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