-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Phyh6EPePwyjoho+UCxx/EygTgDPWliRoNRvaHmwn1OgXdzEpnUopWsNybUYST+n v7CJI94K1z8JBTKkTiP/mA== 0000006260-03-000013.txt : 20030814 0000006260-03-000013.hdr.sgml : 20030814 20030814115836 ACCESSION NUMBER: 0000006260-03-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANACOMP INC CENTRAL INDEX KEY: 0000006260 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 351144230 STATE OF INCORPORATION: IN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08328 FILM NUMBER: 03844673 BUSINESS ADDRESS: STREET 1: 15378 AVENUE OF SCIENCE CITY: SAN DIEGO STATE: CA ZIP: 92128 BUSINESS PHONE: 8587163400 MAIL ADDRESS: STREET 1: 15378 AVENUE OF SCIENCE CITY: SAN DIEGO STATE: CA ZIP: 92128 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTEC INC DATE OF NAME CHANGE: 19740314 10-Q 1 f10qq3fy03.txt 10Q Q3 FY03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO____________ Commission File Number: 1-8328 Anacomp, Inc. (Exact name of registrant as specified in its charter) Indiana 35-1144230 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15378 Avenue of Science, San Diego, California 92128-3407 (858) 716-3400 (Address, including zip code, and telephone number, including area code, of principal executive offices) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No As of July 31, 2003, the number of outstanding shares of the registrant's Class A common Stock, $.01 par value per share, was 4,034,500 and the number of outstanding shares of the registrant's Class B common Stock, $0.01 par value per share, was 4,034. ANACOMP, INC. AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements: Condensed Consolidated Balance Sheets at June 30, 2003 and September 30, 2002............................ 2 Condensed Consolidated Statements of Operations Three Months Ended June 30, 2003 and 2002....................... 3 Condensed Consolidated Statements of Operations Nine Months Ended June 30, 2003, Six Months Ended June 30, 2002, and Three Months Ended December 31, 2001........................ 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended June 30, 2003, Six Months Ended June 30, 2002, and Three Months Ended December 31, 2001........................ 5 Notes to the Condensed Consolidated Financial Statements............. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 28 Item 4. Controls and Procedures.................................................. 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................ 30 Item 6. Exhibits and Reports on Form 8-K......................................... 30 SIGNATURES............................................................................... 31 Index to Exhibits........................................................................ 32
PART I - FINANCIAL INFORMATION Item 1. Financial Statements ANACOMP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
Reorganized Company __________________________________________ (in thousands) June 30, September 30, 2003 2002 __________________ ___________________ Assets (Unaudited) Current assets: Cash and cash equivalents........................................... $ 18,044 $ 15,561 Receivable on sale of Swiss subsidiaries............................ 1,794 --- Accounts receivable, net............................................ 30,431 33,990 Inventories, net.................................................... 3,422 3,474 Prepaid expenses and other.......................................... 4,233 6,442 Assets of discontinued operations................................... --- 12,027 __________________ ___________________ Total current assets.................................................... 57,924 71,494 Property and equipment, net............................................. 19,486 21,448 Reorganization value in excess of identifiable net assets............... 72,827 73,227 Intangible assets, net.................................................. 9,325 10,813 Other assets............................................................ 2,212 3,101 __________________ ___________________ $ 161,774 $ 180,083 ================== =================== Liabilities and Stockholders' Equity Current liabilities: Senior secured revolving credit facility............................ $ 8,163 $ 29,975 Accounts payable.................................................... 6,988 9,797 Accrued compensation, benefits and withholdings..................... 14,426 16,294 Deferred revenue.................................................... 8,149 7,117 Accrued income taxes................................................ 1,535 1,264 Other accrued liabilities........................................... 11,178 9,305 Liabilities of discontinued operations.............................. --- 4,241 __________________ ___________________ Total current liabilities............................................... 50,439 77,993 __________________ ___________________ Long-term liabilities: Unfunded accumulated benefit obligation............................. 6,233 6,233 Other long-term liabilities......................................... 4,085 4,023 __________________ ___________________ Total long-term liabilities............................................. 10,318 10,256 __________________ ___________________ Stockholders' equity: Preferred stock..................................................... --- --- Common stock........................................................ 40 40 Additional paid-in capital.......................................... 97,000 96,942 Accumulated other comprehensive loss................................ (1,450) (2,836) Retained earnings (deficit)......................................... 5,427 (2,312) __________________ ___________________ Total stockholders' equity.............................................. 101,017 91,834 __________________ ___________________ $ 161,774 $ 180,083 ================== ===================
See the Notes to the Condensed Consolidated Financial Statements ANACOMP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Reorganized Company ___________________________________________ (in thousands, except per share amounts) Three months ended Three months ended June 30, 2003 June 30, 2002 __________________ ___________________ Revenues: Services........................................................... $ 40,989 $ 46,262 Equipment and supply sales......................................... 8,817 10,272 __________________ ___________________ 49,806 56,534 __________________ ___________________ Cost of revenues: Services........................................................... 28,119 31,406 Equipment and supply sales......................................... 6,317 7,611 __________________ ___________________ 34,436 39,017 __________________ ___________________ Gross profit........................................................... 15,370 17,517 Costs and expenses: Engineering, research and development.............................. 1,450 1,811 Selling, general and administrative................................ 11,809 13,232 Amortization of intangible assets.................................. 496 496 Restructuring charges.............................................. 1,152 2,081 __________________ ___________________ Operating income (loss) from continuing operations..................... 463 (103) __________________ ___________________ Other income (expense): Interest income.................................................... 45 109 Interest expense and fee amortization.............................. (383) (1,048) Other.............................................................. (79) 513 __________________ ___________________ (417) (426) __________________ ___________________ Income (loss) from continuing operations before income taxes........... 46 (529) Provision for income taxes............................................. 676 (48) __________________ ___________________ Loss from continuing operations........................................ (630) (481) Income from discontinued operations, net of taxes...................... --- 488 __________________ ___________________ Net (loss) income...................................................... $ (630) $ 7 ================== =================== Basic and diluted per share data: Basic and diluted loss from continuing operations.................. $ (0.15) $ (0.12) Basic and diluted income from discontinued operations.............. --- 0.12 __________________ ___________________ Basic and diluted net (loss) income................................ $ (0.15) $ 0.00 ================== =================== Shares used in computing basic and diluted net (loss) income per share. 4,039 4,034 ================== ===================
See the Notes to the Condensed Consolidated Financial Statements ANACOMP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized Company Predecessor Company _______________________________________ _____________________ (in thousands, except per share amounts) Nine months ended Six months ended Three months ended June 30, 2003 June 30, 2002 December 31, 2001 ___________________ __________________ _____________________ (Unaudited) (Unaudited) Revenues: Services............................................. $ 126,852 $ 94,979 $ 55,098 Equipment and supply sales........................... 28,706 22,162 12,926 ___________________ __________________ _____________________ 155,558 117,141 68,024 ___________________ __________________ _____________________ Cost of revenues: Services............................................. 86,027 63,527 36,630 Equipment and supply sales........................... 19,597 15,945 9,874 ___________________ __________________ _____________________ 105,624 79,472 46,504 ___________________ __________________ _____________________ Gross profit............................................. 49,934 37,669 21,520 Costs and expenses: Engineering, research and development................ 4,883 3,415 1,680 Selling, general and administrative.................. 39,439 28,488 15,643 Amortization of intangible assets.................... 1,488 992 2,896 Restructuring charges (credits)...................... 1,152 2,081 (1,032) ___________________ __________________ _____________________ Operating income from continuing operations.............. 2,972 2,693 2,333 ___________________ __________________ _____________________ Other income (expense): Interest income...................................... 192 180 155 Interest expense and fee amortization................ (1,777) (2,253) (3,114) Other................................................ (51) 389 265,108 ___________________ __________________ _____________________ (1,636) (1,684) 262,149 ___________________ __________________ _____________________ Income from continuing operations before reorganization items, and income taxes ............................. 1,336 1,009 264,482 Reorganization items..................................... --- --- 13,328 ___________________ __________________ _____________________ Income from continuing operations before income taxes.... 1,336 1,009 277,810 Provision for income taxes............................... 1,781 1,205 450 ___________________ __________________ _____________________ (Loss) income from continuing operations................. (445) (196) 277,360 Income from discontinued operations, net of taxes........ --- 1,106 --- Gain on sale of discontinued operations, net of taxes.... 8,184 --- --- ___________________ __________________ _____________________ Net income............................................... $ 7,739 $ 910 $ 277,360 =================== ================== ===================== Basic and diluted per share data: Basic and diluted loss from continuing operations.... $ (0.11) $ (0.05) Basic and diluted income from discontinued operations --- 0.27 Gain on sale of discontinued operations.............. 2.03 --- ___________________ __________________ Basic and diluted net income......................... $ 1.92 $ 0.23 =================== ================== Shares used in computing basic and diluted net income per 4,039 4,034 share................................................ =================== ==================
See the Notes to the Condensed Consolidated Financial Statements ANACOMP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Predecessor Reorganized Company Company _______________________________________ _____________________ (in thousands) Nine months ended Six months ended Three months ended June 30, 2003 June 30, 2002 December 31, 2001 ___________________ __________________ _____________________ (Unaudited) (Unaudited) Cash flows from operating activities: Net income............................................ $ 7,739 $ 910 $ 277,360 Adjustments to reconcile net income to net cash provided by operating activities: Other income due to extinguishment of debt.......... --- --- (265,329) Adjustments of assets and liabilities to fair value. --- --- (16,916) Write off of deferred debt issuance costs and unamortized premiums and discounts............... --- --- 2,216 Gain on sale of discontinued operations............. (8,184) --- --- Income from discontinued operations................. --- (1,106) --- Depreciation and amortization....................... 11,054 8,716 7,194 Non-cash settlement of facility lease contract...... --- --- 349 Amortization of debt fees, premiums and discounts... 516 344 92 Non-cash compensation............................... 58 69 --- Change in assets and liabilities: Accounts and other receivables.................... 3,559 (1,269) 3,092 Inventories....................................... 512 374 739 Prepaid expenses and other assets................. 2,666 2,149 332 Accounts payable, accrued expenses and other liabilities.................................... (6,395) (803) (3,733) Accrued interest.................................. --- 168 (387) ___________________ __________________ _____________________ Net cash provided by continuing operations....... 11,525 9,552 5,009 Net cash provided by discontinued operations..... --- 1,214 --- ___________________ __________________ _____________________ Net cash provided by operating activities........ 11,525 10,766 5,009 ___________________ __________________ _____________________ Cash flows from investing activities: Purchases of property and equipment................... (2,067) (2,134) (1,075) Payments to acquire product line assets and customer rights............................................ (500) --- --- Proceeds from sale of discontinued operations, net.... 14,106 --- --- ___________________ __________________ _____________________ Net cash provided by (used in) investing activities................................... 11,539 (2,134) (1,075) ___________________ __________________ _____________________ Cash flows from financing activities: Principal payments on revolving line of credit, net... (21,812) (19,600) (2,000) ___________________ __________________ _____________________ Net cash used in financing activities............ (21,812) (19,600) (2,000) ___________________ __________________ _____________________ Effect of exchange rate changes on cash and cash equivalents........................................... 1,231 739 637 ___________________ __________________ _____________________ Increase (decrease) in cash and cash equivalents.......... 2,483 (10,229) 2,571 Less increase in cash from discontinued operations........ --- (1,214) --- ___________________ __________________ _____________________ Cash and cash equivalents at beginning of period.......... 15,561 26,879 24,308 ___________________ __________________ _____________________ Cash and cash equivalents at end of period................ $ 18,044 $ 15,436 $ 26,879 =================== ================== ====================
See the Notes to the Condensed Consolidated Financial Statements Supplemental Disclosures of Cash Flow Information:
Predecessor Reorganized Company Company _______________________________________ _____________________ (in thousands) Nine months ended Six months ended Three months ended June 30, 2003 June 30, 2002 December 31, 2001 ___________________ __________________ _____________________ (unaudited) (unaudited) Supplemental Disclosures of Cash Flow Information: Cash paid for interest................................. $ 1,184 $ 1,354 $ 1,434 =================== ================== ===================== Cash paid for income taxes............................. $ 1,003 $ 1,380 $ 459 =================== ================== =====================
See the Notes to the Condensed Consolidated Financial Statements ANACOMP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Company Reorganization On October 19, 2001, we filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, together with a prepackaged plan of reorganization, with the U.S. Bankruptcy Court for the Southern District of California. The U.S. Bankruptcy Court confirmed the plan on December 10, 2001, and we emerged from bankruptcy effective December 31, 2001. The primary benefits of our bankruptcy were the elimination of $310 million of senior subordinated notes, related accrued interest of $52.3 million, and the related annual interest expense of approximately $34 million. Additionally, our credit facility was amended such that we cured previous events of default and we continue to have the ability to borrow under the credit facility (see Note 4). New Common Stock was distributed to the holders of the notes as well as to holders of the previously existing Common Stock. Also, as a result of the Chapter 11 reorganization, the following occurred: o all unexercised options were canceled; o prior stock option plans were terminated; o executory contracts were assumed or rejected; o trade creditors were paid in the ordinary course of business and were not impaired; o members of a new Board of Directors were designated by the holders of the subordinated notes; o 403,403 shares of new Class A Common Stock were authorized for use in the establishment of new stock option plans; and o the senior secured revolving credit facility was amended. The U.S. Bankruptcy Court issued its final decree on September 27, 2002 closing the Chapter 11 case. There are no remaining claims or unrecorded obligations related to the bankruptcy proceedings. Note 2. Basis of Presentation At December 31, 2001, as a result of our emergence from bankruptcy, we adopted Fresh Start Reporting in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Fresh Start Reporting resulted in material changes to the Consolidated Balance Sheet as of December 31, 2001, including adjustment of assets and liabilities to estimated fair values, the valuation of equity based on the reorganization value of the ongoing business, and the recording of an asset for reorganization value in excess of the fair value of the separately identifiable assets and liabilities (similar to goodwill). The accompanying financial statements include historical information from prior to December 31, 2001, the effective date we emerged from bankruptcy, and are identified as financial statements of the Predecessor Company. Due to our reorganization and the implementation of Fresh Start Reporting (see Note 3), the financial statements for the Reorganized Company are not comparable to those of the Predecessor Company. The accompanying consolidated financial statements include the accounts of Anacomp and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements, except for the balance sheet as of September 30, 2002 and the statements of operations and cash flows for the three months ended December 31, 2001, have not been audited, but in the opinion of management, include all adjustments (consisting of normal recurring adjustments, the Fresh Start adjustments described in Note 3 and the sale of Switzerland operations adjustments described in Note 5) necessary for a fair presentation of our financial position, results of operations and cash flows for all periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended September 30, 2002, included in our fiscal 2002 Annual Report on Form 10-K. Interim operating results are not necessarily indicative of operating results for the full year or for any other period. Preparation of the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. Estimates have been prepared on the basis of the most current available information and actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform to the current period presentation. We must make estimates of the uncollectability of our accounts receivable. When evaluating the adequacy of the allowance for doubtful accounts, we specifically analyze accounts receivable as well as historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Our accounts receivable balance was $30.4 million, net of allowance for doubtful accounts of $1.5 million, as of June 30, 2003. We account for our employee stock option plans in accordance with APB Opinion No. 25, under which compensation expense is recognized only to the extent the exercise price of the option is less than the fair market value of a share of stock at the date of grant (the intrinsic value method). Accordingly, we have adopted the disclosure only requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure." Had employee compensation costs for these plans been determined based on their fair value on their grant date in accordance with SFAS No. 123, our net results would have been as follows (in thousands, except per-share amounts):
For the three months ended June 30: Reorganized Company ________________________________________ 2003 2002 ____________________ _______________ Net (loss) income as reported...................................... $ (630) $ 7 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards granted since December 31, 2001, net of related tax effects .......................... (161) --- ____________________ _______________ Pro forma net (loss) income........................................ $ (791) $ 7 ==================== =============== Basic and diluted net (loss) income per share: As reported.................................................. $ (0.15) $ 0.00 Pro forma.................................................... $ (0.20) $ 0.00
Reorganized Company Predecessor Company _____________________________________ ___________________ Nine months ended Six months ended Three months ended June 30, 2003 June 30, 2002 December 31, 2001 ___________________ ________________ ___________________ Net income as reported............................ $ 7,739 $ 910 $ 277,360 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards granted since December 31, 2001, net of related tax effects.................... (482) --- --- ___________________ ________________ ___________________ Pro forma net income.............................. $ 7,257 $ 910 $ 277,360 =================== ================ =================== Basic and diluted net income per share: As reported................................. $ 1.92 $ 0.23 Pro forma................................... $ 1.80 $ 0.23
Note 3. Fresh Start Reporting Our enterprise value after reorganization at December 31, 2001 was determined based on the consideration of many factors and resulted in a reorganization value (over the fair value of identifiable net assets) of $72.8 million, as adjusted, and is reported as "Reorganization value in excess of identifiable net assets". Although the asset will not be subject to future amortization (in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets"), it will be subject to, at a minimum, annual impairment testing. In developing the assumptions underlying the enterprise valuation, management considered historical results as well as its best estimates of expected future market conditions based on information available as of December 31, 2001. Actual future events and results could differ substantially from management's estimates, assumptions and projections. Unfavorable changes compared to our projections used for Fresh Start Reporting purposes could result in future impairments of our reorganization asset and identifiable intangible assets. As a result of Fresh Start Reporting, identifiable intangible assets were valued and consist of the following to be amortized over the useful lives indicated:
(dollars in thousands) Life in Years June 30, 2003 _______________________________________________________________________ ______________ ________________ Customer contracts and related customer relationships.................. 10 $ 7,600 Digital technology and intellectual property........................... 3 3,100 COM technology and intellectual property............................... 10 1,300 COM production software................................................ 5 300 ________________ Total.................................................................. 12,300 Less: accumulated amortization......................................... (2,975) ________________ $ 9,325 ================
The income due to extinguishment of debt, net of taxes, is reported as "Other income" in the Condensed Consolidated Statement of Operations for the period ended December 31, 2001, and is calculated as follows:
(in thousands) Amount _________________________________________________________ _______________ Carrying value of senior subordinated notes.............. $ 310,000 Carrying value of related accrued interest............... 52,254 Issuance of new common stock............................. (96,925) _______________ Other income due to extinguishment of debt $ 265,329 ===============
The holders of the senior subordinated notes received 99.9% of the new equity of the Reorganized Company; therefore, the net equity of the Reorganized Company was used as the basis for consideration exchanged in determining the income due to extinguishment of debt. There is no income statement tax effect from the extinguishment of debt (see Note 6). In accordance with Statement of Position 90-7, transactions of the Predecessor Company resulting from the Chapter 11 reorganization are reported separately as reorganization items in the accompanying Condensed Consolidated Statement of Operations for the period ended December 31, 2001, and are summarized below:
Three Months Ended (in thousands) December 31, 2001 __________________________________________________________ ___________________ Adjustment of assets and liabilities to fair value........ $ 16,916 Write off of deferred debt issuance costs and unamortized premiums and discounts.................... (2,216) Professional fees and other reorganization costs.......... (1,023) Settlement of facility lease contract..................... (349) ___________________ Reorganization items $ 13,328 ===================
Note 4. Senior Secured Revolving Credit Facility On December 31, 2001, Anacomp and Fleet National Bank, as agent, and its syndicate of lenders (collectively, "the Bank Group") entered into an Amended and Restated Revolving Credit Agreement. The credit agreement provides for a commitment of $26.1 million as of June 30, 2003, with a $20.0 million direct borrowing sublimit and a $6.1 million letter of credit sublimit. The facility is available for new borrowings when borrowings are below the direct borrowing sublimit. Effective December 19, 2002, we signed an amendment to the revolving credit agreement. The amendment modified certain financial covenants to accommodate the sale of our Switzerland operations and current business plans. Other changes to the agreement included a permanent reduction to the credit facility commitment of $10.0 million and provisions for acquisitions and/or divestitures under specified conditions. At June 30, 2003, the outstanding revolving credit borrowings were $8.2 million (plus outstanding standby letters of credit of $6.1 million). During the nine month period ended June 30, 2003, we made net cash payments totaling $21.8 million and have $11.8 million of borrowing capacity. The original maturity date of the amended facility was June 30, 2003. Due to the receipt of proceeds from our sale of the Switzerland subsidiaries and the application of those proceeds to reduce our facility balance, it has been extended to December 31, 2003 under the terms of the agreement. We reduced the outstanding borrowings and permanently reduced the borrowing sublimit of the credit facility commitment by $11.4 million as a result of proceeds received from the October 2002 sale of our Switzerland operations and subsidiaries. The credit agreement bears interest at a base rate equal to the higher of (a) the annual rate of interest announced from time to time by Fleet National Bank as its best rate, or (b) one-half of one percent above the Federal Funds Effective Rate, for the portion of the facility equal to a Formula Borrowing Base ("FBB"). The FBB equals 80% of eligible accounts, which include U.S. and Canadian accounts receivable. The rate of interest is three percentage points higher than the base rate for the facility balance outstanding in excess of the FBB. Interest is due and payable monthly in arrears. The interest rate was 4.0% for the FBB portion and 7.0% for the excess portion at June 30, 2003. At June 30, 2003, the FBB was $11.4 million; accordingly, there were no excess borrowings over the FBB. The credit facility is secured by virtually all Anacomp assets and 65% of the capital stock of our foreign subsidiaries. The facility contains covenants relating to limitations on the following: o capital expenditures; o additional debt; o purchases of our common stock; o mergers and acquisitions; and o liens and dividends. The credit facility also is subject to minimum EBITDA, interest coverage and leverage ratio covenants. In addition, we are required to remit to the Bank Group the net proceeds of any capital asset sale. Under the current facility as amended, the facility commitment and the direct borrowings sublimit will be permanently reduced by $1.25 million on September 30, 2003. Note 5. Sale of Switzerland and Other Operations We completed a sale of our Switzerland operations and subsidiaries on October 18, 2002. The acquiring company assumed operational responsibility effective October 1, 2002. Under the terms of the sale agreement, we sold all of the outstanding shares of our two Swiss subsidiaries, Cominformatic AG and Anacomp Technical Services AG, to edotech Ltd. (a UK company) at a sales price of CHF 26.7 million (Swiss francs). The sales price is payable as follows: CHF 4.6 million, or approximately $3.1 million, which was received at closing; CHF 18.2 million, or approximately $11.8 million, which was received on March 10, 2003; CHF 1.1 million, or approximately $0.7 million, which was received on April 17, 2003; and CHF 2.8 million is due on or before April 18, 2004 upon expiration of certain indemnification claim periods. As a result of a tax audit of the Switzerland operations for prior year results, we estimate we will incur additional costs not to exceed CHF 0.3 million, or approximately $0.2 million. This will decrease the amount we will receive on or before April 18, 2004. The costs of the sale (including the $0.2 million tax audit costs) are estimated to be $2.4 million. Effectively all of the net proceeds (i.e. sales price less sale costs) received have been used to reduce the revolving credit facility balance outstanding and 85% of such proceeds have permanently reduced the total borrowing commitment under the terms of the senior secured revolving credit facility. The assets and liabilities of the Swiss operations have been classified separately as "Assets of discontinued operations" and "Liabilities of discontinued operations" in the Condensed Consolidated Balance Sheet as of September 30, 2002. The net assets of the disposed operating units are summarized as follows:
September 30, (in thousands) 2002 ______________________________________________ ______________ Cash.......................................... $ 2,749 Accounts and notes receivable................. 2,288 Inventories................................... 1,067 Property, plant and equipment................. 5,227 Other assets.................................. 696 Accounts payable and other accrued Liabilities................................. (4,241) ______________ Total net assets $ 7,786 ==============
In the third quarter of fiscal 2002, we sold two smaller operating units. The results of the Switzerland and other sold operations reported below for the three months ended December 31, 2001 have not been segregated as discontinued operations in the Condensed Consolidated Statements of Operations as they were not material to the operating results of Anacomp in total.
Swiss Operating Results Three Months Ended (in thousands) December 31, 2001 ________________________ Revenues................... $ 7,505 ======================== Income before taxes........ $ 869 Income taxes............... (60) ________________________ Net income................. $ 809 ========================
Note 6. Income Taxes Our provision for income taxes consists of the following:
Predecessor Reorganized Company Company _________________________________________ __________________ Nine months ended Six months ended Three months ended June 30, 2003 June 30, 2002 December 31, 2001 ____________________ _________________ __________________ Federal.................................... $ 388 $ 185 $ --- State...................................... 40 28 10 Foreign.................................... 1,353 992 440 ____________________ _________________ __________________ $ 1,781 $ 1,205 $ 450 ==================== ================= ==================
Due to our reorganization, we have Cancellation of Debt ("COD") income of $265.4 million. As a result, we were required to reduce, for federal income tax purposes, certain tax attributes, including net operating loss carryforwards and property basis by the amount of the COD. These adjustments were determined at the end of our fiscal year ending September 30, 2002. A deferred tax liability is maintained for COD, book intangible assets and certain temporary differences. A deferred tax asset has been established for tax goodwill in excess of book reorganization asset, certain temporary differences, net operating losses and other tax basis carryforwards. We have also established a valuation allowance in the amount of $41.7 million in order to fully offset the net deferred tax asset. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized in future years. Management periodically reviews the need for valuation allowances based upon our results of operations. Note 7. Restructuring Activities Anacomp continues to experience revenue declines in the Computer Output to Microfiche (COM) other output services, COM maintenance, and equipment / supplies product lines. Due to this ongoing trend, we are making adjustments to align our cost structure and infrastructure to maintain operating profitability. This will be achieved through the consolidation of facilities and adjustments to our workforce (affecting approximately 138 employees) during the third and fourth quarters of fiscal 2003. In the three months ended June 30, 2003, we recorded restructuring charges of $1.2 million related to data center consolidation and reorganization of parts of our corporate, marketing, sales, and international operating organizations. The charges consist of employee severance and termination-related costs for approximately 76 employees, all of whom were notified and have left the company as of June 30, 2003. The remaining accrued but unpaid liability of $0.9 million is expected to be paid by the end of calendar year 2003 for all but one employee, whose payments will continue through March of 2004. Additional restructuring charges are expected in the fourth quarter of fiscal 2003. The restructuring charges expected in the fourth quarter of fiscal 2003 have not been accrued for at June 30, 2003, consistent with the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (see Note 13). In fiscal year 2002, we recorded a restructuring charge of $2.1 million related to the reorganization of our operations from two business units to one. We reorganized our workforce by combining the field organizations of Document Solutions and Technical Services into one organization, establishing an executive level position to oversee all sales and marketing activities and implementing a single support group for our data centers, Web Presentment operations, field services operations and process quality. The restructuring charges included $1.6 million in employee severance and termination-related costs for approximately 100 employees, all of whom have left the company. Substantially all of the severance payments have been completed. The restructuring charges also include approximately $0.4 million for the closure of a data center for which payments will continue until the lease expires in July 2004 ($0.2 million remains unpaid as of June 30, 2003). Of the $0.4 million, $69 thousand represents a non-cash charge to write off the net book value of leasehold improvements located in the closed data center. In the second and third quarters of 2000, we effected a reorganization of our workforce in the United States and Europe along our lines of business, reorganized parts of our corporate staff and phased out our manufacturing operations. To accomplish the reorganization of our workforce and corporate staff, we reassessed job responsibilities and personnel requirements in each of our continuing business units and corporate staff. The assessment resulted in substantial permanent personnel reductions and involuntary terminations throughout our organization, primarily in our European operations and our corporate and manufacturing staff. We recorded restructuring charges of $14.6 million related to these actions. Employee severance and termination-related costs were for approximately 300 employees, all of whom have left the company; we have paid all related severance. Other fees relate to professional fees associated with negotiations to terminate facility leases and other costs associated with implementation of our new business unit structure and the reorganization of our business units into separate entities. In the first quarter of fiscal year 2002, we vacated our Japanese facility, terminated substantially all related personnel and undertook other procedures to wind down our Japanese subsidiary. As a result, we reversed approximately $1 million of fiscal 2000 business restructuring reserves due to favorable circumstances related to the shutdown. Our closure costs to vacate the facility in Japan, costs to fulfill our contract obligations and severance and related professional costs up to that time were less than we anticipated at the time we recorded the accrual. As of June 30, 2003, the remaining liability of $0.2 million related to international facility costs is expected to be paid by the end of fiscal year 2003. The restructuring reserves are included as a component of "Other accrued liabilities" in the accompanying Condensed Consolidated Balance Sheets. The following tables present the activity and balances of the restructuring reserves from September 30, 2002 to June 30, 2003 (in thousands):
Fiscal Year 2003 Restructuring ___________________________________________________________________________________________________________ September 30, Payments and 2002 Additions Deductions June 30, 2003 - ------------------------------ ------------------ ------------------- ------------------- ----------------- Employee Separations $ --- $ 1,152 $ (258) $ 894 ------------------ ------------------- ------------------- ----------------- $ --- $ 1,152 $ (258) $ 894 ================== =================== =================== =================
Fiscal Year 2002 Restructuring ___________________________________________________________________________________________________________ September 30, Payments and 2002 Additions Deductions June 30, 2003 - ------------------------------ ------------------ ------------------- ------------------- ----------------- Employee Separations $ 233 $ --- $ (210) $ 23 Facility Closing 325 --- (130) 195 ------------------ ------------------- ------------------- ----------------- $ 558 $ --- $ (340) $ 218 ================== =================== =================== =================
Fiscal Year 2000 Restructuring ___________________________________________________________________________________________________________ September 30, Payments and 2002 Additions Deductions June 30, 2003 - ------------------------------ ------------------ ------------------- ------------------- ----------------- Facility Closing $ 77 $ --- $ (53) $ 24 Contract Obligations 126 --- --- 126 ------------------ ------------------- ------------------- ----------------- $ 203 $ --- $ (53) $ 150 ================== =================== =================== =================
Note 8. Inventories Inventories consist of the following:
Reorganized Company ________________________________________ (in thousands) June 30, 2003 September 30, 2002 ________________________________________________________________ ___________________ ___________________ Finished goods, including purchased film...................... $ 1,744 $ 1,766 Consumable spare parts and supplies........................... 1,678 1,708 ___________________ ___________________ $ 3,422 $ 3,474 =================== ===================
Note 9. Defined Benefit Plan We have a retirement plan in place for our United Kingdom subsidiary that qualifies as a defined benefit plan. The plan provides benefits based primarily on years of service and employee compensation levels. The plan covers approximately 619 participants, including 89 current employees, 484 former employees with vested rights to future benefits, and 46 retirees and beneficiaries receiving benefits. Funding policy for the plans is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus additional amounts as we may determine to be appropriate. As of September 30, 2002, the UK pension plan was under funded by $6.2 million (using September 30, 2002 currency exchange rates) based upon a projected benefit obligation of $21.5 million, accumulated benefit obligation of $19.3 million, and the fair value of plan assets totaling $13.1 million. The under funded liability of $6.2 million is classified as a long-term liability on the Condensed Consolidated Balance Sheet. These actuarial projections were prepared assuming a discount rate of 6.25%, a weighted average expected long-term rate of return on plan assets of 7.5% per year and weighted average annual compensation increases of 4%. Almost all of the plan participants are inactive. As a result, we are amortizing the unfunded liability over the 25-year remaining life expectancy of the inactive participants as required by Financial Accounting Standard (FAS) No. 87, "Employers Accounting for Pensions." In the nine months ended June 30, 2003, amortization of unfunded accumulated benefit obligation expense was $144 thousand and is reflected in "Selling, general and administrative" expense in the Condensed Consolidated Statement of Operations and as amortization in the Comprehensive Income table in Note 11 as prescribed by FAS No. 87. Note 10. Foreign Currency Contracts On October 15, 2002, we entered into three Swiss Franc (CHF) forward contracts to protect the value of the expected cash receipts from the sale of our Switzerland operations. The contracts protect Anacomp against an exchange rate above 1.5425. The first forward contract was written in the amount of CHF 18.2 million and expired on January 29, 2003. At expiration, the forward option was replaced with another short-term option for the same amount, which provided $11.8 million in U.S. dollar proceeds on March 10, 2003. The second forward contract was written in the amount of CHF 2.1 million and expired on April 15, 2003. CHF 1.0 million of the contract expired unused and the remaining CHF 1.1 million was converted at 1.5425, yielding $0.7 million. The third forward contract was written in the amount of CHF 1.8 million and expires on April 15, 2004. We receive full exchange benefits for a lower rate on 50% of the contract and the remaining 50% will be converted at 1.5425. The minimum U.S. dollar proceeds received would be $1.2 million if the buyer releases all funds. The Other Expense category of our Condensed Consolidated Statement of Operations for the nine months ended June 30, 2003 includes the recognition of $16 thousand of exchange loss from currency fluctuations related to the Swiss receivable, the forward contracts and sale costs. Note 11. Comprehensive income Comprehensive income consists of the following components (in thousands):
For the three months ended June 30: Reorganized Company _________________________________ 2003 2002 _______________ ______________ Net (loss) income............................................ $ (630) $ 7 Change in foreign currency translation....................... 1,044 2,087 Amortization of unfunded accumulated benefit obligation...... 48 --- _______________ ______________ Comprehensive income......................................... $ 462 $ 2,094 =============== ==============
Predecessor Reorganized Company Company _______________________________________ __________________ Nine months ended Six months ended Three months ended June 30, 2003 June 30, 2002 December 31, 2001 __________________________________________ __________________ __________________ __________________ Net income................................ $ 7,739 $ 910 $ 277,360 Change in foreign currency translation.... 1,242 2,003 639 Amortization of unfunded accumulated benefit obligation..................... 144 --- --- __________________ __________________ __________________ Comprehensive income...................... $ 9,125 $ 2,913 $ 277,999 ================== ================== ==================
Note 12. Income or Loss Per Share Basic income or loss per share is computed based upon the weighted average number of shares of Anacomp's common stock outstanding during the period. For the nine months ended June 30, 2003, potentially dilutive securities included 783,077 outstanding warrants to purchase Class B Common Stock, which were issued as part of the reorganization. These warrants were excluded from the computation of diluted income per share as they were anti-dilutive using the treasury stock method. Basic and diluted net income amounts for the three months ended December 31, 2001 have not been presented as they are not comparable to subsequent periods due to the implementation of Fresh Start Reporting (see Note 3). Note 13. Recent Accounting Pronouncements In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure", which amends SFAS No. 123 and provides alternative methods of transition for companies who elect to adopt the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also modifies the disclosure requirements for such compensation. Anacomp has not elected to adopt the fair value method; we instead account for our employee stock option plans using the intrinsic value method in accordance with APB Opinion No. 25, under which compensation expense is recognized only to the extent the exercise price of the option is less than the fair market value of a share of stock at the date of grant. However, we are subject to the disclosure requirements of SFAS Nos. 123 and 148. Accordingly, we have expanded our stock-based compensation disclosures (see Note 2). On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in this Statement is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under Statement 146, in many cases, would be recognized over time rather than up front. The FASB decided that if the benefit arrangement requires employees to render future service beyond a "minimum retention period" a liability should be recognized as employees render service over the future service period even if the benefit formula used to calculate an employee's termination benefit is based on length of service. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We adopted the provisions of SFAS No. 146 beginning April 1, 2003. In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A variable interest entity either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources to the entity to support its activities. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 is not expected to have a material impact on our results of operations or financial condition. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report, including the following section regarding "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. Additionally, statements concerning future matters such as our future plans and operations, projections used for valuation purposes, sales levels, consolidation and restructuring plans, liquidity needs, expectations of business trends and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this Quarterly Report reflect the good faith estimates and judgment of our management, such statements can only be based on facts and factors of which we are currently aware. Consequently, forward-looking statements are inherently subject to risks and uncertainties. Our actual results, performance, and achievements may differ materially from those discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading "Risk Factors" below, as well as those discussed elsewhere in this Quarterly Report. We encourage you to not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. We encourage you to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. Forward-looking statements involve known and unknown risks and uncertainties. Risks, uncertainties and other important factors include, among others: o general economic and business conditions; o industry trends and growth rates; o industry capacity; o competition; o future technology; o raw materials costs and availability; o currency fluctuations; o the loss of any significant customers or suppliers; o changes in business strategy or development plans; o litigation issues; o successful development of new products and services; o anticipated financial performance and contributions of our products and services; o availability, terms and deployment of capital; o ability to meet debt service obligations; o availability of qualified personnel; o changes in, or the failure or inability to comply with, government regulations; and o other factors referenced in this report and in other public filings including our Form 10-K for the year ended September 30, 2002. Overview and Recent Events Our 2001 Bankruptcy On October 19, 2001, we filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, together with a prepackaged plan of reorganization with the U.S. Bankruptcy Court for the Southern District of California. Under the plan we eliminated $310 million of senior subordinated notes, related accrued interest of $52.3 million and the related annual interest expense of $34 million. New Common Stock was distributed to the holders of the notes as well as to holders of the previously existing Common Stock. The U.S. Bankruptcy Court confirmed the plan of reorganization on December 10, 2001, and we emerged from bankruptcy effective December 31, 2001. The U.S. Bankruptcy Court issued its final decree on September 27, 2002 closing the Chapter 11 case. There are no remaining claims or unrecorded obligations related to the bankruptcy proceedings. Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and our results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, restructuring and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies can be found in our 2002 Annual Report on Form 10-K. Results of Operations The following results of operations information includes our historical information from prior to December 31, 2001, the effective date we emerged from bankruptcy, and is identified as results of operations of the Predecessor Company. The results of operations for the three and nine month periods ended June 30, 2003, and the six month period ended June 30, 2002, represent the Reorganized Company after adopting Fresh Start Reporting. Due to our reorganization and the implementation of Fresh Start Reporting, the financial information for the Reorganized Company is not comparable to the Predecessor Company. In addition, in the first quarter of fiscal year 2003 we completed the sale of our Switzerland operations and in the third quarter of fiscal year 2002 we sold two smaller operating units. These operations were not material to our consolidated results and are, therefore, not reported as discontinued operations in our statement of operations for the first quarter of fiscal year 2002. Anacomp continues to experience revenue declines in the Computer Output to Microfiche (COM) other output services, COM maintenance and equipment / supplies product lines. Due to this ongoing trend, we are making adjustments to align our cost structure and infrastructure to maintain operating profitability. This will be achieved through the consolidation of facilities and adjustments to our workforce during the third and fourth quarters of fiscal 2003. This process includes the closure of some data centers and the downsizing of other centers. The process also includes an assessment of job responsibilities and personnel requirements in our corporate, marketing, sales, and international operating organizations. We have recorded restructuring related charges of $1.2 million in the third quarter of fiscal year 2003, and we expect that additional charges will be recognized in the fourth quarter. The charges consist of employee severance and termination-related costs. The primary savings to be achieved from these activities will be obtained from the reduced level of employees and facility costs. We estimate that the restructuring changes instituted in the third and fourth quarters of fiscal year 2003 will generate cost savings of approximately $10 million annually. To facilitate a meaningful comparison of Anacomp's quarterly and year-to-date operating performance in fiscal years 2003 and 2002, the following discussion of results of operations on a consolidated basis is presented on a traditional comparative basis for all periods. However, the pro forma results of operations presented below for the nine month period ended June 30, 2002 combines the six month period ended June 30, 2002 on a Reorganized Company basis with the three month period ended December 31, 2001 on a Predecessor Company basis. These periods and bases of accounting are not comparable and we have presented them separately in the accompanying Condensed Consolidated Statements of Operations.
CONSOLIDATED RESULTS OF OPERATIONS Three Months Ended June 30, Nine Months Ended June 30, _______________________________ ____________________________ 2003 2002 2003 2002 (Reorganized (Reorganized (Reorganized (Pro Forma (in thousands) Company) Company) Company) Basis) ________________ ______________ ______________ _____________ Revenues: Services...........................................$ 40,989 $ 46,262 $ 126,852 $ 150,077 Equipment and supply sales......................... 8,817 10,272 28,706 35,088 ________________ ______________ ______________ _____________ 49,806 56,534 155,558 185,165 ________________ ______________ ______________ _____________ Cost of revenues: Services........................................... 28,119 31,406 86,027 100,157 Equipment and supply sales......................... 6,317 7,611 19,597 25,819 ________________ ______________ ______________ _____________ 34,436 39,017 105,624 125,976 ________________ ______________ ______________ _____________ Gross profit........................................... 15,370 17,517 49,934 59,189 Costs and expenses: Engineering, research and development.............. 1,450 1,811 4,883 5,095 Selling, general and administrative................ 11,809 13,232 39,439 44,131 Amortization of intangible assets.................. 496 496 1,488 3,888 Restructuring charges.............................. 1,152 2,081 1,152 1,049 ________________ ______________ ______________ _____________ Operating income (loss) from continuing operations..... 463 (103) 2,972 5,026 ________________ ______________ ______________ _____________ Other income (expense): Interest income.................................... 45 109 192 335 Interest expense and fee amortization.............. (383) (1,048) (1,777) (5,367) Other.............................................. (79) 513 (51) 265,497 ________________ ______________ ______________ _____________ (417) (426) (1,636) 260,465 ________________ ______________ ______________ _____________ Income (loss) from continuing operations before reorganization items and income taxes.............. 46 (529) 1,336 265,491 Reorganization items................................... --- --- --- 13,328 ________________ ______________ ______________ _____________ Income (loss) from continuing operations before taxes.. 46 (529) 1,336 278,819 Provision for income taxes............................. 676 (48) 1,781 1,655 ________________ ______________ ______________ _____________ Loss from continuing operations........................ (630) (481) (445) 277,164 Income from discontinued operations, net of taxes...... --- 488 --- 1,106 Gain on sale of discontinued operations, net of taxes.. --- --- 8,184 --- ________________ ______________ ______________ _____________ Net (loss) income......................................$ (630) $ 7 $ 7,739 $ 278,270 ================ ============== ============== =============
Three Months Ended June 30, 2003 vs. Three Months Ended June 30, 2002 General. We reported a net loss of $0.6 million for the three months ended June 30, 2003 versus $7 thousand in income for the three months ended June 30, 2002. Both MVS and Web revenues grew over the prior year period revenue. COM based revenues, however, continued to decline in the three months ended June 30, 2003, in line with historical trends. We define our product lines as follows: MVS - Multi-Vendor Services where Anacomp acts as a third party maintainer, providing support services such as on-site maintenance, help desk and depot repair, laser printer maintenance and associated hardware sales. Web - Transmitted ingestion, storage, delivery and internet browser-based access to documents. Also includes license sales and maintenance for the Adesso software that is our Web platform in the US. CD/Digital - CD based document management services, scanning and digital software sales. COM/ Other Output Services - Our Computer Output to Microfilm and laser printer document management services. COM Professional Services - Our maintenance services for Computer Output to Microfilm and other micrographic products. Equipment/Supplies - Computer Output to Microfilm original and duplicate film, chemistry and hardware sales. Revenues. Our revenues totaled $49.8 million in the three months ended June 30, 2003, a decrease of 12%, or $6.7 million, from $56.5 million in the three months ended June 30, 2002.
(in thousands) Three Months Ended June 30, ___________________________ Percentage Product Line 2003 2002 Change change - ------------ ---- ---- ------ ------ MVS $ 9,020 $ 6,871 $ 2,149 31% Web Presentment 4,309 4,038 271 7% CD/Digital 7,038 8,016 (978) (12%) COM/Other Output Services 16,928 21,966 (5,038) (23%) COM Professional Services 5,170 6,114 (944) (15%) Equipment/Supplies 7,341 9,529 (2,188) (23%) ----- ----- ------- Total $ 49,806 $ 56,534 $ (6,728) (12%) ======== ======== =========
MVS revenues increased $2.1 million, or 31%, over the prior year three month period. This reflects the continued increase in new OEM agreements and the resulting continued growth in our Multi-Vendor Services offerings. The relative makeup of total professional services revenues (including MVS and COM professional services) continues to migrate from COM to MVS. In the three months ended June 30, 2003, MVS represented 64% of total professional services, compared to 53% in the prior year three month period. Web Presentment revenues increased $0.3 million, or 7%, over the prior year three month period ended June 30, 2002. This reflects the addition of new customers and additional revenue from established customers as they have increased the number of their applications utilizing our Web services. We believe that pricing for this product may become more aggressive in the future, and we must remain competitive with alternative in-house solutions. CD/Digital revenue declined $1.0 million, or 12%, from the prior year three month period. The decline is the result of lower per unit pricing as the CD service has become less specialized and more of a commodity and as customers have opted for in-house or on-line solutions. COM/Other Output Services revenue declined $5.0 million, or 23%, from the prior year three month period. This decline reflects the decreased volumes processed in our data centers and continues the trend experienced in prior years. We expect that COM/Other Output Services revenues will continue to decline in future periods. COM Professional Services revenues declined $0.9 million, or 15%, from the prior year three month period. This decline reflects the continued decrease in the number of COM units in operation. We expect that the number of COM units in use worldwide will continue to decline as organizations choose to outsource these document management functions to service centers, such as those operated by us, or elect to utilize other options such as CD or on-line solutions. Equipment and supplies revenue declined $2.2 million, or 23%, from the prior year three month period. This decrease was largely the result of the decline in demand for and use of COM systems. Gross Margins. Our gross margin, $15.4 million for the three months ended June 30, 2003 and $17.5 million for the three months ended June 30, 2002, remained consistent at 31% of revenue. Even though revenues declined in comparison to the prior year, we were able to maintain the gross margin as a percentage of revenue through cost savings resulting from our recent and prior restructuring activities, which included the consolidation and downsizing of facilities and reductions in our work force. Engineering, Research and Development. Engineering, research and development expenditures decreased from $1.8 million for the three month period ended June 30, 2002, to $1.5 million in the current three month period, and remained consistent at 3% of total revenues in both periods. These expenses will not necessarily have a direct or immediate correlation to revenues. We continue to build and support our outsource service solutions base and corresponding internet and digital technologies. Selling, General and Administrative. SG&A expenses decreased from $13.2 million for the three months ended June 30, 2002 to $11.8 million for the three months ended June 30, 2003, due primarily to benefits realized from our recent restructuring activities and cost savings initiatives. Amortization of Intangible Assets. Amortization of intangible assets was the same at $0.5 million for the three months ended June 30, 2002 and June 30, 2003. The expense reflects the amortization of identifiable intangible assets valued as part of Fresh Start Reporting. Restructuring Charges. Restructuring charges of $1.2 million were incurred in the current quarter. These are related to data center consolidation and reorganization of parts of our corporate, marketing, sales, and international operating organizations. Additional restructuring charges, including approximately $0.9 million of severance, are expected in the fourth quarter of fiscal 2003. The third quarter charges consist of employee severance and termination-related costs for approximately 76 employees, all of whom were notified and have left the company as of June 30, 2003. In fiscal year 2002, we recorded a restructuring charge of $2.1 million related to the reorganization of our operations from two business units to one entity. The reorganization of the workforce consisted of combining the field organizations of Document Solutions and Technical Services into one organization, the establishment of an executive level position to oversee all sales and marketing activities and a single support group for our data centers, Web Presentment operations, field services operations and process quality. The restructuring charges included $1.6 million in employee severance and termination-related costs for approximately 100 employees, all of whom have left the company. The restructuring charges also included approximately $0.4 million for the closure of a data center for which payments will continue until the lease expires in July 2004. Of the $0.4 million, $69 thousand represents a non-cash charge to write off the net book value of leasehold improvements located in the closed data center. Interest Expense and Fee Amortization. Interest expense decreased to $0.4 million for the three months ended June 30, 2003 from $1.0 million for the three months ended June 30, 2002. The decrease reflects the decreased balance outstanding on the senior secured revolving credit facility in the current year period. The expense from both periods is related primarily to interest on the senior secured revolving credit facility. Other. The expense in both periods is related primarily to currency exchange gains and losses. Provision for Income Taxes. The provision for income taxes of $0.7 million and $48 thousand (credit) for the three months ended June 30, 2003 and 2002, respectively, related primarily to earnings of foreign subsidiaries. Nine Months Ended June 30, 2003 vs. Nine Months Ended June 30, 2002 General. We reported net income of $7.7 million for the nine months ended June 30, 2003 versus $278.3 million for the nine months ended June 30, 2002. Both MVS and Web Presentment revenues grew over the prior year nine month period. COM based revenues, however, continued to decline in the nine months ended June 30, 2003 from the comparable prior year period, in line with historical trends. We have been able to reduce our outstanding credit facility balance by $21.8 million during the nine months ended June 30, 2003, primarily by utilizing the proceeds received from the sale of our Switzerland subsidiaries. Revenues. Our revenues totaled $155.6 million in the nine months ended June 30, 2003, a decrease of 16%, or $29.6 million, from $185.2 million in the nine months ended June 30, 2002.
(in thousands) Nine Months Ended June 30, __________________________ Percentage Product Line 2003 2002 Change change - ------------ ---- ---- ------ ------ MVS $ 25,375 $ 19,805 $ 5,570 28% Web Presentment 13,805 11,105 2,700 24% CD/Digital 21,703 31,571 (9,868) (31%) COM/Other Output Services 54,863 71,730 (16,867) (24%) COM Professional Services 15,976 19,507 (3,531) (18%) Equipment/Supplies 23,836 31,447 (7,611) (24%) ------ ------ ------- Total $155,558 $185,165 $(29,607) (16%) ======== ======== =========
In fiscal year 2002, we committed to a plan to sell our Switzerland operations and we sold two smaller operating units. The results of these operations during the first quarter of fiscal 2002 were not material to our operating results and were not excluded from the revenues shown in the above table for the nine month period ended June 30, 2002. MVS revenues increased $5.6 million, or 28%, over the prior year nine month period. This reflects the continued increase in new OEM agreements and the resulting continued growth in our Multi-Vendor Services offerings. The relative makeup of total professional services revenues continues to migrate from COM to MVS. In the nine months ended June 30, 2003, MVS represented 61% of total professional services revenue (including MVS and COM professional services), compared to 50% in the prior year nine month period. Web Presentment revenues increased $2.7 million, or 24%, over the prior year nine month period ended June 30, 2002. This reflects the addition of new customers and additional revenue from established customers as they have increased the number of their applications utilizing our Web services. We believe that pricing for this product may become more aggressive in the future, and we must remain competitive with alternative in-house solutions. CD/Digital revenue declined $9.9 million, or 31%, from prior year revenue. This decrease was primarily the result of the sale of our Switzerland and other operations in fiscal year 2002. CD/Digital revenue from the Switzerland operations included in the nine months ended June 30, 2002 totaled $6.1 million. The remainder of the decline is the result of lower per unit pricing as the CD service has become less specialized and more of a commodity and as customers have opted for in-house or on-line solutions. COM/Other Output Services revenue declined $16.9 million, or 24%, from the prior year nine month period. This decline reflects the decreased volumes processed in our data centers and continues the trend experienced in prior years. We expect that COM/Other Output Services revenues will continue to decline in future periods. COM Professional Services revenues declined $3.5 million, or 18%, from the prior year. This decline reflects the continued decrease in the number of COM units in operation. We expect that the number of COM units in use worldwide will continue to decline as organizations choose to outsource these document management functions to service centers, such as those operated by us, or elect to utilize other options such as CD or on-line software systems. Equipment and supplies revenue declined $7.6 million, or 24%, from the prior year. This decrease was largely the result of the decline in demand for and use of COM units. Gross Margins. Our gross margin as a percentage of revenues was unchanged at 32% ($59.2 million versus $49.9 million for the nine month periods ended June 30, 2002 and 2003 respectively). Even though revenues declined in comparison to the prior year, we were able to maintain the gross margin percentage of revenues through cost savings resulting from our recent and prior restructuring activities, which included the consolidation and downsizing of facilities and reductions in our work force. Engineering, Research and Development. Engineering, research and development expenditures decreased $0.2 million, or 4%, over the prior year. These costs represented 3% of total revenues for the nine months ended June 30, 2003 and 2002. These expenses will not necessarily have a direct or immediate correlation to revenues. We continue to build and support our outsource service solutions base and corresponding internet and digital technologies. Selling, General and Administrative. SG&A expenses decreased from $44.1 million for the nine months ended June 30, 2002 to $39.4 million for the nine months ended June 30, 2003. The $4.7 million, or 11%, decrease resulted in part from the sale of our Switzerland operations, which had $1.3 million of related expenses included in the prior year period. Also, SG&A expenses have declined due to benefits realized from our recent restructuring activities and cost savings initiatives. Amortization of Intangible Assets. Amortization of intangible assets decreased 62%, from $3.9 million for the nine months ended June 30, 2002, to $1.5 million for the nine months ended June 30, 2003. The prior year period amortization expense included amortization, during the first quarter of fiscal 2002, of goodwill related to prior year acquisitions. All goodwill assets from the Predecessor Company were eliminated in conjunction with Fresh Start Reporting. Amortization expense after December 31, 2001 reflects the amortization of identifiable intangible assets valued as part of Fresh Start Reporting. Restructuring Charges. Restructuring charges of $1.2 million were incurred in the third quarter of fiscal year 2003. These are related to data center consolidation and reorganization of parts of our corporate, marketing, sales, and international operating organizations. Additional restructuring charges, including approximately $0.9 million of severance, are expected in the fourth quarter of fiscal 2003. The third quarter charges consist of employee severance and termination-related costs for approximately 76 employees, all of whom were notified and have left the company as of June 30, 2003. In the third quarter of fiscal year 2002, we recorded a restructuring charge of $2.1 million related to the reorganization of our operations from two business units to one entity. The reorganization of the workforce consisted of combining the field organizations of Document Solutions and Technical Services into one organization, the establishment of an executive level position to oversee all sales and marketing activities and a single support group for our data centers, Web Presentment operations, field services operations and process quality. The restructuring charges included $1.6 million in employee severance and termination related costs for approximately 100 employees, all of whom have left the company. The restructuring charges also include approximately $0.4 million for the closure of a data center for which the lease expires in July 2004. In the first quarter of fiscal year 2002, we reversed $1 million of business restructuring reserves primarily due to favorable circumstances related to the shutdown of our Japanese subsidiary. Our closure costs to vacate our facility in Japan, costs to fulfill our contract obligations and severance and related professional costs up to that time were less than anticipated at the time the accrual was recorded. Interest Expense and Fee Amortization. Interest expense decreased to $1.8 million for the nine months ended June 30, 2003 from $5.4 million for the nine months ended June 30, 2002. Prior year expense included interest (approximately $1.7 million) on our senior subordinated notes up to October 19, 2001, the date we filed Chapter 11 bankruptcy. The remaining expense in both periods is related primarily to interest on the senior secured revolving credit facility. Other. We recognized other income due to extinguishment of debt totaling $265.3 million for the nine month period ended June 30, 2002 as a result of our bankruptcy proceedings and subsequent emergence from Chapter 11 proceedings on December 31, 2001. The remaining expense in both periods is related primarily to currency exchange gains and losses. Reorganization Items. Reorganization items in the nine months ended June 30, 2002, represent expenses and adjustments resulting from our reorganization and consist of professional fees incurred subsequent to our Chapter 11 filing totaling $1 million, fair value adjustments made to assets and liabilities totaling $16.9 million and other asset write-offs and settlements totaling $2.6 million (primarily related to our extinguished debt) in Fresh Start Reporting. Provision for Income Taxes. The provision for income taxes of $1.8 million and $1.7 million for the nine months ended June 30, 2003 and 2002, respectively, related primarily to earnings of foreign subsidiaries. Gain on Sale of Discontinued Operations. In the nine months ended June 30, 2003, we realized a gain of $8.2 million on the sale of our Switzerland subsidiaries. This sale was effective October 1, 2002. The Switzerland operations were not material to our consolidated results prior to December 31, 2001. As a result, the statements of operations for the three months ended December 31, 2001 do not segregate the Switzerland operations as discontinued. Liquidity and Capital Resources Our legacy business (COM) has declined in recent years and is forecasted to continue to decline as new technologies become available and are accepted in the marketplace. Our ability to generate sufficient cash to fund operations and to meet future bank requirements is dependent on successful and simultaneous management of the decline in COM as well as the expansion of alternative service offerings. Other factors, such as an uncertain economy, levels of competition in the document management industry, and technological uncertainties will impact our ability to generate cash and maintain liquidity. We believe the actions taken over the past two years, including new and enhanced product and service offerings, company downsizing, cost control measures and the debt restructuring from our bankruptcy will allow us to maintain sufficient cash flows from operations to meet our operating, capital and debt requirements in the normal course of business for at least the next twelve months. On December 31, 2001, Anacomp and Fleet National Bank, as agent, and its syndicate of lenders (collectively, "the Bank Group") entered into an Amended and Restated Revolving Credit Agreement. The credit agreement provides for a commitment of $26.1 million as of June 30, 2003, with a $20.0 million direct borrowing sublimit and a $6.1 million letter of credit sublimit. The facility is available for new borrowings when borrowings are below the direct borrowing sublimit. Effective December 19, 2002, we signed an amendment to the revolving credit agreement. The amendment modified certain financial covenants to accommodate the sale of our Switzerland operations and current business plans. Other changes to the agreement included a permanent reduction to the credit facility commitment of $10.0 million and provisions for acquisitions and/or divestitures under specified conditions. At June 30, 2003, the outstanding revolving credit borrowings were $8.2 million (plus outstanding standby letters of credit of $6.1 million). During the nine month period ended June 30, 2003, we paid $21.8 million to reduce the principal outstanding and have $11.8 million of borrowing capacity. The original maturity date of the amended facility was June 30, 2003. Due to the receipt of proceeds from our sale of the Switzerland subsidiaries and the application of those proceeds to reduce our facility balance, it has been extended to December 31, 2003 under the terms of the agreement. We reduced the outstanding borrowings and permanently reduced the borrowing sublimit of the credit facility commitment by $11.4 million as a result of proceeds received from the October 2002 sale of our Switzerland operations and subsidiaries. The credit agreement bears interest at a base rate equal to the higher of (a) the annual rate of interest announced from time to time by Fleet National Bank as its best rate, or (b) one-half of one percent above the Federal Funds Effective Rate, for the portion of the facility equal to a Formula Borrowing Base ("FBB"). The FBB equals 80% of eligible accounts, which include U.S. and Canadian accounts receivable. The rate of interest is three percentage points higher than the base rate for the facility balance outstanding in excess of the FBB. Interest is due and payable monthly in arrears. The interest rate was 4.0% for the FBB portion and 7.0% for the excess portion at June 30, 2003. At June 30, 2003, the FBB was $11.4 million; accordingly, there were no excess borrowings over the FBB. The credit facility is secured by virtually all Anacomp assets and 65% of the capital stock of our foreign subsidiaries. The facility contains covenants relating to limitations on the following: o capital expenditures; o additional debt; o purchases of our common stock; o mergers and acquisitions; and o liens and dividends. The credit facility also is subject to minimum EBITDA, interest coverage and leverage ratio covenants. In addition, we are required to remit to the Bank Group the net proceeds of any capital asset sale. Under the current facility as amended, the facility commitment and the direct borrowings sublimit will be permanently reduced by $1.25 million on September 30, 2003. Subsequent to June 30, 2003, we have made cash payments totaling $1.8 million to further reduce the outstanding credit facility liability. As of August 12, 2003, the outstanding revolving credit borrowings were $6.4 million and borrowing capacity was $13.6 million. During the past nine months, our significant paydown of the outstanding balance on our revolving credit facility through both scheduled reductions and from proceeds received on the sale of our Switzerland subsidiaries has substantially improved our working capital position. The working capital deficiency of $6.5 million at September 30, 2002, is now positive working capital of $7.2 million at June 30, 2003. Net cash provided by continuing operations was $11.5 million for the nine months ended June 30, 2003, compared to $15.8 million in the comparable prior year period. The prior period amount includes approximately $2.6 million contributed by discontinued operations. Net cash provided by investing activities was $11.5 million in the current nine month period, compared to cash used in investing activities of $3.2 million in the comparable prior year period. The current year period included cash proceeds from the sale of our Switzerland operations and subsidiaries. Expenditures in both years were primarily for purchases of equipment. We received an additional CHF 1.1 million, or approximately $0.7 million, on April 17, 2003, from our sale of Swiss subsidiaries as scheduled under the terms of the sale agreement. During the quarter ended June 30, 2003, we entered into a service agreement with Dot Hill Systems Corp. to provide warranty and non-warranty service and on-site repair support for certain storage network solutions products. Under the terms of the agreement, Anacomp paid Dot Hill $500,000 to acquire new and used inventory, spare parts, test equipment, software, licenses, customer lists, and other commercial and proprietary information necessary for Anacomp to perform the agreed upon services. In addition, Anacomp will pay Dot Hill periodic royalty payments over at least the next two years; a liability of $1.2 million for the minimum royalty payments due has been recorded and is included in "Other accrued liabilities" in the Condensed Consolidated Balance Sheet at June 30, 2003. Additional royalties will be owed to Dot Hill if revenue from services exceed a defined minimum amount. The initial payment of $500,000 is included as "Payments to acquire product line assets and customer rights" in the investing activities section of the Condensed Consolidated Statement of Cash Flows for the nine months ended June 30, 2003. Net cash used in financing activities was $21.8 million during the current nine month period, compared to $21.6 million used in financing activities in the prior year period. In both periods, cash was used to pay down the revolving credit facility. Our cash balance totaled $18.0 million at June 30, 2003 compared to $15.6 million at September 30, 2002. Approximately 56% of the June 30, 2003 cash balance is located at our foreign subsidiaries compared to approximately 49% at September 30, 2002. Our use of excess cash as additional payments against our credit facility resulted in the decrease of domestic cash on hand. RISK FACTORS You should carefully consider the following risk factors and all of the other information included in this Quarterly Report in evaluating our business and our prospects. Investing in our Class A or Class B Common Stock (collectively, "Common Stock") involves a high degree of risk. Additional risks and uncertainties may also materially adversely affect our business and financial condition in the future. Any of the following risks could materially adversely affect our business, operating results or financial condition and could result in a partial or complete loss of your investment. We recently effectuated a financial restructuring pursuant to a prepackaged Chapter 11 plan of reorganization, we have a history of net losses and we may face liquidity issues in the future. On October 19, 2001 we filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code and a prepackaged plan of reorganization. The Bankruptcy Court confirmed the plan of reorganization on December 10, 2001 and we emerged from our bankruptcy proceedings effective December 31, 2001. However, our completion of bankruptcy proceedings does not assure our continued success. For example, the bankruptcy proceedings described above are our second bankruptcy: we previously filed a plan of reorganization in January 1996 and emerged from those proceedings in June 1996. If our financial performance does not exceed our recent historical results, the price of our Common Stock could decline and your investment could be materially adversely affected. As part of our plan of reorganization, our lenders modified the terms of our senior credit facility, which encumbers substantially all of our assets. This facility also includes mandatory periodic pay downs and covenant restrictions concerning the commitment limits of this facility including levels of collateral, financial covenants, and limitations on capital expenditures. Our credit facility is scheduled to mature on December 31, 2003, at which time we will be required to renew, refinance, or modify the credit facility with our lenders or locate alternative financing. These restrictions and provisions could have an adverse impact on our future liquidity and ability to implement our business plan. Our revenues could continue to decrease over the next few years, which could inhibit us from achieving or sustaining profitability or even prevent us from continuing to operate. Our accumulated deficit through December 31, 2001 has been eliminated as a result of Fresh Start Reporting. However, we have not recorded sustained profitable operating results for quite some time. To achieve sustained future profitability we will need to generate and sustain revenues while satisfying our payment obligations under the terms of our senior secured revolving credit facility (including mandatory pay downs) and maintaining reasonable cost and expense levels. Our COM business has been experiencing declining revenues for several years, so revenue growth in other areas would have to offset the decline in COM revenues before our total revenues would increase. We do not know when or if we will become profitable on a sustained basis. If we fail to achieve consistent profitability and generate sufficient cash flows, we will face liquidity and bank covenant issues and our senior secured debt could become immediately due and payable on demand. Even though we generated operating income from continuing operations in recent quarters, we may not be able to sustain or increase profitability on a quarterly or an annual basis. Any failure on our part to achieve or sustain profitability could cause our stock price to decline. The development of alternate technologies in the document management industry is decreasing the need for our micrographics services and products. The document management industry is rapidly changing. The recent trend of technological advances and attendant price declines in digital systems and products is expected to continue. As a result, in certain instances, potential micrographics customers have deferred, and may continue to defer, investments in micrographics systems (including our XFP2000(R) COM system) and the utilization of micrographics service centers while evaluating the capabilities of other technologies. Additionally, the continuing development of local area computer networks and similar systems based on digital technologies has resulted and will continue to result in many of our customers changing their use of micrographics from document storage, distribution and access to primarily archival use. We believe that this is at least part of the reason for the declines in recent years in both sales and prices of our duplicate film, readers and reader/printers. Our service centers also are producing fewer duplicate microfiche per original for customers, reflecting the shift towards using micrographics primarily for long term archival storage. Revenues for our micrographics services and products, including COM service revenues, COM system revenues, maintenance service revenues and micrographics supplies revenues, have been adversely affected for each of the past five fiscal years and will likely in the future be substantially adversely affected by, among other things, the increasing use of digital technology. COM revenues from services, system and supplies sales declined 27% in 2002 from fiscal year 2001 revenues. Overall, COM revenues represented 66% of our revenues for the twelve month period ended September 30, 2002, 71% of our fiscal year 2001 revenues, 77% of 2000 revenues, 83% of 1999 revenues, 91% of 1998 revenues and 95% of 1997 revenues. Additionally, the rapidly changing document management industry has resulted in price competition in certain of our businesses, particularly COM services. We have been and we expect to continue to be impacted adversely by the decline in the demand for COM services, the declining market for COM systems and the attendant reduction in supplies revenues. We expect that our revenues for maintenance of COM systems will continue to decline as a result of decreasing use and fewer sales of COM systems. Additionally, the growth of alternate technologies has created consolidation in the micrographics segment of the document management industry. To the extent consolidation in the micrographics segment has the effect of causing major providers of micrographics services and products to cease providing such services and products, the negative trends in the segment, such as competition from alternate technologies described above, may accelerate. If we do not adapt to the rapid changes in the document management industry, our business will suffer and your investment will be adversely affected. Intense competition in the document management industry could prevent us from increasing or sustaining our revenues and prevent us from achieving or sustaining profitability. The document management industry is becoming increasingly competitive, especially in the market for Internet-based document management services. We face, and will continue to face, competition from other document management outsource service providers as well as from document management software providers who offer in-house solutions. Some of our competitors are leading original equipment manufacturers with established client-relationships in our target markets. Some of our competitors are significantly larger than we are and have greater financial resources, greater name recognition and longer operating histories than we have. Our competitors may be able to respond more quickly or adjust prices more effectively to take advantage of new opportunities or customer requirements. Increased competition could result in pricing pressures, reduced sales, reduced margins or failure to achieve or maintain widespread market acceptance, any of which could prevent us from increasing or sustaining our revenues and achieving or sustaining profitability. Fluctuation in our quarterly financial results may cause instability in our stock price. Our COM business has experienced and continues to experience trending decline; however, the rate at which this decline will impact our operations is difficult to predict. Additionally, we attempt to base our operating expenses on anticipated revenue levels, and a substantial percentage of our expenses are fixed in the short term. As a result, any delay in generating or recognizing revenues could cause our operating results to be below expectations. Moreover, the operating expenses from our growth initiatives may exceed our estimates. Any or all of these factors could cause the price of our common stock to decline. If we are unable to decrease our costs to match the decline in our revenues, we may not be able to sustain profitability. The decline in the demand for COM services, systems and maintenance and the attendant reduction in supplies revenues have adversely affected our business. Over the past several years, COM revenues from services, system and supplies sales have been steadily decreasing as a percentage of our revenues and declined 27% in 2002 from fiscal year 2001 revenues. We expect that our revenues for maintenance of COM systems will continue to decline as a result of decreasing use and fewer sales of COM systems. We have taken steps such as facilities consolidation and personnel reductions to reduce our cost structure and offset the decrease in COM revenues. We intend to take additional measures as necessary to continue to reduce our cost structure. If these measures are unsuccessful, we will not realize profits from our COM business and your investment may be adversely affected. If our future results do not meet or exceed the projections and assumptions we made for Fresh Start Reporting purposes, we may have to write down the values of some of our assets. On December 31, 2001, as a result of our emergence from bankruptcy, we adopted Fresh Start Reporting. This resulted in material changes to our financial statements including the recording of an asset for "reorganization value in excess of identifiable net assets." We determined the value of our business and accordingly, our reorganization asset by making certain projections and assumptions based on historical results as well as our best estimates of expected future market conditions. Unfavorable changes compared to our projections used for Fresh Start Reporting purposes could result in future impairments of our reorganization asset and our identifiable intangible assets. If these assets were to be impaired, the value of your investment could decline. If we are unable to make technological advancements and upgrades to our current product and service offerings, we will lose market share. In order to maintain and grow market share, we continually invest in offering new customer solutions and in upgrading our storage and delivery systems and infrastructure. We cannot assure you that we will be able to continue to develop innovations in our software to stay abreast of client needs. We also cannot assure you that we will be able to maintain or upgrade our infrastructure to take advantage of new technology. Our future plans for growth and a return to profitability would be detrimentally affected if we are unable to develop new and innovative customer solutions or if we are unable to sustain our infrastructure. Litigation or third party claims of intellectual property infringement could require us to spend substantial time and money and adversely affect our ability to develop and commercialize products. Third parties may accuse us of employing their proprietary technology without authorization. In addition, third parties may obtain patents that relate to our technologies and claim that our use of such technologies infringes these patents. Regardless of their merit, such claims could require us to incur substantial costs, including the diversion of management and technical personnel, in defending ourselves against any such claims or enforcing our patents. In the event that a successful claim of infringement is brought against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, or at all. Defense of any lawsuit or failure to obtain any of these licenses could adversely affect our ability to develop and commercialize products and our operating results. The loss of key personnel or the inability to attract and retain additional personnel could impair our ability to expand our operations. We are highly dependent on the principal members of our management team and the technical expertise of our personnel, especially in our professional services business. The success of this business is based on our technical expertise and proven ability to provide fast, expert, on-site service and support around the clock. This service is provided in North America and Europe by approximately 400 Anacomp service professionals, the loss of whose services might adversely impact the achievement of our business objectives. Moreover, our business operations will require additional expertise in specific industries and areas applicable to products identified and developed through our technologies. These activities will require the addition of new personnel, including management and technical personnel as well as the development of additional expertise by existing employees. Competition for experienced technicians may limit our ability to attract or retain such technicians. If we are unable to attract such personnel or to develop this expertise, we may not be able to sustain or expand our operations in a timely manner or at all. We face business, political and economic risks because a significant portion of our sales is to customers outside of the United States. Revenues from operations outside the United States accounted for 28% of our total revenue for the twelve month period ended September 30, 2002 and 30% of our total revenue in fiscal year 2001. Our success continues to depend upon our international operations, and we expect that a significant portion of our total future revenues will be generated from international sales. Our international business involves a number of risks, including: o our ability to adapt our products to foreign design methods and practices; o cultural differences in the conduct of business; o difficulty in attracting and retaining qualified personnel; o longer payment cycles for and greater difficulty collecting accounts receivable; o unexpected changes in regulatory requirements, royalties and withholding taxes that restrict the repatriation of earnings; o tariffs and other trade barriers; o the burden of complying with a wide variety of foreign laws; o political, economic or military conditions associated with current worldwide conflicts and events; o the exchange markets and our ability to generate, preserve and repatriate proceeds and dividends to the parent company in the United States; and o to the extent that profit is generated or losses are incurred in foreign countries, our effective income tax rate may be significantly affected. Any of these factors could significantly harm our future international sales and, consequently, our revenues and results of operations and business and financial condition. We use hazardous chemicals in our business and any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly. Our operations involve the use and sale of hazardous chemicals. Although we believe that our safety procedures for handling and disposing comply with the applicable standards, we cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. In the event of an accident, we may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Disclosure of trade secrets could aid our competitors. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, our employees and consultants. However, these agreements can be breached and, if they are, there may not be an adequate remedy available to us. If our trade secrets become known we may lose our competitive position. If we are unable to adequately protect our intellectual property, third parties may be able to use our technology, which could adversely affect our ability to compete in the market. Our success will depend in part on our ability to obtain protection for our intellectual property. We will be able to protect our intellectual property rights from unauthorized use by third parties only to the extent that our software is copyrightable and business methods are patentable under applicable intellectual property laws or are effectively maintained as trade secrets. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Furthermore, others may independently develop similar or alternative technologies or design around our intellectual property protections. In addition, our competitors may independently develop substantially equivalent proprietary information or may otherwise gain access to our trade secrets. Difficulties we may encounter managing our growth product lines may divert resources and limit our ability to successfully expand our operations and implement our business plan. We anticipate that our MVS and Web Presentment product lines will be able to grow as a result of our reorganization. Our growth in the future anticipates potential acquisitions that may place a strain on our administrative personnel and operational infrastructure should such acquisitions occur. We cannot assure you that we will be able to identify acquisition candidates, or be able to consummate acquisitions on terms acceptable to us, if at all. Additionally, we cannot assure you that we will have funds available for making acquisitions. Effectively managing growth will also require us to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. We rely on a few suppliers to provide us COM products that while in decline, are essential to our operations. Supplies and system sales represented approximately 17% of our total revenue, for fiscal year 2002. The primary products in the equipment and supplies business are silver halide original COM film and non-silver duplicating microfilm. We obtain all of our silver halide products through an exclusive multi-year supply agreement with a single provider and our duplicate film products from one other provider. Any disruption in the supply relationship between Anacomp and such suppliers could result in delays or reductions in product shipment or increases in product costs that adversely affect our operating results in any given period. In the event of any such disruption, we cannot assure you that we could develop alternative sources of raw materials and supplies at acceptable prices and within reasonable times. Additionally, as the demand for COM services declines, the demand for COM supplies falls as well. If the decline in COM supplies is greater than planned, our profitability and liquidity would decline as well. Our stock price may be volatile, and you may not be able to resell your shares at or above the price you paid, or at all. Since the effective date of our bankruptcy restructuring, our common stock has had limited trading activity on the OTC Bulletin Board. We cannot predict the extent to which investor interest in our stock will lead to the development of a more active trading market, how liquid that market might become or whether it will be sustained. The trading price of our common stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this report. In addition, the stock markets in general have experienced extreme price and volume fluctuations. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. Our net deferred tax asset may have no future value should we experience an Ownership Change as defined by the Internal Revenue Code. We maintain a deferred tax asset for tax goodwill in excess of book reorganization asset, certain temporary differences, net operating losses and other tax basis carryforwards. We have also established a valuation allowance in order to fully offset this net deferred tax asset. We have been advised that in the event of an Ownership Change (as defined by the Internal Revenue Code in section 382), our net deferred tax asset may have limited or no value and be unavailable for us to utilize for our benefit in future periods. Item 3. Quantitative and Qualitative Disclosures About Market Risk Revenues generated outside of the United States, as a percentage of total revenues, were 31% and 28% for the nine month periods ended June 30, 2003 and 2002, respectively. Fluctuations in foreign exchange rates could impact operating results through translation of our subsidiaries' financial statements. Recent global economic events have caused exchange rates in general to rise substantially, making foreign currencies more valuable in terms of the U.S. dollar. For example, the Euro has risen more than 16% during the nine months ended June 30, 2003. Exchange rate changes of this magnitude can have a material affect on our financial statement results, particularly with regard to the accumulated other comprehensive income or loss account in the equity section of the balance sheet. Our revolving credit facility bears interest at variable rates and is therefore affected by the general level of U.S. interest rates. We had $8.2 million outstanding under our facility on June 30, 2003. If interest rates were to increase 2%, annual interest expense would increase approximately $0.2 million based on the June outstanding balance. Foreign Exchange Options We completed a sale of our Switzerland operations and subsidiaries on October 18, 2002 to edotech Ltd. (a UK company) at a sales price of CHF 26.7 million (Swiss francs) or approximately $17.9 million (U.S. dollars). CHF 4.6 million of the sales price was paid at closing, CHF 18.2 million was paid on March 10, 2003, and CHF 1.1 million was paid on April 17, 2003. The remaining sales price, CHF 2.8 million, was deferred and is payable on or before April 18, 2004 upon expiration of certain indemnification claim periods. As a result of a tax audit of the Switzerland operations for prior year results, we estimate we will incur additional costs not to exceed CHF 0.3 million, or approximately $0.2 million. This will decrease the amount we will receive on or before April 18, 2004. We are exposed to various foreign currency exchange rate risks that arise in the normal course of business. Our functional currency is the U.S. dollar. We have international operations resulting in receipts and payments in currencies that differ from the functional currency of Anacomp. In connection with the sale of our Switzerland subsidiaries, we entered into forward contracts to hedge the related receivables. All forward contracts entered into by us were entered into for the sole purpose of hedging existing currency exposure, not for speculation or trading purposes. Currently, we are using a forward contract only to hedge balance sheet exposure. The contract is in Swiss francs, and has a maturity of April 15, 2004. When hedging balance sheet exposure, all gains and losses on forward contracts are recognized as other income and expense in the same period as the gains and losses on remeasurement of the foreign currency-denominated assets. We entered into these foreign exchange forward contracts within a few days of the sale, and therefore the difference between the change in the fair value of the asset and the change in value in the contracts that must be recognized in the financial statements is immaterial. Item 4. Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. PART II - OTHER INFORMATION Item 1. Legal Proceedings Anacomp and its subsidiaries are potential or named defendants in several lawsuits and claims arising in the ordinary course of business. While the outcome of claims, lawsuits or other proceedings brought against us cannot be predicted with certainty, management expects that any liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on our financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K (exhibits incorporated by reference) (a) Exhibits: For a list of exhibits filed with this quarterly report, refer to the Index to Exhibits. (b) During the period covered by this report, we filed the following reports on Form 8-K: (1) On May 20, 2003, we filed a Form 8-K to provide non-material information that was inadvertently omitted from the March 12, 2003 8-K filing. (2) On May 21, 2003, we filed a Form 8-K with respect to a press release dated May 16, 2003 regarding our second quarter financial results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANACOMP, INC. /s/ Linster W. Fox ------------------------------ Linster W. Fox Executive Vice President and Chief Financial Officer Date: August 14, 2003 INDEX TO EXHIBITS The following exhibits are filed with this Quarterly Report on Form 10-Q or incorporated herein by reference to the listed document previously filed with the Securities and Exchange Commission (the "SEC"). Previously unfiled documents are noted with an asterisk (*): 2. Plan of Reorganization dated August 29, 2001. (1) 3.1 Amended and Restated Articles of Incorporation of the Company as of December 31, 2001. (2) 3.2 Amended and Restated Bylaws of the Company as of April 25, 2002. (3) 4.1 Shareholders Rights Plan. (4) 4.2 Amendment to the Shareholders Rights Plan dated December 17, 2002. (5) 4.3 Warrant Agreement by and between the Company and Mellon Investor Services LLC dated December 31, 2001. (2) 10.13 Change in Control Agreement as of April 28, 2003, between the Company and Jeffrey R. Cramer. (*) 10.14 Change in Control Agreement as of April 28, 2003, between the Company and Linster W. Fox. (*) 10.15 Change in Control Agreement as of April 28, 2003, between the Company and Richard V. Keele. (*) 10.16 Change in Control Agreement as of April 28, 2003, between the Company and Paul J. Najar. (*) 10.17 Change in Control Agreement as of April 28, 2003, between the Company and Frank Roche. (*) 10.18 Change in Control Agreement as of April 28, 2003, between the Company and Nick Salimbene. (*) 31 Rule 13a - 14 Certifications 32 Section 1350 Certifications ========================= (1) Incorporated by reference to the Company's Form 8-K filed on September 20, 2001 and October 29, 2001. (2) Incorporated by reference to the exhibits to the registration statement of Form 8-A filed by the Company on January 9, 2002. (3) Incorporated by reference to the Company's Form 10-Q/A for the quarterly period ended June 30, 2002. (4) Incorporated by reference to an exhibit to the Company's Form 8-K filed on August 21, 2002. (5) Incorporated by reference to an exhibit to the Company's Form 10-K for the year ended September 30, 2002. EX-31 3 ex31_1q303.txt EXHIBIT 31.1 Q3 FY03 CERTIFICATIONS I, Jeffrey R. Cramer, certify that: 1. I have reviewed this Form 10-Q of Anacomp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /s/Jeffrey R. Cramer __________________________ Jeffrey R. Cramer Chief Executive Officer EX-31 4 ex31_2q303.txt EXHIBIT 31.2 Q3 FY03 CERTIFICATIONS I, Linster W. Fox, certify that: 1. I have reviewed this Form 10-Q of Anacomp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /s/Linster W. Fox _________________________ Linster W. Fox Chief Financial Officer EX-32 5 ex32_1q303.txt EXHIBIT 32.1 Q3 FY03 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Anacomp, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey R. Cramer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 12, 2003 /s/Jeffrey R. Cramer ___________________________ Jeffrey R. Cramer Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Anacomp, Inc. and will be retained by Anacomp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 6 ex32_2q303.txt EXHIBIT 32.2 Q3 FY03 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Anacomp, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Linster W. Fox, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 12, 2003 /s/Linster W. Fox ___________________________ Linster W. Fox Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Anacomp, Inc. and will be retained by Anacomp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-10 7 sevagmrkeele.txt EXHIBIT 10.15 ANACOMP, INC. CHANGE OF CONTROL SEVERANCE AGREEMENT This Change of Control Severance Agreement (the "Agreement") is made and entered into by and between Richard Keele ("Executive") and Anacomp, Inc., an Indiana corporation ("Company"), effective as of April 28, 2003 (the "Effective Date"). RECITALS A. It is expected that Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of Company (the "Board") recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of Company and its shareholders to assure that Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of Company. B. The Board believes that it is in the best interests of Company and its shareholders to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide Executive with certain severance benefits upon Executive's termination of employment following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with Company notwithstanding the possibility of a Change of Control. D. Certain capitalized terms used in the Agreement are defined in Section 6 below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied. 2. At-Will Employment. Company and Executive acknowledge that Executive's employment is and shall continue to be at-will, as defined under applicable law, except as may otherwise be specifically provided under the terms of any written formal employment agreement between Company and Executive (an "Employment Agreement"). If Executive's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or under his or her Employment Agreement. 3. Agreement to Remain with Company for 6 Months Following a Change of Control. Executive agrees to remain employed with Company (or its successor corporation) for a period of six months following a "Change of Control" (as defined herein) unless his or her employment terminates due to death, Executive's "Disability" (as defined herein), for "Good Reason" (as defined herein), or is terminated involuntarily by Company during such six month period. 4. Severance Benefits. (a) Involuntary Termination Other than for Cause or Voluntary Termination for Good Reason Following a Change of Control. If within twelve months following a Change of Control: (i) Executive terminates his or her employment with Company (or any parent or subsidiary of Company) for "Good Reason" (as defined herein); or (ii) Company (or any parent or subsidiary of Company) terminates Executive's employment for other than "Cause" (as defined herein) and Executive signs and does not revoke a standard release of claims with Company in a form reasonably acceptable to Company and Executive agrees to continue to comply with the surviving provisions of any confidentiality or proprietary rights agreement signed by Executive in connection with his or her employment, then Executive shall receive the following severance from Company: (i) Severance Payment. Executive shall be entitled to receive a "Severance Payment" (less applicable withholding taxes) equal to 100% of Executive's annual base salary (as in effect immediately prior to (A) the Change of Control, or (B) Executive's termination, whichever is greater) plus 100% of Executive's Average Bonus Payment (as defined herein) for the fiscal year in which the Change of Control or Executive's termination occurs, whichever is greater, less any amount of the bonus that has already been paid out in the year in which Executive's termination occurs. (ii) Options; Restricted Stock. As provided in Company's existing stock option agreements, all of Executive's then outstanding options to purchase shares of the Company's Common Stock ("Options") shall immediately vest and became exercisable. Additionally, any shares of the Company's Common Stock then held by Executive subject to a Company repurchase right ("Restricted Stock") shall immediately vest and Company's right of repurchase with respect to such shares of Restricted Stock shall lapse. The Options shall remain exercisable following the termination of employment for the period prescribed in the respective option agreements. (iii)Continued Executive Benefits. Company will pay: (A) the premiums required to continue Executive's group health, dental and vision care coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), provided that Executive elects to continue and remains eligible for these benefits under COBRA; and (B) the premiums required to continue Executive's long-term disability and life insurance coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, provided the benefit plans allow Executive to convert these policies to an individual policy (continued coverage under Section 4(a)(iii)(A) & (B) above collectively referred to as "Company-Paid Coverage"). If such coverage included Executive's dependents immediately prior to the Change of Control, such dependents shall also be covered at Company expense. Executive's portion of the premiums shall be deducted from the severance payment described in Section 4(a)(i) above. Company-Paid Coverage shall continue until the earlier of: (i) twelve months from the date of Executive's termination, or (ii) the date upon which Executive and his or her dependents become covered under another employer's group health, dental, vision, long-term disability or life insurance plans that provide Executive and his or her dependents with comparable benefits and levels of coverage. (b) Timing of Severance Payments. The severance payment described in Section 4(a)(i) above shall be paid by Company to Executive within fifteen business days following a termination covered by Section 4(a) above. (c) Voluntary Resignation; Termination for Cause. If Executive's employment with Company terminates (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with Company. (d) Termination Apart from Change of Control. In the event Executive's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve month period following a Change of Control, then Executive shall be entitled to receive severance and any other benefits only as may then be established under Company's existing written severance and benefits plans and practices or pursuant to other written agreements with Company. (e) Exclusive Remedy. In the event of a termination of Executive's employment within twelve months following a Change of Control, the provisions of this Section 4 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive shall be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change of Control other than those benefits expressly set forth in this Section 4. (f) No Duplicative Payments. In the event that Executive would be entitled to severance payments under this Agreement and also under any Company policy or any other agreement with Company, then the terms of this Agreement shall control Company's payment obligations, to the exclusion of any other agreement or Company policy. 5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under Section 4(a) shall be either: (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by Company's independent public accounts immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon Executive and Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. Notwithstanding anything herein to the contrary, Employee may agree to reduce the amount of payments and/or benefits otherwise owed to him or her if such reduction would increase the after tax benefits to him or her. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Average Bonus Payment. "Average Bonus Payment" means the average of the bonuses paid to the individual over the last three fiscal years prior to the date of determination; except that if the computation is being made as of a date before September 30, 2003, then the Average Bonus Payment is the average of the bonuses paid to the individual over the last two fiscal years. (b) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by Executive in connection with his or her responsibilities as an Executive and intended to result in substantial personal enrichment of Executive, (ii) Executive being convicted of a felony, (iii) a willful act by Executive which constitutes gross misconduct and which is injurious to Company, (iv) following delivery to Executive of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that Executive has not substantially performed his or her duties, continued violations by Executive of Executive's obligations to Company which are demonstrably willful and deliberate on Executive's part, (v) Executive's death; or (vi) Executive's Disability. (c) Change of Control. "Change of Control" means the occurrence of any of the following: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Company representing fifty percent (50%) or more of the total voting power represented by Company's then outstanding voting securities; or (ii) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of Company as of the date hereof, or (B) are elected or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of Company); or (iii)The consummation of a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the voting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) The consummation of the sale, lease or other disposition by Company of all or substantially all Company's assets; or (v) Adoption by the shareholders of a plan of liquidation or approval by shareholders of a proposal to dissolve of the Company. Notwithstanding the foregoing, if either of the parties who are grandfathered under the Company's Rights Plan (i.e., Tennenbaum Capital Partners (and its affiliates) and Franklin (and its affiliates)) are the parties that trigger the definition of a Change of Control (either as a "person" acquiring shares, through a merger or consolidation or by effecting a change in the composition of the Board of Directors), then the transaction would not be considered to be a "Change of Control" under this Agreement, unless within the six months immediately following the action that would otherwise be a "Change of Control" the grandfathered person transfers a controlling interest in the Company to another party that is not an affiliate of the grandfathered person. (d) Disability. "Disability" shall mean that Executive has been unable to perform the essential functions of his or her job as the result of his or her incapacity due to physical or mental illness, impairment or medical condition, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by Company or its insurers and acceptable to Executive or Executive's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least thirty days' written notice by the Company of its intention to terminate Executive's employment. In the event that Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Good Reason. "Good Reason" means without Executive's express written consent: (i) a material reduction of Executive's duties, title, authority or responsibilities, relative to Executive's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Executive of such reduced duties, title, authority or responsibilities, provided, however, that a reduction in duties, title, authority or responsibilities solely by virtue of Company being acquired and made part of a larger entity (as, for example, when the Senior Vice-President of a business unit of Company remains as such following a Change of Control) shall not by itself constitute grounds for a "Voluntary Termination for Good Reason"; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to Executive immediately prior to such reduction; or (iii) a reduction by Company in the base salary of Executive as in effect immediately prior to such reduction; or (iv) a material reduction by Company in the kind or level of benefits to which Executive was entitled immediately prior to such reduction with the result that such Executive's overall benefits package is significantly reduced. Notwithstanding the above, Executive will not be deemed to have resigned for Good Reason unless Executive has given the Company written notice of the offending conduct and a thirty day opportunity to cure and Company has failed to cure such conduct within the thirty-day period. 7. Successors. (a) Company's Successors. Any successor to Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to Company's business and/or assets which executes and delivers the assumption agreement described in this Section 7(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. (a) General. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to Executive, at his or her last known residential address and (ii) if to Company, at the address of its principal corporate offices (attention: Secretary), or in any such case at such other address as a party may designate by ten days' advance written notice to the other party pursuant to the provisions above. (b) Notice of Termination. Any termination by Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(b) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated and shall specify the termination date (which shall be not more than thirty days after the giving of such notice). The failure by either party to include in the notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of that party hereunder or preclude that party from asserting such fact or circumstance in enforcing that party's rights hereunder. 9. Miscellaneous Provisions. (a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. (d) Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. The Superior Court of San Diego County and/or the United States District Court for the Southern District of California shall have exclusive jurisdiction and venue over all controversies in connection herewith. (f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (i) Attorneys Fees. In the event of litigation between the parties over the terms of this Agreement and the performance of their respective obligations hereunder, the prevailing party shall be entitled to receive its reasonable attorney's fees and expenses from the other party. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. ANACOMP, INC. By: /s/Edward P. Smoot ________________________ Edward P. Smoot Title: Chairman EXECUTIVE /s/Richard V. Keele _____________________________ Richard V. Keele EX-10 8 sevagmpnajar.txt EXHIBIT 10.16 ANACOMP, INC. CHANGE OF CONTROL SEVERANCE AGREEMENT This Change of Control Severance Agreement (the "Agreement") is made and entered into by and between Paul Najar ("Executive") and Anacomp, Inc., an Indiana corporation ("Company"), effective as of April 28, 2003 (the "Effective Date"). RECITALS A. It is expected that Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of Company (the "Board") recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of Company and its shareholders to assure that Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of Company. B. The Board believes that it is in the best interests of Company and its shareholders to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide Executive with certain severance benefits upon Executive's termination of employment following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with Company notwithstanding the possibility of a Change of Control. D. Certain capitalized terms used in the Agreement are defined in Section 6 below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied. 2. At-Will Employment. Company and Executive acknowledge that Executive's employment is and shall continue to be at-will, as defined under applicable law, except as may otherwise be specifically provided under the terms of any written formal employment agreement between Company and Executive (an "Employment Agreement"). If Executive's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or under his or her Employment Agreement. 3. Agreement to Remain with Company for 6 Months Following a Change of Control. Executive agrees to remain employed with Company (or its successor corporation) for a period of six months following a "Change of Control" (as defined herein) unless his or her employment terminates due to death, Executive's "Disability" (as defined herein), for "Good Reason" (as defined herein), or is terminated involuntarily by Company during such six month period. 4. Severance Benefits. (a) Involuntary Termination Other than for Cause or Voluntary Termination for Good Reason Following a Change of Control. If within twelve months following a Change of Control: (i) Executive terminates his or her employment with Company (or any parent or subsidiary of Company) for "Good Reason" (as defined herein); or (ii) Company (or any parent or subsidiary of Company) terminates Executive's employment for other than "Cause" (as defined herein) and Executive signs and does not revoke a standard release of claims with Company in a form reasonably acceptable to Company and Executive agrees to continue to comply with the surviving provisions of any confidentiality or proprietary rights agreement signed by Executive in connection with his or her employment, then Executive shall receive the following severance from Company: (i) Severance Payment. Executive shall be entitled to receive a "Severance Payment" (less applicable withholding taxes) equal to 100% of Executive's annual base salary (as in effect immediately prior to (A) the Change of Control, or (B) Executive's termination, whichever is greater) plus 100% of Executive's Average Bonus Payment (as defined herein) for the fiscal year in which the Change of Control or Executive's termination occurs, whichever is greater, less any amount of the bonus that has already been paid out in the year in which Executive's termination occurs. (ii) Options; Restricted Stock. As provided in Company's existing stock option agreements, all of Executive's then outstanding options to purchase shares of the Company's Common Stock ("Options") shall immediately vest and became exercisable. Additionally, any shares of the Company's Common Stock then held by Executive subject to a Company repurchase right ("Restricted Stock") shall immediately vest and Company's right of repurchase with respect to such shares of Restricted Stock shall lapse. The Options shall remain exercisable following the termination of employment for the period prescribed in the respective option agreements. (iii)Continued Executive Benefits. Company will pay: (A) the premiums required to continue Executive's group health, dental and vision care coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), provided that Executive elects to continue and remains eligible for these benefits under COBRA; and (B) the premiums required to continue Executive's long-term disability and life insurance coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, provided the benefit plans allow Executive to convert these policies to an individual policy (continued coverage under Section 4(a)(iii)(A) & (B) above collectively referred to as "Company-Paid Coverage"). If such coverage included Executive's dependents immediately prior to the Change of Control, such dependents shall also be covered at Company expense. Executive's portion of the premiums shall be deducted from the severance payment described in Section 4(a)(i) above. Company-Paid Coverage shall continue until the earlier of: (i) twelve months from the date of Executive's termination, or (ii) the date upon which Executive and his or her dependents become covered under another employer's group health, dental, vision, long-term disability or life insurance plans that provide Executive and his or her dependents with comparable benefits and levels of coverage. (b) Timing of Severance Payments. The severance payment described in Section 4(a)(i) above shall be paid by Company to Executive within fifteen business days following a termination covered by Section 4(a) above. (c) Voluntary Resignation; Termination for Cause. If Executive's employment with Company terminates (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with Company. (d) Termination Apart from Change of Control. In the event Executive's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve month period following a Change of Control, then Executive shall be entitled to receive severance and any other benefits only as may then be established under Company's existing written severance and benefits plans and practices or pursuant to other written agreements with Company. (e) Exclusive Remedy. In the event of a termination of Executive's employment within twelve months following a Change of Control, the provisions of this Section 4 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive shall be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change of Control other than those benefits expressly set forth in this Section 4. (f) No Duplicative Payments. In the event that Executive would be entitled to severance payments under this Agreement and also under any Company policy or any other agreement with Company, then the terms of this Agreement shall control Company's payment obligations, to the exclusion of any other agreement or Company policy. 5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under Section 4(a) shall be either: (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by Company's independent public accounts immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon Executive and Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. Notwithstanding anything herein to the contrary, Employee may agree to reduce the amount of payments and/or benefits otherwise owed to him or her if such reduction would increase the after tax benefits to him or her. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Average Bonus Payment. "Average Bonus Payment" means the average of the bonuses paid to the individual over the last three fiscal years prior to the date of determination; except that if the computation is being made as of a date before September 30, 2003, then the Average Bonus Payment is the average of the bonuses paid to the individual over the last two fiscal years. (b) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by Executive in connection with his or her responsibilities as an Executive and intended to result in substantial personal enrichment of Executive, (ii) Executive being convicted of a felony, (iii) a willful act by Executive which constitutes gross misconduct and which is injurious to Company, (iv) following delivery to Executive of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that Executive has not substantially performed his or her duties, continued violations by Executive of Executive's obligations to Company which are demonstrably willful and deliberate on Executive's part, (v) Executive's death; or (vi) Executive's Disability. (c) Change of Control. "Change of Control" means the occurrence of any of the following: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Company representing fifty percent (50%) or more of the total voting power represented by Company's then outstanding voting securities; or (ii) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of Company as of the date hereof, or (B) are elected or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of Company); or (iii)The consummation of a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the voting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) The consummation of the sale, lease or other disposition by Company of all or substantially all Company's assets; or (v) Adoption by the shareholders of a plan of liquidation or approval by shareholders of a proposal to dissolve of the Company. Notwithstanding the foregoing, if either of the parties who are grandfathered under the Company's Rights Plan (i.e., Tennenbaum Capital Partners (and its affiliates) and Franklin (and its affiliates)) are the parties that trigger the definition of a Change of Control (either as a "person" acquiring shares, through a merger or consolidation or by effecting a change in the composition of the Board of Directors), then the transaction would not be considered to be a "Change of Control" under this Agreement, unless within the six months immediately following the action that would otherwise be a "Change of Control" the grandfathered person transfers a controlling interest in the Company to another party that is not an affiliate of the grandfathered person. (d) Disability. "Disability" shall mean that Executive has been unable to perform the essential functions of his or her job as the result of his or her incapacity due to physical or mental illness, impairment or medical condition, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by Company or its insurers and acceptable to Executive or Executive's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least thirty days' written notice by the Company of its intention to terminate Executive's employment. In the event that Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Good Reason. "Good Reason" means without Executive's express written consent: (i) a material reduction of Executive's duties, title, authority or responsibilities, relative to Executive's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Executive of such reduced duties, title, authority or responsibilities, provided, however, that a reduction in duties, title, authority or responsibilities solely by virtue of Company being acquired and made part of a larger entity (as, for example, when the Senior Vice-President of a business unit of Company remains as such following a Change of Control) shall not by itself constitute grounds for a "Voluntary Termination for Good Reason"; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to Executive immediately prior to such reduction; or (iii) a reduction by Company in the base salary of Executive as in effect immediately prior to such reduction; or (iv) a material reduction by Company in the kind or level of benefits to which Executive was entitled immediately prior to such reduction with the result that such Executive's overall benefits package is significantly reduced. Notwithstanding the above, Executive will not be deemed to have resigned for Good Reason unless Executive has given the Company written notice of the offending conduct and a thirty day opportunity to cure and Company has failed to cure such conduct within the thirty-day period. 7. Successors. (a) Company's Successors. Any successor to Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to Company's business and/or assets which executes and delivers the assumption agreement described in this Section 7(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. (a) General. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to Executive, at his or her last known residential address and (ii) if to Company, at the address of its principal corporate offices (attention: Secretary), or in any such case at such other address as a party may designate by ten days' advance written notice to the other party pursuant to the provisions above. (b) Notice of Termination. Any termination by Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(b) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated and shall specify the termination date (which shall be not more than thirty days after the giving of such notice). The failure by either party to include in the notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of that party hereunder or preclude that party from asserting such fact or circumstance in enforcing that party's rights hereunder. 9. Miscellaneous Provisions. (a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. (d) Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. The Superior Court of San Diego County and/or the United States District Court for the Southern District of California shall have exclusive jurisdiction and venue over all controversies in connection herewith. (f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (i) Attorneys Fees. In the event of litigation between the parties over the terms of this Agreement and the performance of their respective obligations hereunder, the prevailing party shall be entitled to receive its reasonable attorney's fees and expenses from the other party. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. ANACOMP, INC. By: /s/Edward P. Smoot _______________________ Edward P. Smoot Title: Chairman EXECUTIVE /s/Paul J. Najar _____________________________ Paul J. Najar EX-10 9 sevagmjcramer.txt EXHIBIT 10.13 ANACOMP, INC. CHANGE OF CONTROL SEVERANCE AGREEMENT This Change of Control Severance Agreement (the "Agreement") is made and entered into by and between Jeffrey Cramer ("Executive") and Anacomp, Inc., an Indiana corporation ("Company"), effective as of April 28, 2003 (the "Effective Date"). RECITALS A. It is expected that Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of Company (the "Board") recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of Company and its shareholders to assure that Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of Company. B. The Board believes that it is in the best interests of Company and its shareholders to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide Executive with certain severance benefits upon Executive's termination of employment following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with Company notwithstanding the possibility of a Change of Control. D. Executive and Company are also parties to that certain Executive Employment Agreement effective as of August 18, 2000, as amended (the "Existing Agreement"). The Existing Agreement and this Agreement provide certain benefits to Executive in the event of certain terminations of employment, and in some circumstances it is possible that severance benefits may be payable under only the Existing Agreement or only this Agreement. However, in the event that severance payments would otherwise be payable under both the Existing Agreement and this Agreement, it is the intention of the parties that Executive shall not be entitled to receive severance payment benefits under both the Existing Agreement and this Agreement. E. Certain capitalized terms used in the Agreement are defined in Section 6 below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied. 2. At-Will Employment. Company and Executive acknowledge that Executive's employment is and shall continue to be at-will, as defined under applicable law, except as may otherwise be specifically provided under the terms of any written formal employment agreement between Company and Executive (an "Employment Agreement"). If Executive's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or under his or her Employment Agreement. 3. Agreement to Remain with Company for 6 Months Following a Change of Control. Executive agrees to remain employed with Company (or its successor corporation) for a period of six months following a "Change of Control" (as defined herein) unless his or her employment terminates due to death, Executive's "Disability" (as defined herein), for "Good Reason" (as defined herein), or is terminated involuntarily by Company during such six month period. 4. Severance Benefits. (a) Involuntary Termination Other than for Cause or Voluntary Termination for Good Reason Following a Change of Control. If within twelve months following a Change of Control: (i) Executive terminates his or her employment with Company (or any parent or subsidiary of Company) for "Good Reason" (as defined herein); or (ii) Company (or any parent or subsidiary of Company) terminates Executive's employment for other than "Cause" (as defined herein) and Executive signs and does not revoke a standard release of claims with Company in a form reasonably acceptable to Company and Executive agrees to continue to comply with the surviving provisions of any confidentiality or proprietary rights agreement signed by Executive in connection with his or her employment, then Executive shall receive the following severance from Company: (i) Severance Payment. Executive shall be entitled to receive a "Severance Payment" (less applicable withholding taxes) equal to 100% of Executive's annual base salary (as in effect immediately prior to (A) the Change of Control, or (B) Executive's termination, whichever is greater) plus 100% of Executive's Average Bonus Payment (as defined herein) for the fiscal year in which the Change of Control or Executive's termination occurs, whichever is greater, less any amount of the bonus that has already been paid out in the year in which Executive's termination occurs. (ii) Options; Restricted Stock. As provided in Company's existing stock option agreements, all of Executive's then outstanding options to purchase shares of the Company's Common Stock ("Options") shall immediately vest and became exercisable. Additionally, any shares of the Company's Common Stock then held by Executive subject to a Company repurchase right ("Restricted Stock") shall immediately vest and Company's right of repurchase with respect to such shares of Restricted Stock shall lapse. The Options shall remain exercisable following the termination of employment for the period prescribed in the respective option agreements. (iii)Continued Executive Benefits. Company will pay: (A) the premiums required to continue Executive's group health, dental and vision care coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), provided that Executive elects to continue and remains eligible for these benefits under COBRA; and (B) the premiums required to continue Executive's long-term disability and life insurance coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, provided the benefit plans allow Executive to convert these policies to an individual policy (continued coverage under Section 4(a)(iii)(A) & (B) above collectively referred to as "Company-Paid Coverage"). If such coverage included Executive's dependents immediately prior to the Change of Control, such dependents shall also be covered at Company expense. Executive's portion of the premiums shall be deducted from the severance payment described in Section 4(a)(i) above. Company-Paid Coverage shall continue until the earlier of: (i) twelve months from the date of Executive's termination, or (ii) the date upon which Executive and his or her dependents become covered under another employer's group health, dental, vision, long-term disability or life insurance plans that provide Executive and his or her dependents with comparable benefits and levels of coverage. (b) Timing of Severance Payments. The severance payment described in Section 4(a)(i) above shall be paid by Company to Executive within fifteen business days following a termination covered by Section 4(a) above. (c) Voluntary Resignation; Termination for Cause. If Executive's employment with Company terminates (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with Company. (d) Termination Apart from Change of Control. In the event Executive's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve month period following a Change of Control, then Executive shall be entitled to receive severance and any other benefits only as may then be established under Company's existing written severance and benefits plans and practices or pursuant to other written agreements with Company. (e) Exclusive Remedy. In the event of a termination of Executive's employment within twelve months following a Change of Control, the provisions of this Section 4 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive shall be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change of Control other than those benefits expressly set forth in this Section 4. (f) No Duplicative Payments. In the event that Executive would be entitled to severance payments under this Agreement and also under any Company policy or any other agreement with Company (including the Existing Agreement), then the terms of this Agreement shall control Company's payment obligations, to the exclusion of any other agreement or Company policy. In case of such overlap, in order to receive the severance benefits under Section 4 hereof, Executive shall be required to waive any payments resulting from his severance under the Existing Agreement. 5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under Section 4(a) shall be either: (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by Company's independent public accounts immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon Executive and Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. Notwithstanding anything herein to the contrary, Employee may agree to reduce the amount of payments and/or benefits otherwise owed to him or her if such reduction would increase the after tax benefits to him or her. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Average Bonus Payment. "Average Bonus Payment" means the average of the bonuses paid to the individual over the last three fiscal years prior to the date of determination; except that if the computation is being made as of a date before September 30, 2003, then the Average Bonus Payment is the average of the bonuses paid to the individual over the last two fiscal years. (b) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by Executive in connection with his or her responsibilities as an Executive and intended to result in substantial personal enrichment of Executive, (ii) Executive being convicted of a felony, (iii) a willful act by Executive which constitutes gross misconduct and which is injurious to Company, (iv) following delivery to Executive of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that Executive has not substantially performed his or her duties, continued violations by Executive of Executive's obligations to Company which are demonstrably willful and deliberate on Executive's part, (v) Executive's death; or (vi) Executive's Disability. (c) Change of Control. "Change of Control" means the occurrence of any of the following: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Company representing fifty percent (50%) or more of the total voting power represented by Company's then outstanding voting securities; or (ii) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of Company as of the date hereof, or (B) are elected or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of Company); or (iii)The consummation of a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the voting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) The consummation of the sale, lease or other disposition by Company of all or substantially all Company's assets; or (v) Adoption by the shareholders of a plan of liquidation or approval by shareholders of a proposal to dissolve of the Company. Notwithstanding the foregoing, if either of the parties who are grandfathered under the Company's Rights Plan (i.e., Tennenbaum Capital Partners (and its affiliates) and Franklin (and its affiliates)) are the parties that trigger the definition of a Change of Control (either as a "person" acquiring shares, through a merger or consolidation or by effecting a change in the composition of the Board of Directors), then the transaction would not be considered to be a "Change of Control" under this Agreement, unless within the six months immediately following the action that would otherwise be a "Change of Control" the grandfathered person transfers a controlling interest in the Company to another party that is not an affiliate of the grandfathered person. (d) Disability. "Disability" shall mean that Executive has been unable to perform the essential functions of his or her job as the result of his or her incapacity due to physical or mental illness, impairment or medical condition, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by Company or its insurers and acceptable to Executive or Executive's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least thirty days' written notice by the Company of its intention to terminate Executive's employment. In the event that Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Good Reason. "Good Reason" means without Executive's express written consent: (i) a material reduction of Executive's duties, title, authority or responsibilities, relative to Executive's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Executive of such reduced duties, title, authority or responsibilities, provided, however, that a reduction in duties, title, authority or responsibilities solely by virtue of Company being acquired and made part of a larger entity (as, for example, when the Senior Vice-President of a business unit of Company remains as such following a Change of Control) shall not by itself constitute grounds for a "Voluntary Termination for Good Reason"; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to Executive immediately prior to such reduction; or (iii) a reduction by Company in the base salary of Executive as in effect immediately prior to such reduction; or (iv) a material reduction by Company in the kind or level of benefits to which Executive was entitled immediately prior to such reduction with the result that such Executive's overall benefits package is significantly reduced. Notwithstanding the above, Executive will not be deemed to have resigned for Good Reason unless Executive has given the Company written notice of the offending conduct and a thirty day opportunity to cure and Company has failed to cure such conduct within the thirty-day period. 7. Successors. (a) Company's Successors. Any successor to Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to Company's business and/or assets which executes and delivers the assumption agreement described in this Section 7(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. (a) General. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to Executive, at his or her last known residential address and (ii) if to Company, at the address of its principal corporate offices (attention: Secretary), or in any such case at such other address as a party may designate by ten days' advance written notice to the other party pursuant to the provisions above. (b) Notice of Termination. Any termination by Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(b) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated and shall specify the termination date (which shall be not more than thirty days after the giving of such notice). The failure by either party to include in the notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of that party hereunder or preclude that party from asserting such fact or circumstance in enforcing that party's rights hereunder. 9. Miscellaneous Provisions. (a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. (d) Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. The Superior Court of San Diego County and/or the United States District Court for the Southern District of California shall have exclusive jurisdiction and venue over all controversies in connection herewith. (f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (i) Attorneys Fees. In the event of litigation between the parties over the terms of this Agreement and the performance of their respective obligations hereunder, the prevailing party shall be entitled to receive its reasonable attorney's fees and expenses from the other party. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. ANACOMP, INC. By: /s/Edward P. Smoot _____________________ Edward P. Smoot Title: Chairman EXECUTIVE /s/Jeffrey R. Cramer ______________________________ Jeffrey R. Cramer EX-10 10 sevagmlfox.txt EXHIBIT 10.14 ANACOMP, INC. CHANGE OF CONTROL SEVERANCE AGREEMENT This Change of Control Severance Agreement (the "Agreement") is made and entered into by and between Linster Fox ("Executive") and Anacomp, Inc., an Indiana corporation ("Company"), effective as of April 28, 2003 (the "Effective Date"). RECITALS A. It is expected that Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of Company (the "Board") recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of Company and its shareholders to assure that Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of Company. B. The Board believes that it is in the best interests of Company and its shareholders to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide Executive with certain severance benefits upon Executive's termination of employment following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with Company notwithstanding the possibility of a Change of Control. D. Certain capitalized terms used in the Agreement are defined in Section 6 below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied. 2. At-Will Employment. Company and Executive acknowledge that Executive's employment is and shall continue to be at-will, as defined under applicable law, except as may otherwise be specifically provided under the terms of any written formal employment agreement between Company and Executive (an "Employment Agreement"). If Executive's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or under his or her Employment Agreement. 3. Agreement to Remain with Company for 6 Months Following a Change of Control. Executive agrees to remain employed with Company (or its successor corporation) for a period of six months following a "Change of Control" (as defined herein) unless his or her employment terminates due to death, Executive's "Disability" (as defined herein), for "Good Reason" (as defined herein), or is terminated involuntarily by Company during such six month period. 4. Severance Benefits. (a) Involuntary Termination Other than for Cause or Voluntary Termination for Good Reason Following a Change of Control. If within twelve months following a Change of Control: (i) Executive terminates his or her employment with Company (or any parent or subsidiary of Company) for "Good Reason" (as defined herein); or (ii) Company (or any parent or subsidiary of Company) terminates Executive's employment for other than "Cause" (as defined herein) and Executive signs and does not revoke a standard release of claims with Company in a form reasonably acceptable to Company and Executive agrees to continue to comply with the surviving provisions of any confidentiality or proprietary rights agreement signed by Executive in connection with his or her employment, then Executive shall receive the following severance from Company: (i) Severance Payment. Executive shall be entitled to receive a "Severance Payment" (less applicable withholding taxes) equal to 100% of Executive's annual base salary (as in effect immediately prior to (A) the Change of Control, or (B) Executive's termination, whichever is greater) plus 100% of Executive's Average Bonus Payment (as defined herein) for the fiscal year in which the Change of Control or Executive's termination occurs, whichever is greater, less any amount of the bonus that has already been paid out in the year in which Executive's termination occurs. (ii) Options; Restricted Stock. As provided in Company's existing stock option agreements, all of Executive's then outstanding options to purchase shares of the Company's Common Stock ("Options") shall immediately vest and became exercisable. Additionally, any shares of the Company's Common Stock then held by Executive subject to a Company repurchase right ("Restricted Stock") shall immediately vest and Company's right of repurchase with respect to such shares of Restricted Stock shall lapse. The Options shall remain exercisable following the termination of employment for the period prescribed in the respective option agreements. (iii)Continued Executive Benefits. Company will pay: (A) the premiums required to continue Executive's group health, dental and vision care coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), provided that Executive elects to continue and remains eligible for these benefits under COBRA; and (B) the premiums required to continue Executive's long-term disability and life insurance coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, provided the benefit plans allow Executive to convert these policies to an individual policy (continued coverage under Section 4(a)(iii)(A) & (B) above collectively referred to as "Company-Paid Coverage"). If such coverage included Executive's dependents immediately prior to the Change of Control, such dependents shall also be covered at Company expense. Executive's portion of the premiums shall be deducted from the severance payment described in Section 4(a)(i) above. Company-Paid Coverage shall continue until the earlier of: (i) twelve months from the date of Executive's termination, or (ii) the date upon which Executive and his or her dependents become covered under another employer's group health, dental, vision, long-term disability or life insurance plans that provide Executive and his or her dependents with comparable benefits and levels of coverage. (b) Timing of Severance Payments. The severance payment described in Section 4(a)(i) above shall be paid by Company to Executive within fifteen business days following a termination covered by Section 4(a) above. (c) Voluntary Resignation; Termination for Cause. If Executive's employment with Company terminates (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with Company. (d) Termination Apart from Change of Control. In the event Executive's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve month period following a Change of Control, then Executive shall be entitled to receive severance and any other benefits only as may then be established under Company's existing written severance and benefits plans and practices or pursuant to other written agreements with Company. (e) Exclusive Remedy. In the event of a termination of Executive's employment within twelve months following a Change of Control, the provisions of this Section 4 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive shall be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change of Control other than those benefits expressly set forth in this Section 4. (f) No Duplicative Payments. In the event that Executive would be entitled to severance payments under this Agreement and also under any Company policy or any other agreement with Company, then the terms of this Agreement shall control Company's payment obligations, to the exclusion of any other agreement or Company policy. 5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under Section 4(a) shall be either: (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by Company's independent public accounts immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon Executive and Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. Notwithstanding anything herein to the contrary, Employee may agree to reduce the amount of payments and/or benefits otherwise owed to him or her if such reduction would increase the after tax benefits to him or her. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Average Bonus Payment. "Average Bonus Payment" means the average of the bonuses paid to the individual over the last three fiscal years prior to the date of determination; except that if the computation is being made as of a date before September 30, 2003, then the Average Bonus Payment is the average of the bonuses paid to the individual over the last two fiscal years. (b) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by Executive in connection with his or her responsibilities as an Executive and intended to result in substantial personal enrichment of Executive, (ii) Executive being convicted of a felony, (iii) a willful act by Executive which constitutes gross misconduct and which is injurious to Company, (iv) following delivery to Executive of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that Executive has not substantially performed his or her duties, continued violations by Executive of Executive's obligations to Company which are demonstrably willful and deliberate on Executive's part, (v) Executive's death; or (vi) Executive's Disability. (c) Change of Control. "Change of Control" means the occurrence of any of the following: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Company representing fifty percent (50%) or more of the total voting power represented by Company's then outstanding voting securities; or (ii) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of Company as of the date hereof, or (B) are elected or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of Company); or (iii)The consummation of a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the voting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) The consummation of the sale, lease or other disposition by Company of all or substantially all Company's assets; or (v) Adoption by the shareholders of a plan of liquidation or approval by shareholders of a proposal to dissolve of the Company. Notwithstanding the foregoing, if either of the parties who are grandfathered under the Company's Rights Plan (i.e., Tennenbaum Capital Partners (and its affiliates) and Franklin (and its affiliates)) are the parties that trigger the definition of a Change of Control (either as a "person" acquiring shares, through a merger or consolidation or by effecting a change in the composition of the Board of Directors), then the transaction would not be considered to be a "Change of Control" under this Agreement, unless within the six months immediately following the action that would otherwise be a "Change of Control" the grandfathered person transfers a controlling interest in the Company to another party that is not an affiliate of the grandfathered person. (d) Disability. "Disability" shall mean that Executive has been unable to perform the essential functions of his or her job as the result of his or her incapacity due to physical or mental illness, impairment or medical condition, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by Company or its insurers and acceptable to Executive or Executive's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least thirty days' written notice by the Company of its intention to terminate Executive's employment. In the event that Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Good Reason. "Good Reason" means without Executive's express written consent: (i) a material reduction of Executive's duties, title, authority or responsibilities, relative to Executive's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Executive of such reduced duties, title, authority or responsibilities, provided, however, that a reduction in duties, title, authority or responsibilities solely by virtue of Company being acquired and made part of a larger entity (as, for example, when the Senior Vice-President of a business unit of Company remains as such following a Change of Control) shall not by itself constitute grounds for a "Voluntary Termination for Good Reason"; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to Executive immediately prior to such reduction; or (iii) a reduction by Company in the base salary of Executive as in effect immediately prior to such reduction; or (iv) a material reduction by Company in the kind or level of benefits to which Executive was entitled immediately prior to such reduction with the result that such Executive's overall benefits package is significantly reduced. Notwithstanding the above, Executive will not be deemed to have resigned for Good Reason unless Executive has given the Company written notice of the offending conduct and a thirty day opportunity to cure and Company has failed to cure such conduct within the thirty-day period. 7. Successors. (a) Company's Successors. Any successor to Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to Company's business and/or assets which executes and delivers the assumption agreement described in this Section 7(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. (a) General. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to Executive, at his or her last known residential address and (ii) if to Company, at the address of its principal corporate offices (attention: Secretary), or in any such case at such other address as a party may designate by ten days' advance written notice to the other party pursuant to the provisions above. (b) Notice of Termination. Any termination by Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(b) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated and shall specify the termination date (which shall be not more than thirty days after the giving of such notice). The failure by either party to include in the notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of that party hereunder or preclude that party from asserting such fact or circumstance in enforcing that party's rights hereunder. 9. Miscellaneous Provisions. (a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. (d) Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. The Superior Court of San Diego County and/or the United States District Court for the Southern District of California shall have exclusive jurisdiction and venue over all controversies in connection herewith. (f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (i) Attorneys Fees. In the event of litigation between the parties over the terms of this Agreement and the performance of their respective obligations hereunder, the prevailing party shall be entitled to receive its reasonable attorney's fees and expenses from the other party. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. ANACOMP, INC. By: /s/Edward P. Smoot ___________________ Edward P. Smoot Title: Chairman EXECUTIVE /s/Linster W. Fox ___________________________ Linster W. Fox EX-10 11 sevagmnsal.txt EXHIBIT 10.18 ANACOMP, INC. CHANGE OF CONTROL SEVERANCE AGREEMENT This Change of Control Severance Agreement (the "Agreement") is made and entered into by and between Nicholas Salimbene ("Executive") and Anacomp, Inc., an Indiana corporation ("Company"), effective as of April 28, 2003 (the "Effective Date"). RECITALS A. It is expected that Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of Company (the "Board") recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of Company and its shareholders to assure that Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of Company. B. The Board believes that it is in the best interests of Company and its shareholders to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide Executive with certain severance benefits upon Executive's termination of employment following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with Company notwithstanding the possibility of a Change of Control. D. Certain capitalized terms used in the Agreement are defined in Section 6 below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied. 2. At-Will Employment. Company and Executive acknowledge that Executive's employment is and shall continue to be at-will, as defined under applicable law, except as may otherwise be specifically provided under the terms of any written formal employment agreement between Company and Executive (an "Employment Agreement"). If Executive's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or under his or her Employment Agreement. 3. Agreement to Remain with Company for 6 Months Following a Change of Control. Executive agrees to remain employed with Company (or its successor corporation) for a period of six months following a "Change of Control" (as defined herein) unless his or her employment terminates due to death, Executive's "Disability" (as defined herein), for "Good Reason" (as defined herein), or is terminated involuntarily by Company during such six month period. 4. Severance Benefits. (a) Involuntary Termination Other than for Cause or Voluntary Termination for Good Reason Following a Change of Control. If within twelve months following a Change of Control: (i) Executive terminates his or her employment with Company (or any parent or subsidiary of Company) for "Good Reason" (as defined herein); or (ii) Company (or any parent or subsidiary of Company) terminates Executive's employment for other than "Cause" (as defined herein) and Executive signs and does not revoke a standard release of claims with Company in a form reasonably acceptable to Company and Executive agrees to continue to comply with the surviving provisions of any confidentiality or proprietary rights agreement signed by Executive in connection with his or her employment, then Executive shall receive the following severance from Company: (i) Severance Payment. Executive shall be entitled to receive a "Severance Payment" (less applicable withholding taxes) equal to 100% of Executive's annual base salary (as in effect immediately prior to (A) the Change of Control, or (B) Executive's termination, whichever is greater) plus 100% of Executive's Average Bonus Payment (as defined herein) for the fiscal year in which the Change of Control or Executive's termination occurs, whichever is greater, less any amount of the bonus that has already been paid out in the year in which Executive's termination occurs. (ii) Options; Restricted Stock. As provided in Company's existing stock option agreements, all of Executive's then outstanding options to purchase shares of the Company's Common Stock ("Options") shall immediately vest and became exercisable. Additionally, any shares of the Company's Common Stock then held by Executive subject to a Company repurchase right ("Restricted Stock") shall immediately vest and Company's right of repurchase with respect to such shares of Restricted Stock shall lapse. The Options shall remain exercisable following the termination of employment for the period prescribed in the respective option agreements. (iii)Continued Executive Benefits. Company will pay: (A) the premiums required to continue Executive's group health, dental and vision care coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), provided that Executive elects to continue and remains eligible for these benefits under COBRA; and (B) the premiums required to continue Executive's long-term disability and life insurance coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, provided the benefit plans allow Executive to convert these policies to an individual policy (continued coverage under Section 4(a)(iii)(A) & (B) above collectively referred to as "Company-Paid Coverage"). If such coverage included Executive's dependents immediately prior to the Change of Control, such dependents shall also be covered at Company expense. Executive's portion of the premiums shall be deducted from the severance payment described in Section 4(a)(i) above. Company-Paid Coverage shall continue until the earlier of: (i) twelve months from the date of Executive's termination, or (ii) the date upon which Executive and his or her dependents become covered under another employer's group health, dental, vision, long-term disability or life insurance plans that provide Executive and his or her dependents with comparable benefits and levels of coverage. (b) Timing of Severance Payments. The severance payment described in Section 4(a)(i) above shall be paid by Company to Executive within fifteen business days following a termination covered by Section 4(a) above. (c) Voluntary Resignation; Termination for Cause. If Executive's employment with Company terminates (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with Company. (d) Termination Apart from Change of Control. In the event Executive's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve month period following a Change of Control, then Executive shall be entitled to receive severance and any other benefits only as may then be established under Company's existing written severance and benefits plans and practices or pursuant to other written agreements with Company. (e) Exclusive Remedy. In the event of a termination of Executive's employment within twelve months following a Change of Control, the provisions of this Section 4 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive shall be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change of Control other than those benefits expressly set forth in this Section 4. (f) No Duplicative Payments. In the event that Executive would be entitled to severance payments under this Agreement and also under any Company policy or any other agreement with Company, then the terms of this Agreement shall control Company's payment obligations, to the exclusion of any other agreement or Company policy. 5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under Section 4(a) shall be either: (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by Company's independent public accounts immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon Executive and Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. Notwithstanding anything herein to the contrary, Employee may agree to reduce the amount of payments and/or benefits otherwise owed to him or her if such reduction would increase the after tax benefits to him or her. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Average Bonus Payment. "Average Bonus Payment" means the average of the bonuses paid to the individual over the last three fiscal years prior to the date of determination; except that if the computation is being made as of a date before September 30, 2003, then the Average Bonus Payment is the average of the bonuses paid to the individual over the last two fiscal years. (b) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by Executive in connection with his or her responsibilities as an Executive and intended to result in substantial personal enrichment of Executive, (ii) Executive being convicted of a felony, (iii) a willful act by Executive which constitutes gross misconduct and which is injurious to Company, (iv) following delivery to Executive of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that Executive has not substantially performed his or her duties, continued violations by Executive of Executive's obligations to Company which are demonstrably willful and deliberate on Executive's part, (v) Executive's death; or (vi) Executive's Disability. (c) Change of Control. "Change of Control" means the occurrence of any of the following: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Company representing fifty percent (50%) or more of the total voting power represented by Company's then outstanding voting securities; or (ii) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of Company as of the date hereof, or (B) are elected or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of Company); or (iii)The consummation of a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the voting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) The consummation of the sale, lease or other disposition by Company of all or substantially all Company's assets; or (v) Adoption by the shareholders of a plan of liquidation or approval by shareholders of a proposal to dissolve of the Company. Notwithstanding the foregoing, if either of the parties who are grandfathered under the Company's Rights Plan (i.e., Tennenbaum Capital Partners (and its affiliates) and Franklin (and its affiliates)) are the parties that trigger the definition of a Change of Control (either as a "person" acquiring shares, through a merger or consolidation or by effecting a change in the composition of the Board of Directors), then the transaction would not be considered to be a "Change of Control" under this Agreement, unless within the six months immediately following the action that would otherwise be a "Change of Control" the grandfathered person transfers a controlling interest in the Company to another party that is not an affiliate of the grandfathered person. (d) Disability. "Disability" shall mean that Executive has been unable to perform the essential functions of his or her job as the result of his or her incapacity due to physical or mental illness, impairment or medical condition, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by Company or its insurers and acceptable to Executive or Executive's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least thirty days' written notice by the Company of its intention to terminate Executive's employment. In the event that Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Good Reason. "Good Reason" means without Executive's express written consent: (i) a material reduction of Executive's duties, title, authority or responsibilities, relative to Executive's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Executive of such reduced duties, title, authority or responsibilities, provided, however, that a reduction in duties, title, authority or responsibilities solely by virtue of Company being acquired and made part of a larger entity (as, for example, when the Senior Vice-President of a business unit of Company remains as such following a Change of Control) shall not by itself constitute grounds for a "Voluntary Termination for Good Reason"; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to Executive immediately prior to such reduction; or (iii) a reduction by Company in the base salary of Executive as in effect immediately prior to such reduction; or (iv) a material reduction by Company in the kind or level of benefits to which Executive was entitled immediately prior to such reduction with the result that such Executive's overall benefits package is significantly reduced. Notwithstanding the above, Executive will not be deemed to have resigned for Good Reason unless Executive has given the Company written notice of the offending conduct and a thirty day opportunity to cure and Company has failed to cure such conduct within the thirty-day period. 7. Successors. (a) Company's Successors. Any successor to Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to Company's business and/or assets which executes and delivers the assumption agreement described in this Section 7(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. (a) General. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to Executive, at his or her last known residential address and (ii) if to Company, at the address of its principal corporate offices (attention: Secretary), or in any such case at such other address as a party may designate by ten days' advance written notice to the other party pursuant to the provisions above. (b) Notice of Termination. Any termination by Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(b) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated and shall specify the termination date (which shall be not more than thirty days after the giving of such notice). The failure by either party to include in the notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of that party hereunder or preclude that party from asserting such fact or circumstance in enforcing that party's rights hereunder. 9. Miscellaneous Provisions. (a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. (d) Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. The Superior Court of San Diego County and/or the United States District Court for the Southern District of California shall have exclusive jurisdiction and venue over all controversies in connection herewith. (f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (i) Attorneys Fees. In the event of litigation between the parties over the terms of this Agreement and the performance of their respective obligations hereunder, the prevailing party shall be entitled to receive its reasonable attorney's fees and expenses from the other party. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. ANACOMP, INC. By: /s/Edward P. Smoot ______________________ Edward P. Smoot Title: Chairman EXECUTIVE /s/Nicholas A. Salimbene ____________________________ Nicholas A. Salimbene EX-10 12 sevagmfroche.txt EXHIBIT 10.17 ANACOMP, INC. CHANGE OF CONTROL SEVERANCE AGREEMENT This Change of Control Severance Agreement (the "Agreement") is made and entered into by and between Frank Roche ("Executive") and Anacomp, Inc., an Indiana corporation ("Company"), effective as of April 28, 2003 (the "Effective Date"). RECITALS A. It is expected that Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of Company (the "Board") recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of Company and its shareholders to assure that Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of Company. B. The Board believes that it is in the best interests of Company and its shareholders to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide Executive with certain severance benefits upon Executive's termination of employment following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with Company notwithstanding the possibility of a Change of Control. D. Certain capitalized terms used in the Agreement are defined in Section 6 below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied. 2. At-Will Employment. Company and Executive acknowledge that Executive's employment is and shall continue to be at-will, as defined under applicable law, except as may otherwise be specifically provided under the terms of any written formal employment agreement between Company and Executive (an "Employment Agreement"). If Executive's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or under his or her Employment Agreement. 3. Agreement to Remain with Company for 6 Months Following a Change of Control. Executive agrees to remain employed with Company (or its successor corporation) for a period of six months following a "Change of Control" (as defined herein) unless his or her employment terminates due to death, Executive's "Disability" (as defined herein), for "Good Reason" (as defined herein), or is terminated involuntarily by Company during such six month period. 4. Severance Benefits. (a) Involuntary Termination Other than for Cause or Voluntary Termination for Good Reason Following a Change of Control. If within twelve months following a Change of Control: (i) Executive terminates his or her employment with Company (or any parent or subsidiary of Company) for "Good Reason" (as defined herein); or (ii) Company (or any parent or subsidiary of Company) terminates Executive's employment for other than "Cause" (as defined herein) and Executive signs and does not revoke a standard release of claims with Company in a form reasonably acceptable to Company and Executive agrees to continue to comply with the surviving provisions of any confidentiality or proprietary rights agreement signed by Executive in connection with his or her employment, then Executive shall receive the following severance from Company: (i) Severance Payment. Executive shall be entitled to receive a "Severance Payment" (less applicable withholding taxes) equal to 100% of Executive's annual base salary (as in effect immediately prior to (A) the Change of Control, or (B) Executive's termination, whichever is greater) plus 100% of Executive's Average Bonus Payment (as defined herein) for the fiscal year in which the Change of Control or Executive's termination occurs, whichever is greater, less any amount of the bonus that has already been paid out in the year in which Executive's termination occurs. (ii) Options; Restricted Stock. As provided in Company's existing stock option agreements, all of Executive's then outstanding options to purchase shares of the Company's Common Stock ("Options") shall immediately vest and became exercisable. Additionally, any shares of the Company's Common Stock then held by Executive subject to a Company repurchase right ("Restricted Stock") shall immediately vest and Company's right of repurchase with respect to such shares of Restricted Stock shall lapse. The Options shall remain exercisable following the termination of employment for the period prescribed in the respective option agreements. (iii)Continued Executive Benefits. Company will pay: (A) the premiums required to continue Executive's group health, dental and vision care coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), provided that Executive elects to continue and remains eligible for these benefits under COBRA; and (B) the premiums required to continue Executive's long-term disability and life insurance coverage at the same ratio of Company's premium payment to Executive as was in effect immediately prior to the Change of Control, provided the benefit plans allow Executive to convert these policies to an individual policy (continued coverage under Section 4(a)(iii)(A) & (B) above collectively referred to as "Company-Paid Coverage"). If such coverage included Executive's dependents immediately prior to the Change of Control, such dependents shall also be covered at Company expense. Executive's portion of the premiums shall be deducted from the severance payment described in Section 4(a)(i) above. Company-Paid Coverage shall continue until the earlier of: (i) twelve months from the date of Executive's termination, or (ii) the date upon which Executive and his or her dependents become covered under another employer's group health, dental, vision, long-term disability or life insurance plans that provide Executive and his or her dependents with comparable benefits and levels of coverage. (b) Timing of Severance Payments. The severance payment described in Section 4(a)(i) above shall be paid by Company to Executive within fifteen business days following a termination covered by Section 4(a) above. (c) Voluntary Resignation; Termination for Cause. If Executive's employment with Company terminates (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with Company. (d) Termination Apart from Change of Control. In the event Executive's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve month period following a Change of Control, then Executive shall be entitled to receive severance and any other benefits only as may then be established under Company's existing written severance and benefits plans and practices or pursuant to other written agreements with Company. (e) Exclusive Remedy. In the event of a termination of Executive's employment within twelve months following a Change of Control, the provisions of this Section 4 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive shall be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change of Control other than those benefits expressly set forth in this Section 4. (f) No Duplicative Payments. In the event that Executive would be entitled to severance payments under this Agreement and also under any Company policy or any other agreement with Company, then the terms of this Agreement shall control Company's payment obligations, to the exclusion of any other agreement or Company policy. 5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under Section 4(a) shall be either: (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by Company's independent public accounts immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon Executive and Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. Notwithstanding anything herein to the contrary, Employee may agree to reduce the amount of payments and/or benefits otherwise owed to him or her if such reduction would increase the after tax benefits to him or her. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Average Bonus Payment. "Average Bonus Payment" means the average of the bonuses paid to the individual over the last three fiscal years prior to the date of determination; except that if the computation is being made as of a date before September 30, 2003, then the Average Bonus Payment is the average of the bonuses paid to the individual over the last two fiscal years. (b) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by Executive in connection with his or her responsibilities as an Executive and intended to result in substantial personal enrichment of Executive, (ii) Executive being convicted of a felony, (iii) a willful act by Executive which constitutes gross misconduct and which is injurious to Company, (iv) following delivery to Executive of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that Executive has not substantially performed his or her duties, continued violations by Executive of Executive's obligations to Company which are demonstrably willful and deliberate on Executive's part, (v) Executive's death; or (vi) Executive's Disability. (c) Change of Control. "Change of Control" means the occurrence of any of the following: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Company representing fifty percent (50%) or more of the total voting power represented by Company's then outstanding voting securities; or (ii) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of Company as of the date hereof, or (B) are elected or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of Company); or (iii)The consummation of a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the voting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) The consummation of the sale, lease or other disposition by Company of all or substantially all Company's assets; or (v) Adoption by the shareholders of a plan of liquidation or approval by shareholders of a proposal to dissolve of the Company. Notwithstanding the foregoing, if either of the parties who are grandfathered under the Company's Rights Plan (i.e., Tennenbaum Capital Partners (and its affiliates) and Franklin (and its affiliates)) are the parties that trigger the definition of a Change of Control (either as a "person" acquiring shares, through a merger or consolidation or by effecting a change in the composition of the Board of Directors), then the transaction would not be considered to be a "Change of Control" under this Agreement, unless within the six months immediately following the action that would otherwise be a "Change of Control" the grandfathered person transfers a controlling interest in the Company to another party that is not an affiliate of the grandfathered person. (d) Disability. "Disability" shall mean that Executive has been unable to perform the essential functions of his or her job as the result of his or her incapacity due to physical or mental illness, impairment or medical condition, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by Company or its insurers and acceptable to Executive or Executive's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least thirty days' written notice by the Company of its intention to terminate Executive's employment. In the event that Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Good Reason. "Good Reason" means without Executive's express written consent: (i) a material reduction of Executive's duties, title, authority or responsibilities, relative to Executive's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Executive of such reduced duties, title, authority or responsibilities, provided, however, that a reduction in duties, title, authority or responsibilities solely by virtue of Company being acquired and made part of a larger entity (as, for example, when the Senior Vice-President of a business unit of Company remains as such following a Change of Control) shall not by itself constitute grounds for a "Voluntary Termination for Good Reason"; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to Executive immediately prior to such reduction; or (iii) a reduction by Company in the base salary of Executive as in effect immediately prior to such reduction; or (iv) a material reduction by Company in the kind or level of benefits to which Executive was entitled immediately prior to such reduction with the result that such Executive's overall benefits package is significantly reduced. Notwithstanding the above, Executive will not be deemed to have resigned for Good Reason unless Executive has given the Company written notice of the offending conduct and a thirty day opportunity to cure and Company has failed to cure such conduct within the thirty-day period. 7. Successors. (a) Company's Successors. Any successor to Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to Company's business and/or assets which executes and delivers the assumption agreement described in this Section 7(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. (a) General. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to Executive, at his or her last known residential address and (ii) if to Company, at the address of its principal corporate offices (attention: Secretary), or in any such case at such other address as a party may designate by ten days' advance written notice to the other party pursuant to the provisions above. (b) Notice of Termination. Any termination by Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(b) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated and shall specify the termination date (which shall be not more than thirty days after the giving of such notice). The failure by either party to include in the notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of that party hereunder or preclude that party from asserting such fact or circumstance in enforcing that party's rights hereunder. 9. Miscellaneous Provisions. (a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. (d) Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. The Superior Court of San Diego County and/or the United States District Court for the Southern District of California shall have exclusive jurisdiction and venue over all controversies in connection herewith. (f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (i) Attorneys Fees. In the event of litigation between the parties over the terms of this Agreement and the performance of their respective obligations hereunder, the prevailing party shall be entitled to receive its reasonable attorney's fees and expenses from the other party. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. ANACOMP, INC. By: /s/Edward P. Smoot ______________________ Edward P. Smoot Title: Chairman EXECUTIVE /s/Frank Roche _____________________________ Frank Roche -----END PRIVACY-ENHANCED MESSAGE-----