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PROSPECTUS
Filed pursuant to
Rule 424 (b)(3),
File No. 333-25281
[LOGO]
OFFER TO EXCHANGE ITS 10 7/8% SENIOR SUBORDINATED NOTES DUE 2004, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING 10 7/8% SENIOR
SUBORDINATED NOTES DUE 2004, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST 11,
1997, UNLESS EXTENDED.
Anacomp, Inc., an Indiana corporation ("Anacomp" or the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and together with this Prospectus, the "Exchange Offer"), to
exchange its 10 7/8% Senior Subordinated Notes due 2004, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement (as defined) of
which this Prospectus is a part, for an equal principal amount of its
outstanding 10 7/8% Senior Subordinated Notes due 2004, Series A (the "Old
Notes"), of which $200 million principal amount is outstanding. The Exchange
Notes and the Old Notes are collectively referred to herein as the "Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
August 11, 1997, unless the Exchange Offer is extended (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange Notes will be issued and
delivered promptly after the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer." Old Notes may be tendered only in integral
multiples of $1,000. The Company has agreed to pay the expenses of the Exchange
Offer.
The Exchange Notes will be obligations of the Company evidencing the same
debt as the Old Notes, and will be entitled to the benefits of the same
indenture, dated as of March 24, 1997 (the "Indenture"), between the Company and
IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). The form and
terms of the Exchange Notes are substantially the same as the form and terms of
the Old Notes except that the Exchange Notes have been registered under the
Securities Act. See "The Exchange Offer."
The Exchange Notes will bear interest from March 24, 1997. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the Old Notes accrued
up until the date of the issuance of the Exchange Notes. Such waiver will not
result in the loss of interest income to such holders, since the Exchange Notes
will bear interest from the issue date of the Old Notes.
Interest on the Exchange Notes will be payable semi-annually on April 1 and
October 1 of each year, commencing October 1, 1997, accruing from March 24, 1997
at the rate of 10 7/8% per annum. The Exchange Notes will mature on April 1,
2004. Except as described below, the Company may not redeem the Exchange Notes
prior to April 1, 2000. On or after such date, the Company may redeem the
Exchange Notes, in whole or in part, at any time, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time and from time to time on or prior to April
, 2000, the Company may, subject to certain requirements, redeem up to 35% of
the aggregate principal amount of the Notes with the cash proceeds of one or
more Public Equity Offerings (as defined) at a redemption price equal to
110.875% of the principal amount to be redeemed, together with accrued and
unpaid interest, if any, to the date of redemption, PROVIDED that at least $130
million of the aggregate principal amount of the Notes remain outstanding
immediately after each such redemption. The Exchange Notes will not be subject
to any sinking fund requirement. Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to repurchase the
Exchange Notes at a price of 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of repurchase. There can be no
assurance that the Company will have sufficient funds or other resources to
repurchase the Notes upon a Change of Control or other mandatory repurchase
event. See "Description of Notes--Optional Redemption" and "--Change of
Control."
The Exchange Notes will be unsecured and will be subordinated to all
existing and future Senior Indebtedness (as defined) of the Company. The
Exchange Notes will rank PARI PASSU with any future Senior Subordinated
Indebtedness (as defined) of the Company and will rank senior to all
subordinated indebtedness of the Company. The Exchange Notes will also be
effectively subordinated to all obligations of each subsidiary of the Company as
may exist from time to time. As of March 31, 1997, the Company had approximately
$56 million of Senior Indebtedness and $255 million of total indebtedness
outstanding (in each case excluding unused revolving credit commitments of $25
million). See "Description of Notes--Ranking" and "--Subordination."
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a Prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that, by so acknowledging and by
delivering a Prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities. The Company has agreed that
for a period of 90 days after consummation of the Exchange Offer, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
There has been no public market for the Old Notes. If a market for the
Exchange Notes should develop, the Exchange Notes could trade at a discount from
their principal amount. The Company does not intend to list the Exchange Notes
on a national securities exchange or to apply for quotation of the Exchange
Notes through the National Association of Securities Dealers Automated Quotation
System. There can be no assurance that an active public market for the Exchange
Notes will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 14, 1997.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Exchange Notes offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company, and the
Exchange Notes offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of certain documents
filed as exhibits to the Registration Statement are not necessarily complete
and, in each case, are qualified by reference to the copy of the document so
filed.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Reports,
proxy and information statements and other information filed by the Company and
the Registration Statement can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such material may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material also can be reviewed
through the Commission's Electronic Data Gathering, Analysis, and Retrieval
System, which is publicly available through the Commission's Web site
(http://www.sec.gov). The Company intends to furnish, or cause the Trustee to
furnish, to each holder of the Exchange Notes annual reports containing audited
financial statements and quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year. The Company also
will furnish to each holder of the Exchange Notes such other reports as may be
required by applicable law. The principal executive offices of the Company are
located at 11550 North Meridian Street, Suite 600, Carmel, Indiana 46032,
telephone number (317) 844-9666.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business" and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company, or industry results, to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors include, among
others: general economic and business conditions; industry capacity; industry
trends; competition; raw material costs and availability; currency fluctuations;
the loss of any significant customers; changes in business strategy or
development plans; availability, terms and deployment of capital; availability
of qualified personnel; changes in, or the failure or inability to comply with,
government regulation; and other factors referenced in this Prospectus. See
"Risk Factors." These forward-looking statements speak only as of the date of
this Prospectus. The Company disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
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PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY BEFORE INVESTING IN THE EXCHANGE NOTES. THE COMPANY'S
FISCAL YEAR ENDS SEPTEMBER 30, AND THUS, FOR EXAMPLE, "FISCAL 1996" REFERS TO
THE FISCAL YEAR ENDED SEPTEMBER 30, 1996. FINANCIAL INFORMATION PRESENTED HEREIN
FOR THE ENTIRE FISCAL 1996 PERIOD REFLECTS THE COMBINATION OF HISTORICAL RESULTS
FOR THE EIGHT MONTHS ENDED MAY 31, 1996 FOR THE "PREDECESSOR COMPANY" (UNTIL MAY
31, 1996) AND FOR THE FOUR MONTHS ENDED SEPTEMBER 30, 1996 FOR THE "REORGANIZED
COMPANY" (STARTING MAY 31, 1996), AND THUS, THIS INFORMATION DOES NOT COMPLY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") APPLICABLE TO COMPANIES
UPON EMERGENCE FROM BANKRUPTCY, WHICH CALLS FOR SEPARATE REPORTING FOR THE
REORGANIZED COMPANY AND THE PREDECESSOR COMPANY.
THE COMPANY
GENERAL
Anacomp is a leading provider of information and image management products
and services to approximately 15,000 customers in more than 65 countries. The
Company offers a broad range of short-term and long-term document management
solutions for the conversion, storage and retrieval of computer data and images
utilizing micrographics, magnetic media products and, to an increasing extent,
digital technologies. For the twelve-month period ended March 31, 1997, the
Company's revenues and EBITDA (as defined) were $460.9 million and $81 million,
respectively.
The Company has built a strong reputation as the world's leading
full-service provider of micrographics systems, services and supplies.
Micrographics is the conversion of information stored in digital form or on
paper to microfilm or microfiche. Traditionally, micrographics has provided one
of the most cost-effective means of data storage and retrieval for
information-intensive organizations such as banks, insurance companies,
financial service companies, retailers, healthcare providers and government
agencies. The Company believes it possesses worldwide market share in excess of
40% in the largest segment of the micrographics industry, Computer Output
Microfilm ("COM"). COM consists of the high-speed conversion of digital
information directly from a computer or magnetic tape to microfilm or
microfiche.
The Company has an extensive installed base of COM equipment, which
management estimates to be in excess of 55% of the systems in use worldwide.
This installed base together with the Company's strong customer relationships
provide the Company with what management believes to be a substantial recurring
revenue stream from COM maintenance and supplies. For customers that prefer
outsourcing solutions, the Company provides COM, digital and related services
through its network of 48 service centers in the United States as well as
through a growing number of international service centers. The Company is also a
leading provider of half-inch magnetic media products for large computing
systems and is increasingly providing digital products and services to its
customers.
INFORMATION AND IMAGE MANAGEMENT INDUSTRY
The information and image management industry, which the Company believes to
be in excess of $8 billion worldwide, provides products and services utilized in
the conversion, storage and retrieval of computer data and images. Users of
these products and services must balance the ease of accessibility of
information with the cost of storing and accessing that information. The
required duration for storing certain information, as well as the necessary
frequency and availability of access to data, determine the type of media on
which the information can be stored and the related cost. In general, as
information ages, customer requirements for frequency of retrieval and speed of
delivery decline.
Historically, information management (both storage and retrieval) was
dominated by micrographics products and services, a segment in which Anacomp has
achieved a leading market position. Recent advances in digital technology have
provided customers with information management alternatives to micrographics,
which provide more rapid retrieval times but at a higher cost. Over the next few
years, the
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Company believes that micrographics technology will continue to retain certain
cost and functional advantages over alternative data storage media, which will
keep micrographics competitive in a wide range of applications. Over a longer
term, the Company believes that micrographics technology will be viewed
predominately as a reliable and cost-effective method for long-term data
storage. To achieve optimal balance of cost-effectiveness and efficiency, many
organizations convert their information to several different storage media over
the life of the information. The Company's new business strategy is to
capitalize on these industry trends by leveraging its competitive strengths to
provide new products and services while maintaining its leading market position
in COM solutions.
COMPETITIVE STRENGTHS
STRONG CUSTOMER RELATIONSHIPS
Since its inception in 1968, the Company has developed long-term
relationships (in excess of five years) with many of its customers. Among the
Company's current long-term customers are Aetna Inc., AT&T Corp., Automatic Data
Processing, Inc., BankAmerica Corporation, Citicorp, Daimler-Benz AG, Deutsche
Bank AG, Eastman Kodak Company ("Kodak"), Electronic Data Systems Corporation,
FMR Corp., General Electric Capital Corporation, International Business Machines
Corporation ("IBM") and Travelers Group Inc. The terms of the contractual
relationships with these customers vary; however, they typically provide for
minimum quantities, pricing structure, terms of one or more years and automatic
renewal. No customer accounted for 10% or more of the Company's revenues in
fiscal 1996. The Company believes that the strength of its customer
relationships results from consistently meeting or exceeding customer
information management needs and expectations. The Company manages these
customer relationships through its worldwide sales force of approximately 200
individuals and through its extensive distributor networks.
LEADING MARKET SHARES
The Company believes that it is the largest manufacturer and distributor of
COM systems in the world; the largest provider of COM maintenance and supplies
in the world; the second largest provider of COM services in the United States;
the largest supplier of half-inch magnetic media products in the world; and the
largest provider of digital compact disc-recordable ("CD") output products and
services in the world. The Company's market position and customer base provide
the necessary platform to introduce new and complementary information management
products and services.
INSTALLED BASE OF EQUIPMENT
The Company believes it has the world's largest installed base of COM
equipment with an estimated market share of 55%. This extensive installed base,
together with the Company's strong customer relationships, provide the Company
with what management believes to be a substantial recurring revenue stream from
COM maintenance and supplies.
BROAD PRODUCT OFFERING
The Company has introduced new products and services in three areas: digital
solutions, complementary outsourcing services and COM enhancements. Digital
solutions include CD services marketed under the ALVA brand name and CD output
systems obtained from the acquisition of Data/Ware Development, Inc.
("Data/Ware"). Complementary outsourcing services include Print/Mail (printing
and mailing client statements and other documents) and archival storage
services. New products in COM systems include DragonCOM, a next generation COM
system which is capable of processing Asian languages.
EXPERIENCED NEW MANAGEMENT TEAM
The Company's new senior management team is led by Ralph W. Koehrer, who
became the Company's President in January 1997 and Chief Executive Officer in
May 1997. This management team has more than 300 cumulative years of experience
in the information and image management industry and is highly committed to
executing the Company's new business strategy.
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NEW BUSINESS STRATEGY
The Company's new management team, assembled over the last eighteen months
as a part of the Company's reorganization plan, has developed a strategy to
rationalize the Company's operations, leverage the Company's competitive
strengths and capitalize on the evolution of the information and image
management industry.
COST REDUCTION AND PRODUCTIVITY ENHANCEMENT
The Company is executing an on-going strategy designed to: (a) reduce
selling, general and administrative expenses by reducing headcount, centralizing
administrative functions and reducing fixed operating costs and (b) develop new
processes and programs to enhance productivity and product quality. The
cumulative effect of these and other activities has been to reduce selling,
general and administrative expenses as a percentage of revenues from 22.4% for
the year ended September 30, 1995 to 19.4% for the twelve months ended March 31,
1997. The Company's management is committed to continue cost and efficiency
improvements focusing on a number of areas including data center automation and
data transmission technology.
EXIT NON-STRATEGIC BUSINESSES
Since July 1995, the Company has exited three lower-margin, non-strategic
businesses including the filming of paper documents, the manufacturing of
microfiche and microfilm readers and reader/printers, as well as the
manufacturing of floppy diskette media.
STRENGTHEN BALANCE SHEET AND ENHANCE FINANCIAL FLEXIBILITY
Following the Company's emergence from bankruptcy proceedings in June 1996,
the Company has completed a $25 million rights offering and an $80 million
senior secured credit financing. Since June 1996, following these two
transactions and pro forma for the Offering and the Redemption, the Company will
have reduced annualized interest expense excluding amortization of discounts and
issuance costs from $38.6 million (based on capitalization data as of June 30,
1996) to $30 million (based on capitalization data as of March 31, 1997). See
"Capitalization."
NEW PRODUCT OFFERINGS AND GROWTH OPPORTUNITIES
The Company is positioning itself to capitalize on its core long-term
information management competency and its significant existing customer base by
providing the latest technologies for short-term and mid-term information
management solutions. This migration towards faster growth areas of the
information and image management industry is being accomplished through internal
development, strategic acquisitions of advanced technology and joint ventures
and strategic alliances. In June 1996, the Company introduced its new DragonCOM
System, which is capable of processing Asian languages. On January 31, 1997, the
Company acquired Data/Ware, a leading manufacturer and supplier of CD output
systems. On January 22, 1997, the Company entered into a product and marketing
agreement with FileNet Corp. ("FileNet"), a leading provider of integrated
document management software, to provide a technological base for the Company's
Windows NT-based application solutions for rapid day-to-day information
management known collectively as "Concerto." Although digital storage systems
account for a small percentage of the Company's total revenues, Anacomp has
rapidly become the largest U.S. provider of CD output solutions, offering
customers high-capacity and high-speed information retrieval applications.
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RECENT DEVELOPMENTS
On October 30, 1996, the Company completed a $25 million rights offering
(the "Rights Offering") of its Common Stock (as defined) to its existing
stockholders that resulted in the issuance of 3.6 million shares of Common Stock
at a subscription price of $6.875 per share. (The Company's Common Stock was
quoted on July 10, 1997 at a closing price of $12.75 per share on the Nasdaq
National Market).
On January 22, 1997, the Company entered into a multi-year product and
marketing agreement with FileNet to provide Windows NT-based software
applications for integrated information delivery. FileNet's newest suite of
software for document imaging, document management, computer output to laser
disc ("COLD") and workflow, a set of integrated, open, componentized and
complementary solutions, will serve as the platform for multi-industry and
vertical applications developed and marketed by the Company under the Concerto
brand name.
On January 31, 1997, Anacomp acquired Data/Ware, a California-based company
that manufactures and markets CD output systems, optical storage controllers and
mainframe connectivity solutions, for $11.2 million cash paid at closing and
contingent cash and/or stock payments of up to $3.2 million based on future
performance.
On February 28, 1997, the Company refinanced (the "Senior Secured
Refinancing") the Old Senior Secured Notes (as defined) with an $80 million
senior secured credit facility (the "Senior Secured Debt") that provides for a
$25 million revolver and term loans of $55 million. The Senior Secured Debt is
secured by substantially all of the assets of the Company and contains financial
covenants and other restrictions on the Company. See "Description of the Senior
Secured Debt."
On March 24, 1997, the Company sold and issued the Old Notes (the "Old Notes
Offering"). Following the consummation of the Old Notes Offering, the Company
used a portion of the proceeds from the Old Notes Offering to redeem (the
"Redemption") all of the Company's $172 million aggregate principal amount
outstanding 13% Senior Subordinated Notes due 2002 (the "Existing Notes") at a
redemption price equal to 103% of the principal amount of the Existing Notes.
BANKRUPTCY REORGANIZATION
On June 4, 1996, the Company emerged from bankruptcy proceedings under its
Third Amended Joint Plan of Reorganization (the "Plan of Reorganization"). On
such date, the Company canceled its existing secured and subordinated debt and
its equity securities, and distributed to its creditors approximately $22.0
million in cash, $112.2 million principal amount of its 11 5/8% Senior Secured
Notes due 1999 (the "Old Senior Secured Notes"), $160 million principal amount
of the Existing Notes, 10 million shares of new common stock, par value $0.01
per share (the "Common Stock"), and warrants to purchase 383,222 shares of
Common Stock at a price of $11.57 per share for a period of five years from June
4, 1996. The Plan of Reorganization resulted in a reduction of approximately
$174 million in principal and accrued interest of the Company's debt obligations
and/or liquidation amount and accrued dividends on its preferred stock. The
resulting capital structure reduced the Company's interest expense by
approximately $31 million per year.
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THE EXCHANGE OFFER
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The Exchange Offer............ $1,000 principal amount of Exchange Notes will be issued in
exchange for each $1,000 principal amount of Old Notes
validly tendered pursuant to the Exchange Offer. As of the
date hereof, $200 million in aggregate principal amount of
Old Notes are outstanding. The Company will issue the
Exchange Notes to tendering holders of Old Notes promptly
after the Expiration Date.
Resales....................... Based on an interpretation by the staff of the Commission
set forth in Morgan Stanley & Co. Incorporated, SEC
No-Action Letter (available June 5, 1991) (the "Morgan
Stanley Letter"), Exxon Capital Holdings Corporation, SEC
No-Action Letter (available May 13, 1988) (the "Exxon
Capital Letter") and similar letters, the Company believes
that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold
and otherwise transferred by any person receiving such
Exchange Notes, whether or not such person is the holder
(other than any such holder or other person which is (i) a
broker-dealer that receives Exchange Notes for its own
account in exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result of mar-
ket-making or other trading activities, or (ii) an
"affiliate" of the Company within the meaning of Rule 405
under the Securities Act (collectively, "Restricted
Holders")) without compliance with the registration and
prospectus delivery provisions of the Securities Act,
provided that (a) such Exchange Notes are acquired in the
ordinary course of business of such holder or other person
(b) neither such holder nor such other person is engaged in
or intends to engage in a distribution of such Exchange
Notes and (c) neither such holder nor other person has any
arrangement or understanding with any person to participate
in the distribution of such Exchange Notes. If any person
were to be participating in the Exchange Offer for the
purposes of participating in a distribution of the Exchange
Notes in a manner not permitted by the Commission's
interpretation, such person (a) could not rely upon the
Morgan Stanley Letter, the Exxon Capital Letter or similar
letters and (b) must comply with the registration and
prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Each broker
or dealer that receives Exchange Notes for its own account
in exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of
market-making or other activities, must acknowledge that it
will deliver a Prospectus in connection with any sale of
such Exchange Notes. See "Plan of Distribution."
Expiration Date............... 5:00 p.m., New York City time, on August 11, 1997, unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to which
the Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and Old
Notes....................... The Exchange Notes will bear interest from March 24, 1997.
Holders of Old Notes whose Old Notes are accepted for
exchange will be
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deemed to have waived the right to receive any payment in
respect of interest on such Old Notes accrued to the date
of issuance of the Exchange Notes.
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to certain customary
conditions. The conditions are limited and relate in
general to proceedings which have been instituted or laws
which have been adopted that might impair the ability of
the Company to proceed with the Exchange Offer. As of the
date of this Prospectus, none of these events had occurred,
and the Company believes their occurrence to be unlikely.
If any such conditions exist prior to the Expiration Date,
the Company may (a) refuse to accept any Old Notes and
return all previously tendered Old Notes, (b) extend the
Exchange Offer or (c) waive such conditions. See "The
Exchange Offer--Conditions."
Procedures for Tendering Old
Notes....................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged and
any other required documentation to the Exchange Agent (as
defined) at the address set forth herein and therein.
Tendered Old Notes, the Letter of Transmittal and
accompanying documents must be received by the Exchange
Agent by 5:00 p.m. New York City time, on the Expiration
Date. See "The Exchange Offer--Procedures for Tendering."
By executing the Letter of Transmittal, each holder will
represent to the Company that, among other things, the
Exchange Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such
person is the holder, that neither the holder nor any such
other person is engaged in or intends to engage in a
distribution of the Exchange Notes or has an arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes, and that neither the
holder nor any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of the
Company.
Special Procedures for
Beneficial Holders.......... Any beneficial holder whose Old Notes are registered in the
name of his broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender in the Exchange
Offer should contact such registered holder promptly and
instruct such registered holder to tender on his behalf. If
such beneficial holder wishes to tender on his own behalf,
such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or obtain
a properly completed bond power from the registered holder.
The transfer of record ownership may take considerable
time. See "The Exchange Offer-- Procedures for Tendering."
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Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their Old Notes and
whose Old Notes are not immediately available or who cannot
deliver their Old Notes and a properly completed Letter of
Transmittal or any other documents required by the Letter
of Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights............. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of Exchange
Notes....................... Subject to certain conditions, the Company will accept for
exchange any and all Old Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered promptly
after the Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Certain U.S. Federal Income
Tax Considerations.......... The exchange of Old Notes for Exchange Notes pursuant to
the Exchange Offer will not be a taxable event for federal
income tax purposes. A holder's holding period for Exchange
Notes will include the holding period for Old Notes. For a
discussion summarizing certain U.S. federal income tax
consequences to holders of the Exchange Notes, see "Certain
U.S. Federal Income Tax Considerations."
Exchange Agent................ IBJ Schroder Bank & Trust Company is serving as exchange
agent (the "Exchange Agent") in connection with the
Exchange Offer. The mailing address of the Exchange Agent
is IBJ Schroder Bank & Trust Company, P.O. Box 84, Bowling
Green Station, New York, New York, 10274-0084, Attention:
Reorganization Operations Department. Deliveries by hand or
overnight courier should be addressed to IBJ Schroder Bank
& Trust Company, One State Street, Securities Processing
Window SC-1, New York, New York 10004. For facsimile
transmission, use facsimile number (212) 858-2611 and
confirm by telephone at (212) 858-2657.
Use of Proceeds............... The Company will not receive any proceeds from the Exchange
Offer. See "Use of Proceeds." The Company has agreed to
bear the expenses of the Exchange Offer pursuant to the
Registration Rights Agreement (as defined). No underwriter
is being used in connection with the Exchange Offer.
</TABLE>
9
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
The Exchange Offer constitutes an offer to exchange up to $200 million
aggregate principal amount of the Exchange Notes for up to an equal aggregate
principal amount of Old Notes. The Exchange Notes will be obligations of the
Company evidencing the same indebtedness as the Old Notes, and will be entitled
to the benefit of the same Indenture. The form and terms of the Exchange Notes
are substantially the same as the form and terms of the Old Notes except that
the Exchange Notes have been registered under the Securities Act. See
"Description of Notes."
COMPARISON WITH OLD NOTES
<TABLE>
<S> <C>
Freely Transferable........... The Exchange Notes will be freely transferable under the
Securities Act by holders who are not Restricted Holders.
Restricted Holders are restricted from transferring the
Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act. The
Exchange Notes will be identical in all material respects
(including interest rate, maturity and restrictive
covenants) to the Old Notes, with the exception that the
Exchange Notes will be registered under the Securities Act.
See "The Exchange Offer--Terms of the Exchange Offer."
Registration Rights........... The holders of Old Notes currently are entitled to certain
registration rights pursuant to the Exchange and
Registration Rights Agreement, dated March 24, 1997 (the
"Registration Rights Agreement"), by and between the
Company and NatWest Capital Markets Limited, the initial
purchaser of the Old Notes ("NatWest"), including the right
to cause the Company to register the Old Notes under the
Securities Act if the Exchange Offer is not consummated
prior to the Exchange Offer Termination Date (as defined).
See "The Exchange Offer--Conditions." However, pursuant to
the Registration Rights Agreement, such registration rights
will expire upon consummation of the Exchange Offer.
Accordingly, holders of Old Notes who do not exchange their
Old Notes for Exchange Notes in the Exchange Offer will not
be able to reoffer, resell or otherwise dispose of their
Old Notes unless such Old Notes are subsequently registered
under the Securities Act or unless an exemption from the
registration requirements of the Securities Act is
available.
</TABLE>
TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
ISSUER........................ Anacomp Inc., an Indiana corporation.
EXCHANGE NOTES OFFERED........ $200 million principal amount of 10 7/8% Senior
Subordinated Notes due 2004, Series B.
MATURITY DATE................. April 1, 2004.
INTEREST PAYMENT DATES........ April and October 1, commencing October 1, 1997. For a
discussion summarizing certain U.S. federal income tax
consequences to holders of the Notes, see "Certain U.S.
Federal Income Tax Considerations--Original Issue
Discount."
OPTIONAL REDEMPTION........... Except as described below and under "--Change of Control,"
the Company may not redeem the Exchange Notes prior to
April 1,
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
2000. On or after such date, the Company may redeem the
Exchange Notes, in whole or in part, at any time at the
redemption prices set forth herein, together with accrued
and unpaid interest, if any, to the date of redemption. In
addition, at any time and from time to time on or prior to
April 1, 2000, the Company may, subject to certain
requirements, redeem up to 35% of the aggregate principal
amount of the Notes with the cash proceeds received from
one or more Public Equity Offerings at a redemption price
equal to 110.875% of the principal amount to be redeemed,
together with accrued and unpaid interest, if any, to the
date of redemption, PROVIDED that at least $130 million of
the aggregate principal amount of the Notes remain
outstanding immediately after each such redemption. See
"Description of Notes--Optional Redemption."
RANKING AND SUBORDINATION..... The Exchange Notes will be unsecured and will be
subordinated to all existing and future Senior Indebtedness
of the Company. The Exchange Notes will rank PARI PASSU
with any future Senior Subordinated Indebtedness of the
Company and will rank senior to all other subordinated
indebtedness of the Company. The Exchange Notes will also
be effectively subordinated to all obligations of each
subsidiary of the Company as may exist from time to time.
As of March 31, 1997, the Company had approximately $56
million of Senior Indebtedness and $255 million of total
indebtedness outstanding (in each case excluding unused
revolving credit commitments of $25 million). See
"Description of Notes--Ranking" and "--Subordination."
CHANGE OF CONTROL............. Upon the occurrence of a Change of Control, the Company
will be required to purchase the Notes at a purchase price
of 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of
repurchase. There can be no assurance that the Company will
have sufficient funds or other resources to repurchase the
Notes upon a Change of Control or other mandatory
repurchase event. In addition, the occurrence of certain of
the events which would constitute a Change of Control could
constitute a default under, and trigger the acceleration
of, the Senior Secured Debt and the Company's other
existing or future indebtedness. See "Description of
Notes--Change of Control."
CERTAIN COVENANTS............. The Indenture will contain certain covenants, including,
without limitation, covenants with respect to the following
matters, (a) limitation on indebtedness, (b) limitation on
restricted payments, (c) limitation on restrictions on
distributions from restricted subsidiaries, (d) limitation
on sale of assets and restricted subsidiary stock,
(e) limitation on transactions with affiliates,
(f) limitation on liens, (g) limitation on sale/leaseback
transactions, (h) limitation on issuance and sale of
capital stock of restricted subsidiaries; and (i)
limitation on mergers, consolidations or sales of all or
substantially all of the Company's assets. See "Description
of Notes-- Certain Covenants" and "--Limitation on Merger,
Consolidation or Sale of Assets."
</TABLE>
11
<PAGE>
RISK FACTORS
Prospective purchasers of the Exchange Notes should consider carefully all
of the information set forth in this Prospectus and, in particular, should
evaluate the specific factors set forth under "Risk Factors" for risks involved
with an investment in the Exchange Notes.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes selected consolidated historical operating
and financial data of the Company for the fiscal years ended September 30, 1995
and 1996, which were derived, except as otherwise noted, from the consolidated
financial statements of the Predecessor Company and the Reorganized Company
audited by Arthur Andersen LLP, and selected unaudited consolidated historical
operating and financial data as of March 31, 1997, for the six months ended
March 31, 1996 and 1997 and for the twelve months ended March 31, 1997, which
were derived from unaudited interim condensed consolidated financial statements
of the Predecessor Company and the Reorganized Company, and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. The following should be read in conjunction with, and is
qualified in its entirety by reference to, "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Results of Operations and
Financial Condition," the Company's Consolidated Financial Statements and the
related notes thereto.
<TABLE>
<CAPTION>
TWELVE
YEAR ENDED SIX MONTHS ENDED MONTHS
SEPTEMBER 30, MARCH 31, ENDED
----------------------- ---------------------- MARCH 31,
1995(1) 1996(1)(2) 1996(1) 1997(1)(3) 1997(1)(2)(3)
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues......................................... $ 591,189 $ 486,140 $ 256,176 $ 230,973 $ 460,937
Costs of sales and services...................... 417,335 331,122 175,099 150,758 306,781
Selling, general and administrative.............. 132,459 93,514 47,595 43,421 89,340
Amortization of reorganization asset............. -- 25,663 -- 37,964 63,627
Special and restructuring charges (4)............ 169,584 -- -- -- --
----------- ---------- ---------- ---------- ------------
Operating income (loss).......................... (128,189) 35,841 33,482 (1,170) 1,189
Interest expense--net (5)........................ 68,938 37,056 22,853 17,415 31,618
Reorganization items (6)......................... -- 92,839 (23,251) -- 116,090
Net income (loss) (7)(8)......................... $ (238,326) $ 142,961 $ (9,678) $ (40,016) $ 112,623
OTHER FINANCIAL DATA:
EBITDA (9)....................................... $ 77,393 $ 84,175 $ 46,669 $ 43,453 $ 80,959
Depreciation and amortization (10)............... 35,998 48,334 13,187 44,623 79,770
Capital expenditures............................. 14,372 5,823 2,537 4,718 8,004
PRO FORMA DATA (11):
Pro forma net interest expense (12).............. -- $ 32,296 $ 17,134 $ 14,937 $ 30,099
Ratio of EBITDA to pro forma net
interest expense (13).......................... -- 2.61x 2.72x 2.91x 2.69x
Ratio of pro forma net debt to
EBITDA (13).................................... -- -- -- -- 2.70x
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1997
--------------------
<S> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents (14).............................................................. $ 36,634
Reorganization value in excess of identifiable assets (15).................................. 202,395
Total assets................................................................................ 405,366
Total current liabilities (16).............................................................. 103,081
Total debt (17)............................................................................. 255,209
Stockholders' equity........................................................................ 41,952
</TABLE>
(FOOTNOTES COMMENCE ON THE FOLLOWING PAGE)
13
<PAGE>
(1) Although the Plan of Reorganization was consummated on June 4, 1996, the
effective date of the consummation of the Plan of Reorganization for
financial reporting purposes is considered to be the close of business on
May 31, 1996. The Company has accounted for the restructuring using the
principles of "fresh start" reporting as required by AICPA Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code ("SOP 90-7"). Pursuant to such principles, in general, the
Company's assets and liabilities were revalued. Therefore, due to the
restructuring and implementation of fresh start reporting, the consolidated
financial statements for the Reorganized Company (starting May 31, 1996) are
not comparable to those of the Predecessor Company.
(2) Results reflect the combination of historical results for the eight months
ended May 31, 1996 for the Predecessor Company and for the four months ended
September 30, 1996 for the Reorganized Company, and thus, this information,
as presented, does not comply with GAAP applicable to companies upon
emergence from bankruptcy, which calls for separate reporting for the
Reorganized Company and the Predecessor Company.
(3) Results include receipt of a one-time $3.6 million payment relating to a
long-standing OEM (as defined) purchase agreement with Kodak.
(4) Includes special charges of $136.9 million that represent a $108 million
write-off of goodwill and $28.9 million of charges associated with software
costs which are not recoverable, as well as restructuring charges of $32.7
million.
(5) Reflects interest expense and fee amortization, net of interest income.
(6) Includes income and expenses resulting from the Plan of Reorganization and
adoption of fresh start accounting as follows:
<TABLE>
<CAPTION>
TWELVE
SIX MONTHS YEAR MONTHS
ENDED ENDED ENDED
MARCH 31, SEPTEMBER 30, MARCH 31,
1996 1996 1997
----------- ------------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Write-off of deferred debt issue costs and
discounts....................................... $ (17,551) $ (17,551) $ --
Adjustments of assets and liabilities to fair
market value.................................... -- 124,903 124,903
Legal and professional fees associated with
bankruptcy...................................... (5,936) (14,944) (9,008)
Interest earned on accumulated cash............... 236 431 195
----------- ------------- -----------
$ (23,251) $ 92,839 $ 116,090
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
(7) Includes an extraordinary gain, net of taxes, resulting from the discharge
of indebtedness of $52.4 million for the year ended September 30, 1996 and
the twelve months ended March 31, 1997.
(8) Includes an extraordinary loss, net of taxes, resulting from the
extinguishment of debt of $12.5 million for the six months ended March 31,
1997 and the twelve months ended March 31, 1997.
(9) "EBITDA" represents earnings before interest income and expense, special
and restructuring charges, reorganization items, other income, extraordinary
items, income taxes, depreciation and amortization, which in periods without
special and restructuring charges is operating income plus depreciation and
amortization. Information regarding EBITDA is presented because management
believes that certain investors use EBITDA as a measure of an issuer's
historical ability to service its debt because EBITDA shows available cash
before debt service and before deducting non-cash charges, such as
depreciation and amortization. Management believes that post-bankruptcy
EBITDA trends depict consistent generation of funds from operations
available to the Company for debt service and investments. EBITDA should not
be considered as an alternative to, or more meaningful than, net income (as
determined in accordance with GAAP) as a measure of the Company's operating
results or cash flows (as determined in accordance with GAAP) as a measure
of the Company's liquidity. Furthermore, caution should be used in comparing
EBITDA to similarly titled measures of other companies as the definitions of
these measures may vary.
14
<PAGE>
The following table sets forth the calculation of EBITDA from net income:
<TABLE>
<CAPTION>
TWELVE
YEAR ENDED SIX MONTHS ENDED MONTHS
SEPTEMBER 30, MARCH 31, ENDED
-------------------- -------------------- MARCH 31,
1995 1996 1996 1997 1997
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
EBITDA.............................. $ 77,393 $ 84,175 $ 46,669 $ 43,453 $ 80,959
Depreciation and amortization..... (35,998) (48,334) (13,187) (44,623) (79,770)
Interest expense--net............. (68,938) (37,056) (22,853) (17,415) (31,618)
Special and restructuring
charges......................... (169,584) -- -- -- --
Reorganization items.............. -- 92,839 (23,251) -- 116,090
Financial restructuring charges... (5,987) -- -- -- --
Other income (loss)............... (212) 6,995 6,644 (795) (444)
Provision for income taxes........ (35,000) (8,100) (3,700) (8,100) (12,500)
Extraordinary gains (losses)...... -- 52,442 -- (12,536) 39,906
--------- --------- --------- --------- -----------
Net income (loss)................... $(238,326) $ 142,961 $ (9,678) $ (40,016) $ 112,623
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
(10) Excludes amortization of debt issuance costs.
(11) The pro forma data give effect to the Old Notes Offering, the Redemption
and the Senior Secured Refinancing and the application of the net proceeds
therefrom as if the Old Notes Offering, the Redemption and the Senior
Secured Refinancing had occurred at the beginning of the applicable
statement of operations periods. Net debt is total debt (including current
portion), net of cash and cash equivalents (including restricted cash).
(12) Pro forma net interest expense is computed by removing from net interest
expense the interest expense associated with the Existing Notes and adding
interest expense on the Old Notes.
(13) The purpose of these ratios is to illustrate the magnitude of cash flow
relative to interest expense and net debt on a pro forma basis. The Company
believes these ratios estimate the Company's ability to fund its debt
service requirements resulting from the Old Notes Offering, the Redemption
and the Senior Secured Refinancing and the application of the proceeds
therefrom.
(14) Includes $11.2 million of restricted cash.
(15) For fresh start reporting purposes, any portion of the Company's
reorganization value not attributable to specific identifiable assets is
reported as "Reorganization value in excess of identifiable assets." This
asset is being amortized over a 3.5 year period beginning May 31, 1996.
(16) Total current liabilities exclude current portion of long-term debt.
(17) Total debt includes current portion of long-term debt, net of unamortized
debt discount.
15
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE INFORMATION SET FORTH
BELOW, TOGETHER WITH THE INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN
THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION.
ADVERSE EFFECT OF GROWTH OF ALTERNATE TECHNOLOGIES
Revenues for the Company's micrographics services and products, including
micrographics service revenues, COM system revenues, maintenance service
revenues and micrographics equipment and supplies revenues, have been adversely
affected for each of the past four fiscal years (see "--Declines in Revenues and
Profits") and could in the future be substantially adversely affected by, among
other things, the increasing use of digital technology. Micrographics revenues
represented 76% of the Company's fiscal 1996 revenues and approximately 75% of
revenues for the first six months of fiscal 1997, and are expected to remain the
Company's primary source of revenues for the foreseeable future.
The effect of digital and other technologies on the demand for micrographics
depends, in part, on the extent of technological advances and cost decreases in
such technologies. The recent trend of technological advances and attendant
price declines in digital systems and products is expected to continue. As a
result, in certain instances, potential micrographics customers have deferred,
and may continue to defer, investments in micrographics systems (including the
Company's XFP 2000 system) and the utilization of micrographics data service
centers while evaluating the abilities of digital and other technologies.
The continuing development of local area computer networks and similar
systems based on digital technologies has resulted and will continue to result
in many Company customers changing their use of micrographics from data storage
and retrieval to primarily archival use. The Company believes this is at least
part of the reason for the declines in the past three fiscal years in both sales
and prices of the Company's duplicate film, readers and reader/printers. The
Company's service centers also are producing fewer duplicate microfiche per
original for customers, reflecting this use of micrographics primarily for
storage. The rapidly changing data storage and management industry also has
resulted in intense price competition in certain of the Company's markets,
particularly micrographics services. The Company's operating income, excluding
special and restructuring charges and amortization of reorganization asset, as a
percentage of revenue was 16% in the first six months of fiscal 1997 compared to
13% in fiscal 1996, 7% in fiscal 1995 and 13% in fiscal 1994.
Therefore, the Company has been and expects to continue to be impacted
adversely by the decline in the market for COM services, the high fixed costs
and declining market for COM systems and the attendant reduction in equipment
and supplies. The Company's revenues for maintenance of COM systems have
declined in part because of efficiencies associated with the Company's XFP 2000
systems but are expected to decline in the event of lesser use and fewer sales
of COM systems. The growth of alternate technologies has created consolidation
in the micrographics industry. To the extent consolidation in the micrographics
industry has the effect of causing major providers of micrographics services and
products to cease providing such services and products, the negative trends in
the industry, such as competition from alternate technologies described above,
may accelerate.
DECLINES IN REVENUES AND PROFITS
As a result of the rapidly changing nature of the data storage and
management industry, the Company has experienced declining or flat revenues in
each of the last five fiscal years. Revenues for fiscal 1996 decreased $105
million from fiscal 1995. Approximately $60.1 million of this decrease was due
to the sale, discontinuance and downsizing of certain product lines in addition
to lower COM services and systems revenues. Fiscal 1995 revenues decreased $34.9
million compared to fiscal 1994, excluding acquisitions made by the Company
during the fiscal year. For further discussion by product line of recent trends
in revenues and operating margins, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
16
<PAGE>
SUBSTANTIAL LEVERAGE
The Company has significant debt service obligations. The ability of the
Company to meet its debt service and other obligations will depend upon its
future performance and is subject to financial, economic and other factors, some
of which are beyond its control. As of March 31, 1997, the Company and its
consolidated subsidiaries had an aggregate of $255 million of total indebtedness
outstanding. The Indenture permits the Company to incur additional indebtedness,
including Senior Indebtedness, subject to certain limitations. See
"Capitalization" and "Description of Notes."
The Company's high degree of leverage could have important consequences to
the holders of the Exchange Notes, including the following: (a) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (b) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; (c) certain of the Company's borrowings will be at variable rates of
interest (including the Senior Secured Debt), which will expose the Company to
the risk of increased interest rates; (d) the Senior Secured Debt will be
secured and matures prior to the maturity of the Exchange Notes; (e) the Company
may be substantially more leveraged than certain of its competitors, which may
place the Company at a competitive disadvantage; and (f) the Company's
substantial degree of leverage may limit its flexibility to adjust to changing
market conditions, reduce its ability to withstand competitive pressures and
make it more vulnerable to a downturn in general economic conditions or its
business. See "Description of the Senior Secured Debt" and "Description of
Notes."
ABILITY TO SERVICE DEBT
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to reduce or delay
planned expansion and capital expenditures, sell assets, obtain additional
equity capital or restructure its debt. In the past, the Company's operating
results, cash flow and capital resources were not sufficient to pay its
indebtedness. See "Business--Bankruptcy Reorganization.' There can be no
assurance that the Company's operating results, cash flow and capital resources
will be sufficient for payment of its indebtedness in the future. In the absence
of such operating results and resources, the Company could face substantial
liquidity problems and might be required to dispose of material assets or
operations to meet its debt service and other obligations, and there can be no
assurance as to the timing of such sales or the proceeds that the Company could
realize therefrom. In addition, because the Senior Secured Debt will bear
interest at floating rates, an increase in interest rates could adversely
affect, among other things, the Company's ability to meet its debt service
obligations. The $55 million of term loans under the Senior Secured Debt matures
on March 31, 2001. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of the Senior Secured Debt."
The ability of the Company to service its indebtedness will be dependent
upon the future performance of the Company. In addition, the Company believes
that its ability to repay portions of its long-term indebtedness (including the
Exchange Notes) will be dependent on the availability of refinancing
indebtedness. The future performance of the Company and the availability of
refinancing indebtedness each will be subject to general economic and market
conditions and to financial, competitive, business and other factors, including
factors beyond the Company's control.
17
<PAGE>
SUBORDINATION; ASSET ENCUMBRANCES
The Exchange Notes are unsecured senior subordinated obligations of the
Company and will be expressly subordinated in right of payment to all existing
and future Senior Indebtedness, including the principal of (and premium, if any)
and interest on and all other amounts due on or payable under the Senior Secured
Debt. As of March 31, 1997, there was outstanding approximately $56 million of
Senior Indebtedness, the Company had availability of $25 million under the
revolving facility under the Senior Secured Debt and there was no PARI PASSU
Senior Subordinated Indebtedness outstanding. The Company can also incur
additional Senior Indebtedness under the terms of the Indenture. By reason of
such subordination, in the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of the Company or upon a default in payment with
respect to, or the acceleration of, any Senior Indebtedness, the holders of such
Senior Indebtedness and any other creditors who are holders of Senior
Indebtedness and creditors of subsidiaries must be paid in full before the
holders of the Exchange Notes may be paid. If the Company incurs any additional
PARI PASSU debt, the holders of such debt would be entitled to share ratably
with the holders of the Exchange Notes in any proceeds distributed in connection
with any insolvency, liquidation, reorganization, dissolution or other
winding-up of the Company. This may have the effect of reducing the amount of
proceeds paid to holders of the Notes. In addition, no payments may be made with
respect to the principal of (and premium, if any) or interest or Liquidated
Damages (as defined) on the Exchange Notes if a payment default exists with
respect to Senior Indebtedness and, under certain circumstances, no payments may
be made with respect to the principal of (and premium, if any) or interest or
Liquidated Damages, if any, on the Exchange Notes for a period of up to 179 days
if a non-payment default exists with respect to Senior Indebtedness. In
addition, the Indenture permits subsidiaries of the Company to incur debt
provided certain conditions are met. See "Description of Notes."
The Company has granted the lenders under the Senior Secured Debt security
interests in substantially all of the current and future assets of the Company,
including a pledge of all of the issued and outstanding shares of capital stock
of the Company's future subsidiaries. In the event of a default on secured
indebtedness, whether as a result of the failure to comply with a payment or
other covenant, a cross-default, or otherwise, the parties granted such security
interests will have a prior secured claim on the capital stock of the Company
and the assets of the Company. If such parties should attempt to foreclose on
their collateral, the Company's financial condition and the value of the Notes
will be materially adversely affected. See "Description of the Senior Secured
Debt."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Old Notes Offering and the application of the net proceeds therefrom may
be subject to review under relevant federal and state fraudulent conveyance laws
if a bankruptcy, reorganization or rehabilitation case or a lawsuit (including
in circumstances where bankruptcy is not involved) were commenced by or on
behalf of unpaid creditors of the Company at some future date. These laws vary
among the various jurisdictions. In general, under these laws, if a court were
to find that, at the time an obligation (such as the Old Notes) was incurred,
either (a) such obligation was incurred with the intent of hindering, delaying
or defrauding creditors or (b) the entity incurring the obligation received less
than reasonably equivalent or fair value consideration in exchange for the
incurrence of such obligation and (i) was insolvent or was rendered insolvent by
reason thereof, (ii) was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, (iii) intended to
incur, or believed, or reasonably should have believed, that it would incur,
debts beyond its ability to pay such debts as they matured (as all of the
foregoing terms are defined in or interpreted under the fraudulent conveyance
statutes) or (iv) such entity was a defendant in an action for money damages, or
had a judgment for money damages docketed against it (if, in either case, after
final judgment, the judgment is unsatisfied) (each of clauses (i)-(iv) above, a
"Fraudulent Conveyance"), such court could impose legal and equitable remedies,
including (x) subordination of the obligation to presently existing and future
indebtedness of the entity, (y) avoidance of the issuance of the obligation and
the liens, and direction of the repayment of any amounts paid from the
18
<PAGE>
proceeds thereof to a fund for the benefit of the entity's creditors or (z)
taking of other action detrimental to the holders of the Notes.
The measures of insolvency for purposes of determining whether a Fraudulent
Conveyance occurred would vary depending upon the laws of the relevant
jurisdiction and upon the valuation assumptions and methodology applied by the
court. Generally, however, a company would be considered insolvent for purposes
of the foregoing if the sum of the company's debts, including contingent
unliquidated and unmatured liabilities, is greater than all of such company's
property at a fair valuation, or if the present fair saleable value of the
company's assets is less than the amount that will be required to pay the
probable liability on its existing debts as they become absolute and matured.
The Company believes that at the time of, or as a result of, the issuance of
the Old Notes and the use of proceeds therefrom, the Company (a) was not
insolvent or rendered insolvent under the foregoing standards, (b) was not
engaged in a business or transactions for which its remaining assets constitute
unreasonably small capital, (c) did not intend to incur, and does not believe
that it did incur, debts beyond its ability to pay such debts as they mature and
(d) had sufficient assets to satisfy any probable money judgment against it in
any pending actions. Consequently, the Company believes that even if one or more
elements of the Old Notes Offering were deemed to involve the incurrence of an
obligation for less than reasonably equivalent or fair value, a Fraudulent
Conveyance did not occur. The beliefs with regard to the solvency of the Company
are based in part on the Company's operating history and management's analysis
of internal cash flow projections and estimated values of assets and liabilities
of the Company at the time of the Old Notes Offering. There can no be assurance,
however, that a court passing on these issues would adopt the same methodology
or assumptions, or arrive at the same conclusions.
LIMITATION ON CHANGE OF CONTROL
The Indenture requires the Company, in the event of a Change of Control in
respect of which it has not elected to redeem the Notes, to repurchase any Notes
that holders thereof desire to have repurchased at 101% of the principal amount
thereof, plus accrued interest to the Change of Control repurchase date. See
"Description of Notes--Change of Control."
There can be no assurance that the Company will have funds available to
redeem or repurchase the Notes upon the occurrence of a Change of Control. In
particular, a Change of Control may cause an acceleration of the Senior Secured
Debt and other indebtedness, if any, of the Company, in which case the Senior
Secured Debt would be required to be repaid in full before redemption or
repurchase of the Notes. See "Description of Notes--Change of Control" and
"Description of the Senior Secured Debt." The inability to repay such
indebtedness, if accelerated, or to redeem or repurchase all of the Notes upon
the occurrence of a Change in Control would constitute an event of default under
the Indenture. Finally, there can be no assurance that the Company will have
funds available to repurchase the Notes upon the occurrence of a Change of
Control.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture will restrict, among other things, the Company's ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, enter into certain transactions with affiliates, impose
restrictions on the ability of a subsidiary to pay dividends or make certain
payments to the Company, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of the Company. In addition, the Senior Secured Debt contains
other and more restrictive covenants and prohibits the Company from prepaying
its other indebtedness (including the Exchange Notes). See "Description of
Notes--Certain Covenants" and "Description of the Senior Secured Debt." The
Senior Secured Debt requires the Company to maintain specified financial ratios
and satisfy certain financial condition tests. The Company's ability to meet
those financial ratios and tests can be affected by events beyond its control,
and there can be no assurance that
19
<PAGE>
the Company will meet those tests. A breach of any of these covenants could
result in a default under the Senior Secured Debt and/or the Indenture. Upon the
occurrence of an event of default under the Senior Secured Debt, the lenders
could elect to declare all amounts outstanding under the Senior Secured Debt,
together with accrued interest, to be immediately due and payable. If the
Company were unable to repay those amounts, the lenders could proceed against
the collateral granted to them to secure that indebtedness. If the lenders under
the Senior Secured Debt accelerate the payment of the indebtedness, there can be
no assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and the other indebtedness of the Company, including the
Exchange Notes. See "Description of the Senior Secured Debt."
AVAILABILITY AND PRICE OF POLYESTER AND CERTAIN OTHER SUPPLIES
Polyester is the basic raw material for the Company's duplicate film and
magnetics products. Large increases in the price of polyester would likely
affect the Company's operating margins adversely as the maturity of the
Company's markets makes it difficult to effect price increases. Increased
polyester prices also could result in the loss of certain customers. Pursuant to
the terms of the Amended and Restated Master Supply Agreement, dated as of
October 8, 1993, as amended (the "SKC Agreement"), among the Company and SKC
Limited and SKC America, Inc. (collectively, "SKC"), the Company purchases all
of its duplicate microfilm and most of its base polyester products from SKC. The
SKC Agreement contains provisions relating to price which, if strictly followed,
would be burdensome to the Company. Accordingly, the Company has sought in the
past to negotiate pricing outside the terms of the SKC Agreement. The SKC
Agreement provides that magnetics-based polyester will be sold at negotiated
fair market value. There can be no assurances the Company will be successful in
such negotiations in the future.
Certain third parties are the sole suppliers of some of the Company's raw
materials and products. In addition to SKC, as described above, Kodak supplies
to the Company on an exclusive basis a proprietary, patented film canister used
in the Company's XFP 2000 COM recorder and supplies to the Company substantially
all of the Company's requirements for original microfilm for earlier-generation
COM recorders. Any disruption in the supply relationship between the Company and
such suppliers could result in delays or reductions in product shipment or
increases in product costs that adversely affect the Company's operating results
in any given period. In the event of any such disruption, there can be no
assurance that the Company could develop alternative sources at acceptable
prices and within reasonable times. For a further description of the Company's
raw material needs and supply relationships, see "Business--Raw Materials and
Suppliers."
ACQUISITIONS
The Company has used acquisitions in the past to try to offset declining
services revenues and to increase market share. The Company is expected to
depend, in part, on acquisitions to try to increase revenues and market share,
and there can be no assurance that the Company will be able to effect any such
further acquisitions. Future acquisitions could be financed by internally
generated funds, bank borrowings, public offerings or private placements of
equity or debt securities, or a combination of the foregoing. There can be no
assurance that the Company will be able to make acquisitions on terms favorable
to the Company. If the Company completes acquisitions, it will encounter various
associated risks, including the possible inability to integrate an acquired
business into the Company's manufacturing systems, increased goodwill
amortization, diversion of management's attention and unanticipated problems or
liabilities, some or all of which could have a material adverse effect on the
Company's operations and financial performance. The Company's substantial
leverage may hinder its ability to consummate future acquisitions. See
"--Substantial Leverage."
20
<PAGE>
NEW PRODUCTS
The Company is introducing new information storage and delivery products,
certain of which will incorporate digital technologies. The Company historically
has not been successful in introducing new micrographics products and services,
and the Company has limited experience in the manufacture, sale or marketing of
these new products and services, especially those incorporating new digital
technologies. However, the Company is relying on such new products and services
to generate significant cash flows in the future.
These products and services currently are being introduced and, accordingly,
have limited or no revenues to date. The markets for such new products and
services are very competitive, and there can be no assurance that the Company's
products and services will achieve market acceptance. The Company currently is
in the process of reeducating and refocusing its sales force to sell its new
products and services, as well as its more traditional COM products and
services, and there can be no assurance that this will be successfully achieved.
The Company intends to hire limited numbers of new sales personnel to help sell
certain of its digital products and services, but needs to rely on its existing
sales force to grow the business after its introduction. In addition, the extent
to which the Company will be able to maintain technological support for such new
products is unclear. The Company's substantial leverage also may hinder the
development and deployment of new technologies. See "--Substantial Leverage."
INTERNATIONAL
The Company's financial results are dependent in part on its international
operations, which represented approximately 35% of revenues for the first six
months of fiscal 1997 and 32% of revenues for each of fiscal 1996 and 1995. The
Company expects that its international operations will continue to be a
significant portion of the Company's business as the Company seeks to expand its
international presence. Certain risks are inherent in international operations,
including exposure to currency fluctuations. From time to time in the past, the
Company's financial results have been affected both favorably and unfavorably by
fluctuations in currency exchange rates. Unfavorable fluctuations in currency
exchange rates also may have an adverse impact on the Company's revenues and
operating results. The Company currently does not enter into hedging
arrangements, although it may do so in the future. Distributions of earnings and
other payments (including interest) received from the Company's operating
subsidiaries and affiliates may be subject to withholding taxes imposed by the
jurisdictions in which such entities are formed or operating, which will reduce
the amount of after-tax cash the Company can receive from its foreign
subsidiaries.
COMPETITION
The Company competes in highly competitive markets with a significant number
of companies of varying sizes, including divisions or subsidiaries of larger
companies. A number of these competitors have multiple product lines as well as
substantially greater financial and other resources available to them, and there
can be no assurance that the Company can compete successfully with such other
companies. Competitive pressures or other factors could cause the Company's
products to lose market share or result in significant price erosion, which
would have a material adverse effect on the Company's results of operations. In
addition, the Company could be adversely impacted by First Image Management
Company ("First Image"), a division of First Data Corporation, assuming the
management of Kodak's COM customer base in the United States, which further
strengthens First Image's leading position in this market. First Image and Kodak
also announced plans to work together to develop new integrated document
management solutions, a market in which Anacomp is increasingly competing. See
"Business."
VARIATION FROM REORGANIZATION PLAN PROJECTIONS
Fiscal 1996 revenue and income were lower than fiscal 1996 revenue and
income projected in connection with the Company's reorganization because of,
among other things, the decline in COM
21
<PAGE>
services and systems revenues and the increase in competition for such services
and systems by alternate technologies, the introduction of new products and
services at a slower rate than expected, as well as the impact of the Company's
being in reorganization proceedings. The Company generally does not publish its
business plans and strategies or make external projections of its anticipated
financial positions or results of operations, and did so only in the context of
its reorganization proceedings. The Company does not intend to update or
otherwise revise any such financial projections to reflect circumstances
existing after the date the projections were included in the disclosure
statement in connection with the Company's reorganization or to reflect the
occurrence of unanticipated events, even in the event the assumptions underlying
the projections are shown to be in error or false or misleading by reason of
subsequent events. Any such financial projections should not be relied on for
any purpose.
NON-COMPARABILITY OF HISTORICAL FINANCIAL STATEMENTS
The Company's historical financial statements prior to the date the Plan of
Reorganization was consummated are not comparable to financial statements after
such date as a result of the application of fresh start reporting and,
therefore, are not indicative of the Company's future performance.
ABSENCE OF A PUBLIC MARKET
The Exchange Notes will be new securities for which there is currently no
public market. The Company does not intend to list the Exchange Notes on any
national securities exchange or to seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. NatWest
has advised the Company that it may make a market in the Exchange Notes, but it
is not obligated to do so and, if commenced, may discontinue such market making
at any time. Accordingly, there can be no assurance as to the development of any
market or liquidity of any market that may develop for the Exchange Notes.
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the aggregate principal amount of Old Notes outstanding will decrease,
with a resulting decrease in the liquidity of the market therefor.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes set forth in the legend thereon as a consequence of
the issuance of the Old Notes pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act. In general,
Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company currently
does not anticipate that it will register the Old Notes under the Securities
Act.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive in exchange Old Notes of like principal amount, the
terms of which are identical in all material respects to the Exchange Notes. The
Old Notes surrendered in exchange for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase in the indebtedness of the Company. The Company
has agreed to bear the expenses of the Exchange Offer pursuant to the
Registration Rights Agreement. No underwriter is being used in connection with
the Exchange Offer.
22
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997. This table should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes thereto and
the other information contained in this Prospectus, including the information
set forth in "Business" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Cash and cash equivalents (1)............................................................... $ 36,634
--------
--------
Senior debt:
Revolving credit facility (2)............................................................. $ --
Term loans................................................................................ 55,000
Capitalized leases and other (including current portion).................................. 933
Subordinated debt:
10 7/8% Senior Subordinated Notes due 2004 (3)............................................ 196,414
Installment notes......................................................................... 2,862
--------
Total debt.............................................................................. 255,209
Stockholders' equity........................................................................ 41,952
--------
Total capitalization........................................................................ $ 297,161
--------
--------
</TABLE>
- ------------------------
(1) Includes $11.2 million of restricted cash.
(2) Amounts to $25 million of availability, none of which is outstanding.
(3) Net of $3.6 million unamortized debt discount.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes selected consolidated historical operating
and financial data of the Company for the five fiscal years ended September 30,
1996, the eight months ended May 31, 1996 and the four months ended September
30, 1996, which were derived, except as otherwise noted, from the consolidated
financial statements of the Predecessor Company and the Reorganized Company
audited by Arthur Andersen LLP, and selected unaudited consolidated historical
operating and financial data as of March 31, 1997, for the six months ended
March 31, 1996 and 1997 and for the twelve months ended March 31, 1997, which
were derived from unaudited interim condensed consolidated financial statements
of the Predecessor Company and the Reorganized Company, and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. The following should be read in conjunction with, and is
qualified in its entirety by reference to, "Management's Discussion and Analysis
of Results of Operations and Financial Condition," the Company's Consolidated
Financial Statements and the related notes thereto.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PREDECESSOR COMPANY(1)
-------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1992 1993 1994 1995
-------- -------- -------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................................................................ $628,940 $590,208 $592,599 $ 591,189
Cost of sales and services...................................................... 412,791 375,373 397,203 417,335
Selling, general and administrative............................................. 115,847 126,201 115,819 132,459
Amortization of reorganization asset............................................ -- -- -- --
Special and restructuring charges (4)........................................... -- -- -- 169,584
-------- -------- -------- -------------
Operating income (loss)......................................................... 100,302 88,634 79,577 (128,189)
Interest expense--net (5)....................................................... 68,866 65,918 64,030 68,938
Reorganization items (6)........................................................ -- -- -- --
Income (loss) before extraordinary items and cumulative effect of accounting
change........................................................................ 18,221 11,691 6,955 (238,326)
Net income (loss) (7)(8)(9)..................................................... $ 26,921 $ 18,591 $ 14,955 $ (238,326)
-------- -------- -------- -------------
-------- -------- -------- -------------
Income (loss) per share (primary) before extraordinary credit and cumulative
effect of accounting change (net of preferred stock dividends and discount
accretion) (10)............................................................... -- -- -- --
Weighted average shares
outstanding (10).............................................................. -- -- -- --
OTHER FINANCIAL DATA:
EBITDA (11)..................................................................... $134,871 $121,640 $114,192 $ 77,393
Depreciation and amortization (12).............................................. 34,569 33,006 34,615 35,998
Capital expenditures............................................................ 18,755 20,726 18,868 14,372
Ratio of earnings to fixed
charges (13).................................................................. 1.41x 1.27x 1.21x (13*)
PRO FORMA DATA(14):
Pro forma net interest expense (15)............................................. -- -- -- --
Ratio of EBITDA to pro forma net interest expense (16).......................... -- -- -- --
Ratio of pro forma net debt to
EBITDA (16)................................................................... -- -- -- --
<CAPTION>
REORGANIZED
COMPANY(1)
---------------
EIGHT FOUR COMBINED
MONTHS MONTHS YEAR
ENDED ENDED ENDED
MAY 31, SEPT. 30, SEPT. 30,
1996 1996 1996(2)
------------ --------------- -------------
<S> <C> <C> <C>
OPERATING DATA:
Revenues........................................................................ $ 334,598 $ 151,542 $ 486,140
Cost of sales and services...................................................... 229,167 101,955 331,122
Selling, general and administrative............................................. 63,826 29,688 93,514
Amortization of reorganization asset............................................ -- 25,663 25,663
Special and restructuring charges (4)........................................... -- -- --
------------ --------------- -------------
Operating income (loss)......................................................... 41,605 (5,764) 35,841
Interest expense--net (5)....................................................... 25,184 11,872 37,056
Reorganization items (6)........................................................ 92,839 -- 92,839
Income (loss) before extraordinary items and cumulative effect of accounting
change........................................................................ 112,528 (22,009) 90,519
Net income (loss) (7)(8)(9)..................................................... $ 164,970 $ (22,009) $ 142,961
------------ --------------- -------------
------------ --------------- -------------
Income (loss) per share (primary) before extraordinary credit and cumulative
effect of accounting change (net of preferred stock dividends and discount
accretion) (10)............................................................... -- $ (2.19) --
Weighted average shares
outstanding (10).............................................................. -- 10,033,576 --
OTHER FINANCIAL DATA:
EBITDA (11)..................................................................... $ 59,128 $ 25,047 $ 84,175
Depreciation and amortization (12).............................................. 17,523 30,811 48,334
Capital expenditures............................................................ 3,599 2,224 5,823
Ratio of earnings to fixed
charges (13).................................................................. (13*) (13*) (1*3)
PRO FORMA DATA(14):
Pro forma net interest expense (15)............................................. -- -- $ 32,296
Ratio of EBITDA to pro forma net interest expense (16).......................... -- -- 2.61x
Ratio of pro forma net debt to
EBITDA (16)................................................................... -- -- --
<CAPTION>
PREDECESSOR
REORGANIZED
COMPANY(1) COMPANY(1)
-------------------------------
--------------- COMBINED
SIX SIX TWELVE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
MAR. 31, MAR. 31, MAR. 31,
1996 1997(3) 1997(1)(2)(3)
------------- --------------- ------------
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Revenues........................................................................ $256,176 $ 230,973 $ 460,937
Cost of sales and services...................................................... 175,099 150,758 306,781
Selling, general and administrative............................................. 47,595 43,421 89,340
Amortization of reorganization asset............................................ -- 37,964 63,627
Special and restructuring charges (4)........................................... -- -- --
------------- --------------- ------------
Operating income (loss)......................................................... 33,482 (1,170) 1,189
Interest expense--net (5)....................................................... 22,853 17,415 31,618
Reorganization items (6)........................................................ (23,251) -- 116,090
Income (loss) before extraordinary items and cumulative effect of accounting
change........................................................................ (9,678) (27,480) 72,717
Net income (loss) (7)(8)(9)..................................................... $ (9,678) $ (40,016) $ 112,623
------------- --------------- ------------
------------- --------------- ------------
Income (loss) per share (primary) before extraordinary credit and cumulative
effect of accounting change (net of preferred stock dividends and discount
accretion) (10)............................................................... -- $ (3.05) --
Weighted average shares
outstanding (10).............................................................. -- 13,134,000 --
OTHER FINANCIAL DATA:
EBITDA (11)..................................................................... $ 46,669 $ 43,453 $ 80,959
Depreciation and amortization (12).............................................. 13,187 44,623 79,770
Capital expenditures............................................................ 2,537 4,718 8,004
Ratio of earnings to fixed
charges (13).................................................................. *(13) (13*) (13*)
PRO FORMA DATA(14):
Pro forma net interest expense (15)............................................. $ 17,134 $ 14,937 $ 30,099
Ratio of EBITDA to pro forma net interest expense (16).......................... 2.72x 2.91x 2.69x
Ratio of pro forma net debt to
EBITDA (16)................................................................... -- -- 2.70x
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------
REORGANIZED COMPANY(1)
PREDECESSOR COMPANY(1) AS OF
AS OF SEPTEMBER 30, SEPTEMBER AS OF
------------------------------------------ 30, MARCH 31,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------- ---------
(DOLLARS IN
THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents (17).......................... $ 29,881 $ 24,922 $ 19,871 $ 19,415 $ 47,795 $ 36,634
Reorganization value in excess of identifiable assets
(18)................................................... -- -- -- -- 240,344 202,395
Total assets............................................ 681,561 643,548 658,639 421,029 435,421 405,366
Total current liabilities (19).......................... 150,522 152,727 163,091 188,957 121,148 103,081
Total debt (20)......................................... 477,303 439,093 411,847 389,900 248,892 255,209
Redeemable preferred stock.............................. 24,287 24,383 24,478 24,574 -- --
Stockholders' equity (deficit).......................... 8,290 13,799 49,756 (188,243) 58,569 41,952
</TABLE>
(FOOTNOTES COMMENCE ON THE FOLLOWING PAGE)
24
<PAGE>
(1) Although the Plan of Reorganization was consummated on June 4, 1996, the
effective date of the consummation of the Plan of Reorganization for
financial reporting purposes is considered to be the close of business on
May 31, 1996. The Company has accounted for the restructuring using the
principles of fresh start reporting as required by SOP 90-7. Pursuant to
such principles, in general, the Company's assets and liabilities were
revalued. Therefore, due to the restructuring and implementation of fresh
start reporting, the consolidated financial statements for the Reorganized
Company (starting May 31, 1996) are not comparable to those of the
Predecessor Company.
(2) Results reflect the combination of historical results for the eight months
ended May 31, 1996 for the Predecessor Company and for the four months ended
September 30, 1996 for the Reorganized Company, and thus, this information,
as presented, does not comply with GAAP applicable to companies upon
emergence from bankruptcy, which calls for separate reporting for the
Reorganized Company and the Predecessor Company.
(3) Results include receipt of a one-time $3.6 million payment relating to a
long-standing OEM purchase agreement with Kodak.
(4) Includes special charges of $136.9 million that represent a $108 million
write-off of goodwill and $28.9 million of charges associated with software
costs which are not recoverable, as well as restructuring charges of $32.7
million.
(5) Reflects interest expense and fee amortization, net of interest income.
(6) Includes income and expenses resulting from the Plan of Reorganization and
adoption of fresh start accounting as follows:
<TABLE>
<CAPTION>
COMBINED
COMBINED TWELVE
SIX MONTHS YEAR MONTHS
ENDED ENDED ENDED
MARCH 31, SEPTEMBER 30, MARCH 31,
1996 1996 1997
----------- ------------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Write-off of deferred debt issue costs and discounts.................. $ (17,551) $ (17,551) $ --
Adjustments of assets and liabilities to fair market value............ -- 124,903 124,903
Legal and professional fees associated with bankruptcy................ (5,936) (14,944) (9,008)
Interest earned on accumulated cash................................... 236 431 195
----------- ------------- -----------
$ (23,251) $ 92,839 $ 116,090
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
(7) The Company adopted Financial Accounting Standards No. 109, Accounting for
Income Taxes, in the first quarter of fiscal 1994. The adoption resulted in
a one-time increase to fiscal 1994 net income of $8 million reflecting the
cumulative effect on prior years of this accounting change. Prior to 1993,
the Company recognized tax benefits resulting from net operating loss
carryforwards ("NOLs") as an extraordinary item in the Consolidated
Statement of Operations.
(8) Includes an extraordinary gain, net of taxes, resulting from the discharge
of indebtedness of $52.4 million for the eight months ended May 31, 1996,
the combined year ended September 30, 1996 and the combined twelve months
ended March 31, 1997.
(9) Includes an extraordinary loss, net of taxes, resulting from the
extinguishment of debt of $12.5 million for the six months ended March 31,
1997 and the combined twelve months ended March 31, 1997.
(10) Due to implementation of the restructuring and fresh start accounting, per
share data for the Predecessor Company have been excluded as they are not
comparable.
25
<PAGE>
(11) EBITDA represents earnings before interest income and expense, special and
restructuring charges, reorganization items, other income, extraordinary
items, income taxes, depreciation and amortization, which in periods without
special and restructuring charges is operating income plus depreciation and
amortization. Information regarding EBITDA is presented because management
believes that certain investors use EBITDA as a measure of an issuer's
historical ability to service its debt because EBITDA shows available cash
before debt service and before deducting non-cash charges, such as
depreciation and amortization. Management believes that post-bankruptcy
EBITDA trends depict consistent generation of funds from operations
available to the Company for debt service and investments. EBITDA should not
be considered as an alternative to, or more meaningful than, net income (as
determined in accordance with GAAP) as a measure of the Company's operating
results or cash flows (as determined in accordance with GAAP) as a measure
of the Company's liquidity. Furthermore, caution should be used in comparing
EBITDA to similarly titled measures of other companies as the definitions of
these measures may vary. The following table sets forth the calculation of
EBITDA from net income:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
REORGANIZED
PREDECESSOR COMPANY COMPANY
----------------------------------------------------- -----------
EIGHT FOUR COMBINED
MONTHS MONTHS YEAR
YEAR ENDED SEPTEMBER 30, ENDED ENDED ENDED
------------------------------------------ MAY 31, SEPT. 30, SEPT. 30,
1992 1993 1994 1995 1996 1996 1996
--------- --------- --------- --------- --------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA.............................. $ 134,871 $ 121,640 $ 114,192 $ 77,393 $ 59,128 $ 25,047 $ 84,175
Depreciation and amortization.... (34,569) (33,006) (34,615) (35,998) (17,523) (30,811) (48,334)
Interest expense--net............ (66,020) (63,484) (62,489) (68,938) (25,184) (11,872) (37,056)
Special and restructuring
charges........................ -- -- -- 169,584 -- -- --
Reorganization items............. -- -- -- -- 92,839 -- 92,839
Financial restructuring
charges........................ -- -- -- (5,987) -- -- --
Other income (loss).............. 985 (2,225) (192) (212) 6,968 27 6,995
Provision for income taxes....... (15,400) (9,900) (9,100) (35,000) (3,700) (4,400) (8,100)
Loss from discontinued
operations,
net of taxes................... (1,646) (1,334) (841) -- -- -- --
Cumulative effect of
accounting change.............. -- -- 8,000 -- -- -- --
Extraordinary gains (losses)..... 8,700 6,900 -- -- 52,442 -- 52,442
--------- --------- --------- --------- --------- ----------- ---------
Net income (loss)................... $ 26,921 $ 18,591 $ 14,955 $(238,326) $ 164,970 $ (22,009) $ 142,961
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
<CAPTION>
PREDECESSOR REORGANIZED
COMPANY COMPANY
----------- ----------- COMBINED
SIX SIX TWELVE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
MAR. 31, MAR. 31, MAR. 31,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
EBITDA.............................. $ 46,669 $ 43,453 $ 80,959
Depreciation and amortization.... (13,187) (44,623) (79,770)
Interest expense--net............ (22,853) (17,415) (31,618)
Special and restructuring
charges........................ -- -- --
Reorganization items............. (23,251) -- 116,090
Financial restructuring
charges........................ -- -- --
Other income (loss).............. 6,644 (795) (444)
Provision for income taxes....... (3,700) (8,100) (12,500)
Loss from discontinued
operations,
net of taxes................... -- -- --
Cumulative effect of
accounting change.............. -- -- --
Extraordinary gains (losses)..... -- (12,536) 39,906
----------- ----------- -----------
Net income (loss)................... $ (9,678) $ (40,016) $ 112,623
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(12) Excludes amortization of debt issuance costs.
(13) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on indebtedness, amortization of deferred debt
issuance costs, accretion of the original issue discount and the portion of
rental expense under operating leases that has been deemed by the Company to
be representative of an interest factor, all on a pre-tax basis. For the
year ended September 30, 1995, the four months ended September 30, 1996 and
the six months ended March 31, 1996 and 1997, income before income taxes,
extraordinary items and cumulative effect of accounting change was
inadequate to cover fixed charges. The amount of coverage deficiency was
$203.3 million, $17.6 million, $6.0 million and $19.4 million, respectively.
For the eight months ended May 31, 1996, the combined year ended September
30, 1996 and the combined twelve months ended March 31, 1997, this ratio is
not meaningful due to the gains recorded associated with the adoption of
fresh start accounting and discharge of indebtedness.
(14) The pro forma data give effect to the Old Notes Offering, the Redemption
and the Senior Secured Refinancing and the application of the net proceeds
therefrom as if the Old Notes Offering, the Redemption and the Senior
Secured Refinancing had occurred at the beginning of the applicable
statement of operations periods. Net debt is total debt (including current
portion), net of cash and cash equivalents (including restricted cash).
(15) Pro forma net interest expense is computed by removing from net interest
expense the interest expense associated with the Existing Notes and adding
interest expense on the Old Notes.
(16) The purpose of these ratios is to illustrate the magnitude of cash flow
relative to interest expense and net debt on a pro forma basis. The Company
believes these ratios estimate the Company's ability to fund its debt
service requirements resulting from the Old Notes Offering, the Redemption
and the Senior Secured Refinancing and the application of the proceeds
therefrom.
(17) Includes $11.2 million and $9.6 million of restricted cash as of March 31,
1997 and September 30, 1996, respectively.
(18) For fresh start reporting purposes, any portion of the Company's
reorganization value not attributable to specific identifiable assets is
reported as "Reorganization value in excess of identifiable assets." This
asset is being amortized over a 3.5 year period beginning May 31, 1996.
(19) Total current liabilities exclude current portion of long-term debt.
(20) Total debt includes current portion of long-term debt, net of unamortized
debt discount.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited Pro Forma Consolidated Statement of Operations for the six
months ended March 31, 1997 and for the twelve months ended September 30, 1996
have been prepared giving effect to the Old Notes Offering, the Redemption and
the Senior Secured Refinancing, as if the Old Notes Offering, the Redemption and
the Senior Secured Refinancing had occurred at the beginning of the applicable
statement of operations periods.
The Pro Forma Unaudited Consolidated Financial Information does not purport
to be indicative of the results which would have been obtained had such
transactions in fact been completed as of the date hereof and for the periods
presented or that may be obtained in the future.
ANACOMP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1997
------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenues:
Services provided............................................. $ 92,745 $ -- $ 92,745
Equipment and supply sales.................................... 138,228 -- 138,228
---------- ----------- -----------
Total revenues.............................................. 230,973 -- 230,973
Operating costs and expenses:
Costs of services provided.................................... 48,945 -- 48,945
Costs of equipment and supplies sold.......................... 101,813 -- 101,813
Selling, general and administrative expenses.................. 43,421 -- 43,421
Amortization of reorganization asset.......................... 37,964 -- 37,964
---------- ----------- -----------
232,143 -- 232,143
---------- ----------- -----------
Income from operations before interest, other income, income
taxes and extraordinary loss.................................. (1,170) -- (1,170)
---------- ----------- -----------
Interest income................................................. 2,123 (1,109)(1) 1,014
Interest expense and fee amortization........................... (19,538) 4,609(2) (15,951)
417(3)
10,973(4)
506(5)
1,331(6)
(2,338)(7)
(10,875)(8)
(188)(9)
(848) 10)
Other loss...................................................... (795) -- (795)
---------- ----------- -----------
(18,210) 2,478 (15,732)
---------- ----------- -----------
Income (loss) before income taxes and extraordinary loss........ (19,380) 2,478 (16,902)
Provision for income taxes...................................... 8,100 -- 8,100
---------- ----------- -----------
Net loss available to common stockholders before extraordinary
loss.......................................................... $ (27,480) $ 2,478 $ (25,002)
---------- ----------- -----------
---------- ----------- -----------
Net loss available to common stockholders per share before
extraordinary loss............................................ $ (2.09) $ (1.90)
Weighted average common shares outstanding...................... 13,134 13,134
---------- -----------
---------- -----------
</TABLE>
See notes to pro forma consolidated statement of operations.
27
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
The following notes set forth the explanations and assumptions used in preparing
the pro forma consolidated statement of operations.
(1) Represents reduction in interest income (at an estimated interest rate of
5%) for the six months ended March 31, 1997 due to net cash reductions of
$44,364 resulting from the Senior Secured Refinancing and the Old Notes
Offering.
(2) Represents elimination of interest expense for the six months ended March
31, 1997 on the Old Senior Secured Notes (face amount of $97,902) at
11 5/8%.
(3) Represents elimination of one month of actual interest expense for the six
months ended March 31, 1997 on term loans (face amount of $55,000) issued on
February 28, 1997 in connection with the Senior Secured Refinancing.
(4) Represents elimination of interest expense for the six months ended March
31, 1997 on the Existing Notes (face amount of $171,960) at 13%.
(5) Represents reduction of interest expense for the six months ended March 31,
1997 on the SKC trade credit facility.
(6) Represents elimination of discount amortization for the six months ended
March 31, 1997 on the Existing Notes, and elimination of one month of actual
fee amortization on the Senior Secured Refinancing completed February 28,
1997.
(7) Represents interest expense for the six months ended March 31, 1997 on term
loans (face amount of $55,000) issued in connection with the Senior Secured
Refinancing at 8 1/2%.
(8) Represents interest expense for the six months ended March 31, 1997 on the
Old Notes (face amount $200,000) at 10 7/8%.
(9) Represents amortization of original issue discount ($3.6 million) for the
six months ended March 31, 1997 on the Old Notes Offering.
(10) Represents deferred issue cost amortization for the six months ended March
31, 1997 on the Old Notes Offering ($4.0 million) and the Senior Secured
Refinancing ($3.1 million).
28
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
HISTORICAL
----------------------------
<CAPTION>
PREDECESSOR REORGANIZED
COMPANY COMPANY
------------- -------------
TWELVE
MONTHS
EIGHT MONTHS FOUR MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
MAY 31, SEPTEMBER 30, PRO FORMA 1996
1996 1996 ADJUSTMENTS PRO FORMA
------------- ------------- ----------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Services provided.................................... $ 130,202 $ 59,055 $ -- $ 189,257
Equipment and supply sales........................... 204,396 92,487 -- 296,883
------------- ------------- ----------- -------------
Total revenues................................... 334,598 151,542 -- 486,140
------------- ------------- ----------- -------------
Operating costs and expenses:
Costs of services provided........................... 72,641 31,858 -- 104,499
Costs of equipment and supplies sold................. 156,526 70,097 -- 226,623
Selling, general and administrative expenses......... 63,826 29,688 -- 93,514
Amortization of reorganization asset................. -- 25,663 -- 25,663
------------- ------------- ----------- -------------
292,993 157,306 -- 450,299
------------- ------------- ----------- -------------
Income (loss) before interest, other income,
reorganization items, income taxes and extraordinary
items................................................ 41,605 (5,764) -- 35,841
------------- ------------- ----------- -------------
Interest income........................................ 1,576 997 (2,218)(1) 355
Interest expense and fee amortization.................. (26,760) (12,869) 12,965(2) (32,651)
18,738(3)
1,177(4)
2,592(5)
(4,675)(6)
(21,750)(7)
(372)(8)
(1,697)(9)
Other income........................................... 6,968 27 -- 6,995
------------- ------------- ----------- -------------
(18,216) (11,845) 4,760 (25,301)
------------- ------------- ----------- -------------
Income (loss) before reorganization items, income taxes
and extraordinary items.............................. 23,389 (17,609) 4,760 10,540
Reorganization items................................... 92,839 -- -- 92,839
------------- ------------- ----------- -------------
Income (loss) before income taxes and extraordinary
items................................................ 116,228 (17,609) 4,760 103,379
Provision for income taxes............................. 3,700 4,400 -- 8,100
------------- ------------- ----------- -------------
Income (loss) before extraordinary items............... 112,528 (22,009) 4,760 95,279
Preferred stock dividends and discount accretion....... 540 -- -- 540
Net income (loss) available to common stockholders
before extraordinary items........................... $ 111,988 $ (22,009) $ 4,760 $ 94,739
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
Net loss available to common stockholders per share
before extraordinary items........................... $ (2.19)
-------------
-------------
Weighted average common shares outstanding............. 10,034
-------------
-------------
</TABLE>
See notes to pro forma consolidated statement of operations.
29
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
The following notes set forth the explanations and assumptions used in preparing
the pro forma consolidated statement of operations.
(1) Represents reduction in interest income (at an estimated interest rate of
5%) for the twelve months ended September 30, 1996 due to net cash
reductions of $44,364 resulting from the Senior Secured Refinancing and the
Old Notes Offering.
(2) Represents elimination of interest expense for the twelve months ended
September 30, 1996 on the Old Senior Secured Notes (face amount of $97,902)
at 11 5/8%.
(3) Represents elimination of interest expense for the twelve months ended
September 30, 1996 on the Existing Notes (face amount of $171,960) at 13%.
(4) Represents reduction of interest expense for the twelve months ended
September 30, 1996 on the SKC trade credit facility.
(5) Represents elimination of discount and debt issue cost amortization for the
twelve months ended September 30, 1996 on the Existing Notes.
(6) Represents interest expense for the twelve months ended September 30, 1996
on term loans (face amount of $55,000) issued in connection with the Senior
Secured Refinancing at 8 1/2%.
(7) Represents interest expense for the twelve months ended September 30, 1996
on the Old Notes (face amount of $200,000) at 10 7/8%.
(8) Represents amortization of original issue discount ($3.6 million) for the
twelve months ended September 30, 1996 on the Old Notes Offering.
(9) Represents deferred issue cost amortization for the twelve months ended
September 30, 1996 on the Old Notes Offering ($4.0 million) and the Senior
Secured Refinancing ($3.1 million).
30
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the sale of Old Notes to the initial purchaser pursuant
to the Purchase Agreement, dated March 19, 1997, between the Company and
NatWest, the holders of the Old Notes became entitled to the benefits of the
Registration Rights Agreement.
Under the Registration Rights Agreement, the Company became obligated to (a)
file a registration statement in connection with a registered exchange offer
within 45 days after March 24, 1997, the date the Old Notes were issued (the
"Issue Date"), and (b) cause the registration statement relating to such
registered exchange offer to become effective within 150 days after the Issue
Date. The Exchange Offer being made hereby, if consummated within the required
time periods, will satisfy the Company's obligations under the Registration
Rights Agreement. The Company understands that there are approximately ten
beneficial owners of such Old Notes. This Prospectus, together with the Letter
of Transmittal, is being sent to all such beneficial holders known to the
Company.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in the
Morgan Stanley Letter, the Exxon Capital Letter and similar letters, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by any
person who received such Exchange Notes, whether or not such person is the
holder (other than Restricted Holders) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's or other
person's business, neither such holder nor such other person is engaged in or
intends to engage in any distribution of the Exchange Notes and such holders or
other persons have no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
If any person were to be participating in the Exchange Offer for the
purposes of participating in a distribution of the Exchange Notes in a manner
not permitted by the Commission's interpretation, such person (a) could not rely
upon the Morgan Stanley Letter, the Exxon Capital Letter or similar letters and
(b) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after consummation of the Exchange Offer, it will
make this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
31
<PAGE>
The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Rights Agreement. No underwriter is being used in
connection with the Exchange Offer.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the Exchange Notes from the Company
and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain conditions set forth herein under
"--Conditions" without waiver by the Company, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes,
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes in connection with the Exchange Offer. See
"--Fees and Expenses."
In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, holders of Old Notes seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act. See "Risk
Factors--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this Prospectus, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will issue a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period of time.
The Company reserves the right (a) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"--Conditions" shall have occurred and shall not have been waived by the Company
(if permitted to be waived by the Company), by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (b) to amend the
terms of the Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Notes. Any such delay in acceptance, extension, termination
or amendment will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment and the Company may extend the Exchange Offer for a
period of up to ten business days, depending upon the significance of the
amendment and the manner of disclosure to holders of the Old Notes, if the
Exchange Offer would otherwise expire during such extension period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
32
<PAGE>
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from March 24, 1997, payable
semiannually on April 1 and October 1 of each year, commencing October 1, 1997,
at the rate of 10 7/8% per annum. Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued up until the date of the
issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by instruction 3 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents. To be validly tendered, such
documents must reach the Exchange Agent on or before 5:00 p.m., New York City
time, on the Expiration Date.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery to the Exchange Agent on or before 5:00 p.m.
New York City time, on the Expiration Date. No Letter of Transmittal or Old
Notes should be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such registered holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States (an "Eligible Institution") unless the Old Notes tendered pursuant
thereto are tendered (a) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (b) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers and a proxy
33
<PAGE>
which authorizes such person to tender the Old Notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or other acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority so to act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes the Company's acceptance of which would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth under "-- Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Rights Agreement
and (b) to the extent permitted by applicable law, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers will differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (a) the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of such holder or other person, (b)
neither such holder nor such other person is engaged in or intends to engage in
a distribution of the Exchange Notes (c) neither such holder or other person has
any arrangement or understanding with any person to participate in the
distribution of such Exchange Notes, and (d) such holder or other person is not
an "affiliate," as defined under Rule 405 of the Securities Act, of the Company
or, if such holder or other person is such an affiliate, will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after consummation of the Exchange Offer, it will
make this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
34
<PAGE>
The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Rights Agreement. No underwriter is being used in
connection with the Exchange Offer.
The Old Notes were issued on March 24, 1997 and there is no public market
for them at present. To the extent Old Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding Old Notes will decrease with
a resulting decrease in the liquidity in the market therefor. Following the
consummation of the Exchange Offer, holders of Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Old Notes could be adversely affected.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (a) whose Old Notes are not
immediately available or (b) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if: (i) the tender is make through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby, and guaranteeing
that, within three business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s) representing
the Old Notes to be tendered in proper form for transfer and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (a) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"), (b)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (c) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the Depositor withdrawing the tender and (d) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
35
<PAGE>
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes not theretofore accepted for exchange, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Notes, if
the Company or the holders of at least a majority in principal amount of Old
Notes reasonably determine in good faith that any of the following conditions
exist prior to the Expiration Date: (a) the Exchange Notes to be received by
such holders of Old Notes in the Exchange Offer, upon receipt, will not be
tradable by each such holder (other than a holder which is an affiliate of the
Company at any time on or prior to the consummation of the Exchange Offer)
without restriction under the Securities Act and the Exchange Act and without
material restrictions under the blue sky or securities laws of substantially all
of the states of the United States, (b) the interests of the holders of the Old
Notes, taken as a whole, would be materially adversely affected by the
consummation of the Exchange Offer or (c) after conferring with counsel, the
Commission is unlikely to permit the making of the Exchange Offer prior to
August 21, 1997.
Pursuant to the Registration Rights Agreement, if an Exchange Offer shall
not be consummated prior to the Exchange Offer Termination Date, the Company
will be obligated to cause to be filed with the Commission a shelf registration
statement with respect to the Old Notes (the "Shelf Registration Statement") as
promptly as practicable after the Exchange Offer Termination Date and thereafter
use its best efforts to have the Shelf Registration Statement declared
effective.
"Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) applicable interpretations of the staff
of the Commission do not permit the Company to effect the Exchange Offer, (b)
any holder of Notes notifies the Company that either (i) such holder is not
eligible to participate in the Exchange Offer or (ii) such holder participates
in the Exchange Offer and does not receive freely transferable Exchange Notes in
exchange for tendered Old Notes or (c) the Exchange Offer is not consummated
within 180 days after the Issue Date.
If any of the conditions described above exist, the Company will refuse to
accept any Old Notes and will return all tendered Old Notes to exchanging
holders of the Old Notes.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal and
deliveries of completed Letters of Transmittal with tendered Old Notes should be
directed to the Exchange Agent addressed as follows:
FACSIMILE TRANSMISSION:
(212) 858-2611
CONFIRM BY TELEPHONE:
(212) 858-2657
<TABLE>
<S> <C>
BY MAIL: BY HAND/OVERNIGHT DELIVERY:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P.O. Box 84 One State Street
Bowling Green Station Securities Processing Window SC-1
New York, New York 10274-0084 New York, New York 10004
Attention: Reorganization Operations
Department
</TABLE>
The Company will indemnify the Exchange Agent and its agents for any loss,
liability or expense incurred by them, including reasonable costs and expenses
of their defense, except for any such loss, liability or expense caused by gross
negligence or bad faith.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional
36
<PAGE>
solicitations may be made by officers and regular employees of the Company and
its affiliates in person, by telephone or facsimile.
The Company will not make any payments to brokers, dealers, or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes, and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and expenses, will be paid by the Company, and are estimated in the
aggregate to be approximately $250,000.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes (or Old Notes for principal amounts not tendered or
accepted for exchange) are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Company will not recognize any gain or loss for accounting purposes upon
the consummation of the Exchange Offer. The expense of the Exchange Offer will
be amortized by the Company over the term of the Exchange Notes under GAAP.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with the
selected financial information and the consolidated financial statements of the
Company and accompanying notes appearing elsewhere in this Prospectus. The
following discussion and analysis of results of operations compare (i) the
Reorganized Company's results of operations for the six months ended March 31,
1997 with the Predecessor Company's results of operations for the six months
ended March 31, 1996 and (ii) the combined Reorganized Company's results of
operations for the four months ended September 30, 1996 and the Predecessor
Company's results of operations for the eight months ended May 31, 1996 with the
Predecessor Company's results of operations for fiscal 1995 and fiscal 1994.
Consequently, the fiscal 1996 information presented below does not comply with
GAAP applicable to companies upon emergence from bankruptcy, which calls for
separate reporting for the Reorganized Company and the Predecessor Company.
On June 4, 1996, the Company emerged from bankruptcy proceedings under its
Plan of Reorganization (the "Reorganization"). The Plan of Reorganization
resulted in a reduction of approximately $174 million in principal and accrued
interest on the Company's debt obligations and in liquidation amount and accrued
dividends on its preferred stock. The resulting capital structure reduced the
Company's interest expense by approximately $31 million per year. As a result of
the Reorganization, the recording of the restructuring transaction and the
implementation of fresh start reporting, the Company's results of operations
after May 31, 1996 (the cutoff date used for financial reporting purposes) are
not comparable to results reported in prior periods. See Note 3 to the
Consolidated Financial Statements for information on consummation of the Plan of
Reorganization and implementation of fresh start reporting.
CONSOLIDATED RESULTS OF OPERATIONS
As an aid to understanding the Company's operations on a comparative basis,
the following table has been prepared to set forth certain income statement and
other data for the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Revenues:
Services provided................................................. $ 223,511 $ 219,881 $ 189,257 $ 99,190 $ 92,745
Equipment and supply sales........................................ 369,088 371,308 296,883 156,986 138,228
--------- --------- --------- --------- ---------
592,599 591,189 486,140 256,176 230,973
Operating costs and expenses:
Costs of services provided........................................ 122,628 126,493 104,499 54,525 48,945
Costs of equipment and supplies sold.............................. 274,575 290,842 226,623 120,574 101,813
Selling, general and administrative............................... 115,819 132,459 93,514 47,595 43,421
Amortization of reorganization asset.............................. -- -- 25,663 -- 37,964
Special charges................................................... -- 136,889 -- -- --
Restructuring charges............................................. -- 32,695 -- -- --
--------- --------- --------- --------- ---------
513,022 719,378 450,299 222,694 232,143
--------- --------- --------- --------- ---------
Operating income (loss)............................................. 79,577 (128,189) 35,841 33,482 (1,170)
Interest expense--net............................................... 64,030 68,938 37,056 22,853 17,415
Financial restructuring costs....................................... -- 5,987 -- -- --
Other expense (income).............................................. 192 212 (6,995) (6,644) 795
--------- --------- --------- --------- ---------
Income (loss) before reorganization items, income taxes,
extraordinary items and cumulative effect of accounting change.... 15,355 (203,326) 5,780 17,273 (19,380)
Reorganization items................................................ -- -- 92,839 (23,251) --
--------- --------- --------- --------- ---------
Income (loss) before income taxes, extraordinary items and
cumulative effect of accounting change............................ 15,355 (203,326) 98,619 (5,978) (19,380)
Provision for income taxes.......................................... 8,400 35,000 8,100 3,700 8,100
--------- --------- --------- --------- ---------
Income (loss) before extraordinary items and cumulative effect of
accounting change................................................. 6,955 (238,326) 90,519 (9,678) (27,480)
Extraordinary credit--gain on discharge of indebtedness, net of
taxes............................................................. -- -- 52,442 -- --
Extraordinary loss on extinguishment of debt, net of income tax
benefit of $4,325................................................. -- -- -- -- 12,536
Cumulative effect on prior years of a change in accounting for
income taxes...................................................... 8,000 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)................................................... $ 14,955 $(238,326) $ 142,961 $ (9,678) $ (40,016)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EBITDA.............................................................. $ 114,192 $ 77,393 $ 84,175 $ 46,669 $ 43,453
</TABLE>
38
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
GENERAL. Anacomp reported a net loss of $40.0 million for the six months
ended March 31, 1997, compared to a net loss of $10.2 million for the six months
ended March 31, 1996. Included in the net loss for the six months ended March
31, 1997 is non-cash amortization of the Company's reorganization value asset of
$38.0 million and an extraordinary loss on the extinguishment of debt of $12.5
million, net of income tax benefits of $4.3 million. This extraordinary loss was
comprised of a 3% call premium of $5.2 million and unamortized discount on the
Existing Notes of $11.6 million.
Pursuant to a 1990 original equipment manufacturer ("OEM") purchase
agreement, Kodak was obligated to purchase an additional 151 XFP 2000 systems by
October 1997 or pay a cash penalty to the Company. The Company and Kodak have
negotiated an amendment to the OEM agreement, whereby the Company accepted a
$3.6 million cash payment from Kodak, which is included in the current period
results, and a commitment to purchase an additional 28 XFP 2000 systems by the
end of calendar 1997, and a one-time purchase of spare parts. Upon Kodak's
purchase of the 28 XFP 2000 systems on or before December 20, 1997, Kodak's
obligations and the OEM agreement shall terminate.
Included in net income for the six months ended March 31, 1996 is a $6.2
million gain on the sale of the Image Conversion Services Division ("ICS") and
$23.3 million in reorganization items including a write-off of deferred debt
issue costs and discounts of $17.6 million and legal and professional fees
associated with bankruptcy of $5.9 million. EBITDA was $43.5 million for the six
months ended March 31, 1997 compared to $46.7 million for the six months ended
March 31, 1996. Excluding the Kodak payment, EBITDA was $39.9 million for the
current period.
Total revenues for the six months ended March 31, 1997 of $231.0 million
represents a $25.2 million decrease from the same period of the prior year.
Approximately $7.7 million of the decrease is due to the discontinuance and
downsizing of product lines, including ICS ($1.5 million), reader and reader
printer products ($3.9 million), source document film ($.5 million) and
micrographics accessories ($1.8 million). The remaining $17.5 million decrease
in revenues is due primarily to the expected general downward trend in both the
micrographics and magnetics product lines.
Cost of services provided as a percentage of services revenue was 53% for
the six months ended March 31, 1997, compared to 55% for the same period of the
prior year. The improvement is due primarily to cost reduction efforts in
maintenance services initiated by new management. Cost of equipment and supplies
sold as a percentage of equipment and supplies sales, excluding the one-time
$3.6 million payment noted above, was 76% for the six months ended March 31,
1997, compared to 77% for the same period of the prior year.
Selling, general and administrative expenses ("SG&A") were 19% of revenue
for both the six months ended March 31, 1997 and the six months ended March 31,
1996, excluding the one-time $3.6 million payment noted above.
Interest expense and fee amortization of $19.5 million for the six months
ended March 31, 1997, decreased $4.2 million over the prior year, primarily due
to the Company's improved debt structure as a result of the Reorganization in
fiscal 1996.
39
<PAGE>
PRODUCTS AND SERVICES. The following table shows Anacomp's revenues for
each of its five product families for the six months ended March 31, 1996 and
1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------------------------
<S> <C> <C> <C> <C>
1996 1997
--------------------- ---------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Output Services......................................................... $ 54,937 21% $ 50,380 22%
Technology Services..................................................... 42,375 17 39,444 17
Output Systems.......................................................... 16,994 7 16,893 7
Micrographics Supplies.................................................. 79,302 31 67,855 30
Magnetic Media.......................................................... 60,300 23 51,337 22
Other................................................................... 2,268 1 5,064 2
---------- --- ---------- ---
Total................................................................... $ 256,176 100% $ 230,973 100%
---------- --- ---------- ---
---------- --- ---------- ---
</TABLE>
Output Services. Output services revenues decreased $3.2 million for the six
months ended March 31, 1997, compared to the same six months of fiscal 1996,
excluding the effect of the ICS sale. COM service volumes increased by less than
one percent while average selling prices decreased by 9%. Data center
acquisitions and several large customer gains have contributed to both the
increase in volumes and the decrease in average selling prices. The acquired
data centers contributed volumes, but at significantly lower average selling
prices. The large customer gains received favorable pricing due to their
volumes. Gross margins as a percentage of revenue decreased by 3% due to the
aforementioned impact of lower average selling prices.
Technology Services. Technology services (primarily maintenance) revenues
decreased $2.9 million for the six months ended March 31, 1997, primarily due to
the effect of replacing older generation COM systems with the XFP, which has a
significantly greater capacity than the older COM systems. Gross margins as a
percentage of revenue improved 6.5% as a result of decreased personnel and
supply costs. Personnel costs decreased as planned reductions in the work force
were made to bring headcount in line with the declining base of COM recorders
under maintenance.
Output Systems. Output systems primarily include COM systems and digital
systems. COM systems revenues for the six months ended March 31,1997, decreased
by $4.3 million compared to the same period of the prior year. The decrease in
revenue is attributable to a decrease in the number of systems sold and the mix
and pricing of new and used systems. Gross margins as a percentage of revenue
improved primarily due to product mix and the result of manufacturing
efficiencies realized during fiscal 1997. Digital systems revenues for the six
months ended March 31, 1997, were $4.2 million. The sale of two XSTAR digital
systems contributed $1.5 million in the first quarter while the second quarter
acquisition of Data/Ware contributed $2.4 million in revenues. There were no
digital systems sold for the same period of the prior year.
Micrographics Supplies. Micrographics supplies revenues for the six months
ended March 31, 1997, decreased $11.5 million compared to the same period of the
prior year. The major product categories experiencing the expected decrease in
revenue include readers and reader/printers ($3.9 million), original COM film
($1.5 million), duplicate film ($2.3 million) and micrographics accessories
($1.8 million). Gross margins as a percentage of revenue increased 1% as a
result of changes in product mix.
Magnetic Media. Magnetic media revenues for the six months ended March 31,
1997, decreased $9.0 million compared to the same period of the prior year. The
major product categories experiencing the expected decrease in revenue include
3480 tape cartridges ($3.6 million), open reel tape ($2.6 million) and TK 50/52
tape ($2.0 million). Gross margins as a percentage of revenue increased slightly
due to increases in sales price on selected products and increased sales of
higher margin products.
40
<PAGE>
FISCAL 1996, 1995 AND 1994
GENERAL. Anacomp reported net income of $143 million for the year ended
September 30, 1996 as compared to a net loss of $238.3 million and net income of
$15 million for the years ended September 30, 1995 and 1994, respectively.
Included in the fiscal 1996 net income are reorganization items of $92.8 million
and a $52.4 million extraordinary gain resulting from the discharge of
indebtedness. Included in the fiscal 1995 loss are special charges of $136.9
million, representing a write-off of goodwill of $108 million and $28.9 million
of costs associated with software investments (See Notes 8 and 18 to the
accompanying Consolidated Financial Statements). Also included in the fiscal
1995 loss is a $29 million deferred tax provision and $32.7 million of
restructuring charges.
EBITDA was $84.2 million for the year ended September 30, 1996 as compared
to $77.4 million and $114.2 million for the years ended September 30, 1995 and
1994, respectively.
Total revenues for fiscal 1996 of $486.1 million represent a $105 million
decrease from fiscal 1995. Approximately $60.1 million of the decrease is due to
the discontinuance or downsizing of certain product lines including ICS ($20
million), flexible diskette media ($20.2 million), reader and reader printer
products ($12.7 million ) and source document film ($7.2 million).
Total revenues for fiscal 1995 decreased $1.4 million from the prior fiscal
year. Revenues from sales of magnetics products increased $30.8 million
resulting from the acquisition of Graham Magnetics, Inc. ("Graham Magnetics") in
May 1994. In addition, the acquisition of the COM services customer base of
fourteen data service centers from National Business Systems, Inc. ("NBS") on
January 3, 1994 contributed incremental revenues of approximately $2.7 million
to the fiscal 1995 results. Offsetting these contributions were decreases in
micrographics supplies, COM systems, maintenance services and other revenues.
Anacomp's fiscal 1994 revenues totaled $592.6 million. The Graham Magnetics
acquisition contributed $22.4 million to fiscal 1994 revenues and NBS
contributed $9.1 million to fiscal 1994 revenues.
SG&A were 19.2% of revenues in fiscal 1996 compared to 22.4% in fiscal 1995.
The decrease in SG&A reflects the cost reductions implemented in late fiscal
1995 as part of the Company's reorganization. Selling, general and
administrative expenses were 19.5% of revenues in fiscal 1994.
The Company reclassified certain operating costs within costs of services
provided, costs of equipment and supplies sold and SG&A in fiscal 1995 and
fiscal 1994 to conform with the fiscal 1996 presentation.
FISCAL 1995 SPECIAL CHARGES. As mentioned above, included in the operating
results for fiscal 1995 are special charges totaling $136.9 million, including
the write-off of a portion of goodwill related to micrographics products. During
fiscal 1995, Anacomp announced several significant events which are summarized
as follows:
On April 6, 1995, the Company announced that it was withdrawing its proposed
offering of $225 million senior secured notes previously announced on January
23, 1995.
On April 27, 1995, the Company announced that it had agreed with its senior
secured lenders to make its current interest payment of $2 million on its
pre-bankruptcy senior secured debt while continuing to negotiate the
rescheduling of all or a substantial portion of the $20 million scheduled
amortization payment due April 26, 1995, which the Company failed to make, and
the waiver of certain financial covenant violations as of March 31, 1995. The
Company also announced that until an agreement was reached with its senior
secured lenders (and holders of pre-bankruptcy senior subordinated notes) the
Company would not make its $16.9 million interest payment on the pre-bankruptcy
senior subordinated notes scheduled for May 1995 and would defer making dividend
payments on the pre-bankruptcy preferred stock.
41
<PAGE>
On May 15, 1995, in connection with announcing a second quarter loss of $8.2
million, the Company announced plans for a restructuring of its operations which
would include several cost cutting measures and personnel reductions. The
Company also announced the appointment of a new President.
These developments significantly constrained Anacomp's ability to finance
certain previously projected activities. In addition, in 1995 Anacomp failed to
achieve its original projections of operating results and experienced lower than
expected sales of major new software products which were first introduced in
January 1995. In light of Anacomp's withdrawn note offering, disappointing
financial performance and default on its indebtedness, the Company prepared a
new operating plan.
Based on the events discussed above and in connection with the change in
accounting discussed in Note 1 to the accompanying Consolidated Financial
Statements, Anacomp determined that goodwill had been impaired and measured the
impairment based on the fair value approach discussed in Note 1. As required by
GAAP, this accounting change, which amounted to a charge of $108 million, was
recorded as a change in estimate of goodwill and was included in the results of
operations during fiscal 1995.
Prior to fiscal 1996, Anacomp invested and capitalized over $20 million
related to the development of software to provide advanced capabilities for the
XFP 2000 related to the processing of Xerox and IBM print streams. These
software enhancements are referred to as the Xerox Compatibility Feature ("XCF")
and the Advanced Function Presentation ("AFP") feature. XCF was introduced at
the beginning of the second quarter of fiscal 1995 and AFP at the beginning of
the fourth quarter of fiscal 1995. Initial sales of the XCF product were
significantly below expectations, as were projections for AFP. As a result,
during fiscal 1995 Anacomp wrote off $20.3 million of deferred software costs
and established a reserve of $8.6 million (none of which exists at September 30,
1996) for future payments to IBM Pennant Systems for software royalty and system
support obligations which were not recoverable based on revised projections. See
Note 18 to the Consolidated Financial Statements.
PRODUCTS AND SERVICES. The following table shows Anacomp's revenues for
each of its five product families for the last three fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996
--------------------- --------------------- ---------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Output Services............................................ $ 131,238 22% $ 132,144 22% $ 103,733 21%
Technology Services........................................ 91,339 15 86,175 15 82,105 17
Output Systems............................................. 57,627 10 51,276 9 32,794 7
Micrographics Supplies..................................... 204,346 34 190,621 32 150,449 31
Magnetic Media............................................. 97,545 16 128,353 22 112,187 23
Other...................................................... 10,504 2 2,620 0 4,872 1
---------- --- ---------- --- ---------- ---
Total.................................................... $ 592,599 100% $ 591,189 100% $ 486,140 100%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
Output Services. Output services revenues, which accounted for 21% of
Anacomp's revenues in fiscal 1996, were down $8.4 million compared to fiscal
1995 (excluding the effect of the ICS sale), primarily due to a 11% decrease in
volume. Output services revenues accounted for 22% of Anacomp's revenues in
fiscal 1995. Volumes were increased in fiscal 1995 due in part to the
acquisition of the COM services customer base of fourteen data service centers
from NBS. Output services revenues increased 5% in fiscal 1994 on volume
increases of 12%. The increase in fiscal 1994 volume is the result of the NBS
acquisition. Decreasing prices adversely affected Anacomp's output services
business in fiscal 1996, 1995 and 1994. Output services gross margins as a
percent of revenue decreased 1% in fiscal 1996, 7% in fiscal 1995 and 2% in
fiscal 1994.
Technology Services. Technology services revenues, which accounted for 17%
of the Company's revenues in fiscal 1996, are derived principally from the
maintenance of COM recorders and duplicators.
42
<PAGE>
Such revenues decreased 5% in fiscal 1996 when compared to fiscal 1995 primarily
due to the effect of replacing older generation COM systems with the XFP 2000,
which has a capacity significantly greater than the previous generation COM
systems. Technology services accounted for 15% of fiscal 1995 revenues and were
down 6% from fiscal 1994. The improvement in fiscal 1994 is largely the result
of the addition of a national data service center company to Anacomp's customer
base. Gross margins increased nearly 7% in fiscal 1996 due primarily to
reductions in costs associated with spare parts and personnel costs.
Output Systems. Output systems revenues, which accounted for 7% of the
Company's revenues in fiscal 1996, decreased $18.5 million with the sale or
lease of 118 XFP 2000 systems in fiscal 1996 compared to 156 systems in fiscal
1995. Included in output systems revenues in fiscal 1995 is $3.5 million of
sales of equipment for use in Anacomp data centers under sale and leaseback
arrangements. Output systems revenues decreased 11% in fiscal 1995 with the sale
or lease of 156 XFP 2000 systems compared to 165 systems in fiscal 1994. Output
systems gross margins improved in fiscal 1996, 1995 and 1994 despite reduced
revenues as a result of product mix of new and used systems in fiscal 1996 and
higher average selling prices in fiscal 1995 and 1994.
Micrographics Supplies. Micrographics supplies revenues, which accounted
for 31% of the Company's revenues in fiscal 1996, decreased 21% compared to
fiscal 1995 principally as a result of the discontinuance and downsizing of
product lines. Micrographics supplies revenues were 32% and 34% of the Company's
revenues in fiscal 1995 and 1994, respectively. Micrographics supplies revenues
decreased 7% in fiscal 1995, principally due to reduced demand for duplicate
film, readers and reader/printers. Micrographics supplies gross margins as a
percent of revenue increased 5% in fiscal 1996 as a result of changes in product
mix due primarily to the sale and downsizing of product lines. Micrographics
supplies gross margins decreased 5% in fiscal 1995.
Magnetic Media. Magnetic media revenues, which accounted for 23% of the
Company's revenues in fiscal 1996, decreased $16.2 million compared to fiscal
1995. The decrease is due to the closure of the Omaha, Nebraska factory, which
produced flexible diskette media, as well as reduced unit sales of open reel
tape. Magnetic media revenues accounted for 22% of the Company's revenues in
fiscal 1995. Fiscal 1995 magnetic media revenues increased $30.8 million over
fiscal 1994. The increase is due to the contribution from the acquisition of
Graham Magnetics in May 1994. Graham Magnetics manufactured certain magnetics
products at its facility in Graham, Texas. Anacomp has shifted all its U.S.
production of those products from its Omaha, Nebraska plant to the Graham
Magnetics facility. The costs associated with this relocation were not
significant. The consolidation resulted in improved manufacturing efficiencies
and overall headcount reduction. Magnetic media gross margins have remained
level over the past three years at approximately 15%.
INTEREST EXPENSE. Interest expense and fee amortization amounted to $39.6
million in fiscal 1996 compared to $70.9 million in fiscal 1995. The decrease
relates to the discontinuance of interest accrued on the Predecessor Company's
old subordinated debt during the bankruptcy proceedings, as well as reduced
interest expense on the new debt instruments.
Interest expense and fee amortization was $70.9 million in fiscal 1995
compared to $67.2 million in fiscal 1994 due to $3.3 million of default interest
and interest on unpaid scheduled interest on the old senior secured debt as well
as the old senior subordinated notes which was required by the terms of the
various debt agreements.
INCOME TAXES. The Company adopted Financial Accounting Standards No. 109.
Accounting for Income Taxes, in the first quarter of fiscal 1994. The adoption
resulted in a one-time increase to income of $8 million reflecting the
cumulative effect on prior years of this accounting change. In addition, the
Company recorded a deferred tax asset of $95 million representing the U.S.
federal and state tax savings from NOLs and tax credits. The Company also
recorded a valuation allowance of $60 million, reducing the deferred tax asset
to $35 million. In determining the valuation allowance, the Company assumed
pre-tax
43
<PAGE>
income at levels they were experiencing at that time and considered the impact
of the reversal of temporary differences and the periods in which NOL
carryforward benefits expire.
The provision for income taxes in fiscal 1996 includes $6.1 million on
earnings of Anacomp's foreign subsidiaries and $2 million of domestic income
taxes primarily related to the alternative minimum tax and state and local
taxes. The effective rate as a percentage of income before reorganization items,
extraordinary credit, and cumulative effect of accounting change (8.2%) is lower
than the U.S. statutory rate because of non-taxable reorganization income
partially offset by increases resulting from non-deductible amortization.
Included in the provision for income taxes in fiscal 1995 is a deferred tax
provision of $29 million. The deferred tax provision includes U.S. tax on
undistributed foreign earnings of $9 million and a write-off of net deferred tax
assets of $20 million. This write-off results from the uncertainty regarding the
financial restructuring that was in progress and, accordingly, the uncertainty
regarding the ultimate benefit to be derived from Anacomp's tax loss
carryforwards. The remaining components of the provision for income taxes in
fiscal 1995 were taxes of $4.8 million on earnings of Anacomp's foreign
subsidiaries and a tax reserve adjustment of $1.2 million.
Income taxes as a percentage of income from operations was 55% in fiscal
1994. In fiscal 1994, income tax expense was reduced $1.2 million, as a result
of the favorable settlement and disposition of previously established tax
reserves. The effective tax rate was higher than the U.S. statutory rate because
of amortization of goodwill, which is not deductible for tax purposes, and
generally higher foreign tax rates. See Note 17 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1997, Anacomp completed the
refinancing of substantially all of its significant debt obligations (see Note
26 to the Consolidated Financial Statements and Note 9 to the Condensed
Consolidated Financial Statements). The refinancings will result in significant
interest savings to the Company. Anacomp's cash interest cost will now be at an
annual rate of approximately $30 million as compared to approximately $40
million upon the Company's exit from bankruptcy on May 31, 1996. The Company's
debt amortization has also been significantly reduced as a result of the
refinancings. Anacomp has no principal payments due on the new debt during the
remainder of fiscal 1997, $8 million due in fiscal 1998 and $14 million due in
fiscal 1999. As of March 31, 1997, the current portion of long-term debt was
$3.7 million as compared to $31.8 million at September 30, 1996.
Anacomp's working capital at March 31, 1997, excluding the current portion
of long-term debt, was $32.3 million, compared to $26.4 million at September 30,
1996 and a $13.8 million deficit at September 30, 1995. Net cash provided by
operating activities was $15.7 million for the first six months of fiscal 1997,
compared to $32.9 million in the comparable prior period. The largest component
of the decrease was a $10 million pay down of the Company's trade credit
facility with SKC. Net cash used in investing activities was $21.2 million for
the six months ended March 31, 1997, compared to net cash provided by investing
activities of $11.0 million in the comparable prior period. This change was
primarily the result of the Company using $16.5 million of cash for acquisitions
in the six months ended March 31, 1997 while the Company generated $13.6 million
in cash for the sale of the ICS Division in the comparable prior period. Also,
the Company increased its capital expenditures for property, plant and equipment
by $2.2 million during the first six months of fiscal 1997, as compared to the
comparable prior period.
To facilitate comparison of cash flow activity for fiscal 1996 to fiscal
1995, cash flows for the eight months ended May 31, 1996 and the four months
ended September 30, 1996, as discussed in the accompanying consolidated
statements of cash flows, have been combined for the following discussion. Net
cash provided by operating activities increased to $49.8 million for fiscal year
ended September 30, 1996 compared to $19.9 million in the comparable prior
period, due primarily to significant reductions in receivables and inventories
as well as non-payment of interest on subordinated debt prior to the
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Reorganization. Net cash provided by investing activities increased to $3.9
million for the year ended September 30, 1996, compared to $3.1 million in the
comparable prior period.
On October 30, 1996, the Company completed the $25 million Rights Offering
of its Common Stock to its existing stockholders that resulted in the issuance
of 3.6 million shares of Common Stock. On February 28, 1997, the Company
refinanced the Old Senior Secured Notes with the Senior Secured Debt that
provides a $25 million revolver and term loans of $55 million. The Company used
available cash balances to reduce the Old Senior Secured Note balance of $97.9
million as of December 31, 1996 to $55 million as of February 28, 1997, and the
$25 million revolver remains undrawn.
Net cash used in financing activities decreased to $7.0 million for the six
months ended March 31, 1997, compared to $13.7 million in the comparable prior
period. The Company's successful Rights Offering of approximately 3.6 million
shares of Common Stock provided approximately $24.3 million in cash in the six
months ended March 31, 1997, and the Company's debt refinancing and principal
reductions used approximately $31.3 million of cash. Net cash used in financing
activities increased to $35.5 million in fiscal 1996 compared to $23.6 million
in fiscal 1995. Fiscal 1996 includes a $13 million repayment of debt with
proceeds from the sale of the ICS Division.
The Company's cash balance (including restricted cash) as of March 31, 1997
was $36.6 million, compared to $47.8 million at September 30, 1996 and $19.4
million at September 30, 1995. The decrease reflected as of March 31, 1997 is
due primarily to cash used in the Company's debt refinancing transactions. The
Company also has full availability of its $25 million revolving credit facility,
which was undrawn at March 31, 1997.
Prior to the Chapter 11 filing, the Company was experiencing a liquidity
shortfall caused by continued declining revenues and a highly leveraged balance
sheet. Upon emergence from bankruptcy proceedings, the Company's pre-petition
liquidity problems were improved.
The Company has significant debt service obligations which will include
obligations under the Notes. The ability of the Company to meet its debt service
and other obligations will depend upon its future performance and is subject to
financial, economic and other factors, some of which are beyond its control.
However, the Company believes that its cash on hand and cash generated from
operations will be sufficient to fund its debt service requirements, acquisition
strategies and working capital requirements in the foreseeable future.
Nevertheless, the Company may in the future issue debt or equity securities to
finance growth opportunities that may become available from time to time.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued two
pronouncements related to the calculation and disclosure of earnings per share
information. These pronouncements are effective for periods ending after
December 15, 1997, and consequently, no adjustments are reflected in the
Condensed Consolidated Financial Statements for the period ended March 31, 1997.
Due to the Company's recent operating losses, adoption of these pronouncements
is not expected to have a significant effect on the Company's financial
statements.
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BUSINESS
Anacomp is a leading provider of information and image management products
and services to approximately 15,000 customers in more than 65 countries. The
Company offers a broad range of short-term and long-term document management
solutions for the conversion, storage and retrieval of computer data and images
utilizing micrographics, magnetic media products and, to an increasing extent,
digital technologies.
The Company has built a strong reputation as the world's leading
full-service provider of micrographics systems, services and supplies.
Micrographics is the conversion of information stored in digital form or on
paper to microfilm or microfiche. Traditionally, micrographics has provided one
of the most cost-effective means of data storage and retrieval for
information-intensive organizations such as banks, insurance companies,
financial service companies, retailers, healthcare providers and government
agencies. The Company believes it possesses worldwide market share in excess of
40% in the largest segment of the micrographics industry, COM. COM consists of
the high-speed conversion of digital information directly from a computer or
magnetic tape to microfilm or microfiche.
The Company has an extensive installed base of COM equipment, which
management estimates to be in excess of 55% of the systems in use worldwide.
This installed base together with the Company's strong customer relationships
provide the Company with what management believes to be a substantial recurring
revenue stream from COM maintenance and supplies. For customers that prefer
outsourcing solutions, the Company provides COM, digital and related services
through its network of 48 service centers in the United States as well as
through a growing number of international service centers. The Company is also a
leading provider of half-inch magnetic media products for large computing
systems and is increasingly providing digital products and services to its
customers.
The Company is positioning itself to capitalize on its traditional long-term
information management competency and its significant existing customer base by
providing the latest technologies for short-term and mid-term information
solutions. This migration towards faster growth areas of the information
management industry is being accomplished through internal product development,
strategic acquisitions of advanced technology and joint ventures and strategic
alliances.
Anacomp was incorporated in Indiana in 1968. In the 1970s and 1980s, Anacomp
became the leader in the COM services portion of the micrographics industry
through acquisitions and internal growth. In 1987, the Company became the
world's leading manufacturer of COM systems by acquiring DatagraphiX, Inc. In
1988, Anacomp acquired Xidex Corporation ("Xidex"), a leading manufacturer of
magnetic media products, duplicate microfilm and microfilm readers and
reader/printers. More recently, the Company has expanded its digital products
and services through the acquisition of Data/Ware, a leading manufacturer and
supplier of CD output systems, and through its agreement with FileNet, a leading
provider of integrated document management software.
Anacomp filed for bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code on January 5, 1996, primarily as a result of the substantial
debt incurred as a result of the Xidex acquisition. The Company emerged from
bankruptcy under its Plan of Reorganization on June 4, 1996 with significantly
reduced debt and lower interest payments, a new financial structure, a new Board
of Directors and management and a new business strategy. See "--Bankruptcy
Reorganization."
The principal executive offices of the Company are located at 11550 North
Meridian Street, Suite 600, Carmel, Indiana 46032, telephone number (317)
844-9666.
INFORMATION AND IMAGE MANAGEMENT INDUSTRY
The information and image management industry, which the Company believes to
be in excess of $8 billion worldwide, provides products and services utilized in
the conversion, storage and retrieval of computer data and images. Users of
these products and services must balance the ease of accessibility of
information with the cost of storing and accessing that information. This
balancing and the Company's
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industry strategy adheres to a paradigm known as the Information Delivery Life
Cycle, which describes the relationship between the age of information, the
frequency and speed of access and the type of media upon which the information
is stored. In general, as information ages, customer requirements for frequency
of retrieval and speed of delivery decline. To achieve the greatest degree of
cost-effectiveness and efficiency, organizations migrate their information
across several different delivery systems over the life of the information.
THE INFORMATION DELIVERY LIFE CYCLE
[LOGO]
Newly created information is generally the most frequently accessed,
requiring a high-speed storage media such as magnetic disk ("DASD"). As the
information begins to age, it is often first migrated to optical disk or CD,
which offers quick access to information at a lower cost than DASD and which has
high storage capacity. As the need to access information becomes more
infrequent, the information is next migrated to magnetic tape, an even lower
cost media that provides somewhat slower, yet readily accessible, information
delivery. Once information moves to an archival stage in its life cycle, it is
often migrated to its final media, microfilm and microfiche, which offers very
low storage costs for both archival and non-archival applications.
Anacomp's array of products and services is designed to help organizations
optimize how they store, deliver and migrate their information across this
entire life cycle. The Company believes that vendor consolidation, a gradual
shift toward integrated solutions and similar trends will favor suppliers that
can provide a broad, technologically advanced suite of products and services
across the entire cycle. The Company also believes that this market will
continue to favor suppliers with a fully developed domestic and international
infrastructure that allows them to serve large customers and benefit from
economies of scale.
Additionally, competitive pressures on companies served by Anacomp have
steadily increased the demand for outsourcing services. Concerns over technology
obsolescence, the sometimes high capital cost of information management systems
and a general recognition of the benefits of outside expertise have induced many
companies to reduce in-house expenditures on certain operations in favor of
third-party service providers. Through outsourcing, companies are able to avoid
the capital requirements of proprietary data management and storage systems, and
maintain flexibility to migrate their information as new products and
technologies become available.
Anacomp believes this trend toward outsourcing should have a positive impact
on many of the output services offered by the Company. Moreover, Anacomp seeks
to differentiate itself from other service providers through its value-added
product features (such as customized indexes, retrieval software and other user
productivity enhancements), strong client relationships and customer service.
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Anacomp recognizes that certain products and services in the information and
image management industry are declining relative to others. Traditionally,
micrographics has provided one of the most cost-effective means of data storage
and retrieval for information-intensive organizations such as banks, insurance
companies, financial service companies, retailers, healthcare providers and
government agencies. However, the ongoing growth of local area and client/server
networks and similar systems based on digital technologies has and will continue
to result in alternative data storage and retrieval technologies for active
records management. Over the next few years, the Company believes that
micrographics technology will continue to retain certain cost and functional
advantages over alternative data storage media, which will keep micrographics
competitive in a wide range of applications. Over a longer term, the Company
believes micrographics technology will be viewed predominately as a reliable and
cost-effective method for long-term data storage.
The Company's new business strategy is to capitalize on these industry
trends by leveraging its competitive strengths to provide new products and
services while maintaining its leading market position in COM solutions.
COMPETITIVE STRENGTHS
STRONG CUSTOMER RELATIONSHIPS
Since its inception in 1968, the Company has developed long-term
relationships (in excess of five years) with many of its customers. Among the
Company's current long-term customers are Aetna Inc., AT&T Corp., Automatic Data
Processing, Inc., BankAmerica Corporation, Citicorp, Daimler-Benz AG, Deutsche
Bank AG, Electronic Data Systems Corporation, FMR Corp., General Electric
Capital Corporation, IBM, Kodak and Travelers Group Inc. The terms of the
contractual relationships with these customers vary; however, they typically
provide for minimum quantities, pricing structure, terms of one or more years
and automatic renewal. No customer accounted for 10% or more of the Company's
revenues in fiscal 1996. The Company believes that the strength of its customer
relationships results from consistently meeting or exceeding customer
information management needs and expectations. The Company manages these
customer relationships through its worldwide sales force of approximately 200
individuals and through its extensive distributor networks.
LEADING MARKET SHARES
The Company believes that it is the largest manufacturer and distributor of
COM systems in the world; the largest provider of COM maintenance and supplies
in the world; the second largest provider of COM services in the United States;
the largest supplier of half-inch magnetic media products in the world; and the
largest provider of digital CD output products and services in the world. The
Company's market position and customer base provide the necessary platform to
introduce new and complementary information management products and services.
INSTALLED BASE OF EQUIPMENT
The Company believes it has the world's largest installed base of COM
equipment with an estimated market share of 55%. This extensive installed base,
together with the Company's strong customer relationships, provide the Company
with what management believes to be a substantial recurring revenue stream from
COM maintenance and supplies.
BROAD PRODUCT OFFERING
The Company has introduced new products and services in three areas: digital
solutions, complementary outsourcing services and COM enhancements. Digital
solutions include CD services marketed under the ALVA brand name and CD output
systems obtained from the acquisition of Data/Ware. Complementary outsourcing
services include Print/Mail (printing and mailing client statements and other
documents)
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and archival storage services. New products in COM systems include DragonCOM, a
next generation COM system which is capable of processing Asian languages.
EXPERIENCED NEW MANAGEMENT TEAM
The Company's new senior management team is led by Ralph W. Koehrer, who
became the Company's President in January 1997 and Chief Executive Officer in
May 1997. This management team has more than 300 cumulative years of experience
in the information and image management industry and is highly committed to
executing the Company's new business strategy.
NEW BUSINESS STRATEGY
The Company's new management team, assembled over the last eighteen months
as a part of the Company's reorganization plan, has developed a strategic plan
to rationalize the Company's operations, leverage the Company's competitive
strengths and capitalize on the evolution in the information and image
management industry.
COST REDUCTION AND PRODUCTIVITY ENHANCEMENT
The Company is executing an on-going strategy designed to: (a) reduce
selling, general and administrative expenses by reducing headcount, centralizing
administrative functions and reducing fixed operating costs and (b) develop new
processes and programs to enhance productivity and product quality. The
cumulative effect of these and other activities has been to reduce selling,
general and administrative expenses as a percentage of revenues from 22.4% for
the year ended September 30, 1995 to 19.4% for the twelve months ended March 31,
1997. The Company's management is committed to continue cost and efficiency
improvements focusing on a number of areas including data center automation and
data transmission technology.
EXIT NON-STRATEGIC BUSINESSES
The Company has exited three lower-margin, non-strategic businesses
including the filming of paper documents, the manufacturing of microfiche and
microfilm readers and reader/printers, as well as the manufacturing of floppy
diskette media.
STRENGTHEN BALANCE SHEET AND ENHANCE FINANCIAL FLEXIBILITY
Following the Company's emergence from bankruptcy proceedings in June 1996,
the Company has completed a $25 million rights offering and an $80 million
senior secured credit facility. Since June 1996, following these two
transactions and pro forma for the Offering and the Redemption, the Company will
have reduced annualized net interest expense from $38.6 million (based on
capitalization data as of June 30, 1996) to $30 million (based on capitalization
data as of March 31, 1997). See "Capitalization."
NEW PRODUCT OFFERINGS AND GROWTH OPPORTUNITIES
The Company is positioning itself to capitalize on its traditional long-term
information management competency and its significant existing customer base by
providing the latest technologies for short-term and mid-term information
management solutions. This migration towards faster growth areas of the
information and image management industry is being accomplished through internal
development, strategic acquisitions of advanced technology and joint ventures
and strategic alliances. In June 1996, the Company introduced its new DragonCOM
system, which is capable of processing Asian languages. On January 31, 1997, the
Company acquired Data/Ware, a leading manufacturer and supplier of CD output
systems. On January 22, 1997, the Company entered into a partnership with
FileNet, a leading provider of integrated document management software, to
provide a technological base for the Company's Windows NT-based application
solutions for rapid day-to-day information management known collectively as
Concerto. Although digital storage systems account for a small percentage of the
Company's total
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revenues, Anacomp has rapidly become the largest United States provider of CD
output solutions, offering customers high-capacity and high-speed information
retrieval applications.
PRODUCTS AND SERVICES
Anacomp's information management solutions can be grouped into five product
families: output services, technology services, output systems, micrographics
supplies and magnetic media. The table below shows Anacomp's revenues for each
of these product families for the last three fiscal years. The information is
presented on a traditional comparative basis for the year ended September 30,
1996, to facilitate a meaningful comparison to fiscal 1995 and 1994.
Consequently, the fiscal 1996 information presented below does not comply with
accounting requirements for companies upon emergence from bankruptcy, which
calls for separate reporting for the newly Reorganized Company and the
Predecessor Company.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996
----------------------- --------------------- ---------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Output Services........................................ $ 131,238 22% $ 132,144 22% $ 103,733 21%
Technology Services.................................... 91,339 15 86,175 15 82,105 17
Output Systems......................................... 57,627 10 51,276 9 32,794 7
Micrographics Supplies................................. 204,346 34 190,621 32 150,449 31
Magnetic Media......................................... 97,545 16 128,353 22 112,187 23
Other.................................................. 10,504 2 2,620 0 4,872 1
---------- --- ---------- --- ---------- ---
Total.............................................. $ 592,599 100% $ 591,189 100% $ 486,140 100%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
OUTPUT SERVICES
The principal output services delivered by Anacomp are COM services, CD
services, archival services and Print/Mail services. Output services are offered
through 48 service centers in the United States, as well as through startup
service centers in Canada and Europe. Output services are sold by Anacomp's
direct sales forces in the United States, Canada and Europe. The Company has
recently acquired several small COM and CD service bureaus as part of its
strategy to increase its market share in specific locations and to consolidate
portions of the maturing COM services business.
The Company plans to generate additional revenue from a multitude of
additional complementary output services including CD services, Print/Mail
services and archival services offered through the Company's service centers.
COM services comprise the Company's most profitable business line. The Company's
objective is to maintain this highly profitable business, while introducing
complementary, higher-growth services. The Company intends to market these new
services as additional, not replacement, services to its core micrographics
output services. Pursuant to this strategy, the Company envisions selling each
image it processes up to four times:
- Once to output the image to paper to be mailed directly to the clients'
customers;
- Once to output the image to CD for short-term storage and frequent
retrieval;
- Once to output the image to microfilm or microfiche for safe, long-term
storage; and
- Once to store the image on media for a customer at an Anacomp site for
archival purposes.
The Company has a large customer base which has proved to be loyal to the
Company in the past. The Company's output services customers include banks,
insurance companies, financial service companies, retailers, healthcare
providers and government agencies. No one customer accounted for more than 10%
of the Company's output services revenues in fiscal 1996. The typical service
contract is exclusive, lasts one year with a one-year automatic renewal period
and provides for usage-based monthly fees, subject to
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increase on 30 days' notice. The Company believes that approximately 75% of the
Company's micrographics services customers are subject to contracts and
estimates approximately 90% of such contracts are renewed annually.
Output service center industry competition is primarily limited to service
centers within a 50-mile radius of a customer because of the emphasis on prompt
turnaround. The Company and First Image (which the Company believes has
approximately 50 output service centers) are the two largest national output
service center organizations. The remainder of the market is served by regional
or local output service centers.
COM SERVICES. COM services, the delivery of micrographics outsourcing
services, represents the largest component of Anacomp's output services. The
Company believes that the COM services portion of the micrographics industry
processed over 45 billion images in 1995, generating over $350 million in
revenues. The Company believes it holds an estimated 25% to 30% market share,
second only to First Image.
On a daily basis, Anacomp's service centers receive thousands of electronic
downloads and computer tapes from customers. This information (both text and
graphics) is converted to 16mm microfilm or to microfiche, which is a four by
six-inch film medium capable of storing up to 1,000 pages of computer output.
Turnaround for a typical COM services job ranges from two hours to 36 hours,
depending on specific circumstances and requirements, and the centers generally
operate 24 hours a day every day of the year.
In response to a gradual decline in the market for micrographics services
and a more competitive market, in fiscal 1995 Anacomp completed installation of
XFP 2000 COM systems in all of its service centers, increasing the efficiency of
COM production. Additionally, the Company has upgraded many of these systems
with Anacomp-developed emulation software for IBM and Xerox laser print streams,
expanding the potential market for COM services and resulting in higher average
prices than for other COM output.
As an adjunct to COM services, Anacomp also provides External Facilities
Management ("XFM") services to selected customers. Under an XFM arrangement,
Anacomp operates and manages a customer's COM production at Anacomp's
facilities.
ALVA CD SERVICES. Although still a relatively small percentage of the
Company's revenues, Anacomp has quickly become a significant provider of digital
output services since entering this emerging market in fiscal 1995. Competition
in this industry is highly fragmented, and Anacomp believes it is one of the
three largest U.S. providers of CD output services.
Anacomp's ALVA CD services provide customers throughout the United States
and at an increasing number of the Company's international locations with a
high-capacity storage and delivery solution for applications requiring frequent
and high-speed information retrieval. ALVA CD services involves storing and
indexing customer information such as invoices and customer statements on CD. In
addition to indexed CD output, ALVA also includes sophisticated Windows NT-based
software for accessing and retrieving the data. ALVA is available at the
majority of the Company's service centers in the United States, as well as
through new Company service centers in Canada and Europe.
The Company believes that its ALVA solution has significant advantages over
competing products, primarily due to the Company's network of service centers,
its extensive knowledge of applications and indexing expertise, and ALVA's
flexible and easy-to-use user interface.
ARCHIVAL AND PRINT/MAIL SERVICES. Anacomp provides archival storage services
at several of its service centers in the United States, providing the long-term
storage of original microfilmed records for its COM services customers. The
microfilm is stored in a secure vault within the Anacomp facility, providing
customers with a convenient and safe method of off-site storage of critical
business records. In addition,
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Anacomp offers customers the ability to retrieve their records on an as-needed
basis. Anacomp plans to expand this business in fiscal 1997 by opening several
new archival vaults.
The Company also intends to broaden its archival services business in the
future by storing multiple-media records--such as paper, optical disks and
magnetic tape in addition to microfiche and microfilm--at dedicated storage
facilities. Anacomp has taken a first step in this direction in October 1996 by
acquiring Archive Storage, Inc. ("ASI"), a small Massachusetts company that
operated an underground, climate-controlled storage vault. ASI also provided
records management and disaster recovery consulting services to businesses,
helping customers ensure they are storing the right information on the most
cost-effective media for the appropriate periods of time.
Anacomp plans to expand Print/Mail services, the output and mailing of
printed information, in the United States in fiscal 1997. The Company sees
Print/Mail services as complementary to the COM and CD output services it offers
to clients today, and the Company believes it can leverage its existing client
relationships and application knowledge to obtain significant Print/Mail
revenues by providing its customers with distinct cost and service advantages.
The Company currently does not believe it has significant market shares in
either archival storage services or Print/Mail services.
TECHNOLOGY SERVICES
Anacomp's technology services includes both traditional maintenance services
as well as newer professional services offered by the Company. Technology
services are sold by Anacomp's direct sales forces worldwide.
The Company provides round-the-clock maintenance and professional services
through over 600 highly trained service employees operating in various countries
worldwide and servicing approximately 2,300 of the nearly 4,000 COM recorders
believed to be in use. In the United States, over 400 field service engineers
and managers provide geographic coverage through ten districts. Internationally,
maintenance services are provided either by Anacomp employees operating in the
Company's foreign subsidiaries or by employees of dealers and distributors.
Anacomp believes that it maintains approximately 98% of its own installed
base of COM systems, as well as a large percentage of those built by other
companies. In addition, the Company provides maintenance services for
micrographics-related devices and, increasingly, non-micrographics equipment.
Since many customers tend to use the maintenance services of the vendor that
installed the system, maintenance revenues traditionally have been a function of
new COM system sales and the size of the installed base. Anacomp believes that
its COM maintenance market share is approximately 65% in the United States, 50%
in Europe and 15% in the Americas (excluding the United States) and Asia.
As sales of COM systems mature, Anacomp is seeking to expand its maintenance
services by adding non-micrographics equipment. As an example of this strategy,
Anacomp recently acquired the customer maintenance base for the computer tape
equipment manufactured and sold by Integra Technologies Corporation ("Integra").
Anacomp now provides maintenance services on these products, and it also plans
to assume product assembly in the near future.
In fiscal 1996, Anacomp identified professional services as a potential
growth area within its maintenance business. Professional services refers to the
delivery of project-specific expertise in such areas as job set-ups, user
interfaces, data communications and networking. Tasks include software
development, problem resolution and consulting. In the past, Anacomp had
provided many of these services to customers free of charge. As an example of
how the Company plans to market professional services, Anacomp now provides a
specified number of hours of "free" job set-up assistance with each XFP 2000
sold, with the customer being charged for work exceeding those hours.
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OUTPUT SYSTEMS
The principal output systems products delivered by Anacomp are COM systems
and newer electronic document management solutions. The Company sells these
products through its direct sales forces in the United States, Canada and Europe
and through distributors in Latin America, Europe and Asia. Anacomp also is an
OEM for other companies for its XFP 2000 COM system.
COM SYSTEMS. Anacomp is the world's leading manufacturer and distributor of
COM systems, offering a complete line of COM recorders, duplicators, sorters and
related software. Anacomp's installed base of COM systems, approximately 55% of
those in use worldwide, is more than twice as large as its nearest competitor,
and related sales of COM services and supplies to the installed base provide the
Company with what management believes to be a recurring revenue stream that
constitutes a significant portion of its annual revenues.
The XFP 2000, which is manufactured by the Company, is the most advanced COM
recorder on the market and has enabled the Company to capture what it believes
to be an estimated 57% of all new COM systems sold or leased. The XFP 2000 is
faster and more reliable than previous COM recorders and, through its laser
technology, has the capability to generate precise reproductions of any image.
The Company sold or leased 118 new XFP 2000 systems in fiscal 1996 compared to
156 in 1995.
Pursuant to a 1990 OEM purchase agreement, Kodak was obligated to purchase
an additional 151 XFP 2000 systems by October 1997 or pay a cash penalty to the
Company. The Company and Kodak have negotiated an amendment to the OEM
agreement, whereby the Company accepted a $3.6 million cash payment from Kodak
and a commitment to purchase an additional 28 XFP 2000 systems by the end of
calendar 1997, and a one-time purchase of spare parts. Upon Kodak's purchase of
the 28 XFP 2000 systems on or before December 20, 1997, Kodak's obligations and
the OEM agreement shall terminate.
In fiscal 1996, Anacomp introduced DragonCOM, a version of the XFP 2000 for
the Asian market, which is capable of processing Chinese, Korean, Taiwanese,
Japanese and other ideographic languages utilizing the popular IBM AFP
architecture. The Company is marketing DragonCOM to customers in Asia through an
agreement with Kodak's Asia-Pacific region, in which Kodak committed to purchase
a minimum of 50 DragonCOM systems over the next four years.
Anacomp also has developed two new software products that emulate IBM and
Xerox laser print streams. AFP software developed in conjunction with IBM
enables the XFP 2000 to process and image AFP formatted data streams used by IBM
high-speed mainframe laser printers. XCF software developed in partnership with
Xerox enables the XFP 2000 to process the same data stream used by Xerox high-
speed, high-volume laser printers.
Anacomp recently introduced its Image Direct application for the XFP 2000,
which enables users to output document images directly to microfilm from desktop
workstations. The initial release of Image Direct supports TIFF images, the most
popular bitmap format in use today; additional format compatibility is expected
in future releases.
Principal customers for the Company's COM systems include
information-intensive organizations such as banks, insurance companies,
financial service companies, retailers, healthcare providers and government
agencies, as well as non-Anacomp COM service centers. While the majority of COM
systems are sold outright, the Company does offer customers lease and monthly
usage options. No customer accounted for more than 10% of the Company's output
system sales in fiscal 1996.
International sales accounted for approximately 40% of the Company's fiscal
1996 sales of COM system units. Sales in Germany, France and Asia accounted for
approximately 30% of COM system sales in fiscal 1996, Germany accounted for 15%
of total COM system revenues in fiscal 1996; however, no single country was
responsible for 10% or more of the Company's total revenues in fiscal 1996. In
foreign markets, the Company sells COM systems through wholly owned operating
subsidiaries and, in countries in which the Company does not have a subsidiary,
through dealers and agents. In 1994, Kodak became the Company's exclusive
distributor in Asia (other than Japan) and Australia.
53
<PAGE>
The Company's primary competitors in the sale of COM systems are
Agfa-Gevaert AG ("Agfa") and Micrographic Technology Corporation. Competition is
based principally on product features, as well as on such factors as product
quality, service and price. Anacomp believes that it sells approximately 57% of
all new COM systems sold worldwide, including those sold through an OEM
arrangement with Kodak. Competition is based principally on product features, as
well as on such factors as product quality, service and price. The Company's
large installed base is an important competitive advantage in the sale of new
COM systems because changing from one manufacturer's COM system to another is
difficult due to software conversion and operator training costs.
ELECTRONIC DATA MANAGEMENT SOLUTIONS. Anacomp is working actively to bring
to market a wide range of electronic data and image management solutions.
Foremost among these is a new product line called "Concerto," which will be a
suite of integrated software solutions relating to document management, COLD,
imaging and workflow. Based on a product and marketing partnership with industry
leader FileNet, Anacomp plans to build applications on top of FileNet's core
technology. The first of these applications, called Concerto Customer Response
System, will provide organizations with significant improvements for managing
information related to customer service operations. Other expected applications
include healthcare claims processing, litigation support and insurance claims
processing.
Anacomp also recently acquired Data/Ware, the leading provider of CD output
systems for mainframe and client/server computing environments. Data/Ware's
flagship products, the Enterprise Authoring System ("EAS") and the
Server/Enterprise Authoring System ("S/EAS"), provide companies with in-house
solutions for the highly automated output of documents to CDs.
In addition, Anacomp markets an integrated system for information management
under the brand names Folders and EOS, which is an acronym for enterprise output
systems. Launched in 1995, Folders and EOS provide data management solutions for
mainframe computing environments that allows organizations with significant data
access requirements to expedite information retrieval regardless of the data's
location. As the name indicates, Folders is software that creates electronic
document folders, allowing users to organize and store electronic documents. EOS
provides for the storage and distribution of electronically generated reports
(often voluminous), thereby enabling users to avoid paper storage of such
reports and to distribute all or selected portions of reports throughout an
organization.
Anacomp intends to position itself as a comprehensive provider of integrated
solutions for organizing, storing, routing and processing information of all
types. Although there are numerous competitors in portions of this business,
Anacomp believes it can be among the first to offer a complete solutions set. In
order to quickly and cost-effectively provide these solutions to its customers,
and to take maximum advantage of the Company's areas of expertise, Anacomp has
embarked on establishing technology alliances with the foremost providers of the
key technologies available today for managing and delivering information.
MICROGRAPHICS SUPPLIES
Anacomp sells the most comprehensive line of micrographics supplies in the
world, including original silver halide film, duplicate film, chemicals for
microfilm processing, paper and toners for reader/printers, micrographics lamps
and bulbs and other consumables. The Company also markets a complete line of
microfilm/microfiche readers. These products are sold through Anacomp's direct
sales forces and through distributor channels.
With the exception of proprietary wet and dry original halide film and
chemistry used in its COM systems, many of these products have become only
marginally profitable in recent years. To increase profitability, the Company
signed an agreement to outsource the manufacture of readers and reader/ printers
beginning in fiscal 1996 as demand and margins for these products continue to
decline. Additionally, the Company ceased production of the DS 300 in fiscal
1996 after completing a build-out of inventory. These decisions resulted in a
significant one-time write-off in fiscal 1995. However, the Company continues to
offer these types of products to its customers on a reseller basis.
54
<PAGE>
The Company supplies proprietary wet and dry original halide film used in
its XFP series of COM systems and proprietary wet and dry original halide film
for its X Series, an earlier generation of Anacomp COM systems. All original
microfilm for the Company's COM systems is manufactured for the Company by Kodak
under an exclusive supply agreement in what the Company considers to be a
proprietary package.
The proprietary film used in the XFP 2000 represents the only original COM
film segment that is currently growing. The Company also believes it can
maintain its market share of XFP 2000 film sales going forward because of the
complexity of the manufacturing process, the Company's patents on its
proprietary canister and the industry's interest in other segments of the film
business.
Anacomp is the world's largest supplier of duplicate microfilm, which is
used to create one or more additional copies of original microfiche and
microfilm masters. The Company believes that its share of this estimated $75
million worldwide market is approximately 67%, which includes sales to its own
output centers. Anacomp's primary competitor in the duplicate microfilm market
is Rexham Graphics Ltd. ("Rexham") with an estimated 25% share of the worldwide
duplicate film market. For fiscal 1996, the Company believes that Kodak
accounted for approximately 25%, and First Image accounted for approximately
15%, of the Company's shipments of duplicate microfilm.
The Company sells original microfilm for Anacomp's COM systems and for other
manufacturers' COM systems, with film sold for Anacomp's systems representing
the vast majority of original microfilm sales. Anacomp competes in sales of
non-proprietary original COM microfilms with other manufacturers, including
Agfa, Fuji Photo Film U.S.A., Inc. ("Fuji"), Kodak and Imation Enterprises
Corporation ("Imation"), formerly part of 3M. For non-OEM sales of the XFP 2000,
the Company is the exclusive supplier for original microfilm because of the
proprietary nature of the canister in which the film is placed. Anacomp believes
that it sells its consumable supplies directly to more than 90% of its worldwide
installed base. The Company recently acquired the assets of one of its
competitors, COM Products, Inc. ("CPI") which provides the Company with a more
diverse customer base.
International sales in fiscal 1996 accounted for 40% of the Company's total
micrographics supplies revenues. In foreign markets, the Company offers supplies
through wholly owned operating subsidiaries and, in countries in which the
Company does not have a subsidiary, through a network of dealers and
distributors. Anacomp believes that it has an estimated 33% of the micrographics
supplies market in Europe and an estimated 39% of the supplies market in the
Americas (excluding the United States) and Asia. In Europe, the Company's
primary competitors for micrographics supplies and equipment are the Kalle
Microfilm Division of Hoechst AG, A. Messerli AG and Rexham. Its primary
competitors in Japan are Kodak and Fuji.
MAGNETIC MEDIA
Anacomp manufactures, sells and distributes a broad range of magnetic media
products such as open reel tape, 3480/3490E tape cartridges, TK 50/52 CompacTape
and back-up tape cartridges such as quarter-inch, 4mm and 8mm. Anacomp is the
world's largest manufacturer of half-inch tape products, widely used by many
organizations for the near-line storage of business data.
Anacomp is exploring new applications and markets based on its magnetics
coating capacity. In fiscal 1995, Anacomp introduced voice logging tape and
instrumentation tape. Voice logging tape is used by brokerage companies, "911"
emergency service providers and other entities to record telephone
conversations. Instrumentation tape is used by various government agencies to
measure and record sensitive data. In fiscal 1996, Anacomp began to use magnetic
coated media to manufacture transfer tape, which is found on the back of
transaction media (similar to credit and telephone cards).
The Company is actively seeking partnerships that will enable the Company to
participate in the next generation of magnetic media products, including
half-inch metal particle tape (3590 cartridges). This product will be introduced
in fiscal 1997 and is expected to enjoy significant growth as this market
expands over the next several years.
55
<PAGE>
Anacomp primarily sells its magnetics products through its worldwide
distributor and dealer network and, to a lesser extent, through parts of the
Company's direct sales force. The Company markets these products under the
"Memorex," "Dysan," "Graham" and "StorageMaster" brand names, and it also is a
leading OEM for many of the magnetic media products it manufactures.
Anacomp has no significant competitors with respect to the manufacture of
open reel tape, and believes that its worldwide market share for that product is
approximately 92%. Anacomp competes with Imation and BASF AG in the sale of
3480/3490E data cartridges. Anacomp's worldwide market share for 3480 and 3490E
data cartridges is estimated by the Company to be 38% and 35%, respectively.
ENGINEERING, RESEARCH AND DEVELOPMENT
Anacomp's engineering costs, including research and development, were
significantly reduced in fiscal 1996, primarily as a result of the substantial
completion of the IBM and Xerox print stream projects for the XFP 2000 COM
system. Research and development expenses were $3.7 million, $2.2 million and $3
million for fiscal 1996, 1995 and 1994, respectively. However, the Company
continues to make investments in projects that enhance the XFP 2000 and the
overall value of COM, including improving the speed and functionality of its
Image Direct bitmapping initiative as well as the continuing development of
DragonCOM, a version of the XFP 2000 for the Asian market that is capable of
processing double-byte ideographic languages.
The Company also launched an engineering initiative in fiscal 1996 known as
"Pegasys" to automate Anacomp's service centers and to develop a
state-of-the-art data transmission capability for these centers. Anacomp
believes that better automation of the service centers will maximize processing
capacity, increase productivity and reduce operating costs. An improved
transmission capability will enable many more of Anacomp's service customers to
send their data to the Company electronically, eliminating the need for tape
handling (on the part of both the customer and the Company's service center
staff) as well as eliminating tape pick-up and delivery. In addition, data
transmission will facilitate the Company's plan to consolidate selected service
centers in order to increase efficiencies and reduce operating costs.
Anacomp expects its current limited research and development relating to
advanced digital technologies to grow as the Company introduces new digital
products and services. In addition, the Company recently inherited a significant
engineering and research and development capability with its purchase of
Data/Ware. One of Data/Ware's significant projects is research in emerging
digital video disc technology, which most industry analysts expect to become a
major media storage option in the near future.
Anacomp's research and development costs will be tempered by the Company's
plan to acquire the rights to core technologies whenever possible. Anacomp's
focus in the digital area will be on the development of customer applications,
where the Company believes it can add value. Anacomp currently is developing a
suite of vertical software applications that is based on a joint technology
partnership with FileNet, a leader in enterprise document management software.
The Company also owns various patents and licenses covering aspects of its
product line and its production processes, as well as proprietary trade secret
information relating to its products and services. While Anacomp believes that
the protection provided by these patents, licenses and proprietary information
is important, the Company also believes that equally significant is the
knowledge and experience of its employees, and their abilities to develop and
market the Company's products and services and to provide a value-added benefit
to customers.
RAW MATERIALS AND SUPPLIERS
Polyester is the principal raw material used in the manufacture of microfilm
and magnetic media products, two of Anacomp's primary businesses. A worldwide
shortage of polyester has abated recently, and supply and demand are more in
balance now. As a result, Anacomp has seen its cost of polyester for magnetic
media products decrease recently--reversing a previous trend of increasing
costs. There can be no assurance, however, that the current trend regarding the
supply and price of polyester will continue.
56
<PAGE>
SKC is Anacomp's sole supplier of duplicate microfilm, the result of a
ten-year supply agreement between the companies entered into in 1993 as part of
SKC's purchase of Anacomp's Sunnyvale, California duplicate microfilm
facilities. SKC's duplicate film production is dedicated exclusively to Anacomp,
and SKC also provides Anacomp with polyester for a large percentage of its
magnetic media products. In connection with the supply agreement, SKC also
provided Anacomp with a $15 million trade credit facility, secured by up to $10
million of products sold to Anacomp by SKC. In addition, under an amendment to
the supply agreement executed in 1996, Anacomp agreed to certain price
increases, retroactive to 1994, and agreed to make the following deferred
payments to SKC related to the retroactive price increases: $400,000 in 1997;
$600,000 in 1998; $800,000 in 1999; $800,000 in 2000; and $1,000,000 in 2001.
Pursuant to the SKC Agreement, the Company is required to purchase a
substantial portion of its polyester requirements for its magnetic media
products. In fiscal 1996, the Company believes that it used more than seven
million pounds of polyester in its magnetic business. While the Company could
purchase certain of these magnetics polyester products from vendors other than
SKC, SKC is currently the sole available source for polyester used by the
Company to manufacture many magnetics products, including open reel tape. SKC's
inability or refusal to supply this polyester in the future might force the
Company to cease manufacturing open reel tape or other magnetics products, which
would negatively impact the Company's profitability and prevent the Company from
fulfilling its contractual obligations to its customers.
Anacomp's XFP 2000 COM system utilizes a proprietary, patented original film
canister, and the original film used in that canister is supplied exclusively by
Kodak. Anacomp also purchases from Kodak substantially all of its requirements
for original microfilm for earlier-generation COM recorders manufactured by
Anacomp and others, although Anacomp has from time to time purchased original
microfilm utilized in those older COM recorders from other suppliers.
BANKRUPTCY REORGANIZATION
By early 1995, revenues from the Company's traditional micrographics
business had been declining for the last several fiscal years. The Company,
however, believed that these declines would stabilize. In addition, the Company
sought to increase revenue through opportunities related to the consolidation of
the micrographics industry, namely the development of new micrographics and
digital products and services, and investments in emerging digital technologies.
Based on this growth strategy, in March 1995, the Company attempted to
refinance certain of its existing indebtedness through a public offering of $225
million of senior secured notes. The new notes would have deferred an aggregate
of $153 million in scheduled principal payments in fiscal years 1995 through
1998, resulting in increased liquidity and cash for product development. The
Company was unable to complete the refinancing and announced the withdrawal of
the proposed offering on April 6, 1995.
As a result of the withdrawn offering and weaker than anticipated second
quarter results, including disappointing sales performance for the Company's new
products, the Company did not have sufficient cash available to make both its
$20 million scheduled principal payment due in April 1995 on its secured debt
and the $17 million scheduled interest payment due May 1995 on its 15% Senior
Subordinated Notes. The Company sought an agreement with its senior secured
lenders to reschedule its April 1995 principal payment but was unable to obtain
such an agreement.
Starting in May 1995, the Company engaged in continuous efforts to formulate
a restructuring plan to satisfy its various investor constituencies. Such
efforts included the retention of various financial advisers to assist in the
restructuring process and the development by the Company of a new business plan
and strategy to address the Company's current financial situation and
disappointing recent financial performance.
After months of discussions and negotiations with representatives of the
Company's senior secured lenders and with unofficial committees representing the
15% Senior Subordinated Notes and the 13.875% Convertible Subordinated
Debentures and 9% Convertible Subordinated Debentures, the Company
57
<PAGE>
reached an agreement in principle with an unofficial committee representing
holders of the 15% Senior Subordinated Notes. On January 5, 1996, the Company
filed a prenegotiated plan of reorganization with the U.S. Bankruptcy Court in
Delaware under Chapter 11 of the Bankruptcy Code.
On March 28, 1996, the Company submitted a Plan of Reorganization and a
Disclosure Statement to the Bankruptcy Court. The Disclosure Statement was
approved by the Bankruptcy Court on such date and was transmitted to the
creditors and preferred stockholders of the Company for solicitation of ballots
for acceptance or rejection of the Plan of Reorganization. Ballots were cast by
May 8, 1996. The Plan of Reorganization, as amended, was confirmed by the
Bankruptcy Court on May 20, 1996, and on June 4, 1996 the Company emerged from
bankruptcy under its Plan of Reorganization.
On June 4, 1996, the Company canceled its existing secured debt and
subordinated debt, including 15% Senior Subordinated Notes, 13.875% Convertible
Subordinated Debentures and 9% Convertible Subordinated Debentures and its
equity securities, including common stock, common stock purchase rights,
preferred stock and warrants, in exchange for cash, new debt securities and new
equity securities. On such date, (a) the Company's secured debt was exchanged
for $112.2 million principal amount of its Old Senior Secured Notes and a cash
payment, (b) the Company's 15% Senior Subordinated Notes and related accrued
interest was exchanged for $160.0 million principal amount of its Existing
Notes, 9,250,000 shares of Common Stock and a cash payment, (c) the Company's
13.875% and 9% Convertible Subordinated Debentures and related accrued interest
was exchanged for 750,000 shares of Common Stock and warrants to purchase
273,731 shares of Common Stock, (d) the Company's preferred stock and related
accrued dividends were exchanged for warrants to purchase 65,695 shares of
Common Stock and (e) the Company's common stock was exchanged for warrants to
purchase 43,796 shares of Common Stock. Each of the warrants is convertible into
one share of Common Stock during the five year period ending June 3, 2001 at an
exercise price of $11.57 per share. The Company simultaneously distributed to
creditors (including holders of the Old Senior Secured Notes and the Existing
Notes) approximately $22 million in cash. The Plan of Reorganization resulted in
a reduction of approximately $174 million in principal and accrued interest on
the Company's debt obligations and liquidation amount and accrued interest on
its preferred stock and reduced the Company's annual interest expense by
approximately $31 million.
EMPLOYEES
As of March 31, 1997, Anacomp employs approximately 2,600 people at multiple
facilities and offices in the United States, Canada, Brazil, Japan and Europe,
including 48 service centers in the United States.
As of March 31, 1997, the Company employs approximately 200 salespeople
worldwide. The Company maintains two separate domestic sales forces: (a) the
U.S. Group, which employs approximately 120 salespeople, is comprised of ten
regions responsible for sales of micrographics and CD services, COM systems and
related maintenance services, supplies and equipment, sales of digital products
and direct sales of magnetics products and (b) the Magnetics Division, which
employs approximately twenty salespeople, responsible for sales of magnetics
products primarily to dealers and distributors.
The Company employs approximately 60 non-Magnetic Division salespeople who
sell to customers located abroad. In countries in which the Company does not
have a subsidiary, the Company sells through approximately 100 distributors and
agents.
FACILITIES
The Company maintains corporate offices at 11550 North Meridian Street,
Suite 600, in Carmel, Indiana 46032 (metropolitan Indianapolis). Micrographics
manufacturing, engineering, micrographics, customer service and marketing and
product maintenance facilities are all located in Poway, California
(metropolitan San Diego). The Company's magnetics manufacturing facilities are
located in Graham, Texas and Brynmawr, Wales.
During 1994, Anacomp's Graham and Brynmawr facilities received international
recognition for quality standards, earning International Standards Organization
("ISO") 9002 certification. Anacomp's Poway facility earned ISO 9002
certification in September 1995.
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The following table indicates the square footage of Anacomp's facilities:
<TABLE>
<CAPTION>
OPERATING OTHER CORPORATE
FACILITIES FACILITIES FACILITIES TOTAL
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
United States:
Leased......................................................... 601,700 119,614 49,111 770,425
Owned.......................................................... 147,420 15,630 -- 163,050
----------- --------- ----------- ----------
749,120 135,244 49,111 933,475
----------- --------- ----------- ----------
----------- --------- ----------- ----------
International:
Leased......................................................... 105,254 29,410 -- 134,664
Owned.......................................................... 145,000 -- -- 145,000
----------- --------- ----------- ----------
250,254 29,410 -- 279,664
----------- --------- ----------- ----------
Total...................................................... 999,374 164,654 49,111 1,213,139
----------- --------- ----------- ----------
----------- --------- ----------- ----------
</TABLE>
Other Facilities consists primarily of leased space of abandoned facilities.
Approximately 151,569 square feet of the Other Facilities have been sublet to
others and an additional 13,085 square feet has been vacant since September
1996. The Company also leases standard office space for its sales and service
centers in a variety of locations. The Company considers its facilities adequate
for its present needs and does not believe that it would experience any
difficulty in replacing any of its present facilities if any of its current
agreements were terminated.
LEGAL PROCEEDINGS
The Company and its subsidiaries are potential or named defendants in
several lawsuits and claims arising in the ordinary course of business. While
the outcome of such claims, lawsuits or other proceedings against the Company
cannot be predicted with certainty, management expects that such liability, to
the extent not provided for through insurance or otherwise, will not have a
material adverse effect on the financial statements of the Company.
DTSC MATTERS
The California Department of Toxic Substances Control (the "DTSC") filed a
civil complaint on January 5, 1996, in Alameda County Superior Court against
Anacomp and Xidex that seeks civil penalties and injunctive relief pursuant to
the Hazardous Waste Control Law, Health and Safety Code Section 25100, ET SEQ.,
and California Code of Regulations, Title 22, Div. 4.5, Section 66001, ET SEQ.,
with respect to Anacomp's Sunnyvale, California facility (the "Sunnyvale
Facility"). Among other things, the DTSC contends that: (a) the Company has not
yet completed regulatory closure of the Sunnyvale Facility, which (the DTSC
contends) is required by law, (b) the closure actions that are required include
collection and analysis of soil samples, evaluation of the risks associated with
the contaminants found and, depending on those risks, removal, treatment and/or
disposal of contaminated soil and/or groundwater and (c) the Company has not
fully complied with the requirement to demonstrate financial assurance for
completing the required closure activities for the Sunnyvale Facility.
An order of the California Regional Water Quality Control Board, San
Francisco Bay Region (the "RWQCB") is also in effect with respect to the
Sunnyvale Facility (the "RWQCB Order"). The RWQCB contends that the Company is
obligated to characterize and cleanup environmental contamination at the
Sunnyvale Facility pursuant to the RWQCB Order. The Company's consultants
submitted to the RWQCB a Remedial Action Plan for addressing environmental
contamination at the Sunnyvale Facility that estimates potential environmental
costs of as much as $998,000 for soil cleanup and $1,842,000 for groundwater
cleanup, for total cleanup costs of $2,840,000. The DTSC and the RWQCB estimate
the Company's environmental cleanup liabilities for the Sunnyvale Facility will
total $3,453,900, and possibly as much as $5,008,155.
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The DTSC and the RWQCB also contend that: (a) all expenditures necessary to
comply with environmental laws are administrative expenses that the Company is
required to incur during the pendency of the Chapter 11 Cases; and (b) to the
extent the Company is required to hire professionals to comply with these
obligations, the Company must seek bankruptcy court authorization for such
expenditures, in addition to the authorization already received to pay holders
of trade claims.
The Company does not necessarily agree (and in most cases strongly
disagrees) with the contentions of the DTSC in its civil complaint and the RWQCB
Order. The Company has filed an answer to the DTSC complaint, and contends that
DTSC's civil penalties action is enjoined. On June 21, 1996, the Company filed
in the United States Bankruptcy Court for the District of Delaware ("Bankruptcy
Court") a limited objection to DTSC's $300,000 civil environmental penalty claim
and alternatively a request to equitably subordinate the claim to the allowed
claims of all the Company's creditors. The Company reserved its rights to object
to the other claims of RWQCB against the Company. RWQCB then filed a motion
requesting the Bankruptcy Court to abstain from exercising its jurisdiction over
the civil penalty claim or, alternatively, to dismiss for lack of jurisdiction.
The Company has opposed RWQCB's motion, and a hearing on the motion has been
continued, pending settlement negotiations.
CUSTOMS CLAIM
On or about May 26, 1996, the United States Customs Service ("Customs")
filed a Notice of Appeal from the order confirming the Plan of Reorganization
(the "Confirmation Order") and also filed an emergency motion for a stay pending
the appeal of the entry of the Confirmation Order with the Bankruptcy Court. On
May 31, 1996, the Bankruptcy Court held a hearing on the Bankruptcy Court stay
motion. After having reviewed legal briefs submitted by the parties and oral
argument, the Bankruptcy Court denied the stay motion.
On May 31, 1996 Customs filed in the United States District Court for the
District of Delaware an emergency motion for a stay pending the appeal of the
Confirmation Order and related memorandum of law. The Company filed an
opposition to the stay motion and related memorandum of law. On or about October
24, 1996, the District Court stay motion was denied as moot. On or about July
10, 1996 Customs filed its brief in support of its appeal of the order
confirming the Plan of Reorganization. The Company's brief was filed on July 24,
1996.
On June 28, 1996, Customs filed two proofs of claim, in the amounts of
$2,482,081.00 and $358,255.74, in the Bankruptcy Court against the Company.
Customs alleges that these sums are owed to Customs for improperly paid drawback
claims. A drawback claim is made by the Company to obtain a refund of previously
paid duties on imported parts that have been incorporated into exported
products. On August 26, 1996, the Company objected to these two proofs of claim,
seeking the disallowance of the claims in their entirety. In the event that the
Customs's claims are allowed, a fund has been created in the United States
District Court for the Northern District of California sufficient to pay the
claims.
On or about November 1, 1996, Customs filed a motion to defer the resolution
of its claims to the Court of International Trade and a motion for permission to
resolve the Company's pending administrative protests. On November 15, 1996, the
Company filed a motion for summary judgment seeking to disallow Customs claims
in their entirety. The summary judgment motion is still pending.
On or about May 7, 1997, the Bankruptcy Court granted Customs's motions to
resolve the Company's administrative protests and to defer the resolution of
Customs's claims to the Court of International Trade. On or about May 16, 1997,
the Company filed a notice of appeal from the May 7, 1997 order of the
Bankruptcy Court. In June 1997, reorganized Anacomp and Customs reached an
agreement in principle to settle Customs's claims for $2.48 million in
consideration for a general release of, among others, reorganized Anacomp and
its sureties and a dismissal of all pending appeals, subject to additional
terms, documentation and Bankruptcy Court approval.
CONTRACT CLAIM
In September 1996, Smith Barney Inc. ("Smith Barney") filed suit in the
United States District Court for the Northern District of California seeking
approximately $2.3 million in additional fees which Smith Barney alleges it
earned for services Smith Barney provided in connection with the Company's
financial restructuring. The Company intends to vigorously defend against the
claim.
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MANAGEMENT
The current directors and executive officers of the Company, and their ages
and positions are listed in the following table.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ralph W. Koehrer..................................... 52 President, Chief Executive Officer and Director
Donald L. Viles...................................... 51 Executive Vice President and Chief Financial Officer
Jeffrey R. Cramer.................................... 43 Senior Vice President--Business Development
Ray L. Dicasali...................................... 48 Senior Vice President and Chief Technology Officer
Barry L. Kasarda..................................... 53 Senior Vice President--Operations
Kevin M. O'Neill..................................... 43 Senior Vice President--Global Marketing
William C. Ater...................................... 57 Vice President, Chief Administrative Officer and
Secretary
Jeffrey S. Withem.................................... 37 Vice President--Planning and Communications and Chief
of Staff
Thomas L. Brown...................................... 41 Vice President and Treasurer
K. Gordon Fife....................................... 51 Vice President--Tax
George C. Gaskin..................................... 38 Vice President--Legal and Assistant Secretary
Hasso Jenss.......................................... 53 President--European Group
Richard V. Keele..................................... 47 President--Data/Ware Group
Gary M. Roth......................................... 55 President--International Group
Thomas R. Simmons.................................... 50 President--U.S. Group
Peter Williams....................................... 44 President--Magnetics Group
Richard D. Jackson................................... 60 Co-Chairman of the Board
Lewis Solomon........................................ 63 Co-Chairman of the Board
Talton R. Embry...................................... 50 Director
Darius W. Gaskins, Jr................................ 59 Director
Jay P. Gilbertson.................................... 37 Director
George A. Poole, Jr.................................. 65 Director
</TABLE>
The business experience of each director and executive officer for the past
five years is described below. The current directors of the Company were elected
February 3, 1997 and will hold office until the next annual meeting of
stockholders of the Company. Each executive officer is elected for a term of one
year and holds office until his successor is chosen and qualified or until his
death, resignation or removal.
RALPH W. KOEHRER was elected Chief Executive Officer and Director (effective
May 1, 1997) on April 29, 1997 and President (effective January 6, 1997) on
December 10, 1996. Prior to joining the Company, Mr. Koehrer was with Automatic
Data Processing, Inc. ("ADP") for eleven years, most recently as Corporate Vice
President of ADP and as President of ADP's Information and Processing Services
division.
DONALD L. VILES was elected Executive Vice President and Chief Financial
Officer effective March 1, 1996. From October 1985 to March 1996, he served as
Vice President and Controller.
JEFFERY R. CRAMER joined Anacomp in July 1996 with the Company's acquisition
of CPI, and was elected Senior Vice President--Business Development on February
3, 1997. Prior to joining Anacomp, Mr. Cramer had served as President of CPI for
more than the past five years.
RAY L. DICASALI was elected Senior Vice President and Chief Technology
Officer on June 3, 1996. From 1993 to 1996, Mr. Dicasali served as Senior Vice
President of Technology and Chief Information Officer of
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Flexel. From 1989 to 1993 Mr. Dicasali was Senior Vice President and Chief
Information Officer of Dun and Bradstreet Software.
BARRY L. KASARDA was elected Senior Vice President--Operations on December
10, 1996. From 1993 to 1996, he served as Vice President of Materials. Prior to
joining the Company, Mr. Kasarda served as Vice President and General Manager of
the ABEX Division of Parker Hannifin Corporation from 1989 to 1993.
KEVIN M. O'NEILL was elected Senior Vice President--Global Marketing on June
3, 1996. Mr. O'Neill had previously served as Vice President--Global Marketing
from 1995 until June 1996. From 1994 to 1995, Mr. O'Neill served as Vice
President of Marketing, Strategic Resellers Group. Prior to joining the Company,
Mr. O'Neill served as Senior Director, Marketing & Product Development for
Fujitsu-ICL Systems, Inc. from 1982 to 1994.
WILLIAM C. ATER was elected Vice President and Chief Administrative Officer
in February 1988. He has served as Secretary since March 1985.
JEFFREY S. WITHEM was elected Vice President, Planning and Communications
and Chief of Staff on June 3, 1996. Mr. Withem was Vice President--Strategic
Planning and Corporate Communications from October 1995 to June 1996. From 1993
to 1995, Mr. Withem served as Vice President--Marketing, for the Company's
Magnetics Group. Prior to that, he was Marketing Communications Manager for
Worldwide Marketing for the Company from 1990 to 1992.
THOMAS L. BROWN was elected Vice President and Treasurer on May 19, 1996.
From January 1995 to April 1996, Mr. Brown served as Corporate Controller of
Hurco Companies, Inc. Mr. Brown had previously served as Assistant Vice
President--Financial Reporting and Analysis for the Company from March 1991.
K. GORDON FIFE was elected Vice President--Tax in October 1985.
GEORGE C. GASKIN was elected Vice President--Legal and Assistant Secretary
on June 3, 1996. From June 1990 to June 1996, Mr. Gaskin served as Corporate
Counsel and Assistant Secretary.
RICHARD V. KEELE joined Anacomp in January 1997 with the Company's
acquisition of Data/Ware, and was elected President--Data/Ware Group on February
3, 1997. Mr. Keele had previously served as President of Data/Ware for more than
the past five years.
HASSO JENSS was elected President--European Group effective October 1, 1995.
Mr. Jenss served as Vice President--European Micrographics from November 1993 to
September 1995. Prior to that, he served from October 1989 to October 1993 as
Managing Director of Anacomp's German subsidiary.
GARY M. ROTH was elected President--International Group, effective October
1, 1995. Previously, Mr. Roth served as Vice President--Americas/Asia Division
from November 1992 to September 1995. From October 1991 to October 1992, he
served as Manager--LAAP/Canada Operations. From October 1988 to October 1991, he
served as Vice President--Data Systems Division.
THOMAS R. SIMMONS was elected President--U.S. Group, effective October 1,
1995. Previously, Mr. Simmons served as Vice President, Direct Sales
Division--East from November 1994 to September 1995. Prior to that, he served as
Vice President--Information Systems Division from November 1991 to November
1994. He served from 1987 to 1991 as Vice President--Micrographics Services
Division.
PETER WILLIAMS was elected President--Magnetics Group, effective October 1,
1995. Previously, he served as General Manager--Magnetics European Group from
1993 to September 1995. Prior to that, he served from 1990 to 1993 as Vice
President, Wales Operations--Magnetics.
TALTON R. EMBRY has served as a director since June 4, 1996. Mr. Embry has
been Chairman and Chief Investment Officer of Magten Asset Management
Corporation ("Magten"), which is an investment advisory firm, since 1978. Mr.
Embry is also a director of Capsure Holdings Corp., Varco International
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Inc., TSX Corporation, Combined Broadcasting, Inc., BDK Holdings, Inc.,
Thermadyne Holdings Corp. and Revco Drug Stores. In July 1992, Mr. Embry was
elected Co-Chairman of the Board of Directors of Revco Drug Stores.
On September 9, 1993, Magten Asset Management Corp. and Talton R. Embry,
without admitting or denying the allegations in a complaint by the Commission,
consented to the entry of judgments enjoining them from violating (and, in the
case of Mr. Embry, aiding and abetting violations of) anti-fraud and other
provisions of the Exchange Act, the Investment Advisor's Act of 1940, as
amended, and the Investment Company Act of 1940, as amended. The final judgment
to the action, SECURITIES AND EXCHANGE COMMISSION V. TALTON R. EMBRY AND MAGTEN
ASSET MANAGEMENT CORP., 93 Civ. 6294 (LMM) (filed September 9, 1993 S.D.N.Y.),
was entered on September 14, 1993.
The Commission's complaint alleged principally that Mr. Embry failed to
advise his clients of certain personal and proprietary trades relevant to the
clients' holdings and to comply with certain reporting requirements. As part of
the settlement, Mr. Embry made a $1 million payment for the benefit of certain
of Magten's clients.
At the same time, Mr. Embry, without admitting or denying the allegations in
an order filed by the Commission, settled a parallel Commission administrative
action against Mr. Embry. The administrative proceeding, the MATTER OF TALTON R.
EMBRY, Administrative Proceeding File No. 3-8153, was commenced by the
Commission on September 16, 1993. In the settlement, Mr. Embry agreed to the
appointment, for a period of five years, of an independent consultant approved
by the Commission to oversee Mr. Embry's personal securities transactions and to
conduct biannual compliance audits of Magten. Gerald Rath, Esq. of the law firm
of Bingham Dana & Gould, Boston, Massachusetts, has been appointed and approved
as the independent consultant.
On February 26, 1996, Magten and the Maryland Securities Commissioner
entered into a consent order whereby Magten paid a fine of $1,500. The Maryland
Securities Commissioner alleged that Magten effected investment advisory
transactions in Maryland prior to its registration as a Maryland investment
adviser. Magten is currently registered as an investment adviser in Maryland,
and its activities are not restricted.
DARIUS W. GASKINS, JR. has served as a director since June 4, 1996. Mr.
Gaskins has been a partner of High Street Associates, Inc. since 1991. Mr.
Gaskins also serves as a director of UNR Industries, Inc. and Northwestern Steel
and Wire Company.
JAY P. GILBERTSON has served as a director since June 4, 1996. Mr.
Gilbertson has been the Chief Financial Officer of HBO & Company since April
1993. From December 1991 until April 1993, he served as Corporate Controller of
HBO & Company.
RICHARD D. JACKSON has served as a director since June 4, 1996, and was
elected Co-Chairman of the Board effective May 1, 1997. Mr. Jackson has been a
consultant since 1995. He joined First Financial Management Corporation in 1993
as Chief Operations Officer and Senior Executive Vice President. He was elected
Vice Chairman of First Financial Management Corporation in February 1995 and
served in that position until August 1995. From 1990 to 1993, Mr. Jackson served
as Vice Chairman and Chief Executive Officer of the Georgia Federal Bank.
GEORGE A. POOLE, JR. has served as a director since June 4, 1996. Mr. Poole
has been a private investor for more than the past five years and serves as a
director of US Home Corporation, Bucyrus International, Inc. and The Bibb
Company.
LEWIS SOLOMON has served as a director since June 4, 1996 and was elected
Co-Chairman of the Board effective May 1, 1997. Mr. Solomon has been Chairman of
G&L Investments for the past five years. He also serves as a director of
Anadigics, Inc., Computer Products, Inc., Cybernetics Services, Inc., ICTV,
Inc., Terayon Corporation and TSX Corporation.
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EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth as to the Company's
Chief Executive Officer and the other four most highly compensated executive
officers (collectively, the "Named Executive Officers") all compensation awarded
to, earned by, or paid to the Named Executive Officers for all services rendered
in all capacities to the Company and its subsidiaries for fiscal 1996, 1995 and
1994, except as otherwise specifically noted.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG
TERM
COMPEN-
SATION
-----------
ANNUAL COMPENSATION
--------------------------------- AWARDS
OTHER -----------
ANNUAL SECURITIES ALL OTHER
FISCAL COMPEN- UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION(1) OPTIONS(2) SATION
- ---------------------------------------- ----------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
P. Lang Lowrey, III..................... 1996 $ 450,000 $ 742,152 $ 136,557(3) 40,000 --
Chairman of the Board, Chief Executive 1995 289,692 87,750 -- 375,000 --
Officer and President 1994 147,500 180,836 -- -- --
1996 206,500 41,595 -- 25,000 3,303(5)(6)
Thomas R. Simmons....................... 1995 206,500 66,374 -- -- 1,680(6)
President, U.S. Group 1994 147,500 137,011 -- -- 2,082(5)(6)
William C. Ater......................... 1996 168,000 37,544 134,697(4) 25,000 1,000(5)
Vice President, Chief Admin- 1995 154,000 21,975 -- -- -- 1,000(5)
istrative Officer and Secretary 1994 110,000 114,981 -- --
Donald L. Viles......................... 1996 157,446 45,980 -- 25,000 1,000(5)
Executive Vice President and 1995 167,846 5,000 -- -- --
Chief Financial Officer 1994 81,000 85,265 -- -- 1,000(5)
1996 170,352 29,576 -- 25,000 --
Hasso Jenss............................. 1995 172,771 72,006 -- -- --
President, European Group 1994 109,224 87,553 -- -- --
</TABLE>
- ------------------------
(1) Except as noted below, the aggregate amount of perquisites and other
personal benefits, securities or property, given to each Named Executive
Officer valued on the basis of aggregate incremental cost of the Company did
not exceed the lesser of $50,000 or 10% of the total of annual salary and
bonus for each such officer during fiscal 1996, 1995 and 1994.
(2) All stock option grants prior to June 4, 1996 were canceled as of that date.
(3) Includes $63,894 in relocation expenses and $62,410 in income tax assistance
for certain relocation expense reimbursements.
(4) Includes $69,786 in relocation expenses and $58,242 in income tax assistance
for certain relocation expense reimbursements.
(5) These figures include a $1,000 contribution per year made by the Company to
the Anacomp Savings Plus Plan for fiscal 1996 and fiscal 1994 for each of
Messrs. Simmons, Ater and Viles.
(6) Includes, $2,303, $1,680 and $1,082 in imputed interest in fiscal 1996, 1995
and 1994, respectively, on Mr. Simmons' loan from the Company. The interest
is calculated on the basis of the applicable federal rate computed by the
Internal Revenue Service.
STOCK OPTION PLANS
On July 22, 1996, the Board of Directors approved the Anacomp, Inc. 1996
Restructure Recognition Stock Incentive Plan (the "Recognition Plan"). The
Company has reserved 1,047,750 shares of Common Stock for issuance to employees
and officers pursuant to stock options or restricted stock. The exercise
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<PAGE>
price per common share under an option granted pursuant to the Recognition Plan
is determined by the Compensation Committee of the Board of Directors (the
"Committee"), which administers the Recognition Plan. Options lapse after ten
years or upon termination of employment. Common Stock granted as restricted
stock will be subject to restrictions on transferability and any other
restrictions as the Committee may impose.
On February 3, 1997, the Company's shareholders approved the Anacomp, Inc.
1997 Qualified Employee Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan allows qualified employees to purchase shares of Common
Stock at the lower of 85% of the fair market value at the date of purchase or
85% of the fair market value on the first day of the offering period. A maximum
of 500,000 shares of Common Stock is available for purchase under the Stock
Purchase Plan. No employee may be granted an option under the Stock Purchase
Plan or any other qualified employee stock purchase plan that would permit such
employee's rights to accrue at a rate which exceeds $25,000 of fair market value
(determined at the offering date) of the Common Stock for each calendar year in
which the option is outstanding. The administrator of the Stock Purchase Plan
establishes a book entry account in the name of each participant to which
deductions from the participant's payroll are credited. Rights and options
granted under the Stock Purchase Plan are not transferable and are exercisable
only by the participant during his or her lifetime.
On February 3, 1997, the Company's shareholders approved the Anacomp, Inc.
1996 Long-Term Incentive Plan (the "Incentive Plan"). The Company has reserved
1,400,000 shares of Common Stock for issuance to employees, officers and
directors pursuant to stock options, stock appreciation rights ("SARs"),
restricted stock awards and other stock-based awards. The maximum number of
shares of Common Stock with respect to one or more options and/or SARs that may
be granted under the Incentive Plan during any one calendar year or to any one
participant is 500,000 shares; the maximum fair market value of any awards other
than options or SARs during any one calendar year is $2,000,000. The exercise
price per common share under an option granted pursuant to the Incentive Plan is
determined by the Committee, which administers the Incentive Plan. Options lapse
after ten years or three months after termination of employment. Upon exercise
of a SAR granted under the Incentive Plan, the participant shall receive the
excess, if any, of the fair market value of one share of Common Stock on the
date of exercise over the grant price of the SAR, as determined by the
Committee, which shall not be less than the fair market value of one share on
the date of grant. Common Stock granted as restricted stock will be subject to
restrictions on transferability and any other restrictions the Committee may
impose. The Committee is also authorized to grant any other awards that are
payable in, valued by reference or otherwise based on or related to shares of
Common Stock.
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<PAGE>
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL GRANT- ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS DATE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE MARKET 10-YEAR OPTION TERM(1)(2)
OPTIONS EMPLOYEES IN PRICE PRICE EXPIRATION -------------------------------
NAME GRANTED FISCAL YEAR PER SHARE PER SHARE DATE 0% 5% 10%
- ---------------------------- ----------- --------------- ----------- ----------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
P. Lang Lowrey.............. 40,000(3) 4.22% $ 4.63 $ 8.125 08/22/2006 139,800 344,156 657,744
Thomas R. Simmons........... 25,000(3) 2.64 4.63 8.125 08/22/2006 87,375 215,098 411,090
William C. Ater............. 25,000(3) 2.64 4.63 8.125 08/22/2006 87,375 215,098 411,090
Donald L. Viles............. 25,000(3) 2.64 4.63 8.125 08/22/2006 87,375 215,098 411,090
Hasso Jenss................. 25,000(3) 2.64 4.63 8.125 08/22/2006 87,375 215,098 411,090
</TABLE>
- ------------------------
(1) The figures shown are potential future undiscounted values based on actual
option term and annual compounding at the applicable rate. Potential
realizable value equals stock price at end of option term less exercise
price, times the number of options granted.
(2) If the assumed annual rate of stock price appreciation of 0%, 5% or 10% per
year should occur, the market value per share of Common Stock at the end of
the ten-year option term would be $8.125, $13.2339 or $21.0736,
respectively.
(3) Of the options granted, one-fourth vest on June 30, 1997, one-fourth vest on
June 30, 1998, one-fourth vest on June 30, 1999 and one-fourth vest on the
earlier of (a) June 30, 2003 or (b) the date, if any, on which it is first
determined that the Company has met at least 95% of its EBITDA goal for
fiscal 1997, 1998 and 1999 combined, as such goal is described in the
Company's Third Amended Joint Plan of Reorganization. In certain
circumstances, pursuant to employment contracts, options may vest sooner
than indicated.
The following table sets forth information regarding all options exercised
during fiscal 1996 or held at September 30, 1996 by the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-
ACQUIRED VALUE OPTIONS AT FY-END MONEY OPTIONS AT FY-END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ------------------------------------- ----------------- ------------- ----------------------- --------------------------
<S> <C> <C> <C> <C>
P. Lang Lowrey....................... 0 $ 0 0/40,000 $ 0/$144,800
Thomas R. Simmons.................... 0 0 0/25,000 0/ 90,500
William C. Ater...................... 0 0 0/25,000 0/ 90,500
Donald L. Viles...................... 0 0 0/25,000 0/ 90,500
Hasso Jenss.......................... 0 0 0/25,000 0/ 90,500
</TABLE>
- ------------------------
(1) Based on the September 30, 1996 closing price of $8.25 on the Nasdaq
National Market.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held 24 meetings in fiscal 1996, three
of them subsequent to June 4, 1996. No incumbent director attended less than 75%
of the meetings held by the Board of Directors and the committees on which he
served. The Board of Directors of the Company has an Audit Committee, a
Compensation Committee and an Executive Committee. The Board of Directors does
not have a nominating committee but has assigned the functions of such a
committee to the Compensation Committee.
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<PAGE>
The members of the Company's Audit Committee during fiscal 1996 were, until
June 4, 1996, Messrs. Roger S. Palamara, Richard E. Neal, Paul G. Roland and
Frederick W. Zuckerman and, from June 4, 1996 to the present, Messrs. Poole
(Chairman), Gilbertson and Solomon. The Audit Committee met one time during
fiscal 1996. The principal duties assigned to the Audit Committee are to
recommend to the Board of Directors the accounting firm to be selected as
independent accountants of the Company and to meet with the Company's
independent accountants after completion of the annual audit and their rendering
of their opinion as a result thereof, to discuss their comments thereon and the
Company's accounting methods and procedures as the Audit Committee deems
appropriate.
The members of the Company's Compensation Committee during fiscal 1996 were,
until June 4, 1996, Messrs. Palamara, Neal, Roland, Zuckerman and Clark A.
Johnson and, from June 4, 1996 to the present, Messrs. Embry (Chairman), Gaskins
and Jackson. The Compensation Committee met five times during fiscal 1996. The
Compensation Committee determines the compensation and benefits of the Chief
Executive Officer and other executive officers of the Company. It is also
responsible for evaluating the performance of existing members of the Board of
Directors and for making recommendations on new candidates for membership on the
Board of Directors. The Compensation Committee also oversees the Company's stock
option, employee stock purchase and other stock-based plans.
The members of the Company's Executive Committee during fiscal 1996 were,
from June 4, 1996 to April 30, 1997, Messrs. Jackson (Chairman), Lowrey and
Solomon. Effective May 1, 1997, Mr. Koehrer replaced Mr. Lowrey. The Executive
Committee met one time during fiscal 1996. The Executive Committee has and may
exercise all the powers of the Board of Directors during the intervals between
meetings of the Board of Directors. It is also responsible for reviewing
possible acquisitions, mergers, joint ventures, partnerships and other entries
into new technologies.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive $1,250 for each
directors and committee meeting attended in person, $1,000 for each such meeting
attended by telephone and an annual retainer of $12,500. Employee directors
receive no fees. Each of the non-employee directors was granted options in
November 1996 to purchase 5,000 shares of Common Stock for such director's first
year of service and in February 1997 to purchase 20,000 shares of Common Stock
vesting in equal yearly installments over four years. In addition, effective
June 4, 1996, the non-employee members of the Executive Committee received a
retainer of $40,000 per year, payable $10,000 each quarter, which, as of May 1,
1997, was increased to $60,000 per year payable $15,000 each quarter. From
November 1995 to June 1996, Paul G. Roland as Chairman of the Board of Directors
received additional compensation of $3,500 per month, with a maximum total
annual compensation of $75,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board of Directors was,
during fiscal 1996, an officer or employee of the Company or any of its
subsidiaries, or was formerly an officer of the Company or any of its
subsidiaries, or had any relationships requiring disclosure by the Company.
EMPLOYMENT CONTRACTS
With the exception of Mr. Jenss, the Named Executive Officers who continue
to be employed by the Company are party to employment agreements with the
Company. Set forth below is a brief description of each such agreement.
P. LANG LOWREY III resigned as Chairman of the Board, Chief Executive
Officer and Director effective April 30, 1997. Mr. Lowrey entered into a
consulting agreement with the Company, effective as of May 1, 1997, with a term
through September 30, 2000, which among other things, terminated the Amended and
Restated Employment Agreement, effective October 1, 1996, between Mr. Lowrey and
the Company and
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<PAGE>
provided for the payment of a $1 million severance allowance to Mr. Lowrey.
Pursuant to his consulting agreement, Mr. Lowrey will provide consulting
services to the Company under the direction of the Chief Executive Officer on a
full-time basis through September 30, 1997 and for up to 80 hours per month
thereafter. Mr. Lowrey also entered into a covenant not to compete with the
Company for a period of one year following any termination of the consulting
agreement and not to solicit the Company's customers for a period of two years
following any termination of the consulting agreement.
Pursuant to the terms of his employment agreement and consulting agreement
for their applicable effective periods, Mr. Lowrey's compensation plan for
fiscal 1997 is composed of (a) a base salary/ consulting fee of $500,000, (b) an
area profit bonus up to $133,333 paid monthly equal to year-to-date actual
performance of the Company's adjusted net income as a percentage of year-to-date
quota for the Company's adjusted net income, (c) a strategic focus bonus up to
$100,000 paid quarterly based on defined strategic corporate revenue goals, (d)
an asset management bonus up to $50,000 paid quarterly based on the Company's
asset management targets and (e) a corporate EBITDA bonus up to $50,000 paid
after year-end and, with the exception of the asset management bonus, may be
greater if goals are exceeded with a maximum possible total performance bonus of
$616,666.
Mr. Lowrey also has been granted, in addition to the options described above
under "Option Grants in Fiscal 1996," options under the 1996 Long-Term Incentive
Plan to acquire 190,679 shares of Common Stock at an exercise price of $7.95 per
share (the fair market price on October 1, 1996, the first day of his employment
under his employment agreement), of which options to acquire 130,679 shares were
canceled and, thus, options to acquire 60,000 shares remain pursuant to the
consulting agreement.
RALPH W. KOEHRER entered into an Employment Agreement with the Company,
effective as of January 6, 1997, with an initial term of two years and
automatically renewable thereafter for additional one-year terms. Mr. Koehrer
also entered into a covenant not to compete with the Company while an employee,
or as a consultant to the Company after any termination of employment, and not
to solicit the Company's customers for a period of two years following any
termination of employment.
Pursuant to the terms of his agreement, Mr. Koehrer's compensation plan for
fiscal 1997 is composed of (a) a base salary of $240,000, which was raised to
$300,000 effective May 1, 1997 (b) a maximum annual bonus opportunity of
$200,000, payable monthly, quarterly or after year-end and (c) a one-time
relocation bonus of $150,000, one-half payable on January 6, 1997 and one-half
payable upon his permanent relocation to Poway, California.
Mr. Koehrer also has been granted options under the 1996 Long-Term Incentive
Plan to acquire 85,000 shares of Common Stock at an exercise price of $8.4375
per share (the fair market price on January 6, 1997) and 72,500 shares of Common
Stock at an exercise price of $12.50 per share (the fair market price on April
29, 1997). Pursuant to his agreement, Mr. Koehrer is to be awarded options to
acquire an additonal 42,500 shares of Common Stock after completing two years of
employment.
Mr. Koehrer's employment agreement further provides that, in the event of a
merger or consolidation where the Company is not the surviving company, or a
transfer of all or substantially all of the Company's assets, in either case if
the surviving or transferee company does not agree to be bound by the terms of
the employment agreement, or in the event of a change in control of the Company,
Mr. Koehrer may elect to treat his employment agreement as terminated and
receive a Severance Allowance of, INTER ALIA, $200,000 during the first year of
the agreement and $400,000 in the second year or any renewal term thereafter,
which shall be in addition to the regular compensation and benefits that he is
entitled to receive up to the date on which his employment terminates. In
addition, Mr. Koehrer is entitled to receive such severance allowance and the
accelerated vesting of options under a variety of other circumstances, but
excluding termination for cause or his voluntary resignation upon 90 days
advance notice.
THOMAS R. SIMMONS entered into a three-year employment agreement with the
Company which expired on September 30, 1995, and which was subsequently renewed
for successive one-year terms
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expiring on September 30, 1996 and September 30, 1997. Mr. Simmons also entered
into a covenant not to compete with the Company for a period of two years
following any termination of employment and not to solicit the Company's
customers for a period of two years following any termination of employment.
Mr. Simmons' compensation plan for fiscal 1997 is composed of (a) a base
salary of $206,500, (b) an area profit bonus up to $44,477 paid monthly equal to
year-to-date actual performance of divisional EBIT as a percentage of
year-to-date quota, (c) a strategic focus bonus up to $33,358 paid quarterly
based on defined divisional strategic products and services revenue, (d) an
asset management bonus up to $16,679 paid quarterly based on the Company's asset
management targets and (e) a corporate EBITDA bonus up to $16,679 paid after
year-end based on the Company's EBITDA goal. All bonuses paid on a monthly or
quarterly basis are adjusted at year-end and, with the exception of the asset
management bonus, may be greater if goals are exceeded with a maximum possible
total performance bonus of $189,028.
Mr. Simmons' employment agreement provides that, in the event of a merger or
consolidation or a transfer of substantially all of the Company's assets or a
change in control of the Company, Mr. Simmons will receive a severance allowance
equal to his prior twelve months compensation if he is subsequently terminated
without cause or if he deems a termination to have occurred due to a demotion,
transfer or reduction in compensation. Mr. Simmons is also entitled to such
severance allowance if he is terminated without cause by the Company or if he
deems a termination to have occurred due to a demotion, transfer or reduction in
compensation.
In an addendum to Mr. Simmons' employment agreement entered into on February
24, 1997, the Company agreed to forgive a $35,000 outstanding loan made to Mr.
Simmons by the Company and to pay Mr. Simmons' additional tax liability incurred
due to such forgiveness. In exchange, Mr. Simmons agreed to relocate to San
Diego, California no later than September 30, 1997. However, if Mr. Simmons
voluntarily resigns or is terminated with cause prior to such date, Mr. Simmons
will pay the Company the amount of the loan plus the amount paid him for his
additional tax liability. The addendum also provides that if Mr. Simmons is
entitled to termination payments set forth in the employment agreement, the
Company will enter into a one-year consulting agreement with Mr. Simmons.
WILLIAM C. ATER entered into a three-year employment agreement with the
Company which expired on September 30, 1995, and which was subsequently renewed
for successive one-year terms expiring on September 30, 1996 and September 30,
1997. Such agreement was amended on June 25, 1996. Mr. Ater also entered into a
covenant not to compete with the Company for a period of one year following any
termination of employment and not to solicit the Company's customers for a
period of two years following any termination of employment.
Mr. Ater's compensation plan for fiscal 1997 is composed of (a) a base
salary of $168,000, (b) an area profit bonus up to $36,185 paid monthly equal to
year-to-date actual performance of the Company's adjusted net income as a
percentage of year-to-date quota for the Company's adjusted net income, (c) a
strategic focus bonus up to $27,139 paid quarterly based on defined strategic
corporate revenue goals, (d) an asset management bonus up to $13,569 paid
quarterly based on the Company's asset management targets and (e) a corporate
EBITDA bonus up to $13,569 paid after year-end based on the Company's EBITDA
goal. All bonuses paid on a monthly or quarterly basis are adjusted at year-end
and, with the exception of the asset management bonus, may be greater if goals
are exceeded with a maximum possible total performance bonus of $153,786.
Mr. Ater's employment agreement provides that, in the event of a merger or
consolidation or a transfer of substantially all of the Company's assets or a
change in control of the Company, Mr. Ater will receive a severance allowance
equal to his prior twenty-four months compensation if he is subsequently
terminated without cause or if he deems a termination to have occurred due to a
demotion, transfer or reduction in compensation. Mr. Ater is also entitled to
such severance allowance if he is terminated without cause by the Company or if
he deems a termination to have occurred due to a demotion, transfer or reduction
in compensation.
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DONALD L. VILES entered into an employment agreement with the Company,
effective February 15, 1996, which expires on September 30, 1998. Mr. Viles also
entered into a covenant not to compete with the Company for a period of one year
following any termination of employment and not to solicit the Company's
customers for a period of two years following any termination of employment.
Mr. Viles' compensation plan for fiscal 1997 is composed of (a) a base
salary of $168,000, (b) an area profit bonus up to $36,185 paid monthly equal to
year-to-date actual performance of the Company's adjusted net income as a
percentage of year-to-date quota for the Company's adjusted net income, (c) a
strategic focus bonus up to $27,139 paid quarterly based on defined strategic
corporation revenue goals, (d) an asset management bonus up to $13,569 paid
quarterly based on the Company's asset management targets and (e) a corporate
EBITDA bonus up to $13,569 paid after year-end based on the Company's EBITDA
goal. All bonuses paid on a monthly or quarterly basis are adjusted at year end
and, with the exception of the asset management bonus, may be greater if goals
are exceeded with a maximum possible total performance bonus of $153,786.
Mr. Viles' employment agreement provides that, in the event of a merger or
consolidation or a transfer of substantially all of the Company's assets or a
change in control of the Company or a discontinuation of the Company's business,
Mr. Viles will receive a severance allowance equal to his prior twenty-four
months compensation if he elects to treat any such occurrence as a termination
of his agreement. Mr. Viles is also entitled to such severance allowance if he
is terminated by mutual agreement or without cause by the Company or if he deems
a termination to have occurred due to a demotion, transfer or reduction in
compensation.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
As discussed above, the employment agreements of Messrs. Lowrey, Koehrer,
Simmons, Ater and Viles provide for certain payments in the event of a
termination of employment or a change of control of the Company. Mr. Jenss is
entitled to termination pay and other benefits as provided by applicable German
labor laws.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 15, 1997,
concerning beneficial ownership of the Common Stock by (a) each stockholder
known by the Company to own beneficially more than 5% of the outstanding shares
of Common Stock, (b) each of the Company's directors, (c) each Named Executive
Officer and (d) all directors and executive officers of the Company as a group.
Unless otherwise noted in the footnotes to the table, the stockholders named in
the table have sole voting and investment power with respect to all shares of
Common Stock indicated as being beneficially owned by the stockholder.
<TABLE>
<CAPTION>
SHARES OF STOCK
BENEFICIALLY PERCENT
NAME OWNED OF CLASS
- ----------------------------------------------------------------------------------- ---------------- -----------
<S> <C> <C>
Magten Asset Management Corp....................................................... 4,671,158(1) 34.1%
35 East 21st Street
New York, New York 10010
Franklin Resources, Inc............................................................ 1,444,670(2) 10.5
777 Mariners Island Boulevard
San Mateo, California 94403
Merrill Lynch & Co., Inc........................................................... 1,407,670(3) 10.3
World Financial Center, North Tower
250 Vesey Street
New York, New York 10281
State Street Research & Management Company......................................... 1,082,467(4) 7.9
One Financial Center
Boston, Massachusetts 02111
P. Lang Lowrey, III................................................................ 10,000(5) *
Talton R. Embry(6)................................................................. -- *
Darius W. Gaskin, Jr............................................................... 5,000(7) *
Jay P. Gilbertson.................................................................. 5,000(8) *
Richard D. Jackson................................................................. 5,830(9) *
George A. Poole, Jr................................................................ 7,500(10) *
Lewis Solomon...................................................................... 10,000(11) *
Thomas R. Simmons.................................................................. 6,250(12) *
William C. Ater.................................................................... 6,251(13) *
Donald L. Viles.................................................................... 6,335(14) *
Hasso Jenss........................................................................ 6,267(15) *
All directors and executive officers as group (23 persons)......................... 119,185(16) *
</TABLE>
- ------------------------
* Less than 1%.
(1) Magten may be deemed to be the beneficial owner of shares owned by its
investment advisory clients. Magten has shared voting power (with its
investment advisory clients and Mr. Embry) and shared dispositive power
(with its investment advisory clients and Mr. Embry) with respect to
3,733,215 and 4,671,158, respectfully, shares of the Common Stock. All of
such shares, which in the aggregate represent 34.1% of the Company's voting
securities, are beneficially owned by the investment advisory clients of
Magten and for which Magten disclaims beneficial ownership. The following
investment advisory clients of Magten have an interest in more than 5% of
the shares of Common Stock: General Motors Employees Domestic Group Pension
Trust, Bankers Trust as Trustee for the Hughes Master Retirement Trust, and
Los Angeles Fire and Police Pension Systems--Fund 2525.
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(2) Franklin Resources, Inc. has sole voting power and shared dispositive power
with respect to 1,444,670 shares of the Common Stock, for which Franklin
disclaims beneficial ownership.
(3) Merrill Lynch & Co., Inc. has shared voting power and shared dispositive
power with respect to 1,407,670 shares of the Common Stock, for which
Merrill Lynch disclaims beneficial ownership.
(4) Includes 32,284 shares issuable upon the exercise of the Company's Common
Share Warrants. State Street Research & Management Company is a wholly-owned
subsidiary of Metropolitan Life Insurance Company. State Street Research &
Management Company and Metropolitan Life Insurance Company disclaim
beneficial ownership of all of the above shares.
(5) Represents 10,000 shares issuable upon the exercise of stock options.
(6) Mr. Embry is a director, executive officer and sole stockholder of Magten
Asset Management Corp., a registered investment advisor. Mr. Embry may be
deemed to be the beneficial owner of shares owned by Magten and its
investment advisory clients as discussed in Note (1) above. Mr. Embry, as
trustee of four pension trusts for the benefit of current and former
employees of Magten (including himself), also has sole voting power and
dispositive power with respect to 53,347 shares of Common Stock held by such
trusts and sole voting and investment power with respect to 2,612 of Common
Stock held by his minor children. Mr. Embry disclaims beneficial ownership
of all of the above shares.
(7) Represents 5,000 shares issuable upon the exercise of stock options.
(8) Represents 5,000 shares issuable upon the exercise of stock options.
(9) Includes 5,000 shares issuable upon the exercise of stock options.
(10) Includes 5,000 shares issuable upon the exercise of stock options.
(11) Includes 5,000 shares issuable upon the exercise of stock options.
(12) Represents 6,250 shares issuable upon the exercise of stock options.
(13) Represents one share issuable upon the exercise of the Company's Common
Share Warrants and 6,250 shares issuable upon the exercise of stock options.
(14) Includes 40 shares issuable upon the exercise of the Company's Common Share
Warrants and 6,250 shares issuable upon the exercise of stock options.
(15) Represents seventeen shares issuable upon the exercise of the Company's
Common Share Warrants and 6,250 shares issuable upon the exercise of stock
options.
(16) Includes 60 shares issuable upon the exercise of the Company's Common Share
Warrants and 108,750 shares issuable upon the exercise of stock options.
Excludes shares beneficially owned by Mr. Embry, as to which Mr. Embry
disclaims beneficial ownership. See Note (6) above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships and related transactions that require disclosure.
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DESCRIPTION OF THE SENIOR SECURED DEBT
The following description of the Senior Secured Debt does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the agreements related to the Senior Secured Debt.
GENERAL
The Senior Secured Debt is evidenced by, among other things, the Credit and
Guarantee Agreement, dated as of February 28, 1997 (the "Credit Facility"),
among the Company, certain foreign subsidiaries of the Company, several banks
and other financial institutions (the "Senior Secured Lenders"), Lehman
Commercial Paper Inc., as arranger and syndication agent, and The First National
Bank of Chicago, as administrative agent for the Senior Secured Lenders (in its
individual capacity, "First Chicago"). The Credit Facility provides for a $55
million term loan facility (the "Term Facility") and a $25 million revolving
credit facility (the "Revolving Facility"). As of February 28, 1997, $55 million
was outstanding under the Term Facility, and no amounts were outstanding under
the Revolving Facility. Up to $10 million of the Revolving Facility is available
for loans denominated in certain foreign currencies ("Multicurrency Loans"), and
up to $10 million of the Revolving Facility is available for letters of credit.
INTEREST
The Company may elect to have loans under the Term Facility or the Revolving
Facility bear interest at (a) the Alternate Base Rate (as defined) plus 2% or
(b) the Eurodollar Rate (as defined), or in the case of Multicurrency Loans, the
Eurocurrency Rate (as defined), plus 3%. Interest is payable quarterly and at
the end of the Interest Period (as defined in the Credit Facility). The
"Alternate Base Rate" for any day means the higher of (i) the corporate base
rate of interest announced by First Chicago and (ii) the federal funds rate
published by the Federal Reserve Bank of New York on the next business day plus
1/2%. The "Eurodollar Rate" for any Interest Period means (A) the applicable
London interbank offered rate for deposits in U.S. dollars two business days
prior to the first day of the Interest Period divided by (B) one minus the
"Eurocurrency Liabilities" under Regulation D of the Board of Governors of the
Federal Reserve System. The "Eurocurrency Rate" for any Interest Period means
the rate at which First Chicago offers to place deposits in the applicable
foreign currency with first-class banks in the London interbank market two
business days prior to the first day of the Interest Period.
SECURITY AND GUARANTORS
As security for the indebtedness of the Company to the Senior Secured
Lenders, the Company has granted to them a first priority security interest in
all of its tangible and intangible assets (including intellectual property, real
property and all of the capital stock of each of the Company's direct or
indirect domestic subsidiaries and 65% of the capital stock of each of the
Company's material direct foreign subsidiaries). All of the Company's
obligations under the Senior Secured Debt are unconditionally guaranteed by the
Company's direct or indirect domestic subsidiaries.
TERM
The Term Facility is repayable in thirteen quarterly installments commencing
March 31, 1998, with the final installment due on March 31, 2001. The Revolving
Facility terminates on February 28, 2001.
CERTAIN COVENANTS
In addition to customary covenants, the Credit Facility requires that the
Company: (a) maintain certain ratios of Consolidated EBITDA (as defined in the
Credit Facility) to Consolidated Interest Expense (as defined in the Credit
Facility) and certain ratios of Consolidated Indebtedness (as defined in the
Credit Facility) to Consolidated EBITDA, (b) not incur any indebtedness other
than the Notes,
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indebtedness under the Credit Facility and certain other indebtedness, (c) not
permit any lien to exist on any of its property, assets or revenues, except the
liens in favor of the Senior Secured Lenders, existing liens and certain other
liens and (d) not to incur any guarantee obligations, except the guarantee
obligations related to the Senior Secured Debt and certain other guarantee
obligations. The Company is in compliance with all covenants under terms of the
Credit Facility.
EVENTS OF DEFAULT
The Credit Facility contains certain events of default, including, without
limitation, the following: (a) any failure by the Company or its subsidiary to
pay principal, interest or other obligations under the Credit Facility, (b) any
representation or warranty made by the Company or its subsidiaries in the Credit
Facility or related agreements proves to have been incorrect in any material
respect when made, (c) any default by the Company or its subsidiaries in the
observance or performance of covenants or other agreements contained in the
Credit Facility or related agreements, (d) certain events of bankruptcy or
insolvency of the Company or its subsidiaries, (e) the entering of a judgment or
decree against the Company or its subsidiaries involving an aggregate liability
of $2.5 million or more, which is not vacated, discharged, stayed or bonded
pending appeal within 30 days and (f) the occurrence of certain change of
control events.
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<PAGE>
DESCRIPTION OF NOTES
The Old Notes were and the Exchange Notes will be issued under the
Indenture. The following summary, which describes certain material provisions of
the Indenture and the Notes, does not purport to be complete, and is subject to
the detailed provisions of, and is qualified in its entirety by reference to,
the provisions of the Indenture and the Notes, including the definition therein
of certain terms. A copy of the Indenture may be obtained from the Company. The
terms of the Notes include those set forth in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), as in effect on the date of the Indenture. Wherever
particular provisions or definitions in the Indenture or the Notes are referred
to in this Prospectus, such provisions or definitions are incorporated by
reference. The definitions of certain capitalized terms used in the following
summary are set forth in "--Certain Definitions" below. Other capitalized terms
used but not defined in the following summary are defined in the Indenture. For
purposes of the following summary, the term "Company" refers to Anacomp, Inc.
and does not include its subsidiaries except for purposes of financial data
determined on a consolidated basis.
GENERAL
The Notes mature on April 1, 2004, and are in an aggregate principal amount
of $200,000,000. The Notes bear interest at the rate of 10 7/8% per annum
payable semi-annually on April 1 and October 1 of each year, beginning on
October 1, 1997, to the holders of record in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding March
1 or September 1, as the case may be. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months. The interest rate on the Notes
is subject to increase in certain circumstances.
Principal of, and premium, if any, and interest on, the Notes will be
payable, and the Notes are exchangeable and transferable, at an office or agency
of the Trustee at One State Street, New York, New York 10004, or such other
office or agency permitted under the Indenture. The Notes will be issued only in
fully registered form, without coupons, in denominations of $1,000 or any
integral multiple thereof.
RANKING
The Notes are general unsecured obligations of the Company and are expressly
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, including the Company's obligations under the Credit Facility
and to all indebtedness and other obligations of the Company's Subsidiaries. As
of March 31, 1997, the Company had approximately $56 million of Senior
Indebtedness, substantially all of which is secured by certain assets of the
Company and certain of its subsidiaries. The Notes will rank PARI PASSU with any
future Senior Subordinated Indebtedness and senior to all Subordinated
Indebtedness of the Company.
SUBORDINATION
The Company's payment of the principal of, interest on or any other amounts
due on the Notes is expressly subordinated in the right of payment to the prior
payment in full of Senior Indebtedness. The expressions "prior payment in full,"
"payment in full" and "paid in full" and any other similar term or phrase when
used herein with respect to Senior Indebtedness means the payment in full of
such Senior Indebtedness in cash or provision for such payment in cash or
otherwise in a manner satisfactory to the holders of the Senior Indebtedness.
Upon (i) the maturity of Senior Indebtedness, whether by lapse of time, upon
redemption or by acceleration or otherwise, or (ii) any default in the payment
of any amount due in respect of principal or interest in respect of Senior
Indebtedness, or (iii) any distribution or payment of assets or securities of
the Company upon any dissolution, winding up, liquidation or reorganization of
the Company of any kind or character, the holders of Senior Indebtedness will be
entitled to receive payment in full (or to have such payment duly provided for)
of the principal thereof and interest due thereon before the holders of the
Notes are entitled to receive any payment on account of the principal of or
interest on the Notes. During the continuance of any Default or Event of Default
(other than a Default
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or Event of Default relating to payment of principal or interest, either at
maturity, upon redemption, by declaration or otherwise) under any agreement
governing Senior Indebtedness permitting acceleration of the maturity thereof
(whether or note such acceleration has occurred) and upon giving of notice
thereof, no payment may be made on the Notes for a period of 179 days after the
notice is given, but payments may thereafter be resumed unless such payments are
then prohibited by Article 9 of the Indenture. Only one notice may be given
effect within any period of 360 consecutive days and no more than one notice may
be given with respect to any continuing Default or Event of Default. If in any
of the situations referred to above, a payment is made to the Trustee or to any
holder of Notes before all Senior Indebtedness has been paid in full or
provision has been made for such payment, the payment to the Trustee or such
holder of the Notes must be paid over to the holders of Notes or their
representative. The failure to make payment on account of principal of or other
interest on the Notes by reason of such subordination will not prevent the
occurrence of any Event of Default.
"Senior Indebtedness" means the principal of, interest (including, without
limitation, interest at the contract rate relating to such Senior Indebtedness
accruing after any proceeding or event referred to in clauses (viii) and (ix)
under "Events of Default" on, or any other amounts due with respect to, (i) the
Senior Secured Debt, (ii) any Refinancing Indebtedness Incurred in respect of
the Senior Secured Debt or in respect of any previous Refinancing Indebtedness
Incurred in respect of such Notes and (iii) any Indebtedness Incurred pursuant
to clause (a) (ii) of the first paragraph of the "Limitation on Indebtedness"
covenant. For purposes of the "Limitation on Sales of Assets and Restricted
Subsidiary Stock" covenant, the amount of consideration received by the Company
or any Restricted Subsidiary for the assumption of Senior Indebtedness by any
purchaser of the Company's property, assets or shares shall be equal to the face
value of such Senior Indebtedness.
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Indebtedness,
including the holders of the Notes, may recover less, ratably, than holders of
Senior Indebtedness.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option of
the Company prior to April 1, 2000. On and after such date, the Notes will be
redeemable at the option of the Company, in whole or in part at any time and
from time to time, on not less than 45 days' nor more than 60 days' prior notice
mailed by first-class mail to each holder's registered address, at the
redemption prices set forth below (expressed as percentage of the principal
amount), plus accrued and unpaid interest (if any) to the date of redemption
(subject to the right of the Holders of record on the relevant date to receive
interest due on the related interest payment date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2000.............................................................................. 108.156%
2001.............................................................................. 105.438%
2002.............................................................................. 102.719%
2003 and thereafter............................................................... 100.000%
</TABLE>
At any time, or from time to time, on or prior to April 1, 2000 the Company
may, at its option, use the net cash proceeds of one or more Public Equity
Offerings to redeem up to 35% of the aggregate principal amount of Notes
originally issued at a redemption price equal to 110.875% of the principal
amount thereof, plus, in each case, accrued and unpaid interest to the date of
redemption; PROVIDED that at least $130 million of the aggregate principal
amount of Notes originally issued remains outstanding after any such redemption.
In order to effect the foregoing redemption with the proceeds of any Public
Equity Offering, the Company shall make such redemption not more than 60 days
after the consummation of any such Public Equity Offering.
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As used in the preceding paragraph, "Public Equity Offering" means a public
offering of Qualified Capital Stock of the Company pursuant to a registration
statement filed with the Commission in accordance with the Securities Act.
If less than all of the Notes are to be redeemed, the Trustee shall select
by such methods as the Trustee shall deem to be fair and appropriate the
particular Notes to be redeemed or any portion thereof that is an integral
multiple of $1,000.
The Notes will not have the benefit of a sinking fund.
CHANGE OF CONTROL
Pursuant to the Indenture, a "Change of Control" means the occurrence of any
of the following events: (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than an underwriter engaged in a
firm commitment underwriting in connection with a public offering of the Voting
Stock of the Company or a Restricted Subsidiary, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person will be deemed to have "beneficial ownership" of all shares that any
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total voting power of the Voting Stock of the Company; (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors of the Company (together with any
new directors whose election by such Board or whose nomination for election by
the shareholders of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of such
Board then in office; or (iii) the Company, either individually or in
conjunction with one or more of its Subsidiaries, sells, conveys, leases or
otherwise transfers, or one or more of such Subsidiaries sell, convey, lease or
otherwise transfer, all or substantially all the assets of the Company and the
Restricted Subsidiaries, taken as a whole, to any Person (other than a
Restricted Subsidiary).
In the event of a Change of Control, the Company will (i) upon such Change
of Control, notify the Trustee, who will in turn notify the holders of the
Notes, in writing of the occurrence of and the circumstances and relevant facts
regarding such Change of Control and (ii) make an offer to purchase (the "Change
of Control Offer") the Notes for cash at a purchase price equal to 101% of the
principal amount thereof, plus any accrued and unpaid interest thereon to the
Change of Control Purchase Date (as defined below) (such price, together with
such interest, the "Change of Control Purchase Price") on or before the date
specified in such notice, which date must be no earlier than 30 days nor later
than 60 business days after the occurrence of the Change of Control (the "Change
of Control Purchase Date"). The Change of Control Offer will remain open from
the time such offer is made until the Change of Control Purchase Date. The
Company will purchase all Notes properly tendered in the Change of Control Offer
and not withdrawn in accordance with the procedures set forth in such notice of
withdrawal delivered to the Trustee by the holder prior to or on the Change of
Control Purchase Date. The Change of Control Offer will state, among other
things, the procedures that holders of the Notes must follow to accept the
Change of Control Offer.
The occurrence of certain of the events which would constitute a Change of
Control could constitute a default under, and trigger the acceleration of, the
Senior Secured Debt and the Company's other existing and future indebtedness. In
addition, the exercise by the holders of the Notes of their right to require the
Company to repurchase Notes could cause a default under such indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, if a Change of Control Offer is made, there
can be no assurance that the Company will have sufficient funds or other
resources to pay the Change of Control Purchase Price for all the Notes that
might be delivered by holders thereof seeking to accept the Change of Control
Offer. Moreover, as of the date of the Prospectus, after giving effect to the
sale of the Notes and the application of the estimated net proceeds therefrom as
described herein, the Company would not have sufficient funds available to
purchase all of the outstanding
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Notes pursuant to a Change of Control Offer. In the event that the Company were
required to purchase outstanding Notes pursuant to a Change of Control Offer,
the Company expects that it would need to seek third-party financing to the
extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all. In addition, the Company's ability to
purchase the Notes may be limited by other then-existing borrowing agreements
(including, without limitation, the Credit Facility), and the existence of the
Change of Control (or the financial effect of the required repurchases by the
Company) could cause a default under the Credit Facility or other indebtedness
of the Company and its Subsidiaries.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company and, thus, the
removal of incumbent management. The Change of Control provisions will not
prevent a change in a majority of the members of the Board of Directors of the
Company which is approved by a majority of the then-present Board of Directors
of the Company. One of the events that constitutes a Change of Control under the
Indenture is a sale, conveyance, transfer or lease of all or substantially all
the property of the Company and its Subsidiaries, taken as a whole, to any
Person (other than a Restricted Subsidiary). The phrase "all or substantially
all" is subject to judicial interpretation depending on the facts and
circumstances of the subject transaction. The Indenture is governed by New York
law, and there is no established quantitative definition under New York law of
"substantially all" the assets of a corporation. Accordingly in certain
circumstances it may be unclear whether a Change of Control has occurred and
whether the Company may therefore be required to make a Change of Control Offer.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to any Change of Control
Offer. To the extent that the provisions of any securities laws or regulations
conflict with provisions relating to the Change of Control Offer, the Company
will comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Change of Control covenant by
virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS
(a) The Company will not be permitted to Incur any Indebtedness; PROVIDED,
HOWEVER, that: (i) the Company may Incur Indebtedness ranking on a parity with
or which is subordinated in right of payment to the Notes pursuant to the terms
of such Indebtedness or pursuant to a written agreement if no Default or Event
of Default shall have occurred and be continuing at the time of such Incurrence
or would occur as a consequence of such Incurrence and after giving pro forma
effect to such Incurrence, the Consolidated Coverage Ratio would be equal to at
least 1.75 to 1; and (ii) the Company may Incur Indebtedness senior in right of
payment to the Notes pursuant to the terms of such Indebtedness or pursuant to a
written agreement if no Default or Event of Default shall have occurred and be
continuing at the time of such Incurrence or would occur as a consequence of
such Incurrence and (A) after giving pro forma effect to such Incurrence, the
Consolidated Coverage Ratio would be at least equal to 2.5 to 1 or (B) after
such Incurrence, the total principal amount of such Indebtedness would not
exceed $80 million.
(b) Notwithstanding the foregoing, the Company may Incur the following
Indebtedness if no Default or Event of Default shall have occurred and be
continuing at the time of such Incurrence or would occur as a consequence of
such Incurrence (collectively, "Permitted Indebtedness"): (i) Indebtedness to be
outstanding on the Issue Date (including the Senior Secured Debt) and listed on
Schedule I of the Indenture; (ii) Indebtedness represented by the Notes; (iii)
Indebtedness (A) under Interest Rate Protection Agreements relating to
Indebtedness permitted hereunder entered into in the ordinary course of the
Company's financial management and not for speculative purposes; PROVIDED,
HOWEVER, that the notional amount of each such Interest Rate Protection
Agreement does not exceed the principal amount of the Indebtedness
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to which such Interest Rate Protection Agreement relates; or (B) under Currency
Exchange Protection Agreements entered into in the ordinary course of the
Company's financial management and not for speculative purposes; PROVIDED,
HOWEVER, in the case of either clause (A) or (B), any such Interest Rate
Protection Agreement or Currency Exchange Protection Agreement, as the case may
be, does not increase the Indebtedness of the Company outstanding at any time
other than as a result of fluctuations in the interest rates or exchange rates,
as the case may be, or by reason of customary fees, indemnities and compensation
payable thereunder; (iv) Indebtedness owing to and held by any Wholly Owned
Subsidiary; PROVIDED, HOWEVER, that any subsequent issuance or transfer of any
Capital Stock that results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or another Wholly Owned Subsidiary) will be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof; (v) Indebtedness Incurred in connection with a prepayment of the Notes
pursuant to a Change of Control Offer; PROVIDED, HOWEVER, that the aggregate
principal amount of such Indebtedness does not exceed 101% of the aggregate
principal amount of the Notes prepaid; PROVIDED, FURTHER, HOWEVER, that such
Indebtedness (A) has an Average Life equal to or greater than the remaining
Average Life of the Notes and (B) does not mature prior to the Stated Maturity
of the Notes; (vi) Indebtedness in respect of Purchase Money Indebtedness or
Capital Lease Obligations directly Incurred by the Company; PROVIDED, HOWEVER,
that the sum of (A) the aggregate principal amount of such Purchase Money
Indebtedness incurred by the Company or by Restricted Subsidiaries as permitted
under clause (ii) of the definition of "Permitted Restricted Subsidiary
Indebtedness" and (B) the aggregate amount of Capital Lease Obligations Incurred
by the Company or Incurred by Restricted Subsidiaries as permitted under clause
(ii) of the definition of "Permitted Restricted Subsidiary Indebtedness" does
not at any one time outstanding exceed $20 million (such maximum permitted
amount to increase by $10 million on each anniversary of the Issue Date); (vii)
Indebtedness Incurred (A) in the ordinary course of business of the Company with
respect to trade credit made available to the Company in connection with the
obtaining of goods or services by the Company (including commercial letters of
credit, bankers' acceptances or accommodation Guarantees for the benefit of
trade creditors or suppliers), in each case for a period not to exceed 180 days,
in an amount not to exceed the purchase price for the goods or services for
which such credit is made available and which do not constitute obligations for
borrowed money, and (B) with respect to standby letters of credit, performance
bonds and surety bonds that do not constitute obligations for borrowed money
Incurred by the Company in the ordinary course of business relating to services
to be performed by or on behalf of the Company; (viii) Indebtedness in respect
of Guarantees by the Company of Indebtedness of any Restricted Subsidiary
permitted to be Incurred under the definition of "Permitted Restricted
Subsidiary Indebtedness"; (ix) Refinancing Indebtedness Incurred in respect of
Indebtedness Incurred pursuant to clause (i), (ii) or (v) above; and (x) in
addition to any Indebtedness permitted by clauses (i) through (ix) above, up to
an aggregate of (A) $25 million in principal amount of Indebtedness at any one
time outstanding minus (B) the principal amount of Indebtedness at such time
outstanding of any Restricted Subsidiaries permitted pursuant to clause (vi) of
the definition of "Permitted Restricted Subsidiary Indebtedness."
The Company will not directly or indirectly Incur any Indebtedness if the
proceeds thereof are used, directly or indirectly, to repay, prepay, redeem,
defease, retire, refund or refinance any Subordinated Obligations unless such
Indebtedness is subordinated to the Notes to at least the same extent as such
Subordinated Obligations.
LIMITATION ON RESTRICTED SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK
The Company shall not permit any Restricted Subsidiary directly or
indirectly to Incur any Indebtedness or issue any Preferred Stock unless (i) no
Default or Event of Default has occurred and is continuing at the time of such
Incurrence or would occur as a consequence of such Incurrence and (ii) such
Indebtedness or Preferred Stock is Permitted Restricted Subsidiary Indebtedness.
"Permitted Restricted Subsidiary Indebtedness" is defined as: (i)
Indebtedness or Preferred Stock to be outstanding on the Issue Date and listed
on Schedule II to the Indenture; (ii) Indebtedness in respect of
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Purchase Money Indebtedness or Capital Lease Obligations directly Incurred by
any Restricted Subsidiary; PROVIDED, HOWEVER, that the sum of (A) the aggregate
amount of Capital Lease Obligations Incurred by Restricted Subsidiaries or
Incurred by the Company pursuant to clause (vi) under "Limitation on
Indebtedness" and (B) the aggregate principal amount of Purchase Money
Indebtedness Incurred by Restricted Subsidiaries or Incurred by the Company
pursuant to clause (vi) under "Limitation on Indebtedness" does not at any one
time outstanding exceed $20 million (such maximum permitted amount to increase
by $10 million on each anniversary of the Issue Date); (iii) Indebtedness
Incurred (A) in the ordinary course of business of any Restricted Subsidiary
with respect to trade credit made available to such Restricted Subsidiary in
connection with the obtaining of goods or services by such Restricted Subsidiary
(including commercial letters of credit, bankers' acceptances or accommodation
Guarantees for the benefit of trade creditors or suppliers), in each case for a
period not to exceed 180 days, in an amount not to exceed the purchase price for
the goods or services for which such credit is made available and which do not
constitute obligations for borrowed money and (B) standby letters of credit,
performance bonds and surety bonds that do not constitute obligations for
borrowed money Incurred by any Restricted Subsidiary in the ordinary course of
business relating to services to be performed by or on behalf of such Restricted
Subsidiary; (iv) Indebtedness (A) under Interest Rate Protection Agreements
relating to Indebtedness permitted hereunder entered into in the ordinary course
of any Restricted Subsidiary's financial management and not for speculative
purposes; PROVIDED, HOWEVER, that the notional amount of each such Interest Rate
Protection Agreement does not exceed the principal amount of the Indebtedness to
which such Interest Rate Protection Agreement relates; or (B) under Currency
Exchange Protection Agreements entered into in the ordinary course of any
Foreign Subsidiary's financial management and not for speculative purposes;
PROVIDED, HOWEVER, in the case of either clause (A) or (B), any such Interest
Rate Protection Agreement or Currency Exchange Protection Agreement, as the case
may be, does not increase the Indebtedness of such Subsidiary outstanding at any
time other than as a result of fluctuations in the interest rates or exchange
rates, as the case may be, or by reason of customary fees, indemnities and
compensation payable thereunder; (v) Indebtedness or Preferred Stock owing to
and held by the Company or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that
any subsequent issuance or transfer of any Capital Stock that results in any
such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of any such Indebtedness or Preferred Stock (except to the
Company or a Wholly Owned Subsidiary) will be deemed, in each case, to
constitute the Incurrence of such Indebtedness or Preferred Stock by the issuer
thereof; (vi) Refinancing Indebtedness Incurred in respect of Indebtedness
Incurred pursuant to clause (i) above; and (vii) in addition to any Indebtedness
permitted by clauses (i) through (v) above, up to an aggregate of $10 million in
principal amount of Indebtedness of Foreign Restricted Subsidiaries at any one
time outstanding.
LIMITATION ON RESTRICTED PAYMENTS
(a) Neither the Company nor any Restricted Subsidiary will be permitted to
(i) declare or pay any dividend on, or make any distribution on or in respect
of, its Capital Stock (including any payment in connection with any merger or
consolidation involving the Company), except dividends or distributions payable
solely in its Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase such Capital Stock and except dividends or
distributions payable solely to the Company or any Restricted Subsidiary, (ii)
purchase, redeem, retire or otherwise acquire for value any Capital Stock of the
Company or any Restricted Subsidiary held by Persons other than the Company or
any Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or
otherwise acquire or retire for value (including pursuant to mandatory
repurchase covenants), prior to any scheduled repayment, scheduled sinking fund
payment or other scheduled maturity, any Subordinated Obligation or (iv) make
any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to as a "Restricted
Payment"), if at the time of and after giving effect to the proposed Restricted
Payment: (a) a Default or Event of Default has occurred and is continuing (or
would result therefrom); (b) the Company could not Incur at least $1.00 of
additional Indebtedness pursuant to clause (ii) under "Limitation on
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Indebtedness"; or (c) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors of the Company to be
evidenced by a Board Resolution furnished to the Trustee) declared or made since
the Issue Date, would exceed, without duplication, the sum of: (1) an amount
equal to 50% of the Consolidated Net Income accrued during the period (treated
as one accounting period) beginning on the first day of the fiscal quarter of
the Company immediately following the fiscal quarter in which the Issue Date
occurs and ending on the last day of the Company's last fiscal quarter ended at
least 45 days prior to the date of such proposed Restricted Payment (or, if such
Consolidated Net Income is a deficit, minus 100% of such deficit) and minus 100%
of the amount of any write-downs, write-offs, other negative revaluations and
other negative extraordinary charges not otherwise reflected in Consolidated Net
Income during such period; (2) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its Capital Stock, including Capital Stock of
the Company issued upon conversion of convertible debt or the exercise of
options, warrants or rights to purchase Capital Stock of the Company, but
excluding Disqualified Stock, subsequent to the Issue Date (other than an
issuance or sale to (x) a Subsidiary of the Company, (y) an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries or (z) management employees); (3) the amount by which the
Indebtedness of the Company or its Restricted Subsidiaries is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of
the Company or its Restricted Subsidiaries convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company (less the amount of
any cash or other property distributed by the Company or any Restricted
Subsidiary upon such conversion or exchange) and (4) the amount equal to the net
reduction in Investments in Unrestricted Subsidiaries resulting from (x)
payments of dividends, repayments of loans or advances or other transfers of
assets to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries or (y) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of "Investment")
not to exceed, in the case of any Unrestricted Subsidiary, the amount of
Investments previously made (and treated as a Restricted Payment) by the Company
or any Restricted Subsidiary in such Unrestricted Subsidiary.
(b) The foregoing provisions do not prohibit: (i) any purchase or redemption
of Capital Stock of the Company or Subordinated Obligations made in exchange
for, or out of the proceeds of a substantially concurrent sale of, Capital Stock
of the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock ownership
plan or other trust established by the Company or any of its Subsidiaries) or
out of proceeds of an equity contribution made substantially concurrently with
such purchase or redemption; PROVIDED, HOWEVER, that (A) such purchase or
redemption will be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale will be excluded from
subclause (2) of the above paragraph; (ii) any purchase or redemption of
Subordinated Obligations made in exchange for, or out of the proceeds of the
substantially concurrent sale of, Indebtedness of the Company which is permitted
to be Incurred pursuant to "--Limitation on Indebtedness"; PROVIDED, HOWEVER,
that (A) such Indebtedness is Incurred in an aggregate principal amount (or if
issued with original issue discount, an aggregate issue price) that is equal to
or less than the aggregate sum of (1) the aggregate principal amount (or if
issued with original issue discount, the aggregate accreted value) then
outstanding of such Subordinated Obligations being so purchased or redeemed and
(2) any premiums, fees and other expenses paid by the Company or any Restricted
Subsidiary in connection with such purchase or redemption, (B) such Indebtedness
is at least as subordinated to the Notes as such Subordinated Obligations so
purchased or redeemed and the covenants relating to such Indebtedness are no
more restrictive in the aggregate than those of such Subordinated Obligations,
(C) such Indebtedness has a Stated Maturity no earlier than the Stated Maturity
of such Subordinated Obligations, (D) such Indebtedness has an Average Life at
the time such Indebtedness is Incurred equal to or greater than the Average Life
of such Subordinated Obligations and (E) such purchase or redemption will be
excluded in the calculation of the amount of Restricted Payments; (iii) any
payment in cash in lieu of the issuance of fractional shares of Capital Stock to
any holder of Capital Stock warrants of the Company outstanding on the Issue
Date pursuant to the exchange of such warrants for other Capital Stock
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of the Company upon the exercise of such warrants pursuant to the terms thereof;
PROVIDED, HOWEVER, that such payment will be excluded in the calculation of the
amount of Restricted Payments; (iv) dividends paid within 60 days after the date
of declaration thereof if at such date of declaration such dividend would have
complied with the above first paragraph of this section; PROVIDED, HOWEVER, that
(A) at the time of payment of such dividend, no other Default has occurred and
is continuing (or would result therefrom) and (B) such dividend will be included
in the calculation of the amount of Restricted Payments from and after the date
of declaration of such dividend; or (v) so long as no Default or Event of
Default has occurred and is continuing or would occur as a consequence thereof,
the redemption or repurchase of Capital Stock of the Company, options in respect
thereof or related rights pursuant to and in accordance with the repurchase
provisions of any employee stock option or any stock purchase or other agreement
between the Company and any of its management employees; PROVIDED, HOWEVER, that
such redemptions or repurchases pursuant to this clause (v) from and after the
Issue Date will not in the aggregate exceed $1 million, plus the amount of any
net cash proceeds to the Company from sales of Capital Stock of the Company to
management employees subsequent to the Issue Date.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
Neither the Company nor any Restricted Subsidiary will be permitted to
create or otherwise cause or permit to exist or become effective any encumbrance
or restriction on the ability of any Restricted Subsidiary to (i) pay dividends
or make any other distributions on or in respect to its Capital Stock to the
Company or any Restricted Subsidiary or pay any Indebtedness owed to the Company
or any Restricted Subsidiary, (ii) make loans or advances to the Company or
(iii) transfer any of its property or assets to the Company or any Restricted
Subsidiary, except for (a) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue Date, (b) any encumbrance or
restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary became a Subsidiary of, or was
acquired by, the Company (other than Indebtedness Incurred as consideration in,
or to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Subsidiary of, or was acquired by, the
Company) and outstanding on such date, (c) any encumbrance or restriction
pursuant to an agreement relating to an acquisition of property, so long as the
encumbrances or restrictions in such agreement relate solely to the property so
acquired, (d) any encumbrance or restriction pursuant to an agreement effecting
a refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (a), (b) or (c) hereof or contained in any amendment to any such
agreement; PROVIDED, HOWEVER, that any encumbrance and any restriction contained
in any such refinancing agreement or amendment is no less favorable to the
Holders of the Notes than any encumbrance or restriction contained in such
agreement, and (e) in the case of clause (iii), certain encumbrances or
restrictions that do not, individually or in the aggregate, detract from the
value of property or assets of the Company or any Restricted Subsidiary in any
manner material to the Company or any such Restricted Subsidiary.
LIMITATION ON SALES OF ASSETS AND RESTRICTED SUBSIDIARY STOCK
The Company will not, and will not permit any Restricted Subsidiary to, make
any Asset Disposition unless (i) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Disposition at
least equal to the Fair Market Value of the shares, property and assets subject
to such Asset Disposition, (ii) at least 75% of such consideration (or, in the
event of any Asset Disposition of all or any portion of the Company's Magnetics
Division or a Foreign Restricted Subsidiary, at least 50% of such consideration)
consists of cash, Temporary Cash Investments or the assumption of Senior
Indebtedness of the Company or any Restricted Subsidiary and the release of the
Company or such Restricted Subsidiary from all liability under such Senior
Indebtedness, (iii) in connection with any Asset Disposition with an aggregate
consideration greater than $10 million, the Company delivers an Officer's
Certificate to the Trustee certifying that such Asset Disposition complies with
clauses (i) and (ii) and that such Asset Disposition was approved by a majority
of the disinterested members of the Board of Directors
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of Company, as evidenced by a resolution of the Board delivered to the Trustee
and (iv) 100% of the Net Cash Proceeds of such Asset Disposition are applied as
follows: (A) within 365 days after the receipt of any Net Cash Proceeds (or
within such longer period after receipt thereof as may be permitted of the
Credit Facility) (the last day of such period, an "Application Date"), the
Company or Restricted Subsidiary, as the case may be, may apply all or a portion
of such Net Cash Proceeds to the repayment of Indebtedness under the Credit
Facility or the reinvestment (whether by acquisition of an existing business or
expansion, including, without limitation, capital expenditures) in one or more
Permitted Lines of Business, or any combination thereof, and (B) to the extent
any or all of such Net Cash Proceeds are not applied as set forth above in
clause (A), the Company will apply all remaining Net Cash Proceeds of such Asset
Disposition (the "Asset Disposition Purchase Amount") to an offer to purchase
(an "Asset Disposition Purchase Offer") Notes, on the first business day
occurring 60 business days after the Application Date (the "Asset Disposition
Purchase Date") for cash at a purchase price (such price, the "Asset Disposition
Purchase Price") equal to 100% of the principal amount of the Notes so purchased
plus accrued and unpaid interest thereon to the Asset Disposition Purchase Date,
in accordance with the procedures set forth in the Indenture. Any such Net Cash
Proceeds which remain after the acquisition by the Company of Notes tendered
(and not withdrawn) by holders of Notes pursuant to such Asset Disposition
Purchase Offer in accordance with the procedures (including proration in the
event of oversubscription) set forth in the Indenture cease to be Net Cash
Proceeds. Notwithstanding the foregoing, the Company will not be required to
make an Asset Disposition Purchase Offer until such time as the aggregate amount
of Net Cash Proceeds from Asset Dispositions required to be so applied to the
purchase of Notes exceeds $10 million (the "Asset Disposition Trigger"), and
then the total amount of such Net Cash Proceeds is required to be applied to an
Asset Disposition Offer.
Within 30 business days of the occurrence of an Asset Disposition Trigger,
(i) the Company will notify the Trustee in writing of the occurrence of the
Asset Disposition Trigger and will make the Asset Disposition Purchase Offer to
purchase Notes in an aggregate principal amount equal to the Asset Disposition
Purchase Amount at the Asset Disposition Purchase Price on or before Asset
Disposition Purchase Date, (ii) the Company will mail a copy of the Asset
Disposition Purchase Offer to each Holder of the Notes and (iii) the Company
will cause a notice of the Asset Disposition Purchase Offer to be sent to the
Dow Jones News Service or similar business news service in the United States.
The Asset Disposition Purchase Offer will remain open from the time such offer
is made until the Asset Disposition Purchase Date. The Company will purchase all
Notes properly tendered pursuant to the Asset Disposition Purchase Offer and not
withdrawn in accordance with the procedures set forth in the Asset Disposition
Purchase Notice (as defined in the Indenture). The Asset Disposition Purchase
Offer will state, among other things, the procedures that Holders of the Notes
must follow to accept the Asset Disposition Purchase Offer.
LIMITATION ON LIENS
Neither the Company nor any Restricted Subsidiary will be permitted to
create or permit to exist any lien directly or indirectly (other than Permitted
Liens) on any of its property or assets (including Capital Stock), whether owned
on the Issue Date or thereafter acquired, or any right, title or interest
thereto, unless the Company or such Restricted Subsidiary will secure all
payments hereunder and under the Notes on an equal and ratable basis with the
obligation so secured until such time as such obligation is no longer secured by
a lien.
PROHIBITION ON LAYERING
The Indenture will prohibit the Company and each Restricted Subsidiary from
incurring or suffering to exist any Indebtedness that is expressly subordinate
in right of payment to any Senior Indebtedness and senior in right of payment to
the Notes.
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LIMITATION ON TRANSACTIONS WITH AFFILIATES
Neither the Company nor any Restricted Subsidiary will be permitted to
conduct any business, enter into or permit to exist any transaction (including,
without limitation, the sale, conveyance, disposition, purchase, exchange or
lease of any property, the lending, borrowing or advancing of any money or the
rendering of any services) with, or for the benefit of, any Affiliate of the
Company (an "Affiliate Transaction") unless (i) the terms of such Affiliate
Transaction are in writing, (ii) such Affiliate Transaction is in the best
interest of the Company or such Restricted Subsidiary, as the case may be, (iii)
such Affiliate Transaction is on terms as favorable to the Company or such
Restricted Subsidiary, as the case may be, as those that could be obtained at
the time of such Affiliate Transaction for a similar transaction in arm's-length
dealings with a Person who is not such an Affiliate and (iv) with respect to
each Affiliate Transaction involving aggregate payments or value in excess of
$500,000, such Affiliate Transaction was approved by a majority of the Board of
Directors of the Company, including a majority of the disinterested members of
such Board, PROVIDED, HOWEVER, that the foregoing does not prohibit (A) any
Restricted Payment permitted to be paid as described above under "Limitation on
Restricted Payments", (B) any issuance of securities or other payments, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directories of the Company, (C) loans or advances permitted under the
Indenture to employees in the ordinary course of business in accordance with
past practices of the Company, (D) the payment of reasonable fees to directors
of the Company and its Restricted Subsidiaries who are not employees of the
Company or any Restricted Subsidiary, (E) any transaction between the Company
and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries or (F)
reasonable and customary indemnification arrangements between the Company or any
Restricted Subsidiary and their respective directors and officers (to the extent
that such indemnification arrangements are permitted under applicable law).
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not permit (i) any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Wholly Owned Subsidiary; or (ii)
any Person (other than the Company or a Wholly Owned Subsidiary) to, directly or
indirectly, own or control any Capital Stock of any Restricted Subsidiary (other
than directors' qualifying shares); PROVIDED, HOWEVER, that clauses (i) and (ii)
will not prohibit (a) any sale of 100% of the shares of the Capital Stock of any
Restricted Subsidiary owned by the Company or any Wholly Owned Subsidiary
effected in accordance with "Limitation on Sales of Assets and Restricted
Subsidiary Stock" or (b) any issuance of Preferred Stock of a Restricted
Subsidiary to any Person permitted under "Limitation on Restricted Subsidiary
Indebtedness and Preferred Stock."
LIMITATION ON SALE/LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, Guarantee or otherwise become liable with
respect to any Sale/Leaseback Transaction with respect to any property or assets
unless (i) the Company or such Restricted Subsidiary, as the case may be, would
be entitled to pursuant to the Indenture Incur Indebtedness secured by a
Permitted Lien on such property or assets in an amount equal to the Attributable
Indebtedness with respect to such Sale/Leaseback Transaction, (ii) the Net Cash
Proceeds from such Sale/Leaseback Transaction are at least equal to the Fair
Market Value of the property or assets subject to such Sale/Leaseback
Transaction (such Fair Market Value determined, in the event such property or
assets have a Fair Market Value in excess of $2 million, no more than 30 days
prior to the effective date of such Sale/Leaseback Transaction, by the Board of
Directors of the Company, including a majority of the disinterested members of
such Board, as evidenced by a resolution of such Board) and (iii) the net cash
proceeds of such Sale/Leaseback Transaction are applied in accordance with the
provisions described under "Limitation on Sales of Assets and Restricted
Subsidiary Stock."
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LIMITATIONS ON MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company shall not, and the Company shall not permit any Restricted
Subsidiary to, enter into any transaction or series of transactions to
consolidate, amalgamate or merge with or into any other Person (other than the
merger of a Wholly Owned Subsidiary (i) with another Wholly Owned Subsidiary or
(ii) into the Company), or directly or indirectly through its Subsidiaries sell,
convey, assign, transfer, lease or otherwise dispose of all or substantially all
its property and assets to any Person or group of affiliated Persons (other than
to one or more Wholly Owned Subsidiaries or to the Company) unless (i) if the
Company is a party to such transaction and is not the surviving entity (the
"Surviving Entity"), the Surviving Entity formed by such consolidation or
amalgamation or into which the Company is merged or that acquires, by sale,
conveyance, assignment, transfer, lease or other disposition, all or
substantially all the properties and assets of the Company as an entirety, shall
be a corporation organized and validly existing under the laws of the United
States or any State thereof or the District of Columbia and shall expressly
assume (a) by a supplemental indenture executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company pursuant to
the Notes and the Indenture and (b) by written instruments executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under any agreements entered into by the Company
pursuant to the Limitation on Liens covenant; (ii) the Surviving Entity, if any
Restricted Subsidiary is a party to such transaction and is not the Surviving
Entity, shall by written instruments executed and delivered to the Trustee, in
form satisfactory to the Trustee, expressly assume all the obligations of such
Restricted Subsidiary under any agreements entered into by such Restricted
Subsidiary pursuant to the Limitation on Liens covenant; (iii) immediately
before and after giving effect to such transaction or series of transactions on
a pro forma basis (and treating any Indebtedness which becomes an obligation of
the Company, the Surviving Entity or any Restricted Subsidiary as a result of
such transaction or series of transactions as having been incurred by the
Company, such Surviving Entity or such Restricted Subsidiary at the time of such
transaction or series of transactions) no Default or Event of Default shall have
occurred and be continuing; (iv) immediately after giving effect to such
transaction or series or transactions on a pro forma basis (and treating any
Indebtedness which becomes an obligation of the Company, the Surviving Entity or
any Restricted Subsidiary as a result of such transaction or series of
transactions as having been incurred by the Company, such Surviving Entity or
such Restricted Subsidiary at the time of such transaction or series of
transactions), the Company or the Surviving Entity, as the case may be, could
incur at least $1.00 of additional Indebtedness pursuant to the Limitation on
Indebtedness covenant; (v) immediately after giving effect to such transaction
or series of transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the Company, the Surviving Entity or any
Restricted Subsidiary as a result of such transaction or series of transactions
as having been incurred by the Company, such Surviving Entity or such Restricted
Subsidiary at the time of such transaction or series of transactions), the
Company or the Surviving Entity, as the case may be, shall have a Consolidated
Tangible Net Worth which is not less than the Consolidated Tangible Net Worth of
the Company immediately prior to such transaction or transactions; and (vi) the
Company shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating (A) that such consolidation, amalgamation,
merger or transfer and such supplemental indenture (if any) and written
instrument (if any) comply with this Indenture and (B) that upon execution and
delivery of such supplemental indenture or written instrument the Company or
such Surviving Entity shall be bound by the terms of the Indenture as thereby
amended and the Indenture as thereby amended shall be enforceable against the
Company or such Surviving Entity in accordance with its terms.
Upon any transaction involving the Company in which the Company is not the
Surviving Entity, such Surviving Entity shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this
Indenture, but the Company in the case of a transfer or lease shall not be
released from the obligation to pay the principal of, and premium, if any, or
interest on, the Notes.
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RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Subsidiary of the Company or any
Restricted Subsidiary to be an Unrestricted Subsidiary if (i) the Subsidiary to
be so designated does not own any Capital Stock, Redeemable Stock or
Indebtedness of, or own or hold any Lien on any property or assets of, the
Company or any other Restricted Subsidiary, (ii) the Subsidiary to be so
designated is not obligated by any Indebtedness or Lien that, if in default,
would result (with the passage of time or notice or otherwise) in a default on
any Indebtedness of the Company or any Restricted Subsidiary, and (iii) either
(A) the Subsidiary to be so designated has total assets of $1,000 or less or (B)
such designation is effective immediately upon such Person becoming a Subsidiary
of the Company or of a Restricted Subsidiary. Unless so designated as an
Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company or
any Restricted Subsidiary will be classified as a Restricted Subsidiary. Except
as provided in the first sentence of this paragraph, no Restricted Subsidiary
may be redesignated as an Unrestricted Subsidiary. Subject to the following
paragraph, an Unrestricted Subsidiary may not be redesignated as a Restricted
Subsidiary.
The Company will not, and will not permit any Restricted Subsidiary to, take
any action or enter into any transaction or series of transactions that would
result in a Person becoming a Restricted Subsidiary (whether through an
acquisition, the redesignation of an Unrestricted Subsidiary or otherwise)
unless after giving effect to such action, transaction or series of
transactions, on a pro forma basis, (i) the Company could incur at least $1.00
of additional Indebtedness pursuant to clause (i) under "--Certain Covenants--
Limitation on Indebtedness", (ii) such Restricted Subsidiary could then Incur
under "--Certain Covenants--Limitation on Restricted Subsidiary Indebtedness and
Preferred Stock" all Indebtedness as to which it is obligated at such time,
(iii) no Default or Event of Default would occur or be continuing and (iv) there
exist no Liens with respect to the property or assets of such Restricted
Subsidiary other than Permitted Liens.
EVENTS OF DEFAULT
An "Event of Default" will occur under the Indenture if (i) the Company
fails to make any payment of interest on any Note when the same is due and
payable, and such failure continues for a period of 30 days; (ii) the Company
(A) fails to make the payment of the principal of, or premium, if any, on, any
Note when the same becomes due and payable at its Stated Maturity, upon
acceleration, redemption or declaration, or otherwise or (B) fails to redeem or
purchase Notes when and to the extent required pursuant to the Indenture or the
Notes; (iii) the Company fails to comply with any of the requirements described
under Limitations on Merger, Consolidation or Sale of Assets in the Indenture;
(iv) the Company fails to comply with any of its covenants or agreements
described under "--Additional Information," "--Change of Control," or "--Certain
Covenants--Limitation on Indebtedness," "--Limitation on Restricted Subsidiary
Indebtedness and Preferred Stock," "--Limitation on Restricted Payments,"
"--Limitation Transactions with Affiliates," "--Limitation on Liens,"
"--Limitation on Restrictions on Distributions from Restricted Subsidiaries,"
"--Limitation on Sales of Assets and Restricted Subsidiary Stock," "--Limitation
on Sale/ Leaseback Transactions" or "--Limitation on Issuance and Sale of
Capital Stock of Restricted Subsidiaries" and such failure continues for 30 days
after the notice specified below, or the Company fails to give the notice
specified below; (v) the Company fails to comply with any of its agreements in
the Notes or the Indenture (other than those specified in clauses (i), (ii),
(iii) and (iv) above) and such failure continues for a period of 60 days after
the notice specified below or the Company fails to give the notice specified
below; (vi) Principal of or interest on any Indebtedness of the Company or any
Restricted Subsidiary is not paid when due within any applicable grace period
after final maturity or is accelerated by the holders thereof, if the total
amount of such Indebtedness unpaid or accelerated or exceeds $7.5 million or its
Dollar Equivalent at the time; (vii) one or more judgments or decrees
aggregating in excess of $7.5 million or its Dollar Equivalent at the time is
rendered against the Company or any Restricted Subsidiary and is not discharged
and either: (A) an enforcement proceeding has been commenced by any creditor
upon such
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judgment or decree; or (B) there is a period of 60 days following the entry of
such judgment or decree during which such judgment or decree is not discharged,
waived or the execution thereof stayed; (viii) the Company or any Restricted
Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A)
commences a voluntary case; (B) consents to the entry of an order for relief
against it in an involuntary case; (C) consents to the appointment of a
Custodian of it or for any substantial part of its property; or (D) makes a
general assignment for the benefit of its creditors; or takes any comparable
action under any foreign laws relating to insolvency; or (ix) a court of
competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against the Company or any Restricted Subsidiary in an
involuntary case; (B) appoints a Custodian of the Company or any Restricted
Subsidiary or for any substantial part of its property; or (C) orders the
winding up or liquidation of the Company or any Restricted Subsidiary; or any
similar relief is granted under any foreign laws and the order or decree remains
unstated and in effect for 60 days.
A Default under clause (iv) or (v) above will not be an Event of Default
until the Trustee or the holders of at least 25% in principal amount of the
Notes notify the Company of the Default and the Company does not cure such
Default within the time specified after receipt of such notice. Such notice must
specify the Default, demand that it be remedied and state that such notice is a
"Notice of Default."
The Company will deliver to the Trustee, within 30 days after the occurrence
thereof, written notice in the form of an Officers' Certificate of any event
which, with the giving of notice and the lapse of time, would become an Event of
Default under clause (iv), (v), (vi) or (vii) above, its status and what action
the Company is taking or proposes to take with respect thereto.
If an Event of Default (other than an Event of Default specified in clause
(viii) or (ix) under "Events of Default") occurs and is continuing, the Trustee
by notice to the Company, or the holders of at least 25% in principal amount of
the Notes by notice to the Trustee, may declare the principal of and accrued
interest on all the Notes to be due and payable. Upon such declaration, such
principal and interest will be due and payable immediately. If an Event of
Default specified in clause (viii) or (ix) under "--Events of Default" occurs,
the principal of and interest on all the Notes becomes immediately due and
payable without any declaration or other act on the part of the Trustee or any
holders of Notes. The holders of a majority in principal amount of the Notes by
notice to the Trustee may rescind an acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of acceleration. No such rescission
will affect any subsequent Default or impair any right consequent thereto.
A holder of Notes may not pursue any remedy with respect to the Indenture,
or the Notes the unless: (i) such holder gives to the Trustee written notice
stating that an Event of Default is continuing; (ii) holders of at least 25% in
principal amount of the Notes make a written request to the Trustee to pursue
the remedy; (iii) such holder or holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense; (iv) the Trustee
does not comply with the request within 60 days after receipt of the request and
the offer of security or indemnity; and (v) the holders of a majority in
principal amount of the Notes do not give the Trustee a direction inconsistent
with the request during such 60-day period.
A holder of a Note may not use the Indenture to prejudice the rights of
another holder of the Notes or to obtain preference or priority over another
holder of the Notes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
without notice to any holder with the written consent of the holders of at least
a majority in principal amount of the Notes. However, without the consent of
each holder affected, no amendment may, among other things, (i) reduce the
percentage of principal amount of Notes whose holders must consent to an
amendment or waiver, (ii) reduce the rate of or extend the time for payment of
interest on any Notes, (iii) reduce the principal of or extend the Stated
Maturity of any Notes, (iv) reduce the premium payable upon the redemption of
any
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Note or change the time or times at which any Notes may be redeemed, (v) make
any Note payable in money other than that stated in the Notes, (vi) impair the
right of any holder of Notes to institute suit for the enforcement of any
payment on or with respect to any Notes, or (vii) make any change in certain
waiver or payment provisions of the Indenture or the second sentence of this
paragraph.
Without notice to or the consent of any holder of the Notes, the Company and
the Trustee may, among other things, amend or supplement the Indenture to cure
any ambiguity, omission, defect or inconsistency; to provide for the assumption
by a successor company to the obligations of the Company under the Indenture; to
provide for uncertificated Notes in addition to or in place of certificated
Notes, PROVIDED, HOWEVER, that the uncertificated Notes are issued in registered
form under the Code; to add Guarantees with respect to the Notes or to secure
the Notes; to add to the covenants of the Company for the benefit of the holders
of the Notes or to surrender any right or power conferred upon the Company; to
make any change that does not adversely affect the rights of any holder of the
Notes or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act or to provide for
the acceptance of appointment hereunder by a successor Trustee.
DEFEASANCE
The Company at any time may terminate all of its obligations under, and with
respect to, the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. The Company at any time may terminate, among other things, its
obligations under the covenants described under "Certain Covenants" and "Change
of Control" above, and with respect to Restricted Subsidiaries, the operation of
the cross acceleration provision, certain of the bankruptcy provisions, and the
judgment default provision described under "--Events of Default" above and
certain limitations under "Merger, Consolidation or Sale of Assets" above
("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (vi), (vii) or (viii) (except with respect
to the Company) under "Events of Default" above or because of the failure of the
Company to comply with, among other things, the covenants described under
"Certain Covenants" or "Change of Control" or with certain limitations under
"Merger, Consolidation or Sale of Assets" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivering to the Trustee an Opinion of Counsel to
the effect that holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and defeasance and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect (except as otherwise
expressly provided for in the Indenture) when either (i) all outstanding Notes
have been delivered (other than lost, stolen or destroyed Notes which have been
replaced) to the Trustee for cancellation or (ii) all outstanding Notes have
become due and payable, whether at maturity or as a result of the mailing of a
notice of redemption pursuant to the
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terms of the Indenture and the Company has irrevocably deposited with the
Trustee funds sufficient to pay at maturity or upon redemption all outstanding
Notes, including interest thereon (other than lost, stolen, mutilated or
destroyed Notes which have been replaced), and, in either case, the Company has
paid all other sums payable under the Indenture. The Trustee is required to
acknowledge satisfaction and discharge of the Indenture on demand of the Company
accompanied by an Officer's Certificate and an Opinion of Counsel at the cost
and expense of the Company.
TRANSFER AND EXCHANGE
Upon any transfer of a Note, the registrar may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The registrar
is not required to transfer or exchange any Notes selected for redemption nor is
the registrar required to transfer or exchange any Notes for a period of 15 days
before a selection of Notes to be redeemed. The registered holder of a Note may
be treated as the owner of it for all purposes.
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is the Trustee under the Indenture. The
Trustee's current address is One State Street, New York, New York 10004.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any of the holders of the Notes issued thereunder, unless they
shall have offered to the Trustee security and indemnity satisfactory to it.
ADDITIONAL INFORMATION
So long as any Notes are outstanding, the Company will furnish to the
Trustee and will furnish, or cause the Trustee to furnish, to the holders of
Notes within fifteen days after the Company files them with the Commission all
quarterly and annual reports that the Company is required to file with the
Commission under the Exchange Act. In the event that the Company is not at the
time required to file such reports with the Commission pursuant to the Exchange
Act, the Company shall nevertheless continue to file such reports with the
Commission and furnish, or cause the Trustee to furnish, them to holders of the
Notes as if the Company were so required. The Company will also comply with the
other provisions of Section314(a) of the Trust Indenture Act.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
The following definitions, among others, are used in the Indenture.
Prospective purchasers of Notes are encouraged to read each of the following
definitions carefully and to consider such definitions in the context in which
they are used in the Senior Secured Indenture.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
Notwithstanding the foregoing, each Unrestricted Subsidiary shall be deemed an
Affiliate of the Company and of each other Subsidiary of the Company.
"ASSET DISPOSITION" means any direct or indirect sale, lease, transfer,
conveyance or other disposition (or series of related sales, leases, transfers,
conveyances or dispositions) of shares of Capital Stock of any Restricted
Subsidiary (other than directors' qualifying shares), property or other assets
(each referred to for the purposes of this definition as a "disposition") by the
Company or any Restricted Subsidiary (including any disposition by means of a
merger, consolidation or similar transaction), other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of the Company's or
any Restricted Subsidiary's accounts receivable, lease receivables or inventory
(other than the disposition of inventory pursuant to a Sale/ Leaseback
Transaction) at Fair Market Value in the Ordinary Course of Business, (iii) a
disposition of property or assets, whether in a single transaction or a series
of related transactions which constitute a single plan of disposition, that have
an aggregate Fair Market Value not in excess of $250,000, (iv) an operating
lease entered into in the ordinary course of business with respect to property,
plant or equipment that in the judgment of the Board of Directors constitutes
excess capacity or (v) a "like-kind exchange" of an asset in exchange for an
asset of a third party, so long as, in the judgment of the Company's Board of
Directors, the asset received by the Company or such Restricted Subsidiary in
such exchange (x) has a Fair Market Value at least equal to the fair market
value of the asset transferred by the Company or such Restricted Subsidiary and
(y) is usable in a Permitted Line of Business to at least the same extent as the
asset transferred by the Company or such Restricted Subsidiary. An Asset
Disposition will include the requisition of title to, seizure of or forfeiture
of any property or assets, or any actual or constructive total loss or an agreed
or compromised total loss of any property or assets. The term "Asset
Disposition" when used with respect to the Company will not include any
disposition pursuant to provisions in the Indenture which constitutes a
disposition of all or substantially all the assets of the Company.
"ATTRIBUTABLE INDEBTEDNESS", in respect of a Sale/Leaseback Transaction,
means, as at the time of determination, the greater of (i) the Fair Market Value
of the property subject to such Sale/Leaseback Transaction (as determined in
good faith by the Board of Directors) or (ii) the present value (discounted at
the interest rate borne by the Notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption of similar payment with respect to such Preferred Stock and (b) the
amount of such payment by (ii) the sum of all such payments.
"BANKRUPTCY LAW" means Title 11, United States Code, or any similar Federal
or state law for the relief of debtors.
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"BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the Company
or any committee thereof duly authorized to act on behalf of such Board.
"CAPITAL LEASE OBLIGATIONS" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP; the amount of Indebtedness represented by such
obligation will be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof will be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
(including partnership interests) in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"CONSOLIDATED COVERAGE RATIO" means, as of any date of determination, the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; PROVIDED, HOWEVER, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period is to be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if since the beginning of such period the
Company or any Restricted Subsidiary has made any Asset Disposition or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Asset Disposition, or both, EBITDA for such period will be reduced by an
amount equal to EBITDA (if positive) directly attributable to the property or
assets which are the subject of such Asset Disposition for such period, or
increased by an amount equal to EBITDA (if negative) directly attributable
thereto for such period and Consolidated Interest Expense for such period will
be reduced by an amount equal to Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and the continuing Restricted Subsidiaries in connection with such Asset
Dispositions for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and the continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) above if since the beginning of such period
the Company or any Restricted Subsidiary (by merger or otherwise) has made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction causing a calculation to be
made hereunder, which constitutes all or substantially all of an operating unit
of a business, EBITDA and Consolidated Interest Expense for such period will be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of such period and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) has
made any Asset Disposition or any Investment that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period will be calculated after giving pro forma effect thereto
as if such Asset Disposition or Investment occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma
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calculations will be determined in good faith by a responsible financial or
accounting officer of the Company and as further contemplated by the definition
of pro forma. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness is calculated
as if the rate in effect on the date of determination had been the applicable
rate for the entire period (taking into account any Interest Rate Protection
Agreement applicable to such Indebtedness if such Interest Rate Protection
Agreement has a remaining term in excess of 12 months).
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the sum of (i) the
total cash and noncash interest expense of the Company and its consolidated
Subsidiaries, plus, to the extent not included in such interest expense, (A)
interest expense attributable to Capital Lease Obligations, (B) amortization of
debt discount and debt issuance cost, (C) capitalized interest, (D) accrued
interest, (E) commissions, discounts and other fees and charges paid or owed
with respect to letters of credit and bankers' acceptance financing, (F)
interest actually paid by the Company or any such Subsidiary under any Guarantee
of Indebtedness or other obligation of any other Person, (G) net costs
associated with Hedging Obligations (including amortization of discounts and
fees), (H) the interest portion of any deferred obligation, (I) Preferred Stock
dividends in respect of all Preferred Stock of Subsidiaries of the Company and
Redeemable Stock of the Company held by Persons other than the Company or a
Wholly Owned Subsidiary and (J) cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust;
PROVIDED, HOWEVER, that there will be excluded from this clause (i), (x) any
such interest expense of any Unrestricted Subsidiary to the extent the related
Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary and (y) any such interest expense attributable to original issue
discount as a result of Fresh Start Accounting adjustments), less (ii) to the
extent included in clause (i), amortization or write-off of deferred financing
costs of the Company and its consolidated Subsidiaries during such period and
any charge related to any premium or penalty paid in connection with redeeming
or retiring any Indebtedness of the Company and its consolidated Subsidiaries
prior to its Stated Maturity.
"CONSOLIDATED NET INCOME" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries for such period determined in
accordance with GAAP but excluding for such purpose the impact of any Fresh
Start Accounting adjustment; PROVIDED, HOWEVER, that there will be excluded
therefrom (i) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained in
clause (iv) below, the Company's equity in the net income of any such Person for
such period will be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person during such period to the
Company or a Restricted Subsidiary as a dividend or other distribution (subject,
in the case of a dividend or other distribution to a Restricted Subsidiary, to
the limitations contained in clause (iii) below) and (B) the Company's equity in
a net loss of any such Person (other than an Unrestricted Subsidiary) for such
period will be included in determining such Consolidated Net Income, (ii) any
net income (loss) of any Person acquired by the Company or a Restricted
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition, (iii) any net income (loss) of any Restricted
Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Restricted Subsidiary for such period will be
included in such Consolidated Net Income up to the aggregate amount of cash that
could have been distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend (subject, in the case
of a dividend to another Restricted Subsidiary, to the limitation contained in
this clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period will be included in determining such Consolidated Net
Income, (iv) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/ Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business,
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(v) any gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person, (vi) any extraordinary gain or loss, (vii) the
cumulative effect of any change in accounting principles and (viii) any
non-recurring restructuring charges for any fiscal quarter in the fiscal year of
the Company commencing October 1, 1995.
"CONSOLIDATED TANGIBLE NET WORTH" means the amount by which (i) the total of
the amounts shown on the balance sheet of the Company and its consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the end of the most recent fiscal quarter of the Company ending at least 45 days
prior to the taking of any action for the purpose of which the determination is
being made, as (x) the par or stated value of all outstanding Capital Stock of
the Company plus (y) paid-in capital or capital surplus relating to such Capital
Stock plus (z) any retained earnings or earned surplus exceeds (ii) the sum of
(A) any accumulated deficit, (B) any amounts attributable to Disqualified Stock,
(C) the amounts appearing on the assets side of such balance sheet for all
contracts, patents, trademarks, copyrights and other intellectual property
rights, franchises, licenses, goodwill, treasury stock, unamortized debt
discount and expense and similar intangibles, (D) any increase in the amount of
capitalized research and development and capitalized interest subsequent to the
Issue Date, and (E) the amount of any write-up subsequent to the Issue Date in
the book value of any asset owned on the Issue Date resulting from the
revaluation thereof subsequent to such date, or any write-up in excess of the
cost of any asset acquired subsequent to that date.
"CREDIT FACILITY" means the Credit and Guarantee Agreement dated as of
February 28, 1997 among the Company, the Foreign Subsidiary Borrower, the First
National Bank of Chicago, Lehman Commercial Paper, Inc. and the lenders
thereunder.
"CURRENCY EXCHANGE PROTECTION AGREEMENT" means, in respect of any Person,
any foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in foreign currency exchange rates.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DISQUALIFIED STOCK" of a Person means Redeemable Stock of such Person as to
which the maturity, mandatory redemption, conversion or exchange or redemption
at the option of the holder thereof occurs, or may occur, on or prior to the
first anniversary of the Stated Maturity of the Notes.
"DOLLAR EQUIVALENT" means, with respect to any monetary amount in a currency
other than U.S. dollars, at any time for the determination thereof, the amount
of U.S. dollars obtained by converting such foreign currency involved in such
computation into U.S. dollars at the spot rate for the purchase of U.S. dollars
with the applicable foreign currency as quoted by Citibank, N.A. in New York
City at approximately 11:00 a.m. (New York time) on the date two business days
prior to such determination.
"EBITDA" means, for any period, the Consolidated Net Income for such period,
plus, to the extent deducted in calculating such Consolidated Net Income, (i)
income tax expense, (ii) Consolidated Interest Expense, (iii) depreciation
expense, (iv) amortization expense and (v) any charge related to any premium or
penalty paid in connection with redeeming or retiring any Indebtedness prior to
its Stated Maturity, in each case for such period.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction; PROVIDED, that the foregoing
does not prohibit sales of inventory at a discount or on terms which are typical
in the industry to which such inventory relates. Fair Market Value is
determined, except as otherwise provided herein, (i) if such
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property or asset has a Fair Market Value less than $5 million, by two officers
of the Company in an Officers' Certificate delivered to the Trustee or (ii) if
such property or asset has a Fair Market Value in excess of $5 million, by the
Board of Directors as a whole and evidenced by a resolution, dated within 30
days of the relevant transaction, of such Board delivered to the Trustee.
"FOREIGN ASSET DISPOSITION" means an Asset Disposition in respect of Capital
Stock or assets of a Restricted Subsidiary of the type described in Section 936
of the Internal Revenue Code of 1986, as amended (the "Code") to the extent that
the proceeds of such Asset Disposition are received by a Person subject in
respect of such proceeds to the tax laws of a jurisdiction other than the United
States of America, any State thereof or the District of Columbia.
"FOREIGN RESTRICTED SUBSIDIARY" means, any Restricted Subsidiary that is
incorporated in a jurisdiction other than the United States of America, any
State thereof or the District of Columbia.
"FRESH START ACCOUNTING" means Fresh Start Accounting as described in
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" (Am. Inst. of Certified Public Accountants 1990), as
then in effect, or any comparable statement then in effect.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person,
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term
"Guarantee" does not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"HEDGING OBLIGATIONS" of any Person means the obligations of such Person
pursuant to any Interest Rate Protection Agreement, Commodity Price Protection
Agreement or Currency Exchange Protection Agreement or other similar agreement
or arrangement.
"INCUR" means to, directly or indirectly, create, issue, assume, Guarantee,
incur (by conversion, exchange or otherwise) extend, assume, or otherwise become
liable for, contingently or otherwise; PROVIDED, HOWEVER, that any Indebtedness
or Capital Stock of a Person existing at the time such Person becomes a
Subsidiary (whether by merger, consolidation, acquisition or otherwise) will be
deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary.
The terms "Incurrence," "Incurred" and "Incurring" each have a correlative
meaning.
"INDEBTEDNESS" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments; (iii) all Capital Lease
Obligations and all Attributable Indebtedness of such Person; (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except (A) Trade Payables and (B) any obligation to pay
any portion of such purchase price that becomes due only if the earnings
attributable to such property or services satisfy predetermined minimum amounts
subsequent to the purchase of such property or services and the amount of such
obligation cannot be determined on the date of such purchase); (v) all
obligations of such Person in
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respect of letters of credit, banker's acceptances or other similar instruments
or credit transactions (including reimbursement obligations with respect
thereto), other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i) through (iv) above)
entered into in the ordinary course of business of such Person to the extent
such letters of credit are not drawn upon or, if and to the extent drawn upon,
such drawing is reimbursed no later than the third business day following
receipt by such Person of a demand for reimbursement following payment on any
such letter of credit; (vi) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, any Preferred Stock
(but excluding in each case, any accrued dividends); (vii) all Indebtedness of
other Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; PROVIDED, HOWEVER, that the amount of
such Indebtedness is the lesser of (A) the Fair Market Value of such asset at
such date of determination and (B) the amount of such Indebtedness of such other
Persons; (viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person; and (ix) to the extent not otherwise included in the definition,
obligations of such Person in respect of Hedging Obligations. For purposes of
this definition, the maximum fixed redemption, repayment or repurchase price of
any Disqualified Stock or Preferred Stock that does not have a fixed redemption,
repayment or repurchase price is calculated in accordance with the terms of such
stock as if such stock were redeemed, repaid or repurchased on any date on which
Indebtedness is required to be determined pursuant to the Indenture; PROVIDED,
HOWEVER, that if such stock is not then permitted to be redeemed, repaid or
repurchased, the redemption, repayment or repurchase price is the book value of
such stock as reflected in the most recent financial statements of such Person.
The amount of Indebtedness of any Person at any date is the outstanding balance
at such date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"INTEREST RATE PROTECTION AGREEMENT" means, in respect of any Person, any
interest rate swap agreement, interest rate option agreement, interest rate cap
agreement, interest rate collar agreement, interest rate floor agreement or
other similar agreement or arrangement designed to protect such Person against
fluctuations in interest rates.
"INVESTMENT" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others) such
Person, or any purchase or acquisition of all or substantially all the business
or assets of, Capital Stock, Indebtedness, any other evidence of beneficial
ownership or other similar instruments issued by, such Person. For purposes of
"--Limitation on Restricted Payments" and "--Restricted and Unrestricted
Subsidiaries", (i) the term "Investment" includes the portion (proportionate to
the Company's equity interest in such Subsidiary) of the Fair Market Value of
the net assets of any Subsidiary of the Company at the time that such Subsidiary
is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company will be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (x) the Company's "Investment" in
such Subsidiary at the time of such redesignation less (y) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the Fair
Market Value of the net assets of such Subsidiary at the time that such
Subsidiary is so redesignated as a Restricted Subsidiary; and (ii) any property
transferred to or from an Unrestricted Subsidiary will be valued at its Fair
Market Value at the time of such transfer. In determining the amount of any
Investment in respect of any property or asset other than cash, such property or
asset will be valued at its Fair Market Value at the time of such Investment
(unless otherwise specified in this definition).
"ISSUE DATE" means the first date on which the Notes will be issued pursuant
to the Indenture.
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"LIEN" means any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangement, preference, priority, security interest, encumbrance,
easement, restriction, covenant, right-of-way, servitude, lien (statutory or
otherwise), charge, other security or similar agreement or preferential
arrangement of any kind or nature whatsoever or other adverse claim of any kind
or nature (including, without limitation, any conditional sale or other title
retention agreement or lease having substantially the same economic effect of
any of the foregoing).
"MAGNETICS DIVISION" means the property and assets of the Company or any
Restricted Subsidiary used in connection with the manufacture, marketing and
sale of magnetic tape, computer tape or other magnetic products.
"NET CASH PROCEEDS" from an Asset Disposition means the sum of (i) cash
payments and Temporary Cash Investments received (including any cash payments
received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received, but
excluding any other consideration received in the form of assumption by the
acquiring person of Indebtedness or other obligations relating to such
properties or assets or received in any other non-cash form) therefrom and (ii)
the Fair Market Value of all securities issued to the Company or a Subsidiary of
the Company in connection therewith, in each case net of (A) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred,
and all Federal, state, provincial, foreign and local taxes required to be paid
or accrued as a liability under GAAP as a consequence of such Asset Disposition,
(B) all payments made on any Indebtedness which is secured by any property or
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such property or assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law, be
repaid out of the proceeds from such Asset Disposition, (C) all distributions
and other payments required to be made to minority interest holders in
Subsidiaries or joint ventures as a result of such Asset Disposition and (D) the
deduction of appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the property or
assets disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition; PROVIDED, that, in the event
that any consideration for such Asset Disposition (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) will become Net Cash Proceeds only at
such time as it is released to the Company or any Restricted Subsidiary from
escrow; PROVIDED, FURTHER, that any non-cash consideration received in
connection with such Asset Disposition, which is subsequently converted to cash,
is deemed to be Net Cash Proceeds at such time and is thereafter be applied in
accordance with "-- Certain Covenants--Limitation on Sales of Assets and
Restricted Subsidiary Stock." The term "Net Cash Proceeds" from an issuance or
sale of Capital Stock means the cash proceeds of such issuance or sale, net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"OFFICER" means the Chairman of the Board, Chief Executive Officer, the
President, Chief Operating Officer, the Chief Administrative Officer, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers.
"OPINION OF COUNSEL" means a written opinion, in form acceptable to the
Trustee, from legal counsel who is acceptable to the Trustee. The counsel may be
an employee of or counsel to the Company or the Trustee.
"ORDINARY COURSE OF BUSINESS" means sales or assignments of inventory or
accounts receivable or the performance of services at Fair Market Value or the
collection of accounts receivable in the ordinary course of business and does
not include any sale, assignment or collection after the voluntary or
involuntary bankruptcy of the Company, including, without limitation, those
events of the type described in
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"--Events of Default." The ordinary course of business includes (i) sales of
inventory to customers, (ii) returns of merchandise to manufacturers or
distributors for refunds of merchandise to manufacturers or distributors for
refunds or credit and (iii) exchanges of inventory with manufacturers or
distributors for other inventory.
"PERMITTED INVESTMENT" means an Investment by the Company or any Restricted
Subsidiary in (i) a Wholly Owned Subsidiary (including any Person which will
become a Wholly Owned Subsidiary as a result of such Investment) or any Person
that is merged or consolidated with or into, or transfers or conveys all or
substantially all of its business or assets to, the Company or any Wholly Owned
Subsidiary at the time such Investment is made; (ii) Temporary Cash Investments;
(iii) receivables owing to the Company or such Restricted Subsidiary, if created
or acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; PROVIDED, HOWEVER, that nothing in this
paragraph limits in any way the ability of the Company or such Restricted
Subsidiary to settle, compromise or otherwise deal with such receivables in the
ordinary course of business; (iv) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (v) loans or advances, in an aggregate principal amount of $6 million
outstanding from time to time, to employees of the Company or such Restricted
Subsidiary made in the ordinary course of business consistent with past
practices of the Company or such Restricted Subsidiary, as the case may be; (vi)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or such Restricted
Subsidiary or in satisfaction of judgments; (vii) joint ventures, whether in the
form of cash or through a contribution of assets (the nature of which, if other
than cash, to be determined in good faith by the Board of Directors of the
Company, whose determination will be evidenced by a Board Resolution delivered
to the Trustee) in an amount not to exceed $10 million at any one time; (viii)
any other property, asset or Person if made pursuant to any written agreement of
the Company or such Restricted Subsidiary in effect on the Issue Date; and (ix)
Investments made as a result of the receipt of non-cash consideration from an
Asset Disposition that was made pursuant to and in compliance with "--Certain
Covenants-- Limitation on Sales of Assets and Restricted Subsidiary Stock" or a
disposition of assets pursuant to and in compliance with Limitations on Merger,
Consolidation or Sale of Assets provisions in the Indenture.
"PERMITTED LIENS" means: (i) pledges or deposits by the Company or any
Restricted Subsidiary under workmen's compensation laws, unemployment insurance
laws, other types of social security benefits or similar legislation, or good
faith deposits in connection with bids, tenders or contracts (other than for the
payment of Indebtedness ) or leases to which the Company or any Restricted
Subsidiary is a party, or deposits to secure public or statutory obligations or
deposits of cash or United States government bonds to secure surety or appeal
bonds to which the Company or any Restricted Subsidiary is a party, or deposits
as security for contested taxes or import duties or for the payment of rent, in
each case incurred by the Company or any Restricted Subsidiary in the ordinary
course of business consistent with past practice; (ii) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due from the Company or any Restricted Subsidiary or being contested in
good faith by appropriate proceedings by the Company or any Restricted
Subsidiary, as the case may be, or other Liens arising out of judgments or
awards against the Company or any Restricted Subsidiary with respect to which
the Company or such Restricted Subsidiary, as the case may be, will then be
prosecuting an appeal or other proceedings for review; (iii) Liens for property
taxes or other taxes, assessments or governmental charges of the Company or any
Restricted Subsidiary not yet due or payable or subject to penalties for
nonpayment or which are being contested by the Company or such Restricted
Subsidiary, as the case may be, in good faith by appropriate proceedings; (iv)
Liens in favor of issuers of standby letters of credit, performance bonds and
surety bonds issued pursuant to clause (vii) under "--Certain
Covenants--Limitation on Indebtedness" or clause (iii) under "--Certain
Covenants--Limitation on Restricted Subsidiary Indebtedness and Preferred
Stock"; (v) survey exceptions, encumbrances, easements or, reservations of, or
rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph
and telephone lines and other similar purposes or zoning or other restrictions
as to the use of real property of the Company or any Restricted
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Subsidiary incidental to the ordinary course of conduct of the business of the
Company or such Restricted Subsidiary or as to the ownership of properties of
the Company or any Restricted Subsidiary, which, in either case, were not
incurred in connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of the Company or any Restricted
Subsidiary; (vi) Liens to secure Indebtedness permitted under clauses (a)(ii)
and (b)(i) under "--Certain Covenants--Limitation on Indebtedness" or clauses
(vi) and (vii) of the definition of "Permitted Restricted Subsidiary
Indebtedness"; (vii) Liens outstanding immediately after the Issue Date as set
forth on Schedule II to the Indenture (and not otherwise permitted by clause
(vi)); (viii) Liens on property, assets or shares of stock of any Restricted
Subsidiary at the time such Restricted Subsidiary became a Subsidiary of the
Company; PROVIDED, HOWEVER, that (A) if any such Lien has been Incurred in
anticipation of such transaction, such property, assets or shares of stock
subject to such Lien will have a Fair Market Value at the date of the
acquisition thereof not in excess of the lesser of (1) the aggregate purchase
price paid or owed by the Company in connection with the acquisition of such
Restricted Subsidiary and (2) the Fair Market Value of all property and assets
of such Restricted Subsidiary and (B) any such Lien will not extend to any other
assets owned by the Company or any Restricted Subsidiary; (ix) Liens on property
or assets at the time the Company or any Restricted Subsidiary acquired such
assets, including any acquisition by means of a merger or consolidation with or
into the Company or such Restricted Subsidiary; PROVIDED, HOWEVER, that (A) if
any such Lien is Incurred in anticipation of such transaction, such property or
assets subject to such Lien will have a Fair Market Value at the date of the
acquisition thereof not in excess of the lesser of (1) the aggregate purchase
price paid or owed by the Company or such Restricted Subsidiary in connection
with the acquisition thereof and of any other property and assets acquired
simultaneously therewith and (2) the Fair Market Value of all such property and
assets acquired by the Company or such Restricted Subsidiary and (B) any such
Lien will not extend to any other property or assets owned by the Company or any
Restricted Subsidiary; (x) Liens securing Indebtedness or other obligations of a
Restricted Subsidiary owing to the Company or a Wholly Owned Subsidiary; (xi)
Liens to secure any extension, renewal, refinancing, replacement or refunding
(or successive extensions, renewals, refinancings, replacements or refundings),
in whole or in part, of any Indebtedness secured by Liens referred to in any of
clauses (vii), (viii) and (ix); PROVIDED, HOWEVER, that any such Lien will be
limited to all or part of the same property or assets that secured the original
Lien (plus improvements on such property) and the aggregate principal amount of
Indebtedness that is secured by such Lien will not be increased to an amount
greater than the sum of (A) the outstanding principal amount, or, if greater,
the committed amount, of the Indebtedness described under clauses (vii), (viii)
and (ix) at the time the original Lien became a Permitted Lien under the
Indenture and (B) an amount necessary to pay any premiums, fees and other
expenses Incurred by the Company in connection with such refinancing, refunding,
extension, renewal or replacement; (xii) Liens on property or assets of the
Company securing Hedging Obligations so long as the related Indebtedness is, and
is permitted under "-- Certain Covenants--Limitation on Indebtedness", secured
by a Lien on the same property securing the relevant Hedging Obligation; (xiii)
Liens securing Indebtedness incurred under (A) in the case of the Company, any
revolving credit facility, PROVIDED, that such Indebtedness constitutes
permitted hereunder and such Liens relate only to accounts receivable, inventory
and proceeds thereof (other than proceeds from the disposition of inventory
pursuant to any Sale/Leaseback Transaction); and (B) in the case of any Foreign
Restricted Subsidiary, any foreign currency revolving credit facility; PROVIDED,
that such Indebtedness was incurred in compliance with clause (ii) of "--Certain
Covenants--Limitation on Restricted Subsidiary Indebtedness and Preferred Stock"
and such Liens relate only to the accounts receivable, inventory and proceeds
thereof of such Foreign Restricted Subsidiary (other than proceeds from the
disposition of inventory pursuant to any Sale/Leaseback Transaction); and (xiv)
Liens on property or assets of the Company or any Restricted Subsidiary securing
Indebtedness (1) under Purchase Money Indebtedness or Capital Lease Obligations
permitted under, in the case of the Company, clause (vi) under "-- Certain
Covenants--Limitation on Indebtedness" and, in the case of such Restricted
Subsidiary, clause (ii) under "--Certain Covenants--Limitation on Restricted
Subsidiary Indebtedness and Preferred Stock" or (2) under Sale/Leaseback
Transactions permitted under "--Certain Covenants--Limitation on Sale/
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Leaseback Transactions"; PROVIDED, that (A) the amount of Indebtedness Incurred
in any specific case does not, at the time such Indebtedness is Incurred, exceed
the lesser of the cost or Fair Market Value of the property or asset acquired or
constructed in connection with such Purchase Money Indebtedness or Capital Lease
Obligation or subject to such Sale/Leaseback Transaction, as the case may be,
(B) such Lien will attach to such property or asset upon acquisition of such
property or asset and or upon commencement of such Sale/Leaseback Transaction,
as the case may be, and (C) no property or asset of the Company or any
Restricted Subsidiary (other than the property or asset acquired or contracted
in connection with such Purchase Money Indebtedness or Capital Lease Obligation
or subject to such Sale/Leaseback Transaction, as the case may be) are subject
to any Lien securing such Indebtedness.
"PERMITTED LINE OF BUSINESS" means (i) the line or lines of business in
which the Company or any of its Subsidiaries is engaged on the Issue Date and
(ii) a line or lines of business similar or related to the line or lines of
business described in the foregoing clause (i).
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision hereof or any other entity.
"PREFERRED STOCK", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"PRO FORMA" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act (to the extent
applicable) as interpreted in good faith by the Board of Directors after
consultation with the independent certified public accountants of the Company,
or otherwise a calculation made in good faith by such Board after consultation
with such independent certified public accountants, as the case may be.
"PURCHASE MONEY INDEBTEDNESS" means, with respect to any Person, all
obligations of such Person (i) consisting of the deferred purchase price of any
property or assets, conditional sale obligations, obligations under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business) and other purchase money obligations, in each case
where the maturity of such obligation does not exceed the anticipated useful
life of the property or asset being financed, (ii) Incurred to finance the
acquisition or construction of such property or asset and (iii) Incurred to
finance the acquisition of 100% of the Capital Stock (other than directors'
qualifying shares) of any other Person.
"QUALIFIED CAPITAL STOCK" of any Person shall mean any Capital Stock of such
Person which is not Disqualified Stock.
"REDEEMABLE STOCK" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including, without limitation,
upon the happening of any event) (i) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise, (ii) is convertible or
exchangeable for Indebtedness (other than Preferred Stock) or Disqualified Stock
or (iii) is redeemable at the option of the holder thereof, in whole or in part.
"REFINANCING INDEBTEDNESS" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," "refinancing" and "refinanced"
has a correlative meaning) any Indebtedness (including Indebtedness of the
Company that refinances Indebtedness of any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that
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refinances Refinancing Indebtedness; PROVIDED, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being refinanced and (iii)
such Refinancing Indebtedness is Incurred in an aggregate principal amount (or
if issued with original issue discount, an aggregate issue price) that is equal
to or less than the sum of (A) the aggregate principal amount (or if issued with
original issue discount, the aggregate accreted value) then outstanding of the
Indebtedness being refinanced and (B) any premiums, fees and other expenses paid
by the Company or the Restricted Subsidiary, as the case may be, in connection
with such refinancing; PROVIDED, FURTHER, that Refinancing Indebtedness does not
include (x) Indebtedness of a Subsidiary of the Company that refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary; PROVIDED,
FURTHER, that the covenants relating to the Refinancing Indebtedness are no more
restrictive in the aggregate then those of the Indebtedness being refinanced
and, if the Indebtedness being refinanced is subordinated to the Notes, the
Refinancing Indebtedness is at least as subordinated to the Notes as the
Indebtedness being refinanced.
"STATED MATURITY" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"SUBORDINATED OBLIGATION" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to the terms of such
Indebtedness or pursuant to a written agreement.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property now
owned or hereafter by the Company whereby pursuant to a direct or indirect
arrangement the Company or any Restricted Subsidiary of the Company transfers
such property to a Person and the Company or such Restricted Subsidiary leases
it from such Person.
"SUBSIDIARY" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"TEMPORARY CASH INVESTMENTS" means any of the following: (i) investments in
U.S. Government Obligations maturing within 90 days of the date of acquisition
thereof; (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 90 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America or any State thereof having capital, surplus and
undivided profits aggregating in excess of $250,000,000 (or the Dollar
Equivalent thereof) and whose long-term debt is rated "A" or higher according to
Moody's Investors Service, Inc. (or such equivalent rating by at least one
"nationally recognized statistical rating organization" (as defined in Rule 436
under the Securities Act)); (iii) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
entered into with a bank meeting the qualifications described in clause (ii);
and (iv) investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America with a rating at the time as of which any investment therein is made of
"P-2" (or higher) according to Moody's Investors Service, Inc. or "A-2" (or
higher) according to Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc..
100
<PAGE>
"TRADE PAYABLES" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business of such
Person in connection with the acquisition of goods or services, including under
the SKC Agreement as such Agreement is amended from time to time.
"UNRESTRICTED SUBSIDIARY" means (i) each Subsidiary of the Company that the
Company has designated, or is deemed to have designated, pursuant to the
provisions described under "--Restricted and Unrestricted Subsidiaries" as an
Unrestricted Subsidiary and that has not been redesignated a Restricted
Subsidiary and (ii) any Subsidiary of an Unrestricted Subsidiary.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"VOTING STOCK" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary, all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or another Wholly Owned Subsidiary.
101
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal federal income tax
consequences of the acquisition, beneficial ownership and disposition of
Exchange Notes that are held as capital assets and received in exchange for
tendered Old Notes that were purchased at original issuance, but does not
purport to be a comprehensive description of all of the tax considerations that
may be relevant to an investment in Exchange Notes. This summary deals only with
(i) citizens or residents of the United States or any State or political
subdivision thereof, (ii) corporations, partnerships and other business entities
created or organized under the laws of the United States, (iii) estates the
income of which is subject to U.S. federal income taxation regardless of its
source and (iv) trusts with respect to which a court within the United States is
able to exercise primary supervision over its administration and one or more
U.S. fiduciaries have the authority to control all substantial decisions (each,
a "Holder"). This summary does not address investors that may be subject to
special rules, such as banks, tax-exempt entities, insurance companies, dealers
in securities, persons whose functional currency is not the U.S. dollar or
persons that will hold Exchange Notes as part of a "straddle" or "conversion
transaction" for federal income tax purposes or otherwise as part of an
integrated transaction.
This summary is based on laws, regulations, rulings and decisions in effect
as of the date of this Prospectus, all of which are subject to change, with
possible retroactive effect. No ruling from the Internal Revenue Service (the
"IRS") will be sought with respect to the Exchange Notes, and the IRS could take
a contrary view with respect to the matters described below. HOLDERS SHOULD
CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND OTHER TAX
CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF EXCHANGE
NOTES.
CONSEQUENCES OF THE EXCHANGE
The exchange of Exchange Notes for Old Notes pursuant to the Exchange Offer
will not constitute a taxable event for federal income tax purposes.
Accordingly, no gain or loss will be recognized by a Holder upon receipt of an
Exchange Note, the holding period of an Exchange Note will include the holding
period of the Old Note exchanged therefor, and the adjusted tax basis of an
Exchange Note will be the same as the adjusted tax basis immediately before the
exchange of the Old Note exchanged therefor.
STATED INTEREST
Stated interest on the Exchange Notes will be taxable to a Holder as
ordinary interest income as the interest accrues or is paid (in accordance with
the Holder's method of tax accounting).
ORIGINAL ISSUE DISCOUNT
The Exchange Notes will be treated as issued with original issue discount
("OID") for federal income tax purposes. The aggregate amount of OID in respect
of an Exchange Note will be equal to the difference between its principal amount
and its "issue price." An Exchange Note's "issue price" is equal to the first
price (including any accrued interest) at which a substantial portion of the Old
Notes were first sold to investors.
Holders generally will be required to include OID on an Exchange Note in
income over the term of the Exchange Note as the OID accrues, without regard to
the timing of receipt of the cash attributable to such income. OID will accrue
under a constant yield method based on the original yield to maturity of the
Exchange Note calculated by reference to its issue price. The amount of OID on
an Exchange Note allocable to each semi-annual accrual period is determined by
(i) multiplying the "adjusted issued price" (as defined) of the Note at the
beginning of the accrual period by a fraction, the numerator of which is the
annual yield to maturity of the Exchange Note and the denominator of which is
two and (ii) subtracting from that product the stated interest payable on the
Exchange Note with respect to that semi-annual accrual period. The "adjusted
issue price" of an Exchange Note at the beginning of any semi-annual
102
<PAGE>
accrual period will generally be the sum of its issue price and the amount of
OID allocable to all prior accrual periods.
SALE, EXCHANGE AND RETIREMENT OF NOTES
Upon the sale, exchange or retirement of an Exchange Note, a Holder will
recognize gain or loss equal to the difference between the amount received
(other than amounts in respect of accrued and unpaid interest) and the adjusted
tax basis of the Exchange Note. A Holder's tax basis in an Exchange Note will,
in general, be such Holder's cost therefor, increased by the aggregate OID with
respect thereto previously included in income by the Holder. Any such gain or
loss will be capital gain or loss and will be long-term capital gain or loss if,
at the time of sale, exchange or retirement, the Exchange Note has been held for
more than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Information reporting requirements apply to certain payments of principal of
and interest on (and the amount of OID, if any, accrued on) a debt obligation,
and to proceeds of certain sales of a debt obligation before maturity, paid to
certain nonexempt persons. In addition, a backup withholding tax also may apply
with respect to such amounts if such a person fails to provide a correct
taxpayer identification number and other information. The backup withholding tax
rate is 31%. Any amounts withheld under the backup withholding rules from a
payment to a Holder will be allowed as a refund or a credit against such
Holder's U.S. federal income tax.
STATE, LOCAL AND FOREIGN TAXES
Holders should consult their tax advisors with respect to state, local and
foreign tax considerations relevant to an investment in Exchange Notes.
103
<PAGE>
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Company or any
affiliate of the Company) may exchange such Old Notes for Exchange Notes
pursuant to the Exchange Offer; PROVIDED, that each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that for a period of 90 days
after consummation of the Exchange Offer, it will make this Prospectus, as it
may be amended or supplemented from time to time, available to any broker-dealer
for use in connection with any such resale. In addition, until , 1997,
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other holder of Exchange Notes. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer and to the Company's performance of, or
compliance with, the Registration Rights Agreement (other than commissions or
concessions of any brokers or dealers) and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters related to the Exchange Notes being offered hereby are
being passed upon for the Company by Cadwalader, Wickersham & Taft, New York,
New York.
EXPERTS
The consolidated balance sheets of the Company and its subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1996, included in this Prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto appearing herein.
104
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Financial Statements
Report of Independent Public Accountants................................................................. F-2
Consolidated Balance Sheets as of September 30, 1996 and 1995............................................ F-3
Consolidated Statements of Operations for the four months ended September 30, 1996, the eight months
ended May 31, 1996 and the twelve months ended September 30, 1995 and 1994............................. F-4
Consolidated Statements of Cash Flows for the four months ended September 30, 1996, the eight months
ended May 31, 1996 and the twelve months ended September 30, 1995 and 1994............................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the four months ended September 30, 1996,
the eight months ended May 31, 1996 and the twelve months ended September 30, 1995 and 1994............ F-7
Notes to Consolidated Financial Statements............................................................... F-8
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997 (unaudited) and September 30, 1996............ F-39
Condensed Consolidated Statements of Operations for the three months ended March 31, 1997 (unaudited) and
1996 (unaudited)....................................................................................... F-40
Condensed Consolidated Statements of Operations for the six months ended March 31, 1997 (unaudited) and
1996 (unaudited)....................................................................................... F-41
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 1997 (unaudited) and
1996 (unaudited)....................................................................................... F-42
Condensed Consolidated Statements of Stockholders' Equity for the six months ended March 31, 1997
(unaudited) and 1996 (unaudited)....................................................................... F-44
Notes to Condensed Consolidated Financial Statements..................................................... F-45
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Anacomp, Inc.:
We have audited the accompanying consolidated balance sheets of Anacomp,
Inc. (an Indiana corporation) and subsidiaries as of September 30, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the four months ended September 30, 1996,
the eight months ended May 31, 1996 and the twelve months ended September 30,
1995 and 1994. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 2 to the consolidated financial statements,
effective June 4, 1996, the Company emerged from protection under Chapter 11 of
the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was confirmed
by the Bankruptcy Court on May 20, 1996. In accordance with AICPA Statement of
Position 90-7, the Company adopted "Fresh Start Reporting" whereby its assets,
liabilities and new capital structure were adjusted to reflect estimated fair
values as of May 31, 1996. As a result, the consolidated financial statements
for the periods subsequent to May 31, 1996 reflect the Successor Company's new
basis of accounting and are not comparable to the Predecessor Company's pre-
reorganization consolidated financial statements.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Anacomp,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for the four months ended September 30,
1996, the eight months ended May 31, 1996 and the twelve months ended September
30, 1995 and 1994 in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
June 30, 1995, the Company changed its method of accounting for the measurement
of goodwill impairment.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
November 15, 1996
F-2
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
----------------------------
<CAPTION>
AS OF AS OF
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 38,198 $ 19,415
Restricted cash................................................................... 9,597 --
Accounts and notes receivable, less allowances for doubtful accounts of $6,459 and
$7,367,respectively............................................................. 58,806 90,091
Current portion of long-term receivables.......................................... 4,690 6,386
Inventories....................................................................... 31,856 53,995
Prepaid expenses and other........................................................ 4,383 5,306
------------- -------------
Total current assets................................................................ 147,530 175,193
Property and equipment, at cost less accumulated depreciation and amortization of
$3,696 and $96,898, respectively.................................................. 27,102 44,983
Long-term receivables, net of current portion....................................... 10,632 12,322
Excess of purchase price over net assets of businesses acquired and other
intangibles, net.................................................................. 2,285 160,315
Reorganization value in excess of identifiable assets (See Note 3).................. 240,344 --
Other assets........................................................................ 7,528 28,216
------------- -------------
$ 435,421 $ 421,029
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt................................................. $ 31,848 $ 389,900
Accounts payable.................................................................. 48,090 57,368
Accrued compensation, benefits and withholdings................................... 13,728 20,891
Accrued income taxes.............................................................. 11,930 9,365
Accrued interest.................................................................. 10,586 40,746
Other accrued liabilities......................................................... 36,814 60,587
------------- -------------
Total current liabilities........................................................... 152,996 578,857
------------- -------------
Long-term debt, net of current portion.............................................. 217,044 --
Other noncurrent liabilities........................................................ 6,812 5,841
------------- -------------
Total noncurrent liabilities........................................................ 223,856 5,841
------------- -------------
Commitments and contingencies (See Note 18)
Redeemable preferred stock, $.01 par value, issued and outstanding 500,000 shares
(aggregate preference value of $25,000)........................................... -- 24,574
------------- -------------
Stockholders' equity (deficit):
Preferred stock, 1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value; 20,000,000 and 100,000,000 shares authorized
respectively; 10,099,050 and 46,187,625 issued, respectively.................... 101 462
Capital in excess of par value.................................................... 80,318 182,725
Cumulative translation adjustment (from May 31, 1996 for Reorganized Company)..... 159 1,329
Accumulated deficit (from May 31, 1996 for Reorganized Company)................... (22,009) (372,759)
------------- -------------
Total stockholders' equity (deficit)................................................ 58,569 (188,243)
------------- -------------
$ 435,421 $ 421,029
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
-----------------------------------------------------
<CAPTION>
TWELVE MONTHS
FOUR MONTHS EIGHT MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
SEPTEMBER 30, MAY 31, -----------------------
1996 1996 1995 1994
------------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C>
REVENUES:
Services provided....................................... $ 59,055 $ 130,202 $ 219,881 $ 223,511
Equipment and supply sales.............................. 92,487 204,396 371,308 369,088
------------- ------------- ----------- ----------
151,542 334,598 591,189 592,599
------------- ------------- ----------- ----------
OPERATING COSTS AND EXPENSES:
Costs of services provided.............................. 31,858 72,641 126,493 122,628
Costs of equipment and supplies sold.................... 70,097 156,526 290,842 274,575
Selling, general and administrative expenses............ 29,688 63,826 132,459 115,819
Amortization of reorganization asset.................... 25,663 -- -- --
Special charges (See Note 1)............................ -- -- 136,889 --
Restructuring charges (See Note 6)...................... -- -- 32,695 --
------------- ------------- ----------- ----------
157,306 292,993 719,378 513,022
------------- ------------- ----------- ----------
Income (loss) before interest, other income,
reorganization items, income taxes, extraordinary credit
and cumulative effect of accounting change.............. (5,764) 41,605 (128,189) 79,577
------------- ------------- ----------- ----------
Interest income........................................... 997 1,576 2,000 3,144
Interest expense and fee amortization..................... (12,869) (26,760) (70,938) (67,174)
Financial restructuring costs (See Note 7)................ -- -- (5,987) --
Other income (expense).................................... 27 6,968 (212) (192)
------------- ------------- ----------- ----------
(11,845) (18,216) (75,137) (64,222)
------------- ------------- ----------- ----------
Income (loss) before reorganization items, income taxes,
extraordinary credit, and cumulative effect of
accounting change....................................... (17,609) 23,389 (203,326) 15,355
Reorganization items (See Note 4)......................... -- 92,839 -- --
------------- ------------- ----------- ----------
Income (loss) before income taxes, extraordinary credit
and cumulative effect of accounting change.............. (17,609) 116,228 (203,326) 15,355
Provision for income taxes................................ 4,400 3,700 35,000 8,400
------------- ------------- ----------- ----------
Income (loss) before extraordinary credit and cumulative
effect of accounting change............................. (22,009) 112,528 (238,326) 6,955
Extraordinary credit--gain on discharge of indebtedness,
net of taxes (See Note 3)............................... -- 52,442 -- --
Cumulative effect on prior years of a change in accounting
for income taxes........................................ -- -- -- 8,000
------------- ------------- ----------- ----------
Net income (loss)......................................... (22,009) 164,970 (238,326) 14,955
Preferred stock dividends and discount accretion.......... -- 540 2,158 2,158
------------- ------------- ----------- ----------
Net income (loss) available to common stockholders........ $ (22,009) $ 164,430 $ (240,484) $ 12,797
------------- ------------- ----------- ----------
------------- ------------- ----------- ----------
EARNINGS (LOSS) PER COMMON ANDCOMMON EQUIVALENT SHARE..... $ (2.19)
-------------
-------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
--------------------------------------------------
<CAPTION>
TWELVE MONTHS
FOUR MONTHS EIGHT MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
SEPTEMBER 30, MAY 31, --------------------
1996 1996 1995 1994
------------- ------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (22,009) $ 164,970 $(238,326) $ 14,955
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary credit...................................... -- (52,442) -- --
Non-cash reorganization items............................. -- (107,352) -- --
Depreciation and amortization............................. 31,610 18,788 43,375 40,649
Cumulative effect of a change in accounting for income
taxes................................................... -- -- -- (8,000)
Provision (benefit) for losses on accounts receivable..... 482 110 2,742 (695)
Provision for inventory valuation......................... -- -- 10,956 --
Non-cash charge in lieu of taxes.......................... 1,300 -- -- --
Deferred taxes............................................ -- -- 29,000 6,000
Special charges (See Note 1).............................. -- -- 136,889 --
Gain on sale of ICS Division.............................. -- (6,202) -- --
Other..................................................... (175) 997 6,308 776
Restricted cash requirements.................................. (2,755) (6,842) -- --
Change in assets and liabilities net of effects from
acquisitions:
Decrease in accounts and long-term receivables.............. 5,637 24,624 30,948 3,040
Decrease (increase) in inventories and prepaid expenses..... 10,416 11,174 (1,612) 15,254
Decrease (increase) in other assets......................... 1 1,094 (8,207) (11,349)
Increase (decrease) in accounts payable and accrued
expenses................................................ (17,283) (5,077) 11,465 (3,623)
Increase (decrease) in other noncurrent liabilities......... 4,671 (5,899) (3,626) (4,323)
------------- ------------- --------- ---------
Net cash provided by operating activities................. 11,895 37,943 19,912 52,684
------------- ------------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of other assets.......................... -- -- 18,777 7,805
Proceeds from sale of ICS Division.......................... -- 13,554 -- --
Purchases of property, plant and equipment.................. (2,224) (3,599) (14,372) (18,868)
Payments to acquire companies and customer rights........... (3,844) -- (1,262) (14,565)
------------- ------------- --------- ---------
Net cash provided by (used in) investing activities....... (6,068) 9,955 3,143 (25,628)
------------- ------------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants......... (139) -- 743 1,484
Proceeds from revolving line of credit and long-term
borrowing............................................... -- 2,656 22,529 39,000
Principal payments on long-term debt........................ (22,646) (15,332) (45,859) (71,095)
Preferred dividends paid.................................... -- -- (1,031) (2,062)
------------- ------------- --------- ---------
Net cash used in financing activities..................... (22,785) (12,676) (23,618) (32,673)
------------- ------------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....................... (172) 691 107 566
------------- ------------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (17,130) 35,913 (456) (5,051)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. 55,328 19,415 19,871 24,922
------------- ------------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 38,198 $ 55,328 $ 19,415 $ 19,871
------------- ------------- --------- ---------
------------- ------------- --------- ---------
</TABLE>
F-5
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
--------------------------------------------------
<CAPTION>
TWELVE MONTHS
FOUR MONTHS EIGHT MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
SEPTEMBER 30, MAY 31, --------------------
1996 1996 1995 1994
------------- ------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest.................................................... $ 5,581 $ 11,613 $ 39,426 $ 57,781
Income taxes................................................ $ 2,942 $ 3,045 $ 4,128 $ 2,007
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
See Note 3 for discussion of non-cash activity related to Fresh Start
Reporting and the Reorganization. During 1996, 1995, and 1994 the Company
acquired companies and rights to provide future services. In conjunction with
these acquisitions, the purchase price consisted of the following:
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
----------------------------------------------------
<CAPTION>
TWELVE MONTHS
FOUR MONTHS EIGHT MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
SEPTEMBER 30, MAY 31, --------------------
1996 1996 1995 1994
------------- --------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash paid..................................................... $ 3,844 $ -- $ 1,262 $ 14,565
Credit memos issued........................................... -- -- -- 3,085
Notes payable issued.......................................... 500 -- -- 4,290
Stock issued.................................................. -- -- -- 17,201
------ ----- --------- ---------
Total fair value of acquisitions.............................. $ 4,344 $ -- $ 1,262 $ 39,141
------ ----- --------- ---------
------ ----- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE
COMMON EXCESS OF TRANSLATION ACCUMULATED
STOCK PAR VALUE ADJUSTMENT DEFICIT TOTAL
----------- ---------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993-- PREDECESSOR
COMPANY.......................................... $ 406 $ 163,209 $ (4,744) $ (145,072) $ 13,799
Common stock issued for purchases under the
Employee Stock Purchase Plan..................... 3 872 -- -- 875
Exercise of stock options.......................... 3 606 -- -- 609
Preferred stock dividends.......................... -- -- -- (2,062) (2,062)
Accretion of redeemable preferred stock discount... -- -- -- (96) (96)
Translation adjustments for twelve months.......... -- -- 4,475 -- 4,475
NBS stock issuance................................. 20 7,380 -- -- 7,400
Graham stock issuance.............................. 25 9,776 -- -- 9,801
Net income for the twelve months................... -- -- -- 14,955 14,955
----- ---------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1994-- PREDECESSOR
COMPANY.......................................... 457 181,843 (269) (132,275) 49,756
Common stock issued for purchases under the
Employee Stock Purchase Plan..................... 3 689 -- -- 692
Exercise of stock options.......................... 1 50 -- -- 51
Preferred stock dividends.......................... -- -- -- (2,062) (2,062)
Accretion of redeemable preferred stock discount... -- -- -- (96) (96)
Translation adjustments for twelve months.......... -- -- 1,598 -- 1,598
Graham stock issuance.............................. 1 143 -- -- 144
Net loss for the twelve months..................... -- -- -- (238,326) (238,326)
----- ---------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1995-- PREDECESSOR
COMPANY.......................................... 462 182,725 1,329 (372,759) (188,243)
Preferred stock conversion......................... 11 7,893 -- -- 7,904
Preferred stock dividends.......................... -- -- -- (516) (516)
Accretion of redeemable preferred stock discount... -- -- -- (24) (24)
Translation adjustment for eight months............ -- -- (1,560) -- (1,560)
NBS stock issuance................................. 11 (11) -- -- --
Reorganization..................................... (484) (190,607) 231 208,329 17,469
New stock issuance................................. 100 79,666 -- -- 79,766
Net income for eight months........................ -- -- -- 164,970 164,970
----- ---------- ----------- ------------ -----------
BALANCE AT MAY 31, 1996--
REORGANIZED COMPANY.............................. 100 79,666 -- -- 79,766
Common stock issued for restricted stock award..... 1 791 -- -- 792
Fees associated with rights offering............... -- (139) -- -- (139)
Translation adjustment for four months............. -- -- 159 -- 159
Net loss for four months........................... -- -- -- (22,009) (22,009)
----- ---------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1996-- REORGANIZED
COMPANY.......................................... $ 101 $ 80,318 $ 159 $ (22,009) $ 58,569
----- ---------- ----------- ------------ -----------
----- ---------- ----------- ------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The consolidated financial statements include the accounts of Anacomp, Inc.
("Anacomp" or the "Company") and its wholly-owned subsidiaries. Material
intercompany transactions have been eliminated. Certain amounts in the prior
year consolidated financial statements have been reclassified to conform to the
current presentation.
Due to the Reorganization and implementation of Fresh Start Reporting, the
consolidated financial statements for the Reorganized Company (period starting
May 31, 1996) are not comparable to those of the Predecessor Company. For
financial reporting purposes, the effective date of the emergence from
bankruptcy is considered to be the close of business on May 31, 1996.
A black line has been drawn on the accompanying consolidated financial
statements to distinguish between the Reorganized Company and the Predecessor
Company.
FOREIGN CURRENCY TRANSLATION
Substantially all assets and liabilities of Anacomp's international
operations are translated at the year-end exchange rates; income and expenses
are translated at the average exchange rates prevailing during the year.
Translation adjustments are accumulated in a separate section of stockholders'
equity. Foreign currency transaction gains and losses are included in net
income.
SEGMENT REPORTING
Anacomp operates in a single business segment: providing equipment, supplies
and services for information management, including storage, processing and
retrieval.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenues from sales of products and services or from lease of equipment
under sales-type leases are recorded based on shipment of products or
performance of services. Under sales-type leases, the present value of all
payments due under the lease contracts is recorded as revenue, cost of sales is
charged with the book value of the equipment plus installation costs, and future
interest income is deferred and recognized over the lease term. Revenues from
maintenance contracts are deferred and recognized in earnings on a pro rata
basis over the period of the agreements.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined by methods approximating the first-in, first-out basis.
F-8
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The cost of the inventories is distributed as follows:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
<CAPTION>
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished goods................................................. $ 22,557 $ 38,702
Work in process................................................ 2,748 4,955
Raw materials and supplies..................................... 6,551 10,338
------------- -------------
$ 31,856 $ 53,995
------------- -------------
------------- -------------
</TABLE>
RESTRICTED CASH
Restricted cash represents cash reserved as collateral for letters of credit
issued by the Company or cash held in escrow primarily to secure certain
contingent obligations of the Company. The contingent obligations are primarily
related to environmental liabilities and certain insurance policies.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization of
property and equipment are generally provided under the straight-line method for
financial reporting purposes over the shorter of the estimated useful lives or
the lease terms. Tooling costs are amortized over the total estimated units of
production, not to exceed three years. In accordance with Fresh Start Reporting,
property and equipment were reflected at fair market values as of May 31, 1996
(See Note 3).
DEBT ISSUANCE COSTS
The Company capitalizes all costs related to its issuance of debt and
amortizes those costs using the effective interest method over the life of the
related debt instruments. Debt issuance costs were $200,000 and $12.7 million at
September 30, 1996 and 1995, respectively, and are included in "Other assets" in
the accompanying Consolidated Balance Sheets. During the eight months ended May
31, 1996 and fiscal years 1995 and 1994, the Company amortized $1 million, $5.7
million and $5.3 million, respectively, of debt issuance costs which are
included in "Interest expense and fee amortization" in the accompanying
Consolidated Statements of Operations. Also, in accordance with AICPA Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" (SOP 90-7), the Company wrote-off deferred debt issuance costs
of $11.1 million upon the date of the bankruptcy filing. These costs are
included in "Reorganization Items" in the accompanying Consolidated Statements
of Operations for the eight months ended May 31, 1996.
GOODWILL
Excess of purchase price over net assets of businesses acquired ("goodwill")
is amortized on the straight-line method over the estimated periods of future
demand for the related products acquired. Goodwill at September 30, 1996 is
being amortized over a three year period. Effective with Fresh Start Reporting,
the Company now measures impairment based on future cash flows of the related
products.
F-9
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
For the Predecessor Company, effective June 30, 1995, Anacomp elected to
modify its method of measuring goodwill impairment to a fair value approach. If
it was determined that impairment had occurred, the excess of the unamortized
goodwill over the fair value of the goodwill applicable to the business unit was
charged to operations. For purposes of determining fair value, the Company
valued the goodwill using a multiple of cash flow from operations based on
consultation with its investment advisors. Anacomp concluded that fair value was
a better measurement of goodwill considering the Company's highly leveraged
financial condition. As discussed in Note 8, Anacomp revised its projected
operating results in fiscal 1995 which, along with applying Anacomp's revised
goodwill accounting policy, resulted in a write-off of $108 million of goodwill
for the year ended September 30, 1995. This write-off is reflected in "Special
charges" in the accompanying Consolidated Statement of Operations.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED TO IDENTIFIABLE ASSETS
As more fully discussed in Note 3, the Company has "reorganization value in
excess of amounts allocated to identifiable assets" of $240,344 at September 30,
1996. This asset is being amortized over a 3.5 year period beginning May 31,
1996. The carrying value of the Reorganization Asset will be periodically
reviewed if the facts and circumstances suggest that it may be impaired. The
Company will measure the impairment based upon future cash flows of the Company
over the remaining amortization period.
OTHER INTANGIBLES
Other intangibles of $21.3 million, net of accumulated amortization of $16.1
million, at September 30, 1995, represent the purchase of the rights to provide
microfilm or maintenance services to certain customers and were being amortized
on a straight-line basis over 10 years. These unamortized costs were evaluated
for impairment each period by determining their net realizable value. As
discussed in Note 3, in connection with Fresh Start Reporting, the Company
wrote-off the remaining balance of other intangibles at May 31, 1996.
RESEARCH AND DEVELOPMENT
The engineering costs associated specifically with research and development
programs are expensed as incurred, and amounted to $1.3 million for the four
months ended September 30, 1996, $2.4 million for the eight months ended May 31,
1996, $2.2 million in 1995, and $3 million in 1994. The Company supports several
engineering processes, including basic technological research, product
development and sustaining engineering support for existing customer
installations. The majority of the operating costs for engineering programs in
fiscal years 1995 and 1994 related to continued software development for the XFP
2000 COM recorder, which were recorded as deferred software costs.
Deferred software costs are the capitalized costs of software products to be
sold in future periods with COM systems or as stand alone products for current
COM system users. The unamortized costs are evaluated for impairment each period
by determining their net realizable value. Such costs are amortized over the
greater of the estimated units of sale or under the straight-line method not to
exceed five years. Due to lower than expected sales of new software products
introduced in 1995, Anacomp revised its projected future sales and operating
results of software products through 1999. As a result, during 1995 Anacomp
wrote off $20.3 million of deferred software costs and established a reserve of
$8.6 million (none of which exists at September 30, 1996) for future payments to
IBM Pennant Systems for software royalty and system support obligations which
are not recoverable based on these revised projections (See Note
F-10
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
18). These charges are reflected in "Special charges" in the accompanying
Consolidated Statement of Operations for the fiscal year ended September 30,
1995. Unamortized deferred software costs remaining as of September 30, 1996
total $4.2 million and are included in "Other assets" on the accompanying
Consolidated Balance Sheets.
SALE-LEASEBACK TRANSACTIONS
Anacomp entered into sale-leaseback transactions of $19.3 million in 1995
and $11.9 million in 1994 relating to COM systems installed in the Company's
data service centers. Part of the proceeds were treated as fixed asset sales and
the remainder as sales of equipment. Revenues of $3.5 million and $5.6 million
were recorded for the years ended September 30, 1995 and 1994, respectively. All
profits were deferred and were being recognized over the applicable leaseback
periods. In connection with Fresh Start Reporting as discussed in Note 3, the
deferred profit amount was reduced to zero. Concurrently, the Company
established an unfavorable lease reserve related to these leases in the amount
of $8.6 million. The unfavorable lease reserve is being amortized over the
applicable lease periods.
ACCRUED LEASE RESERVES
Other noncurrent liabilities include reserves established for unfavorable
facility and equipment lease commitments, vacant facilities and related future
lease costs. Total obligations recorded for these unfavorable lease commitments
and future lease and related costs at their estimated amounts were $11.4 million
and $7.5 million at September 30, 1996 and 1995, respectively. The current
portion of these obligations was $6.8 million and $2 million as of September 30,
1996 and 1995, respectively, and is included in "Other accrued liabilities" and
"Accounts payable" in the accompanying Consolidated Balance Sheets.
INCOME TAXES
In general, Anacomp's practice has been to reinvest the earnings of its
foreign subsidiaries in those operations and to repatriate those earnings only
when it was advantageous to do so. In 1995, Anacomp changed its practice whereby
the Company now repatriates these earnings. As a result, Anacomp recorded
deferred taxes of $8.8 million on all undistributed foreign earnings in 1995.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 mandates the liability method for computing deferred income taxes
and requires that the benefit of certain loss carryforwards be estimated and
recorded as an asset unless it is "more likely than not" that the benefit will
not be realized. Another principal difference is that changes in tax rates and
laws will be reflected in income from continuing operations in the period such
changes are enacted.
Anacomp adopted FAS 109 in the first quarter of fiscal 1994. Under FAS 109,
the Company recorded a significant deferred tax asset in 1994 to reflect the
benefit of loss carryforwards that could not be recognized under prior
accounting rules. The recording of this asset reduced goodwill and increased
income as discussed in more detail in Note 17. During 1995, the valuation
allowance was increased to reduce the deferred tax asset to zero as a result of
the Company's deteriorating financial condition.
F-11
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Anacomp considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. These temporary
investments, primarily repurchase agreements and other overnight investments,
are recorded at cost, which approximates market.
NOTE 2. FINANCIAL REORGANIZATION:
On May 20, 1996 (the "Confirmation Date"), the U.S. Bankruptcy Court
confirmed the Company's Third Amended Joint Plan of Reorganization (the
"Reorganization"), and on June 4, 1996, the Company emerged from bankruptcy.
Pursuant to the Reorganization, on such date certain indebtedness of the Company
was canceled in exchange for cash, new indebtedness, and /or new equity
interests, certain indebtedness was reinstated, certain other prepetition claims
were discharged, certain claims were settled, executory contracts and unexpired
leases were assumed or rejected, and the members of a new Board of Directors of
the Company were designated. The Company simultaneously distributed to creditors
approximately $22 million in cash, $112.2 million principal amount of its
11 5/8% Senior Secured Notes due 1999 (the "Senior Secured Notes") and $160
million principal amount of its 13% Senior Subordinated Notes due 2002 (the
"Senior Subordinated Notes"), equity securities consisting of 10 million shares
of new common stock and 362,694 warrants, each of which is convertible into
1.0566 shares of new common stock during the five year period ending June 3,
2001 at an exercise price of $11.57 per share.
The process began January 5, 1996, when Anacomp filed a Prenegotiated Plan
of Reorganization with the U.S. Bankruptcy Court in Delaware under Chapter 11 of
the U.S. Bankruptcy Code. The Company was in default under substantially all of
its debt agreements as a result of its failure to make $89.7 million of
principal payments scheduled for April 26, 1995 and October 26, 1995 on the
senior secured credit facilities (including $60 million relating to the
revolving loan agreement which expired on October 26, 1995), $11.4 million of
principal and interest payments on the 9% Convertible Subordinated Debentures
which were due January 15, 1996, $34.1 million of interest payments scheduled
for May 1, 1995 and November 1, 1995 on its Senior Subordinated Notes, and $3.2
million of interest payments scheduled for July 15, 1995 and January 15, 1996 on
the 13.875% Subordinated Debentures, as well as certain financial covenant
violations, and the cross-default provisions of the other debt agreements.
As noted above, upon emerging from bankruptcy, the Company's Revolving Loan,
Multi-Currency Revolving Loan, Term Loans, Series B Senior Notes, 15% Senior
Subordinated Notes, 13.875% Convertible Subordinated Debentures and 9%
Convertible Subordinated Debentures were canceled. In addition, the Company's
8.25% Cumulative Convertible Redeemable Exchangeable Preferred Stock, Common
Stock, Warrants and Stock Options were canceled. In connection therewith, the
Company issued new debt and equity securities as mentioned above and described
in more detail in Notes 14 and 16.
NOTE 3. FRESH START REPORTING:
As of May 31, 1996, the Company adopted Fresh Start Reporting in accordance
with SOP 90-7. Fresh Start Reporting resulted in material changes to the
Consolidated Balance Sheet, including valuation of assets, intangible assets
(including goodwill) and liabilities at fair market value and valuation of
equity based on the appraised reorganization value of the ongoing business.
The Company's reorganization value of $350 million (the approximate fair
value) was based on the consideration of many factors and various valuation
methods, including discounted cash flows, selected
F-12
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. FRESH START REPORTING: (CONTINUED)
publicly traded Company market multiples, selected acquisition transaction
multiples and other applicable ratios and valuation techniques believed by the
Company's management and its financial advisors to be representative of the
Company's business and industry. The excess of the reorganization value over the
fair value of identifiable assets and liabilities is reported as "Reorganization
value in excess of identifiable assets" in the accompanying Consolidated Balance
Sheets and is being amortized over a three and a half year period.
The Company obtained an independent appraisal of certain property and
equipment to support the fair values of such assets.
The Reorganization and the adoption of Fresh Start Reporting resulted in the
following adjustments to the Company's Consolidated Balance Sheet for the period
ended May 31, 1996:
<TABLE>
<CAPTION>
REORGANIZATION AND
PREDECESSOR FRESH START REORGANIZED
COMPANY ADJUSTMENTS COMPANY
MAY 31, ---------------------- MAY 31,
1996 DEBIT CREDIT 1996
----------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Total current assets....................................... $ 179,457 $ -- $ 1,881(a) $ 177,576
Property and equipment (net)............................... 35,619 -- 7,754(b) 27,865
Long-term receivables...................................... 9,411 -- -- 9,411
Excess of purchase price over net assets of businesses
acquired and other intangibles........................... 153,864 -- 124,864(c) --
29,000(d)
Reorganization value in excess of identifiable assets...... -- 267,460(e) -- 267,460
Other assets............................................... 12,862 -- 4,384(f) 7,878
600(g)
----------- ---------- ---------- -----------
$ 391,213 $ 267,460 $ 168,483 $ 490,190
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt........................ $ 380,554 $ 379,256(h) $ 36,076(i) $ 37,374
Accrued interest......................................... 52,696 48,500(h) -- 4,196
Accounts payable and other accrued liabilities........... 130,179 -- 3,673(j) 133,852
----------- ---------- ---------- -----------
Total current liabilities.................................. 563,429 427,756 39,749 175,422
----------- ---------- ---------- -----------
Total noncurrent liabilities............................... 5,130 -- 229,872(i) 235,002
Redeemable preferred stock and accrued dividends........... 18,241 18,241(k) -- --
Stockholders' equity (deficit):
Common stock............................................. 484 484(l) 100(m) 100
Capital in excess of par value........................... 190,607 190,607(l) 79,666(m) 79,666
Cumulative translation adjustment........................ (231) -- 231(l) --
Retained earnings (deficit).............................. (386,447) 29,000(d) 334,005(l) --
81,442(n)
----------- ---------- ---------- -----------
$ 391,213 $ 666,088 $ 765,065 $ 490,190
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
F-13
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. FRESH START REPORTING: (CONTINUED)
Explanations of the above adjustment columns are as follows:
(a) To adjust current assets to fair market value.
(b) To adjust property and equipment to estimated current fair value.
(c) To reflect the write-off of excess of purchase price over net assets of
businesses acquired and other intangibles.
(d) To provide income tax expense for gain on discharge of indebtedness,
reflected as a reduction in the goodwill of the Predecessor Company related
to the utilization of pre-acquisition NOLs.
(e) To establish the reorganization value in excess of identifiable assets. The
reorganization value in excess of identifiable assets is calculated below
(in thousands):
<TABLE>
<S> <C>
New debt......................................................... $ 270,234
New equity....................................................... 79,766
---------
Reorganization Value........................................... 350,000
Plus: Fair value of identifiable liabilities..................... 140,190
Less: Fair value of identifiable assets.......................... (222,730)
---------
$ 267,460
---------
---------
</TABLE>
(f) To adjust other long-term assets to fair market value.
(g) To write-off the remaining debt issue costs.
(h) To reflect the cancellation of the old debt and related accrued interest.
(i) To reflect issuance of new current and long-term debt.
(j) To adjust current liabilities to fair market value.
(k) To reflect the cancellation of the old preferred stock.
(l) To reflect the elimination of stockholders' equity of the Predecessor
Company.
(m) To reflect the issuance of 10 million shares of new common stock (par value
$.01) at estimated fair market value.
F-14
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. FRESH START REPORTING: (CONTINUED)
(n) To reflect the extraordinary credit resulting from discharge of
indebtedness. The extraordinary credit, net of taxes, is calculated below
(in thousands):
<TABLE>
<S> <C>
Historical carrying value of old debt securities................. $ 379,256
Historical carrying value of related accrued interest............ 48,500
Unamortized portion of deferred debt issuance costs.............. (600)
Market value of consideration exchanged for the old debt:
Plan securities (face value $279,691).......................... (265,948)
New common stock (10 million new shares issued)................ (79,766)
---------
81,442
Tax provision (d).......................................... (29,000)
---------
Extraordinary credit....................................... $ 52,442
---------
---------
</TABLE>
The following Pro Forma Condensed Financial Information for the twelve
months ended September 30, 1996 and 1995, have been prepared giving effect to
the sale of the Image Conversion Services ("ICS") Division and the adjustments
related to the consummation of the Reorganization for interest expense and
intangible asset amortization. The Condensed Financial Information was prepared
as if the Pro Forma adjustments had occurred on October 1, 1995 and October 1,
1994, respectively. This information does not purport to be indicative of the
results which would have been obtained had such transactions in fact been
completed as of the date hereof and for the periods presented or that may be
obtained in the future.
ANACOMP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total Revenues.................................................................... $ 484,637 $ 569,668
Operating costs and expenses...................................................... 493,291 763,514
Loss before interest, other income, reorganization items, income taxes and
extraordinary credit............................................................ (8,654) (193,846)
Interest expense and fee amortization............................................. (41,327) (44,301)
Net loss available to common stockholders......................................... (53,713) (277,346)
</TABLE>
F-15
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. REORGANIZATION ITEMS:
In accordance with SOP 90-7, expenses of the Predecessor Company resulting
from the Chapter 11 Reorganization are reported separately as reorganization
items in the accompanying Consolidated Statement of Operations, and are
summarized below:
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
MAY 31, 1996
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Write-off of deferred debt issue costs and discounts........................... $ (17,551)
Adjustment of assets and liabilities to fair market value...................... 124,903
Legal and professional fees associated with bankruptcy......................... (14,944)
Interest earned on accumulated cash............................................ 431
-------------
$ 92,839
-------------
-------------
</TABLE>
NOTE 5. SALE OF ICS DIVISION:
Effective November 1, 1995, Anacomp sold its ICS Division for approximately
$13.5 million, which resulted in a net gain to the Company of $6.2 million that
is reflected in "other income (expense)" in the accompanying Consolidated
Statement of Operations. The proceeds from this sale were used to reduce the
principal balance on certain senior debt. The ICS Division performed source
document microfilm services at several facilities around the country generating
approximately $20 million of revenues per year.
NOTE 6. RESTRUCTURING CHARGES:
Included in the operating results for 1995 are restructuring charges of
$32.7 million. These charges were the result of the Company's reassessment of
its strategy for ongoing financial improvement and a decision to downsize or
exit certain areas of its business. Specifically, the Company closed its Omaha,
Nebraska magnetic media manufacturing facility, exited the manufacture of
readers and reader/printers at its San Diego, California manufacturing facility
and reduced headcount worldwide. The restructuring charges included severance
costs of $5.9 million, which included personnel related to magnetics media
manufacturing, reader and reader/printer manufacturing and other various
personnel associated with the worldwide headcount reduction. Approximately 400
people were terminated pursuant to these plans. Also included in restructuring
charges were inventory write downs of $9.1 million, excess facility reserves of
$7.7 million and other reserves of $10 million. The Company completed these
restructuring activities during fiscal 1996. The actual costs associated with
the restructuring did not vary significantly from the previously reported
amounts.
NOTE 7. FINANCIAL RESTRUCTURING COSTS:
On April 6, 1995, Anacomp announced that it had withdrawn its proposed
offering of $225 million Senior Secured Notes and a related offer to purchase up
to $50 million of the Company's outstanding 15% Senior Subordinated Notes. The
offering would have deferred an aggregate of $153 million in scheduled principal
payments in fiscal years 1995 through 1998, thereby providing Anacomp with
increased liquidity and additional cash for product development. Costs directly
related to these activities of $6 million are included as "Financial
restructuring costs" in the accompanying Consolidated Statements of Operations
for fiscal year 1995.
F-16
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. EXCESS OF PURCHASE PRICE OVER NET ASSETS OF BUSINESSES ACQUIRED
(GOODWILL):
Goodwill related to the micrographics business as of September 30 is
summarized as follows:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
--------------------------
<S> <C> <C>
<CAPTION>
AS OF
AS OF SEPTEMBER
SEPTEMBER 30, 30,
1996 1995
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Goodwill........................................... $ 2,419 $ 315,561
Less goodwill write-off............................ -- (108,000)
Less accumulated amortization...................... (134) (73,988)
------ -----------
$ 2,285 $ 133,573
------ -----------
------ -----------
</TABLE>
Anacomp failed to achieve its original projections of fiscal 1995 operating
results and experienced lower than expected sales of new software products first
introduced in January 1995. In light of Anacomp's withdrawn note offering,
disappointing financial performance and default on its indebtedness, the Company
prepared a revised business plan and operating forecast through 1999.
Based on these developments and in connection with the change in accounting
discussed in Note 1, Anacomp determined that goodwill had been impaired and
measured the impairment based on a fair value approach. As required by generally
accepted accounting principles, this accounting change, which amounted to a
charge of $108 million, was recorded as a change in estimate and was included in
the results of operations for the quarter ended June 30, 1995.
NOTE 9. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of fair value information
for certain financial instruments. The carrying amounts for trade receivables
and payables are considered to be their fair values. The carrying amounts
F-17
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
and fair values of the Company's other financial instruments at September 30,
1996, and 1995, are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
<S> <C> <C> <C> <C>
----------------------------------------------
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-Term Debt:
11 5/8% Senior Note............................................ $ 97,902 $ 97,902 $ -- $ --
Revolving Loan................................................. -- -- 31,328 31,328
Multicurrency Revolving Loan -- -- 28,813 28,813
Term Loans..................................................... -- -- 13,039 13,039
Series B Senior Notes.......................................... -- -- 58,908 58,908
13% Senior Subordinated Note................................... 147,058 163,829 -- --
15% Senior Subordinated Notes.................................. -- -- 220,281 181,224
13.875% Convertible Subordinated Debentures.................... -- -- 21,155 4,376
9% Convertible Subordinated Debentures......................... -- -- 10,479 1,880
Redeemable Preferred Stock....................................... -- -- 24,574 --
</TABLE>
The September 30, 1996 estimated fair value of Long-Term Debt was based on
quoted market values or discounted cash flow.
The September 30, 1995 estimated fair values of Long-Term Debt and
Redeemable Preferred Stock were based on a restructuring proposal prepared as a
result of discussion and negotiations with representatives of the lenders at
that time in connection with a "prepackaged" plan of reorganization.
NOTE 10. ACQUISITIONS:
During the three years ended September 30, 1996, Anacomp made the
acquisitions set forth below, each of which has been accounted for as a
purchase. The consolidated financial statements include the operating results of
each business from the date of acquisition. Pro forma results of operations have
not been presented because the effects of these acquisitions were not
significant.
FISCAL 1996
During fiscal 1996, Anacomp acquired certain assets of a micrographics
equipment and supplies business. The acquisition was effective July 15, 1996 and
total consideration was $4.3 million, of which approximately $2.4 million was
assigned to excess of purchase price over net assets acquired. The consideration
consisted of $3.8 million in cash and a one-year note payable of $500,000 which
accrues interest at prime plus 2.75%.
FISCAL 1995
During fiscal 1995, Anacomp made no significant acquisitions.
F-18
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. ACQUISITIONS: (CONTINUED)
FISCAL 1994
During fiscal 1994, Anacomp acquired 16 data service centers or the related
customer base (all were incorporated with existing Anacomp service centers), a
magnetics media manufacturing company and the customer base of a micrographics
supplies business. Total consideration for these acquisitions was $39.1 million,
of which approximately $24.2 million was assigned to excess of purchase price
over net assets of businesses acquired and other intangible assets. In
connection with these acquisitions, Anacomp issued $17.2 million of its common
stock and increased debt and accrued liabilities by $4.3 million.
NATIONAL BUSINESS SYSTEMS
One of the acquisitions included above was the purchase of the COM services
customer base of 14 data service centers operated by National Business Systems,
Inc. ("NBS"). The acquisition was effective on January 3, 1994, and the
acquisition cost consisted of the following (dollars in thousands):
<TABLE>
<S> <C>
Cash paid to NBS shareholders...................................... $ 7,400
Common stock issued to NBS shareholders............................ 7,400
Acquisition costs incurred......................................... 416
---------
$ 15,216
---------
---------
</TABLE>
Anacomp issued 1,973,000 common shares to the NBS shareholders at a price of
$3.75 per share. As part of the acquisition agreement, Anacomp agreed to provide
stock price protection at the end of two years on those shares so designated by
the NBS shareholders (1,128,000 of the shares issued were subject to this
protection). Related to this price protection, on February 15, 1996, Anacomp
issued 1,127,143 additional shares of stock to NBS shareholders. As a result of
the Reorganization, discussed in Note 2, this price protection is no longer in
effect.
GRAHAM MAGNETICS
Another of the acquisitions included above was the purchase of Graham
Acquisition Corporation ("Graham"), a magnetics media manufacturing company. The
acquisition was effective on May 4, 1994, and the acquisition cost consisted of
the following (dollars in thousands):
<TABLE>
<S> <C>
Common stock issued to Graham shareholders......................... $ 8,515
Common stock issued for a note payable............................. 1,286
Issuance of note payable to a creditor............................. 4,240
Cash paid to retire bank debt...................................... 5,540
Acquisition costs incurred......................................... 689
---------
$ 20,270
---------
---------
</TABLE>
Anacomp issued 2,129,000 common shares to the Graham shareholders based on
an agreed upon per share price. However, to determine the acquisition cost, the
shares were valued at the market price on the date of closing.
Contingent consideration of $7.6 million was payable in Anacomp common stock
and was based upon defined future earnings through September 1997. The
contingent consideration amount was $144,000 for
F-19
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. ACQUISITIONS: (CONTINUED)
fiscal 1994 and zero for fiscal 1995. As a result of the Reorganization,
discussed in Note 2, this contingency is no longer in effect.
Anacomp also issued 360,000 common shares to a Graham creditor at $3.57 per
share to reduce the note payable to $4.2 million. The note was unsecured and
bore interest at 10%. Principal payments of $345,000 plus accrued interest were
payable quarterly beginning July 15, 1994. The note holder could at any time
require Anacomp to prepay any amount of the note by issuing common stock. The
shares of common stock to be issued were equal to the prepayment amount divided
by $3.57. In connection with the Plan of Reorganization, the original note was
canceled and a new promissory note was issued in the amount of $1.2 million. The
note did not bear interest and was payable in two installments; $800,000 due
within thirty days of the effective date of the bankruptcy, and $400,000 due on
or before October 30, 1996. The outstanding note balance was $400,000 and $2.5
million at September 30, 1996 and 1995, respectively. The note was paid off
subsequent to September 30, 1996.
NOTE 11. SKC AGREEMENT:
Anacomp has entered into a supply agreement (the "Supply Agreement") with
SKC America, Inc., a New Jersey corporation ("SKCA"), and SKC Limited ("SKCL"),
an affiliated corporation of SKCA organized pursuant to the laws of the Republic
of Korea. SKCA and SKCL are collectively referred to as "SKC". The Supply
Agreement expires in December 2003. Pursuant to the Supply Agreement, Anacomp
purchases substantially all of its requirements for coated duplicate microfilm
from SKC. Pursuant to the Supply Agreement, SKC also provides the Company with a
substantial portion of its polyester requirements for its magnetic media
products.
In connection with the Supply Agreement, SKC also provided the Company with
a $25 million trade credit facility (secured by up to $10 million of products
sold to the Company by SKC), all of which is outstanding at September 30, 1996.
The trade credit arrangement bears interest at 2.5% over the prime rate of The
First National Bank of Boston (10.75% as of September 30, 1996).
In connection with an amendment to the Supply Agreement as of the effective
date under the Plan of Reorganization, the Company agreed to certain price
increases, retroactive to 1994, and agreed to make the following deferred
payments related to the retroactive price increases to SKC (which are accrued in
"Other accrued liabilities" in the accompanying Consolidated Balance Sheets):
(a) $400,000 in 1997: (b) $600,000 in 1998; (c) $800,000 in 1999; (d) $800,000
in 2000; and (e) 1,000,000 in 2001.
F-20
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. PROPERTY AND EQUIPMENT:
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C> <C>
----------------------------
<CAPTION>
ESTIMATED
USEFUL SEPTEMBER 30, SEPTEMBER 30,
LIFE IN YEARS 1996 1995
---------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land and buildings............................................... 10-40 $ 3,148 $ 5,283
Office furniture................................................. 3-12 2,499 12,141
Manufacturing equipment and tooling.............................. 2-10 4,161 31,351
Field support spare parts........................................ 4-7 5,852 21,764
Leasehold improvements........................................... Term of Lease 852 10,782
Equipment leased to others....................................... 2-4 467 1,838
Processing equipment............................................. 3-12 13,819 58,722
------------- -------------
30,798 141,881
Less accumulated depreciation and amortization................... (3,696) (96,898)
------------- -------------
$ 27,102 $ 44,983
------------- -------------
------------- -------------
</TABLE>
NOTE 13. LONG-TERM RECEIVABLES:
Long-term receivables consist of the following:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
----------------------------
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable...................................... $ 12,546 $ 15,678
Notes receivable from asset sales............................... 2,260 2,619
Other........................................................... 516 411
------------- -------------
15,322 18,708
Less current portion............................................ (4,690) (6,386)
------------- -------------
$ 10,632 $ 12,322
------------- -------------
------------- -------------
</TABLE>
Lease contracts receivable result from customer leases of products under
agreements which qualify as sales-type leases. Annual future lease payments to
be received under sales-type leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------
<S> <C>
1997................................................................. $ 5,540
1998................................................................. 4,503
1999................................................................. 2,805
2000................................................................. 1,370
2001................................................................. 566
-------
14,784
Less deferred interest............................................... (2,238)
-------
$ 12,546
-------
-------
</TABLE>
F-21
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. LONG-TERM DEBT:
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
----------------------------
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
11 5/8% Senior Secured Notes........................................................ $ 97,902 $ --
13% Senior Subordinated Notes (net of unamortized discount of $12,942).............. 147,058 --
Revolving Loan at 8.63%............................................................. -- 31,328
Multicurrency Revolving Loan at 8.44%............................................... -- 28,813
Term Loans at 8.56%................................................................. -- 13,039
Series B Senior Notes at 12.25%..................................................... -- 58,908
15% Senior Subordinated Notes (net of unamortized discount of $4,619)............... -- 220,281
13.875% Convertible Subordinated Debentures (net of unamortized discount of
$2,077)........................................................................... -- 21,155
9% Convertible Subordinated Debentures.............................................. -- 10,479
Non-interest bearing installment note payable due October 30, 1996.................. 400 2,513
Other............................................................................... 3,532 3,384
------------- -------------
248,892 389,900
Less current portion................................................................ (31,848) (389,900)
------------- -------------
$ 217,044 $ --
------------- -------------
------------- -------------
</TABLE>
SENIOR SECURED NOTES
In connection with the Reorganization, the Company issued $112.2 million
aggregate principal amount of 11 5/8% Senior Secured Notes due September 30,
1999. Interest is payable on March 31 and September 30 each year. The Company
pre-paid the September 30, 1996, installment of $14.3 million on September 3,
1996. The Company is required to redeem the remaining notes at par on each
interest payment date according to the following schedule (dollars in
thousands):
<TABLE>
<S> <C>
March 31, 1997..................................................... $ 14,286
September 30, 1997................................................. 16,163
March 31, 1998..................................................... 16,161
September 30, 1998................................................. 17,100
March 31, 1999..................................................... 17,100
September 30, 1999................................................. 17,092
---------
$ 97,902
---------
---------
</TABLE>
The Senior Secured Notes are redeemable at the option of the Company, in
whole or in part, at any time, at 100% of the principal amount thereof, plus
accrued and unpaid interest. The Company is required in certain circumstances to
make offers to purchase the Senior Secured Notes then outstanding at a purchase
price equal to 100% of the principal amount thereof, plus accrued and unpaid
interest, with the net cash proceeds of certain sales or other distributions of
assets by the Company or certain of its subsidiaries. Also, upon a change of
control, the Company is required to make an offer to purchase the
F-22
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. LONG-TERM DEBT: (CONTINUED)
Senior Secured Notes then outstanding at a purchase price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest.
The Senior Secured Notes are senior secured obligations of the Company and
will rank pari passu with all other existing and future senior obligations of
the Company, and senior to all existing and future subordinated or junior
indebtedness of the Company. The collateral securing the Senior Secured Notes
consists of substantially all of the assets of the Company and all future
acquired assets of the Company to the extent such assets are acquired by the
Company without secured financing.
The indenture related to the Senior Secured Notes contains covenants
limiting among other things, (i) the incurrence of additional indebtedness by
the Company and certain of its subsidiaries, (ii) the payment of dividends on,
and the redemption of, capital stock of the Company and certain of its
subsidiaries, (iii) the redemption of certain subordinated obligations of the
Company and certain of its subsidiaries and the making of certain investments by
the Company and certain of its subsidiaries, (iv) the sale by the Company and
certain of its subsidiaries of assets and certain subsidiary stock, (v)
transactions between the Company and its affiliates, (vi) liens on the
collateral securing the Senior Secured Notes, (vii) consolidations and mergers
and transfers of all or substantially all of the Company's and certain of its
subsidiaries' assets and (viii) capital expenditures. All of the limitations and
prohibitions are subject to a number of qualifications and exceptions.
The indenture also contains a covenant requiring the Company to maintain a
minimum interest coverage ratio. At September 30, 1996, the Company was in
compliance with all covenants under the Senior Secured Notes indenture.
SENIOR SUBORDINATED NOTES
In connection with the Reorganization, the Company issued $160 million
aggregate principal amount of 13% Senior Subordinated Notes due June 2002. This
debt was recorded at its estimated fair value of $146.3 million. The difference
between the aggregate principal amount and the fair value of the debt will be
amortized as a charge to interest expense over the life of the debt. Interest is
payable on June 30 and December 31 each year, beginning on December 31, 1996.
For the interest payable on December 31, 1996 and June 30, 1997, the Company
will provide Payment-In-Kind ("PIK") notes in satisfaction of its interest
obligation rather than a cash settlement. The PIK notes will have a principal
amount corresponding to the amount of interest due on the notes on the related
interest payment date.
The Company is required to redeem prior to June 30, 2001 the principal
amount of the Senior Subordinated Notes equal to the aggregate principal amount
of PIK notes issued prior to such date, plus any accrued and unpaid interest on
the PIK notes, at a redemption price equal to the price that would be then
applicable in the case of an optional redemption. The remaining Senior
Subordinated Notes are redeemable at the option of the Company, in whole or in
part, at any time, at various redemption prices ranging from 103% to 101.5% of
the principal amount thereof through December 31, 2001. Thereafter, the Senior
Subordinated Notes may be redeemed at the aggregate principal amount thereof.
Also, upon a change in control, the Company is required to make an offer to
purchase the Senior Subordinated Notes then outstanding at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
The Senior Subordinated Notes are unsecured senior subordinated obligations
of the Company and rank pari passu with all other existing and future
subordinated obligations of the Company. The payment
F-23
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. LONG-TERM DEBT: (CONTINUED)
of principal and interest is subordinated and subject to the prior payment in
full of the Company's senior indebtedness.
The indenture related to the Senior Subordinated Notes contains covenants
limiting, among other things, (i) the incurrence of additional indebtedness by
the Company and certain of its subsidiaries, (ii) the payment of dividends on,
and the redemption of, capital stock of the Company and certain of its
subsidiaries, (iii) the redemption of certain subordinated obligations of the
Company and certain of its subsidiaries and the making of certain investments of
the Company and certain of its subsidiaries, (iv) the sale by the Company and
certain of its subsidiaries of assets and certain subsidiary stock, (v)
transactions between the Company and its affiliates, (vi) sale/leaseback
transactions by the Company and certain of its subsidiaries, (vii)
consolidations and mergers and transfers of all or substantially all of the
Company's and certain of its subsidiaries' assets and (viii) capital
expenditures. All of the limitations and prohibitions are subject to a number of
qualifications and exceptions. The indenture also contains a covenant requiring
the Company to maintain a minimum interest coverage ratio. At September 30,
1996, the Company was in compliance with all covenants under the Senior
Subordinated Notes indenture.
NOTE 15. REDEEMABLE PREFERRED STOCK:
Anacomp issued 500,000 shares of 8.25% Cumulative Convertible Redeemable
Exchangeable Preferred Stock (the "Preferred Shares") in a 1987 private
placement. Each Preferred Share had a preference value of $50 and was
convertible into Anacomp common stock at a conversion price of $7.50. The
Preferred Shares were recorded at fair value on the date of issuance less issue
costs. The excess of the preference value over the carrying value was accreted
by periodic charges to retained earnings over the original life of the issue. At
September 30, 1995, 500,000 shares were issued and outstanding. In connection
with the Reorganization discussed in Note 2 , the Preferred Shares were
canceled.
NOTE 16. CAPITAL STOCK:
REORGANIZED COMPANY
PREFERRED STOCK
The Board of Directors of the Company has the ability, at its discretion, to
create one or more series of Preferred Stock and shall determine the
preferences, limitations, and relative voting and other rights of one or more
series of Preferred Stock.
STOCK OPTION PLANS
On July 22, 1996, the Company's Board of Directors approved the 1996
Restructure Recognition Incentive Plan. Under this plan, effective August 22,
1996, the Company awarded to employees 947,500 stock options to acquire new
common stock and 99,050 shares of restricted new common stock.
With regard to the stock options, the options were granted an exercise price
of $4.63 per share of new common stock which will result in approximately $3.2
million of compensation expense over the vesting period of the options based on
the market value of the stock at August 22, 1996. 75% of the options vest
ratably during the period from June 30, 1997 to June 30, 1999. 25% of the
options vest on September 30, 1999, provided certain performance goals have been
met; otherwise the options vest on June 30, 2003. During 1996, approximately
$975,000 was recognized as compensation expense related to the options. The
F-24
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. CAPITAL STOCK: (CONTINUED)
options expire ten years after the date of the grant. As of September 30, 1996,
none of the options were exercisable.
With regard to the restricted shares of new common stock, the shares vest
immediately and thus the Company recognized approximately $0.8 million of
compensation expense immediately upon granting the award based on the market
value of the Company's stock on August 22, 1996. The shares are restricted from
sale or transfer by the recipient employees until September 30, 1997. Effective
December 6, 1996, 34,650 shares of restricted stock were returned by employees
to the Company.
In addition, on August 22, 1996, the Company's Board of Directors approved
the 1996 Long-Term Incentive Plan, which provides for the future issuance of
various forms of stock related awards including options, stock appreciation
rights and restricted shares. The Company has reserved 1,400,000 shares of new
common stock for future issuance under this plan. Future awards, including the
nature of the awards and related exercise prices, are to be determined at the
discretion of the Compensation Committee of the Board of Directors in accordance
with the plan provisions. As of September 30, 1996, no awards were issued
related to this plan. Subsequent to September 30, 1996, 438,179 stock option
awards were made to certain Executive Officers and Non-Employee Directors at
current market value on the date of grant.
WARRANTS
In connection with the Reorganization discussed in Note 2, Anacomp issued
362,694 new warrants to certain creditors and previous common and preferred
stockholders. Each new warrant was convertible into one share of new common
stock at an exercise price of $12.23 per share. In connection with the rights
offering discussed in Note 25, each new warrant is now convertible into 1.0566
shares of new common stock at an exercise price of $11.57 per share. The new
warrants expire on June 3, 2001.
OTHER ITEMS
At September 30, 1996, approximately 1.3 million shares of Anacomp new
common stock were reserved for exercise of stock options, exercise of warrants
and other corporate purposes.
PREDECESSOR COMPANY
STOCK OPTION PLANS
Anacomp's stock option plans provided that the exercise price of the options
be determined by the Board of Directors (the "Board"), and in no case be less
than 100% of fair market value at the time of grant for qualified options, or
less than the par value of the stock for non-qualified options. An option could
be exercised subject to such restrictions as the Board may impose at the time
the option was granted. In any event, each option terminated not later than 10
years after the date on which it was granted.
F-25
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. CAPITAL STOCK: (CONTINUED)
No shares were available for grant at May 31, 1996. Shares available for
grant under the plans were 1,401,328 and 725,827 at September 30, 1995 and 1994,
respectively. Options outstanding, were as follows:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
----------- -------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING AT SEPTEMBER 30, 1993......................................... 4,414,528 $ 1.000 -- $ 9.000
Granted................................................................... 205,381 2.750 -- 4.000
Canceled.................................................................. (81,908) 1.000 -- 7.875
Expired................................................................... (23,096) 2.000 -- 7.875
Exercised................................................................. (306,646) 1.000 -- 3.375
----------- --------- --- ---------
OUTSTANDING AT SEPTEMBER 30, 1994......................................... 4,208,259 1.000 -- 9.000
Granted................................................................... 1,355,736 .563 -- 2.500
Canceled.................................................................. (2,010,753) .563 -- 4.750
Expired................................................................... (20,484) 2.000 -- 4.500
Exercised................................................................. (24,863) .563 -- 2.000
----------- --------- --- ---------
OUTSTANDING AT SEPTEMBER 30, 1995......................................... 3,507,895 .563 -- 9.000
Granted................................................................... 677,181 .313 -- .313
Canceled.................................................................. (4,182,076) .313 -- 9.000
Expired................................................................... (3,000) 2.000 -- 3.500
----------- --------- --- ---------
OUTSTANDING AT MAY 31, 1996............................................... -- $ -- -- $ --
----------- --------- --- ---------
----------- --------- --- ---------
</TABLE>
All options existing at May 31, 1996 were canceled in connection with the
Company's Reorganization discussed in Note 2.
WARRANTS
In October 1990, Anacomp issued 6,825,940 warrants ("Old Warrants") to
holders of the 15% Senior Subordinated Notes. Each Old Warrant entitled the
holder to purchase one common share at a price of $1.873 and was exercisable
through November 11, 2000, the date of expiration. In connection with the
Reorganization discussed in Note 2, the Old Warrants were canceled.
NOTE 17. INCOME TAXES:
The components of income (loss) before income taxes and extraordinary credit
were:
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
---------------------------------------------------------
<CAPTION>
TWELVE MONTHS ENDED
FOUR MONTHS EIGHT MONTHS SEPTEMBER 30,
ENDED ENDED ----------------------
SEPTEMBER 30, 1996 MAY 31, 1996 1995 1994
------------------ ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
United States.......................................... $ (21,602) $ 112,100 $ (209,151) $ 7,143
Foreign................................................ 3,993 4,128 5,825 8,212
-------- ------------- ----------- ---------
$ (17,609) $ 116,228 $ (203,326) $ 15,355
-------- ------------- ----------- ---------
-------- ------------- ----------- ---------
</TABLE>
F-26
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. INCOME TAXES: (CONTINUED)
The components of income tax expense after utilization of net operating loss
carryforwards and the adjustment of tax reserves are summarized below:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
--------------------------------------------------------
<CAPTION>
TWELVE MONTHS ENDED
FOUR MONTHS EIGHT MONTHS SEPTEMBER 30,
ENDED ENDED --------------------
SEPTEMBER 30, 1996 MAY 31, 1996 1995 1994
------------------- ------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal................................................ $ 600 $ -- $ -- $ --
Foreign................................................ 2,400 3,700 4,800 3,300
State.................................................. 100 -- -- 300
------ ------ --------- ---------
3,100 3,700 4,800 3,600
Tax reserve adjustment................................... -- -- 1,200 (1,200)
Non-cash charge in lieu of taxes......................... 1,300 -- 29,000 6,000
------ ------ --------- ---------
$ 4,400 $ 3,700 $ 35,000 $ 8,400
------ ------ --------- ---------
------ ------ --------- ---------
</TABLE>
In addition, for the eight months ended May 31, 1996, there was an
additional expense of $29 million related to the tax liability associated with
the gain on discharge of indebtedness. This liability was offset by the
utilization of net operating loss carryforwards ("NOLs"). See Note 3 for further
discussion.
The following is a reconciliation of income taxes calculated at the United
States federal statutory rate to the provision for income taxes:
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
--------------------------------------------------------
<CAPTION>
TWELVE MONTHS
FOUR MONTHS EIGHT MONTHS ENDED SEPTEMBER 30,
ENDED ENDED ---------------------
SEPTEMBER 30, 1996 MAY 31, 1996 1995 1994
------------------ ------------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Provision for income taxes at U.S. statutory rate....... $ (6,200) $ 40,700 $ (71,200) $ 5,374
Non taxable reorganization income....................... -- (43,700) -- --
Increase in deferred tax asset valuation allowance...... -- -- 51,400 --
Nondeductible amortization and write-off of intangible
assets................................................ 8,300 2,500 40,500 3,175
State and foreign income taxes.......................... 1,200 2,300 2,800 821
U.S. tax on distributed and undistributed foreign
earnings.............................................. -- -- 12,300 --
Tax reserve adjustment.................................. -- -- 1,200 (1,200)
Tax effect of pre-reorganization loss not available due
to ownership change................................... -- 2,100 -- --
Alternative minimum tax................................. 1,000 -- -- --
Other................................................... 100 (200) (2,000) 230
------- ------------- ---------- ---------
$ 4,400 $ 3,700 $ 35,000 $ 8,400
------- ------------- ---------- ---------
------- ------------- ---------- ---------
</TABLE>
F-27
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. INCOME TAXES: (CONTINUED)
The Company adopted FAS 109 in the first quarter of fiscal 1994 and recorded
a deferred tax asset of $95 million representing the federal and state tax
savings from NOLs and tax credits. The Company also recorded a valuation
allowance of $60 million reducing the deferred tax asset to a net $35 million.
Recognition of the deferred tax asset reduced goodwill by $27 million and
provided a cumulative effect increase to income of $8 million. During 1994, the
net deferred tax asset was reduced to $29 million, reflecting usage of the asset
to reduce income taxes payable by $6 million. During 1995, tax effects of future
differences and carryforwards increased from $86 million to $108.4 million, an
increase of $22.4 million resulting from the tax effect of the 1995 taxable loss
($5.6 million) and the tax effect of an increase in cumulative temporary
differences ($16.8 million) between income reported for financial reporting
purposes and for tax purposes. The valuation allowance was increased from $57
million to $108.4 million to reduce the net deferred tax asset to zero as a
result of the uncertainty associated with the utilization of these assets in
future periods due to the Company's deteriorating financial condition prior to
the bankruptcy.
During 1996, tax effects of future differences and carryforwards decreased
from $108.4 million to $85.4 million, a decrease of $23 million resulting
primarily from the tax effect of a reduction in the Reorganized Company's NOLs
due to cancellation of indebtedness in connection with the bankruptcy
reorganization ($24.5 million) and the tax effect of the 1996 taxable income
($8.5 million) offset by an increase in tax credits, principally foreign tax
credits ($9 million).
F-28
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. INCOME TAXES: (CONTINUED)
The components of deferred tax assets and liabilities at September 30, 1996
and September 30, 1995 are as follows:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
----------------------------
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
NET DEFERRED TAX ASSET 1996 1995
- ------------------------------------------------------------------------------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tax effects of future tax deductible differences related to:
Inventory reserves................................................................ $ 7,000 $ 5,700
Depreciation...................................................................... 1,600 1,700
Building reserves................................................................. 500 1,800
EPA reserve....................................................................... 2,500 2,500
Sale/leaseback of assets.......................................................... 700 2,800
Restructuring activities.......................................................... 1,200 8,000
Asset sale........................................................................ 2,600 3,200
Capitalized software.............................................................. -- 1,600
Bad debt reserve.................................................................. 1,800 2,100
Other net deductible differences.................................................. 7,800 5,500
Tax effects of future differences related to:
Undistributed foreign earnings.................................................... -- (8,800)
Leases............................................................................ (2,100) (3,300)
Capitalized software.............................................................. (2,700) --
------------- -------------
Net tax effects of future differences............................................... 20,900 22,800
------------- -------------
Tax effects of carryforward benefits:
Federal net operating loss carryforwards.......................................... 47,900 78,600
Federal general business tax credits.............................................. 3,600 3,000
Foreign tax credits............................................................... 13,000 4,000
------------- -------------
Tax effects of carryforwards........................................................ 64,500 85,600
------------- -------------
Tax effects of future taxable differences and carryforwards......................... 85,400 108,400
Less deferred tax asset valuation allowance......................................... (85,400) (108,400)
------------- -------------
Net deferred tax asset.............................................................. $ -- $ --
------------- -------------
------------- -------------
</TABLE>
At September 30, 1996, the Reorganized Company has NOLs of approximately
$133 million available to offset future taxable income. This amount will
increase to $191 million as certain temporary differences reverse in future
periods. Usage of these NOLs by the Reorganized Company is limited to
approximately $4 million annually. However, the Reorganized Company may
authorize the use of other tax planning techniques to utilize a portion of the
remaining NOLs before they expire. In any event, the Reorganized Company expects
that substantial amounts of the NOLs will expire unused.
The Reorganized Company has tax credit carryforwards of approximately $16.6
million. These tax credits are principally foreign tax credit carryforwards
resulting from inclusion of the accumulated earnings and profits of the
Reorganized Company's foreign subsidiaries in U.S. taxable income in 1996. The
Reorganized Company expects that these credits will expire unused.
F-29
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. INCOME TAXES: (CONTINUED)
The tax benefits of pre-reorganization net deferred tax assets will be
reported first as a reduction of "Reorganization value in excess of identifiable
assets" and then as a credit to equity. These tax benefits will not reduce
income tax expense.
NOTE 18. COMMITMENTS AND CONTINGENCIES:
Anacomp has commitments under long-term operating leases, principally for
building space and data service center equipment. Lease terms generally cover
periods from five to twelve years. The following summarizes the future minimum
lease payments under all noncancelable operating lease obligations, including
the unfavorable lease commitments and vacant facilities discussed in Note 1,
which extend beyond one year:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------
<S> <C>
1997................................................................ $ 18,307
1998................................................................ 14,350
1999................................................................ 5,561
2000................................................................ 2,087
2001................................................................ 1,097
2002 and thereafter................................................. 7,387
-------
48,789
Less liabilities recorded as of September 30, 1996 related to
unfavorable lease commitments and future lease costs for vacant
facilities ($6,831 reflected in current liabilities).............. (11,439)
-------
$ 37,350
-------
-------
</TABLE>
The total of future minimum rentals to be received under noncancelable
subleases related to the above leases is $1.2 million. No material losses in
excess of the liabilities recorded are expected in the future.
In November 1993, Anacomp and Pennant Systems, a division of IBM, announced
a joint effort to develop software which will allow Anacomp's XFP 2000 to
process and image IBM Advanced Function Presentation ("AFP") formatted data.
This program resulted in the XFP 2000 being able to output AFP data streams,
including those containing fonts, logos, signatures and other images, onto
microfiche.
As consideration for the development of the AFP, Anacomp paid Pennant
Systems a development fee of $6.5 million. Anacomp was also required to pay
Pennant Systems minimum annual royalty payments for the licensed system
installations for six years and for ongoing system support which began in
December 1995 and continued for 10 years. As of September 30, 1995, Anacomp
established a reserve of $7.7 million for future payments to Pennant Systems for
software royalty and systems support obligations which were not recoverable as
more fully discussed in Note 1. In connection with the Company's financial
restructuring during 1996, this contract was renegotiated with Pennant and,
accordingly, no reserve requirements exist at September 30, 1996. The
renegotiated contract requires Anacomp to make future license fee payments to
Pennant Systems of $625,000 annually through fiscal year 1999.
The Company sold $10.5 million and $5.9 million of lease receivables in the
twelve months ended September 30, 1995 and 1994, respectively. Under the terms
of the sale, the purchasers have recourse to
F-30
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
the Company should the receivables prove to be uncollectable. The amount of
recourse at September 30, 1996 is $5.3 million.
Anacomp also is involved in various claims and lawsuits incidental to its
business and management believes that the outcome of any of those matters will
not have a material adverse effect on its consolidated financial position or
results of operations.
NOTE 19. SUPPLEMENTARY INCOME STATEMENT INFORMATION:
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
<S> <C> <C> <C> <C>
-------------------------------------------------------
<CAPTION>
TWELVE MONTHS ENDED
FOUR MONTHS EIGHT MONTHS SEPTEMBER 30,
ENDED ENDED --------------------
SEPTEMBER 30, 1996 MAY 31, 1996 1995 1994
------------------ ------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maintenance and repairs.................................. $ 3,505 $ 7,243 $ 16,609 $ 12,759
Depreciation and amortization:
Property and equipment................................. 3,696 8,573 19,406 17,524
Deferred software costs................................ 297 1,883 3,449 3,673
Intangible assets...................................... 25,853 6,841 13,143 13,418
Rent and lease expense................................... 5,936 13,958 23,755 19,371
</TABLE>
NOTE 20. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
----------------------------
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred profit on sale/leaseback transactions...................................... $ -- $ 14,559
Unfavorable lease commitment related to sale/leaseback transactions................. 4,550 --
EPA reserve......................................................................... 6,961 7,350
Software license reserve............................................................ -- 7,672
Other............................................................................... 25,303 31,006
------------- -------------
$ 36,814 $ 60,587
------------- -------------
------------- -------------
</TABLE>
Xidex Corporation, a predecessor company of Anacomp, was designated by the
United States Environmental Protection Agency ("EPA") as a potentially
responsible party for investigatory and cleanup costs incurred by state and
federal authorities involving locations included on a list of EPA's priority
sites for investigation and remedial action under the federal Comprehensive
Environmental Response, Compensation, and Liability Act. The EPA reserve noted
above relates to its estimated liability for cleanup costs for the
aforementioned locations and other sites. No material losses are expected in
excess of the liabilities recorded above.
F-31
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21. EARNINGS (LOSS) PER SHARE:
The computation of earnings (loss) per share is based upon the weighted
average number of common shares outstanding during the period plus (in periods
in which they have a dilutive effect) the effect of common shares contingently
issuable, primarily from stock options and exercise of warrants. Fully diluted
earnings (loss) per share also reflect additional dilution related to stock
options due to the use of the market price at the end of the period, when higher
than the average price for the period. For the four months ended September 30,
1996, only primary earnings per share is presented due to the loss reported for
the period.
The weighted average number of common shares outstanding and net income
(loss) per common share for periods prior to May 31, 1996 have not been
presented because, due to the Reorganization and implementation of Fresh Start
Reporting, they are not comparable to subsequent periods.
The weighted average number of common and common equivalent shares used to
compute earnings per share is:
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
Common and common equivalent shares....................................... 10,033,576
------------------
------------------
</TABLE>
NOTE 22. INTERNATIONAL OPERATIONS:
Anacomp's international operations are conducted principally through
subsidiaries, a substantial portion of whose operations are located in Western
Europe. Information as to U.S. and international operations for the four months
ended September 30, 1996, the eight months ended May 31, 1996 and the twelve
months ended September 30, 1995 and 1994 is as follows:
FOUR MONTHS ENDED SEPTEMBER 30, 1996--REORGANIZED COMPANY
<TABLE>
<CAPTION>
U.S. INTERNATIONAL ELIMINATION CONSOLIDATED
---------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Customer sales.............................................. $ 102,733 $ 48,809 $ -- $ 151,542
Inter-geographic............................................ 4,449 -- (4,449) --
---------- ------------ ----------- ------------
Total sales................................................. $ 107,182 $ 48,809 $ (4,449) $ 151,542
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
Operating income............................................ $ (12,401) $ 6,637 $ -- $ (5,764)
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
Identifiable assets......................................... $ 390,088 $ 45,333 $ -- $ 435,421
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
</TABLE>
EIGHT MONTHS ENDED MAY 31, 1996--PREDECESSOR COMPANY
<TABLE>
<CAPTION>
U.S. INTERNATIONAL ELIMINATION CONSOLIDATED
----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Customer sales............................................. $ 227,742 $ 106,856 $ -- $ 334,598
Inter-geographic........................................... 12,592 -- (12,592) --
----------- ------------ ----------- ------------
Total sales................................................ $ 240,334 $ 106,856 $ (12,592) $ 334,598
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Operating income........................................... $ 34,990 $ 6,615 $ -- $ 41,605
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
F-32
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22. INTERNATIONAL OPERATIONS: (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
TWELVE MONTHS ENDED SEPTEMBER 30, 1995--PREDECESSOR COMPANY
<CAPTION>
U.S. INTERNATIONAL ELIMINATION CONSOLIDATED
----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Customer sales............................................. $ 404,239 $ 186,950 $ -- $ 591,189
Inter-geographic........................................... 24,973 -- (24,973) --
----------- ------------ ----------- ------------
Total sales................................................ $ 429,212 $ 186,950 $ (24,973) $ 591,189
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Operating income (loss).................................... $ (135,811) $ 7,622 $ -- $ (128,189)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Identifiable assets........................................ $ 350,310 $ 70,719 $ -- $ 421,029
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
TWELVE MONTHS ENDED SEPTEMBER 30, 1994--PREDECESSOR COMPANY
<CAPTION>
U.S. INTERNATIONAL ELIMINATION CONSOLIDATED
----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Customer sales............................................. $ 421,339 $ 171,260 $ -- $ 592,599
Inter-geographic........................................... 23,726 -- (23,726) --
----------- ------------ ----------- ------------
Total sales................................................ $ 445,065 $ 171,260 $ (23,726) $ 592,599
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Operating income........................................... $ 60,794 $ 18,783 $ -- $ 79,577
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Identifiable assets........................................ $ 590,743 $ 67,896 $ -- $ 658,639
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
F-33
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY REORGANIZED COMPANY
---------------------------------------------------------
TWO MONTHS ONE MONTH
ENDED ENDED
FIRST SECOND MAY 31, JUNE 30, FOURTH
QUARTER QUARTER 1996 1996 QUARTER
--------- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 1996
Revenues.............................. $ 130,265 $ 125,911 $ 78,422 $ 36,786 $ 114,756
Gross profit.......................... 40,666 40,411 23,903 11,895 37,692
Income (loss) before extraordinary
credit.............................. 1,053 (10,731) 122,206 (4,372) (17,637)
Extraordinary credit:
Gain on discharge of indebtedness..... -- -- 52,442 -- --
Net income (loss)..................... 1,053 (10,731) 174,648 (4,372) (17,637)
Preferred stock dividends and discount
accretion........................... 540 -- -- -- --
--------- --------- ----------- ----------- ---------
Net income (loss) available to common
stockholders........................ $ 513 $ (10,731) $ 174,648 $ (4,372) $ (17,637)
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
Earnings per common share (primarily
and fully diluted):
Net loss available to common
stockholders........................ $ (.44) $ (1.75)
----------- ---------
----------- ---------
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
FISCAL 1995--PREDECESSOR COMPANY
Revenues.............................. $ 151,812 $ 151,489 $ 148,933 $ 138,955
Gross profit.......................... 49,406 45,945 45,931 32,482
Net income (loss)..................... 281 (7,664) (138,829) (92,114)
Preferred stock dividends and discount
accretion........................... 540 539 540 539
--------- --------- ----------- ---------
Net loss to common stockholders....... $ (259) $ (8,203) $(139,369) $ (92,653)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
F-34
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES:
The following is a summary of activity in the Company's valuation and
qualifying accounts and reserves for the periods ended September 30, 1996 and
May 31, 1996 and for the twelve months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FOUR MONTHS ENDED SEPTEMBER 30, 1996--
REORGANIZED COMPANY
Allowance for doubtful accounts............................ $ 7,464 $ 388 $ 1,393(1) $ 6,459
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EIGHT MONTHS ENDED MAY 31, 1996--
PREDECESSOR COMPANY
Allowance for doubtful accounts............................ $ 7,367 $ 253 $ 156(1) $ 7,464
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TWELVE MONTHS ENDED SEPTEMBER 30, 1995-- PREDECESSOR COMPANY
Allowance for doubtful accounts.............................. $ 3,550 $ 4,670 $ 853(1) $ 7,367
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TWELVE MONTHS ENDED SEPTEMBER 30, 1994-- PREDECESSOR COMPANY
Allowance for doubtful accounts.............................. $ 4,245 $ (268) $ 427(1) $ 3,550
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Uncollectable accounts written off, net of recoveries.
NOTE 25. RIGHTS OFFERING:
On October 30, 1996, the Company completed a rights offering to its existing
shareholders resulting in the issuance of 3.6 million shares of new common
stock. For each share of Anacomp new common stock held as of the close of
business on September 18, 1996, the Company distributed 0.36 rights to purchase
additional shares of new common stock at a subscription price of $6.875 per
share. The Company will use the proceeds of the rights offering, approximately
$25 million, for the acquisition of businesses, assets and technologies.
NOTE 26. SUBSEQUENT EVENTS (UNAUDITED):
ACQUISITIONS
Subsequent to September 30, 1996, the company acquired the customer bases
and other specified assets of three businesses: Archive Storage, Inc. ("ASI"),
Precision Data Services, Inc. ("PDS"), and Integra Technologies Corporation
("ITC"). Additionally, the Company acquired all of the common stock of Data/Ware
Development Inc. ("Data/Ware").
- ASI is a Massachusetts company that specializes in the long-term storage
of critical business records. The ASI purchase price consisted of $180,000
cash at closing, the assumption of a $70,000 debt obligation, and a
contingent cash payment of up to $500,000 based on future earnings of
Anacomp's storage business.
F-35
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 26. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
- PDS is a service bureau in New York specializing in Computer Output to
Microfilm ("COM"). The PDS purchase price was $1.7 million cash at
closing.
- ITC is a Massachusetts company that provides maintenance services relating
to ITC equipment sold for the cleaning, testing, certifying and degaussing
of computer tape. The ITC purchase price consisted of $1.5 million cash at
closing, the assumption of a $600,000 deferred revenue liability, and a
contingent cash payment of up to $2.7 million based on future revenues of
the ITC business.
- Data/Ware is a California company that manufactures and markets CD output
systems, optical storage controllers and mainframe connectivity solutions.
The Data/Ware purchase price consisted of $11.2 million cash paid at
closing, and contingent cash and/or stock payments of up to $3.2 million
based upon future operating results of the Data/Ware business over the
next two years.
SENIOR SECURED CREDIT FACILITY
On February 28, 1997, the Company and certain foreign subsidiaries entered
into a Credit and Guarantee Agreement (the "Credit Facility") with a syndicate
of banks and other financial institutions (collectively, the "Senior Secured
Lenders"), Lehman Commercial Paper Inc., as arranger and syndication agent, and
The First National Bank of Chicago (in its individual capacity, "First
Chicago"), as administrative agent. The Credit Facility provides for a $55
million term loan facility (the "Term Facility") and a $25 million revolving
credit facility (the "Revolving Facility"). The proceeds of the Term Facility
and available cash were used to repay the existing 11 5/8% Senior Secured Notes
due 1999 (the "Old Senior Secured Notes"). The balance of the Old Senior Secured
Notes at February 28, 1997, was $83.6 million, reflecting the prepayment of the
March 31, 1997 installment of $14.3 million made on February 20, 1997.
As of February 28, 1997, $55 million was outstanding under the Term
Facility, and no amounts were outstanding under the Revolving Facility. The
entire Revolving Facility is available for loans denominated in U.S. dollars and
certain foreign currencies ("Multicurrency Loans"), and up to $10 million of the
Revolving Facility is available for letters of credit. The Term Facility is
repayable in thirteen quarterly installments commencing March 31, 1998, with the
final installment due on March 31, 2001. The Revolving Facility terminates on
February 28, 2001.
The Company may elect to have loans under the Term Facility or the Revolving
Facility bear interest at (a) the Alternate Base Rate plus 2% or (b) the
Eurodollar Rate, or in the case of Multicurrency Loans, the Eurocurrency Rate,
plus 3%. Interest is payable quarterly and at the end of the Interest Period (as
defined in the Credit Facility). The "Alternate Base Rate" for any day means the
higher of (i) the corporate base rate of interest announced by First Chicago and
(ii) the federal funds rate published by the Federal Reserve Bank of New York on
the next business day plus 1/2%. The "Eurodollar Rate" for any Interest Period
means (A) the applicable London interbank offered rate for deposits in U.S.
dollars two business days prior to the first day of the Interest Period divided
by (B) one minus the "Eurocurrency Liabilities" under Regulation D of the Board
of Governors of the Federal Reserve System. The "Eurocurrency Rate" for any
Interest Period means the rate at which First Chicago offers to place deposits
in the applicable foreign currency with first- class banks in the London
interbank market two business days prior to the first day of the Interest
Period.
The Term Facility and the Revolving Facility are secured by all of the
Company's tangible and intangible assets (including intellectual property, real
property and all of the capital stock of each of the Company's direct or
indirect domestic subsidiaries and 65% of the capital stock of each of the
Company's
F-36
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 26. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
material direct foreign subsidiaries). All of the Company's obligations under
the Credit Facility are unconditionally guaranteed by the Company's direct or
indirect domestic subsidiaries. In addition to customary covenants, the Credit
Facility requires that the Company: (a) maintain certain ratios of Consolidated
EBITDA (as defined in the Credit Facility) to Consolidated Interest Expense (as
defined in the Credit Facility) and certain ratios of Consolidated Indebtedness
(as defined in the Credit Facility) to Consolidated EBITDA, (b) not incur any
indebtedness other than the 10 7/8% Senior Subordinated Notes due 2004 (the
"Notes"), indebtedness under the Credit Facility and certain other indebtedness,
(c) not permit any lien to exist on any of its property, assets or revenues,
except the liens in favor of the Senior Secured Lenders, existing liens and
certain other liens and (d) not to incur any guarantee obligations, except the
guarantee obligations related to the Credit Facility and certain other guarantee
obligations.
The Company must use 25% of Consolidated Excess Cash Flow (as defined in the
Credit Facility) in fiscal 1997 and 50% of Consolidated Excess Cash Flow
thereafter to repay the Term Facility and reduce Revolving Facility commitments.
Additionally, 100% of the Net Proceeds (as defined in the Credit Facility) of
any Asset Sale (as defined in the Credit Facility) and 75% of proceeds from the
sale of Capital Stock (as defined in the Credit Facility) not used for
acquisitions or the repurchase of subordinated debt, must be applied to repay
the Term Facility and reduce the Revolving Facility commitments. The Term
Facility repayment schedule is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDED SEPTEMBER 30, THOUSANDS)
- ------------------------------------------------------------------------
<S> <C>
1998.................................................................... $ 8,000
1999.................................................................... 14,000
2000.................................................................... 21,000
2001.................................................................... 12,000
-------
$ 55,000
-------
-------
</TABLE>
10 7/8% SENIOR SUBORDINATED NOTES
On March 24, 1997, the Company issued $200 million of the Notes. The Notes
were sold at a discount of 98.2071% to yield proceeds of $196.4 million. The
proceeds of the Notes were used to repay the existing 13% Senior Subordinated
Notes due 2002, including a 3% call premium and accrued interest, to reduce the
SKC trade payable by $10 million and associated accrued interest, and to pay
certain fees and expenses. As a result of the call premium ($5.2 million) and
existing discount on the 13% notes ($11.7 million), the Company will record an
extraordinary loss before income tax consideration on the extinguishment of debt
in the second quarter of fiscal 1997 of $16.9 million.
The Notes are not redeemable at the option of the Company prior to April 1,
2000. On or after such date until April 1, 2003, the Notes will be redeemable at
the option of the Company in whole or in part at prices ranging from 108.156% to
102.719% plus accrued and unpaid interest. On or after April 1, 2003, the Notes
may be redeemable at 100% plus accrued and unpaid interest. Prior to April 1,
2000, the Company may, at its option, use the net cash proceeds of one or more
Public Equity Offerings (as defined in the Indenture), to redeem up to 35% of
the aggregate principal amount at a redemption price equal to 110.875% plus
unpaid interest to the date of redemption, provided that at least $130 million
of the aggregate principal amount of Notes originally issued remains outstanding
after any such redemption. Also, upon a Change of Control (as defined in the
Indenture), the Company is required to make an offer
F-37
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 26. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
to purchase the Notes then outstanding at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest. The Notes have no
sinking fund requirements and are due in full on April 1, 2004.
The Notes are general unsecured obligations of the Company and will be
expressly subordinated in right of payment to all existing and future Senior
Indebtedness (as defined in the Indenture) of the Company. The Notes will rank
PARI PASSU with any future Senior Subordinated Indebtedness (as defined in the
Indenture), and senior to all Subordinated Indebtedness (as defined in the
Indenture) of the Company.
The indenture relating to the Notes (the "Indenture") contains covenants
related to limitations of indebtedness of the Company and restricted
subsidiaries, limitations on restricted payments, limitations on restrictions on
distributions from restricted subsidiaries, limitations on sale of assets and
restricted subsidiary stock, limitations on liens, a prohibition on layering,
limitations on transactions with affiliates, limitations on issuance and sale of
capital stock of restricted subsidiaries and limitations of sale/leaseback
transactions.
F-38
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 25,484 $ 38,198
Restricted cash................................................................... 11,150 9,597
Accounts and notes receivable, less allowances for doubtful accounts of $6,587 and
$6,768, respectively............................................................ 60,356 58,806
Current portion of long-term receivables.......................................... 3,736 4,690
Inventories....................................................................... 28,104 31,856
Prepaid expenses and other........................................................ 6,584 4,383
------------ -------------
Total current assets................................................................ 135,414 147,530
Property and equipment, at cost less accumulated depreciation and amortization...... 28,147 27,102
Long-term receivables, net of current portion....................................... 8,605 10,632
Excess of purchase price over net assets of businesses acquired and other
intangibles, net.................................................................. 15,042 2,285
Reorganization value in excess of identifiable assets............................... 202,395 240,344
Other assets........................................................................ 15,736 7,528
------------ -------------
$ 450,366 $ 435,421
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 3,687 $ 31,848
Accounts payable.................................................................. 37,636 48,090
Accrued compensation, benefits and withholdings................................... 15,141 13,728
Accrued income taxes.............................................................. 9,334 11,930
Accrued interest.................................................................. 3,920 10,586
Other accrued liabilities......................................................... 37,050 36,814
------------ -------------
Total current liabilities........................................................... 106,768 152,996
------------ -------------
Noncurrent liabilities:
Long-term debt, net of current portion............................................ 251,523 217,044
Other noncurrent liabilities...................................................... 5,123 6,812
------------ -------------
Total noncurrent liabilities........................................................ 256,646 223,856
------------ -------------
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized, none issued......................... -- --
Common stock, $.01 par value; 20,000,000 shares authorized; 13,700,764 and
10,099,050 issued respectively.................................................. 137 101
Capital in excess of par value.................................................... 104,553 80,318
Cumulative translation adjustment from May 31, 1996............................... (714) 159
Accumulated deficit from May 31, 1996............................................. (62,024) (22,009)
------------ -------------
Total stockholders' equity.......................................................... 41,952 58,569
------------ -------------
$ 450,366 $ 435,421
------------ -------------
------------ -------------
</TABLE>
See notes to condensed consolidated financial statements.
F-39
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
----------------------------
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
------------- -------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues:
Services provided................................................................. $ 47,320 $ 48,262
Equipment and supply sales........................................................ 67,200 77,649
------------- -------------
114,520 125,911
------------- -------------
Operating costs and expenses:
Costs of services provided........................................................ 24,838 26,687
Costs of equipment and supplies sold.............................................. 50,881 58,813
Selling, general and administrative expenses...................................... 21,973 23,148
Amortization of reorganization asset.............................................. 18,717 --
------------- -------------
116,409 108,648
------------- -------------
Income (loss) from operations before interest, other income, reorganization items,
income taxes and extraordinary loss............................................... (1,889) 17,263
------------- -------------
Interest income..................................................................... 1,139 431
Interest expense and fee amortization............................................... (9,736) (5,499)
Reorganization items................................................................ -- (20,450)
Other income (loss)................................................................. (780) 24
------------- -------------
(9,377) (25,494)
------------- -------------
Income (loss) before income taxes and extraordinary loss............................ (11,266) (8,231)
Provision for income taxes.......................................................... 3,300 2,500
------------- -------------
Net income (loss) before extraordinary loss......................................... (14,566) (10,731)
Extraordinary loss on extinguishment of debt, net of income tax benefit of $4,325... 12,536 --
------------- -------------
Net income (loss) available to common stockholders.................................. $ (27,102) $ (10,731)
------------- -------------
------------- -------------
Weighted average common shares outstanding.......................................... 13,701
-------------
-------------
Earnings (loss) per common and common equivalent share:
Net income (loss) available to common stockholders before extraordinary loss...... $ (1.06)
Extraordinary loss on extinguishment of debt (net of tax benefit)................. .92
Net income (loss) available to common stockholders................................ $ (1.98)
-------------
-------------
</TABLE>
See notes to condensed consolidated financial statements.
F-40
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
------------------------
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
----------- -----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues:
Services provided..................................................................... $ 92,745 $ 99,190
Equipment and supply sales............................................................ 138,228 156,986
----------- -----------
230,973 256,176
----------- -----------
Operating costs and expenses:
Costs of services provided............................................................ 48,945 54,525
Costs of equipment and supplies sold.................................................. 101,813 120,574
Selling, general and administrative expenses.......................................... 43,421 47,595
Amortization of reorganization asset.................................................. 37,964 --
----------- -----------
232,143 222,694
----------- -----------
Income (loss) from operations before interest, other income, reorganization items,
income taxes and extraordinary loss................................................... (1,170) 33,482
----------- -----------
Interest income......................................................................... 2,123 932
Interest expense and fee amortization................................................... (19,538) (23,785)
Reorganization items.................................................................... -- (23,251)
Other income (loss)..................................................................... (795) 6,644
----------- -----------
(18,210) (39,460)
----------- -----------
Income (loss) before income taxes and extraordinary loss................................ (19,380) (5,978)
Provision for income taxes.............................................................. 8,100 3,700
----------- -----------
Net income (loss) before extraordinary loss............................................. (27,480) (9,678)
Extraordinary loss on extinguishment of debt, net of income tax benefit of $4,325....... 12,536 --
----------- -----------
Net income (loss)....................................................................... (40,016) (9,678)
----------- -----------
----------- -----------
Preferred stock dividends and discount accretion........................................ -- 540
----------- -----------
Net income (loss) available to common stockholders...................................... $ (40,016) $ (10,218)
----------- -----------
----------- -----------
Weighted average common shares outstanding.............................................. 13,134
-----------
-----------
Earnings (loss) per common and common equivalent share:
Net income (loss) available to common stockholders before extraordinary loss............ $ (2.09)
Extraordinary loss on extinguishment of debt (net of tax benefit)....................... .96
-----------
Net income (loss) available to common stockholders...................................... $ (3.05)
-----------
-----------
</TABLE>
See notes to condensed consolidated financial statements.
F-41
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
------------------------
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. $ (40,016) $ (9,678)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization....................................................... 45,442 14,564
Extraordinary loss on extinguishment of debt........................................ 12,536 --
Non-cash compensation............................................................... 510 --
Non-cash charge in lieu of taxes.................................................... 4,310 --
Non-cash reorganization items....................................................... -- 23,251
Gain on sale of ICS Division........................................................ -- (6,202)
Other non-cash items................................................................ (116) 53
Restricted cash requirements........................................................ (1,553) --
Change in assets and liabilities, net of acquisitions:
Decrease in accounts and long-term receivables.................................... 2,481 16,652
Decrease in inventories and prepaid expenses...................................... 5,135 9,501
Decrease (increase) in other assets............................................... (347) 1,914
Decrease in accounts payable and accrued expenses................................. (10,983) (17,301)
Increase (decrease) in other noncurrent liabilities............................... (1,655) 113
----------- -----------
Net cash provided by operating activities....................................... 15,744 32,867
----------- -----------
Cash flows from investing activities:
Proceeds from sale of ICS Division.................................................... -- 13,554
Purchases of property, plant and equipment............................................ (4,718) (2,537)
Payments to acquire companies and customer rights..................................... (16,464) --
----------- -----------
Net cash provided by (used in) investing activities............................. (21,182) 11,017
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common stock rights......................................... 24,271 --
Proceeds from revolving line of credit and long-term borrowings....................... 251,414 1,329
Principal payments on long-term debt.................................................. (270,416) (14,991)
Payments related to the issuance and extinguishment of debt........................... (12,259) --
----------- -----------
Net cash used in financing activities........................................... (6,990) (13,662)
----------- -----------
Effect of exchange rates on cash........................................................ (286) (378)
----------- -----------
Increase (decrease) in cash and cash equivalents........................................ (12,714) 29,844
Cash and cash equivalents at beginning of period........................................ 38,198 19,415
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 25,484 $ 42,259
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-42
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
------------------------
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash paid during the period for:
Interest.......................................................... $ 7,745 $ 8,175
Income taxes...................................................... $ 3,995 $ 1,297
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
<S> <C> <C>
--------------------------
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets acquired by assuming liabilities............................. $ 1,553 $ --
Interest on subordinated notes satisfied with additional notes...... $ 11,960 $ --
</TABLE>
See notes to condensed consolidated financial statements.
F-43
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1997--REORGANIZED COMPANY
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE
COMMON EXCESS OF TRANSLATION ACCUMULATED
STOCK PAR VALUE ADJUSTMENT DEFICIT TOTAL
----------- ---------- ------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996....................... $ 101 $ 80,318 $ 159 $ (22,009) $ 58,569
Common stock issued for exercise of rights.......... 36 24,235 -- -- 24,271
Translation adjustments for period.................. -- -- (873) -- (873)
Other............................................... -- -- -- 1 1
Net loss for the period............................. -- -- -- (40,016) (40,016)
----- ---------- ----- ------------ ----------
BALANCE AT MARCH 31, 1997........................... $ 137 $ 104,553 $ (714) $ (62,024) $ 41,952
----- ---------- ----- ------------ ----------
----- ---------- ----- ------------ ----------
</TABLE>
SIX MONTHS ENDED MARCH 31, 1996--PREDECESSOR COMPANY
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE
COMMON EXCESS OF TRANSLATION ACCUMULATED
STOCK PAR VALUE ADJUSTMENT DEFICIT TOTAL
----------- ---------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995...................... $ 462 $ 182,725 $ 1,329 $ (372,759) $ (188,243)
Preferred stock conversion......................... 7 4,798 -- -- 4,805
Preferred stock dividends.......................... -- -- -- (516) (516)
Accretion of redeemable preferred stock discount... -- -- -- (24) (24)
Translation adjustments for period................. -- -- (1,381) -- (1,381)
NBS stock issuance................................. 11 (11) -- -- --
Net loss for the period............................ -- -- -- (9,678) (9,678)
----- ---------- ----------- ------------ -----------
BALANCE AT MARCH 31, 1996.......................... $ 480 $ 187,512 $ (52) $ (382,977) $ (195,037)
----- ---------- ----------- ------------ -----------
----- ---------- ----------- ------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-44
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL:
The Condensed Consolidated Financial Statements included herein have been
prepared by Anacomp, Inc. ("Anacomp" or the "Company") and its wholly-owned
subsidiaries without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations; however, the Company believes that the disclosures are
adequate to make the information presented not misleading. The Condensed
Consolidated Financial Statements included herein should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Report on Form 10-K for the fiscal year ended September 30, 1996.
In the opinion of management, the accompanying interim Condensed
Consolidated Financial Statements contain all material adjustments necessary to
present fairly the consolidated financial condition, results of operations, and
changes in financial position and stockholders' equity of Anacomp and its
subsidiaries for the interim periods presented. Certain amounts in the prior
interim consolidated financial statements have been reclassified to conform to
the current period presentation.
Due to the Company's Reorganization and implementation of Fresh Start
Reporting, the Condensed Consolidated Financial Statements for the new
Reorganized Company (period starting May 31, 1996) are not comparable to those
of the Predecessor Company. For financial reporting purposes, the effective date
of the Reorganized Company's emergence from bankruptcy is considered to be the
close of business on May 31, 1996.
A black line has been drawn on the accompanying Condensed Consolidated
Financial Statements to distinguish between the Reorganized Company and the
Predecessor Company.
NOTE 2. COMPONENTS OF CERTAIN BALANCE SHEET ACCOUNTS:
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
by methods approximating the first-in, first-out basis.
The cost of the inventories is distributed as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished goods..................................................... $ 17,493 $ 22,557
Work in process.................................................... 3,226 2,748
Raw materials and supplies......................................... 7,385 6,551
----------- -------------
$ 28,104 $ 31,856
----------- -------------
----------- -------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization of
property and equipment are generally provided under the straight-line method for
financial reporting purposes over the shorter of the estimated useful lives or
the lease terms. Tooling costs are amortized over the total estimated
F-45
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. COMPONENTS OF CERTAIN BALANCE SHEET ACCOUNTS: (CONTINUED)
units of production, not to exceed three years. In accordance with Fresh Start
Reporting, property and equipment were reflected at fair market values as of May
31, 1996.
RESTRICTED CASH
Restricted cash represents cash reserved as collateral for letters of credit
issued by the Company or cash held in escrow primarily to secure certain
contingent obligations of the Company. The contingent obligations are primarily
related to environmental liabilities and certain insurance policies.
NOTE 3. REORGANIZATION ITEMS:
In accordance with SOP 90-7, expenses of the Predecessor Company resulting
from the Chapter 11 Reorganization are reported separately as reorganization
items in the accompanying Consolidated Statement of Operations, and are
summarized below:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Write-off of deferred debt issue costs and discounts......... $ (17,551) $ (17,551)
Legal and professional fees associated with bankruptcy....... (3,135) (5,936)
Interest earned on accumulated cash.......................... 236 236
-------------- --------------
$ 20,450 $ 23,251
-------------- --------------
-------------- --------------
</TABLE>
NOTE 4. SALE OF ICS DIVISION:
Effective November 1, 1995, Anacomp sold its Image Conversion Services
Division ("ICS") for approximately $13.5 million, which resulted in a net gain
to the Company of $6.2 million. The proceeds from this sale were used to reduce
the principal balance on certain senior debt. The ICS Division performed source
document microfilm services at several facilities around the country generating
approximately $20.0 million of revenues per year.
NOTE 5. INCOME TAXES:
Income tax expense is reported for the Predecessor Company based on the
actual effective tax rate for the six month period ended March 31, 1996. For
this period, the U.S. Federal tax provision is zero because the Predecessor
Company incurred a domestic loss for the period.
Amortization of "Reorganization value in excess of identifiable assets" is
not deductible for income tax purposes. Accordingly, the Reorganized Company
incurs income tax expense even though it reports a pre-tax loss due to such
amortization.
For the six month period ended March 31, 1997, income tax expense is
reported for the Reorganized Company based upon an estimated effective tax rate
for fiscal 1997 of 43%. Also during the period, the Company recorded an
extraordinary loss on the extinguishment of debt as discussed in Note 9. The
income tax benefit of $4.3 million associated with this charge is the amount
available at March 31, 1997. This amount is limited by other items affecting
taxable income for the period and may require adjustment in future periods as
additional income tax benefits become available.
F-46
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAXES: (CONTINUED)
At March 31, 1997, the Reorganized Company had net operating loss
carryforwards ("NOLs") of approximately $116 million available to offset future
taxable income. Usage of these NOLs by the Reorganized Company is limited to $4
million annually. However, the Reorganized Company may authorize the use of
other tax planning techniques to utilize a portion of the remaining NOLs before
they expire. In any event, the Reorganized Company expects that substantial
amounts of the NOLs will expire unused. NOLs available to offset income for
fiscal year 1997 is estimated to be $17 million.
NOTE 6. EARNINGS (LOSS) PER SHARE:
The computation of earnings (loss) per common and common equivalent share is
based upon the weighted average number of common shares outstanding during the
periods plus (in the periods in which they have a dilutive effect) the effect of
common shares contingently issuable, primarily from stock options and exercise
of warrants.
Fully diluted earnings (loss) per share are the same as primary earnings per
share for the periods presented.
The weighted average number of common shares outstanding and net income
(loss) per common share for periods prior to May 31, 1996 have not been
presented because, due to the restructuring and implementation of Fresh Start
Reporting, they are not comparable to subsequent periods.
NOTE 7. ACQUISITIONS:
During the six months ended March 31, 1997, the Company acquired either the
customer bases and other assets or the stock of seven businesses:
- A San Diego based company that manufactures and markets CD output systems,
optical storage controllers and mainframe connectivity solutions. The
purchase price consisted of $10.4 million cash paid at closing (net of
cash acquired) and contingent cash and/or stock payments of up to $3.2
million based upon future operating results over the next two years.
- Four companies operating seven service bureaus (three in Northern
California, one in Nevada, one in New York, one in Italy and one in
Belgium) specializing in COM. The combined purchase prices consisted of
$4.0 million cash paid at closing, notes payable of $880,000 and
contingent cash payments of up to $3.4 million based upon future operating
results over the next two years.
- A Boston based company that provides maintenance services relating to its
manufactured equipment used for the cleaning, testing, certifying and
degaussing of computer tape. The purchase price consisted of $1.5 million
cash paid at closing, the assumption of a $600,000 deferred revenue
liability and contingent cash payments of up to $2.7 million based upon
future revenues over the next five years.
- A Boston based company that specializes in the long-term storage of
critical business records. The purchase price consisted of $180,000 cash
paid at closing, the assumption of a $70,000 debt obligation and
contingent cash payments of up to $500,000 based upon future operating
results over the next three years.
F-47
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. RIGHTS OFFERING:
On October 30, 1996, the Company completed a rights offering to its existing
shareholders that resulted in the issuance of 3.6 million shares of common
stock. For each share of Anacomp common stock held as of the close of business
on September 18, 1996, the Company distributed 0.36 rights to purchase an
additional share of common stock at a subscription price of $6.875 per share.
The Company is using the proceeds of the rights offering, approximately $24
million, for the acquisition of businesses, assets and technologies.
NOTE 9. DEBT:
SENIOR SECURED CREDIT FACILITY
On February 28, 1997, the Company and certain foreign subsidiaries entered
into a Credit and Guarantee Agreement (the "Credit Facility") with a syndicate
of banks and other financial institutions (collectively, the "Senior Secured
Lenders"), Lehman Commercial Paper Inc., as arranger and syndication agent, and
The First National Bank of Chicago (in its individual capacity, "First
Chicago"), as administrative agent. The Credit Facility provides for a $55
million term loan facility ("the Term Facility") and a $25 million revolving
credit facility (the "Revolving Facility"). The proceeds of the Term Facility
and available cash were used to repay the existing 11 5/8% Senior Secured Notes
due 1999 (the "Old Senior Secured Notes"). The balance of the Old Senior Secured
Notes at February 28, 1997, was $83.6 million, reflecting the prepayment of the
March 31, 1997 installment of $14.3 million made on February 20, 1997.
As of March 31, 1997, $55 million was outstanding under the Term Facility,
and no amounts were outstanding under the Revolving Facility. The entire
Revolving Facility is available for loans denominated in U.S. dollars and
certain foreign currencies ("Multicurrency Loans"), and up to $10 million of the
Revolving Facility is available for letters of credit. The Term Facility is
repayable in thirteen quarterly installments commencing March 31, 1998, with the
final installment due on March 31, 2001. The Revolving Facility terminates on
February 28, 2001.
The Company may elect to have loans under the Term Facility or the Revolving
Facility bear interest at (a) the Alternate Base Rate plus 2% or (b) the
Eurodollar Rate, or in the case of Multicurrency Loans, the Eurocurrency Rate,
plus 3%. Interest is payable quarterly and at the end of the Interest Period (as
defined in the Credit Facility). The "Alternate Base Rate" for any day means the
higher of (i) the corporate base rate of interest announced by First Chicago and
(ii) the federal funds rate published by the Federal Reserve Bank of New York on
the next business day plus 1/2%. The "Eurodollar Rate" for any Interest Period
means (A) the applicable London interbank offered rate for deposits in U.S.
dollars two business days prior to the first day of the Interest Period divided
by (B) one minus the "Eurocurrency Liabilities" under Regulation D of the Board
of Governors of the Federal Reserve System. The "Eurocurrency Rate" for any
Interest Period means the rate at which First Chicago offers to place deposits
in the applicable foreign currency with first-class banks in the London
interbank market two business days prior to the first day of the Interest
Period.
The Term Facility and the Revolving Facility are secured by all of the
Company's tangible and intangible assets (including intellectual property, real
property and all of the capital stock of each of the Company's direct or
indirect domestic subsidiaries and 65% of the capital stock of each of the
Company's material direct foreign subsidiaries). All of the Company's
obligations under the Credit Facility are unconditionally guaranteed by the
Company's direct or indirect domestic subsidiaries. In addition to
F-48
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. DEBT: (CONTINUED)
customary covenants, the Credit Facility requires that the Company: (a) maintain
certain ratios of Consolidated EBITDA (as defined in the Credit Facility), (b)
not incur any indebtedness other than the 10 7/8% Senior Subordinated Notes due
2004 (the "Notes"), indebtedness under the Credit Facility and certain other
indebtedness, (c) not permit any lien to exist on any of its property, assets or
revenues, except the liens in favor of the Senior Secured Lenders, existing
liens and certain other liens and (d) not to incur any guarantee obligations,
except the guarantee obligations related to the Credit Facility and certain
other guarantee obligations.
The Company must use 25% of Consolidated Excess Cash Flow (as defined in the
Credit Facility) in fiscal 1997 and 50% of Consolidated Excess Cash Flow
thereafter to repay the Term Facility and reduce Revolving Facility commitments.
Additionally, 100% of the Net Proceeds (as defined in the Credit Facility) of
any Asset Sale (as defined in the Credit Facility) and 75% of proceeds from the
sale of Capital Stock (as defined in the Credit Facility) not used for
acquisitions or the repurchase of subordinated debt, must be applied to repay
the Term Facility and reduce the Revolving Facility commitments. The Term
Facility repayment schedule is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDED SEPTEMBER 30, THOUSANDS)
- --------------------------------------------------------------------
<S> <C>
1998................................................................ $ 8,000
1999................................................................ 14,000
2000................................................................ 21,000
2001................................................................ 12,000
-------
$ 55,000
-------
-------
</TABLE>
10 7/8% SENIOR SUBORDINATED NOTES
On March 24, 1997, the Company issued $200 million of the Notes. The Notes
were sold at 98.2071% of the face amount to yield proceeds of $196.4 million.
The proceeds of the Notes were used to repay the existing 13% Senior
Subordinated Notes due 2002, including a 3% call premium and accrued interest,
to reduce the SKC trade payable by $10 million and associated accrued interest,
and to pay certain fees and expenses. As a result of the call premium ($5.2
million) and existing discount on the 13% notes ($11.6 million), the Company
recorded an extraordinary loss on the extinguishment of debt of $12.5 million,
net of tax benefits.
The Notes are not redeemable at the option of the Company prior to April 1,
2000. On or after such date until April 1, 2003, the Notes will be redeemable at
the option of the Company in whole or in part at prices ranging from 108.156% to
102.710% plus accrued and unpaid interest. On or after April 1, 2003, the Notes
may be redeemable at 100% plus accrued and unpaid interest. Prior to April 1,
2000, the Company may, at its option, use the net cash proceeds of one or more
Public Equity Offerings (as defined in the Indenture), to redeem up to 35% of
the aggregate principal amount at a redemption price equal to 110.875% plus
unpaid interest to the date of redemption, provided that at least $130 million
of the aggregate principal amount of Notes originally issued remains outstanding
after any such redemption.
Also, upon a Change of Control (as defined in the Indenture), the Company is
required to make an offer to purchase the Notes then outstanding at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest. The Notes have no sinking fund requirements and are due in full on
April 1, 2004.
F-49
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. DEBT: (CONTINUED)
The Notes are general unsecured obligations of the Company and will be
expressly subordinated in right of payment to all existing and future Senior
Indebtedness (as defined in the Indenture) of the Company. The Notes will rank
pari passu with any future Senior Subordinated Indebtedness (as defined in the
Indenture) and senior to all Subordinated Indebtedness (as defined in the
Indenture) of the Company.
The indenture relating to the Notes contains covenants related to
limitations of indebtedness of the Company and restricted subsidiaries,
limitations on restricted payments, limitations on restrictions on distributions
from restricted subsidiaries, limitations on sale of assets and restricted
subsidiary stock, limitations on liens, a prohibition on layering, limitations
on transactions with affiliates, limitations on issuance and sale of capital
stock of restricted subsidiaries and limitations of sale/leaseback transactions.
NOTE 10. STOCK PLANS:
On February 3, 1997, the Company's shareholders approved the Anacomp, Inc.
1997 Qualified Employee Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan allows qualified employees to purchase shares of the
Company's common stock at the lower of 85% of the fair market value at the date
of purchase or 85% of the fair market value on the first day of the offering
period. A maximum of 500,000 shares of common stock is available for purchase
under the Stock Purchase Plan.
On February 3, 1997, the Company's shareholders approved the Anacomp, Inc.
1996 Long-Term Incentive Plan (the "Incentive Plan"). The Company has reserved
1,450,000 shares of its common stock for issuance in connection with options and
awards under the Incentive Plan.
F-50
<PAGE>
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NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ANACOMP, INC. OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NOTES
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF ANACOMP, INC. OR ANY OF ITS SUBSIDIARIES SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information........................... 2
Forward-Looking Statements...................... 2
Prospectus Summary.............................. 3
Risk Factors.................................... 16
Use of Proceeds................................. 22
Capitalization.................................. 23
Selected Consolidated Financial Data............ 24
Unaudited Pro Forma Consolidated Financial
Information................................... 27
The Exchange Offer.............................. 31
Management's Discussion and Analysis of Results
of Operations and Financial Condition......... 38
Business........................................ 46
Management...................................... 61
Security Ownership of Certain Beneficial Owners
and Management................................ 71
Certain Relationships and Related
Transactions.................................. 72
Description of the Senior Secured Debt.......... 73
Description of Notes............................ 75
Certain U.S. Federal Income Tax
Considerations................................ 102
Plan of Distribution............................ 104
Legal Matters................................... 104
Experts......................................... 104
Index to Consolidated Financial Statements...... F-1
</TABLE>
UNTIL AUGUST 23, 1997 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
OFFER TO EXCHANGE ITS
10 7/8% SENIOR SUBORDINATED NOTES
DUE 2004, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
10 7/8% SENIOR SUBORDINATED NOTES
DUE 2004, SERIES A
---------------------
PROSPECTUS
---------------------
JULY 14, 1997
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