<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 33-1144230
(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 January 31, 2000, the number of outstanding shares of the
registrant's common stock, $.01 par value per share, was 14,412,139.
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
December 31, 1999 and September 30, 1999........................ 2
Condensed Consolidated Statements of Operations
Three Months Ended December 31, 1999 and 1998................... 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998................... 4
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income (Loss) Three Months
Ended December 31, 1999........................................ 5
Notes to the Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 13
Item 2. Changes in Securities and Use of Proceeds.............................. 13
Item 6. Exhibits and Reports on Form 8-K....................................... 13
SIGNATURES........................................................................... 14
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
(in thousands) 1999 1999
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 8,411 $ 11,144
Accounts and notes receivable, net.................................. 67,786 75,259
Current portion of long-term receivables, net....................... 2,943 2,952
Inventories......................................................... 23,075 19,659
Prepaid expenses and other.......................................... 9,792 8,589
------------- --------------
Total current assets.................................................... 112,007 117,603
Property and equipment, net............................................. 46,071 47,439
Long-term receivables, net of current portion........................... 6,776 7,635
Goodwill................................................................ 128,369 132,965
Reorganization value in excess of identifiable assets, net ............. --- 12,003
Other assets............................................................ 13,520 12,872
------------- --------------
$ 306,743 $ 330,517
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank borrowings and current portion of long-term debt............... $ 21,869 $ 9,987
Accounts payable.................................................... 34,037 34,058
Accrued compensation, benefits and withholdings..................... 16,301 17,229
Accrued income taxes................................................ 15,042 16,509
Accrued interest.................................................... 8,589 17,061
Other accrued liabilities........................................... 34,471 38,798
------------- --------------
Total current liabilities............................................... 130,309 133,642
------------- --------------
Noncurrent liabilities:
Long-term debt, net of current portion.............................. 310,505 313,885
Other noncurrent liabilities........................................ 653 626
------------- --------------
Total noncurrent liabilities........................................ 311,158 314,511
------------- --------------
Stockholders' equity (deficit):
Preferred stock..................................................... ---- ----
Common stock........................................................ 148 149
Capital in excess of par value...................................... 107,882 108,997
Cumulative other comprehensive loss................................. (1,990) (1,222)
Accumulated deficit................................................. (240,764) (225,560)
------------- --------------
Total stockholders' deficit............................................. (134,724) (117,636)
------------- --------------
$ 306,743 $ 330,517
============= ==============
</TABLE>
See the notes to the condensed consolidated financial statements
2
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
(in thousands, except per share amounts) 1999 1998
-------- --------
<S> <C> <C>
Revenues:
docHarbor.......................................................... $ 863 $ 180
Document Solutions................................................. 58,460 58,276
Field Service...................................................... 18,481 18,381
DatagraphiX........................................................ 24,020 37,528
-------- --------
101,824 114,365
-------- --------
Cost of revenues:
Costs of docHarbor................................................. 2,205 100
Costs of Document Solutions........................................ 37,327 36,631
Costs of Field Service............................................. 9,320 9,339
Costs of DatagraphiX............................................... 15,400 22,755
-------- --------
64,252 68,825
-------- --------
Gross Profit........................................................... 37,572 45,540
Costs and expenses:
Engineering, research and development.............................. 2,481 2,514
Selling, general and administrative expenses....................... 23,108 23,726
Amortization of reorganization asset............................... 12,003 17,945
Amortization of intangible assets.................................. 5,374 4,536
-------- --------
Operating loss from continuing operations.............................. (5,394) (3,181)
-------- --------
Other income (expense):
Interest income.................................................... 282 388
Interest expense and fee amortization.............................. (9,596) (9,961)
Other.............................................................. 25 229
-------- --------
(9,289) (9,344)
-------- --------
Loss from continuing operations before income taxes.................... (14,683) (12,525)
Provision for income taxes............................................. 521 2,277
-------- --------
Loss from continuing operations........................................ (15,204) (14,802)
Income from discontinued operations, net of income taxes............... --- 289
-------- --------
Net loss............................................................... (15,204) (14,513)
======== ========
Basic and diluted per share data:
Loss from continuing operations........................................ $ (1.06) $ (1.04)
Income from discontinued operations.................................... --- 0.02
-------- --------
Basic and diluted net loss............................................. $ (1.06) $ (1.02)
-------- --------
Shares used in computing basic net loss per share...................... 14,345 14,267
======== ========
</TABLE>
See the notes to the condensed consolidated financial statements
3
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
(in thousands, except per share amounts) 1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(15,204) $(14,513)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Income from discontinued operations, net of taxes................ --- (289)
Depreciation and amortization.................................... 21,798 27,423
Non-cash compensation............................................ 86 286
Non-cash charge in lieu of taxes................................. --- 1,711
Restricted cash requirements.................................... --- 3,383
Change in assets and liabilities, net of effects from
acquisitions:
Decrease in accounts and long-term receivables................. 9,719 5,327
Increase in inventories and prepaid expenses................... (4,103) (2,232)
Increase in other assets....................................... (1,289) (442)
Decrease in accounts payable and accrued expenses.............. (19,781) (17,602)
Increase in other noncurrent liabilities....................... 27 3
-------- --------
Net cash provided by (used in) continuing operations.......... (8,747) 3,055
Net operating cash provided by discontinued operations........ --- 489
-------- --------
Net cash provided by (used in) operating activities........... (8,747) 3,544
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment......................... (3,639) (8,918)
Capital expenditures of discontinued operations.................... --- (83)
Payments to acquire companies and customer rights.................. --- (3,821)
-------- --------
Net cash used in investing activities......................... (3,639) (12,822)
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of options and warrants................. 480 113
Repurchases of common stock........................................ (1,596) ---
Proceeds from revolving line of credit............................. 12,000 ---
Principal payments on long-term debt............................... --- (115)
-------- --------
Net cash provided by (used in) financing activities........... 10,884 (2)
-------- --------
Effect of exchange rate changes on cash................................ (1,231) 248
-------- --------
Decrease in cash and cash equivalents.................................. (2,733) (9,032)
Cash and cash equivalents at beginning of period....................... 11,144 17,721
-------- --------
Cash and cash equivalents at end of period............................. $ 8,411 $ 8,689
======== ========
Supplemental Information:
Cash paid for interest............................................... $ 17,528 $ 15,403
======== ========
Cash paid for income taxes........................................... $ 1,735 $ 667
======== ========
</TABLE>
See the notes to the condensed consolidated financial statements
4
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
other
(in thousands) Common Additional comprehensive Accumulated
Stock paid-in capital income (loss) Deficit Total
---------- --------------- ------------- ----------- ------------
BALANCE AT SEPTEMBER 30, 1999 $ 149 $ 108,997 $ (1,222) $ (225,560) $ (117,636)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss.................................... ---- ---- ---- (15,204) (15,204)
Translation adjustment...................... ---- ---- (3,748) ---- (3,748)
Unrealized gain on currency swap
Contract............................... ---- ---- 2,980 ---- 2,980
-----------
COMPREHENSIVE LOSS.......................... (15,972)
-----------
Common stock issued for exercise of stock
Options................................ ---- 480 ---- ---- 480
Common stock purchased and retired.......... (1) (1,595) ---- ---- (1,596)
==========================================================================================================================
BALANCE AT DECEMBER 31, 1999 $ 148 $ 107,882 $ (1,990) $ (240,764) $ (134,724)
==========================================================================================================================
</TABLE>
See the notes to the condensed consolidated financial statements
<PAGE>
ANACOMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Anacomp, Inc. ("Anacomp" or the "Company") and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated. These financial statements, except for the balance sheet as
of September 30, 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 2. MANAGEMENT ESTIMATES AND ASSUMPTIONS
The Company's preparation of the accompanying condensed consolidated financial
statements in conformity with generally accepted accounting principles requires
its management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Estimates have been prepared
on the basis of the most current available information and actual results could
differ from those estimates.
NOTE 3. REORGANIZATION ASSET
As of May 31, 1996, the Company adopted Fresh Start Reporting which resulted in
material changes to the consolidated balance sheet, including valuation of
assets, intangible assets and liabilities at fair market value and valuation of
equity based on the appraised reorganization value of the ongoing business. The
net result of the valuation of identifiable assets, the recognition of
liabilities at fair market value and the valuation of equity was the Company
recognizing an asset "Reorganization value in excess of identifiable assets"
("Reorganization Asset") totaling $267.5 million as of May 31, 1996. The
Reorganization Asset was fully amortized by November 30, 1999.
<TABLE>
<CAPTION>
NOTE 4. INVENTORIES
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Finished goods.......................... $ 11,385 $ 9,827
Work in process......................... 1,554 2,433
Raw materials and supplies.............. 10,136 7,399
------------ -----------
$ 23,075 $ 19,659
============ ===========
</TABLE>
NOTE 5. INCOME TAXES
The Company's amortization of the Reorganization Asset is not deductible for
income tax purposes. Accordingly, the Company incurs income tax expense even
though it reports a pre-tax loss due to such amortization.
For the three months ended December 31, 1999 and 1998, income tax expense is
reported for the Company based upon the estimated effective tax rates. For the
three months ended December 31, 1999 and 1998, the effective tax rate utilized
was 42% of pretax income before amortization of the Reorganization Asset. For
the three months ended December 31, 1998, the limited tax benefit of the U.S.
Federal net operating loss carryforwards ("NOL") of the Company resulted in a
reduction of $1.7 million in the Company's Reorganization Asset and did not
reduce income tax expense.
6
<PAGE>
NOTE 6. HEDGING:
The Company has entered into three cross-currency swap agreements that hedge
the U.S. dollar value of the Company's investment in the net assets of
certain foreign subsidiaries. These agreements effectively swapped higher
fixed-rate U.S. dollar debt for lower fixed-rate debt in the subsidiaries'
respective local currencies. The Company is exposed to the risk of future
currency exchange rate fluctuations on such debt. The amounts outstanding as
of December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Unrealized Gain Unrealized Gain
as of (Loss) as of
Notional Interest December 31, September 30,
Currency Amount Maturity Rate 1999 1999
- ---------------- ---------- ------------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Euro fixed-rate 28,860,029 April 1, 2002 8.69% $ 955,000 $(862,000)
Swiss Franc fixed-rate 22,725,000 September 8, 2002 2.99% 626,750 11,000
Swiss Franc fixed-rate 14,635,700 April 1, 2002 7.45% 253,600 (294,000)
------------ -------------
$ 1,835,350 $ (1,145,000)
============ =============
</TABLE>
The above net unrealized gain (loss) has been reflected as a decrease (increase)
to "Long-term debt, net of current portion" in the December 31, 1999 and
September 30, 1999 Consolidated Balance Sheets respectively, with a
corresponding adjustment to the cumulative translation account.
In February 2000, the Company liquidated its cross currency swap hedge positions
and received $3.4 million in cash. This will be reflected in the Company's
second quarter financial statements as an increase to accumulated comprehensive
income in stockholders' equity.
NOTE 7. LOSS PER SHARE:
Basic earnings per share is computed based upon the weighted average number of
shares of the Company's common stock outstanding during the period. Diluted
earnings per share is computed based upon the weighted average number of shares
of common stock 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 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. The balance on the subordinated note at December 31, 1999
was $2.6 million, which represents the net present value of the $3 million note
due in 2006 on which interest has been deferred until June 2001. There can be no
assurance that Magnetics will be able to fund the interest payments or principal
at maturity. The Company recognized a gain after taxes of approximately $2.2
million in 1999 as a result of the sale.
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 period ended December
31, 1998.
7
<PAGE>
The operating results of the discontinued operations are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998
------------------
<S> <C>
Revenues...................................... $ 24,582
-------------
Operating income.............................. $ 1,182
Income taxes.................................. 893
-------------
Net income.................................... $ 289
=============
</TABLE>
NOTE 9. ENGINEERING, RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Digital ..................... $ 1,628 $ 1,144
COM and other................ 853 1,370
-------- -------
Total ....................... $ 2,481 $ 2,514
======== =======
</TABLE>
NOTE 10. STOCK REPURCHASE PROGRAM
During the quarter ended December 31, 1999, the Company repurchased 93,200
shares of its common stock in accordance with a previously announced stock
buyback program. On February 8, 2000, the Company terminated the stock
repurchase program.
NOTE 11. OPERATING SEGMENT
Anacomp's business is focused in the document management industry. The
Company manages its business through four operating units: docHarbor-SM-,
which provides Internet-based document-management service; Document Solutions
("DS"), which provides document-management outsource services; Field Service,
which provides equipment maintenance services for Anacomp and third-party
manufactured products; and DatagraphiX-R-, which provides COM and CD systems
and related supplies and contract manufacturing services.
Management evaluates performance based upon earnings before interest, other
income, reorganization items, non-recurring and restructuring charges, taxes,
depreciation and amortization and extraordinary items ("EBITDA"). These costs
are managed at the Corporate segment.
As of and for the Three Months Ended December 31,
<TABLE>
<CAPTION>
DocHarbor DS Field Service DatagraphiX Corporate Consolidated
- -------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C> <C>
Digital/Renewal Revenue $ 863 $ 19,855 $ 4,408 $ 1,051 $ --- $ 26,177
COM Revenue --- 38,605 14,073 22,969 --- 75,647
----------------------------------------------------------------------------------
Total Revenues 863 58,460 18,481 24,020 --- 101,824
EBITDA (5,283) 14,150 8,543 4,366 (4,989) 16,787
Identifiable operating assets 22,487 176,406 15,145 56,601 36,104 306,743
1998
Digital/Renewal Revenue $ 180 $ 11,788 $ 3,079 $ 1,583 $ --- $ 16,630
COM Revenue --- 46,488 15,302 35,945 --- 97,735
----------------------------------------------------------------------------------
Total Revenues 180 58,276 18,381 37,528 --- 114,365
EBITDA (731) 12,968 8,083 10,641 (6,677) 24,284
Identifiable operating assets 890 156,967 17,849 75,613 99,050 350,369
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" within the meaning of 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 of Anacomp, Inc. ("Anacomp" or
the Company"), or industry results, to differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry trends; industry capacity; competition; raw materials costs and
availability; currency fluctuations; the loss of any significant customers;
changes in business strategy or development plans; successful development of
new products; availability, terms and deployment of capital; ability to meet
debt service obligations; availability of qualified personnel; changes in, or
the failure or inability to comply with, government regulations; and other
factors referenced in this report. The words "may", "could", "should",
"would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and
similar expressions or statements regarding future periods are intended to
identify forward-looking statements. All forward-looking statements are
inherently uncertain as they involve substantial risks and uncertainties
beyond the Company's control. The Company undertakes no obligation to update
or revise any forward-looking statements for events or circumstance after the
date on which such statement is made. New factors emerge from time to time,
and it is not possible for the Company to predict all of such factors.
Further, the Company cannot assess the impact of each such factor on its
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
RESULTS OF OPERATIONS
As of May 31, 1996, the Company adopted Fresh Start Reporting, which
resulted in material changes to the consolidated balance sheet. The net
result of the valuation of identifiable assets, the recognition of
liabilities at fair market value and the valuation of equity was the Company
recognizing an asset "Reorganization value in excess of identifiable assets"
("Reorganization Asset") totaling $267.5 million as of May 31, 1996. This
Asset was fully amortized at November 30, 1999.
On May 31, 1999, the Company completed the sale of the Magnetics
Divison. The results of the Magnetics business have been reported separately
as discontinued operations in the Condensed Consolidated Statements of
Operations.
GENERAL. In fiscal 1999 Anacomp moved to a four business unit
reporting structure. The four business units include docHarbor, Document
Solutions ("DS"), Field Service, and DatagraphiX. In the second quarter of
fiscal 2000 the Company effected 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 will result in restructuring charges that are estimated
to be approximately $8 to $10 million, primarily over the next two quarters.
These charges relate primarily to employee and facility termination costs.
Anacomp announced on February 8, 2000, it had retained Allen &
Company Incorporated to assist in the exploration of strategic and financial
alternatives for the purpose of enhancing shareholder value. Such
alternatives could include, among other transactions a merger or sale of the
company (which could include a management buyout). The Allen & Company
assignment is expected to last three to four months. There can be no
assurance that any strategic alternative will be pursued or that any
transaction will be consummated.
9
<PAGE>
Anacomp reported a net loss of $15.2 million for the three months
ended December 31, 1999, compared to a net loss of $14.5 million for the
three months ended December 31, 1998. Earnings from continuing operations
before interest, other income, taxes, depreciation and amortization
("EBITDA") was $16.8 million, or 17%, of revenues, for the three months ended
December 31, 1999. Excluding the investment in docHarbor, EBITDA would have
been $22.1 million, or 21% of revenues. This compares to EBITDA of $24.3
million, or 21 %, of revenues for the three months ended December 31, 1998.
THREE MONTHS ENDED DECEMBER 31, 1999 VS. THREE MONTHS ENDED DECEMBER 31, 1998
REVENUES. The Company's revenues decreased 11% from $114.4 million
for the three months ended December 31, 1998, to $101.8 million for the three
months ended December 31, 1999. The decrease was primarily in the DatagraphiX
business unit.
The Company's Document Solutions revenues were essentially unchanged
from the prior year period. Digital/renewal revenues increased 68% over the
prior year period to offset the continued decline in COM related revenues.
Digital/renewal revenues represented 34% of total DS revenues compared to 20%
in the prior year period.
Field Service revenues were essentially unchanged from the prior
year period. Digital/renewal revenues increased 43% over the prior year
period to offset the decline in COM related revenues. Digital/renewal
revenues represented 24% of total Field Service revenues compared to 17% in
the prior year period. Current quarter COM revenues include $1.1 million
relating to the sale of a COM systems maintenance income stream.
docHarbor revenues increased $0.7 million, versus the first quarter
of 1999. This was primarily the result of added revenues from existing
customers and new customer orders.
DatagraphiX revenues decreased 36%, or $13.5 million versus the
first quarter of 1999. This decrease was attributable to general weaknesses
in the computer systems marketplace in late 1999 due to Y2K concerns from
potential customers coupled with the continuing decline in the market for COM
systems and supplies.
GROSS MARGINS. The Company's gross margin decreased from $45.5
million (40% of revenues) for the three months ended December 31, 1998, to
$37.6 million (37% of revenues) for the three months ended December 31, 1999.
The decrease in gross margins was largely the result of the decreased
DatagraphiX revenues and increased infrastructure spending in the docHarbor
business unit. Gross margins for Document Solutions and Field Service were
essentially unchanged from the prior year period at 36% and 50% respectively.
ENGINEERING, RESEARCH AND DEVELOPMENT. Engineering, research and
development expense in the period ended December 31, 1999 was essentially the
same as in the prior year period. Spending on digital product offerings
increased to 66% of total spending compared to 46% in the prior year period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expenses decreased from $23.7 million (21% of
revenues) for the three months ended December 31, 1998, to $23.1 million (23%
of revenues) for the three months ended December 31, 1999. This decrease was
primarily the result of reductions in corporate personnel expenses and cost
savings realized from the integration of the First Image Management Company
business acquired in June 1998 into the Company's Document Solutions business.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased 19% from $4.5 million (4% of revenues) for the three months ended
December 31, 1998, to $5.4 million (5% of revenues) for the three months
ended December 31, 1999. This increase is principally the result of the
amortization of goodwill associated with the twelve acquisitions completed in
fiscal year 1999.
INTEREST EXPENSE. Interest expense decreased 4% from $10 million for
the three months ended December 31, 1998, to $9.6 million for the three
months ended December 31, 1999. This decrease was the result of the fiscal
year 1999 principal repayments of long-term debt.
10
<PAGE>
PROVISION FOR INCOME TAXES. The provision for income taxes for the
three months ended December 31, 1999 is primarily related to earnings of the
Company's foreign subsidiaries. The provision for the three months ended
December 31, 1998, includes $1 million on earnings of the Company's domestic
operations and $1.3 million on earnings from the Company's foreign
subsidiaries.
DISCONTINUED OPERATIONS. During the second fiscal 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
that quarter. The Magnetics Division's income was $289 thousand during the
period ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Anacomp had negative working capital of $18.3 million at December
31, 1999, compared to negative working capital of $16 million at September
30, 1999. Net cash used by operating activities was $8.7 million for the
three months ended December 31, 1999, compared to cash provided of $3.5
million in the comparable prior year period.
Net cash used in investing activities was $3.6 million in the
current period, compared to the use of $12.8 million in the comparable prior
year period. The prior year period included 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 the development of infrastructure for docHarbor.
Net cash provided by financing activities increased approximately
$10.9 million during the three months ended December 31, 1999, compared to
the same period in the prior year. This increase was principally the result
of $12 million in proceeds from the Company's revolving credit facility ,
offset by the repurchase of $1.6 million of Company common stock during the
current period.
The Company's cash balance as of December 31, 1999 was $8.4 million,
compared to $11.1 million at September 30, 1999. The Company also has
available a $75 million revolving credit facility. As of December 31, 1999,
$20.9 million was outstanding under the credit facility.
The Company has significant debt service obligations. The ability of
the Company to meet its debt service and other obligations will depend upon
its future performance and is subject to financial, economic and other
factors, some of which are beyond its control. However, the Company believes
that cash on hand, cash generated from operations and cash available under
the revolving credit facility will be sufficient to fund its debt service
requirements, acquisition strategies and working capital requirements in the
foreseeable future.
In February 2000, the Company liquidated its cross currency swap
hedge positions and received $3.4 million in cash. This will be reflected in
the Company's second quarter financial statements as an increase to
accumulated comprehensive income in stockholders' equity.
YEAR 2000
As of February 10, 2000, Anacomp was unaware of any continuing
date-related problems with any of its products or services, or the products
or services of any of its significant suppliers or vendors. The Company has
established contingency plans for implementation in the event that it should
experience date-related problems in the future.
11
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has U.S. Dollar fixed-rate indebtedness and in September
1999 entered into three cross currency swap agreements that hedge the U.S.
Dollar value of the Company's investment in the net assets of certain foreign
subsidiaries. These agreements effectively swapped higher fixed-rate U.S.
dollar debt for lower fixed-rate debt in the subsidiaries' respective local
currencies. The Company is exposed to the risk of future currency exchange
fluctuations on such debt, which are accounted for as an adjustment to
stockholders' equity. Therefore, changes from reporting period to reporting
period in the exchange rates between various foreign currencies and the U.S.
Dollar have had and will continue to have an impact on the foreign currency
translation component of stockholders' equity reported by the Company, and
such effect may be material in any individual reporting period.
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 will be
reflected as accumulated comprehensive income in stockholder' equity in the
Company's second quarter balance sheet.
The Company's revolving credit facility is affected by the general
level of U.S. interest rates and/or Libor. The Company had $20.9 million
outstanding under its revolving credit facility on December 31, 1999.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are potential or named defendants
in several lawsuits and claims arising in the ordinary course of business.
While the outcome of such claims, lawsuits or other proceedings against the
Company cannot be predicted with certainty, management expects that such
liability, to the extent not provided for through insurance or otherwise,
will not have a material adverse effect on the financial conditions or
results of operations of the Company.
On August 29, 1997, Access Solutions International, Inc. ("ASI")
filed a complaint for patent infringement in the U.S. District Court,
District of Rhode Island, against Data/Ware Development, Inc. ("Data/Ware"),
of which Anacomp is the successor by merger, and The Eastman Kodak Company
("Kodak"). The complaint seeks injunctive relief and unspecified damages,
including attorney's fees, for the alleged infringement by Data/Ware and
Kodak of ASI's United States Letters Patent No. 4,775,969 for "Optical Disk
Storage Format, Method and Apparatus for Emulating a Magnetic Tape Drive" and
No. 5,034,914 for "Optical Disk Storage Method and Apparatus with Buffered
Interface." Malcolm G. Chace, a co-owner of the patents, has been added as a
plaintiff in the case. The Company has assumed the defense of this matter on
behalf of both Data/Ware and Kodak, although the Company has also requested
indemnification from the principal selling shareholder of Data/Ware.
Discovery in this matter continues, with any trial to occur probably not
before the third calendar quarter of 2000. Although there can be no assurance
as to the eventual outcome of this matter, the Company believes that it has
numerous meritorious defenses that it intends to pursue vigorously.
In a related matter, the Company has brought a lawsuit in California
State court against the principal selling shareholder of Data/Ware, seeking
to enforce that shareholder's obligation to indemnify the Company in the ASI
litigation. The state court granted the Company's motion for summary
adjudication of the shareholder's duty to fund most of the defense costs of
the ASI case, which the shareholder is currently paying into the court's
escrow account. 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 December 31, 1999, an aggregate of 1,875 options
was granted to three directors in lieu of aggregate cash compensation of
$9,375. The issuance of such options was effected in reliance upon the
private placement exemption set forth in Section 4 (2) of the Securities Act,
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 $16.5625 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
December 31, 1999.
13
<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: February 11, 2000
14
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