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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the transition period from ___________to____________.
Commission File Number (1-8328)
ANACOMP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1144230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12365 CROSTHWAITE CIRCLE, POWAY, CALIFORNIA 92064
(858) 679-9797
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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COMMON STOCK, $.01 PAR VALUE
COMMON STOCK WARRANTS
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, 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 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of November 30, 1999, was approximately $176,130,883 (based
upon the closing price for shares of the registrant's common stock as
reported by the NASDAQ National Market for November 29, 1999, the last
trading day prior to that date). Shares of common stock held by each of the
registrant's officers and directors, and by a certain holder of more than 10%
of the registrant's outstanding common stock, have been excluded in that such
persons may be deemed to be affiliates of the registrant; however, this
determination of affiliate status is not necessarily a conclusive
determination for any other purpose.
The number of shares outstanding of the registrant's common stock, $.01 par
value, as of November 30, 1999 was 14,341,039 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the registrant's 2000 Annual Meeting of Shareholders are
incorporated herein by reference into Part III of this Report. Such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year ended September 30, 1999.
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ANACOMP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
INDEX
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PART I
Item 1 Business 1
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 13
Item 6 Selected Consolidated Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures About Market Risks 21
Item 8 Financial Statements and Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
PART III
Item 10 Directors and Executive Officers of the Registrant 22
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners and Management 22
Item 13 Certain Relationships and Related Transactions 22
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
Signatures 26
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PART I
ITEM 1. BUSINESS
Certain statements in this Item 1, "Business", and in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of Anacomp, Inc. ("Anacomp" or 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; changes in
business strategy or development plans; successful development of new
products; availability, terms and deployment of capital; ability to meet debt
service obligations; availability of qualified personnel; changes in, or the
failure or inability to comply with, government regulations; and other
factors referenced in this report. The words "may", "could", "should",
"would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and
similar expressions or statements regarding future periods are intended to
identify forward-looking statements. All forward-looking statements are
inherently uncertain as they involve substantial risks and uncertainties
beyond the Company's control. The Company undertakes no obligation to update
or revise any forward-looking statements for events or circumstance after the
date on which such statement is made. New factors emerge from time to time,
and it is not possible for the Company to predict all of such factors.
Further, the Company cannot assess the impact of each such factor on its
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
DOCUMENT MANAGEMENT INDUSTRY
The document-management industry provides businesses and other
organizations with services and products for storing, distributing and
accessing documents. Today, the rapid increase in the number of documents
generated in both commercial and non-commercial sectors and the rapid advance
of digital technologies are fueling swift growth in this industry. Leading
analysts estimate that the overall document-management market exceeded $10
billion in 1999 and project a compound annual growth rate of more than 20%
over the next five years.
Industry experts identify several key trends that are shaping the
document-management industry. One of these trends is that organizations want
to access and utilize the knowledge embedded in the billions of documents
they create, process and store. Increasingly, organizations want instant,
reliable access to the information they need, and they want that information
delivered to their personnel via the Internet, intranets or extranets, for
use with desktop browsers. Many organizations also want to provide this
web-based access to their customers via the Internet. This trend is leading
many organizations, especially document-intensive commercial entities, to
re-evaluate their document-management requirements and implement web-based
solutions to meet those requirements.
Another trend shaping the document-management industry is the
increasing popularity of outsourcing. In general, by outsourcing non-core
business functions, an organization can increase its focus on its core
competencies while taking advantage of the expertise and economies of scale
offered by dedicated service providers. For many organizations, the
document-management function is an excellent candidate for outsourcing. By
choosing an outsource solution over an in-house system, the organization can
obtain superior capabilities, reduce operational and capital costs, have
faster time-to-market, and avoid the challenge of keeping pace with changes
in technology and user requirements. Many industry experts believe that
outsource-service providers with the expertise and resources to provide a
complete, cost-effective document-management solution will gain an increasing
share of the market in coming years.
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A third trend shaping the document-management industry is heightened
focus on application-specific solutions. Organizations are no longer content
with generic document-management products or services; they demand solutions
tailored to the specific tasks their personnel and customers perform,
including the ability to have appropriate business information easily
available in customer interactions. As a result, leading document-management
providers are analyzing their customers' key business processes, particularly
interactions with the end-customer, and developing solutions tailored to
those processes.
In response to these trends, expert Application Service Providers
("ASPs") have begun to offer Internet-based document-management solutions for
specific business applications, provided as an outsource service. These
web-based service solutions can provide an organization a significant
competitive advantage by giving its personnel and customers superior access
to information with lower cost and greater convenience than the organization
could achieve with an in-house system.
OVERVIEW OF THE COMPANY
Anacomp is one of the world's leading document-management providers,
offering a broad range of document-management services and products. Building
on three decades of experience in applying technology to solve organizations'
document-management challenges, Anacomp specializes in using web-based and
media-based technologies to help its customers maximize the value of their
important documents.
BUSINESS STRATEGY
In 1997, the Company developed a strategic plan, entitled Strategy
2000, to guide its activities for the next five years. The Company updates
the plan continually to reflect changes in its business and markets. The plan
currently sets forth these four strategic imperatives:
CAPITALIZE ON ITS BASE OF PREMIER CUSTOMERS, PROVIDING THEM WITH ADDITIONAL
APPLICATIONS TAILORED TO THE SPECIFIC REQUIREMENTS OF THEIR VERTICAL MARKETS
The Company has a large base of premier customers, particularly in
the banking, insurance and brokerage sectors, with substantial and diverse
document-management needs. These customers and other potential customers in
these sectors, represent a prime opportunity for the Company. Through
Anacomp's Work Smart Process-SM-, the Company works closely with customers to
analyze their business requirements and processes, identify their full range
of document-management needs, and provide effective solutions to meet those
needs. The Company is currently expanding its range of outsource services,
especially web-based applications for these key sectors, to meet its
customers' full range of document-management needs. In this way, the Company
expects to provide customers with the greatest value and maximize the
Company's business with each customer.
BECOME THE WORLD'S LEADING APPLICATION SERVICE PROVIDER FOR DIGITAL
DOCUMENT-MANAGEMENT SOLUTIONS
In light of the three key business trends outlined above
(Internet-based document management, outsourcing of non-core business
functions, and focus on application specific solutions), the Company believes
it has the opportunity to seize a leading position in the emerging
Application Service Provider segment for document-management outsource
services. The Company has three decades of experience in document-management
outsourcing, and has acquired extensive expertise in the development and
operation of web-based service solutions for specific business applications.
Combining this experience and expertise in its Internet Document Services
offering, the Company is pursuing this opportunity aggressively and in just
one year has attained a leading position according to several industry
analysts.
DELIVER CONSISTENT GROWTH IN REVENUE AND EARNINGS IN INTERNET DOCUMENT
SERVICES-SM- AND DOCUMENT MANAGEMENT SOLUTIONS, WITH THE MAJORITY ON A
RECURRING BASIS
The Company places a strategic focus on providing
document-management outsource services, especially in its key banking,
insurance and brokerage market sectors. This service-based business model
generates recurring revenue and earnings from long-term customer agreements.
As the Company introduces new and expanded service solutions into its current
customer base and acquires new customers for these solutions, the Company
expects the growth of its service-based business to produce steadily
increasing recurring revenue and earnings.
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MAXIMIZE EARNINGS AND CASH FLOW FROM ITS TRADITIONAL BUSINESSES
The Company maintains leading positions in its traditional
document-management businesses: DatagraphiX - manufacturing hardware,
providing supporting software systems and supplies - and providing field
maintenance services. Although these businesses are mature, the Company
intends to maximize earnings and cash flow through increased operational
efficiencies and continued growth in overall market share. In addition, the
Company is introducing new products and services in these businesses to
generate new sources of revenue and earnings. These products and services are
described in more detail in the next section.
LINES OF BUSINESS
Having divested its Magnetics Division during fiscal 1999 (see Note
3 of the Notes to the Consolidated Financial Statements), the Company has
progressively separated its activities into four essentially autonomous
business units. These business units (or lines of business) are described
below.
DOCUMENT MANAGEMENT SOLUTIONS BUSINESS UNIT
The Company's primary business is document-management outsource
services. Anacomp is a global leader in this business, with a 31-year
tradition of service excellence and customer satisfaction. Through its
worldwide network of document-processing service centers, the Company serves
more than 7,000 outsource-service customers in the United States and Europe.
Anacomp has industry-leading expertise and resources for analyzing
businesses' specific document-management requirements and for designing,
implementing and operating service solutions tailored to those requirements.
To maintain these capabilities, Anacomp continually invests in developing new
customer solutions and in upgrading its storage and delivery systems and
infrastructure to take advantage of new technologies. To ensure its
customers' continued success in today's dynamic business environment, Anacomp
works closely with its customers to ensure that their document-management
solutions continue to meet their changing requirements.
The Company's principal business strategy is to capitalize on
current trends in the document-management industry by providing its large
base of premier customers with powerful, cost-effective, outsource-service
solutions for on-line and media-based document management, tailored to their
specific business applications.
Anacomp's largest markets are the financial-services sectors of
banking, brokerage and insurance, all of which offer significant growth
opportunities. The Company is leveraging its traditional strength in these
sectors by developing service-based solutions for their specific business
applications. By providing ready access to critical documents such as
policies, statements, invoices and reports, these application-specific
solutions enable companies in these sectors to improve their competitiveness
by reducing capital and operating costs, enhancing their business processes,
and improving customer service.
Anacomp provides online and media-based document-management services
and integrated system solutions using unique consulting, software, and
professional-service components. The offerings of this line of business are
sold and supported by the Company's direct sales force in the United States
and Europe. Document Management Solutions is expected to continue to be a
growth area for the Company, largely due to its digital offerings, which
accounted for approximately 23% of the total revenue in this line of business
during fiscal 1999. The Company expects the contribution from its digital
offerings in this line of business to increase as a percentage of total
revenue.
Services are provided through the Company's network of
document-processing service centers in the U.S. and Europe, in which the
Company currently processes more than two billion original pages, or "images"
each month. The Company has consolidated its service-center network from 78
locations one year ago to 57 centers today. This consolidation has resulted
in significant cost savings from increased operational efficiencies while
maintaining a high level of service for its customers. At the same time,
seeking to increase its outsource-service business in Europe, the Company
continues to expand its service-center network in Europe through acquisitions
of service providers in several countries.
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The Company's large customer base includes banks, brokerage firms,
mutual funds, insurance companies, and to a lesser extent, utilities,
telecommunications providers, retailers and other providers of business
services. No single customer accounted for more than 5% of the Company's
outsource-service revenues in fiscal 1999. The typical service contract with
customers is exclusive, has a multi-year term with automatic renewal, and
provides for usage-based monthly fees. The Company believes that
approximately 75% of its outsource-service customers are under contract and
estimates that approximately 90% of these contracts are renewed automatically.
The Company plans to continue to expand its outsource-services
business in both Internet-based and media-based solutions by capitalizing on
its strong presence within its large, loyal customer base and its expertise
in document-management technology and operations.
CD DOCUMENT SERVICES. Anacomp offers industry-leading outsource
services for storing, delivering and accessing documents using the Compact
Disc-Recordable (CD-R) medium. Anacomp's CD Document Services offering is a
consistently strong performer, growing an average of 25% per quarter over the
past 12 quarters.
This outsource service provides customers an easy-to-use,
high-capacity, portable, standardized solution for document distribution,
access and storage. In this service, customers provide invoices, reports,
statements, policies, trade confirmations and other documents to the Company
in electronic form. In its service centers, these electronic documents are
indexed and written to compact disc (CD-R). Each disc also includes the
Company's powerful Windows-Registered Trademark--based tools for accessing
and viewing these documents. The customer needs no additional data or
software to use the documents on a disc. The Company delivers the discs to
the customer for use in various applications, including customer service,
audit, analysis, and long-term archive.
Since entering the emerging field of CD-based document management in
1995, the Company has quickly become what it believes to be the world's
largest provider of CD-based services. Currently, the Company has
approximately 1,000 customers for CD Document Services. The majority of these
customers are in the U.S., currently representing 89% of the total revenue
from CD Document Services.
The Company's CD Document Services business has grown at a rate
exceeding 100% per annum since its inception. In fiscal 1999, CD Document
Services totaled $18 million in revenue. This growth is due primarily to
aggressive marketing to both current and new customers. More than 400 of the
1,000 CD Document Services customers are new customers to Anacomp,
significantly expanding its market presence and overall share.
INTEGRATED SYSTEM SOLUTIONS. Through unique consulting, software
and professional services, the Company provides integrated system solutions
to customers to help them manage their documents. These capabilities are
offered principally in the Company's European markets, where the outsourcing
trend is not currently as strong as in the U.S. and where the Company is
still building its outsource-services infrastructure.
In fiscal 1999, the Company invested in both acquisitions and
internal growth to build the capability to deliver complete digital system
solutions in its European markets. The Company acquired a leading Swiss
system integrator, BGIN Holding AG, complementing its existing digital
services and systems business in Switzerland. The Company also acquired
several smaller software development and integration businesses in the U.K.
and Italy. In addition, the Company invested internally to grow both its
document-management outsource services and its systems-integration capability
in Europe. The Company has enjoyed particular success in Switzerland,
Germany, Italy and the U.K. as a result of these efforts. Overall, the
Document Management Solutions business in Europe grew by 80% in fiscal 1999.
SOFTWARE AND INFRASTRUCTURE DEVELOPMENT. The Company also continued
to make improvements in its Document Management Solutions infrastructure,
with higher levels of automation in its document-processing service centers
and advanced electronic communications with its customers. In addition, the
Company continued to invest in its CD Document Services and ImageStar
offering in Europe, including acquisition of non-exclusive source-code
licenses from its primary software technology suppliers in these segments.
COM DOCUMENT SERVICES. The Company remains the unchallenged world
leader in Computer Output to Microfiche ("COM") services. With unsurpassed
technological and operational expertise in COM Document Services, the Company
images just under two billion original pages to microfiche each month for
more than 6,500 customers around the world.
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This line of business grew substantially in fiscal 1999 compared to
prior years as a result of the acquisition of First Image Management Company
("First Image") in June 1998. This acquisition brought the Company a large
base of new customers, along with the accompanying recurring revenue and
EBITDA (defined on page 15). In aggregate, the COM Document Services business
has declined at an average rate of approximately 3% per quarter during fiscal
1999. This decline was anticipated and reflects the overall trend in the
mature micrographics market segment.
The Company is minimizing the impact of the declining micrographics
market on its COM Document Services business in two ways. First, it is
increasing its focus on transitioning customers who currently operate
in-house COM systems to outsource services. Outsourcing is an attractive
option for many customers, enabling them to eliminate capital and recurring
costs and operational burden. Second, the Company is aggressively encouraging
customers to migrate their COM applications to CD Document Services. This is
attractive to many customers because CD-R provides fast electronic access
unavailable with microfiche. By migrating customers to CD Document Services,
the Company retains its business and relationship with its customers and
provides the customer with an effective, useful solution.
Currently, the Company has approximately 6,500 active customers for
COM Document Services worldwide. The majority of these customers are in the
U.S., currently representing 87% of the total revenue from COM Document
Services. As a result of the First Image acquisition and continued focus on
operational efficiencies, the Company has continued to increase the EBITDA
contribution from its COM Document Services despite declining market trends
and revenues.
With the acquisition of First Image, the Company has no major
competitor in its core Document Management Solutions business for outsource
services. There are a number of document-management outsource-service
providers in the U.S. market, but these are generally small, regional
providers. There are also regional and national providers that focus on
document-conversion services (scanning, printing and reproduction), but these
are not directly competitive with the Company's offerings. In Europe, the
Company competes with document-management outsource-service providers within
individual countries. The Company also competes with several
document-management software providers, including FileNET Corporation,
Documentum, Inc., SER, Mobius Management Systems and IBM, who offer in-house
systems and some integration services as an alternative to outsourcing.
INTERNET DOCUMENT SERVICES-SM- BUSINESS UNIT
Over the past several years, the Company has increased its
investment in developing new solutions by expanding the breadth of its
offerings through acquisition and through the application of new digital
technologies. The Company has established itself as a leader in the emerging
field of Internet-based document-management services, now offering Internet
Document Services from two mega-centers in the United States. The Company
expects to continue to increase its operational capability, investment and
business results in this area in the future.
This all-in-one service manages customers' documents throughout
their lifecycle. The service transforms electronic documents of virtually any
type to a web-compatible format, indexes them for easy retrieval, and hosts
them in the Company's secure "e-warehouse" of integrated storage systems and
web servers at the Company's document-processing facilities. Customers of the
Company can authorize secure access for their own personnel and even their
customers to specific documents or pages of documents over private-networks
or the Internet through standard web browsers, using retrieval and viewing
tools developed for specific applications. As an outsource service, this
solution provides superior performance, economy, security, convenience and
support because of the Company's technological and operational expertise,
economies of scale and continual system enhancements.
During fiscal 1999, the Company acquired Litton Adesso Software,
Inc. ("Adesso Software"), which had developed world-class software technology
for document ingestion, index, compression and storage, and which
complemented the Company's own software development capabilities and
activities. This acquisition provided key technology components and technical
expertise for the expansion of the Company's Internet Document Services
offerings.
The Company's Internet Document Services provides electronic storage
of customer documents and delivery of these documents to customers using
private networks or the Internet via standard web browsers. These
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new web-based storage and delivery solutions, provided as an outsource
service, offer better performance, value and longevity than most businesses
can achieve on their own with an internal document-management system. The
Internet Document Services offering is sold and supported by a dedicated and
specialized sales force in the United States.
The effectiveness of the Company's Internet Document Services is
enhanced by Anacomp's Work Smart Process, a unique consultative approach for
identifying customer requirements that the Company acquired in fiscal 1998.
This process is a critical part of the Company's initial sales activities,
enabling the Company to apply its web-based services optimally in order to
fulfill its customers' requirements more effectively. This process
differentiates the Company from its competitors in the marketplace.
As a dedicated ASP, the Company is focusing this new offering on
specific business applications. The Company is currently developing
capabilities to provide customers with web-based document management tailored
to several specific vertical market applications, such as insurance-policy
management, bank customer-research services, and delivery of brokerage
statements and transaction confirmations.
Customer service is a common focus for this offering. With quick,
online access to customer-related documents, a company's service
representatives can resolve most customer inquiries in one telephone call or
communication, minimizing costly retrieval and research functions. Customers
of the Company can also use Internet Document Services to provide document
access and delivery directly to their customers over the Internet. With the
growing importance of customer service in today's commercial world, and the
move towards customer self-service, these capabilities can be a significant
competitive advantage for the Company's customers.
The Company's engineering costs, including research and development,
were $10.0 million in fiscal 1999, compared to $9.0 million in fiscal 1998.
In fiscal 1999, approximately 50% of these expenses related to Internet
Document Services. The Company expects its current research and development
efforts and expenditures to increase as a result of acquisitions in fiscal
1999 as well as increased internal investment as it develops and introduces
new solutions in Internet Document Services and the other lines of business.
Competition is currently undefined in this very new and emerging
market of Internet-based document-management services. There are several
smaller companies offering somewhat similar services, but these are generally
limited to vertical-market sectors or specific applications.
FIELD MAINTENANCE SERVICES BUSINESS UNIT
Although document-management solutions are its primary line of
business, the Company also offers field maintenance service for a broad range
of electromechanical systems. Originally a maintenance service for the
Company's own products, this business has grown to include a wide variety of
systems from IBM, Sony, Overland Data, Inc. and many other suppliers,
including COM systems manufactured by Anacomp and others, optical disc
storage subsystems, computer tape subsystems, CD-R writers and jukeboxes,
high-speed laser printers and even large video scoreboards at sports
stadiums. The success of this business is based on the Company's technical
expertise and its proven ability to provide fast, expert, on-site service and
support around the clock. This maintenance and support service is provided in
the U.S., Canada and Europe by a force of approximately 500 highly- trained
technicians.
THIRD-PARTY MAINTENANCE SERVICES. The principal growth area for the
Company's field maintenance business is third-party maintenance services. By
providing service for systems from other manufacturers, the Company leverages
its considerable expertise and infrastructure by expanding its services far
beyond the range of its own systems.
The Company offers its third-party maintenance services using two
approaches. In one approach, the Company is an alternative to maintenance
services provided by the original equipment manufacturer ("OEM"). For
example, the Company offers users of Xerox high-speed laser printers a
high-quality, economical alternative to the service offered by Xerox
Corporation itself. There is a large installed base of Xerox printers
worldwide, and in most cases Xerox has been the only source of field
maintenance services for these critical printing systems. In the second
approach, the Company contracts with the OEM to provide field maintenance
service for the OEM's end users. This arrangement appeals to manufacturers
that have geographically limited maintenance capabilities or no capabilities
of their own, or whose own service operation is more costly than the
Company's service. The
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Company services Sony CD jukeboxes, IBM optical disc subsystems, Overland
tape subsystems and 55 other systems under this type of arrangement.
The Company is striving to grow its third-party maintenance business
through both acquisition and internal initiatives. Third-party maintenance
revenue grew 77% in fiscal 1999 compared to fiscal 1998. Revenue from
third-party maintenance represented 20% of Field Maintenance Services total
revenue in fiscal 1999, and the Company anticipates this percentage will
increase to approximately 40% in fiscal 2000. The growth in third-party
maintenance business currently offsets the decline in micrographics
maintenance services and the Company believes that growth in its third-party
business will exceed the decline in micrographics maintenance revenue in the
future.
In the third-party maintenance business, the Company competes with a
number of other providers including the OEM for products such as Xerox laser
printers, and with other third-party maintenance providers such as
DecisionOne Holdings, TAB and Bell & Howell.
COM AND MICROGRAPHICS MAINTENANCE SERVICES. The Company believes
that it maintains virtually the entire installed base of Anacomp-manufactured
COM systems in use today, as well as a significant percentage of the COM
systems manufactured by other suppliers. In addition, the Company provides
maintenance services for other micrographics equipment, such as retrieval
devices, microfilm scanners, cameras and duplicators. Although this segment
of the business is declining, the Company has increased its maintenance
market share and continues to maintain earnings from this segment.
The Company has no major competitor in its traditional COM and
microgaphics maintenance services business. The majority of the equipment
that the Company maintains is proprietary to the Company.
DATAGRAPHIX-Registered Trademark- BUSINESS UNIT
The Company develops, manufactures, sells and supports a variety of
COM systems, CD authoring systems and related peripheral products. It also
sells and supports microfilm, chemicals and other consumable supplies for its
own and other systems, and it offers a contract manufacturing service to
produce products for other companies. The DatagraphiX business unit has its
own direct sales force in the U.S. and Europe and sells through a network of
distributors in many other countries around the world. In addition to
manufacturing and sales, DatagraphiX has its own dedicated hardware and
software development staff, support organization and material distribution
channel.
COM SYSTEMS. The Company is the world's leader in the COM systems
market. Building on its acquisition of DatagraphiX, Inc. in 1987, the Company
has an extensive installed base of COM systems at user sites around the
world. The Company's flagship XFP2000-Registered Trademark- COM system
remains the premier system in the marketplace, using extremely precise laser
optics and advanced film-processing techniques to produce high-quality
original and duplicate images of reports and other documents on microfiche or
roll microfilm. The XFP2000 is the most widely used COM system in the world,
with over 1,000 customer installations. The Company also uses the XFP2000 for
its own COM Document Services operations. The Company believes that its
placements of XFP2000 systems in fiscal 1999 represent the majority of
systems placed during this period in the marketplace.
CD AUTHORING SYSTEMS. The DatagraphiX business unit also produces
and sells automated, high-volume CD authoring systems for mainframe and
client/server environments, based primarily on a line of products acquired
through the Company's acquisition of Data/Ware Development, Inc.
("Data/Ware") in 1997. These systems are used by a variety of customers to
write reports, statements, invoices, check images and other important
documents in electronic form to high-capacity CD-R media for distribution and
archive purposes. The primary candidates for these systems are organizations
that need to produce CD media in large quantities, where economies of scale
can make in-house production a practical alternative to outsourcing. The
Company also uses these systems for its own CD Document Services operations.
The Company sold or leased 17 CD authoring systems in fiscal 1999.
The Company also continued to make investments in its traditional
business to improve the throughput and functionality of the XFP2000 COM
system, to incorporate new CD technology and functionality in its CD-R
authoring systems, and to assess and, where necessary, remediate its products
and services for year 2000 purposes.
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CONTRACT MANUFACTURING SERVICES. In the early 1990s, the Company
made a substantial investment in facilities, equipment and expertise to
develop the capability to manufacture high-precision optical and
electromechanical equipment in order to produce the XFP2000 COM system. More
recently, the Company has invested to achieve ISO 9001 certification for its
manufacturing and logistics functions. In fiscal 1999, to fully leverage this
capability, the Company launched a contract manufacturing business, wherein
it fabricates, assembles and tests high-technology products under contract to
other companies. The Company actively markets this service to design and
manufacturing firms that wish to bring a product to market but lack the
expertise or capacity to produce it cost-effectively themselves.
This service enables the Company to leverage its current
manufacturing capabilities, and provides an alternate stream of revenue and
profit for the DatagraphiX business. One significant contract was executed
and initial production begun during fiscal 1999. The DatagraphiX line of
business is actively seeking additional contract manufacturing opportunities
to help absorb underutilized capacity and overhead and produce an alternate
stream of revenue and profit for the Company. The Company believes there is a
large potential market for these services and that further growth will be
realized from this segment.
SUPPLIES. Complementing the systems business within the DatagraphiX
line of business is the sale and distribution of consumable supplies for COM
and CD production. These supplies are sold through the DatagraphiX direct
sales force, through a centralized telesales group and through various
distributors worldwide.
The primary products in the supplies business are silver halide
original COM film (used to produce master images) and non-silver duplicating
microfilm (used to produce copies of master images). The majority of silver
halide original COM film is sold in what the Company believes is a
proprietary package, and thus is currently available only from the Company.
The Company obtains its silver halide products through an exclusive
multi-year supply agreement with The Eastman Kodak Company ("Kodak"). The
DatagraphiX business also distributes non-proprietary duplicating film to its
installed base of COM systems and other micrographics users. The Company
obtains its duplicate film products through a long-term supply agreement with
SKC America, Inc. The Company believes that the users of its COM systems
purchase the majority of their original and duplicate film and related
chemicals from the Company.
In fiscal 1999, the Company developed an innovative new product
called the Image Mouse-TM-. This new product is an inexpensive, hand-held
microfiche reader that uses CMOS imaging technology to capture a digital
microfiche image in real time, which can be easily viewed, printed, or used
in common PC applications. This innovative device has been well-received in
initial user test marketing and trials, and is planned for release in
production volume in early fiscal 2000. A patent for this device is pending,
and the Company is currently developing a version for roll microfilm. The
Company believes that, as a bridge between COM and digital solutions, the
Image Mouse can be a significant source of revenue growth in the future.
The Company has no major competitor in its core COM systems and
proprietary XFP2000 original COM film business. The Company competes with
Fuji Photo Film U.S.A., Inc. ("Fuji"), Agfa-Gevaert AG ("Agfa") and Kodak in
original COM film market for older COM systems, and with Rexam Image Products
in the duplicate film segment. The Company also competes with a number of CD
system providers in the CD authoring systems segment, and with other
manufacturers for its contract manufacturing services.
ENGINEERING, RESEARCH, AND DEVELOPMENT
Anacomp's engineering costs, including research and development,
totaled $10.0 million in fiscal 1999, $9.0 million in fiscal 1998, and $8.5
million in fiscal 1997. The Company expects its current research and
development efforts to increase as it introduces new document management
solutions.
The Company also owns various patents and licenses covering aspects
of its business lines and its production processes, as well as proprietary
trade secret information relating to its services and products. While the
Company believes that the protection provided by these patents, licenses and
proprietary information is important, the Company believes that equally
significant is the knowledge and experience of its employees, and their
abilities to develop and market the Company's services and products and to
provide value-added benefits to customers.
8
<PAGE>
Development activity in fiscal 1999 included the acquisition of
Adesso Software from Litton Industries, which acquisition provided key
technology components and technical expertise for the expansion of the
Company's Internet Document Services offerings. The activity also included
significant increases in the internal technical staff, primarily to develop
and implement the expanded Internet Document Services offerings.
RAW MATERIALS AND SUPPLIERS
Polyester is the principal raw material used in the manufacture of
both original and duplicate microfilm products. Costs for polyester remained
generally stable in fiscal 1999 as a result of a relative balance between
supply and demand. There can be no assurance, however, that the current trend
will continue.
SKC America, Inc. and SKC Limited (collectively, "SKC") is Anacomp's
sole supplier of duplicate microfilm under a ten-year supply agreement
entered into in 1993. In connection with the supply agreement, SKC also
provided Anacomp with a $25 million trade credit facility, which was reduced
to $15 million in fiscal 1997 and further reduced to $5 million in the first
half of fiscal 1998. Under an amendment to the supply agreement executed in
1996, Anacomp agreed to certain price increases, retroactive to 1994, and
agreed to make deferred payments to SKC related to the retroactive price
increases. The Company has recognized the liability and is committed to pay
$0.8 million and $1 million in 2000 and 2001, respectively. In addition, the
parties amended and restated the supply agreement effective as of July 1,
1997 for the purpose of, among other things, deleting minimum purchase
commitments.
Anacomp's XFP 2000 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 systems
manufactured by Anacomp and others, although the Company has from time to
time purchased original microfilm utilized in those older systems from other
suppliers.
INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
As discussed previously, Anacomp manages its business through four
operating units providing document management services and solutions.
Financial information concerning the Company's four business units is
included in Note 17 of the Notes to the Consolidated Financial Statements.
Financial information concerning the Company's operations in different
geographical areas is included in Note 18 of the Notes to the Consolidated
Financial Statements.
ASSOCIATES
As of September 30, 1999, Anacomp employed approximately 2,500
people at multiple facilities and offices in the United States, Canada,
Brazil, Japan and Europe.
9
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters are located in Poway, California. This
facility houses the Company's management, systems manufacturing, software
development, engineering, customer service, marketing, technical service
operations, finance, accounting, legal and MIS groups. The Company also
leases standard office space for its sales and service centers in a variety
of locations around the world. Anacomp's manufacturing facilities have
received international recognition for quality standards and have earned
International Standards Organization ("ISO") 9001 certification.
The following table indicates the square footage of Anacomp's leased
and owned facilities:
<TABLE>
<CAPTION>
OPERATING OTHER
FACILITIES FACILITIES TOTAL
---------- ---------- -----
<S> <C> <C> <C>
United States:
Leased................. 1,324,771 214,923 1,539,694
Owned.................. -- -- --
--------- ------- ---------
1,324,771 214,923 1,539,694
--------- ------- ---------
International:
Leased................. 173,984 18,500 192,484
Owned.................. 25,000 -- 25,000
--------- ------- ---------
198,984 18,500 217,484
--------- ------- ---------
Total................ 1,523,755 233,423 1,757,178
========= ======= =========
</TABLE>
"Other Facilities" consist primarily of leased space of abandoned
facilities. Approximately 215,000 square feet of the Other Facilities have
been sublet to others. 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.
ITEM 3. 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 any
liability under the foregoing, 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, of which Anacomp is the
successor by merger, and Kodak. The complaint seeks injunctive relief and
unspecified damages, including attorney's fees, for 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. Discovery in this case continues, with
any trial to occur probably not before the second calendar quarter of 2000.
Although there can be no assurance as to the eventual outcome of this matter,
the Company believes that it has numerous meritorious arguments and intends
to pursue them vigorously.
In a related matter, the Company has brought a lawsuit in California
State court against the principal selling shareholder of Data/Ware, seeking
to enforce that shareholder's obligation to indemnify the Company in the ASI
litigation. The state court granted the Company's motion for summary
adjudication of the shareholder's duty to fund most of the defense of the ASI
case, which the shareholder is currently paying into the court's escrow
account. Discovery in the state court litigation continues.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the three months ended September
30, 1999, to a vote of Anacomp's security holders through the solicitation of
proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company, their ages (as of
December 14, 1999) and their positions with the Company are listed in the
following table:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ------------------------------------------------------
<S> <C> <C>
Ralph W. Koehrer 54 President, Chief Executive Officer and Director
David B. Hiatt 53 Executive Vice President and Chief Financial Officer
Donald W. Thurman 53 Executive Vice President
Peter Williams 47 Executive Vice President
William C. Ater 59 Senior Vice President and Chief Administrative Officer
Jeffrey R. Cramer 46 Senior Vice President
William E. Farrant 45 Senior Vice President
Linster W. Fox 50 Senior Vice President and Corporate Controller
George C. Gaskin 40 Senior Vice President, General Counsel and Secretary
Hasso Jenss 56 Senior Vice President
Richard V. Keele 50 Senior Vice President
Thomas J. Magazzine 54 Senior Vice President
Kevin M. O'Neill 45 Senior Vice President
Emery E. Skarupa 47 Senior Vice President
Thomas L. Brown 43 Vice President and Treasurer
</TABLE>
The business experience of each executive officer for the past five
years is described below. Each executive officer is elected for a term of one
year and holds office until his successor is chosen and qualified or until
his earlier 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.
DAVID B. HIATT joined Anacomp in April 1999 as Executive Vice
President and Chief Financial Officer. Prior to joining Anacomp, Mr. Hiatt
served as Senior Vice President, Finance and Administration and Chief
Financial Officer for Molecular Simulations Inc. from April 1992 to October
1998. Before that, Mr. Hiatt served as Vice President, Finance and
Administration, and Chief Financial Officer at Language Technology Inc. from
October 1986 to September 1991.
DONALD W. THURMAN was elected Executive Vice President on November
16, 1998, having served as Senior Vice President and General Manager -
Outsourcing Services Business since May 4, 1998. From November 1997 to May
1998, Mr. Thurman served as Senior Vice President and General Manager North
America East. Mr. Thurman served as Senior Vice President - U.S. East from
August 1997 to November 1997, and as Region Vice President - U.S. Group from
October 1996 to August 1997. From November 1993 to October 1995, Mr. Thurman
was Senior Vice President of Marketing and Business Development for First
Image. Mr. Thurman served as General Manager of The Software Factory from
January to November 1993 and previously served as Senior Vice President of
the Company from January 1990 to January 1993.
PETER WILLIAMS was elected Executive Vice President on November 16,
1998, having served as Senior Vice President and General Manager -
International Business since November 1997. From October 1995 to November
1997, Mr. Williams served as President - Magnetics Group. Previously, Mr.
Williams served as General Manager
11
<PAGE>
- - Magnetics European Group from 1993 to September 1995. Prior to that, Mr.
Williams served from 1990 to 1993 as Vice President, Wales Operations -
Magnetics.
WILLIAM C. ATER was elected Senior Vice President on August 13, 1997
and Chief Administrative Officer in February 1988. He served as Secretary
from March 1985 until November 1999.
JEFFERY R. CRAMER was elected Senior Vice President - Technical
Services on August 13, 1997. Mr. Cramer joined Anacomp in July 1996 with the
Company's acquisition of COM Products, Inc. ("CPI"), and served as Senior
Vice President - Business Development from February to August 1997. Mr.
Cramer had served as President of CPI since March 1987.
WILLIAM E. FARRANT was elected Senior Vice President - Support
Services on November 16, 1998 and had served as Senior Vice President Service
Center Support since February 1998. Mr. Farrant had previously served as Vice
President - U.S. Group Operations from October 1994 to January 1998. Prior to
that, Mr. Farrant was Director - Product Management from December 1992 to
October 1994.
LINSTER W. FOX was elected Senior Vice President and Corporate
Controller on August 2, 1999, having served as Vice President and Controller
since July 1998. From January 1996 to June 1998, Mr. Fox served as Vice
President and U.S. Controller. Mr. Fox served as Vice President and
Controller of Poway Operations from May 1995 to December 1995. From October
1992 to May 1995, Mr. Fox was Vice President of Finance and Administration
for Poway Operations. Mr. Fox served as Vice President of Finance and
Administration for International Operations from October 1990 to October 1992.
GEORGE C. GASKIN was elected Secretary on November 15, 1999, and was
previously elected Senior Vice President, General Counsel and Assistant
Secretary on November 17, 1997. He had served as Vice President - Legal and
Assistant Secretary since June 1996. From July 1990 to June 1996, Mr. Gaskin
served as Corporate Counsel and Assistant Secretary.
HASSO JENSS was elected Senior Vice President and General Manager -
COM Systems and Supplies on February 9, 1998 and had served as Senior Vice
President and General Manager - Europe since August 1997. From October 1995
to August 1997, Mr. Jenss served as President - European Group. Mr. Jenss
served as Vice President - European Micrographics from November 1993 to
September 1995. Prior to that, Mr. Jenss served from October 1989 to October
1993 as Managing Director of Anacomp's German subsidiary.
RICHARD V. KEELE was elected Senior Vice President - Product
Development on May 4, 1998 and had served as Senior Vice President and
General Manager - CDS Cluster since August 1997. Mr. Keele joined Anacomp in
January 1997 with the Company's acquisition of Data/Ware, and was elected
President - Data/Ware Group in February 1997. Mr. Keele had previously served
as President of Data/Ware for more than five years.
THOMAS J. MAGAZZINE was elected Senior Vice President and General
Manager - Consulting Services on May 4, 1998, having joined Anacomp with its
acquisition of WorkSmart, Incorporated ("WorkSmart") in January 1998. Prior
to joining Anacomp, Mr. Magazzine had been President and Chief Executive
Officer of WorkSmart since 1996. Before launching WorkSmart, Mr. Magazzine
founded GTE Vantage Solutions in 1990, a company which implemented
information technologies for process-level re-engineering.
KEVIN M. O'NEILL was elected Senior Vice President - Corporate
Development and Marketing on November 16, 1998, and has served as Senior Vice
President - Strategy, Business and Product Development since May 1998. From
August 1997 to May 1998, Mr. O'Neill served as Senior Vice President -
Business Development and Strategy, after serving as Senior Vice President -
Global Marketing since June 1996. Mr. O'Neill had 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. Mr. O'Neill
had previously served as Senior Director, Marketing and Product Development
for Fujitsu - ICL Systems, Inc.
12
<PAGE>
EMERY E. SKARUPA was elected Senior Vice President - Manufacturing
and Materials on August 13, 1997. Mr. Skarupa joined the Company in November
1993 as Director of Purchasing and was promoted to Vice President of
Materials in May of 1996. Prior to joining Anacomp, Mr. Skarupa served as
Director of Materials for Abex Aerospace, a division of Abex Corp., since
January 1991.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market
("NASDAQ") under the symbol ANCO. The following table sets forth the range of
high and low closing prices for the Company's common stock for the periods
indicated, as reported by NASDAQ:
<TABLE>
<CAPTION>
Fiscal Year 1999 Fiscal Year 1998
---------------- ----------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter $ 18.63 $ 8.88 $ 16.25 $ 12.38
Second Quarter 18.50 13.50 17.75 14.63
Third Quarter 19.25 15.50 24.38 14.81
Fourth Quarter 18.50 15.81 23.38 12.00
</TABLE>
The Company currently intends to retain all future earnings, if any,
for the use in the operation and development of its business and, therefore,
does not expect to declare or pay any cash dividends on the Company's capital
stock. In addition, the Company's borrowing agreements prohibit the payment
of cash dividends on the Company's capital stock. As of November 30, 1999,
there were approximately 124 holders of record of the Company's common stock.
The number of beneficial shareholders of record as of that date was
approximately 1,350.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data of the Company
should be read in conjunction with the other sections of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this report and the consolidated financial statements and the
related notes thereto included elsewhere herein. (in thousands, except per
share data):
<TABLE>
<CAPTION>
Reorganized Company (a) Predecessor Company (a)
----------------------------------------------------- ------------------------
Four Eight
months months
Year ended Year ended Year ended Ended Ended Year ended
9/30/99 9/30/98 9/30/97 9/30/96 5/31/96 9/30/95
---------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $442,162 $394,938 $359,275 $117,723 $256,320 $ 460,581
Income from operations before
amortization of reorganization
asset, acquired in-process
research & development,
asset impairment charge and
restructuring charges.......... 51,055 46,516 56,171 17,812 36,626 47,588
Income (loss) from operations.... (28,539) (33,829) (15,820) (6,568) 36,626 (121,996)
Income (loss) before
extraordinary items............ (67,782) (66,635) (56,850) (22,009) 112,528 (238,326)
Net income (loss)................ (67,992)(b) (67,749)(b) (67,811)(b) (22,009)(b) 164,970(c) (238,326)(e)
Basic and diluted loss
per share...................... $ (4.78) $ (4.85) $ (5.05) $ (2.19) (d) (d)
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
--------------------------------------------------------
Predecessor
Reorganized Company Company
------------------------------------------- -----------
1999 1998 1997 1996 1995
------------------------------------------- -----------
<S> <C> <C> <C> <C> <C>
Current assets.......................... $ 117,603 $147,629 $164,485 $160,553 $ 174,538
Current liabilities..................... 133,642 119,859 117,625 146,276 566,915
Total assets............................ 330,517 411,837 381,411 428,570 408,910
Long-term debt, less current portion.... 313,885 338,851 247,889 217,042 --
Stockholders' equity (deficit).......... (117,636) (47,492) 14,520 58,569 (188,243)
</TABLE>
(a) On May 20, 1996, the Company's Plan of Reorganization was confirmed by the
United States Bankruptcy Court and on June 4, 1996, the Company emerged
from bankruptcy 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. 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) (the "Reorganized
Company") are not comparable to results reported in prior periods (the
"Predecessor Company"). See Note 2 to the accompanying Consolidated
Financial Statements for information on the consummation of the Plan of
Reorganization and implementation of Fresh Start Reporting.
(b) The net loss for the fiscal years ended September 30, 1999, 1998 and 1997
and the four months ended September 30, 1996, includes $68.4, $71.9 and
$72.0 and $24.4 million of Reorganization Asset amortization, respectively.
During the 1999 fourth quarter, the Company recorded an $8.2 million asset
impairment charge and a $3 million write-off of in-process research and
development. The 1998 third quarter included an $8.5 million restructuring
charge and an "Extraordinary loss on extinguishment of debt, net of taxes"
of $11.0 million was recorded in 1997.
(c) The net income for the eight months ended May 31, 1996, includes $92.8
million of Reorganization items and an extraordinary gain of $52.4 million
related to the Company's financial reorganization.
(d) Due to the implementation of Fresh Start Reporting, per share data for the
Predecessor Company has been excluded as it is not comparable.
(e) The net loss for the year ended September 30, 1995, includes a $136.9
million charge related to the write-off of goodwill.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On May 31, 1999, the Company completed the sale of the Magnetics
Division ("Magnetics"). The results of the Magnetics business have been
reported separately as discontinued operations in the Consolidated Statements
of Operations. Prior year's results have been restated to present Magnetics
as a discontinued operation. Revenues of Magnetics were $50.5 million for the
six months ended March 31, 1999, $104.1 million in 1998 and $103.2 million in
1997.
On June 18, 1998, the Company completed its acquisition of assets
constituting substantially all of the business and operations of First Image.
For reporting purposes, the acquisition date was set as June 1, 1998 and was
accounted for as a purchase transaction. The First Image acquisition resulted
in incremental revenues and earnings before interest, other income,
reorganization items, special and restructuring charges, taxes, depreciation
and amortization and extraordinary items ("EBITDA") of $37.7 million and $9.7
million, respectively, for the period June 1, 1998 to September 30, 1998,
which are included in the Company's results of operations for the fiscal year
ended September 30, 1998. See Note 7 to the accompanying Consolidated
Financial Statements for additional information related to this acquisition.
On May 20, 1996, the Company's Plan of Reorganization was confirmed
by the United States Bankruptcy Court and on June 4, 1996, the Company
emerged from bankruptcy 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. 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 2 to the accompanying
Consolidated Financial Statements for information on the consummation of the
Plan of Reorganization and implementation of Fresh Start Reporting.
GENERAL
In fiscal 1999 Anacomp moved to a four business unit reporting
structure. The four business units include Internet Document Services,
Document Management Solutions ("DMS"), Field Services, and DatagraphiX. In
addition, the Company disposed of the Magnetics business during fiscal 1999.
As a result, the following financial results identify and differentiate the
four business units where material and do not include financial results for
Magnetics.
Anacomp reported a net loss of $68 million in fiscal 1999, compared
to a loss of $67.7 million and $67.8 million in fiscal 1998 and 1997,
respectively. EBITDA was $94.9 million (21.5% of revenues) in fiscal 1999,
compared to EBITDA of $73 million (18.5% of revenues) and $71.2 million
(19.8% of revenues) in fiscal 1998 and 1997, respectively.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 VS. FISCAL YEAR ENDED SEPTEMBER 30, 1998
REVENUES. The Company's revenues increased by 12%, or $47.3
million, from $394.9 million in fiscal 1998 to $442.2 million in fiscal 1999.
The Company experienced increased revenues of $65.1 million (14.7% of
revenues) in its DMS business line, increased revenues of $1.2 million in its
Internet Document Services business line, and a revenue decline of $18.6
million (4.2% of revenues) in its DatagraphiX product lines.
The $65.1 million increase in DMS revenue resulted primarily from
the June 1, 1998 acquisition of First Image and the inclusion of its
operating results for the entire year ended September 30, 1999, compared to
four months in the prior year.
15
<PAGE>
The $1.2 million increase in Internet Document Services revenue in
fiscal 1999 is a 347% increase from 1998 and reflects the company's continued
emphasis on new technology. The Company secured new contracts with four major
customers in 1999. In addition, 1999 results included a full year of revenues
from contracts initiated in 1998.
The $18.6 million decrease in DatagraphiX revenue was the result of
the company's discontinuance of the sale of duplicate microfilm to the
reseller market in the 1998 fourth quarter, as well as the declining sales of
original COM microfilm and duplicate microfilm, which is consistent with the
gradual decline of COM units in service worldwide.
GROSS MARGIN. The Company's gross margins increased 11.1% from
$158.4 million (40.1% of revenues) in fiscal 1998 to $176.0 million (40.0% of
revenues) in fiscal 1999.
The DMS margins, as a percentage of revenue, decreased 2.8
percentage points from 1998 to 1999. The decrease was the result of decreases
in average selling prices and of costs incurred for the consolidation of the
First Image business data centers. The Field Services margins, as a
percentage of revenue, were essentially unchanged from 1998 to 1999. The
DatagraphiX margins, as a percentage of revenue, increased 3.8 percentage
points because of an increase in hardware sales and the discontinuance in the
1998 fourth quarter of lower margin duplicate film sales.
ENGINEERING, RESEARCH AND DEVELOPMENT. The Company's research and
development spending increased 10.5% from $9.0 million in fiscal 1998 to
$10.0 million in fiscal 1999. Spending on digital product offerings,
including the Electronic Policy Warehouse ("EPW") and Internet Document
Services, increased $3.2 million, or 69%, to $7.9 million in 1999, from $4.7
million in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased 2.1% from $90.7 million (23% of
revenues) in fiscal 1998 to $92.6 million (20.9% of revenues) in fiscal 1999.
This increase in expense resulted primarily from operating costs of the First
Image business and costs related to the new strategic marketing initiatives.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. The
write-off of acquired in-process research and development costs of $3.0
million, incurred in the fourth quarter of 1999, relates to the acquisition
of Adesso Software.
The value of acquired in-process research and development was
computed using a discounted cash flow analysis on the anticipated income
stream of the related product sales. The value assigned to acquired
in-process research and development was determined by estimating the costs to
develop the acquired in-process research and development into commercially
viable products, estimating the resulting net cash flows from the products
and discounting the net cash flows to their present value. With respect to
the acquired in-process research and development, the calculations of value
were adjusted to reflect the value creation efforts Adesso created prior to
the close of the acquisition.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible
assets increased 82.9% from $12.2 million (3.1% of revenues) in fiscal 1998
to $22.4 million (5.1% of revenues) in fiscal 1999. This increase is
primarily related to the amortization of goodwill associated with the First
Image acquisition in the 1998 third quarter.
INTEREST EXPENSE AND FEE AMORTIZATION. Interest expense increased
16.7% from $34.6 million in fiscal 1998 to $40.4 million in 1999. This was
the result of the increased level of debt, related to the June 1998
acquisition of First Image, for an entire year.
PROVISION FOR INCOME TAXES. The provision for income taxes on
continuing operations in fiscal 1999 includes $3.1 million on earnings of
Anacomp's foreign subsidiaries and $1.9 million of domestic taxes, after
considering the impact of the extraordinary loss. Of the $1.9 million
domestic tax provision, approximately $0.6 million is currently payable. The
Company's effective tax rate increased from 42% of taxable income from
continuing operations in fiscal 1998 to 213% of taxable income in 1999. This
increase in percentage was
16
<PAGE>
primarily the result of the 1999 charges for impaired assets and write-off of
acquired in-process research and development that were not deductible for tax
purposes. In addition, 1999 results included an increase over the prior year
in amortization expense, also non-deductible for tax purposes, of goodwill.
This was primarily the result of a full year of amortization expense related
to the First Image acquisition compared to only four months of related
expense in 1998. See Note 15 to the accompanying Consolidated Financial
Statements for further discussion.
DISCONTINUED OPERATIONS. During the second quarter of 1999 the
Company adopted a plan to divest its Magnetics business. For financial
reporting purposes, the divestiture was effective as of the end of the second
quarter of fiscal 1999. Magnetics recognized income from operations of $0.8
million for the six months ending March 31, 1999 compared to $2.2 million for
all of 1998. The Company recognized a net gain of $2.2 million on the sale of
Magnetics in 1999.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 VS. FISCAL YEAR ENDED SEPTEMBER 30, 1997
REVENUES. The Company's revenues increased 9.9% from $359.3
million in fiscal 1997 to $394.9 million in fiscal 1998. The Company
experienced increased revenues of $55.7 million in its DMS business line,
decreased revenues of $15.7 million in its DatagraphiX business line and
decreased revenues of $4.7 million in its Field Services business line.
The $55.7 million increase in DMS revenues was primarily the result
of the First Image acquisition of and the inclusion of its COM service
revenues for the four months ending September 30, 1998 ($37.7 million). Also,
excluding the results of First Image, COM service volumes increased by
approximately 23% while average selling prices decreased by approximately
12%. Certain data center acquisitions in Europe and several large customer
gains contributed to both the increase in volumes and the decrease in average
selling prices. Additionally, DMS revenues were favorably impacted by the
growth of CD services ($4.6 million) and by the growth of Digital software
sales ($4.7 million).
The $15.7 million decrease in DatagraphiX revenues was primarily
caused by the expected decrease in micrographics supplies revenues. This
decline was the result of the Company's discontinuance of the sale of
duplicate film to the reseller market, as well as declining sales of original
COM film and duplicate film, which is consistent with long-term trends.
Additionally, 1997 revenues included a $3.6 million cash receipt from a
negotiated amendment to an OEM agreement with Kodak.
The $4.7 million decrease in Field Service revenues was primarily
caused by the expected decline in COM maintenance ($8.7 million). This
decline was offset by the growth of third party maintenance opportunities
($4.0 million).
GROSS MARGIN. The Company's gross margins increased 6.7% from
$148.4 million (41.3% of revenues) in fiscal 1997 to $158.4 million (40.1% of
revenues) in fiscal 1998 (excluding the one-time cash settlement in fiscal
1997 discussed above). Gross margins generated by DMS decreased as a
percentage of revenues by 5.0 percentage points which was primarily the
result of decreases in COM services average selling prices. The decrease in
average selling prices was in part due to the large customer gains that
received favorable pricing due to their large volumes and acquisitions that
increased sales volume at lower average selling prices. Gross margins
generated by COM systems sales as a percent of revenues increased by
approximately 2.9 percentage points, which was primarily the result of
product mix changes and manufacturing efficiencies realized during fiscal
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased 12.8% from $80.4 million (22.4% of revenues) in fiscal 1997 to
$90.7 million (23.0% of revenues) in fiscal 1998. This increase was primarily
the result of increased expenses associated with the First Image and other
acquisitions. Additionally, the Company increased its sales efforts, sales
support and product development for the digital systems products.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible
assets increased 265% from $3.3 million (0.9% of revenues) in fiscal 1997 to
$12.2 million (3.1% of revenues) in fiscal 1998. This increase was primarily
the result of amortization of goodwill associated with the First Image
acquisition.
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RESTRUCTURING CHARGES. Restructuring charges totaled $8.5 million
(2.2% of revenues) in fiscal 1998. These charges resulted from the Company's
acquisition of First Image and the related plans to close down Anacomp sites
with multiple market presence in certain cities and convert First Image
customers to Anacomp equipment. These restructuring activities were
substantially completed during fiscal year 1999. The restructuring charges
consisted of personnel-related costs of $2.7 million, facility closedown
costs of $4.8 million, and other costs of $1.0 million.
INTEREST EXPENSE. Interest expense decreased 3.6% from $35.9
million in fiscal 1997 to $34.6 million in fiscal 1998. This decrease was the
result of the Company refinancing substantially all of its debt obligations
at lower interest rates during fiscal 1998 and 1997, which was partially
offset by additional borrowings used to finance the acquisition of First
Image.
PROVISION FOR INCOME TAXES. The Company's effective tax rate
decreased by approximately 3% from 45% of taxable income in fiscal 1997 to
42% of taxable income in 1998. This decrease was the result of a substantial
portion of the Company's taxable income being generated in countries with
lower income tax rates relative to the prior period. See Note 15 to the
accompanying Consolidated Financial Statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Anacomp had negative working capital of $16 million at September 30,
1999, compared to working capital of $27.8 million at September 30, 1998. In
1999, working capital was utilized to purchase and retire $25 million of the
Company's long-term debt, repurchase $8.8 million of Company stock and
acquire twelve businesses for an aggregate purchase price that included $40.1
million in cash. Net cash provided by operating activities increased 66% to
$40.8 million for the fiscal year ended September 30, 1999, compared to $24.6
million in the comparable prior period. Fiscal 1999 included $11.2 million of
non-cash special charges and a $6.8 million increase in depreciation and
amortization expense.
As of September 30, 1999 the Company had $314 million of its 10 7/8%
Senior Subordinated Notes (the "Subordinated Notes") outstanding, down from
$339 million as of September 30, 1998. Interest on these Subordinated Notes
is payable semi-annually and they are due in April, 2004.
Net cash used in investing activities was $28.5 million in the
current period, compared to $142.7 million in the comparable prior period.
This decrease was primarily the result of the First Image acquisition in 1998.
Net cash used by financing activities was $20.3 million for the
fiscal year ended September 30, 1999, compared to cash flows provided of
$79.6 million in the comparable prior period. This change was primarily the
result of the Company's acquisition of $25 million in Subordinated Notes and
its repurchase of $8.9 million of Company common stock during the current
period, compared with the issuance of $135 million of the Subordinated Notes
during 1998.
The Company's cash balance as of September 30, 1999 was $11.1
million, compared to $22.0 million (including restricted cash) at September
30, 1998. The Company also has available a $75 million revolving credit
facility. As of September 30, 1999, $8.9 million was outstanding under the
revolving credit facility.
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 revolving credit facility will be sufficient to fund its debt service
requirements, acquisition strategies and working capital requirements in the
foreseeable future.
STATE OF YEAR 2000 READINESS
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
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2000 and beyond. The Company has worked with its outside suppliers to ensure
that they will continue to support the products that they supply to Anacomp
for resale, including the performance by the suppliers 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 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 previously 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 has communicated in writing, sometimes on multiple
occasions, with all known customers of many products 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. Customers who refuse to upgrade are asked to sign a release
of year 2000 liability for the benefit of Anacomp. Anacomp has also launched
its "Analog as a Fail Safe" campaign to educate customers about the value of
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 the retrieval of data stored on microfilm does not require digital
technology.
Anacomp has categorized approximately 850 of its suppliers into one
of four categories depending upon the criticality of the product or service
and the amount of time necessary to implement the contingency plans which
Anacomp has identified. If a supplier does not declare its readiness to
Anacomp in enough time to permit implementation of its contingency plans
before December 31, 1999, Anacomp may replace the supplier, have the supplier
hold additional inventory of the supplier's products, or implement
alternative contingency plans depending upon the product or service provided.
As of September 30, 1999, Anacomp had received written responses to
Anacomp's year 2000 readiness questionnaire from 100% of the 125 suppliers
that Anacomp deems critical to its operations. Anacomp has either received
declarations of readiness from, or established contingency plans for, all
critical suppliers. For example, Anacomp is currently interviewing
alternative sources of key products as part of its contingency planning but
has no reason to believe that any of its critical suppliers will not be ready
in time. The Company is increasing its supply of certain key consumable
products such as original film, duplicate film, and digital production
materials in order to increase the minimum supply of such consumables in
twelve of the Company's strategically located data centers for the month of
January, 2000. Anacomp also continues to monitor the readiness of its
non-critical suppliers.
For those Anacomp products that incorporate the products of a third
party supplier, Anacomp continues to request 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.
The contingency planning for these vendors is based upon their level of
criticality and in some cases requires manual processing of claims or
replacement of the vendor.
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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 completed such remediation or
renovation. Anacomp has also completed the documentation of such efforts for
its year 2000 archives. All critical building facilities at the Company's
Poway headquarters have been assessed, remediated and tested, and changes
have been implemented where necessary, except for the headquarters'
door-entry security system, which is scheduled to be replaced by the end of
the calendar year.
All of the Company's domestic offices have requested statements of
year 2000 readiness from their vendors, including electric utilities and
providers of HVAC, electronic security systems, electronic sprinkler systems,
fire prevention systems, courier services, time clock vendors, consumable
suppliers, consumable delivery services, office equipment and voice and data
communication. Anacomp has formulated contingency plans depending upon the
responses from the vendors. If a vendor has issued a statement of year 2000
compliance, no additional follow up will be conducted. If a vendor has
indicated a target date for year 2000 compliance, Anacomp will continue to
monitor the vendor until receiving a definitive statement. If the vendor has
not responded, Anacomp is implementing alternative plans and back-up
arrangements.
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 are subject to the same
assessment, remediation, testing and implementation phases as those described
above.
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, will total approximately $0.3, $2.3, and $1.5 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 if currently
unforeseen problems occur.
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 such 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
Anacomp believes that existing technical support resources, as
backed-up by current overflow capabilities, will be able to handle customer
inquiries during the century rollover. Nevertheless, as an added precaution,
the Company will increase its 24-hour support staffing during such rollover,
although no assurance can be given that such staffing will be able to handle
all customer contingencies.
In those instances where the Company experiences a year 2000 problem
with its operational facilities, the Company believes that its business will
still be able to function without substantial interruption. Anacomp has
20
<PAGE>
designated a year 2000 coordinator in each of its approximately 50 national
data centers. Each coordinator must report its center's year 2000 status to a
central coordinator on the morning of January 1, 2000, who in turn must
notify senior management in the event of any problems. For each data center,
a primary (intra-region) and a secondary (inter-region) back-up data center
has been identified. Additional third-level support will be available in the
Company's San Diego headquarters facility, where additional COM, CD and
selected laser print equipment will be available. This will enable data
centers which experience, for example, a loss of power due to a third party
utility's failure to identify or remediate an isolated year 2000 problem, to
shift work to another data center without substantial interruption. The plan
includes the potential replacement of electronic transmission of data 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 will 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 contingency planning.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has U.S. Dollar fixed rate indebtedness and in September
1999 entered into three cross currency swap agreements that hedge the U.S.
Dollar value of the Company's investment in the net assets of certain foreign
subsidiaries. These agreements effectively swapped higher fixed rate U.S.
Dollar debt for lower fixed rate debt in the subsidiaries' respective local
currencies. The Company is exposed to the risk of future currency exchange
rate fluctuations on such debt which are accounted for as an adjustment to
stockholders' equity. Therefore, changes from reporting period to reporting
period in the exchange rates between various foreign currencies and the U.S.
Dollar have had and will continue to have an impact on the foreign currency
translation component of stockholders' equity reported by the Company, and
such effect may be material in any individual reporting period.
The Company's bank line of credit is affected by the general level
of U.S. interest rates and/or Libor. The Company had $8.9 million outstanding
under its bank line of credit on September 30, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary financial information appear
on pages A-1 to A-30 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on
accounting and financial disclosures.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company hereby incorporates by reference the information
contained under the headings "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" from its definitive Proxy
Statement (hereinafter, the "Proxy Statement") to be delivered to the
shareholders of the Company in connection with the 2000 Annual Meeting of
Shareholders to be held February 7, 2000. Certain information relating to
executive officers of the Company appears on pages 11 through 13 hereof.
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference into this Item the
information contained under the heading "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company hereby incorporates by reference into this Item the
information contained under the heading "Security Ownership of Management and
Other Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Hasso Jenss, a Senior Vice President of the Company, borrowed
$115,600 from the Company on August 12, 1998 in connection with his
relocation from Germany to the Poway, California area and his purchase of a
residence. The indebtedness was evidenced by a promissory note dated that
same date which bears interest at 7.5% per annum with a stated maturity date
of November 30, 1998 (subject to extension). On December 16, 1998, Mr. Jenss
repaid to the Company the entire principal amount of the promissory note
(which was then cancelled), and he repaid all accrued interest on December
18, 1998.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements and other information appear in
Appendix A to this Annual Report on Form 10-K and are filed as a part
hereof:
Report of Independent Public Accountants.
Consolidated Balance Sheets - September 30, 1999 and 1998.
Consolidated Statements of Operations - Years Ended September 30, 1999,
1998 and 1997.
Consolidated Statements of Stockholders' Equity (Deficit) - Years
Ended September 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - Years Ended September 30,
1999, 1998 and 1997.
Notes to the Consolidated Financial Statements.
2. Financial Statement Schedules are not filed with this Annual Report on
Form 10-K because the Schedules are either inapplicable or the required
information is presented in the financial statements listed immediately
above or in the notes thereto.
(b) Reports on Form 8-K:
During the quarter ended September 30, 1999, and prior to filing this
Annual Report on Form 10-K, Anacomp filed one report on Form 8-K, dated
July 2, 1999 (the "Form 8-K Amendment"). The Form 8-K Amendment was
filed to amend the June 25, 1999 Form 8-K that the Company had
previously filed reporting that the Company and Anacomp Ltd. had
entered into an Asset Purchase Agreement with eMag, L.L.C. and MSG
Acquisition (UK) Ltd. to sell the Company's Magnetics Solutions Group
division. The Form 8-K Amendment was filed to update the Company's
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March
31, 1999, and the Unaudited Pro Forma Condensed Consolidate Statement
of Operations for the six months ended March 31, 1999, that were
included in the original Form 8-K filing.
(c) The following exhibits are filed with this Annual Report on Form 10-K
or incorporated herein by reference to the listed document previously
filed with the Securities and Exchange Commission (the "SEC").
Previously unfiled documents are noted with an asterisk (*):
2.1 Third Amended Joint Plan of Reorganization of the Company and certain
of its subsidiaries. (1)
2.2 Asset Purchase Agreement, dated as of May 5, 1998, among the Company,
First Financial Management Corporation and First Data Corporation. (2)
2.3 Amendment No. 1, dated as of June 18, 1998, to Asset Purchase
Agreement, dated as of May 5, 1998, among the Company, First Financial
Management Corporation and First Data Corporation. (3)
3.1 Amended and Restated Articles of Incorporation of the Company as of
February 8, 1999. (4)
3.2 Amended and Restated Bylaws of the Company as of February 9, 1998. (4)
4.1 Form of Common Stock Certificate. (5)
4.2 Warrant Agreement, dated as of June 4, 1996, between the Company and
ChaseMellon Shareholder Services, L.L.C. (2)
4.3 Form of Warrant Certificate. (5)
23
<PAGE>
4.4 Indenture, dated as of March 24, 1997, between the Company and IBJ
Schroder Bank & Trust Company, as trustee, relating to the Company's
10-7/8% Senior Subordinated Notes due 2004, Series B. (6)
4.5 First Supplemental Indenture, date as of June 12, 1998, to the
Indenture, dated as of March 24, 1997, between the Company, as issuer,
and IBJ Schroder Bank & Trust Company, as trustee relating to the
10-7/8% Senior Subordinated Notes due 2004, Series A and the 10-7/8%
Senior Subordinated Notes due 2004, Series B (containing, as exhibits,
specimens of such Series A Notes and Series B Notes ). (2)
4.6 Indenture, dated as of June 18, 1998, between the Company and IBJ
Schroder Bank & Trust Company, as trustee, relating to the Company's
10-7/8% Series C Senior Subordinated Notes due 2004 and 10-7/8% Series
D Senior Subordinated Notes due 2004. (2)
4.7 Purchase Agreement, dated June 12, 1998, between the Company and
NatWest Capital Markets Limited, relating to the Company's 10-7/8%
Series Senior C Subordinated Notes due 2004. (2)
4.8 Exchange and Registration Rights Agreement, dated June 18, 1998,
between the Company and NatWest Capital Markets Limited, relating to
the Company's 10-7/8% Series C Senior Subordinated Notes due 2004 and
10-7/8% Series D Senior Subordinated Notes due 2004. (2)
4.9 Form Letter of Transmittal, relating to the Company's 10-7/8% Series C
Senior Subordinated Notes due 2004 and Series D Senior Subordinated
Notes due 2004. (3)
10.1 Employment Agreement, effective October 1, 1997, between the Company
and Ralph W. Koehrer. (6)
10.2 Employment Agreement, effective January 5, 1998, between the Company
and Frederick F. Geyer. (3)
10.3 General Release of All Claims and Non-Renewal of Employment Agreement,
dated October 6, 1999, between the Company and Frederick F. Geyer.*
10.4 Employment Agreement, effective October 1, 1994, between the Company
and Dr. Peter Williams. (7)
10.5 Employment Agreement, effective October 1, 1998, between the Company
and Donald W. Thurman.*
10.6 Employment Agreement, effective September 1, 1997, between the Company
and George C. Gaskin.*
10.7 Revolving Credit Agreement, dated as of June 15, 1998, among Anacomp,
Inc., the various lending institutions named therein and BankBoston,
N.A. as agent. (2)
10.8 Common Stock Registration Rights Agreement, dated as of June 4, 1996,
by and among the Company and the Holders of Registrable Shares. (4)
10.9 Amended and Restated Master Supply Agreement, dated October 8, 1993, by
and among the Company, SKC America, Inc. and SKC Limited. (9)
10.10 First Cumulative Amendment to the Amended and Restated Master Supply
Agreement, dated May 17, 1996, by and among the Company, SKC America,
Inc. and SKC Limited. (10)
10.11 Second Amended and Restated Master Supply Agreement, dated as of July
1, 1997, by and among the Company, SKC America, Inc. and SKC Limited.*
21.1 Subsidiaries.*
27.1 Financial data schedule (required for electronic filing only).*
- ---------------------
24
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(1) Incorporated by reference to the Company's Form 8-A filed with the SEC
on May 15, 1996 (File No. 0-7641).
(2) Incorporated by reference to the Company's Form 8-K filed with the SEC
on June 24, 1998 (File No. 1-8328).
(3) Incorporated by reference to the Company's Form S-4 Registration
Statement filed with the SEC on August 17, 1998 (File No. 333-61675).
(4) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 31, 1999.
(5) Incorporated by reference to the Company's Form 8-K filed with the SEC
on June 19, 1996 (File No. 1-8328).
(6) Incorporated by reference to the Company's Form S-4 Registration
Statement filed with the SEC on April 16, 1997 (File No. 333-25281).
(7) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended December 31, 1997.
(8) Incorporated by reference to the Company's Form 10-K for the year ended
September 30, 1998.
(9) Incorporated by reference to the Company's Form 10-K for the year ended
September 30, 1993.
(10) Incorporated by reference to the Company's Pre-Effective Amendment No.
1 to Form S-1 Registration Statement filed with the SEC on September
19, 1996 (File No. 333-9395).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Ralph W. Koehrer
-------------------------------------
Ralph W. Koehrer
President, Chief Executive
Officer and Director
Dated: December 27, 1999
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: December 27, 1999 By: /s/ Ralph W. Koehrer
-------------------------------------
Ralph W. Koehrer
President, Chief Executive
Officer and Director
Dated: December 27, 1999 By: /s/ David B. Hiatt
-------------------------------------
David B. Hiatt, Executive Vice
President and Chief Financial Officer
Dated: December 27, 1999 By: /s/ Richard D. Jackson
-------------------------------------
Richard D. Jackson,
Co-Chairman of the Board
Dated: December 27, 1999 By: /s/ Lewis Solomon
-------------------------------------
Lewis Solomon,
Co-Chairman of the Board
Dated: December 27, 1999 By: /s/ Talton R. Embry
-------------------------------------
Talton R. Embry, Director
Dated: December 27, 1999 By: /s/ Darius W. Gaskins, Jr.
-------------------------------------
Darius W. Gaskins, Jr., Director
Dated: December 27, 1999 By: /s/ Jay P. Gilbertson
-------------------------------------
Jay P. Gilbertson, Director
Dated: December 27, 1999 By: /s/ George A. Poole, Jr.
-------------------------------------
George A. Poole, Jr., Director
26
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APPENDIX A
ANNUAL REPORT ON FORM 10-K
ANACOMP, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................. A-2
Consolidated Balance Sheets - September 30, 1999 and 1998............ A-3
Consolidated Statements of Operations - Years Ended
September 30, 1999, 1998 and 1997.................................. A-4
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended September 30, 1999, 1998 and 1997 ..................... A-5
Consolidated Statements of Cash Flows -
Years Ended September 30, 1999, 1998 and 1997...................... A-6
Notes to the Consolidated Financial Statements....................... A-8
</TABLE>
A-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Anacomp, Inc.:
We have audited the accompanying consolidated balance sheets of
Anacomp, Inc. (an Indiana corporation) and subsidiaries as of September 30,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended September 30, 1999. 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.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
San Diego, California
November 5, 1999
A-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Anacomp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
--------- ---------
(dollars in thousands, except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 11,144 $ 17,721
Restricted cash.............................................. -- 4,285
Accounts and notes receivable, net........................... 75,259 63,288
Current portion of long-term receivables, net................ 2,952 5,641
Inventories.................................................. 19,659 16,485
Net assets of discontinued operations........................ -- 29,939
Prepaid expenses and other................................... 8,589 10,270
--------- ---------
Total current assets........................................... 117,603 147,629
Property and equipment, net.................................... 47,439 35,092
Long-term receivables, net of current portion.................. 7,635 9,002
Goodwill....................................................... 132,965 120,654
Reorganization value in excess of identifiable assets, net..... 12,003 83,818
Other assets................................................... 12,872 15,642
--------- ---------
$ 330,517 $ 411,837
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............................ $ 9,987 $ 1,152
Accounts payable............................................. 34,058 28,961
Accrued compensation, benefits and withholdings.............. 17,229 17,327
Accrued income taxes......................................... 16,509 15,197
Accrued interest............................................. 17,061 18,158
Other accrued liabilities.................................... 38,798 39,064
--------- ---------
Total current liabilities...................................... 133,642 119,859
--------- ---------
Noncurrent liabilities:
Long-term debt, net of current portion....................... 313,885 338,851
Other noncurrent liabilities................................. 626 619
--------- ---------
Total noncurrent liabilities................................... 314,511 339,470
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, 1,000,000 shares authorized, none issued.... -- --
Common stock, $.01 par value; 40,000,000 and 20,000,000
shares authorized, respectively; 14,386,089 and
14,263,569 issued and outstanding, respectively............ 149 143
Additional paid-in capital................................... 108,997 109,486
Accumulated other comprehensive income (loss)................ (1,222) 447
Accumulated deficit.......................................... (225,560) (157,568)
--------- ---------
Total stockholders' deficit.................................... (117,636) (47,492)
--------- ---------
$ 330,517 $ 411,837
========= =========
</TABLE>
See the notes to the consolidated financial statements.
A-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Anacomp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(in thousands, except per share amounts) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Internet Document Services............................ $ 1,568 $ $ 351 $ --
Document Management Solutions......................... 227,269 162,209 106,517
Field Services........................................ 71,962 72,458 77,118
DatagraphiX........................................... 141,363 159,920 175,640
-------- -------- --------
442,162 394,938 359,275
Cost of revenues:
Costs of Internet Document Services................... 1,539 202 --
Costs of Document Management Solutions................ 144,933 99,027 59,184
Costs of Field Services............................... 37,607 38,272 40,118
Costs of DatagraphiX.................................. 82,074 98,991 111,559
-------- -------- --------
266,153 236,492 210,861
-------- -------- --------
Gross profit............................................ 176,009 158,446 148,414
Costs and expenses:
Engineering, research and development................. 9,992 9,043 8,519
Selling, general and administrative expenses.......... 92,607 90,667 80,375
Amortization of reorganization asset.................. 68,370 71,851 71,991
Amortization of intangible assets..................... 22,355 12,220 3,349
Write-off of acquired in-process research
and development..................................... 3,000 -- --
Asset impairment charges.............................. 8,224 -- --
Restructuring charges................................. -- 8,494 --
-------- -------- --------
Operating loss from continuing operations............... (28,539) (33,829) (15,820)
Other income (expense):
Interest income....................................... 2,322 2,339 4,346
Interest expense and fee amortization................. (40,358) (34,598) (35,896)
Other................................................. 530 (517) (1,285)
-------- -------- --------
(37,506) (32,776) (32,835)
-------- -------- --------
Loss from continuing operations before
income taxes.......................................... (66,045) (66,605) (48,655)
Provision for income taxes.............................. 4,960 2,194 10,508
-------- -------- --------
Loss from continuing operations......................... (71,005) (68,799) (59,163)
Income from discontinued operations, net of taxes....... 980 2,164 2,313
Gain on sale of discontinued operations,
net of taxes.......................................... 2,243 -- --
-------- -------- --------
Loss before extraordinary loss.......................... (67,782) (66,635) (56,850)
Extraordinary loss on extinguishment of debt,
net of taxes.......................................... (210) (1,114) (10,961)
-------- -------- --------
Net loss................................................ $(67,992) $(67,749) $(67,811)
======== ======== ========
Basic and diluted per share data:
Loss from continuing operations......................... $ (4.99) $ (4.92) $ (4.40)
Income from and gain on sale of discontinued
operations, net of taxes.. ........................... 0.23 0.15 0.17
Extraordinary loss on extinguishment of debt,
net of taxes.......................................... (0.02) (0.08) (0.82)
-------- -------- --------
Basic and diluted net loss.............................. $ (4.78) $ (4.85) $ (5.05)
======== ======== ========
Shares used in computing basic and diluted
net loss per share.................................... 14,232 13,963 13,432
======== ======== ========
</TABLE>
See the notes to the consolidated financial statements.
A-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Anacomp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
(dollars in thousands) Additional other
Common paid-in comprehensive Accumulated
Stock capital income (loss) Deficit Total
------ ---------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996............ $101 $ 80,318 $ 159 $ (22,009) $ 58,569
- ---------------------------------------------------------------------------------------------------------
Net loss................................. -- -- -- (67,811) (67,811)
Translation adjustment................... -- -- (145) -- (145)
Unrealized loss on currency
swap contract.......................... -- -- (1,145) -- (1,145)
----------
COMPREHENSIVE LOSS....................... (69,101)
----------
Common stock issued for exercise
of rights.............................. 36 24,511 -- -- 24,547
Common stock issued for exercise
of stock options....................... 1 500 -- -- 501
Other.................................... -- -- -- 1 1
- ---------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997............ 138 105,329 (1,128) (89,819) 14,520
- ---------------------------------------------------------------------------------------------------------
Net loss................................. -- -- -- (67,749) (67,749)
Translation adjustment................... -- -- 1,575 -- 1,575
----------
COMPREHENSIVE LOSS....................... (66,174)
----------
Common stock issued for exercise of
stock options and warrants............. 4 2,668 -- -- 2,672
Common stock issued for employee
stock purchases........................ 1 905 -- -- 906
Common stock issued as incentive
compensation........................... -- 584 -- -- 584
- ---------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998............ 143 109,486 447 (157,568) (47,492)
- ---------------------------------------------------------------------------------------------------------
Net loss................................. -- -- -- (67,992) (67,992)
Translation adjustment................... -- -- (1,669) -- (1,669)
----------
COMPREHENSIVE LOSS....................... (69,661)
----------
Common stock issued for exercise of
stock options and warrants............. 9 3,843 -- -- 3,852
Common stock issued for employee
stock purchases........................ -- 781 -- -- 781
Common stock purchased and retired....... (5) (8,784) -- -- (8,789)
Common stock issued for acquisitions..... 2 3,671 -- -- 3,673
- ---------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999............ $149 $108,997 $(1,222) $(225,560) $(117,636)
=========================================================================================================
</TABLE>
See the notes to the consolidated financial statements.
A-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Anacomp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollars in thousands) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(67,992) $ (67,749) $ (67,811)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Extraordinary items................................. 210 1,114 10,961
Asset impairment charge............................. 8,224 -- --
Write-off of acquired in-process research
and development................................... 3,000 -- --
Income from discontinued operations................. (980) (2,164) (2,313)
Gain on sale of discontinued operations............. (2,243) -- --
Depreciation and amortization....................... 109,952 103,103 92,203
Non-cash compensation............................... 1,103 1,004 1,012
Non-cash charge in lieu of taxes.................... 1,527 -- 700
Other............................................... -- -- 6,278
Restricted cash requirements............................ 4,285 3,147 2,164
Change in assets and liabilities, net of effects
from acquisitions:
Decrease in accounts and long-term receivables.... 877 2,989 8,866
Decrease in inventories and prepaid expenses...... 656 660 5,811
Increase in other assets.......................... (1,572) (1,951) (1,247)
Increase (decrease) in accounts payable and
accrued expenses................................ (14,520) (14,663) 807
Decrease in other noncurrent liabilities.......... (1,699) (934) (6,447)
-------- --------- ---------
Net cash provided by continuing operations...... 40,828 24,556 50,984
Net operating cash provided by (used in)
discontinued operations 1,620 (662) 6,393
-------- --------- ---------
Net cash provided by operating activities....... 42,448 23,894 57,377
-------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of discontinued operations
and other assets.................................... 41,422 -- --
Purchases of property and equipment................... (24,660) (11,724) (9,934)
Payments to acquire companies and customer rights,
net of the proceeds from the sale of DAS and
DPDS business lines in 1998......................... (45,284) (130,936) (22,443)
-------- --------- ---------
Net cash used in investing activities........... (28,522) (142,660) (32,377)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, options
and warrants........................................ 4,633 3,015 412
Proceeds from revolving line of credit and
long-term borrowings, net........................... 8,900 214,286 253,853
Proceeds from exercise of common stock rights......... --- -- 24,548
Repurchases of common stock........................... (8,789) -- --
Principal payments on long-term debt.................. (25,000) (132,197) (271,288)
Payments related to the issuance and
extinguishment of debt.............................. -- (5,541) (12,647)
-------- --------- ---------
Net cash provided by (used in)
financing activities.......................... (20,256) 79,563 (5,122)
-------- --------- ---------
Effect of exchange rate changes on cash................. (247) (1,136) (16)
-------- --------- ---------
Increase (decrease) in cash and cash equivalents........ (6,577) (40,339) 19,862
Cash and cash equivalents at beginning of period........ 17,721 58,060 38,198
-------- --------- ---------
Cash and cash equivalents at end of period.............. $ 11,144 $ 17,721 $ 58,060
======== ========= =========
</TABLE>
See the notes to the consolidated financial statements.
A-6
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollars in thousands) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest............................................ $34,463 $27,277 $15,016
Income taxes........................................ $ 5,425 $ 5,150 $ 6,612
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollars in thousands) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Assets acquired by assuming liabilities............ $9,824 $11,955 $ 1,553
Interest on subordinated notes satisfied
with additional notes............................ -- -- $11,960
Stock issued for acquisitions...................... $3,673 -- --
</TABLE>
See the notes to the consolidated financial statements.
A-7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Anacomp, Inc. and Subsidiaries
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING:
THE COMPANY
Anacomp, Inc. ("Anacomp" or the "Company") is a global application services
provider for digital document-management outsource services utilizing the
Internet and other technologies. The Company is also a leading provider of
field maintenance services and document management systems and supplies. The
Company primarily serves customers in the banking, insurance and brokerage
market sectors.
CONSOLIDATION
The consolidated financial statements include the accounts of Anacomp and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents primarily represent highly liquid investments, with original
maturities of 90 days or less, in repurchase agreements and money market
funds that are convertible to a known amount of cash and carry an
insignificant risk of change in value. The Company has periodically
maintained balances in various operating accounts in excess of federally
insured limits.
RESTRICTED CASH
Restricted cash in 1998 represented 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
were primarily related to environmental liabilities and certain insurance
policies requiring letters of credit.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined by methods approximating the first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated or amortized using
the straight-line method over estimated useful lives. Buildings are
principally depreciated over ten to forty years. Leasehold improvements are
amortized over the shorter of their estimated useful life or the remaining
term of the related lease. Tooling costs are amortized over the total
estimated units of production, not to exceed three years. Processing
equipment and other property and equipment have useful lives ranging from two
to twelve years. Repair and maintenance costs are expensed as incurred.
SOFTWARE COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," software production costs incurred from the time
technological feasibility is reached until the product is available for
general release to customers are capitalized and reported at the lower of
cost or estimated 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 three years. Unamortized deferred software costs were $0.4 million
and $0.6 million as of September 30, 1999 and 1998, respectively.
A-8
<PAGE>
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
benefit. Goodwill at September 30, 1999 is being amortized over periods of
three to fifteen years.
REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS
As more fully discussed in Note 2, the Company has "Reorganization value in
excess of identifiable assets" ("Reorganization Asset") of $12.0 million and
$83.8 million at September 30, 1999 and 1998, respectively, net of
accumulated amortization. The Reorganization Asset is being amortized over a
three and one-half year period beginning May 31, 1996 and will be fully
amortized by November 30, 1999.
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. Unamortized debt issuance costs were $6.9
million and $8.6 million at September 30, 1999 and 1998, respectively.
Unamortized debt issuance costs are included in "Other assets" in the
accompanying Consolidated Balance Sheets. During the years ended September
30, 1999, 1998 and 1997, the Company amortized $1.8 million, $1.6 million and
$0.9 million, respectively, of debt issuance costs that are included in
"Interest expense and fee amortization" in the accompanying Consolidated
Statements of Operations.
The Company retired $25.0 million of 10-7/8% Senior Subordinated Notes in the
fourth quarter of 1999 (see Note 12). This resulted in a $0.6 million
write-off, before income taxes, of unamortized debt issuance costs, which is
included in the "Extraordinary Loss on extinguishment of debt, net of taxes"
for the year ended September 30, 1999.
The Company refinanced certain long-term obligations in June 1998 and March
1997, which resulted in the write-off of $1.9 million and $16.9 million,
respectively, of unamortized debt issuance costs. These write-offs are
recorded in the accompanying Consolidated Statements of Operations as an
"Extraordinary loss on extinguishment of debt, net of taxes" for the years
ended September 30, 1998 and 1997.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset and/or liability is
computed for both the expected future impact of temporary differences between
the financial statement and tax bases of assets and liabilities and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be "more likely than not"
realized in future tax returns.
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 (deficit) in the Consolidated Balance Sheets. Foreign
currency transaction gains and losses are included in the Consolidated
Statements of Operations.
REVENUE RECOGNITION
Revenues from sales of products and services or from leases 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.
Operating lease revenues are recognized during the applicable period of
customer usage.
A-9
<PAGE>
During 1999, the Company entered into software contracts falling under the
provisions of Statement of Position 97-2, ("SOP 97-2"), "Software Revenue
Recognition". In accordance with SOP 97-2, revenues from software license
agreements are recognized currently, provided that all of the following
conditions are met: a non-cancelable license agreement has been signed, the
software has been delivered, there are no material uncertainties regarding
customer acceptance, collection of the resulting receivable is deemed
probable and the risk of concession is deemed remote, and no other
significant vendor obligations exist. For contracts with multiple
obligations, the Company unbundles the respective components using vendor
specific objective evidence.
The Company recognizes revenue from maintenance and service ratably over the
period of the related contract.
Contract revenue for the development and implementation of document services
solutions under contracts is recognized using the percentage-of-completion
method with progress to completion measured by output measures as defined by
deliverable items identified in the contract. Provisions for estimated losses
on contracts, if any, are made during the period when the loss becomes
probable and can be reasonably estimated. Revenues recognized in excess of
amounts billed and project costs are classified as work in progress.
LONG-LIVED ASSETS
The Company evaluates potential impairment of long-lived assets and
long-lived assets to be disposed of in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes
procedures for review of recoverability and measurement of impairment (if
necessary) of long-lived assets and certain identifiable intangibles held and
used by an entity. SFAS No. 121 requires that those assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the respective asset may not be fully recoverable. SFAS
No. 121 also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less estimated selling costs. Based on the Company's review of
each acquisition, projected future undiscounted cash flows and modifications
to the Company's strategic direction in the fiscal 1999 fourth quarter, the
Company recorded an impairment charge of $8.2 million, which is included in
the 1999 Consolidated Statement of Operations.
RESEARCH AND DEVELOPMENT
The engineering costs associated specifically with research and development
programs are expensed as incurred, and amounted to $6.7, $3.9 and $4.8
million for the years ended September 30, 1999, 1998 and 1997, respectively.
The Company supports several engineering processes, including basic
technological research, service offering and product development, and
sustaining engineering support for existing service customers and product
installations.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based upon the weighted average
number of shares of common stock outstanding during the period. Diluted
earnings (loss) per share is based upon the weighted average number of shares
of common stock outstanding and potentially dilutive securities outstanding
during the period. Potentially dilutive securities include options granted
under the Company's stock option plans and outstanding warrants, both using
the treasury stock method, and shares of common stock expected to be issued
under the Company's employee stock purchase plan. Potentially dilutive
securities were not used to calculate diluted earnings (loss) per share
because of their anti-dilutive effect.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
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, 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.
A-10
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and for Hedging Activities".
SFAS No. 133 requires that all derivatives be recorded on the balance sheet
as an asset or liability measured at its fair value with changes in fair
value recognized currently in earnings unless hedge accounting criteria are
met. In June 1999, the FASB issued SFAS No. 137, which deferred the
implementation of SFAS No. 133 to fiscal years beginning after June 15, 2000.
A company may implement these provisions as of the beginning of any fiscal
quarter after June 15, 2000. The Company has not yet determined what impact,
if any, the adoption of SFAS No. 133 will have on its consolidated financial
statements, results of operations or related disclosures thereto.
NOTE 2.
FINANCIAL REORGANIZATION AND FRESH START REPORTING:
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 that 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
and $160 million principal amount of its 13% Senior Subordinated Notes due
2002, 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 15% Senior Subordinated Notes,
and $3.2 million of interest payments scheduled for July 15, 1995 and January
15, 1996 on the 13.875% Convertible Subordinated Debentures, as well as
certain financial covenant violations, and the cross-default provisions of
the other debt agreements.
As of May 31, 1996, the Company adopted Fresh Start Reporting in accordance
with the American Institute of Certified Public Accountant's Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code". Fresh Start Reporting resulted in material changes to the
Consolidated Balance Sheet, including the valuation of assets, intangible
assets (including goodwill) and liabilities at fair market value, and the
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 that the Company recognized an asset entitled "Reorganization value in
excess of identifiable assets" totaling $267.5 million as of May 31, 1996
(see Note 1).
NOTE 3.
SALE OF THE MAGNETICS DIVISION:
In February 1999, the Company adopted a plan to dispose of its Magnetics
Division (the "Magnetics Division"), and on April 28, 1999, the Company
signed a definitive agreement to sell the Magnetics Division. The sale was
effective June 1, 1999, and the sales price of $40.0 million included $37.0
million in cash at closing, an interest-bearing $3.0 million subordinated
note, and incentive payments based upon sales of magnetic media products to
the Company's customer base over the next two years. A post-closing
adjustment resulted in the Company returning to the buyer $1.2 million to
reflect a shortfall in the agreed-upon working capital for the Magnetics
Division. The Company recognized a gain, net of income taxes, of
approximately $2.2 million as a result of the
A-11
<PAGE>
sale, which is reflected in the 1999 Consolidated Statements of Operations as
a "Gain on sale of discontinued operations, net of taxes".
The assets and liabilities of the Magnetics Division have been classified
separately as "Net assets of discontinued operations" in the Consolidated
Balance Sheet as of September 30, 1998. The net assets of the Magnetics
Division were summarized as follows:
<TABLE>
<CAPTION>
September 30,
(dollars in thousands) 1998
-------------
<S> <C>
Accounts and notes receivable.............................. $15,821
Inventories................................................ 12,133
Property and equipment..................................... 6,657
Other assets............................................... 4,644
Accounts payable and other accrued liabilities............. (9,316)
-------
Net assets................................................. $29,939
=======
</TABLE>
Similarly, the results of operations of the Magnetics Division have been
reported separately as "Income from discontinued operations, net of taxes" in
the Consolidated Statements of Operations for the years ended September 30,
1999, 1998 and 1997. The operating results of the discontinued operations are
summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------
(dollars in thousands) 1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Revenues $50,544 $104,079 $103,235
======= ======== ========
Operating income $ 2,763 $ 6,470 $ 7,305
Income taxes 1,783 4,306 4,992
------- -------- --------
Net income $ 980 $ 2,164 $ 2,313
======= ======== ========
</TABLE>
NOTE 4.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information for certain financial
instruments. The carrying amounts for trade and other receivables and
payables are considered to be their fair values. The carrying amounts, net of
unamortized discounts and premiums, and fair values of the Company's other
financial instruments at September 30, 1999, and 1998, are as follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
--------------------- ---------------------
Carrying Carrying
(dollars in thousands) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt:
Senior Secured Revolving Credit Facility.... $ 8,900 $ 8,900 $ -- $ --
10-7/8% Senior Subordinated Notes........... 311,937 304,945 337,181 335,000
Unrealized loss on currency swap
contract (see Note 5)..................... (1,145) (1,145) -- --
</TABLE>
The September 30, 1999 and 1998 estimated fair values of Long-term debt were
based on quoted market values.
A-12
<PAGE>
NOTE 5.
HEDGING:
During September 1999, the Company entered into three cross-currency swap
agreements that hedge the U.S. dollar value of the Company's investment in
the net assets of certain foreign subsidiaries. These agreements effectively
swapped higher fixed rate U.S. dollar debt for lower fixed-rate debt in the
subsidiaries' respective local currencies. The Company is exposed to the risk
of future currency exchange rate fluctuations on such debt. The amounts
outstanding as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Unrealized Gain
Notional (Loss) as of
Currency Amount Maturity Interest Rate September 30, 1999
- ---------------------- ---------- ----------------- ------------- ------------------
<S> <C> <C> <C> <C>
Euro fixed-rate 28,860,029 April 1, 2002 8.69% $ (862,000)
Swiss Franc fixed-rate 22,725,000 September 8, 2002 2.99% 11,000
Swiss Franc fixed-rate 14,635,700 April 1, 2002 7.45% (294,000)
-----------
$(1,145,000)
===========
</TABLE>
The above net unrealized loss has been reflected as an increase to "Long-term
debt, net of current portion" in the 1999 Consolidated Balance Sheet (see
Note 12), with a corresponding adjustment to the cumulative translation
account.
NOTE 6.
ACQUISITIONS:
During the three years ended September 30, 1999, Anacomp made the
acquisitions set forth below, each of which has been accounted for under the
purchase method of accounting and, accordingly, the assets, including
in-process research and development, and the liabilities were recorded based
on their fair values at the date of acquisition and the results of operations
for each of the acquisitions have been included in the financial statements
for the periods subsequent to acquisition. Pro forma results have not been
presented because the effects of these acquisitions, excluding First Image,
were not significant.
In July 1999, Anacomp acquired Litton Adesso Software, Inc ("Adesso") for
$17.0 million and incurred additional costs of $1.6 million. Based upon an
independent third party appraisal, Anacomp allocated $3.0 million to
in-process research and development, $3.2 million to developed technology,
$10.8 million to goodwill and $1.6 million to the identifiable net assets.
The intangible assets are being amortized over three to seven years. The
in-process research and development was immediately written-off and is shown
as a "Write-off of acquired in-process research and development" in the 1999
Consolidated Statement of Operations. The fair values for all other
acquisitions were allocated between the net assets and goodwill.
The value of acquired in-process research and development was computed using
a discounted cash flow analysis on the anticipated income stream of the
related product sales. The value assigned to acquired in-process research and
development was determined by estimating the costs to develop the acquired
in-process research and development into commercially viable products,
estimating the resulting net cash flows from the products and discounting the
net cash flows to their present value. With respect to the acquired
in-process research and development, the calculations of value were adjusted
to reflect the value creation efforts Adesso created prior to the close of
the acquisition.
FISCAL 1999
During fiscal 1999, Anacomp acquired either the customer bases and other
assets or the stock of twelve businesses, including Adesso discussed above.
Total consideration paid at the closing was $50.0 million and 169,010 shares
of Anacomp common stock, of which approximately $31.6 million was assigned to
goodwill. The aggregate purchase prices consisted of $40.2 million in cash
and $9.8 million in assumed liabilities. In addition, one of the acquisitions
includes contingent future cash payments of up to a maximum of $12.0 million,
based upon future sales from that business unit above a defined level of
sales. Three of the other acquisitions include provisions for contingent cash
payments of up to approximately $0.7 million in the aggregate. In 1999, $3.8
million was paid and 14,400 unregistered shares of Anacomp common stock were
issued related to contract clauses included in the purchase agreements of
prior year acquisitions.
A-13
<PAGE>
FISCAL 1998
During fiscal 1998, excluding the First Image acquisition discussed
separately in Note 7 below, Anacomp acquired either the customer bases and
other assets or the stock of nine businesses. Total consideration paid at the
closing was $17.9, million of which approximately $12.5 million was assigned
to goodwill. 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 of the acquired
businesses over the next ten years from the respective acquisition dates.
FISCAL 1997
During fiscal 1997, Anacomp acquired either the customer bases and other
assets or the stock of nine businesses. Total consideration was $25.5
million, of which approximately $18.3 million was assigned to goodwill. The
aggregate purchase prices consisted of $22.4 million cash, $1.6 million in
assumed liabilities and contingent cash and/or stock payments of up to $10.0
million based upon future operating results of the acquired businesses over
the next two to five years from the acquisition dates.
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"), which was 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
resulted in FFMC returning to the Company $4.9 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 goodwill was
approximately $100.0 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 between the Company, FFMC and FDC were all cleared. In
addition, 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 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 retained
and continues to operate the IAS Business. IAS Business revenues of $37.7
million and EBITDA of $9.7 million for the period June 1, 1998, to September
30, 1998 were included in the Company's results of operations for the fiscal
year ended September 30, 1998.
The Company sold the DAS Business to ACS Shared Services, Inc., a wholly
owned subsidiary of Affiliated Computer Services, Inc., effective July 1,
1998. The Company also sold the DPDS Business to Southern Micrographix
Company LLC (now known as AccuDocs LLC) effective August 1, 1998. The Company
generated $45.0 million in cash from the sale of both Businesses and
liquidation of related working capital. Combined, the two Businesses
accounted for 44% of First Image's revenues for the year ended December 31,
1997. The Company excluded the results of operations for the DAS and DPDS
Businesses from the Company's results of operations for the year ended
September 30, 1998.
The unaudited pro forma consolidated operating data of the Company for the
year ended September 30, 1998 and 1997 are presented below. The unaudited pro
forma consolidated operating data for the year ended September 30, 1998
includes the Company's operations for the year ended September 30, 1998 and
First Image's operations for the eight months ended May 31, 1998. The
unaudited pro forma consolidated operating data for the year ended September
30, 1997 includes the Company's operations for the year ended September 30,
1997 and First Image's operations for the year ended December 31, 1997.
The unaudited pro forma consolidated operating data was prepared giving
effect to the IAS Business acquisition, the disposition of the DAS and DPDS
Businesses and the use of the proceeds thereof, the new Senior Secured
A-14
<PAGE>
Revolving Credit Facility and Senior Subordinated Notes (as each such term is
described in Note 12 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 operating data 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>
Year ended September 30,
------------------------
(dollars in thousands) 1998 1997
-------- --------
<S> <C> <C>
Total revenues from continuing operations..... $466,793 $468,218
Net loss from continuing operations before
extraordinary item.......................... (62,270) (48,312)
</TABLE>
NOTE 8.
RESTRUCTURING RESERVES:
In connection with the acquisition of First Image, the Company recorded
certain reserves associated with the restructuring of the Company's existing
business and the acquired business. The reserves associated with costs to be
incurred related to restructuring the Company's existing business are charged
to expense while the reserves associated with restructuring costs to be
incurred related to the acquired business are recorded as a purchase
accounting adjustment and does not effect the operating results of the
Company.
Included in the Company's operating results for the year ended September 30,
1998, are restructuring charges of $8.5 million. These charges result from
the Company's acquisition of the First Image Businesses and the Company's
plans to close down Anacomp sites with multiple market presence in certain
cities and convert First Image customers to Anacomp equipment. The majority
of these restructuring activities were completed during fiscal year 1999. In
1999, $4.4 million was charged against the reserve. As of September 30, 1999,
a balance of $2.6 million remains, consisting primarily of reserves for idle
leased facilities.
The Company also recorded $15.2 million in reserves in 1998 related to the
restructuring of the First Image Businesses and the Company's plans to
integrate the First Image corporate functions into Anacomp's and to close
down certain First Image sites where the Company had a multiple market
presence. The majority of these restructuring activities were completed
during fiscal year 1999. In 1999 and 1998, $9.2 and $1.9 million,
respectively was charged against the reserve. As of September 30, 1999, a
balance of $4.1 million remains, consisting primarily of reserves for idle
leased facilities and personnel severance.
NOTE 9.
SKC AGREEMENT:
Anacomp has 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 provided the
Company with a substantial portion of its polyester requirements for its
magnetic media products prior to the sale of its Magnetics Division.
In connection with the Supply Agreement, SKC also provided the Company with a
$25 million trade credit facility, which was reduced to $15 million in fiscal
1997 and further reduced to $5 million in fiscal 1998 (secured by up to $5
million of products sold to the Company by SKC. The $5 million trade credit
is outstanding at September 30, 1999. The trade credit arrangement bears
interest at 1.75% over the prime rate of The First National Bank of Boston
(10% as of September 30, 1999).
In connection with an amendment to the Supply Agreement in June 1996, the
Company agreed to certain price increases, retroactive to 1994, and the
Company agreed to make the deferred payments related to the retroactive price
increases to SKC. The Company is committed to pay SKC $0.8 million and $1.0
million in 2000 and 2001, respectively, which is accrued in "Current portion
of long-term debt" and "Long-term debt, net of current portion" in the
accompanying Consolidated Balance Sheets. In addition, the parties amended
and restated the supply
A-15
<PAGE>
agreement effective as of July 1, 1997 for the purpose of, among other
things, deleting minimum purchase commitments.
NOTE 10.
COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
September 30,
---------------------
(dollars in thousands) 1999 1998
-------- --------
<S> <C> <C>
ACCOUNTS AND NOTES RECEIVABLE:
Trade receivables, net of allowance for
doubtful accounts of $5,815 and $6,957,
respectively..................................... $ 74,379 $ 60,798
Other.............................................. 880 2,490
-------- --------
$ 75,259 $ 63,288
======== ========
INVENTORIES:
Finished goods..................................... $ 9,827 $ 9,600
Work in process.................................... 2,433 2,071
Raw materials and supplies......................... 7,399 4,814
-------- --------
$ 19,659 $ 16,485
======== ========
PROPERTY AND EQUIPMENT:
Land and buildings................................. $ 4,651 $ 777
Office furniture................................... 12,526 6,165
Manufacturing equipment and tooling................ 4,983 5,431
Field support spare parts.......................... 4,433 5,077
Leasehold improvements............................. 10,481 3,171
Equipment leased to others......................... 1,950 2,552
Processing equipment............................... 27,774 17,116
-------- --------
66,798 40,289
Less accumulated depreciation and amortization..... (19,359) (5,197)
-------- --------
$ 47,439 $ 35,092
======== ========
EXCESS OF PURCHASE PRICE OVER NET ASSETS OF
BUSINESSES ACQUIRED:
Goodwill........................................... $177,407 $134,467
Less accumulated amortization...................... (44,442) (13,813)
-------- --------
$132,965 $120,654
======== ========
OTHER ACCRUED LIABILITIES:
Restructuring reserves (see Note 8)................ $ 6,651 $ 20,302
EPA reserve........................................ 2,789 3,331
Deferred revenues.................................. 11,892 7,297
Sales tax and VAT liability........................ 3,837 3,560
Other.............................................. 13,629 4,574
-------- --------
$ 38,798 $ 39,064
======== ========
</TABLE>
A-16
<PAGE>
NOTE 11.
LONG-TERM RECEIVABLES:
<TABLE>
<CAPTION>
(dollars in thousands) September 30,
-------------------
1999 1998
------- -------
<S> <C> <C>
LONG-TERM RECEIVABLES:
Lease contracts receivable................. $ 7,214 $13,219
Other...................................... 3,373 1,424
------- -------
10,587 14,643
Less current portion....................... (2,952) (5,641)
------- -------
$ 7,635 $ 9,002
======= =======
</TABLE>
Lease contracts receivable result from customer leases of products under
agreements that qualify as sales-type leases. Annual future lease payments to
be received under sales-type leases are as follows:
<TABLE>
<CAPTION>
Year Ended
(dollars in thousands) September 30,
-------------
<S> <C>
2000................................ $ 3,157
2001................................ 2,742
2002................................ 1,878
2003................................ 445
2004................................ 64
-------
8,286
Less deferred interest.............. (1,072)
-------
$ 7,214
=======
</TABLE>
NOTE 12.
LONG-TERM DEBT:
Long-term debt comprises of the following:
<TABLE>
<CAPTION>
September 30,
-------------------
(dollars in thousands) 1999 1998
-------- --------
<S> <C> <C>
Senior Secured Revolving Credit Facility.......... $ 8,900 $ --
10-7/8% Senior Subordinated Notes, including
net unamortized premium of $1.9 million and
$2.2 million, respectively...................... 311,937 337,181
Other............................................. 1,890 2,822
-------- --------
322,727 340,003
Less current portion.............................. (9,987) (1,152)
Plus unrealized hedging loss (see Note 5)......... 1,145 --
-------- --------
$313,885 $338,851
======== ========
</TABLE>
SENIOR SECURED REVOLVING CREDIT FACILITY
The Company has a $75 million Senior Secured Revolving Credit Facility (the
"Facility") with a syndicate of banks and BankBoston, N.A. ("BankBoston") as
agent. The Facility terminates on June 15, 2003.
The Facility is available for loans denominated in U.S. dollars and in
certain foreign currencies. In addition, up to $15 million of the Facility is
available for letters of credit. Letters of credit outstanding against the
Facility totaled $5.1 million and $3.4 million at September 30, 1999 and
1998, respectively.
The Company may elect to have loans under the Facility bear interest at (a)
the Base Rate (as defined below) plus 3/4% or (b) the Eurocurrency Rate (as
defined below) 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
A-17
<PAGE>
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 weighted average interest rate for the Facility borrowings at
September 30, 1999 was 7.1%.
The Facility is secured by virtually all of the Company's assets and 65% of
the capital stock of the Company's foreign subsidiaries. The Facility
contains covenants relating to limitations on capital expenditures,
limitations on additional debt, limitations on open market purchases of the
Company's Notes (as defined below), limitations on open market purchases of
the Company's common stock, limitations on mergers and acquisitions,
limitations on liens, minimum EBITDA requirements, minimum interest coverage
ratios and minimum leverage ratios.
10 7/8% SENIOR SUBORDINATED NOTES
The Company had outstanding $310 million of publicly traded 10-7/8% Senior
Subordinated Notes ("the Notes") at September 30, 1999. The Notes have no
sinking fund requirements and are due in full on April 1, 2004.
In 1997, the Company issued $200 million of Series B Notes at 98.2071% of the
face amount to yield proceeds of $196.4 million. The $3.6 million discount is
being amortized as additional interest expense over the life of the Series B
Notes. In 1998, the Company issued $135 million of Series D Notes at 104% of
face value to yield proceeds of $140.4 million. The $5.4 million premium is
being amortized as an offset to interest expense over the life of the Series
D Notes. The proceeds from the Series D Notes, along with available cash,
were used to finance the Acquisition (see Note 7).
In September 1999, the Company made open market purchases of $25 million of
the Notes at an average price of 100.4425% of the face amount and cancelled
them. In connection with the purchases, the Company recorded an
"Extraordinary loss on extinguishment of debt" of $0.6 million. The
associated income tax benefit was $0.4 million resulting in a net loss of
$0.2 million.
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. Interest on the Notes is payable semi-annually on October 1
and April 1 of each year.
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 will rank pari passu with
any future Senior Subordinated Indebtedness (as defined) and senior to all
Subordinated Indebtedness (as defined) of the Company.
The indenture relating to the Notes contains covenants with respect to the
Company related to limitations of indebtedness of the Company and 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 13.
CAPITAL STOCK:
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 to determine each such
series' preferences, limitations, and relative voting and other rights.
A-18
<PAGE>
COMMON STOCK REPURCHASE PROGRAM
In February 1999, the Board of Directors authorized repurchases of up to two
percent of the Company's outstanding shares of common stock per quarter.
Shares may be purchased on the open market from time to time and at such
prices as the management of the Company may determine, based on current
prices and market conditions. The program is subject to compliance with the
Company's credit agreements. During 1999, the Company repurchased 534,156
shares of its common stock at an average price of $16.45 per share.
WARRANTS
As of September 30, 1999 and 1998 the Company had 356,064 and 362,015
warrants to purchase its common stock outstanding, respectively. Each warrant
is convertible into 1.0566 shares of common stock at an exercise price of
$11.57 per share. The warrants expire on June 3, 2001.
NOTE 14.
STOCK 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
common stock.
With regard to the stock options, the options were granted at an exercise
price of $4.63 per share of 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, and 25%
of the options will vest on November 15, 1999. The Company recognized $0.5,
$1.0 and $1.0 million of compensation expense related to the options issued
and the restricted stock awarded during the fiscal years ended September 30,
1999, 1998 and 1997 respectively. The options expire 10 years after the date
of the grant.
In April 1998, the Company awarded 35,000 shares of restricted common stock
that were valued at $0.5 million. The compensation expense related to this
award is being amortized to expense over the vesting period. Amortization
expense related to this award was $1.1 million and $0.3 million for the years
ended September 30, 1999 and 1998, respectively.
On February 3, 1997, the Company's shareholders approved the 1996 Long-Term
Incentive Plan, which provides for the future issuance of various forms of
common stock-related awards, including options, stock appreciation rights and
restricted shares. The Company has reserved 2.4 million shares of common
stock for issuance under this plan. 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.
Transactions under the Company's stock option plans are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- ---------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding on
October 1.......... 2,005,706 $11.36 1,671,055 $ 7.96 947,500 $ 4.63
Grant................ 653,150 16.65 979,375 14.31 939,205 10.64
Canceled ............ (152,749) 14.07 (335,336) 9.41 (135,650) 4.86
Exercised............ (345,777) 9.25 (309,388) 6.17 (80,000) 5.15
--------- --------- ---------
Outstanding on
September 30....... 2,160,330 $13.12 2,005,706 $11.36 1,671,055 $ 7.96
========= ========= =========
</TABLE>
A-19
<PAGE>
The following table summarizes all options outstanding and exercisable by
price range as of September 30, 1999:
<TABLE>
<CAPTION>
Weighted-Avg.
Weighted- Weighted- Exercise Price
Number of Range of Exercise Average Average Options Of Exercisable
Options Price Per Share Exercise Price Remaining Life Exercisable Options
- --------- ----------------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
438,505 $ 4.63 - $ 8.50 $ 5.59 7.0 Years 230,380 $ 5.05
794,175 $10.63 - $15.88 $12.90 7.9 Years 519,731 $12.93
927,650 $16.00 - $22.81 $16.88 9.3 Years 90,191 $17.29
- ---------
2,160,330
=========
</TABLE>
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 each
quarterly offering period. A maximum of 500,000 shares of common stock is
available for purchase under the Stock Purchase Plan. As of September 30,
1999, 193,427 shares were issued under the plan.
The Company has reserved approximately 4.4 million shares of Anacomp common
stock for the exercise of stock options, the exercise of warrants, employee
stock purchases and other corporate purposes.
The Company accounts for its stock option plans in accordance with APB
Opinion No. 25 ("APB 25"), under which compensation expense is recognized
only to the extent the exercise price of the option is less than the fair
market value of a share of stock at the date of grant. During 1995, the FASB
issued SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"),
which considers the stock options as compensation expense to the Company
based on their fair value at the date of grant. Under this standard, the
Company has the option of accounting for employee stock option plans as it
currently does or under the new method. The Company uses the APB 25 method
for accounting, but has adopted the disclosure requirements of SFAS 123.
Had compensation costs for these plans been determined based on their fair
value on their grant date, the Company's net loss would have been as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollar in thousands, except per share data) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net loss as reported........................ $(67,992) $(67,749) $(67,811)
Pro forma net loss.......................... (72,960) (70,309) (69,940)
Pro forma net loss per share................ $ (5.13) $ (5.04) $ (5.21)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option pricing model. The weighted average fair value of
options granted during 1999, 1998 and 1997, as well as the weighted average
assumptions used to determine the fair values, are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ---------
<S> <C> <C> <C>
Fair Value of Options Granted......... $7.61 $7.30 $6.73
Risk-Free Interest Rate............... 5.40% 5.69% 6.22%
Expected Dividend Yield............... 0% 0% 0%
Expected Volatility................... 43% 46% 40%
Expected Life......................... 5 Years 5 Years 10 Years
</TABLE>
A-20
<PAGE>
NOTE 15.
INCOME TAXES:
The components of income (loss) from continuing operations before income
taxes and extraordinary items were:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollars in thousands) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
United States............... $(74,793) $(78,424) $(58,878)
Foreign..................... 8,748 11,819 10,223
-------- -------- --------
$(66,045) $(66,605) $(48,655)
======== ======== ========
</TABLE>
The components of the consolidated tax provision after utilization of net
operating loss carryforwards and the adjustment of tax reserves are
summarized below:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollars in thousands) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal................. $ 672 $ -- $ 300
Foreign................. 5,498 5,000 5,400
State................... 516 400 400
------ ------ ------
6,686 5,400 6,100
Tax reserve adjustment.... 767 400 2,800
Non-cash charge in
lieu of taxes........... 1,527 -- 700
------ ------ ------
$8,980 $5,800 $9,600
====== ====== ======
</TABLE>
The non-cash charge in lieu of taxes represents the utilization of
pre-organization tax benefits that are reflected as reductions to the
Reorganization Asset.
The income tax provision is included in the Consolidated Statements of
Operations as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollars in thousands) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Provision for income taxes
before discontinued operations
and extraordinary item......... $4,960 $2,194 $10,508
Discontinued operations.......... 4,427 4,306 4,992
Extraordinary loss on discharge
of indebtedness................ (407) (700) (5,900)
------ ------ -------
$8,980 $5,800 $ 9,600
====== ====== =======
</TABLE>
A-21
<PAGE>
The following is a reconciliation of income taxes from continuing operations
calculated at the United States federal statutory rate to the provision for
income taxes:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, September 30,
(dollars in thousands) 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Benefit for income taxes at U.S.
statutory rate...................... $(23,115) $(23,370) $(16,769)
Nondeductible amortization and
write-off of intangible assets...... 26,607 25,450 22,654
State and foreign income taxes........ 321 (76) 2,191
Tax reserve adjustment................ 1,200 380 2,659
Alternative minimum tax............... -- -- 301
Other................................. (53) (190) (528)
-------- -------- --------
$ 4,960 $ 2,194 $ 10,508
======== ======== ========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------
(dollars in thousands) 1999 1998
-------- --------
<S> <C> <C>
NET DEFERRED TAX ASSET:
Tax effects of future temporary differences related to:
Inventory reserves........................................ $ 5,100 $ 5,000
Reserves.................................................. 2,200 6,500
Depreciation and amortization............................. 5,400 3,500
Other..................................................... 6,500 2,300
-------- --------
Net tax effects of future differences....................... 19,200 17,300
-------- --------
Tax effects of carryforward benefits:
Federal net operating loss carryforwards.................. 59,800 62,000
Federal general business tax credits...................... 1,100 1,100
Foreign tax credits....................................... 3,000 3,000
-------- --------
Tax effects of carryforwards................................ 63,900 66,100
-------- --------
Tax effects of future taxable differences
and carryforwards......................................... 83,100 83,400
Less deferred tax asset valuation allowance................. (83,100) (83,400)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
</TABLE>
At September 30, 1999, the Company has federal net operating loss
carryforwards ("NOLs") of approximately $149.5 million available to offset
future U.S. taxable income. This amount will increase to $197.5 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.
The Company has tax credit carryforwards of approximately $4.1 million. These
tax credits are principally foreign tax credit carryforwards resulting from
the repatriation of a portion of the Company's foreign subsidiaries'
accumulated earnings and profits included in U.S. taxable income in 1996. The
Company expects that these credits will expire unused.
The tax benefits of pre-reorganization net deferred tax assets will be
reported first as a reduction of the Reorganization Asset and then as a
credit to equity. Effective with the beginning of the year ended September
30, 1998, the Company intends to permanently reinvest the earnings of its
foreign subsidiaries, exclusive of those foreign subsidiaries in Brazil,
Canada and Japan. For those foreign subsidiaries in Brazil, Canada, and
Japan, the Company will continue to remit and record applicable U.S. income
and withholding tax expense on their earnings. As of September 30, 1999, the
Company has approximately $21.7 million in undistributed earnings from those
foreign subsidiaries that the Company intends to permanently reinvest. These
tax benefits will not reduce income tax expense for financial reporting
purposes.
A-22
<PAGE>
NOTE 16.
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
that extend beyond one year:
<TABLE>
<CAPTION>
Year Ended
(dollars in thousands) September 30,
-------------
<S> <C>
2000........................................ $11,605
2001........................................ 9,127
2002........................................ 7,692
2003........................................ 6,481
2004........................................ 5,102
Thereafter.................................. 16,319
-------
$56,326
=======
</TABLE>
The total of future minimum rentals to be received under noncancelable
subleases related to the above leases is $1.3 million. The Company's rent and
lease expense was $18 million, $18 million and $16.3 million for the years
ended September 30, 1999, 1998 and 1997, respectively.
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,
disclosed in Note 10, relates to its estimated liability for cleanup costs
for the aforementioned locations and other sites. No material losses are
expected in excess of the liability recorded.
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 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. Discovery in this case continues, with any trial to occur probably
not before the second calendar quarter of 2000. Although there can be no
assurance as to the eventual outcome of this matter, the Company believes
that it has numerous meritorious arguments and intends to pursue them
vigorously.
In a related matter, the Company has brought a lawsuit in California State
court against the principal shareholder of Data/Ware, seeking to enforce that
shareholder's obligation to indemnify the Company in the ASI litigation. The
state court granted the Company's motion for summary adjudication of the
shareholder's duty to fund most of the defense of the ASI case, which the
shareholder is currently paying into the court's escrow account. Discovery in
the state court litigation continues.
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.
A-23
<PAGE>
NOTE 17.
OPERATING SEGMENTS:
Anacomp's business is focused in the document management industry. The Company
manages its business through four operating units: Internet Document Services,
which provides Internet-based document-management service; Document Management
Solutions ("DMS"); Field Services, which provides equipment maintenance services
for Anacomp and third-party manufactured products; and DatagraphiX, which
provides COM and CD systems, related supplies and contract manufacturing
services.
Management evaluates performance based upon earnings before interest, other
income, reorganization items, non-recurring and restructuring charges, taxes,
depreciation and amortization and extraordinary items ("EBITDA"). Segment profit
or loss also excludes acquired in-process research and development. These costs
are managed at the Corporate segment.
Information about the Company's operations by operating segment is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Internet
Document Field
Services DMS Services DatagraphiX Corporate Consolidated
- ---------------------------- -------------- ------------ ------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999
Digital/Renewal Revenue...... $ 1,568 $ 52,281 $14,698 $ 5,015 $ -- $ 73,562
COM Revenue.................. -- 174,988 57,264 136,348 -- 368,600
------- -------- ------- -------- -------- --------
Total Revenues............... 1,568 227,269 71,962 141,363 -- 442,162
EBITDA....................... (6,459) 50,100 30,749 42,326 (21,838) 94,878
Depreciation and
amortization............ 759 29,092 5,322 6,776 68,003 109,952
Identifiable operating
assets.................. 16,921 184,897 17,548 58,238 52,913 330,517
Capital Expenditures........ 1,957 18,223 1,609 1,232 1,639 24,660
==============================================================================================================
1998
Digital/Renewal Revenue..... $ 351 $ 24,307 $ 8,300 $ 4,274 $ -- $ 37,232
COM Revenue................. -- 137,902 64,158 155,646 -- 357,706
------- -------- ------- -------- -------- --------
Total Revenues.............. 351 162,209 72,458 159,920 -- 394,938
EBITDA...................... (1,755) 25,457 30,365 39,398 (20,452) 73,013
Depreciation and
amortization............ 101 12,495 2,456 7,017 81,034 103,103
Identifiable operating
assets.................. 72 159,542 15,238 74,391 162,594 411,837
Capital Expenditures........ -- 6,316 2,027 1,341 2,040 11,724
==============================================================================================================
1997
Digital/Renewal Revenue..... $ -- $ 6,878 $ 4,295 $ 6,387 $ -- $ 17,560
COM Revenue................. -- 99,639 72,823 169,253 -- 341,715
------- -------- ------- -------- -------- --------
Total Revenues.............. -- 106,517 77,118 175,640 -- 359,275
EBITDA...................... -- 17,601 28,453 46,669 (21,531) 71,192
Depreciation and
amortization............ -- 5,218 760 6,033 80,192 92,203
Identifiable operating
assets.................. -- 38,785 12,241 55,468 274,917 381,411
Capital Expenditures........ -- 5,595 719 3,461 159 9,934
==============================================================================================================
</TABLE>
A-24
<PAGE>
NOTE 18.
INTERNATIONAL OPERATIONS:
Anacomp's international operations are conducted principally through
subsidiaries, a substantial portion of whose operations are located in Western
Europe. Total international sales includes sales by subsidiaries and through
distributors. Information as to U.S. and international operations for the years
ended September 30, 1999, 1998 and 1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
U.S. International Elimination Consolidated
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Customer sales....................... $329,168 $112,994 $ -- $442,162
Inter-geographic..................... 13,110 -- (13,110) --
-------- -------- -------- --------
Total sales.......................... 342,278 112,994 (13,110) 442,162
======== ======== ======== ========
Operating income (loss) from
continuing operations.............. (40,258) 11,719 -- (28,539)
======== ======== ======== ========
Identifiable assets.................. $266,700 $ 63,817 $ -- $330,517
======== ======== ======== ========
YEAR ENDED SEPTEMBER 30, 1998
U.S. International Elimination Consolidated
-------- ------------- ----------- ------------
Customer sales....................... $270,886 $124,052 $ -- $394,938
Inter-geographic..................... 17,016 -- (17,016) --
-------- -------- -------- --------
Total sales.......................... 287,902 124,052 (17,016) 394,938
======== ======== ======== ========
Operating income (loss) from
continuing operations.............. (48,216) 14,387 -- (33,829)
======== ======== ======== ========
Identifiable assets.................. $368,492 $ 43,345 $ -- $411,837
======== ======== ======== ========
YEAR ENDED SEPTEMBER 30, 1997
U.S. International Elimination Consolidated
-------- ------------- ----------- ------------
Customer sales....................... $247,050 $112,225 $ -- $359,275
Inter-geographic..................... 16,304 -- (16,304) --
-------- -------- -------- --------
Total sales.......................... 263,354 112,225 (16,304) 359,275
======== ======== ======== ========
Operating income (loss) from
continuing operations.............. (31,846) 16,026 -- (15,820)
======== ======== ======== ========
Identifiable assets.................. $346,029 $ 35,382 $ -- $381,411
======== ======== ======== ========
</TABLE>
A-25
<PAGE>
NOTE 19.
QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
First Second Third Fourth
(dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter
-------- --------- --------- --------
<S> <C> <C> <C> <C>
FISCAL 1999
Revenues....................................... $114,365 $112,542 $106,250 $109,005
Gross margin................................... 45,539 45,240 43,278 41,952
Loss from continuing operations (1)............ (14,802) (15,398) (15,611) (25,194)
Gain on sale/income from discontinued
operations, net of taxes..................... 289 520 3,056 (642)
Loss before extraordinary item................. (14,513) (14,878) (12,555) (25,836)
Extraordinary loss on extinguishment of debt,
net of taxes................................. -- -- -- (210)
-------- -------- -------- --------
Net loss....................................... $(14,513) $(14,878) $(12,555) $(26,046)
======== ======== ======== ========
Basic and diluted per share data:
Loss from continuing operations................ $ (1.04) $ (1.08) $ (1.10) $ (1.78)
Gain on sale/income from discontinued
operations, net of taxes..................... 0.02 0.04 -- 0.01
Loss before extraordinary item................. (1.02) (1.04) (1.10) (1.77)
Extraordinary loss on extinguishment of debt,
net of taxes................................. -- -- -- (0.01)
-------- -------- -------- --------
Net loss....................................... $ (1.02) $ (1.04) $ (0.88) $ (1.84)
======== ======== ======== ========
</TABLE>
(1) Fourth quarter includes certain charges discussed in Notes 1 and 6.
<TABLE>
<S> <C> <C> <C> <C>
FISCAL 1998
Revenues....................................... $ 92,474 $ 91,314 $ 94,976 $116,174
Gross margin................................... 37,081 37,288 37,878 46,199
Loss from continuing operations (2)............ (15,823) (16,401) (22,325) (14,250)
Gain on sale/income from discontinued
operations, net of taxes..................... 455 546 576 587
Loss before extraordinary loss................. (15,368) (15,855) (21,749) (13,663)
Extraordinary loss on extinguishment of debt,
net of taxes................................. -- -- (1,857) 743
-------- -------- -------- --------
Net loss....................................... $(15,368) $(15,855) $(23,606) $(12,920)
======== ======== ======== ========
Basic and diluted per share data:
Loss from continuing operations................ $ (1.14) $ (1.18) $ (1.59) $ (1.00)
Gain on sale/income from discontinued
operations, net of taxes..................... 0.03 0.04 0.04 0.04
Loss before extraordinary item................. (1.11) (1.14) (1.55) (0.96)
Extraordinary loss on extinguishment of debt,
net of taxes................................. -- -- (0.13) 0.05
-------- -------- -------- --------
Net loss....................................... $ (1.11) $ (1.14) $ (1.68) $ (0.91)
======== ======== ======== ========
</TABLE>
(2) Third quarter includes a restructuring charge discussed in Note 8.
A-26
<PAGE>
NOTE 20.
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 years ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Charges
Balance at (Credits) to Balance at
beginning costs and end of
of period expenses Deductions Other period
---------- ------------ ---------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1999
Allowance for doubtful accounts (a) ...... $ 6,957 (752) (103) (287) $ 5,815
======= ===== ======= ====== =======
Restructuring reserves ................... $20,302 -- (13,651) -- $ 6,651
======= ===== ======= ====== =======
YEAR ENDED SEPTEMBER 30, 1998
Allowance for doubtful accounts (b) ...... $ 5,206 249 (479) 1,981 $ 6,957
======= ===== ======= ====== =======
Restructuring reserves (b) ............... $ -- 8,494 (3,422) 15,230 $20,302
======= ===== ======= ====== =======
YEAR ENDED SEPTEMBER 30, 1997
Allowance for doubtful accounts .......... $ 6,473 (341) (926) -- $ 5,206
======= ===== ======= ====== =======
</TABLE>
(a) Other deletions include the elimination of Magnetics related reserves
(see Note 3).
(b) Other additions include restructuring liabilities and allowance for
doubtful accounts recorded in connection with the First Image
acquisition.
A-27
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER
(10) MATERIAL CONTRACTS.
(21) SUBSIDIARIES OF THE REGISTRANT.
(27) FINANCIAL DATA SCHEDULE (REQUIRED FOR ELECTRONIC FILING ONLY).
A-28
<PAGE>
GENERAL RELEASE OF ALL CLAIMS AND NON RENEWAL OF EMPLOYMENT AGREEMENT
This General Release of All Claims and Non Renewal of Employment
Agreement ("Agreement") is made and entered into by and between Frederick F.
Geyer ("Geyer") and Anacomp, Inc. ("Anacomp").
RECITALS
A. Geyer is an Executive Vice President of Anacomp.
B. Geyer is employed pursuant to an Employment Agreement dated December
15, 1997 (herein "Employment Agreement").
C. Geyer is also signatory to a "Confidentiality, Non-Competition and
Non-Disclosure Agreement" dated December 15, 1997, a copy of which is attached
to this Agreement as Exhibit A (herein "Confidentiality Agreement").
D. Anacomp has elected not to renew or extend Geyer's Employment
Agreement. Geyer's employment with Anacomp shall terminate effective December
31, 1999.
E. Anacomp and Geyer desire to settle fully and finally all of the
differences, if any, between them on the terms and conditions set forth in this
Agreement, which both sides acknowledge and represent to be fair, reasonable,
adequate and in their mutual best interests.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises contained herein, it is agreed as follows:
1. NONRENEWAL AND EXTINGUISHMENT OF EMPLOYMENT AGREEMENT. Effective
December 31, 1999, Geyer's Employment Agreement shall expire and shall not be
renewed by Anacomp. The parties agree that this Agreement supersedes the
Employment Agreement, and that the Employment Agreement shall be null and void
and of no further force and effect upon the execution of this Agreement by both
parties.
2. CONTINUING EMPLOYMENT. Effective October 8, 1999, Geyer shall have
no further job responsibilities. Through December 31, 1999, Geyer will serve in
a strategic advisory capacity to the President on the Manufacturing, Field
Services, Systems and Supplies businesses and on other projects at the
President's discretion. Anacomp agrees that Geyer will continue to have access
to corporate email, voicemail, and the Company's laptop computer in his
possession until December 31, 1999. Geyer will receive his current base salary
and cost of living differential as set forth in the Employment Agreement in
biweekly periods until December 31, 1999, and his FY1999 Fourth Quarter Bonus
will pay out normally.
3. FIRST QUARTER BONUS. Geyer shall be entitled to receive the FY2000
First Quarter Bonus based on the performance of the corporate goals, in
accordance with Anacomp's Executive Vice President Plan, with a target
compensation of $60,000.
4. VACATION PAY. Geyer will receive all earned but unused vacation pay
as of December 31, 1999.
5. OUTPLACEMENT. In consideration for entering into this Agreement,
Anacomp shall pay for outplacement services for six (6) months in the
Drake-Beam-Morin Executive Program for Geyer. In the event that Geyer is not
employed after six months, the Company will provide him with additional six (6)
months of the same outplacement services.
<PAGE>
6. SEVERANCE.
6.1 SEVERANCE PAYMENTS. Anacomp shall pay Geyer a total of
$300,000 to be paid in biweekly installments over a 12-month period commencing
January 1, 2000 less normal payroll withholdings and taxes.
6.2 HEALTH COVERAGE AFTER JANUARY 1, 2000. Geyer shall
continue to receive the same Health Benefits from January 1, 2000 until December
31, 2000 that he received during the term of his Employment Agreement with
Anacomp or until such time as he secures health benefits with another employer.
6.3 NO EMPLOYEE BENEFITS AFTER JANUARY 1, 2000. Geyer shall
not be entitled to receive any standard Anacomp employee benefits (aside from
the Health Coverage) after January 1, 2000, including but not limited to
vacation, sick leave, life insurance, 401(k) and disability benefits.
7. AMENDMENT OF STOCK OPTION AND RESTRICTED STOCK AWARD.
7.1 VESTING. On January 5, 1998, Anacomp granted to Geyer a
non-qualified stock option (the "Option") to purchase 100,000 shares of
Anacomp's common stock at a price of $14.625 per share pursuant to Anacomp's
1996 Restructure Recognition Incentive Plan, which was evidenced by a form of
Non-Qualified Stock Option Agreement ("Option Agreement") between Anacomp and
Geyer dated February 19, 1998. The Option is hereby amended by this Agreement,
as follows: (a) Anacomp agrees to fully vest any unvested options effective
January 1, 2000, and (b) Geyer shall be required to exercise the Option no later
than March 31, 2001. Exercise of the Option shall be subject to section 7.3 of
this Agreement.
7.2 RESTRICTED STOCK. Anacomp agrees to provide Geyer with the
final award of 10,000 shares of restricted stock under the Employment Agreement
on January 1, 2000.
7.3 SALE OF ANACOMP SHARES. Notwithstanding any provision of
the Option Agreement to the contrary, Geyer may not sell more than five thousand
(5,000) shares of Anacomp stock acquired pursuant to the Option Agreement or
Restricted Stock under his Employment Agreement on any day without obtaining the
prior consent of the President or Chief Financial Officer of Anacomp.
7.4 ALL OTHER TERMS. Except as set forth in this Agreement,
all other terms and conditions of the Option Agreement shall remain in full
force and effect.
8. AGREEMENT NOT TO SOLICIT EMPLOYEES. Geyer agrees that for a two
(2) year period following the date of the execution of this Agreement, he
will not:
(a) Induce or attempt to induce, any employee of
Anacomp to leave employment with Anacomp;
(b) Interfere with or disrupt Anacomp's relationship
with any of its employees, consultants, customers, suppliers or vendors; or
(c) Solicit any employee of Anacomp to come to
work for Geyer or Geyer's subsequent employer(s). Nothing in this Section
shall prohibit Geyer from conversing with employees or providing career
counseling to employees in the future.
-2-
<PAGE>
9. GEYER'S GENERAL RELEASE OF ALL CLAIMS. In consideration for the
promises contained in this Agreement, Geyer hereby unconditionally, irrevocably
and absolutely releases and discharges Anacomp and its directors, officers,
employees, agents, successors and assigns and any related entities or businesses
(all of whom are referred to herein as "Releasees") from any and all claims
related in any way to the transactions, affairs or occurrences between them to
date, including but not limited to all losses, liabilities, claims, charges,
demands and causes of action, known or unknown, suspected or unsuspected,
arising directly or indirectly out of or in any way connected with Geyer's
employment with Anacomp, the Employment Agreement, or his tenure as Executive
Vice President of Anacomp.
This Release is intended to have the broadest possible application and
includes, but is not limited to, any claim for severance pay, unpaid salary,
bonuses, stock options, salary continuation payouts or other benefits, breach of
contract, wrongful termination, tortuous discharge, defamation, infliction of
emotional distress, violation of privacy, fraud, conspiracy, loss of consortium,
shareholder derivative claims, wrongful termination in violation of public
policy, retaliation, negligence, harassment or employment discrimination arising
under federal, state or local law, including the California Fair Employment and
Housing Act, Title VII of the Civil Rights Act of 1964, and the Age
Discrimination in Employment Act of 1967, as amended.
Geyer acknowledges that he may discover facts or law different from, or
in addition to, the facts or law that he knows or believes to be true with
respect to the claims released in this Agreement, and agrees, nonetheless, that
this Agreement and the release contained in it shall be and remain effective in
all respects notwithstanding such different or additional facts or the discovery
of them.
Geyer declares and represents that he is executing this Agreement with
the opportunity to obtain full advice from his legal counsel, and that he
intends this Agreement shall be complete and shall not be subject to any claim
of mistake, and that the release herein expresses the full and complete release,
and regardless of the adequacy or inadequacy of the consideration, he intends
the release herein to be final and complete. Geyer executes this release with
the full knowledge that this release covers all possible claims against
Releasees.
10. OLDER WORKERS BENEFIT PROTECTION ACT REQUIREMENTS. This Agreement
is intended by the parties to release and discharge any and all claims of Geyer
against Anacomp, including, but not limited to, any claims arising under the Age
Discrimination in Employment Act (29 U.S.C. section 621 et seq.). It is the
intent of Geyer and Anacomp that this Agreement satisfy the requirements of the
Older Workers Benefit Protection Act (29 U.S.C. section 626(f)). The following
general provisions, along with the other provisions of this Agreement, are
agreed to for this purpose:
10.1 Geyer acknowledges and agrees that he has read and
understands the terms of this Agreement.
10.2 Geyer acknowledges that he has been given a full
opportunity to consult with a lawyer with respect to the matters referenced in
this Agreement, and that Geyer has obtained and considered such legal counsel as
he deems necessary, such that Geyer is entering into this Agreement freely,
knowingly and voluntarily.
10.3 Geyer acknowledges that he has been given at least
twenty-one (21) days in which to consider whether or not to enter into this
Agreement. If Geyer elects to sign the Agreement in a period shorter than 21
days, he does so at his sole option.
10.4 As to the waiver of any claim under the Age
Discrimination in Employment Act ("ADEA"), Geyer shall have seven (7) days after
the execution of this Agreement in which to revoke the
-3-
<PAGE>
Agreement as to any ADEA claim only. If Geyer does so revoke, he forfeits any
further compensation to be paid under this Agreement. In order to revoke this
Agreement within the seven-day period after its execution, Geyer must deliver
a written letter of revocation to the president of Anacomp.
11. CALIFORNIA CIVIL CODE SECTION 1542 WAIVER.
California Civil Code section 1542 states:
A general release does not extend to claims which the creditor
does not know of or suspect to exist in his favor at the time
of executing the release, which if known by him must have
materially affected his settlement with the debtor.
Geyer acknowledges that he has read the releases contained in
paragraphs 9 and 10 of this Agreement and the above Civil Code section, and that
he fully understands the releases and the Civil Code section. Geyer expressly
waives any benefits and rights granted to him pursuant to Civil Code section
1542.
12. ANACOMP'S GENERAL RELEASE OF ALL CLAIMS. In consideration for the
promises contained in this Agreement, and except as set forth below, Anacomp
hereby unconditionally, irrevocably and absolutely releases and discharges
Geyer, his executors, administrators and heirs ("Releasees") from any and all
claims related in any way to the transactions, affairs or occurrences between
them to date, including, but not limited to, all losses, liabilities, claims,
charges, demands and causes of action, known or unknown, suspected or
unsuspected, arising directly or indirectly out of or in any way connected with
Geyer's prior employment with Anacomp.
Anacomp acknowledges that it may discover facts or law different from,
or in addition to, the facts or law that it knows or believes to be true with
respect to the claims released in this Agreement, and agrees, nonetheless, that
this Agreement and the release contained in it shall be and remain effective in
all respects notwithstanding such different or additional facts or discovery of
them.
Anacomp declares and represents that it is executing this Agreement
with the opportunity to obtain full advice from legal counsel, and that it
intends that this Agreement shall be complete and shall not be subject to any
claim of mistake, and that the release herein expresses the full and complete
release, and regardless of the adequacy or inadequacy of the consideration, it
intends the release herein to be final and complete. Anacomp executes this
release with the full knowledge that this release covers all possible claims
against Releasees.
California Civil Code Section 1542 states:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
Anacomp acknowledges that it has read the releases contained in this
Section 12, and the above Civil Code section, and that it understands both the
release and the Civil Code section. Anacomp expressly waives any benefits and
rights granted to it pursuant to Civil Code Section 1542. Notwithstanding
anything herein set forth to the contrary, no provision of this Section 12 shall
constitute or be construed as a release or discharge of any obligations, claims
or causes of action hereafter arising
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<PAGE>
out of the breach of any of the terms, provisions or conditions of this
Agreement, the Stock Option Agreement, or the Confidentiality Agreement.
13. PROMISE NOT TO PROSECUTE. Geyer agrees that he will not prosecute,
nor allow to be prosecuted on his behalf, in any administrative agency, whether
state or federal, or in any court, whether state or federal, any claim or demand
of any type related to the matters released above, it being the intention of the
parties that with the execution of this release, Anacomp (as defined expansively
above) will be absolutely, unconditionally and forever discharged of and from
all obligations to or on behalf of Geyer related in any way to the matters
discharged herein.
14. CONFIDENTIALITY OF THIS AGREEMENT. Geyer agrees that the terms and
conditions of this Agreement and the underlying facts leading to the nonrenewal
of Geyer's Employment Agreement shall remain confidential and that he shall not
disclose, directly or indirectly, any such terms, conditions, facts or
allegations, to any other person or entity except to his family members, tax
advisors and lawyers. Without limiting the generality of the foregoing, Geyer
will not respond to or in any way participate in or contribute to any public
discussion, notice or other publicity concerning, or in any way relating to, the
execution of this Agreement or the events that led to its execution. Without
limiting the generality of the foregoing, Geyer specifically agrees that he
shall not disclose information regarding this Agreement or the events that led
to the nonrenewal of his Employment Agreement, and any current, former or
prospective employees of Anacomp, and/or its suppliers, and/or its customers.
Geyer hereby agrees that disclosure by him of any of said terms, conditions,
facts or allegations, in violation of the foregoing, shall constitute and be
treated as a material breach of this Agreement.
15. AGREED-UPON STATEMENT. The parties will agree upon an acceptable
statement to inform Anacomp employees within the area of Geyer's former
responsibilities of Geyer's departure from the Company.
16. AGREEMENT TO RETURN ANACOMP PROPERTY AND INFORMATION. Geyer agrees
that on or about December 31, 2000, he shall return to Anacomp all property of
Anacomp including, but not limited to, his laptop computer, information stored
on his computer, financial information, product and pricing information,
customer lists, research and development plans, business plans, credit cards,
keys and computers.
17. AGREEMENT TO COMPLY WITH CONFIDENTIALITY AGREEMENT. Geyer
acknowledges that he is signatory to a "Confidentiality, Non-Competition and
Non-Disclosure Agreement" (herein "Confidentiality Agreement" attached as
Exhibit A to this Agreement) with Anacomp dated December 15, 1997. In exchange
for the consideration contained in this Agreement, Geyer agrees to continue to
fully comply with the terms of the Confidentiality Agreement.
18. NONDISPARAGEMENT. Geyer agrees that he will not make any
statements, written or verbal, disparaging the performance or business
reputation of Anacomp (including its officers, directors, employees, agents and
any related entities), or the personal or business reputation or character of
any employees of Anacomp to any customers, vendors or partners of Anacomp.
Anacomp agrees that it will not make any statements, written or verbal,
disparaging the performance or the personal or business reputation or character
of Geyer.
19. GENERAL PROVISIONS.
19.1 Geyer acknowledges that no promise has been made to him
that is not contained in this Agreement and the attachments hereto. Rather, this
Agreement and the attachments hereto (including the Stock Option Agreement and
the Confidentiality Agreement) constitute the entire
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agreement between Geyer and Anacomp. This Agreement may not be amended or
modified unless it is done so in a writing, signed by both Geyer and the
president of Anacomp.
19.2 The provisions of this Agreement are severable, and if
any one or more provisions may be determined to be judicially unenforceable, in
whole or in part, the remaining provisions shall nevertheless be binding and
enforceable.
19.3 In any action at law or equity between the parties
seeking enforcement of any of the terms and provisions of this Agreement or the
attachments hereto, the prevailing party in such action shall be awarded, in
addition to damages or other relief, its reasonable costs and expenses,
including, but not limited to, taxable costs and reasonable attorneys' fees.
Such recovery shall also include out-of-pocket expenses and attorneys' fees on
appeal, if any. The court shall determine the prevailing party, whether or not
the dispute or controversy proceeds to final judgment.
19.4 This Agreement shall be binding upon the parties hereto
and their representatives, successors, assigns and heirs, and shall inure to the
benefit of said parties and all other persons and entities released herein.
Geyer shall not be entitled to assign any of his rights or obligations under
this Agreement.
19.5 This Agreement shall be governed by the laws of the State
of California.
THE PARTIES TO THIS AGREEMENT, WITH THE FULL OPPORTUNITY TO OBTAIN THE
BENEFIT OF REPRESENTATION AND ADVICE OF COUNSEL, HAVE READ THE FOREGOING
AGREEMENT, AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN.
WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
dates shown below.
Dated:
------------ ----------------------------------------------
Frederick F. Geyer
ANACOMP, INC.
Dated: By:
------------ -------------------------------------------
William C. Ater
Senior Vice President and Chief
Administrative Officer
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<PAGE>
EMPLOYMENT AGREEMENT
BETWEEN
ANACOMP, INC.
("ANACOMP")
with offices located at
12365 Crosthwaite Circle
Poway, California 92064
and
DONALD W. THURMAN
("EMPLOYEE")
Date of Agreement: DECEMBER 15, 1998
-----------------
Effective Date of Agreement: OCTOBER 1, 1998
-----------------
Date of Expiration of Agreement: SEPTEMBER 30, 2001
-----------------
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EMPLOYMENT AGREEMENT
This Agreement is entered into between ANACOMP, INC. or any of its
subsidiaries or affiliates (herein referred to as "ANACOMP") and EMPLOYEE. The
full identification of each party, date of Agreement, effective date of
Agreement, and date of expiration of Agreement are all included on the cover
sheet immediately preceding this page which is incorporated herein by this
reference. The following conditions and terms shall apply:
SECTION I
MERGER OF ALL PRIOR AGREEMENTS
1.1 MERGER. This Agreement and the letter agreement dated between the
parties shall supersede and terminate all prior employment contracts and
agreements between EMPLOYEE and ANACOMP. In the event of any conflict between
this Agreement and such letter agreement, the terms of this Agreement shall
govern.
SECTION II
SCOPE AND TERM OF EMPLOYMENT, COMPENSATION
2.1 SCOPE OF EMPLOYMENT. ANACOMP and EMPLOYEE mutually agree that
Addendum I, attached hereto and incorporated herein by this reference, is
intended to define the scope of employment, base salary, and incentive
compensation.
2.2 EMPLOYMENT TERM. Subject always to termination provisions as
provided elsewhere in this Agreement, the term of this Agreement shall begin on
the Effective Date of Agreement and shall terminate on the Date of Expiration of
Agreement, both as shown on the cover sheet. Unless otherwise terminated as
provided elsewhere herein, this Agreement shall automatically renew after
expiration date on an annual basis unless either party gives the other party
thirty (30) days prior written notice requesting that said Agreement not be
renewed. If this Agreement is not renewed and EMPLOYEE continues working beyond
Termination Date at the request of ANACOMP, said employment shall be on a
month-to-month basis. If, at the expiration of the original two-year term or any
renewal term, ANACOMP declines to renew this Agreement and does not request that
EMPLOYEE continue working, of if ANACOMP terminates the month-to-month
employment basis described in the previous sentence, EMPLOYEE shall be entitled
to all benefits due him under this Agreement and not previously paid, a
severance payment equal to EMPLOYEE's prior twelve months' salary, payable in a
lump sum or biweekly at EMPLOYEE's option, health benefits until other
employment is secured or for twelve months, whichever is sooner, and the
immediate vesting of all of EMPLOYEE's existing already awarded options to
acquire ANACOMP common stock. If, on the other hand, EMPLOYEE elects not to
renew the Agreement, EMPLOYEE shall only be entitled to all benefits due him
under the Agreement through the end of the then term of the Agreement.
2.3 COMPENSATION. Compensation is confidential and is to be discussed
only with the officers of ANACOMP, as required.
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SECTION III
FRINGE BENEFITS
3.1 BENEFITS. In addition to the regular compensation, EMPLOYEE shall
be entitled to the normally available employee fringe benefits including regular
holidays, vacations and health insurance. ANACOMP, however, reserves the right
to change or alter these fringe benefits from time to time with the
understanding that the EMPLOYEE will be treated on an equal basis with other
employees of similar status.
SECTION IV
INSURANCE ON EMPLOYEE
4.1 INSURANCE. EMPLOYEE agrees that ANACOMP may, at its option and
expense, obtain life insurance on the life of the EMPLOYEE and the ownership of
all such policies and the proceeds therefrom shall be the sole property of
ANACOMP. EMPLOYEE agrees to undergo a routine physical examination for insurance
purposes within fifteen (15) days upon the request and at the expense of
ANACOMP.
SECTION V
RELOCATION
5.1 RELOCATION. EMPLOYEE agrees that it is a condition of his
employment that he relocate to Poway, California by January 31, 1999. He further
agrees that such relocation will not trigger a termination of this Agreement nor
a right to receive the Severance Allowance pursuant to Section 6.4.2 hereof. For
the purpose of this Agreement, "relocate to Poway" shall mean that EMPLOYEE
normally lives in the vicinity of Poway such that he can attend ANACOMP's office
located in Poway on a regular daily basis, except when traveling on Company
business, or on vacation or holiday.
5.2 RELOCATION ALLOWANCE. Anacomp will pay EMPLOYEE a relocation
allowance of $150,000 in a lump sum subsequent to January 1, 1999, within five
days of EMPLOYEE's request for same. If EMPLOYEE resigns or is terminated for
cause prior to the expiration of the original term of this Agreement, EMPLOYEE
agrees to repay to the Company a prorata amount of this severance allowance
based on the termination date (1st year of Agreement - $150,000; 2nd year -
$100,000; 3rd year - $50,000).
5.3 MOVE-BACK ALLOWANCE. If Anacomp terminates EMPLOYEE under Section
6.1(a), (d) or (f) below during the original term of this Agreement, Anacomp
agrees to pay the cost to physically relocate EMPLOYEE's household goods and
personal automobile back to Atlanta, GA.
SECTION VI
TERMINATION
6.1 COMPENSATION AND BENEFITS UPON TERMINATION. This Agreement may be
terminated prior to the expiration of the initial term or any renewal term by
any of the following events:
(a) mutual written agreement expressed in a single document signed by
both ANACOMP and EMPLOYEE;
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<PAGE>
(b) voluntary written resignation by EMPLOYEE given to ANACOMP ninety
(90) days prior to the date of resignation;
(c) death of EMPLOYEE;
(d) written notice of termination by ANACOMP without cause as defined
in Section 6.2;
(e) written notice of termination by ANACOMP with cause as defined in
Section 6.3; or
(f) the occurrence of any of the events specified in Section 6.4.1,
which EMPLOYEE elects to treat as a termination.
Upon termination for any of the foregoing reasons, EMPLOYEE shall
continue to render his services and shall be paid his regular compensation and
benefits up to the date of termination. If this Agreement is terminated under
Sections 6.1(b), 6.1(c) or 6.1(e), no Severance Allowance (as defined below)
shall be paid to EMPLOYEE (except, with respect to any termination pursuant to
Section 6.1(e), as otherwise provided in Section 6.3). If this Agreement is
terminated under Sections 6.1(a), 6.1(d) or 6.1(f), then ANACOMP shall pay to
EMPLOYEE a severance allowance equal to the EMPLOYEE's prior twelve months cash
compensation, payable in a lump sum or biweekly at EMPLOYEE's option, health
benefits until other employment is secured or for twelve months, whichever is
sooner, and all of EMPLOYEE's existing already awarded options to acquire
ANACOMP common stock shall immediately vest (collectively, the "Severance
Allowance"). This Severance Allowance is in addition to the regular compensation
and benefits which EMPLOYEE shall receive up to the date of termination. In the
event of such termination, this Agreement shall be deemed terminated for all
purposes except to the extent otherwise herein provided.
6.2 TERMINATION WITHOUT CAUSE. If ANACOMP concludes that EMPLOYEE's
services are no longer required, this Agreement may be terminated without cause
by giving EMPLOYEE written notice thereof. The noninsurability of EMPLOYEE,
either present or future, does not constitute grounds for termination under this
or any other section of the Agreement. If EMPLOYEE is terminated under this
section, ANACOMP shall pay EMPLOYEE the compensation, benefits and Severance
Allowance provided in Section 6.1 above.
6.3 TERMINATION WITH CAUSE.
6.3.1 ANACOMP may immediately terminate this Agreement at any
time with cause upon written notice to the EMPLOYEE specifying the cause and
effective date of termination. As used in this section, "cause" shall mean only
the following:
(i) Inability of EMPLOYEE, as determined by ANACOMP, to
perform EMPLOYEE's assigned duties on a fulltime basis for any continuous period
of one hundred twenty (120) days or a total of one hundred eighty (180) days in
any twelve (12) month period, which period shall commence on the initial date of
this Agreement and every anniversary thereafter.
(ii) The willful and continued failure by EMPLOYEE
substantially to perform his duties and obligations, including the continued
failure to meet business goals, or the willful engagement by EMPLOYEE in
misconduct which is materially injurious to ANACOMP, monetarily or otherwise.
For purposes of this subsection, no act or failure to act on EMPLOYEE's part
shall be considered
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<PAGE>
"willful" unless done or omitted to be done by EMPLOYEE in bad faith and without
reasonable belief that his action or omission was in the best interests of
ANACOMP.
(iii) The failure of EMPLOYEE to relocate permanently to
Poway, California by .
6.3.2 Employee agrees that in the event written notice of
termination is given under this Section 6.3, the EMPLOYEE agrees to treat the
contents of said notice as privileged and EMPLOYEE shall have no action against
ANACOMP or any of its officers, agents or employees due to the contents of said
notice unless the contents are intentionally false and malicious. If EMPLOYEE is
terminated under this Section 6.3, he shall receive no Severance Allowance at
the time of such termination. If EMPLOYEE is given notice of termination under
this Section 6.3 and it is later established that no "cause" existed, EMPLOYEE
shall be entitled to all compensation, benefits and allowances due him for the
period following such alleged termination and through the date of such
determination and shall be entitled to the Severance Allowance, plus legal
interest from the date of termination and all reasonable attorneys' fees
incurred by EMPLOYEE in contesting the notice of termination.
6.4 DEMOTION, TRANSFER OR REDUCTION IN COMPENSATION, MERGER, TRANSFER
OF ASSETS, CHANGE IN CONTROL OR BUSINESS DISCONTINUATION.
6.4.1 DEMOTION, TRANSFER, OR REDUCTION IN COMPENSATION. If any
of the following takes place:
(1) EMPLOYEE is demoted, including for these purposes (i) any material
change in the title or duties described in Addendum I hereto, (ii) any
significant reduction or change by ANACOMP in the functions, duties or
responsibilities of EMPLOYEE under this Agreement, or (iii) EMPLOYEE no longer
reports to the Chief Executive Officer.
(2) a transfer of EMPLOYEE to another location, other than Poway or San
Diego, California, or
(3) any reduction in annual base salary (but not including a reduction
in the incentive bonus received by EMPLOYEE resulting from his or ANACOMP's
performance under any of the bonus plans discussed in Addendum II hereof),
EMPLOYEE may, in his sole discretion, elect to treat any such occurrence as a
termination of this Agreement by giving written notice of such election to
ANACOMP, entitling EMPLOYEE to payment of the compensation, benefits and
Severance Allowance provided in Section 6.1 above. In the event ANACOMP disputes
any election made by EMPLOYEE pursuant to this Section 6.4.1, ANACOMP shall
notify EMPLOYEE in writing of such dispute within ten (10) days of receiving
EMPLOYEE's written election and both parties shall proceed to negotiate a
resolution of such dispute in good faith. If ANACOMP does not so notify EMPLOYEE
within the ten (10) day period, ANACOMP shall be deemed to have accepted
EMPLOYEE's election and shall pay all compensation, benefits and Severance
Allowance provided in Section 6.1 above.
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<PAGE>
6.4.2 MERGER, TRANSFER OF ASSETS, CHANGE IN CONTROL OR
BUSINESS DISCONTINUATION. In the event of any:
(a) merger or consolidation where ANACOMP is not the
consolidated or surviving company and the surviving or resulting company does
not expressly agree to be bound by and have the benefits of the provisions of
this Agreement, or
(b) transfer of all or substantially all of the assets of
ANACOMP and the transferee of ANACOMP's assets does not expressly agree to be
bound by and have the benefits of the provisions of this Agreement, or
(c) change in control of ANACOMP of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934 as in effect on the
day thereof (the "Exchange Act"), provided that, without limitation, such a
change in control shall be deemed to have occurred if: (i) any person or persons
acting in concert (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial holder directly or indirectly of
securities of ANACOMP representing 25% or more of the combined voting power of
ANACOMP's then outstanding securities; (ii) during any period of two (2)
consecutive years, individuals who at the beginning of such period constitute
the Board cease for any reason to constitute a majority thereof, unless the
election or nomination for election by ANACOMP's shareholders of each new
director was approved by a vote of at least 2/3 of the directors who were
directors at the beginning of such period; or (iii) transfer of all or
substantially all of the stock of ANACOMP and the transferee of ANACOMP's stock
does not expressly agree to be bound by and have the benefits of the provisions
of this Agreement, or
(d) discontinuation of the business by ANACOMP, then, in such
event, EMPLOYEE shall remain subject to and have no greater rights that he would
otherwise be entitled to receive under Sections 6.1, 6.2, 6.3 and 6.4.1 hereof.
6.5 RETURN OF COMPANY PROPERTY. EMPLOYEE agrees to return all property
of ANACOMP, including but not limited to, details of equipment, prices,
specifications, programs, customer and prospective customer lists and any other
proprietary data or objects acquired through the EMPLOYEE"s employment with
ANACOMP, within seven (7) days after termination of employment, regardless of
the reason therefor.
6.6 WAIVER OF CLAIMS. All Severance Allowance payments made by ANACOMP
to EMPLOYEE pursuant to Section II hereof or this Section VI shall be in full
and complete payment of any and all claims that EMPLOYEE may have against
ANACOMP regarding his employment or the termination thereof, and EMPLOYEE hereby
expressly waives all rights that he may have to any other payments or to bring
any other claims based upon his employment or the termination thereof. Except
for the qualification with respect to employee benefits described in Section II
above, all Severance Allowance payments due from ANACOMP to EMPLOYEE under this
Agreement are absolute, and shall not be diminished or otherwise affected by
virtue of EMPLOYEE's securing alternative employment. At the time he receives
his Severance Allowance, EMPLOYEE agrees that he will execute a release
agreement in favor of ANACOMP.
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SECTION VII
RESTRICTIVE COVENANT AND NON-COMPETITION
CONFIDENTIAL INFORMATION
7.1 NON-COMPETITION. EMPLOYEE and ANACOMP shall enter into the
"Confidentiality, Non-Competition and Non-Disclosure Agreement" attached hereto
as Addendum III. In the event of any conflict between the terms of this
Agreement and such Non-Disclosure Agreement, this Agreement shall govern. If
EMPLOYEE violates such Non-Disclosure Agreement, ANACOMP shall have the right to
stop all termination payments due under Sections II and/or VI hereof, which have
not yet been fully paid to EMPLOYEE. EMPLOYEE agrees that, upon his relocation
to Poway, California, he will, upon request by ANACOMP, execute a revised
Non-Disclosure Agreement that will comply with the laws of the State of
California.
The provisions of this Section shall not prevent EMPLOYEE from
complying with the terms of this Agreement with ANACOMP nor from owning any
shares of stock of any competitor of ANACOMP so long as such shares are
regularly traded on a recognized security exchange or are listed for trade by
NASDAQ in the Over-the-Counter Market.
SECTION VIII
WARRANTIES AND REPRESENTATIONS
8.1 EMPLOYEE hereby warrants and represents as follows:
(1) That the execution of this Agreement and the discharge of
EMPLOYEE's obligations hereunder will not breach or conflict with any other
contract, agreement or understanding between EMPLOYEE and any other party or
parties.
(2) That EMPLOYEE has ideas, information and know-how relating to the
type of business conducted by ANACOMP and EMPLOYEE's disclosure of such ideas,
information and know-how to ANACOMP will not conflict with or violate the rights
of any third party or parties with respect thereto.
SECTION IX
REMEDIES
9.1 The parties agree that the remedy for breach of this Agreement
shall include actions in equity for injunctive relief as well as money damages.
The remedies given to or reserved by each party hereunder shall be cumulative
and not exclusive of any other remedy available under law.
SECTION X
NO WAIVER
10.1 The failure of EMPLOYER to terminate this Agreement for the breach
of any condition or covenant herein by the EMPLOYEE shall not affect EMPLOYER's
right to terminate for subsequent breaches of the same or other conditions or
covenants. The failure of either party to enforce at any time or for any period
of time any of the provisions of this Agreement shall not be construed as a
waiver of such provisions or of the right of the party thereafter to enforce
each and every such provision.
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ARTICLE XI
BENEFIT
11.1 This Agreement shall bind, benefit, and be enforceable by ANACOMP,
its successors and assigns, and by EMPLOYEE, EMPLOYEE's heirs, executors,
administrators, and legal representatives.
ARTICLE XII
SEVERABILITY
12.1 Should any provision of this Agreement not be enforceable in any
jurisdiction, the remainder of the Agreement shall not be affected thereby.
ARTICLE XIII
SURVIVAL
13.1 The obligations contained in Sections II, VI, and VII shall
survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the day, month and year stated on the cover page
of this Agreement, which Agreement shall be effective only upon approval by
ANACOMP, INC., as evidenced by the authorized signature of an officer of ANACOMP
below.
APPROVED BY:
ANACOMP, INC. EMPLOYEE:
By:
Ralph W. Koehrer Donald W. Thurman
President and Chief Executive Officer
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ADDENDUM I
TO
EMPLOYMENT AGREEMENT DATED DECEMBER 15, 1998
BETWEEN
ANACOMP, INC. ("ANACOMP")
AND
DONALD W. THURMAN ("EMPLOYEE")
SCOPE OF EMPLOYMENT
ANACOMP will employ the EMPLOYEE in the capacity of Executive Vice
President of ANACOMP, effective October 1, 1998. EMPLOYEE will be responsible
for managing ANACOMP's Document Management Solutions division. EMPLOYEE will
report to the President and Chief Executive Officer.
LOCATION
EMPLOYEE will be based at ANACOMP's Poway, California facility and will
be required to relocate there permanently on or before January 31, 1999.
BASE SALARY
For all services rendered by EMPLOYEE under this Agreement, EMPLOYEE
shall receive a Base Salary of $200,000 per year payable bi-weekly, effective
October 1, 1998. Base Salary will be reviewed at the beginning of each fiscal
year.
INCENTIVE COMPENSATION
BONUSES
In addition to Base Salary, EMPLOYEE shall receive an annual bonus
opportunity of $200,000, payable quarterly or after year-end, as more
particularly described in the EMPLOYEE's Compensation Plan attached hereto as
Addendum II. This annual bonus will take effect on October 1, 1998. The annual
bonus shall be established at the beginning of each fiscal year.
ANACOMP, INC. EMPLOYEE
By:
Ralph W. Koehrer Donald W. Thurman
President and Chief Executive
Officer
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ADDENDUM II
TO
EMPLOYMENT AGREEMENT DATED
BETWEEN
ANACOMP, INC. ("ANACOMP")
AND
("EMPLOYEE")
FY COMP PLAN EXECUTIVE SUMMARY
FOR SENIOR MANAGEMENT REFERENCE ONLY / NOT FOR DISTRIBUTION
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ADDENDUM III
TO
EMPLOYMENT AGREEMENT DATED DECEMBER 15, 1998
BETWEEN
ANACOMP, INC. ("ANACOMP")
AND
DONALD W. THURMAN ("EMPLOYEE")
In consideration of the employment or continued employment of EMPLOYEE by
Anacomp, Inc. and its successors, assigns, subsidiaries, or duly authorized
representatives (hereinafter collectively referred to as "Anacomp"), EMPLOYEE
hereby agrees as follows:
1. CONFIDENTIALITY AND TRADE SECRETS. The EMPLOYEE recognizes and acknowledges
that during the course of his/her employment, he/she will have access to and
become acquainted with confidential, trade secret and proprietary information
about Anacomp's businesses and customers (hereinafter collectively referred to
as the "Protected Information"). The parties hereto recognize that the Protected
Information available to EMPLOYEE may pertain both to customers and accounts
handled by EMPLOYEE personally as well as accounts with which EMPLOYEE is not
personally involved. The parties agree that all Protected Information
constitutes a trade secret of Anacomp. Protected Information may include, but is
not limited to, the names, addresses, and requirements of any customer or
prospective customer of Anacomp; the terms (including price terms) of
contractual relations with such customers; special requirements of such
customers; the identities of individual contacts at such customers; and any
other information relating to Anacomp's research, operations, business
relationships, engineering data or results, specifications, concepts, methods,
processes, rates or schedules, vendor information, products or services
(including prices, costs, sales or content), financial information or measures,
business methods, future business plans, data bases, computer programs, designs,
models, operating procedures, and knowledge of the organization. The EMPLOYEE
recognizes and acknowledges that all of the Protected Information is valuable,
special and essential to the successful and effective conduct of Anacomp's
business. Therefore, the EMPLOYEE shall not, during his/her employment with
Anacomp or at any time thereafter, regardless of the reasons for leaving that
employment, use, disclose or communicate, directly or indirectly, any Protected
Information to any third party for any reason or purpose whatsoever, except as
required in the course of his/her employment with Anacomp. Further, upon the
termination of his/her employment with Anacomp, for any reason whatsoever,
EMPLOYEE shall promptly return any and all copies of any written material,
documents, computer hardware and software, tools and equipment belonging to
Anacomp or relating to the business of Anacomp in his/her possession.
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2. NON-COMPETITION.
2.1 NON-COMPETITION WHILE AN EMPLOYEE OR CONSULTANT. While an employee of
Anacomp, or as a consultant to Anacomp after his termination of employment,
EMPLOYEE agrees not to compete in any manner, either directly or indirectly as
an employee, consultant, investor or owner, whether for compensation or
otherwise, with Anacomp, or to assist any other person or entity to compete with
Anacomp. Further, while an employee of Anacomp, EMPLOYEE agrees not to engage in
any other employment without the prior written permission of Anacomp.
3. NON-SOLICITATION.
3.1 NON-SOLICITATION OF EMPLOYEES. During the term of his/her employment at
Anacomp and for two (2) years following the termination for any reason of such
employment, EMPLOYEE agrees, either on his/her own behalf or on behalf of any
other person or entity, directly or indirectly, not to hire, solicit, or
encourage to leave the employ of Anacomp any person who is then an employee of
Anacomp. The foregoing restrictions shall apply to employees located in all
geographical areas where EMPLOYEE performed services for Anacomp during the
two-year period prior to his/her termination, including areas for which EMPLOYEE
had supervisory authority.
3.2 NON-SOLICITATION OF CUSTOMERS. Because of EMPLOYEE's access to
Protected Information of Anacomp, EMPLOYEE agrees that, during the term of
his/her employment at Anacomp and for two (2) years following the termination
for any reason of such employment, he/she will not, directly or indirectly, in
connection with the products and services offered by Anacomp and those products
and services which are competitive with the products and services of Anacomp:
(a) solicit, attempt to obtain, or in any way transact business with any
customers which were customers of Anacomp during his/her employment or at the
time of his/her termination; (b) aid or assist any other party in the
solicitation of any such customers; or (c) interfere with Anacomp's
relationships with any of its customers by soliciting such customers or inducing
them to discontinue their relationships with Anacomp. Products and services
which are competitive with the products and services of Anacomp include but are
not limited to: MICROGRAPHICS PRODUCTS (computer output to
microfilm-COM-equipment and software, cameras and film, processors, duplicators,
retrieval and display equipment and software, computer aided
retrieval-CAR-systems, readers, reader printers, other micrographics equipment,
micrographics equipment maintenance, micrographics consumable supplies and
accessories, records management software); OUTPUT SERVICES (computer output to
microfilm-COM, source document microfilming, output of data to compact disk,
laser printing, conversion of paper and film to electronic images, micrographic
or electronic imaging system design, consulting and education, system
implementation and integration); ELECTRONIC IMAGE MANAGEMENT PRODUCTS (hardware,
software, magnetics products including tapes, tape drives and optical media
supplies, maintenance of electronic imaging equipment); ELECTRONIC IMAGE
MANAGEMENT SERVICES (conversion of computer generated data to optical or laser
disk, COLD, electronic document imaging and workflow, conversion of paper
documents to electronic images, system design consulting and education, system
implementation and integration, conversion of microfilm to electronic images);
and ARCHIVAL SERVICES (storage, management and retrieval of all forms of
customer information and business records, including but not limited to paper,
microfiche, magnetic media and digital storage media). The foregoing
restrictions shall apply to all geographical areas where EMPLOYEE performed
services for Anacomp during the two-year period prior to his/her termination,
including areas for which EMPLOYEE had supervisory authority.
4. REMEDIES. EMPLOYEE acknowledges that compliance with Sections 1, 2 and 3
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of this Agreement is necessary to protect the business and good will of
Anacomp and that a breach of those sections will irreparably and continually
damage Anacomp for which money damages may not be adequate. Therefore,
EMPLOYEE agrees that, in the event he/she breaches or threatens to breach any
of these Sections, Anacomp shall be entitled to both a preliminary or
permanent injunction in order to prevent the continuation of such harm and
money damages insofar as they can be determined. Nothing in this Agreement,
however, shall be construed to prohibit Anacomp from also pursuing any other
remedy, the parties having agreed that all remedies shall be cumulative.
5. INVENTIONS. EMPLOYEE agrees that all inventions, improvements, discoveries,
systems, techniques, ideas, processes, programs, and other things of value made
or conceived in whole or in part by EMPLOYEE while an employee of Anacomp shall
be and remain the sole and exclusive property of Anacomp, and he/she will
disclose all such things of value to Anacomp and will cooperate with Anacomp to
insure that the ownership by Anacomp of such things of value is protected.
Nothing in this Section is meant to apply to an invention for which no
equipment, supplies, facility or trade secret information of Anacomp was used,
which was developed entirely on EMPLOYEE's own time, and which does not relate
to Anacomp's business, research, development or from any work performed by
EMPLOYEE for Anacomp.
6. EMPLOYMENT. This Agreement does not confer upon EMPLOYEE any rights to
continue in the employ of Anacomp or affect in any way Anacomp's right to
terminate his/her employment at any time.
7. SEVERABILITY. If any provision or clause of this Agreement, or portion
thereof, shall be held by any court or other tribunal of competent jurisdiction
to be illegal, void or unenforceable in such jurisdiction, the remainder of such
provisions shall not thereby be affected and shall be given full effect, without
regard to the invalid portion. It is the intention of the parties that, if any
court construes any provision or clause of this Agreement, or any portion
thereof, to be illegal, void or unenforceable because of the duration of such
provision or the area or matter covered thereby, such court shall reduce the
duration, area or matter of such provision and, in its reduced form, such
provision shall then be enforceable and shall be enforced.
8. BINDING EFFECT. The rights and obligations of this Agreement shall inure to
and be binding upon the parties and their respective heirs, successors and
assigns.
9. ATTORNEYS' FEES. In the event of any dispute, proceeding or litigation
concerning any controversy, claim or dispute between the parties hereto, arising
out of or relating to this Agreement or the interpretation or breach thereof,
each party shall pay its own expenses, attorneys' fees, expert fees, and costs
incurred therein or in the enforcement or collection of any judgment or award
rendered therein.
10. NO WAIVER. Anacomp's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, or prevent
Anacomp thereafter from enforcing each and every provision of this Agreement.
11. ENTIRE AGREEMENT. This Agreement represents the entire agreement between
EMPLOYEE and Anacomp, with respect to the subject matter hereof, superseding all
previous oral and written communications, representations, understandings or
agreements.
12. EMPLOYEE'S UNDERSTANDING. EMPLOYEE represents and warrants that he/she has
read each and every term of this Agreement and understands the serious
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duties and obligations imposed upon EMPLOYEE thereby. EMPLOYEE further
represents and warrants that he/she has had full and ample opportunity to
question Anacomp about this Agreement and each of its terms and to consult an
attorney regarding this Agreement and each of its terms. EMPLOYEE represents
that he/she is free to enter this Agreement and to perform each of its terms
and covenants. EMPLOYEE represents that he/she is not restricted or
prohibited, contractually or otherwise, from entering into and performing
this Agreement, and that his or her execution and performance of this
Agreement is not a violation or breach of any other agreement between
EMPLOYEE and any other person or entity.
DATED: , 19
------------------------
ANACOMP, INC.
By:
William C. Ater EMPLOYEE (signature)
Its: Senior Vice President, CAO & DONALD W. THURMAN
Secretary -----------------
EMPLOYEE (printed)
Current position
Current location
Social Security Number
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<PAGE>
EMPLOYMENT AGREEMENT
BETWEEN
ANACOMP, INC.
("ANACOMP")
with offices located at
11550 North Meridian Street
Suite 600
Carmel, Indiana 46032
and
GEORGE C. GASKIN
----------------
("EMPLOYEE")
Date of Agreement: SEPTEMBER 10,1997
-----------------
Effective Date of Agreement: SEPTEMBER 1, 1997
-----------------
Date of Expiration of Agreement: AUGUST 31, 1999
-----------------
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<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is entered into between ANACOMP, INC. or any of its
subsidiaries or affiliates (herein referred to as "ANACOMP") and EMPLOYEE.
The full identification of each party, date of Agreement, effective date of
Agreement, and date of expiration of Agreement are all included on the cover
sheet immediately preceding this page which is incorporated herein by this
reference. The following conditions and terms shall apply:
SECTION I
MERGER OF ALL PRIOR AGREEMENTS
1.1 MERGER. This Agreement and the letter agreement dated July 16,
1997 between the parties shall supersede and terminate all prior employment
contracts and agreements between EMPLOYEE and ANACOMP. In the event of any
conflict between this Agreement and such letter agreement, the terms of this
Agreement shall govern.
SECTION II
SCOPE AND TERM OF EMPLOYMENT, COMPENSATION
2.1 SCOPE OF EMPLOYMENT. ANACOMP and EMPLOYEE mutually agree that
Addendum I, attached hereto and incorporated herein by this reference, is
intended to define the scope of employment, base salary, and incentive
compensation.
2.2 EMPLOYMENT TERM. Subject always to termination provisions as
provided elsewhere in this Agreement, the term of this Agreement shall begin on
the Effective Date of Agreement and shall terminate on the Date of Expiration of
Agreement, both as shown on the cover sheet. Unless otherwise terminated as
provided elsewhere herein, this Agreement shall automatically renew after
expiration date on an annual basis unless either party gives the other party
thirty (30) days prior written notice requesting that said Agreement not be
renewed. If this Agreement is not renewed and EMPLOYEE continues working beyond
Termination Date at the request of ANACOMP, said employment shall be on a
month-to-month basis. If, at the expiration of the original two-year term or any
renewal term, ANACOMP declines to renew this Agreement and does not request that
EMPLOYEE continue working, of if ANACOMP terminates the month-to-month
employment basis described in the previous sentence, EMPLOYEE shall be entitled
to all benefits due him under this Agreement and not previously paid, a
severance payment equal to EMPLOYEE's prior twelve months' salary, payable in a
lump sum or biweekly at EMPLOYEE's option, health benefits until other
employment is secured or for twelve months, whichever is sooner, and the
immediate vesting of all of EMPLOYEE's existing already awarded options to
acquire ANACOMP common stock. If, on the other hand, EMPLOYEE elects not to
renew the Agreement, EMPLOYEE shall only be entitled to all benefits due him
under the Agreement through the end of the then term of the Agreement.
2.3 COMPENSATION. Compensation is confidential and is to be discussed
only with the officers of ANACOMP, as required.
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<PAGE>
SECTION III
FRINGE BENEFITS
3.1 BENEFITS. In addition to the regular compensation, EMPLOYEE shall
be entitled to the normally available employee fringe benefits including regular
holidays, vacations and health insurance. ANACOMP, however, reserves the right
to change or alter these fringe benefits from time to time with the
understanding that the EMPLOYEE will be treated on an equal basis with other
employees of similar status.
SECTION IV
INSURANCE ON EMPLOYEE
4.1 INSURANCE. EMPLOYEE agrees that ANACOMP may, at its option and
expense, obtain life insurance on the life of the EMPLOYEE and the ownership of
all such policies and the proceeds therefrom shall be the sole property of
ANACOMP. EMPLOYEE agrees to undergo a routine physical examination for insurance
purposes within fifteen (15) days upon the request and at the expense of
ANACOMP.
SECTION V
RELOCATION
5.1 RELOCATION. EMPLOYEE agrees that it is a condition of his
employment that he relocate to Poway, California by September 2, 1997. He
further agrees that such relocation will not trigger a termination of this
Agreement nor a right to receive the Severance Allowance pursuant to Section
6.4.2 hereof. For the purpose of this Agreement, "relocate to Poway" shall mean
that EMPLOYEE normally lives in the vicinity of Poway such that he can attend
ANACOMP's office located in Poway on a regular daily basis.
SECTION VI
TERMINATION
6.1 COMPENSATION AND BENEFITS UPON TERMINATION. This Agreement may be
terminated prior to the expiration of the initial term or any renewal term by
any of the following events:
(a) mutual written agreement expressed in a single document signed by
both ANACOMP and EMPLOYEE;
(b) voluntary written resignation by EMPLOYEE given to ANACOMP ninety
(90) days prior to the date of resignation;
(c) death of EMPLOYEE;
(d) written notice of termination by ANACOMP without cause as defined
in Section 6.2;
(e) written notice of termination by ANACOMP with cause as defined in
Section 6.3; or
(f) the occurrence of any of the events specified in Section 6.4.1,
which EMPLOYEE elects to treat as a termination.
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<PAGE>
Upon termination for any of the foregoing reasons, EMPLOYEE shall
continue to render his services and shall be paid his regular compensation and
benefits up to the date of termination. If this Agreement is terminated under
Sections 6.1(b), 6.1(c) or 6.1(e), no Severance Allowance (as defined below)
shall be paid to EMPLOYEE (except, with respect to any termination pursuant to
Section 6.1(e), as otherwise provided in Section 6.3). If this Agreement is
terminated under Sections 6.1(a), 6.1(d) or 6.1(f), then ANACOMP shall pay to
EMPLOYEE a severance allowance equal to the EMPLOYEE's prior twelve months cash
compensation, payable in a lump sum or biweekly at EMPLOYEE's option, health
benefits until other employment is secured or for twelve months, whichever is
sooner, and all of EMPLOYEE's existing already awarded options to acquire
ANACOMP common stock shall immediately vest (collectively, the "Severance
Allowance"). This Severance Allowance is in addition to the regular compensation
and benefits which EMPLOYEE shall receive up to the date of termination. In the
event of such termination, this Agreement shall be deemed terminated for all
purposes except to the extent otherwise herein provided.
6.2 TERMINATION WITHOUT CAUSE. If ANACOMP concludes that EMPLOYEE's
services are no longer required, this Agreement may be terminated without cause
by giving EMPLOYEE written notice thereof. The noninsurability of EMPLOYEE,
either present or future, does not constitute grounds for termination under this
or any other section of the Agreement. If EMPLOYEE is terminated under this
section, ANACOMP shall pay EMPLOYEE the compensation, benefits and Severance
Allowance provided in Section 6.1 above.
6.3 TERMINATION WITH CAUSE.
6.3.1 ANACOMP may immediately terminate this Agreement at any
time with cause upon written notice to the EMPLOYEE specifying the cause and
effective date of termination. As used in this section, "cause" shall mean only
the following:
(i) Inability of EMPLOYEE, as determined by ANACOMP, to
perform EMPLOYEE's assigned duties on a fulltime basis for any continuous period
of one hundred twenty (120) days or a total of one hundred eighty (180) days in
any twelve (12) month period, which period shall commence on the initial date of
this Agreement and every anniversary thereafter.
(ii) The willful and continued failure by EMPLOYEE
substantially to perform his duties and obligations, including the continued
failure to meet business goals, or the willful engagement by EMPLOYEE in
misconduct which is materially injurious to ANACOMP, monetarily or otherwise.
For purposes of this subsection, no act or failure to act on EMPLOYEE's part
shall be considered "willful" unless done or omitted to be done by EMPLOYEE in
bad faith and without reasonable belief that his action or omission was in the
best interests of ANACOMP.
(iii) The failure of EMPLOYEE to relocate permanently to
Poway, California by September 2, 1997.
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<PAGE>
6.3.2 Employee agrees that in the event written notice of
termination is given under this Section 6.3, the EMPLOYEE agrees to treat the
contents of said notice as privileged and EMPLOYEE shall have no action against
ANACOMP or any of its officers, agents or employees due to the contents of said
notice unless the contents are intentionally false and malicious. If EMPLOYEE is
terminated under this Section 6.3, he shall receive no Severance Allowance at
the time of such termination. If EMPLOYEE is given notice of termination under
this Section 6.3 and it is later established that no "cause" existed, EMPLOYEE
shall be entitled to all compensation, benefits and allowances due him for the
period following such alleged termination and through the date of such
determination and shall be entitled to the Severance Allowance, plus legal
interest from the date of termination and all reasonable attorneys' fees
incurred by EMPLOYEE in contesting the notice of termination.
6.4 DEMOTION, TRANSFER OR REDUCTION IN COMPENSATION, MERGER, TRANSFER
OF ASSETS, CHANGE IN CONTROL OR BUSINESS DISCONTINUATION.
6.4.1 DEMOTION, TRANSFER, OR REDUCTION IN COMPENSATION. If any
of the following takes place:
(1) EMPLOYEE is demoted, including for these purposes (i) any material
change in the title or duties described in Addendum I hereto, or (ii) any
significant reduction or change by ANACOMP in the functions, duties or
responsibilities of EMPLOYEE under this Agreement,
(2) a transfer of EMPLOYEE to another location, other than Poway or San
Diego, California, or
(3) any reduction in annual base salary (but not including a reduction
in the incentive bonus received by EMPLOYEE resulting from his or ANACOMP's
performance under any of the bonus plans discussed in Addendum II hereof),
EMPLOYEE may, in his sole discretion, elect to treat any such occurrence as a
termination of this Agreement by giving written notice of such election to
ANACOMP, entitling EMPLOYEE to payment of the compensation, benefits and
Severance Allowance provided in Section 6.1 above. In the event ANACOMP disputes
any election made by EMPLOYEE pursuant to this Section 6.4.1, ANACOMP shall
notify EMPLOYEE in writing of such dispute within ten (10) days of receiving
EMPLOYEE's written election and both parties shall proceed to negotiate a
resolution of such dispute in good faith. If ANACOMP does not so notify EMPLOYEE
within the ten (10) day period, ANACOMP shall be deemed to have accepted
EMPLOYEE's election and shall pay all compensation, benefits and Severance
Allowance provided in Section 6.1 above.
6.4.2 MERGER, TRANSFER OF ASSETS, CHANGE IN CONTROL OR
BUSINESS DISCONTINUATION. In the event of any:
(a) merger or consolidation where ANACOMP is not the
consolidated or surviving company and the surviving or resulting company does
not expressly agree to be bound by and have the benefits of the provisions of
this Agreement, or
(b) transfer of all or substantially all of the assets of
ANACOMP and the transferee of ANACOMP's assets does not expressly agree to be
bound by and have the benefits of the provisions of this Agreement, or
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<PAGE>
(c) change in control of ANACOMP of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934 as in effect on the
day thereof (the "Exchange Act"), provided that, without limitation, such a
change in control shall be deemed to have occurred if: (i) any person or persons
acting in concert (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial holder directly or indirectly of
securities of ANACOMP representing 25% or more of the combined voting power of
ANACOMP's then outstanding securities; (ii) during any period of two (2)
consecutive years, individuals who at the beginning of such period constitute
the Board cease for any reason to constitute a majority thereof, unless the
election or nomination for election by ANACOMP's shareholders of each new
director was approved by a vote of at least 2/3 of the directors who were
directors at the beginning of such period; or (iii) transfer of all or
substantially all of the stock of ANACOMP and the transferee of ANACOMP's stock
does not expressly agree to be bound by and have the benefits of the provisions
of this Agreement, or
(d) discontinuation of the business by ANACOMP,
then, in such event, EMPLOYEE shall remain subject to and have no greater rights
that he would otherwise be entitled to receive under Sections 6.1, 6.2, 6.3 and
6.4.1 hereof.
6.5 RETURN OF COMPANY PROPERTY. EMPLOYEE agrees to return all property
of ANACOMP, including but not limited to, details of equipment, prices,
specifications, programs, customer and prospective customer lists and any other
proprietary data or objects acquired through the EMPLOYEE"s employment with
ANACOMP, within seven (7) days after termination of employment, regardless of
the reason therefor.
6.6 WAIVER OF CLAIMS. All Severance Allowance payments made by ANACOMP
to EMPLOYEE pursuant to Section II hereof or this Section VI shall be in full
and complete payment of any and all claims that EMPLOYEE may have against
ANACOMP regarding his employment or the termination thereof, and EMPLOYEE hereby
expressly waives all rights that he may have to any other payments or to bring
any other claims based upon his employment or the termination thereof. Except
for the qualification with respect to employee benefits described in Section II
above, all Severance Allowance payments due from ANACOMP to EMPLOYEE under this
Agreement are absolute, and shall not be diminished or otherwise affected by
virtue of EMPLOYEE's securing alternative employment. At the time he receives
his Severance Allowance, EMPLOYEE agrees that he will execute a release
agreement in favor of ANACOMP.
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SECTION VII
RESTRICTIVE COVENANT AND NON-COMPETITION
CONFIDENTIAL INFORMATION
7.1 NON-COMPETITION. EMPLOYEE and ANACOMP shall enter into the
"Confidentiality, Non-Competition and Non-Disclosure Agreement" attached hereto
as Addendum III. In the event of any conflict between the terms of this
Agreement and such Non-Disclosure Agreement, this Agreement shall govern. If
EMPLOYEE violates such Non-Disclosure Agreement, ANACOMP shall have the right to
stop all termination payments due under Sections II and/or VI hereof, which have
not yet been fully paid to EMPLOYEE. EMPLOYEE agrees that, upon his relocation
to Poway, California, he will, upon request by ANACOMP, execute a revised
Non-Disclosure Agreement that will comply with the laws of the State of
California.
The provisions of this Section shall not prevent EMPLOYEE from
complying with the terms of this Agreement with ANACOMP nor from owning any
shares of stock of any competitor of ANACOMP so long as such shares are
regularly traded on a recognized security exchange or are listed for trade by
NASDAQ in the Over-the-Counter Market.
SECTION VIII
WARRANTIES AND REPRESENTATIONS
8.1 EMPLOYEE hereby warrants and represents as follows:
(1) That the execution of this Agreement and the discharge of
EMPLOYEE's obligations hereunder will not breach or conflict with any other
contract, agreement or understanding between EMPLOYEE and any other party or
parties.
(2) That EMPLOYEE has ideas, information and know-how relating to the
type of business conducted by ANACOMP and EMPLOYEE's disclosure of such ideas,
information and know-how to ANACOMP will not conflict with or violate the rights
of any third party or parties with respect thereto.
SECTION IX
REMEDIES
9.1 The parties agree that the remedy for breach of this Agreement
shall include actions in equity for injunctive relief as well as money damages.
The remedies given to or reserved by each party hereunder shall be cumulative
and not exclusive of any other remedy available under law.
SECTION X
NO WAIVER
10.1 The failure of EMPLOYER to terminate this Agreement for the breach
of any condition or covenant herein by the EMPLOYEE shall not affect EMPLOYER's
right to terminate for subsequent breaches of the same or other conditions or
covenants. The failure of either party to enforce at any time or for any period
of time any of the provisions of this Agreement shall not be construed as a
waiver of such provisions or of the right of the party thereafter to enforce
each and every such provision.
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ARTICLE XI
BENEFIT
11.1 This Agreement shall bind, benefit, and be enforceable by ANACOMP,
its successors and assigns, and by EMPLOYEE, EMPLOYEE's heirs, executors,
administrators, and legal representatives.
ARTICLE XII
SEVERABILITY
12.1 Should any provision of this Agreement not be enforceable in any
jurisdiction, the remainder of the Agreement shall not be affected thereby.
ARTICLE XIII
SURVIVAL
13.1 The obligations contained in Sections II, VI, and VII shall
survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the day, month and year stated on the cover page
of this Agreement, which Agreement shall be effective only upon approval by
ANACOMP, INC., as evidenced by the authorized signature of an officer of ANACOMP
below.
APPROVED BY:
ANACOMP, INC. EMPLOYEE:
By:
Ralph W. Koehrer George C. Gaskin
President and Chief Executive Officer
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ADDENDUM I
TO
EMPLOYMENT AGREEMENT DATED SEPTEMBER 10,1997
BETWEEN
ANACOMP, INC. ("ANACOMP")
AND
GEORGE C. GASKIN ("EMPLOYEE")
SCOPE OF EMPLOYMENT
ANACOMP will employ the EMPLOYEE in the capacity of Senior Vice
President, General Counsel, and Secretary of ANACOMP, effective upon the
EMPLOYEE'S permanent relocation to Poway. EMPLOYEE will be responsible for
managing ANACOMP's legal staff, handling ANACOMP's legal requirements and will
be the primary conduit for matters relating to ANACOMP's Board of Directors.
EMPLOYEE will report to the Chief Executive Officer in the interim, but that
reporting relationship may change and the EMPLOYEE understands that he may in
the future report to another position within the organization.
LOCATION
EMPLOYEE will be based at ANACOMP's Poway, California facility and will
be required to relocate there permanently on or before September 2, 1997.
BASE SALARY
For all services rendered by EMPLOYEE under this Agreement, EMPLOYEE
shall receive a new Base Salary of $155,350 per year payable bi-weekly. This new
Base Salary will take effect concurrent with the EMPLOYEE'S permanent relocation
to Poway. Base Salary will be reviewed at the beginning of each fiscal year.
INCENTIVE COMPENSATION
BONUSES
In addition to Base Salary, EMPLOYEE shall receive a new annual bonus
opportunity of $83,650, payable monthly, quarterly or after year-end, as more
particularly described in the EMPLOYEE's Compensation Plan attached hereto as
Addendum II. This new annual bonus will take effect on October 1, 1997, assuming
that EMPLOYEE has permanently relocated to Poway by that date. The annual bonus
shall be established at the beginning of each fiscal year.
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STOCK OPTIONS
ANACOMP will award the EMPLOYEE with additional non-qualified stock
options to purchase 15,000 shares of ANACOMP Common Stock at fair market value.
The EMPLOYEE will be eligible to receive these options upon the EMPLOYEE'S
permanent relocation to Poway, and his execution of Addendum III of this
Agreement, subject to approval by Anacomp's Board of Directors. After they are
awarded, these options will vest in one-third increments over three years from
the date of grant.
ANACOMP, INC. EMPLOYEE
By:
Ralph W. Koehrer George C. Gaskin
President and Chief Executive
Officer
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ADDENDUM II
TO
EMPLOYMENT AGREEMENT DATED SEPTEMBER 10, 1997
BETWEEN
ANACOMP, INC. ("ANACOMP")
AND
GEORGE C. GASKIN ("EMPLOYEE")
FY97 COMP PLAN EXECUTIVE SUMMARY
FOR SENIOR MANAGEMENT REFERENCE ONLY / NOT FOR DISTRIBUTION
PLAN: MGT 1
NAME: Senior Managers & Equivalents
DATE: Final / 10-07-96
- ------------------------------------------------------------------------------
SALARY: -Represents 65% of total comp base
-Paid bi-weekly
- ------------------------------------------------------------------------------
AREA -Represents 14% of total comp base (40% of total bonus base)
PROFIT -Paid on area of responsibility profit goal
BONUS: -Paid on divisional EBIT for channel presidents
-Paid on Anacomp, Inc. adjusted net income for corporate
personnel
-Paid monthly based on the following formula:
-Nothing paid for performance less than 70% of goal
-For performance greater than=70% and less than=150% of goal,
payment percentage is calculated as follows:
Payment % = 40 + ((Perf. % - 70) * 2)
-Performance vs. payment examples:
<TABLE>
<CAPTION>
PERFORMANCE PAYMENT PERFORMANCE PAYMENT
----------------------- -----------------------
<S> <C> <C> <C>
less than 70% 0% 105% 110%
70% 40% 110% 120%
80% 60% 120% 140%
90% 80% 130% 160%
100% 100% 140% 180%
150% 200%
</TABLE>
-Maximum payment percentage is 200% of bonus amount
- ------------------------------------------------------------------------------
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STRATEGIC -Represents 10.5% of total comp base (30% of total bonus base)
FOCUS -Paid on area of responsibility revenue goal for defined
BONUS: strategic products and services
-Paid on divisional strategic revenue goal for channel
presidents
-Paid on Anacomp, Inc. strategic revenue goal for
corporate personnel
-Paid quarterly based on the following formula:
-Nothing paid for performance less than 70% of goal
-For performance greater than=70% and less than=150% of goal,
payment percentage is calculated as follows:
Payment % = 40 + ((Perf. % - 70) * 2)
-Performance vs. payment examples:
<TABLE>
<CAPTION>
PERFORMANCE PAYMENT PERFORMANCE PAYMENT
----------------------- ---------------------
<S> <C> <C> <C>
less than70% 0% 105% 110%
70% 40% 110% 120%
80% 60% 120% 140%
90% 80% 130% 160%
100% 100% 140% 180%
150% 200%
</TABLE>
-Maximum payment percentage is 200% of bonus amount
-No payment percentage above 100% will be paid unless at least
90% of the area profit goal described above is achieved
- -----------------------------------------------------------------------------
ASSET -Represents 5.25% of total comp base (15% of total bonus base)
MGT -Paid on Anacomp, Inc. asset management targets
BONUS: -Paid quarterly based on the following formula:
-Nothing paid for performance less than 95% of goal
-For performance greater than=95% and less than=100% of goal,
payment percentage is calculated as follows: Payment
% = 50 + ((Perf. % - 50) * 10)
-Performance vs. payment examples:
<TABLE>
<CAPTION>
PERFORMANCE PAYMENT PERFORMANCE PAYMENT
----------------------- -------------------------
<S> <C> <C> <C>
less than 95% 0% 100% 100%
95% 50% greater than100% 100%
</TABLE>
-Maximum payment percentage is 100% of bonus amount
- ------------------------------------------------------------------------------
CORP. -Represents 5.25% of total comp base (15% of total bonus base)
EBITDA -Paid on Anacomp, Inc. EBITDA
BONUS: -Paid after year-end based on the following formula:
-Nothing paid for performance less than 95% of goal
-For performance greater than=95% and less than=110% of goal,
payment percentage is calculated as follows: Payment
% = 50 + ((Perf. % - 95) * 10)
-Performance vs. payment examples:
<TABLE>
<CAPTION>
PERFORMANCE PAYMENT PERFORMANCE PAYMENT
--------------------- ---------------------
<S> <C> <C> <C>
less than 95% 0% 100% 100%
95% 50% 110% 200%
</TABLE>
-Maximum payment percentage is 200% of bonus amount
- ------------------------------------------------------------------------------
NOTES:
1. Salaries will be frozen and 65%/35% split of base vs. bonus (it's currently
70%/30%) will be achieved through the awarding of additional bonus.
2. President's Club qualification will be on an invitation basis.
-2-
<PAGE>
ADDENDUM III
TO
EMPLOYMENT AGREEMENT DATED ______
BETWEEN
ANACOMP, INC. ("ANACOMP")
AND
GEORGE C. GASKIN ("EMPLOYEE")
In consideration of the employment or continued employment of EMPLOYEE by
Anacomp, Inc. and its successors, assigns, subsidiaries, or duly authorized
representatives (hereinafter collectively referred to as "Anacomp") and of the
award of an option for the purchase of 15,000 shares of Anacomp, Inc. Common
Stock (contingent upon Employee's relocation to Poway and approval by the
Compensation Committee of the Board of Directors), par value $.01 per share, at
a price of $_____ (price as set on the date of award), EMPLOYEE hereby agrees as
follows:
1. CONFIDENTIALITY AND TRADE SECRETS. The EMPLOYEE recognizes and
acknowledges that during the course of his/her employment, he/she will have
access to and become acquainted with confidential, trade secret and
proprietary information about Anacomp's businesses and customers (hereinafter
collectively referred to as the "Protected Information"). The parties hereto
recognize that the Protected Information available to EMPLOYEE may pertain
both to customers and accounts handled by EMPLOYEE personally as well as
accounts with which EMPLOYEE is not personally involved. The parties agree
that all Protected Information constitutes a trade secret of Anacomp.
Protected Information may include, but is not limited to, the names,
addresses, and requirements of any customer or prospective customer of
Anacomp; the terms (including price terms) of contractual relations with such
customers; special requirements of such customers; the identities of
individual contacts at such customers; and any other information relating to
Anacomp's research, operations, business relationships, engineering data or
results, specifications, concepts, methods, processes, rates or schedules,
vendor information, products or services (including prices, costs, sales or
content), financial information or measures, business methods, future
business plans, data bases, computer programs, designs, models, operating
procedures, and knowledge of the organization. The EMPLOYEE recognizes and
acknowledges that all of the Protected Information is valuable, special and
essential to the successful and effective conduct of Anacomp's business.
Therefore, the EMPLOYEE shall not, during his/her employment with Anacomp or
at any time thereafter, regardless of the reasons for leaving that
employment, use, disclose or communicate, directly or indirectly, any
Protected Information to any third party for any reason or purpose
whatsoever, except as required in the course of his/her employment with
Anacomp. Further, upon the termination of his/her employment with Anacomp,
for any reason whatsoever, EMPLOYEE shall promptly return any and all copies
of any written material, documents, computer hardware and software, tools and
equipment belonging to Anacomp or relating to the business of Anacomp in
his/her possession.
2. NON-COMPETITION.
2.1 NON-COMPETITION WHILE AN EMPLOYEE OR CONSULTANT. While an employee of
Anacomp, or as a consultant to Anacomp after his termination of employment,
EMPLOYEE agrees not to compete in any manner, either directly or indirectly as
-1-
<PAGE>
an employee, consultant, investor or owner, whether for compensation or
otherwise, with Anacomp, or to assist any other person or entity to compete
with Anacomp. Further, while an employee of Anacomp, EMPLOYEE agrees not to
engage in any other employment without the prior written permission of
Anacomp.
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<PAGE>
3. NON-SOLICITATION.
3.1 NON-SOLICITATION OF EMPLOYEES. During the term of his/her employment
at Anacomp and for two (2) years following the termination for any reason of
such employment, EMPLOYEE agrees, either on his/her own behalf or on behalf
of any other person or entity, directly or indirectly, not to hire, solicit,
or encourage to leave the employ of Anacomp any person who is then an
employee of Anacomp. The foregoing restrictions shall apply to employees
located in all geographical areas where EMPLOYEE performed services for
Anacomp during the two-year period prior to his/her termination, including
areas for which EMPLOYEE had supervisory authority.
3.2 NON-SOLICITATION OF CUSTOMERS. Because of EMPLOYEE's access to
Protected Information of Anacomp, EMPLOYEE agrees that, during the term of
his/her employment at Anacomp and for two (2) years following the termination
for any reason of such employment, he/she will not, directly or indirectly,
in connection with the products and services offered by Anacomp and those
products and services which are competitive with the products and services of
Anacomp: (a) solicit, attempt to obtain, or in any way transact business with
any customers which were customers of Anacomp during his/her employment or at
the time of his/her termination; (b) aid or assist any other party in the
solicitation of any such customers; or (c) interfere with Anacomp's
relationships with any of its customers by soliciting such customers or
inducing them to discontinue their relationships with Anacomp. Products and
services which are competitive with the products and services of Anacomp
include but are not limited to: MICROGRAPHICS PRODUCTS (computer output to
microfilm-COM-equipment and software, cameras and film, processors,
duplicators, retrieval and display equipment and software, computer aided
retrieval-CAR-systems, readers, reader printers, other micrographics
equipment, micrographics equipment maintenance, micrographics consumable
supplies and accessories, records management software); OUTPUT SERVICES
(computer output to microfilm-COM, source document microfilming, output of
data to compact disk, laser printing, conversion of paper and film to
electronic images, micrographic or electronic imaging system design,
consulting and education, system implementation and integration); ELECTRONIC
IMAGE MANAGEMENT PRODUCTS (hardware, software, magnetics products including
tapes, tape drives and optical media supplies, maintenance of electronic
imaging equipment); ELECTRONIC IMAGE MANAGEMENT SERVICES (conversion of
computer generated data to optical or laser disk, COLD, electronic document
imaging and workflow, conversion of paper documents to electronic images,
system design consulting and education, system implementation and
integration, conversion of microfilm to electronic images); and ARCHIVAL
SERVICES (storage, management and retrieval of all forms of customer
information and business records, including but not limited to paper,
microfiche, magnetic media and digital storage media). The foregoing
restrictions shall apply to all geographical areas where EMPLOYEE performed
services for Anacomp during the two-year period prior to his/her termination,
including areas for which EMPLOYEE had supervisory authority.
4. REMEDIES. EMPLOYEE acknowledges that compliance with Sections 1, 2 and 3 of
this Agreement is necessary to protect the business and good will of Anacomp and
that a breach of those sections will irreparably and continually damage Anacomp
for which money damages may not be adequate. Therefore, EMPLOYEE agrees that, in
the event he/she breaches or threatens to breach any of these Sections, Anacomp
shall be entitled to both a preliminary or permanent injunction in order to
prevent the continuation of such harm and money damages insofar as they can be
determined. Nothing in this Agreement, however, shall be construed to prohibit
Anacomp from also pursuing any other remedy, the parties having agreed that all
remedies shall be cumulative.
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<PAGE>
5. INVENTIONS. EMPLOYEE agrees that all inventions, improvements,
discoveries, systems, techniques, ideas, processes, programs, and other
things of value made or conceived in whole or in part by EMPLOYEE while an
employee of Anacomp shall be and remain the sole and exclusive property of
Anacomp, and he/she will disclose all such things of value to Anacomp and
will cooperate with Anacomp to insure that the ownership by Anacomp of such
things of value is protected. Nothing in this Section is meant to apply to an
invention for which no equipment, supplies, facility or trade secret
information of Anacomp was used, which was developed entirely on EMPLOYEE's
own time, and which does not relate to Anacomp's business, research,
development or from any work performed by EMPLOYEE for Anacomp.
6. EMPLOYMENT. This Agreement does not confer upon EMPLOYEE any rights to
continue in the employ of Anacomp or affect in any way Anacomp's right to
terminate his/her employment at any time.
7. SEVERABILITY. If any provision or clause of this Agreement, or portion
thereof, shall be held by any court or other tribunal of competent
jurisdiction to be illegal, void or unenforceable in such jurisdiction, the
remainder of such provisions shall not thereby be affected and shall be given
full effect, without regard to the invalid portion. It is the intention of
the parties that, if any court construes any provision or clause of this
Agreement, or any portion thereof, to be illegal, void or unenforceable
because of the duration of such provision or the area or matter covered
thereby, such court shall reduce the duration, area or matter of such
provision and, in its reduced form, such provision shall then be enforceable
and shall be enforced.
8. BINDING EFFECT. The rights and obligations of this Agreement shall inure
to and be binding upon the parties and their respective heirs, successors and
assigns.
9. ATTORNEYS' FEES. In the event of any dispute, proceeding or litigation
concerning any controversy, claim or dispute between the parties hereto,
arising out of or relating to this Agreement or the interpretation or breach
thereof, each party shall pay its own expenses, attorneys' fees, expert fees,
and costs incurred therein or in the enforcement or collection of any
judgment or award rendered therein.
10. NO WAIVER. Anacomp's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, or
prevent Anacomp thereafter from enforcing each and every provision of this
Agreement.
11. ENTIRE AGREEMENT. This Agreement represents the entire agreement between
EMPLOYEE and Anacomp, with respect to the subject matter hereof, superseding
all previous oral and written communications, representations, understandings
or agreements.
12. EMPLOYEE'S UNDERSTANDING. EMPLOYEE represents and warrants that he/she has
read each and every term of this Agreement and understands the serious duties
and obligations imposed upon EMPLOYEE thereby. EMPLOYEE further represents and
warrants that he/she has had full and ample opportunity to question Anacomp
about this Agreement and each of its terms and to consult an attorney regarding
this Agreement and each of its terms. EMPLOYEE represents that he/she is free to
enter this Agreement and to perform each
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<PAGE>
of its terms and covenants. EMPLOYEE represents that he/she is not restricted
or prohibited, contractually or otherwise, from entering into and performing
this Agreement, and that his or her execution and performance of this
Agreement is not a violation or breach of any other agreement between
EMPLOYEE and any other person or entity.
DATED: , 19
-----------------------
ANACOMP, INC.
By:
Eric K. Whinston EMPLOYEE (signature)
Its: Vice President
EMPLOYEE (printed)
Current position
Current location
Social Security Number
-5-
<PAGE>
SECOND AMENDED AND RESTATED
MASTER SUPPLY AGREEMENT
By and Among
ANACOMP, INC.,
SKC AMERICA, INC.
and
SKC LIMITED
Dated as of July 1, 1997
<PAGE>
TABLE OF CONTENTS
1. Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Agreement Term and Renewals.. . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Initial Term. . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Renewals. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 No Extension of Trade Credit Arrangement. . . . . . . . . . . . 9
3. Supply of the Products; Restrictions on SKC Distribution. . . . . . . . . 9
3.1 Manufacture and Supply of the Products. . . . . . . . . . . . . 9
3.2 Restrictions on SKC Distribution of the Microfilm Products . . 9
4. Consolidation of the Facility; the Microfilm Products Technology . . . . 11
4.1 Consolidation of the Facility . . . . . . . . . . . . . . . . 11
4.2 Disclosure of the Technology . . . . . . . . . . . . . . . . . 11
4.3 Anacomp Technical Assistance . . . . . . . . . . . . . . . . . 11
4.4 Technical Meetings . . . . . . . . . . . . . . . . . . . . . . 11
4.5 Use of the Technology . . . . . . . . . . . . . . . . . . . . 11
4.6 Delivery of Technology . . . . . . . . . . . . . . . . . . . . 12
4.7 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . 13
5. Product Purchase Obligations . . . . . . . . . . . . . . . . . . . . . . 13
5.1 Magnetic Base Products . . . . . . . . . . . . . . . . . . . . 13
5.2 Microfilm Base Products . . . . . . . . . . . . . . . . . . . 14
5.3 Microfilm Products . . . . . . . . . . . . . . . . . . . . . . 14
5.4 Allocation of Deliveries . . . . . . . . . . . . . . . . . . . 17
5.5 Anacomp's Subsidiaries and Affiliates . . . . . . . . . . . . 17
5.6 Information . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.7 Payment in U.S. Dollars . . . . . . . . . . . . . . . . . . . 18
5.8 Returned Microfilm Documents . . . . . . . . . . . . . . . . . 18
6. Scheduling of Production and Placement of Orders for Unconverted
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.1 Forecasting . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.2 Purchase Orders . . . . . . . . . . . . . . . . . . . . . . . 18
6.3 Cancellation and Rescheduling . . . . . . . . . . . . . . . . 19
6A. Scheduling of Production and Placement of Orders for Converted Microfilm
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6A.1 Continuation of Existing Procedures . . . . . . . . . . . . . 19
6A.2 Overbuild . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6A.3 Category C Products . . . . . . . . . . . . . . . . . . . . . 20
6A.4 Reworking . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7. Pricing and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.1 Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.2 Price Increases Due to Increased Costs . . . . . . . . . . . . 24
7.3 Favored Nation Pricing . . . . . . . . . . . . . . . . . . . . 27
7.4 Invoicing . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.5 Deferred Payment Terms . . . . . . . . . . . . . . . . . . . . 27
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8. Shipment and Delivery . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.1 Shipment and Risk of Loss . . . . . . . . . . . . . . . . . . 34
8.2 Packing and Shipment List . . . . . . . . . . . . . . . . . . 34
8.3 Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.4 Maintenance of Inventory . . . . . . . . . . . . . . . . . . . 34
8.5 Sunnyvale Warehouse Facility . . . . . . . . . . . . . . . . . 34
9. Product Specifications and Modifications . . . . . . . . . . . . . . . . 35
9.1 Specifications and Modifications . . . . . . . . . . . . . . . 35
9.2 Anacomp-Requested Modifications . . . . . . . . . . . . . . . 35
10. Intentionally Deleted . . . . . . . . . . . . . . . . . . . . . . . . . 36
11. Warranties, Disclaimer and Limitation on Damages . . . . . . . . . . . . 36
11.1 Pre-Shipment Testing . . . . . . . . . . . . . . . . . . . . . 36
11.2 SKCs Warranty for the Base Products . . . . . . . . . . . . . 36
11.3 SKC's Warranty for the Microfilm Products . . . . . . . . . . 36
11.4 Credit for Field Scrap . . . . . . . . . . . . . . . . . . . . 37
11.5 Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.6 Limitations of Liability and Time to Sue . . . . . . . . . . . 38
12. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
12.1 Infringement of Proprietary Rights by SKC . . . . . . . . . . 38
12.2 Indemnification by Anacomp . . . . . . . . . . . . . . . . . . 39
12.3 Limitation on Indemnification . . . . . . . . . . . . . . . . 39
12.4 Special Indemnification by Anacomp . . . . . . . . . . . . . . 39
13. Protection of Confidential Information . . . . . . . . . . . . . . . . . 39
13.1 Nondisclosure . . . . . . . . . . . . . . . . . . . . . . . . 39
13.2 Security Precautions . . . . . . . . . . . . . . . . . . . . . 39
13.3 Coordination of Publicity . . . . . . . . . . . . . . . . . . 39
13.4 Survival of Obligations . . . . . . . . . . . . . . . . . . . 39
14. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
14.1 Grounds for Termination . . . . . . . . . . . . . . . . . . . 39
14.2 Effect of Termination by SKC . . . . . . . . . . . . . . . . . 40
14.3 Liability and Other Remedies . . . . . . . . . . . . . . . . . 41
14.4 Legal Fees and Other Costs . . . . . . . . . . . . . . . . . . 41
14.5 Equipment Malfunction . . . . . . . . . . . . . . . . . . . . 41
14.6 Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.1 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 41
15.2 Entire Agreement; Amendments . . . . . . . . . . . . . . . . . 41
15.3 Subcontracting; No Assignment . . . . . . . . . . . . . . . . 41
15.4 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . 42
15.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 42
15.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 42
ii
<PAGE>
15.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
15.8 Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . 43
15.9 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . 43
15.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 43
15.11 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
15.12 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
15.13 General Contract Administration . . . . . . . . . . . . . . . 44
15.14 Anacomp and SKC Acting as Independent Contractors; Expenses . 44
15.15 Official Text . . . . . . . . . . . . . . . . . . . . . . . . 45
15.16 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 45
iii
<PAGE>
SCHEDULES
Schedule A: Prices of Converted Microfilm Products
Schedule B: Magnetics Purchase Letters
Schedule C: Anacomp Contracts for Sales to Indirect Channels
Schedule D: Exceptions to Distribution Restrictions
Schedule E: First Year Forecasts
Schedule F: CPI of Price Adjustment
Schedule G: Microfilm price changes and volume adjustments to Anacomp
(12/1/93 - 5/1/97)
Schedule H: 16mm Microfilm Product Numbers Sold to Kodak by SKC
EXHIBITS
A Base Products
A-1 Magnetic Base Products
A-2 Microfilm Base Products
B Coated Microfilm Products
C Product and Packing Specifications
C-1 Magnetic Base Products
C-2 Microfilm Base Products
C-3 Coated Microfilm Products
C-4 Converted Microfilm Products
D Technology (including Proprietary Technology)
E Purchase Order
F Procedures for Scheduling of Production and Placement of Orders for
Converted Microfilm Products
F-1 Forecasting and Firm Orders
F-2 Minimum Order Quantity Guidelines
F-3 Leadtimes
F-4 Cancellation of Orders
F-5 Pull Ahead Procedure
F-6 Overbuild
F-7 Classification of Converted Microfilm Products
F-8 Assignment of Part Numbers
F-9 Material Movement Records
F-10 Finished Product Acceptance
F-11 Returns ("SARS")
F-12 Packing Specifications
F-13 Quality Assurance Measurements
G Trade Credit Security Agreement
H Illustration of Production Price Increase
I Net Efficiency Savings
J Sunnyvale Warehouse Facility Sublease
iv
<PAGE>
SECOND AMENDED AND RESTATED MASTER SUPPLY AGREEMENT
THIS SECOND AMENDED AND RESTATED MASTER SUPPLY AGREEMENT (this "Agreement")
is made as of July 1, 1997, by and among Anacomp, Inc., an Indiana
corporation ("Anacomp"), SKC America, Inc., a New Jersey corporation
("SKCA"), and SKC Limited, an affiliated corporation of SKCA organized
pursuant to the laws of the Republic of Korea ("SKCL"). SKCA and SKCL are
hereinafter jointly and severally referred to as "SKC."
WITNESSETH:
WHEREAS, Anacomp is engaged, inter alia, in the business of
manufacturing, selling and distributing on a worldwide basis certain
micrographics products, including duplicate microfilm, as well as certain
magnetic media products; and
WHEREAS, SKC is engaged, inter alia, in the business of manufacturing
various types of polyester film, which is used in the manufacture of
duplicate microfilm and magnetic media products; and
WHEREAS, Anacomp and SKC entered into a Master Supply Agreement dated as
of March 2, 1992 (together with any amendments or waivers thereto,
collectively the "1992 Agreement") pursuant to which SKC agreed to
manufacture and sell to Anacomp, and Anacomp agreed to purchase, Products (as
hereinafter defined) for use by Anacomp in the manufacture of its duplicate
microfilm and magnetic media products, and SKC agreed to provide in favor of
Anacomp a trade credit arrangement to be used by Anacomp to pay for purchases
of Products from SKC; and
WHEREAS, Anacomp and SKCA entered into an Asset Purchase and
Consolidation Agreement dated October 8, 1993 (together with any amendments
or waivers thereto, collectively the "Purchase Agreement"), pursuant to which
SKCA acquired certain assets of Anacomp located in Sunnyvale, California
presently used to coat and convert polyester base film for Anacomp's
duplicate microfilm business; and
WHEREAS, Anacomp and SKC amended and restated the 1992 Agreement
pursuant to the Amended and Restated Master Supply Agreement dated October 8,
1993 (together with any amendments or waivers thereto, collectively the "1993
Agreement"); and
WHEREAS, Anacomp and SKC entered into the First Cumulative Amendment to
the 1993 Agreement dated May 17, 1996 (the "First Cumulative Amendment"),
which included provisions contained in a letter amending the 1993 Agreement
dated December 1, 1993 (the "1993 Letter Agreement") (the 1993 Agreement as
amended by the First Cumulative Amendment, collectively the "MSA"); and
WHEREAS, Anacomp and SKC have vertically integrated and thereby joined
efforts under the MSA to manufacture Diazo Microfilm Products (as defined
below) and Vesicular Microfilm Products (as defined below) with Anacomp
supplying technology and marketing and with SKC manufacturing Diazo Microfilm
Products and Vesicular Microfilm Products; and
WHEREAS, Anacomp and SKC wish to maximize their marketing strategies,
production and sales with regard to the sale of Diazo Microfilm Products and
Vesicular Microfilm Products; and
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<PAGE>
WHEREAS, sales of Diazo Microfilm Products and Vesicular Microfilm
Products are undergoing pressure from competition from emerging alternatives
such as digital storage media; and
WHEREAS, Anacomp and SKC wish to amend and restate the MSA to enhance
production output of the Facility (as defined below) in Sunnyvale,
California, to lower manufacturing and distribution costs and to stimulate
interbrand competition in Diazo Microfilm Products and Vesicular Microfilm
Products and competition against other media; and
WHEREAS, Anacomp wishes to protect its proprietary technology and trade
secrets with regard to the production of Diazo Microfilm Products and
Vesicular Microfilm Products; and
WHEREAS, Anacomp and SKC jointly wish to maximize the production of
Diazo Microfilm Products and Vesicular Microfilm Products using Anacomp's
manufacturing Technology as defined below; and
WHEREAS, Anacomp has to date exclusively marketed SKC's production of
Diazo Microfilm Products and Vesicular Microfilm Products, and the purpose of
this Agreement is to open up new opportunities in the distribution, marketing
and sales of Diazo Microfilm Products and Vesicular Microfilm Products for
both Anacomp and SKC, through the grant of an exclusive technology license,
utilizing the expertise of both firms; and
WHEREAS, for the foregoing reasons, Anacomp and SKC entered into an
Agreement in Principle dated July 1, 1997 (the "Agreement in Principle"); and
WHEREAS, Anacomp and SKC now desire to amend and restate the MSA to
include provisions of the 1993 Agreement, the First Cumulative Amendment, the
Agreement in Principle, and certain other provisions on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and intending to be legally bound hereby, Anacomp and SKC
agree to amend and restate the MSA in its entirety as follows:
1. DEFINITIONS. For purposes of this Agreement, any amendments or
supplements hereto and any Exhibits or Schedules attached hereto, the
following capitalized terms shall have the following meanings:
"Adjustment Year" is defined in Section 7.2(b).
"Aggregate Exposure" is defined in Section 7.5(g)(i).
"Audit Right" shall mean the right to audit, at the auditing party's own
cost and expense, the books, records and calculations of the other party by
the auditors of the auditing party (or any other international accounting
firm that regularly audits the auditing party's books) and, if relevant, the
foreign affiliate of such firm, in accordance with U.S. or Korean generally
accepted auditing standards, consistently applied; PROVIDED, HOWEVER, that
the audited party shall have the right to review such audit (including access
to such accountant's work papers) through a nationally recognized accounting
firm at
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<PAGE>
the audited party's own cost and expense. The auditing and audited parties
shall preserve the confidentiality of, and shall cause their respective
auditors to preserve the confidentiality of, all Confidential Information.
"Bankruptcy" shall mean the Chapter 11 case of Anacomp initiated by that
certain petition for relief filed by Anacomp under Chapter 11 of the United
States Bankruptcy Code on January 5, 1996 in the United States Bankruptcy
Court for the District of Delaware.
"Bankruptcy Court" shall mean the United States Bankruptcy Court for the
District of Delaware, or any other court of competent jurisdiction exercising
jurisdiction over the Bankruptcy.
"Bankruptcy Law" shall mean Title 11, U.S. Code or any similar Federal
or state law for the relief of debtors.
"Base Products" shall mean collectively the Magnetic Base Products and
the Microfilm Base Products described on Exhibits A-1 and A-2.
"Base Year" is defined in Section 7.2 (b).
"Category C Products" is defined in Section 6A.3.
"Change in Control" shall mean with respect to Anacomp the occurrence of
one or more of the following events: (i) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all or
substantially all of the assets of Anacomp to any person or related group for
purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended
(a "Group"), together with any affiliates thereof; (ii) the shareholders of
Anacomp shall approve any plan or proposal for the liquidation or dissolution
of Anacomp; (iii) any person or Group, together with any affiliates thereof,
shall, as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, have become the beneficial owner
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934,
as amended), directly or indirectly, of securities representing at least a
majority of the voting stock of Anacomp; or (iv) a majority of the Board of
Directors shall not constitute Continuing Directors.
"Change of Circumstances Event" shall mean the occurrence of a change in
cost of a key manufacturing ingredient of any Microfilm Product exceeding (i)
fifteen percent (15%) during any CPI year (as defined in Section 7.2(b)) or
(ii) twenty five percent (25%) during any three year period during the term
hereof, in either case commencing January 1, 1999.
"Change of Circumstances Event Price Adjustment" shall mean a
dollar-for-dollar change to the price of Microfilm Products notified by SKC
to Anacomp as a result of a Change of Circumstances Event, which price
adjustment shall become effective ninety (90) days from the notification by
SKC to Anacomp of the occurrence of a Change of Circumstances Event.
"Coated Microfilm Products" shall mean the duplicate microfilm products
described on Exhibit B.
"Collateral" is defined in Section 7.5(k)(i) .
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"Collateral Perfection Date" is defined in Section 7.5 (k)(ii) .
"Confidential Information" shall mean any proprietary matter obtained,
whether from observation, from materials, information or data submitted or
from disclosures made in any form by one party hereto (the "receiving party")
from the other party (the "disclosing party"), including, without limitation,
trade secrets, inventions, know-how, financial data, processes, reports,
plans and documents. Confidential Information shall exclude any such matter
which:
(a) was already rightfully known to the receiving party at the
time of receiving the submission or disclosure (except for disclosure
pursuant to the 1992 Agreement);
(b) rightfully is or becomes available to the public through
sources independent of and through no action or omission of the receiving
party; or
(c) is received from a third party without breach of any agreement
to which a party hereto or such third party is a party.
"Consumer Price Index" shall mean all Urban Consumers, U.S. City
Average, All Items (1982-84=100) as published by the Bureau of Labor
Statistics of the Department of Labor. If the 1982-84=100 Consumer Price
Index is discontinued or revised during the Initial Term or any Renewal
Periods, such other governmental index or computation with which it is
replaced shall be used in order to obtain substantially the same result as
would be obtained if the Consumer Price Index had not been discontinued or
revised, or if no other index or computation replaces the Consumer Price
Index or is otherwise agreed upon by the parties hereto within a reasonable
time, either party may make application to any court of competent
jurisdiction to designate such other index. If the base year of the Consumer
Price Index is changed, the Consumer Price Index shall be converted in
accordance with the conversion factor published by the United States
Department of Labor, Bureau of Labor Statistics.
"Continuing Director" shall mean, at any time, (i) any member of the
Board of Directors of Anacomp who was a director of Anacomp on the Effective
Date or (ii) any person who becomes a member of the Board of Directors if
such person was appointed or nominated for election to the Board of Directors
by a majority of the Continuing Directors, provided, however, from May 26,
1996 to July 1, 1997, "Continuing Director" shall mean "at any time, (i)
any member of the Board of Directors of Anacomp who was a director of Anacomp
on the Reorganization Effective Date or (ii) any person who becomes a member
of the Board of Directors if such person was appointed or nominated for
election to the Board of Directors by a majority of the Continuing Directors."
"Converted Microfilm Products" shall mean Coated Microfilm Products that
have been slit, packaged and finished as described in Exhibit C-4.
"Contract Year" shall mean the twelve (12) month period beginning on
December 1, 1993, and each successive twelve (12) month period thereafter
during the Initial Term or any Renewal Period.
"Credit Event" is defined in Section 14.1(d).
"Custodian" shall mean any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
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"Diazo Microfilm Products" shall mean Microfilm Products manufactured
using the diazo process.
"Direct Channels" shall mean end-user customers of any supplier of
Microfilm Products.
"Documents" is defined in Section 7.5(n).
"Effective Date" shall mean December 1, 1993.
"Effective Date of SARMSA" shall mean July 1, 1997, the effective date
of this Second Amended Restated Master Supply Agreement.
"Facility" shall mean the facility located at 307-309 North Pastoria
Avenue, Sunnyvale, California and related assets purchased by SKCA pursuant
to the Purchase Agreement that will be used to coat and convert polyester
base film.
"Firm Order" shall mean a firm order for Products as described in
Exhibit F-1.
"Final Date" is defined in Section 7.5(i).
"Fiscal Year" shall mean the twelve (12) month period beginning on
October 1 in any given year and ending on September 30 in the following year.
"Indemnitees" is defined in Section 7.5(u).
"Initial Interest Rate" is defined in Section 7.5(d).
"Initial Term" is defined in Section 2.1.
"Interest" is defined in Section 7.5(d).
"Interest Payment Date" is defined in Section 7.5(e).
"Interest Rate" is defined in Section 7.5(d).
"Invoice Date" is defined in Section 7.5(g)(i).
"Invoiced Amount" is defined in Section 7.5(g)(i).
"Indirect Channels" shall mean (a) in the United States of America and
Canada, any and all OEM manufacturers and resellers of Microfilm Products,
including, without limitation, Rexam Graphics, Ltd., Eastman Kodak Company,
Fuji Photo Film USA, Inc. and Imation Corp. (and each of their respective
subsidiaries and affiliates as well as any successors thereto) and shall also
include microfilm service bureaus not owned by Anacomp (and each of their
respective subsidiaries and affiliates as well as any successors thereto) and
(b) any other companies to be set forth in Schedule D by the parties from
time to time. Subject to Section 3.2(b)(1) hereof and upon the occurrence
of a Material Adverse Event, "Indirect Channels" shall also include, on a
worldwide basis (and thus not just limited to the United States of America
and Canada), any and all OEM manufacturers and resellers of Microfilm
Products, including,
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without limitation, Rexam Graphics Ltd., Eastman Kodak Company, Fuji Photo
Film USA, Inc. and Imation Corp. (and each of their respective subsidiaries
and affiliates as well as any successors thereto) and shall include microfilm
service bureaus not owned by Anacomp (and each of their respective
subsidiaries and affiliates as well as any successors thereto).
"Junior Loan Document" shall mean the Indentures dated as of March 24,
1997 and June 18, 1998 between Anacomp and IBJ Schroder Bank and Trust
Company, as Trustee for the benefit of the holders of Anacomp's 10 7/8%
Senior Subordinated Notes Due 2004, Series A, B, C and D and any waivers or
amendments thereto, provided that prior to May 17, 1996, "Junior Loan
Document" meant: "the Indenture dated as of October 24, 1990 between Anacomp
and State Street Bank and Trust Company, as Trustee for the benefit of the
holders of Anacomp's 15% Senior Subordinated Notes Due 2000, and any waivers
or amendments thereto,"and further provided that from May 17, 1996 to July 1,
1997, "Junior Loan Document" meant the Indenture dated as of the
Reorganization Effective Date between Anacomp and I.B.J. Schroder Bank and
Trust Company, as Trustee for the benefit of the holders of Anacomp's 13%
Senior Subordinated Notes due 2002, and any waivers or amendments thereto.
"Magnetic Base Products" shall mean the polyester base film (PET)
products used in the manufacture of magnetic media products and described on
Exhibit A-l, and any additional magnetic media products which become
qualified by SKC.
"Magnetic Base Products Percentage Purchase Obligation" is defined in
Section 5.1(a).
"Material Adverse Event" shall mean (a) a material impact on the
overall actual sales by SKC of Microfilm Products worldwide (which, for
purposes of this Agreement, shall mean a reduction of sales of Microfilm
Products by SKC to Anacomp equal to or greater than 15% as compared with the
last calendar's year's worldwide sales of Microfilm Products by SKC to
Anacomp), (b) a material reduction in the purchases by Anacomp of Microfilm
Products as compared with the forecasts for such sales of Microfilm Products
as described in Section 5.3(b) hereof (which, for purposes of this Agreement,
shall mean a failure by Anacomp to purchase Microfilm Products as set forth
in any quarterly or annual forecast described in Section 5.3(b) hereof equal
to or greater than 20% or higher of such forecast relating to the purchase by
Anacomp of Microfilm Products) or (c) a material breach by Anacomp of any
provision of this Agreement which shall not have been cured pursuant to the
terms hereof.
"Microfilm Base Products" shall mean the polyester base film (PET)
products used in the manufacture of duplicate microfilm and described on
Exhibit A-2.
"Microfilm Base Products Percentage Purchase Obligation" is defined in
Section 5.2.
"Microfilm Products" shall mean collectively Coated Microfilm Products
and Converted Microfilm Products.
"Microfilm Products Minimum Quantity Purchase Obligation" is defined in
Section 5.3(b).
"Microfilm Products Percentage Purchase Obligation" is defined in
Section 5.3 (a).
"MSA" is defined in the sixth recital of this Agreement.
"Net Efficiency Savings" is defined in Section 7.2(b).
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"1992 Agreement" is defined in the third recital of this Agreement.
"1993 Agreement" is defined in the fifth recital of this Agreement.
"Outstanding Amount" is defined in Section 7.5(g)(i).
"Overbuild" shall mean Converted Microfilm Products produced by SKC for
which no current Firm Order is in place as defined in Exhibit F-6 and which
are transferred to Anacomp as described in Exhibit F-6.
"Overdue Interest" is defined in Section 7.5(p).
"Phase I" shall mean the first phase of the transition of the operation
of the Sunnyvale Warehouse from Anacomp to SKC during which phase, inter
alia, Anacomp shall ship Products to SKC's Indirect Channels. Phase I shall
commence on December 1, 1997 and terminate within three (3) months after
July 1, 1998.
"Phase II" shall mean the second phase of the transition of the
operation of the Sunnyvale Warehouse from Anacomp to SKC during which phase
SKC builds and ships Products to SKC's Indirect Channels. Phase II shall
commence upon the termination of Phase I and terminate upon the mutual
agreement of the parties hereto.
"Plan of Reorganization" shall mean the Second Amended Joint Plan of
Reorganization filed by Anacomp with the Bankruptcy Court on March 28, 1996,
as amended or modified from time to time.
"Prime Rate" is defined in Section 7.5(d).
"Products" shall mean collectively the Magnetic Base Products, the
Coated Microfilm Products and the Converted Microfilm Products, provided,
however, prior to July 1, 1997, "Products" meant "collectively the Magnetic
Base Products, the Microfilm Base Products, the Coated Microfilm Products and
the Converted Microfilm Products."
"Proprietary Technology" shall mean that Technology of Anacomp which is
indicated to be Proprietary Technology on Exhibit D. Proprietary Technology
shall exclude any such matter which:
(a) was already rightfully known to SKC at the time of receiving
the submission or disclosure, except for disclosure pursuant to the 1992
Agreement;
(b) rightfully is or becomes available to the public through sources
independent of and through no part of SKC; or
(c) is received from a third party without breach of any agreement
to which SKC or such third party is a party.
Notwithstanding the foregoing, any technology or modifications of
technology, including changes in coating mix formulations or converting
techniques, hereafter developed by SKC that are related to the Microfilm
Products but are substantially different from the Proprietary
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Technology provided by Anacomp hereunder shall not be deemed to be
Proprietary Technology solely by reason of the fact that SKC was aware of
or referred to the Proprietary Technology in the course of developing
such technology or modifications.
"Purchase Agreement" is defined in the fourth recital of this Agreement.
"Reduced Interest Rate" is defined in Section 7.5(d).
"Reference Bank" is defined in Section 7.5 (d).
"Renewal Period" is defined in Section 2.2.
"Reorganization Effective Date" shall mean the date on which the Plan of
Reorganization shall have become effective pursuant to Section 10.2 thereof.
"Resin" shall mean the resin raw material used to produce Coated
Microfilm Products, provided, however, prior to July 1, 1997, "Resin" meant
"the resin raw material used to coat Microfilm Base Products to produce
Coated Microfilm Products."
"Security Agreements" shall mean the Trade Credit Security Agreement and
any other similar security agreement entered into by Anacomp or any
subsidiary thereof to secure Anacomp's obligations to SKC hereunder and
thereunder.
"Senior Loan Document" shall mean the Revolving Credit Agreement dated
as of June 15, 1998 among Anacomp, the various lending institutions named
therein, and the Bank of Boston, N.A. as agent, and any waivers or amendments
thereto, provided, however, from February 28, 1997 to June 15, 1998, "Senior
Loan Document" meant the Credit and Guarantee Agreement dated as of February
28, 1997 among Anacomp, the Foreign Subsidiary Borrowers (as therein
defined), the lenders party thereto, and the First National Bank of Chicago,
and any waivers or amendments thereto, provided, however, prior to May 17,
1996, "Senior Loan Document" meant "the Amended and Restated Master
Agreement dated as of March 22, 1993 among the Multicurrency Borrowers, the
Lenders, the Multicurrency Lenders, the Series A Purchasers, the Series B
Purchasers, First National Bank of Chicago, as multicurrency agent, and
Citibank, N.A. as agent, administrative agent and collateral agent, and any
waivers or amendments thereto." and further provided that from May 17, 1996
to July 1, 1997, "Senior Loan Document" meant "the Indenture dated as of the
Reorganization Effective Date between Anacomp and the Bank of New York, as
Trustee for the benefit of the holders of Anacomp's 11.625% Senior Secured
Notes dues 1999, and any waivers or amendments thereto."
"Specifications" shall mean the design features, functions and
performance capabilities of the Products as described more fully in Exhibit
C. The Specifications of the Magnetic Base Products are described in Exhibit
C-I, the Specifications of the Coated Microfilm Products are described in
Exhibit C-3, and the Specifications of the Converted Microfilm Products are
described in Exhibit C-4, provided, however, prior to July 1, 1997,
"Specifications" meant "the design features, functions and performance
capabilities of the Products as described more fully in Exhibit C. The
Specifications of the Magnetic Base Products are described in Exhibit C-I,
the Specifications of the Microfilm Base Products are described in Exhibit
C-2, the Specifications of the Coated Microfilm Products are described in
Exhibit C-3, and the Specifications of the Converted Microfilm Products are
described in Exhibit C-4.
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"Sunnyvale Warehouse" means the warehouse in Sunnyvale, California to be
leased by Anacomp and partially subleased to SKC as described in Section 8.5.
"Taxes" is defined in Section 7.5(m).
"Technology" shall mean all of the patents, patent applications,
technology, know-how and show-how owned by Anacomp and described generally on
Exhibit D which will enable SKC to manufacture the Resins, the Coated
Microfilm Products and the Converted Microfilm Products for Anacomp in
accordance with the Specifications.
"Termination Date" shall mean the last day of the Initial Term and, if
this Agreement is renewed for one or more Renewal Terms, the last day of each
successive Renewal Term.
"Trade Credit Arrangement" is defined in Section 7.5(a).
"Trade Credit Security Agreement" shall mean the Trade Credit Security
Agreement dated October 7, 1993, which agreement terminated effective June 1,
1998.
"Unconverted Products" shall mean Magnetic Base Products and Coated
Microfilm Products.
"Vesicular Microfilm Products" shall mean Microfilm Products manufactured
using the vesicular process.
2. AGREEMENT TERM AND RENEWALS.
2.1 INITIAL TERM. The initial term of this Agreement (the
"Initial Term") shall commence as of the Effective Date and shall end on
November 30, 2003, unless this Agreement is terminated prior to the
Termination Date of the Initial Term in accordance with the provisions
hereof.
2.2 RENEWALS. This Agreement shall automatically renew for
additional periods of five (5) Contract Years each (each such period is
referred to as a "Renewal Period") unless either party (1) is in material
beach of this Agreement, or (2) provides the other party with written notice
of its intention to terminate this Agreement at least one (1) year prior to
the relevant Termination Date. Notwithstanding the foregoing, either party
may at its option refuse to renew this Agreement for any Renewal Period if
the other party shall be in material breach of any provisions of this
Agreement at the time of such renewal.
2.3 NO EXTENSION OF TRADE CREDIT ARRANGEMENT. The renewal of this
Agreement under Section 2.2 shall not operate to extend the Trade Credit
Arrangement beyond December 31, 2001.
3. SUPPLY OF THE PRODUCTS; RESTRICTIONS ON SKC DISTRIBUTION.
3.1 MANUFACTURE AND SUPPLY OF THE PRODUCTS. During the Initial
Term and any Renewal Period, SKC agrees to manufacture and sell to Anacomp,
and Anacomp agrees to purchase from SKC, the Products in the quantities
requested by Anacomp from time to time as set forth herein, and at the prices
and upon the terms and conditions set forth herein. Anacomp shall meet the
various purchase obligations for the Products as set forth in Section 5.
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3.2 RESTRICTIONS ON DISTRIBUTION OF THE MICROFILM PRODUCTS.
(a) SKC SALES. Subject to Sections 3.2(b) and 3.2(c) hereof, SKC
acknowledges and agrees that during the Initial Term or any Renewal Period it
will manufacture the Microfilm Products exclusively for Anacomp and its
subsidiaries worldwide, and Anacomp, and no other party, shall have the right
to purchase, warehouse, market, distribute, sell, lease and/or rent the
Microfilm Products; PROVIDED, HOWEVER, that Anacomp agrees that the foregoing
restriction does not prohibit SKC from manufacturing for third parties other
than Anacomp (i) original silver halide microfilm or (ii) coated products
other than duplicate microfilm. Notwithstanding the preceding, SKC shall be
entitled to sell, warehouse, market, distribute, lease and/or rent the
Microfilm Products returned by Anacomp for reasons of defects or
nonconformity, only as provided in Section 11.3; PROVIDED, HOWEVER, that in
any Contract Year the aggregate amount of such Microfilm Products sold by SKC
shall not exceed one and three-tenths percent (1.3%) of the total production
of Converted Microfilm Products in the relevant Contract Year (net of any
amounts of such Microfilm Products purchased by Anacomp or sold by Anacomp to
third parties as provided in Section 11.3). Notwithstanding the preceding,
prior to July 1, 1997, SKC shall be entitled to sell Category C Products,
only as provided in Section 6A.3, and Microfilm Products returned by Anacomp
for reasons of defects or nonconformity, only as provided in Section 11.3;
provided, however, that in any Contract Year the aggregate amount of such
Category C Products and Microfilm Products sold by SKC shall not exceed one
and three-tenths percent (1.3%) of the total production of Converted
Microfilm Products in the relevant Contract Year (net of any amounts of such
Category C Products and Microfilm Products purchased by Anacomp or sold by
Anacomp to third parties as provided in Sections 6A.3 and 11.3).
(b) SKC SALES OF MICROFILM PRODUCTS TO INDIRECT CHANNELS.
(1) Notwithstanding Section 3.2(a) hereof, commencing July 1,
1997, Anacomp grants to SKC, and covenants that it shall not grant to any
other party, the right to sell Microfilm Products in the United States of
America and Canada to Indirect Channels, and subject to Anacomp's existing
contractual obligations as set forth in Schedule "C" attached hereto,
including any renewals, and, provided that if Anacomp fails to fulfill its
covenants set forth in Section 5.3(a) below, or if a Material Adverse Event
occurs, then, in addition to the foregoing grant and covenant regarding
Indirect Channels (as defined in the last sentence of the definition
thereof), SKC shall be permitted to sell Microfilm Products worldwide to
Indirect Channels, including microfilm service bureaus not owned by Anacomp,
and MR Data.
(2) Commencing in Phase II, SKC shall assume full
responsibility from Anacomp for the distribution of Microfilm Products to the
Indirect Channel customers which choose to buy from SKC subject to the
expiration of Anacomp's existing contractual obligations set forth in
Schedule "C" attached hereto. Anacomp shall cooperate with SKC during such
transition.
(c) SKC SALES OF MICROFILM PRODUCTS TO DIRECT CHANNELS PROHIBITED.
Anacomp shall continue to make sales of Microfilm Products to Direct Channels
and to Indirect Channel customers which choose to buy from Anacomp; SKC shall
not sell Microfilm Products to Direct Channels worldwide.
(d) ANACOMP SALES OF MICROFILM PRODUCTS THROUGH DIRECT
CHANNELS. Anacomp shall continue to supply Microfilm Products to its Direct
Channels worldwide and to its worldwide microfilm service bureau customers
which desire to continue purchasing Microfilm Products from Anacomp.
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Anacomp shall also be permitted to supply Microfilm Products worldwide to new
or former end-users and new or former microfilm service bureau customers; SKC
shall not sell Microfilm Products to service bureaus owned by Anacomp
worldwide.
(e) EXCEPTIONS TO SECTIONS 3.2(a)-(d). Any exceptions to Sections
3.2(a)-(d) of this Agreement shall be in the form of Schedule "D" attached
hereto and mutually agreed to by the parties.
(f) RETURN OF TECHNOLOGY. Upon the expiration or termination of this
Agreement for any reason whatsoever, SKC agrees that it will (i) immediately
discontinue all use of the Proprietary Technology, (ii) thereafter refrain from
using any of the Proprietary Technology to manufacture duplicate microfilm, and
(iii) either destroy all copies of the Proprietary Technology previously
provided by Anacomp to SKC hereunder (or otherwise) or, at the request of
Anacomp, return all of such copies of the Proprietary Technology to Anacomp;
PROVIDED, HOWEVER, that in the event that SKC terminates this Agreement in
accordance with Section 14.1 as a result of a material breach by Anacomp, then
SKC shall be permitted to utilize Proprietary Technology relating solely to the
manufacture of Diazo Microfilm Products. In addition, upon the expiration or
termination of this Agreement for any reason whatsoever, SKC shall be permitted
to complete the manufacture of and sell all Microfilm Products then in its
inventory or in process and to complete any contractual obligations to Indirect
Channels.
(g) NON-COMPETITION. SKC agrees that if this Agreement is terminated
by Anacomp in accordance with Section 14.1 due to a material breach by SKC, then
for a period of one (1) year thereafter, it will not manufacture, package,
promote, supply or sell, directly or indirectly, any of the Microfilm Products
supplied to Anacomp under this Agreement, or any duplicate microfilm products
which utilize the Microfilm Products, to any current or potential competitive
dealer, distributor, end-user or other third party; PROVIDED, HOWEVER, that the
restrictions set forth in this paragraph shall not apply in the event that
Anacomp (or its successor) is no longer in the business of selling duplicate
microfilm.
4. CONSOLIDATION OF THE FACILITY; THE MICROFILM PRODUCTS TECHNOLOGY.
4.1 CONSOLIDATION OF THE FACILITY. As provided in the Purchase
Agreement, the parties will effect the Consolidation (as such term is defined in
the Purchase Agreement) of the Facility in Sunnyvale, California.
4.2 DISCLOSURE OF THE TECHNOLOGY. Anacomp agrees to disclose the
Technology to SKC as well as to provide technical support and assistance with
respect to the design and installation of the Facility and the proper use of the
Technology to manufacture each of the Microfilm Products in accordance with the
Specifications.
4.3 ANACOMP TECHNICAL ASSISTANCE. From the Effective Date to July 1,
1997, at the reasonable request of SKC, Anacomp shall make its technical
personnel available to render assistance and training to SKC in connection with
the design, manufacture, testing and (where applicable) qualification of the
Microfilm Products. Without limitation, Anacomp shall permit SKC technical
personnel to inspect all aspects of the Facility prior to the Effective Date,
shall assist SKC in understanding and utilizing the Technology and (where
applicable) qualifying the Microfilm Products, and shall, following the
Effective Date, make its remaining technical personnel reasonably available, in
sufficient numbers and for sufficient periods, to render assistance, training
and support at the Facility. All travel and other expenses incurred by Anacomp
or SKC in visiting the other party's facilities during and after the Effective
Date shall be borne by SKC; provided, however, that Anacomp shall be
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responsible for all travel and other expenses incurred by Anacomp in visiting
the Facility. For the avoidance of doubt, it is hereby acknowledged and
agreed by SKC and Anacomp that this Section 4.3 applies only to assistance
and training in connection with the design, manufacture, testing and (where
applicable) qualification of Microfilm Products and not to Anacomp's
providing "stand-alone" support services to SKC or any other services that
SKC may reasonably request, which support and other services shall be
governed by the terms and provisions of Section 10.5 of the Purchase
Agreement.
4.4 TECHNICAL MEETINGS. From the Effective Date to July 1, 1997,
Anacomp and SKC technical personnel, together with the general contract
administrators appointed by the parties pursuant to Section 15.13 or their
designees, shall meet promptly following the execution of this Agreement and
from time to time thereafter as reasonably required to coordinate the disclosure
of the Technology and (where applicable) the process of qualification of the
Microfilm Products to be produced by SKC hereunder. Without limitation, such
personnel shall after the initial disclosure of the Technology by Anacomp,
discuss and coordinate additional or further disclosures reasonably necessary to
enable SKC to utilize the Technology efficiently, and schedule orientation and
training for SKC personnel and technical assistance and training by Anacomp
personnel.
4.5 USE OF THE TECHNOLOGY. (a) Anacomp grants to SKC an exclusive,
non-transferable and non-assignable royalty free right to use the Technology to
manufacture the Microfilm Products exclusively for Anacomp and, commencing on
July 1, 1997, provided that SKC supplies Microfilm Products solely to Indirect
Channels, to manufacture the Microfilm Products for sale to Indirect Channels.
Notwithstanding such royalty-free right to use the Technology, SKC shall remit
to Anacomp a 15% royalty, payable semi-annually within forty-five (45) days of
the end of each semi-annual period, of the price paid by Anacomp to SKC during
such time period of sales to such Indirect Channels for the same product code on
SKC's sales (net of returns) of Vesicular Microfilm Products to Rexam Graphics
Ltd. ("Rexam") and Fuji Photo Film USA, Inc. ("Fuji"), whether such sales are
made directly or, with the actual knowledge of SKC, indirectly through other
companies. Actual knowledge shall exist if Anacomp notifies SKC that any
intermediary is reselling to Rexam or Fuji. The royalty period shall be deemed
to commence on the date of such notice to SKC by Anacomp. SKC shall not be
obligated to pay the 15% royalty if SKC can establish to Anacomp's reasonable
satisfaction that such other company did not and will not resell to Rexam or
Fuji. SKC shall be permitted to sell such Microfilm Products under its own SKC
label or the private label of its customers. SKC's royalty calculations shall
be subject to an annual Audit Right by Anacomp. The right to use the Technology
authorizes SKC, among other matters, to manufacture in volume the Microfilm
Products. SKC may make a reasonable number of copies of the Technology in order
to effectively exercise the rights granted hereunder. However, SKC acknowledges
that all copies of the Technology and proprietary rights in and appurtenant
thereto, including but not limited to copyright, patent and trade secret rights,
are and shall remain the sole property of Anacomp, and SKC agrees to treat all
Technology and related documentation as Confidential Information in the manner
specified in Section 13.
(b) Upon the expiration or early termination of this Agreement for
any reason, the right granted in Section 4.5(a) shall immediately terminate,
and SKC agrees to return the Proprietary Technology to Anacomp in accordance
with Section 3.2(f). Anacomp agrees that upon such expiration or early
termination, SKC may retain the Technology, other than the Proprietary
Technology (except to the extent and in the circumstances permitted by the
proviso to Section 3.2(f)), and may utilize such non-Proprietary Technology
both during and after the term of this Agreement to manufacture for its own
use or for sale to third parties products other than the Microfilm Products.
SKC may also use the non-
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Proprietary Technology to manufacture Microfilm Products for its own use or
for sale to third parties after the termination of this Agreement subject to
the limitations set forth in Section 3.2(g).
4.6 (a) DELIVERY OF TECHNOLOGY. (a) Commencing on the Effective Date and
ending on July 1, 1997, Anacomp shall deliver to SKC the Microfilm Product
Specifications as set forth in Exhibits C-3 and C-4. These Specifications
describe the general performance parameters of the Diazo Microfilm Products and
Vesicular Microfilm Products that SKC will manufacture for Anacomp hereunder
with respect to, among other matters, length, sensitometry, density, adhesion,
coating quality, packaging, spewing, bricking and conversion. Anacomp will also
deliver to SKC the Technology described in Exhibit D on or prior to the
Effective Date. The Technology, as supplemented by the additional technical
assistance and advice to be provided by Anacomp or its consultants to SKC
hereunder, will enable SKC to formulate the various coating mixtures and to coat
and convert each of the Microfilm Products in accordance with the
Specifications. Notwithstanding the termination of the delivery of certain
documents relating to the Technology as described herein, the license granted to
SKC in and to such Technology shall nonetheless continue as described in and for
the period(s) set forth in this Agreement.
(b) The Resin used in the coating process with respect to the Diazo
Microfilm Products may be purchased by SKC from third party suppliers. SKC will
with Anacomp's assistance utilize the reactor and centrifuge process necessary
to produce the Resin for the Vesicular Microfilm Products using the equipment at
the Facility. Commencing on the Effective Date and ending on July 1, 1997,
Anacomp shall transfer to SKC as a part of the Technology the Proprietary
Technology necessary to manufacture the Resin used in the coating process with
respect to the Vesicular Microfilm Products. Notwithstanding the termination of
the transfer of the Proprietary Technology as described herein, the license
granted to SKC in and to such Technology shall nonetheless continue as described
in and for the period(s) set forth in this Agreement.
4.7 NON-COMPETITION. Except to the extent permitted by the proviso
to the first sentence of Section 5.3(a), Anacomp agrees that it will not
establish any duplicate microfilm coating or converting facility or license any
person other than SKC to use the Technology during the Initial Term and any
Renewal Period.
5. PRODUCT PURCHASE OBLIGATIONS.
Commencing on July 1, 1997, Anacomp shall have no minimum quantity
purchase obligations or penalties for any Products, other than the purchase
commitments set forth in Sections 5.1(a) and (b), and Section 5.3(b) below.
5.1 MAGNETIC BASE PRODUCTS. (a) Subject to the qualification
requirements set forth in Section 5.1(b), Anacomp agrees that it will purchase
from SKC sixty percent (60%) of its worldwide requirements for each of the
Magnetic Base Products for the period of time commencing on the Effective Date
and ending on December 31, 1993. From January 1, 1994 through the Termination
Date, Anacomp shall purchase ninety percent (90%) of its worldwide requirements
for Magnetic Base Products from SKC. This purchase obligation is hereinafter
referred to as the "Magnetic Base Products Percentage Purchase Obligation."
Other than meeting the Magnetic Base Products Percentage Purchase Obligation,
Anacomp shall not be obligated to purchase from SKC any minimum number of square
feet of Magnetic Base Products. In the event that this Agreement is renewed
pursuant to Section 2.2, then the Magnetic Base Products Percentage Purchase
Obligation shall remain in effect for each Renewal Period. The prices which SKC
will charge Anacomp for the Magnetic Base Products during the Initial Term and
any
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<PAGE>
Renewal Period shall be determined in accordance with Section 7.1(a). Prior
to July 1, 1997, the provisions of the letters dated January 15, 1996 and May
3, 1996 from Peter Williams of Anacomp Magnetics to Y. W. Kim of SKCA
Marketing and Sales attached hereto as Schedule "B" applied in accordance
with their terms and for the periods indicated therein.
(b) QUALIFICATION OF POLYESTER FOR MAGNETIC BASE PRODUCTS AND
ADDITIONAL MAGNETIC MEDIA PRODUCTS. SKC acknowledges that certain types of its
polyester used in the manufacture of magnetic media products have not been fully
qualified by Anacomp and do not currently meet the specifications necessary for
Anacomp to use such polyester in manufacturing certain of its magnetic media
products. For this reason, the Magnetic Base Products Percentage Purchase
Obligation described in Section 5.1(a) is only applicable to those Magnetic Base
Products which SKC is currently qualified to manufacture for Anacomp. Anacomp
agrees to assist SKC to qualify its polyester for use in additional Anacomp
magnetic media products. Upon such qualification, Anacomp agrees that it will
purchase from SKC ninety percent (90%) (or prior to January 1, 1994, sixty
percent (60%)) of its worldwide requirements for each such additional magnetic
media product so qualified by SKC for the period of time (i) commencing on the
date that is six (6) months after the date such magnetic media product is first
qualified by SKC and ending on the Termination Date or (ii) if Anacomp's
existing commitments of up to one (1) year in duration to the vendor of the
newly-qualified magnetic media product extend beyond the date that is six (6)
months after the date that such magnetic media product is first qualified by
SKC, then commencing on the date that such commitments to such vendor terminate
and ending on the Termination Date. However, upon SKC's qualification of a
polyester based magnetic media product currently purchased by Anacomp from a
vendor that also supplies other magnetic media products not qualified by SKC, if
Anacomp reasonably believes that it is necessary to continue to purchase such
other magnetic media products in order to induce such vendor to continue to
supply such other magnetic media products to Anacomp, Anacomp shall use its best
efforts to reduce the amount of its purchases of such product to the lowest
level that can be negotiated with such supplier, and Anacomp and SKC shall
adjust the Magnetic Base Products Percentage Purchase Obligation applicable to
such newly qualified magnetic media product to permit such purchases from such
supplier. The prices which SKC will charge Anacomp for the newly-qualified
Magnetic Base Products shall be determined in accordance with Section 7.1(a).
5.2 MICROFILM BASE PRODUCTS. During the Initial Term and ending
on July 1,1997, and provided no Change of Circumstances Event Price Adjustment
shall have occurred, Anacomp agrees that it will purchase from SKC one hundred
percent (100%) of its worldwide requirements for all of the Microfilm Base
Products currently manufactured by SKC which have been qualified by Anacomp and
meet Anacomp's Specifications, except for any purchases of Microfilm Base
Products from third parties in the European Community that may hereafter be
required in connection with the manufacture of Microfilm Products by Anacomp as
permitted by the proviso to the first sentence of Section 5.3(a). This purchase
obligation is hereinafter referred to as the "Microfilm Base Products Percentage
Purchase Obligation." Other than meeting the Microfilm Base Products Percentage
Purchase Obligation, Anacomp shall not be obligated to purchase from SKC any
minimum number of square feet of Microfilm Base Products. In the event that this
Agreement is renewed pursuant to Section 2.2, then the Microfilm Base Products
Percentage Purchase Obligation shall remain in effect for each Renewal Period.
The prices which SKC will charge Anacomp for the Microfilm Base Products shall
be determined in accordance with Section 7.1(b).
5.3 MICROFILM PRODUCTS. (a) Commencing on July 1, 1997 and subject
to an annual Audit Right by SKC, and provided no Change of Circumstances Event
Price Adjustment shall have occurred, Anacomp agrees that it will purchase from
SKC, and SKC agrees that it will supply to
14
<PAGE>
Anacomp, one hundred percent (100%) of Anacomp's worldwide requirements for
the Microfilm Products; PROVIDED, HOWEVER, that SKC grants to Anacomp the
right to meet its Diazo Microfilm Products needs in Europe (for sale in
Europe only) directly from Rexam Graphics Ltd., and PROVIDED FURTHER that a
Material Adverse Event shall not have occurred. SKC shall notify Anacomp
upon the occurrence of a Material Adverse Event. Upon such occurrence and
notification, Indirect Channels shall be immediately modified as provided in
Section 3.2(b)(1), and the senior management, including the chief executive
officer of each party, shall meet to discuss the matter. This purchase
obligation is hereinafter referred to as the "Microfilm Products Percentage
Purchase Obligation." The prices which SKC will charge Anacomp for the
Microfilm Products shall be determined in accordance with Section 7.1(c). In
connection with any grant by SKC to Anacomp to meet its Diazo Microfilm
Products needs in Europe (but for sale in Europe only) by purchasing such
Microfilm Products directly from Rexam Graphics, Ltd. (collectively the
"Rexam Purchases") and notwithstanding any other provision set forth herein,
Anacomp agrees that any such approval and grant with respect to the Rexam
Purchases shall not be automatic but rather shall be conditioned upon Anacomp
notifying SKC of its desire to make Rexam Purchases, the amounts and types of
Microfilm Products relating to the Rexam Purchases and such other information
as SKC may reasonably request (the "Rexam Purchases Notice"). SKC may
withhold its approval with respect to such Rexam Purchases if, in SKC's
reasonable judgment, a Material Adverse Event has occurred or, with the lapse
of time or events would, occur. Upon receiving from SKC its prior written
approval for such Rexam Purchases under this Agreement, Anacomp may proceed
with such Rexam Purchases, as described in the Rexam Purchases Notice. SKC
may withhold its approval in its discretion if Anacomp has breached or is in
default of this Agreement. Notwithstanding the foregoing, prior to July 1,
1997, Anacomp agreed that it will purchase from SKC one hundred percent
(100%) of its worldwide requirements for the Microfilm Products; PROVIDED,
HOWEVER, that in the event that SKC is unable to supply Microfilm Products
conforming to Anacomp's requirements with respect to European "local content"
requirements or in order to respond to bona fide customer demand for
Microfilm Products of 100% European origin in the European Community, after
notice to and due consultation with SKC, up to ten percent (10%) of such
worldwide requirements for Microfilm Products in any Contract Year may be
produced by Anacomp at its subsidiary's Wales facility (or at another
European facility owned by Anacomp or one of its subsidiaries) and/or
purchased by Anacomp from a European manufacturer for sale or resale by
Anacomp solely within the European Community.
(b) FORECASTING. Subject to Section 5.3(a) above, Anacomp shall
provide SKC with written annual purchase forecasts containing quarterly volume
forecasts for Microfilm Products. SKC acknowledges and agrees that Anacomp's
forecasts of Microfilm Product purchases are estimates only and are non-binding
on Anacomp. However, Anacomp acknowledges that its forecasts assist SKC in
planning and scheduling the manufacture of the Microfilm Products, and Anacomp
agrees to purchase eighty percent (80%) of the immediately previous quarterly or
annual forecast within ninety (90) days of failing to purchase at least eighty
percent (80%) of such quarterly or annual forecast. In lieu thereof, Anacomp
shall have the option of reimbursing SKC for SKC's lost profits attributable to
the difference between eighty percent (80%) of such quarterly or annual forecast
and the volume actually purchased. For example, if Anacomp meets 65% of its
quarterly forecast for a particular quarter, Anacomp shall have the option of
purchasing an additional 15% (80% - 65%) or reimbursing SKC for SKC's lost
profit margin on such 15%, in either case within ninety (90) days of achieving
the 65% threshold. The volume of any Microfilm Products which SKC supplies to
Indirect Channels shall have the effect of reducing Anacomp's forecasts by such
volume. The forecast for the period July 1, 1997 to June 30, 1998 is attached
hereto as Schedule "D." Commencing on the Effective Date and ending on July 1,
1997, in addition to the Microfilm Products Percentage Purchase Obligation
described in Section 5.3(a), Anacomp
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<PAGE>
agrees that it will purchase from SKC at least the following minimum volumes
of Microfilm Products (the "Microfilm Products Minimum Quantity Purchase
Obligation"):
(i) from and after the Effective Date through the last day
of the Initial Term, 625,000,000 square feet of Microfilm Products per
Contract Year (at least 110,000,000 square feet of Microfilm Products per
quarter of each Contract Year);
(ii) during the first Renewal Period, 450,000,000 square
feet of Microfilm Products per Contract Year (at least 90,000,000 square
feet of Microfilm Products per quarter of each Contract Year); and
(iii) during any subsequent Renewal Period, 320,000,000
square feet of Microfilm Products per Contract Year (at least 70,000,000
square feet of Microfilm Products per quarter of each Contract Year).
(c) During the Initial Term and up to July 1, 1997, SKC shall not be
obligated to manufacture for Anacomp more than 821,000,000 square feet of
Microfilm Products per Contract Year or 69,000,000 square feet of Microfilm
Products per calendar month thereof. However, notwithstanding the Microfilm
Products Percentage Purchase Obligation set forth in Section 5.3(a), in the
event that Anacomp desires to purchase Microfilm Products from SKC in excess of
821,000,000 square feet during a Contract Year and SKC is unwilling to
manufacture Anacomp's excess needs, then Anacomp shall be permitted to have a
third party manufacture its excess Microfilm Product requirements (but solely
such excess requirements).
(d) Commencing on the Effective Date and ending on July 1, 1997,
Anacomp's failure to meet the Microfilm Products Minimum Quantity Purchase
Obligation set forth in Section 5.3(b) shall not result in a breach of this
Agreement. However, in the event that Anacomp's purchases are more than
640,000,000 square feet or less than 610,000,000 square feet in any Contract
Year, the price of Microfilm Products shall be adjusted as follows:
(i) if the volume of Microfilm Products purchased by Anacomp in
any Contract Year is more than 350,000,000 square feet, the price of Microfilm
Products shall be retroactively adjusted in accordance with the following
formula:
<TABLE>
<CAPTION>
VOLUME RANGE (MILLION SQUARE FEET) PRICE ADJUSTMENT
- ---------------------------------- ----------------
<S> <C>
from 821 to 790.......................................-3.46%
from 790 to 760.......................................-3.00%
from 760 to 730.......................................-2.49%
from 730 to 700.......................................-1.95%
from 700 to 670.......................................-1.36%
from 670 to 640.......................................-0.71%
from 640 to 610.................................no adjustment
from 610 to 580.......................................+0.78%
from 580 to 550.......................................+1.64%
from 550 to 520.......................................+2.60%
from 520 to 490.......................................+3.68%
from 490 to 460.......................................+4.89%
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
VOLUME RANGE (MILLION SQUARE FEET) PRICE ADJUSTMENT
- ---------------------------------- ----------------
<S> <C>
from 460 to 430.......................................+6.26%
from 430 to 400.......................................+7.83%
from 400 to 370.......................................+9.74%
from 370 to 350......................................+11.82%
</TABLE>
If Anacomp is entitled to receive a price decrease by reason of competitive
pricing pursuant to Section 7.1(c)(iii) at the same time as prices are to be
adjusted pursuant to this Section 5.3(d), the competitive price shall first be
set pursuant to Section 7.1(c)(iii) and Section 7.1(e) and, thereupon, such
competitive price shall be further adjusted pursuant to the application of the
formula contained in this Section 5.3(d);
(ii) if the volume of Microfilm Products purchased by
Anacomp in any Contract Year is less than 350,000,000 square feet, the parties
shall negotiate in good faith to determine a further retroactive price increase,
within six (6) months following the end of the Contract Year in which such
shortfall occurs, to be applied to actual Microfilm Product purchases during
such Contract Year. In calculating any such price increase, the parties (or, if
arbitrators are appointed pursuant to the next sentence, such arbitrators) shall
endeavor to determine the amount required to put SKC in as good a position as if
Anacomp had purchased the Microfilm Products Minimum Quantity Purchase
Obligation, taking into consideration, among other factors, SKC's expected
income from the sale of such minimum requirement and increased costs and
decreased economies of scale to SKC as a result of lower volume, mitigated to
the extent of (A) the purchase, if any, by Anacomp of Microfilm Products in
excess of the Microfilm Products Minimum Quantity Purchase Obligation in prior
years, (B) the net profits of SKC (if any) as a result of purchases of Magnetic
Base Products by Anacomp in excess of 2.5 million pounds per year and (C) any
profits arising from any other use of the Facility by SKC as a result of
Anacomp's purchase of less than 350,000,000 square feet of Microfilm Products.
If the parties have not agreed on the amount to be paid to SKC within six (6)
months from the end of the Contract Year in which Anacomp failed to meet such
Microfilm Products Minimum Purchase Obligation, then either party may submit the
issue to binding arbitration in New York City under the rules of the American
Arbitration Association. Unless the parties otherwise agree, the arbitration
shall be conducted before a panel of three (3) arbitrators, with SKC and Anacomp
each to select one (1) arbitrator and such arbitrators in turn to select the
third arbitrator.
(iii) For purposes of the application of the formula set
forth in Section 5.3(d)(i), Anacomp's price of Microfilm Product during the
preceding Contract Year shall be the price paid by Anacomp during such Contract
Year less the portion of such price attributable to any Microfilm Product
surcharge carried forward pursuant to Section 7.2(d).
If any amounts are owing to either party under this Section 5.3(d),
then (i) the party to whom such amounts are owing will, within fifteen (15) days
following the end of the relevant Contract Year, provide the other party with a
statement thereof in reasonable detail, together with its invoice, and (ii) the
party obligated to make payment will do so within thirty (30) days after receipt
of such invoice or, if the amount due is determined by arbitration, within
thirty (30) days of the determination thereof by arbitration, together in each
case with interest from the last day of the relevant Contract Year to the date
of payment at the Interest Rate.
(e) COMMENCING ON THE EFFECTIVE DATE AND ENDING ON JULY 1, 1997, in
the event that Anacomp's purchases of Microfilm Products are less than the
minimum quarterly quantity required by Section 5.3(b) in any quarter of any
Contract Year, Anacomp shall pay to SKC an additional charge of $0.01 for each
square foot of the deficiency. Such deficiency charge shall be invoiced by SKC
to
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<PAGE>
Anacomp on or after the fifth (5th) business day of the month following the
quarter for which such invoice is issued, and shall be paid by Anacomp within
thirty (30) days following receipt of invoice. Such deficiency charge shall be
increased, on a prospective basis only, by the percentage of the aggregate
increase, if any, in the prices of Converted Microfilm Products under Section
7.2(a), effective from the date of determination of such increase.
(f) Commencing on the Effective Date and ending on July 1, 1997,
one-half (1/2) of the Category C Products purchased by Anacomp pursuant to
Section 6A.3 shall be treated as purchases of Microfilm Products for purposes of
the Microfilm Products Minimum Quantity Purchase Obligation.
(g) Commencing on the Effective Date and ending on July 1, 1997, if
the first Contract Year after the Effective Date has more than three hundred
sixty-five (365) days, the Microfilm Products Minimum Quantity Purchase
Obligation shall be increased proportionally to reflect the additional days.
(h) PRICE AND VOLUME ADJUSTMENTS. Exhibit G summarizes prior price
and volume adjustments. From May 17, 1997 to December 1, 1997, notwithstanding
anything stated to the contrary in Section 5.3(d) and(e), no new volume
adjustment will be made for the 1994-1995 Contract Year or the 1995-1996
Contract Year, and the volume adjustment will continue to be the same as was
made for the 1993-1994 Contract Year. The price for the 1996-1997 Contract Year
will be adjusted prospectively at the beginning of the Contract Year (December
1, 1996) to reflect actual volume levels purchased in the 1995-1996 Contract
Year, and again retroactively at November 30, 1997 to reflect actual volume
levels purchased in the 1996-1997 Contract Year.
5.4 ALLOCATION OF DELIVERIES. Commencing on the Effective Date and
ending on July 1, 1997, for purposes of determining the volume of Microfilm
Products purchased by Anacomp and Anacomp's compliance with the Microfilm
Products Minimum Quantity Purchase Obligation during any Contract Year or
quarter thereof, Anacomp shall receive full credit for all Microfilm Products
(including Category C Products, to the extent set forth in Section 5.3(f))
ordered by Anacomp and scheduled for delivery during the relevant Contract Year
or quarter thereof regardless of whether actual delivery is made during the
relevant Contract Year or quarter, unless the failure to make delivery in the
scheduled Contract Year or quarter thereof is due to Anacomp; provided, however,
that any such Microfilm Products so credited toward the Microfilm Products
Minimum Quantity Purchase Obligation in the Contract Year or quarter scheduled
for delivery shall not be credited in the Contract Year or quarter of actual
delivery.
5.5 ANACOMP'S SUBSIDIARIES AND AFFILIATES. (a) All references in
this Agreement to Anacomp's worldwide requirements for any of the Products shall
be deemed to refer to all the requirements of Anacomp and all of Anacomp's
subsidiaries and affiliates, wherever located and whether past, present or
future, and Anacomp agrees to take all steps that may be necessary to ensure
that such subsidiaries and affiliates comply with this Agreement.
(b) Any Products delivered to subsidiaries or affiliates of Anacomp
shall be invoiced to such subsidiaries and affiliates, and the price thereof
shall be deemed to be owing pursuant to this Agreement for all purposes hereof
(including the Trade Credit Arrangement), provided that Anacomp shall remain
jointly and severally liable for all such payments. Anacomp shall cause such
subsidiaries and affiliates to execute such Security Agreements and other
related Documents (as defined in Section 7.5(n)) as SKC may reasonably request
to confer upon SKC a first priority purchase money security interest (or
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<PAGE>
the functional equivalent thereof) to the extent set forth in Section 7.5(k),
or an equivalent security interest or title retention in the local
jurisdiction in which the Collateral (as defined in Section 7.5(k)) is
located.
5.6 INFORMATION. Anacomp shall provide to SKC within sixty (60) days
after the conclusion of each Fiscal Year during the term of this Agreement an
annual officer's certificate certifying as to Anacomp's worldwide requirements
for and purchases of each of the Products. Anacomp shall also provide SKC on
request with an annual certificate of Anacomp's independent accountants
certifying, for each such Fiscal Year, as to Anacomp's compliance with its
purchase commitments hereunder; PROVIDED, HOWEVER, that SKC shall reimburse
Anacomp for any expenses of such accountants in excess of $10,000 incurred in
connection with such certificate. SKC or its representatives shall have the
right to audit all of such information through a nationally recognized
accounting firm at SKC's own cost and expense.
5.7 PAYMENT IN U.S. DOLLARS. All amounts payable under this
Agreement, including amounts payable under the Trade Credit Agreement, shall be
paid in U.S. dollars. Unless otherwise indicated, all other sums set forth in
this Agreement are denominated in U.S. dollars.
5.8 RETURNED MICROFILM PRODUCTS. From May 17, 1996 to July 1, 1997,
in calculating volume adjustments pursuant to Section 5.3(d) and (e), Microfilm
Products returned by Anacomp in any Contract Year shall be excluded from the
calculation of volume in such Contract Year. In the event returned Microfilm
Products are repackaged and sold, such Microfilm Products will be included in
volume in the Contract Year and quarter of their resale.
6. SCHEDULING OF PRODUCTION AND PLACEMENT OF ORDERS FOR UNCONVERTED
PRODUCTS.
6.1 FORECASTING. Anacomp shall provide SKC with a twelve (12) month
rolling forecast for anticipated purchases of Unconverted Products, updated
monthly. SKC acknowledges and agrees that Anacomp's forecasts of Unconverted
Product purchases are estimates only and are non-binding on Anacomp, that actual
Unconverted Product purchases will be made by Anacomp pursuant to purchase
orders in accordance with Section 6.2, and that Anacomp's sole obligation under
this Agreement with respect to Unconverted Product purchases is to meet the
purchase obligations set forth in Section 5. However, Anacomp acknowledges that
its forecasts assist SKC in planning and scheduling the manufacture of the
Unconverted Products, and Anacomp agrees to use its reasonable best efforts in
calculating its forecasted purchases.
6.2 PURCHASE ORDERS. (a) Anacomp shall place orders for the
Unconverted Products on a monthly basis by issuing its purchase order document
(substantially in the form attached hereto as Exhibit E) at least three (3)
months in advance of the requested delivery date. The order shall be placed with
Mr. Hojo Kim, SKC's contract administrator in Mt. Olive, New Jersey, by telex or
facsimile, with a confirming copy of the purchase order to be mailed to SKC
within fifteen (15) days thereafter. The written terms on the front of the
purchase order shall state the Unconverted Product numbers and description, the
roll length, the quantity of the Unconverted Products ordered, the requested
delivery date, if then known (including the desired shipment date and the
destination), and the confirmation of price (which shall be consistent with this
Agreement). No different or additional or reverse printed terms proposed by
Anacomp shall apply. If any terms of Anacomp's purchase order conflict with any
terms of this Agreement, then the terms of this Agreement shall govern. SKC
shall confirm all accepted purchase orders within fourteen (14) days of receipt
by written order confirmation stating the Unconverted Product numbers and
quantity ordered and their anticipated production completion date(s). With
respect to
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<PAGE>
purchases of Coated Microfilm Products, Anacomp agrees that it will also
provide SKC with an update to its monthly purchase orders at least three (3)
weeks prior to the shipment date describing in more specific detail the types
and quantities of Coated Microfilm Products (e.g., Diazo Microfilm Products
or Vesicular Microfilm Products) required and the requested delivery dates
for the same.
(b) SKC agrees to manufacture Unconverted Products in accordance with
the delivery dates specifically negotiated and agreed to between Anacomp and SKC
and indicated in individual purchase orders issued under this Agreement or
subsequently communicated to and accepted by SKC in writing. SKC will notify
Anacomp immediately of any event which may result in any delay in the completion
or the shipment of any Unconverted Product. SKC acknowledges and agrees that
the delivery dates set forth on Anacomp's purchase orders (or subsequently
communicated to and accepted by SKC) are firm delivery dates, and SKC agrees to
meet such delivery dates and otherwise deliver the Unconverted Products to
Anacomp in a timely manner.
6.3 CANCELLATION AND RESCHEDULING. (a) Subject to Anacomp meeting
the purchase obligations set forth in Section 5, Anacomp may cancel any
Unconverted Product purchase order or any portion thereof without any liability
or obligation if it notifies SKC at least sixty (60) days prior to the scheduled
delivery date.
(b) Subject to Anacomp meeting the purchase obligations set forth in
Section 5, Anacomp may reschedule up to fifty percent (50%) of an Unconverted
Product purchase order if Anacomp notifies SKC at least thirty (30) days prior
to the scheduled shipment date, and up to one hundred percent (100%) of an order
if Anacomp notifies SKC at least forty-five (45) days prior to the scheduled
shipment date. Anacomp shall not subsequently cancel any shipments which it has
rescheduled hereunder.
6A. SCHEDULING OF PRODUCTION AND PLACEMENT OF ORDERS FOR CONVERTED
MICROFILM PRODUCTS.
6A.1 CONTINUATION OF EXISTING PROCEDURES. It is understood and agreed
that in scheduling production and placement of orders for Converted Microfilm
Products after the Effective Date the parties shall adhere to the extent
possible to the systems and procedures utilized by Anacomp prior to the
Effective Date in operating its facilities in Sunnyvale, California, with such
changes and adjustments as the parties may mutually agree in writing are
necessary or desirable with a view to ensuring efficient production and timely
delivery of Converted Microfilm Products. Such procedures are generally
outlined in Exhibit F hereto, including the following:
(a) Exhibit F-1, which describes the procedures to be followed in
forecasting purchases of Converted Microfilm Products by Anacomp and the
procedures for reflecting such forecasts in Firm Orders;
(b) Exhibit F-2, which describes the minimum order quantity
guidelines to facilitate efficient production of Converted Microfilm Products;
(c) Exhibit F-3, which describes the leadtimes required for orders of
various categories of Converted Microfilm Products;
(d) Exhibit F-4, which describes the procedures for cancellation of
Firm Orders;
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<PAGE>
(e) Exhibit F-5, which describes the procedures for production on a
"pull ahead" basis in advance of scheduled delivery;
(f) Exhibit F-6, which describes the procedure's for production,
delivery and return of Overbuild;
(g) Exhibit F-7, which describes the classification of Converted
Microfilm Products into various categories;
(h) Exhibit F-8, which describes the assignment of "part numbers;"
(i) Exhibit F-9, which describes material movement records (including
charges for reworking);
(j) Exhibit F-10, which describes finished coated Microfilm Product
acceptance; and
(1) Exhibit F-11, which describes procedures for customer returns.
(m) Exhibit F-12, which describes Anacomp's packing specifications;
(n) Exhibit F-13, which describes reporting mechanisms regarding
ongoing quality assurance programs.
To the extent that there shall exist any inconsistency between this
Agreement and Exhibit F-1 through Exhibit F-13 hereto, this Agreement shall
govern for all purposes unless SKC and Anacomp agree otherwise.
6A.2 OVERBUILD. It is understood and agreed that in the process of
converting Coated Microfilm Products into Converted Microfilm Products in
accordance with Firm Orders received by Anacomp, and commencing on July 1, 1997,
during Phase I and Phase II, SKC shall continue Anacomp's practice prior to the
Effective Date of producing and delivering to Anacomp's MX division Overbuild
for which no orders are outstanding to the extent required to convert in the
most efficient way. Anacomp agrees to accept such Overbuild, which shall be
invoiced in the same manner and at the same price as Converted Microfilm
Products hereunder for which Firm Orders are in place and to use its best
efforts to market such Overbuild in the same manner as prior to the Effective
Date; provided, however, that Anacomp will not be obligated to accept more than
600,000 square feet of Overbuild in any calendar month (net of any returns of
Overbuild accepted by SKC in such month). SKC shall accept returns of Overbuild
in the manner described in Exhibit F-6, and shall issue a credit to Anacomp in
the amount of the full purchase price thereof. Commencing on the Effective Date
and ending on July 1, 1997, all such Overbuild accepted by Anacomp pursuant to
this Agreement shall be fully credited toward Anacomp's Microfilm Products
Minimum Quantity Purchase Obligation.
6A.3 CATEGORY C PRODUCTS. Commencing on the Effective Date and
ending on July 1, 1997, it is understood and agreed that in the course of
producing Converted Microfilm Products certain quantities of short rolls and
defective products ("Category C Products") will occur that are unsuitable for
general use as Coated Microfilm Products but that can be manufactured into
commercially useful products by Anacomp's Microprinting Services division.
Anacomp hereby agrees to accept Category C
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<PAGE>
Products in quantities up to one and three-tenths percent (1.3%) of the total
production of Converted Microfilm Products in any Contract Year for use in
its Microprinting Services division but only for so long as Anacomp has use
for such Category C Products in its Microprinting Services division.
Category C Products accepted by Anacomp shall be invoiced by SKC at $0.04 per
square foot. If Anacomp ceases purchasing or is unable to utilize such
quantities of Category C Products Anacomp will use its reasonable efforts in
light of market conditions to sell such Category C Products at such price to
third parties within one hundred twenty (120) days after notice from SKC as
to the availability thereof. If such Category C Products have not been sold
within such period, SKC may sell such Category C Products to any third party
subject to the applicable restrictions set forth in Section 3.2(a). Anacomp
may purchase at $0.04 per square foot any Category C Products that SKC
produces in excess of one and three-tenths percent (1.3%) of the total
production of Converted Microfilm Products in any Contract Year, but shall
have no obligation to do so. Any such excess Category C Products not
purchased by Anacomp shall not be sold by SKC to any third party but shall be
reworked by SKC at its own expense or shall be scrapped.
6A.4 REWORKING. If Anacomp returns any quantity of non-defective
Converted Microfilm Products and requests SKC to rework such Products, SKC shall
rework such Products in accordance with Anacomp's instructions, to the extent
possible, and redeliver to Anacomp together with its invoice for a reworking
charge of $0.007 per square foot. The reworking charge hereunder shall be
increased, on a prospective basis only, by the percentage of the aggregate
increase, if any, in the prices of Converted Microfilm Products under Section
7.2, effective from the date of determination of such increase. SKC shall not
charge Anacomp for any reworking that is required (i) due to any manufacturing
defect in the Converted Microfilm Products or (ii) due to the nonconformance of
such Converted Microfilm Products with the warranty specified in Section 11.3,
or (iii) in respect of Overbuild to the extent set forth in Exhibit F.
Commencing on July 1, 1997, SKC shall be responsible for reworking any quantity
of non-defective Converted Microfilm Products returned by SKC's customers.
7. PRICING AND PAYMENT.
7.1 PRICING. (a) MAGNETIC BASE PRODUCTS. The price of the Magnetic
Base Products shall be agreed to by the parties from time to time and shall be
at amounts which are competitive with prevailing market prices for such Magnetic
Base Products.
(b) MICROFILM BASE PRODUCTS. (i) Commencing on the Effective Date
and ending on July 1, 1997, the price of the Microfilm Base Products shall be
agreed to by the parties from time to time and shall be at amounts which are
competitive with prevailing market prices for such Microfilm Base Products.
(ii) Commencing on the Effective Date and ending on July 1,
1997, the price of the Microfilm Base Products shipped to Anacomp's European
facility in accordance with Section 8.1 shall be agreed to by the parties from
time to time and shall be at amounts which are competitive with prevailing
market prices for such Microfilm Base Products. If the prices which SKC charges
for the Microfilm Base Products to be shipped to Europe are not competitive with
similar European manufactured products, then Anacomp shall, to the extent
necessary, be released from the Microfilm Base Products Percentage Purchase
Obligation.
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(c) MICROFILM PRODUCTS.
(i) During the Initial Term, the price of the Microfilm Products
shall be set forth in Schedule "A." Prior to July 1, 1997, during the Initial
Term, the price of the Microfilm Products shall be as follows (subject to
adjustment in accordance with Section 7.2(a)):
(A) The prices of Converted Microfilm Products and Coated
Microfilm Products shipped on or after the Effective Date through September
30, 1994 shall be as set forth in Schedule A.
(B) For shipments of Converted Microfilm Products and Coated
Microfilm Products shipped on or after July 1, 1994, the prices set forth
in Schedule A shall be reduced by 3.75%. From the Effective Date to May
26, 1996, the date after which the prices of Converted Microfilm Products
and Coated Microfilm Products as set forth in Schedule A will be reduced by
3.75% pursuant to Section 7.1(c)(i) of the Supply Agreement, originally
June 30, 1994, will be changed to September 30, 1994.
(C) From May 17, 1996 to July 1, 1997, for shipments of
Converted Microfilm Products and Coated Microfilm Products shipped on or
after June 1, 1995, the prices will be increased by 5% over the prices
called for in Section 7.1(c)(i)(B).
(D) From May 17, 1996 to July 1, 1997, for shipments of
Converted Microfilm Products and Coated Microfilm Products shipped on or
after the Reorganization Effective Date, the prices will be increased by 2%
over the prices called for in Section 7.1(c)(i)(B) and Section 7.1(c)(i)(C)
and such price increases will begin on the Reorganization Effective Date.
(ii) Commencing on the Effective Date and ending on July 1, 1997,
except as provided in Section 5.3(d) and except during the first Contract Year
of the Initial Term , so long as Anacomp is in compliance with at least
fifty-six percent (56%) of the Microfilm Products Minimum Quantity Purchase
Obligation as provided in Section 7.1(e)(ii) and is not in default under Section
7.5(r) (excluding Section 7.5(r)(x)), the average monthly prices charged by SKC
for the Microfilm Products shall at all times during the term of this Agreement
remain competitive with the prices charged by other manufacturers for
substantially similar products, determined as set forth in Section 7.1(e). Any
change in the price of the Microfilm Products in accordance with this Section
7.1(c)(ii) shall be effective prospectively for all Microfilm Product purchases
from the month following the determination thereof and retroactive to the date
of the request for such competitive price adjustment.
(d) TAXES, FREIGHT AND CUSTOMS DUTIES. From the Effective Date until
the end of Phase II, the prices for all Products shall include all charges such
as packaging, packing, and delivery by SKC to the Sunnyvale Warehouse for
unloading by SKC. Notwithstanding the foregoing, SKC shall invoice Anacomp, on a
monthly basis, for forty percent (40%) (a pro rata portion in Phases I and II
divided between Anacomp products and SKC Indirect Channel or SKC customer
products) of the actual cost of transporting Anacomp's Products (including raw
materials, coated web and finished products, but excluding depreciation cost of
SKC's loading, dock and other equipment) between the Facility and the Sunnyvale
Warehouse. SKC shall bear all cost for transportation of SKC's Products.
Prices shall be exclusive of all Korean taxes (excluding taxes based upon the
income of Anacomp) and U.S. import and other duties, which are the exclusive
responsibility of and shall be paid by SKC. SKC shall be
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responsible for and shall pay all freight, as well as all customs duties
imposed upon the importation of the Products into the United States;
PROVIDED, HOWEVER, that Anacomp shall be entitled to any duty-drawback
payable as a result of Anacomp's subsequent re-exportation of the Products
outside of the United States (except for refunds of antidumping duties, if
any, to which SKC shall be entitled). On request, the parties shall furnish
each other with such information and assistance as shall be necessary to
obtain any such duty drawback. Anacomp shall pay any customs duties imposed
upon the importation of the Products into Europe for Anacomp's customers, and
SKC shall pay any customs duties imposed upon the importation of the Products
into Europe for SKC's customers.
(e) COMPETITIVE PRICING. (i) Commencing on the Effective Date and
ending on July 1, 1997, the determination of whether a price under this
Agreement is competitive at any time shall be resolved with reference to the
current prices charged by at least three (3) manufacturers for the same grade of
the relevant Product (it being understood that with respect to Microfilm
Products there may not be sufficient relevant quotations, in which case
reference shall be made to percentage changes in the prices charged by
manufacturers of Microfilm Base Products other than SKC and its affiliates)
after the Effective Date).
(ii) Commencing on the Effective Date and ending on July 1,
1997, Anacomp's right to request a reduction based on competitive prices under
this Section 7 is subject to the condition that Anacomp is at the time of the
request in compliance with at least fifty-six percent (56%) of the Microfilm
Product Minimum Quantity Purchase Obligation set forth in Section 5 and is not
in default under Section 7.5(r) (excluding Section 7.5(r)(x)). For purposes of
this Section 7.1(e)(ii), Anacomp shall be deemed to be in compliance with its
Microfilm Products Minimum Quantity Purchase Obligation if in the immediately
preceding Contract Year or the preceding quarters (if any) of the current
Contract Year, Anacomp purchased 56% of its Microfilm Products Minimum Quantity
Purchase Obligation in respect of such Contract Year or quarters, as the case
may be.
(iii) Commencing on the Effective Date and ending on July 1,
1997, if SKC is unwilling or unable to sell Base Products to Anacomp at the
competitive price determined hereunder, then SKC shall without further
obligation to Anacomp release Anacomp from the relevant minimum purchase
requirement for the Base Product in question in lieu of supplying such Base
Product at such competitive price.
(iv) Commencing on the Effective Date and ending on July 1,
1997, a price adjustment based on competitive prices may be effected only once
per six (6) month period for each category of Products sold hereunder. All of
such price adjustments shall be effective prospectively for all Product
purchases from the month following the adjustment of such price and retroactive
to the date of the request for such competitive price adjustment.
(v) Commencing on the Effective Date and ending on July 1,
1997, if the price of Products has been reduced based on competitive pricing and
thereafter the current prices charged by manufacturers of such Products
increase, then at SKC's request, the prices of such Products shall be increased
in accordance with competitive pricing on the same basis and in the same manner
as they were previously reduced, subject, in the case of Microfilm products, to
the limitation on price increases set forth in Section 7.2 (d).
(vi) Commencing on the Effective Date and ending on July 1,
1997, it is understood and agreed that the intent of the parties in providing
for competitive pricing is to enable
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Anacomp to obtain Products from SKC hereunder at prices within the range of
current prices at which competitors of Anacomp are obtaining such Products
for the manufacture of products substantially the same as those produced by
Anacomp with the Products purchased from SKC.
(vii) Commencing on the Effective Date and ending on July 1,
1997, it is understood and agreed that if the competitive prices of Products are
different in different geographical markets, the prices in the area in which
each Anacomp facility is located will be considered for purposes of determining
the competitive price for Products to be delivered to such facility.
(viii) Commencing on the Effective Date and ending on July 1,
1997, it is understood and agreed that if Anacomp requests a reduction based on
competitive prices under this Section 7.1(e) with respect to any Product, the
parties will negotiate in good faith to adjust such reduction to appropriately
reflect any improvement in the net margin of profit earned by Anacomp for such
Product at the time of such request as compared to such margin in the 1993-1994
Contract Year in the first instance and thereafter in the most recent Contract
Year, if any, in which a reduction based on competitive prices under this
Section 7.1(e) has been effected.
7.2 PRICE CHANGES DUE TO CONSUMER PRICE INDEX CHANGES OR OTHER FACTORS.
(a) INCREASED COSTS OF PRODUCTION. Commencing on the Effective Date
and ending on July 1, 1997,during the twenty-four (24) months following the
Effective Date, the prices of the Microfilm Products set forth in Section 7.1(c)
shall apply. Subsequent price increases under this Section 7.2 shall be limited
to one (1) increase per twelve (12) month period (with the initial increase, if
any, retroactive to the beginning of the thirteenth (13th) month following the
Effective Date), and will be limited to cases where SKC has experienced
verifiable increases in its cost in manufacturing and/or acquiring polyester
base film, chemicals, and other raw materials, and increases in its labor,
overhead, and freight costs and duties, but shall exclude (i) corporate
allocation, (ii) depreciation, (iii) increase in SKC's specific allocation of
corporate general and administrative expenses and (iv) any additional costs
incurred by SKC for its MIS system in excess of those payable to Anacomp
pursuant to Section 10.5 of the Purchase Agreement, if SKC elects to replace the
existing MIS system at the Facility with a new MIS system or similar system;
provided, however, that any cost savings resulting from such replacement shall
likewise be omitted from the calculation of increased costs. For purposes of
determining SKC's cost at the Facility, all variable and fixed costs of
production (such as the factors identified in the preceding sentence) shall be
allocated over all manufacturing operations and product lines of SKC at the
Facility.
(b) PRICE CHANGES. Commencing on July 1, 1997, prices from SKC to
Anacomp for Microfilm Products shall be established at the current levels set
forth in Schedule "A" for 12 months from July 1, 1997, subject to increase or
decrease or no change thereafter at 12 month intervals ("CPI Year") in the
amount of any documented increase or decrease in the Consumer Price Index to be
submitted by SKC to Anacomp within thirty (30) days of the publication of the
Consumer Price Index for the month of June of each year. On July 1, 1998, and
on July 1 of every CPI Year during the Initial Term and any Renewal Period
thereafter, the prices shall be adjusted to reflect any increase or decrease in
the Consumer Price Index. In calculating the adjusted prices, the Consumer
Price Index for the month of June of the immediately preceding CPI Year
("Initial Index") shall be compared by SKC with the Consumer Price Index for the
month of June of the then current CPI Year ("Comparison Index"). The adjusted
prices shall be established by SKC by multiplying the then current prices by a
fraction, the numerator of which is the Comparison Index and the denominator of
which is the Initial Index. Price changes shall be effective as of July 1 for
the CPI Year then following. For example, if the Comparison Index decreased
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to a level of 150 for June of 1998 from an Initial Index level of 160 for
June of 1997, then SKC shall submit evidence of such decrease to Anacomp
within thirty (30) days of the publication of such Comparison Index and SKC
shall multiply prices on all Microfilm Products by 93.75% (150)160), with
such price reduction to be effective July 1, 1998 through June 30, 1999.
Schedule F sets forth an illustration of this methodology. Notwithstanding
the foregoing, at any time, upon the occurrence of a Change of Circumstances
Event which requires the increase of the prices of the Products, SKC shall
give notice thereof to Anacomp (the "COCE Notice") and shall also notify
Anacomp of the relevant Change of Circumstance Event Price Adjustment. If
for any reason Anacomp disputes the Change of Circumstances Event Price
Adjustment within 20 days after its receipt of the COCE Notice, then the
senior management of SKC and Anacomp shall meet and discuss a proper
resolution and equitable result arising from the occurrence of the Change of
Circumstances Event. If Anacomp does not respond within 20 days after receipt
of the COCE Notice or if Anacomp agrees or consents to the Change of
Circumstances Event Price Adjustment, then such Change of Circumstances Event
Price Adjustment notified by SKC to Anacomp shall come into effect ninety
(9)) days after such COCE Notice. Commencing on the Effective Date and
ending on July 1, 1997, the price increase hereunder for any twelve (12)
month period (the "Adjustment Year") shall be equal to the increase in the
relevant costs experienced by SKC in the Adjustment Year over such costs in
the 1993-1994 Contract Year in the first instance and thereafter in the most
recent Contract Year, if any, in which a price increase under this Section
7.2 has been effected (the "Base Year"), and shall be expressed in cents per
square foot of Microfilm Products produced by SKC in the Adjustment Year.
The operation of the foregoing provisions is illustrated in Exhibit H. In
addition, the price increase to be effected in any Adjustment Year shall be
reduced by the Net Efficiency Savings (as such term is defined and
illustrated in Exhibit I) per square foot experienced by SKC in such
Adjustment Year, to the extent that the cumulative Net Efficiency Savings
from the Closing Date through such Adjustment Year exceeds $2,000,000." From
December 1, 1993 to May 17, 1996, the costs experienced by SKCA in the
1993-1994 Contract Year, which will be used as the initial Base Year for the
first price adjustment under Section 7.2 shall exclude such costs experienced
by SKCA from the Closing Date through the date on which the Pastoria Facility
achieves the Operational Levels; PROVIDED, HOWEVER, that if the Operational
Levels have not been achieved by May 31, 1994, the parties will consult and
negotiate in good faith to agree upon a Base Year that accurately reflects
SKCA's costs and preserves the intent of Section 7.2 of the Supply Agreement.
From December 1, 1993 to May 17, 1996, notwithstanding anything to the
contrary in the Supply Agreement, for a period of 90 days from the Closing
Date, Anacomp agrees to insure SKC's personal property located in the
Pastoria Facility, at SKCA's expense, under Anacomp's domestic property
insurance policy with Protection Mutual Insurance Company (Policy No.
620801-91), subject to the terms and conditions of such policy. SKCA will
promptly reimburse Anacomp for all expenses of Anacomp related to such
insurance coverage as and when such costs are incurred by Anacomp. From May
17, 1996 to July 1, 1997, the costs experienced by SKCA in the 1993-1994
Contract Year, which will be used as the initial Base Year for the first
price adjustment under this Section 7.2, shall exclude such costs experienced
by SKCA from the Closing Date through the date on which the Pastoria Facility
achieves the Operational Levels, i.e., May 31, 1994, and shall therefore
consist of such costs experienced by SKCA during the period from June 1, 1994
through November 30, 1994, annualized.
(c) PAYMENT OF PRICE INCREASES. From the Effective Date until July
1, 1997, SKC shall provide Anacomp with written notice of any price increase,
together with its invoice therefor, which shall be retroactive for Anacomp's
purchases in the Adjustment Year (payable in a lump sum thirty (30) days after
such invoice) and prospective for Anacomp's purchases in the twelve (12) month
period following the Adjustment Year and thereafter; provided, however, that if
such retroactive price increase shall exceed one percent (1%) of the price of
the Microfilm Products prior to such adjustment, then such
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excess (expressed in cents per square foot) shall be added as a supplement to
the price of Anacomp's purchases in the period following the Adjustment Year
until such time as the entire amount thereof has been paid to SKC (regardless
of any adjustment based on competitive pricing under Section 7.1(e) that may
become effective after such Adjustment Year and regardless of the limitation
set forth in Section 7.2(d)).
(d) LIMITATION ON PRICE INCREASES. From the Effective Date until
July 1, 1997, no price increase under this Section 7.2 based on increases in the
costs of manufacturing Microfilm Products shall exceed ten percent (10%) of the
portion of the price of the Microfilm Products prior to such adjustment in any
one Adjustment Year. If any cost increase in the production of the Microfilm
Products experienced by SKC is not fully reflected in a price increase hereunder
due to the limitation set forth in the preceding sentence, such cost increase
shall be carried forward into subsequent years and shall be used in calculating
price increases in such subsequent years, subject in each year to such
limitation. However, SKC shall not be entitled to this retroactive price
increase on Microfilm Products purchases in the Adjustment Year to the extent
that such increase will cause the price which Anacomp paid for such Microfilm
Products to not be competitive with the prevailing market prices in such year,
in which case such cost increase shall be carried forward and used in
calculating price increases in subsequent years, subject in each such subsequent
year to the limitation set forth in this Section 7.2(d) and competitive pricing.
(e) TRANSACTIONS WITH AFFILIATES. From the Effective Date until July
1, 1997, if any portion of the cost increase under this Section 7.2 results from
a material or labor cost increase experienced by SKC which is payable to an
SKC-affiliated company, then SKC shall document to Anacomp's reasonable
satisfaction that the cost being charged SKC by its affiliate reflects the
market price which SKC could pay an unaffiliated third party for such material
or labor.
(f) VERIFICATION OF INCREASED COSTS. From the Effective Date until
July 1, 1997, any cost increases described in this Section 7.2 will be audited
by Deloitte Touche (or any other "big five" international accounting firm that
regularly audits SKC's books) and, if relevant, the Korean affiliate of such
firm, in accordance with U.S. and, if relevant, Korean generally accepted
auditing standards, consistently applied; provided, however, that Anacomp shall
have the right to review such audit (including access to such accountant's work
papers) through a nationally recognized accounting firm at Anacomp's own cost
and expense. If the parties shall fail to reach agreement with respect to a
price increase, then such matter shall be submitted to binding arbitration in
New York City, New York, pursuant to the commercial rules of arbitration of the
American Arbitration Association.
(g) PAYMENTS TO SKC.
(i) Notwithstanding anything to the contrary in this
Agreement, with respect to the calculation of prior price increases for the
1994-1995 Contract Year and the 1995-1996 Contract Year, Anacomp shall pay to
SKC a deferred amount of $3,600,000 as provided in Section 7.2(g)(ii), of
which $1,800,000 shall be allocated to the 1994-1995 Contract Year and
$1,800,000 million shall be allocated to the 1995-1996 Contract Year. (i)
From May 17, 1996 to July 1, 1997, notwithstanding anything to the contrary
in this Agreement, with respect to the calculation of the price increases
under this Section 7.2 due to increased costs for the 1994-1995 Contract Year
and the 1995-1996 Contract Year, (1) a 5% price increase shall be applied
beginning on the Reorganization Effective Date, (2) an additional 5% price
increase shall be applied beginning on December 1, 1996, (3) Anacomp shall
pay to SKC $1.9 million on the
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Reorganization Effective Date with respect to increased costs for the
1994-1995 Contract Year, (4) and Anacomp shall pay to SKC a deferred amount
of $3.6 million as provided in Section 7.2(g)(ii), of which $1,800,000 shall
be allocated to the 1994-1995 Contract Year and $1,800,000 shall be allocated
to the 1995-1996 Contract Year. Other than as provided in this Section
7.2(g)(i), there will be no additional increases for production costs
incurred in the 1994-1995 Contract Year or the 1995-1996 Contract Year and
there will be no other price increases due to increased production costs
until the next production cost increase for the 1996-1997 Contract Year,
collected retroactively after calculation as of November 30, 1997 and based
on increases in production costs incurred in the 1996-1997 Contract Year over
production costs incurred in the 1995-1996 Contract Year;
(ii) Commencing on July 1, 1997, the deferred payment of
$3,600,000 provided for in Section 7.2(g)(i) shall not bear interest, shall
be evidenced by a note and shall be amortized as follows: (1) June 1, 1997,
$400,000 (previously received by SKC), (2) June 1, 1998, $600,000, (3) June
1, 1999, $800,000, (4) June 1, 2000, $800,000 and (5) June 1, 2001,
$1,000,000."
7.3 LOWEST PRICING. Commencing on July 1, 1997, if at any time during
the term of this Agreement SKC provides more favorable prices to a customer for
comparable Microfilm Products (other than the 16mm product sold to Eastman Kodak
Company under the product number(s) shown on Schedule H) than those prices
which Anacomp is receiving, where "comparable" shall mean grade, destination,
quality and other relevant quality factors relating to Microfilm Products
(except for quantity discounts or other sales incentives), then, so long as
Anacomp is in compliance with all the terms of this Agreement, SKC shall grant
equally favorable prices to Anacomp on quantities of Microfilm Products than
those sold to such customer at such prices. Nothing in this Agreement shall
be deemed to restrict or limit SKC's ability to sell the Microfilm Products to
any person on such terms as it deems appropriate. Notwithstanding this Section
7.3, SKC shall be permitted to bid or quote or enter into contracts with (a) its
own affiliated companies (other than bids, quotes or contracts which circumvent
the intent of this Section 7.3) or (b) governmental or quasi-governmental
agencies, in each case on terms and conditions which need not be offered to
Anacomp. Commencing on the Effective Date and ending on July 1, 1997, if at
any time during the term of this Agreement SKC provides more favorable prices
to a customer for the Base Products than those prices which Anacomp is
receiving for the same grade of Base Products in the same geographical area,
taking into account the quantities and terms of this Agreement, and such
customer is utilizing such Base Products for the manufacture of duplicate
microfilm (in the case of Microfilm Base Products) or other products
substantially the same as those produced by Anacomp with Magnetic Base Products
purchased from SKC hereunder (in the case of such Magnetic Base Products), then,
so long as Anacomp is in compliance with all the terms of this Agreement, SKC
shall grant equally favorable prices to Anacomp on quantities of Base Products
equal to those sold to such customer at such prices. Nothing in this
Agreement shall be deemed to restrict or limit SKC's ability to sell the Base
Products to any person on such terms as it deems appropriate. Notwithstanding
this Section 7.3, SKC shall be permitted to bid or quote or enter into contracts
with (a) its own affiliated companies (other than bids, quotes or contracts
which circumvent the intent of this Section 7.3) or (b) governmental or
quasi-governmental agencies, in each case on terms and conditions which need not
be offered to Anacomp.
7.4 INVOICING. Except during the continuation of the Trade Credit
Arrangement described in Section 7.5, all invoices for the Products purchased by
Anacomp hereunder shall be due and payable thirty (30) days from the date of
SKC's invoice. Any such invoice not paid when due shall bear
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interest at the lower of (a) Six and Seventy-Five Hundredths Percent (6.75%)
over the Prime Rate, or (b) the highest rate permitted by applicable law.
SKC shall issue an invoice to Anacomp with respect to purchased Products upon
their arrival at the Sunnyvale Warehouse or other designated ship-to facility
as described in Section 8.1.
7.5 DEFERRED PAYMENT TERMS. (a) CONTINUATION OF TRADE CREDIT
ARRANGEMENT. SKCA agrees to continue the Trade Credit Arrangement under the 1992
Agreement pursuant to which SKCA agreed to defer payment and to grant trade
credit to Anacomp for purchase of the Products by Anacomp in an aggregate amount
of up to Twenty Five Million United States Dollars ($25,000,000), subject to the
terms of this Agreement (as so continued, the "Trade Credit Arrangement"). The
available credit under the Trade Credit Arrangement as of the Closing Date shall
be $25,000,000 less the aggregate Outstanding Amounts under the 1992 Agreement
as of the Closing Date. All Invoiced Amounts outstanding under the 1992
Agreement as of the Closing Date shall become Outstanding Amounts hereunder
thereafter as provided in Section 7.5(g). The available credit under the Trade
Credit Arrangement as of February 1, 1998, shall be $5,000,000."
(b) ONGOING TRADE CREDIT. The Trade Credit Arrangement agreed to
herein shall be an ongoing trade credit arrangement, subject to Section 7.5(r).
(c) EVIDENCE OF OUTSTANDING AMOUNTS. Amounts recorded on invoices or
on the books and records of SKCA regarding the amounts owing from time to time
under the Trade Credit Arrangement shall be prima facie evidence of such
amounts. SKCA shall forward to Anacomp from time to time statements of amounts
owing under the Trade Credit Arrangement which shall be deemed correct and
binding in the absence of manifest error.
(d) INTEREST AND INTEREST RATE. For so long as the Trade Credit
Arrangement is in place, there shall accrue interest (the "Interest") on the
amounts owing under the Trade Credit Arrangement upon the expiration of thirty
(30) days following the date of each invoice at an interest rate (the "Initial
Interest Rate") calculated and determined by SKCA and equal to Two and Five
Tenths Percent (2.5%) (or after the Collateral Perfection Date, as hereinafter
defined, One and Seventy Five Hundredths Percent (1.75%) (the "Reduced Interest
Rate")) over the prime rate (the "Prime Rate") of the First National Bank of
Boston (the "Reference Bank") in effect two (2) business days prior to each
Interest Payment Date (as hereinafter defined), computed based upon a year
comprised of 360 days for the actual number of days elapsed. The Initial
Interest Rate and the Reduced Interest Rate are together referred to as the
"Interest Rate." If for any reason the Reference Bank no longer quotes a prime
rate, then SKCA may in its discretion designate a replacement Reference Bank or
Reference Banks from time to time in order to determine the Interest Rate.
(e) INTEREST PAYMENT DATE. Interest under the Trade Credit
Arrangement shall be paid to SKCA in advance hereunder monthly on or before the
fifth (5th) business day of each month (an "Interest Payment Date").
(f) PLACE OF PAYMENT. All repayments of Outstanding Amounts (as
defined in Section 7.5(g)), payments of Interest and other payments required
hereunder shall be made by wire transfer to SKCA to its account at the First
National Bank of Boston, 100 Federal Street, 01-06-03, Boston, Massachusetts
02106, ABA #011000-390, Account Number 521-39767, or such other bank and bank
account as SKCA shall notify Anacomp in writing from time to time.
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(g) PAYMENT OF INVOICES. (i) SKCA shall issue an invoice to Anacomp
for Products purchased by Anacomp hereunder on the date such Products are
delivered to Anacomp as described in Section 7.4. Such date is hereinafter
referred to as the "Invoice Date" and the amount of such invoice is hereinafter
referred to as the "Invoiced Amount." Upon the expiration of thirty (30) days
following each Invoice Date, such Invoiced Amount shall be deemed an
"Outstanding Amount" under the Trade Credit Arrangement. The sum from time to
time of the aggregate of all Invoiced Amounts that have not yet been paid under
clause (ii) of this Section 7.5(g) (regardless of whether such Invoiced Amounts
have become Outstanding Amounts) is hereinafter referred to as the "Aggregate
Exposure."
(ii) Anacomp shall from time to time pay such invoices
(beginning with the first invoice billed to Anacomp pursuant to this Agreement,
and thereafter on a first in-first out basis) as are necessary (A) to maintain
the aggregate Outstanding Amounts at all times at an amount less than or equal
to $5,000,000 and (B) to maintain the Aggregate Exposure at all times at an
amount less than or equal to $2,600,000. Such invoices shall be paid by Anacomp
at least three (3) business days prior to the date on which the Outstanding
Amounts or the Aggregate Exposure, as the case may be, would otherwise exceed
the relevant amount set forth in the preceding sentence. Prior to July 1, 1997,
Anacomp shall from time to time pay such invoices (beginning with the first
invoice billed to Anacomp pursuant to this Agreement, and thereafter on a first
in-first out basis) as are necessary (A) to maintain the aggregate Outstanding
Amounts at all times at an amount less than or equal to $25,000,000 and (B) to
maintain the Aggregate Exposure at all times at an amount less than or equal to
$29,000,000. Such invoices shall be paid by Anacomp at least three (3) business
days prior to the date on which the Outstanding Amounts or the Aggregate
Exposure, as the case may be, would otherwise exceed the relevant amount set
forth in the preceding sentence. Notwithstanding the foregoing, on March 25,
1997, the limit for aggregate Outstanding Amounts was reduced from $25 million
to $15 million, and on February 11, 1998, to $5 million.
(iii) Upon the written request of any party not subject to
termination by the other party pursuant to Section 14.1, the $2,600,000 limit
set forth in Section 7.5(g)(ii)(B) shall be adjusted annually (to the nearest
$100,000) to the extent that Anacomp's average monthly purchases hereunder
during the previous twelve (12) months are greater or less than $2,600,000.
Such adjustment shall be effective beginning on the first day of the month
following such determination; PROVIDED, HOWEVER, that if Anacomp is required to
adjust the $2,600,000 limit set forth in Section 7.5(g)(ii)(B) (or such lower
amount if such limit has been previously adjusted downward pursuant to this
Section 7.5(g)(iii)) to an amount below $2,600,000 or the then existing limit,
then Anacomp shall have 90 days to comply with any such adjustment. Prior to
December 1, 1997, upon the written request of any party not subject to
termination by the other party pursuant to Section 14.1, the $29,000,000 limit
set forth in Section 7.5(g)(ii)(B) shall be adjusted annually (to the nearest
$100,000) to the extent that Anacomp's average monthly purchases hereunder
during the previous twelve (12) months are greater or less than $4,000,000.
Such adjustment shall be effective beginning on the first day of the month
following such determination; provided, however, that if Anacomp is required to
adjust the $29,000,000 limit set forth in Section 7.5(g)(ii)(B) (or such lower
amount if such limit has been previously adjusted downward pursuant to this
Section 7.5(g)(iii)) to an amount below $29,000,000 or the then existing limit,
then Anacomp shall have 90 days to comply with any such adjustment.
(iv) SKCA shall give Anacomp at least seven (7) days" prior
written notice of each delivery of Products hereunder. Failure to give such
notice shall not relieve Anacomp of its obligation to make payments hereunder.
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(v) From May 17, 1996 to December 1, 1997, on the
Reorganization Effective Date, Anacomp will make a cash payment to SKC in an
amount necessary to bring the aggregate Outstanding Amounts to an amount less
than $25,000,000, as required by Section 7.5(g)(i) of the Agreement.
(h) MANDATORY PREPAYMENT. Upon the refinancing or restructuring of
substantially all of the debt currently outstanding under the Junior Loan
Document, the aggregate Outstanding Amounts, Interest and Overdue Interest (as
defined in Section 7.5(p)) owing under the Trade Credit Arrangement shall be
mandatorily repaid and paid, as the case may be, and the Trade Credit
Arrangement shall be terminated. Only normal trade credit may be extended
thereafter, on the terms set forth in Section 7.4. From May 17, 1996 to
December 1, 1997, notwithstanding anything to the contrary in this Section
7.5(h), for purposes of this Section 7.5(h), the plan of reorganization
effective under the Bankruptcy shall not be deemed to constitute a refinancing
or restructuring that would require mandatory prepayment, and shall not be a
cause for termination of the Trade Credit Arrangement.
(i) DEFERRED MATURITY DATE. Unless earlier prepaid, all amounts
under the Trade Credit Arrangement, including without limitation Outstanding
Amounts, Interest and Overdue Interest shall be fully paid on December 31, 2001
(the "Final Date"), which Final Date shall not be subject to any extension
whatsoever regardless of whether this Agreement is renewed or extended beyond
the Final Date pursuant to Section 2.2 or otherwise.
(j) PAYMENT UPON TERMINATION. The due date for all invoices for the
Products shall automatically be accelerated so that they will immediately
become due and payable on the effective date of termination of the Trade Credit
Arrangement or this Agreement (whether in accordance with its terms or by reason
of default by either party), even if longer terms had been provided previously.
(k) COLLATERAL AND NEGATIVE PLEDGE. (i) In order to induce SKCA to
enter into this Agreement and to furnish to Anacomp the Trade Credit
Arrangement, Anacomp granted to SKCA a first priority purchase money security
interest under the applicable provisions of the Uniform Commercial Code (or
other applicable law in the case of non-U.S. operations) in and to all of
Anacomp's right, title and interest of the Products and work-in process,
products, by-products, intangibles, accounts receivable or other proceeds of the
Products sold under this Agreement, wherever located (collectively, the
"Collateral") on the Collateral Perfection Date. The specific terms and
conditions of this security interest shall be set forth in the Trade Credit
Security Agreement and other similar documents for non-U.S. Collateral, together
with the filing of financing statements as required under the Uniform Commercial
Code or other applicable law. From the Effective Date to July 1, 1997, in order
to perfect the security interest to be granted under the Trade Credit Security
Agreement and other similar documents for non-U.S. Collateral, Anacomp shall
sign, execute and deliver to SKCA for filing any and all financing statements,
maintenance filings, extensions, renewals and other documents requested from
time to time by SKCA or otherwise necessary to maintain SKCA's first priority
security interest in the Collateral. Effective June 1, 1998, the Trade Credit
and Security Agreement is deemed terminated, and SKC agrees that it shall sign,
execute and deliver to Anacomp for filing any and all financing termination
statements and other documents requested from time to time by Anacomp or
otherwise necessary to release and terminate SKCA's first priority security
interest in the Collateral.
(ii) As used herein, the "Collateral Perfection Date" shall
mean November 1, 1993, and with such additional terms as the parties may
hereafter agree in writing.
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(iii) From the Effective Date to June 1,1998, so long as the
Trade Credit Arrangement remains in effect, Anacomp agrees that it shall not
grant any purchase money security interest (or the equivalent thereof) to any
third party.
(l) CONSENTS AND WAIVERS. On or before the Effective Date, Anacomp
shall obtain and deliver to SKCA any consents or waivers that may be required
under the Senior Loan Document with respect to the transactions contemplated
hereby and by the Purchase Agreement
(m) TAXES AND WITHHOLDING TAXES. All taxes, withholding taxes,
imposts, penalties, fines and other amounts or deductions (collectively, the
"Taxes") imposed upon any Outstanding Amounts, or Interest or Overdue Interest
(other than taxes on the net income of SKCA) shall be the full responsibility of
and shall be paid by Anacomp, and all payments to SKCA pursuant to this Section
7.5 shall be made free from such Taxes, and shall be grossed up to the extent
that SKC is required to make any payment of Taxes from any payment of
Outstanding Amounts, Interest or Overdue Interest made by Anacomp hereunder.
Anacomp shall indemnify, hold harmless and reimburse SKCA fully for any of such
Taxes which SKC is required to pay. The obligations under this Section 7.5(m)
shall survive the termination, cancellation, rescission or annulment of this
Agreement.
(n) SPECIAL REPRESENTATIONS AND WARRANTIES. (i) Anacomp hereby
represents and warrants that (A) it is a corporation duly organized in the State
of Indiana and has made all filings necessary with the Secretary of State of the
State of Indiana in order to obtain a certificate of existence and it is
qualified to do business in all states or jurisdictions where the failure to be
so qualified would have a material adverse effect on Anacomp's business, (B) it
has taken all corporate action necessary or required in order to execute, issue
and deliver this Agreement, the Purchase Agreement, the Security Agreements and
the other documents referred to herein or therein (the "Documents"), (C) no
provision of any material agreement to which Anacomp is a party is in default or
will be with the lapse of time in default or accelerated as a result of any
provision of the Documents or the carrying out of any of the transactions
contemplated by the Documents, (D) the information previously provided to SKC
with respect to Anacomp's cost of producing Coated Microfilm Products in Fiscal
Years 1990, 1991 and 1992 is true and correct in all material respects and not
misleading in any material respect, (E) it has obtained all material government
permits, consents, approvals or licenses and delivered such notices as shall be
required or necessary under applicable laws, regulations or orders affecting or
applicable to Anacomp, (F) there are no pending or, to the knowledge of Anacomp,
threatened actions or proceedings which individually or in the aggregate would
have a material adverse effect on Anacomp's business, (G) there are no security
interests affecting its property other than those in favor of the Lenders (or
Trustee and Security Holders) under the Senior Loan Document and liens permitted
under Section 5.1 of the Senior Loan Document, and (H) the information
previously provided to SKC with respect to Anacomp's polyester purchase
obligations is true and correct in all material respects and not misleading.
(ii) Each use of the Trade Credit Arrangement by Anacomp
shall be deemed to be a representation and warranty to SKC that such transaction
will not result in a violation of any provision of the Junior Loan Document.
(o) NON-SUBORDINATION. No amount of the Trade Credit Arrangement
shall be subordinated or made expressly inferior to any other obligation of
Anacomp. SKCA shall not be required to enter into any subordination,
intercreditor, waiver or relinquishment of rights agreement which would or could
effect a subordination of payments or the enforcement of its rights under this
Agreement or applicable law.
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(p) OVERDUE INTEREST. Anacomp shall pay interest on any amount not
paid when due under this Agreement ("Overdue Interest") at the lower of (a) Five
Percent (5%) over the Interest Rate or Reduced Interest Rate, as the case may
be, or (b) the highest rate permitted by applicable law.
(q) REPORTING REQUIREMENTS. During the term of this Agreement,
Anacomp shall furnish and supply to SKCA any and all reports, financial
statements, public Securities and Exchange Commission filings and other
documents furnished or supplied to Anacomp's lending institutions. SKCA shall
receive copies of any amendments, waivers, alterations, new or restated
agreements, instruments or other documents, including any notice of default or
correspondence with respect to potential or alleged defaults, between Anacomp
and any of the Lenders under the Senior Loan Document or the Junior Loan
Document.
(r) TRADE CREDIT ARRANGEMENT DEFAULT EVENT. The following shall
constitute default events under this Section 7.5 and this Agreement:
(i) Anacomp defaults in the payment of Interest or
repayment of any Outstanding Amounts when the same become due and payable under
the Trade Credit Arrangement or any other payment default occurs, and such
default continues for a period of five (5) days after written notice to Anacomp
thereof;
(ii) Anacomp materially breaches this Agreement (including
any representation or warranty), which breach has not been cured by the
ninetieth (90th) day after notice of such breach by SKCA to Anacomp;
(iii) Anacomp materially breaches any of the Security
Agreements or other Documents, which breach has not been cured by the thirtieth
(30th) day after notice of such breach by SKCA to Anacomp;
(iv) (1) Anacomp or any subsidiary of Anacomp fails to pay
when due principal of or interest on indebtedness for borrowed money of Anacomp
or such subsidiary with an aggregate principal amount of US$5,000,000 or (2)
there occurs a default or defaults on indebtedness for borrowed money of Anacomp
or any subsidiary of Anacomp, which results in the acceleration of the maturity
of indebtedness for borrowed money with an aggregate principal amount of
US$5,000,000 or more;
(v) Anacomp or any subsidiary of Anacomp pursuant to or
within the meaning of any Bankruptcy Law:
(1) commences a voluntary case or proceeding for relief as a
debtor under any Bankruptcy Law,
(2) consents to the entry of an order for relief against it in
an involuntary case or proceeding,
(3) applies for, consents to or acquiesces in the appointment of
or taking of possession by a Custodian of it or for all or substantially
all of its respective property,
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(4) makes a general assignment for the benefit of its creditors,
(5) consents to or acquiesces in the institution of a bankruptcy
or an insolvency proceeding against it,
(6) admits in writing its inability to pay its debts as they
become due, or
(7) takes any corporate action in furtherance of or to
facilitate, conditionally or otherwise, any of the foregoing;
(vi) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(1) seeks relief against Anacomp or any subsidiary of Anacomp,
in an involuntary case or proceeding,
(2) appoints a Custodian of Anacomp or any subsidiary of
Anacomp, or for all or substantially all of its respective properties, or
(3) orders the liquidation of Anacomp or any subsidiary of
Anacomp; and in each case the order or decree remains unstayed and in
effect for sixty (60) days;
(vii) final judgments for the payment of money, which
judgments in the aggregate exceed US$5,000,000 and are not adequately covered by
insurance, reserved against or bonded for by a responsible bonding authority,
shall be rendered against Anacomp or any majority-owned subsidiary of Anacomp by
a court of competent jurisdiction and shall remain undischarged for a period
(during which execution shall not be effectively stayed) of sixty (60) days
after the date on which any period for appeals has expired and all rights of
appeal have been denied;
(viii) any non-monetary judgment or order shall be rendered
against Anacomp or any of its majority-owned subsidiaries that has a reasonable
likelihood of having a material adverse effect and either (1) enforcement
proceedings shall have been commenced by any person upon such judgment or order
or (2) there shall have been a period of thirty (30) consecutive days during
which a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect;
(ix) an event of default under the Senior Loan Document
relating to the Employment Retirement Income Security Act of 1974 (or any
successor legislation thereto) shall have occurred;
(x) there shall occur any Change in Control; or
(xi) the Lenders under the Senior Loan Document shall assert
that the entering into or performance of this Agreement by Anacomp constitutes a
default under the Senior Loan Document, and such assertion has not been
withdrawn within sixty (60) days. From May 17, 1996 to July 1, 1997,
notwithstanding anything to the contrary set forth in this Section 7.5(r) or in
this Agreement, as of the Reorganization Effective Date, SKC waives any event of
default under this Section 7.5(r) (as now or at any time theretofore in effect)
which was or could have occurred or been in existence and which was
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known to SKC on the date of execution hereof as a result of or in connection
with the Bankruptcy, including a Change in Control event of default referred
to in Section 7.5(r)(x), and none of such events shall constitute events of
default under this Agreement. The foregoing shall not constitute a waiver of
any event of default not known to SKC or a waiver of any event occurring
after the date of execution hereof that may constitute an event of default
under this Agreement.
(s) TERMINATION UPON DEFAULT. Upon the occurrence of any default
event under this Section 7.5, SKCA shall have the option to terminate this Trade
Credit Arrangement and/or, if it so elects, this Agreement in its entirety,
without limiting any other right, remedy or action SKCA may have against Anacomp
or the Collateral; provided, however, that in the event of a default event
pursuant to Section 7.5(r)(x), SKC shall be permitted to terminate the Trade
Credit Arrangement but this Agreement shall continue in full force and effect,
unless this Agreement is otherwise in default by Anacomp. If SKCA terminates
the Trade Credit Agreement, all amounts owing pursuant to the Trade Credit
Arrangement and all other invoices of SKCA relating to Products sold hereunder
shall immediately become due and payable as of the date of such acceleration.
(t) EXPENSES. Anacomp shall pay all reasonable out-of-pocket
expenses incurred by SKCA following the date upon which this Agreement is
executed, including reasonable fees and disbursements of its attorneys, in
connection with any matters relating to the Trade Credit Arrangement and the
Collateral, including without limitation any such amounts incurred in connection
with the collection or enforcement proceedings hereunder or in connection with
any revision, amendment, restatement or novation of the Documents or any one of
them, or in connection with the maintenance, filing, monitoring, perfection and
other action related to the Collateral. From May 17, 1996 to July 1, 1997, this
obligation includes the reimbursement by Anacomp to SKC of reasonable fees paid
to SKC's attorneys in connection with the Bankruptcy. Anacomp has agreed that
the amount of such fees incurred through April 30, 1996, amounting to
approximately $185,000, is reasonable and will be paid upon presentation of
invoice following the Reorganization Effective Date.
(u) GENERAL INDEMNITY. Anacomp hereby agrees to indemnify, protect,
save, and keep harmless SKCA and its suppliers or contractors and each of their
respective shareholders, officers, directors, employees and agents, or any of
their respective successors or assigns (collectively the "Indemnitees"), from
and against any and all liabilities, obligations, losses, damages, penalties,
claims, actions, suits, costs, expenses and disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against any
Indemnitee in any way relating to or arising out of the Trade Credit
Arrangement.
(v) PAYMENT OBLIGATIONS ABSOLUTE. The obligations of Anacomp to make
payments under the Trade Credit Arrangement and this Section 7.5 are absolute
notwithstanding (a) the invalidity, illegality or unenforceability of the supply
or manufacture provisions of this Agreement, (b) the termination, rescission or
amendment of the Purchase Agreement, (c) the existence of indebtedness or other
obligations of any Indemnitee to Anacomp, (d) the failure of SKCA to perform its
obligations under provisions of this Agreement other than this Section 7.5, (e)
the amendment, waiver or revision of the provisions of the Documents other than
this Section 7.5, or (f) any other event or thing, whether similar or dissimilar
to the foregoing.
(w) PAYING INTEREST AFTER BANKRUPTCY. "From May 17, 1996 to July 1,
1997, on the Reorganization Effective Date, Anacomp will pay all interest due to
SKC pursuant to Sections 7.5(d) and
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7.5(p) of the Agreement. Attached hereto as Schedule I is a statement of all
such outstanding interest due to SKC through April 30, 1996.
8. SHIPMENT AND DELIVERY.
8.1 SHIPMENT AND RISK OF LOSS. All Microfilm Products shall be
shipped by SKC to the Sunnyvale Warehouse for unloading by SKC. Title and risk
of loss of Microfilm Products for Anacomp customers shall pass to Anacomp when
they are delivered to Anacomp at the Sunnyvale Warehouse. Title and risk of
loss of Microfilm Products for SKC's customers shall never pass to Anacomp. If
Anacomp orders Magnetic Base Products hereunder for its U.S. or European
facility, then such Magnetic Base Products shall be shipped F.O.B. such U.S.
facility or C.I.F. such European facility, as the case may be.
8.2 PACKING AND SHIPMENT LIST. SKC agrees to pack all Products for
delivery to Anacomp and provide shipment lists in accordance with the procedures
described on Exhibit F-12.
8.3 DELIVERIES. SKC shall deliver the Microfilm Products at the
Sunnyvale Warehouse, and Anacomp shall arrange for receipt thereof, as described
in Exhibit F-10.
8.4 MAINTENANCE OF INVENTORY. SKC agrees to maintain in its
inventory at or near the Facility an amount equal to a three-week (prior to July
1, 1998, four-week) supply of Coated Microfilm Products and, (commencing July 1,
1998) beginning in Phase II, Microfilm Products, based on Anacomp's then current
demand for such products, or such greater amount as SKC may determine to be
necessary from time to time in order to meet its commitments to Anacomp in a
timely manner.
8.5 SUNNYVALE WAREHOUSE FACILITY. (a) On or before the Effective
Date, Anacomp shall, in cooperation and consultation with SKC, lease a warehouse
facility for its own and SKC's use in Sunnyvale, California (or such other
location as may be mutually acceptable to Anacomp and SKC) (the "Sunnyvale
Warehouse"), which facility and related lease agreement shall be mutually
acceptable to Anacomp and SKC. It is anticipated by the parties that upon the
expiration of Phase I, SKC shall enter into a sublease with Anacomp covering a
portion of the facility of approximately 30,000 square feet to be occupied by
SKC after the Effective Date and used for the storage of Products. The terms
and conditions of the sublease between Anacomp and SKC shall be, in all
respects, the same as the terms and conditions of the master lease agreement
between Anacomp and the lessor as approved by SKC, and the parties shall
negotiate in good faith an appropriate allocation of SKC's share of the
operating expenses payable by Anacomp under such master lease agreement.
(b) The parties shall commence and complete a Phase I transition in
connection with the use of the Sunnyvale Warehouse Facility. In connection with
Phase I and related to any and all sales of Microfilm Products under this
Agreement including sales to Indirect Channels by SKC, Anacomp shall ship
Products to such Indirect Channels from the Sunnyvale Warehouse Facility. The
cost to be paid by SKC for such use of the Sunnyvale Warehouse operation shall
be the 2.5% distribution fee. The Phase II sublease of the Sunnyvale Warehouse
Facility in favor of SKC from Anacomp in connection with the rented space is
attached hereto as Exhibit J.
(c) Commencing at the end of Phase I the parties shall commence and
complete a Phase II transition in connection with the use and leasing of the
Sunnyvale Warehouse Facility. In connection with Phase II and related to any
and all sales of Microfilm Products under this Agreement
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including sales to Indirect Channels by SKC, SKC shall arrange for the
transportation of the Microfilm Products to be transported from its Pastoria
facility and delivered to the Sunnyvale Warehouse Facility, and SKC shall
ship the Microfilm Products to SKC's Indirect Channels from the Sunnyvale
Warehouse Facility. The cost to be paid by SKC for such use and leasing of
the Sunnyvale Warehouse Facility shall be the pro rata rent on the Sunnyvale
Warehouse Facility as set forth in the lease between Anacomp and the landlord
of the Sunnyvale Warehouse Facility and to be set forth in the sublease
between SKC and Anacomp. Phase II shall continue in effect, unless the
parties mutually agree to terminate it in a writing executed by the parties
hereto.
9. PRODUCT SPECIFICATIONS AND MODIFICATIONS.
9.1 SPECIFICATIONS AND MODIFICATIONS. SKC represents and warrants
that the Products will on the date of delivery to Anacomp conform to the
Specifications listed in Exhibit C. With Anacomp's consent, SKC may, from time
to time after the Effective Date, modify the Specifications (including
engineering changes which affect the Product configurations) or create
enhancements to the Products providing additional features, functions or
performance capabilities, and shall provide Anacomp with sixty (60) days prior
written notice of any such Specification modification or enhancement. Any such
Specification modification or enhancement created by SKC shall remain the
exclusive property of SKC; provided, however, that SKC shall grant Anacomp a
perpetual, nonexclusive, royalty-free license on the use thereof, excluding the
use of such modification or enhancement to manufacture Products in the Republic
of Korea. All Products shipped after the effective date of any Specification
changes shall conform to the changed Specification. In the event that any
Specification modification or enhancement is approved by Anacomp and made in
order to correct a deficiency in Product performance, Anacomp shall bear all
costs associated with making such modification or enhancement. SKC will not
make any Specification modification or enhancement without Anacomp's prior
written approval.
9.2 ANACOMP-REQUESTED MODIFICATIONS. Anacomp shall have the right to
request modifications to the Products (including any modification that could
result in a new part number), and SKC shall give due consideration to the
requested modification and shall use its commercially reasonable best efforts to
implement each such modification. If SKC agrees to implement the modification,
then prior thereto SKC shall provide Anacomp with an estimate of the cost of the
modification and SKC's proposed price for the modified Product. SKC and Anacomp
shall then negotiate in good faith to reach an agreement on the price to be
charged for the modified Product. In the event that the parties cannot agree on
a price for the modified Product, or if SKC determines that the requested
modification would not significantly improve the Product or would be
impracticable to implement, then SKC shall not be obligated to make the
requested modification and shall notify Anacomp of its decision not to implement
the modification. Anacomp may then seek to have a third party manufacture the
modified Product, subject to Anacomp continuing to meet the Product purchase
obligations set forth in Section 5.
10. INTENTIONALLY DELETED.
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11. WARRANTIES, DISCLAIMER AND LIMITATION ON DAMAGES.
11.1 PRE-SHIPMENT TESTING. SKC shall conduct reasonable pre-shipment
tests of the Products to ensure that the Products comply with the Specifications
in all material respects in accordance with Anacomp's practices and procedures
in effect prior to the Effective Date. SKC will retain such test results for a
period of twelve (12) months from the delivery date of the tested Products. Any
tested Products found not to materially comply with the Specifications will be
replaced, and SKC will repeat the test procedures with respect to the
replacement Products prior to shipment thereof to Anacomp.
11.2 SKC'S WARRANTY FOR THE MAGNETIC BASE PRODUCTS (PRIOR TO JULY 1,
1997, "BASE PRODUCTS"). (a) WARRANTY. SKC warrants that it will deliver free
and clear title to the Magnetic Base Products (PRIOR TO JULY 1, 1997, "BASE
PRODUCTS"), subject only to SKC's security interest created pursuant to Section
7.5. Furthermore, notwithstanding the expiration or termination of this
Agreement, SKC warrants that for a period of one hundred twenty (120) days from
the time of delivery to Anacomp of the Magnetic Base Products (PRIOR TO JULY 1,
1997, "BASE PRODUCTS"), all such Magnetic Base Products (PRIOR TO JULY 1, 1997,
"BASE PRODUCTS") will be free from defects in materials and manufacturing and
will comply with Anacomp's Specifications in all material respects. At no time
during the term of this Agreement shall SKC provide Anacomp with defective or
nonconforming Magnetic Base Products (PRIOR TO JULY 1, 1997, "BASE PRODUCTS")
returned due to manufacturing defects in excess of fifteen percent (15%) of the
total amount of Magnetic Base Products (PRIOR TO JULY 1, 1997, "BASE PRODUCTS")
purchased by Anacomp in any Contract Year.
(b) REMEDIES FOR NONCONFORMANCE WITH THE WARRANTY. If any of
the Magnetic Base Products (PRIOR TO JULY 1, 1997, "BASE PRODUCTS") do not
conform to the warranty set forth in Section ll.2(a) during the warranty period,
then SKC's sole liability and obligation under the warranty shall be to pay for
the expense of returning the Magnetic Base Products (PRIOR TO JULY 1, 1997,
"BASE PRODUCTS") to SKC (with risk of loss in transit to be borne by SKC) and to
replace the Magnetic Base Products (PRIOR TO JULY 1, 1997, "BASE PRODUCTS")
within sixty (60) days of Anacomp's notifying SKC of such nonconformance, at
SKC's expense (including payment of shipping costs) and risk. Anacomp shall
repackage the defective Magnetic Base Products (PRIOR TO JULY 1, 1997, "BASE
PRODUCTS") that Anacomp returns to SKC in accordance with the repacking
specifications that SKC provides to Anacomp. Anacomp shall reimburse SKC,
within ten (10) days of SKC's invoice date, for shipment expenses and testing
costs for any Magnetic Base Products (PRIOR TO JULY 1, 1997, "BASE PRODUCTS")
rejected by Anacomp that SKC subsequently determines were in compliance with the
Specifications.
11.3 SKC'S WARRANTY FOR THE MICROFILM PRODUCTS. (a) WARRANTY.
Notwithstanding the expiration or early termination of this Agreement, SKC
warrants that it will deliver free and clear title to the Microfilm Products,
subject only to SKC's security interest created pursuant to Section 7.5.
Furthermore, notwithstanding the expiration or early termination of this
Agreement, SKC warrants that for a period of (i) one (1) year from the time of
delivery to Anacomp in the case of Diazo Microfilm Products, and (ii) eighteen
(18) months from the time of delivery to Anacomp in the case of Vesicular
Microfilm Products, all of such Microfilm Products will be free from defects in
materials, manufacturing and the manner in which the base microfilm is coated
and will comply with Anacomp's Specifications in all material respects;
provided, however, that this warranty shall not apply to ordinary wear and tear
or if any such Microfilm Products have been improperly stored or otherwise used
in an improper manner. At no time during the term of this Agreement shall SKC
provide Anacomp with defective or nonconforming Microfilm Products returned due
to manufacturing defects in excess of 15% of the total amount of Microfilm
Products purchased by Anacomp in any Contract Year.
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(b) REMEDIES FOR NONCONFORMANCE WITH THE WARRANTY. If any of the
Microfilm Products do not conform to the foregoing warranty during the warranty
period, then SKC's sole liability and obligation under the warranty will be to
pay for the expense of returning the Microfilm Products to SKC (with risk of
loss in transit to be borne by SKC) and to replace the Microfilm Products within
sixty (60) days, at SKC's expense (including payment of shipping costs) and risk
or, if such Microfilm Products are not replaced within sixty (60) days, on
request to credit Anacomp's account for the value of such Microfilm Products
(including payment of shipping costs). Anacomp will repackage the defective
unconverted Products that Anacomp returns to SKC in accordance with the packing
specifications that SKC provides to Anacomp. Defective Converted Microfilm
Products will be returned to SKC in the packaging in which such Products were
returned by Anacomp's customers. Anacomp will reimburse SKC, within ten (10)
days of SKC's invoice date, for shipment expenses and testing costs for any
Microfilm Products rejected by Anacomp that SKC subsequently determines were in
compliance with the Specifications. If any Microfilm Products are returned by
Anacomp by reason of defects or nonconformity, Anacomp will use its best efforts
to sell such defective or nonconforming Microfilm Products within one hundred
twenty (120) days after notice from SKC as to the availability thereof for sale.
If such defective or nonconforming Microfilm Products have not been sold within
such period, SKC may sell such defective or nonconforming Microfilm Products to
any third party subject to the applicable restrictions set forth in Section 3.2.
(c) END-USER WARRANTY. Anacomp will provide a warranty (co-extensive
with the warranty provided to Anacomp by SKC pursuant to paragraph (a) above) to
the initial end-user customer of the Microfilm Products. Anacomp's obligation
under this warranty will be to provide for the replacement of the defective or
nonconforming Microfilm Products. SKC shall have no liability to the initial
end-user customer or any other user of the Microfilm Products under this
Agreement.
(d) AUTHORIZATION OF RETURNS. Anacomp will consult with SKC
regarding, and SKC will authorize and advise the appropriate time and procedures
for, return of defective or nonconforming Products to SKC.
11.4 CREDIT FOR FIELD SCRAP. Notwithstanding the provisions of
Sections 11.2(b) and 11.3(b), Anacomp shall not be required to return to SKC
Products claimed by Anacomp's customers to be defective or non-conforming if the
price of such Products does not exceed $250 per incident, but will scrap such
Products in the field in each Contract Year and SKC shall issue a credit
therefor up to a maximum of $15,000. Any defective Products scrapped in the
field in excess of $15,000 in each Contract Year shall be for Anacomp's
account.
11.5 DISCLAIMER. THE FOREGOING WARRANTIES AND REMEDIES ARE THE
SOLE AND EXCLUSIVE WARRANTIES AND REMEDIES GIVEN BY SKC IN CONNECTION WITH
THIS AGREEMENT, EXPRESS OR IMPLIED, AND SKC DISCLAIMS ALL IMPLIED WARRANTIES,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. NO AGENT OF SKC IS AUTHORIZED TO ALTER OR EXCEED THE
WARRANTY OBLIGATIONS OF SKC SET FORTH HEREIN.
11.6 LIMITATIONS OF LIABILITY AND TIME TO SUE. ANACOMP ACKNOWLEDGES
AND AGREES THAT THE PURCHASE PRICE FOR THE PRODUCTS THAT SKC IS CHARGING
HEREUNDER DOES NOT INCLUDE ANY CONSIDERATION FOR
39
<PAGE>
ASSUMPTION BY SKC OF THE RISK OF ANACOMP'S CONSEQUENTIAL OR INCIDENTAL
DAMAGES WHICH MAY ARISE IN CONNECTION WITH ANACOMP'S USE OF THE PRODUCTS.
ACCORDINGLY, ANACOMP AGREES THAT SKC WILL NOT BE RESPONSIBLE TO ANACOMP FOR
ANY LOSS-OF-PROFIT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT
OF THE USE OR RESALE OF THE PRODUCTS, EVEN IF SKC HAS BEEN INFORMED OF THE
POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT SKC SHALL BE RESPONSIBLE
FOR SUCH COSTS AND EXPENSES ARISING IN CONNECTION WITH ANY INFRINGEMENT OR
ALLEGED INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS, TO THE EXTENT SET
FORTH IN SECTION 12.1. IN NO EVENT WILL SKC'S LIABILITY IN CONNECTION WITH
THE PRODUCTS OR THIS AGREEMENT EXCEED AMOUNTS PAID TO SKC BY ANACOMP
HEREUNDER, EXCEPT IN THE EVENT OF INDEMNIFICATION, WHICH SHALL HAVE NO
LIMITATION. THESE LIMITATIONS APPLY TO ALL CAUSES OF ACTION IN THE
AGGREGATE, INCLUDING WITHOUT LIMITATION, BREACH OF CONTRACT, BREACH OF
WARRANTY, SKC'S NEGLIGENCE, STRICT LIABILITY, FRAUD, MISREPRESENTATION AND
OTHER TORTS.
12. INDEMNIFICATION.
12.1 INFRINGEMENT OF PROPRIETARY RIGHTS BY SKC. SKC represents and
warrants that the Products supplied by SKC to Anacomp will not directly or
indirectly violate or infringe any agreement with a third party or any
copyright, patent, trade secret or proprietary right of a third party; PROVIDED,
HOWEVER, that SKC makes no representation with respect to Products supplied by
SKC in compliance with the Technology or Specifications. SKC hereby agrees to
indemnify Anacomp against any damages, costs and expenses (including reasonable
attorney's fees) incurred by Anacomp and arising out of any claim that the
Products as supplied by SKC directly infringe any third party's patent,
copyright, trade secret or proprietary right. SKC's obligation to indemnify
Anacomp shall be subject to the following terms and conditions:
(a) The obligation shall arise only if Anacomp gives SKC prompt
notice of the infringement claim and grants SKC, in writing, exclusive control
over the defense and settlement of such claim;
(b) The obligation shall not cover any claim that the Products
infringe any third party's rights as used in combination with any products not
supplied by SKC, if that claim could have been avoided by the use of the
Products in combination with other products;
(c) If an infringement claim is asserted, or if SKC believes that one
is likely, then SKC shall have the right, but not the obligation: (i) to
procure a license from the person claiming or likely to claim infringement; (ii)
to modify the Products, as necessary in order to eliminate any infringement, as
long as modification for this purpose does not materially impair the operation
thereof; or (iii) to accept the return of the Products subject to or likely to
be subject to the claim and to refund to Anacomp the price paid for the
Products, reflecting any quantity or other discounts granted to Anacomp; and
(d) SKC shall have no obligation to indemnify Anacomp for claims
arising from SKC's use of the Technology or Specifications.
40
<PAGE>
12.2 INDEMNIFICATION BY ANACOMP. Anacomp hereby agrees to indemnify
SKC to the same extent provided in Section 12.1 in the event that any claim
against SKC results from SKC's use of or is based upon Anacomp's Technology or
Specifications.
12.3 LIMITATION ON INDEMNIFICATION. SECTIONS 12.1 AND 12.2 STATE THE
EXCLUSIVE OBLIGATIONS OF THE PARTIES WITH RESPECT TO CLAIMS OF INFRINGEMENT OF
PROPRIETARY RIGHTS OF ANY KIND IN CONNECTION WITH THE PRODUCTS.
12.4 SPECIAL INDEMNIFICATION BY ANACOMP. Anacomp agrees to indemnify
SKC against any damages, costs and expenses (including reasonable attorney's
fees) incurred by SKC arising out of any claim by Hoechst Celanese or by
employees of Anacomp with respect to the entering into of this Agreement and the
other Documents or the carrying out of any of the transactions contemplated
hereby and thereby.
13. PROTECTION OF CONFIDENTIAL INFORMATION.
13.1 NONDISCLOSURE. The parties hereto acknowledge and agree that in
connection with the services to be provided hereunder each shall have access to
Confidential Information of the other party. Each party agrees (i) to hold the
Confidential Information of the other party in strict confidence, (ii) not to
make use of any Confidential Information of the other party other than as
necessary in the performance of this Agreement, and (iii) to disclose the
Confidential Information of the other party only to its full-time employees
and/or consultants requiring such Confidential Information in order to perform
this Agreement, and who have undertaken written obligations of confidentiality
and limitation of use consistent with this Agreement.
13.2 SECURITY PRECAUTIONS. Each party shall institute internal
operating procedures to assure limited access and use of such Confidential
Information consistent with this Agreement, and shall exercise due care to
monitor and assure compliance with this Agreement.
13.3 COORDINATION OF PUBLICITY. The parties shall consult with each
other prior to issuing public announcements or other publicity in connection
with the transactions contemplated herein. It is understood that Anacomp does
not currently intend to file this Agreement or a summary hereof with the
Securities and Exchange Commission. In the event that such filings may hereafter
be considered or required, Anacomp shall first consult with SKC and shall use
its best efforts to keep all sensitive business information regarding such
transactions confidential.
13.4 SURVIVAL OF OBLIGATIONS. Each party's nondisclosure and
confidentiality obligations set forth in this Section 13 shall survive
termination of this Agreement for any reason and shall remain in effect for so
long as the owner of the Confidential Information is entitled to protection of
its rights under applicable law. The obligations of SKC set forth in this
Section 13 shall also extend to any subsidiaries of SKCA or SKCL.
14. TERMINATION.
14.1 GROUNDS FOR TERMINATION. This Agreement may be terminated:
41
<PAGE>
(a) By SKC, in its discretion, upon a default under the Trade Credit
Arrangement as defined in Section 7.5(r); or
(b) By SKC, on or after the fifth (5th) day after written notice of
any other payment default under this Agreement; or
(c) By either party, on or after the ninetieth (90th) day after
either party gives the other written notice of a material breach by the other of
any other term or condition of this Agreement, unless the breach is cured before
such ninetieth (90th) day; or
(d) By either party, at any time after the occurrence of a Credit
Event with respect to the other party. A Credit Event shall be deemed to have
occurred with respect to a party if (1) such party or any subsidiary of such
party pursuant to or within the meaning of any Bankruptcy Law: (i) commences a
voluntary case or proceeding for relief as a debtor under any Bankruptcy Law,
(ii) consents to the entry of an order for relief against it in an involuntary
case or proceeding, (iii) applies for, consents to or acquiesces in the
appointment of or taking of possession by a Custodian of it or for all or
substantially all of their respective property, (iv) makes a general assignment
for the benefit of its creditors, (v) consents to or acquiesces in the
institution of a bankruptcy or an insolvency proceeding against it, (vi) admits
in writing its inability to pay its debts as they become due, or (vii) takes any
corporate action in furtherance of or to facilitate, conditionally or otherwise,
any of the foregoing; or (2) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that: (i) seeks relief against such party or
any subsidiary of such party, in an involuntary case or proceeding, (ii)
appoints a Custodian of such party or any subsidiary of such party, or for all
or substantially all of its respective properties, or (iii) orders the
liquidation of such party or any subsidiary of such party, and in each case the
order or decree remains unstayed and in effect for sixty (60) days.
14.2 EFFECT OF TERMINATION BY SKC. Upon termination of this Agreement
by SKC pursuant to Section 14.1:
(a) all amounts owing to SKC under this Agreement, whether pursuant
to the Trade Credit Arrangement or otherwise, shall become immediately due and
payable, and shall bear Overdue Interest from the date of termination until
payment in full;
(b) SKC's obligation, if any, to deliver Products or to give or
continue further financial accommodation to Anacomp hereunder shall immediately
terminate;
(c) SKC shall have the right to enforce its rights and remedies under
this Agreement, the Purchase Agreement, the Security Agreements and the other
Documents, in addition to all other rights or remedies provided by law; and
(d) Anacomp shall purchase all Microfilm Products in SKC's inventory
within thirty (30) days of termination in the event of a termination pursuant to
Sections 14.1(c) or (d) and immediately upon the occurrence of a termination
pursuant to Section 14.1(a) or (b).
(e) From May 17, 1996 to July 1, 1997, for purposes of this Section
14.2, the Bankruptcy will not be a valid cause for SKC to terminate this
Agreement pursuant to Section 14.1."
42
<PAGE>
14.3 LIABILITY AND OTHER REMEDIES. Neither party shall be liable for
damages of any kind as a result of exercising its right to terminate this
Agreement according to its terms, and termination will not affect any other
right or remedy of either party.
14.4 LEGAL FEES AND OTHER COSTS. Should any action be brought by any
party to enforce its rights under this Agreement, the prevailing party shall be
entitled to recover in addition to any other damages it might claim, all of its
reasonable attorneys" fees and costs incurred in connection with such claim, the
enforcement and collection of any judgment relating thereto, all appeals thereof
and actions to recover the attorneys' fees and expenses permitted under this
Section 14.4.
14.5 EQUIPMENT MALFUNCTION. From the Effective Date and ending on
July 1, 1997, notwithstanding any other term of this Agreement, if as a result
of any malfunction of the coating and converting equipment at the Facility
occurring within six (6) months after the Effective Date SKC is unable to meet
its supply obligations hereunder, SKC shall at its own expense exercise
commercially reasonable best efforts to repair such malfunction promptly but
such failure shall not constitute a default by SKC under this Agreement unless
such equipment malfunction was the direct result of the gross negligence or
willful misconduct of SKC.
14.6 YEAR 2000. SKC hereby represents and warrants that the products
and their related manufacturing processes are not date sensitive and shall
perform and operate in accordance with their specifications and without
ambiguity with respect to century before, during and after the year 2000,
including leap years.
15. MISCELLANEOUS.
15.1 COMPLIANCE WITH LAWS. SKC and Anacomp shall each comply with
all national, federal, state, and local laws, ordinances, rules and regulations
applicable to the manufacture and sale of the Products and/or the performance of
the services required hereunder. SKC agrees to indemnify, defend and hold
Anacomp harmless from any loss, damages or costs arising from or caused in any
way by SKC's actual or alleged violation of any national, federal, state or
local laws, ordinances, rules and regulations, including but not limited to
national, federal, state and local environmental and health and safety laws and
anti-dumping laws; provided, however, that SKC shall have no obligation to
indemnify Anacomp for any such claim arising from SKC's use of the Technology to
manufacture and deliver Products in accordance with the Specifications
hereunder.
15.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Purchase
Agreement, the Security Agreements and the other Documents constitute the entire
agreement between the parties with respect to the subject matter hereof, and,
effective as of the Effective Date, shall supersede all prior agreements, oral
or written, and all other communications relating to the subject matter hereof
including the 1992 Agreement, the MSA, the Purchase Agreement and the Agreement
in Principle. Except for the representations expressly made in this Agreement,
the Purchase Agreement, the Security Agreements and the other Documents, neither
party is relying on any representation, written or oral, of the other party. No
amendment or modification of any provision of this Agreement shall be effective
unless it is set forth in a writing that purports to amend this Agreement and is
executed by both parties hereto.
15.3 SUBCONTRACTING; NO ASSIGNMENT. Except as provided in this
Section 15.3, SKC shall not subcontract any portion of the manufacture of the
Products without Anacomp's prior written consent, which consent shall not be
unreasonably withheld. Either party may assign this Agreement and
43
<PAGE>
delegate its duties hereunder to a wholly-owned subsidiary or to the
surviving entity in a merger or consolidation in which it participates or to
a purchaser of substantially all of its assets, if the assignee agrees in
writing to be bound by the terms and conditions hereof. Subject to the
foregoing, neither party shall sell, transfer, assign or subcontract any
right or obligation hereunder without the prior written consent of the other
party, which consent shall not be unreasonably withheld. Notwithstanding the
foregoing, SKCA or SKCL may subcontract with any majority-owned subsidiary;
provided, however, such action shall not relieve SKCA or SKCL of its
obligations hereunder. Any act in derogation of the foregoing shall be null
and void; provided, however, that any assignment shall not relieve the
assigning party of its obligations under this Agreement.
15.4 FORCE MAJEURE. (a) Neither party hereto shall be liable for
any delay in the performance of this Agreement caused by labor or student
strikes, civil unrest, war, act of God, embargo, fire, flood, earthquake,
explosion, or other similar causes beyond its control and generally accepted by
international practice as force majeure; PROVIDED, HOWEVER, if such delays
continue for one hundred twenty (120) days, the other party shall have the
option, exercisable by written notice to the party affected by such force
majeure event, to cancel all or any portion of orders placed hereunder and to
terminate this Agreement. In the event such delays continue for thirty (30)
days, Anacomp shall be excused, to the extent appropriate, from its minimum
quantity and percentage purchase obligations set forth in Section 5. In the
event such delays continue for one (1) year, the party affected by such force
majeure event shall have the option, exercisable by written notice to the other
party, to terminate this Agreement. No event of force majeure shall excuse or
delay any payment obligations under this Agreement.
(b) Notwithstanding Section 15.4(a), in the event of civil unrest
and labor or student strikes in the Republic of Korea, SKC shall remain liable
to Anacomp for any damages arising out of its resulting inability to deliver the
Products hereunder. Upon the occurrence of an event described in the preceding
sentence affecting SKC, Anacomp shall, to the extent possible, utilize any
inventory of the Products it may have on hand, and thereafter shall mitigate its
damages by seeking to purchase substitute Products from a third party.
(c) Upon the occurrence of national financial and/or currency
disruption, or civil unrest or a labor or student strike in the United States or
Wales (or any other jurisdiction in which Anacomp has a facility utilizing the
Products) affecting Anacomp, Anacomp shall remain liable to SKC for any damages
arising out of its resulting inability to meet its purchase obligations
hereunder.
15.5 GOVERNING LAW. (a) This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of New York
(without regard to its rules of conflicts of law). Except as otherwise provided
in Sections 5.3(d) and 7.2(b),the parties agree to submit to the exclusive
jurisdiction of the state or federal courts within the County of New York, State
of New York, U.S.A. (and to the jurisdiction of the state, federal or foreign
courts within whose jurisdiction any collateral provided by Anacomp to SKC is
located), for the resolution of any disputes hereunder.
(b) This Agreement shall be subject to Incoterms (1990) and shall be
governed, as applicable, by the trade provisions set forth therein. The
International Convention on the Sale of Goods shall not apply. The 1974
Convention on the Limitation Period in the International Sale of Goods as
amended by 1980 Protocol on the Limitation Period in the International Sale of
Goods shall not apply.
44
<PAGE>
15.6 SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be contrary to law, then the remaining
provisions of this Agreement shall remain in full force and effect.
15.7 WAIVER. No waiver by either party to this Agreement, whether
express or implied, of its rights under any provision of this Agreement, shall
constitute a waiver of the party's rights under the provision at any other time
or a waiver of any of its rights under any other provision of this Agreement.
No failure by either party to this Agreement to take any action against any
breach of this Agreement or default by the other party to this Agreement shall
constitute a waiver of such party's right to enforce any provision of this
Agreement or to take action against the breach or default or any subsequent
breach or default by the other party.
15.8 INJUNCTIVE RELIEF. The parties hereto acknowledge and agree
that a breach by the other party of any of the terms and conditions of this
Agreement may result in irrevocable harm to the non-breaching party for damages
suffered. Both parties agree that in the event of such breach, the non-breaching
party shall be entitled to injunctive relief or such other equitable remedies as
a court of competent jurisdiction may provide. Nothing contained herein will be
construed to limit the non-breaching party's right to any remedies at law,
including the recovery of damages for breach of this Agreement.
15.9 WAIVER OF JURY TRIAL. In the event of litigation involving any
matter connected in any respect with this Agreement, the parties hereby waive
the right to a trial by jury.
15.10 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same instrument.
15.11 HEADINGS. The section and paragraph headings in this Agreement
are for convenience of reference only and shall not be deemed to alter or affect
any provision of this Agreement.
15.12 NOTICES. Any notice, demand, request or communication required
or permitted to be made or given by either party under this Agreement (other
than the purchase and confirmation orders and other communications described in
Section 15.13) shall be made in writing and shall be deemed to have been duly
given or delivered if delivered personally or sent by telex, facsimile,
telegram, express delivery service, or registered or certified mail, return
receipt requested, with first class postage prepaid:
(a) To Anacomp:
Anacomp, Inc.
12365 Crosthwaite Circle
Poway, California 92064
Attn: Mr. Kevin M. O'Neill
Senior Vice President
Business Development and Strategy
Fax: 858-679-8359
and to:
45
<PAGE>
Anacomp, Inc.
12365 Crosthwaite Circle
Poway, California 92064
Attn: John D. Hart, Esq.
Associate General Counsel
Fax: 858-486-2060
(b) To SKC:
SKC Limited
199-15, 2-ga Ulji-ro Chung-gu
Seoul 100-192, Republic of Korea
Attn: Mr. Yong Kyun Chang, President
Fax: 82-2-752-9088 with a copy to:
SKC America, Inc.
850 Clark Drive
Mount Olive, New Jersey
Attn: Mr. E. H. Kim
President
Telephone: (973) 448-2302
Fax: (973) 347-8105
and to:
Gary Whitaker, Esq.
General Counsel, SKC America, Inc.
110 East 55th Street, 8th Floor
New York, New York 10022
Fax: (212) 906-8280
or to any other address that either party to this Agreement has last designated
by notice to the other party. Any such notice, demand, request or communication
shall be effective upon receipt.
15.13 GENERAL CONTRACT ADMINISTRATION. Anacomp and SKC shall each
appoint an administrator who will be responsible for the general administration
of this Agreement, including but not limited to issuing Product purchase orders
and confirmation notices of the same, scheduling Product manufacturing
completion dates and Product delivery dates, and responding to technical
inquiries from the other party hereto with respect to the Products to be
manufactured and supplied hereunder. All purchase orders, confirmations of
orders and the other notices and inquiries described herein shall be addressed
to the respective administrators, and shall be forwarded in the manner described
in Section 15.12. The name and address of the initial administrator for each
party is as follows: (i) for Anacomp, Mr. Jim Hunt, 12365 Crosthwaite Circle,
Poway, California 92064 and, for Magnetic Base Products, Mr. Gary Roth, 12365
Crosthwaite Circle, Poway, California 92064; and (ii) for SKC, Mr. Hojo Kim, 850
Clark Drive, Mount Olive, New Jersey 07828.
15.14 ANACOMP AND SKC ACTING AS INDEPENDENT CONTRACTORS; EXPENSES.
Each of Anacomp and SKC acknowledges and agrees that each party, in performing
its obligations pursuant to
46
<PAGE>
this Agreement, is acting as an independent contractor, and is not to be
considered or deemed to be an agent, employee, joint venturer or partner of
the other party. Neither party has the authority to contract for or bind the
other party in any manner and neither party shall represent itself as an
agent of the other party or as otherwise authorized to act for or on behalf
of the other party. No representative of a party to this Agreement shall
have the status of an employee of the other party or any right to any
benefits that the other party grants to its employees. Each party
acknowledges that as an independent contractor, it is fully responsible for
its federal, state, and local taxes and those of its employees. Each of the
parties shall pay its own costs and expenses, including without limitation
legal fees, incurred or to be incurred by it in negotiating and preparing
this Agreement.
15.15 OFFICIAL TEXT. This Agreement may for convenience be translated
by SKC into the Korean language. However the parties agree that the English
language version of this Agreement shall be deemed to be the official text for
all purposes.
15.16 EFFECTIVE DATE. Unless otherwise indicated, the amendments to
the MSA shall come into effect as of the Effective Date of SARMSA, at which time
the MSA shall be deemed to be superseded and shall automatically terminate. The
remaining provisions of this Agreement shall come into effect as of the
Effective Date, I.E., upon the Closing as defined in the Purchase Agreement;
PROVIDED, HOWEVER, that the provisions of Article 4 with respect to technical
cooperation and disclosure of Technology that by their terms call for
performance prior to the Effective Date shall be effective as of the date of
execution hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written, with this Agreement to be effective as described
in Section 15.16 hereof.
ANACOMP, INC.
By: ___________________________________________
Ralph W. Koehrer
President and Chief
Executive Officer
Execution Date:____________________________
SKC AMERICA, INC.
By: ___________________________________________
E. H. Kim
President
Execution Date:____________________________
SKC LIMITED
47
<PAGE>
By: ___________________________________________
Yong Kyun Chang
President
Execution Date:____________________________
48
<PAGE>
SCHEDULE D
EXCEPTIONS TO DISTRIBUTION RESTRICTIONS
To: SKC America, Inc.
SKC Limited
From: Anacomp, Inc.
Date: __________________________
Re: Exceptions to Distribution Restrictions
Pursuant to the Second Amended and Restated Master Supply Agreement By
and Among Anacomp, Inc., SKC America, Inc. and SKC Limited dated as of July
1, 1997 ("SARMSA"), and notwithstanding Sections 3.2(a)-(d) thereof, Anacomp
hereby permits SKC to sell Microfilm Products to:
MR DATA
MICROFILM SHOPS/
MIKE REARDON
Capitalized terms used herein shall have the meanings given to them in the
SARMSA. In all other respects, the provisions of the SARMSA are in full
force and effect.
Anacomp, Inc.
By: ___________________________
Title: ________________________
Date: _________________________
Agreed and Accepted:
SKC America, Inc.
By: __________________________
SKC Limited
By: __________________________
<PAGE>
EXHIBIT 21.1
SIGNIFICANT SUBSIDIARIES OF ANACOMP, INC.
<TABLE>
<CAPTION>
Percentage of
State or Country Voting Securities
Name of Incorporation Owned *
- ----------------------------------------------------------------------------
<S> <C> <C>
Anacomp, GmbH Germany 100%
Anacomp Limited United Kingdom 100%
Anacomp, S.A France 100%
Cominformatik A.G Switzerland 100%
</TABLE>
* Directly or indirectly
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,144
<SECURITIES> 0
<RECEIVABLES> 75,259
<ALLOWANCES> 5,815
<INVENTORY> 19,659
<CURRENT-ASSETS> 117,603
<PP&E> 66,798
<DEPRECIATION> 19,359
<TOTAL-ASSETS> 330,517
<CURRENT-LIABILITIES> 133,642
<BONDS> 313,885
0
0
<COMMON> 149
<OTHER-SE> (117,785)
<TOTAL-LIABILITY-AND-EQUITY> 330,517
<SALES> 153,115
<TOTAL-REVENUES> 442,162
<CGS> 96,433
<TOTAL-COSTS> 266,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,358
<INCOME-PRETAX> (66,045)
<INCOME-TAX> 4,960
<INCOME-CONTINUING> (71,005)
<DISCONTINUED> 3,223
<EXTRAORDINARY> (210)
<CHANGES> 0
<NET-INCOME> (67,992)
<EPS-BASIC> (4.78)
<EPS-DILUTED> (4.78)
</TABLE>
