SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-8328
ANACOMP, INC.
(Exact Name of Regisrant as Specified in Charter)
Indiana 35-1144230
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
12365 Crosthwaite Circle
Poway, California 92064
(Address of Principal Executive Office)
Registrant's Telephone Number is (619) 679-9797
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES (X) NO ( )
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES (X) NO ( )
The number of shares of the Registrant's Common Stock outstanding on June 30,
1998, the close of the period covered by this report, was 14,188,583.
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1998 and September 30, 1997
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended June 30, 1998
and 1997
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997
Supplemental Disclosures of Cash Flow Information
Supplemental Schedule of Non-cash Investing and
Financing Activities
Condensed Consolidated Statements of Stockholders'
(Deficit) Equity Nine Months Ended June 30,
1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
Anacomp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30, September 30,
(Dollars in thousands, except per share amounts) 1998 1997
- - ------------------------------------------------ ---------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 11,454 $ 58,060
Restricted cash.............................................. 4,285 7,433
Accounts and notes receivable, less allowances for doubtful
accounts of $7,773 and $5,501, respectively.............. 87,117 58,628
Current portion of long-term receivables..................... 4,317 3,647
Inventories.................................................. 29,447 25,261
Assets held for sale....................................... 34,520 --
Prepaid expenses and other................................... 9,579 6,853
-------------------- ---------------
Total current assets............................................. 180,719 159,882
Property and equipment, at cost less accumulated depreciation
and amortization........................................... 39,822 29,063
Long-term receivables, net of current portion.................... 7,438 6,587
Excess of purchase price over net assets of businesses acquired
and other intangibles, net................................. 122,356 17,800
Reorganization value in excess of identifiable assets............ 107,621 163,856
Other assets..................................................... 17,763 14,763
==================== ===============
$ 475,719 $ 391,951
==================== ===============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt............................ $ 54,907 $ 9,595
Accounts payable............................................. 29,631 39,270
Accrued compensation, benefits and withholdings.............. 16,025 16,481
Accrued income taxes......................................... 14,398 13,471
Accrued interest............................................. 9,093 14,738
Other accrued liabilities.................................... 49,172 34,529
-------------------- ---------------
Total current liabilities........................................ 173,226 128,084
-------------------- ---------------
Noncurrent liabilities:
Long-term debt, net of current portion....................... 338,974 247,889
Other noncurrent liabilities................................. 933 1,458
-------------------- ---------------
Total noncurrent liabilities..................................... 339,907 249,347
-------------------- ---------------
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized, none issued.... -- --
Common stock, $.01 par value; 20,000,000 shares authorized;
14,188,583 and 13,789,764 issued and outstanding,
respectively............................................ 142 138
Capital in excess of par value............................... 108,798 105,329
Cumulative translation adjustment from May 31, 1996.......... (1,706) (1,128)
Accumulated deficit from May 31, 1996........................ (144,648) (89,819)
-------------------- -------------------
Total stockholders' (deficit) equity............................. (37,414) 14,520
==================== ===================
$ 475,719 $ 391,951
==================== ===================
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Anacomp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
------------------------- -----------------------------------
(Amounts in thousands, except per share amounts) 1998 1997 1998 1997
- - ----------------------------------------------------------------------- --------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Services provided................................. $ 57,839 $ 46,690 $157,279 $139,435
Equipment and supply sales........................ 63,182 67,351 199,149 205,579
----------------- --------------------- ---------------- -------------------
121,021 114,041 356,428 345,014
----------------- --------------------- ---------------- -------------------
Operating costs and expenses:
Costs of services provided........................ 34,027 24,400 89,393 73,345
Costs of equipment and supplies sold.............. 46,387 51,859 147,114 153,672
Selling, general and administrative expenses...... 24,207 21,919 72,901 64,403
Amortization of reorganization assets............. 18,745 18,973 56,235 56,937
Amortization of intangible assets............... 3,219 711 7,963 1,648
Restructuring charges........................... 8,494 -- 8,494 --
----------------- --------------------- ---------------- -------------------
135,079 117,862 382,100 350,005
----------------- --------------------- ---------------- -------------------
Loss from operations before interest, other expense,
income taxes, and extraordinary gain (loss)...... (14,058) (3,821) (25,672) (4,991)
----------------- --------------------- ---------------- -------------------
Interest income....................................... 463 1,058 1,802 3,181
Interest expense and fee amortization................. (8,562) (8,436) (24,440) (27,974)
Other expense......................................... (272) (357) (843) (1,152)
----------------- --------------------- ---------------- -------------------
(8,371) (7,735) (23,481) (25,945)
----------------- --------------------- ---------------- -------------------
Loss before income taxes and extraordinary gain (loss) (22,429) (11,556) (49,153) (30,936)
Provision (benefit) for income taxes.................. (680) 3,300 3,819 11,400
----------------- --------------------- ---------------- -------------------
Net loss before extraordinary gain (loss)............. (21,749) (14,856) (52,972) (42,336)
----------------- --------------------- ---------------- -------------------
Extraordinary gain (loss) on extinguishment of debt... (1,857) 875 (1,857) (11,661)
================= ===================== ================ ===================
Net loss.............................................$ (23,606) $ (13,981) $ (54,829) $ (53,997)
================= ===================== ================ ===================
Weighted average common shares outstanding............ 14,078 13,701 13,921 13,323
================= ===================== ================ ===================
Basic and diluted loss per common share:
Net loss before extraordinary gain (loss)............. $ (1.55) $ (1.08) $ (3.81) $ (3.18)
Extraordinary gain (loss) on extinguishment of debt.... (0.13) 0.06 (0.13) (0.87)
----------------- --------------------- ---------------- -------------------
Net loss.............................................. $ (1.68) $ (1.02) $(3.94) $ (4.05)
================= ===================== ================ ===================
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Anacomp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
June 30, June 30,
(Dollars in thousands) 1998 1997
- - ---------------------------------------------------------------------------- ------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss......................................................... $ (54,829) $ (53,997)
Adjustments to reconcile net loss to net cash provided by
(used in)
operating activities:
Depreciation and amortization.................................. 75,820 68,605
Extraordinary loss on extinguishment of debt................... 1,857 11,661
Non-cash compensation.......................................... 753 761
Non-cash charge in lieu of taxes............................... -- 6,453
Other non-cash items........................................... 435 310
Restricted cash requirements................................... 3,148 (69)
Change in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accounts and long-term receivables... (8,626) 5,152
(Increase) decrease in inventories and prepaid expenses..... (1,331) 5,614
Increase in other assets.................................... (2,494) (1,233)
Decrease in accounts payable and accrued expenses........... (21,024) (5,235)
Decrease in other noncurrent liabilities.................... (686) (2,516)
------------------------------------
Net cash provided by (used in) operating activities....... (6,977) 35,506
------------------------------------
Cash flows from investing activities:
Purchases of property and equipment.............................. (8,586) (8,131)
Payments to acquire companies and customer rights................ (164,302) (17,453)
------------------------------------
Net cash used in investing activities..................... (172,888) (25,584)
------------------------------------
Cash flows from financing activities:
Proceeds from exercise of common stock rights ................... -- 24,271
Proceeds from exercise of common stock options .................. 1,728 6
Proceeds from employee stock purchases .......................... 906 --
Proceeds from revolving line of credit and
long-term borrowings........................................ 214,262 251,414
Principal payments on long-term debt............................. (78,484) (271,274)
Payments related to the issuance of debt......................... (4,769) (12,259)
------------------------------------
Net cash provided by (used in) financing activities....... 133,643 (7,842)
------------------------------------
Effect of exchange rate changes on cash.............................. (384) 62
------------------------------------
Increase (decrease) in cash and cash equivalents..................... (46,606) 2,142
Cash and cash equivalents at beginning of period..................... 58,060 38,198
------------------------------------
Cash and cash equivalents at end of period........................... $ 11,454 $ 40,340
====================================
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Unaudited):
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
June 30, June 30,
(Dollars in thousands) 1998 1997
- - -------------------------------------------------------------- ----------------------- ----------------------
Cash paid during the period for:
<S> <C> <C>
Interest............................................. $ 26,687 $ 8,568
Income taxes......................................... $ 2,599 $ 5,078
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES (Unaudited):
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
June 30, June 30,
(Dollars in thousands) 1998 1997
- - -------------------------------------------------------------- ----------------------- ----------------------
<S> <C> <C>
Assets acquired by assuming liabilities ................. $ 11,580 $ 1,553
Common stock issued as incentive compensation ........... $ 584 $ --
Interest on subordinated notes satisfied with additional
notes.................................................... $ -- $ 11,960
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
(DEFICIT) EQUITY (Unaudited)
Anacomp, Inc. and Subsidiaries
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Capital in Cumulative
Common excess of Translation Accumulated
(Dollars in thousands) Stock par value Adjustment Deficit Total
- - ------------------------------------------------- -------------- ------------ -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 $ 138 $ 105,329 $ (1,128) $ (89,819) $ 14,520
Common stock issued for exercise of options 3 1,980 -- -- 1,983
Common stock issued for employee stock purchases 1 905 -- -- 906
Common stock issued as incentive compensation -- 584 -- -- 584
Translation adjustments for period -- -- (578) -- (578)
Net loss for the period -- -- -- (54,829) (54,829)
-------------- ------------ -------------- --------------- ------------
BALANCE AT JUNE 30, 1998 $ 142 $ 108,798 $ (1,706) $ (144,648) $ (37,414)
============== ============ ============== =============== =============
</TABLE>
NINE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Capital in Cumulative
Common excess of Translation Accumulated
(Dollars in thousands) Stock par value Adjustment Deficit Total
- - ------------------------------------------------- -------------- ------------ -------------- --------------- -------------
<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
Common stock issued for exercise of options 6 6
Translation adjustments for period -- -- (982) -- (982)
Other -- -- -- 1 1
Net loss for the period -- -- -- (53,997) (53,997)
============== ============ ============== =============== =============
BALANCE AT JUNE 30, 1997 $ 137 $ 104,559 $ (823)$ (76,005) $ 27,868
============== ============ ============== =============== =============
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Anacomp, Inc. and Subsidiaries
NOTE 1. GENERAL:
The Condensed Consolidated Financial Statements (the "Financial Statements")
included herein have been prepared by Anacomp, Inc. and its wholly owned
subsidiaries (collectively, "Anacomp" or the "Company") without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"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 information and disclosures
presented herein are adequate and not misleading. The Financial Statements
included herein should be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997.
In the opinion of management, the accompanying 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 for the interim periods presented. Certain
amounts in the prior consolidated financial statements included herein have been
reclassified to conform to the current period presentation.
NOTE 2. COMPONENTS OF CERTAIN BALANCE SHEET ACCOUNTS:
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by methods approximating the first-in, first-out basis. The cost of
the inventories is distributed as follows:
June 30, September 30,
(Dollars in thousands) 1998 1997
------------------------------------ ------------------- -----------------
Finished goods...................... $ 16,044 $ 14,887
Work in process..................... 3,496 3,299
Raw materials and supplies.......... 9,907 7,075
=================== =================
$ 29,447 $ 25,261
=================== =================
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.
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.
<PAGE>
NOTE 3. INCOME TAXES:
Amortization of the Company's asset entitled "Reorganization value in excess of
identifiable assets" (the "Reorganization Asset") is not deductible for income
tax purposes. Accordingly, the Company incurs income tax expense even though it
reports a pre-tax loss due to such amortization.
For the nine months ended June 30, 1998, and 1997, income tax expense is
reported for the Company based upon the estimated effective tax rates. For
fiscal 1998 and 1997, the effective tax rates were 54% and 43% of pretax income
before amortization of the Reorganization Asset, respectively. For the nine
months ended June 30, 1998, the tax provision represents only income tax expense
on income generated outside of the United States. The restructuring charges and
the extraordinary loss on the extinguishment of debt created a loss in the
United States for which no income tax benefit could be recognized.
At June 30, 1998, the Company had U.S. net operating loss carryforwards ("NOLs")
of approximately $150 million available to offset future taxable income. This
amount will increase to $200 million as certain temporary differences reverse in
future periods. Usage of these NOLs by the Company is limited to approximately
$4 million annually. However, the 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 Company expects that substantial amounts of the NOLs
will expire unused. NOLs available to offset taxable income for fiscal year 1998
are estimated to be $22 million.
NOTE 4. LOSS PER SHARE:
The computation of basic loss per common share is based upon the weighted
average number of common shares outstanding during the periods. Diluted loss per
share is the same as basic earnings per share for the periods presented due to
the losses reported for the periods.
NOTE 5. ACQUISITIONS:
During the nine months ended June 30, 1998, excluding the First Image
acquisition discussed in Note 7 below, the Company acquired either the customer
bases and other specified assets or the stock of nine businesses. Total
consideration paid at closing was $17.9 million, of which approximately $12.5
million was assigned to excess of purchase price over net assets acquired.
The aggregate purchase prices consisted of $17.0 million cash at closing, $0.9
million in assumed liabilities and contingent cash payments of up to $10.9
million based upon future operating results over the next 10 years.
NOTE 6. 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 used the proceeds of the rights offering, approximately $25 million,
for the acquisition of businesses, assets and technologies.
NOTE 7. FIRST IMAGE ACQUISITION:
On June 18, 1998, the Company completed its acquisition (the "Acquisition") of
assets constituting substantially all of the business and operations (the "First
Image Businesses") of First Image Management Company ("First Image"), a division
of First Financial Management Corporation ("FFMC"), a wholly owned subsidiary of
First Data Corporation ("FDC"). The Company also assumed substantially all of
the ongoing liabilities of the First Image Businesses. The purchase price paid
by the Company to FFMC at the closing of the Acquisition was $150.0 million,
although a post-closing adjustment has resulted in FFMC returning to the Company
$4,182,000 to reflect a shortfall in the agreed-upon working capital for the
First Image Businesses. The Acquisition was accounted for as a purchase, and the
excess of the purchase price over the estimated fair value of net assets
acquired ("goodwill") approximates $100 million, which is being amortized over a
15-year period on a straight-line basis. For reporting purposes, the Acquisition
date was set as June 1, 1998 because the significant contingencies associated
with the definitive agreement among the Company, FFMC and FDC were all cleared
and the Company received the economic benefits and assumed the economic risks
associated with the operations of the First Image Businesses beginning June 1,
1998.
The First Image Businesses include (i) image access services, primarily Computer
Output to Microfilm ("COM") and Compact Disc ("CD") services (the "IAS
Business"), (ii) document print and distribution services such as laser print
and mail and demand publishing services (the "DPDS Business") and (iii) document
acquisition services such as health care and insurance claims entry and data
capture services (the "DAS Business"). The Company will retain and continue to
operate the IAS Business whose revenues and earnings before interest, other
expense, taxes, restructuring charges, depreciation and amortization ("EBITDA")
of $8.5 million and $2.2 million, respectively, for the period June 1, 1998 to
June 30, 1998 are included in the Company's results of operations for the three
and nine months ended June 30, 1998.
The Company closed the sale of the DAS Business to ACS Shared Services, Inc., a
wholly-owned subsidiary of Affiliated Computer Services, Inc., effective July 1,
1998. The Company also closed the sale of the DPDS Business to Southern
Micrographix Company LLC (now known as AccuDocs LLC) effective August 1, 1998.
The sale of both the DAS Business and the DPDS Business generated $45.0 million
in cash for the Company. Combined, the DAS Business and the DPDS Business
accounted for 44% of First Image's revenues for the year ended December 31,
1997. The Company has classified the net assets of the DAS Business and the DPDS
Business as assets held for sale on the Company's consolidated balance sheet as
of June 30, 1998 and have excluded the results of operations for the DAS
Business and the DPDS Business from the Company's results of operations for the
periods ending June 30, 1998.
The unaudited pro forma consolidated operating data of the Company for the nine
months ended June 30, 1998 and 1997 are presented below. The unaudited pro forma
consolidated operating data for the nine months ended June 30, 1998 includes the
Company's operations for the nine months ended June 30, 1998 and First Image's
operations for the eight months ended May 31, 1998. The unaudited pro forma
consolidated operating data for the nine months ended June 30, 1997 includes the
Company's operations for the nine months ended June 30, 1997 and First Image's
operations for the nine months ended September 30, 1997.
The unaudited pro forma consolidated operating data have been prepared giving
effect to the Acquisition, the disposition of the DAS Business and the DPDS
Business and the use of the proceeds thereof, the New Facility and Senior
Subordinated Notes (as each such term is defined in Note 8, below) and the
fiscal year 1997 refinancings as if they had all occurred at the beginning of
the applicable results of operations period.
The unaudited pro forma consolidated information is not necessarily indicative
of the results that would have been obtained had such transactions in fact been
completed at the beginning of the periods presented nor is such information
indicative of future results.
<TABLE>
<CAPTION>
(Dollars in thousands)
- - ------------------------------------------------
<S> <C>
Nine Months ended June 30, 1998:
Total revenues $428,283
Net income (loss) before extraordinary items (47,648)
Net income (loss) (48,725)
Nine Months ended June 30, 1997:
Total revenues $426,935
Net income (loss) before extraordinary items (32,613)
Net income (loss) (44,274)
</TABLE>
NOTE 8. DEBT:
Senior Secured Revolving Credit Facility
On June 15, 1998, the Company entered into a new $80 million Senior Secured
Revolving Credit Facility (the "New Facility") with a syndicate of banks and
BankBoston, N.A. ("BankBoston") as agent. The proceeds of the New Facility were
used to repay the outstanding balance of the existing $80 million Senior Secured
Term Loan and Revolving Credit Facility (the "Old Facility"). The balance of the
Old Facility at June 15, 1998, was $53.6 million.
As of June 30, 1998, $53.9 million was outstanding under the New Facility and is
classified as a current liability because the Company intends to pay off the
outstanding balance by September 30, 1998 using cash generated from the sale of
the DAS Business and the DPDS Business and from the Company's operations. The
New Facility is available for loans denominated in U.S. dollars and certain
foreign currencies. In addition, up to $15 million of the New Facility is
available for letters of credit. The New Facility terminates on June 15, 2003.
The Company may elect to have loans under the New Facility bear interest at (a)
the Base Rate (as defined) plus 0-3/4% or (b) the Eurocurrency Rate (as defined)
plus 1-2%. Interest is payable quarterly under the Base Rate loans and payable
either quarterly or at the end of the interest period if less than three months
under the Eurocurrency Rate loans. The "Base Rate" for any day means the higher
of (i) the corporate base rate of interest announced by BankBoston and (ii) the
federal funds rate published by the Federal Reserve Bank of New York on the next
business day plus 1/2%. The "Eurocurrency Rate" means the Eurodollar Rate or the
International Eurocurrency Rate as defined and offered by BankBoston.
The New Facility is secured by substantially all of the Company's assets and 65%
of the capital stock of the Company's foreign subsidiaries. Among other
restrictions, the New Facility contains certain covenants with respect to the
Company relating to limitations on additional debt, limitations on mergers and
acquisitions, limitations on liens, and minimum EBITDA, interest coverage and
leverage ratios.
As of June 15, 1998, the Company had $1.9 million of unamortized debt issuance
costs associated with the Old Facility. As a result of the repayment of the Old
Facility, the Company recorded these unamortized debt issuance costs as an
extraordinary loss on the early extinguishment of debt for the period ended June
30, 1998.
10 7/8% Senior Subordinated Notes
On June 18, 1998, the Company issued $135 million of additional 10 7/8% Senior
Subordinated Notes (the "Notes"). The Notes were sold at 104% of the face amount
to yield proceeds of $140.4 million which resulted in a $5.4 million premium to
be offset against interest expense over the life of the Notes. The proceeds of
the Notes, along with available cash, were used to finance the Acquisition (see
Note 7).
The Notes are not redeemable at the option of the Company prior to April 1,
2000. On or after such date and 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), 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 $87.75
million of the aggregate principal amount of Notes originally issued remains
outstanding after such redemption. Also, upon a Change of Control (as defined),
the Company is required to make an offer to purchase the Notes then outstanding
at a purchase price equal to 101% 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 expressly
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. The Notes rank pari passu with any future Senior
Subordinated Indebtedness (as defined) and senior to all Subordinated
Indebtedness (as defined) of the Company.
The indenture related to the Notes contains covenants with respect to the
Company related to limitations of indebtedness of the Company and its restricted
subsidiaries, limitations on restricted payments, limitations 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, limitations of sale/leaseback transactions and
limitations on mergers, consolidations or sales of substantially all of the
Company's assets.
NOTE 9. RESTRUCTURING CHARGES
Included in the Company's operating results for the three and nine months ended
June 30, 1998 are restructuring charges of $8.5 million. These charges result
from the Company's acquisition of the First Image Businesses as the Company
plans to close down Anacomp sites with multiple market presence in certain
cities and convert First Image customers to Anacomp equipment. These
restructuring activities are expected to be completed during fiscal year 1999.
The restructuring charges consist of personnel related costs of $3.6 million and
facility closedown costs of $4.9 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Results of Operations do not include the
results of First Image for the period June 1, 1998 to June 30, 1998. Inclusion
of such results and discussion would not allow for a meaningful comparison
between the periods presented. Therefore, not included in the results below are
revenues of $8.5 million, EBITDA of $2.2 million and net income of $1.3 million
for First Image for the period June 1, 1998 to June 30, 1998.
Three Months Ended June 30, 1998 compared to the Three Months Ended June 30,
1997
Results of Operations
General
Anacomp reported a net loss of $24.9 million for the three months ended June 30,
1998, compared to a net loss of $14.0 million for the three months ended June
30, 1997. Included in the net loss for the three months ended June 30, 1998 and
1997 is non-cash amortization of the Company's Reorganization Asset of $18.7
million and $19.0 million, respectively. Included in the net loss for the three
months ended June 30, 1998 is a one-time restructuring charge of $8.5 million
resulting from planned data center consolidations in conjunction with the First
Image Acquisition. Also included in the net loss for the three months ended June
30, 1998 is an extraordinary loss on the early extinguishment of debt of $1.9
million. The extraordinary loss resulted from the write-off of unamortized debt
issuance costs related to the Company's Old Facility which was refinanced in
June 1998.
Earnings before interest, other expense, taxes, restructuring charges,
depreciation and amortization ("EBITDA") was $17.8 million for the three months
ended June 30, 1998 compared to $19.1 million for the three months ended June
30, 1997.
Total revenues for the third quarter of $112.5 million represents a $1.6 million
decrease from the revenues for the third quarter of the prior year. This
decrease is primarily due to the decline in the Company's micrographics supplies
business.
Cost of sales as a percentage of revenues was 67% for the three months ended
June 30, 1998, compared to 67% for the same period of the prior year.
Selling, general and administrative expenses, excluding amortization of
intangible assets, were 21% of revenue for the three months ended June 30, 1998,
compared to 19% for those months ended June 30, 1997. These increased costs are
primarily due to investments in product development and sales support for the
digital systems products.
Products and Services
Outsource services revenues, which include COM and ALVA CD services, increased
$5.4 million, or 21%, for the three months ended June 30, 1998 compared to the
same three months of fiscal 1997. Outsource services volumes increased 27%,
while the average selling price decreased 11%. Data center acquisitions in
Europe as well as several large customer gains have contributed to both the
increase in volumes and the decrease in average selling price. The acquired data
centers contributed volumes, but at somewhat lower selling prices. The large
customer gains received favorable pricing due to their volumes. Gross margins as
a percentage of revenue decreased by two percentage points due to the impact of
the lower average selling price.
Technical services (primarily maintenance) revenues decreased $466,000 for the
three months ended June 30, 1998 compared to the prior year, primarily due to
the decrease in the population of older generation COM systems in the customer
base. Gross margins as a percentage of revenue decreased by two percentage
points compared to the same period of the prior year.
COM systems revenues for the three months ended June 30, 1998 increased $411,000
or 7% compared to the same period of the prior year. Gross margins as a
percentage of revenue increased by six percentage points compared to the same
period of the prior year.
Digital systems revenues for the three months ended June 30, 1998 were $2.5
million compared to $2.4 million in the prior year.
Micrographics supplies revenues for the three months ended June 30, 1998
decreased $6.4 million compared to the same period of the prior year. This
decrease is due to the decline in original COM film and duplicate film, which is
consistent with long-term trends as well as the discontinuance of the sale of
duplicate film to the reseller market. Gross margins as a percentage of revenue
improved by two percentage points due primarily to changes in product mix.
Magnetic media revenues and gross margins for the three months ended June 30,
1998 were comparable to the same period of the prior year.
Nine Months Ended June 30, 1998 compared to the Nine Months Ended June 30, 1997
Results of Operations
General
Anacomp reported a net loss of $56.1 million for the nine months ended June 30,
1998, compared to net loss of $54.0 million for the nine months ended June 30,
1997. Included in the net loss for the nine months ended June 30, 1998 and 1997
is non-cash amortization of the Company's Reorganization Asset of $56.2 million
and $56.9 million, respectively. Included in the net loss for the nine months
ended June 30, 1998 is a one-time restructuring charge of $8.5 million resulting
from planned data center consolidations in conjunction with the Acquisition.
Also included in the net loss for the nine months ended June 30, 1998 and 1997
were extraordinary losses on the extinguishment of debt of $1.9 million and
$11.7 million, respectively. The extraordinary loss for the nine months ended
June 30, 1998 was the result of the early extinguishment of the Company's Old
Facility and the associated write-off of unamortized debt issuance costs. The
extraordinary loss for the nine months ended June 30, 1997 was comprised of a 3%
call premium and the write-off of unamortized discount on the Company's 13%
Subordinated Notes.
Pursuant to a 1990 OEM agreement, Kodak was obligated to purchase an additional
151 XFP 2000 systems by October 1997 or pay a cash penalty to the Company. In
satisfaction of this earlier OEM agreement, the Company accepted a $3.6 million
cash payment from Kodak, which is included in the results for the nine months
ended June 30, 1997.
EBITDA, excluding the Kodak payment noted above, was $55.6 million for the nine
months ended June 30, 1998, compared to $58.9 million for the nine months ended
June 30, 1997.
Total revenues for the nine months ended June 30, 1998 of $347.9 million
represents a $6.5 million increase from the same period of the prior year,
excluding the Kodak payment noted above. A variety of factors contributed to the
higher revenues, including large COM services contracts with new customers,
higher volumes in COM and CD services from existing customers, and the positive
effect of acquisitions. These improvements were offset by expected historical
declines in micrographics supplies.
Cost of sales as a percentage of revenues was 66% for the nine months ended
June 30, 1998, compared to 66% for the same period of the prior year.
Selling, general and administrative expenses, excluding amortization of
intangible assets, was 21% of revenue for the nine months ended June 30, 1998
and 19% for the nine months ended June 30, 1997, excluding the one-time $3.6
million payment noted above. These increased costs are primarily due to
investments in the Company's sales force and in product development and sales
support for the digital systems products.
Interest expense and fee amortization of $24.4 million for the nine months ended
June 30, 1998, decreased $3.5 million over the prior year, primarily due to more
favorable interest rates and reduction in debt levels as a result of the
refinancing of substantially all of the Company's significant debt obligations
during the second quarter of fiscal 1997.
Products and Services
Outsource services revenues, which include COM and ALVA CD services, increased
$17.0 million for the nine months ended June 30, 1998, compared to the same nine
months of fiscal year 1997. Outsource service volumes increased by 30% while
average selling prices decreased by 11%. 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 approximately two percentage points due to
the aforementioned impact of lower average selling prices.
Technology services (primarily maintenance) revenues decreased $2.8 million for
the nine months ended June 30, 1998, primarily due to the effect of replacing
older generation COM systems with the XFP 2000 COM System, which has a
significantly greater capacity than the older COM systems. Gross margins as a
percentage of revenue remained level.
COM systems revenues for the nine months ended June 30, 1998 increased by $4.5
million compared to the same period of the prior year. The increase in revenue
is attributable to an increase in the number of systems sold and the mix and
pricing of new and used systems. Gross margins as a percentage of revenue
improved five percentage points primarily due to product mix and the result of
manufacturing efficiencies realized during fiscal 1998.
Digital systems revenues for the nine months ended June 30, 1998, were $9.3
million compared to $6.6 million in the prior year. The increase was due to the
contribution from a business acquired in October 1997.
Micrographics supplies revenues for the nine months ended June 30, 1998,
decreased $16.9 million compared to the same period of the prior year. This
decrease is due to the decline in original COM film and duplicate film, which is
consistent with long-term trends as well as the discontinuance of the sale of
duplicate film to the reseller market. Gross margins as a percentage of revenue
remained level.
Magnetic media revenues and gross margins for the nine months ended June 30,
1998 remained level compared to the same period of the prior year.
Liquidity and Capital Resources
Anacomp's working capital at June 30, 1998, excluding the current portion of
long-term debt, was $62.4 million, compared to $41.4 million at September 30,
1997. Net cash used in operating activities was $7.0 million for the first nine
months of fiscal 1998, compared to net cash provided by operating activities of
$35.5 million in the comparable prior period. The change in net cash provided by
(used in) operating activities was caused by a $10 million payment on the
Company's trade credit facility and by usual working capital changes. Net cash
used in investing activities was $172.9 million in the current period compared
to $25.6 million in the comparable prior period. The fiscal 1998 investments
were significantly higher because of the Acquisition.
Net cash provided by financing activities was $133.6 million for the nine months
ended June 30, 1998, compared to net cash used in financing activities of $7.8
million in the comparable prior period. The fiscal 1998 proceeds were
significantly higher because of new subordinated debt issued to finance the
Acquisition. The Company's successful rights offering of approximately 3.6
million shares of common stock provided approximately $24.3 million in cash
during the first three quarters of fiscal 1997. The company's debt refinancing
and principal reductions during the second quarter of fiscal 1997 used
approximately $31.3 million of cash.
The Company's cash balance (including restricted cash) as of June 30, 1998 was
$15.7 million, compared to $65.5 million at September 30, 1997. The decrease was
primarily due to cash used for acquisitions. The Company also has availability
of $26.1 million on its $80 million revolving credit facility at June 30, 1998.
In addition, the Company intends to pay off the outstanding balance of the New
Facility by September 30, 1998 using cash generated from the sale of the DAS
Business and the DPDS Business and from operations.
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. However, the Company believes that cash on hand,
cash generated from operations and cash available under the New Facility will be
sufficient to fund its debt service requirements, acquisition strategies and
working capital requirements in the foreseeable future.
Year 2000
Anacomp has undertaken a comprehensive "Year 2000" program for the products that
it sells or distributes in the marketplace. Under this program, the Company has
sought to assess all of its critical software and hardware products to determine
what remediation, if any, is necessary for the proper functioning of these
systems in the year 2000 and beyond. The Company is also working with its
outside vendors to ensure that they will continue to support the products that
the vendors supply to Anacomp for resale, including the performance by the
vendors of any required Year 2000 remediation.
Anacomp is also in the process of analyzing the software and hardware systems
that it uses internally to determine if there are any Year 2000 issues. Where
necessary, the Company is updating its internal systems and working with the
vendors of any products from whom the Company still receives support.
Based upon its assessment to date, Anacomp believes that it will be able to
complete all required remediation of its supported and internal products in a
timely fashion, and that the effort and the cost of such remediation will not
have a material effect upon the Company's results of operations, liquidity or
capital resources. The Company expenses these costs as they are incurred.
Nevertheless, there can be no assurance that the Company will be able to
complete all of such remediation in the required time frame, or that the Company
will be able to identify all Year 2000 issues before problems manifest
themselves. Further, it is possible that the future level of expenses in the
Company's remediation efforts could rise significantly. Finally, there can be no
assurance that, if left unremedied, the products that the Company sells or
distributes would remain competitive in the marketplace or the products that the
Company uses internally would not have a material effect upon the ability of the
Company to report its financial results.
Anacomp has set a goal of completing its Year 2000 program, including all
required remediation work, by December 31, 1998, both for the products that it
supports and for the products that it uses internally. The Company is hopeful,
however, that it will complete its program for certain of its products before
that internal deadline.
Forward-Looking Statements
Certain statements in this "Management's Decision and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report 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 trends; industry capacity;
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 report. These forward-looking
statements speak only as of the date of this report.
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Unregistered sales of securities
Pursuant to the 1996 Non-employee Director Stock Option Plan (Amended and
Restated as of December 1, 1997), non-employee directors of the Company may
elect to receive their annual retainer in the form of options to acquire common
stock of the Company. Pursuant to such elections, during the nine-months ended
June 30, 1998, an aggregate of 2,500 options were granted to four directors in
lieu of aggregate cash compensation of $12,500. The issuance of such options was
effected in reliance on the private placement exception set forth in Section 4
(2) of the Securities Act of 1993, as amended, on the basis of familiarity of
such directors with the business and affairs of the Company. No underwriting
fees or discounts were applicable to the transactions. The options are first
exercisable six months after the date of grant and remain exercisable through
the tenth anniversary of the grant date, at an exercise price of $15.1875 per
share.
ITEM 5. OTHER INFORMATION
Shareholder Proposals
The eligibility of shareholders to submit proposals, the proper subjects of
shareholder proposals and other issues governing shareholder proposals are
regulated by the rules (the "Shareholder Proposal Rules") adopted under Section
14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Shareholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act
for inclusion in the Company's proxy materials for the 1999 Annual Meeting of
Shareholders must be received by the Company at its principal executive office,
12365 Crosthwaite Circle, Poway, California 92064, no later than Tuesday,
September 1, 1998.
In addition, in accordance with recent amendments to the Shareholder Proposal
Rules, written notice of shareholder proposals to be submitted outside of Rule
14a-8 described above for consideration at the 1999 Annual Meeting of
Shareholders must be received by the Company, at the address set forth in the
preceding paragraph, on or before Monday, November 16, 1998, in order to be
considered timely for purposes of the Shareholder Proposal Rules. The persons
designated as proxies by the Company in connection with the 1999 Annual Meeting
of Shareholders will have discretionary voting authority with respect to any
shareholder proposal of which the Company did not receive timely notice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with the Quarterly Report on Form 10-Q:
(27) Financial data schedule (required for electronic filing only)
(b) Reports on Form 8-K
On June 18, 1998, a Form 8-K was filed to report that the Company entered into
an Asset Purchase Agreement with First Data Corporation to acquire the First
Image Businesses.
On August 12, 1998, a Form 8-K/A was filed to amend the June 18, 1998 Form 8-K
by including the audited financial statements of First Image for the three years
ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANACOMP, INC.
/s/ Donald L. Viles
- - -------------------
Donald L. Viles
Executive Vice President and
Chief Financial Officer
Dated this 14th day of August, 1998
<PAGE>
EXHIBIT INDEX
(27) Financial Data Schedule (required for electronic filing only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANACOMP
INC.'S JUNE 30, 1998 FORM 10-Q QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 15,739
<SECURITIES> 0
<RECEIVABLES> 94,890
<ALLOWANCES> 7,773
<INVENTORY> 29,447
<CURRENT-ASSETS> 180,719
<PP&E> 54,322
<DEPRECIATION> 14,500
<TOTAL-ASSETS> 475,719
<CURRENT-LIABILITIES> 118,319
<BONDS> 393,881
0
0
<COMMON> 142
<OTHER-SE> (37,556)
<TOTAL-LIABILITY-AND-EQUITY> 475,719
<SALES> 63,182
<TOTAL-REVENUES> 121,021
<CGS> 46,387
<TOTAL-COSTS> 135,079
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,562
<INCOME-PRETAX> (22,429)
<INCOME-TAX> (680)
<INCOME-CONTINUING> (21,749)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,857)
<CHANGES> 0
<NET-INCOME> (23,606)
<EPS-PRIMARY> (1.68)
<EPS-DILUTED> (1.68)
</TABLE>
