SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 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
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Principal Executive Offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of July 31, 1999, the number of outstanding shares of the registrant's
common stock, $.01 par value per share, was 14,118,437.
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at
June 30, 1999 and September 30, 1998........ 2
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1999 and 1998... 3
Condensed Consolidated Statements of Operations
Nine Months Ended June 30, 1999 and 1998.... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1999 and 1998.... 5
Supplemental Disclosures of Cash Flow Information
Information and Non-Cash Investing Activities
Nine Months Ended June 30, 1999............. 6
Condensed Consolidated Statements of
Stockholders' Equity (Deficit) Nine Months 7
Ended June 30, 1999.........................
Condensed Consolidated Statements of
Comprehensive Income (Loss) Three and Nine 7
Months Ended June 30, 1999 and 1998.........
Notes to the Condensed Consolidated Financial 8
Statements.....................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......... 11
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risk.......................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 18
Item 2. Changes in Securities and Use of Proceeds......... 18
Item 6. Exhibits and Reports on Form 8-K.................. 18
SIGNATURES.................................................. 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
(in thousands) 1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 47,050 $ 17,721
Restricted cash 564 4,285
Accounts and notes receivable, net 66,026 63,288
Current portion of long-term receivables, net 2,593 5,642
Inventories 17,884 16,485
Net assets of discontinued operations --- 29,939
Prepaid expenses and other 6,446 10,269
------------- -------------
Total current assets 140,563 147,629
------------- -------------
Property and equipment, net 44,599 35,092
Long-term receivables, net of current portion. 6,952 9,002
Excess of purchase price over net assets of
businesses acquired and other intangibles, net 117,280 120,654
Reorganization value in excess of identifiable
assets, net 24,965 83,819
Other assets 15,350 15,641
------------- -------------
$ 349,709 $ 411,837
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 1,088 $ 1,152
Accounts payable 22,798 28,961
Accrued compensation, benefits and withholdings 18,356 17,327
Accrued income taxes 13,881 15,197
Accrued interest 9,350 18,158
Other accrued liabilities 41,041 39,650
------------- -------------
Total current liabilities 106,514 120,445
------------- -------------
Long-term debt, net of current portion 338,677 338,884
------------- -------------
Stockholders' equity (deficit):
Preferred stock -- --
Common stock 142 143
Capital in excess of par value 107,433 109,486
Cumulative translation adjustment
(from May 31, 1996) (3,543) 447
Accumulated deficit (from May 31, 1996) (199,514) (157,568)
------------- -------------
Total stockholders' deficit (95,482) (47,492)
------------- -------------
$ 349,709 $ 411,837
============= =============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
(in thousands, except per share amounts) 1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Document Management Solutions $ 54,151 $ 40,480
Field Services 17,531 18,015
Systems and Supplies 34,568 36,481
------------ ------------
106,250 94,976
------------ ------------
Cost of revenues:
Cost of Document Management Solutions 34,281 24,923
Cost of Field Services 9,084 9,434
Cost of Systems and Supplies 19,607 22,741
------------ ------------
62,972 57,098
------------ ------------
Gross Profit 43,278 37,878
------------ ------------
Operating expenses:
Research & development 3,251 2,276
Selling, general and administrative expenses 22,241 21,851
Amortization of reorganization asset 17,093 17,807
Amortization of intangible assets 5,355 3,181
Restructuring charges --- 8,494
------------ ------------
Operating loss from continuing operations (4,662) (15,371)
------------ ------------
Other income (expense):
Interest income 426 463
Interest expense and fee amortization (10,118) (8,562)
Other (185) (272)
------------ ------------
(9,877) (8,371)
------------ ------------
Loss from continuing operations before
income taxes (14,539) (24,102)
Provision (benefit) for income taxes 1,072 (1,777)
------------ ------------
Loss from continuing operations (15,611) (22,325)
Income from discontinued operations, net
of taxes --- 576
Gain on sale of discontinued operations, net of
taxes 3,056 ---
------------ ------------
Loss before extraordinary loss on
extinguishment of debt (12,555) (21,749)
Extraordinary loss on extinguishment of debt --- (1,857)
------------ ------------
Net loss $ (12,555) $ (23,606)
============ ============
Basic and diluted loss per share from continuing
operations $ (1.10) $ (1.59)
Income per share from discontinued operations 0.00 0.04
Gain on sale of discontinued operations, net of
taxes 0.22 0.00
Extraordinary loss on extinguishment of debt 0.00 (0.13)
------------ ------------
Basic and diluted net loss per share $ (0.88) $ (1.68)
============ ============
Shares used to compute basic and diluted income
(loss) per share 14,244 14,078
============ ============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------
(in thousands, except per share amounts) 1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Document Management Solutions $ 172,166 $ 106,554
Field Services 54,398 54,403
Systems and Supplies 106,593 117,807
------------ ------------
333,157 278,764
------------ ------------
Cost of revenues:
Cost of Document Management Solutions 108,169 63,222
Cost of Field Services 27,997 28,809
Cost of Systems and Supplies 62,939 74,486
------------ ------------
199,105 166,517
------------ ------------
Gross Profit 134,052 112,247
Operating expenses:
Research & development 7,637 6,982
Selling, general and administrative expenses 69,352 65,918
Amortization of reorganization asset 52,984 53,423
Amortization of intangible assets 14,989 7,858
Restructuring charges --- 8,494
------------ ------------
Operating loss from continuing operations (10,910) (30,428)
------------ ------------
Other income (expense):
Interest income 1,505 1,802
Interest expense and fee amortization (30,396) (24,440)
Other (816) (843)
------------ ------------
(29,707) (23,481)
------------ ------------
Loss from continuing operations before
income taxes (40,617) (53,909)
Provision for income taxes 5,194 640
------------ ------------
Loss from continuing operations (45,811) (54,549)
Income from discontinued operations, net of taxes 809 1,577
Gain on sale of discontinued operations, net of
taxes 3,056 ---
------------ ------------
Loss before extraordinary loss (41,946) (52,972)
Extraordinary loss on extinguishment of debt --- (1,857)
------------ ------------
Net loss $ (41,946) $ (54,829)
============ ============
Basic and diluted loss per share from continuing
operations $ (3.21) $ (3.92)
Income per share from discontinued operations 0.06 0.11
Gain on sale of discontinued operations, net of
taxes 0.21 ---
Extraordinary loss on extinguishment of debt --- (0.13)
------------ ------------
Basic and diluted net loss per share $ (2.94) $ (3.94)
============ ============
Shares used to compute basic and diluted income
(loss) per share 14,248 13,921
============ ============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------------
(in thousands) 1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (41,946) $ (54,829)
Adjustments to reconcile net loss to net
cash provided by (used in) continuing
operations:
Income from discontinued operations (738) (1,577)
Gain on sale of discontinued operations
and other assets (3,485) ---
Depreciation and amortization 82,875 74,893
Extraordinary loss on extinguishment of debt --- 1,857
Non-cash compensation 844 753
Non-cash charge in lieu of taxes 5,190 ---
Other non-cash items --- 435
Restricted cash requirements 3,721 3,148
Change in assets and liabilities net of
effects from acquisitions:
Decrease (increase) in current assets and
long-term receivables 3,252 (10,727)
Decrease in accounts payable and accrued
expenses (26,558) (19,334)
Decrease in other noncurrent liabilities (223) (650)
------------- -------------
Net cash provided by (used in) continuing
operations 22,932 (6,031)
Net operating cash provided by (used in)
discontinued operations 1,785 (946)
------------- -------------
Net cash provided by (used in)
operating activities 24,717 (6,977)
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (19,266) (7,910)
Capital expenditures of discontinued
operations (165) (676)
Proceeds from sale of discontinued
operations and other assets 39,887 --
Payments to acquire companies and customer
rights (13,371) (164,302)
------------- -------------
Net cash provided by (used in) investing
activities 7,085 (172,888)
------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of options and
warrants 2,183 1,728
Proceeds from employee stock purchases 782 906
Repurchases of common stock (5,019) --
Proceeds from revolving line of credit and
long-term borrowings -- 214,262
Payments related to the issuance of debt -- (4,769)
Principal payments on long-term debt (169) (78,484)
------------- -------------
Net cash provided by (used in) financing
activities (2,223) 133,643
------------- -------------
Effect of exchange rate changes on cash (250) (384)
------------- -------------
Increase (decrease) in cash and cash equivalents 29,329 (46,606)
Cash and cash equivalents at beginning of period 17,721 58,060
------------- -------------
Cash and cash equivalents at end of period $ 47,050 $ 11,454
============= =============
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH INVESTING
ACTIVITIES (Unaudited):
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------
(Dollars in Thousands) 1999 1998
------------- -------------
<S> <C> <C>
Cash paid for interest $ 34,114 $ 26,687
============= =============
Cash paid for income taxes $ 4,525 $ 2,599
============= =============
Assets acquired by assuming liabilities $ 1,885 $ 11,580
============= =============
Common stock issued as incentive compensation $ --- $ 584
============= =============
</TABLE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Cap. in
excess Cum. trans-
(in thousands) Common of lation Accum.
Stock Par value adjstmnt. Deficit Total
------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ 143 $109,486 $ 447 $(157,568) $(47,492)
Common stock issued for the
exercise of options and warrants -- 2,183 -- -- 2,183
Common stock issued for
employee stock purchases 1 781 -- -- 782
Common stock repurchased (2) (5,017) -- -- (5,019)
Translation adjustment -- -- (3,990) -- (3,990)
Net loss for nine months -- -- -- (41,946) (41,946)
------- --------- ---------- ---------- --------
Balance at June 30, 1999 $ 142 $107,433 $(3,543) $(199,514) $(95,482)
======= ========= ========== ========== ========
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------------
(in thousands) 1999 1998
----------------- -----------------
<S> <C> <C>
Net loss $ (12,555) $ (23,606)
Translation adjustment (1,282) (459)
----------------- -----------------
Comprehensive loss $ (13,837) $ (24,065)
================= =================
Nine Months Ended
June 30,
------------------------------------
(in thousands) 1999 1998
----------------- -----------------
Net loss $ (41,946) $ (54,829)
Translation adjustment (3,990) (578)
----------------- -----------------
Comprehensive loss $ (45,936) $ (55,407)
================= =================
</TABLE>
See the notes to the condensed consolidated financial statements
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Anacomp, Inc. ("Anacomp" or the "Company") and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. These financial statements have not been audited but, in the opinion
of the Company's management, include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the Company's financial
position, results of operations, and cash flows for all periods presented. These
financial statements should be read in conjunction with the Company's financial
statements and notes thereto for the year ended September 30, 1998, included in
the Company's 1998 Annual Report on Form 10-K. Interim operating results are not
necessarily indicative of operating results for the full year.
Note 2. Management Estimates and Assumptions
The Company's preparation of the accompanying condensed consolidated financial
statements in conformity with generally accepted accounting principles requires
its management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Estimates have been prepared
on the basis of the most current available information and actual results could
differ from those estimates.
<PAGE>
Note 3. Reorganization Asset
As of May 31, 1996, the Company adopted Fresh Start Reporting, which resulted in
material changes to the consolidated balance sheet - including the valuation of
assets, intangible assets, 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 valuations was that the Company recognized an
asset captioned "Reorganization value in excess of identifiable assets"
("Reorganization Asset") totaling $267.5 million as of May 31, 1996. Net of
accumulated amortization, the Reorganization Asset was $25 million at June 30,
1999. 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.
Reorganization Asset amortization was $53.0 million and $53.4 million for the
nine-month periods ended June 30, 1999 and 1998, respectively. On a pro forma
basis for the nine-month periods ended June 30, 1999 and 1998, excluding
Reorganization Asset amortization, the Company would have reported income from
continuing operations as follows:
<TABLE>
Pro Forma Condensed Consolidated Statement of Operations
Nine months ended
June 30,
---------------------------
1999 1998
------------- -------------
<CAPTION>
<S> <C> <C>
Pro forma income (loss) from continuing
operations $ 7,173 $ (1,126)
============= =============
Pro forma basic earnings (loss) per share
from continuing operations $ 0.50 $ (0.08)
============= =============
Pro forma diluted earnings (loss) per share
from continuing operations $ 0.47 $ (0.08)
============= =============
</TABLE>
Note 4. Comprehensive Income
The Company adopted Financial Accounting Standards Board ("FASB") Statement No.
130 Reporting Comprehensive Income - effective October 1, 1998. This statement
requires the presentation of comprehensive income, as defined, as part of the
basic financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by and distributions to
owners.
Note 5. First Image Acquisition
Effective June 1, 1998, the Company completed its acquisition (the
"Acquisition") of assets constituting substantially all of the business and
operations (the "First Image Businesses") of First Image Management Company
("First Image"), a division of First Financial Management Corporation ("FFMC"),
which in turn is a wholly owned subsidiary of First Data Corporation. The
Company also assumed substantially all of the ongoing liabilities of the First
Image Businesses. The purchase price paid by the Company to FFMC was $150
million, although a post-closing adjustment resulted in FFMC returning to the
Company $4.4 million to reflect a shortfall in the agreed-upon working capital
for the First Image Businesses. The Acquisition was accounted for as a purchase
and the excess of the purchase price over the estimated fair value of net assets
acquired (referred to as "goodwill") approximated $100 million, which is being
amortized over a 15-year period on a straight-line basis.
<PAGE>
The First Image Businesses consisted of (i) image access services, primarily
Computer Output to Microfilm ("COM") and Compact Disc ("CD") services (the "IAS
Business"), (ii) document print and distribution services such as laser print
and mail and demand publishing services (the "DPDS Business"), and (iii)
document acquisition services such as health care and insurance claims entry and
data capture services (the "DAS Business"). The Company sold the DPDS Business
and the DAS Business during the three-month period ended September 30, 1998. The
Company retained and continues to operate the IAS Business, whose revenues and
earnings are included in the Company's results of operations for the nine months
ended June 30, 1999.
Note 6. Inventories
June 30, September 30,
1999 1998
------------ --------------
Finished goods $ 10,912 $ 9,248
Work in process 1,222 2,071
Raw materials and supplies 5,750 5,166
------------ --------------
$ 17,884 $ 16,485
============ ==============
Note 7. Income Taxes
The Company's amortization of the Reorganization Asset is not deductible for
income tax purposes. Accordingly, the Company incurs income tax expense even
though it reports a pre-tax loss due to such amortization.
For the nine months ended June 30, 1999 and 1998, income tax expense is reported
for the Company based upon an estimated effective tax rate of 42% of pretax
income before amortization of the Reorganization Asset. For the nine months
ended June 30, 1999, the limited tax benefit of the U.S. Federal net operating
loss carryforwards ("NOL") of the Company resulted in a reduction of $5.2
million in the Company's U.S. Federal income tax liability.
Note 8. Loss Per Share
Basic earnings (loss) per share is computed based upon the weighted average
number of shares of the Company's common stock outstanding during the period
presented. Diluted earnings (loss) per share is computed based upon the weighted
average number of shares of common stock outstanding and dilutive common stock
equivalents during the period presented. Common stock equivalents include
options granted under the Company's stock option plans using the treasury stock
method and shares of common stock expected to be issued under the Company's
employee stock purchase plan. Common stock equivalents were not used to
calculate diluted earnings (loss) per share because of their anti-dilutive
effect. There are no reconciling items in calculating the numerator for basic
and diluted earnings (loss) per share for any of the periods presented.
Note 9. Acquisitions
During the nine months ended June 30, 1999, the Company acquired the customer
bases and other specified assets of ten businesses. Total consideration paid at
the closings of the acquisitions was $13.4 million, of which approximately $10.2
million was assigned to goodwill. Three of the acquisition agreements include
provisions for contingent cash payments of up to approximately $0.7 million in
the aggregate.
On July 30, 1999, the Company acquired the stock of Litton Adesso Software, Inc.
("Adesso") from TASC, Inc. for a payment at the closing of $15 million. The
agreement also included a provision for a post-closing purchase price adjustment
to reflect any change in the agreed-upon working capital for Adesso, as well as
a provision for an additional payment to TASC of up to $2.1 million if Adesso's
revenues exceed a target amount for the year ended July 31, 1999.
<PAGE>
Note 10. Sale of Magnetics Solutions Division
In February 1999, the Company adopted a plan to dispose of its Magnetics
Solutions Group Division ("the Magnetics Division"), and on April 28, 1999, the
Company signed a definitive agreement to sell the Magnetics Division. The sale
was effective May 1, 1999, and the final price of $40 million included $37
million in cash at closing, a $3 million subordinated note, and incentive
payments based upon sales of magnetic media products to the Company's customer
base over the next two years. The Company recognized a gain after taxes of
approximately $3.1 million in the third quarter as a result of the sale.
The assets and liabilities of the Magnetics Division have been reported
separately as "Net assets of discontinued operations" in the restated condensed
consolidated balance sheet as of September 30, 1998. The net assets of the
Magnetics Division are summarized as follows (in thousands):
September 30,
1998
--------------
Accounts and notes receivable $ 15,821
Inventories 12,133
Property and equipment 6,657
Reorganization value in excess of
identifiable assets 4,412
Other assets 232
Accounts payable and other accrued liabilities (9,316)
--------------
Net assets $ 29,939
==============
Similarly, the results of operations of the Magnetics Division have been
reported separately as "Income from discontinued operations, net of income
taxes" in the condensed consolidated statements of operations for the periods
ended June 30, 1999 and 1998.
The operating results of the discontinued operations are summarized as follows
(in thousands):
<TABLE>
Three Three Six Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, March 31, June 30,
1999 1998 1999 1998
---------- --------- ---------- -----------
<CAPTION>
<S> <C> <C> <C> <C>
Revenues $ --- $ 26,046 $ 50,544 $ 77,664
========== ========= ========== ============
Operating income $ --- $ 1,671 $ 2,763 $ 4,755
Income taxes --- 1,095 1,954 3,178
---------- --------- ---------- ------------
Net income (loss) $ --- $ 576 $ 809 $ 1,577
========== ========= ========== ============
</TABLE>
<PAGE>
Note 11. Research and Development
<TABLE>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- -----------------------
1999 1998 1999 1998
----------- --------- ---------- -----------
<CAPTION>
<S> <C> <C> <C> <C>
Digital $ 2,614 $ 690 $ 5,013 $ 2,072
COM and other 637 1,586 2,624 4,910
----------- --------- ---------- -----------
Total $ 3,251 $ 2,276 $ 7,637 $ 6,982
=========== ========= ========== ===========
</TABLE>
Note 12. Stock Repurchase Program
During the third quarter of 1999, the Company repurchased 160,400 shares of its
common stock in accordance with a previously announced stock buyback program.
These purchases bring the total purchases during the year to approximately
535,000 shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry trends; industry capacity; competition; raw materials costs and
availability; currency fluctuations; the loss of any significant customers or
suppliers; changes in business strategy or development plans; availability,
terms and deployment of capital; availability of qualified personnel; changes
in, or the failure or inability to comply with, government regulation; and other
factors referenced in this report. These forward-looking statements speak only
as of the date of this report.
Pro Forma Statements of Operations
As of May 31, 1996, the Company adopted Fresh Start Reporting, which
resulted in material changes to the consolidated balance sheet. See Note 3 to
the accompanying condensed consolidated financial statements for a description
of the Company's Reorganization Asset. To facilitate a better understanding of
the Company's operating performance after the Reorganization Asset is fully
amortized, pro forma condensed consolidated statements of operations for the
three and nine months ended June 30, 1999 and 1998 have been presented below.
The only difference from the Company's reported results is a pro forma
adjustment to exclude the amortization of the Reorganization Asset.
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
Three Months Ended June 30,
------------------------------------
(in thousands, except per share 1999 1998
amounts) ----------------- ------------------
<CAPTION>
<S> <C> <C> <C> <C>
Revenues $ 106,250 100.0% $ 94,976 100.0%
Operating costs and expenses 93,819 88.3% 84,406 88.9%
Restructuring charges --- 8,494 8.9%
---------- ---------
Total operating costs and expenses 93,819 92,900 97.8%
Operating income from continuing
operations 12,431 11.7% 2,076 2.2%
---------- ---------
Income (loss) from continuing
operations 1,482 1.4% (4,518) (4.8%)
Gain on Sale of discontinued
operations, net of taxes 3,056 ---
Income from discontinued operations,
net of taxes --- 576
Loss on extinguishment of debt --- (1,857)
------------ ------------
Net income (loss) $ 4,538 $ (5,799)
============ ============
Basic income per share from
continuing operations $ 0.10 $ 0.03
============ ============
Diluted income per share from
continuing operations $ 0.10 $ 0.03
============ ============
Shares used to compute basic income
per share 14,244 14,078
============ ============
Shares used to compute diluted
income per share 15,194 15,028
============ ============
</TABLE>
<PAGE>
<TABLE>
Nine Months Ended June 30,
------------------------------------
(in thousands, except per share 1999 1998
amounts) ----------------- ------------------
<CAPTION>
<S> <C> <C> <C> <C>
Revenues $ 333,157 100.0% $ 278,764 100.0%
Operating costs and expenses 291,083 87.4% 247,275 88.7%
Restructuring charges --- 8,494 3.1%
------------ ------------
Total operating costs and expenses 291,083 87.4% 255,769 91.8%
Operating income from continuing 42,074 12.6% 22,995 8.2%
operations ------------ ------------
Income (loss) from continuing
operations 7,173 2.2% (1,126) 0.4%
Gain on Sale of discontinued
operations, net of taxes 3,056 ---
Income from discontinued operations,
net of taxes 809 1,577
Loss on extinguishment of debt --- (1,857)
------------ ------------
Net income (loss) $ 11,038 $ (1,406)
============ ============
Basic income per share from
continuing operations $ 0.50 $ 0.08
============ ============
Diluted income per share from
continuing operations $ 0.47 $ 0.08
============ ============
Shares used to compute basic income
per share 14,248 13,921
============ ============
Shares used to compute diluted
income per share 15,198 13,921
============ ============
</TABLE>
Results of Operations
Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998
General. Anacomp reported a net loss of $12.6 million for the three months
ended June 30, 1999, compared to a net loss of $23.6 million for the three
months ended June 30, 1998. Earnings from continuing operations before interest,
other income, taxes, depreciation, amortization and restructuring charges
("EBITDA") were $23.1 million, or 21.7% of revenues, for the three months ended
June 30, 1999. This compares to EBITDA of $17.0 million, or 17.9% of revenues,
for the three months ended June 30, 1998.
As a result of the divestiture of its Magnetics Division, the Company has
reorganized it's internal and public reporting around three primary lines of
business. Document Management Solutions ("DMS"), which includes analog and
digital services as well as software solutions; Field Services, which include
COM and third-party maintenance services; and Systems and Supplies, which
includes both COM and digital hardware plus related supplies.
Revenues. The Company's DMS revenues in the third quarter of 1999 increased
33.8%, or $13.7 million versus the third quarter of 1998. This was primarily the
result of the inclusion of the IAS Business operating results for the three
months ended June 30, 1999 versus one month for the similar period in 1998. In
addition, digital service revenues increased in 1999 due to an increase in the
number of images produced.
The Company's Field Services revenues in the third quarter of 1999
decreased 2.7% or $0.5 million versus the third quarter of 1998, with decreases
in COM maintenance revenue largely offset by increases in third party
maintenance revenue.
The Company's Systems and Supplies revenues in the third quarter of 1999
decreased 5.2% or $1.9 million versus the third quarter of 1998. This was
primarily the result of the Company's discontinuance of the sale of duplicate
microfilm to the reseller market.
Gross Margins. The Company's gross margin increased 14.3% from $37.9
million (39.9% of revenues) for the three months ended June 30, 1998, to $43.3
million (40.7% of revenues) for the three months ended June 30, 1999. The
increase in gross margins was largely the result of increases in Systems and
Supplies margins related to increased hardware sales.
Research and development. Research and development expense in the third
quarter of 1999 increased 42.8% compared to the third quarter of 1998. This was
due to increased spending of $1.9 million in the development of digital
services, which was partially offset by a $0.9 million reduction in spending for
the development of COM system capabilities.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses increased 1.7% from $21.9 million (23.0% of
revenues) for the three months ended June 30, 1998 to $22.2 million (20.9% of
revenues) for the three months ended June 30, 1999. This increase is primarily
the result of operating costs of the IAS Business and of costs related to new
strategic marketing initiatives. SG&A costs, as a percentage of revenues,
decreased 2.1 percentage points, primarily because of the added IAS Business
sales volume.
Amortization of intangible assets. Amortization of intangible assets
increased 68.3% from $3.2 million (3.3% of revenues) for the three months ended
June 30, 1998, to $5.4 million (5.0% of revenues) for the three months ended
June 30, 1999. This increase is principally the result of the amortization of
goodwill associated with the IAS Business acquisition in fiscal year 1998 and
with the ten acquisitions completed in fiscal year 1999.
Interest Expense. Interest expense increased 18.2% from $8.6 million for
the three months ended June 30, 1998, to $10.1 million for the three months
ended June 30, 1999. This increase was the result of additional borrowings used
to finance the IAS Business acquisition.
Provision for Income Taxes. The Company's effective tax rate remained at
42% of taxable income for both periods presented. See Note 7 to the accompanying
condensed consolidated financial statements for a further discussion.
Discontinued Operations. During the second quarter of 1999, the Company
adopted a plan to dispose of its Magnetics Division. For financial reporting
purposes the disposal was effective as of the end of the second quarter 1999. As
a result, the third quarter Magnetics Division loss from operations of $71
thousand has been included in the calculation of the gain from the sale of
discontinued operations. The Magnetics Division operating income was $576
thousand during the third quarter of 1998.
Nine Months Ended June 30, 1999 vs. Nine Months Ended June 30, 1998
General. Anacomp reported a net loss of $41.9 million for the nine months
ended June 30, 1999, compared to a net loss of $54.8 million for the nine months
ended June 30, 1998. EBITDA was $71.9 million, or 21.6% of revenues, for the
nine months ended June 30, 1999. This compares to EBITDA of $49.1 million, or
17.6% of revenues for the nine months ended June 30, 1998.
Revenues. The Company's continuing revenues increased 19.5% from $278.8
million for the nine months ended June 30, 1998, to $333.2 million for the nine
months ended June 30, 1999. The Company experienced increased revenues in its
DMS line of business and decreased revenues in its Systems and Supplies
business.
The increase in DMS revenues resulted primarily from the June 1, 1998
acquisition of the IAS Business and the inclusion of its operating results for
the nine months ended June 30, 1999. Digital Service revenues, which are
included in DMS, increased 255% from the prior year to $20.4 million for the
nine months ended June 30, 1999.
The decrease in Systems and Supplies revenues was the result of the
Company's discontinuance of the sale of duplicate microfilm to the reseller
market, as well as declining sales of original COM microfilm and duplicate
microfilm, which is consistent with the gradual decline of COM units in service
worldwide.
Gross Margins. The Company's gross margins increased 19.4% from $112.2
million (40.3% of revenues) for the nine months ended June 30, 1998, to $134.1
million (40.2% of revenues) for the nine months ended June 30, 1999.
DMS margins, as a percentage of revenue, decreased 3.5 percentage points
from 1998 to 1999. This decrease was the result of decreases in average selling
prices and because of costs incurred for the consolidation of IAS Business data
centers. Field Services margins, as a percentage of revenue, increased 1.5
percentage points from 1998 to 1999 principally, of a reduction in related
operating costs. Systems and Supplies gross margins, as a percentage of revenue,
increased 4.2 percentage points because of increased hardware sales.
Research and development. Research and development expense increased 9.4%
from $7.0 for the nine months ended June 30, 1998, to $7.6 million for the nine
months ended June 30, 1999. This increase reflects a $2.9 million increase in
spending for the development of digital services, which was offset partially by
a $2.3 million reduction in spending for the development of COM system
capabilities. The Company expects to continue to increase its investment in the
digital services area.
Selling, general and administrative expenses. SG&A expenses increased 5.2%
from $65.9 million (23.6% of revenues) for the nine months ended June 30, 1998
to $69.4 million (20.8% of revenues) for the nine months ended June 30, 1999.
This increase in expense resulted primarily from operating costs of the IAS
Business and costs related to new strategic marketing initiatives. SG&A costs,
as a percentage of revenues, decreased 2.8 percentage points primarily because
of the added IAS Business sales volume.
Amortization of intangible assets. Amortization of intangible assets
increased 90.7% from $7.9 million (2.8% of revenues) for the nine months ended
June 30, 1998, to $15.0 million (4.5% of revenues) for the nine months ended
June 30, 1999. This increase is primarily related to the amortization of
goodwill associated with the IAS Business acquisition in fiscal year 1998 and
with the ten acquisitions completed in fiscal year 1999.
Interest Expense. Interest expense increased 24.4% from $24.4 million for
the nine months ended June 30, 1998, to $30.4 million for the nine months ended
June 30, 1999. This increase was the result of additional borrowings used to
finance the acquisition of the IAS Business.
Provision for Income Taxes. The Company's effective tax rate remained at
42% of taxable income for both periods presented. See Note 7 to the accompanying
condensed consolidated financial statements for a further discussion.
Discontinued Operations. During the second quarter of 1999 the Company
adopted a plan to dispose of its Magnetics Division. For financial reporting
purposes the disposal was effective as of the end of the second quarter 1999.
The Magnetics Division recognized income from operations for the six months
ended March 31, 1999 of $809 thousand. The Magnetics Division operating income
was $1,577 thousand during the nine months ended June 30, 1998.
Liquidity and Capital Resources
Anacomp's working capital at June 30, 1999 was $34.0 million, compared to
$27.2 million at September 30, 1998. Net cash provided by continuing operations
was $22.9 million for the nine months ended June 30, 1999, compared to a use of
$6.0 million in cash in the comparable prior period. The current period
benefited from improved operating results over 1998 and an increase in
depreciation and amortization of approximately $8.0 million, which was primarily
the result of increased goodwill and depreciable assets from the IAS Business
acquisition. The current period also benefited from a $5.2 million non-cash
charge for taxes resulting from the utilization of a net operating loss
carry-forward.
Net cash from investing activities was $7.1 million in the current period,
compared to the use of cash of $172.9 million in the comparable prior period.
The cash from investing activities in the current year was primarily the result
of the proceeds from the sale of the Magnetics division, compared to the use of
capital needed to acquire the IAS Business in 1998.
Net cash used in financing activities was $2.2 during the nine months ended
June 30, 1999. This reflected the Company's stock buyback of $5.0 million of
Company common stock, which was offset by proceeds from the exercise of options,
warrants and employee stock purchases. Net cash provided by financing activities
was $133.6 million for the nine months ended June 30, 1998, due to the issuance
of subordinated debt to finance the acquisition of the IAS business.
The Company's cash balance (including restricted cash) as of June 30, 1999
was $47.6 million compared to $22.0 million at September 30, 1998. The Company
also has available a $75 million revolving credit facility. There were no
amounts outstanding under the revolving credit facility as of June 30, 1999.
The Company has significant debt service obligations. As of June 30, 1999,
the Company had $335 million of 10-7/8% Senior Subordinated Notes outstanding,
which are due in April 2004. The ability of the Company to meet its debt service
and other obligations will depend upon its future performance and is subject to
financial, economic and other factors, some of which are beyond its control.
However, the Company believes that cash generated from operations, cash on hand,
and cash available under its revolving credit facility will be sufficient to
fund its debt service requirements, acquisition strategies, and working capital
requirements in the foreseeable future.
Year 2000
Anacomp has undertaken a comprehensive "year 2000" program for the
products that it sells or distributes in the marketplace. Under this program,
the Company has assessed all of its critical software and hardware products to
determine what remediation, if any, is necessary for the proper functioning of
these systems in the year 2000 and beyond. The Company has worked with its
outside 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 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 and continues to offer 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 June 30, 1999, Anacomp had received written responses to Anacomp's
year 2000 readiness questionnaire from approximately 98% of the 165 suppliers,
which 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. Anacomp
continues to monitor the readiness of its critical and 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.
Anacomp has identified all internal software and hardware products used in
its corporate headquarters in San Diego, California, including those used to
assimilate and report financial information and to handle billing, collections
and electronic commerce. In those instances where remediation or renovation was
required, Anacomp has either completed or has nearly completed such remediation
or renovation. Anacomp is in the process of completing the documentation of such
efforts for its year 2000 archives. All critical building facilities at the
Company's San Diego headquarters have been assessed, remediated, tested and,
where necessary, changes have been implemented, except for the headquarters'
HVAC and door-entry security systems, which are scheduled to be replaced by the
end of the fiscal year.
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.
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. In those instances where the Company determines that
year 2000 problems with its operational facilities may not be identified or
remediated in time, the Company believes that its business will still be able to
function without substantial interruption. For example, the Company has prepared
a contingency plan which will enable data centers which experience 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 ongoing contingency planning.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any significant financial instruments other than
fixed rate indebtedness. The general level of U.S. interest rates, the LIBOR
rate or both affects the Company's revolving credit facility. However, the
Company had no amounts outstanding under this revolving credit facility on June
30, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its subsidiaries are potential or named defendants in
several lawsuits and claims arising in the ordinary course of business. While
the outcome of such claims, lawsuits or other proceedings against the Company
cannot be predicted with certainty, management expects that 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 Development, Inc. ("Data/Ware"), of which Anacomp is
the successor by merger, and The Eastman Kodak Company ("Kodak"). The complaint
seeks injunctive relief and unspecified damages, including attorney's fees, for
the alleged infringement by Data/Ware and Kodak of ASI's United States Letters
Patent No. 4,775,969 for "Optical Disk Storage Format, Method and Apparatus for
Emulating a Magnetic Tape Drive" and No. 5,034,914 for "Optical Disk Storage
Method and Apparatus with Buffered Interface." The Company has assumed the
defense of this matter on behalf of both Data/Ware and Kodak. Discovery in this
case continues, with any trial to occur probably not before the fourth
calendar quarter of 1999. Although there can be no assurance as to the eventual
outcome of this matter, the Company believes that it has numerous meritorious
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 recently granted the Company's motion for summary adjudication of
the shareholder's duty to fund most of the defense of the ASI case, a decision
which the shareholder is contesting. Discovery in the state court litigation
continues.
Item 2. Changes in Securities and Use of Proceeds.
(c) Unregistered Securities - Pursuant to the 1996 Non-employee Director
Stock Option Plan (Amended and Restated as of December 1, 1997),
non-employee directors of the Company may elect to receive their annual
retainer in the form of options to acquire common stock of the Company.
Pursuant to such elections, during the three-month period ending June 30,
1999, an aggregate of 1,875 options was granted to directors in lieu of
aggregate cash compensation of $9,375. The issuance of such options was
effected in reliance upon the private placement exemption set forth in
Section 4 (2) of the Securities Act of 1933 (the "Securities Act"), as
amended, on the basis of the directors' familiarity with the business and
affairs of the Company. No underwriting fees or discounts were applicable
to the transactions. The options are first exercisable six months after the
date of grant and remain exercisable through the tenth anniversary of the
grant date, at an exercise price of $16.0625 per share.
On May 3, 1999, the Company's Board of Directors approved the issuance of
14,400 unregistered shares of Anacomp common stock to a former shareholder
of WorkSmart, Incorporated ("WorkSmart"), whose stock the Company acquired
in January 1998, in fulfillment of the Company's obligation to pay the
shareholder additional consideration for his WorkSmart shares. The issuance
of the Anacomp shares to the former WorkSmart shareholder was effected in
the reliance upon the private placement exemption set forth in Section 4(2)
of the Securities Act, on the basis of the familiarity of such shareholder
and his adviser with the business and affairs of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27.1 - Financial Data Schedule.
(b) On June 25, 1999, the Company filed a Form 8-K with the Securities and
Exchange Commission related to the sale of the Magnetics Division.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANACOMP, INC.
/s/ David B. Hiatt
David B. Hiatt
Executive Vice President and
Chief Financial Officer
Date: August 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANACOMP
INC'S MARCH 31, 1999 FORM 10-Q QUARTERLY REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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