**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                                    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ý                                                                                                                                                                            |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                              |   |   |
|                                                                                                                                                                              |   | **For the  fiscal year ended September 30, 2004** |
|                                                                                                                                                                              |   | **or** |
|                                                                                                                                                                              |   |   |
| o                                                                                                                                                                                 |   | **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 Registrantas Specified in Its Charter)

 

| **Indiana**                                                     | ** ** | **35-1144230**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

1**5378 Avenueof Science, San Diego, California 92128-3407**

**(858) 716-3400**

(Address, Including ZipCode, and Telephone Number, Including Area Code, of Principal Executive Office)

 

Securities registeredpursuant to Section 12(b) of the Act:  **None**

Securities registeredpursuant to Section 12(g) of the Act:

 

**Title of each class**

**Class A Common Stock, $0.01 parvalue per share**

**Class B Common Stock $0.01 parvalue per share**

**Class B Common Stock Warrants**

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days.   Yes  ý     No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act.)  Yes  o  No  ý

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates of the registrant, based upon the average bid and askedprices for shares of the registrant’s common equity as reported by the OTC BulletinBoard, was approximately $9,184,282 as of March 31, 2004, the last business dayof the registrant’s most recently completed second fiscal quarter. Shares ofeach class of common stock held by each of the registrant’s executive officers,directors and stockholders whose ownership exceeds 10% of such class of commonstock outstanding at December 3, 2004, have been excluded since such personsmay be deemed to be affiliates of the registrant. However, this determinationof affiliate status is not necessarily a conclusive determination for any otherpurpose.

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Section 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.   Yes  ý     No  o

 

As of December 3, 2004, the number of outstanding shares of theregistrant’s Class A Common Stock, $0.01 par value per share, was 3,689,484 andthe number of outstanding shares of the registrant’s Class B Common Stock,$0.01 par value per share, was 4,034.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

** **

**Portions of the registrant’s Definitive ProxyStatement to be filed with the Securities and Exchange Commission pursuant toRegulation 14A in connection with the registrant’s 2005 Annual Meeting ofShareholders are incorporated by reference into Part III of this report.**

 

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** **

**ANACOMP, INC.**

** **

**FORM 10-K**

** **

**For the Fiscal Year EndedSeptember 30, 2004**

** **

**INDEX**

** **
| **Part I**   |                                                                                                                  |   |
|--------------|-----------------------------------------------------------------------------------------------------------------------|--------|
| Item  1      | Business                                                                                                              |   |
| Item 2       | Properties                                                                                                            |   |
| Item 3       | Legal Proceedings                                                                                                     |   |
| Item  4      | Submission  of Matters to a Vote of Security Holders                                                                  |   |
|         |                                                                                                                  |   |
| **Part II**  |                                                                                                                  |   |
| Item  5      | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Repurchases of Equity Securities |   |
| Item 6       | Selected Financial  Data                                                                                              |   |
| Item  7      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |   |
| Item  7A     | Quantitative  and Qualitative Disclosures About Market Risks                                                          |   |
| Item  8      | Financial  Statements and Supplementary Data                                                                          |   |
| Item  9      | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures                                |   |
| Item 9A.     | Controls and  Procedures                                                                                              |   |
| Item 9B      | Other Information                                                                                                     |   |
|         |                                                                                                                  |   |
| **Part III** |                                                                                                                  |   |
| Item  10     | Directors  and Executive Officers of the Registrant                                                                   |   |
| Item 11      | Executive Compensation                                                                                                |   |
| Item  12     | Security  Ownership of Certain Beneficial Owners and Management                                                       |   |
| Item  13     | Certain  Relationships and Related Transactions                                                                       |   |
| Item  14     | Principal  Accounting Fees and Services                                                                               |   |
|         |                                                                                                                  |   |
| **Part IV**  |                                                                                                                  |   |
| Item  15     | Exhibits  and Financial Statement Schedules                                                                           |   |
|         | Signatures                                                                                                            |   |

 

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**PART I**

 

**ITEM 1. BUSINESS**

 

This Annual Report, including Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”contains “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended regarding our business, financial condition, results ofoperations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,”“believes,” “seeks,” “estimates” and similar expressions or variations of suchwords are intended to identify forward-looking statements, but are not theexclusive means of identifying forward-looking statements in this AnnualReport. Additionally, statements concerning future matters such as our futureplans and operations, sales levels, liquidity needs, our status as a publicreporting company, anticipated growth of the markets in which we operate,anticipated revenue and expense trends, assumptions used in the computation ofvaluation in connection with our Fresh Start accounting and other statementsregarding matters that are not historical are forward-looking statements.

 

Although forward-looking statements in this AnnualReport on Form 10-K reflect the good faith and judgment of our management, suchstatements can only be based on facts and factors of which we are currentlyaware. Consequently, forward-looking statements are inherently subject to risksand uncertainties. Our actual results, performance, achievements and otheritems contained in the forward-looking statements may differ materially fromthose discussed in or anticipated by the forward-looking statements. Factorsthat could cause or contribute to such differences in results and outcomesinclude without limitation those discussed under the heading “Risk Factors”below, as well as those discussed elsewhere in this Annual Report on Form 10-K.We encourage you to not place undue reliance on these forward-lookingstatements, which speak only as of the date of filing this Annual Report. Weundertake no obligation to revise or update any forward-looking statements inorder to reflect any event or circumstance that may arise as of the date offiling this Annual Report. We encourage you to carefully review and considerthe various disclosures made in this Annual Report on Form 10-K, which attemptto address the risks and factors that may affect our business, financialcondition, results of operations and prospects. Forward-looking statementsinvolve known and unknown risks, uncertainties and other important factors thatcould cause our actual results, performance or achievements, or industryresults, to differ materially from any future results, performance orachievements expressed or implied by forward-looking statements. Risks, uncertaintiesand other important factors include, among others:

 

•                  general economic andbusiness conditions;

•                  industry trends and growthrates;

•                  competition;

•                  technology development;

•                  increased loss of customersresulting from our fiscal year 2004 data center consolidation;

•                  the loss of any significantcustomers or suppliers;

•                  changes in business strategyor development plans;

•                  litigation issues;

•                  successful development ofnew products and services;

•                  changes in, or the failureor inability to comply with, government regulations;

•                  our status as a publicreporting company;

•                  costs related to timelycompliance with  Sarbanes-Oxleyregulations; or

•                  other factors referenced inthis public filing.

 

**OVERVIEW**

** **

Anacomp®, Inc. (togetherwith its consolidated subsidiaries, “Anacomp” or the “Company”) is a globalprovider of Information Management Solutions outsourcing services, Multi-VendorServices maintenance support, and imaging and print solutions.  Anacomp was incorporated in Indiana in 1968and has active international subsidiaries in Austria, Belgium, Canada, France,Germany, Italy, the Netherlands, Scandinavia and the United Kingdom (U.K.).

 

We can be reached on theInternet at http://www.anacomp.com.  Ourmost recent annual report on Form 10-K and certain of our other filings withthe Securities and Exchange Commission (“SEC”) are available in PDF formatthrough our Investor Relations website athttp://www.anacomp.com/Corporate/FinancialReports.asp.  Our annual 

 

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reports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K and amendments to those reports are also available on the SECwebsite at http://www.sec.gov which can be reached from our Investor Relationswebsite.

 

For over 35 years, Anacomphas provided a broad range of analog and digital Information Managementservices and systems to help companies manage and distribute their criticalbusiness documents.  We provide acomplete range of information management solutions delivered through ourInformation Management Megacenters.  Thisincludes the production of Computer Output Microfilm (COM), the production ofdigital content delivered electronically or on physical media, such as CD orDVD, and the delivery of web hosted content. We have recently expanded these offerings to include source documentscanning services for paper and film documents as well as application specificservices such as e-mail archiving and report mining.  We are also one of the world’s leadingindependent, vendor neutral providers of Multi-Vendor Services (MVS), where weact as a third party maintainer, providing support services such as on-sitemaintenance, call center/help desk service and/or depot repair services, aswell as laser printer maintenance and associated hardware.  We offer expert installation, maintenance andrepair services for a broad array of third party equipment, such as massstorage devices and high-speed output systems. In addition, we provide systems and related supplies and services to muchof the installed base of COM imaging systems worldwide through a combination ofdirect sales, telemarketing and distributors. Anacomp was once the primary manufacturer for most of the base of thisinstalled COM equipment and today we provide “as new” systems to our customersin North America, Japan and Europe.  Wealso refurbish high-speed laser printers and provide maintenance support for anumber of these devices, as well as selling associated supplies.

We deliver our products and services to thousands of businesses andorganizations in 70 countries directly or through our worldwide network ofdealers and distributors.  We have alarge base of premier customers in the banking, insurance and brokeragesectors, including approximately one half of the Fortune 500 companies.  Our Information Management Solutionsoutsourcing sales efforts are focused heavily on these three segments, each ofwhich has substantial and diverse document management needs.  We have recently expanded our range ofoutsource services, adding document imaging (scanning) services, e-mail archiveservices, as well as report mining capabilities to meet the demandingrequirements of these and other markets. By meeting our customers’ full range of information managementoutsourcing needs in this way, we expect to provide increased value and tomaximize our business with each customer.

The majority of ourbusiness relates to managing customer documents, supporting the devices thesedocuments are captured, printed or stored on, and providing supplies andservice for the same.  We attempt toservice our existing and future customers by “bundling” an expanded list ofservices (e.g., Web viewing, CD Services, printing, scanning and long-termarchival storage).

 

**Information Technology (IT) Services Market**

** **

The IT Services market,in which Anacomp provides outsourcing services in the area of InformationManagement, as well as Multi-Vendor Services, is a dynamic and rapidly growingindustry.  Today, the rapid increase inthe number of unstructured content documents (i.e., documents, images, e-mails)generated, the increase in the amount of structured data stored, combined withthe desire in both the commercial and non-commercial sectors to increaseproductivity and reduce cost by outsourcing non-core business processes, isfueling growth in the IT Services industry and demand for advanced digitaltechnologies and other cost and efficiency improvements.  Anacomp provides these businesses andorganizations with products and services for capturing, storing, distributingand accessing critical documents, as well as supporting and maintaining thecapture, print, storage and network devices on which organizations depend.  The overall information technology andrelated services market is projected to reach $553 billion in 2004 and isforecasted to grow at a 6.9% compound annual growth rate for the next fiveyears.  We believe Anacomp’s IToutsourcing solutions (Information Management and Multi-Vendor Services) meetthe needs of the following customer requirements within the IT Services market:

 

*OutsourcingAlternatives* — Businesses are increasingly looking to outsourcenon-core activities.   It is estimatedthat approximately 60% of businesses regularly use outsourcers.  Information management has been identified asa potential candidate for outsourcing. Most companies can implement information management solutions faster,more effectively and less expensively by utilizing third parties.  Maintenance Service has also become anaccepted outsourcing strategy for Original Equipment Manufacturers (OEM).  Many manufacturers are looking to shednon-core support activities surrounding their products and focus instead ondevelopment and sale of their products.

 

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*Immediate Access to Information* — To reactquickly and effectively to changing business conditions, companies need readyaccess to information on their business and customers. They also need toprovide their customers with immediate access to their account information viathe Web in order to compete effectively in the financial marketplace.

 

*ApplicationFocused Support* — Businesses are no longer content withgeneric document management products or services; rather, they demand solutionsthat are tailored to the specific tasks their personnel and customers perform,including the ability to have vital business information readily availableduring customer interactions.  To meetthis need, document management companies must focus on developing expertise onparticular business processes in selected industries.

 

*IndependentService and Support* — Equipment and systems manufacturers arereassessing their organizations, business structure and the specific taskstheir personnel and distributors perform in order to refocus on core activitiesaround research and development and channel enhancement.  Independent service organizations can providecritical services for customer installations, warranty support, call center anddepot repair of equipment.  To meet thisIT Services need, multi-vendor service companies must focus on developingexpertise in business processes, supporting technologies and deployingappropriately trained personnel to maintain a large array of OEM equipment.

 

*GovernmentRegulation* — Current events have also begun to drive theadoption of new information management systems. In the wake of numerous government investigations, financial failuresand corporate misconduct, financial institutions and public companies are beingdriven by new regulations (e.g. Sarbanes-Oxley Act) to record and retain allactivity related to their ongoing business. In addition, modifications to andstricter enforcement of existing rules (e.g. SEC Rule 17a-4) that govern howfinancial documents (including e-mails and Instant Messages) must be stored,and recently issued HIPAA regulations, which affect the record-keepingrequirements of all health insurance providers, are pushing faster adoption ofdocument management technologies that provide the required retention, accessand control of regulated content.  The “governmentregulation” factor has only recently begun to impact the document managementmarket, but could have a substantial effect in the long-term.

 

**Products and Services**

** **

Anacomp provides informationmanagement archival and retrieval services based upon the documentaccessibility, security and archival requirements of our customers’ businesses.Utilizing our extensive infrastructure, a growing number of our customerstransmit their documents to our information management service centers via oursecure, high-speed, data network. We offer four primary information outsourcingservices:  (1) we host customer documentson a server and provide secure, high-speed indexed access to them via standardWeb browsers, (2) we convert and index customer documents to industry standardformats and return them electronically or package them on CompactDisc-Recordable (CD-R) or Digital Video Disc (DVD) media with a viewer andnavigational tools, (3) we index these documents and capture them on microficheor microfilm—a very stable, economical, long-term storage alternative, and (4)we prepare, scan and index source documents (paper and film) and return theresulting electronic versions in customer specified format.

 

Anacomp’s maintenancesupport services are offered in North America and Europe primarily through adedicated, experienced organization of approximately 425 service and supportprofessionals.  We extend this service toapproximately 50 countries through our worldwide network of affiliated, certifiedservice technicians.  We support morethan 125 hardware manufacturers, resellers and distributors.

 

During fiscal year 2004, we focused on enhancing the capabilities ofour information management offerings and our MVS services that we felt were importantto strengthen Anacomp’s leadership position in the information management andrelated support services marketplace. Significant features and software capabilities such as report mining andscanning software integration were added into our docHarbor solution, while anexpansion to our call center/depot repair capabilities was completed to provideenhanced support and capacity for our OEM partners.  The net effect of these expanded features wasto introduce additional offerings to the market and to nurture the synergiesbetween our customers’ business needs and Anacomp’s set of IT solutions.

 

*docHarbor®*.  Anacomp’s docHarbor solution (also referredto as docHarbor Web Presentment services) is one of two principal growth areasfor us and provides what we believe is an industry-leading capability forstoring,

 

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delivering and accessing documents using theInternet.  This outsource serviceprovides worldwide access to critical information for authorized users.  Customer print data streams, e-mails andscanned source documents are securely transmitted to an Anacomp docHarbor DataCenter, where the information is indexed and converted to a format suitable forviewing through industry-standard Web browsers. Critical customer information can be stored concurrently at dual sites,facilitating disaster recovery planning. Records for all aspects of the customer storage process are maintainedfor the storage life of the document, providing an auditable record of alldocument activity.  We believe thatfinancial market institutions, with highly regulated document retention andcontrol requirements, will be among the primary users of this service.  The docHarbor solution is sold via Anacomp’sdirect sales force and authorized resellers.

 

docHarbor revenues increasedby 32% in fiscal year 2004, growing from $18.8 million in fiscal year 2003 to$24.8 million in fiscal year 2004. docHarbor revenues in fiscal year 2004 represent 13% of total Companyrevenues for the year.  We expectcontinued growth in our docHarbor solution revenue stream in fiscal year 2005based upon a number of factors, including increased customer awareness andrecognition; increased acceptance of outsourcing non-core business processes;and tighter regulations around financial reporting and record keeping.  docHarbor revenues are currently generatedprimarily in North America.  We continueto expand these services to customers throughout the U.K. and Italy.

 

Competition is growing inthe Internet-based document management services market.  In the U.S., several smaller companies areoffering somewhat similar services on a regional basis.  Some nationwide competitors have also emergedand are focused on vertical market sectors or specific, more narrowly focusedapplications such as check presentment, enrollment or e-mail support.  In particular, there is intense competitionin the area of on-line document viewing. Nevertheless, the major competition for Anacomp’s docHarbor solution inNorth America is in-house solutions (i.e., software licenses sold tocorporations for running a Web service on internal computer equipment).  Providers of technology for competitivein-house solutions include Mobius Management Systems, IBM, FileNET, Documentum,and Computer Associates.  Some of thesein-house software solutions providers, recognizing the merits and potentialrevenues of a services-based solution, have initiated competing serviceofferings, by partnering with existing document services providers.  The current economic conditions and widelyreported limitations on capital spending by companies worldwide favoroutsourcing as a more economical means of acquiring Internet-based documentmanagement solutions.  In the U.K. andItaly, Anacomp competes both with global providers such as IBM and individualdocument management outsource service providers within each country.

 

*Multi-VendorServices.*  Multi-VendorServices (MVS) is the second principal growth area for us.  By providing installation and maintenance forproducts made by other OEMs, we are able to leverage our considerable fieldservices and support expertise and infrastructure by expanding beyond the rangeof our own products.  We offerMulti-Vendor Services using two approaches. First, we contract with an OEM to provide maintenance services,including on-site maintenance services, as well as support services such ascall center/help desk support, logistics support and depot repair for the OEMand their end users.  For example, weoffer purchasers of Brocade fabric switches warranty and post-warranty supportfor their Storage Area Networks (SAN) infrastructure devices includinginstallation, on-site repair and maintenance. As a second approach, Anacompserves as an alternative to maintenance services provided by the OEM or itsdistributors.  For example, we offerusers of Xerox high-speed laser printers a high-quality, economical alternativeto the service offered by Xerox Corporation itself.  There is a large installed base of Xeroxprinters worldwide and, in most cases, Xerox has been the major source of fieldmaintenance services for these critical printing systems.

 

The first approach appealsto manufacturers that have geographically limited maintenance capabilities orno capabilities of their own, or whose own service operations are more costlyto operate than ours.  We service manydifferent makes and types of storage products, various routers and switches,high speed printing devices, tape subsystems and many other systems under thesearrangements.  The second approachappeals to end-users of devices that are looking for maintenance and supportservice alternatives to the more costly OEM offering.

 

We plan to grow our MVSbusiness by adding additional OEM partners and Value Added Resellers (VARs),and possibly through acquisitions. Revenues in fiscal year 2004 from MVS were $37.5 million, representing68% of total maintenance services revenues (MVS and Micrographic MaintenanceServices) and 20% of total Company revenues for the year.  Annual MVS revenues increased $3.5 million or10% in fiscal year 2004 after increasing $7.1 million or 26% in fiscal year2003 and $4.7 million or 21% in fiscal year 2002.  MVS revenues continued to exceed MicrographicMaintenance Services revenues, which were $17.3 million in fiscal year 2004.

 

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We compete with a number ofother providers in the MVS business such as IBM, Xerox Corporation, UnisysCorporation and Eastman Kodak Company (“Kodak”).

 

*Micrographic Maintenance Services.*  Anacomp maintains virtually the entireinstalled base of Anacomp-manufactured COM systems in use today, as well as COMsystems manufactured by other suppliers. We also provide maintenance support for other micrographic equipment,such as retrieval devices, microfilm scanners, cameras and duplicators.  Revenues from micrographic maintenanceservices were $17.3 million or 9% of total Company revenues in fiscal year2004.

 

*CDServices.*  Anacompoffers outsource services for storing, delivering and accessing documents usingthe CD-R medium.  This outsource serviceprovides customers with an easy-to-use, high-capacity, portable, standardizedsolution for the electronic distribution, access and storage of invoices, reports,statements, policies, trade confirmations and other important documents.  Since entering the emerging field of CD-baseddocument management in 1995, Anacomp has become one of the world’s largestoutsource service providers.  Overall,fiscal year 2004 CD Services revenues were $22.8 million and represented 12% oftotal Company revenues.

 

Our CD Services revenuesdeclined by $5.5 million or 19% in fiscal year 2004 after a $11.3 milliondecrease in fiscal year 2003.  Prior tofiscal year 2002, CD Services had been a consistently strong revenue contributor,but industry adoption of Web technologies and product commoditization continueto impact revenue.  We expect the declinein CD revenues in fiscal year 2004 to continue into fiscal year 2005 and beyondas CD services are becoming increasingly commodity-driven and prices continueto erode.  We believe we can mitigatethese effects through increasing product sales by linking CD usage with ourgrowing Web services segment, and by introducing improved services, whichinclude electronic delivery as well as CD and DVD delivery.  Primary competition in this market is fromlarge document services providers such as Lason and EPSIIA (a Fiserv company),from hundreds of local and regional CD services providers, and from in-houseon-line viewing systems.  These revenuesare reported as CD/Digital in our financial statements.

 

*Micrographic Services.*  Anacomp is the world leader in Micrographic(COM) Services.  With time-testedtechnological and operational expertise in COM, we image nearly two billionoriginal pages to microfiche each month for thousands of customersworldwide.  Overall, fiscal year 2004Micrographic Services revenues were $56 million and represented 30% of totalCompany revenues.

 

Compared with prior fiscalyears, this line of business continued to decline in fiscal year 2004 largelyas the result of a decreased demand for the COM storage and retrievalmedium.  Overall, the MicrographicServices revenues declined $14.8 million in fiscal year 2004, or 21%, reflectingthe trend in the mature micrographics market segment. The decline in revenuesin fiscal year 2003 from fiscal year 2002 was $21.8 million and represented a24% decrease.  We continue to manage thegross margin impact of the declining micrographics market on our MicrographicServices business and continue to implement cost containment strategies thatare focused on retaining our business and relationships with our customers,while providing an effective and efficient production and deliveryinfrastructure.

 

Our primary competitors inthe COM outsourcing business in the U.S. marketplace include Lason andSourceCorp.  We also compete on a regularbasis with many local and regional COM service providers.  To date, competition in this arena has beenprimarily based on price.  We believe wecan sustain our market share by providing customers with bundled services thatprovide COM, print, Web and CD services in a single package.  We are also investigating using microficheand microfilm for additional applications that require very long retentionperiods.

 

We have few largecompetitors in our traditional micrographic maintenance services business, andthe majority of the equipment we maintain is our own proprietary equipment.

 

*Imaging and Print Systems.*  Anacomp has the largest installed base of COMsystems in the world.  Our flagshipXFP2000® imaging platform remains the premier system in the marketplace, usingprecise laser-optics and advanced film processing techniques to producehigh-quality, original and duplicate images of reports and other documents onmicrofiche or 16mm roll film.  TheXFP2000 is the most widely used COM imaging system in the world.  We also use the XFP2000 for our ownMicrographic Services operations.  Whilewe no longer manufacture the XFP2000, we continue to offer “as new” XFP2000imaging systems for sale, as well as refurbished laser printers. Revenues fromimaging systems and related equipment (which is included in Equipment/Suppliesrevenue) in fiscal

 

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year 2004 were approximately $1.6 million or1% of total Company revenues in fiscal year 2004.  For fiscal year 2004 and beyond, we expectCOM imaging systems sales to continue to decline.

 

*Imaging and Print Supplies.*  Complementing Anacomp’s imaging and printsystems product offerings, we sell and distribute an extensive assortment ofsupplies to help customers with their imaging needs.  These supplies are sold through a telesalesgroup and various distributors worldwide.

 

Primary products in oursupplies business include silver halide original COM film (used to producemaster images) and non-silver duplicating microfilm (used to produce copies ofmaster images).  The majority of silverhalide original COM film for use of Anacomp’s XFP2000 systems is sold in aproprietary package and is currently available only from Anacomp.  We obtain our proprietary silver halideproducts through an exclusive multi-year supply agreement with Kodak.  The supplies business also distributesnon-proprietary duplicating film to our installed base of imaging systemsusers.  We obtain our duplicate filmproducts through a supply agreement with InteliCoat Technologies.  We believe the users of our imaging systemspurchase the majority of their original, duplicate film and related chemicalsfrom us.  Revenues from supplies sales infiscal year 2004 were $26 million or 14% of total Company revenues and werereported as part of Equipment/Supplies revenues in our financial statements.  One customer, Nissho Electronics (USA),comprised 11% of total Equipment/Supplies revenue for fiscal year 2004.

 

We have no significant competitors in our proprietary XFP2000 originalCOM film business.  In the original andduplicate COM film market for older imaging systems, we compete withAgfa-Gevaert AG (“Agfa”) and Kodak.

 

*Scanning Services*. During fiscal year 2004 westarted to offer source document scanning services to complement our docHarborWeb Presentment services and CD Services. To date, scanning services have beenbundled into the delivery service (docHarbor or CD Services). We performscanning services, including document preparation, scanning and indexing in ourinformation management solutions service centers, or through third-partyscanning providers, or in combination depending on the document volumes andcustomer requirements. In fiscal year 2004, we reported scanning revenueswithin the revenues of the delivery mechanism, generally docHarbor or CDServices. We expect that our scanning services will grow in fiscal year 2005based on recent contract awards and a strong sales pipeline.

 

We have significantcompetitors in the scanning services marketplace, ranging from nationwidecompetitors like Ikon, Lason and SourceCorp to smaller regionalcompetitors.  Competition in thismarketplace is largely based on price, and some of our competitors utilizeoffshore resources to minimize labor costs. We believe that we can compete effectively in the marketplace based onour knowledge of the high volume film-based imaging users, our existinginfrastructure and by bundling the scanning services with other services likedocHarbor.

 

**Engineering, Research and Development**

** **

Anacomp’s ability to meetcustomer needs for improved technology, and to maintain our leadership in thedocument management and related services industry, depends on our ability toincorporate evolving technologies into products and services to meet ourcustomers’ needs.  Our engineering anddevelopment expenses totaled $6.0 million in fiscal year 2004 and $6.4 millionin fiscal year 2003.

 

We own patents andlicenses covering various aspects of our business lines and productionprocesses, as well as proprietary trade secret information relating to ourproducts and services.  While we believethat the protection provided by these patents, licenses and proprietaryinformation is important, we also feel that the knowledge and experience of ouremployees, along with their abilities to develop and market our services andproducts and to provide value added benefits to our customers, is equallysignificant.

 

**IntellectualProperty**

 

Anacomp has three patentsthat are material to our COM business that prevent competitors from developinga film canister that is usable in the XFP2000 imaging system.  As a result, it is more difficult forcompetitors to offer COM film directly to our customers.  Although the COM business is in decline,these patents help us to maintain our leadership in this business segment.  The patents described above expire at varioustimes between September 2010 and January 2016.

 

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In addition, wehold patent and trade secrets relating to the compression technology applicableto our information outsourcing service offerings.  While some trade secrets may be patentable,we have not applied for patents for competitive reasons.  Our compression technology affords useconomies of storage, transmission and back-up of data.  As these economies reduce our costs, theyprovide a competitive advantage.  Weattempt to protect our trade secrets by entering into confidentialityagreements with third parties, employees and consultants.  Our employees and engineering consultantsalso sign agreements requiring that they assign to us their interests inpatents and other intellectual property arising from their work for us.  Additionally, all employees sign an agreementnot to engage in any conflicting employment or activity during their employmentwith us nor to disclose or misuse our confidential information.

 

**RawMaterials and Suppliers**

 

Polyester is theprincipal raw material used in the manufacture of both original and duplicatemicrofilm products.  As a petroleum-basedraw material, polyester costs could be volatile in fiscal year 2005.  Indications are that film suppliers intend toresist implementing further such price increases over the next year due topotential impact on the marketplace.

 

InteliCoat Technologies andAnacomp entered into a four-year agreement in October 2001, in which InteliCoatagreed to supply Anacomp with Diazo and Vesicular duplicate microfilms.  At this time InteliCoat is the exclusiveprovider of duplicate microfilm to Anacomp. There is only one other international manufacturer of Diazo duplicatemicrofilm.

 

Anacomp’s XFP2000 systemutilizes a proprietary, patented original film canister that is suppliedexclusively by Kodak.  We also purchasefrom Kodak substantially all of our requirements for original microfilm forearlier-generation systems once manufactured by us as well as other oldersystems.

 

**IndustrySegments and Foreign Operations**

 

Anacomp’s businessis focused in the document management industry. In prior years, our business results were reported in two primarybusiness lines, Document Solutions and Technical Services.  We now manage our business through oneoperating unit.  We believe this approachcreates operating efficiencies in our sales and support organizations, and thatit will promote business decisions that are more synergistic across productlines.  Financial information concerning ouroperations in different geographical areas, sales by geographic region andrevenues from external customers is included in Note 17 of the Notes to theConsolidated Financial Statements.

 

###### **Bankruptcy Reorganization**

 

On October 19,2001, we filed a voluntary petition for reorganization under Chapter 11 of theU.S. Bankruptcy Code, together with a prepackaged plan of reorganization, withthe U.S. Bankruptcy Court for the Southern District of California.  The U.S. Bankruptcy Court confirmed the planon December 10, 2001, and we emerged from bankruptcy effective December 31,2001.

 

The primarybenefits of our bankruptcy were the elimination of $310 million of seniorsubordinated notes, related accrued interest of $52.3 million, and the relatedannual interest expense of approximately $34 million. Additionally, our creditfacility was amended such that we cured previous events of default.  New Common Stock was distributed to theholders of the notes as well as to holders of the previously existing CommonStock.

 

Also, as a resultof the Chapter 11 reorganization, the following occurred:

 

•                  all unexercised stock options werecanceled;

•                  prior stock option plans wereterminated;

•                  executory contracts were assumed orrejected;

•                  trade creditors were paid in theordinary course of business and were not impaired;

•                  members of a new Board of Directorswere designated by the holders of the subordinated notes;

•                  403,403 shares of new Class A CommonStock were authorized for use in new stock option plans; and

•                  the revolving credit facility wasamended.

 

 

7

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The U.S. Bankruptcy Court issued its final decree on September 27, 2002closing the Chapter 11 case.  There areno remaining claims or unrecorded obligations related to the bankruptcyproceedings.

 

**Employees**

 

As of October 31,2004, we employed 1,109 people at multiple facilities and offices in NorthAmerica and Europe.  Some of ouremployees in certain European countries are represented by worker’s councils.We consider our employee relations to be good.

 

**Executive Officers**

** **

The currentexecutive officers of the Company, their ages (as of November 12, 2004) andtheir positions with the Company are listed in the following table:

 
| **NAME**             | ** ** | **AGE** | ** ** | **PRINCIPAL  OCCUPATION**                                               |
|----------------------|------------|---------|------------|-------------------------------------------------------------------------|
| Jeffrey R. Cramer    |       | 51      |       | Chief Executive Officer                                                 |
| William R. Pesch     |       | 53      |       | President and Chief  Operating Officer                                  |
| Linster W. Fox       |       | 55      |       | Executive Vice President  and Chief Financial Officer                   |
| Richard V. Keele     |       | 55      |       | Executive Vice President,  Global Marketing                             |
| Frank Roche          |       | 58      |       | Executive Vice President  and General Manager International             |
| Paul J. Najar        |       | 42      |       | Executive Vice  President-Administration, General Counsel and Secretary |
| Thomas P. Cunningham |       | 44      |       | Senior Vice President and  General Manager Information Management       |
| Arthur J. DiScipio   |       | 52      |       | Senior Vice President of  North American Operations                     |
| James P. Hunt        |       | 45      |       | Senior Vice President of  Materials and Repair                          |

 

The business experience ofeach executive officer for the past five years is described below.  Each executive officer holds office until hissuccessor is chosen and qualified or until his earlier death, resignation orremoval.

 

*JeffreyR. Cramer* was elected the ChiefExecutive Officer after serving as President and Chief Executive Officer sinceOctober 2002.  Prior to that, he was ourSenior Vice President-Technical Services since August 13, 1997.  Mr. Cramer joined Anacomp in July 1996with Anacomp’s acquisition of COM Products, Inc., referred to as CPI, andserved as Senior Vice President-Business Development from February to August1997.  Mr. Cramer had served asPresident of CPI since March 1987.

 

*William R. Pesch* was elected President and Chief Operating Officer effective as ofNovember 15, 2004.  Prior to joiningAnacomp, Mr. Pesch served as the founder and president of WRPAssociates, Inc., an interim executive leadership business for private equityfirms, since 2002. From 1999 to 2001, Mr. Pesch was President ofFrancotyp-Postalia, Inc., a German company with a U.S. division providingelectronic office and mailroom equipment. Prior to that, Mr. Pesch held seniormanagement positions in such firms as A.B. Dick Company, Siemens BuildingTechnologies and Bell & Howell.

 

*LinsterW. Fox* was elected Executive Vice President on April25, 2002, Director from November 2, 2001 until February 2003, and SeniorVice President and Chief Financial Officer on November 15, 2000, havingserved as Senior Vice President and Corporate Controller since August 2,1999, and Vice President and Controller since July 1998.  From January 1996 to June 1998, Mr. Foxserved as Vice President and U.S. Controller.  Previously, Mr. Fox served as VicePresident and Controller of our Poway Operations from May 1995 to December1995.  From October 1992 to May 1995, Mr. Foxwas Vice President of Finance and Administration for Poway Operations.  Prior to that, Mr. Fox served as VicePresident of Finance and Administration for our International Operations fromOctober 1990 to October 1992.

 

*Richard V. Keele*  was elected Executive Vice President on April 25, 2002 and has ledAnacomp’s Global Marketing since June 2002. Mr. Keele served as Senior Vice President and Chief Technology Officersince September 2000.  Mr. Keele joinedAnacomp in January 1997 with the Company’s acquisition of Data/Ware

 

8

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Development, Inc.thereafter he served as Senior Vice President of Product Development andPresident of the Data/Ware Group.

 

*Frank Roche* was elected Executive Vice President — Internationalon July 22, 2002. Mr. Roche joined Anacomp in November 1997 serving asTechnical Services Director for the UK and then was promoted to TechnicalServices Director for the International Region. Prior to joining Anacomp, Mr.Roche was Managing Director and CEO for the Fortay Group Holdings in the UKfrom 1991 to 1997.

 

*PaulJ. Najar* was elected Executive VicePresident — Administration, General Counsel and Secretary on April 25, 2002after serving as Vice President- Administration, General Counsel and Secretarysince November 15, 2000.  Mr. Najarhad served as Associate General Counsel and Assistant Secretary since joiningAnacomp in October 1996. Prior to joining Anacomp, Mr. Najar was anattorney for the University of California, Irvine from May 1992 to October1996.

 

*Thomas P. Cunningham* was promoted to Senior Vice President and General Manager of InformationManagement in June 2004 after serving as Senior Vice President of ProfessionalServices since December of 2000.  Hejoined the Company as part of the First Image acquisition in April of 1998 asVice President of Technical Support.  Mr.Cunningham has also held field-based management positions at both First Imageand Zytron.

 

*Arthur J. DiScipio* was elected the Senior VicePresident of North American MVS Operations in September 2004 after serving asSenior Vice President of both Field Services and Document Management Operationssince October 2002.  Mr. DiScipioformerly held the position of Senior Vice President of the Eastern U.S.Operations and prior to that, Vice President of the U.S. and Canadian TechnicalServices Organization.  Art joinedAnacomp in 1997 and prior to joining Anacomp; Mr. DiScipio held key corporateand field management positions during his 16-year career with Digital EquipmentCorporation.

 

*James P.Hunt* was elected to SeniorVice President of Materials and Repair on July 22, 2002 after serving as VicePresident of Resource and Materials Management since January 25, 2001.  Mr. Hunt joined Anacomp in 1981, previouslyserving as Vice President of Materials, as well as in a variety of managementroles within the materials/manufacturing arena.

**ITEM 2.  PROPERTIES**

Anacomp’sheadquarters are in San Diego, California. This leased facility houses our management, marketing, finance,accounting, legal and information technology groups.  An additional leased facility located inVista, California houses the equipment/supplies, Multi-Vendor Services, COMProfessional Services groups, and our call center and a depot repair facility.We also lease office space for sales and service centers in a variety oflocations around the world including 7 megacenters in the United States.  The following table indicates the squarefootage of our facilities:

 

| ** **     | ** ** | **Operating Facilities** | ** ** | **Other Facilities** | ** ** | **Total** | ** ** |
|----------------|------------|--------------------------|------------|----------------------|------------|-----------|------------|
| United States: |       |                     |       |                 |       |      |       |
| Leased         |       | 460,603                  |       | 42,336               |       | 502,939   |       |
|           |       |                     |       |                 |       |      |       |
| International: |       |                     |       |                 |       |      |       |
| Leased         |       | 118,089                  |       | 16,609               |       | 134,698   |       |
| Total          |       | 578,692                  |       | 58,945               |       | 637,637   |       |

 

“Other Facilities” consists of currently unused space,portions of which have been subleased to others. Management considers itsfacilities adequate for its present needs and does not believe that it wouldexperience any difficulty in replacing any of its present facilities if any ofits current agreements were terminated.

 

**ITEM 3. LEGALPROCEEDINGS**

** **

Anacomp and its subsidiariesare potential or named defendants in several lawsuits and claims arising in theordinary course of business. While the outcome of claims, lawsuits or otherproceedings brought against the Company cannot be predicted with certainty,management expects that any liability, to the extent not provided for

 

 

9

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through insurance or otherwise, will not havea material adverse effect on the Company’s financial condition or results ofoperations.

** **

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

** **

During the three months ended September 30, 2004, nomatters were submitted to a vote of Anacomp’s security holders through thesolicitation of proxies or otherwise.

 

 

 

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### **PART II**

### ** **

###### **ITEM 5.  MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER** MATTERS AND ISSUER REPURCHASES OFEQUITY SECURITIES

** **

Anacomp’s Class A andClass B Common Stock are traded on the OTC Bulletin Board.  Class B Common Stock is not actively traded andis quoted only on a limited basis, and, as a result there is no establishedpublic trading market with respect to Class B Common Stock.  The Class A Common Stock is traded under thesymbol “ANCPA.”  The following table setsforth the range of high and low closing prices for our Class A Common Stock forthe periods indicated, as reported by the OTC Bulletin Board (these quotationsreflect inter-dealer prices, without retail mark up, mark down, or commissions,and may not necessarily represent actual transactions):

 
| ** **     | ** ** | **Fiscal Year 2004** | ** ** | **Fiscal Year 2003** | ** ** |
|----------------|------------|----------------------|------------|----------------------|------------|
| ** **     | ** ** | **High**             | ** ** | **Low**              | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter  |       | $                    | 23.50      |                 | $          | 19.70 |   | $ | 24.50 |   | $ | 18.12 |   |
| Second quarter |       | 26.00                |       | 19.75                |       | 20.25 |   | 15.75 |   |
| Third quarter  |       | 21.50                |       | 18.10                |       | 17.25 |   | 15.75 |   |
| Fourth quarter |       | 21.05                |       | 18.30                |       | 23.00 |   | 15.00 |   |
|                |            |                      |            |                      |            |  |  |  |  |  |  |  |  |

 

Management currently intends to retain anyfuture earnings for use in the operation and development of the business and,therefore, does not expect to declare or pay any cash dividends on Anacompcapital stock.  In addition, Anacomp’sborrowing agreements prohibit the payment of cash dividends on capitalstock.  As of December 3, 2004, therewere approximately 53 holders of record of Class A Common Stock andapproximately 175 holders of record of Class B Common Stock.  The price of the Class A Common Stock was$18.35 as of December 2, 2004.

### **Issuer Purchasesof Securities**

 
| **Period**                                  | ** ** | **Total Number of Shares Purchased** | ** ** | **Average Price Paid per Share** | ** ** | **Total Number of Shares Purchased as Part of Publicly Announced Plans  or Programs** | ** ** | **Approximate Dollar Value of Shares that May Yet Be Purchased Under  the Plans or Programs(1)** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| July 1, 2004 - July 31, 2004                |       | —                               |       | $                                | —     |                                                                                  | —     |                                                                                             | $          | — |   |
| August 1, 2004 - August 31, 2004            |       | 354,450                              |       | $                                | 18.75      |                                                                                  | 354,450    |                                                                                             | $          | 8,350,807 |   |
| September 1, 2004 - September 30, 2004 |       | —                               |       | $                                | —     |                                                                                  | —     |                                                                                             | $          | — |   |
| Total                                       |       | 354,450                              |       | $                                | 18.75      |                                                                                  | 354,450    |                                                                                             | $          | 8,350,807 |   |
|                                             |            |                                      |            |                                  |            |                                                                                       |            |                                                                                                  |            |  |  |  |

 

(1)                       Repurchasedpursuant to the Company’s repurchase program, effective as of August 5,2004, under which Anacomp’s Board of Directors authorized the repurchase of upto an aggregate of $15.0 million of its Class A Common Stock.

 

 

11

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**ITEM6.  SELECTED FINANCIAL DATA**

 

The Company, priorto the bankruptcy reorganization, is referred to in this Annual Report on Form10-K as the “Predecessor Company” and the Company, after the bankruptcyreorganization, is referred to in this Annual Report on Form 10-K as the “ReorganizedCompany.”  The following SelectedFinancial Data of the Company should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” setforth in Item 7 of this Annual Report on Form 10-K, and with the consolidatedfinancial statements and the related notes thereto included elsewhere herein:

 
| ** **                                                   | ** ** | **Reorganized Company**                   | ** ** | **Predecessor Company** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|
| ** **                                                   | ** ** | **Year  ended**                           | ** ** | **Year  ended**         | ** ** | **Nine  months  ended** | ** ** | **Three  months  ended** | ** ** | **Year  ended** | ** ** | **Year  ended** | ** ** |
| ** **                                                   | ** ** | **9/30/04**                               | ** ** | **9/30/03**             | ** ** | **9/30/02** | ** ** | **12/31/01** | ** ** | **9/30/01** | ** ** | **9/30/00** | ** ** |
| ** **                                                   | ** ** | **(In thousands, except per share data)** | ** ** |
| Revenues                                                     |       | $                                         | 184,429    |                    | $          | 204,023 |   | $ | 173,807 |   | $ | 68,024 |   | $ | 306,348 |   | $ | 383,197 |   |
| Operating income (loss) from continuing operations           |       | (7,133                                    | )          | 2,084                   |       | 3,219 |   | 2,333 |   | (1,621 | ) | (67,648 | ) |
| Reorganization items(a)                                      |       | —                                    |       | —                  |       | — |   | 13,328 |   | — |   | — |   |
| Gain on extinguishment of debt(b)                            |       | —                                    |       | —                  |       | — |   | 265,329 |   | — |   | — |   |
| Income (loss) from continuing operations before income taxes |       | (8,190                                    | )          | 1,071                   |       | 799 |   | 277,810 |   | (44,274 | ) | (108,248 | ) |
| Gain on sale of discontinued operations(c)                   |       | —                                    |       | 7,995                   |       | — |   | — |   | — |   | — |   |
| Net income (loss)                                            |       | (9,941                                    | )          | 7,306                   |       | (2,312 | ) | 277,360 |   | (47,491 | ) | (111,434 | ) |
| Basic and diluted net income (loss) per share(d)             |       | $                                         | (2.48      | )                       | $          | 1.81 |   | $ | (0.57 | ) |   |   |   |   |   |   |
| Cash dividends declared                                      |       | —                                    |       | —                  |       | — |   | — |   | — |   | — |   |
|                                                              |            |                                           |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

** **
| ** **                          | ** ** | **Reorganized Company** | ** ** | **Predecessor Company** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **As of**               | ** ** | **As of**               | ** ** | **As of** | ** ** | **As of** | ** ** | **As of** | ** ** |
| ** **                          | ** ** | **9/30/04**             | ** ** | **9/30/03**             | ** ** | **9/30/02** | ** ** | **9/30/01** | ** ** | **9/30/00** | ** ** |
| ** **                          | ** ** | **(In thousands)**      | ** ** |
| Current assets                      |       | $                       | 41,692     |                    | $          | 57,471 |   | $ | 72,453 |   | $ | 81,315 |   | $ | 85,442 |   |
| Current liabilities(e)              |       | 39,980                  |       | 39,634                  |       | 78,952 |   | 475,603 |   | 458,673 |   |
| Total assets                        |       | 144,473                 |       | 164,941                 |       | 185,949 |   | 207,818 |   | 238,289 |   |
| Stockholders’ equity (deficit) |       | 84,203                  |       | 101,143                 |       | 93,144 |   | (277,927 | ) | (230,926 | ) |
|                                     |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

----

(a)                       Reorganizationitems represent expense and adjustments resulting from our reorganization andconsist of professional fees incurred subsequent to our Chapter 11 filingtotaling $1 million, fair value adjustments made to assets and liabilitiestotaling $16.9 million and other asset write-offs and settlements totaling $2.6million (primarily related to our extinguished debt) in Fresh Start Reporting.

(b)                      Gain onextinguishment of debt resulted from our bankruptcy proceedings and emergencefrom Chapter 11 proceedings on December 31, 2001.

(c)                       We realized again of $8 million on the sale of our Switzerland subsidiaries effective as ofOctober 1, 2003.

(d)                      Basic anddiluted net income or loss per share for periods prior to the nine months endedSeptember 30, 2002 have not been presented as they are not comparable tosubsequent periods due to the implementation of Fresh Start Reporting (see Note3).

(e)                       We did not makerequired interest payments on our senior subordinated notes on October 1, 2001and April 1, 2001.  Accordingly, theNotes balance outstanding, $310.9 million and $311.3 million at September 30,2001 and 2002, respectively, have been classified as a current liability.

** **

** **

**12**

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** **

**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND** RESULTS OF OPERATIONS

 

**Overview**

 

                Anacomp is aglobal provider of information outsourcing services, maintenance support, andimaging and print solutions.

 

                The majority ofour business relates to managing customer documents, supporting the devicesthese documents are captured, printed or stored on, and providing supplies andservice for the same. We attempt to service our existing and future customersby “bundling” an expanded list of services (e.g. Web viewing, CD Services,printing, scanning and long-term storage).

 

                We are also one ofthe world’s leading independent, vendor neutral providers of Multi-VendorServices (MVS), where we act as a third party maintainer, providing supportsuch as on-site maintenance, call center/help desk service and/or depot repairservices, as well as laser printer maintenance and associated hardware. Weoffer expert installation, maintenance and repair services for a broad array ofthird party equipment, such as mass storage devices and high-speed outputsystems. In addition, we provide systems and related supplies and services tomuch of the installed base of COM imaging systems worldwide through acombination of direct sales, telemarketing and distributors. Anacomp was oncethe primary manufacturer for most of the base of this installed COM equipmentand today we provide “as new” systems to our customers in North America, Japanand Europe. We also refurbish high-speed laser printers and provide maintenancesupport for a number of these devices, as well as selling associated supplies.

 

*Our 2001 Bankruptcy*

* *

                On October 19,2001, we filed a voluntary petition for reorganization under Chapter 11 of theU.S. Bankruptcy Code, together with a prepackaged plan of reorganization withthe U.S. Bankruptcy Court for the Southern District of California. Under theplan we eliminated $310 million of senior subordinated notes, related accruedinterest of $52.3 million and the related annual interest expense of $34million. New Common Stock was distributed to the holders of the notes as wellas to holders of the previously existing Common Stock. The U.S. BankruptcyCourt confirmed the plan of reorganization on December 10, 2001, and we emergedfrom bankruptcy effective December 31, 2001. The U.S. Bankruptcy Court issuedits final decree on September 27, 2002 closing the Chapter 11 case. We are notaware of any remaining claims or unrecorded obligations related to the bankruptcyproceedings.

 

**Critical Accounting Policies and Estimates**

** **

                Our discussion andanalysis of financial condition and our results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to baddebts, inventories, intangible assets, income taxes, restructuring andcontingencies and litigation. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. Our critical accounting policies are asfollows:

 

•                  revenue recognition;

•                  estimating valuationallowances and accrued liabilities, including the allowance for doubtful accounts,inventory valuation, restructuring expenses and assessments of the probabilityof the outcomes of our current litigation and environmental matters;

•                  defined benefit plans;

•                  accounting for income taxes;and

•                  valuation of long-lived,intangible and reorganization assets.

 

 

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***Revenue Recognition.***We recognizecontract revenue for the development and implementation of document servicessolutions under contracts over the contract period based on output measures asdefined by deliverable items identified in the contract.  We make provisions for estimated losses oncontracts, if any, during the period when the loss becomes probable and can bereasonably estimated.

 

We record revenues fromsales of products and services or from leases of equipment under sales-typeleases based on shipment of products (and transfer of risk of loss),commencement of the lease, or performance of services. We recognize operatinglease revenues during the applicable period of customer usage.  We recognize revenue from maintenancecontracts ratably over the period of the related contract.  Amounts billed in advance of our performingthe related services are deferred and recognized as revenues as they areearned.  Under sales-type leases, werecord as revenue the present value of all payments due under the lease, chargethe cost of sales with the book value of the equipment plus installation costs,and defer and recognize future interest income over the lease term.

 

For contracts with multipleobligations, we unbundle the respective components to determine revenuerecognition using vendor-specific objective evidence (VSOE).  In instances where VSOE is not determinable,all of the related revenue is deferred and amortized over the contract period.

 

In accordance withSOP 97-2, ‘‘Software Revenue Recognition,’’ we recognize revenues from softwarelicense agreements provided that all of the following conditions are met:

 

•                  a non-cancelable licenseagreement has been signed;

•                  the software has beendelivered and there are no material uncertainties regarding customeracceptance;

•                  fees are fixed ordeterminable;

•                  collection of the resultingreceivable is deemed probable and the risk of concession is deemed remote; and

•                  no other significant vendorobligations exist.

 

***Allowance for doubtful accounts, inventoryvaluations, restructuring charges, litigation and environmental matters.***We must makeestimates of the uncollectability of our accounts receivable.  When evaluating the adequacy of the allowancefor doubtful accounts, we specifically analyze accounts receivable as well ashistorical bad debts, customer concentrations, customer credit-worthiness,current economic trends and changes in our customer payment terms.  Our accounts receivable balance was $26.6million, net of allowance for doubtful accounts of $1 million, as of September30, 2004.

 

We write down our inventoryfor estimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions. If actual marketconditions are less favorable than management projects, we may need to writedown additional inventory.

 

We estimate the charges forour excess facilities related to restructuring by estimating the timing ofexiting certain facilities and then estimating the future lease and operatingcosts to be paid until the lease is terminated and the amount of any subleaseincome.  To form our estimates for thesecosts, we performed an assessment of the affected facilities and considered thecurrent market conditions for each site. Our policies require us to periodically evaluate the adequacy of theremaining liabilities under our restructuring initiatives.  Our assumptions for the operating costs untiltermination or the offsetting sublease revenues may turn out to be incorrect,and our actual costs may be materially different from our estimates, whichcould result in the need to record additional costs or to reverse previouslyrecorded liabilities.

 

We estimate ranges ofliability related to pending litigation based on claims for which we candetermine the probability of loss and estimate the amount and range of loss.When an estimate of loss is deemed probable we record our best estimate of theexpected loss or the minimum estimated liability related to those claims, wherethere is an estimable range of loss. Because of the uncertainties related toboth the outcomes and ranges of loss on currently pending litigation, we hadnot accrued for any litigation losses as of September 30, 2004. As additionalinformation becomes available, we will assess the potential liability relatedto our pending litigation and revise our estimates as necessary. Such revisionsin our estimates of the potential liability could materially impact our resultsof operations and financial position.

 

Xidex Corporation, a companythat we acquired in 1988, was designated by the United States EnvironmentalProtection Agency (‘‘EPA’’) as a potentially responsible party forinvestigatory and cleanup costs incurred by state and federal authoritiesinvolving locations included on a list of EPA’s priority sites for investigation

 

 

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and remedial action under the federalComprehensive Environmental Response, Compensation, and Liability Act. AtSeptember 30, 2004, we had an estimated EPA liability for cleanup costs for theaforementioned locations and other sites totaling $0.4 million.  Based upon updated environmental analysis andhistorical sampling data, we recorded a $0.6 million reduction to our EPAliability in fiscal year 2004.  Remedialaction required by the EPA may exceed our current estimates and reserves and wemay incur additional expenses related to environmental clean-up.

 

***Defined benefit retirement plans.***  The plan obligations and related assets ofdefined benefit retirement plans maintained in the United Kingdom and Germanyare presented in Note 12 of the Notes to Consolidated Financial Statements.  Plan assets, which consist primarily ofmarketable equity and debt instruments, are valued using marketquotations.  Plan obligations and theannual pension expense are determined by independent actuaries and through theuse of a number of assumptions.  Keyassumptions in measuring the plan obligations include the discount rate, therate of salary increases, mortality rates and the estimated future return onplan assets.  In determining the discountrate, we utilize the yield on high-quality, fixed-income investments currentlyavailable with maturities corresponding to the anticipated timing of thebenefit payments.  Salary increaseassumptions are based upon historical experience and anticipated futuremanagement actions.  Asset returns arebased upon the anticipated average rate of earnings expected on the investedfunds of the plans.  At September 30,2004, the ranges of weighted-average actuarial assumptions of our internationalplans were: discount rate 5.25% to 5.75%; long-term rate of return on planassets 5.0% to 7.5%; and assumed salary increases of 2.5% to 2.75%.

 

***Accounting for income taxes.***As part of theprocess of preparing our consolidated financial statements we are required toestimate our income taxes in each of the jurisdictions in which we operate.This process involves us estimating our actual current tax liability togetherwith assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. These differences result in deferred tax assets and liabilities, whichare included within our Consolidated Balance Sheet. We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome and to the extent we believe that recovery is not likely, we must establisha valuation allowance. To the extent we establish a valuation allowance orincrease this allowance in a period, we must include an expense within the taxprovision in the statement of operations.

 

Significant managementjudgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. The net deferred tax asset as of September30, 2004 was $0.5 million, net of a valuation allowance of approximately $42.7million, due to uncertainties related to our ability to utilize our netdeferred tax assets before they expire. The valuation allowance is based on ourestimates of taxable income by jurisdiction in which we operate and the periodover which our deferred tax assets will be recoverable. In the event thatactual results differ from these estimates or we adjust these estimates infuture periods, we could materially impact our financial position and resultsof operations.

 

The tax benefits of pre-reorganizationnet deferred tax assets will be reported first as a reduction of thereorganization asset and then as a reduction to non-current intangible assetsarising from the reorganization, and finally as a credit to stockholders’equity. These tax benefits will not reduce future income tax expense forfinancial reporting purposes.

 

***Valuation of long-lived, intangible andreorganization assets.***We assess the impairment ofidentifiable intangibles, long-lived assets and reorganization value in excessof identifiable assets annually or whenever events or changes in circumstancesindicate that the carrying value may not be recoverable.  Factors we consider important which couldtrigger an impairment review include the following:

 

•                  significant underperformancerelative to historical trends or projected future operating results;

•                  significant changes in themanner of our use of our assets or the strategy for our overall business,including potential asset dispositions;

•                  significant negativeindustry or economic trends;

•                  significant decline in ourstock price for a sustained period; and

•                  our market capitalizationrelative to net book value.

 

When we determinethat the carrying value of intangibles, long-lived assets and reorganizationvalue in excess of identifiable net assets may not be recoverable based uponthe existence of one or more of the above indicators of impairment, we measureany impairment based on a projected discounted cash flow method using adiscount rate determined by our management to be commensurate with the riskinherent in our current business model. Net intangible assets, long-livedassets, and reorganization value in excess of identifiable assets amounted to$102.8 million as of September 30, 2004.

 

 

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The assigned fairvalues of the Reorganized Company and its assets and liabilities representsignificant estimates that we made based on facts and circumstances available.Valuation methodologies employed in estimating fair values also require theinput of highly subjective assumptions and predictions of future events andoperations. Actual future events and results could differ substantially frommanagement’s estimates and assumptions. Unfavorable changes compared to ourprojections used for Fresh Start Reporting purposes (which were based on ourbest estimates and information available at that time) could result in futureimpairments of our reorganization asset and identifiable intangible assets,which could be material.

 

Management has discussedthe development and selection of these critical accounting policies with theAudit Committee of our Board of Directors and the Audit Committee has reviewedour disclosure relating to it in this Management Discussion and Analysis.

 

**Results ofOperations**

 

The following results ofoperations information includes our historical information prior to December31, 2001, the effective date we emerged from bankruptcy and is identified asresults of operations of Predecessor Company. The results of operations for the fiscal year ended September 30, 2004,the fiscal year ended September 30, 2003 and for the nine months endedSeptember 30, 2002 represent results for the Reorganized Company after adoptingFresh Start Reporting.  Due to ourreorganization and the implementation of Fresh Start Reporting, the financialinformation for the Reorganized Company is not comparable to the PredecessorCompany.  In addition, in the fourthquarter of fiscal year 2002 we committed to a plan to sell our Switzerlandoperations and in the third quarter of fiscal year 2002 we sold two smalleroperating units.  The operating resultsfor these units have been classified as income from discontinued operations forthe nine-month period ended September 30, 2002. For the Predecessor Company, prior periods presented these units as notbeing material to our consolidated results and were therefore not reported asdiscontinued operations.

 

To facilitate ameaningful comparison of Anacomp’s year-to-date operating performance, thefollowing discussion of results of operations on a consolidated basis ispresented on a traditional comparative basis for all periods.  However, the pro forma results of operationspresented below for the twelve-month period ended September 30, 2002 combinesthe nine-month period ended September 30, 2002 on a Reorganized Company basiswith the three-month period ended December 31, 2001 on a Predecessor Companybasis.  These periods and bases ofaccounting are not comparable and we have presented them separately in theaccompanying Consolidated Statements of Operations.

 

**CONSOLIDATED RESULTS OF OPERATIONS**
| ** **                                                                             | ** ** | **Fiscal Year Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                             | ** ** | **2004  (Reorganized  Company)**    | ** ** | **2003  (Reorganized  Company)** | ** ** | **2002  (Pro Forma  Basis)** | ** ** |
| ** **                                                                             | ** ** | **(in thousands, unaudited)**       | ** ** |
| Revenues:                                                                              |       |                                |       |   |   |   |   |
| Services                                                                               |       | $                                   | 151,829    |   | $ | 166,594 |   | $ | 195,837 |   |
| Equipment and supply sales                                                             |       | 32,600                              |       | 37,429 |   | 45,994 |   |
|                                                                                   |       | 184,429                             |       | 204,023 |   | 241,831 |   |
| Cost of revenues:                                                                      |       |                                |       |   |   |   |   |
| Services                                                                               |       | 102,269                             |       | 113,789 |   | 131,729 |   |
| Equipment and supply sales                                                             |       | 22,069                              |       | 25,353 |   | 32,868 |   |
|                                                                                   |       | 124,338                             |       | 139,142 |   | 164,597 |   |
|                                                                                   |       |                                |       |   |   |   |   |
| Gross profit                                                                           |       | 60,091                              |       | 64,881 |   | 77,234 |   |
| Costs and expenses:                                                                    |       |                                |       |   |   |   |   |
| Engineering, research and development                                                  |       | 6,014                               |       | 6,397 |   | 6,985 |   |
| Selling, general and administrative                                                    |       | 50,834                              |       | 51,720 |   | 59,265 |   |
| Reversal of environmental liability                                                    |       | (626                                | )          | — |   | — |   |
| Amortization of intangible assets                                                      |       | 1,983                               |       | 1,983 |   | 4,383 |   |
| Restructuring charges (credits)Asset impairment charges                                |       | 9,019                               |       | 2,697 |   | 1,049 |   |
|                                                                                   |       |                                |       |   |   |   |   |
| Operating income (loss) from continuing operations                                     |       | (7,133                              | )          | 2,084 |   | 5,552 |   |
|                                                                                   |       |                                |       |   |   |   |   |
| Other income (expense):                                                                |       |                                |       |   |   |   |   |
| Interest income                                                                        |       | 216                                 |       | 257 |   | 508 |   |
| Interest expense and fee amortization                                                  |       | (591                                | )          | (1,789 | ) | (6,183 | ) |
| Gain on extinguishments of debt                                                        |       | —                              |       | — |   | 265,329 |   |
| Other                                                                                  |       | (682                                | )          | 519 |   | 75 |   |
|                                                                                   |       | (1,057                              | )          | (1,013 | )  | 259,729 |   |
| Income (loss) from continuing operations before reorganization items  and income taxes |       | (8,190                              | )          | 1,071 |   | 265,281 |   |
| Reorganization items                                                                   |       | —                              |       | — |   | 13,328 |   |
| Income (loss) from continuing operations before income taxes                           |       | (8,190                              | )          | 1,071 |   | 278,609 |   |
| Provision for income taxes                                                             |       | 1,751                               |       | 1,760 |   | 4,474 |   |
| Income (loss) from continuing operations                                               |       | (9,941                              | )          | (689 | ) | 274,135 |   |
| Income from discontinued operations, net of taxes                                      |       | —                              |       | — |   | 913 |   |
| Gain on sale of discontinued operations, net of taxes                                  |       | —                              |       | 7,995 |   | — |   |
| Net income (loss)                                                                      |       | $                                   | (9,941     | ) | $ | 7,306 |   | $ | 275,048 |   |

 

 

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We reported a netloss of $9.9 million for the fiscal year ended September 30, 2004.  The net loss included $9 million in restructuringcharges.  Net income for the fiscal yearended September 30, 2003 was $7.3 million, due primarily to the $8 million gainfrom the sale of our Switzerland subsidiaries. Net income for the fiscal year ended September 30, 2002 was $275million, due primarily to the cancellation of our senior subordinated notespayable and the implementation of Fresh Start reporting subsequent to our 2001bankruptcy.

 

Cash flowsprovided by operations were $7.9 million for the twelve months ended September30, 2004.  At September 30, 2004, we hada positive working capital of $1.7 million, and stockholders’ equity of $84.2million.

 

During the fiscal year endedSeptember 30, 2004, our COM related revenues (including COM/Other OutputServices, COM Professional Services, Equipment/Supplies and CD/Digital)continued to decline in line with historical rates. We substantially completedour plan to consolidate our COM related operations in order to maintain ouroperating profit margins resulting in restructuring charges totaling $9million.

***Fiscal Year Ended September 30,2004 vs. Fiscal Year Ended September 30, 2003***

*General*.  We reported net loss of $9.9 million infiscal year 2004 versus net income of $7.3 million for fiscal year 2003.  The net loss for fiscal year 2004 included$9.0 million in net restructuring charges compared to restructuring charges of$2.7 million in the comparable prior year period.  The prior fiscal year period’s net incomeincluded an $8 million gain on the sale of our Swiss subsidiaries.  Both MVS and Web Presentment revenues grewsubstantially over the prior year revenues. COM-based revenues continued to decline in the fiscal year endedSeptember 30, 2004, in line with historical trends.  Due to the generalweakening of the U.S. dollar, our total net revenues for fiscal year 2004 werefavorably impacted by foreign exchange rates as compared with fiscal year 2003exchange rates.  The impact of theforeign exchange benefit in the current period was approximately 4% of totalnet revenues as compared with last year.

*Revenues.*  Our revenues totaled $184.4 million in fiscalyear 2004, a decrease of 10%, or $19.6 million, from $204 million in fiscalyear 2003.

 

Wedefine our product lines as follows:

 

MVS — Multi-Vendor Services where Anacomp acts as a third partymaintainer, provides support services such as on-site maintenance, callcenter/help desk or depot repair, laser printer maintenance and associatedhardware sales.

 

docHarbor Web Presentment— Transmitted ingestion or scanning, storage,delivery and internet browser-based access to documents. Also includes licensesales and maintenance for the docHarbor software that is our Web platform inthe US.

 

CD/Digital — CD based document management services, scanning to CD anddigital software sales.

 

COM/ Other Output Services — Our Computer Output Microfilm and laserprinter document management services.

 

 

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COM Professional Services — Our maintenance services for ComputerOutput Microfilm and other micrographic products.

 

Equipment/Supplies —Computer Output Microfilm original and duplicate film, chemistry and hardwaresales.

| **Product Line**          | ** ** | **FY 2004** | ** ** | **FY 2003** | ** ** | **Change** | ** ** | **Percentage  change** | ** ** |
|---------------------------|------------|-------------|------------|-------------|------------|------------|------------|------------------------|------------|
| MVS                       |       | $           | 37,532     |        | $          | 34,124     |       | $                      | 3,408      |   | 10 | % |
| docHarbor Web Presentment |       | 24,767      |       | 18,789      |       | 5,978      |       | 32                     | %          |
| CD/Digital                |       | 22,830      |       | 28,300      |       | (5,470     | )          | (19                    | %)         |
| COM/Other Output Services |       | 56,005      |       | 70,807      |       | (14,802    | )          | (21                    | %)         |
| COM Professional Services |       | 17,314      |       | 20,834      |       | (3,520     | )          | (17                    | %)         |
| Equipment/Supplies        |       | 25,981      |       | 31,169      |       | (5,188     | )          | (17                    | %)         |
| Total                     |       | $           | 184,429    |        | $          | 204,023    |       | $                      | (19,594    | ) | (10 | %) |
|                           |            |             |            |             |            |            |            |                        |            |  |  |  |  |

 

MVS revenues increased $3.4million, or 10%, over the prior fiscal year. This increase reflects the addition of new OEM agreements and theresulting growth in our Multi-Vendor Services offerings.  We have experienced several years ofcontinuous growth in MVS revenues, and we expect continued growth in this areaas we expand our service offerings to include call center/help desk and depotrepair capabilities.  The relative makeupof total professional services revenues (consisting of MVS and COM professionalservices) continues to shift from COM to MVS. In the fiscal year ended September 30, 2004, MVS represented 68% oftotal professional services, compared to 62% in the prior fiscal year.

 

docHarbor Web Presentmentrevenues increased $6 million, or 32%, over the prior fiscal year period.  This increase reflects the addition of newcustomers and additional revenue from established customers as they haveincreased the number of their applications utilizing our Web services.  A large Web Presentment customer(representing 21% of docHarbor Web Presentment revenue in fiscal year 2004) didnot renew its Web Presentment services agreement, which expired in September2004.  Although we lost this customer, weexpect continued revenue growth on an annual basis in this product lineresulting from increased customer awareness and recognition, increasedacceptance of outsourcing non-core business processes and tighter regulationsaround financial reporting and record keeping. Over the long term, we believe that pricing for this product may becomemore competitive.

 

CD/Digital revenue declined$5.5 million, or 19%, from the prior fiscal year’s revenue.  The decline was due primarily to theavailability of alternative Web-based or in-house solutions.

 

COM/Other Output Servicesrevenue declined $14.8 million, or 21%, from the prior fiscal year.  This decline reflects the decreased volumesprocessed in our data centers and continues the trend experienced in prior fiscalyears.  This decline also was andcontinues to be due primarily to the availability of alternativetechnologies.  We expect that COMrevenues will continue to decline in future fiscal years.

 

COM Professional Servicesrevenues declined $3.5 million, or 17%, from the prior fiscal year.  This decline reflects the continued decreasein the number of COM units in operation. We expect that the number of COM units in use worldwide will continue todecline as organizations choose to outsource the functions to service centers,such as those operated by us, or elect to utilize other options such as CD oron-line solutions.

 

Equipment and suppliesrevenue declined $5.2 million, or 17%, over the prior fiscal year.  This decrease was largely the result of thedecline in demand for and use of COM systems.

 

*Gross Margins. *Our grossmargins, based on gross profits of $60.1 million for the fiscal year endedSeptember 30, 2004 and $64.9 million for the fiscal year ended September 30,2003, were 33% and 32% of total revenues, respectively.  The increased fiscal year 2004 gross marginpercentage resulted from the benefits obtained from the fiscal year 2003restructuring actions.

 

*Engineering, Research and Development.*  Engineering, research and developmentexpenditures decreased $0.4 million, or 6%, from the fiscal year endedSeptember 30, 2003, and remained consistent at 3% of total revenues

 

 

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in both periods.  This decrease in spending was mainly theresult of restructuring-related actions taken in the third and fourth quartersof fiscal year 2003.  These expenses willnot necessarily have a direct or immediate correlation to revenues.  We continue to build and support ouroutsource service solutions base and corresponding internet and digitaltechnologies.  Most of these expenditureswere in support of the docHarbor Web Presentment and CD/Digital services and,to a lesser extent, COM products.

 

*Selling, General and Administrative.*  SG&A expenses decreased from $51.7million for the fiscal year ended September 30, 2003 to $50.8 million for thefiscal year ended September 30, 2004. SG&A expenses for the fiscal year ended September 30, 2004 includeda $3.2 million increase in international expenses over the comparable priorfiscal year period.  This increase inpart reflects the weakening of the US dollar against the Euro and British Poundof approximately 12% when comparing the average rates in fiscal year 2004 tothe prior fiscal year average rates.

 

*Reversal of Environmental Liability.*  Based upon updated environmental analysis andcontinued favorable site contamination test results, we recorded a reduction toour EPA liability of $0.5 million in the three months ended December 31, 2003.  We also recorded a reduction of $0.1 million inthe quarter ended June 30, 2004 based on the favorable results of historicalsampling data.

 

*Amortization of Intangible Assets.*Amortization ofintangible assets remained at $2 million for the fiscal years ended September30, 2003 and September 30, 2004.  Theexpense in each period reflects amortization of identifiable intangible assetsvalued as part of Fresh Start Reporting.

 

*RestructuringCharges. *We continue to experience revenue declines in ComputerOutput to Microfiche (COM)/Other Output Services, CD/Digital, COM ProfessionalServices, and Equipment/Supplies product lines. Due to this ongoing trend, we initiated significant changes in fiscalyear 2004 to align our cost structure and infrastructure through theconsolidation and downsizing of facilities and adjustments to our worldwideworkforce.

 

•                  We recorded restructuring charges of $9.1 million for the fiscal year2004 plan.

•                  Adjustments to our workforce affected approximately 246 employeesresulted in severance charges of $3.6 million in fiscal year 2004. All affectedemployees were notified and left the Company.

•                  The remaining accrued but unpaid liability of $1.1 million, as ofSeptember 30, 2004, is expected to be paid by March 2005.

•                  Facility closure costs for the closure of 30 facilities totaled $5.6million, including future lease payments, abandoned leasehold improvements andoperating equipment, and incremental travel and relocation costs incurred as aresult of our consolidation efforts.

•                  $2.3 million of facility closure costs remained unpaid, and we expectthat payments (non-cancelable facility lease payments) will continue throughSeptember 2006.

•                  We also included non-cash charges of $1.3 million in the year toreflect the write-off of leasehold improvements ($0.5 million) and excess andobsolete equipment from closed data centers.

•                  We estimate that as a result of these data center closures and workforce reductions, we will achieve annual operating expense savings ofapproximately $10 million in fiscal year 2005.

 

In the third and fourthquarters of fiscal year 2003, we recorded restructuring charges totaling $2.9million.  Adjustments to our workforce inthose periods (affecting approximately 178 employees) totaled $2.5 million, andall affected employees were notified and departed the Company.  The remaining accrued but unpaid liability of$20,000 is expected to be paid by December 31, 2004.  Also included in the $2.9 millionrestructuring charge was $0.4 million of facility closure costs, includingincremental travel and relocation costs incurred as a result of ourconsolidation efforts.  In the secondquarter of fiscal year 2004, we were able to negotiate an early termination ofone of our leased facilities included in the 2003 restructuring charges and inthe third quarter of fiscal year 2004 we were able to negotiate a favorableresolution to an international employee termination.  These favorable events resulted in reducedobligations, and we recorded a favorable adjustment of $0.1 million in fiscalyear 2004.

 

*Interest Expense and Fee Amortization. *Interest expense decreasedto $0.6 million for the fiscal year ended September 30, 2004 from $1.8 millionfor the fiscal year ended September 30, 2003. This decrease reflects the lower balance outstanding on the seniorsecured revolving credit facility in the current year.

 

 

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*Other. *Other expense in fiscalyear 2004 includes $0.4 million of unamortized revolver costs related to theFleet credit facility entered into in November 2003.  This was expensed when the Fleet agreementwas cancelled and replaced with the new Foothill agreement effective July 30,2004.  Both periods also include currencyexchange gains and losses.

 

*Provisionfor Income Taxes.*Theprovision for income taxes of $1.8 million and $1.8 million for the fiscalyears ended September 30, 2004 and 2003, respectively, related primarily toearnings of foreign subsidiaries. Certain European subsidiaries generate taxable income and resultantincome tax expense.  Other legal entitiesgenerate operating losses on which no income tax benefit is recorded due to theuncertainty of future profits against which these benefits could be used.  These events create an unbalanced situationwhere income tax expense is a disproportionate percentage of operating incomeor loss.

 

***Fiscal Year Ended September 30,2003 vs. Fiscal Year Ended September 30, 2002***

* *

*General. *We reported net income of$7.3 million in fiscal year 2003, primarily as a result of our gain on the saleof our Switzerland subsidiaries, compared to net income of $275 million infiscal year 2002, which was principally due to the cancellation of our seniorsubordinated notes and implementation of Fresh Start accounting subsequent toour 2001 bankruptcy.  COM based revenuescontinued to decline in line with historical trends; however, both MVS anddocHarbor Web Presentment revenues continued to grow at a double-digit rateover the prior year’s revenue.  Cash flowfrom operations for the twelve months ended September 30, 2003 was $14.4million, which in addition to our September 30, 2002 cash on hand, and proceedsfrom the sale of our Switzerland subsidiaries, enabled us to reduce ouroutstanding credit facility balance by $24.1 million during the fiscal year.

 

*Revenues.*  Our revenues totaled $204 million in fiscalyear 2003, a decrease of 16%, or $37.8 million, from $241.8 million in fiscalyear 2002.

 

Wedefine our product lines as follows:

 

MVS — Multi-Vendor Services where Anacomp acts as a third partymaintainer, provides support services such as on-site maintenance, callcenter/help desk or depot repair, laser printer maintenance and associatedhardware sales.

 

docHarbor Web Presentment— Transmitted ingestion or scanning, storage,delivery and internet browser-based access to documents. Also includes licensesales and maintenance for the docHarbor software that is our Web platform inthe US.

 

CD/Digital — CD based document management services, scanning to CD, anddigital software sales.

 

COM/ Other Output Services — Our Computer Output Microfilm and laserprinter document management services.

 

COM Professional Services — Our maintenance services for ComputerOutput Microfilm and other micrographic products.

 

Equipment/Supplies — Computer Output Microfilm original and duplicatefilm, chemistry and hardware sales.

 

| **Product Line**          | ** ** | **FY 2003** | ** ** | **FY 2002** | ** ** | **Change** | ** ** | **Percentage  change** | ** ** |
|---------------------------|------------|-------------|------------|-------------|------------|------------|------------|------------------------|------------|
| MVS                       |       | $           | 34,124     |        | $          | 27,069     |       | $                      | 7,055      |   | 26 | % |
| docHarbor Web Presentment |       | 18,789      |       | 15,716      |       | 3,073      |       | 20                     | %          |
| CD/Digital                |       | 28,300      |       | 39,639      |       | (11,339    | )          | (29                    | %)         |
| COM/Other Output Services |       | 70,807      |       | 92,615      |       | (21,808    | )          | (24                    | %)         |
| COM Professional Services |       | 20,834      |       | 25,402      |       | (4,568     | )          | (18                    | %)         |
| Equipment/Supplies        |       | 31,169      |       | 41,390      |       | (10,221    | )          | (25                    | %)         |
| Total                     |       | $           | 204,023    |        | $          | 241,831    |       | $                      | (37,808    | ) | (16 | %) |
|                           |            |             |            |             |            |            |            |                        |            |  |  |  |  |

 

 

 

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The $7.1 million,or 26%, increase in MVS revenues over prior year revenue reflected the increasein new OEM agreements and the resulting continued growth in our Multi-VendorServices offerings.  We have experienced severalyears of continuous growth in MVS revenues, and we expect continued growth inthis area as we expand our service offerings to include call center/help deskand depot repair capabilities.  Therelative makeup of total professional services revenues continues to migratefrom COM to MVS.   In fiscal year 2003, MVS revenues represented62% of total professional services revenue (MVS plus COM professionalservices), compared to 52% in the prior fiscal year.

 

docHarbor WebPresentment revenues increased $3.1 million, or 20% over the prior fiscal year’srevenue.  This reflected the addition ofnew customers and additional revenue from established customers as theyincreased the number of their applications utilizing our Web services.

 

CD/Digital revenue declined$11.3 million, or 29%, from the prior fiscal year’s revenue.  This decrease was primarily the result of thesale of our Switzerland and other operations in 2002.  CD/Digital revenue from the Switzerlandoperations included in the twelve months ended September 30, 2002 totaled $6.1million.  The remaining decline was dueprimarily to the availability of alternative web-based or in-house solutionsthat had become more affordable and practical.

 

COM/Other Output Servicesrevenue declined $21.8 million, or 24%, from the prior fiscal year’s revenue.  This decline reflected the decreased volumesprocessed in our data centers and continued the trend experienced in priorfiscal years. 

 

COM Professional Servicesrevenues declined $4.6 million, or 18%, from the prior fiscal year’srevenue.  This decline reflected thecontinued decrease in the number of COM units in operation worldwide.

 

Equipment and suppliesrevenue declined $10.2 million, or 25%, over the prior fiscal year’srevenue.  This decrease was largely theresult of the decline in demand for and use of COM units.

 

Due to the general weakeningof the U.S. dollar during fiscal year 2003, our total net revenues werefavorably impacted by foreign exchange as compared with fiscal year 2002.  The impact of the foreign exchange benefit infiscal year 2003 as compared with fiscal year 2002 approximated 4% on total netrevenues for fiscal year 2003.

 

*Gross Margins. *Our grossmargin as a percentage of revenues remained steady at 32% for fiscal years 2003and 2002, and in dollars decreased from $77.2 million in 2002 to $64.9 millionin 2003.  We were able to maintain thegross margin percentage of revenues in spite of the revenue declines throughcost savings resulting from our recent and prior restructuring activities,which included the consolidation and downsizing of facilities and reductions inour work force.

 

*Engineering, Research and Development.*  Engineering, research and developmentexpenditures decreased $0.6 million, or 8%, from the prior fiscal year’sexpenditures.  These costs represented 3%of total revenues in both fiscal years 2003 and 2002.  Most of these expenditures were in support ofthe docHarbor Web Presentment and CD/Digital services and, to a lesser extent,COM products.

 

*Selling, General and Administrative.*  SG&A expenses decreased from $59.3million for the fiscal year ended September 30, 2002 to $51.7 million for thefiscal year ended September 30, 2003. The $7.6 million, or 13%, decrease resulted in part from the sale of ourSwitzerland operations, which had $1.3 million of related expenses included inthe prior period.  The majority of thedecrease in fiscal year 2003 was due to benefits realized from our recentrestructuring activities and cost savings initiatives.

 

*Amortization of Intangible Assets.*Amortization ofintangible assets decreased 55%, from $4.4 million for the fiscal year endedSeptember 30, 2002, to $2 million for the fiscal year ended September 30,2003.  The prior fiscal year periodamortization expense included amortization of goodwill, during the first quarterof fiscal year 2002, related to prior year acquisitions.  All goodwill assets from the PredecessorCompany were eliminated in conjunction with Fresh Start Reporting.  Amortization expense after December 31, 2001reflected the amortization of identifiable intangible assets valued as part ofFresh Start Reporting.

 

*RestructuringCharges. *In the third and fourth quarters of fiscal year 2003,we recorded restructuring charges totaling $2.9 million related to data centerconsolidation and reorganization of parts of our corporate, 

 

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marketing, sales, andinternational operating organizations. The charges consisted primarily of employee severance andtermination-related costs totaling $2.5 million for approximately 178employees, all of whom were notified and have left the Company. Also includedin the $2.9 million charge was $0.4 million of facility closure costs,including incremental travel and relocation costs incurred as a result of ourconsolidation efforts.

 

The $2.9 millionfiscal year 2003 restructuring charge was partially offset by $0.2 million incredits to restructuring charges recorded in fiscal years 2000 and 2002,resulting primarily from favorable lease transactions.

 

In the thirdquarter of fiscal year 2002, we recorded a restructuring charge of $2.1 millionrelated to the reorganization of our operations from two business units to oneentity.  The reorganization of theworkforce consisted of combining the field organizations of Document Solutionsand Technical Services into one organization, the establishment of an executivelevel position to oversee all sales and marketing activities and a singlesupport group for our data centers, docHarbor Web Presentment operations, fieldservices operations and process quality. The restructuring charges included $1.6 million in employee severanceand termination related costs for approximately 100 employees, all of whom leftthe Company.  The restructuring chargesalso included approximately $0.4 million for the closure of a data center.

 

In the first quarter of fiscal year 2002, we reversed**$1 million of businessrestructuring reserves primarily related to favorable circumstances related tothe shutdown of our Japanese subsidiary.  The closurecosts to vacate our facility in Japan, costs to fulfill our contractobligations and severance and related professional costs up to that time wereless than anticipated at the time the accrual was recorded.

 

*Interest Expense and Fee Amortization. *Interest expense decreasedto $1.8 million for the fiscal year ended September 30, 2003 from $6.2 millionfor the fiscal year ended September 30, 2002. The expense from both periods was related primarily to interest on therevolving credit facility.  The decreasein interest expense reflected our lower credit facility liability balance infiscal year 2003 due to the repayment of $24.1 million in such fiscal year.

 

*Provision for Income Taxes. *Tax expense totaled $1.8 million in fiscal year 2003 and relatedprimarily to earnings of our foreign subsidiaries.  Tax expense in fiscal year 2002, totaling$4.5 million, consisted of $1.7 million related to earnings of foreignsubsidiaries and $2.8 million related to domestic operations.  The significant fiscal year 2002 provision comparedto income before income taxes, resulted from taxes related to foreignoperations and to cancellation of life insurance policies for which cashsurrender value increases had not been tax effected in prior fiscal years.

 

*Discontinued Operations. *During the fourth quarter of fiscal year 2002, we adopted a plan todivest our Switzerland businesses and on October 18, 2002 we completed thesale.  The Switzerland operations werenot material to our consolidated results prior to December 31, 2001.  As a result, the statements of operations forthe fiscal year ended September 30, 2001 and for the three months endedDecember 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 newtechnologies become available and are accepted in the marketplace.  Our ability to generate sufficient cash tofund operations is dependent on successful and simultaneous management of thedecline 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 technologicaluncertainties will impact our ability to generate cash and maintainliquidity.  We believe the actions takenover the past three years, including new and enhanced product and serviceofferings, company downsizing, cost control measures and the debt restructuringfrom our bankruptcy will allow us to maintain sufficient cash flows fromoperations to meet our operating, capital and debt requirements in the normalcourse of business for at least the next twelve months.

 

In fiscal year 2004, wegenerated cash from operations of $7.9 million, compared to $14.4 million infiscal year 2003.  Net cash fromoperations in fiscal year 2004 primarily reflected our operating loss offset bynon-cash charges for depreciation, amortization, restructuring and a decreasein accounts receivable.  Fiscal year 2004cash payments of $6.1 million, related to fiscal year 2003 and 2004restructuring costs were the primary reason for the decline compared to fiscalyear 2003.

 

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Net cash used in investingactivities was $4.1 million in the current fiscal year, compared to cashprovided by investing activities of $11.1 million in the comparable priorfiscal year period.  Investments includedpurchase of operating equipment.  In theprior fiscal year we received $14.6 million in cash proceeds from the sale ofour Switzerland operations and subsidiaries.

 

Net cash used in financing activities was $13.4million during the current twelve-month period, compared to $24.1 million usedin financing activities in the prior year period  In the fourth quarter of fiscal year 2004, weused $6.6 million to buy back in the open market an aggregate of 354,450 sharesof our outstanding Class A Common Stock. In addition, cash payments totaling $5.9 million and $24.1 million wereused to pay down the revolving credit facility in fiscal years 2004 and 2003,respectively.

 

At September 30, 2004, there were no outstandingrevolving credit borrowings compared to $5.9 million payable at September 30,2003.  The outstanding standby letters ofcredit were $5 million at September 30, 2004. During the twelve month period ended September 30, 2004, we paid $13.2million to reduce the principal outstanding.

 

Effective July 30, 2004, we signed a 5-year, $50.0million senior secured credit facility agreement with Wells Fargo Foothill,Inc.  The credit facility is comprised ofa $25.0 million revolver and a $25.0 million acquisition facility.  The credit facility will provide for workingcapital requirements and will fund acquisitions and stock buybacks.  Subject to certain conditions, up to $15.0million of our shares can be repurchased under the credit facility.

 

The credit facility bears interest at a base rateequal to the higher of (a) the annual rate of interest announced from timeto time by Wells Fargo Bank, National Association (Wells Fargo) as its primerate plus the base rate margin of between 0.5 to 1.0 percentage points basedupon defined levels of EBITDA. The borrowing base equals 85% of eligibleaccounts, which include U.S. and Canadian accounts receivable plus the lesserof $12.5 million or defined percentages of our recurring revenues.

 

The credit facility is secured by virtually allAnacomp assets and 65% of the capital stock of our foreign subsidiaries. Thecredit facility contains covenants relating to limitations on the following:

 

•       additional debt;

 

•       permitted acquisitions; and

 

•       liens and dividends.

 

The credit facility also issubject to minimum EBITDA and leverage ratio covenants, minimum recurringdocument imaging revenue and limits on annual capital expenditures.  Except as noted, the banks must approve anybuyback or open market purchases of our common stock.

 

The borrowing base for the credit facility was $20.1million as of September 30, 2004, with borrowing base availability of $15.1million.

 

During the past year, our significant paydown of theoutstanding balance on our revolving credit facility was achieved primarilythrough payments of cash generated through operations and from proceedsreceived on the fiscal year 2003 sale of our Switzerland subsidiaries.  Working capital was a positive $1.7 millionat September 30, 2004.

 

Our cash balance totaled$7.9 million at September 30, 2004 compared to $18.4 million at September 30,2003. Approximately 82% of the September 30, 2004 cash balance is located at ourforeign subsidiaries compared to approximately 65% at September 30, 2003.

 

The Anacomp Board ofDirectors has authorized the Company to repurchase up to $15.0 million of theCompany’s Class A common stock in open market and private transactions, subjectto the Company’s assessment of market conditions and buying opportunities.  The repurchase program became effectiveAugust 5, 2004 and terminates December 31, 2005.  At September 30, 2004, under the currentboard authorization and after giving effect to repurchases made by the Companyduring the fourth quarter of fiscal year 2004, the Company had $8.4 millionremaining available for future repurchases of Class A Common Stock.

 

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***Subsequent Events***

 

The Company owed $3.1million on its senior secured revolving credit facility at December 14, 2004.  The proceeds of this borrowing were utilizedfor general corporate purposes.  See Note4 for further discussion regarding the nature and terms of the Company’s bankrevolving credit facility.

 

Also subsequent toSeptember 30, 2004, the Company was awarded a multi-million dollar purchaseorder from EDS to support the U.S. Department of Homeland Security, Bureau ofCitizenship and Immigration Services (USCIS).

 

TheAmerican Jobs Creation Act of 2004, which was signed into law on October 22,2004 provides for a one-year tax benefit for U.S. corporations who repatriateearnings from their controlled foreign subsidiaries.  This benefit iscontingent upon meeting certain restrictions, including surpassing a five yearaverage of dividend payment history.  Based on the Company’s currentcircumstances, including the existence of previously taxed income, ability ofthe foreign subsidiary to declare dividends, and cash availability, the Companywill likely not be able to benefit from the reduced tax rate on dividends.  We will provide source documentscanning and indexing, imaging management and services in support ofdigitization.

 

***Off-balance Sheet Arrangements***

 

Weprovide indemnification of varying scope and size to certain customers againstclaims of intellectual property infringement made by third parties arising fromthe use of our products and services.  Weevaluate estimated losses for such indemnifications under SFAS No. 5, “Accountingfor Contingencies,” as interpreted by FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” (“FIN 45”).  We consider such factors as the degree ofprobability of an unfavorable outcome and the ability to make a reasonableestimate of the amount of loss when evaluating our indemnificationobligations.  To date, aside from apatent infringement case settled in fiscal year 2001, we have not encounteredmaterial costs as a result of such obligations and have not accrued anyliabilities related to such indemnifications in our financial statements.

 

In the normal course ofbusiness, we occasionally enter into arrangements with customers, suppliers orother parties that may result in material obligations or commitments from acash flow standpoint.  The followingtable shows our material contractual obligations and commercial commitments atSeptember 30, 2004:

 
| ** **                   | ** ** | ** **         | ** ** | **Payment Due By Period:** | ** ** |
|------------------------------|------------|--------------------|------------|----------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**          | ** ** | **1 year**                 | ** ** | **2-3 years** | ** ** | **4-5 years** | ** ** | **6+ years** | ** ** |
| ** **                   | ** ** | **(in thousands)** | ** ** |
| Standby letters of credit(1) |       | $                  | 5,040      |                       | $          | — |   | $ | 5,040 |   | $ | — |   | $ | — |   |
| Non-cancelable leases        |       | 41,042             |       | 8,442                      |       | 13,945 |   | 10,657 |   | 7,998 |   |
| Royalty payments(2)          |       | 600                |       | 600                        |       | — |   | — |   | — |   |
| Total                        |       | $                  | 46,682     |                       | $          | 9,042 |   | $ | 18,985 |   | $ | 10,657 |   | $ | 7,998 |   |

 

(1)           As of December 9, 2004, the balanceof standby letters of credit outstanding was $4,615.

(2)           This item is included with otheraccrued liabilities in our September 30, 2004 balance sheet.

** **

**RISKFACTORS**

 

*You shouldcarefully consider the following risk factors and all of the other informationincluded in this Form 10-K 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 alsomaterially 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 complete loss ofyour investment.*

 

**Our Common Stock is thinlytraded and an active and visible trading market for our Common Stock appearsunlikely to develop.  Management iscurrently assessing whether to remain a public reporting company or voluntarilyderegister its securities from the reporting requirements of the SEC, whichwould likely lead to a decrease in the market price of your Common Stock andwould diminish even further the trading activity in the Common Stock.**

** **

Our Common Stock is currently traded on a limitedbasis on the OTC Bulletin Board under the symbol “ANCPA.”  The quotation of our Common Stock on the OTCBulletin Board does not assure that a meaningful, consistent and 

 

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liquid trading market exists, that such quotationswill continue in the future, or that a more active market for our Common Stockwill develop.  Because of the limitedtrading market for our Common Stock and the costs associated with remaining apublic reporting company, our senior management is currently assessing whetherto remain a public reporting company or voluntarily deregister the Company’ssecurities from the reporting requirements of the SEC.  If management determines it is in the bestinterests of the Company to deregister the Company’s securities, among otherfactors:

 

•                  The market price of our Common Stock willlikely decrease at least in the near term;

•                  The Company will no longer be subject tothe reporting and disclosure requirements of the SEC and The Sarbanes-OxleyAct;

•                  Investors may have difficulty buying andselling, or obtaining market quotations for, the Common Stock; and

•                  Market visibility for our Common Stockand financial and other information relating to the Company may be limited.

 

**We may not be able to timely comply with the requirements ofThe Sarbanes-Oxley Act relating to our and our independent registered publicaccounting firm’s assessment of the effectiveness of our internal controls overfinancial reporting, which can adversely affect our results of operations andfinancial condition.**

 

The SEC, as directed bySection 404 of The Sarbanes-Oxley Act, adopted rules generally requiringeach public company to include a report of management on the company’s internalcontrols over financial reporting in its annual report on Form 10-K thatcontains an assessment by management of the effectiveness of the company’sinternal control over financial reporting. In addition, the company’sindependent registered public accounting firm must attest to and report onmanagement’s assessment of the effectiveness of the company’s internal controlover financial reporting. This requirement will first apply to our annualreport on Form 10-K for the fiscal year ending September 30, 2005.

 

We are evaluating ourinternal control systems in order to allow our management to report on, and ourindependent registered public accounting firm to attest to, our internalcontrol over financial reporting, as required by Section 404.  We have in the past discovered, and may inthe future discover, areas of our internal controls that need improvement.  We are performing the system and processevaluation and testing required in an effort to comply with the managementcertification and auditor attestation requirements of Section 404.  As a result, we have incurred additionalexpenses and a diversion of our management’s time and expect this to continueinto fiscal year 2005 when the reports are required to be filed in conjunctionwith our annual report on Form 10-K for such period.

 

We have devotedconsiderable resources to the documentation, testing and evaluation of ourinternal controls and there can be no assurance that we will be able toimplement the requirements relating to internal controls and all other aspectsof Section 404 in a timely fashion. Because of the time and expense required to internally evaluate ourinternal controls, our independent registered public accounting firm may havelimited time before their attestation is required, which may prevent them frombeing able to adequately test and subsequently certify our internal controls,particularly if weaknesses are discovered which we will have to remediate andthen have retested prior to their certification.  Any failure to implement required new orimproved controls, or difficulties encountered in their implementation, couldharm our operating results or cause us to fail to meet our reportingobligations.  Inferior investor controlscould also cause investors to lose confidence in our reported financialinformation, which could have a negative effect on the trading price of ourstock.

 

**Thedevelopment of alternate technologies in the document management industry isdecreasing the need for our micrographics services and products.**

 

The document management industry is rapidlychanging. The trend of technological advances and attendant price declines indigital systems and products is expected to continue. As a result, in certaininstances, potential micrographics customers have deferred, and may continue todefer, investments in micrographics systems (including our XFP2000 COM system)and the utilization of micrographics service centers while evaluating theabilities of other technologies. In addition, the continuing development of localarea computer networks and similar systems based on digital technologies hasresulted and will continue to result in many of our customers changing theiruse of micrographics from document storage, distribution and access toprimarily archival use. We believe that this is at least part of the reason forthe declines in recent years in both sales and prices of our duplicate film,readers and reader/printers. Our service centers also are producing fewerduplicate microfiche per original for customers, 

 

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reflecting the shift towards usingmicrographics primarily for long term archival storage. Revenues for ourmicrographics services and products, including COM service revenues, COM systemrevenues, maintenance service revenues and micrographics supplies revenues,have been adversely affected for each of the past five fiscal years and willlikely in the future be substantially adversely affected by, among otherthings, the increasing use of digital technology. COM revenues from services,system and supplies sales declined 19% in fiscal year 2004 from fiscal year2003 revenues.  Overall, COM revenuesrepresented 54% of our revenues for fiscal year 2004 and 60% for fiscal year2003, 66% for fiscal year 2002, 71% for 2001, 77% for 2000, 83% for 1999, and91% for 1998.  Additionally, the rapidlychanging document management industry has resulted in price competition incertain of our businesses, particularly COM services. We have been and weexpect to continue to be impacted adversely by the decline in the demand forCOM services, the declining market for COM systems and the attendant reductionin supplies revenues. We expect that our revenues for maintenance of COMsystems will continue to decline as a result of decreasing use and fewer salesof COM systems. Additionally, the growth of alternate technologies has createdconsolidation in the micrographics segment of the document management industry.To the extent consolidation in the micrographics segment has the effect ofcausing major providers of micrographics services and products to ceaseproviding such services and products, the negative trends in the segment, suchas competition from alternate technologies described above, may accelerate. Ifwe do not adapt to the rapid changes in the document management industry, ourbusiness will suffer and your investment will be adversely affected.

 

**Ourrevenues could continue to decrease over the next few years, which couldinhibit us from achieving or sustaining profitability or even prevent us fromcontinuing to operate.**

 

Our accumulated deficitthrough December 31, 2001 was eliminated as a result of Fresh Start Reporting.However, we have not recorded sustained profitable operating results for quitesome time. To achieve sustained future profitability we will need to generateand sustain planned revenues and maintain reasonable cost and expense levels.We do not know when or if we will become profitable on a sustained basis. If wefail to achieve consistent profitability and generate sufficient cash flows, wewill face liquidity and bank covenant issues and our credit facility couldbecome immediately due and payable on demand. Even though we generatedoperating income from continuing operations before taxes in the years endedSeptember 30, 2003 and 2002, we may not be able to sustain or increaseprofitability on a quarterly or an annual basis. Any failure on our part toachieve or sustain profitability could cause our stock price to decline.

 

**The loss or theft of customerdata could cause us to be liable for significant damages or cause harm to ourreputation.**

 

Thelaws concerning the privacy of consumer data have changed and companies arebeing held more accountable for any loss, theft or misuse of suchinformation.  Although our data centers,and the carriers that we use to ship data, have taken many security measures,it is possible that customer data could be stolen, lost or misused.Additionally, we use electronic transmission lines and computer systems, whichcould be hacked into by third parties. Any failure by Anacomp or its carriers to protect data could cause us tobe liable to our customers for significant losses and could significantly harmour reputation in the marketplace.

 

**Thedevelopment of alternative technologies in the document management industry isdecreasing the need for our CD Services.**

 

The document management industry iscontinuing to change.  The technologicaladvances and price declines in digital systems and products are expected tocontinue.  As a result, some of our CDservices customers are choosing in-house digital solutions and products orother service providers instead of our CD service offerings. We believe thatthis is part of the reason for the recent declines in our CD service revenues.  Revenues from our CD services declined 6% infiscal year 2002 and 20% in fiscal year 2003 and 19% in fiscal year 2004compared to the prior year.  Revenues forCD services have been adversely affected for the last three years and willlikely in the future be substantially adversely affected by, among otherthings, the increasing use of other digital technologies.  Additionally, the rapidly changing documentmanagement industry has resulted in price competition in the CD servicebusiness.  We expect that our revenuesfor CD services will continue to decline because of the availability of othertechnologies.  If we do not adapt to therapid changes in the document management industry, our business will suffer andyour investment will be adversely affected.

 

**Restructuringof our operations could result in a loss of customers and impact operatingresults.**

 

We have implemented aplan to reduce costs in order to remain competitive within our industry.  This cost reduction plan involves, amongother things, significant headcount reductions, the exit of certainnon-strategic facility 

 

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locations, and thetransfer of customer work to new data centers. If we fail to successfully implement our cost restructuring plan, includingthe transfer and retention of customers to other data centers, the timelysublease or buyout of vacant facilities, and fail to achieve our otherlong-term cost reduction goals, we may not reduce costs quickly enough toremain competitive within our industry, may lose valuable institutionalknowledge, bear the risk of additional costs and expenses and incur a loss ofcustomers, a diminishment in our operational functions, which could result innegative consequences to our customer service and operating results.

 

**If we areunable to decrease our costs to match the decline in our revenues, we may notbe able to achieve or sustain profitability.**

 

The decline in the demandfor COM services, systems and maintenance and the attendant reduction insupplies revenues have adversely affected our business. Over the past severalyears, COM revenues from services, system and supplies sales have been steadilydecreasing as a percentage of our revenues and declined 19% in 2004 from fiscalyear 2003 revenues and 23% in 2003 from fiscal year 2002 revenues.  We expect that our revenues for maintenanceof COM systems will continue to decline as a result of decreasing use and fewersales of COM systems. We have taken steps such as facilities consolidation andpersonnel reductions to reduce our cost structure and offset the decrease inCOM revenues. We intend to take additional measures as necessary to continue toreduce our cost structure. If these measures are unsuccessful, we will notrealize profits from our COM business and your investment may be adverselyaffected.

 

**Asignificant portion of our docHarbor Web Presentment product line revenues isderived from a limited number of customers. This trend will continue until we can diversify our customer base toreduce our reliance on these largest customers.**

 

Revenues from our docHarbor Web Presentmentproduct line have grown by 20% or more each year for the last four years.  In general these limited number of customershave increased their usage of docHarbor Web Presentment services.  In September of fiscal year 2004, a customerrepresenting 21% of fiscal year 2004 docHarbor Web Presentment revenue did notrenew its Web Presentment services agreement. This loss will cause the rate of growth of docHarbor Web Presentmentrevenues to decrease significantly from historical trends and could cause adecline in revenues from this product line.

 

**Intensecompetition in the document management industry could prevent us fromincreasing or sustaining our revenues and prevent us from achieving orsustaining profitability.**

 

The document management industry is becomingincreasingly competitive, especially in the market for Internet-based documentmanagement services. We face, and will continue to face, competition from otherdocument-management outsource service providers as well as from documentmanagement software providers who offer in-house solutions. Some of ourcompetitors are leading original equipment manufacturers with establishedclient relationships in our target markets. Some of our competitors aresignificantly larger than we are and have greater financial resources, greatername recognition and longer operating histories than we have. Our competitorsmay be able to respond more quickly or adjust prices more effectively to takeadvantage of new opportunities or customer requirements. Increased competitioncould result in pricing pressures, reduced sales, reduced margins or failure toachieve or maintain widespread market acceptance, any of which could prevent usfrom increasing or sustaining our revenues and achieving or sustainingprofitability.

 

**Anyfailure by us to manage acquisitions, divestitures and other significanttransactions successfully could harm our financial results, business andprospects.**

 

As part of our businessstrategy, we frequently engage in discussions with third parties regarding,possible acquisitions, strategic alliances, joint ventures, divestitures andoutsourcing transactions in order to further our business objectives.  In order to pursue this strategy successfully,we must identify suitable candidates for these transactions, complete thesetransactions, and manage post-closing issues such as the integration ofacquired companies or employees. Integration and other risks of acquisitions, strategic alliances, jointventures and outsourcing deals can be more pronounced for larger and morecomplicated transactions, or if multiple transactions are pursuedsimultaneously.  However, if we fail toidentify and successfully complete transactions that further our strategicobjectives, we may be required to expend our resources to develop products,services and technology internally, which may place us at a competitivedisadvantage in relation to our peers.

 

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Managing acquisitions, joint ventures,divestitures and outsourcing transactions requires varying levels of managementresources, which may divert our attention from other business operations.  These transactions may result in significantcosts, expenses and charges to earnings, including those related to severancepay, employee benefit costs, asset impairment charges, charges from theelimination of duplicative facilities and contracts, inventory adjustments,legal, accounting and financial advisory fees, and, as a result, can adverselyaffect our business.

 

**If we areunable to update our information technology systems we may not be able toadequately support our business operations.**

 

Although we believe that our informationtechnology systems provide adequate support to our current business, we believethat we, like many companies, must continue to improve the software andhardware technology that support our business operations.  The emergence of new technology industrystandards or legal requirements may render our current equipment and computersystems infrastructure obsolete in the future. We are in the process of evaluating our technology needs.  The acquisition and implementation of newtechnologies, software and equipment may require significant expense or capitalinvestment, which could reduce our operating margins and our operatingresults.  Our failure to anticipate andimplement these changes could have an adverse effect on our business.

 

**We facebusiness, political and economic risks because a significant portion of oursales is to customers outside of the United States.**

 

Revenues from operationsoutside the United States accounted for 35% of our total revenue for the fiscalyear ended September 30, 2004 and 31% of our total revenue in fiscal year2003.  Our success continues to dependupon our international operations, and we expect that a significant portion ofour total future revenues will be generated from international sales. Ourinternational business involves a number of risks, including:

 

•                  our ability to adapt ourproducts to foreign design methods and practices;

•                  cultural differences in theconduct of business;

•                  difficulty in attracting andretaining qualified personnel;

•                  longer payment cycles forand greater difficulty collecting accounts receivable;

•                  unexpected changes inregulatory requirements, royalties and withholding taxes that restrict therepatriation of earnings;

•                  tariffs and other tradebarriers;

•                  the burden of complying witha wide variety of foreign laws;

•                  political, economic or militaryconditions associated with current worldwide conflicts and events;

•                  the exchange markets and ourability to generate, preserve and repatriate proceeds and dividends to theparent company in the United States; and

•                  to the extentthat profit is generated or losses are incurred in foreign countries, oureffective income tax rate may be significantly affected.

** **

**We recentlyeffectuated a financial restructuring pursuant to a prepackaged Chapter 11 planof reorganization, we have a history of net losses and we may face liquidityissues in the future.**

 

On October 19, 2001 wefiled a voluntary petition for reorganization under Chapter 11 of the U.S.Bankruptcy Code and a prepackaged plan of reorganization. The Bankruptcy Courtconfirmed the plan of reorganization on December 10, 2001 and we emerged fromour bankruptcy proceedings effective December 31, 2001. However, our completionof bankruptcy proceedings does not assure our continued success. For example,the bankruptcy proceedings described above are our second bankruptcy: wepreviously filed a plan of reorganization in January 1996 and emerged fromthose proceedings in June 1996. If our financial performance does not exceedour recent historical results, the price of our Common Stock could decline and yourinvestment could be materially adversely affected.  Our current credit facility includes covenantrestrictions concerning a leverage ratio, minimum EBITDA, liquidity, andcapital expenditures.

 

**Fluctuationin our quarterly financial results may cause instability in our stock price.**

 

Our COM businesscontinues to decline; however, the rate at which this decline will impact ouroperations is difficult to predict. Additionally, we attempt to base ouroperating expenses on anticipated revenue levels, and a substantial percentageof our expenses are fixed in the short term. As a result, any delay ingenerating or recognizing revenues could cause our operating results to bebelow expectations. Moreover, the operating expenses from our 

 

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growth initiatives mayexceed our estimates. Any or all of these factors could affect our financialresults and cause the price of our Common Stock to decline.

 

**If ourfuture results do not meet or exceed the projections and assumptions we madefor Fresh Start Reporting purposes, we may have to write down the values ofsome of our assets.**

 

On December 31, 2001, as a result of ouremergence from bankruptcy, we adopted Fresh Start Reporting. This resulted inmaterial changes to our financial statements including the recording of anasset for “Reorganization value in excess of identifiable net assets.” Wedetermined the value of our business and accordingly, our reorganization assetby making certain projections and assumptions based on historical results aswell as our best estimates of expected future market conditions. Unfavorablechanges compared to our projections used for Fresh Start Reporting purposescould result in future impairments of our reorganization asset and our identifiableintangible assets. If these assets were to be impaired, the value of yourinvestment could decline.

 

**If we areunable to make technological advancements and upgrades to our current productand services 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 ourstorage and delivery systems and infrastructure. We cannot ensure that we willbe able to continue to develop innovations in our software to stay abreast ofclient needs. We also cannot ensure that we will be able to maintain or upgradeour infrastructure to take advantage of new technology. Our future plans forgrowth and a return to profitability would be detrimentally affected if we areunable to develop new and innovative customer solutions or if we are unable tosustain our infrastructure.

 

**Litigationor third party claims of intellectual property infringement could require us tospend substantial time and money and adversely affect our ability to developand commercialize products.**

 

Third parties may accuse us of employingtheir proprietary technology without authorization. In addition, third partiesmay obtain patents that relate to our technologies and claim that our use ofsuch technologies infringes these patents. Regardless of their merit, suchclaims could require us to incur substantial costs, including the diversion ofmanagement and technical personnel, in defending ourselves against any suchclaims or enforcing our patents. In the event that a successful claim ofinfringement is brought against us, we may be required to pay damages andobtain one or more licenses from third parties. We may not be able to obtainthese licenses at a reasonable cost, or at all. Defense of any lawsuit orfailure to obtain any of these licenses could adversely affect our ability todevelop and commercialize products and our operating results.

 

**The loss ofkey personnel or the inability to attract and retain additional personnel couldimpair our ability to expand our operations.**

 

We are highly dependent on the principalmembers of our management team and the technical expertise of our personnel.The success of our business is based on our technical expertise and provenability to provide fast, expert, on-site service and support around theclock.  Approximately 410 Anacomp serviceprofessionals provide this service in North America and Europe, the loss ofwhose services might adversely impact the achievement of our businessobjectives. Moreover, our business operations will require additional expertisein specific industries and areas applicable to products identified anddeveloped through our technologies. These activities will require the additionof new personnel, including management and technical personnel as well as thedevelopment of additional expertise by existing employees. Competition forexperienced technicians may limit our ability to attract or retain suchtechnicians. If we are unable to attract such personnel or to develop thisexpertise, we may not be able to sustain or expand our operations in a timelymanner or at all.

 

**We usehazardous chemicals in our business and any claims relating to improperhandling, storage or disposal of these materials could be time consuming andcostly.**

 

Our operations involve the use and sale ofhazardous chemicals. Although we believe that our safety procedures forhandling and disposing comply with the applicable standards, we cannoteliminate the risk of accidental contamination or discharge and any resultant injuryfrom these materials. Federal, state and local laws and regulations govern theuse, manufacture, storage, handling and disposal of hazardous materials. In theevent of an accident, we may be sued for any injury or contamination thatresults from our use or the use by third parties of these materials, and ourliability may exceed our insurance coverage and our total assets.

 

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**Disclosureof trade secrets could aid our competitors.**

 

We attempt to protect our trade secrets byentering into confidentiality agreements with third parties, our employees andconsultants. However, these agreements can be breached and, if they are, theremay not be an adequate remedy available to us. If our trade secrets become knownwe may lose our competitive position.

 

**If we areunable to adequately protect our intellectual property, third parties may beable to use our technology, which could adversely affect our ability to competein the market.**

 

Our success will depend in part on ourability to obtain protection for our intellectual property. We will be able toprotect our intellectual property rights from unauthorized use by third partiesonly to the extent that our software is copyrightable and business methods arepatentable under applicable intellectual property laws or are effectivelymaintained as trade secrets. The laws of some foreign countries do not protectintellectual property rights to the same extent as the laws of the UnitedStates and many companies have encountered significant problems in protectingand defending such rights in foreign jurisdictions. Furthermore, others mayindependently develop similar or alternative technologies or design around ourintellectual property protections. In addition, our competitors mayindependently develop substantially equivalent proprietary information or mayotherwise gain access to our trade secrets.

 

**Difficultieswe may encounter managing our growth product lines may divert resources andlimit our ability to successfully expand our operations and implement ourbusiness plan.**

 

We anticipate that our MVS and docHarbor WebPresentment product lines will continue to grow. Our growth in the futureanticipates potential acquisitions that may place a strain on ouradministrative personnel and operational infrastructure should suchacquisitions occur. We cannot assure you that we will be able to identifyacquisition candidates, or be able to consummate acquisitions on termsacceptable to us, if at all. Additionally, we cannot assure you that we willhave funds available for making acquisitions. Effectively managing growth willalso require us to improve our operational, financial and management controls,reporting systems and procedures. We may not be able to successfully implementimprovements to our management information and control systems in an efficientor timely manner and may discover deficiencies in existing systems andcontrols.

 

**We rely ona few suppliers to provide us COM products that while in decline, are essentialto our operations.**

 

Supplies and system sales representedapproximately 14% of our total revenue, for fiscal year 2004. The primaryproducts in the supplies business are silver halide original COM film andnon-silver duplicating microfilm. We obtain all of our silver halide productsthrough an exclusive multi-year supply agreement with a single provider and ourduplicate film products from one other provider. Any disruption in the supplyrelationship between Anacomp and such suppliers could result in delays or reductionsin product shipment or increases in product costs that adversely affect ouroperating results in any given period. In the event of any such disruption, wecannot assure you that we could develop alternative sources of raw materialsand supplies at acceptable prices and within reasonable times. Additionally, asthe demand for COM services declines, the demand for COM supplies falls aswell. If the decline in COM supplies is greater than planned, our profitabilityand liquidity would decline as well.

** **

**Our netdeferred tax asset may have no future value should we experience an OwnershipChange as defined by the Internal Revenue Code.**

 

We maintain adeferred tax asset for tax goodwill in excess of book reorganization asset,certain temporary differences, net operating losses and other tax basiscarryforwards.  We have also establisheda valuation allowance in order to fully offset this net deferred taxasset.  We have been advised that in theevent of an Ownership Change (as defined by Section 382 of the Internal RevenueCode), our net deferred tax asset may have limited or no value and beunavailable for us to utilize for our benefit in future periods.

 

**Most of ourgovernment contracts are awarded through a regulated competitive biddingprocess.  The inability to completeexisting government contracts or win new government contracts over an extendedperiod could cause a decrease in our future revenues.**

 

Most of our government contracts are awardedthrough a regulated competitive bidding process.  Some government contracts are awarded tomultiple competitors, which increases overall competition and pricing pressureand may require us to make sustained post-award efforts to realize revenuesunder these government contracts.  Inaddition, 

 

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government clients can generally terminate ormodify their contracts at their convenience. Moreover, even if we are qualified to work on a new government contract,we might not be awarded the contract because of existing government policiesdesigned to protect small businesses and underrepresented minority contractors.The inability to complete existing government contracts or win new governmentcontracts over an extended period could decrease our future revenues.

 

**If our partnersfail to perform their contractual obligations on a project, we could be exposedto legal liability, loss of reputation and profit reduction or loss on theproject.**

 

We perform projects jointly with outsidepartners in order to enter into subcontracts and other contractual arrangementsso that we can jointly bid and perform on a particular project.  Success on these joint projects depends inlarge part on whether our partners fulfill their contractual obligationssatisfactorily. If any of our partners fails to satisfactorily perform theircontractual obligations as a result of financial or other difficulties, we maybe required to make additional investments and provide additional services inorder to make up for our partner’s shortfall. If we are unable to adequatelyaddress our partner’s performance issues, then our client could terminate thejoint project, exposing us to legal liability, loss of reputation, and reducedprofit or loss on the project.

 

Our future success will likely depend, inpart, on the success of our existing collaborative relationships. Collaborativearrangements involve risks that the participating parties may disagree onbusiness decisions and strategies resulting in potential delays, additionalcosts, and risks of litigation. Our inability to successfully maintain existingcollaborative relationships or enter into new collaborative arrangements couldhave a material adverse effect on our future revenue.

** **

**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISKS**

 

Revenues generatedoutside the United States, as a percentage of total revenues, were 35% infiscal year 2004 and 31% in fiscal year 2003. Fluctuations in foreign exchange rates could impact operating resultsthrough translation of the Company’s subsidiaries’ financial statements.  Recent global economic events have causedexchange rates in general to rise over the past several months, making foreigncurrencies more valuable in terms of the U.S. dollar.  For example, the year-to-date averageexchange rate for the Euro has appreciated over 12% against the U.S. dollarduring the fiscal year ended September 30, 2004.  Exchange rate changes of this magnitude canhave a material impact on our financial statement results, particularly withregard to the accumulated other comprehensive income or loss account in theequity section of the balance sheet.

 

The Company’s bankrevolving credit facility is affected by the general level of U.S. interestrates.  The Company had no borrowingsunder its bank line of credit on September 30, 2004.

 

**Foreign Exchange Options**

 

On October 15, 2002, we entered into a Swiss Franc (CHF) forwardcontract to protect the value of the expected cash receipts from the sale ofour Switzerland operations. The contract protected Anacomp against an exchangerate above 1.5425.  This contract expiredin April 2004.

 

The Other Expense categoryof our Condensed Consolidated Statement of Operations includes the recognitionof $37,000 of exchange loss from currency fluctuations related to the Swissreceivable in fiscal year 2004.  Infiscal year 2003 we recognized $25,000 of exchange loss from currencyfluctuations related to the Swiss receivable, forward contracts and sale costs.

 

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Financial statements andsupplementary financial information appear on pages A-1 to A-31 of this AnnualReport on Form 10-K.

 

**ITEM 9.  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**** FINANCIAL DISCLOSURES**

 

None.

 

31

**ITEM 9A.  CONTROLS AND PROCEDURES**

 

Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour disclosure controls and procedures, as such term is defined underRule 13a-15(e) promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”). Based on this evaluation, our principal executiveofficer and our principal financial officer concluded that, as of the end ofthe period covered by this Annual Report on Form 10-K, our disclosure controlsand procedures were effective.

 

There was no change in our internalcontrol over financial reporting identified in management’s evaluation duringthe fourth quarter of fiscal year 2004 which has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**ITEM 9B.  OTHER INFORMATION**

 

None.

 

32

----

 

**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

** **

**Theinformation required by this item is incorporated by reference to theDefinitive Proxy Statement under the headings “Election of Directors.” “Section16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” from itsDefinitive Proxy Statement to be delivered to the shareholders of the Companyin connection with the 2005 Annual Meeting of Shareholders to be held on orabout February 24, 2005.  Informationregarding executive officers is set forth in Item 1 of Part I of this Reportunder the caption “Executive Officers.”**

** **

**ITEM11.  EXECUTIVE COMPENSATION**

 

The information required bythis item is incorporated by reference to the Definitive Proxy Statement underthe heading “Executive Compensation and Other Matters.”

 

**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

The information required by this item is incorporated by reference tothe Definitive Proxy Statement under the heading, “Stock Ownership ofManagement and Certain Beneficial Owners” and “Equity Compensation PlanInformation.”

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Theinformation required by this item is incorporated by reference to theDefinitive Proxy Statement under the heading “Certain Relationships and RelatedTransactions.”

 

**ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES**

The information required by this item is incorporated byreference to the information contained in the Definitive Proxy Statement underthe heading “Ratification of Appointment of Independent Auditors.”

 

33

----

 

**PART IV**

 

**ITEM 15**.  **EXHIBITS AND FINANCIALSTATEMENT SCHEDULES.**

 

(a)  1.                   The following financialstatements and other information appear at the end of this Annual

 

Report on Form 10-K and arefiled as a part hereof:

 

Report of Ernst & YoungLLP, Independent Registered Public Accounting Firm.

 

Consolidated Balance Sheets- September 30, 2004 and 2003.

 

Consolidated Statements ofOperations - Years Ended September 30, 2004, 2003 and 2002.

 

ConsolidatedStatements of Stockholders’ Equity (Deficit) - Years Ended September 30, 2004,2003 and 2002.

 

Consolidated Statements ofCash Flows - Years Ended September 30, 2004, 2003 and 2002.

 

Notes to the ConsolidatedFinancial Statements.

 

2.                   Financial StatementSchedules are not filed with this Annual Report on Form 10-K because theSchedules are either inapplicable or the required information is presented inthe financial statements listed immediately above or in the notes thereto.

 

3.                   See below for a descriptionof the documents that are filed as exhibits to this report on Form 10-K orincorporated by reference herein. Any document incorporated by reference isidentified by a parenthetical referencing the SEC filing that included thedocument.  Documents being filed herewithare noted with an asterisk (*):

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                              |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------|
| 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 January 13, 2004.(18)                                              |
|            |       |                                                                                                                 |
| 4.1             |       | Shareholders Rights  Plan.(4)                                                                                        |
|            |       |                                                                                                                 |
| 4.2             |       | Amendments to the  Shareholders Rights Plan.(5)                                                                      |
|            |       |                                                                                                                 |
| 4.3             |       | Warrant Agreement by and  between the Company and Mellon Investor Services LLC dated December 31,  2002.(2)          |
|            |       |                                                                                                                 |
| 4.4             |       | Amendment No. 1 to Rights  Agreement dated August 6, 2004.(20)                                                       |
|            |       |                                                                                                                 |
| 10.1            |       | Retirement / Part-Time  Employment Agreement dated October 27, 1999, between the Company and William  C. Ater.(6)(8) |
|            |       |                                                                                                                 |
| 10.2            |       | Employment Agreement,  effective August 21, 2000, between the Company and Jeffrey R. Cramer.(7)(8)                   |
|            |       |                                                                                                                 |

 

34

----

 
| 10.3   |   | Revolving Credit  Agreement, dated as of June 15, 1998, among Anacomp, Inc., the various  lending institutions named therein and BankBoston, N.A. as agent.(9)                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                |
| 10.4   |   | Forbearance and Standstill  Agreement, dated as of November 15, 2000, among Anacomp, Inc., the various  banks named therein, and Fleet National Bank as agent for the banks.(6)                                                                     |
|   |   |                                                                                                                                                                                                                                                |
| 10.5   |   | Amendment to the  Forbearance and Standstill Agreement, dated as of December 15, 2000, between  Anacomp, Inc. and Fleet National Bank.(6)                                                                                                           |
|   |   |                                                                                                                                                                                                                                                |
| 10.6   |   | Amended and Restated  Master Supply Agreement, dated October 8, 1993, by and among the Company, SKC  America, Inc. and SKC Limited.(10)                                                                                                             |
|   |   |                                                                                                                                                                                                                                                |
| 10.7   |   | First  Cumulative Amendment to the Amended and Restated Master Supply Agreement,  dated May 17, 1996, by and among the Company, SKC America, Inc. and SKC  Limited.(11)                                                                             |
|   |   |                                                                                                                                                                                                                                                |
| 10.8   |   | Second  Amended and Restated Master Supply Agreement, dated as of July 1, 1997, by  and among the Company, SKC America, Inc. and SKC Limited.(12)                                                                                                   |
|   |   |                                                                                                                                                                                                                                                |
| 10.9   |   | Second  Amendment to Amended and Restated Revolving Credit Agreement and Restructure  of Obligations dated as of December 19, 2002, by and among the Company, the  various banks named therein, and Fleet National Bank as agent for the  banks.(5) |
|   |   |                                                                                                                                                                                                                                                |
| 10.10  |   | Lease  Agreement by and between the Company and Kilroy Realty, LP., a Delaware  limited partnership dated June 14, 2002.(13)                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                |
| 10.11  |   | Consulting  Agreement by and between the Company and Steven G. Singer dated May 7,  2002.(13)                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                |
| 10.12  |   | Employment  Agreement and Amended Employment Agreement between the Company and Edward P.  Smoot dated November 12, 2002 and April 28, 2003, respectively.(16)                                                                                       |
|   |   |                                                                                                                                                                                                                                                |
| 10.13  |   | Second  Amended and Restated Revolving Credit Agreement, dated as of November 21,  2003, by and among, Anacomp, Inc., Fleet National Bank and Union Bank of  California.(14)                                                                        |
|   |   |                                                                                                                                                                                                                                                |
| 10.14  |   | First  Amendment to Second Amended and Restated Revolving Credit Agreement, dated as  of March 26, 2004, by and among, Anacomp, Inc., Fleet National Bank and Union  Bank of California.(19)                                                        |
|   |   |                                                                                                                                                                                                                                                |
| 10.15  |   | Employment  Agreement, effective as of November 15, 2004, by and between Anacomp, Inc.  and William R. Pesch.(8)(21)                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                |
| 10.16  |   | Incentive  Stock Option Agreement for William R. Pesch.(8)(21)                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                |
| 10.17  |   | Master  Procurement Agreement, effective as of August 1, 1996, by and between  Anacomp, Inc. and Electronic Data Systems Corporation.(22)                                                                                                           |
|   |   |                                                                                                                                                                                                                                                |
| 10.18  |   | Loan  and Security Agreement, dated as of July 30, 2004, by and between Anacomp,  Inc. and Wells Fargo Foothill, Inc.(20)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                |
| 10.19  |   | Anacomp,  Inc. 2004 Outside Director Compensation Plan, effective as of November 25,  2003.(8)(23)                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                |
| 16.    |   | Letter  by Arthur Anderson to the SEC dated May 28, 2002 regarding change in  certifying accountant.(15)                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                |
| 21.1   |   | Subsidiaries.(16)                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                |
| 23.1   |   | Consent of Ernst  and Young LLP, Independent Registered Public Accounting Firm.*                                                                                                                                                                    |

 

35

----

 
| 23.2   |   | Solely due to  the closure of Arthur Andersen LLP’s San Diego, California office, after  reasonable efforts, the Registrant was unable to obtain the written consent  of Arthur Andersen LLP to incorporate by reference its report dated November  21, 2001. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1   |   | Rule 13a -  14(a)/15(d) - 14(a) Certification of Chief Executive Officer.*                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                               |
| 31.2   |   | Rule 13a -  14(a)/15(d) - 14(a) Certification of Chief Financial Officer.*                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                               |
| 32.1   |   | Section 1350 Certification of Chief Executive Officer.*                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                               |
| 32.2   |   | Section 1350 Certification of Chief Financial Officer.*                                                                                                                                                                                                            |

----

(1)                                        Incorporated byreference to an exhibit to the Company’s Form 8-K (File No. 1-08328) filed onSeptember 20, 2001 and October 29, 2001.

(2)                                        Incorporated byreference to an exhibit to the Registration Statement on Form 8-A (File No.1-08328) filed by the Company on January 9, 2002.

(3)                                        Incorporated byreference to an exhibit to the Company’s Form 10-Q/A (File No.1-08328) for the quarterly period ended June 30, 2002.

(4)                                        Incorporated byreference to an exhibit to the Company’s Form 8-K (File No. 1-08328) filed onSeptember 21, 2002.

(5)                                        Incorporated byreference to an exhibit to the Company’s Form 10-K (File No. 1-08328) for thefiscal year ended September 30, 2002.

(6)                                        Incorporated byreference to an exhibit to the Company’s Form 10-K (File No. 1-08328) for thefiscal year ended September 30, 2000.

(7)                                        Incorporated byreference to an exhibit to the Company’s Form 10-K (File No. 1-08328) for thefiscal year ended September 30, 2001.

(8)                                        Managementcontract or compensation plan.

(9)                                        Incorporated byreference to an exhibit to the Company’s Form 8-K (File No. 1-08328) filed withthe SEC on June 24, 1998 (File No. 1-8328).

(10)                                  Incorporated byreference to an exhibit to the Company’s Form 10-K (File No. 1-08328) for the fiscalyear ended September 30, 1993.

(11)                                  Incorporatedby reference to the Company’s Pre-Effective Amendment No. 1 to the RegistrationStatement on Form S-1 (File No. 333-9395) filed with the SEC on September 19,1996.

(12)                                  Incorporatedby reference to an exhibit to the Company’s Form 10-K (File No. 1-08328) forthe fiscal year ended September 30, 1999.

(13)                                  Incorporated by reference to an exhibit to theCompany’s Form 10-Q (File No. 1-08328) for the quarterly period ended June 30, 2002.

(14)                                  Incorporated by reference to an exhibit to theCompany’s Form 8-K (File No. 1-08328) filed on November 25, 2003.

(15)                                  Incorporatedby reference to an exhibit to the Company’s Form 8-K (File No.1-08328) filed with the SEC on May 29, 2002.

(16)                                  Incorporated by reference to an exhibit to theCompany’s Form 10-K for the fiscal year ended September 30, 2003.

(17)                                  Incorporatedby reference to an exhibit to the Company’s Form 10-Q (File No. 1-08328) forthe quarterly period ended December 31, 2003.

 

36

----

 

(18)                                  Incorporatedby reference to an exhibit to the Company’s Form 10-Q (File No. 1-08328) forthe quarterly period ended December 31, 2003.

(19)                                  Incorporatedby reference to an exhibit to the Company’s Form 10-Q (File No. 1-08328) forthe quarterly period ended March 31, 2004.

(20)                                  Incorporatedby reference to an exhibit to the Company’s Form 10-Q (File No. 1-08328) forthe quarterly period ended June 30, 2004.

(21)                                  Incorporatedby reference to an exhibit to the Company’s Form 8-K (File No. 1-08328) filedon November 9, 2004.

(22)                                  Incorporatedby reference to an exhibit to the Company’s Form 8-K (File No. 1-08328) filedon November 19, 2004.

(23)                                  Incorporatedby reference to Exhibit D to the Company’s Proxy Statement filed on January 21,2004.

 

37

----

 

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| ** ** | ** ** | ** ** | **ANACOMP,  INC.**      |
|------------|------------|------------|-------------------------|
|       |       |       |                    |
|       |       |       | By:                     | /s/  Jeffrey R. Cramer |   |
|       |       |       | Jeffrey  R. Cramer      |
|       |       |       | Chief Executive Officer |

 

Dated: December 14, 2004

 

Pursuant to the requirementof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| Dated:  December 14, 2004 |   | By:    | /s/ Michael E.  Tennenbaum                                                       |   |
|---------------------------|--------|--------|----------------------------------------------------------------------------------|--------|
|                      |   |   | Michael E. Tennenbaum                                                            |
|                      |   |   | Chairman of the Board                                                            |
|                      |   |   |                                                                             |
| Dated:  December 14, 2004 |   | By:    | /s/  Jeffrey R. Cramer                                                           |   |
|                      |   |   | Jeffrey R. Cramer                                                                |
|                      |   |   | Chief Executive Officer                                                          |
|                      |   |   |                                                                             |
| Dated:  December 14, 2004 |   | By:    | /s/  Gary J. Fernandes                                                           |   |
|                      |   |   | Gary  J. Fernandes, Director                                                     |
|                      |   |   |                                                                             |
| Dated:  December 14, 2004 |   | By:    | /s/  Mark Holdsworth                                                             |   |
|                      |   |   | Mark  Holdsworth, Director                                                       |
|                      |   |   |                                                                             |
| Dated:  December 14, 2004 |   | By:    | /s/  Fred G. Jager                                                               |   |
|                      |   |   | Fred  G. Jager, Director                                                         |
|                      |   |   |                                                                             |
| Dated:  December 14, 2004 |   | By:    | /s/  James McGovern                                                              |   |
|                      |   |   | James  McGovern, Director                                                        |
|                      |   |   |                                                                             |
| Dated:  December 14, 2004 |   | By:    | /s/  Linster W. Fox                                                              |   |
|                      |   |   | Linster  W. Fox                                                                  |
|                      |   |   | Executive Vice President,  Chief Financial Officer and  Chief Accounting Officer |

 

38

----

 

 

**AnnualReport on Form 10-K**

**Anacomp,Inc.**

** **

 

 
|                                                                                                                                                                                                                  |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Report  of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                                                                                       |   |   |
|                                                                                                                                                                                                                  |   |   |
| Consolidated Balance Sheets  — September 30, 2004 and 2003                                                                                                                                             |   |   |
|                                                                                                                                                                                                                  |   |   |
| Consolidated  Statements of Operations — Year Ended September 30, 2004, Year Ended  September 30, 2003, Nine Months Ended September 30, 2002, and Three Months  Ended December 31, 2001                          |   |   |
|                                                                                                                                                                                                                  |   |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit) — Year Ended September 30, 2004,  Year Ended September 30, 2003, Nine Months Ended September 30, 2002, and  Three Months Ended December 31, 2001 |   |   |
|                                                                                                                                                                                                                  |   |   |
| Consolidated  Statements of Cash Flows — Year Ended September 30, 2004, Year Ended  September 30, 2003, Nine Months Ended September 30, 2002, and Three Months  Ended December 31, 2001                          |   |   |
|                                                                                                                                                                                                                  |   |   |
| Notes to  the Consolidated Financial Statements                                                                                                                                                                       |   |   |

 

 

 

----

 

 

 

**REPORTOF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC**

**ACCOUNTINGFIRM**

 

To the Stockholders and the

Board of Directors of Anacomp, Inc.:

 

We have audited theaccompanying consolidated balance sheets of Anacomp, Inc. and subsidiaries asof September 30, 2004 and 2003, and the related consolidated statements ofoperations, stockholders’ equity (deficit), and cash flows for the fiscal yearsended September 30, 2004 and 2003 (Reorganized Company), the nine months endedSeptember 30, 2002 (Reorganized Company) and the three months ended December31, 2001 (Predecessor Company). These financial statements are theresponsibility of Anacomp, Inc.’s management. Our responsibility is to expressan opinion on these financial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, financial statements referredto above present fairly, in all material respects, the consolidated financialposition of Anacomp, Inc. and subsidiaries as of September 30, 2004 and 2003,and the consolidated results of their operations and their cash flows for thefiscal years ended September 30, 2004 and 2003 (Reorganized Company), the ninemonths ended September 30, 2002 (Reorganized Company) and the three monthsended December 31, 2001 (Predecessor Company), in conformity with U.S.generally accepted accounting principles.

 

As discussed in Note 2 and 3 to the consolidated financial statements, effective January 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets.

 

 

 

 

/s/ ERNST&YOUNG LLP

 

 

 

San Diego, California

November 18, 2004

 

 

F-2

----

** **

**CONSOLIDATEDBALANCE SHEETS****Anacomp, Inc. and Subsidiaries**

 

 
| ** **                                                                                                                                                       | ** ** | **Reorganized Company**                                         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **September 30,**

**2004**                                     | ** ** | **September  30,**

**2003** | ** ** |
|                                                                                                                                                             | ** ** | **(amounts  in thousands, except share and per share amounts)** | ** ** |
| **Assets**                                                                                                                                                       |       |                                                            |       |   |   |
| Current assets:                                                                                                                                                  |       |                                                            |       |   |   |
| Cash and cash equivalents                                                                                                                                        |       | $                                                               | 7,937      |   | $ | 18,390 |   |
| Receivable on sale of Swiss subsidiaries                                                                                                                         |       | —                                                          |       | 1,262 |   |
| Accounts receivable, net                                                                                                                                         |       | 26,602                                                          |       | 29,847 |   |
| Current portion of long term receivables, net                                                                                                                    |       | 455                                                             |       | 889 |   |
| Inventories                                                                                                                                                      |       | 3,308                                                           |       | 3,174 |   |
| Prepaid expenses and other                                                                                                                                       |       | 3,390                                                           |       | 3,909 |   |
| Total current assets                                                                                                                                             |       | 41,692                                                          |       | 57,471 |   |
|                                                                                                                                                             |       |                                                            |       |   |   |
| Property and equipment, net                                                                                                                                      |       | 15,098                                                          |       | 18,398 |   |
| Long term receivables, net of current portion                                                                                                                    |       | 796                                                             |       | 928 |   |
| Reorganization value in excess of identifiable net assets                                                                                                        |       | 72,030                                                          |       | 73,363 |   |
| Intangible assets, net                                                                                                                                           |       | 6,846                                                           |       | 8,829 |   |
| Other assets                                                                                                                                                     |       | 8,011                                                           |       | 5,952 |   |
|                                                                                                                                                             |       | $                                                               | 144,473    |   | $ | 164,941 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                    |       |                                                            |       |   |   |
| Current liabilities:                                                                                                                                             |       |                                                            |       |   |   |
| Accounts payable                                                                                                                                                 |       | $                                                               | 8,864      |   | $ | 9,118 |   |
| Accrued compensation, benefits and withholdings                                                                                                                  |       | 12,285                                                          |       | 12,407 |   |
| Deferred revenue                                                                                                                                                 |       | 8,808                                                           |       | 7,784 |   |
| Accrued income taxes                                                                                                                                             |       | 1,701                                                           |       | 1,063 |   |
| Other accrued liabilities                                                                                                                                        |       | 8,322                                                           |       | 9,262 |   |
| Total current liabilities                                                                                                                                        |       | 39,980                                                          |       | 39,634 |   |
|                                                                                                                                                             |       |                                                            |       |   |   |
| Long-term liabilities:                                                                                                                                           |       |                                                            |       |   |   |
| Senior secured revolving credit facility                                                                                                                         |       | —                                                          |       | 5,917 |   |
| Pension benefit obligation                                                                                                                                       |       | 16,584                                                          |       | 13,296 |   |
| Other long-term liabilities                                                                                                                                      |       | 3,706                                                           |       | 4,951 |   |
| Total long-term liabilities                                                                                                                                      |       | 20,290                                                          |       | 24,164 |   |
|                                                                                                                                                             |       |                                                            |       |   |   |
| Commitments and contingencies                                                                                                                                    |       |                                                            |       |   |   |
|                                                                                                                                                             |       |                                                            |       |   |   |
| Stockholders’ equity:                                                                                                                                       |       |                                                            |       |   |   |
| Preferred stock, 1,000,000 shares authorized, none issued                                                                                                        |       | —                                                          |       | — |   |
| Common stock, $.01 par value; 40,787,711 shares authorized; 3,689,484  and 4,038,534 shares issued and outstanding at September 30, 2004 and 2003,  respectively |       | 37                                                              |       | 40 |   |
| Additional paid-in capital                                                                                                                                       |       | 90,802                                                          |       | 97,000 |   |
| Accumulated other comprehensive loss                                                                                                                             |       | (1,634                                                          | )          | (891 | ) |
| Deferred compensation                                                                                                                                            |       | (55                                                             | )          | —- |   |
| Accumulated earnings (deficit)                                                                                                                                   |       | (4,947                                                          | )          | 4,994 |   |
| Total stockholders’ equity                                                                                                                                  |       | 84,203                                                          |       | 101,143 |   |
|                                                                                                                                                             |       | $                                                               | 144,473    |   | $ | 164,941 |   |

 

 

See thenotes to the consolidated financial statements.

 

 

F-3

----

 

**CONSOLIDATED STATEMENTS OFOPERATIONS****Anacomp, Inc. and Subsidiaries**

** **
| ** **                                                                             | ** ** | **Reorganized  Company(a)**                                      | ** ** | **Predecessor  Company(a)**             | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                             | ** ** | **Year  ended  September 30, 2004**                         | ** ** | **Year  ended September 30, 2003** | ** ** | **Nine  months ended  September 30, 2002** | ** ** | **Three  months ended  December 31, 2001** | ** ** |
|                                                                                   |       | **(dollars  and shares in thousands, except per share amounts)** |       |
| Revenues:                                                                              |       |                                                             |       |                                    |       |   |   |   |   |
| Services                                                                               |       | $                                                                | 151,829    |                                    | $          | 166,594 |   | $ | 140,739 |   | $ | 55,098 |   |
| Equipment and  supply sales                                                            |       | 32,600                                                           |       | 37,429                                  |       | 33,068 |   | 12,926 |   |
|                                                                                   |       | 184,429                                                          |       | 204,023                                 |       | 173,807 |   | 68,024 |   |
| Cost of  revenues:                                                                     |       |                                                             |       |                                    |       |   |   |   |   |
| Services                                                                               |       | 102,269                                                          |       | 113,789                                 |       | 95,099 |   | 36,630 |   |
| Equipment and  supply sales                                                            |       | 22,069                                                           |       | 25,353                                  |       | 22,994 |   | 9,874 |   |
|                                                                                   |       | 124,338                                                          |       | 139,142                                 |       | 118,093 |   | 46,504 |   |
| Gross profit                                                                           |       | 60,091                                                           |       | 64,881                                  |       | 55,714 |   | 21,520 |   |
| Costs and expenses:                                                                    |       |                                                             |       |                                    |       |   |   |   |   |
| Engineering,  research and development                                                 |       | 6,014                                                            |       | 6,397                                   |       | 5,305 |   | 1,680 |   |
| Selling, general  and administrative                                                   |       | 50,834                                                           |       | 51,720                                  |       | 43,622 |   | 15,643 |   |
| Reversal of  environmental liability                                                   |       | (626                                                             | )          | —                                  |       | — |   | — |   |
| Amortization of  intangible assets, including goodwill                                 |       | 1,983                                                            |       | 1,983                                   |       | 1,487 |   | 2,896 |   |
| Restructuring  charges (credits)                                                       |       | 9,019                                                            |       | 2,697                                   |       | 2,081 |   | (1,032 | ) |
| Operating income  (loss) from continuing operations                                    |       | (7,133                                                           | )          | 2,084                                   |       | 3,219 |   | 2,333 |   |
|                                                                                   |       |                                                             |       |                                    |       |   |   |   |   |
| Other income  (expense):                                                               |       |                                                             |       |                                    |       |   |   |   |   |
| Interest income                                                                        |       | 216                                                              |       | 257                                     |       | 353 |   | 155 |   |
| Interest expense  and fee amortization                                                 |       | (591                                                             | )          | (1,789                                  | )          | (3,069 | ) | (3,114 | ) |
| Gain on  extinguishment of debt                                                        |       | —                                                           |       | —                                  |       | — |   | 265,329 |   |
| Other                                                                                  |       | (682                                                             | )          | 519                                     |       | 296 |   | (221 | ) |
|                                                                                   |       | (1,057                                                           | )          | (1,013                                  | )          | (2,420 | ) | 262,149 |   |
| Income (loss)  from continuing operations before reorganization items and income taxes |       | (8,190                                                           | )          | 1,071                                   |       | 799 |   | 264,482 |   |
| Reorganization  items                                                                  |       | —                                                           |       | —                                  |       | — |   | 13,328 |   |
| Income (loss)  from continuing operations before income taxes                          |       | (8,190                                                           | )          | 1,071                                   |       | 799 |   | 277,810 |   |
| Provision for  income taxes                                                            |       | 1,751                                                            |       | 1,760                                   |       | 4,024 |   | 450 |   |
| (Loss) income  from continuing operations                                              |       | (9,941                                                           | )          | (689                                    | )          | (3,225 | ) | 277,360 |   |
| Gain on sale of  discontinued operations, net of taxes                                 |       | —                                                           |       | 7,995                                   |       | — |   | — |   |
| Income from  discontinued operations, net of taxes                                     |       | —                                                           |       | —                                  |       | 913 |   | — |   |
| Net income  (loss)                                                                     |       | $                                                                | (9,941     | )                                       | $          | 7,306 |   | $ | (2,312 | ) | $ | 277,360 |   |
|                                                                                   |       |                                                             |       |                                    |       |   |   |   |   |
| Basic and  diluted per share data:                                                     |       |                                                             |       |                                    |       |   |   |   |   |
| Basic and  diluted net loss from continuing operations                                 |       | $                                                                | (2.48      | )                                       | $          | (0.17 | ) | $ | (0.80 | ) |   |   |
| Gain on sale of discontinued  operations                                               |       | —                                                           |       | 1.98                                    |       | — |   |   |   |
| Basic and  diluted net income from discontinued operations                             |       | —                                                           |       | —                                  |       | 0.23 |   |   |   |
| Basic and  diluted net income (loss)                                                   |       | $                                                                | (2.48      | )                                       | $          | 1.81 |   | $ | (0.57 | ) |   |   |
| Shares used in  computing basic and diluted net income (loss) per share                |       | 4,001                                                            |       | 4,039                                   |       | 4,036 |   |   |   |

 

(a)  Reorganized Company data includes results ofdiscontinued operations separately. Discontinued operations data has not been included for the PredecessorCompany as amounts are not material.

 

Seethe notes to the consolidated financial statements.

 

F-4

----

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)****Anacomp, Inc. and Subsidiaries**
| ** **                                         | ** ** | ** **                             | ** ** | ** ** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Earnings/  (Deficit)** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|------------|------------|----------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|-----------|------------|
| **Common  Stock**                                  |
| **Shares**                                         | ** ** | **Amount**                             |
| ** **                                         | ** ** | **(in  thousands, except share data)** | ** ** |
| **SEPTEMBER  30, 2001 - PREDECESSOR COMPANY** |       | 14,566,198                             |       | $          | 146        |                             | $          | 111,324                                              |       | $                          | (4,912     | )                                     | $          | —    |       | $ | (384,485 | ) | $ | (277,927 | ) |
| Net income for  three months                       |       | —                                 |       | —     |       | —                           |       | —                                               |       | —                     |       | 277,360                               |       | 277,360   |       |
| Translation  adjustment for three months           |       | —                                 |       | —     |       | —                           |       | 639                                                  |       | —                     |       | —                                |       | 639       |       |
| **Comprehensive  income for three months**         |       |                                   |       |       |       |                             |       |                                                 |       |                       |       |                                  |       | 277,999   |       |
| Reorganization  items                              |       | (14,566,198                            | )          | (146       | )          | (111,324                         | )          | 4,273                                                |       | —                     |       | 107,125                               |       | (72       | )          |
| New stock  issuance                                |       | 4,034,034                              |       | 40         |       | 96,885                           |       | —                                               |       | —                     |       | —                                |       | 96,925    |       |
| **DECEMBER  31, 2001 - REORGANIZED COMPANY**  |       | 4,034,034                              |       | 40         |       | 96,885                           |       | —                                               |       | —                     |       | —                                |       | 96,925    |       |
| Net loss for nine  months                          |       | —                                 |       | —     |       | —                           |       | —                                               |       | —                     |       | (2,312                                | )          | (2,312    | )          |
| Translation  adjustment for nine months            |       | —                                 |       | —     |       | —                           |       | 1,996                                                |       | —                     |       | —                                |       | 1,996     |       |
| Additional  minimum pension                        |       | —                                 |       | —     |       | —                           |       | (3,522                                               | )          | —                     |       | —                                |       | (3,522    | )          |
| **Comprehensive  loss for nine months**            |       |                                   |       |       |       |                             |       |                                                 |       |                       |       |                                  |       | (3,838    | )     |
| Common stock  issued for director stock grants     |       | 2,000                                  |       | —     |       | 57                               |       | —                                               |       | —                     |       | —                                |       | 57        |       |
| **SEPTEMBER  30, 2002 - REORGANIZED COMPANY** |       | 4,036,034                              |       | 40         |       | 96,942                           |       | (1,526                                               | )          | —                     |       | (2,312                                | )          | 93,144    |       |
| Net income                                         |       | —                                 |       | —     |       | —                           |       | —                                               |       | —                     |       | 7,306                                 |       | 7,306     |       |
| Translation  adjustment                            |       | —                                 |       | —     |       | —                           |       | 900                                                  |       | —                     |       | —                                |       | 900       |       |
| Additional  minimum pension                        |       | —                                 |       | —     |       | —                           |       | (265                                                 | )          | —                     |       | —                                |       | (265      | )          |
| **Comprehensive  income**                          |       |                                   |       |       |       |                             |       |                                                 |       |                       |       |                                  |       | 7,941     |       |
| Common stock  issued for director stock grants     |       | 2,500                                  |       | —     |       | 58                               |       | —                                               |       | —                     |       | —                                |       | 58        |       |
| **SEPTEMBER  30, 2003 - REORGANIZED COMPANY** |       | 4,038,534                              |       | 40         |       | 97,000                           |       | (891                                                 | )          | —                     |       | 4,994                                 |       | 101,143   |       |
| Net loss                                           |       | —                                 |       | —     |       | —                           |       | —                                               |       | ——               |       | (9,941                                | )          | (9,941    | )          |
| Translation  adjustment                            |       | —                                 |       | —     |       | —                           |       | 873                                                  |       | —                     |       | —                                |       | 873       |       |
| Additional  minimum pension obligation             |       | —                                 |       | —     |       | —                           |       | (1,616                                               | )          | —                     |       | —                                |       | (1,616    | )          |
| **Comprehensive  loss**                            |       |                                   |       |       |       |                             |       |                                                 |       |                       |       |                                  |       | (10,684   | )     |
| Common stock  issued for director stock grants     |       | 5,400                                  |       | —     |       | 447                              |       | —                                               |       | (447                       | )          | —                                |       | —    |       |
| Amortization of  deferred compensation             |       | —                                 |       | —     |       | —                           |       | —                                               |       | 392                        |       | —                                |       | 392       |       |
| Repurchase of  common stock                        |       | (354,450                               | )          | (3         | )          | (6,645                           | )          | —                                               |       | —                     |       | —                                |       | (6,648    | )          |
| **SEPTEMBER  30, 2004 - REORGANIZED COMPANY** |       | 3,689,484                              |       | $          | 37         |                             | $          | 90,802                                               |       | $                          | (1,634     | )                                     | $          | (55       | )          | $ | (4,947 | ) | $ | 84,203 |   |

 

See thenotes to the consolidated financial statements.

 

F-5

----

 

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**Anacomp, Inc. and Subsidiaries**

 
| ** **                                                                                | ** ** | **Reorganized Company**                      | ** ** | **Predecessor  Company**                | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **Year ended  September** **30,  2004** | ** ** | **Year ended  September 30, 2003** | ** ** | **Nine months ended  September 30, 2002** | ** ** | **Three months  ended December 31, 2001** | ** ** |
| ** **                                                                                | ** ** | **(dollars in thousands)**                   | ** ** |
| Cash flows from operating activities:                                                     |       |                                         |       |                                    |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                                            | (9,941     | )                                       | $          | 7,306 |   | $ | (2,312 | ) | $ | 277,360 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |       |                                         |       |                                    |       |   |   |   |   |
| Other income due to extinguishment of debt                                                |       | —                                       |       | —                                  |       | — |   | (265,329 | ) |
| Adjustment 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                                                   |       | —                                       |       | (7,995                                  | )          | — |   | — |   |
| Income from discontinued operations                                                       |       | —                                       |       | —                                  |       | (913 | ) | — |   |
| Depreciation and amortization                                                             |       | 11,961                                       |       | 14,414                                  |       | 12,999 |   | 7,194 |   |
| Amortization of debt fees, premiums and discounts                                         |       | 592                                          |       | 516                                     |       | 516 |   | 92 |   |
| Utilization of deferred tax asset without rate benefit                                    |       | —                                       |       | —                                  |       | 1,994 |   | — |   |
| Noncash compensation                                                                      |       | 1,341                                        |       | 58                                      |       | — |   | — |   |
| Noncash reorganization asset                                                              |       | 1,333                                        |       | —                                  |       | — |   | — |   |
| Noncash restructuring charges                                                             |       | 1,297                                        |       | 32                                      |       | — |   | — |   |
| Other noncash charges                                                                     |       | —                                       |       | —                                  |       | 358 |   | 349 |   |
| Change in assets and liabilities:                                                         |       |                                         |       |                                    |       |   |   |   |   |
| Accounts and other receivables                                                            |       | 4,507                                        |       | 5,102                                   |       | (1,239 | ) | 3,092 |   |
| Inventories                                                                               |       | (134                                         | )          | 760                                     |       | (148 | ) | 739 |   |
| Prepaid expenses and other assets                                                         |       | (1,263                                       | )          | 1,708                                   |       | (5,497 | ) | 332 |   |
| Accounts payable, accrued expenses and other liabilities                                  |       | (1,762                                       | )          | (7,518                                  | )          | 8,039 |   | (3,733 | ) |
| Accrued interest                                                                          |       | —                                       |       | —                                  |       | (13 | ) | (387 | ) |
| Net cash provided by continuing operations                                                |       | 7,931                                        |       | 14,383                                  |       | 13,784 |   | 5,009 |   |
| Net operating cash provided by discontinued operations                                    |       | —                                       |       | —                                  |       | 2,797 |   | — |   |
| Net cash provided by operating activities                                                 |       | 7,931                                        |       | 14,383                                  |       | 16,581 |   | 5,009 |   |
| Cash flows from investing activities:                                                     |       |                                         |       |                                    |       |   |   |   |   |
| Purchases of property and equipment for continuing operations                             |       | (4,104                                       | )          | (3,068                                  | )          | (2,727 | ) | (1,075 | ) |
| Purchases of property and equipment for discontinued operations                           |       | —                                       |       | —                                  |       | (48 | ) | — |   |
| Proceeds from sale of discontinued operations and other assets                            |       | —                                       |       | 14,631                                  |       | — |   | — |   |
| Payments to acquire product line assets and customer rights                               |       | —                                       |       | (500                                    | )          | — |   | — |   |
| Net cash provided by (used in) investing activities                                       |       | (4,104                                       | )          | 11,063                                  |       | (2,775 | ) | (1,075 | ) |
| Cash flows from financing activities:                                                     |       |                                         |       |                                    |       |   |   |   |   |
| Debt issuance costs                                                                       |       | (794                                         | )          | —                                  |       | — |   | — |   |
| Proceeds from revolving line of credit                                                    |       | 7,252                                        |       | 2,500                                   |       | — |   | — |   |
| Payments on revolving line of credit                                                      |       | (13,169                                      | )          | (26,558                                 | )          | (23,100 | ) | (2,000 | ) |
| Common Stock Repurchased                                                                  |       | (6,648                                       | )          | —                                  |       | — |   | — |   |
| Net cash used in financing activities                                                     |       | (13,359                                      | )          | (24,058                                 | )          | (23,100 | ) | (2,000 | ) |
| Effect of exchange rate changes on cash                                                   |       | (921                                         | )          | 1,441                                   |       | 725 |   | 637 |   |
| Increase (decrease) in cash and cash equivalents                                          |       | (10,453                                      | )          | 2,829                                   |       | (8,569 | ) | 2,571 |   |
| Less increase in cash from discontinued operations                                        |       | —                                       |       | —                                  |       | (2,749 | ) | — |   |
| Cash and cash equivalents at beginning of period                                          |       | 18,390                                       |       | 15,561                                  |       | 26,879 |   | 24,308 |   |
| Cash and cash equivalents at end of period                                                |       | $                                            | 7,937      |                                    | $          | 18,390 |   | $ | 15,561 |   | $ | 26,879 |   |

 

See the notes to theconsolidated financial statements.

 

F-6

----

 

** **

**SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**

** **
| ** **                                   | ** ** | **Reorganized Company**                 | ** ** | **Predecessor Company**                 | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **Year ended  September 30, 2004** | ** ** | **Year ended  September 30, 2003** | ** ** | **Nine months ended  September 30, 2002** | ** ** | **Three months ended  December 31,   2001** | ** ** |
| ** **                                   | ** ** | **(dollars in thousands)**              | ** ** |
| Cash paid during period for:                 |       |                                    |       |                                    |       |   |   |   |   |
| Interest                                     |       | $                                       | 490        |                                    | $          | 1,323 |   | $ | 2,175 |   | $ | 1,434 |   |
| Income taxes                                 |       | $                                       | 1,534      |                                    | $          | 1,658 |   | $ | 2,208 |   | $ | 459 |   |
| Non-cash investing and financing activities: |       |                                    |       |                                    |       |   |   |   |   |
| Additional minimum pension obligation        |       | $                                       | 1,616      |                                    | $          | 265 |   | $ | (3,522 | ) | $ | — |   |

 

 

See thenotes to the consolidated financial statements.

 

 

F-7

----

 

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS****Anacomp, Inc. and Subsidiaries**

 

**NOTE 1.COMPANY OPERATIONS AND BASIS OF PRESENTATION:**

Anacomp®, Inc. provides comprehensive informationoutsourcing services, maintenance support, and imaging and print solutions forbusinesses and organizations around the globe. We primarily serve customers inthe financial services and insurance sectors and, in the case of Multi-VendorServices, the technology sector.

*FinancialRestructuring and Reorganization*

On October 19, 2001, wefiled a voluntary petition for reorganization under Chapter 11 of the U.S.Bankruptcy Code, together with a prepackaged plan of reorganization (the “Plan”),with the U.S. Bankruptcy Court for the Southern District of California.  The U.S. Bankruptcy Court confirmed the Planon December 10, 2001, and we emerged from bankruptcy effective December 31,2001.

The primary benefits ofour bankruptcy were the elimination of $310 million of debt, related accruedinterest of $52.3 million and the related annual interest expense ofapproximately $34 million. Additionally, our credit facility was amended suchthat we cured previous events of default.

Under the Plan, ourpublicly traded 10-7/8% senior subordinated notes, related accrued interest andexisting Anacomp common stock (14,566,198 shares) were canceled, and new commonstock was issued.  New Class A CommonStock was distributed to the holders of the notes, as well as reserved forissuance as incentive compensation to Anacomp personnel.  New Class B Common Stock was issued anddistributed to holders of previously existing Anacomp common stock.

Pursuant to thereorganization, we are authorized to issue 40,000,000 shares of Class A CommonStock, 787,711 shares of Class B Common Stock and 1,000,000 shares of preferredstock.  Terms and conditions of the ClassA and Class B Common Stock are identical, including voting rights, dividends,when and if declared, and liquidation rights, subject to any preference ofpreferred stock as may be issued in the future. Class B Common Stock is also subject to potential further dilution ifadditional shares of Class B Common Stock are required to be issued insatisfaction of claims pursuant to the reorganization.  Preferred stock is authorized to be issued inone or more series with terms to be established at the time of issuance by ourBoard of Directors.

In exchange for the notestotaling $310 million and related accrued interest totaling $52.3 million,holders of the notes received 4,030,000 shares of new Class A Common Stock.

For each share of commonstock outstanding immediately prior to the emergence from bankruptcy, commonshareholders received .0002769 shares of new Class B Common Stock.  As a result, 4,034 shares of new Class BCommon Stock were issued.  In addition, foreach share of new Class B Common Stock issued, these shareholders received194.12 warrants.  Each warrant isexercisable for a period of five years for the purchase of one share of the newClass B Common Stock at an exercise price of $61.54 per share.  As a result, 783,077 warrants to purchaseClass B Common Stock were issued.

Holders of Class A CommonStock own 99.9% of our equity and those holding Class B Common Stock own 0.1%.

Also, as a result of theChapter 11 reorganization, the following occurred:

•                  all unexercised stock options were canceled;

•                  prior stock option plans were terminated;

•                  executory contracts were assumed or rejected;

•                  trade creditors were paid in the ordinary course of business and werenot impaired;

•                  members of a new Board of Directors were designated by the holders ofthe subordinated notes;

•                  403,403 shares of new Class A Common Stock were authorized for use innew stock option plans; and

•                  the revolving credit facility was amended(it was replaced by a new facility from a new financial institution in July2004).

 

F-8

----

 

Under bankruptcy law, anexecutory contract is an agreement between a debtor and third party underwhich, as of the date of a debtor’s Chapter 11 petition, material performanceon the agreement remains due from both the debtor and non-debtor party, suchthat the failure of either side to perform its obligations under the agreementwould excuse the other party from further performance.  The Bankruptcy Code permits a Chapter 11debtor to assume (i.e. agree to continue to be bound both during the Chapter 11case and following emergence) or reject (breach and no longer be bound duringthe Chapter 11 case or thereafter) any executory contract.  We assumed all of our executory contractsunder our confirmed plan of reorganization except one, which was anonresidential lease of real property.

The U.S. Bankruptcy Courtissued its final decree on September 27, 2002 closing the Chapter 11 case.  There are no remaining claims or unrecordedobligations related to the bankruptcy proceedings.

*Basis ofPresentation*

At December 31, 2001, as a result of our emergencefrom bankruptcy, we adopted Fresh Start Reporting in accordance with AICPAStatement of Position 90-7, “Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code.”  Fresh StartReporting resulted in material changes to the Consolidated Balance Sheet as ofDecember 31, 2001, including adjustment of assets and liabilities to estimatedfair values, the valuation of equity based on the reorganization value of theongoing business, and the recording of an asset for reorganization value inexcess of the fair value of the separately identifiable assets and liabilities(similar to goodwill).

The accompanying financialstatements include historical information from prior to December 31, 2001, theeffective date we emerged from bankruptcy, and are identified as financialstatements of the Predecessor Company. The Consolidated Statements of Operations and the Statements of CashFlows as of and for the nine-month period ended September 30, 2002 andtwelve-month periods ended September 30, 2003 and September 30, 2004,respectively, and the Consolidated Balance Sheets as of September 30, 2003 and2004; represent the Reorganized Company after adopting Fresh StartReporting.  Due to our reorganization,the implementation of Fresh Start Reporting (see Note 3), and our presentationof discontinued operations for the nine-month period ended September 30, 2002;the financial statements for the Reorganized Company are not comparable tothose of the Predecessor Company.  We didnot reflect the discontinued operations presentation relating to the sale ofSwitzerland in the financial statements of the Predecessor Company due to the immaterialityof such results in those periods.

The accompanying consolidated financial statementsinclude the accounts of Anacomp and our wholly-owned subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.  The financial statements,in the opinion of management, include all adjustments (consisting of normalrecurring accruals and the Fresh Start adjustments described in Note 3)necessary for a fair presentation of our financial position, results of operationsand cash flows for all periods presented.

Preparation of the accompanying consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the periods presented.  Estimates have been prepared on the basis ofthe most current available information and actual results could differ fromthose estimates.

Certain prior period amountshave been reclassified to conform to the current period presentation.  Such reclassifications include thepresentation of certain employee benefit obligations from current liabilitiesto long-term liabilities.

Weaccount for our employee stock option plans in accordance with APB Opinion No.25, under which compensation expense is recognized only to the extent theexercise price of the option is less than the fair market value of a share ofstock at the date of grant (the intrinsic value method).  Accordingly, we have adopted the disclosureonly requirements of Statement of Financial Accounting Standards (“SFAS”) No.123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure.”  Had employee compensation costs for theseplans been determined based on their fair value on their grant date inaccordance with SFAS No. 123, our net results would have been as follows (inthousands, except per-share amounts):

 
| ** **                                                                                                                                                              | ** ** | **Reorganized Company**                          | ** ** | **Predecessor Company**                          | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **Year ended**

**September 30,**

**2004** | ** ** | **Year ended**

**September 30,**

**2003** | ** ** | **Nine months ended September 30, 2002** | ** ** | **Three months ended December 31, 2001** | ** ** |
| Net income (loss) as reported                                                                                                                                           |       | $                                                | (9,941     | )                                                | $          | 7,306 |   | $ | (2,312 | ) | $ | 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 |       | (437                                             | )          | (607                                             | )          | (106 | ) | — |   |
| Pro forma net income (loss)                                                                                                                                             |       | $                                                | (10,378    | )                                                | $          | 6,699 |   | $ | (2,418 | ) | $ | 277,360 |   |
|                                                                                                                                                                    |       |                                             |       |                                             |       |   |   |   |   |
| Basic and diluted net income (loss) per share:                                                                                                                          |       |                                             |       |                                             |       |   |   |   |   |
| As reported                                                                                                                                                             |       | $                                                | (2.48      | )                                                | $          | 1.81 |   | $ | (0.57 | ) |   |   |
| Pro forma                                                                                                                                                               |       | $                                                | (2.59      | )                                                | $          | 1.66 |   | $ | (0.60 | ) |   |   |

 

F-9

----

 

**NOTE 2.**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

**Consolidation**

The consolidated financialstatements include the accounts of Anacomp and its wholly ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated.

**Cashand Cash Equivalents**

Cash equivalents primarilyrepresent highly liquid investments, with original maturities of 90 days orless, in money market funds that are convertible to a known amount of cash andcarry an insignificant interest rate risk.

**Concentrationof Credit Risk**

The Company sells its products to customers primarily in theUnited States, Canada, Europe and Asia. The Company maintains a reserve forpotential credit losses and historically such losses have been withinmanagement’s estimates.  Whenevaluating the adequacy of the allowance for doubtful accounts, we specificallyanalyze accounts receivable as well as historical bad debts, customerconcentrations, customer credit-worthiness, current economic trends and changesin our customer payment terms.

**Inventories**

Inventories are stated atthe lower of cost or market, with cost being determined by methodsapproximating the first-in, first-out basis. We evaluate our ending inventories for estimated obsolescence orunmarketable inventory based upon assumptions about future demand and marketconditions.  Inventories in excess ofdemand are reserved.

**Propertyand Equipment**

Property and equipment,which includes leasehold improvements, is recorded at cost and depreciated oramortized using the straight-line method over estimated useful lives.  Leasehold improvements are amortized over theshorter of their estimated useful life or the remaining term of the relatedlease.  Processing equipment and otherproperty and equipment has useful lives ranging from two to twelve years.  Repair and maintenance costs are expensed asincurred.

Software Developmentcosts are accounted for in accordance with Statement of Position ( SOP ) 98-1,Accounting for the Costs of Computer Software Developed or Obtained forInternal Use. In accordance with SOP 98-1, costs to develop internal usecomputer software during the application development stage are capitalized.Capitalized software costs are amortized on a straight-line basis over theestimated useful lives of the related software applications. During the yearended September 30, 2004 the Company capitalized $0.3 million in softwaredevelopment costs.

 

F-10

----

 

**IncomeTaxes**

Income tax expense generally is the amount of incometaxes expected to be payable for the current year.  During the application of Fresh Startaccounting principles, a valuation allowance was recorded equal to pre-reorganizationdeferred tax assets.  A portion of theincome tax expense related to the United States based operating results willnot be payable as we will utilize pre-reorganization deferred tax assets.  Utilization of tax benefits frompre-reorganization deferred tax assets will be reported first as a reduction ofthe Reorganization Asset and then as a credit to equity.  A deferred tax asset and/or liability iscomputed for both the expected future impact of temporary differences betweenthe financial statement and tax basis of assets and liabilities and for theexpected future tax benefit to be derived from tax loss and tax creditcarryforwards.  Valuation allowances areestablished to reduce deferred tax assets to the amount expected to be realizedin future tax returns.

**ForeignCurrency Translation**

Substantially all assetsand liabilities of Anacomp’s international operations are translated atyear-end exchange rates; revenues and expenses are translated at the averageexchange rates prevailing during the year. Foreign currency translation adjustments are included as a component of “Accumulatedother comprehensive loss” in the accompanying Consolidated Balance Sheets.  Foreign currency transaction gains and lossesare charged to operations as incurred.

A foreign currency transactionloss of $0.7 million was recorded for the twelve months ended September 30,2004.  A foreign currency transactiongain of $41,000 and $0.3 million was recorded for the twelve months endedSeptember 30, 2003 and nine months ended September 30, 2002, respectively.  A foreign currency transaction loss of $0.2million was recorded for the three months ended December 31, 2001.  Foreigncurrency transaction gains and losses are included as a component of “Otherincome (expense)” in the accompanying Consolidated Statements of Operations.

**Goodwill**

The excess ofpurchase price over net assets of businesses acquired (“goodwill”) wasamortized on the straight-line method over the estimated periods of futurebenefit through December 31, 2001, and was eliminated as part of ourreorganization and implementation of Fresh Start accounting (see Note 3).

In June 2001, the FASBissued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill andOther Intangible Assets.”  SFAS No. 141requires that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001. The Company adopted SFAS No. 142 beginning January 1, 2002 uponapplication of Fresh Start Reporting (See Note 3).  As a result of the implementation of Fresh StartReporting, all goodwill on the books at December 31, 2001 was eliminated. UnderSFAS No. 142, purchased goodwill and intangible assets with indefinite livesare no longer amortized, but instead are tested for impairment at leastannually.  Accordingly, the Company doesnot amortize goodwill and intangible assets with indefinite lives as of January1, 2002.  Intangible assets with finitelives, primarily customer contracts, customer relationships and proprietary technologywill be amortized over their useful lives.

The following tablereconciles our net income to net income (loss) adjusted for the amortization ofintangible assets and goodwill.  Due toour net loss tax position in prior fiscal years, no tax benefit was realizedfrom this expense.
| ** **                                                  | ** ** | **Reorganized Company**                  | ** ** | **Predecessor Company**                 | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                  | ** ** | **Year ended September 30,   2004** | ** ** | **Year ended September 30,  2003** | ** ** | **Nine months ended September 30,   2002** | ** ** | **Three months   ended December 31,   2001** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                       | ** ** |
| Net income (loss) as reported                               |       | $                                        | (9,941     | )                                       | $          | 7,306 |   | $ | (2,312 | ) | $ | 277,360 |   |
| Goodwill amortization                                       |       | —                                   |       | —                                  |       | — |   | 2,629 |   |
| Net income (loss) excluding effect of goodwill amortization |       | $                                        | (9,941     | )                                       | $          | 7,306 |   | $ | (2,312 | ) | $ | 279,989 |   |

 

**Debt Issuance Costs**

TheCompany capitalizes all costs related to its issuance of debt and amortizesthose costs using the effective interest method over the life of the relateddebt instruments.  Unamortized debtissuance costs were $0.8 million and $0.1 million at September 30, 2004 and2003, respectively.  Unamortized debtissuance costs are included in “Other

 

F-11

----

 

assets”in the accompanying Consolidated Balance Sheets.  During the twelve months ended September 30,2004, the twelve months ended September 30, 2003, the nine months endedSeptember 30, 2002, and the three months ended December 31, 2001, the Companyamortized $0.2 million, $0.5 million, $0.5 million, and $0.1 million,respectively, of debt issuance costs that are included in “Interest expense andfee amortization” in the accompanying Consolidated Statements ofOperations.  In addition, the Companyrecognized $0.4 million of unamortized revolver costs as “Other” in the Otherincome (expense) category related to the early termination of a credit facilityin the fourth quarter of fiscal year 2004.

**RevenueRecognition**

Contract revenue for thedevelopment and implementation of document services solutions under contractsis recognized over the contract period based on output measures as defined bydeliverable items identified in the contract. Provisions for estimated losses on contracts, if any, are made duringthe period when the loss becomes probable and can be reasonably estimated.

Revenues from sales ofproducts and services or from leases of equipment under sales-type leases arerecorded based on shipment of products (and transfer of risk of loss),commencement of the lease, or performance of services.  Operating lease revenues are recognizedduring the applicable period of customer usage. Revenue from maintenance contracts is recognized ratably over the periodof the related contract.

In accordance with Statementof Position (SOP) 97-2, “Software Revenue Recognition,” revenues from softwarelicense agreements are recognized, provided that all of the followingconditions are met:  a non-cancelablelicense agreement has been signed, the software has been delivered, the feesare fixed or determinable, there are no material uncertainties regardingcustomer acceptance, collection of the resulting receivable is deemed probableand the risk of concession is deemed remote, and no other significant vendorobligations exist.  For contracts withmultiple obligations, the Company unbundles the respective components todetermine revenue recognition using vendor-specific objective evidence (VSOE).  In instances where VSOE cannot be determined,the related fees are deferred and amortized over the life of the contract.

**Long-LivedAssets**

The Company evaluatespotential impairment of long-lived assets and long-lived assets to be disposedof in accordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  SFAS No. 144established procedures for review of recoverability and measurement ofimpairment (if necessary) of long-lived assets and certain identifiable intangiblesheld and used by an entity.  SFAS No. 144required that those assets be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of the respectiveasset may not be fully recoverable.  Nosuch indicators of impairment were present in the fiscal year ended September30, 2004.

**FairValues of Financial Instruments**

SFAS No. 107, “Disclosures About Fair Value ofFinancial Instruments,” requires disclosure of fair value information forcertain financial instruments.  Thecarrying amounts for trade and other receivables and payables are considered tobe their fair values, and the carrying amount for our revolving credit facilityis considered to be its fair value for all periods presented.

**Research and Development**

Research and developmentcosts are expensed as incurred. Engineering costs associated specifically withresearch and development amounted to $1.7 million, $2.1 million, $3.4 million,and $0.9 million for the twelve months ended September 30, 2004, and September30, 2003, the nine months ended September 30, 2002, and the three months endedDecember 31, 2001, respectively. The Company supports several engineeringprocesses, including basic technological research, service offering and productdevelopment, and sustaining engineering for its existing products.

 

**Income or Loss Per Share**

Basic income orloss per share is computed based upon the weighted average number of shares ofAnacomp’s common stock outstanding during the period. For the fiscal year endedSeptember 30, 2004, potentially dilutive securities include 783,077 outstandingwarrants to purchase Class B Common Stock, which were issued as part of

 

F-12

----

 

thereorganization.  These warrants wereexcluded from diluted income per share as they were anti-dilutive using thetreasury stock method.  Basic and dilutednet income or loss per share for periods prior to the nine months endedSeptember 30, 2002 have not been presented as they are not comparable tosubsequent periods due to the implementation of Fresh Start Reporting (see Note3).

The followingtable summarizes potential common shares that are not included in thedenominator used in net loss per common share for the fiscal year endedSeptember 30, 2004 and 2003, because to do so would be anti-dilutive for theperiods presented:

 
| ** **                                | ** ** | **For the Twelve Months Ended September 30,** | ** ** | **For the Twelve Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                           | ** ** | **2003**                                           | ** ** |
| Options to purchase common stock          |       | 227,500                                            |       | 210,000                                            |       |
| Warrants to purchase Class B common stock |       | 783,077                                            |       | 783,077                                            |       |
| Total                                     |       | 1,010,577                                          |       | 993,077                                            |       |

 

**ManagementEstimates and Assumptions**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Estimates have beenprepared on the basis of the most current available information and actualresults could differ from those estimates.

**RecentAccounting Pronouncements**

On March 31, 2004,The FASB issued its exposure draft, *“Share-BasedPayment,”* which is a proposed amendment to SFAS 123.  The exposure draft would require allshare-based payments to employees, including grants of employee stock optionsand purchases under employee stock purchase plans, to be recognized as expensesin the statement of operations based on their fair values and vestingperiods.  The FASB expects to issue afinal standard late in 2004 that would be effective for public companies forfiscal years beginning after December 15, 2004. We have not yet assessed the impact of adopting this new standard.  See Note 1 to the financial statements.

 

**NOTE 3.**

**FRESH STARTREPORTING:**

Our enterprisevalue after reorganization at December 31, 2001 was determined based on theconsideration of many factors and resulted in a reorganization value (over thefair value of identifiable net assets) of $72 million, as adjusted, and isreported as “Reorganization value in excess of identifiable net assets”.  Although the asset will not be subject tofuture amortization (in accordance with SFAS No. 142, “Goodwill and OtherIntangible Assets”), it will be subject to, at a minimum, annual impairmenttesting.

In developing theassumptions underlying the enterprise valuation, management consideredhistorical results as well as its best estimates of expected future marketconditions based on information available as of December 31, 2001.  Actual future events and results could differsubstantially from management’s estimates, assumptions and projections.  Unfavorable changes compared to ourprojections used for Fresh Start Reporting purposes could result in futureimpairments of our reorganization asset and identifiable intangible assets.

As a result of FreshStart Reporting, identifiable intangible assets were valued and consist of thefollowing to be amortized over the useful lives indicated:
| ** **                                            | *** *** | **Life in Years**          | ** ** | **September 30, 2004** | ** ** |
|-------------------------------------------------------|--------------|----------------------------|------------|------------------------|------------|
| ** **                                            | *** *** | **(dollars in thousands)** | ** ** |
| 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                        |         |                       |       | (5,454                 | )     |
|                                                  |         |                       |       | $                      | 6,846      |   |

 

F-13

----

 

The income due toextinguishment of debt, net of taxes, is reported as “Gina on extinguishment ofdebt” in the Consolidated Statement of Operations for the period ended December31, 2001, and is calculated as follows:

 
| ** **                                  | ** ** | **Amount**         | ** ** |
|---------------------------------------------|------------|--------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 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 thesenior subordinated notes received 99.9% of the new equity of the ReorganizedCompany; therefore, the net equity of the Reorganized Company was used as thebasis for consideration exchanged in determining the income due toextinguishment of debt.  There is noincome statement tax effect from the extinguishment of debt.

In accordance withStatement of Position 90-7, “Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code,” transactions of the Predecessor Company resultingfrom the Chapter 11 reorganization are reported separately as reorganizationitems in the accompanying Consolidated Statement of Operations for the periodended December 31, 2001, and are summarized below:

 

 
| ** **                                                                        | ** ** | **Three Months Ended December 31, 2001** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                        | ** ** | **(in thousands)**                       | ** ** |
| 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.**

**SENIORSECURED REVOLVING CREDIT FACILITY:**

Effective July 30, 2004, wesigned a 5-year, $50.0 million senior secured credit facility agreement withWells Fargo Foothill, Inc. (the “credit facility”).  The credit facility is comprised of a $25.0million revolver and a $25.0 million acquisition facility.  The credit facility will provide for workingcapital requirements and will fund acquisitions and stock buybacks.  Subject to certain conditions, up to $15.0million of our shares can be repurchased under the credit facility.

Thecredit facility bears interest at a base rate equal to the higher of(a) the annual rate of interest announced from time to time by Wells FargoBank, National Association (Wells Fargo) as its prime rate plus the base ratemargin of between 0.5 to 1.0 percentage points based upon defined levels ofEBITDA. The borrowing base equals 85% of eligible accounts, which include U.S.and Canadian accounts receivable plus the lesser of $12.5 million or definedpercentages of our recurring revenues.

Thecredit facility is secured by virtually all of Anacomp assets and 65% of thecapital stock of our foreign subsidiaries. The credit facility containscovenants relating to limitations on the following:

•  additionaldebt;

•  permittedacquisitions; and

•  liens and dividends.

 

F-14

----

 

The credit facility also issubject to minimum EBITDA and leverage ratio covenants, minimum recurringdocument imaging revenue and limits on annual capital expenditures.  Except as noted, the banks must approve any buybackor open market purchases of our common stock.

No amounts were outstandingunder the credit facility at September 30, 2004.

Effective November 24, 2003,we entered into a revolving credit agreement with Fleet National Bank (“Agent”)and Union Bank of California.  The creditfacility is for a maximum commitment of $22.5 million with a term of two yearsfrom November 24, 2003.  The agreementprovides for a standby letter of credit sublimit of up to $10 million.  Availability is limited to the lesser of (a)the maximum commitment of $22.5 million or (b) the borrowing base plus anover-advance facility for acquisitions.

The facility bearsinterest at a base rate equal to the higher of a) the annual rate of interestannounced 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 portionof the facility equal to the borrowing base. The borrowing base equals 80% of eligible accounts, which include U.S.and Canadian accounts receivable. Eligible accounts of our U.K. based customers may be added at a latertime after certain conditions are met.

The facility with FleetNational Bank was closed in August 2004 and replaced with the Foothill creditfacility.

 

**NOTE 5.**

**SENIORSUBORDINATED NOTES:**

The Predecessor Companyhad outstanding $310 million of publicly traded 10-7/8% senior subordinatednotes and related accrued interest of $52.3 million at October 19, 2001.  As detailed in Note 1, the notes and relatedaccrued interest were extinguished in the reorganization.  The accompanying Consolidated Statement ofOperations for the period ended December 31, 2001 includes approximately $1.7million of interest expense on the notes through October 19, 2001, the date thePredecessor Company filed for bankruptcy. Had interest on the senior subordinated notes continued to accrue beyondthe October 19, 2001 bankruptcy filing date, we would have recognized anadditional $6.9 million in interest expense through December 31, 2001.

 

**NOTE 6.**

**RESTRUCTURINGCHARGES:**

We continue to experience revenue declines in ComputerOutput to Microfiche (COM)/Other Output Services, CD/Digital, COM ProfessionalServices, and Equipment/Supplies product lines. Due to this ongoing trend, we initiated significant changes in fiscalyear 2004 to align our cost structure and infrastructure through theconsolidation and downsizing of facilities and adjustments to our worldwideworkforce.

 

•                  We recorded restructuring charges of $9.1 million for the fiscal year2004 plan.

•                  Adjustments to our workforce affected approximately 246 employeesresulted in severance charges of $3.6 million in fiscal year 2004. All affectedemployees were notified and left the Company.

•                  The remaining accrued but unpaid liability of $1.1 million, as ofSeptember 30, 2004, is expected to be paid by March 2005.

•                  Facility closure costs for the closure of 30 facilities totaled $5.6million, including future lease payments, abandoned leasehold improvements andoperating equipment, and incremental travel and relocation costs incurred as aresult of our consolidation efforts.

•                  $2.3 million of facility closure costs remained unpaid, and we expectthat payments (non-cancelable facility lease payments) will continue throughSeptember 2006.

•                  We also included non-cash charges of $1.3 million in the year toreflect the write-off of leasehold improvements ($0.5 million) and excess andobsolete equipment from closed data centers.

 

In the third and fourth quarters of fiscal year 2003,we recorded restructuring charges totaling $2.9 million.  Adjustments to our workforce in those periods(affecting approximately 178 employees) totaled $2.5 million, and all affectedemployees were notified and have departed the Company.  The remaining accrued but unpaid liability of$20,000 is expected to be paid by December 31, 2004.  Also included in the $2.9 millionrestructuring charge was $0.4 million of facility closure costs, includingincremental travel and relocation costs incurred as a result of ourconsolidation efforts.  In the secondquarter of fiscal year 2004, we were able to negotiate an early termination ofone of our leased facilities included in the 2003 restructuring charges and inthe third quarter of fiscal year 2004 we were

 

F-15

----

 

able to negotiate a favorable resolution to aninternational employee termination. These favorable events resulted in reduced obligations, and we recordeda favorable adjustment of $0.1 million in fiscal year 2004.

The restructuringreserves are included as a component of “Other accrued liabilities” in theaccompanying Consolidated Balance Sheets. Lease obligations payable more than twelve months from September 30,2004 totaled $0.2 million, were considered long-term and are included as “Otherlong-term liabilities” in the accompanying Consolidated Balance Sheets.

The followingtables present the activity and balances of the restructuring reserves fromSeptember 30, 2003 to September 30, 2004 (in thousands):

 

**Fiscal Year 2003 Restructuring**
| ** **                    | ** ** | **Employee**    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                    | ** ** | **Separations** | ** ** | **Closing**  | ** ** | **Total**  | ** ** |
| Liability, September 30, 2003 |       | $               | 1,510      |         | $          | 253        |       | $ | 1,763 |   |
| Cash payments                 |       | (1,482          | )          | (125         | )          | (1,607     | )          |
| Adjustments to expense        |       | (28             | )          | (108         | )          | (136       | )          |
| Liability, September 30, 2004 |       | $               | —     |         | $          | 20         |       | $ | 20 |   |

** **

**Fiscal Year 2004 Restructuring**
| ** **                                   | ** ** | **Employee**    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                                   | ** ** | **Separations** | ** ** | **Closing**  | ** ** | **Total**  | ** ** |
| Liability, September 30, 2003                |       | $               | —     |         | $          | —     |       | $ | — |   |
| Charged to expense                           |       | 3,580           |       | 5,575        |       | 9,155      |       |
| Non-cash write-off of leasehold improvements |       | —          |       | (1,297       | )          | (1,297     | )          |
| Cash payments                                |       | (2,459          | )          | (2,024       | )          | (4,483     | )          |
| Liability, September 30, 2004                |       | $               | 1,121      |         | $          | 2,254      |       | $ | 3,375 |   |

 

**Summary of RestructuringActivities**
| ** **                                   | ** ** | **Employee**    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                                   | ** ** | **Separations** | ** ** | **Closing**  | ** ** | **Total**  | ** ** |
| Liability, September 30, 2003                |       | $               | 1,510      |         | $          | 253        |       | $ | 1,763 |   |
| Charged to expense                           |       | 3,580           |       | 5,575        |       | 9,155      |       |
| Non-cash write-off of leasehold improvements |       | —          |       | (1,297       | )          | (1,297     | )          |
| Cash payments                                |       | (3,941          | )          | (2,149       | )          | (6,090     | )          |
| Adjustments                                  |       | (28             | )          | (108         | )          | (136       | )          |
| Liability, September 30, 2004                |       | $               | 1,121      |         | $          | 2,274      |       | $ | 3,395 |   |

# ** **

# **NOTE 7.**

# **SALE OF SWITZERLAND AND OTHER OPERATIONS:**

We completed a sale of our Switzerland operations andsubsidiaries on October 18, 2002.  Theacquiring 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).

On October 13, 2004 we received the remaining $0.2 million outstanding as of September 30, 2004 that was reported as “Accounts Receivable, net” on the Consolidated Balance Sheet in fiscal year 2004.  All of the net proceeds (i.e. sales price less sale costs) have been used to reduce the balance outstanding under the terms of our 2002 Amended and Restated Revolving Credit Agreement.

 

F-16

 

The results ofoperations of the Switzerland and other operations have been reportedseparately as “Income from discontinued operations, net of taxes” in theConsolidated Statements of Operations for the nine months ended September 30,2002.  The results of operations reportedbelow for the three months ended December 31, 2001, and the fiscal year endedSeptember 30, 2002 have not been segregated as discontinued operations in theConsolidated Statements of Operations for the respective periods as they werenot material to the operating results of Anacomp in total.

 

 
| ** **          | ** ** | **Reorganized Company**                                 | ** ** | **Predecessor Company**                                 | ** ** |
|---------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **          | ** ** | **Nine Months**

**Ended**

**September 30,**

**2002** | ** ** | **Three Months**

**Ended**

**December 31,**

**2001** | ** ** |
| ** **          | ** ** | **(dollars in thousands)**                              | ** ** |
| Revenues            |       | $                                                       | 20,440     |                                                    | $          | 7,505 |   |
| Income before taxes |       | 1,212                                                   |       | 869                                                     |       |
| Income taxes        |       | 299                                                     |       | 60                                                      |       |
| Net income          |       | $                                                       | 913        |                                                    | $          | 809 |   |

 

**NOTE 8.**

**HEDGING:**

On October 15, 2002, weentered into three Swiss Franc (CHF) forward contracts to protect the value ofthe expected cash receipts from the sale of our Switzerland operations. Thecontracts protected Anacomp against an exchange rate above 1.5425. The firstforward contract was written in the amount of CHF 18.2 million and expired onJanuary 29, 2003.  At expiration, theforward 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 inthe amount of CHF 2.1 million and expired on April 15, 2003.   CHF 1.0 million of the contract expiredunused and the remaining CHF 1.1 million was converted at 1.5425, yielding $0.7million.  The third forward contract waswritten in the amount of CHF 1.8 million and expired on April 15, 2004.

The “Other” category under “Other income (expense)” ofour Condensed Consolidated Statement of Operations includes the recognition of$37,000 of exchange loss from currency fluctuations related to the Swissreceivable in fiscal year 2004.  Infiscal year 2003 we recognized $25,000 of exchange loss from currencyfluctuations related to the Swiss receivable, forward contracts and sale costs.

 

**NOTE9.**

**SUPPLIERCONCENTRATION RISK:**

**InteliCoat Technologies Agreement**

Anacomp has a supply agreement with InteliCoatTechnologies that expires October 1, 2005. Pursuant to the supply agreement, Anacomp can purchase coated duplicatemicrofilm from InteliCoat at fixed prices for a one year period, which can bemodified as defined in the agreement subject to justifiable extraordinary costincreases.  The supply agreement has nominimum purchase requirements and all purchase obligations are backed bycustomer commitments.  During fiscal year2004, we obtained all of our duplicate microfilm from InteliCoat.

**KodakAgreement**

We obtain our silver halidefilm used to produce master images principally from Eastman Kodak Company undera multi-year supply agreement.  Thesupply agreement has no minimum purchase requirements.

 

F-17

----

 

** **

**NOTE 10.**

**COMPOSITIONOF CERTAIN FINANCIAL STATEMENT CAPTIONS:**

** **
| ** **                                                                                    | ** ** | **Reorganized Company**    | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                    | ** ** | **September 30, 2004**     | ** ** | **September 30, 2003** | ** ** |
| ** **                                                                                    | ** ** | **(dollars in thousands)** | ** ** |
| **Accounts Receivable:**                                                                      |       |                       |       |   | ** ** |
| Trade receivables, net of allowance for doubtful accounts of $1,034 and  $1,532, respectively |       | $                          | 26,037     |   | $ | 29,469 | ** ** |
| Other                                                                                         |       | 565                        |       | 378 | ** ** |
|                                                                                          |       | $                          | 26,602     |   | $ | 29,847 | ** ** |
| **Inventories:**                                                                              |       |                       |       |   | ** ** |
| Finished goods, including purchased film                                                      |       | $                          | 592        |   | $ | 593 | ** ** |
| Consumable spare parts and supplies                                                           |       | 2,716                      |       | 2,581 | ** ** |
|                                                                                          |       | $                          | 3,308      |   | $ | 3,174 | ** ** |
| **Property and Equipment:**                                                                   |       |                       |       |   | ** ** |
| Office furniture                                                                              |       | $                          | 3,982      |   | $ | 4,470 | ** ** |
| Field support spare parts                                                                     |       | 6,557                      |       | 7,768 | ** ** |
| Leasehold improvements                                                                        |       | 6,448                      |       | 7,778 | ** ** |
| Processing and manufacturing equipment                                                        |       | 22,200                     |       | 22,625 | ** ** |
|                                                                                          |       | 39,187                     |       | 42,641 | ** ** |
| Less accumulated depreciation and amortization                                                |       | (24,089                    | )          | (24,243 | ) |
|                                                                                          |       | $                          | 15,098     |   | $ | 18,398 | ** ** |
| **Other Assets:**                                                                             |       |                       |       |   | ** ** |
| Pension related insurance policies                                                            |       | $                          | 5,145      |   | $ | 4,465 | ** ** |
| Net cash surrender values of life insurance policies                                          |       | 784                        |       | 758 | ** ** |
| Capitalized debt issuance costs                                                               |       | 794                        |       | — | ** ** |
| Deferred tax asset                                                                            |       | 515                        |       | — | ** ** |
| Other                                                                                         |       | 773                        |       | 729 | ** ** |
|                                                                                          |       | $                          | 8,011      |   | $ | 5,952 | ** ** |
|                                                                                          |       |                       |       |   | ** ** |
| Face amounts of life insurance policies                                                       |       | $                          | 1,433      |   | $ | 1,418 | ** ** |
|                                                                                          |       |                       |       |   | ** ** |
| **Other Accrued Liabilities:**                                                                |       |                       |       |   | ** ** |
| Sales tax and VAT liability                                                                   |       | $                          | 922        |   | $ | 1,665 | ** ** |
| Restructuring reserves                                                                        |       | 3,396                      |       | 1,785 | ** ** |
| Other                                                                                         |       | 4,004                      |       | 5,812 | ** ** |
|                                                                                          |       | $                          | 8,322      |   | $ | 9,262 | ** ** |

 

F-18

----

 

** **

**NOTE 11.LONG-TERM RECEIVABLES:**

** **

| ** **                 | ** ** | **Reorganized Company**    | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **September 30,  2004**    | ** ** | **September 30,  2003** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)** | ** ** |
| Long-term  receivables:    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Lease contracts receivable |       | $1,251                     |       | $1,817 |   |
|                       |       |                       |       |   |   |
| Less current portion       |       | (455                       | )          | (889 | ) |
|                       |       | $796                       |       | $928 |   |

Lease contractsreceivable result from customer leases of products under agreements thatqualify as sales-type leases. Annual future lease payments to be received undersales-type leases are as follows:

 

| ** **             | ** ** | **Year  Ended  September 30,** | ** ** |
|------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | **(dollars  in thousands)**    | ** ** |
| 2005                   |       | $                              | 560        |   |
| 2006                   |       | 408                            |       |
| 2007                   |       | 323                            |       |
| 2008                   |       | 116                            |       |
| 2009                   |       | 27                             |       |
|                   |       |                           |       |
| Less deferred interest |       | (183                           | )          |
|                   |       | $                              | 1,251      |   |

 

**NOTE 12.**

**RETIREMENT PLANS:**

**Defined Contribution Plans**

Anacomphas a retirement savings plan for its U.S. employees that qualifies underSection 401(k) of the Internal Revenue Code. Participating employees may contribute up to 15% of their pretax salary,but not more than statutory limits. Anacomp may contribute, at its discretion, up to fifty cents for eachdollar a participant contributes, with a maximum contribution of $2,500 peremployee per plan year.  Company expensefor matching contributions was $1.1 million, $1.3 million, $1.0 million, and$0.3 million for the fiscal year ended September 30, 2004, the fiscal yearended September 30, 2003, the nine months ended September 30, 2002, and thethree months ended December 31, 2001, respectively.

 Certain of our non-U.S. subsidiaries haveretirement plans that cover substantially all regular employees, for which wedeposit funds under various fiduciary-type arrangements.  Company contributions are generally based onyears of service as well as on the employee’s level of compensation.  The ranges of assumptions that are used forthese contributions reflect the different economic environments and statutoryrequirements within the various countries. Company expense for contributions to the non-U.S. plans was $2.6million, $1.7 million, $0.8 million, and $0.4 million for the fiscal year endedSeptember 30, 2004, the fiscal year ended September 30, 2003, the nine monthsended September 30, 2002, and for the three months ended December 31, 2001,respectively.

**Defined Benefit Pension**

The Company accounts for its defined benefit pensionplans using actuarial models required by SFAS No. 87, “Employers’ Accountingfor Pensions,”  SFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions” and SFAS No. 132 “EmployersDisclosures about Pensions and Other Post Retirement Benefits, an amendment ofFASB Statements No. 87, 88 and 106.” These models use an attribution approach that generally spreadsindividual events over the average service lives of the employees in theplan.  Examples of “events” are planamendments and changes in actuarial assumptions such as discount rate, rate ofcompensation increases and mortality. The principle underlying the required attribution approach is thatemployees render service over their service lives on a relatively smooth basisand therefore, the income statement effects of pension plans are earned in, andshould follow, the same pattern.

 

F-19

----

 

One of the principal components of the net periodicpension cost/(income) calculation is the expected long-term rates of return onplan assets.  The required use ofexpected long-term rate of return on plan assets may result in recognizedpension income that is greater or less than the actual returns of those planassets in any given year.  Over time,however, the expected long-term returns are designed to approximate the actuallong-term returns and therefore result in a pattern of income and expenserecognition that more closely matches the pattern of the services provided bythe employees.  Differences betweenactual and expected returns are recognized in the calculation of net periodicpension cost/(income) over five years as provided for in the accounting rules.

These expected returns on plan assets are developed in conjunction withexternal advisors, and take into account long-term expectations for futurereturns and investment strategy.  Amountsare tested for reasonableness against their historical averages, usually over aten-year period.

The discount rate assumptions used for pension planaccounting reflect the prevailing rates available on high-quality, fixed-incomedebt instruments.  The rate ofcompensation increase is another significant assumption used in the actuarialmodel for pension accounting and is determined by the Company, based upon itslong-term plans for such increases.

As required by SFAS No. 87, for instances in whichpension plan assets are less than the accumulated benefit obligation (ABO) asof the end of the reporting period (defined as an unfunded ABO position), aminimum liability equal to this difference is established in the ConsolidatedStatement of Financial Position.  The ABOis the present value of the actuarially determined company obligation forpension payments assuming no further salary increases for the employees.  The offset to the minimum liability is a chargeto equity.  The charge to equity isincluded in the Accumulated other comprehensive loss not affecting retainedearnings section of Stockholders’ equity in the Consolidated Statement ofFinancial Position.

The Company uses a September 30, 2004 measurementdate for of its pension plans.

We have retirement plans inplace for our United Kingdom and German subsidiaries that qualify as definedbenefit plans.  The plans providebenefits based primarily on years of service and employee compensation levels.  Funding policy for the plans is to contributeamounts sufficient to meet minimum funding requirements as set forth inemployee benefit and tax laws plus additional amounts as we may determine to beappropriate.

Components of the netperiodic benefit cost were as follows:

 
| ** **                     | ** ** | **Fiscal  Year 2004** | ** ** | **Fiscal  Year 2003** | ** ** | **Nine months  ended  September 30, 2002** | ** ** | **Three months  ended  December 31, 2001** | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **(in thousands)**    | ** ** |
| Service cost                   |       | $                     | 944        |                  | $          | 882                                             |       | $                                               | 581        |   | $ | 193 |   |
| Interest cost                  |       | 2,047                 |       | 1,735                 |       | 1,183                                           |       | 394                                             |       |
| Expected return on plan assets |       | (1,423                | )          | (1,249                | )          | (956                                            | )          | (318                                            | )          |
| Recognized actuarial loss      |       | 317                   |       | 305                   |       | 70                                              |       | 30                                              |       |
| Net periodic benefit cost      |       | $                     | 1,885      |                  | $          | 1,673                                           |       | $                                               | 878        |   | $ | 299 |   |

 

F-20

----

 

Changes in theprojected benefit obligation for the plans are as follows:

 
| ** **                              | ** ** | **Fiscal Year**** 2004** | ** ** | **Fiscal Year**** 2003** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **(in thousands)**            | ** ** |
| Benefit obligation at beginning of year |       | $                             | 35,958     |                          | $          | 29,831 |   |
| Service cost for benefits earned        |       | 944                           |       | 882                           |       |
| Participant contributions               |       | 238                           |       | 242                           |       |
| Interest cost                           |       | 2,047                         |       | 1,735                         |       |
| Actuarial loss                          |       | 2,564                         |       | 1,298                         |       |
| Foreign currency exchange rate changes  |       | 2,709                         |       | 3,123                         |       |
| Benefits paid                           |       | (1,080                        | )          | (1,153                        | )          |
| Benefit obligation at end of year       |       | $                             | 43,380     |                          | $          | 35,958 |   |

 

Changes in the fair valueof assets for the plans are as follows:

 
| ** **                                     | ** ** | **Fiscal Year**** 2004** | ** ** | **Fiscal Year**** 2003** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **(in thousands)**            | ** ** |
| Fair value of plan assets at beginning of year |       | $                             | 20,205     |                          | $          | 16,760 |   |
| Actual return on plan assets                   |       | 1,918                         |       | 2,098                         |       |
| Employer contributions                         |       | 712                           |       | 540                           |       |
| Participant contributions                      |       | 238                           |       | 242                           |       |
| Foreign currency exchange rate changes         |       | 1,542                         |       | 1,633                         |       |
| Benefits paid                                  |       | (950                          | )          | (1,068                        | )          |
| Fair value of plan assets at end of year       |       | $                             | 23,665     |                          | $          | 20,205 |   |

 

Plan assets are held intrust and consist primarily of equity securities.

The accrued pension costsrecognized in the accompanying Consolidated Balance Sheets were computed asfollows:

 
| ** **                           | ** ** | **Fiscal Year**** 2004** | ** ** | **Fiscal Year**** 2003** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **(in thousands)**            | ** ** |
| Funded status at end of year         |       | $                             | (19,715    | )                             | $          | (15,753 | ) |
| Unrecognized net actuarial loss      |       | 8,496                         |       | 6,244                         |       |
| Net amount recognized                |       | $                             | (11,219    | )                             | $          | (9,509 | ) |
|                                 |       |                          |       |                          |       |
| Accrued benefit cost                 |       | $                             | (16,584    | )                             | $          | (13,296 | ) |
| Accumulated other comprehensive loss |       | 5,365                         |       | 3,787                         |       |
| Net amount recognized                |       | $                             | (11,219    | )                             | $          | (9,509 | ) |

 

Under U.S. accounting rules,the Company balance sheet reflects an unfunded pension obligation of $16.6million and $13.3 million as of September 30, 2004 and 2003, respectively.  U.S. accounting rules require that we excludeGerman insurance contracts from the fair value of plan assets, which werevalued at $5.1 million and $4.5 million as of September 30, 2004 and 2003,respectively.  These assets are includedon our Consolidated Balance Sheet as “Other Assets.”  These assets exist only to provide acomponent of the total pension benefits payable to German employees, consistentwith local law.  Our unfunded pensionobligation would be $11.5 million and $8.8 million at September 30, 2004 and2003, respectively, when reviewing the plans and including these additionalassets.

The recent underfunding of pension plans is primarily due to decreases in actual investmentreturns, a decrease in the assumed discount rates, and an increase in lifeexpectancy.  In addition, the weakeningof the U.S. dollar against foreign currencies is a significant factor in theincreased liability at September 30, 2004. The Company evaluates its actuarial assumptions on an annual basis.  These assumptions are revised based on anevaluation of long-term trends and market condition in each country that mayhave an impact on the cost of providing retirement benefits.

Assumptions forthe defined benefit plans, which are reflected on a weighted average basis ofindividual country plans, were as follows:

 
| ** **                             | ** ** | **Fiscal Year  2004** | ** ** | **Fiscal Year  2003** | ** ** | **Fiscal Year  2002** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| Discount rate                          |       | 5.43                  | %          | 5.43                  | %          | 6.25                  | %          |
| Expected rate of return on plan assets |       | 6.66                  | %          | 6.63                  | %          | 7.5                   | %          |
| Rate of compensation increase          |       | 3.08                  | %          | 3.07                  | %          | 4.0                   | %          |

** **

**F-21**

----

** **

**Plan Assets**

 

Plan assets are held intrust.  The Company’s pension planweighted-average asset allocations at September 30, 2004 by asset categorywere:

 
| **Asset category** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|
| Equity securities  |       | 68.5     | %          |
| Debt securities    |       | 7.7      | %          |
| Real estate        |       | 2.3      | %          |
| Other              |       | 21.6     | %          |

 

The investment objectives ofthe portfolio of assets are designed to generate returns that will enable theFund to meet its future obligations.  Theprecise amount for which these obligations will be settled depends on futureevents, including the life expectancy of the Plan’s members and salaryinflation.  The obligations are estimatedusing actuarial assumptions, based on the current economic environment.  The strategy balances the requirement togenerate return using higher-returning assets such as equity securities, withthe need to control risk in the Fund with less volatile assets, such as fixedincome securities.

The United Kingdom planassets are managed by a professional investment firm selected by a board thatincludes members elected by employees and retirees.  Consideration is given among others tobalancing security concentration, issuer concentration, investment style, andreliance on particular active investment strategies.  German law requires that pension assets beinvested in fixed income securities.

The plans’ expected returnon assets are based on management’s expectations of long-term average rates ofreturn to be achieved by the plans’ investments.  These expectations are based upon the plan’shistorical returns and the long-term corporate bond yields and an impliedequity risk premium for the asset classes in which the plan is invested.

**It is the Company’s generalpractice to fund amounts for pensions sufficient to meet the minimumrequirements set forth in applicable employee benefits laws and local taxlaws.  The Company’s Projected BenefitObligation (PBO) is calculated similarly to ABO except for the fact that PBOincludes an estimate for future salary increases.  SFAS No. 132 (revised 2003), “Employers’Disclosures about Pensions and Other Postretirement Benefits — an amendment ofFASB Statements No. 87, 88 and 106,” requires that companies disclose theaggregate PBO and plan assets of all plans in which the PBO exceeds planassets.  Similar disclosure is requiredfor all plans in which the ABO exceeds plan assets.  The aggregate PBO and plan assets are alsodisclosed for plans in which the plan assets exceed the PBO.**

** **

**Other Disclosures**

 
| ** **                                                            | ** ** | **Total**** 9/30/04** | ** ** | **Total**** 9/30/03** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                            | ** ** | **(in US$)**               | ** ** |
| Accumulated benefit obligation September 30,  2004                    |       | $                          | 39,548,000 |                       | $          | 32,623,000 |   |
| Increase in minimum liability included in other  comprehensive income |       | 1,616,000                  |       | 265,000                    |       |
| Expected 2005 Company contributions                                   |       | 676,000                    |       | —                     |       |
|                                                                       |            |                            |            |                            |            |  |  |

 

F-22

----

 
| **Additional  year-end information for plan with (a)  accumulated benefit obligation in excess of plan assets; (b)  projected benefit obligation in excess of plan assets:** | ** ** | **Total**** 9/30/04** | ** ** | **Total**** 9/30/04** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Projected benefit obligation                                                                                                                                                 |       | $                          | 43,380,000 |                       | $          | 35,958,000 |   |
| Accumulated benefit obligation                                                                                                                                               |       | 39,548,000                 |       | 32,623,000                 |       |
| Fair value of plan assets                                                                                                                                                    |       | 23,665,000                 |       | 20,205,000                 |       |
|                                                                                                                                                                         |       |                       |       |                       |       |
|                                                                                                                                                                              |            |                            |            |                            |            |  |  |

 
| **Estimated future benefit payments** | ** ** | **Total**** 9/30/04** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------|------------|------------|------------|
| 2005                                  |       | $                          | 736,000    |       |       |   |
| 2006                                  |       | 792,000                    |       |       |       |
| 2007                                  |       | 776,000                    |       |       |       |
| 2008                                  |       | 1,001,000                  |       |       |       |
| 2009                                  |       | 1,364,000                  |       |       |       |
| 2010 to 2014                          |       | 9,060,000                  |       |       |       |
|                                       |            |                            |            |            |            |  |

 

 

**NOTE13.CAPITAL STOCK:**

**BankruptcyReorganization**

**Class A and Class B Common Shares**

We are authorizedto issue up to 40,000,000 shares of Class A Common Stock and 787,111 shares ofClass B Common Stock.  Each share ofClass A and Class B Common Stock is identical, including voting rights,dividends, when and if declared, and liquidation rights, subject to anypreference of preferred stock as may be issued in the future.

**CommonStock Repurchase Program**

In August 2004,the Board of Directors authorized repurchases of up to $15 million of its ClassA Common Stock.  Shares may be purchasedin the open market or in private transactions, subject to the Company’sassessment of market conditions and buying opportunities from time totime.  The program is subject tocompliance with our credit agreements. During fiscal year 2004, we repurchased 354,450 shares of our Class ACommon Stock for $6.6 million.

**PreferredStock**

OurBoard of Directors has the ability, at its discretion, to create one or moreseries of Preferred Stock and to determine each such series’ preferences,limitations, and relative voting and other rights.  We are authorized to issue up to 1,000,000shares of Preferred Stock, as established during our financial restructuringand reorganization (see Note 1).  As ofSeptember 30, 2004, we have not issued any Preferred Stock.

**Warrants**

As of September 30, 2004, we had 783,077 warrants outstanding topurchase common stock at an exercise price of $61.54 per share.  These warrants were authorized and issued inconnection with our financial restructuring and reorganization (see Note 1).

 

**NOTE 14.**

**STOCK PLANS:**

Underthe Plan of Reorganization all prior stock option plans were canceled.

Underthe Reorganization Plan effective December 31, 2001, the Board of Directorsreserved 403,403 Class A Common Stock for issuance to employees of Anacomp orits subsidiaries as incentive compensation. We currently maintain two such compensation plans, consisting of the2001 Stock Option Plan, which was approved in the bankruptcy proceedings by theparties that became our shareholders, and the 2004 Outside DirectorsCompensation Plan  (the “2004 Plan”),which has been approved by our shareholders.

 

F-23

----

 

Underthe terms of a prior plan, the 2003 Outside Directors Compensation Plan (the “2003Plan”), we had reserved 50,000 shares of Class A Common Stock forissuance.  The 2003 Plan provided for aone time grant of 1,800 shares of Class A Common Stock to outside directors,the consideration of which shall be services actually rendered to Anacomp forits benefit.  Under the terms of thisPlan, outside directors can defer receipt of these shares (as well as cashdirectors fees).  All deferred fees arepaid immediately prior to the effective date of a change in control ofAnacomp.  This plan was terminated inFebruary 2004 upon shareholder approval of the 2004 Plan.

On February 26,2004, the Company’s shareholders approved the 2004 Outside DirectorCompensation Plan, which provides for the future issuance of sock options,restricted stock and deferred stock units. A maximum of 100,000 of the authorized but unissued or reacquired sharesof our Class A Common Stock may be issued under this plan.

Transactionsunder the Company’s stock option plans are summarized as follows:

 
| ** **                   | ** ** | **2004**   | ** ** | **2003**                         | ** ** | **2002**   | ** ** |
|------------------------------|------------|------------|------------|----------------------------------|------------|------------|------------|
| ** **                   | ** ** | **Shares** | ** ** | **Weighted-Avg. Exercise Price** | ** ** | **Shares** | ** ** | **Weighted-Avg. Exercise Price** | ** ** | **Shares** | ** ** | **Weighted-Avg. Exercise Price** | ** ** |
| Outstanding on October 1,    |       | 210,000    |       | $                                | 26.00      |       | 210,000    |   | $ | 26.00 |   | — |   | $ | — |   |
| Granted                      |       | 17,500     |       | 22.00                            |       | —     |       | — |   | 210,000 |   | 26.00 |   |
| Canceled                     |       | —     |       | —                           |       | —     |       | — |   | — |   | — |   |
| Exercised                    |       | —     |       | —                           |       | —     |       | — |   | — |   | — |   |
| Outstanding on September 30, |       | 227,500    |       | $                                | 25.69      |       | 210,000    |   | $ | 26.00 |   | 210,000 |   | $ | 26.00 |   |

The followingtable summarizes all options outstanding and exercisable by price range as ofSeptember 30, 2004:

 
| **Exercise Prices** | ** ** | **Options Outstanding** | ** ** | **Weighted- Average Remaining Contractual Life** | ** ** | **Weighted- Average Exercise Price** | ** ** | **Options Exercisable** | ** ** | **Weighted- Average Exercise Price** | ** ** |
|---------------------|------------|-------------------------|------------|--------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|
| $                   | 22.00      |                    | 17,500     |                                             | 9.41       |                                 | $          | 22.00                   |       | —                               |       | $ | — |   |
| $                   | 26.00      |                    | 210,000    |                                             | 7.84       |                                 | 26.00      |                    | 117,500    |                                 | 26.00      |   |
|                |       | 227,500                 |       | 7.96                                             |       | $                                    | 25.69      |                    | 117,500    |                                 | $          | 26.00 |   |

We account for our compensation plans that provide for the issuance ofstock to officers and other employees, directors and consultants in accordancewith APB Opinion No. 25, under which compensation expense is recognized only tothe extent the exercise price of the option is less than the fair market valueof a share of stock at the date of grant. Accordingly, we have adopted the disclosure only requirements of SFASNo. 123; “Accounting for Stock Based Compensation” (see Note 1).  The fair value of each option grant isestimated on the date of grant using the Black Scholes option pricing model.The weighted average fair value of options granted during fiscal years 2002 and2004 (no options were granted in fiscal year 2003), as well as the weightedaverage assumptions used to determine the fair values, are summarized below:

 
| ** **                    | ** ** | **2004** | ** ** | **2002** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Fair Value of Options Granted |       | $        | 6.91       |     | $          | 9.05 |   |
| Risk-Free Interest Rate       |       | 3.14     | %          | 3.32     | %          |
| Expected Dividend Yield       |       | 0        | %          | 0        | %          |
| Expected Volatility           |       | .29      | %          | .33      | %          |
| Expected Life                 |       | 5  Years |       | 5  Years |       |
|                               |            |          |            |          |            |  |  |

 

F-24

----

 

 

 

 

**NOTE 15.**

**INCOMETAXES**:

The components of income(loss) from continuing operations before gain on extinguishment of debt,reorganization items and income taxes were:

 
| ** **    | ** ** | **Reorganized Company**                           | ** ** | **Predecessor  Company**                          | ** ** |
|---------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **Twelve Months  Ended  September 30, 2004** | ** ** | **Twelve Months  Ended  September 30, 2003** | ** ** | **Nine Months  Ended  September 30, 2002** | ** ** | **Three Months  Ended  December 31, 2001** | ** ** |
| ** **    | ** ** | **(dollars in thousands)**                        | ** ** |
| United States |       | $                                                 | (7,904     | )                                                 | $          | (1,396 | ) | $ | (1,947 | ) | $ | 11,363 |   |
| Foreign       |       | (286                                              | )          | 2,467                                             |       | 2,746 |   | 1,118 |   |
|          |       | $                                                 | (8,190)    |                                              | $          | 1,071 |   | $ | 799 |   | $ | 12,481 |   |

 

The components of the consolidated tax provision aresummarized below:

 
| ** ** | ** ** | **Reorganized Company**                           | ** ** | **Predecessor  Company**                          | ** ** |
|------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **Twelve Months  Ended  September 30, 2004** | ** ** | **Twelve Months  Ended  September 30, 2003** | ** ** | **Nine Months  Ended  September 30, 2002** | ** ** | **Three Months  Ended  December 31, 2001** | ** ** |
| ** ** | ** ** | **(dollars in thousands)**                        | ** ** |
| Current:   |       |                                              |       |                                              |       |   |   |   |   |
| Federal    |       | $                                                 | —     |                                              | $          | — |   | $ | 636 |   | $ | — |   |
| Foreign    |       | 1,581                                             |       | 1,556                                             |       | 1,543 |   | 440 |   |
| State      |       | 170                                               |       | 60                                                |       | 150 |   | 10 |   |
|       |       | 1,751                                             |       | 1,616                                             |       | 2,329 |   | 450 |   |
| Deferred:  |       |                                              |       |                                              |       |   |   |   |   |
| Foreign    |       | —                                            |       | —                                            |       | — |   | — |   |
| Federal    |       | —                                            |       | 333                                               |       | 1,994 |   | — |   |
|       |       | $                                                 | 1,751      |                                              | $          | 1,949 |   | $ | 4,323 |   | $ | 450 |   |

 

The income tax provision is included in theConsolidated Statements of Operations as follows:

 
| ** **                                                | ** ** | **Reorganized Company**                                | ** ** | **Predecessor  Company**                               | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                | ** ** | **Twelve Months  Ended  September 30,**

**2004** | ** ** | **Twelve Months  Ended  September 30,**

**2003** | ** ** | **Nine Months  Ended  September 30,**

**2002** | ** ** | **Three Months  Ended  December 31,**

**2001** | ** ** |
| ** **                                                | ** ** | **(dollars in thousands)**                             | ** ** |
| Provision for income taxes before discontinued operations |       | $                                                      | 1,751      |                                                   | $          | 1,760 |   | $ | 4,024 |   | $ | 450 |   |
| Discontinued operations                                   |       | —                                                 |       | 189                                                    |       | 299 |   | — |   |
|                                                      |       | $                                                      | 1,751      |                                                   | $          | 1,949 |   | $ | 4,323 |   | $ | 450 |   |

 

F-25

----

 

The following is areconciliation of income taxes from continuing operations calculated at theUnited States federal statutory rate to the provision for income taxes:

 
| ** **                                                | ** ** | **Reorganized Company**                           | ** ** | **Predecessor  Company**                          | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **Twelve Months  Ended  September 30, 2004** | ** ** | **Twelve Months  Ended  September 30, 2003** | ** ** | **Nine Months  Ended  September 30, 2002** | ** ** | **Three Months  Ended  December 31, 2001** | ** ** |
| ** **                                                | ** ** | **(dollars in thousands)**                        | ** ** |
| (Benefit) expense for income taxes at U.S. statutory rate |       | $                                                 | (2,867     | )                                                 | $          | 375 |   | $ | 280 |   | $ | 4,368 |   |
| Reorganization items                                      |       | —                                            |       | —                                            |       | — |   | (4,665 | ) |
| Life insurance                                            |       | —                                            |       | —                                            |       | 2,590 |   | — |   |
| U.S. tax on dividends from foreign subsidiaries           |       | 310                                               |       | —                                            |       | 3,157 |   | — |   |
| Foreign tax credits generated                             |       | —                                            |       | —                                            |       | (4,940 | ) | — |   |
| State and foreign income taxes                            |       | 1,391                                             |       | 1,307                                             |       | 1,113 |   | 450 |   |
| Increase in deferred tax asset valuation allowance        |       | 2,875                                             |       | —                                            |       | 1,771 |   | 297 |   |
| Other                                                     |       | 42                                                |       | 78                                                |       | 53 |   | — |   |
|                                                      |       | $                                                 | 1,751      |                                              | $          | 1,760 |   | $ | 4,024 |   | $ | 450 |   |

 

Thecomponents of deferred tax assets and liabilities are as follows:

 

| ** **                                                          | ** ** | **Reorganized Company**     | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
| ** **                                                          | ** ** | **(dollars in thousands)**  | ** ** |
| DEFERRED TAX ASSETS:                                                |       |                        |       |   |   |
| Tax effects of future temporary differences related to:             |       |                        |       |   |   |
| Accrued expenses and reserves                                       |       | $                           | 12,079     |   | $ | 10,915 |   |
| Depreciation and amortization                                       |       | 30,050                      |       | 28,691 |   |
| Other                                                               |       | 602                         |       | 489 |   |
| Total Deferred Tax Assets                                           |       | 42,731                      |       | 40,095 |   |
|                                                                |       |                        |       |   |   |
| DEFERRED TAX LIABILITIES:                                           |       |                        |       |   |   |
| Tax effects of future temporary differences related to:             |       |                        |       |   |   |
| Accrued expenses and reserves                                       |       | (5                          | )          | (12 | ) |
| Depreciation and amortization                                       |       | (3,560                      | )          | (2,581 | ) |
| Other                                                               |       | (734                        | )          | (1,212 | ) |
| Total Deferred Tax Liabilities                                      |       | (4,299                      | )          | (3,805 | ) |
| Net tax effects of future differences                               |       | $                           | 38,432     |   | $ | 36,290 |   |
|                                                                |       |                        |       |   |   |
| Tax effects of carryforward benefits:                               |       |                        |       |   |   |
| Federal net operating loss carryforwards                            |       | 4,799                       |       | 3,551 |   |
| Foreign tax credits                                                 |       | —                      |       | — |   |
| Tax effects of carryforwards                                        |       | 4,799                       |       | 3,551 |   |
| Tax effects of future taxable differences and carryforward benefits |       | 43,231                      |       | 39,841 |   |
| Less valuation allowance                                            |       | (42,716                     | )     | (39,841 | ) |
| Net deferred tax asset                                              |       | $                           | 515        |   | $ | — |   |

 

The valuation allowance is based on ourestimates of taxable income by jurisdiction in which we operate and the periodover which our deferred tax assets will be recoverable.  A valuationallowance has been established for all jurisdictions in which we believe thereare uncertainties related to our ability to utilize our net deferred tax assetsbefore they expire.  The Company has U.S. Federal net operating losscarryforwards of approximately $11.9 million, which will begin to expire in2023.

 

F-26

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The Company also has $7.9 million of statenet operating loss carryforwards which will begin to expire in 2008.

The tax benefits ofpre-reorganization deferred tax assets will be reported first as a reduction ofthe Reorganization Asset and then as a credit to equity.  These taxbenefits will not reduce income tax expense for financial reporting purposes,although such assets when recognized or amortized as an expense for tax returnpurposes may reduce U.S. federal and certain state taxable income if any, andtherefore reduce the income tax payable.  As of September 30, 2004, thebalance of the pre-reorganization deferred tax asset was $38.5 million subjectto a full valuation allowance.  The reduction of these tax benefits willbe recorded as a reduction to the Reorganization Asset and should not generateincome statement benefit.  During the period ended September 30, 2004,none of the pre-reorganization net deferred tax assets were utilized asdeductions for tax return purposes and therefore, there were no relatedreductions of the Reorganization Asset.

On October 19, 2001, theCompany filed a voluntary petition under Chapter 11 of the United StatesBankruptcy Code.  Under the terms of the plan of reorganization, theCompany has cancellation of debt (“COD”).  As a result, the Company isrequired to reduce, for federal income tax purposes, certain tax attributes,including net operating loss carryforwards, tax credit carryforwards, andproperty basis, by the amount of the COD.  In general, the amount ofattribute reduction is equal to the excess of the debt discharged in bankruptcyover the fair market value of the stock issued in the reorganization.

Additionally, the Companyexperienced an ownership change under Internal Revenue Code section 382, whichwill limit the Company’s ability to utilize certain tax attributes and possiblycertain built-in losses recognized within a five-year period.

Undistributed earnings ofthe Company’s foreign subsidiaries amounted to approximately $9.5 million atSeptember 30, 2004.  Those earnings are considered to be indefinitely reinvestedand, accordingly, no provision for U.S. federal and state income taxes has beenprovided thereon.  Upon distribution of those earnings in the form ofdividends or otherwise, we would be subject to both U.S. income taxes (subjectto an adjustment for foreign tax credits) and withholding taxes payable to thevarious foreign countries.  Determination of the amount of unrecognizeddeferred U.S. income tax liability is not practicable because of the amount ofthe complexities associated with its hypothetical calculation; however,unrecognized foreign tax credit carryforwards may be available to reduce someportion of the U.S. liability.

**NOTE 16.**

**COMMITMENTS AND CONTINGENCIES:**

**Lease Commitments**

Anacomp has commitments under long-term operatingleases, principally for building space and data service center equipmentexpiring at various dates through December 2015.  The following summarizes the future minimumlease payments under all noncancelable operating lease obligations that extendbeyond one year:

 
| ** **               | ** ** | **Lease  Payments**        | ** ** | **Sublease  Income** | ** ** |
|--------------------------|------------|----------------------------|------------|----------------------|------------|
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| Year Ended September 30, |       |                       |       |                 |       |
| 2005                     |       | $8,442                     |       | $839                 |       |
| 2006                     |       | 7,437                      |       | 732                  |       |
| 2007                     |       | 6,508                      |       | 709                  |       |
| 2008                     |       | 5,668                      |       | 705                  |       |
| 2009                     |       | 4,989                      |       | 682                  |       |
| Thereafter               |       | 7,998                      |       | 476                  |       |
|                     |       | $41,042                    |       | $4,143               |       |

 

The Company’s rent andlease expense was $11.7 million, $12.5 million, $9.8 million, and $3.3 millionfor the fiscal year ended September 30, 2004, the fiscal year ended September30, 2003, the nine months ended September 30, 2002, and the three months endedDecember 31, 2001, respectively.

 

F-27

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**Environmental Liability**

Xidex Corporation, a predecessor company of Anacomp, was designated bythe United States Environmental Protection Agency (“EPA”) as a potentially responsibleparty for investigatory and cleanup costs incurred by state and federalauthorities involving locations included on a list of EPA’s priority sites forinvestigation and remedial action under the federal Comprehensive EnvironmentalResponse, Compensation, and Liability Act. At September 30, 2004, we have an estimated EPA liability for cleanupcosts for the aforementioned locations and other sites totaling $0.4million.   During fiscal year 2004, werecorded a $0.6 million reduction to our EPA liability previously estimated andaccrued upon release from certain further clean-up activity.  In the opinion of management, no materiallosses are expected in excess of the liability recorded.  We have classified the liability as long termin the balance sheet presentation.

**Legal Matters**

Anacomp and itssubsidiaries are potential or named defendants in several lawsuits and claimsarising in the ordinary course of business. While the outcome of claims,lawsuits or other proceedings brought against the Company cannot be predictedwith certainty, management expects that any liability, to the extent notprovided for through insurance or otherwise, will not have a material adverseeffect on the Company’s financial condition or results of operations.

**NOTE 17.INTERNATIONAL OPERATIONS:**

 

Anacomp’sinternational operations are conducted principally through subsidiaries, asubstantial portion of whose operations are located in Western Europe.  Total international sales include sales bysubsidiaries and through distributors. Information as to U.S. and international operations for the fiscal yearended September 30, 2004, the fiscal year ended September 30, 2003, the ninemonths ended September 30, 2002, and the three months ended December 31, 2001is as follows (dollars in thousands):

** **

**Fiscal Year Ended September 30,2004 (Reorganized company)**

** **
| ** **                                | ** ** | **U.S.** | ** ** | **International** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|----------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| Customer sales                            |       | $        | 119,975    |              | $          | 64,454          |       | $                | —     |   | 184,429 |   |
| Inter-geographic                          |       | 731      |       | —            |       | (731            | )          | —           |       |
| Total sales                               |       | $        | 120,706    |              | $          | 64,454          |       | $                | (731       | ) | $ | 184,429 |   |
| Operating loss from continuing operations |       | $        | (6,930     | )                 | $          | (203            | )          | —           |       | $ | (7,133 | ) |
| Long-lived assets                         |       | $        | 87,858     |              | $          | 14,923          |       | $                | —     |   | $ | 102,781 |   |

** **

**Fiscal Year Ended September 30,2003 (Reorganized company)**

** **
| ** **                                         | ** ** | **U.S.** | ** ** | **International** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|----------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| Customer sales                                     |       | $        | 140,502    |              | $          | 63,521          |       | $                | —     |   | $ | 204,023 |   |
| Inter-geographic                                   |       | 1,075    |       | —            |       | (1,075          | )          | —           |       |
| Total sales                                        |       | $        | 141,577    |              | $          | 63,521          |       | $                | (1,075     | ) | $ | 204,023 |   |
| Operating income (loss) from continuing operations |       | $        | (715       | )                 | $          | 2,799           |       | $                | —     |   | $ | 2,084 |   |
| Long-lived assets                                  |       | $        | 96,110     |              | $          | 11,360          |       | $                | —     |   | $ | 107,470 |   |

** **

**Nine Months Ended September 30,2002 (Reorganized company)**

** **
| ** **                                  | ** ** | **U.S.** | ** ** | **International** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|----------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| Customer sales                              |       | $        | 128,008    |              | $          | 45,799          |       | $                | —     |   | $ | 173,807 |   |
| Inter-geographic                            |       | 1,215    |       | —            |       | (1,215          | )          | —           |       |
| Total sales                                 |       | $        | 129,223    |              | $          | 45,799          |       | $                | (1,215     | ) | $ | 173,807 |   |
| Operating income from continuing operations |       | $        | 839        |              | $          | 2,380           |       | $                | —     |   | $ | 3,219 |   |
| Long-lived assets                           |       | $        | 104,899    |              | $          | 8,597           |       | $                | —     |   | $ | 113,496 |   |

 

F-28

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**Three Months Ended December 31,2001 (Predecessor company)**

** **
| ** **                                  | ** ** | **U.S.** | ** ** | **International** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|----------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| Customer sales                              |       | $        | 45,807     |              | $          | 22,217          |       | $                | —     |   | $ | 68,024 |   |
| Inter-geographic                            |       | 763      |       | —            |       | (763            | )          | —           |       |
| Total sales                                 |       | $        | 46,570     |              | $          | 22,217          |       | $                | (763       | ) | $ | 68,024 |   |
| Operating income from continuing operations |       | $        | 990        |              | $          | 1,343           |       | $                | —     |   | $ | 2,333 |   |
| Long-lived assets                           |       | $        | 113,787    |              | $          | 10,390          |       | $                | —     |   | $ | 124,177 |   |

** **

**NOTE 18.**

**QUARTERLYFINANCIAL DATA (UNAUDITED):**

** **

**Summary Results of Operations:**

** **
| ** **                                     | ** ** | **First**                                            | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                     | ** ** | **Quarter**                                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
| **Fiscal Year 2004 (Reorganized company)**     | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Revenues                                       |       | $                                                    | 47,423     |        | $          | 48,866      |       | $           | 45,190     |   | $ | 42,950 |   |
| Gross margin                                   |       | 15,076                                               |       | 16,188      |       | 15,021      |       | 13,806      |       |
| Income (loss) from continuing operations       |       | 310                                                  |       | (1,789      | )          | (3,996      | )          | (2,715      | )          |
| Net income (loss)                              |       | $                                                    | (124       | )           | $          | (2,167      | )          | $           | (4,545     | ) | $ | (3,105 | ) |
| Basic and diluted per share data:              |       |                                                 |       |        |       |        |       |        |       |
| Net income (loss)                              |       | $                                                    | (0.03      | )           | $          | (0.54       | )          | $           | (1.12      | ) | $ | (0.79 | ) |
|                                           |       |                                                 |       |        |       |        |       |        |       |
| **Fiscal Year 2003 (Reorganized company)**     | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Revenues                                       |       | $                                                    | 52,971     |        | $          | 52,781      |       | $           | 49,806     |   | $ | 48,465 |   |
| Gross margin                                   |       | 17,386                                               |       | 17,178      |       | 15,370      |       | 14,947      |       |
| Income (loss) from continuing operations       |       | (272                                                 | )          | 457         |       | (630        | )          | (244        | )          |
| Gain (loss) on sale of discontinued operations |       | 8,384                                                |       | (200        | )          | —      |       | (189        | )          |
| Net income (loss)                              |       | $                                                    | 8,112      |        | $          | 257         |       | $           | (630       | ) | $ | (433 | ) |
| Basic and diluted per share data:              |       |                                                 |       |        |       |        |       |        |       |
| Net income (loss)                              |       | $                                                    | 2.01       |        | $          | 0.06        |       | $           | (0.15      | ) | $ | (0.11 | ) |

** **

**Summary of Significant Charges:**

 
| **Fiscal Year 2004** |       |       |       |       |       |       |       |       |       |
|----------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Restructuring charge |       | $          | —     |       | $          | 2,307      |       | $          | 3,970      |   | $ | 2,742 |   |
| ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Fiscal Year 2003** |       |       |       |       |       |       |       |       |       |
| Restructuring charge |       | $          | —     |       | $          | —     |       | $          | 1,152      |   | $ | 1,545 |   |

 

F-29

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**NOTE 19.**

**VALUATIONAND QUALIFYING ACCOUNTS AND RESERVES:**

The following is a summary of activity in the Company’s valuation andqualifying accounts and reserves for the periods ended September 30, 2004,2003, 2002, and December 31, 2001:

 
| ** **                                                      | ** ** | **Balance at  beginning of  period** | ** ** | **Charges  (credits) to  costs and  expenses** | ** ** | **Deductions****(1)** | ** ** | **Balance at  end of period** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | **(dollars in thousands)**           | ** ** |
| **Fiscal Year ended September 30, 2004  (Reorganized Company)** |       |                                 |       |                                           |       |                  |       |                          |       |
| Allowance for doubtful accounts                                 |       | $                                    | 1,532      |                                           | (18        | )                     | (480       | )                             | $          | 1,034 |   |
|                                                            |       |                                 |       |                                           |       |                  |       |                          |       |
| **Fiscal Year ended September 30, 2003  (Reorganized Company)** |       |                                 |       |                                           |       |                  |       |                          |       |
| Allowance for doubtful accounts                                 |       | $                                    | 2,693      |                                           | (159       | )                     | (1,002     | )                             | $          | 1,532 |   |
|                                                            |       |                                 |       |                                           |       |                  |       |                          |       |
| **Nine months ended September 30, 2002  (Reorganized Company)** |       |                                 |       |                                           |       |                  |       |                          |       |
| Allowance for doubtful accounts                                 |       | $                                    | 3,586      |                                           | (16        | )                     | (877       | )                             | $          | 2,693 |   |
|                                                            |       |                                 |       |                                           |       |                  |       |                          |       |
| **Three months ended December 31, 2001  (Predecessor Company)** |       |                                 |       |                                           |       |                  |       |                          |       |
| Allowance for doubtful accounts                                 |       | $                                    | 4,538      |                                           | 123        |                  | (33        | )                             | $          | 4,628 |   |

----

**(1)**  Amount consists primarily of receivablebalances reserved for that have been determined to be uncollectible andwritten-off.

 

**NOTE 20.**

**SUBSEQUENT EVENTS (Unaudited)**

 

The Company owed $3.1 million on its senior secured revolving creditfacility at December 14, 2004.  Theproceeds of this borrowing were utilized for general corporate purposes.  See Note 4 for further discussion regardingthe nature and terms of the Company’s bank revolving credit facility.

 

Also subsequent to September 30, 2004, the Company was awarded amulti-million dollar purchase order from EDS to support the U.S. Department ofHomeland Security, Bureau of Citizenship and Immigration Services (USCIS).  We will provide source document scanning andindexing, imaging management and services in support of digitization.

 

The American Jobs Creation Act of 2004, which was signed into law onOctober 22, 2004 provides for a one-year tax benefit for U.S. corporations whorepatriate earnings from their controlled foreign subsidiaries.  Thisbenefit is contingent upon meeting certain restrictions, including surpassing afive year average of dividend payment history.  Based on the Company’scurrent circumstances, including the existence of previously taxed income,ability of the foreign subsidiary to declare dividends, and cash availability,the Company will likely not be able to benefit from the reduced tax rate ondividends.

 

F-30

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