ITEM 1. BUSINESS
Overview
Anacomp, Inc. ("Anacomp" or the "Company") is one of the world's leading providers of products and services used to manage corporate information throughout its life cycle. The Company serves more than 15,000 customers in 65 countries, maintaining significant market positions in micrographics products and services, magnetic media manufacturing, digital output services, and related information delivery technologies.
One of Anacomp's largest businesses is output services. In the United States, the Company is the second largest provider of Computer Output to Microfilm ("COM") output services, the high-speed conversion of digital information to microfilm or microfiche. Micrographics is widely used throughout the world as a long-term, low-cost medium for storing large amounts of information.
Although still a small percentage of Anacomp's revenues, the Company has quickly become a significant provider of digital output services since entering this market in fiscal 1995, ranking as the third largest U.S. provider of Compact Disc-Recordable ("CD-R") output services. Available throughout the United States and at an increasing number of the Company's international locations, CD services provide Anacomp's customers with a high-capacity storage and delivery solution for applications requiring frequent and high-speed information retrieval.
Anacomp recently introduced archival services and print/mail services, both of which it views as highly complementary to its existing output services. The Company offers archival services, the physical storage of microfilmed records, at selected service centers in the United States and plans to open several new archival vaults in fiscal 1997. The Company intends to expand this business to include the off-site storage of multiple-media formats and, ultimately, to develop an electronic storage and distribution service. Anacomp believes that print/mail services, which involve the output and mailing of printed information for clients, represent a promising opportunity for both the Company and its customers. The Company intends to roll-out this service to a broad portion of its U.S. customer base in fiscal 1997.
Complementing Anacomp's output services are the development and sale of micrographic and digital systems for customers who desire in-house information management solutions. The Company and its subsidiaries have introduced virtually every major advance in the COM industry, including the XFP 2000, the world's leading COM system, and Advanced Function Indexing, a sophisticated method to index and retrieve large volume COM applications. Recently, Anacomp has increasingly invested in electronic management products to provide customers with COLD (Computer Output to Laserdisk), imaging, workflow, and document management solutions.
The Company Also Provides Maintenance And Professional Services To Its Customers Worldwide To Facilitate The Installation, Management, Maintenance, And Competitive Use Of Information Delivery Solutions. Services Include System Integration, Technical Support, Document Conversion, And Software And Hardware Maintenance.
Anacomp derives a significant portion of its revenues and profits from the sale of micrographics supplies, as well as magnetic media products. The Company has the world's largest installed base of COM systems (approximately 55% of those in use), which enables it to generate recurring revenue by providing related consumable supplies, a significant portion of which are proprietary. Anacomp also is a major manufacturer and distributor of computer tape products used by data processing operations, including 3480/ 3490E tape cartridges, open reel tape, and back-up tape cartridges such as quarter-inch, 4mm, and 8mm.
In general, the Company's customers are mid-sized and large organizations whose businesses rely on efficient, reliable, and ongoing access to significant amounts of information. The Company's clients include leaders in the finance, insurance, and retail industries, businesses that tend to process and maintain relatively large amounts of customer and legal documentation. In addition, the Company's 44 output service facilities in the United States, along with multiple locations abroad, have made Anacomp an attractive supplier for customers requiring products and services at multiple locations.
The Company believes it has a loyal following among businesses in the United States and abroad, and provides a solid foundation for continued technological and market innovation.
Recent Developments
On June 4, 1996, the Company emerged from bankruptcy proceedings under its Third Amended Joint Plan of Reorganization (the "Reorganization"). On such date, the Company canceled its existing secured debt and subordinated debt, including 15% Senior Subordinated Notes, 13.875% Convertible Subordinated Debentures and 9% Convertible Subordinated Debentures, and its equity securities, including common stock, common stock purchase rights, preferred stock and warrants, and distributed to its creditors approximately $22 million in cash, $112.2 million principal amount of its 11-5/8% Senior Secured Notes due 1999 (the "Senior Secured Notes"), $160 million principal amount of its 13% Senior Subordinated Notes due 2002 (the "Senior Subordinated Notes"), 10 million shares of new common stock, par value $.01 per share (the "New Common Stock"), and warrants to purchase 362,694 shares of New Common Stock at a price of $12.23 per share for a period of five years from June 4, 1996. The Plan of Reorganization resulted in a reduction of approximately $173 million in principal and accrued interest on the Company's debt obligations and in liquidation amount and accrued dividends on its preferred stock. The resulting capital structure reduced the Company's interest expense by approximately $30 million per year.
The process began January 5, 1996, when Anacomp filed a Prenegotiated Plan of Reorganization with the U.S. Bankruptcy Court in Delaware under Chapter 11 of the U.S. Bankruptcy Code. The Company was in default under substantially all of its debt agreements as a result of its failure to make $89.7 million of principal payments scheduled for April 26, 1995 and October 26, 1995 on the senior secured credit facilities (including $60 million relating to the revolving loan agreement which expired on October 26, 1995), $11.4 million of principal and interest payments on the 9% Convertible Subordinated Debentures which were due January 15, 1996, $34.1 million of interest payments scheduled for May 1, 1995 and November 1, 1995 on its Senior Subordinated Notes, and $3.2 million of interest payments scheduled for July 15, 1995 and January 15, 1996 on the 13.875% Subordinated Debentures, as well as certain financial covenant violations, and the cross-default provisions of the other debt agreements.
Organization and Operations
Anacomp currently employs over 2,600 people at multiple facilities and offices in the United States, Canada, Brazil, Japan, and Europe, including 44 output service centers in the United States.
Domestically, Anacomp markets its products and services through two separate sales forces based in offices located throughout the country. The U.S. Group, which employs approximately 120 salespeople, is comprised of ten regions responsible for sales of micrographics and CD-R services; COM systems and related maintenance services, supplies, and equipment; digital hardware and software solutions; and sales of magnetics products to end-users. The Magnetics Group sales organization employs 21 salespeople and is responsible for sales of magnetics products, primarily to dealers and distributors.
Outside of the United States, the Company maintains direct sales forces in most of those countries where it has subsidiaries, and a network of dealers and distributors is used to reach the market in other countries. In addition to relationships with end-users and with dealers and distributors worldwide, the Company also manufactures products as an Original Equipment Manufacturer ("OEM") to companies who re-label and sell Anacomp's products under their respective brand names.
The Company provides round-the-clock maintenance and professional services through over 600 highly trained service employees operating in various countries worldwide. In the United States, over 400 field service engineers and managers provide geographic coverage through ten districts. Internationally, maintenance services are provided either by Anacomp employees operating in the Company's foreign subsidiaries or by employees of dealers and distributors.
Anacomp maintains its corporate headquarters in Carmel, Indiana, and has corporate and administrative offices in Atlanta, Georgia and Poway (San Diego), California. The Company operates three manufacturing facilities, all of which have received international recognition for quality standards by earning International Standards Organization ("ISO") 9002 certification. All of Anacomp's micrographics manufacturing and software development is conducted at the Company's Poway facility. The Company's magnetics manufacturing facilities are located in Graham, Texas and Brynmawr, Wales.
Engineering, Research and Development
Anacomp's engineering costs, including research and development, were significantly reduced in fiscal 1996, primarily as a result of the substantial completion of the IBM and Xerox print stream projects for the XFP 2000 COM system. However, the Company continues to make investments in projects that enhance the XFP 2000 and the overall value of COM, including a high-speed bitmapping initiative and the continuing development of DragonCOM, a version of the XFP 2000 for the Asian market that is capable of processing double-byte ideographic languages.
The Company also launched an engineering initiative in fiscal 1996 known as "Pegasys" to automate Anacomp's 44 output service centers in the United States and to develop a state-of-the-art data transmission capability for these centers. Anacomp believes that better automation of the service centers will maximize processing capacity, increase productivity, and reduce operating costs. An improved transmission capability will enable many more of Anacomp's service customers to send their data to the Company electronically, eliminating the need for tape handling (on the part of both the customer and the Company's service center staff) as well as eliminating tape pick-up and delivery. In addition, data transmission will facilitate the Company's plan to consolidate selected service centers in order to increase efficiencies and reduce operating costs.
Anacomp expects its current limited research and development relating to advanced digital technologies to grow going forward as the Company introduces new digital products and services. These costs will be tempered, however, by the Company's plan to acquire the rights to core technologies whenever possible. Anacomp's focus in the digital area will be on the development of customer applications, where the Company believes it can add value.
The Company also owns various patents and licenses covering aspects of its product line and its production processes, as well as proprietary trade secret information relating to its products and services. While Anacomp believes that the protection provided by these patents, licenses, and proprietary information is important, the Company also believes that equally significant is the knowledge and experience of its employees, and their abilities to develop and market the Company's products and services and to provide a value-added benefit to customers.
Raw Materials and Suppliers
Polyester is the principal raw material used in the manufacture of microfilm and magnetic media products, two of Anacomp's primary businesses. A worldwide shortage of polyester has abated recently, and supply and demand are more in balance now. As a result, Anacomp has seen its cost of polyester for magnetic media products decrease recently -- reversing a previous trend of increasing costs.
SKC America, Inc. and SKC Limited (collectively "SKC") is Anacomp's sole supplier of duplicate microfilm, the result of a ten-year supply agreement between the companies entered into in 1993 as part of SKC's purchase of Anacomp's Sunnyvale, California duplicate microfilm facilities. SKC's duplicate film production is dedicated exclusively to Anacomp, and SKC also provides Anacomp with polyester for a large percentage of its magnetic media products. In connection with the supply agreement, SKC also provided Anacomp with a $25 million trade credit facility, secured by up to $10 million of products sold to Anacomp by SKC. In addition, under an amendment to the supply agreement executed in 1996, Anacomp agreed to certain price increases, retroactive to 1994, and agreed to make the following deferred payments to SKC related to the retroactive price increases: $400,000 in 1997; $600,000 in 1998; $800,000 in 1999; $800,000 in 2000; and $1,000,000 in 2001.
Anacomp's XFP 2000 COM system utilizes a proprietary, patented original film canister, and the original film used in that canister is supplied exclusively by the Eastman Kodak Company ("Kodak"). Anacomp also purchases from Kodak substantially all of its requirements for original microfilm for earlier-generation COM recorders manufactured by Anacomp and others, although Anacomp has from time to time purchased orginal microfilm utilized in those older COM recorders from other suppliers.
Market Strategy
The Company's market strategy adheres to a paradigm known as the Information Delivery Life Cycle, which describes the relationship between the age of information, the frequency and speed of access, and the type of media upon which the information is stored. In general, as information ages, the frequency with which retrieval is required and the speed with which it needs to be delivered declines. To achieve the greatest degree of cost-effectiveness and efficiency, organizations migrate this information across several different delivery systems over the life of the information.
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Newly created information is generally the most frequently accessed, requiring a high-speed storage media such as magnetic disk ("DASD"). As the information begins to age, it is often migrated to optical disk ("OD") or CD-R, which offers quick access to information at a lower cost than DASD and which has high storage capacity. As the need to access information becomes more infrequent, it often is migrated to magnetic tape, an even lower cost media that provides somewhat slower, yet readily accessible, information delivery. Once information moves to an archival stage in its life cycle, it is often moved to microfilm and microfiche, which offers very low storage costs for both archival and non-archival applications.
Anacomp's array of products and services are designed to help organizations best manage how they store, deliver, and migrate their information across this entire life cycle. The Company believes that vendor consolidation, a gradual blending of product and market components of document imaging, and similar trends will favor suppliers that can provide a broad, technologically robust suite of products and services across the entire cycle. The Company also believes that this market will continue to favor vendors with a fully developed domestic and international infrastructure allowing them to serve large customers and reap the benefits of economies of scale.
Additionally, competitive pressures on companies in industries served by Anacomp have steadily increased the demand for output services. Concerns over technology obsolescence, the sometimes high capital cost of information management systems, and a general recognition of the benefits of outside expertise have induced many companies to reduce in-house expenditures on certain operations in favor of third-party service providers. Through outsourcing, companies are able to avoid the capital requirements of proprietary data management and storage systems, and maintain flexibility to migrate their information as new products and technologies become available.
Anacomp believes this trend should have a positive impact on many of the output services offered by the Company. Value-added product features (such as customized indexes, retrieval software, and other user productivity enhancements), as well as strong client relationships and unsurpassed customer service enable Anacomp to differentiate itself from other service providers.
Anacomp recognizes that certain products and services in the information delivery industry are declining relative to others. Traditionally, micrographics has provided one of the most cost-effective means of data storage and retrieval for information-intensive organizations such as banks, insurance companies, financial service companies, retailers, healthcare providers, and government agencies. However, the ongoing growth of local area and client/server networks and similar systems based on digital technologies has and will continue to result in alternative data storage and retrieval technologies for active records management. Over the next few years, the Company believes that micrographics technology will continue to retain certain cost and functional advantages over alternative data storage media, which will keep micrographics competitive in a wide range of applications. Over a longer term, the Company believes micrographics technology will be viewed predominately as a cost-effective method for long-term data storage.
The Company also believes that its leadership in micrographics, particularly COM services, affords it a substantial marketing and business platform from which to advance its product and service plans. New and complementary offerings such as CD-R output services provide a migration path for customer transitions to digital technologies for certain applications. Further, by maximizing its share of existing markets such as micrographics and magnetic media, the Company creates additional opportunities to work with organizations to better manage their information throughout its life cycle.
The Company believes that strategic acquisitions are integral to future success in the fragmented information delivery industry. To that end, a core component of the Company's strategy is to acquire a select number of outsourcing and other businesses that provide services complementary to Anacomp's existing data output services. Recent and potential acquisitions include companies in either COM or CD-R outsourcing, as well as organizations providing complementary archival and print/mail services.
Likewise, the Company is actively pursuing partnerships with companies which it believes possess products, technology, or other resources that add value to Anacomp's own capabilities. Currently, the Company maintains partnerships with major technology companies for the development of print and data stream technologies, the development of digital software applications, the distribution of COM systems in Asia, and in other information management areas.
Products and Services
Anacomp's information management solutions address its customers' needs along the entire life cycle of documents. The Company's product and service offerings are grouped into several areas: Output Services, Technology Services, Output Systems, Micrographics Supplies and Magnetic Media.
The table below shows Anacomp's revenues by product and service line for the last three fiscal years. The table is presented on a traditional comparative basis for the twelve months ended September 30, 1996, to facilitate a meaningful comparison to fiscal years 1995 and 1994. Consequently, the fiscal 1996 information presented below does not comply with accounting requirements for companies upon emergence from bankruptcy which calls for separate reporting for the newly reorganized company and the predecessor company.
Output Services
COM Services
COM services, the delivery of microfilm outsourcing services, represents the largest component of Anacomp's output services. The Company operates 44 output service centers in the United States, ranking second in domestic market share, and plans to begin offering COM services in fiscal 1997 at startup output service centers in Canada and Europe.
On a daily basis, Anacomp's output service centers receive thousands of electronic downloads and computer tapes from customers. This information (both text and graphics) is converted to 16mm microfilm or to microfiche, which is a four-inch by six-inch film medium capable of storing up to 1,000 pages of computer output. Turnaround for a typical COM services job ranges from two hours to 36 hours, depending on specific circumstances and requirements, and the centers generally operate 24 hours a day every day of the year.
In response to a gradual decline in the market for micrographics services and a more competitive market, in fiscal 1995 Anacomp completed installation of XFP 2000 COM systems in all of its output service centers, increasing the efficiency of COM production. Additionally, the Company has upgraded many of these systems with Anacomp-developed emulation software for IBM and Xerox laser print streams, expanding the potential market for COM services and resulting in higher average prices than for other COM output.
As an adjunct to COM services, Anacomp also provides External Facilities Management ("XFM") services to selected customers. Under an XFM arrangement, Anacomp operates and manages a customer's COM production at Anacomp's facilities.
The COM services segment of the micrographics industry processed over 45 billion images in 1995, generating over $350 million in revenues. The Company believes it holds an estimated 25 percent to 30 percent market share, second only to First Image Management Company, a division of First Data Corporation.
ALVA CD Services
Anacomp is the third largest U.S. provider of CD-R output services. The Company's ALVA CD Services provide Anacomp customers with a high-capacity storage and delivery solution for applications requiring frequent and high-speed information retrieval.
ALVA CD services involves storing and indexing customer information such as invoices and customer statements on CD-R. In addition to indexed CD output, ALVA also includes sophisticated Windows-based software for accessing and retrieving the data. ALVA is available at the majority of the Company's output service centers in the United States, as well as through new Company output service centers in Canada and Europe.
Anacomp estimates the total market for CD services to grow from an estimated $10 - $15 million in revenues in fiscal 1996 to $75 million by 1999. The Company believes that its ALVA solution has significant advantages over competing products, primarily due to the Company's network of output service centers, its extensive knowledge of applications and indexing expertise, and ALVA's flexible and easy-to-use user interface.
Archival And Print/Mail Services
Anacomp provides archival storage services at several of its output service centers in the United States, providing the long-term storage of original microfilmed records for its COM services customers. The microfilm is stored in a secure vault within the Anacomp facility, providing customers with a convenient and safe method of off-site storage of critical business records. In addition, Anacomp offers customers the ability to retrieve their records on an as-needed basis. Anacomp plans to expand this business in fiscal 1997 by opening several new archival vaults.
The Company also intends to broaden its archival services business in the future by storing multiple-media records -- such as paper, optical disks, and magnetic tape in addition to microfiche and microfilm -- at dedicated storage facilities. Anacomp has taken a first step in this direction in October 1996 by acquiring Archive Storage, Inc. ("ASI"), a small Massachusetts company that operated an underground, climate-controlled storage vault. ASI also provided records management and disaster recovery consulting services to businesses, helping customers ensure they are storing the right information on the most cost-effective media for the appropriate periods of time.
Anacomp plans to expand print/mail services, the output and mailing of printed information, in the United States in fiscal 1997. The Company sees print/mail services as complementary to the COM and CD output services it offers to clients today, and the Company believes it can leverage its existing client relationships and application knowledge to obtain significant print/mail revenues by providing its customers with distinct cost and service advantages.
Technology Services
Anacomp's technology services includes both traditional maintenance services as well as newer professional services offered by the Company.
Anacomp maintains approximately 98% of its own installed base of COM systems, as well as a large percentage of those built by other companies. In addition, the Company provides maintenance services for micrographics-related devices and, increasingly, non-micrographics equipment. Since many customers tend to use the maintenance services of the vendor that installed the system, maintenance revenues traditionally have been a function of new COM system sales and the size of the installed base. Anacomp's COM maintenance market share is approximately 65 percent in the United States, 50 percent in Europe, and 15 percent in the Americas (excluding the United States) and Asia.
In fiscal 1996, Anacomp identified professional services as a potential growth segment of its maintenance business. Professional services refers to the delivery of project-specific expertise in such areas as job set-ups, user interfaces, data communications, and networking. Tasks include software development, problem resolution, and consulting. In the past, Anacomp had provided many of these services to customers free of charge. As an example of how the Company plans to market professional services, Anacomp now provides a specified number of hours of "free" job set-up assistance with each XFP 2000 sold; the customer is charged for work exceeding those hours.
Output Systems
COM Systems
Anacomp is the world's leading manufacturer and distributor of COM systems, offering a complete line of COM recorders, duplicators, sorters, and related software. Anacomp's installed base of COM systems, approximately 55 percent of those in use worldwide, is more than twice as large as its nearest competitor, and related sales of COM services and supplies to the installed base provide the Company with a recurring revenue stream that constitutes a significant portion of its annual revenues.
The XFP 2000, which is manufactured by the Company, is the most advanced COM recorder on the market and has enabled the Company to capture an estimated 57 percent of all new COM systems sold or leased. The XFP 2000 is faster and more reliable than previous COM recorders and, through its laser technology, has the capability to generate precise reproductions of any image.
In fiscal 1996, Anacomp introduced DragonCOM, a version of the XFP 2000 for the Asian market, which is capable of processing Chinese, Korean, Taiwanese, Japanese, and other ideographic languages utilizing the popular IBM Advanced Function Presentation ("AFP") architecture.
Anacomp also has developed two new software products that emulate IBM and Xerox laser print streams. AFP software developed in conjunction with IBM enables the XFP 2000 to process and image AFP formatted data streams used by IBM high-speed mainframe laser printers. Xerox Compatibility Feature ("XCF") software developed in partnership with Xerox enables the XFP 2000 to process the same data stream used by Xerox high-speed, high-volume laser printers.
Principal customers for the Company's COM systems include information-intensive organizations such as banks, insurance companies, financial service companies, retailers, healthcare providers, and government agencies, as well as non-Anacomp COM output service centers. While the majority of COM systems are sold outright, the Company does offer customers lease and monthly usage options.
The Company's primary competitors in the sale of COM systems are Agfa-Gevaert AG ("Agfa") and Micrographic Technology Corporation. Competition is based principally on product features, as well as on such factors as product quality, service and price. Anacomp sells approximately 57 percent of all new COM systems sold worldwide, including those sold through an OEM arrangement.
Electronic Data Management
The Company is working actively to bring to market a new suite of electronic data and image management solutions, known as "Concerto". These software solutions are expected to support a wide range of computer output, document images, document routing, and management applications. Applications are expected to include customer response systems, healthcare claims processing, litigation support, insurance claims processing, and many other applications involving the electronic storage, retrieval, routing, and management of documents and associated information.
The Company also markets an integrated system for information management known as XSTAR, or the eXtended STorage And Retrieval system ("XSTAR"). Launched in 1995, XSTAR is a solution for mainframe computing environments that allows organizations with significant data access requirements to expedite information retrieval regardless of the data's location.
The Company intends to position itself as a comprehensive provider of integrated solutions for organizing, storing, routing, and processing information of all types. In order to quickly and cost-effectively provide these solutions to its customers, and to take maximum advantage of the Company's areas of expertise, Anacomp has embarked on establishing technology alliances with the foremost providers of the key technologies available today for managing and delivering information.
Micrographics Supplies
Anacomp sells the most comprehensive line of micrographics supplies in the world, including original silver halide film, duplicate film, chemicals for microfilm processing, paper and toners for reader/printers, micrographics lamps and bulbs, and other consumables. The Company also markets a complete line of microfilm/microfiche readers.
Anacomp is the world's largest supplier of duplicate microfilm, which is used to create one or more additional copies of original microfiche and microfilm masters. The Company's share of this estimated $75 million worldwide market is approximately 67 percent, which includes sales to its own output centers. Anacomp's primary competitor in the duplicate microfilm market is Rexham Graphics Ltd. ("Rexham") with an estimated 25 percent share of the worldwide duplicate film market.
The Company sells original microfilm for Anacomp's COM systems and for other manufacturers' COM systems, with film sold for Anacomp's systems representing the vast majority of original microfilm sales. Anacomp competes in sales of non-proprietary original COM microfilms with other manufacturers, including Agfa, Fuji Photo Film U.S.A., Inc. ("Fuji"), Kodak, and Imation Enterprises Corporation ("Imation") (formerly part of 3M). For non-OEM sales of the XFP 2000, the Company is the exclusive supplier for original microfilm because of the proprietary nature of the canister in which the film is placed. Anacomp sells its consumable supplies directly to more than 90 percent of its worldwide installed base.
Ancomp has an estimated 33 percent of the micrographics supplies market in Europe and an estimated 39 percent of the supplies market in the Americas (excluding the United States) and Asia. In Europe, the Company's primary competitors for micrographics supplies and equipment are the Kalle Microfilm Division of Hoechst AG, A. Messerli AG and Rexham. Its primary competitors in Japan are Kodak and Fuji.
Magnetic Media
Anacomp manufactures, sells, and distributes a broad range of magnetics products such as open reel tape, 3480/3490E tape cartridges, TK 50/52 CompacTape, and back-up tape cartridges such as quarter-inch, 4mm, and 8mm. Anacomp is the world's largest manufacturer of half-inch tape products, widely used by many organizations for the near-line storage of business data.
Anacomp is exploring new applications and markets based on its magnetics coating capacity. In fiscal 1995, Anacomp introduced voice logging tape and instrumentation tape. Voice logging tape is used by brokerage companies, "911" emergency service providers, and other entities to record telephone conversations. Instrumentation tape is used by various government agencies to measure and record sensitive data. In fiscal 1996, Anacomp began to use magnetic coated media to manufacture transfer tape, which is found on the back of transaction media (similar to credit and telephone cards).
The Company is actively seeking partnerships that will enable the Company to participate in the next generation of magnetic media products, including half-inch metal particle tape (3590 cartridges). This product will be introduced in fiscal 1997 and is expected to enjoy significant growth as this market expands over the next several years.
Anacomp primarily sells its magnetics products through its worldwide distributor and dealer network and, to a lesser extent, through parts of the Company's direct sales force. Anacomp markets its magnetics products under the "Memorex", "Dysan", "Graham", and "StorageMaster" trademarks.
Anacomp has no significant competitors with respect to the manufacture of open reel tape, and its worldwide market share for that product is estimated at 92 percent. Anacomp competes with Imation and BASF AG in the sale of 3480/3490E data cartridges. Anacomp's worldwide market share for 3480 and 3490E data cartridges is estimated to be 38 percent and 35 percent, respectively.
Industry Segment and Foreign Operations
As discussed in Note 1 to the consolidated financial statements, Anacomp operates in a single business segment -- providing equipment, supplies and services for information management, including storage, processing and retrieval. Financial information concerning the Company's operations in different geographical areas is included in Note 22 to the consolidated financial statements.
Summary
Soon to begin its fourth decade of operation, Anacomp has substantial market positions for most of its products. Serving more than 15,000 customers in 65 countries, the Company is one of the oldest and most well-known names in information management.
Micrographics, historically its core product line, continues to provide the Company access to a premier customer base and the revenue to invest in new products and technologies. New products and services, such as ALVA, Concerto, archival services, and print/mail services, offer the Company the opportunity to extend its history of leadership into the next decade. After its financial reorganization in fiscal 1996, Anacomp believes it has positioned itself to become the world leader in helping organizations manage information across its entire life cycle.
ITEM 2.

ITEM 2. PROPERTIES
Anacomp maintains its corporate headquarters in Carmel, Indiana (a suburb of Indianapolis) and has corporate and administrative offices in Atlanta, Georgia and Poway (San Diego), California. Micrographics manufacturing, engineering, customer service, marketing and product maintenance facilities are all located in Poway, California near San Diego. Anacomp's magnetics manufacturing facilities are located in Graham, Texas and Brynmawr, Wales. During 1994, Anacomp's Graham and Brynmawr facilities received international recognition for quality standards, earning International Standards Organization ("ISO") 9002 certification. Anacomp's Poway facility earned ISO 9002 certification in September 1995.
The following table indicates the square footage of Anacomp's facilities:
Other Facilities consist primarily of abandoned facilities, of which 151,569 square feet is sublet to others. Anacomp also leases office space for its sales and service centers in a variety of locations. Anacomp considers its facilities adequate for its present needs and does not believe that it would experience any difficulty in replacing any of its present facilities if any of its current agreements were terminated.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGSLegal Proceedings
The Company and its subsidiaries are named defendants in several lawsuits and claims arising in the ordinary course of business. While the outcome of such claims, lawsuits or other proceedings against the Company cannot be predicted with certainty, management expects that any liability arising thereunder, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the financial statements of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the three months ended September 30, 1996, to a vote of Anacomp's security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company, their ages (as of December 16, 1996) and positions are listed below:
Name Age Position P. Lang Lowrey, III 43 President, Chief Executive Officer and Chairman of the Board Ralph W. Koehrer 51 President and Chief Operating Officer (effective January 6, 1997) Donald L. Viles 50 Executive Vice President and Chief Financial Officer Ray L. Dicasali 48 Senior Vice President and Chief Technology Officer Barry L. Kasarda 53 Senior Vice President-Operations Kevin M. O'Neill 42 Senior Vice President-Global Marketing William C. Ater 56 Vice President, Chief Administrative Officer and Secretary Jeffrey S. Withem 37 Vice President-Planning and Communications and Chief of Staff Thomas L. Brown 40 Vice President and Treasurer K. Gordon Fife 51 Vice President-Tax George C. Gaskin 37 Vice President-Legal, Corporate Counsel and Assistant Secretary Hasso Jenss 53 President-European Group Gary M. Roth 54 President-International Group T. Randy Simmons 49 President-U.S. Group Peter Williams 44 President-Magnetics Group
The business experience of the above officers and directors for the past five years is described below. Each executive officer is elected for a term of one year and holds office until his successor is chosen and qualified or until his death, resignation or removal.
P. Lang Lowrey, III was elected Chairman of the Board on June 4, 1996. Mr. Lowrey was elected President and Chief Operating Officer in May 1995 and subsequently assumed the duties of Chief Executive Officer, effective October 1, 1995. Prior to that, he served as President - Magnetics Group from November 1992 to May 1995. He served from October 1990 to October 1992 as Vice President Worldwide Marketing Division.
Ralph W. Koehrer was elected President and Chief Operating Officer (effective January 6, 1997) on December 10, 1996. Koehrer will join the Company from Automatic Data Processing, Inc. ("ADP"), where, most recently, he served as a corporate officer and as president of ADP's Information and Processing Services division.
Donald L. Viles was elected Executive Vice President and Chief Financial Officer on February 15, 1996. From October 1985 to February 1996, he served as Vice President and Controller.
Ray L. Dicasali was elected Senior Vice President and Chief Technology Officer on June 3,1996. From 1993 to 1996, Mr. Dicasali served as Senior Vice President of Technology and CIO of Flexel. From 1989 to 1993, Mr. Dicasali was Senior Vice President and CIO of Dun and Bradstreet Software.
Barry L. Kasarda was elected Senior Vice President - Operations on December 10, 1996, after assuming responsibility for the Technology Services Group. He had been elected Senior Vice President of Manufacturing and Materials on June 3, 1996 and continues to oversee those functions. From 1993 to 1996, he served as Vice President of Materials. Prior to joining the Company, Mr. Kasarda served as Vice President and General Manager of ABEX Division of Parker Hannifin Corporation from 1989 to 1993.
Kevin M. O'Neill was elected Senior Vice President - Global Marketing on June 3, 1996. Mr. O'Neill had previously served as Vice President of Global Marketing from 1995 until June 1996. From 1994 to 1995, Mr. O'Neill served as Vice President of Marketing, Strategic Resellers Group. Prior to joining the Company, Mr. O'Neill served as Senior Director, Marketing & Product Development for Fujitsu-ICL Systems, Inc. from 1982 to 1994.
William C. Ater was elected Vice President and Chief Administrative Officer in February 1988. He has served as Secretary since March 1985.
Jeffrey S. Withem was elected Vice President - Planning and Communications and Chief of Staff on June 3, 1996. Mr. Withem was Vice President, Strategic Planning and Corporation Communications from October 1995 to June 1996. From 1993 to 1995, Mr. Withem served as Vice President, Marketing, for the Company's Magnetics Group. Prior to that, he was Marketing Communications Manager for Worldwide Marketing for the Company from 1990 to 1992.
Thomas L. Brown was elected Vice President and Treasurer on May 19, 1996. From January 1995 to April 1996, Mr. Brown served as Corporate Controller of Hurco Companies, Inc. Mr. Brown had previously served as Assistant Vice President of Financial Reporting and Analysis for the Company from March 1991 to 1995.
K. Gordon Fife was elected Vice President - Tax in October 1985.
George C. Gaskin was elected Vice President - Legal, Corporate Counsel and Assistant Secretary on June 3, 1996. From June 1990 to June 1996, Mr. Gaskin served as Corporate Counsel and Assistant Secretary.
Hasso Jenss was elected President of the European Group effective October 1,1995. Mr. Jenss served as Vice President - European Micrographics from November 1993 to September 1995. Prior to that, he served from October 1989 to October 1993 as Managing Director of Anacomp's German subsidiary.
Gary M. Roth was elected President of the International Group, effective October 1, 1995. Previously, Mr. Roth served as Vice President, Americas/Asia Division from November 1992 to September 1995. From October 1991 to October 1992, he served as Manager, LAAP/Canada Operations. From October 1988 to October 1991, he served as Vice President - Data Systems Division.
T. Randy Simmons was elected President of the U.S. Group, effective October 1, 1995. Previously, Mr. Simmons served as Vice President, Direct Sales Division - - East from November 1994 to September 1995. Prior to that, he served as Vice President - Information Systems Division from November 1991 to November 1994. He served from 1987 to 1991 as Vice President - Micrographics Services Division.
Peter Williams was elected President of the Magnetics Group, effective October 1, 1995. Previously, he served as General Manager of the Magnetics European Group from 1993 to September 1995. Prior to that, he served from 1990 to 1993 as Vice President, Wales Operations - Magnetics.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market, holder and dividend information concerning the Company's common stock appears on page A-2 of this Annual Report on Form 10-K.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Selected financial data appears on page A-2 of this Annual Report on Form 10-K.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations appears on pages A-3 to A-9 of this Annual Report on Form 10-K.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary financial information appear on pages A-10 to A-41 of this Annual Report on Form 10-K.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and financial disclosures.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company hereby incorporates by reference the information contained under the headings "Election of Directors" and "Compliance with Section 16(a) of the Securities and Exchange Act of 1934" from its definitive Proxy Statement (hereinafter, the "Proxy Statement") to be delivered to the shareholders of the Company in connection with the 1997 Annual Meeting of Shareholders to be held February 3, 1997. Certain information relating to executive officers of the Company appears on pages 13 and 14 hereof.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATIONExecutive Compensation
The Company hereby incorporates by reference the information contained under the heading "Executive Compensation" in the Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the information contained under the heading "Security Ownership of Management and Other Beneficial Owners" in the Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or related transactions that require disclosure.
PART IV ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements and other information appear in Appendix A to this Annual Report on Form 10-K and are filed as a part hereof:
Selected Financial Data. Market Price and Dividend Information. Management's Discussion and Analysis of Financial Condition and Results of Operations. Report of Independent Public Accountants. Consolidated Balance Sheets - September 30, 1996 and 1995. Consolidated Statements of Operations - Four Months Ended September 30, 1996, Eight Months Ended May 31, 1996, Twelve Months Ended September 30, 1995 and 1994. Consolidated Statements of Cash Flows - Four Months Ended September 30, 1996, Eight Months Ended May 31, 1996, Twelve Months Ended September 30, 1995 and 1994. Consolidated Statements of Stockholders' Equity (Deficit) - Four Months Ended September 30, 1996, Eight Months Ended May 31, 1996, Twelve Months Ended September 30, 1995 and 1994. Notes to Consolidated Financial Statements.
2. Financial Statement Schedules are not filed with this Annual Report on Form 10-K because the Schedules are either inapplicable or the required information is represented in the financial statements or notes thereto.
(b) Reports on Form 8-K:
During the quarter ended September 30, 1996, and prior to filing its Annual Report on Form 10-K, Anacomp filed no reports on Form 8-K.
(c) The following exhibits are filed with this Annual Report on Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below.
Previously unfiled documents are noted with an asterisk (*):
(3) Articles of Incorporation and Bylaws:
a) The Amended and Restated Articles of Incorporation of Anacomp were effective June 4, 1996, and are incorporated by reference to Anacomp's Form 8-K filed on June 19, 1996 (File No. 1-8328).
b) The Amended and Restated Bylaws of Anacomp were effective June 4, 1996, and are incorporated by reference to Anacomp's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(4) Instruments defining the rights of security holders, including indentures:
(a) Third Amended Joint Plan of Reorganization of the Company and certain of its subsidiaries. Previously filed and incorporated by reference to the Company's Form 8-A filed on May 15, 1996 (File No. 0-7641).
(b) Indenture, dated as of June 4, 1996, between the Company and The Bank of New York, as trustee, relating to the Company's 11-5/8% Senior Secured Notes due 1999. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(c) Application by the Company for Exemption from Section 314(d) of the Trust Indenture Act of 1939, as amended, pursuant to Section 304(d) and Rule 4d-7 thereunder. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(d) Indenture, dated as of June 4, 1996, between the Company and IBJ Schroder Bank & Trust Company, as trustee, relating to the Company's 13% Senior Subordinated Notes due 2002. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(e) Warrant Agreement, dated as of June 4, 1996, between the Company and ChaseMellon Shareholder Services, L.L.C. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(f) Security and Pledge Agreement, dated as of June 4, 1996, by the Company, in favor of the Senior Secured Trustee. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(g) First Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated June 4, 1996, made by Anacomp, Inc., as grantor, in favor of Chicago Title Insurance Company, as trustee, for the benefit of The Bank of New York, as beneficiary. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(h) First Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated June 4, 1996 made by Anacomp, Inc., as grantor, in favor of Chicago Title Insurance Company, as trustee, for the benefit of The Bank of New York, as beneficiary. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(10) Material Contracts:
(a) *Amended and Restated Employment Agreement, effective October 1, 1996, between Anacomp, Inc. and P. Lang Lowrey, III.
(b) Employment Agreement, effective March 1, 1992, between Anacomp, Inc. and Thomas R. Simmons. Previously filed and incorporated by reference to the Company's Form 10-K for the year ended September 30, 1993.
(c) *Employment Agreement, effective October 1, 1992, between Anacomp, Inc. and William C. Ater.
(d) *Employment Agreement, effective February 15, 1996, between Anacomp, Inc. and Donald L. Viles.
(e) Common Stock Registration Rights Agreement, dated as of June 4, 1996 by and among the Company and the Holders of Registrable Shares. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(f) Senior Secured Note Registration Rights Agreement, dated as of June 4, 1996 by and among the Company and the Holders of Registrable Notes. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(g) Senior Subordinated Note Registration Rights Agreement dated as of June 4, 1996, by and among the Company and Holders of Registrable Notes. Previously filed and incorporated by reference to the Company's Form 8-K filed on June 19, 1996 (File No. 1-8328).
(h) Amended and Restated Master Supply Agreement, dated October 8, 1993, among Anacomp, Inc., SKC America, Inc. and SKC Limited. Previously filed and incorporated by reference to the Company's Form 10-K for the year ended September 30, 1993.
(11)*Statement re: computation of per share earnings.
(21)*Subsidiaries of the registrant.
(27)*Financial data schedule (Required for electronic filing only).
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANACOMP, INC. By: /s/ P. Lang Lowrey, III P. Lang Lowrey, III President, Chief Executive Officer, and Chairman of the Board December 23, 1996
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and on the dates indicated.
Dated: December 23, 1996 By: /s/ P. Lang Lowrey, III P. Lang Lowrey, III President, Chief Executive Officer, and Chairman of the Board
Dated: December 23, 1996 By: /s/ Donald L. Viles Donald L. Viles, Executive Vice President and Chief Financial Officer
Dated: December 23, 1996 By: /s/ Talton R. Embry Talton R. Embry, Director
Dated: December 23, 1996 By: /s/ Darius W. Gaskins, Jr. Darius W. Gaskins, Jr., Director
Dated: December 23, 1996 By: /s/ Jay P. Gilbertson Jay P. Gilbertson, Director
Dated: December 23, 1996 By: /s/ Richard D. Jackson Richard D. Jackson, Director
Dated: December 23, 1996 By: /s/ George A. Poole, Jr. George A. Poole, Jr., Director
Dated: December 23, 1996 By: /s/ Lewis Solomon Lewis Solomon, Director
APPENDIX A
Annual Report on Form 10-K Anacomp, Inc.
ANACOMP, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction with Item 1, "Business", of Part I of this Annual Report on Form 10-K, and with the Notes to Consolidated Financial Statements:
MARKET PRICE AND DIVIDEND INFORMATION
Anacomp, Inc.'s common stock is traded on The NASDAQ Stock Market ("NASDAQ") under the ticker symbol "ANCO." The high and low closing prices (as reported by NASDAQ) for the Company's common stock were as follows:
HIGH LOW Three months ended: September 30, 1996 $11.13 $7.63
The Company's borrowing agreements prohibit the payment of cash dividends on common shares. The number of stockholders of record as of December 16, 1996 was 229. The number of beneficial stockholders of record as of December 16, 1996 was approximately 1,200.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Developments
On June 4, 1996, the Company emerged from bankruptcy proceedings under its Third Amended Joint Plan of Reorganization (the "Reorganization"). On such date, the Company canceled its existing secured debt and subordinated debt, including 15% Senior Subordinated Notes, 13.875% Convertible Subordinated Debentures and 9% Convertible Subordinated Debentures, and its equity securities, including common stock, common stock purchase rights, preferred stock and warrants, and distributed to its creditors approximately $22 million in cash, $112.2 million principal amount of its 11-5/8% Senior Secured Notes due 1999 (the "Senior Secured Notes"), $160 million principal amount of its 13% Senior Subordinated Notes due 2002 (the "Senior Subordinated Notes"), 10 million shares of new common stock, par value $.01 per share (the "New Common Stock"), and warrants to purchase 362,694 shares of New Common Stock at a price of $12.23 per share for a period of five years from June 4, 1996. The Plan of Reorganization resulted in a reduction of approximately $173 million in principal and accrued interest on the Company's debt obligations and in liquidation amount and accrued dividends on its preferred stock. The resulting capital structure reduced the Company's interest expense by approximately $30 million per year.
The process began January 5, 1996, when Anacomp filed a Prenegotiated Plan of Reorganization with the U.S. Bankruptcy Court in Delaware under Chapter 11 of the U.S. Bankruptcy Code. The Company was in default under substantially all of its debt agreements as a result of its failure to make $89.7 million of principal payments scheduled for April 26, 1995 and October 26, 1995 on the senior secured credit facilities (including $60 million relating to the revolving loan agreement which expired on October 26, 1995), $11.4 million of principal and interest payments on the 9% Convertible Subordinated Debentures which were due January 15, 1996, $34.1 million of interest payments scheduled for May 1, 1995 and November 1, 1995 on its Senior Subordinated Notes, and $3.2 million of interest payments scheduled for July 15, 1995 and January 15, 1996 on the 13.875% Subordinated Debentures, as well as certain financial covenant violations, and the cross-default provisions of the other debt agreements.
Results of Operations
On May 20, 1996 (the "Confirmation Date"), the Company's Plan was confirmed by the United States Bankruptcy Court and the Company emerged from bankruptcy on June 4, 1996. As a result of the Reorganization, the recording of the restructuring transaction and the implementation of Fresh Start Reporting, the Company's results of operations after May 31, 1996 (the cutoff date used for financial reporting purposes) are not comparable to results reported in prior periods. See Note 3 to the accompanying consolidated financial statements for information on consummation of the Plan of Reorganization and implementation of Fresh Start Reporting.
To facilitate a meaningful comparison of the Company's quarterly and year-to-date operating performance in fiscal years 1996 and 1995, the following discussion of results of operations on a consolidated basis is presented on a traditional comparative basis for all periods. Consequently, the current year's information presented below does not comply with accounting requirements for companies upon emergence from bankruptcy, which requirements call for separate reporting for the newly reorganized company and the predecessor company.
Results of Operations-Fiscal 1996, 1995 and 1994
General
Anacomp reported net income of $143 million for the year ended September 30, 1996 as compared to a net loss of $238.3 million and net income of $15 million for the years ended September 30, 1995 and 1994, respectively. Included in the fiscal 1996 income are reorganization items of $92.8 million and a $52.4 million extraordinary gain resulting from the discharge of indebtedness. Included in the fiscal 1995 loss are special charges of $136.9 million, representing a write-off of goodwill of $108 million and $28.9 million of costs associated with software investments (See Notes 8 and 18 to the accompanying consolidated financial statements). Also included in the fiscal 1995 loss is a $29 million deferred tax provision and $32.7 million of restructuring charges. Earnings before interest, other income, reorganization items, extraordinary credits, restructuring charges, special charges, taxes, depreciation and amortization ("EBITDA") was $84.2 million for the year ended September 30, 1996 as compared to $77.2 million and $114.2 million for the years ended September 30, 1995 and 1994 respectively.
Total revenues for fiscal 1996 of $486.1 million represent a $105.1 million decrease from fiscal 1995. Approximately $60.1 million of the decrease is due to the discontinuance or downsizing of certain product lines including Image Conversion Services ("ICS") ($20 million), flexible diskette media ($20.2 million), reader and reader printer products ($12.7 million) and source document film ($7.2 million).
Total revenues for fiscal 1995 decreased $1.4 million from the prior fiscal year. Revenues from sales of magnetics products increased $29.5 million resulting from the acquisition of Graham Magnetics, Inc. ("Graham Magnetics") in May 1994. In addition, the acquisition of the COM services customer base of 14 data service centers from National Business Systems, Inc. ("NBS") on January 3, 1994 contributed incremental revenues of approximately $2.7 million to the fiscal 1995 results. Offsetting these contributions were decreases in micrographics supplies, COM systems, maintenance services and other revenues.
Anacomp's fiscal 1994 revenues totaled $592.6 million. The Graham Magnetics acquisition contributed $22.4 million to fiscal 1994 revenues and NBS contributed $9.1 million to fiscal 1994 revenues.
Selling, general and administrative expenses ("S,G&A") were 19.2% of revenues in fiscal 1996 compared to 22.4% in fiscal 1995. The decrease in S,G&A reflects the cost reductions implemented in late fiscal 1995 as part of the Company's reorganization. Selling, general and administrative expenses were 16.4% of revenues in 1994.
The Company has reclassified certain operating costs within costs of services provided, costs of equipment and supplies sold and S,G&A in fiscal 1995 and fiscal 1994 to conform with the fiscal 1996 presentation.
1995 Special Charges
As mentioned above, included in the operating results for fiscal 1995 are special charges totaling $136.9 million, including the write-off of a portion of goodwill related to micrographics products. During fiscal 1995, Anacomp announced several significant events which are summarized as follows:
On April 6, 1995, the Company announced that it was withdrawing its proposed offering of $225 million senior secured notes previously announced on January 23, 1995.
On April 27, 1995, the Company announced that it had agreed with its Senior Secured Lenders to make its current interest payment of $2 million on its Old Senior Secured Debt while continuing to negotiate the rescheduling of all or a substantial portion of the $20 million scheduled amortization payment due April 26, 1995, which the Company failed to make, and the waiver of certain financial covenant violations as of March 31, 1995. The Company also announced that until an agreement was reached with its Senior Secured Lenders (and Holders of Old Senior Subordinated Notes) the Company would not make its $16.9 million interest payment on the Old Senior Subordinated Notes scheduled for May, 1995 and would defer making dividend payments on the Old Preferred Stock.
On May 15, 1995, in connection with announcing a second quarter loss of $8.2 million, the Company announced plans for a restructuring of its operations which would include several cost cutting measures and personnel reductions. The Company also announced the appointment of a new president.
These developments significantly constrained Anacomp's ability to finance certain previously projected activities. In addition, in 1995, Anacomp failed to achieve its original projections of operating results and experienced lower than expected sales of major new software products which were first introduced in January 1995. In light of Anacomp's withdrawn note offering, disappointing financial performance and default on its indebtedness, the Company prepared a new operating plan.
Based on the events discussed above and in connection with the change in accounting discussed in Note 1 to the accompanying consolidated financial statements, Anacomp determined that goodwill had been impaired and measured the impairment based on the fair value approach discussed in Note 1. As required by generally accepted accounting principles, this accounting change, which amounted to a charge of $108 million, was recorded as a change in estimate of goodwill and was included in the results of operations during fiscal 1995.
Prior to fiscal 1996, Anacomp invested and capitalized over $20.0 million related to the development of software to provide advanced capabilities for the XFP 2000 related to the processing of Xerox and IBM print steams. These software enhancements are referred to as the Xerox Compatibility Feature ("XCF") and the Advanced Function Presentation ("AFP") feature. XCF was introduced at the beginning of the second quarter of fiscal 1995 and AFP at the beginning of the fourth quarter of fiscal 1995. Initial sales of the XCF product were significantly below expectations, as were projections for AFP. As a result, during 1995 Anacomp wrote off $20.3 million of deferred software costs and established a reserve of $8.6 million (none of which exists at September 30, 1996) for future payments to IBM Pennant Systems for software royalty and system support obligations which were not recoverable based on revised projections. See Note 18 to the accompanying consolidated financial statements.
Results of Operations - Products and Services
Output Services
Output services revenues, which accounted for 21% of Anacomp's revenues in fiscal 1996, were down $8.4 million compared to fiscal 1995 (excluding the effect of the ICS sale), primarily due to a 10% decrease in volume. Output services revenues accounted for 22% of Anacomp's revenues in fiscal 1995. Volumes were increased in fiscal 1995 due in part to the acquisition of the COM services customer base of 14 data service centers from NBS. Output services revenues increased 5% in fiscal 1994 on volume increases of 10%. The increase in fiscal 1994 volume is the result of the NBS acquisition. Decreasing prices adversely affected Anacomp's output services business in fiscal 1996, 1995 and 1994.
Output services gross margins as a percent of revenue decreased 1% in fiscal 1996, 5% in fiscal 1995 and 2% in fiscal 1994.
Technology Services
Technology services revenues, which accounted for 17% of the Company's revenues in fiscal 1996, are derived principally from the maintenance of COM recorders and duplicators. Such revenues decreased 5% in fiscal 1996 when compared to fiscal 1995 primarily due to the effect of replacing older generation COM systems with the XFP 2000, which has a capacity significantly greater than the previous generation COM systems. Technology services accounted for 15% of fiscal 1995 revenues and were down 5% from fiscal 1994. Technology services revenues increased $3.5 million in fiscal 1994. The improvement in fiscal 1994 is largely the result of the addition of a national data service center company to Anacomp's customer base.
Gross margins increased nearly 7% in fiscal 1996 due primarily to reductions in costs associated with spare parts and personnel costs.
Output Systems
Output systems revenues, which accounted for 7% of the Company's revenues in fiscal 1996, decreased $18.5 million with the sale or lease of 118 XFP 2000 systems in fiscal 1996 compared to 153 systems in fiscal 1995. Included in output systems revenues in fiscal 1995 is $3.5 million of sales of equipment for use in Anacomp data centers under sale and leaseback arrangements. Output systems revenues decreased 9% in fiscal 1995 with the sale or lease of 153 XFP 2000 systems compared to 165 systems in fiscal 1994. Output systems revenues decreased 25% in fiscal 1994 because of the decline in sales or leases of XFP 2000 output systems from 274 systems in fiscal 1993. The decline in fiscal 1994 was partly the result of reduced original equipment manufacturer ("OEM") shipments (25 systems in fiscal 1994 compared to 67 in fiscal 1993).
Output systems gross margins improved in fiscal 1996, fiscal 1995 and fiscal 1994 despite reduced revenues as a result of product mix of new and used systems in fiscal 1996 and higher average selling prices in fiscal 1995 and 1994.
Micrographics Supplies
Micrographics supplies revenues, which accounted for 31% of the Company's revenues in fiscal 1996, decreased 21% compared to fiscal 1995 principally as a result of the discontinuance and downsizing of product lines. Micrographics supplies revenues were 32% and 35% of the Company's revenues in fiscal 1995 and 1994, respectively. Micrographics supplies revenues decreased 7% in fiscal 1995 and 8% in fiscal 1994, principally due to reduced demand for duplicate film, readers and reader/printers.
Micrographics supplies gross margins as a percent of revenue increased 5% in fiscal 1996 as a result of changes in product mix due primarily to the sale and downsizing of product lines. Micrographics supplies gross margins decreased 4% in fiscal 1995.
Magnetic Media
Magnetic media revenues, which accounted for 23% of the Company's revenues in fiscal 1996, decreased $16.2 million compared to fiscal 1995. The decrease is due to the closure of the Omaha, Nebraska factory, which produced flexible diskette media, as well as reduced unit sales of open reel tape. Magnetic media revenues accounted for 22% of the Company's revenues in fiscal 1995. Fiscal 1995 magnetic media revenues increased $31.9 million over fiscal 1994. The increase is due to the contribution from the acquisition of Graham Magnetics in May 1994. The acquisition of Graham Magnetics in May 1994 was the primary reason for a 36% increase in fiscal 1994 magnetic media revenues over fiscal 1993. Graham Magnetics manufactured certain magnetics products at its facility in Graham, Texas. Anacomp has shifted all its U.S. production of those products from its Omaha, Nebraska plant to the Graham Magnetics facility. The costs associated with this relocation were not significant. The consolidation resulted in improved manufacturing efficiencies and overall headcount reduction.
Magnetic media gross margins have remained level over the past 3 years at approximately 16%.
Results of Operations - Other
Interest
Interest expense and fee amortization amounted to $39.6 million in fiscal 1996 compared to $70.9 million in fiscal 1995. The decrease relates to the discontinuance of interest accrued on the predecessor Company's old subordinated debt during the bankruptcy proceedings, as well as reduced interest expense on the new debt instruments.
Interest expense and fee amortization was $70.9 million in fiscal 1995 compared to $67.2 million in fiscal 1994 due to $3.3 million of default interest and interest on unpaid scheduled interest on the Old Senior Secured Debt as well as the Old Senior Subordinated Notes which was required by the terms of the various debt agreements.
Income Taxes
The Company adopted Financial Accounting Standards No. 109, Accounting for Income Taxes, in the first quarter of fiscal year 1994. The adoption resulted in a one-time increase to income of $8 million reflecting the cumulative effect on prior years of this accounting change. In addition, the Company recorded a deferred tax asset of $95 million representing the U.S. federal and state tax savings from net operating loss carryforwards ("NOLs") and tax credits. The Company also recorded a valuation allowance of $60 million, reducing the deferred tax asset to $35 million. In determining the valuation allowance, the Company assumed pre-tax income at levels they were experiencing at that time and considered the impact of the reversal of temporary differences and the periods in which NOL carryforward benefits expire.
The provision for income taxes in 1996 includes $6.1 million on earnings of Anacomp's foreign subsidiaries and $2 million of domestic income taxes required primarily related to the alternative minimum tax and state and local taxes. The effective rate as a percentage of income before reorganization items, extraordinary credit, and cumulative effect of accounting change (8.2%) is lower than the U.S. statutory rate because of non-taxable reorganization income partially offset by increases resulting from non-deductible amortization.
Included in the provision for income taxes in fiscal 1995 is a deferred tax provision of $29 million. The deferred tax provision includes U.S. tax on undistributed foreign earnings of $9 million and a write-off of net deferred tax assets of $20 million. This write-off results from the uncertainty regarding the financial restructuring that was in progress and, accordingly, the uncertainty regarding the ultimate benefit to be derived from Anacomp's tax loss carryforwards. The remaining components of the provision for income taxes in 1995 were taxes of $4.8 million on earnings of Anacomp's foreign subsidiaries and a tax reserve adjustment of $1.2 million.
Income taxes as a percentage of income from operations was 55% in fiscal 1994. In fiscal 1994, income tax expense was reduced $1.2 million, as a result of the favorable settlement and disposition of previously established tax reserves. The effective tax rate was higher than the U.S. statutory rate because of amortization of goodwill, which is not deductible for tax purposes, and generally higher foreign tax rates. See Note 17 to the accompanying consolidated financial statements.
Liquidity and Capital Resources Liquidity and Capital Resources
Anacomp's working capital at September 30, 1996, excluding the current portion of long-term debt, was $26.4 million compared to a $13.8 million deficit at September 30, 1995. To facilitate comparison of cash flow activity for fiscal 1996 to fiscal 1995, cash flows for the eight months ended May 31, 1996 and the four months ended September 30, 1996, as discussed in the accompanying consolidated statements of cash flows, have been combined for the following discussion. Net cash provided by operating activities increased to $49.8 million for fiscal year ended September 30, 1996 compared to $19.9 million in the comparable prior period, due primarily to significant reductions in receivables and inventories as well as non-payment of interest on subordinated debt prior to the Reorganization. Net cash provided by investing activities increased to $3.9 million in the current period, compared to $3.1 million in the comparable prior period.
Net cash used in financial activities increased to $35.5 million in fiscal 1996 compared to $23.6 million in fiscal 1995. The current period includes a $13 million repayment of debt with proceeds from the sale of the ICS Division.
The Company's cash balance (including restricted cash) as of September 30, 1996 was $47.8 million compared to $19.4 million at September 30, 1995. Subsequent to September 30, 1996, the Company successfully completed a rights offering for approximately 3.6 million shares of New Common Stock. The rights offering generated approximately $25 million in cash, which will be used for the acquisition of businesses, assets and technologies.
Prior to the Chapter 11 filing, the Company was experiencing a liquidity shortfall caused by continued declining revenues and a highly leveraged balance sheet. Upon emergence from bankruptcy proceedings the Company's pre-petition liquidity problems were improved.
The Company believes that its cash on hand and cash generated from operations will be sufficient to fund its debt service requirements, acquisition strategies and working capital requirements in the foreseeable future.
On November 20, 1996, the Company reached agreement with Lehman Brothers for the refinancing of the Company's 11-5/8% Senior Secured Notes. Lehman Brothers has agreed to underwrite a new $115 million debt facility to replace the existing Senior Secured Notes, which had a balance outstanding of $97.9 million at September 30, 1996. The new debt facility will consist of $90 million in term loans and a revolver of up to $25 million. The refinancing requires the consent of Anacomp's 13% Senior Subordinated Noteholders. The consent solicitation period ends January 17, 1997.
Forward - Looking Statements
The statements contained in this filing on Form 10-K that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Actual results may differ materially from those included in the forward-looking statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Anacomp, Inc.:
We have audited the accompanying consolidated balance sheets of Anacomp, Inc. (an Indiana corporation) and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the four months ended September 30, 1996, the eight months ended May 31, 1996 and the twelve months ended September 30, 1995 and 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 2 to the consolidated financial statements, effective June 4, 1996, the Company emerged from protection under Chapter 11 of the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was confirmed by the Bankruptcy Court on May 20, 1996. In accordance with AICPA Statement of Position 90-7, the Company adopted "Fresh Start Reporting" whereby its assets, liabilities and new capital structure were adjusted to reflect estimated fair values as of May 31, 1996. As a result, the consolidated financial statements for the periods subsequent to May 31, 1996 reflect the Successor Company's new basis of accounting and are not comparable to the Predecessor Company's pre-reorganization consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Anacomp, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for the four months ended September 30, 1996, the eight months ended May 31, 1996 and the twelve months ended September 30, 1995 and 1994 in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective June 30, 1995, the Company changed its method of accounting for the measurement of goodwill impairment.
Indianapolis, Indiana, Arthur Andersen LLP November 15, 1996
CONSOLIDATED BALANCE SHEETS Anacomp, Inc. and Subsidiaries
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
See Note 3 for discussion of non-cash activity related to Fresh Start Reporting and the Reorganization. During 1996, 1995, and 1994 the Company acquired companies and rights to provide future services. In conjunction with these acquisitions, the purchase price consisted of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Anacomp, Inc. and Subsidiaries
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
The consolidated financial statements include the accounts of Anacomp, Inc. ("Anacomp" or the "Company") and its wholly-owned subsidiaries. Material intercompany transactions have been eliminated. Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current presentation.
Due to the Reorganization and implementation of Fresh Start Reporting, the consolidated financial statements for the Reorganized Company (period starting May 31, 1996) are not comparable to those of the Predecessor Company. For financial reporting purposes, the effective date of the emergence from bankruptcy is considered to be the close of business on May 31, 1996.
A black line has been drawn on the accompanying consolidated financial statements to distinguish between the Reorganized Company and the Predecessor Company.
Foreign Currency Translation
Substantially all assets and liabilities of Anacomp's international operations are translated at the year-end exchange rates; income and expenses are translated at the average exchange rates prevailing during the year. Translation adjustments are accumulated in a separate section of stockholders' equity. Foreign currency transaction gains and losses are included in net income.
Segment Reporting
Anacomp operates in a single business segment: providing equipment, supplies and services for information management, including storage, processing and retrieval.
Significant Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from these estimates.
Revenue Recognition
Revenues from sales of products and services or from lease of equipment under sales-type leases are recorded based on shipment of products or performance of services. Under sales-type leases, the present value of all payments due under the lease contracts is recorded as revenue, cost of sales is charged with the book value of the equipment plus installation costs, and future interest income is deferred and recognized over the lease term. Revenues from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the period of the agreements.
Inventories
Inventories are stated at the lower of cost or market, with cost being determined by methods approximating the first-in, first-out basis.
The cost of the inventories is distributed as follows:
Restricted Cash
Restricted cash represents cash reserved as collateral for letters of credit issued by the Company or cash held in escrow primarily to secure certain contingent obligations of the Company. The contingent obligations are primarily related to environmental liabilities and certain insurance policies.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization of property and equipment are generally provided under the straight-line method for financial reporting purposes over the shorter of the estimated useful lives or the lease terms. Tooling costs are amortized over the total estimated units of production, not to exceed three years. In accordance with Fresh Start Reporting, property and equipment were reflected at fair market values as of May 31, 1996 (See Note 3).
Debt Issuance Costs
The Company capitalizes all costs related to its issuance of debt and amortizes those costs using the effective interest method over the life of the related debt instruments. Debt issuance costs were $200,000 and $12.7 million at September 30, 1996 and 1995, respectively, and are included in "Other assets" in the accompanying Consolidated Balance Sheets. During the eight months ended May 31, 1996 and fiscal years 1995 and 1994, the Company amortized $1 million, $5.7 million and $5.3 million, respectively, of debt issuance costs which are included in "Interest expense and fee amortization" in the accompanying Consolidated Statements of Operations. Also, in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7), the Company wrote-off deferred debt issuance costs of $11.1 million upon the date of the bankruptcy filing. These costs are included in "Reorganization Items" in the accompanying Consolidated Statements of Operations for the eight months ended May 31, 1996.
Goodwill
Excess of purchase price over net assets of businesses acquired ("goodwill") is amortized on the straight-line method over the estimated periods of future demand for the related products acquired. Goodwill at September 30, 1996 is being amortized over a three year period. Effective with Fresh Start Reporting, the Company now measures impairment based on future cash flows of the related products.
For the Predecessor Company, effective June 30, 1995, Anacomp elected to modify its method of measuring goodwill impairment to a fair value approach. If it was determined that impairment had occurred, the excess of the unamortized goodwill over the fair value of the goodwill applicable to the business unit was charged to operations. For purposes of determining fair value, the Company valued the goodwill using a multiple of cash flow from operations based on consultation with its investment advisors. Anacomp concluded that fair value was a better measurement of goodwill considering the Company's highly leveraged financial condition. As discussed in Note 8, Anacomp revised its projected operating results in fiscal 1995 which, along with applying Anacomp's revised goodwill accounting policy, resulted in a write-off of $108 million of goodwill for the year ended September 30, 1995. This write-off is reflected in "Special charges" in the accompanying Consolidated Statement of Operations.
Reorganization Value in Excess of Amounts Allocated to Identifiable Assets
As more fully discussed in Note 3, the Company has "reorganization value in excess of amounts allocated to identifiable assets" of $240,344 at September 30, 1996. This asset is being amortized over a 3.5 year period beginning May 31, 1996. The carrying value of the Reorganization Asset will be periodically reviewed if the facts and circumstances suggest that it may be impaired. The Company will measure the impairment based upon future cash flows of the Company over the remaining amortization period.
Other Intangibles
Other intangibles of $21.3 million, net of accumulated amortization of $16.1 million, at September 30, 1995, represent the purchase of the rights to provide microfilm or maintenance services to certain customers and were being amortized on a straight-line basis over 10 years. These unamortized costs were evaluated for impairment each period by determining their net realizable value. As discussed in Note 3, in connection with Fresh Start Reporting, the Company wrote-off the remaining balance of other intangibles at May 31, 1996.
Research and Development
The engineering costs associated specifically with research and development programs are expensed as incurred, and amounted to $1.3 million for the four months ended September 30, 1996, $2.4 million for the eight months ended May 31, 1996, $2.2 million in 1995, and $3 million in 1994. The Company supports several engineering processes, including basic technological research, product development and sustaining engineering support for existing customer installations. The majority of the operating costs for engineering programs in fiscal years 1995 and 1994 related to continued software development for the XFP 2000 COM recorder, which were recorded as deferred software costs.
Deferred software costs are the capitalized costs of software products to be sold in future periods with COM systems or as stand alone product for current COM systems users. The unamortized costs are evaluated for impairment each period by determining their net realizable value. Such costs are amortized over the greater of the estimated units of sale or under the straight-line method not to exceed five years. Due to lower than expected sales of new software products introduced in 1995, Anacomp revised its projected future sales and operating results of software products through 1999. As a result, during 1995 Anacomp wrote off $20.3 million of deferred software costs and established a reserve of $8.6 million (none of which exists at September 30, 1996) for future payments to IBM Pennant Systems for software royalty and system support obligations which are not recoverable based on these revised projections (See Note 18). These charges are reflected in "Special charges" in the accompanying Consolidated Statement of Operations for the fiscal year ended September 30, 1995. Unamortized deferred software costs remaining as of September 30, 1996 total $4.2 million and are included in "Other assets" on the accompanying Consolidated Balance Sheets.
Sale-Leaseback Transactions
Anacomp entered into sale-leaseback transactions of $19.3 million in 1995 and $11.9 million in 1994 relating to COM systems installed in the Company's data service centers. Part of the proceeds were treated as fixed asset sales and the remainder as sales of equipment. Revenues of $3.5 million and $5.6 million were recorded for the years ended September 30, 1995 and 1994, respectively. All profits were deferred and were being recognized over the applicable leaseback periods. In connection with Fresh Start Reporting as discussed in Note 3, the deferred profit amount was reduced to zero. Concurrently, the Company established an unfavorable lease reserve related to these leases in the amount of $8.6 million. The unfavorable lease reserve is being amortized over the applicable lease periods.
Accrued Lease Reserves
Other noncurrent liabilities include reserves established for unfavorable facility and equipment lease commitments, vacant facilities and related future lease costs. Total obligations recorded for these unfavorable lease commitments and future lease and related costs at their estimated amounts were $11.4 million and $7.5 million at September 30, 1996 and 1995, respectively. The current portion of these obligations was $6.8 million and $2 million as of September 30, 1996 and 1995, respectively, and is included in "Other accrued liabilities" and "Accounts payable" in the accompanying Consolidated Balance Sheets.
Income Taxes
In general, Anacomp's practice has been to reinvest the earnings of its foreign subsidiaries in those operations and to repatriate those earnings only when it was advantageous to do so. In 1995, Anacomp changed its practice whereby the Company now repatriates these earnings. As a result, Anacomp recorded deferred taxes of $8.8 million on all undistributed foreign earnings in 1995.
In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 mandates the liability method for computing deferred income taxes and requires that the benefit of certain loss carryforwards be estimated and recorded as an asset unless it is "more likely than not" that the benefit will not be realized. Another principal difference is that changes in tax rates and laws will be reflected in income from continuing operations in the period such changes are enacted.
Anacomp adopted FAS 109 in the first quarter of fiscal 1994. Under FAS 109, the Company recorded a significant deferred tax asset in 1994 to reflect the benefit of loss carryforwards that could not be recognized under prior accounting rules. The recording of this asset reduced goodwill and increased income as discussed in more detail in Note 17. During 1995, the valuation allowance was increased to reduce the deferred tax asset to zero as a result of the Company's deteriorating financial condition.
Consolidated Statements of Cash Flows
Anacomp considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. These temporary investments, primarily repurchase agreements and other overnight investments, are recorded at cost, which approximates market.
NOTE 2. FINANCIAL REORGANIZATION:
On May 20, 1996 (the "Confirmation Date"), the U.S. Bankruptcy Court confirmed the Company's Third Amended Joint Plan of Reorganization (the "Reorganization"), and on June 4, 1996, the Company emerged from bankruptcy. Pursuant to the Reorganization, on such date certain indebtedness of the Company was canceled in exchange for cash, new indebtedness, and /or new equity interests, certain indebtedness was reinstated, certain other prepetition claims were discharged, certain claims were settled, executory contracts and unexpired leases were assumed or rejected, and the members of a new Board of Directors of the Company were designated. The Company simultaneously distributed to creditors approximately $22 million in cash, $112.2 million principal amount of its 11-5/8% Senior Secured Notes due 1999 (the "Senior Secured Notes") and $160 million principal amount of its 13% Senior Subordinated Notes due 2002 (the "Senior Subordinated Notes"), equity securities consisting of 10 million shares of new common stock and 362,694 warrants, each of which is convertible into 1.0566 shares of new common stock during the five year period ending June 3, 2001 at an exercise price of $11.57 per share.
The process began January 5, 1996, when Anacomp filed a Prenegotiated Plan of Reorganization with the U.S. Bankruptcy Court in Delaware under Chapter 11 of the U.S. Bankruptcy Code. The Company was in default under substantially all of its debt agreements as a result of its failure to make $89.7 million of principal payments scheduled for April 26, 1995 and October 26, 1995 on the senior secured credit facilities (including $60 million relating to the revolving loan agreement which expired on October 26, 1995), $11.4 million of principal and interest payments on the 9% Convertible Subordinated Debentures which were due January 15, 1996, $34.1 million of interest payments scheduled for May 1, 1995 and November 1, 1995 on its Senior Subordinated Notes, and $3.2 million of interest payments scheduled for July 15, 1995 and January 15, 1996 on the 13.875% Subordinated Debentures, as well as certain financial covenant violations, and the cross-default provisions of the other debt agreements.
As noted above, upon emerging from bankruptcy, the Company's Revolving Loan, Multi-Currency Revolving Loan, Term Loans, Series B Senior Notes, 15% Senior Subordinated Notes, 13.875% Convertible Subordinated Debentures and 9% Convertible Subordinated Debentures were canceled. In addition, the Company's 8.25% Cumulative Convertible Redeemable Exchangeable Preferred Stock, Common Stock, Warrants and Stock Options were canceled. In connection therewith, the Company issued new debt and equity securities as mentioned above and described in more detail in Notes 14 and 16.
NOTE 3. FRESH START REPORTING:
As of May 31, 1996, the Company adopted Fresh Start Reporting in accordance with SOP 90-7. Fresh Start Reporting resulted in material changes to the Consolidated Balance Sheet, including valuation of assets, intangible assets (including goodwill) and liabilities at fair market value and valuation of equity based on the appraised reorganization value of the ongoing business.
The Company's reorganization value of $350 million (the approximate fair value) was based on the consideration of many factors and various valuation methods, including discounted cash flows, selected publicly traded Company market multiples, selected acquisition transaction multiples and other applicable ratios and valuation techniques believed by the Company's management and its financial advisors to be representative of the Company's business and industry. The excess of the reorganization value over the fair value of identifiable assets and liabilities is reported as "Reorganization value in excess of identifiable assets" in the accompanying Consolidated Balance Sheets and is being amortized over a three and a half year period. The Company obtained an independent appraisal of certain property and equipment to support the fair values of such assets.
The Reorganization and the adoption of Fresh Start Reporting resulted in the following adjustments to the Company's Consolidated Balance Sheet for the period ended May 31, 1996:
Explanations of the above adjustment columns are as follows:
a) To adjust current assets to fair market value.
b) To adjust property and equipment to estimated current fair value.
c) To reflect the write-off of excess of purchase price over net assets of businesses acquired and other intangibles.
d) To provide income tax expense for gain on discharge of indebtedness, reflected as a reduction in the goodwill of the Predecessor Company related to the utilization of pre-acquisition NOLs.
e) To establish the reorganization value in excess of identifiable assets. The reorganization value in excess of identifiable assets is calculated below (in thousands):
New debt $270,234 New equity 79,766
Reorganization Value 350,000 Plus: Fair value of identifiable liabilities 140,190 Less: Fair value of identifiable assets (222,730)
$267,460
f) To adjust other long-term assets to fair market value.
g) To write-off the remaining debt issue costs.
h) To reflect the cancellation of the old debt and related accrued interest.
i) To reflect issuance of new current and long-term debt.
j) To adjust current liabilities to fair market value.
k) To reflect the cancellation of the old preferred stock.
l) To reflect the elimination of stockholders' equity of the Predecessor Company.
m) To reflect the issuance of 10 million shares of new common stock (par value $.01) at estimated fair market value.
n) To reflect the extraordinary credit resulting from discharge of indebtedness. The extraordinary credit, net of taxes, is calculated below (in thousands):
Historical carrying value of old debt securities $379,256 Historical carrying value of related accrued interest 48,500 Unamortized portion of deferred debt issuance costs (600) Market value of consideration exchanged for the old debt: Plan securities (face value $279,691) (265,948) New common stock (10 million new shares issued) (79,766)
81,442 Tax provision (d) (29,000)
Extraordinary credit $ 52,442
The following Pro Forma Condensed Financial Information for the twelve months ended September 30, 1996 and 1995, have been prepared giving effect to the sale of the Image Conversion Services ("ICS") Division and the adjustments related to the consummation of the Reorganization for interest expense and intangible asset amortization. The Condensed Financial Information was prepared as if the Pro Forma adjustments had occurred on October 1, 1995 and October 1, 1994, respectively. This information does not purport to be indicative of the results which would have been obtained had such transactions in fact been completed as of the date hereof and for the periods presented or that may be obtained in the future.
Anacomp, Inc. and Subsidiaries Pro Forma Condensed Financial Information
NOTE 4. REORGANIZATION ITEMS:
In accordance with SOP 90-7, expenses of the Predecessor Company resulting from the Chapter 11 Reorganization are reported separately as reorganization items in the accompanying Consolidated Statement of Operations, and are summarized below:
NOTE 5. SALE OF ICS DIVISION:
Effective November 1, 1995, Anacomp sold its ICS Division for approximately $13.5 million, which resulted in a net gain to the Company of $6.2 million that is reflected in other income (expense) in the accompanying Consolidated Statement of Operations. The proceeds from this sale were used to reduce the principal balance on certain senior debt. The ICS Division performed source document microfilm services at several facilities around the country generating approximately $20 million of revenues per year.
NOTE 6. RESTRUCTURING CHARGES:
Included in the operating results for 1995 are restructuring charges of $32.7 million. These charges were the result of the Company's reassessment of its strategy for ongoing financial improvement and a decision to downsize or exit certain areas of its business. Specifically, the Company closed its Omaha, Nebraska magnetic media manufacturing facility, exited the manufacture of readers and reader/printers at its San Diego, California manufacturing facility and reduced headcount worldwide. The restructuring charges included severance costs of $5.9 million, which included personnel related to magnetics media manufacturing, reader and reader/printer manufacturing and other various personnel associated with the worldwide headcount reduction. Approximately 400 people were terminated pursuant to these plans. Also included in restructuring charges were inventory write downs of $9.1 million, excess facility reserves of $7.7 million and other reserves of $10 million. The Company completed these restructuring activities during fiscal 1996. The actual costs associated with the restructuring did not vary significantly from the previously reported amounts.
NOTE 7. FINANCIAL RESTRUCTURING COSTS:
On April 6, 1995, Anacomp announced that it had withdrawn its proposed offering of $225 million Senior Secured Notes and a related offer to purchase up to $50 million of the Company's outstanding 15% Senior Subordinated Notes. The offering would have deferred an aggregate of $153 million in scheduled principal payments in fiscal years 1995 through 1998, thereby providing Anacomp with increased liquidity and additional cash for product development. Costs directly related to these activities of $6 million are included as "Financial restructuring costs" in the accompanying Consolidated Statements of Operations for fiscal year 1995.
NOTE 8. EXCESS OF PURCHASE PRICE OVER NET ASSETS OF BUSINESSES ACQUIRED (GOODWILL):
Goodwill related to the micrographics business as of September 30 is summarized as follows (dollars in thousands):
Anacomp failed to achieve its original projections of fiscal 1995 operating results and experienced lower than expected sales of new software products first introduced in January 1995. In light of Anacomp's withdrawn note offering, disappointing financial performance and default on its indebtedness, the Company prepared a revised business plan and operating forecast through 1999.
Based on these developments and in connection with the change in accounting discussed in Note 1, Anacomp determined that goodwill had been impaired and measured the impairment based on a fair value approach. As required by generally accepted accounting principles, this accounting change, which amounted to a charge of $108 million, was recorded as a change in estimate and was included in the results of operations for the quarter ended June 30, 1995.
NOTE 9. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information for certain financial instruments. The carrying amounts for trade receivables and payables are considered to be their fair values. The carrying amounts and fair values of the Company's other financial instruments at September 30, 1996, and 1995, are as follows:
The September 30, 1996 estimated fair value of Long-Term Debt was based on quoted market values or discounted cash flow.
The September 30, 1995 estimated fair values of Long-Term Debt and Redeemable Preferred Stock were based on a restructuring proposal prepared as a result of discussion and negotiations with representatives of the lenders at that time in connection with a "prepackaged" plan of reorganization.
NOTE 10. ACQUISITIONS:
During the three years ended September 30, 1996, Anacomp made the acquisitions set forth below, each of which has been accounted for as a purchase. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant.
Fiscal 1996
During fiscal 1996, Anacomp acquired certain assets of a micrographics equipment and supplies business. The acquisition was effective July 15, 1996 and total consideration was $4.3 million, of which approximately $2.4 million was assigned to excess of purchase price over net assets acquired. The consideration consisted of $3.8 million in cash and a one-year note payable of $500,000 which accrues interest at prime plus 2.75%.
Fiscal 1995
During fiscal 1995, Anacomp made no significant acquisitions.
Fiscal 1994
During fiscal 1994, Anacomp acquired 16 data service centers or the related customer base (all were incorporated with existing Anacomp service centers), a magnetics media manufacturing company and the customer base of a micrographics supplies business. Total consideration for these acquisitions was $39.1 million, of which approximately $24.2 million was assigned to excess of purchase price over net assets of businesses acquired and other intangible assets. In connection with these acquisitions, Anacomp issued $17.2 million of its common stock and increased debt and accrued liabilities by $4.3 million.
National Business Systems
One of the acquisitions included above was the purchase of the COM services customer base of 14 data service centers operated by National Business Systems, Inc. ("NBS"). The acquisition was effective on January 3, 1994, and the acquisition cost consisted of the following (dollars in thousands):
Cash paid to NBS shareholders $ 7,400
Common stock issued to NBS shareholders 7,400
Acquisition costs incurred 416
$ 15,216
Anacomp issued 1,973,000 common shares to the NBS shareholders at a price of $3.75 per share. As part of the acquisition agreement, Anacomp agreed to provide stock price protection at the end of two years on those shares so designated by the NBS shareholders (1,128,000 of the shares issued were subject to this protection). Related to this price protection, on February 15, 1996, Anacomp issued 1,127,143 additional shares of stock to NBS shareholders. As a result of the Reorganization, discussed in Note 2, this price protection is no longer in effect.
Graham Magnetics
Another of the acquisitions included above was the purchase of Graham Acquisition Corporation ("Graham"), a magnetics media manufacturing company. The acquisition was effective on May 4, 1994, and the acquisition cost consisted of the following (dollars in thousands):
Anacomp issued 2,129,000 common shares to the Graham shareholders based on an agreed upon per share price. However, to determine the acquisition cost, the shares were valued at the market price on the date of closing.
Contingent consideration of $7.6 million was payable in Anacomp common stock and was based upon defined future earnings through September 1997. The contingent consideration amount was $144,000 for fiscal 1994 and zero for fiscal 1995. As a result of the Reorganization, discussed in Note 2, this contingency is no longer in effect.
Anacomp also issued 360,000 common shares to a Graham creditor at $3.57 per share to reduce the note payable to $4.2 million. The note was unsecured and bore interest at 10%. Principal payments of $345,000 plus accrued interest were payable quarterly beginning July 15, 1994. The note holder could at any time require Anacomp to prepay any amount of the note by issuing common stock. The shares of common stock to be issued were equal to the prepayment amount divided by $3.57. In connection with the Plan of Reorganization, the original note was canceled and a new promissory note was issued in the amount of $1.2 million. The note did not bear interest and was payable in two installments; $800,000 due within thirty days of the effective date of the bankruptcy, and $400,000 due on or before October 30, 1996. The outstanding note balance was $400,000 and $2.5 million at September 30, 1996 and 1995, respectively. The note was paid off subsequent to September 30, 1996.
NOTE 11. SKC AGREEMENT:
Anacomp has entered into a supply agreement (the "Supply Agreement") with SKC America, Inc., a New Jersey corporation ("SKCA"), and SKC Limited ("SKCL"), an affiliated corporation of SKCA organized pursuant to the laws of the Republic of Korea. SKCA and SKCL are collectively referred to as "SKC". The Supply Agreement expires in December 2003. Pursuant to the Supply Agreement, Anacomp purchases substantially all of its requirements for coated duplicate microfilm from SKC. Pursuant to the Supply Agreement, SKC also provides the Company with a substantial portion of its polyester requirements for its magnetic media products.
In connection with the Supply Agreement, SKC also provided the Company with a $25 million trade credit facility (secured by up to $10 million of products sold to the Company by SKC), all of which is outstanding at September 30, 1996. The trade credit arrangement bears interest at 2.5% over the prime rate of The First National Bank of Boston (10.75% as of September 30, 1996).
In connection with an amendment to the Supply Agreement as of the effective date under the Plan of Reorganization, the Company agreed to certain price increases, retroactive to 1994, and agreed to make the following deferred payments related to the retroactive price increases to SKC (which are accrued in "Other accrued liabilities" in the accompanying Consolidated Balance Sheets): (a) $400,000 in 1997: (b) $600,000 in 1998; (c) $800,000 in 1999; (d) $800,000 in 2000; and (e) 1,000,000 in 2001.
NOTE 12. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
NOTE 13. LONG-TERM RECEIVABLES:
Lease contracts receivable result from customer leases of products under agreements which qualify as sales-type leases. Annual future lease payments to be received under sales-type leases are as follows:
NOTE 14. LONG-TERM DEBT: Long-term debt is comprised of the following:
Senior Secured Notes
In connection with the Reorganization, the Company issued $112.2 million aggregate principal amount of 11- 5/8% Senior Secured Notes due September 30, 1999. Interest is payable on March 31 and September 30 each year. The Company pre-paid the September 30, 1996, installment of $14.3 million on September 3, 1996. The Company is required to redeem the remaining notes at par on each interest payment date according to the following schedule (in thousands):
March 31, 1997 $14,286 September 30, 1997 16,163 March 31, 1998 16,161 September 30, 1998 17,100 March 31, 1999 17,100 September 30, 1999 17,092
$97,902
The Senior Secured Notes are redeemable at the option of the Company, in whole or in part, at any time, at 100% of the principal amount thereof, plus accrued and unpaid interest. The Company is required in certain circumstances to make offers to purchase the Senior Secured Notes then outstanding at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of certain sales or other distributions of assets by the Company or certain of its subsidiaries. Also, upon a change of control, the Company is required to make an offer to purchase the Senior Secured Notes then outstanding at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest.
The Senior Secured Notes are senior secured obligations of the Company and will rank pari passu with all other existing and future senior obligations of the Company, and senior to all existing and future subordinated or junior indebtedness of the Company. The collateral securing the Senior Secured Notes consists of substantially all of the assets of the Company and all future acquired assets of the Company to the extent such assets are acquired by the Company without secured financing.
The indenture related to the Senior Secured Notes contains covenants limiting among other things, (i) the incurrence of additional indebtedness by the Company and certain of its subsidiaries, (ii) the payment of dividends on, and the redemption of, capital stock of the Company and certain of its subsidiaries, (iii) the redemption of certain subordinated obligations of the Company and certain of its subsidiaries and the making of certain investments by the Company and certain of its subsidiaries, (iv) the sale by the Company and certain of its subsidiaries of assets and certain subsidiary stock, (v) transactions between the Company and its affiliates, (vi) liens on the collateral securing the Senior Secured Notes, (vii) consolidations and mergers and transfers of all or substantially all of the Company's and certain of its subsidiaries' assets and (viii) capital expenditures. All of the limitations and prohibitions are subject to a number of qualifications and exceptions.
The indenture also contains a covenant requiring the Company to maintain a minimum interest coverage ratio. At September 30, 1996, the Company was in compliance with all covenants under the Senior Secured Notes indenture.
Senior Subordinated Notes
In connection with the Reorganization, the Company issued $160 million aggregate principal amount of 13% Senior Subordinated Notes due June 2002. This debt was recorded at its estimated fair value of $146.3 million. The difference between the aggregate principal amount and the fair value of the debt will be amortized as a charge to interest expense over the life of the debt. Interest is payable on June 30 and December 31 each year, beginning on December 31, 1996. For the interest payable on December 31, 1996 and June 30, 1997, the Company will provide Payment-In-Kind ("PIK") notes in satisfaction of its interest obligation rather than a cash settlement. The PIK notes will have a principal amount corresponding to the amount of interest due on the notes on the related interest payment date.
The Company is required to redeem prior to June 30, 2001 the principal amount of the Senior Subordinated Notes equal to the aggregate principal amount of PIK notes issued prior to such date, plus any accrued and unpaid interest on the PIK notes, at a redemption price equal to the price that would be then applicable in the case of an optional redemption. The remaining Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time, at various redemption prices ranging from 103% to 101.5% of the principal amount thereof through December 31, 2001. Thereafter, the Senior Subordinated Notes may be redeemed at the aggregate principal amount thereof. Also, upon a change in control, the Company is required to make an offer to purchase the Senior Subordinated Notes then outstanding at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
The Senior Subordinated Notes are unsecured senior subordinated obligations of the Company and rank pari passu with all other existing and future subordinated obligations of the Company. The payment of principal and interest is subordinated and subject to the prior payment in full of the Company's senior indebtedness.
The indenture related to the Senior Subordinated Notes contains covenants limiting, among other things, (i) the incurrence of additional indebtedness by the Company and certain of its subsidiaries, (ii) the payment of dividends on, and the redemption of, capital stock of the Company and certain of its subsidiaries, (iii) the redemption of certain subordinated obligations of the Company and certain of its subsidiaries and the making of certain investments of the Company and certain of its subsidiaries, (iv) the sale by the Company and certain of its subsidiaries of assets and certain subsidiary stock, (v) transactions between the Company and its affiliates, (vi) sale/leaseback transactions by the Company and certain of its subsidiaries, (vii) consolidations and mergers and transfers of all or substantially all of the Company's and certain of its subsidiaries' assets and (viii) capital expenditures. All of the limitations and prohibitions are subject to a number of qualifications and exceptions. The indenture also contains a covenant requiring the Company to maintain a minimum interest coverage ratio. At September 30, 1996, the Company was in compliance with all covenants under the Senior Subordinated Notes indenture.
NOTE 15. REDEEMABLE PREFERRED STOCK:
Anacomp issued 500,000 shares of 8.25% Cumulative Convertible Redeemable Exchangeable Preferred Stock (the "Preferred Shares") in a 1987 private placement. Each Preferred Share had a preference value of $50 and was convertible into Anacomp common stock at a conversion price of $7.50. The Preferred Shares were recorded at fair value on the date of issuance less issue costs. The excess of the preference value over the carrying value was accreted by periodic charges to retained earnings over the original life of the issue. At September 30, 1995, 500,000 shares were issued and outstanding. In connection with the Reorganization discussed in Note 2 , the Preferred Shares were canceled.
NOTE 16. CAPITAL STOCK:
Reorganized Company
Preferred Stock
The Board of Directors of the Company has the ability, at its discretion, to create one or more series of Preferred Stock and shall determine the preferences, limitations, and relative voting and other rights of one or more series of Preferred Stock.
Stock Option Plans
On July 22, 1996, the Company's Board of Directors approved the 1996 Restructure Recognition Incentive Plan. Under this plan, effective August 22, 1996, the Company awarded to employees 947,500 stock options to acquire new common stock and 99,050 shares of restricted new common stock.
With regard to the stock options, the options were granted an exercise price of $4.63 per share of new common stock which will result in approximately $3.2 million of compensation expense over the vesting period of the options based on the market value of the stock at August 22, 1996. 75% of the options vest ratably during the period from June 30, 1997 to June 30, 1999. 25% of the options vest on September 30, 1999, provided certain performance goals have been met; otherwise the options vest on June 30, 2003. During 1996, approximately $975,000 was recognized as compensation expense related to the options. The options expire 10 years after the date of the grant. As of September 30, 1996, none of the options were exercisable.
With regard to the restricted shares of new common stock, the shares vest immediately and thus the Company recognized approximately $0.8 million of compensation expense immediately upon granting the award based on the market value of the Company's stock on August 22, 1996. The shares are restricted from sale or transfer by the recipient employees until September 30, 1997. Effective December 6, 1996, 34,650 shares of restricted stock were returned by employees to the Company.
In addition, on August 22, 1996, the Company's Board of Directors approved the 1996 Long-Term Incentive Plan, which provides for the future issuance of various forms of stock related awards including options, stock appreciation rights and restricted shares. The Company has reserved 1,400,000 shares of new common stock for future issuance under this plan. Future awards, including the nature of the awards and related exercise prices, are to be determined at the discretion of the Compensation Committee of the Board of Directors in accordance with the plan provisions. As of September 30, 1996, no awards were issued related to this plan. Subsequent to September 30, 1996, 438,179 stock option awards were made to certain Executive Officers and Non-Employee Directors. At current market value on the date of grant.
Warrants
In connection with the Reorganization discussed in Note 2, Anacomp issued 362,694 new warrants to certain creditors and previous common and preferred stockholders. Each new warrant was convertible into one share of new common stock at an exercise price of $12.23 per share. In connection with the rights offering discussed in Note 25, each new warrant is now convertible into 1.0566 shares of new common stock at an exercise price of $11.57 per share. The new warrants expire on June 3, 2001.
Other Items
At September 30, 1996, approximately 1.3 million shares of Anacomp new common stock were reserved for exercise of stock options, exercise of warrants and other corporate purposes.
Predecessor Company
Stock Option Plans
Anacomp's stock option plans provided that the exercise price of the options be determined by the Board of Directors (the "Board"), and in no case be less than 100% of fair market value at the time of grant for qualified options, or less than the par value of the stock for non-qualified options. An option could be exercised subject to such restrictions as the Board may impose at the time the option was granted. In any event, each option terminated not later than 10 years after the date on which it was granted.
No shares were available for grant at May 31, 1996. Shares available for grant under the plans were 1,401,328 and 725,827 at September 30, 1995 and 1994, respectively. Options outstanding, were as follows:
All options existing at May 31, 1996 were canceled in connection with the Company's Reorganization discussed in Note 2.
Warrants
In October 1990, Anacomp issued 6,825,940 warrants ("Old Warrants") to holders of the 15% Senior Subordinated Notes. Each Old Warrant entitled the holder to purchase one common share at a price of $1.873 and was exercisable through November 11, 2000, the date of expiration. In connection with the Reorganization discussed in Note 2, the Old Warrants were canceled.
NOTE 17. INCOME TAXES:
The components of income (loss) before income taxes and extraordinary credit were:
The components of income tax expense after utilization of net operating loss carryforwards and the adjustment of tax reserves are summarized below:
In addition, for the eight months ended May 31, 1996, there was an additional expense of $29 million related to the tax liability associated with the gain on discharge of indebtedness. This liability was offset by the utilization of net operating loss carryforwards ("NOLs"). See Note 3 for further discussion.
The Company adopted FAS 109 in the first quarter of fiscal 1994 and recorded a deferred tax asset of $95 million representing the federal and state tax savings from NOLs and tax credits. The Company also recorded a valuation allowance of $60 million reducing the deferred tax asset to a net $35 million. Recognition of the deferred tax asset reduced goodwill by $27 million and provided a cumulative effect increase to income of $8 million. During 1994, the net deferred tax asset was reduced to $29 million, reflecting usage of the asset to reduce income taxes payable by $6 million. During 1995, tax effects of future differences and carryforwards increased from $86 million to $108.4 million, an increase of $22.4 million resulting from the tax effect of the 1995 taxable loss ($5.6 million) and the tax effect of an increase in cumulative temporary differences ($16.8 million) between income reported for financial reporting purposes and for tax purposes. The valuation allowance was increased from $57 million to $108.4 million to reduce the net deferred tax asset to zero as a result of the uncertainty associated with the utilization of these assets in future periods due to the Company's deteriorating financial condition prior to the bankruptcy.
During 1996, tax effects of future differences and carryforwards decreased from $108.4 million to $85.4 million, a decrease of $23 million resulting primarily from the tax effect of a reduction in the Reorganized Company's NOLs due to cancellation of indebtedness in connection with the bankruptcy reorganization ($24.5 million) and the tax effect of the 1996 taxable income ($8.5 million) offset by an increase in tax credits, principally foreign tax credits ($9 million).
The components of deferred tax assets and liabilities at September 30, 1996 and September 30, 1995 are as follows:
At September 30, 1996, the Reorganized Company has NOLs of approximately $133 million available to offset future taxable income. This amount will increase to $191 million as certain termporary differences reverse in future periods. Usage of these NOLS by the Reorganized Company is limited to approximately $4 million annually. However, the Reorganized Company may authorize the use of other tax planning techniques to utilize a portion of the remaining NOLs before they expire. In any event, the Reorganized Company expects that substantial amounts of the NOLs will expire unused.
The Reorganized Company has tax credit carryforwards of approximately $16.6 million. These tax credits are principally foreign tax credit carryforwards resulting from inclusion of the accumulated earnings and profits of the Reorganized Company's foreign subsidiaries in U.S. taxable income in 1996. The Reorganized Company expects that these credits will expire unused.
The tax benefits of pre-reorganization net deferred tax assets will be reported first as a reduction of "Reorganization value in excess of identifiable assets" and then as a credit to equity. These tax benefits will not reduce income tax expense.
NOTE 18. COMMITMENTS AND CONTINGENCIES:
Anacomp has commitments under long-term operating leases, principally for building space and data service center equipment. Lease terms generally cover periods from five to twelve years. The following summarizes the future minimum lease payments under all noncancelable operating lease obligations, including the unfavorable lease commitments and vacant facilities discussed in Note 1, which extend beyond one year:
(Dollars in thousands) Year ended September 30, -----------------------------------------------------------------
1997....................................... $ 18,307
1998....................................... 14,350
1999....................................... 5,561
2000....................................... 2,087
2001....................................... 1,097
2002 and thereafter........................ 7,387
48,789
Lessliabilities recorded as of September 30, 1996 related to unfavorable lease commitments and future lease costs for vacant facilities ($6,831 reflected in current liabilities) (11,439)
$ 37,350
The total of future minimum rentals to be received under noncancelable subleases related to the above leases is $1.2 million. No material losses in excess of the liabilities recorded are expected in the future.
In November 1993, Anacomp and Pennant Systems, a division of IBM, announced a joint effort to develop software which will allow Anacomp's XFP 2000 to process and image IBM Advanced Function Presentation ("AFP") formatted data. This program resulted in the XFP 2000 being able to output AFP data streams, including those containing fonts, logos, signatures and other images, onto microfiche.
As consideration for the development of the AFP, Anacomp paid Pennant Systems a development fee of $6.5 million. Anacomp was also required to pay Pennant Systems minimum annual royalty payments for the licensed system installations for six years and for ongoing system support which began in December 1995 and continued for 10 years. As of September 30, 1995, Anacomp established a reserve of $7.7 million for future payments to Pennant Systems for software royalty and systems support obligations which were not recoverable as more fully discussed in Note 1. In connection with the Company's financial restructuring during 1996, this contract was renegotiated with Pennant and, accordingly, no reserve requirements exist at September 30, 1996. The renegotiated contract requires Anacomp to make future license fee payments to Pennant Systems of $625,000 annually through fiscal year 1999.
The Company sold $10.5 million and $5.9 million of lease receivables in the twelve months ended September 30, 1995 and 1994, respectively. Under the terms of the sale, the purchasers have recourse to the Company should the receivables prove to be uncollectable. The amount of recourse at September 30, 1996 is $5.3 million.
Anacomp also is involved in various claims and lawsuits incidental to its business and management believes that the outcome of any of those matters will not have a material adverse effect on its consolidated financial position or results of operations.
NOTE 19. SUPPLEMENTARY INCOME STATEMENT INFORMATION:
NOTE 20. OTHER ACCRUED LIABILITIES:
Xidex Corporation, a predecessor company of Anacomp, was designated by the United States Environmental Protection Agency ("EPA") as a potentially responsible party for investigatory and cleanup costs incurred by state and federal authorities involving locations included on a list of EPA's priority sites for investigation and remedial action under the federal Comprehensive Environmental Response, Compensation, and Liability Act. The EPA reserve noted above relates to its estimated liability for cleanup costs for the aforementioned locations and other sites. No material losses are expected in excess of the liabilities recorded above.
NOTE 21. EARNINGS (LOSS) PER SHARE:
The computation of earnings (loss) per share is based upon the weighted average number of common shares outstanding during the period plus (in periods in which they have a dilutive effect) the effect of common shares contingently issuable, primarily from stock options and exercise of warrants. Fully diluted earnings (loss) per share also reflect additional dilution related to stock options due to the use of the market price at the end of the period, when higher than the average price for the period. For the four months ended September 30, 1996, only primary earnings per share is presented due to the loss reported for the period.
The weighted average number of common shares outstanding and net income (loss) per common share for periods prior to May 31, 1996 have not been presented because, due to the Reorganization and implementation of Fresh Start Reporting, they are not comparable to subsequent periods.
The weighted average number of common and common equivalent shares used to compute earnings per share is:
Four Months Ended September 30, 1996
Common and common equivalent shares....................... 10,033,576
NOTE 22. INTERNATIONAL OPERATIONS:
Anacomp's international operations are conducted principally through subsidiaries, a substantial portion of whose operations are located in Western Europe. Information as to U.S. and international operations for the four months ended September 30, 1996, the eight months ended May 31, 1996 and the twelve months ended September 30, 1995 and 1994 is as follows:
Four Months Ended September 30, 1996 - Reorganized Company
NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED):
NOTE 24. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES:
The following is a summary of activity in the Company's valuation and qualifying accounts and reserves for the periods ended September 30, 1996 and May 31, 1996 and for the twelve months ended September 30, 1995 and 1994:
NOTE 25. RIGHTS OFFERING:
On October 30, 1996, the Company completed a rights offering to its existing shareholders resulting in the issuance of 3.6 million shares of new common stock. For each share of Anacomp new common stock held as of the close of business on September 18, 1996, the Company distributed 0.36 rights to purchase additional shares of new common stock at a subscription price of $6.875 per share. The Company will use the proceeds of the rights offering, approximately $25 million, for the acquisition of businesses, assets and technologies.
NOTE 26. SUBSEQUENT EVENTS (Unaudited):
On November 20, 1996, the Company reached agreement with Lehman Brothers for the refinancing of the Company's 11-5/8% Senior Secured Notes. Lehman Brothers has agreed to underwrite a new $115 million debt facility to replace the existing Senior Secured Notes, which had a balance outstanding of $97.9 million at September 30, 1996. The new debt facility will consist of $90 million in term loans and a revolver of up to $25 million. The refinancing requires the consent of Anacomp's 13% Senior Subordinated Noteholders. The consent solicitation period ends January 17, 1997.
Subsequent to September 30, 1996, the company acquired the customer bases and other specified assets of three businesses: Archive Storage, Inc. ("ASI"), Precision Data Services, Inc. ("PDS") and Integra Technologies Corporation ("ITC").
ASI is a Massachusetts company that specializes in the long-term storage of critical business records. The ASI purchase price consisted of $180,000 cash at closing, the assumption of a $70,000 debt obligation, and a contingent cash payment of up to $500,000 based on future earnings of Anacomp's storage business.
PDS is a service bureau in New York specializing in Computer Output to Microfilm ("COM"). The PDS purchase price was $1.7 million cash at closing.
ITC is a Massachusetts company that provides maintenance services relating to ITC equipment sold for the cleaning, testing, certifying and degaussing of computer tape. The ITC purchase price consisted of $1.5 million cash at closing, the assumption of a $600,000 deferred revenue liability, and a contingent cash payment of up to $2.7 million based on future revenues of the ITC business.