The 10Q is out. You can read it right here. It'll sober ya' up as to the reality of what we're dealing with. Phil has his work cut out, that's for sure.
ANACOMP INC (ANCO.OB)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), including those related to the Company's plans, liquidity needs, potential restructuring and future operations, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; industry trends; industry capacity; competition; raw materials costs and availability; currency fluctuations; the loss of any significant customers or suppliers; changes in business strategy or development plans; successful development of new products; availability, terms and deployment of capital; ability to meet debt service obligations; availability of qualified personnel; changes in, or the failure or inability to comply with, government regulations; and other factors referenced in this report. The words "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions or statements regarding future periods are intended to identify forward-looking statements. All forward-looking statements are inherently uncertain as they involve substantial risks and uncertainties beyond the Company's control. The Company undertakes no obligation to update or revise any forward-looking statements for events or circumstance after the date on which such statement is made. New factors emerge from time to time, and it is not possible for the Company to predict all such factors. Further, the Company cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
OVERVIEW
Anacomp's revenues, operating results, cash flows and liquidity in the first quarter of fiscal 2001 continue to be negatively impacted by a number of factors, including a significant decline in the Company's COM business, restructuring and reorganization of certain of its operations, and negative cash flows related to the docHarbor business unit.
The Company is experiencing substantial liquidity issues and is in default on its senior secured revolving credit facility (the "Facility"), which totaled $57.6 million at December 31, 2000. The Company and the lenders for this facility are operating under an agreement that amends and continues the senior secured revolving credit facility and provides Anacomp with a forbearance of default remedies valid through February 28, 2001. The forbearance agreement places additional restrictions on the facility and
requires the Company to meet additional covenants and operating requirements, including certain spending limitations. The Company and the Bank Group are currently negotiating an extension of the forbearance agreement and an amendment of the existing revolving credit facility.
On October 1, 2000, the Company did not make a required $17 million interest payment to holders of the Company's publicly traded 10-7/8% Senior Subordinated Notes (the "Notes"), which totaled $311 million at December 31, 2000. The Company continues to have discussions with certain holders of these Notes and their legal and financial advisors to consider various alternatives - including possible debt restructuring - to resolve Anacomp's liquidity situation. Credit Suisse First Boston has been engaged to serve as the Company's advisors with respect to these Notes.
In addition to working with lenders and their advisors to address the defaults and seek possible financing alternatives, management is continuing to evaluate all of the Company's operations. New strategic directions are being examined and the Company is determining what other actions might be taken to improve operations and cash flows and help satisfy or restructure debt obligations. Alternatives being explored include possible discontinuance or sale of certain business units or parts thereof and fundamental changes in corporate activities and structure. The Company is in varying stages of discussions with third parties regarding the possible sales of certain assets and lines of business. An example of actions being taken was a reduction in expenditure levels in the Company's docHarbor business unit late in fiscal 2000 to reduce cash outflows. These reductions were designed to bring costs more in line with anticipated revenue growth as well as to comply with requirements imposed by the Company's senior secured lenders. On January 17, 2001, the Company announced it had entered into a non-binding Letter of Intent to sell 100% of the docHarbor business unit to a large corporate buyer. The transaction is subject to certain approvals, due diligence, negotiation of acceptable terms and conditions of a definitive agreement and satisfaction of required closing conditions. It is expected that Anacomp's Document Solutions business will continue to use docHarbor for its Internet-based document services. Although there can be no assurance the sale will be consummated, it is expected that terms of the sale will be finalized in the second quarter of fiscal 2001. If the sale is not completed, the Company will continue to evaluate its docHarbor business in an effort to preserve cash and meet its other commitments. During the first quarter management has continued to take actions in an effort to improve operating results and cash flows.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 VS. THREE MONTHS ENDED DECEMBER 31, 1999
GENERAL. Anacomp reported a net loss of $7.7 million for the three months ended December 31, 2000, compared to a net loss of $15.2 million for the three months ended December 31, 1999. EBIT for the first quarter of fiscal 2001 was $3.2 million compared to EBIT loss of $5.4 million for the three months ended December 31, 1999.
REVENUES. The Company's revenues decreased 19% from $101.8 million for the three months ended December 31, 1999, to $82.1 million for the three months ended December 31, 2000. The decrease was the result of the $17 million decline in COM-related revenues across the Document Solutions and Technical Services business units in addition to a $3 million decrease in digital and renewal revenues across the business units. The Company expects that COM revenues will continue to decline in this fiscal year.
Document Solutions COM related revenues decreased 21% from the prior year period, from $38.6 million to $30.6 million. Revenue contributed by digital services and products decreased 20% over the prior year period, from $19.9 million to $15.9 million. This decrease was primarily related to fewer digital-related contracts in international operations.
Technical Services revenues (including results of operations from the former DatagraphiX business unit) decreased from the prior year period, from $42.5 million to $33.2 million. Approximately $5 million of this decline resulted from declining revenues from the COM maintenance business, and an additional approximately $5 million was due to the discontinuance of manufacturing operations in fiscal 2000 combined with the continuing decline in the market for COM systems and supplies. Prior year COM revenues included $1.1 million related to the sale to Kodak of certain COM systems maintenance contracts for Kodak COM systems.
docHarbor revenues increased $1.5 million versus the prior year period. This was the result of increased revenues from existing customers and new customer orders.
GROSS MARGINS. The Company's gross margin decreased from $37.6 million (37% of revenues) for the three months ended December 31, 1999, to $28.2 million (34% of revenues) for the three months ended December 31, 2000. The decrease in company-wide gross margins was primarily the result of continued declines in COM-related services and supplies sales.
Technical Services gross margins (including results of operations from the former DatagraphiX business unit) decreased from 42% to 34% of revenues in the quarter ended December 31, 2000. This was primarily the result of the lower level of revenues in the current-year quarter and the $1.1 million gross margin recorded in December 1999 from the sale to Kodak of certain COM systems maintenance contracts for Kodak COM systems. Document Solutions gross margin increased slightly to 38% of revenues in the quarter ended December 31, 2000, from 36% of revenues in the prior year period. docHarbor gross margins improved from the prior year period as the result of cost reductions and a reduction in infrastructure development implemented at the end of fiscal year 2000.
ENGINEERING, RESEARCH AND DEVELOPMENT. Engineering, research and development expense decreased from $2.5 million for the three months ended December 31, 1999, to $1.7 million for the three months ended December 31, 2000. This decrease was primarily the result of lower expenses related to the discontinuance of manufacturing operations effective October 1, 2000 and the resulting decrease in support engineering expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses decreased from $23.1 million for the three months ended December 31, 1999, to $20.5 million for the three months ended December 31, 2000. This decrease was primarily the result of cost reduction efforts implemented in the second and third quarters of fiscal 2000, offset in part by increased legal, professional and financial advisory costs.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets decreased 50% from $5.4 million (5% of revenues) for the three months ended December 31, 1999, to $2.7 million (3% of revenues) for the three months ended December 31, 2000. This decrease is primarily the result of the completion of amortization for prior acquisitions and reduced amortization related to impaired intangibles written off in fiscal 2000.
AMORTIZATION OF REORGANIZATION ASSET. Amortization of reorganization assets was $12 million in the fiscal period ended December 31, 1999. This charge in the first quarter of fiscal year 2000 completed the amortization of the reorganization asset.
INTEREST EXPENSE. Interest expense increased from $9.6 million for the three months ended December 31, 1999, to $11.1 million for the three months ended December 31, 2000. This increase was the result of a higher level of borrowings at higher interest rates on the revolving credit facility in the current year period.
PROVISION FOR INCOME TAXES. The provision for income taxes ($387 thousand for the quarter ended December 31, 2000, and $521 thousand for the quarter ended December 31, 1999) related primarily to earnings of certain foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a Facility with a syndicate of banks and Fleet as agent (collectively, "the Bank Group"). The outstanding borrowings under the Facility were $57.6 million at December 31, 2000. The Company is in violation of certain of its financial covenants . During the third quarter of fiscal 2000, the Company reached an agreement with the Bank Group to amend the Facility and to provide Anacomp with a waiver, which was in effect through October 26, 2000, with respect to those covenants of which the Company is in default. On October 26, 2000, the Bank Group declared Anacomp in violation of certain financial covenants of the Facility and the Company entered into a forbearance agreement with the Bank Group to amend the Facility and to delay the exercise of certain rights and remedies provided to the Bank Group under the Facility until February 28, 2001.
As discussed above, the Company is not in compliance with certain of the covenants and is operating under a forbearance agreement with the Bank Group. Management believes that the Company has been in compliance with the forbearance agreement and has made progress in improving the business operations of the Company. Management believes that the Company's ability to continue to meet the Bank Group's objectives by February 28, 2001, will significantly influence the resolution of the debt issues faced by the Company. The Company and the Bank Group are currently negotiating an extension of the forbearance agreement and an amendment of the existing revolving credit facility.
Significant provisions of the forbearance agreement are (a) a reduction of the Facility commitment from $75 million to $64.2 million, with commitment reductions of $400,000 on December 15, 2000 and another $400,000 on January 31, 2001; (b) all proceeds of Company asset dispositions must be used to reduce the outstanding borrowings which will also permanently reduce the Facility commitment; (c) the Eurocurrency interest rate option was suspended and the Base Rate (as defined below) interest rate option was increased by 1%, with the accrual of another 1% to be paid in the event that the outstanding borrowings are not reduced by $20 million by February 28, 2001; (d) the maturity date of the Facility was changed from June 15, 2003 to June 15, 2002; (e) the Company may not provide funds to the docHarbor business unit in excess of an agreed-upon budget; (f) the Company may not remit funds to its foreign subsidiaries; and (g) the Company is prohibited from making any payment in satisfaction of the senior subordinated notes (see Note 5) or any related accrued interest.
As of February 13, 2001, the Facility commitment, as amended, totaled $63.2 million. The Facility is available for borrowings of up to $57.2 million and for letters of credit of up to $6 million.
Loans under the Facility bear interest, payable monthly, at the Base Rate plus 1.75% plus accrued interest of another 1% if the outstanding loans are not reduced by $20 million on February 28, 2001. The "Base Rate" for any day means the higher of (i) the corporate base rate of interest announced by Fleet and (ii) the federal funds rate published by the Federal Reserve Bank of New York on the next business day plus 1/2%.
In the event the Bank Group accelerates payment of Anacomp's outstanding borrowings, the Company's ability to make such payment will be dependent on generating sufficient cash from potential asset sales or obtaining alternate financing (see "Overview"). There can be no assurance that the Company will be able to execute potential asset sales or obtain alternate financing on terms acceptable to the Company, if at all, or in amounts sufficient to satisfy the Company's obligations.
The Company has outstanding $311 million of publicly traded 10-7/8% Senior Subordinated Notes ("the Notes"). An interest payment on the Notes of approximately $17 million is due semi-annually on October 1 and April 1 of each year. The Company did not make the interest payment that was due on October 1, 2000 and does not expect to make the payment due on April 1, 2001. Fleet provided notice to the trustee of the Notes on October 26, 2000 ("the Notice Date") that the Company was in default of certain covenant provisions in the Facility. Under the provisions of the indenture governing the Notes, due to the default under the Facility, the Company cannot make payments in satisfaction of the Notes or any related accrued interest for 179 days from the Notice Date.
The Company continues to have discussions with certain of the holders of the Notes and their legal and financial advisors to explore various alternatives to resolve the Company's liquidity situation, including a possible debt restructuring. The Company has engaged Credit Suisse First Boston to serve as advisors regarding financial alternatives with respect to the outstanding Notes. Because of the missed interest payment, which is an event of default, the Notes have been classified as a short-term obligation in the accompanying condensed consolidated balance sheets.
In the event the Note holders accelerate payment of Anacomp's outstanding Notes, the Company would not have resources available to repay such Notes. Through February 13, 2001, no action has been taken by the Note holders to declare the unpaid principal and interest to be due and payable. There can be no assurance that the Note holders will continue to not declare the Notes and related interest immediately due and payable.
In an event of acceleration of the Facility or the Notes, it is possible that the Company may be required to seek protection under bankruptcy laws, either voluntarily or involuntarily.
The significant operating and liquidity issues being experienced by the Company raise substantial doubt about the Company's ability to continue as a going concern. The Company has prepared its financial statements assuming the Company will continue as a going concern. Accordingly, the financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Anacomp had negative working capital of $375 million at December 31, 2000, compared to negative working capital of $373 million at September 30, 2000. The working capital deficiency is primarily due to $311 million in Notes, $57.6 million of senior secured revolving credit facility and $26 million of accrued interest payable. Net cash provided by continuing operations was $8.9 million for the three months ended December 31, 2000, compared to net cash used in operations of $8.7 million in the comparable prior year period. The $17.6 million improvement to cash flows from operations from the prior year was primarily the result of the non-payment of $17 million in interest expense on the Company's Notes on October 1, 2000.
Net cash used in investing activities was $1 million in the current three-month period, compared to cash used in investing activities of $3.6 million in the comparable prior year period. This decrease reflects the Company's emphasis to control its expenditures to maximize liquidity. Expenditures during both periods were primarily for purchases of equipment.
Net cash provided by financing activities decreased $10.2 million during the three months ended December 31, 2000, from the same period in the prior year. This decrease was principally the result of no borrowings against the Facility in the current year compared to $12 million in borrowings against the Facility in the prior year period.
The Company's cash balance totaled $22.5 million at December 31, 2000 compared to $14 million at September 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Revenues generated outside of the United States, as a percentage of total revenues, were 26% and 32% in the three months ended December 31, 2000 and 1999, respectively. Fluctuations in foreign exchange rates could impact operating results through translation of the Company's subsidiaries' financial statements.
The Company is exposed to market risks related to fluctuations in interest rates on the $311 million of 10 7/8 % Senior Subordinated Notes outstanding at December 31, 2000. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument. Interest rate risk and resulting changes in fair value should not have an impact on the Company's operating results.
In November 2000, the Company liquidated its cross currency swap agreements and received $0.8 million in cash. These proceeds have been reflected as a component of accumulated other comprehensive loss in stockholders' equity (deficit) in the Company's December 31, 2000 Condensed Consolidated Balance Sheet.
The Company's bank revolving credit facility is affected by the general level of U.S. interest rates. The Company had $57.6 million outstanding under its bank line of credit on December 31, 2000. The Company and the Bank Group are currently negotiating an amendment of the existing credit facility. Such re-negotiation could also result in material changes to the interest rates on the Facility. If interest rates were to increase 2%, the Company's annual interest expense would increase approximately $1.2 million based on a $57.6 million outstanding balance.
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