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, 2003.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO____________
Commission File Number: 1-8328
Anacomp, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1144230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15378 Avenue of Science, San Diego, California 92128-3407
(858) 716-3400
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of July 31, 2003, the number of outstanding shares of the registrant's
Class A common Stock, $.01 par value per share, was 4,034,500 and the number of
outstanding shares of the registrant's Class B common Stock, $0.01 par value per
share, was 4,034.
ANACOMP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 2003 and September 30, 2002............................ 2
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2003 and 2002....................... 3
Condensed Consolidated Statements of Operations
Nine Months Ended June 30, 2003, Six Months Ended June 30, 2002,
and Three Months Ended December 31, 2001........................ 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2003, Six Months Ended June 30, 2002,
and Three Months Ended December 31, 2001........................ 5
Notes to the Condensed Consolidated Financial Statements............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 28
Item 4. Controls and Procedures.................................................. 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 30
Item 6. Exhibits and Reports on Form 8-K......................................... 30
SIGNATURES............................................................................... 31
Index to Exhibits........................................................................ 32
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Reorganized Company
__________________________________________
(in thousands) June 30, September 30,
2003 2002
__________________ ___________________
Assets (Unaudited)
Current assets:
Cash and cash equivalents........................................... $ 18,044 $ 15,561
Receivable on sale of Swiss subsidiaries............................ 1,794 ---
Accounts receivable, net............................................ 30,431 33,990
Inventories, net.................................................... 3,422 3,474
Prepaid expenses and other.......................................... 4,233 6,442
Assets of discontinued operations................................... --- 12,027
__________________ ___________________
Total current assets.................................................... 57,924 71,494
Property and equipment, net............................................. 19,486 21,448
Reorganization value in excess of identifiable net assets............... 72,827 73,227
Intangible assets, net.................................................. 9,325 10,813
Other assets............................................................ 2,212 3,101
__________________ ___________________
$ 161,774 $ 180,083
================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Senior secured revolving credit facility............................ $ 8,163 $ 29,975
Accounts payable.................................................... 6,988 9,797
Accrued compensation, benefits and withholdings..................... 14,426 16,294
Deferred revenue.................................................... 8,149 7,117
Accrued income taxes................................................ 1,535 1,264
Other accrued liabilities........................................... 11,178 9,305
Liabilities of discontinued operations.............................. --- 4,241
__________________ ___________________
Total current liabilities............................................... 50,439 77,993
__________________ ___________________
Long-term liabilities:
Unfunded accumulated benefit obligation............................. 6,233 6,233
Other long-term liabilities......................................... 4,085 4,023
__________________ ___________________
Total long-term liabilities............................................. 10,318 10,256
__________________ ___________________
Stockholders' equity:
Preferred stock..................................................... --- ---
Common stock........................................................ 40 40
Additional paid-in capital.......................................... 97,000 96,942
Accumulated other comprehensive loss................................ (1,450) (2,836)
Retained earnings (deficit)......................................... 5,427 (2,312)
__________________ ___________________
Total stockholders' equity.............................................. 101,017 91,834
__________________ ___________________
$ 161,774 $ 180,083
================== ===================
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Reorganized Company
___________________________________________
(in thousands, except per share amounts) Three months ended Three months ended
June 30, 2003 June 30, 2002
__________________ ___________________
Revenues:
Services........................................................... $ 40,989 $ 46,262
Equipment and supply sales......................................... 8,817 10,272
__________________ ___________________
49,806 56,534
__________________ ___________________
Cost of revenues:
Services........................................................... 28,119 31,406
Equipment and supply sales......................................... 6,317 7,611
__________________ ___________________
34,436 39,017
__________________ ___________________
Gross profit........................................................... 15,370 17,517
Costs and expenses:
Engineering, research and development.............................. 1,450 1,811
Selling, general and administrative................................ 11,809 13,232
Amortization of intangible assets.................................. 496 496
Restructuring charges.............................................. 1,152 2,081
__________________ ___________________
Operating income (loss) from continuing operations..................... 463 (103)
__________________ ___________________
Other income (expense):
Interest income.................................................... 45 109
Interest expense and fee amortization.............................. (383) (1,048)
Other.............................................................. (79) 513
__________________ ___________________
(417) (426)
__________________ ___________________
Income (loss) from continuing operations before income taxes........... 46 (529)
Provision for income taxes............................................. 676 (48)
__________________ ___________________
Loss from continuing operations........................................ (630) (481)
Income from discontinued operations, net of taxes...................... --- 488
__________________ ___________________
Net (loss) income...................................................... $ (630) $ 7
================== ===================
Basic and diluted per share data:
Basic and diluted loss from continuing operations.................. $ (0.15) $ (0.12)
Basic and diluted income from discontinued operations.............. --- 0.12
__________________ ___________________
Basic and diluted net (loss) income................................ $ (0.15) $ 0.00
================== ===================
Shares used in computing basic and diluted net (loss) income per share. 4,039 4,034
================== ===================
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized Company Predecessor Company
_______________________________________ _____________________
(in thousands, except per share amounts) Nine months ended Six months ended Three months ended
June 30, 2003 June 30, 2002 December 31, 2001
___________________ __________________ _____________________
(Unaudited) (Unaudited)
Revenues:
Services............................................. $ 126,852 $ 94,979 $ 55,098
Equipment and supply sales........................... 28,706 22,162 12,926
___________________ __________________ _____________________
155,558 117,141 68,024
___________________ __________________ _____________________
Cost of revenues:
Services............................................. 86,027 63,527 36,630
Equipment and supply sales........................... 19,597 15,945 9,874
___________________ __________________ _____________________
105,624 79,472 46,504
___________________ __________________ _____________________
Gross profit............................................. 49,934 37,669 21,520
Costs and expenses:
Engineering, research and development................ 4,883 3,415 1,680
Selling, general and administrative.................. 39,439 28,488 15,643
Amortization of intangible assets.................... 1,488 992 2,896
Restructuring charges (credits)...................... 1,152 2,081 (1,032)
___________________ __________________ _____________________
Operating income from continuing operations.............. 2,972 2,693 2,333
___________________ __________________ _____________________
Other income (expense):
Interest income...................................... 192 180 155
Interest expense and fee amortization................ (1,777) (2,253) (3,114)
Other................................................ (51) 389 265,108
___________________ __________________ _____________________
(1,636) (1,684) 262,149
___________________ __________________ _____________________
Income from continuing operations before reorganization
items, and income taxes ............................. 1,336 1,009 264,482
Reorganization items..................................... --- --- 13,328
___________________ __________________ _____________________
Income from continuing operations before income taxes.... 1,336 1,009 277,810
Provision for income taxes............................... 1,781 1,205 450
___________________ __________________ _____________________
(Loss) income from continuing operations................. (445) (196) 277,360
Income from discontinued operations, net of taxes........ --- 1,106 ---
Gain on sale of discontinued operations, net of taxes.... 8,184 --- ---
___________________ __________________ _____________________
Net income............................................... $ 7,739 $ 910 $ 277,360
=================== ================== =====================
Basic and diluted per share data:
Basic and diluted loss from continuing operations.... $ (0.11) $ (0.05)
Basic and diluted income from discontinued operations --- 0.27
Gain on sale of discontinued operations.............. 2.03 ---
___________________ __________________
Basic and diluted net income......................... $ 1.92 $ 0.23
=================== ==================
Shares used in computing basic and diluted net income per 4,039 4,034
share................................................ =================== ==================
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Predecessor
Reorganized Company Company
_______________________________________ _____________________
(in thousands) Nine months ended Six months ended Three months ended
June 30, 2003 June 30, 2002 December 31, 2001
___________________ __________________ _____________________
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income............................................ $ 7,739 $ 910 $ 277,360
Adjustments to reconcile net income to net
cash provided by operating activities:
Other income due to extinguishment of debt.......... --- --- (265,329)
Adjustments of assets and liabilities to fair value. --- --- (16,916)
Write off of deferred debt issuance costs and
unamortized premiums and discounts............... --- --- 2,216
Gain on sale of discontinued operations............. (8,184) --- ---
Income from discontinued operations................. --- (1,106) ---
Depreciation and amortization....................... 11,054 8,716 7,194
Non-cash settlement of facility lease contract...... --- --- 349
Amortization of debt fees, premiums and discounts... 516 344 92
Non-cash compensation............................... 58 69 ---
Change in assets and liabilities:
Accounts and other receivables.................... 3,559 (1,269) 3,092
Inventories....................................... 512 374 739
Prepaid expenses and other assets................. 2,666 2,149 332
Accounts payable, accrued expenses and other
liabilities.................................... (6,395) (803) (3,733)
Accrued interest.................................. --- 168 (387)
___________________ __________________ _____________________
Net cash provided by continuing operations....... 11,525 9,552 5,009
Net cash provided by discontinued operations..... --- 1,214 ---
___________________ __________________ _____________________
Net cash provided by operating activities........ 11,525 10,766 5,009
___________________ __________________ _____________________
Cash flows from investing activities:
Purchases of property and equipment................... (2,067) (2,134) (1,075)
Payments to acquire product line assets and customer
rights............................................ (500) --- ---
Proceeds from sale of discontinued operations, net.... 14,106 --- ---
___________________ __________________ _____________________
Net cash provided by (used in) investing
activities................................... 11,539 (2,134) (1,075)
___________________ __________________ _____________________
Cash flows from financing activities:
Principal payments on revolving line of credit, net... (21,812) (19,600) (2,000)
___________________ __________________ _____________________
Net cash used in financing activities............ (21,812) (19,600) (2,000)
___________________ __________________ _____________________
Effect of exchange rate changes on cash and cash
equivalents........................................... 1,231 739 637
___________________ __________________ _____________________
Increase (decrease) in cash and cash equivalents.......... 2,483 (10,229) 2,571
Less increase in cash from discontinued operations........ --- (1,214) ---
___________________ __________________ _____________________
Cash and cash equivalents at beginning of period.......... 15,561 26,879 24,308
___________________ __________________ _____________________
Cash and cash equivalents at end of period................ $ 18,044 $ 15,436 $ 26,879
=================== ================== ====================
See the Notes to the Condensed Consolidated Financial Statements
Supplemental Disclosures of Cash Flow Information:
Predecessor
Reorganized Company Company
_______________________________________ _____________________
(in thousands) Nine months ended Six months ended Three months ended
June 30, 2003 June 30, 2002 December 31, 2001
___________________ __________________ _____________________
(unaudited) (unaudited)
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest................................. $ 1,184 $ 1,354 $ 1,434
=================== ================== =====================
Cash paid for income taxes............................. $ 1,003 $ 1,380 $ 459
=================== ================== =====================
See the Notes to the Condensed Consolidated Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Company Reorganization
On October 19, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code, together with a prepackaged plan of
reorganization, with the U.S. Bankruptcy Court for the Southern District of
California. The U.S. Bankruptcy Court confirmed the plan on December 10, 2001,
and we emerged from bankruptcy effective December 31, 2001.
The primary benefits of our bankruptcy were the elimination of $310 million of
senior subordinated notes, related accrued interest of $52.3 million, and the
related annual interest expense of approximately $34 million. Additionally, our
credit facility was amended such that we cured previous events of default and we
continue to have the ability to borrow under the credit facility (see Note 4).
New Common Stock was distributed to the holders of the notes as well as to
holders of the previously existing Common Stock.
Also, as a result of the Chapter 11 reorganization, the following occurred:
o all unexercised options were canceled;
o prior stock option plans were terminated;
o executory contracts were assumed or rejected;
o trade creditors were paid in the ordinary course of business and were not
impaired;
o members of a new Board of Directors were designated by the holders of the
subordinated notes;
o 403,403 shares of new Class A Common Stock were authorized for use in the
establishment of new stock option plans; and
o the senior secured revolving credit facility was amended.
The U.S. Bankruptcy Court issued its final decree on September 27, 2002 closing
the Chapter 11 case. There are no remaining claims or unrecorded obligations
related to the bankruptcy proceedings.
Note 2. Basis of Presentation
At December 31, 2001, as a result of our emergence from bankruptcy, we adopted
Fresh Start Reporting in accordance with AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code."
Fresh Start Reporting resulted in material changes to the Consolidated Balance
Sheet as of December 31, 2001, including adjustment of assets and liabilities to
estimated fair values, the valuation of equity based on the reorganization value
of the ongoing business, and the recording of an asset for reorganization value
in excess of the fair value of the separately identifiable assets and
liabilities (similar to goodwill).
The accompanying financial statements include historical information from prior
to December 31, 2001, the effective date we emerged from bankruptcy, and are
identified as financial statements of the Predecessor Company. Due to our
reorganization and the implementation of Fresh Start Reporting (see Note 3), the
financial statements for the Reorganized Company are not comparable to those of
the Predecessor Company.
The accompanying consolidated financial statements include the accounts of
Anacomp and our wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The financial statements, except for the balance sheet as of
September 30, 2002 and the statements of operations and cash flows for the three
months ended December 31, 2001, have not been audited, but in the opinion of
management, include all adjustments (consisting of normal recurring adjustments,
the Fresh Start adjustments described in Note 3 and the sale of Switzerland
operations adjustments described in Note 5) necessary for a fair presentation of
our financial position, results of operations and cash flows for all periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended September 30, 2002,
included in our fiscal 2002 Annual Report on Form 10-K. Interim operating
results are not necessarily indicative of operating results for the full year or
for any other period.
Preparation of the accompanying condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the periods presented. Estimates have been prepared
on the basis of the most current available information and actual results could
differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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 $30.4
million, net of allowance for doubtful accounts of $1.5 million, as of June 30,
2003.
We account for our employee stock option plans in accordance with APB Opinion
No. 25, under which compensation expense is recognized only to the extent the
exercise price of the option is less than the fair market value of a share of
stock at the date of grant (the intrinsic value method). Accordingly, we have
adopted the disclosure only requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and SFAS
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure."
Had employee compensation costs for these plans been determined based on their
fair value on their grant date in accordance with SFAS No. 123, our net results
would have been as follows (in thousands, except per-share amounts):
For the three months ended June 30: Reorganized Company
________________________________________
2003 2002
____________________ _______________
Net (loss) income as reported...................................... $ (630) $ 7
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards granted since December
31, 2001, net of related tax effects .......................... (161) ---
____________________ _______________
Pro forma net (loss) income........................................ $ (791) $ 7
==================== ===============
Basic and diluted net (loss) income per share:
As reported.................................................. $ (0.15) $ 0.00
Pro forma.................................................... $ (0.20) $ 0.00
Reorganized Company Predecessor Company
_____________________________________ ___________________
Nine months ended Six months ended Three months ended
June 30, 2003 June 30, 2002 December 31, 2001
___________________ ________________ ___________________
Net income as reported............................ $ 7,739 $ 910 $ 277,360
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards granted since December 31, 2001,
net of related tax effects.................... (482) --- ---
___________________ ________________ ___________________
Pro forma net income.............................. $ 7,257 $ 910 $ 277,360
=================== ================ ===================
Basic and diluted net income per share:
As reported................................. $ 1.92 $ 0.23
Pro forma................................... $ 1.80 $ 0.23
Note 3. Fresh Start Reporting
Our enterprise value after reorganization at December 31, 2001 was determined
based on the consideration of many factors and resulted in a reorganization
value (over the fair value of identifiable net assets) of $72.8 million, as
adjusted, and is reported as "Reorganization value in excess of identifiable net
assets". Although the asset will not be subject to future amortization (in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets"), it will
be subject to, at a minimum, annual impairment testing.
In developing the assumptions underlying the enterprise valuation, management
considered historical results as well as its best estimates of expected future
market conditions based on information available as of December 31, 2001. Actual
future events and results could differ substantially from management's
estimates, assumptions and projections. Unfavorable changes compared to our
projections used for Fresh Start Reporting purposes could result in future
impairments of our reorganization asset and identifiable intangible assets.
As a result of Fresh Start Reporting, identifiable intangible assets were valued
and consist of the following to be amortized over the useful lives indicated:
(dollars in thousands) Life in Years June 30, 2003
_______________________________________________________________________ ______________ ________________
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......................................... (2,975)
________________
$ 9,325
================
The income due to extinguishment of debt, net of taxes, is reported as "Other
income" in the Condensed Consolidated Statement of Operations for the period
ended December 31, 2001, and is calculated as follows:
(in thousands) Amount
_________________________________________________________ _______________
Carrying value of senior subordinated notes.............. $ 310,000
Carrying value of related accrued interest............... 52,254
Issuance of new common stock............................. (96,925)
_______________
Other income due to extinguishment of debt $ 265,329
===============
The holders of the senior subordinated notes received 99.9% of the new equity of
the Reorganized Company; therefore, the net equity of the Reorganized Company
was used as the basis for consideration exchanged in determining the income due
to extinguishment of debt. There is no income statement tax effect from the
extinguishment of debt (see Note 6).
In accordance with Statement of Position 90-7, transactions of the Predecessor
Company resulting from the Chapter 11 reorganization are reported separately as
reorganization items in the accompanying Condensed Consolidated Statement of
Operations for the period ended December 31, 2001, and are summarized below:
Three Months Ended
(in thousands) December 31, 2001
__________________________________________________________ ___________________
Adjustment of assets and liabilities to fair value........ $ 16,916
Write off of deferred debt issuance costs and
unamortized premiums and discounts.................... (2,216)
Professional fees and other reorganization costs.......... (1,023)
Settlement of facility lease contract..................... (349)
___________________
Reorganization items $ 13,328
===================
Note 4. Senior Secured Revolving Credit Facility
On December 31, 2001, Anacomp and Fleet National Bank, as agent, and its
syndicate of lenders (collectively, "the Bank Group") entered into an Amended
and Restated Revolving Credit Agreement. The credit agreement provides for a
commitment of $26.1 million as of June 30, 2003, with a $20.0 million direct
borrowing sublimit and a $6.1 million letter of credit sublimit. The facility is
available for new borrowings when borrowings are below the direct borrowing
sublimit.
Effective December 19, 2002, we signed an amendment to the revolving credit
agreement. The amendment modified certain financial covenants to accommodate the
sale of our Switzerland operations and current business plans. Other changes to
the agreement included a permanent reduction to the credit facility commitment
of $10.0 million and provisions for acquisitions and/or divestitures under
specified conditions.
At June 30, 2003, the outstanding revolving credit borrowings were $8.2 million
(plus outstanding standby letters of credit of $6.1 million). During the nine
month period ended June 30, 2003, we made net cash payments totaling $21.8
million and have $11.8 million of borrowing capacity.
The original maturity date of the amended facility was June 30, 2003. Due to the
receipt of proceeds from our sale of the Switzerland subsidiaries and the
application of those proceeds to reduce our facility balance, it has been
extended to December 31, 2003 under the terms of the agreement. We reduced the
outstanding borrowings and permanently reduced the borrowing sublimit of the
credit facility commitment by $11.4 million as a result of proceeds received
from the October 2002 sale of our Switzerland operations and subsidiaries.
The credit agreement bears interest at a base rate equal to the higher of (a)
the annual rate of interest announced from time to time by Fleet National Bank
as its best rate, or (b) one-half of one percent above the Federal Funds
Effective Rate, for the portion of the facility equal to a Formula Borrowing
Base ("FBB"). The FBB equals 80% of eligible accounts, which include U.S. and
Canadian accounts receivable. The rate of interest is three percentage points
higher than the base rate for the facility balance outstanding in excess of the
FBB. Interest is due and payable monthly in arrears. The interest rate was 4.0%
for the FBB portion and 7.0% for the excess portion at June 30, 2003. At June
30, 2003, the FBB was $11.4 million; accordingly, there were no excess
borrowings over the FBB.
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 purchases of our common stock;
o mergers and acquisitions; and
o liens and dividends.
The credit facility also is subject to minimum EBITDA, interest coverage and
leverage ratio covenants. In addition, we are required to remit to the Bank
Group the net proceeds of any capital asset sale.
Under the current facility as amended, the facility commitment and the direct
borrowings sublimit will be permanently reduced by $1.25 million on September
30, 2003.
Note 5. Sale of Switzerland and Other Operations
We completed a sale of our Switzerland operations and subsidiaries on October
18, 2002. The acquiring company assumed operational responsibility effective
October 1, 2002.
Under the terms of the sale agreement, we sold all of the outstanding shares of
our two Swiss subsidiaries, Cominformatic AG and Anacomp Technical Services AG,
to edotech Ltd. (a UK company) at a sales price of CHF 26.7 million (Swiss
francs).
The sales price is payable as follows: CHF 4.6 million, or approximately $3.1
million, which was received at closing; CHF 18.2 million, or approximately $11.8
million, which was received on March 10, 2003; CHF 1.1 million, or approximately
$0.7 million, which was received on April 17, 2003; and CHF 2.8 million is due
on or before April 18, 2004 upon expiration of certain indemnification claim
periods. As a result of a tax audit of the Switzerland operations for prior year
results, we estimate we will incur additional costs not to exceed CHF 0.3
million, or approximately $0.2 million. This will decrease the amount we will
receive on or before April 18, 2004. The costs of the sale (including the $0.2
million tax audit costs) are estimated to be $2.4 million. Effectively all of
the net proceeds (i.e. sales price less sale costs) received have been used to
reduce the revolving credit facility balance outstanding and 85% of such
proceeds have permanently reduced the total borrowing commitment under the terms
of the senior secured revolving credit facility.
The assets and liabilities of the Swiss operations have been classified
separately as "Assets of discontinued operations" and "Liabilities of
discontinued operations" in the Condensed Consolidated Balance Sheet as of
September 30, 2002. The net assets of the disposed operating units are
summarized as follows:
September 30,
(in thousands) 2002
______________________________________________ ______________
Cash.......................................... $ 2,749
Accounts and notes receivable................. 2,288
Inventories................................... 1,067
Property, plant and equipment................. 5,227
Other assets.................................. 696
Accounts payable and other accrued
Liabilities................................. (4,241)
______________
Total net assets $ 7,786
==============
In the third quarter of fiscal 2002, we sold two smaller operating units. The
results of the Switzerland and other sold operations reported below for the
three months ended December 31, 2001 have not been segregated as discontinued
operations in the Condensed Consolidated Statements of Operations as they were
not material to the operating results of Anacomp in total.
Swiss Operating Results
Three Months Ended
(in thousands) December 31, 2001
________________________
Revenues................... $ 7,505
========================
Income before taxes........ $ 869
Income taxes............... (60)
________________________
Net income................. $ 809
========================
Note 6. Income Taxes
Our provision for income taxes consists of the following:
Predecessor
Reorganized Company Company
_________________________________________ __________________
Nine months ended Six months ended Three months ended
June 30, 2003 June 30, 2002 December 31, 2001
____________________ _________________ __________________
Federal.................................... $ 388 $ 185 $ ---
State...................................... 40 28 10
Foreign.................................... 1,353 992 440
____________________ _________________ __________________
$ 1,781 $ 1,205 $ 450
==================== ================= ==================
Due to our reorganization, we have Cancellation of Debt ("COD") income of $265.4
million. As a result, we were required to reduce, for federal income tax
purposes, certain tax attributes, including net operating loss carryforwards and
property basis by the amount of the COD. These adjustments were determined at
the end of our fiscal year ending September 30, 2002. A deferred tax liability
is maintained for COD, book intangible assets and certain temporary differences.
A deferred tax asset has been established for tax goodwill in excess of book
reorganization asset, certain temporary differences, net operating losses and
other tax basis carryforwards. We have also established a valuation allowance in
the amount of $41.7 million in order to fully offset the net deferred tax asset.
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
Anacomp continues to experience revenue declines in the Computer Output to
Microfiche (COM) other output services, COM maintenance, and equipment /
supplies product lines. Due to this ongoing trend, we are making adjustments to
align our cost structure and infrastructure to maintain operating profitability.
This will be achieved through the consolidation of facilities and adjustments to
our workforce (affecting approximately 138 employees) during the third and
fourth quarters of fiscal 2003. In the three months ended June 30, 2003, we
recorded restructuring charges of $1.2 million related to data center
consolidation and reorganization of parts of our corporate, marketing, sales,
and international operating organizations. The charges consist of employee
severance and termination-related costs for approximately 76 employees, all of
whom were notified and have left the company as of June 30, 2003. The remaining
accrued but unpaid liability of $0.9 million is expected to be paid by the end
of calendar year 2003 for all but one employee, whose payments will continue
through March of 2004. Additional restructuring charges are expected in the
fourth quarter of fiscal 2003. The restructuring charges expected in the fourth
quarter of fiscal 2003 have not been accrued for at June 30, 2003, consistent
with the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" (see Note 13).
In fiscal year 2002, we recorded a restructuring charge of $2.1 million related
to the reorganization of our operations from two business units to one. We
reorganized our workforce by combining the field organizations of Document
Solutions and Technical Services into one organization, establishing an
executive level position to oversee all sales and marketing activities and
implementing a single support group for our data centers, Web Presentment
operations, field services operations and process quality. The restructuring
charges included $1.6 million in employee severance and termination-related
costs for approximately 100 employees, all of whom have left the company.
Substantially all of the severance payments have been completed. 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 ($0.2 million remains unpaid as of June 30, 2003). 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.
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. 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, 2003, the remaining liability of $0.2 million related to
international facility costs is expected to be paid by the end of fiscal year
2003.
The restructuring reserves are included as a component of "Other accrued
liabilities" in the accompanying Condensed Consolidated Balance Sheets.
The following tables present the activity and balances of the restructuring
reserves from September 30, 2002 to June 30, 2003 (in thousands):
Fiscal Year 2003 Restructuring
___________________________________________________________________________________________________________
September 30, Payments and
2002 Additions Deductions June 30, 2003
- ------------------------------ ------------------ ------------------- ------------------- -----------------
Employee Separations $ --- $ 1,152 $ (258) $ 894
------------------ ------------------- ------------------- -----------------
$ --- $ 1,152 $ (258) $ 894
================== =================== =================== =================
Fiscal Year 2002 Restructuring
___________________________________________________________________________________________________________
September 30, Payments and
2002 Additions Deductions June 30, 2003
- ------------------------------ ------------------ ------------------- ------------------- -----------------
Employee Separations $ 233 $ --- $ (210) $ 23
Facility Closing 325 --- (130) 195
------------------ ------------------- ------------------- -----------------
$ 558 $ --- $ (340) $ 218
================== =================== =================== =================
Fiscal Year 2000 Restructuring
___________________________________________________________________________________________________________
September 30, Payments and
2002 Additions Deductions June 30, 2003
- ------------------------------ ------------------ ------------------- ------------------- -----------------
Facility Closing $ 77 $ --- $ (53) $ 24
Contract Obligations 126 --- --- 126
------------------ ------------------- ------------------- -----------------
$ 203 $ --- $ (53) $ 150
================== =================== =================== =================
Note 8. Inventories
Inventories consist of the following:
Reorganized Company
________________________________________
(in thousands) June 30, 2003 September 30, 2002
________________________________________________________________ ___________________ ___________________
Finished goods, including purchased film...................... $ 1,744 $ 1,766
Consumable spare parts and supplies........................... 1,678 1,708
___________________ ___________________
$ 3,422 $ 3,474
=================== ===================
Note 9. Defined Benefit Plan
We have a retirement plan in place for our United Kingdom subsidiary that
qualifies as a defined benefit plan. The plan provides benefits based primarily
on years of service and employee compensation levels. The plan covers
approximately 619 participants, including 89 current employees, 484 former
employees with vested rights to future benefits, and 46 retirees and
beneficiaries receiving benefits. Funding policy for the plans is to contribute
amounts sufficient to meet minimum funding requirements as set forth in employee
benefit and tax laws plus additional amounts as we may determine to be
appropriate.
As of September 30, 2002, the UK pension plan was under funded by $6.2 million
(using September 30, 2002 currency exchange rates) based upon a projected
benefit obligation of $21.5 million, accumulated benefit obligation of $19.3
million, and the fair value of plan assets totaling $13.1 million. The under
funded liability of $6.2 million is classified as a long-term liability on the
Condensed Consolidated Balance Sheet. These actuarial projections were prepared
assuming a discount rate of 6.25%, a weighted average expected long-term rate of
return on plan assets of 7.5% per year and weighted average annual compensation
increases of 4%.
Almost all of the plan participants are inactive. As a result, we are amortizing
the unfunded liability over the 25-year remaining life expectancy of the
inactive participants as required by Financial Accounting Standard (FAS) No. 87,
"Employers Accounting for Pensions." In the nine months ended June 30, 2003,
amortization of unfunded accumulated benefit obligation expense was $144
thousand and is reflected in "Selling, general and administrative" expense in
the Condensed Consolidated Statement of Operations and as amortization in the
Comprehensive Income table in Note 11 as prescribed by FAS No. 87.
Note 10. Foreign Currency Contracts
On October 15, 2002, we entered into three Swiss Franc (CHF) forward contracts
to protect the value of the expected cash receipts from the sale of our
Switzerland operations. The contracts protect Anacomp against an exchange rate
above 1.5425. The first forward contract was written in the amount of CHF 18.2
million and expired on January 29, 2003. At expiration, the forward option was
replaced with another short-term option for the same amount, which provided
$11.8 million in U.S. dollar proceeds on March 10, 2003.
The second forward contract was written in the amount of CHF 2.1 million and
expired on April 15, 2003. CHF 1.0 million of the contract expired unused and
the remaining CHF 1.1 million was converted at 1.5425, yielding $0.7 million.
The third forward contract was written in the amount of CHF 1.8 million and
expires on April 15, 2004. We receive full exchange benefits for a lower rate on
50% of the contract and the remaining 50% will be converted at 1.5425. The
minimum U.S. dollar proceeds received would be $1.2 million if the buyer
releases all funds.
The Other Expense category of our Condensed Consolidated Statement of Operations
for the nine months ended June 30, 2003 includes the recognition of $16 thousand
of exchange loss from currency fluctuations related to the Swiss receivable, the
forward contracts and sale costs.
Note 11. Comprehensive income
Comprehensive income consists of the following components (in thousands):
For the three months ended June 30: Reorganized Company
_________________________________
2003 2002
_______________ ______________
Net (loss) income............................................ $ (630) $ 7
Change in foreign currency translation....................... 1,044 2,087
Amortization of unfunded accumulated benefit obligation...... 48 ---
_______________ ______________
Comprehensive income......................................... $ 462 $ 2,094
=============== ==============
Predecessor
Reorganized Company Company
_______________________________________ __________________
Nine months ended Six months ended Three months ended
June 30, 2003 June 30, 2002 December 31, 2001
__________________________________________ __________________ __________________ __________________
Net income................................ $ 7,739 $ 910 $ 277,360
Change in foreign currency translation.... 1,242 2,003 639
Amortization of unfunded accumulated
benefit obligation..................... 144 --- ---
__________________ __________________ __________________
Comprehensive income...................... $ 9,125 $ 2,913 $ 277,999
================== ================== ==================
Note 12. Income or Loss Per Share
Basic income or loss per share is computed based upon the weighted average
number of shares of Anacomp's common stock outstanding during the period. For
the nine months ended June 30, 2003, potentially dilutive securities included
783,077 outstanding warrants to purchase Class B Common Stock, which were issued
as part of the reorganization. These warrants were excluded from the computation
of diluted income per share as they were anti-dilutive using the treasury stock
method. Basic and diluted net income amounts for the three months ended December
31, 2001 have not been presented as they are not comparable to subsequent
periods due to the implementation of Fresh Start Reporting (see Note 3).
Note 13. Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amends SFAS No. 123 and provides
alternative methods of transition for companies who elect to adopt the fair
value method of accounting for stock-based employee compensation. SFAS No. 148
also modifies the disclosure requirements for such compensation. Anacomp has not
elected to adopt the fair value method; we instead account for our employee
stock option plans using the intrinsic value method in accordance with APB
Opinion No. 25, under which compensation expense is recognized only to the
extent the exercise price of the option is less than the fair market value of a
share of stock at the date of grant. However, we are subject to the disclosure
requirements of SFAS Nos. 123 and 148. Accordingly, we have expanded our
stock-based compensation disclosures (see Note 2).
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
adopted the provisions of SFAS No. 146 beginning April 1, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity either (a) does not have equity investors with voting
rights, or (b) has equity investors that do not provide sufficient financial
resources to the entity to support its activities. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The adoption of FIN 46 is not
expected to have a material impact on our results of operations or financial
condition.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report, including the following section regarding "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
contains "forward-looking statements" 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, projections used for valuation purposes, sales levels,
consolidation and restructuring plans, liquidity needs, expectations of business
trends and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this Quarterly Report reflect the good
faith estimates and judgment of our management, such statements can only be
based on facts and factors of which we are currently aware. Consequently,
forward-looking statements are inherently subject to risks and uncertainties.
Our actual results, performance, and achievements may differ materially from
those discussed in or anticipated by the forward-looking statements. Factors
that could cause or contribute to such differences in results and outcomes
include without limitation those discussed under the heading "Risk Factors"
below, as well as those discussed elsewhere in this Quarterly Report. 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 and uncertainties. Risks, uncertainties and
other important factors include, among others:
o general economic and business conditions;
o industry trends and growth rates;
o industry capacity;
o competition;
o future technology;
o raw materials costs and availability;
o currency fluctuations;
o the loss of any significant customers or suppliers;
o changes in business strategy or development plans;
o litigation issues;
o successful development of new products and services;
o anticipated financial performance and contributions of our products and
services;
o availability, terms and deployment of capital;
o ability to meet debt service obligations;
o availability of qualified personnel;
o changes in, or the failure or inability to comply with, government
regulations; and
o other factors referenced in this report and in other public filings
including our Form 10-K for the year ended September 30, 2002.
Overview and Recent Events
Our 2001 Bankruptcy
On October 19, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code, together with a prepackaged plan of
reorganization with the U.S. Bankruptcy Court for the Southern District of
California. Under the plan we eliminated $310 million of senior subordinated
notes, related accrued interest of $52.3 million and the related annual interest
expense of $34 million. New Common Stock was distributed to the holders of the
notes as well as to holders of the previously existing Common Stock. The U.S.
Bankruptcy Court confirmed the plan of reorganization on December 10, 2001, and
we emerged from bankruptcy effective December 31, 2001. The U.S. Bankruptcy
Court issued its final decree on September 27, 2002 closing the Chapter 11 case.
There are no remaining claims or unrecorded obligations related to the
bankruptcy proceedings.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and our results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts, inventories, intangible assets, income taxes,
restructuring and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. A summary of our
significant accounting policies can be found in our 2002 Annual Report on Form
10-K.
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 the Predecessor
Company. The results of operations for the three and nine month periods ended
June 30, 2003, and 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, the financial
information for the Reorganized Company is not comparable to the Predecessor
Company. In addition, in the first quarter of fiscal year 2003 we completed the
sale of our Switzerland operations and in the third quarter of fiscal year 2002
we sold two smaller operating units. These operations were not material to our
consolidated results and are, therefore, not reported as discontinued operations
in our statement of operations for the first quarter of fiscal year 2002.
Anacomp continues to experience revenue declines in the Computer Output to
Microfiche (COM) other output services, COM maintenance and equipment / supplies
product lines. Due to this ongoing trend, we are making adjustments to align our
cost structure and infrastructure to maintain operating profitability. This will
be achieved through the consolidation of facilities and adjustments to our
workforce during the third and fourth quarters of fiscal 2003. This process
includes the closure of some data centers and the downsizing of other centers.
The process also includes an assessment of job responsibilities and personnel
requirements in our corporate, marketing, sales, and international operating
organizations. We have recorded restructuring related charges of $1.2 million in
the third quarter of fiscal year 2003, and we expect that additional charges
will be recognized in the fourth quarter. The charges consist of employee
severance and termination-related costs. The primary savings to be achieved from
these activities will be obtained from the reduced level of employees and
facility costs. We estimate that the restructuring changes instituted in the
third and fourth quarters of fiscal year 2003 will generate cost savings of
approximately $10 million annually.
To facilitate a meaningful comparison of Anacomp's quarterly and year-to-date
operating performance in fiscal years 2003 and 2002, the following discussion of
results of operations on a consolidated basis is presented on a traditional
comparative basis for all periods. However, the pro forma results of operations
presented below for the nine month period ended June 30, 2002 combines the six
month period ended June 30, 2002 on a Reorganized Company basis with the three
month period ended December 31, 2001 on a Predecessor Company basis. These
periods and bases of accounting are not comparable and we have presented them
separately in the accompanying Condensed Consolidated Statements of Operations.
CONSOLIDATED RESULTS OF OPERATIONS Three Months Ended June 30, Nine Months Ended June 30,
_______________________________ ____________________________
2003 2002 2003 2002
(Reorganized (Reorganized (Reorganized (Pro Forma
(in thousands) Company) Company) Company) Basis)
________________ ______________ ______________ _____________
Revenues:
Services...........................................$ 40,989 $ 46,262 $ 126,852 $ 150,077
Equipment and supply sales......................... 8,817 10,272 28,706 35,088
________________ ______________ ______________ _____________
49,806 56,534 155,558 185,165
________________ ______________ ______________ _____________
Cost of revenues:
Services........................................... 28,119 31,406 86,027 100,157
Equipment and supply sales......................... 6,317 7,611 19,597 25,819
________________ ______________ ______________ _____________
34,436 39,017 105,624 125,976
________________ ______________ ______________ _____________
Gross profit........................................... 15,370 17,517 49,934 59,189
Costs and expenses:
Engineering, research and development.............. 1,450 1,811 4,883 5,095
Selling, general and administrative................ 11,809 13,232 39,439 44,131
Amortization of intangible assets.................. 496 496 1,488 3,888
Restructuring charges.............................. 1,152 2,081 1,152 1,049
________________ ______________ ______________ _____________
Operating income (loss) from continuing operations..... 463 (103) 2,972 5,026
________________ ______________ ______________ _____________
Other income (expense):
Interest income.................................... 45 109 192 335
Interest expense and fee amortization.............. (383) (1,048) (1,777) (5,367)
Other.............................................. (79) 513 (51) 265,497
________________ ______________ ______________ _____________
(417) (426) (1,636) 260,465
________________ ______________ ______________ _____________
Income (loss) from continuing operations before
reorganization items and income taxes.............. 46 (529) 1,336 265,491
Reorganization items................................... --- --- --- 13,328
________________ ______________ ______________ _____________
Income (loss) from continuing operations before taxes.. 46 (529) 1,336 278,819
Provision for income taxes............................. 676 (48) 1,781 1,655
________________ ______________ ______________ _____________
Loss from continuing operations........................ (630) (481) (445) 277,164
Income from discontinued operations, net of taxes...... --- 488 --- 1,106
Gain on sale of discontinued operations, net of taxes.. --- --- 8,184 ---
________________ ______________ ______________ _____________
Net (loss) income......................................$ (630) $ 7 $ 7,739 $ 278,270
================ ============== ============== =============
Three Months Ended June 30, 2003 vs. Three Months Ended June 30, 2002
General. We reported a net loss of $0.6 million for the three months ended
June 30, 2003 versus $7 thousand in income for the three months ended June 30,
2002. Both MVS and Web revenues grew over the prior year period revenue. COM
based revenues, however, continued to decline in the three months ended June 30,
2003, in line with historical trends.
We define our product lines as follows:
MVS - Multi-Vendor Services where Anacomp acts as a third party maintainer,
providing support services such as on-site maintenance, help desk and depot
repair, laser printer maintenance and associated hardware sales.
Web - Transmitted ingestion, storage, delivery and internet browser-based access
to documents. Also includes license sales and maintenance for the Adesso
software that is our Web platform in the US.
CD/Digital - CD based document management services, scanning and digital
software sales.
COM/ Other Output Services - Our Computer Output to Microfilm and laser printer
document management services.
COM Professional Services - Our maintenance services for Computer Output to
Microfilm and other micrographic products.
Equipment/Supplies - Computer Output to Microfilm original and duplicate film,
chemistry and hardware sales.
Revenues. Our revenues totaled $49.8 million in the three months ended June
30, 2003, a decrease of 12%, or $6.7 million, from $56.5 million in the three
months ended June 30, 2002.
(in thousands) Three Months Ended June 30,
___________________________
Percentage
Product Line 2003 2002 Change change
- ------------ ---- ---- ------ ------
MVS $ 9,020 $ 6,871 $ 2,149 31%
Web Presentment 4,309 4,038 271 7%
CD/Digital 7,038 8,016 (978) (12%)
COM/Other Output Services 16,928 21,966 (5,038) (23%)
COM Professional Services 5,170 6,114 (944) (15%)
Equipment/Supplies 7,341 9,529 (2,188) (23%)
----- ----- -------
Total $ 49,806 $ 56,534 $ (6,728) (12%)
======== ======== =========
MVS revenues increased $2.1 million, or 31%, over the prior year three month
period. This reflects the continued increase in new OEM agreements and the
resulting continued growth in our Multi-Vendor Services offerings. The relative
makeup of total professional services revenues (including MVS and COM
professional services) continues to migrate from COM to MVS. In the three months
ended June 30, 2003, MVS represented 64% of total professional services,
compared to 53% in the prior year three month period.
Web Presentment revenues increased $0.3 million, or 7%, over the prior year
three month period ended June 30, 2002. This reflects the addition of new
customers and additional revenue from established customers as they have
increased the number of their applications utilizing our Web services. We
believe that pricing for this product may become more aggressive in the future,
and we must remain competitive with alternative in-house solutions.
CD/Digital revenue declined $1.0 million, or 12%, from the prior year three
month period. The decline is the result of lower per unit pricing as the CD
service has become less specialized and more of a commodity and as customers
have opted for in-house or on-line solutions.
COM/Other Output Services revenue declined $5.0 million, or 23%, from the prior
year three month period. This decline reflects the decreased volumes processed
in our data centers and continues the trend experienced in prior years. We
expect that COM/Other Output Services revenues will continue to decline in
future periods.
COM Professional Services revenues declined $0.9 million, or 15%, from the prior
year three month period. This decline reflects the continued decrease in the
number of COM units in operation. We expect that the number of COM units in use
worldwide will continue to decline as organizations choose to outsource these
document management functions to service centers, such as those operated by us,
or elect to utilize other options such as CD or on-line solutions.
Equipment and supplies revenue declined $2.2 million, or 23%, from the prior
year three month period. This decrease was largely the result of the decline in
demand for and use of COM systems.
Gross Margins. Our gross margin, $15.4 million for the three months ended
June 30, 2003 and $17.5 million for the three months ended June 30, 2002,
remained consistent at 31% of revenue. Even though revenues declined in
comparison to the prior year, we were able to maintain the gross margin as a
percentage of revenue through cost savings resulting from our recent and prior
restructuring activities, which included the consolidation and downsizing of
facilities and reductions in our work force.
Engineering, Research and Development. Engineering, research and
development expenditures decreased from $1.8 million for the three month period
ended June 30, 2002, to $1.5 million in the current three month period, and
remained consistent at 3% of total revenues in both periods. These expenses will
not necessarily have a direct or immediate correlation to revenues. We continue
to build and support our outsource service solutions base and corresponding
internet and digital technologies.
Selling, General and Administrative. SG&A expenses decreased from $13.2
million for the three months ended June 30, 2002 to $11.8 million for the three
months ended June 30, 2003, due primarily to benefits realized from our recent
restructuring activities and cost savings initiatives.
Amortization of Intangible Assets. Amortization of intangible assets was
the same at $0.5 million for the three months ended June 30, 2002 and June 30,
2003. The expense reflects the amortization of identifiable intangible assets
valued as part of Fresh Start Reporting.
Restructuring Charges. Restructuring charges of $1.2 million were incurred
in the current quarter. These are related to data center consolidation and
reorganization of parts of our corporate, marketing, sales, and international
operating organizations. Additional restructuring charges, including
approximately $0.9 million of severance, are expected in the fourth quarter of
fiscal 2003. The third quarter charges consist of employee severance and
termination-related costs for approximately 76 employees, all of whom were
notified and have left the company as of June 30, 2003.
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 have left
the company. The restructuring charges also included 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.
Interest Expense and Fee Amortization. Interest expense decreased to $0.4
million for the three months ended June 30, 2003 from $1.0 million for the three
months ended June 30, 2002. The decrease reflects the decreased balance
outstanding on the senior secured revolving credit facility in the current year
period. The expense from both periods is related primarily to interest on the
senior secured revolving credit facility.
Other. The expense in both periods is related primarily to currency
exchange gains and losses.
Provision for Income Taxes. The provision for income taxes of $0.7 million
and $48 thousand (credit) for the three months ended June 30, 2003 and 2002,
respectively, related primarily to earnings of foreign subsidiaries.
Nine Months Ended June 30, 2003 vs. Nine Months Ended June 30, 2002
General. We reported net income of $7.7 million for the nine months ended
June 30, 2003 versus $278.3 million for the nine months ended June 30, 2002.
Both MVS and Web Presentment revenues grew over the prior year nine month
period. COM based revenues, however, continued to decline in the nine months
ended June 30, 2003 from the comparable prior year period, in line with
historical trends. We have been able to reduce our outstanding credit facility
balance by $21.8 million during the nine months ended June 30, 2003, primarily
by utilizing the proceeds received from the sale of our Switzerland
subsidiaries.
Revenues. Our revenues totaled $155.6 million in the nine months ended June
30, 2003, a decrease of 16%, or $29.6 million, from $185.2 million in the nine
months ended June 30, 2002.
(in thousands) Nine Months Ended June 30,
__________________________
Percentage
Product Line 2003 2002 Change change
- ------------ ---- ---- ------ ------
MVS $ 25,375 $ 19,805 $ 5,570 28%
Web Presentment 13,805 11,105 2,700 24%
CD/Digital 21,703 31,571 (9,868) (31%)
COM/Other Output Services 54,863 71,730 (16,867) (24%)
COM Professional Services 15,976 19,507 (3,531) (18%)
Equipment/Supplies 23,836 31,447 (7,611) (24%)
------ ------ -------
Total $155,558 $185,165 $(29,607) (16%)
======== ======== =========
In fiscal year 2002, we committed to a plan to sell our Switzerland operations
and we sold two smaller operating units. The results of these operations during
the first quarter of fiscal 2002 were not material to our operating results and
were not excluded from the revenues shown in the above table for the nine month
period ended June 30, 2002.
MVS revenues increased $5.6 million, or 28%, over the prior year nine month
period. This reflects the continued increase in new OEM agreements and the
resulting continued growth in our Multi-Vendor Services offerings. The relative
makeup of total professional services revenues continues to migrate from COM to
MVS. In the nine months ended June 30, 2003, MVS represented 61% of total
professional services revenue (including MVS and COM professional services),
compared to 50% in the prior year nine month period.
Web Presentment revenues increased $2.7 million, or 24%, over the prior year
nine month period ended June 30, 2002. This reflects the addition of new
customers and additional revenue from established customers as they have
increased the number of their applications utilizing our Web services. We
believe that pricing for this product may become more aggressive in the future,
and we must remain competitive with alternative in-house solutions.
CD/Digital revenue declined $9.9 million, or 31%, from prior year revenue. This
decrease was primarily the result of the sale of our Switzerland and other
operations in fiscal year 2002. CD/Digital revenue from the Switzerland
operations included in the nine months ended June 30, 2002 totaled $6.1 million.
The remainder of the decline is the result of lower per unit pricing as the CD
service has become less specialized and more of a commodity and as customers
have opted for in-house or on-line solutions.
COM/Other Output Services revenue declined $16.9 million, or 24%, from the prior
year nine month period. This decline reflects the decreased volumes processed in
our data centers and continues the trend experienced in prior years. We expect
that COM/Other Output Services revenues will continue to decline in future
periods.
COM Professional Services revenues declined $3.5 million, or 18%, from the prior
year. This decline reflects the continued decrease in the number of COM units in
operation. We expect that the number of COM units in use worldwide will continue
to decline as organizations choose to outsource these document management
functions to service centers, such as those operated by us, or elect to utilize
other options such as CD or on-line software systems.
Equipment and supplies revenue declined $7.6 million, or 24%, from the prior
year. This decrease was largely the result of the decline in demand for and use
of COM units.
Gross Margins. Our gross margin as a percentage of revenues was unchanged
at 32% ($59.2 million versus $49.9 million for the nine month periods ended June
30, 2002 and 2003 respectively). Even though revenues declined in comparison to
the prior year, we were able to maintain the gross margin percentage of revenues
through cost savings resulting from our recent and prior restructuring
activities, which included the consolidation and downsizing of facilities and
reductions in our work force.
Engineering, Research and Development. Engineering, research and
development expenditures decreased $0.2 million, or 4%, over the prior year.
These costs represented 3% of total revenues for the nine months ended June 30,
2003 and 2002. These expenses will not necessarily have a direct or immediate
correlation to revenues. We continue to build and support our outsource service
solutions base and corresponding internet and digital technologies.
Selling, General and Administrative. SG&A expenses decreased from $44.1
million for the nine months ended June 30, 2002 to $39.4 million for the nine
months ended June 30, 2003. The $4.7 million, or 11%, decrease resulted in part
from the sale of our Switzerland operations, which had $1.3 million of related
expenses included in the prior year period. Also, SG&A expenses have declined
due to benefits realized from our recent restructuring activities and cost
savings initiatives.
Amortization of Intangible Assets. Amortization of intangible assets
decreased 62%, from $3.9 million for the nine months ended June 30, 2002, to
$1.5 million for the nine months ended June 30, 2003. The prior year period
amortization expense included amortization, during the first quarter of fiscal
2002, of goodwill related to prior year acquisitions. All goodwill assets from
the Predecessor Company were eliminated in conjunction with Fresh Start
Reporting. Amortization expense after December 31, 2001 reflects the
amortization of identifiable intangible assets valued as part of Fresh Start
Reporting.
Restructuring Charges. Restructuring charges of $1.2 million were incurred
in the third quarter of fiscal year 2003. These are related to data center
consolidation and reorganization of parts of our corporate, marketing, sales,
and international operating organizations. Additional restructuring charges,
including approximately $0.9 million of severance, are expected in the fourth
quarter of fiscal 2003. The third quarter charges consist of employee severance
and termination-related costs for approximately 76 employees, all of whom were
notified and have left the company as of June 30, 2003.
In the third quarter of fiscal year 2002, we recorded a restructuring
charge of $2.1 million related to the reorganization of our operations from two
business units to one entity. The reorganization of the workforce consisted of
combining the field organizations of Document Solutions and Technical Services
into one organization, the establishment of an executive level position to
oversee all sales and marketing activities and a single support group for our
data centers, Web Presentment operations, field services operations and process
quality. The restructuring charges included $1.6 million in employee severance
and termination related costs for approximately 100 employees, all of whom have
left the company. The restructuring charges also include approximately $0.4
million for the closure of a data center for which the lease expires in July
2004.
In the first quarter of fiscal year 2002, we reversed $1 million of
business restructuring reserves primarily due to favorable circumstances related
to the shutdown of our Japanese subsidiary. Our closure costs to vacate our
facility in Japan, costs to fulfill our contract obligations and severance and
related professional costs up to that time were less than anticipated at the
time the accrual was recorded.
Interest Expense and Fee Amortization. Interest expense decreased to $1.8
million for the nine months ended June 30, 2003 from $5.4 million for the nine
months ended June 30, 2002. Prior year expense included interest (approximately
$1.7 million) on our senior subordinated notes up to October 19, 2001, the date
we filed Chapter 11 bankruptcy. The remaining expense in both periods is related
primarily to interest on the senior secured revolving credit facility.
Other. We recognized other income due to extinguishment of debt totaling
$265.3 million for the nine month period ended June 30, 2002 as a result of our
bankruptcy proceedings and subsequent emergence from Chapter 11 proceedings on
December 31, 2001. The remaining expense in both periods is related primarily to
currency exchange gains and losses.
Reorganization Items. Reorganization items in the nine months ended June
30, 2002, represent expenses and adjustments resulting from our reorganization
and consist of professional fees incurred subsequent to our Chapter 11 filing
totaling $1 million, fair value adjustments made to assets and liabilities
totaling $16.9 million and other asset write-offs and settlements totaling $2.6
million (primarily related to our extinguished debt) in Fresh Start Reporting.
Provision for Income Taxes. The provision for income taxes of $1.8 million
and $1.7 million for the nine months ended June 30, 2003 and 2002, respectively,
related primarily to earnings of foreign subsidiaries.
Gain on Sale of Discontinued Operations. In the nine months ended June 30,
2003, we realized a gain of $8.2 million on the sale of our Switzerland
subsidiaries. This sale was effective October 1, 2002. The Switzerland
operations were not material to our consolidated results prior to December 31,
2001. As a result, the statements of operations for the three months ended
December 31, 2001 do not segregate the Switzerland operations as discontinued.
Liquidity and Capital Resources
Our legacy business (COM) has declined in recent years and is forecasted to
continue to decline as new technologies become available and are accepted in the
marketplace. Our ability to generate sufficient cash to fund operations and to
meet future bank requirements is dependent on successful and simultaneous
management of the decline in COM as well as the expansion of alternative service
offerings. Other factors, such as an uncertain economy, levels of competition in
the document management industry, and technological uncertainties will impact
our ability to generate cash and maintain liquidity. We believe the actions
taken over the past two years, including new and enhanced product and service
offerings, company downsizing, cost control measures and the debt restructuring
from our bankruptcy will allow us to maintain sufficient cash flows from
operations to meet our operating, capital and debt requirements in the normal
course of business for at least the next twelve months.
On December 31, 2001, Anacomp and Fleet National Bank, as agent, and its
syndicate of lenders (collectively, "the Bank Group") entered into an Amended
and Restated Revolving Credit Agreement. The credit agreement provides for a
commitment of $26.1 million as of June 30, 2003, with a $20.0 million direct
borrowing sublimit and a $6.1 million letter of credit sublimit. The facility is
available for new borrowings when borrowings are below the direct borrowing
sublimit.
Effective December 19, 2002, we signed an amendment to the revolving credit
agreement. The amendment modified certain financial covenants to accommodate the
sale of our Switzerland operations and current business plans. Other changes to
the agreement included a permanent reduction to the credit facility commitment
of $10.0 million and provisions for acquisitions and/or divestitures under
specified conditions.
At June 30, 2003, the outstanding revolving credit borrowings were $8.2 million
(plus outstanding standby letters of credit of $6.1 million). During the nine
month period ended June 30, 2003, we paid $21.8 million to reduce the principal
outstanding and have $11.8 million of borrowing capacity.
The original maturity date of the amended facility was June 30, 2003. Due to the
receipt of proceeds from our sale of the Switzerland subsidiaries and the
application of those proceeds to reduce our facility balance, it has been
extended to December 31, 2003 under the terms of the agreement. We reduced the
outstanding borrowings and permanently reduced the borrowing sublimit of the
credit facility commitment by $11.4 million as a result of proceeds received
from the October 2002 sale of our Switzerland operations and subsidiaries.
The credit agreement bears interest at a base rate equal to the higher of (a)
the annual rate of interest announced from time to time by Fleet National Bank
as its best rate, or (b) one-half of one percent above the Federal Funds
Effective Rate, for the portion of the facility equal to a Formula Borrowing
Base ("FBB"). The FBB equals 80% of eligible accounts, which include U.S. and
Canadian accounts receivable. The rate of interest is three percentage points
higher than the base rate for the facility balance outstanding in excess of the
FBB. Interest is due and payable monthly in arrears. The interest rate was 4.0%
for the FBB portion and 7.0% for the excess portion at June 30, 2003. At June
30, 2003, the FBB was $11.4 million; accordingly, there were no excess
borrowings over the FBB.
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 purchases of our common stock;
o mergers and acquisitions; and
o liens and dividends.
The credit facility also is subject to minimum EBITDA, interest coverage and
leverage ratio covenants. In addition, we are required to remit to the Bank
Group the net proceeds of any capital asset sale.
Under the current facility as amended, the facility commitment and the direct
borrowings sublimit will be permanently reduced by $1.25 million on September
30, 2003.
Subsequent to June 30, 2003, we have made cash payments totaling $1.8 million to
further reduce the outstanding credit facility liability. As of August 12, 2003,
the outstanding revolving credit borrowings were $6.4 million and borrowing
capacity was $13.6 million.
During the past nine months, our significant paydown of the outstanding balance
on our revolving credit facility through both scheduled reductions and from
proceeds received on the sale of our Switzerland subsidiaries has substantially
improved our working capital position. The working capital deficiency of $6.5
million at September 30, 2002, is now positive working capital of $7.2 million
at June 30, 2003.
Net cash provided by continuing operations was $11.5 million for the nine months
ended June 30, 2003, compared to $15.8 million in the comparable prior year
period. The prior period amount includes approximately $2.6 million contributed
by discontinued operations.
Net cash provided by investing activities was $11.5 million in the current nine
month period, compared to cash used in investing activities of $3.2 million in
the comparable prior year period. The current year period included cash proceeds
from the sale of our Switzerland operations and subsidiaries. Expenditures in
both years were primarily for purchases of equipment. We received an additional
CHF 1.1 million, or approximately $0.7 million, on April 17, 2003, from our sale
of Swiss subsidiaries as scheduled under the terms of the sale agreement.
During the quarter ended June 30, 2003, we entered into a service agreement with
Dot Hill Systems Corp. to provide warranty and non-warranty service and on-site
repair support for certain storage network solutions products. Under the terms
of the agreement, Anacomp paid Dot Hill $500,000 to acquire new and used
inventory, spare parts, test equipment, software, licenses, customer lists, and
other commercial and proprietary information necessary for Anacomp to perform
the agreed upon services. In addition, Anacomp will pay Dot Hill periodic
royalty payments over at least the next two years; a liability of $1.2 million
for the minimum royalty payments due has been recorded and is included in "Other
accrued liabilities" in the Condensed Consolidated Balance Sheet at June 30,
2003. Additional royalties will be owed to Dot Hill if revenue from services
exceed a defined minimum amount. The initial payment of $500,000 is included as
"Payments to acquire product line assets and customer rights" in the investing
activities section of the Condensed Consolidated Statement of Cash Flows for the
nine months ended June 30, 2003.
Net cash used in financing activities was $21.8 million during the current nine
month period, compared to $21.6 million used in financing activities in the
prior year period. In both periods, cash was used to pay down the revolving
credit facility.
Our cash balance totaled $18.0 million at June 30, 2003 compared to $15.6
million at September 30, 2002. Approximately 56% of the June 30, 2003 cash
balance is located at our foreign subsidiaries compared to approximately 49% at
September 30, 2002. Our use of excess cash as additional payments against our
credit facility resulted in the decrease of domestic cash on hand.
RISK FACTORS
You should carefully consider the following risk factors and all of the other
information included in this Quarterly Report in evaluating our business and our
prospects. Investing in our Class A or Class B Common Stock (collectively,
"Common Stock") involves a high degree of risk. Additional risks and
uncertainties may also materially adversely affect our business and financial
condition in the future. Any of the following risks could materially adversely
affect our business, operating results or financial condition and could result
in a partial or complete loss of your investment.
We recently effectuated a financial restructuring pursuant to a prepackaged
Chapter 11 plan of reorganization, we have a history of net losses and we may
face liquidity issues in the future.
On October 19, 2001 we filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code and a prepackaged plan of reorganization.
The Bankruptcy Court confirmed the plan of reorganization on December 10, 2001
and we emerged from our bankruptcy proceedings effective December 31, 2001.
However, our completion of bankruptcy proceedings does not assure our continued
success. For example, the bankruptcy proceedings described above are our second
bankruptcy: we previously filed a plan of reorganization in January 1996 and
emerged from those proceedings in June 1996. If our financial performance does
not exceed our recent historical results, the price of our Common Stock could
decline and your investment could be materially adversely affected. As part of
our plan of reorganization, our lenders modified the terms of our senior credit
facility, which encumbers substantially all of our assets. This facility also
includes mandatory periodic pay downs and covenant restrictions concerning the
commitment limits of this facility including levels of collateral, financial
covenants, and limitations on capital expenditures. Our credit facility is
scheduled to mature on December 31, 2003, at which time we will be required to
renew, refinance, or modify the credit facility with our lenders or locate
alternative financing. These restrictions and provisions could have an adverse
impact on our future liquidity and ability to implement our business plan.
Our revenues could continue to decrease over the next few years, which could
inhibit us from achieving or sustaining profitability or even prevent us from
continuing to operate.
Our accumulated deficit through December 31, 2001 has been eliminated as a
result of Fresh Start Reporting. However, we have not recorded sustained
profitable operating results for quite some time. To achieve sustained future
profitability we will need to generate and sustain revenues while satisfying our
payment obligations under the terms of our senior secured revolving credit
facility (including mandatory pay downs) and maintaining rea