UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 registrant as specified in its charter)
Indiana 33-1144230
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
12365 Crosthwaite Circle, Poway, California 92064
(619) 679-9797
(Address, including zip code, and telephone number, including area
code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes X
No
As of January 31, 1999, the number of outstanding shares of the
registrant's common stock, $.01 par value per share, was 14,285,541.
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at
December 31, 1998 and September 30, 1998.... 2
Condensed Consolidated Statements of Operations
Three Months Ended December 31, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of
Stockholders' Equity (Deficit) Three Months
Ended December 31, 1998..................... 5
Condensed Consolidated Statements of
Comprehensive Income (Loss) Three Months
Ended December 31, 1998 and 1997............ 5
Notes to Condensed Consolidated Financial
Statements..................................... 6
Management's Discussion and Analysis of Financial
Item 2. Condition and Results of Operations....... 9
Quantitative and Qualitative Disclosures About
Item 3. Market Risk..................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................... 14
Item 2. Changes in Securities and Use of Proceeds....... 14
Item 6. Exhibits and Reports on Form 8-K................ 14
SIGNATURES.................................................. 15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
(in thousands) 1998 1998
-------------- --------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $8,689 $17,721
Restricted cash 902 4,285
Accounts and notes receivable, net 73,293 79,109
Current portion of long-term receivables, net 5,516 5,641
Inventories 31,372 28,618
Prepaid expenses and other 10,873 10,321
-------------- --------------
Total current assets 130,645 145,695
Property and equipment, net 47,496 41,749
Long-term receivables, net of current portion 8,508 9,002
Excess of purchase price over net assets of
businesses acquired
and other intangibles, net 119,340 120,814
Reorganization value in excess of identifiable
assets, net 67,629 88,230
Other assets 14,963 15,663
-------------- --------------
$388,581 $421,153
</TABLE>
<TABLE>
<CAPTION>
============== ==============
Liabilities and Stockholders' Equity (Deficit)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $1,145 $1,152
Accounts payable 27,405 36,464
Accrued compensation, benefits and
withholdings 16,261 18,372
Accrued income taxes 16,291 15,197
Accrued interest 12,209 18,158
Other accrued liabilities 38,759 40,418
-------------- --------------
Total current liabilities 112,070 129,761
-------------- --------------
Long-term debt, net of current portion 338,744 338,884
-------------- --------------
Stockholders' equity (deficit):
Preferred stock ---- ----
Common stock 143 143
Capital in excess of par value 109,599 109,486
Cumulative translation adjustment (from May
31, 1996) 106 447
Accumulated deficit (from May 31, 1996) (172,081) (157,568)
-------------- --------------
Total stockholders' equity (deficit) (62,233) (47,492)
-------------- --------------
$388,581 $421,153
- - -------------------------------------------------============== ==============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
(in thousands, except per share amounts) 1998 1997
- - ------------------------------------------------- ------------ ------------
<S> <C> <C>
Revenues:
Services provided $75,485 $48,507
Equipment and supply sales 63,462 69,307
------------ ------------
138,947 117,814
------------ ------------
Operating costs and expenses:
Costs of services provided 45,598 27,199
Costs of equipment and supplies sold 45,748 51,071
Selling, general and administrative expenses 26,214 23,861
Amortization of reorganization asset 18,890 18,745
Amortization of intangible assets 4,495 2,600
------------ ------------
140,945 123,476
------------ ------------
Loss from operations (1,998) (5,662)
------------ ------------
Other income (expense):
Interest income 388 785
Interest expense and fee amortization (9,961) (7,921)
Other 229 (170)
------------ ------------
(9,344) (7,306)
------------ ------------
Loss before income taxes (11,342) (12,968)
Provision for income taxes 3,171 2,400
------------ ------------
Net loss $(14,513) $(15,368)
============ ============
Basic net loss per share $(1.02) $(1.11)
============ ============
Shares used in computing basic net loss per
share 14,267 13,814
============ ============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------------
(in thousands) 1998 1997
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(14,513) $(15,368)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 28,800 24,993
Non-cash compensation 286 251
Non-cash charge in lieu of taxes 1,711 1,460
Restricted cash requirements 3,383 2,881
Change in assets and liabilities net of effects
from acquisitions:
Decrease (increase) in accounts and long-term
receivables 5,664 (2,774)
Decrease (increase) in inventories and prepaid
expenses (2,843) 247
Increase in other assets (442) (207)
Decrease in accounts payable and accrued
expenses (18,493) (17,637)
Decrease in other noncurrent liabilities (9) (338)
------------- -------------
Net cash provided by (used in) operating
activities 3,544 (6,492)
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,001) (2,331)
Payments to acquire companies and customer
rights (3,821) (13,020)
------------- -------------
Net cash used in investing activities (12,822) (15,351)
------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of options and
warrants 113 421
Principal payments on long-term debt (115) (3,951)
------------- -------------
Net cash used in financing activities (2) (3,530)
------------- -------------
Effect of exchange rate changes on cash 248 (778)
------------- -------------
Decrease in cash and cash equivalents (9,032) (26,151)
Cash and cash equivalents at beginning of period 17,721 58,060
------------- -------------
Cash and cash equivalents at end of period $8,689 $31,909
============= =============
Supplemental Information:
Cash paid for interest $15,403 $12,834
============= =============
Cash paid for income taxes $667 $1,090
============= =============
Assets acquired by assuming liabilities $-- $702
============= =============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Cap. in
excess of Cum.
Common par Translation Accum.
(in thousands) Stock value adj. Deficit Total
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1998 $143 $109,486 $447 $(157,568)$(47,492)
Common stock issued for
the exercise of options
and warrants ---- 113 ---- ---- 113
Cumulative translation
adjustment ---- ---- (341) ---- (341)
Net loss for three months ---- ---- ---- (14,513) (14,513)
----------------------------------------------------
Balance at December 31,
1998 $143 $109,599 $106 $(172,081)$(62,233)
====================================================
</TABLE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------------
(in thousands) 1998 1997
------------- -------------
<S> <C> <C>
Net loss $(14,513) $(15,368)
Translation adjustment (341) (607)
------------- -------------
Comprehensive loss $(14,854) $(15,975)
============= =============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Anacomp, Inc. ("Anacomp" or the "Company") and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. These financial statements, except for the balance sheet as of
September 30, 1998, have not been audited but, in the opinion of the Company's
management, include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for all periods presented. These financial
statements should be read in conjunction with the Company's financial statements
and notes thereto for the year ended September 30, 1998, included in the
Company's 1998 Annual Report on Form 10-K. Interim operating results are not
necessarily indicative of operating results for the full year.
Note 2. Management Estimates and Assumptions
The Company's preparation of the accompanying condensed consolidated financial
statements in conformity with generally accepted accounting principles requires
its management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Estimates have been prepared
on the basis of the most current available information and actual results could
differ from those estimates.
Note 3. Reorganization Asset
As of May 31, 1996, the Company adopted Fresh Start Reporting which resulted in
material changes to the consolidated balance sheet, including valuation of
assets, intangible assets and liabilities at fair market value and valuation of
equity based on the appraised reorganization value of the ongoing business. The
net result of the valuation of identifiable assets, the recognition of
liabilities at fair market value and the valuation of equity was the Company
recognizing an asset "Reorganization value in excess of identifiable assets"
("Reorganization Asset") totaling $267.5 million as of May 31, 1996. The
Reorganization Asset was $67.6 million, net of accumulated amortization, at
December 31, 1998. This asset is being amortized over a 3.5 year period
beginning May 31, 1996 and will be fully amortized by November 30, 1999.
On a pro forma basis, excluding the Reorganization Asset amortization of $18.9
million and $18.7 million, the Company would have reported net income of $4.4
million and $3.4 million, basic net income per share of $.31 and $.24 and
diluted net income per share of $.29 and $.23 for the three months ended
December 31, 1998 and 1997, respectively.
Note 4. Comprehensive Income
The Company adopted Financial Accounting Standards Board ("FASB") Statement No.
130 - Reporting Comprehensive Income effective October 1, 1998. This statement
requires the presentation of comprehensive income, as defined, as part of the
basic financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners.
Note 5. First Image Acquisition
Effective June 1, 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 was $150.0 million,
although a post-closing adjustment resulted in FFMC returning to the Company
$4.4 million 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") approximated $100.0 million, which is being amortized over
a 15-year period on a straight-line basis.
The First Image Businesses included (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 sold the DPDS Business and
the DAS Business during the three-month period ended September 30, 1998. The
Company retained and continues to operate the IAS Business whose revenues and
earnings are included in the Company's results of operations for the three
months ended December 31, 1998.
Note 6. Inventories
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Finished goods $18,374 $14,946
Work in process 3,212 3,583
Raw materials and supplies 9,786 10,089
-------------------------
$31,372 $28,618
=========================
</TABLE>
Note 7. Income Taxes
The Company's amortization of 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 three months ended December 31, 1998 and 1997, income tax expense is
reported for the Company based upon the estimated effective tax rates. For the
three months ended December 31, 1998 and 1997, the effective tax rate utilized
was 42% of pretax income before amortization of the Reorganization Asset. For
the three months ended December 31, 1998 and 1997, the limited tax benefit of
the U.S. Federal net operating loss carryforwards ("NOL") of the Company
resulted in a reduction of $1.7 million and $1.5 million, respectively, in the
Company's Reorganization Asset and did not reduce income tax expense.
Note 8. Loss Per Share:
Basic earnings per share is computed based upon the weighted average number of
shares of the Company's common stock outstanding during the period. Diluted
earnings per share is computed based upon the weighted average number of shares
of common stock outstanding and dilutive common stock equivalents during the
period. Common stock equivalents include options granted under the Company's
stock option plans using the treasury stock method and shares of common stock
expected to be issued under the Company's employee stock purchase plan. Common
stock equivalents were not used to calculate diluted earnings per share because
of their anti-dilutive effect. There are no reconciling items in calculating the
numerator for basic and diluted earnings per share for any of the periods
presented.
Note 9. Acquisitions
During the three months ended December 31, 1998, the Company acquired the
customer bases and other specified assets of four businesses. Total
consideration paid at closing was $3.6 million, of which approximately $1.2
million was assigned to excess of purchase price over the net assets acquired.
The provisions of one of the acquisition agreements includes contingent cash
payments of up to $536,000, based upon the transfer of additional customer
contracts through March 31, 2000.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" 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 materials costs and
availability; currency fluctuations; the loss of any significant customers or
suppliers; 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.
Pro Forma Statements of Operations
As of May 31, 1996, the Company adopted Fresh Start Reporting which
resulted in material changes to the consolidated balance sheet. The net result
of the valuation of identifiable assets, the recognition of liabilities at fair
market value and the valuation of equity was the Company recognizing an asset
"Reorganization value in excess of identifiable assets" ("Reorganization Asset")
totaling $267.5 million as of May 31, 1996. This asset is being amortized over a
3.5 year period beginning May 31, 1996 and will be fully amortized by November
30, 1999.
To facilitate a better understanding of the Company's operating
performance after the Reorganization Asset is fully amortized, pro forma
condensed consolidated statements of operations for the three months ended
December 31, 1998 and 1997 have been presented below. The only difference from
the Company's reported results is a pro forma adjustment to exclude the
amortization of the Reorganization Asset of $18.9 million and $18.7 million in
1998 and 1997, respectively.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
(in thousands, except per share
amounts) 1998 1997
-------------------------------------
<S> <C> <C> <C> <C>
Revenues $138,947 100.0% $117,814 100.0%
------------ ------------
Cost of sales 91,346 65.7% 78,270 66.4%
Selling, general and administrative
expenses 26,214 18.9% 23,861 20.3%
Amortization of intangible assets 4,495 3.2% 2,600 2.2%
------------ ------------
Total operating costs and expenses 122,055 87.8% 104,731 88.9%
------------ ------------
Income from operations 16,892 12.2% 13,083 11.1%
Interest expense and other (9,344) 6.7% (7,306) 6.2%
------------ ------------
Income before income taxes 7,548 5.5% 5,777 4.9%
Provision for income taxes 3,171 2.3% 2,400 2.0%
------------ ------------
Net income $4,377 3.2% $3,377 2.9%
============ ============
Basic net income per share $.31 $.24
============ ============
Diluted net income per share $.29 $.23
============ ============
Shares used in computing basic net
income per share 14,267 13,814
============ ============
Shares used in computing diluted
net income per share 15,216 14,760
============ ============
</TABLE>
<PAGE>
Results of Operations
General
Anacomp reported a net loss of $14.5 million for the three months ended
December 31, 1998, compared to a net loss of $15.4 million for the three months
ended December 31, 1997. The net losses include non-cash amortization of the
Company's Reorganization Asset of $18.9 and $18.7 million for the periods ended
December 31, 1998 and 1997, respectively.
Earnings before interest, other income, taxes, depreciation and
amortization ("EBITDA") was $26.8 million, or 19.3% of revenues for the three
months ended December 31, 1998. This compares to EBITDA of $19.1 million, or
16.2% of revenues for the three months ended December 31, 1997.
Three Months Ended December 31, 1998 vs. Three Months Ended December
31, 1997
Revenues. The Company's revenues increased 17.9% from $117.8 million for
the three months ended December 31, 1997, to $138.9 million for the three months
ended December 31, 1998. The Company experienced increased revenues of $27.0
million in its Outsource Services business line, while experiencing decreased
revenues of $3.7 million in its Micrographic Supplies product line.
The $27.0 million increase in Outsource Service revenues was primarily due
to the June 1, 1998 acquisition of First Image Management Company ("First
Image") and the inclusion of its operating results for the three months ending
December 31, 1998. Digital service revenues also increased significantly with
quarterly revenues now exceeding $7 million.
The $3.7 million decrease in Micrographics Supplies revenues was the
result of the Company's discontinuance of the sale of duplicate microfilm to the
reseller market, as well as declining sales of original COM microfilm and
duplicate microfilm, which is consistent with long-term trends.
Gross Margins. The Company's gross margins increased 20.4% from $39.5
million (33.6% of revenues) for the three months ended December 31, 1997, to
$47.6 million (34.3% of revenues) for the three months ended December 31, 1998.
Gross margins, as a percentage of revenue, remained relatively consistent in
total. Services margins, as a percentage of revenue, decreased 4.3 percentage
points from 1997 to 1998 principally because of decreases in average selling
prices for Outsource Service business and of costs incurred for the
consolidation of First Image data centers. Equipment and supplies margins, as a
percentage of revenue, increased 1.6 percentage points from 1997 to 1998
primarily due to product mix in the Micrographic Supplies and Magnetic Media
businesses.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses increased 9.9% from $23.9 million (20.3% of
revenues) for the three months ended December 31, 1997 to $26.2 million (18.9%
of revenues) for the three months ended December 31, 1998. This increase is
primarily due to the increased expenses associated with the First Image
acquisition.
Amortization of intangible assets. Amortization of intangible assets
increased 72.9% from $2.6 million (2.2% of revenues) for the three months ended
December 31, 1997, to $4.5 million (3.2% of revenues) for the three months ended
December 31, 1998. This increase is primarily due to the amortization of
goodwill associated with the First Image acquisition.
Interest Expense. Interest expense increased 25.8% from $7.9 million for
the three months ended December 31, 1997 to $10.0 million for the three months
ended December 31, 1998. This increase was the result of additional borrowings
used to finance the acquisition of First Image.
Provision for Income Taxes. The provision for income taxes for the three
months ended December 31, 1998 includes $1.5 million on earnings of the
Company's domestic operations and $1.7 million on earnings from the Company's
foreign subsidiaries. The Company's effective tax rate remained at 42% of
taxable income for both periods presented. See Note 7 to the accompanying
Condensed Consolidated Financial Statements for further discussion.
<PAGE>
Liquidity and Capital Resources
Anacomp's working capital at December 31, 1998, excluding the current
portion of long-term debt was $19.7 million, compared to $17.1 million at
September 30, 1998. Net cash provided by operating activities was $3.5 million
for the three months ended December 31, 1998, compared to a use of $6.5 million
in the comparable prior period. The current period benefited from an increase in
depreciation and amortization of approximately $3.8 million, which was primarily
the result of increased goodwill and depreciable assets from the First Image
acquisition. The current period also benefited from a $5.7 million reduction in
accounts and long-term receivables, which was offset by a $2.8 million increase
in inventories and prepaid expenses.
Net cash used in investing activities was $12.8 million in the current
period, compared to $15.3 million in the comparable prior period. This decrease
was the result of the decline in capital used to acquire companies and customer
rights which was offset by an increase in capital expenditures which were
primarily used to integrate the First Image businesses.
Net cash used in financing activities decreased approximately $3.5 million
during the three months ended December 31, 1998 with respect to the same period
in the prior year. This decrease was principally the result of $4.0 million in
payments on the Company's senior debt obligations during the three months ended
December 31, 1997. No payments were made on the Company's senior debt
obligations for the three months ended December 31, 1998.
The Company's cash balance (including restricted cash) as of December 31,
1998 was $9.6 million, compared to $22.0 million at September 30, 1998. The
Company also has available an $80 million revolving credit facility. There were
no amounts outstanding under the revolving credit facility as of December 31,
1998.
The Company has significant debt service obligations. As of December 31,
1998, the Company had $335 million of 10-7/8% Senior Subordinated Notes
outstanding. Interest on these notes is payable semi-annually and the notes are
due in April 2004. 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 and cash generated from operations and cash
available under the revolving credit facility will be sufficient to fund its
debt service requirements, acquisition strategies and working capital
requirements in the foreseeable future.
<PAGE>
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 assessed 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 has worked 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 has also analyzed and
updated for year 2000 purposes certain software and hardware systems that it
uses internally. The Company continues to consider year 2000 issues for all new
products and services as well as those in development or included in business
acquisitions.
State of Readiness. Anacomp's overall state of readiness can be assessed
by describing its specific readiness in four key areas, namely its products and
services, its vendors' and suppliers' products and services, its internal
systems, and its products in development.
Anacomp has completed the assessment, remediation and year 2000 testing
phases of nearly all supported products and services, including those
responsible for generating the material portion of its revenues. Anacomp
summarizes the status of each completed product or service in a written report
to the Company's year 2000 steering committee, for archiving in the Company's
year 2000 database. These processes have been reviewed and approved by a third
party consultant retained for this purpose.
The implementation phase of the Company's year 2000 project depends upon
the response of the Company's customers who may require upgrades or migration
paths. Anacomp is in the process of communicating with identified customers and
has no reason to believe that all customers who require upgrades or migration
will not receive them. To this end, Anacomp has offered financial incentives to
encourage early responses and avoid peak demand loads, although no assurance can
be made that the demand will be spread sufficiently to eliminate delays in
implementation. Anacomp has also launched its "Analog as a Fail Safe" campaign
to educate customers about the value of COM and microfilm as a way to minimize
the risk of the year 2000. Although customers may divert expenditures away from
these products and services in order to fund other year 2000 remediation,
Anacomp encourages customers to consider these products and services as a
cost-effective backup to digital storage because retrieval of data stored on
microfilm does not require digital technology.
The Company has requested that approximately 1,000 of its vendors and
suppliers answer a year 2000 readiness questionnaire and has sent a follow-up
letter and questionnaire to each of approximately 200 key vendors and suppliers
who did not reply to the first mailing. Anacomp is in the process of reviewing
the responses for their likely impact on the Company. For those Anacomp products
that incorporate the products of a third party supplier, Anacomp requests that
its suppliers disclose test procedures and results. Anacomp has also requested
that its vendors in the human resources area, such as its retirement, health and
insurance providers, respond in writing as to their readiness, but there can be
no assurance that such vendors will either respond or achieve readiness in a
timely fashion.
Anacomp has identified all internal software and hardware products used in
its corporate headquarters in Poway, California, including those used to
assimilate and report financial information and to handle billing, collections
and electronic commerce. In those instances where remediation or renovation was
required, Anacomp has either completed or has nearly completed such remediation
or renovation. Anacomp is in the process of completing the documentation of such
efforts for its year 2000 archives.
The Company continues to develop new products and services and acquire new
businesses. Anacomp develops and tests each new product, sometimes with the
assistance of an outside consultant, for year 2000 readiness. Businesses that
Anacomp acquires, such as First Image, are subject to the same assessment,
remediation, testing and implementation phases as those described above.
<PAGE>
Costs. Anacomp estimates that total expenditures on its year 2000 project,
including costs of outside parties such as consultants and attorneys, costs of
hardware and software remediation, internal labor, travel and out of pocket
expenses to be approximately $0.3, $2.3, and $1.2 million in fiscal year 1997,
1998, and 1999, respectively. These figures include estimates from the
engineering, manufacturing, legal and information technology departments of the
Company.
Risks. There can be no assurance that the Company and its vendors and
suppliers will be able to identify all year 2000 issues before problems manifest
themselves or to complete all remediation in the required time frame. Further,
it is possible that the future level of expenses in the Company's remediation
efforts could rise significantly.
The Company relies upon the continuous provision of services from third
parties such as electrical and telecommunication utilities around the world, and
the Company plans to enhance its electronic data transmission capabilities. Any
sustained disruption of service or capability could adversely impact the
Company's ability to operate its business. Finally, there can be no assurance
that, if left unremedied, the products or services 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.
Contingency Plans. In those instances where the Company determines that
year 2000 problems with its operational facilities may not be identified or
remediated in time, the Company believes that its business will still be able to
function without substantial interruption. For example, COM services provided in
a data center which experiences a loss of power due to a third party utility's
failure to identify or remediate an isolated year 2000 problem could be shifted
to another data center without substantial interruption. In addition, electronic
transmission of data could be replaced with manual delivery of data upon
completion of certain modifications. In those instances where an installed COM
customer experiences a year 2000 problem while operating its own COM equipment,
Anacomp could offer its COM services to the customer at one of its data centers
upon completion of certain modifications. This seamless nature of many of
Anacomp's products and services forms the basis of Anacomp's ongoing contingency
planning.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks
The Company does not have any significant financial instruments other than
fixed rate debt. The Company's revolving credit facility is affected by the
general level of U.S. interest rates and/or the LIBOR rate. However, the Company
had no amounts outstanding under this revolving credit facility on December 31,
1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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 conditions or results of operations of
the Company.
On August 29, 1997, Access Solutions International, Inc. ("ASI") filed a
complaint for patent infringement in the U.S. District Court, District of Rhode
Island, against Data/Ware Development, Inc. ("Data/Ware"), of which Anacomp is
the successor by merger, and The Eastman Kodak Company ("Kodak"). The complaint
seeks injunctive relief and unspecified damages, including attorney's fees, for
the alleged infringement by Data/Ware and Kodak of ASI's United States Letters
Patent No. 4,775,969 for "Optical Disk Storage Format, Method and Apparatus for
Emulating a Magnetic Tape Drive" and No. 5,034,914 for "Optical Disk Storage
Method and Apparatus with Buffered Interface." The Company has assumed the
defense of this matter on behalf of both Data/Ware and Kodak, although the
Company has also requested indemnification from the principal selling
shareholder of Data/Ware. Discovery in this matter continues, with any trial to
occur probably not before the third calendar quarter of 1999. Although there can
be no assurance as to the eventual outcome of this matter, the Company believes
that it has numerous meritorious defenses that it intends to pursue vigorously.
Item 2. Changes in Securities and Use of Proceeds
(c) Unregistered 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 three-month period
ending December 31, 1998, an aggregate of 1,875 options was granted to three
directors in lieu of aggregate cash compensation of $9,375. The issuance of such
options was effected in reliance upon the private placement exemption set forth
in Section 4 (2) of the Securities Act of 1933, as amended, on the basis of the
directors' familiarity 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 $11.375
per share.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
December 31, 1998.
<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
Date: February 10, 1999
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANACOMP
INC.'S DECEMBER 31, 1998 FORM 10-Q QUARTERLY REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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