UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE
30, 2000.
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, 2000, the number of outstanding shares of the registrant's
common stock, $.01 par value per share, was 14,563,198.
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 2000 and September 30, 1999........ 2
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2000 and 1999... 3
Condensed Consolidated Statements of Operations
Nine Months Ended June 30, 2000 and 1999.... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2000 and 1999.... 5
Condensed Consolidated Statements of
Stockholders' Equity (Deficit) and
Comprehensive Income (Loss)
Nine Months Ended June 30, 2000........... 6
Notes to the Condensed Consolidated Financial
Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 20
Item 2. Changes in Securities and Use of Proceeds......... 20
Item 5. Other Information................................. 20
Item 6. Exhibits and Reports on Form 8-K.................. 21
SIGNATURES................................................... 22
</TABLE>
<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) 2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 5,763 $ 11.144
Accounts and notes receivable, net............ 61,222 75,259
Current portion of long-term receivables, net. 2,028 2,952
Inventories................................... 13,041 19,659
Prepaid expenses and other.................... 7,649 8,589
------------- -------------
Total current assets............................. 89,703 117,603
Property and equipment, net...................... 49,698 47,439
Long-term receivables, net of current portion.... 2,176 7,635
Goodwill......................................... 121,521 132,965
Reorganization value in excess of identifiable
assets, net .................................. ---- 12,003
Other assets..................................... 11,737 12,872
------------- -------------
$ 274,835 $ 330,517
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Bank borrowings and current portion of
long-term debt.............................. $ 52,299 $ 9,987
Accounts payable.............................. 27,265 34,058
Accrued compensation, benefits and withholdings 14,194 17,229
Accrued income taxes.......................... 3,302 6,509
Accrued interest.............................. 8,514 17,061
Other accrued liabilities..................... 33,121 38,008
------------- -------------
Total current liabilities........................ 138,695 122,852
------------- -------------
Noncurrent liabilities:
Long-term debt, net of current portion........ 311,494 313,885
Other noncurrent liabilities.................. 10,774 10,626
------------- -------------
Total noncurrent liabilities..................... 322,268 324,511
------------- -------------
Stockholders' equity (deficit):
Preferred stock............................... ---- ----
Common stock.................................. 146 149
Capital in excess of par value................ 111,360 109,787
Accumulated other comprehensive loss.......... (1,617) (1,222)
Accumulated deficit........................... (296,017) (225,560)
------------- -------------
Total stockholders' deficit...................... (186,128) (116,846)
------------- -------------
$ 274,835 $ 330,517
============= =============
</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) 2000 1999
---------- ----------
<S> <C> <C>
Revenues:
docHarbor.................................... $ 1,109 $ 277
Document Solutions........................... 50,644 53,874
Technical Services........................... 15,003 17,531
DatagraphiX.................................. 22,133 34,568
---------- ----------
88,889 106,250
---------- ----------
Cost of revenues:
docHarbor.................................... 4,351 333
Document Solutions........................... 33,597 33,948
Technical Services........................... 8,525 9,084
DatagraphiX.................................. 24,997 19,607
---------- ----------
71,470 62,972
---------- ----------
Gross Profit.................................... 17,419 43,278
Costs and expenses:
Engineering, research and development........ 2,483 3,251
Selling, general and administrative.......... 27,854 22,241
Amortization of reorganization asset......... ---- 17,093
Amortization of intangible assets............ 4,636 5,355
Restructuring charges........................ 7,641 ----
Asset impairment charges..................... 5,671 ----
---------- ----------
Operating loss from continuing operations....... (30,866) (4,662)
---------- ----------
Other income (expense):
Interest income.............................. 196 426
Interest expense and fee amortization........ (10,271) (10,118)
Other........................................ (257) (185)
---------- ----------
(10,332) (9,877)
---------- ----------
Loss from continuing operations before income
taxes........................................ (41,198) (14,539)
Provision for income taxes...................... 224 1,072
---------- ----------
Loss from continuing operations................. (41,422) (15,611)
(Loss) gain on sale of discontinued operations.. (1,636) 3,056
---------- ----------
Net loss........................................ $ (43,058) $ (12,555)
========== ==========
Basic and diluted per share data:
Loss from continuing operations................. $ (2.85) $ (1.10)
Gain (loss) on sale of discontinued operations,
net of taxes................................. (0.11) 0.22
---------- ----------
Basic and diluted net loss...................... $ (2.96) $ (0.88)
========== ==========
Shares used in computing basic and diluted net
loss per share............................... 14,536 14,244
========== ==========
</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) 2000 1999
---------- ----------
<S> <C> <C>
Revenues:
docHarbor.................................... $ 2,921 $ 663
Document Solutions........................... 165,843 171,503
Technical Services........................... 49,291 54,398
DatagraphiX.................................. 77,531 106,593
---------- ----------
295,586 333,157
---------- ----------
Cost of revenues:
docHarbor.................................... 9,622 534
Document Solutions........................... 105,378 107,635
Technical Services........................... 25,749 27,997
DatagraphiX.................................. 63,700 62,939
---------- ----------
204,449 199,105
---------- ----------
Gross Profit.................................... 91,137 134,052
Costs and expenses:
Engineering, research and development........ 7,715 7,637
Selling, general and administrative.......... 74,885 69,352
Amortization of reorganization asset......... 12,003 52,984
Amortization of intangible assets............ 14,803 14,989
Restructuring charges........................ 14,607 ----
Asset impairment charges..................... 5,671 ----
---------- ----------
Operating loss from continuing operations....... (38,547) (10,910)
---------- ----------
Other income (expense):
Interest income.............................. 894 1,505
Interest expense and fee amortization........ (29,907) (30,396)
Other........................................ (487) (816)
---------- ----------
(29,500) (29,707)
---------- ----------
Loss from continuing operations before income
taxes........................................ (68,047) (40,617)
Provision for income taxes...................... 774 5,194
---------- ----------
Loss from continuing operations................. (68,821) (45,811)
Income from discontinued operations, net of
income taxes................................. ---- 809
(Loss) gain on sale of discontinued operations.. (1,636) 3,056
---------- ----------
Net loss........................................ $ (70,457) $ (41,946)
========== ==========
Basic and diluted per share data:
Loss from continuing operations................. $ (4.77) $ (3.21)
Income from discontinued operations............. ---- 0.05
Gain (loss) on sale of discontinued operations,
net of taxes................................. (0.11) 0.22
---------- ----------
Basic and diluted net loss...................... $ (4.88) $ (2.94)
========== ==========
Shares used in computing basic and diluted net
loss per share............................... 14,438 14,248
========== ==========
</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) 2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (70,457) $ (41,946)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Income from discontinued operations......... --- (738)
Loss (gain) on sale of discontinued
operations and other assets............... 1,636 (3,485)
Asset impairment charge................... 5,671 ---
Depreciation and amortization............... 41,550 82,875
Non-cash compensation....................... 34 844
Non-cash charge in lieu of taxes............ --- 5,190
Restricted cash requirements.............. --- 3,721
Write down of inventories................. 9,031 ---
Change in assets and liabilities, net
of effects from acquisitions:
Decrease in current assets and long-term
receivables............................. 14,197 3,252
Decrease in accounts payable and accrued
expenses................................ (34,693) (26,558)
Increase (decrease) in other noncurrent
liabilities............................. 147 (223)
---------- ----------
Net cash (used in) provided by continuing
operations............................. (32,884) 22,932
Net operating cash provided by
discontinued operations................ --- 1,785
---------- ----------
Net cash (used in) provided by operating
activities............................. (32,884) 24,717
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment... (15,502) (19,431)
Proceeds from sale of discontinued
operations and other assets................ --- 39,887
Payments to acquire companies and customer
rights..................................... (1,833) (13,371)
---------- ----------
Net cash (used in) provided by investing
activities............................. (17,335) 7,085
---------- ----------
Cash flows from financing activities:
Proceeds from the exercise of options........ 2,530 2,183
Proceeds from employee stock purchases....... 510 782
Repurchases of common stock.................. (1,599) (5,019)
Proceeds from liquidation of currency swap
contracts.................................. 3,424 ---
Net proceeds from revolving line of credit... 42,500 ---
Principal payments on long-term debt......... (1,083) (169)
---------- ----------
Net cash provided by (used in) financing
activities............................. 46,282 (2,223)
---------- ----------
Effect of exchange rate changes on cash......... (1,444) (250)
---------- ----------
Decrease (increase) in cash and cash equivalents (5,381) 29,329
Cash and cash equivalents at beginning of period 11,144 17,721
---------- ----------
Cash and cash equivalents at end of period...... $ 5,763 $ 47,050
========== ==========
Supplemental Information:
Cash paid for interest........................ $ 39,663 $ 34,114
========== ==========
Cash paid for income taxes.................... $ 3,098 $ 4,525
========== ==========
Assets acquired by assuming liabilities....... $ --- $ 1,885
========== ==========
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
other
(in thousands) Addit. comprehensive
Common paid-in income Accum.
Stock capital (loss) Deficit Total
----- ------- ------ --------- -----
BALANCE AT SEPTEMBER 30, 1999 $149 $109,787 $(1,222) $(225,560) $(116,846)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss...................... --- --- --- (70,457) (70,457)
Translation adjustment........ --- --- (3,674) --- (3,674)
Realized gain on currency
swap contracts.............. --- --- 3,424 --- 3,424
Unrealized loss on currency
swap contracts.............. --- --- (145) --- (145)
--------
Comprehensive loss............ (70,852)
--------
Common stock issued for
exercise of stock options... --- 2,564 --- --- 2,564
Common stock issued for
acquisitions................ --- 95 --- --- 95
Common stock issued for
employee stock purchases...... --- 510 --- --- 510
Common stock purchased and
retired...................... (3) (1,596) --- --- (1,599)
--------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 $146 $111,360 $(1,617) $(296,017) $(186,128)
================================================================================
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Company Operations and Liquidity Issues
Anacomp, Inc. ("Anacomp" or the "Company") incurred significant losses during
the current quarter and for the nine months ended June 30, 2000. In an effort to
address these issues, the Company has made senior management changes and has
recently appointed a new Chief Executive Officer. In addition, the Company is
experiencing significant liquidity issues and is in violation of its senior
credit facility loan covenants. However, it has also reached an agreement in
principle, subject to the internal approval of its senior lenders, to amend the
credit facility and to provide Anacomp with a waiver, valid through late October
2000, with respect to those covenants for which the Company is in default (see
Note 4). During the waiver period, the Company will be evaluating all of its
operations and will develop, refine and implement plans in an effort to improve
future operating results and cash flows. It will also continue to work with all
of its lenders to resolve the Company's liquidity issues, including the holders
of the Company's senior subordinated notes, to whom the Company owes an
approximate $17 million interest payment on October 1, 2000. Because of its
current liquidity position, the Company anticipates that it will be unable to
make the interest payment on October 1.
Management's plan includes evaluating all business units against the Company's
current strategic direction. This evaluation includes, among other things, the
possible discontinuance, sale or other fundamental change in all business units
and corporate activities and structure. Business units or portions of business
units not deemed consistent with the Company's current growth or cash strategies
are being considered for sale. The Company is actively exploring financing
alternatives to raise the capital necessary to make the needed investments in
docHarbor, the Company's document application service provider. Finally,
Donaldson, Lufkin and Jenrette (" DLJ") has been retained to assist the Company
in raising new capital to support its docHarbor business unit and in financial
restructuring activities, including a possible debt restructuring.
During the current quarter and nine months ended June 30, 2000, the Company has
recorded restructuring charges (see Note 5), asset impairment charges (see Note
6) and other charges to operations. Management has made its best estimate to
record these charges based on known facts and circumstances. As management
develops, refines and implements its plans, it is possible that additional
charges, which could be substantial, may be required in the near term because of
changed facts and circumstances.
Note 2. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Anacomp and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These financial
statements, except for the balance sheet as of September 30, 1999, have not been
audited but, in the opinion of the Company's management, include all adjustments
(consisting only of normal recurring adjustments) 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, 1999, included in the Company's 1999 Annual Report on
Form 10-K. Interim operating results are not necessarily indicative of operating
results for the full year.
Note 3. 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.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
<PAGE>
Note 4. Senior Secured Revolving Credit Facility and Senior Subordinated Notes
The Company has a $75 million Senior Secured Revolving Credit Facility (the
"Facility") with a syndicate of banks for whom BankBoston, N.A. acts as agent.
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 Senior
Subordinated Notes, limitations on open market purchases of the Company's common
stock, limitations on mergers and acquisitions, limitations on liens, minimum
EBITDA (as defined in the Facility) requirements, minimum interest coverage
ratios and minimum leverage ratios. At June 30 and July 31, 2000, $51.4 million
and $57.4 million was outstanding under the Facility, respectively.
As previously announced, Anacomp is in violation of certain of the financial
covenants described above on the basis of third quarter results. However, the
Company has reached an agreement in principle with its senior lenders, subject
to their internal approval, to amend the Facility and to provide Anacomp a
waiver, valid though late October 2000, with respect to those covenants for
which the Company is in default. The Company will have limited additional access
to its Facility during this time.
At June 30, 2000, the Company had outstanding $310 million of publicly-traded
senior subordinated notes due 2004. Interest payments of approximately $17
million are due April 1 and October 1 each year. At this time, the Company
anticipates that it will be unable to make the interest payment on its
subordinated debt that is due on October 1, 2000. The Company has engaged DLJ to
advise it with respect to a possible restructuring of the Company's debt. In the
event the Company does not make its $17 million interest payment due in October
2000, and should such non-payment result in an event of default, the senior
subordinated notes would be classified as a short-term obligation in the
company's financial statements.
Note 5. Restructuring Charges
In the third quarter of 2000, the Company recorded restructuring charges of $7.6
million. This amount includes $4.5 million related to the DatagraphiX business
unit and the phase out of manufacturing operations, $1.0 million related to the
Document Solutions business unit, $1.0 million related to the Technical Services
business unit and $0.6 million related to the docHarbor business unit.
Additional restructuring charges of $0.5 million, related to the reorganization
of the workforce announced in the second fiscal quarter of 2000, were also
recorded in the third fiscal quarter of 2000. Total restructuring charges for
the nine months ended June 30, 2000 were $14.6 million. Employee severance and
termination related costs in the third quarter were for approximately 182
employees, all of whom will leave the Company by December 31, 2000.
The following table displays the activity and balances of the restructuring
reserve account from March 31, 2000 to June 30, 2000:
<TABLE>
<CAPTION>
(in thousands)
March 31, 2000 June 30, 2000
Type of Cost Balance Additions Deductions Balance
---------------- -------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Employee
Separations $ 3,700 $ 4,900 $ 2,600 $ 6,000
Facility Closing 2,500 400 300 2,600
Professional and
Other 900 900 100 1,700
Contract Obligations --- 1,400 --- 1,400
-------------- --------- ---------- -------------
$ 7,100 $ 7,600 $ 3,000 $ 11,700
-------------- --------- ---------- -------------
</TABLE>
As the Company continues to develop, refine and implement its plans, it is
anticipated that additional restructuring charges will be incurred in the near
term.
<PAGE>
Note 6. Asset Impairment Charges
The Company evaluates potential impairment of 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 and 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 value or fair value less estimated selling costs. Based on events
related to the buyer of the Company's Magnetics business, sold in 1999, and on
the Company's change in strategic direction, announced in the third quarter of
fiscal 2000, the Company recorded an impairment charge of $5.7 million, which is
included in the fiscal 2000 third quarter results, as follows (in thousands):
<TABLE>
<CAPTION>
Assets Amount
-------------------------------------------------- ----------
<S> <C>
Magnetics note receivable (see Note 8)............ $ 2,738
Development assets................................ 2,338
Leasehold improvements............................ 595
----------
$ 5,671
==========
</TABLE>
As reflected in the June 30, 2000 balance sheet, the Company has $122 million of
goodwill related to the following acquisitions (in thousands):
<TABLE>
<CAPTION>
Business Acquisition Amount
-------------------------------------------------- ----------
<S> <C>
First Image Management Co......................... $ 87,517
BGIN Holding AG................................... 14,823
Litton Adesso Software............................ 9,270
All Other......................................... 9,911
----------
$ 121,521
==========
</TABLE>
In addition, there is an earn out provision related to the BGIN acquisition that
could provide for additional consideration, which if paid would increase the
goodwill stated above.
As management assesses its business units and develops, refines and implements
its plans (see Note 1), certain courses of action may be taken that could result
in the impairment of goodwill as required by SFAS No. 121.
Note 7. Inventories
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
----------- -------------
2000 1999
----------- -------------
<S> <C> <C>
Finished goods................................ $ 2,789 $ 9,827
Work in process............................... 1,429 2,433
Raw materials and supplies.................... 8,823 7,399
----------- -------------
$ 13,041 $ 19,659
=========== =============
</TABLE>
In the third quarter of fiscal 2000 the Company elected to restructure its
DatagraphiX business unit and to phase out its manufacturing operations. The
Company reviewed the estimated future requirements for the related inventories
and recorded a $9 million charge to operations in the third quarter of fiscal
2000.
Note 8. 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 June 1, 1999, and the sales price of $40 million included $37
million in cash at closing and an interest bearing $3 million subordinated note.
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.
<PAGE>
The Company recognized a gain upon the sale of the Magnetics Division during the
third fiscal quarter of 1999. However, as a result of changes in its business
strategy and the related effect on certain Magnetics Division obligations, the
Company revised certain estimates of costs to be incurred in connection with
this disposition, resulting in a charge of $1.6 million being recorded in the
quarter ended June 30, 2000.
During the third quarter of 2000, the Company determined that the collectibility
of the note receivable, with a carrying value of $2.7 million, was impaired.
Accordingly, the Company recorded a $2.7 million reserve against the note at
June 30, 2000 (see Note 6).
The Magnetics Division has been reported separately as discontinued operations
in the condensed consolidated statements of operations for the three and nine
month periods ended June 30, 2000 and 1999.
The operating results of the discontinued operations are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1999
-----------------
<S> <C>
Revenues....................... $ 50,544
=================
Operating income............... $ 2,763
Income taxes................... 1,954
-----------------
Net income..................... $ 809
=================
</TABLE>
Note 9. Reorganization Asset
As of May 31, 1996, the Company adopted Fresh Start Reporting, which resulted in
material changes to its consolidated balance sheet, including valuation of
assets, intangible assets and liabilities at fair market value and valuation of
equity based on the appraised reorganization value of the ongoing business. The
net result of the valuation of identifiable assets, the recognition of
liabilities at fair market value and the valuation of equity was the Company
recognizing an asset entitled "Reorganization value in excess of identifiable
assets" (the "Reorganization Asset") totaling $267.5 million as of May 31, 1996.
The Reorganization Asset was fully amortized as of November 30, 1999.
Note 10. Income Taxes
The Company's amortization of the Reorganization Asset is not deductible for
income tax purposes. Accordingly, the Company may incur income tax expense even
though it reports a pre-tax loss due to such amortization.
For the nine months ended June 30, 2000, income tax expense reported for the
Company primarily represents taxes on certain of its foreign operations. For the
nine months ended June 30, 1999, income tax expense is based upon an 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 of the Company resulted in a
reduction of $3.3 million in the Company's Reorganization Asset and did not
reduce income tax expense.
Note 11. Hedging
In April 2000, the Company entered into a cross-currency swap agreement that
hedges the U.S. dollar value of the Company's investment in the net assets of a
foreign subsidiary. This agreement effectively swaps higher fixed-rate U.S.
dollar debt for lower fixed-rate debt in the subsidiary's local currency. The
Company is exposed to the risk of future currency exchange rate fluctuations on
such debt. The amount outstanding as of June 30, 2000 is as follows (in
thousands, except for interest rate):
<TABLE>
<CAPTION>
Notional Unrealized
Currency Amount Maturity Interest Rate Loss
----------------- --------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Swiss Franc
Fixed-rate 10,000 April 1, 2003 4.051 $ 145
</TABLE>
<PAGE>
The unrealized loss, related to the fair value of the currency swap at June 30,
2000, is reflected as a component of comprehensive loss in stockholders' equity.
Note 12. Loss Per Share
Basic loss per share is computed based upon the weighted average number of
shares of the Company's common stock outstanding during the period. Diluted loss
per share is computed based upon the weighted average number of shares of common
stock and potentially dilutive securities outstanding during the period.
Potentially dilutive securities 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.
Potentially dilutive securities were not used to calculate diluted earnings per
share because of their anti-dilutive effect. There are no reconciling items in
calculating the numerator for basic and diluted earnings per share for any of
the periods presented.
Note 13. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and in June 1999
issued SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The objective of the
statement is to establish accounting and reporting standards for derivative
instruments and hedging activities. The Company uses cross-currency swap
agreements that hedge the U.S. dollar value of its net assets of certain foreign
subsidiaries (see Note 11). The adoption of this new accounting pronouncement is
not expected to be material to the Company's consolidated financial position or
results of operations as the accounting for such cross-currency swap agreements
is essentially unchanged by the provisions of SFAS No. 133.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", in
which the SEC interprets existing accounting literature related to revenue
recognition. SAB No. 101 must be implemented no later than the fourth fiscal
quarter of the fiscal year beginning after December 15, 1999. The Company is
currently assessing the impact of SAB 101 on its financial position and results
of operations.
Note 14. Operating Segments
Anacomp's business is focused in the document management industry. The Company
manages its business through four operating units: docHarborSM, an application
service provider ("ASP"), which provides Internet-based document-management
services; Document Solutions, which provides document-management outsource
services; Technical Services, which provides equipment maintenance services for
Anacomp COM and CD products and for third-party manufactured products; and
DatagraphiX(R), which provides COM and CD systems and related supplies and
contract manufacturing services. As of October 1, 2000, DatagraphiX will no
longer provide manufacturing operations and the remainder of the business will
be fully integrated into the Technical Services business unit.
Management evaluates operating unit performance based upon earnings before
interest, other income, reorganization items, asset impairment and restructuring
charges, taxes, depreciation and amortization, and extraordinary items (referred
to as "EBITDA"). The excluded costs are managed at the Corporate level and not
in the operating units.
As of and for the Three Months Ended June 30,
<TABLE>
<CAPTION>
Document Technical
(in thousands) docHarbor Solutions Services DatagraphiX Corporate Consolidated
--------------------------------------------------------------------------------
2000
<S> <C> <C> <C> <C> <C> <C>
Digital/Renewal
Revenue $ 1,109 $ 17,176 $ 4,900 $ 3,133 $ --- $ 26,318
COM Revenue --- 33,468 10,103 19,000 --- 62,571
----------------------------------------------------------------
Total Revenues 1,109 50,644 15,003 22,133 --- 88,889
EBITDA (8,143) 8,391 5,904 (6,415) (7,512) (7,775)
1999
Digital/Renewal
Revenue $ 277 $ 11,356 $ 3,629 $ 911 $ --- $ 16,173
COM Revenue --- 42,518 13,902 33,657 --- 90,077
----------------------------------------------------------------
Total Revenues 277 53,874 17,531 34,568 --- 106,250
EBITDA (2,316) 11,669 7,468 11,004 (4,749) 23,076
</TABLE>
<PAGE>
As of and for the Nine Months Ended June 30,
<TABLE>
<CAPTION>
Document Technical
(in thousands) docHarbor Solutions Services DatagraphiX Corporate Consolidated
--------------------------------------------------------------------------------
2000
<S> <C> <C> <C> <C> <C> <C>
Digital/Renewal
Revenue $ 2,921 $ 55,284 $ 14,084 $ 12,943 $ --- $ 85,232
COM Revenue --- 110,559 35,207 64,588 --- 210,354
----------------------------------------------------------------
Total Revenues 2,921 165,843 49,291 77,531 --- 295,586
EBITDA (20,188) 36,630 21,591 2,122 (16,840) 23,315
1999
Digital/Renewal
Revenue $ 663 $ 36,315 $ 10,472 $ 2,983 $ --- $ 50,433
COM Revenue --- 135,188 43,926 103,610 --- 282,724
----------------------------------------------------------------
Total Revenues 663 171,503 54,398 106,593 --- 333,157
EBITDA (4,297) 37,690 23,633 31,865 (17,039) 71,852
</TABLE>
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" ("MD&A") 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. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements 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; 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 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.
<PAGE>
Overview
Anacomp, Inc. ("Anacomp" or the "Company") incurred significant losses
during the current quarter and for the nine months ended June 30, 2000. In an
effort to address these issues, the Company has made senior management changes
and has recently appointed a new Chief Executive Officer. In addition, the
Company is experiencing significant liquidity issues and is in violation of its
senior credit facility loan covenants. However, it has also reached an agreement
in principle, subject to the internal approval of its senior lenders, to amend
the credit facility and to provide Anacomp with a waiver, valid through late
October 2000, with respect to those covenants for which the Company is in
default. During the waiver period, the Company will be evaluating all of its
operations and will develop, refine and implement plans in an effort to improve
future operating results and cash flows. It will also continue to work with all
of its lenders to resolve the Company's liquidity issues, including the holders
of the Company's senior subordinated notes, to whom the Company owes an
approximate $17 million interest payment on October 1, 2000. Because of its
current liquidity position, the Company anticipates that it will be unable to
make the interest payment on October 1.
Management's plan includes evaluating all business units against the
Company's current strategic direction. This evaluation includes, among other
things, the possible discontinuance, sale or other fundamental change in all
business units and corporate activities and structure. Business units or
portions of business units not deemed consistent with the Company's current
growth or cash strategies are being considered for sale. The Company is actively
exploring financing alternatives to raise the capital necessary to make the
needed investments in docHarbor, the Company's document application service
provider. Finally, DLJ has been retained to assist the Company in raising new
capital to support its docHarbor business unit and in financial restructuring
activities, including a possible debt restructuring.
During the current quarter and nine months ended June 30, 2000, the
Company has recorded restructuring charges, asset impairment charges and other
charges to operations. Management has made its best estimate to record these
charges based on known facts and circumstances. As management develops, refines
and implements its plans, it is possible that additional charges, which could be
substantial, may be required in the near term because of changed facts and
circumstances.
As of May 31, 1996, the Company adopted Fresh Start Reporting, which
resulted in material changes to its consolidated balance sheet. The net result
of the valuation of identifiable assets, the recognition of liabilities at fair
market value and the valuation of equity was the Company recognizing the
Reorganization Asset totaling $267.5 million as of May 31, 1996. This Asset was
fully amortized at November 30, 1999.
On May 31, 1999, the Company completed the sale of the Magnetics Division.
The results of the Magnetics business have been reported separately as
discontinued operations in the Condensed Consolidated Statements of Operations
for the three and nine months ended June 30, 1999 and 2000.
On August 10, 2000, the Board of Directors confirmed the appointment of
Phil Smoot as President and Chief Executive Officer of the Company.
In fiscal 1999, Anacomp moved to a four business unit reporting structure.
The four business units comprise docHarbor, Document Solutions, Technical
Services, and DatagraphiX. In the second quarter of fiscal 2000 the Company
affected a reorganization of its workforce in Europe along the four lines of
business and, as part of its program to decentralize its corporate services
consistent with the business unit structure, also reorganized parts of its
corporate staff. The reorganization and cost reduction initiatives resulted in a
restructuring charge of $7.0 million in the second quarter. These charges relate
primarily to employee and facility termination costs and other reorganization
related costs.
In the third quarter of fiscal 2000 the Company announced its intent to
restructure the DatagraphiX business unit and phase out associated manufacturing
operations by September 30, 2000. The DatagraphiX restructuring plus additional
actions related to the second quarter reorganization and cost reduction
initiatives resulted in restructuring charges of $7.6 million in the third
quarter. This amount includes $4.5 million related to the DatagraphiX business
unit and the phase out of manufacturing operations, $1.0 million related to the
Document Solutions business unit, $1.0 million related to the Technical Services
business unit and $0.6 million related to the docHarbor business unit.
Additional restructuring charges of $0.5 million, related to the reorganization
of the workforce announced in the second quarter at fiscal 2000, were also
recorded in the third quarter of fiscal 2000. As the Company continues to
develop, refine and implement its plans, it is anticipated that additional
restructuring charges will be incurred in the near term.
<PAGE>
Results of Operations
Three Months Ended June 30, 2000 vs. Three Months Ended June 30, 1999
General. Anacomp reported a net loss of $43.1 million for the three months
ended June 30, 2000, compared to a net loss of $12.6 million for the three
months ended June 30, 1999. EBITDA for the third quarter of fiscal 2000 was
negative $7.8 million. Included in these results are a $9.0 million inventory
reserve related to the cessation of manufacturing announced previously, and $1.9
million in severance and other costs related to the senior management changes
previously announced. Excluding these charges, EBITDA for the quarter would have
been $3.2 million.
Revenues. The Company's revenues decreased 16% from $106.3 million for the
three months ended June 30, 1999, to $88.9 million for the three months ended
June 30, 2000. The decrease was the result of the $27.5 million decline in
COM-related revenues across the Document Solutions, Technical Services and
DatagraphiX business units, partially offset by the $10.1 million increase in
digital and renewal revenues across the business units. The rate of decline in
COM revenues across the business units during the third quarter increased from
the rate of decline experienced historically, and the Company anticipates that
this more rapid decline may continue as customers migrate to other technologies
or eliminate certain COM applications.
Revenues from the Document Solutions business decreased 6% from the prior
year period, from $53.9 million to $50.6 million. Revenue contributed by digital
services and products increased 51% over the prior year period, from $11.4
million to $17.2 million. The Company's growth in digital outsourcing services,
which increased to 34% of revenue from 21% in the prior year period, enabled it
to partially offset the long-term declines in the COM outsourcing business,
which dropped $9 million or 21% from the prior year period.
Technical Services revenues decreased from the prior year period, from
$17.5 million to $15.0 million. Approximately $1.3 million of this decline
resulted from the discontinuance of a segment of the COM maintenance business.
The unit's third party maintenance related revenues increased 34% over the prior
year period, partially offsetting declines in COM hardware maintenance revenues.
Third party maintenance revenues contributed 33% of total Technical Services
revenues, compared to 21% in the prior year period. The discontinuation of the
Company's manufacturing operations noted below may exacerbate the decline in COM
hardware maintenance revenues in future periods.
docHarbor revenues increased $0.8 million versus the prior year period.
This was the result of increased revenues from existing customers and new
customer orders.
DatagraphiX revenues decreased 36%, or $12.4 million, compared to the
three months June 30, 1999. The decrease was attributable to an increased
decline in the market for COM systems and supplies. This was partially offset by
increased revenues from contract manufacturing. On June 1, 2000, the Company
announced a restructuring of the DatagraphiX business unit, the merger of this
unit into the Technical Services business unit and the discontinuance of
manufacturing operations effective October 1, 2000.
Gross Margins. The Company's gross margin decreased from $43.3 million
(41% of revenues) for the three months ended June 30, 1999, to $17.4 million
(20% of revenues) for the three months June 30, 2000. The decrease in company
wide gross margins was primarily the result of declines in the DatagraphiX
business unit. DatagraphiX fiscal 2000 costs included a $9 million reserve
against inventory as a result of the decision to eliminate manufacturing
operations. In addition, DatagraphiX margins were impacted by the 36% decline in
revenues in the quarter ended June 30, 2000.
Technical Services gross margin decreased from 48% to 43% of revenues in
the quarter ended June 30, 2000. This was primarily the result of the lower
level of revenues in the current year quarter. Document Solutions gross margin
decreased slightly to 34% of revenues in the quarter ended June 30, 2000, from
37% of revenues in the prior year period. This was primarily the result of the
decrease in revenues in the current year period. docHarbor gross margins were
impacted by the continuing development of infrastructure necessary to meet the
anticipated demand for the docHarbor product.
<PAGE>
Engineering, Research and Development. Engineering, research and
development expense decreased from $3.3 million for the three months ended June
30, 1999, to $2.5 million for the three months ended June 30, 2000. The 1999
period included development costs for a product that was subsequently
discontinued.
Selling, general and administrative. Selling, general and administrative
(SG&A) expenses increased from $22.2 million (21% of revenues) for the three
months ended June 30, 1999, to $27.9 million (31% of revenues) for the three
months ended June 30, 2000. This increase was primarily the result of increased
sales and marketing efforts for the docHarbor and Document Solutions business
units and severance and other costs related to the senior management changes
previously announced.
Amortization of intangible assets. Amortization of intangible assets
decreased 13% from $5.4 million (5% of revenues) for the three months ended June
30, 1999, to $4.6 million (5% of revenues) for the three months ended June 30,
2000. This decrease is primarily the result of the completion of amortization
for a number of 1997 acquisitions and reduced amortization related to
intangibles written off in the 1999 fourth fiscal quarter.
Restructuring Charges. In the third quarter of fiscal 2000, the Company
recorded restructuring charges of $7.6 million. This amount includes $4.5
million related to the DatagraphiX business unit and the phase out of
manufacturing operations, $1.0 million related to the Document Solutions
business unit, $1.0 million related to the Technical Services business unit and
$0.6 million related to the docHarbor business unit. Additional restructuring
charges of $0.5 million, related to the reorganization of the workforce
announced in the second fiscal quarter of 2000, were also recorded in the third
fiscal quarter of 2000.
Asset Impairment Charges. In the 1999 third quarter, the Company sold its
Magnetics Division for $37 million and a $3 million note due in 2006. In the
third quarter of fiscal 2000, it became apparent that the buyers of the
Magnetics Division would be unable to repay the note. As a result, the Company
has fully reserved the $2.7 million carrying value of the note.
During the third quarter of 2000 the Company determined that certain
development projects were no longer consistent with the Company's strategic
direction and, therefore, discontinued them. This resulted in the write-off of
certain assets totaling $2.4 million.
As a result of discontinuing its manufacturing operations, the Company
recognized a write down of $0.6 million related to its leasehold improvements.
Interest Expense. Interest expense increased from $10.1 million for the
three months ended June 30, 1999, to $10.3 million for the three months ended
June 30, 2000. This increase was the result of increased borrowings on the
revolving credit facility in the current year period.
Provision for Income Taxes. The provision for income taxes for the three
months ended June 30, 2000 of $224 thousand primarily related to earnings of
certain foreign subsidiaries. The provision of $1.1 million for the three months
ended June 30, 1999 was based upon an effective tax rate of 42% of taxable
income for the period.
Discontinued operations. During the second quarter of 1999, the Company
adopted a plan to dispose of its Magnetics Division for which the results of
operations were reported as discontinued operations. The Company recognized a
gain upon the sale of the Magnetics Division during the third fiscal quarter of
1999. However, as a result of changes in its business strategy and the related
effect on certain Magnetics Division obligations, the Company revised certain
estimates of costs to be incurred in connection with this disposition, resulting
in a charge of $1.6 million being recorded in the quarter ended June 30, 2000.
Nine Months Ended June 30, 2000 vs. Nine Months Ended June 30, 1999
General. Anacomp reported a net loss of $70.5 million for the nine months
ended June 30, 2000, compared to a net loss of $41.9 million for the nine months
ended June 30, 1999. EBITDA for the nine months ended June 30, 2000 was $23.3
million. Included in these results are a $9.0 million inventory reserve related
to the cessation of manufacturing announced previously, and $1.9 million in
severance and other costs related to the senior management changes previously
announced. Excluding these charges, EBITDA for the nine months ended June 30,
2000, would have been $34.2 million.
<PAGE>
Revenues. The Company's revenues decreased 11% from $333.2 million for the
nine months ended June 30, 1999, to $295.6 million for the nine months ended
June 30, 2000. The decrease was primarily the result of declines in the
DatagraphiX business unit.
Revenues from the Company's Document Solutions business decreased from the
prior year period, from $171.5 million to $165.8 million. Revenue contributed by
digital services and products was up 52% over the prior year period, from $36.3
million to $55.3 million. The Company's growth in digital outsourcing services
enabled it to partially offset the long-term declines it is experiencing in its
COM outsourcing business, which dropped from 79% to 67% of revenues in the prior
year period.
Technical Services revenues were down from the prior year period,
decreasing from $54.4 million to $49.3 million. Approximately $3.5 million of
this decline resulted from the discontinuance of a segment of the COM
maintenance business that was sold in the first quarter of fiscal 2000. The
unit's third party maintenance related revenues increased 34% over the prior
year period, partially offsetting declines in COM hardware maintenance revenues.
Third party maintenance revenues contributed 29% of total Technical Services
revenues in 2000 compared to 19% in the prior year period.
docHarbor revenues increased $2.3 million versus the nine months ended
June 30, 1999. This was the result of increased revenues from existing customers
and new customer orders.
DatagraphiX revenues decreased 27%, or $29.1 million, compared to the
prior year period. The decrease was attributable to the increased decline in the
market for COM systems and supplies, partially offset by new revenues from
contract manufacturing.
Gross Margins. The Company's gross margin decreased from $134.1 million
(40% of revenues) for the nine months ended June 30, 1999, to $91.1 million (31%
of revenues) for the nine months ended June 30, 2000. The decrease in gross
margins was primarily due to results in the DatagraphiX business unit and the
continued investment in docHarbor infrastructure.
DatagraphiX gross margins decreased due to the third fiscal quarter 2000
decision to eliminate manufacturing operations and the related $9 million
reserve against DatagraphiX inventories, and the current year decrease in
revenues. docHarbor gross margins reflect the Company's continued investment in
the infrastructure of this business unit in fiscal year 2000. Gross margins for
Document Solutions and Technical Services decreased slightly from the prior year
period at 36% and 48%, respectively.
Engineering, Research and Development. Engineering, research and
development expense increased from $7.6 for the nine months ended June 30, 1999,
to $7.7 million for the nine months ended June 30, 2000.
Selling, general and administrative. Selling, general and administrative
(SG&A) expenses increased 8%, from $69.4 million (21% of revenues) for the nine
months ended June 30, 1999, to $74.9 million (25% of revenues) for the nine
months ended June 30, 2000. This increase was primarily the result of increased
sales and marketing efforts for the docHarbor and Document Solutions business
units and severance and other costs related to the senior management changes
previously announced..
Amortization of intangible assets. Amortization of intangible assets
decreased from $15.0 million (4% of revenues) for the nine months ended June 30,
1999, to $14.8 million (5% of revenues) for the nine months ended June 30, 2000.
Restructuring Charges. During the nine months ended June 30, 2000, the
Company recorded restructuring charges totaling $14.6 million. This amount
includes $7 million recorded in the second quarter of fiscal 2000, in a
reorganization of the Company's workforce in Europe along the four lines of
business and, as part of its program to decentralize its corporate services
consistent with the business unit structure, also reorganized parts of its
corporate staff. In the third quarter of 2000, the Company recorded
restructuring charges of $7.6 million. This amount includes $4.5 million related
to the DatagraphiX business unit and the phase out of manufacturing operations,
$1.0 million related to the Document Solutions business unit, $1.0 million
related to the Technical Services business unit and $0.6 million related to the
docHarbor business unit. Additional restructuring charges of $0.5 million,
related to the reorganization of the workforce announced in the second fiscal
quarter of 2000, were also recorded in the third fiscal quarter of 2000.
<PAGE>
Asset Impairment Charges. In the 1999 third quarter, the Company sold its
Magnetics Division for $37 million and a $3 million note due in 2006. In the
fiscal year 2000 third quarter, it became apparent that the buyers of the
Magnetics Division would be unable to repay the note. As a result, the Company
has fully reserved the $2.7 million carrying value of the note.
During the third quarter of 2000 the Company determined that certain
development projects no longer were consistent with the Company's strategic
direction and, therefore, discontinued them. This resulted in the write-off of
certain assets totaling $2.4 million.
As a result of discontinuing its manufacturing operations, the Company
recognized a write down of $0.6 million related to its leasehold improvements.
Interest Expense. Interest expense decreased from $30.4 million for the
nine months ended June 30, 1999, to $29.9 million for the nine months ended June
30, 2000. This decrease was the result of the fiscal year 1999 repurchase of
long-term subordinated debt partially offset by increased borrowings against the
Company's Credit Facility in fiscal year 2000.
Provision for Income Taxes. The provision for income taxes for the nine
months ended June 30, 2000 of $774 thousand primarily related to earnings of
certain foreign subsidiaries. The provision of $5.2 million for the nine months
ended June 30, 1999 was based upon an effective tax rate of 42% of taxable
income for the period.
Discontinued operations. During the second quarter of 1999, the Company
adopted a plan to dispose of its Magnetics Division for which the results of
operations were reported as discontinued operations. The Company recognized a
gain upon the sale of the Magnetics Division during the third fiscal quarter of
1999. However, as a result of changes in its business strategy and the related
effect on certain Magnetics Division obligations, the Company revised certain
estimates of costs to be incurred in connection with this disposition, resulting
in a charge of $1.6 million being recorded in the quarter ended June 30, 2000.
Liquidity and Capital Resources
Anacomp had negative working capital of $49.0 million at June 30, 2000,
compared to negative working capital of $5.2 million at September 30, 1999. Net
cash used in continuing operations was $32.9 million for the nine months ended
June 30, 2000, compared to cash provided from operations of $22.9 million in the
comparable prior year period.
Net cash used in investing activities was $17.3 million in the current
nine month period, compared to cash provided by investing activities of $7.1
million in the comparable prior year period. The prior year period included
$39.9 million in proceeds from the sale of the Magnetics Solutions Division and
other assets. This was offset by capital expenditures that were primarily used
to integrate the First Image business and capital used to acquire companies and
company rights. Current year expenditures were primarily for docHarbor equipment
and facilities. Current year payments to acquire companies represents earn out
payments related to acquisitions in prior years. The Company may be liable for
an additional earn out payment in 2001 that is contingent upon attaining certain
revenue targets.
Net cash provided by financing activities increased approximately $48.5
million during the nine months ended June 30, 2000, from the same period in the
prior year. This increase was principally the result of $42.5 million in net
proceeds from the Company's revolving credit facility and the $3.4 million
proceeds from the liquidation of cross currency swap contracts in the current
year.
The Company's cash balance totaled $5.8 million at June 30, 2000 compared
to $11.1 million at September 30, 1999. The Company has a $75 million Senior
Secured Revolving Credit Facility (the "Facility") with a syndicate of banks and
BankBoston, N.A. as agent. With the release of third quarter results, Anacomp,
as previously announced, is in violation of certain financial covenants.
However, the Company has reached an agreement in principle, subject to the
internal approval of its senior lenders, to amend the current credit facility
and to provide Anacomp with a waiver, valid though late October 2000, with
respect to those covenants for which the Company is in default. The Company will
have limited additional access to its senior credit facility during this time.
<PAGE>
There can be no assurance that the Company will be able to ultimately resolve
this matter on terms favorable to the Company. The amount outstanding under the
Credit Facility was $57.4 million at July 31, 2000.
The Company has significant debt obligations. As of August 14, 2000, the
Company's liquidity is such that it anticipates that it will be unable to pay
the approximate $17 million interest on the senior subordinated debt that is due
on October 1, 2000. The Company has retained DLJ to advise the Company regarding
financial initiatives, including a possible restructuring of its subordinated
debt.
Although the Company has only limited access to its Facility through
October 2000, the Company believes that, with the exception of the interest
payment due on the subordinated debt, it will be able to meet its financial
obligations during that time period. In addition, the Company is hopeful that it
will be able to restructure its subordinated debt without any adverse impact
upon Anacomp's trade and other creditors. If Anacomp is unable to successfully
implement its plans, including reaching an accommodation with its lenders and
bondholders, then the Company's auditors have indicated their report to be
issued on the Company's annual financial statements as of September 30, 2000,
would likely include a "going concern" modification.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has U.S. Dollar fixed-rate indebtedness, and in September
1999, it 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.
In February 2000, due to the decline in the value of Swiss Franc and the Euro
against the U.S. Dollar, the Company liquidated its cross currency swap
agreements and received $3.4 million in cash. This amount is reflected as
accumulated comprehensive income in total stockholders' equity in the Company's
June 30, 2000 Condensed Consolidated Balance Sheet.
In March 2000, the Company entered into a cross-currency swap agreement
that hedges the U.S. dollar value of the Company's investment in the net assets
of a foreign subsidiary. This agreement effectively swaps higher fixed-rate U.S.
dollar debt for lower fixed-rate debt in the subsidiary's local currency. The
Company is exposed to the risk of future currency exchange rate fluctuations on
such debt. The amount outstanding as of June 30, 2000 is as follows (in
thousands, except for interest rate):
<TABLE>
<CAPTION>
Notional Unrealized
Currency Amount Maturity Interest Rate Loss
----------------- --------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Swiss Franc
Fixed-rate 10,000 April 1, 2003 4.051 $ 145
</TABLE>
The Company is exposed to the risk of future currency exchange
fluctuations on such debt, which are accounted for as an adjustment to total
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 revolving credit facility is affected by the general level
of U.S. interest rates and/or Libor. The Company had $51.4 million outstanding
under its revolving credit facility at June 30, 2000.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are potential or named defendants in
several lawsuits and claims arising in the ordinary course of business. While
the outcome of such claims, lawsuits or other proceedings against the Company
cannot be predicted with certainty, management expects that such liability, to
the extent not provided for through insurance or otherwise, will not have a
material adverse effect on the financial conditions or results of operations of
the Company.
See the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1999, for a discussion of Access Solutions International, Inc. and
Malcolm G. Chase vs. Anacomp, Inc. and Eastman Kodak Company, and the related
matter Anacomp, Inc. vs. G. Graham Murray.
Item 2. Changes in Securities and Use of Proceeds
(c) Unregistered Securities
On May 25, 2000, the Company issued 38,262 shares of Common Stock to the
two former shareholders of BGIN Holding AG, a Swiss company that Anacomp
acquired in September 1999 ("BGIN"). The Common Stock was issued as additional
consideration for Anacomp's acquisition of all of the share capital of BGIN from
such shareholders. The issuance of the shares of Common Stock was made in
reliance upon the private placement exception set forth in Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), on the basis of the
shareholders' familiarity with the business and affairs of Anacomp. No
underwriting fees or discounts were applicable to the transaction.
Pursuant to the Company's 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, 2000, an aggregate of 1,875 options was
granted to three directors in lieu of aggregate cash compensation of $9,375. The
issuance of such options was made in reliance upon the private placement
exemption set forth in Section 4 (2) of the Securities Act, 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 $15.56
per share.
Item 3. Default Upon Senior Securities
With the release of the Company's third quarter financial results,
the Company is in violation of certain of the financial covenants contained in
the Facility that the Company previously entered into with its senior lenders.
The covenants that the Company has violated are: (i) leverage ratio (total debt
to EBITDA) over the past twelve months; (ii) interest coverage ratio (EBITDA to
interest expense) over the past twelve months; and (iii) minimum EBITDA over the
past twelve months. As described in Notes 1 and 4 to the Condensed Consolidated
Financial Statements and in the "Liquidity and Capital Resources" section of the
MD&A, the Company has reached an agreement in principle with such lenders to
amend the Facility and to provide the Company with a waiver, valid through late
October 2000, with respect to those covenants for which the Company is in
default. However, there can be no assurance that the Company will be able to
ultimately resolve this matter on terms favorable to the Company.
Item 5. Other Information
On May 2, 2000, the Company announced that Ralph Koehrer had resigned as
President and Chief Executive Officer and from the Board of Directors, effective
May 5, 2000. Richard D. Jackson and Lewis Solomon, co-chairmen of the Company's
Board of Directors, agreed to serve as co-CEOs until two chief executive
officers, one for docHarbor and one for the Company's other three business
units, were named. On July 27, 2000, Lloyd Miller, a private investor who joined
Anacomp's Board of Directors on July 6, 2000, resigned his position as Director.
On August 10, 2000, the Board of Directors confirmed the appointment of Phil
Smoot as President and Chief Executive Officer of the Company. The Board also
elected Mr. Soloman as Chairman of the Board, with Mr. Jackson remaining as a
director.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 - Termination Agreement dated May 1, 2000, between the
Company and Ralph W. Koehrer.
(b) Exhibit 10.2 - Termination Agreement dated May 1, 2000, between the
Company and Donald W. Thurman.
(c) Exhibit 27.1 - Financial Data Schedule.
(d) The Company filed no reports on Form 8-K during the quarter ended June
30, 2000.
<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
/s/ Linster W. Fox
Linster W. Fox
Senior Vice President and
Corporate Controller
Date: August 14, 2000
