Statement on
Form 8-A (File No. 1-08328) filed by the Company on January 9, 2002.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A
(File No. 1-08328) for the quarterly period ended June 30, 2002.
(4) Incorporated by reference to an exhibit to the Company's Current Report on
Form 8-K (File No. 1-08328) filed on September 21, 2002.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K (File
No. 1-08328) for the fiscal year ended September 30, 2002.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K (File
No. 1-08328) for the fiscal year ended September 30, 2000.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K (File
No. 1-08328) for the fiscal year ended September 30, 2001.
(8) Management contract or compensation plan.
(9) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 1-08328) filed with the SEC on June 24, 1998 (File No. 1-08328).
(10) Incorporated by reference to the Company's Annual Report on Form 10-K (File
No. 1-08328) for the fiscal year ended September 30, 1993.
(11) Incorporated by reference to the Company's Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1 (File No. 333-9395) filed with the
SEC on September 19, 1996.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K (File
No. 1-08328) for the fiscal year ended September 30, 1999.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 1-08328) for the quarterly period ended June 30, 2002.
(14) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 1-08328) filed on November 25, 2003.
(15) Incorporated by reference to an exhibit to the Company's Current Report on
Form 8-K (File No. 1-08328) filed with the SEC on May 29, 2002.
(16) Incorporated by reference to Exhibit 3.2.1 to the Company's Quarterly
Report on Form 10-Q (File No. 1-08328) filed with the SEC on February 17,
2004.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 1-08328) for the quarterly period ended March 31, 2004.