UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 333-50995
December 31, 2001 Commission File Number
PHOENIX COLOR CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-2269911
(State of (I.R.S. Employer Identification No.)
incorporation)
540 Western Maryland Parkway
Hagerstown, Maryland 21740
(Address of principal executive offices) (Zip Code)
(301) 733-0018
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Not Applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of December 31, 2001, the Registrant had no capital stock or other
securities registered under the Securities Exchange Act of 1934, as amended.
As of March 15, 2002, there were 11,100 shares of the Registrant's Class A
Common Stock issued and outstanding and 7,794 of the Registrant's Class B Common
Stock issued and outstanding.
Documents Incorporated by Reference
None
Table of Contents
Item No. Name of Item Page No.
Part I
Item 1. Business.................................................. 1
Item 2. Properties................................................ 8
Item 3. Legal Proceedings......................................... 8
Item 4. Submission of Matters to a Vote of Security Holders....... 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 9
Item 6. Selected Consolidated Financial Data...................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data............... 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 17
Part III
Item 10. Directors and Executive Officers of the Registrant........ 17
Item 11. Executive Compensation.................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 21
Item 13. Certain Relationships and Related Transactions............ 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................ 22
PART I
ITEM 1. BUSINESS
Overview
Phoenix Color Corp. (the "Company" or "Phoenix Color") manufactures books
and book components, which include book jackets, paperback covers, pre-printed
case covers for hardcover books, illustrations, endpapers and inserts. The
Company generates revenues primarily through the sale of book components to book
publishers. The manufacture of book components requires high-quality, intricate
work and specialized equipment, materials and finishes. Book publishers
generally design book components to enhance the sales appeal of the books. As a
result, many leading publishers rely on specialty printers such as Phoenix Color
to supply high quality book components. The Company also produces book
components for its book manufacturing operations, which print thin books, hard
and soft cover books and print-on-demand books.
In developing and growing our business, we have emphasized:
o Technologically advanced prepress and manufacturing equipment and
efficient production techniques;
o Computer managed information systems that link all of our facilities
and customers and furnish real time operating data;
o Fast turnaround times made possible by our state-of-the-art
manufacturing equipment, the strategic location of our four plants
near major delivery points and the use of our own delivery trucks;
o Long-term relationships with suppliers of important raw materials such
as paper, laminating film and ink; and
o Highly motivated and trained sales personnel.
History
Phoenix Color was founded in 1979 by a group of fifteen printing industry
veterans, including Louis LaSorsa, its Chairman, President and Chief Executive
Officer. Initially, the Company focused on supplying book components for the
higher education and professional reference markets and in subsequent years
expanded into other segments of the publishing industry. In 1998, the Company
began manufacturing thin books and in 1999 hard and soft cover books. Early
operations were conducted in a single production facility in Long Island City,
New York. In
1
1993, the Company moved the major portion of its business to Hagerstown,
Maryland. In December 2000, the Company closed its book component manufacturing
facility in Taunton, Massachusetts. We currently operate a total of four plants
in the States of Maryland and New Jersey.
The Company was incorporated in the State of New York in 1979 and
reincorporated by merger in the State of Delaware in 1996. The Company's
headquarters are at 540 Western Maryland Parkway, Hagerstown, Maryland 21740 and
its telephone number is (301) 733-0018.
Acquisitions
On January 4, 1999, the Company acquired all of the capital stock of
Mid-City Lithographers, Inc., a specialty book component printer that was
located in Lake Forest, Illinois, for a total purchase price of $12.5 million.
During the fourth quarter of 1999, the Company decided to relocate the Mid-City
facility to Hagerstown, Maryland and completed the relocation in December 1999.
Mid-City sold book components primarily to the elementary and high school
textbook publishing market, a market in which the Company had only a minor
presence. As a result of the acquisition, the Company currently serves the
elementary and high school textbook publishing market, which tends to be more
active during the first half of the year. The other markets served by Phoenix
Color tend to be more active during the second half of the year.
On February 12, 1999, the Company acquired all of the capital stock of
TechniGraphix, Inc., a producer of print-on-demand books that was located in
Sterling, Virginia, for a total purchase price of $7.3 million. During the
fourth quarter of 1999, the Company decided to relocate the TechniGraphix, Inc.
facility to Hagerstown, Maryland and completed the relocation in January 2000.
In September 2000, TechniGraphix, Inc. closed its print-on-demand operations.
See "Restructuring" below and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Restructuring
In September 2000, the Company announced a plan to restructure its
operations, which resulted in the Company recording a one-time restructuring
charge totaling $11.4 million. The restructuring plan involved the closing of
TechniGraphix, Inc. and the Company's Taunton, Massachusetts component facility
in order to reduce costs and improve productivity. The restructuring charge
included approximately $7.5 million related to the write-down of unrecoverable
assets and goodwill in TechniGraphix, Inc. and the Taunton facility, in which
the carrying value was no longer supported by future cash flows, $3.6 million
for equipment lease termination costs and $325,000 for facility closing costs.
2
Manufacturing Operations and Technology
Order Processing.
Customer orders are received at the Company's various plant locations by
physical delivery or electronic file transfer. Once entered into the Company's
order processing system, a customer order is monitored on a real-time basis
throughout the entire manufacturing process. At the time orders are entered,
management allocates work orders among the Company's plants through the
Company's data network to maximize plant efficiency and minimize operating cost.
To limit the costs associated with maintaining inventory, many book
publishers have instituted inventory controls that limit the amount of inventory
held by them. As a result, specialty printers, such as the Company, are under
increasing pressure to process orders quickly and efficiently. By investing in
upgrades to the Company's printing equipment, digital communications and
information network, the Company has been able to respond successfully to its
customers' increasing demands. Further, the Company's printing facilities
operate on a 24-hour basis, seven days a week. As an additional service, the
Company provides real-time job status information to its customers over the
Internet.
Digital Prepress Services.
The Company provides a complete range of prepress services, including color
separations, high speed imaging, assembly, electronic retouching, archiving,
digital file transfer, color-accurate digital proofing and computer generated
platemaking. The Company's prepress services are available at each of its
plants, and are linked through a high speed telecommunications network. The
Company does not rely on any subcontractors for its prepress needs.
Printing and Finishing Services.
The Company manufactures book components, thin books, hard and soft cover
books and print-on-demand books. The Company manufactures book components by
using 19 modern high-speed, sheet-feed offset lithographic printing presses
capable of printing up to eight colors in a single pass, some of which can print
both sides of the sheet at the same time, and some with inline coaters. The
Company protects manufactured book components by applying an ultraviolet liquid
coating or laminating different types of film such as polypropelene and mylar.
The Company also offers a complete array of in-house services, including foil
stamping, selected and overall embossing, selected and overall liquid coatings
and die cutting.
The Company produces thin books in its manufacturing plant in New Jersey,
which has three presses capable of printing up to eight or ten colors on a
single side or four or five colors on each side during a single pass. These
presses employ roll stand technology, which sheets the paper as it enters the
press, thereby eliminating the need to sheet paper off line and continually add
paper to the feeder system of the press. The Company offers several varieties of
binding
3
styles including, smythe sewn, side sewn and thread seal for hard cover books in
addition to gluing for both hard cover and soft cover books.
The Company prints hard and soft cover books in its manufacturing plant in
Maryland, which has three single color web presses and one two color web press.
The Company's workflow for the production of books is completely digital. In
connection with the manufacture of books, the Company offers perfect binding,
saddle wire binding and hard cover casing-in.
In September 2000, the closing of TechniGraphix, Inc. significantly reduced
the scope of the Company's print-on-demand capabilities from six sheet feed
digital presses and three web feed digital presses to one digital web feed
press. The Company continues to assemble print-on-demand books at a print
facility in Hagerstown, Maryland and the Company is capable of producing
finishing styles in perfect binding and hard cover flat back binding.
Distribution and Logistics.
The Company operates its own tractor-trailers to deliver a majority of its
products. This enables the Company to reduce transportation costs and to save
one or more days of delivery time in fulfilling customer requirements. The
tractor-trailers are also used to distribute raw materials among the Company's
manufacturing plants.
Technology.
The Company continues to invest in new technology to ensure modern highly
efficient production capabilities. Quality and efficiency in conventional
printing is augmented by computer-to-plate technology, which permits the
creation of a printing plate directly from a digital file and eliminates the use
of negative film. The Company uses computer-to-plate technology on new jobs, and
traditional platemaking equipment for jobs where negative film had previously
been created. The Company archives negative film and digital files to facilitate
reorders. The Company also has state of the art printing presses, foil stamping
presses, finishing equipment and binding equipment, most of which is less than
five years old.
Before printing, the Company provides its customer with a color accurate
digital proof of the job, which must be approved by the customer. The Company is
capable of transferring digital files within the Company's facilities and to its
customers who have been provided with the appropriate equipment. Proofs for book
manufacturing consist of bound galleys, which are digitally printed and bound.
The Company may also receive or transmit files from or to customers through use
of the Internet, in various formats, including PDF, HTML and FTP, among others.
4
Raw Materials, Purchasing and Inventory
The Company uses substantial quantities of paper, ink, laminating film,
foil and other materials in its operations. Management generally favors "single
sourcing" of its various raw materials purchases, believing that establishing
strong commercial relationships with a relatively small number of suppliers
enables the Company to negotiate favorable prices and to maintain reliable
supplies of such materials. Nevertheless, the Company is not party to any
long-term supply agreements, is not dependent on any single source for its raw
materials and believes it could replace any individual supplier without
disruption to its business. A change in suppliers, however, could cause a delay
in manufacturing, and a possible loss of sales, which could adversely affect
operating results.
The Company generally obtains annual pricing commitments from its
suppliers, but such commitments are not legally binding. Nevertheless, the
Company's vendors have historically complied with commitments made to the
Company. In the event of material price increases by vendors, the Company may
pass such increases through to its customers.
The Company uses centralized purchasing and storage for book component
inventory at the Hagerstown, Maryland plants in order to control raw material
costs. Further, the Company purchases paper in large rolls and converts the
paper, using its own computerized sheeters, into sheets in the sizes required by
its presses. By converting in excess of 30 million pounds of paper in-house
annually, the Company is able to reduce paper costs, avoid delays in obtaining
properly sized sheets and minimize the need to maintain an inventory of specific
sheet paper sizes.
Markets
The Company sells book components, thin books, hard and soft cover books
and print-on-demand books to publishers in all segments of the book publishing
market. Various segments of the book publishing market may respond to different
economic and other factors, and declines in one or more segments in a given year
may be offset by improvements in other segments. Accordingly, management views
the Company's sales to a broad range of book publishing market segments as a
competitive strength.
Sales of book components by the Company represented 70.1% of the Company's
net sales in 2001 and 78.3% of net sales in 2000. Sales of book components for
use in general interest books accounted for 50.1% of the Company's net book
component sales for the year 2001 and 48.5% for 2000. Sales of book components
to publishers of educational materials accounted for 24.3% and 23.9% of net book
component sales in 2001 and 2000, respectively, and sales to publishers of
business-related books accounted for 7.8% and 8.1% of net book component sales
in 2001 and 2000, respectively. Sales of book components to all other book
publishers, accounted for 17.8% and 19.5% of net book component sales in 2001
and 2000, respectively.
5
The Company began selling thin books to publishers of juvenile books in the
fourth quarter of 1998. The Company is continuing to expand its customer base in
both juvenile and non-juvenile customers. Sales of thin books represented 17.5%
and 13.9% of the Company's net sales for the years ended December 31, 2001 and
2000 respectively.
The Company began to sell paperback books in July 1999 and hard cover books
in May 2000. Sales of hard and soft cover books represented 12.4% and 8.9% of
the Company's net sales for the years ended December 31, 2001 and 2000,
respectively. The Company manufactures hard and soft cover books for virtually
all segments of the book publishing industry.
Customers
The Company has a base of over 200 active customers, including many of the
leading publishing companies in the world. Among its largest customers are
HarperCollins, Pearson Publishing, Simon & Schuster, Random House, Holtzbrink
Publishers, McGraw-Hill, Time Warner, Thomson Learning, John Wiley & Sons,
Microsoft, Houghton Mifflin, Oxford University Press, Walt Disney, Harcourt
Brace and W.W. Norton, many of which have been customers of the Company since
its inception in 1979. Many of these customers have decentralized operations in
which purchasing decisions are made by various divisions. Pearson Publishing,
and HarperCollins Publishers accounted for 11.7%, and 10.8%, respectively, of
the Company's net sales in 2001. Pearson Publishing, HarperCollins Publishers
and Random House Inc. accounted for 13.3%, 11.3% and 10.1% , respectively, of
the Company's net sales in 2000. Our ten largest customers accounted for
approximately 64.8% and 70.1% of net sales in 2001 and 2000, respectively.
Sales
The Company has a direct sales force consisting of 33 sales representatives
located throughout the U.S. The Company intends to expand its sales force to
provide superior service to customers, to capture a greater share of the
business from its existing publishing customers, and to identify and solicit new
customers, including smaller regional publishers. The Company has established a
marketing department apart from its sales department to promote its services,
including participating in publishing industry trade shows.
6
Printing has become more technology driven. To remain competitive, the
Company requires its new sales representatives to participate in a three-month
manufacturing and sales orientation program, which includes spending at least
two weeks at the Company's manufacturing plants. All sales personnel are
required to participate annually in the Company's continuing education program.
Various programs by management are used to monitor goals for individual sales
representatives.
Backlog
The Company does not operate with any backlog. Both the Company and its
customers share the same goal: processing orders on demand in the shortest
possible time frame.
Competition
The printing industry in general, and the printing and manufacturing of
books in particular, are extremely competitive. The Company faces competition
from other printers, such as R.R. Donnelley, Quebecor/World and Banta
Corporation, all of which have significantly larger revenues and assets than the
Company. In addition, the Company competes with book component printers who
offer similar services to the publishing industry, but none of which have
complete book component services in house. Competitive factors in the printing
of book components and the manufacture of complete books include price, quality,
speed of production and delivery, use of technology and the ability to service
specialized customer needs on a consistent basis.
Employees
As of December 31, 2001, the Company had 862 employees, of whom 13 were
engaged in management, 46 in finance, administration and billing, 73 in sales,
sales support and customer service, 10 in information systems and technological
development, 12 in transportation and 708 in manufacturing. None of the
employees are represented by unions, and the Company believes it has
satisfactory relations with its workforce.
7
ITEM 2. PROPERTIES
The Company's corporate and administrative offices are located in one of
its two adjacent manufacturing facilities in Hagerstown, Maryland. The Company
leases various manufacturing and regional sales offices. A summary of the
location, size and nature of the principal facilities appears below:
Location Use Leased/Owned; Square
- -------- --- Expiration Date Footage
--------------- -------
Hagerstown, MD..... Corporate offices; printing, prepress and Owned 114,000
finishing for book components
Hagerstown, MD..... Printing, prepress and finishing for book Owned 86,000
components
New York City, NY.. Prepress and sales Leased; 10/31/09 11,000
Taunton, MA........ Closed operations Leased; 12/31/12 53,000
Rockaway, NJ....... Printing, prepress and finishing for complete Leased; 3/31/08 90,000
books
Hagerstown, MD..... Printing, prepress and binding for complete books Owned 170,000
ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company filed a complaint against Krause Biagosch
GmbH ("Krause Germany") and Krause America, Inc. ("Krause America" and together
with Krause Germany "Krause"), which was tried in October 2000 in the United
States District Court for the District of Maryland, based on breach of contract
and statutory warranties on certain prepress equipment which the Company had
agreed to purchase from Krause. The Company attempted to operate the equipment,
and contended that the equipment failed to perform as warranted. During 1999,
the Company removed the portion of the equipment actually delivered, and sought
recovery of the approximately $2.0 million paid on this equipment, which
included amounts for deposits on the balance of the equipment not yet delivered.
As of December 31, 2000 and 2001, the Company included in other non-current
assets a receivable from Krause of approximately $2.0 million. On January 27,
2000, the court granted summary judgment in favor of the Company with respect to
the three machines previously delivered to the Company. On October 24, 2000, a
jury rendered a verdict against Krause for $1.9 million. On December 27, 2001
the Federal Court of Appeals for the 4th Circuit rendered a decision confirming
the lower court's decision without modification. Due to recent efforts by Krause
America to avoid enforcement of the judgment, the Company has been forced to
file a new lawsuit in the U.S. District Court for the District of Maryland
against Krause America, Krause CTP, Limited, Krause Germany, and Jurgen
Horstmann, Krause Germany's sole shareholder.
In August 1999, the Company filed a complaint against Motion Technology
Horizons, Inc. ("Motion Technology") in the Circuit Court for Washington County,
Maryland to recover approximately $300,000 in deposits made on equipment which
failed to perform in accordance with manufacturer's warranties, and $703,000 for
the purchase of substitute equipment. Motion Technology has counterclaimed for
$250,000 for the balance of the purchase price for the equipment, plus
incidental charges. In March 2001, the Company amended its complaint, adding
Eagles Systems, Inc. ("Eagle") as a defendant in the case. In November 2001, the
Company obtained an order of default against Eagle. The Company has filed a
motion for summary judgment against Eagle and Motion Technology. On February 25,
2002, the court granted the Company's motions for summary judgment and entry of
an order of default and entered a judgment against Eagle and
8
Motion Technology in the amount of $1,006,750. Defendants had thirty (30) days
from that date to appeal the judgment. On February 26, 2002, defendants filed
for bankruptcy.
The Company is not a party to any other legal proceedings, other than
claims and lawsuits arising in the normal course of the Company's business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows for any quarterly or
annual period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No established public trading market exists for the Company's Class A
Common Stock or Class B Common Stock or any of its other securities. As of March
15, 2001, there were eleven holders of record of the Company's Class A Common
Stock and two holders of record of the Company's Class B Common Stock.
The Company did not declare or pay any dividends on its capital stock in
the past three years. The Company expects to retain future earnings, if any, to
finance the growth and development of its business. Thus, the Company does not
intend to declare or pay dividends on its capital stock for the foreseeable
future. Further, each of the Company's senior credit facility and the indenture
under which the Company has issued 10 3/8% Senior Subordinated Notes restricts
the payment of dividends.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial information is derived from our
Consolidated Financial Statements and related Notes thereto as of December 31,
1997 through 2001 and for the years then ended. Our Consolidated Financial
Statements for the years ended December 31, 1997 through 2001 have been audited
by PricewaterhouseCoopers LLP, independent accountants. PricewaterhouseCoopers
LLP's report on the Company's Consolidated Financial Statements as of December
31, 2000 and 2001 and for each of the three years in the period ended December
31, 2001 is included as Item 8 of this form 10-K. The selected consolidated
financial information set forth below should be read with our Consolidated
Financial Statements, the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Years Ended December 31,
1997 1998 1999(1) 2000 2001
---- ---- ------- ---- ----
(dollars in thousands)
Statement of Operations Data:
Sales ................................................. $104,794 $107,491 $141,338 $147,544 $129,365
Cost of sales ......................................... 73,722 80,627 109,357 117,874 104,370
Gross profit .......................................... 31,072 26,864 31,981 29,670 24,995
Operating expenses:
Selling and marketing expenses ........................ 5,881 6,278 5,688 7,494 8,046
General and administrative ............................ 12,265 12,934 17,168 17,511 15,619
(Gain) loss on sale of assets (2) ..................... -- (133) 358 2,630 122
Restructuring charge (3) .............................. -- -- -- 11,425 (304)
Total operating expenses .............................. 18,146 19,079 23,214 39,060 23,483
Income (loss) from operations ......................... 12,926 7,785 8,767 (9,390) 1,512
Interest expense ...................................... 4,484 5,076 14,939 12,943 12,374
Other (income) expense ............................... 62 (327) (283) (116) (253)
Income (loss) before income taxes: .................... 8,380 3,036 (5,889) (22,217) (10,609)
Income tax (benefit) provision ........................ 3,898 2,008 (1,045) (7,055) 4,400
Net income (loss) ..................................... $ 4,482 $ 1,028 $ (4,844) $(15,162) $(15,009)
Balance Sheet Data (at year end):
Cash and cash equivalents ............................. $ 1,045 $ 14,834 $ 271 $ 368 $ 122
Total assets .......................................... 84,993 132,440 151,505 133,072 122,402
Total debt (including capital lease obligations) ...... 46,726 95,447 114,362 114,180 117,902
Total stockholders' equity (deficit) .................. 16,154 17,283 12,471 -2,653 -17,624
Other Financial Data:
Depreciation and amortization expense ................. $ 9,142 $ 10,834 $ 17,174 $ 15,956 $ 14,484
Capital expenditures (4) .............................. 15,131 48,168 17,871 7,431 5,368
EBITDA (5) ............................................ 22,005 18,946 24,686 6,162 15,720
EBITDA margin (6) ..................................... 21.00% 17.60% 17.47% 4.18% 12.2%
Ratio of earnings to fixed charges (7) ................ 2.7x 1.5x -- -- --
10
(1) In January and February 1999, the Company acquired Mid-City Lithographers,
Inc. and TechniGraphix, Inc., respectively. See Note 7 of Notes to
Consolidated Financial Statements.
(2) Reflects non-cash losses on sale of capital assets.
(3) Reflects a charge for closing the operations of TechniGraphix, Inc. and the
Taunton, Massachusetts facility, of which approximately $7.5 million are
non-cash expenses.
(4) Includes property and equipment financed through notes, deposits and
capital leases. See Consolidated Statements of Cash Flows in the
Consolidated Financial Statements.
(5) EBITDA represents net income of the Company before interest, income taxes,
depreciation and amortization. EBITDA is not a measure of financial
performance under GAAP and may not be comparable to other similarly titled
measures by other companies. EBITDA does not represent income or cash flows
from operations as defined by GAAP and does not necessarily indicate that
cash flows will be sufficient to fund cash needs. As a result, EBITDA
should not be considered an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. EBITDA is
included in this Form 10-K because it is a basis on which the Company
assesses its financial performance, and certain covenants in the Company's
borrowing agreements are tied to similar measurements. See Consolidated
Statements of Cash Flows.
(6) EBITDA margin represents EBITDA divided by sales.
(7) In calculating the ratio of earnings to fixed charges, earnings consist of
earnings before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs), whether expensed or capitalized,
and that portion of rental expense estimated to be attributable to
interest. For 1999, 2000 and 2001 the ratio of earnings to fixed charges
was less than one-to-one. The dollar amount by which the earnings, as
defined above, were insufficient to cover fixed charges was $6.3 million,
$22.2 million and $10.6 million in the years 1999, 2000,and 2001,
respectively.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the audited Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this Form
10-K.
Results of Operations
The following table sets forth for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations:
Years Ended December 31,
1999 2000 2001
---- ---- ----
$ % $ % $ %
--- --- --- --- --- ---
Sales ................................ 141,338 100.0 147,544 100.0 129,365 100.0
Cost of sales ........................ 109,357 77.4 117,874 79.9 104,370 80.7
Gross profit ......................... 31,981 22.6 29,670 20.1 24,995 19.3
Operating Expenses:
Selling and marketing expenses ....... 5,688 4.0 7,494 5.1 8,046 6.2
General and administrative expenses .. 17,168 12.1 17,511 11.9 15,619 12.1
Loss on sale of assets ............... 358 0.2 2,630 1.8 122 0.1
Restructuring charge ................. -- -- 11,425 7.7 (304) -0.2
Total operating expenses ............. 23,214 16.3 39,060 26.5 23,483 18.2
Income (loss) from operations ........ 8,767 6.3 (9,390) -6.4 1,512 1.1
Interest expense ..................... 14,939 10.6 12,943 8.8 12,374 9.6
Other income.......................... (283) -0.2 (116) -0.1 (253) -0.2
Loss before income taxes ............. (5,889) -4.1 (22,217) -15.1 (10,609) -8.3
Income tax (benefit) provision ....... (1,045) -0.7 (7,055) -4.8 4,400 3.4
Net loss.............................. (4,844) -3.4 (15,162) -10.3 (15,009) -11.7
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Sales decreased $18.1 million or 12.3% to $129.4 million for the year ended
December 31, 2001 from $147.5 million for the same period in 2000. This decrease
was a result of lower sales of book components offset by higher sales of
complete books manufactured in Rockaway, New Jersey and Hagerstown, Maryland.
Sales of complete books increased $11.7 million or 34.7% to $45.4 million for
the year ended December 31, 2001 from $33.7 million for the same period in 2000.
The decrease in book components was primarily caused by a contraction in the
publishing industry, particularly in reprints of general interest books, and was
exacerbated by the further contraction of the U.S. economy in general after the
September 11, 2001 terrorist attacks.
Gross profit decreased $4.7 million or 15.8% to $25.0 million for the year
ended December 31, 2001, from $29.7 million for the same period in 2000, and the
gross profit margin decreased to 19.3% for the year ended December 31, 2001 from
20.1% for the same period in 2000. The decline in gross profit margin was
12
primarily attributable to lower sales of components without a corresponding
decrease in overhead, and from the continued operating losses at the Company's
book manufacturing facility in Hagerstown, Maryland. The Maryland book
manufacturing facility incurred $27.9 million of costs with offsetting sales of
$22.6 million for the year ending December 31,2001, compared to $19.7 million of
costs with offsetting sales of $13.1 million for the same period in 2000. The
Company estimates the Maryland book manufacturing facility has the capacity to
produce a sufficient amount of books to generate $45.0 million in sales with its
current equipment.
Operating expenses decreased $15.6 million or 39.9% to $23.5 million for
the year ended December 31, 2001, from $39.1 million for the same period in
2000. This decrease was composed of a reduction in the non-cash losses on the
sale of certain property, plant and equipment; a reversal of part of the
restructuring charge associated with the termination of certain operating leases
for equipment (see Management's Discussion and Analysis for the year 2000
compared with 1999); a reduction in general and administrative expenses of $1.9
million, due primarily to staff reductions, and offset by an increase in selling
expenses of $600,000.
Interest expense decreased $500,000 or 3.9% to $12.4 million for the year
ended December 31, 2001 from $12.9 million for the same period in 2000. The
decrease was the result of less average outstanding debt and lower interest
rates during the period.
The Company's effective tax rate for the year ended December 31, 2001 was a
provision of 41.5% compared to a benefit of 31.8% for the same period in 2000.
The change in the effective rate is primarily attributable to the recognition of
a valuation allowance in 2001 against the Company's deferred tax assets due to
the uncertainty regarding the likelihood of the realization of certain of these
assets.
Net loss decreased $200,000 to a loss of $15.0 million for the year ended
December 31, 2001 from a loss of $15.2 million for the same period in 2000. The
decrease was due to the factors described above.
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Sales increased $6.2 million or 4.4% to $147.5 million for the year ended
December 31, 2000 from $141.3 million for the same period in 1999. This increase
was a result of higher sales of complete books manufactured in Rockaway, New
Jersey and Hagerstown, Maryland, offset by lower sales of book components and
print-on-demand books. Sales of complete books increased $21.1 million or 167.5%
to $33.7 million for the year ended December 31, 2000 from $12.6 million for the
same period in 1999.
Gross profit decreased $2.3 million or 7.2% to $29.7 million for the year
ended December 31, 2000, from $32.0 million for the same period in 1999, and the
gross profit margin decreased to 20.1% for the year ended December 31, 2000 from
22.6% for the same period in 1999. The decline in gross profit margin resulted
primarily from the operations of the Company's book manufacturing facility in
Hagerstown, Maryland, which opened in July 1999, and the operations of its
print-on-demand facility. The book manufacturing facility incurred $19.7 million
of costs with offsetting sales of $13.1 million. The Company estimates the
Maryland book manufacturing facility has the capacity to produce a sufficient
amount of books to generate $35.0 million in sales with its current equipment.
Operating expenses increased $15.9 million or 68.5% to $39.1 million for
the year ended December 31, 2000, from $23.2 million for the same period in
1999. This increase is composed of a non-cash charge of
13
$2.6 million on the sale of certain property, plant and equipment; a
restructuring charge of $11.4 million associated with the closing of the
print-on-demand facility and the Taunton, Massachusetts component facility; and
$2.2 million associated with the increase in operating expenses due principally
to costs of additional sales and customer service personnel, and their attendant
expenses, associated with Maryland book manufacturing and increased delivery
expenses. In September 2000, the Company announced a plan to restructure its
operations, which resulted in the Company recording a one-time restructuring
charge totaling $11.4 million. The restructuring plan involved the closing of
TechniGraphix, Inc. and the Company's Taunton, Massachusetts component facility
in order to reduce costs and improve productivity. The restructuring charge
included approximately $7.5 million related to the write-down of unrecoverable
assets and goodwill in TechniGraphix, Inc. and the Taunton facility, in which
the carrying value was no longer supported by future cash flows, $3.6 million
for equipment lease termination costs and $325,000 for facility closing costs.
Interest expense decreased $2.0 million or 13.2% to $12.9 million for the
year ended December 31, 2000 from $14.9 million for the same period in 1999.
Interest expense in 1999 included a one time charge of $1.1 million associated
with the write off of finance costs on the 1998 bridge note with First Union
National Bank (the "Bridge Note") and a charge of $1.6 million for prepayment
premiums incurred in connection with the early repayment of equipment debt.
The Company's effective tax rate was a benefit of 31.8% and 17.7% for the
years ended December 31, 2000 and 1999, respectively. The change in the
effective rate is primarily attributable to the increased net loss in 2000
compared to 1999 and the proportion of non-deductible amortization expense for
goodwill resulting from certain acquisitions.
Net loss increased $10.4 million to a loss of $15.2 million for the year
ended December 31, 2000 from a loss of $4.8 million for the same period in 1999.
The increase was due to the factors described above.
Liquidity and Capital Resources
The Company historically has financed its operations with internally
generated funds, external short and long-term borrowings and capital and
operating leases. Cash flows from operating activities amounted to $6.6 million
for 1999, $6.0 million for 2000 and $1.2 million for 2001.
In September 1998, the Company entered into a three year $20.0 million
revolving credit facility with First Union National Bank (the "Senior Credit
Facility"). On August 14, 2001, the Senior Credit Facility was amended to extend
the maturity date to August 1, 2004 and provide for an increase in the
availability of funds. As of December 31, 2001, the outstanding aggregate
principal of the Senior Credit Facility was $12.4 million, bearing interest at
the rate of 5.25% per annum. The Company's borrowings under the Senior Credit
Facility are secured by substantially all of the Company's assets. The Senior
Credit Facility contains limitations on the payment of dividends, the
distribution or redemption of stock, sales of assets and subsidiary stock, and
on additional Company and subsidiary debt and requires the Company to maintain a
fixed coverage charge ratio as defined in the Senior Credit Facility as amended
on August 14, 2001. As of December 31, 2000, the Company was in compliance with
the covenants in the Senior Credit Facility as amended in November 2000. As of
December 31, 2001, the Company was in compliance with the covenants of the
Senior Credit Facility as amended in August 2001.
14
On February 2, 1999, the Company issued $105.0 million in 10 3/8% Senior
Subordinated Notes (the "Old Notes"), maturing on February 2, 2009, in a private
placement. The proceeds from the issuance of the Old Notes were used to repay
substantially all existing debt of the Company including capital leases, and to
invest in the expansion of the Company. In May 1999, the Company exchanged the
Old Notes for notes registered with the Securities and Exchange Commission under
the Securities Act of 1933, as amended. The terms of the registered notes are
equivalent to those of the Old Notes in all material respects.
The Company has operating lease arrangements for printing equipment. Rental
expense related to such leases was approximately $3.2 million for 1999, $5.8
million for 2000 and $4.5 million for 2001. The increase from 1999 to 2000 was
substantially due to the operating leases for printing and binding equipment at
the Maryland book manufacturing facility. The decrease from 2000 to 2001 was
primarily attributed to the closing of TechniGraphix, Inc. the Company's
print-on-demand facility.
Capital expenditures totaled $16.5 million for 1999, $6.8 million for 2000
and $5.3 million for 2001. The Company has traditionally invested in facilities
and equipment to increase capacity, improve efficiency, maintain high levels of
productivity and meet customer needs. Capital expenditures primarily have been
for prepress, pressroom and finishing equipment and plant construction.
The Company currently estimates its capital expenditures and other
operating deposits for 2002 will total approximately $6.0 million. The capital
expenditures are principally for the replacement of existing equipment including
printing presses, finishing equipment and prepress equipment. The Company also
intends to enter into operating leases for presses and bindery equipment valued
at approximately $7.8 million for its book manufacturing facility in Hagerstown,
Maryland. The Company believes that in 2002 funds generated from operations and
funds available under the Senior Credit Facility will be sufficient to complete
its capital expenditures and service its debt. Net income from operations after
adjusting for non-cash expenses for depreciation, amortization and restructuring
charges was $25.9 million, $14.0 million and $16.0 million for the years ended
December 31, 1999, 2000 and 2001, respectively. Should the Company fail to
achieve results in 2002 equal at least to the year 2000, or should a decrease in
demand for the Company's products, or inability to reduce costs, adversely
affect the availability of funds, such decrease in the availability of funds
could have a material adverse effect on the Company's business prospects or
results of operations. As of December 31, 2001, the Company had not met the
required consolidated coverage ratio under the Senior Notes and therefore, is
unable to incur more than $5 million additional new indebtedness for capital
expenditures until the Company attains the consolidated coverage ratio as
defined in the Senior Note agreement.
Implication of New Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board ("FASB")
finalized SFAS 141, "Business Combinations"("SFAS 141") and SFAS 142, "Goodwill
and Other intangible Assets," ("SFAS 142"), which are effective for fiscal years
beginning after December 15, 2001. The Company is required to and will adopt
both SFAS 141 and SFAS 142 beginning in 2002. Upon adoption of SFAS 141 and SFAS
142, the Company will cease to amortize goodwill recorded on prior business
combinations and will annually review the recorded goodwill for impairment. The
Company's management does not expect that the application of the provisions of
SFAS 141 and SFAS 142 will have a material impact on the Company's consolidated
financial statements.
15
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses the accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 will be effective for the Company in the first quarter of 2002.
The Company's management does not expect that the application of the provisions
of SFAS 143 will have a material impact on The Company's consolidated financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 clarifies the accounting for the impairment of long-lived assets
and for long-lived assets to be disposed of, including the disposal of business
segments and major lines of business. SFAS 144 will be effective for the Company
in the first quarter of 2002. The Company's management does not expect that the
application of the provisions of SFAS 144 will have a material impact on the
Company's consolidated financial statements.
Forward Looking Statements
Some of the statements in this Annual Report on Form 10-K are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These statements include indications regarding the intent,
belief or current expectations of the Company and its management, including
without limitation expectations regarding (i) the sufficiency of funds generated
from the Company's operations, together with existing cash, available credit
under the Senior Credit Facility and other financial sources, to finance the
Company's current operation, remaining capital expenditure requirements and
internal growth for the year 2002, (ii) whether any claims or lawsuits filed,
threatened or to be filed or pending against the Company, individually or in the
aggregate, will have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows, (iii) the Company's
ability to enter into operating leases for presses and binding equipment, pass
any material vendor price increases to its customers, and replace any individual
supplier without disruption to the business, (iv) the Company's current
expectations with respect to capital expenditures and operating deposits for
2002, and (v) the Company's expectations regarding the materiality of interest
rate fluctuations to its business. In some cases, you can identify
forward-looking statements by terminology such as "may," "estimates,"
"anticipates," "intends," "will," "should," "expects," "believes," "continue" or
"predicts." These statements involve a variety of known and unknown risks,
uncertainties, and other factors that may cause the Company's actual results to
differ materially from intended or expected results. These factors include (i)
the risk factors and other information presented in the Company's Registration
Statement filed with the Securities and Exchange Commission, File No. 333-50995,
which became effective May 13, 1999, (ii) the sufficiency of funds to finance
the Company's current operations, remaining capital expenditures and internal
growth for the year 2002, and (iii) the outcome of any claims and lawsuits
filed, threatened to be filed or pending against the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes its current exposure to interest rate changes is
immaterial because approximately 89% of the Company's debt bears a fixed rate of
interest. However, if the ratio of debt with fixed interest were to materially
decline or interest rates were to materially increase it could have a material
adverse effect on the Company's business and results of opertations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, supplementary data and report of independent
public accountants are included as part of this Form 10-K on pages F-1 through
F-19 and S-1 and S-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change of accountants or disagreements on any matter of accounting
principles or financial statement disclosures have occurred within the last
three years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Board of Directors is composed of seven members, of which
there are now six incumbents and one vacancy. Directors generally serve for
one-year terms and until their successors are duly elected and qualified.
17
The following table sets forth certain information regarding the Company's
current directors and executive officers:
Directors and Executive Officers Age Positions
- -------------------------------- --- ---------
Louis LaSorsa.................. 55 Chairman, Chief Executive Officer and Director
Edward Lieberman............... 59 Executive Vice President, Chief Financial Officer, Secretary and Director
John Carbone................... 43 Vice President, Manufacturing, Book Components, and Director
David Rubin.................... 45 Director
Thomas Newell.................. 58 Chief Information Officer
Earl S. Wellschlager........... 54 Director
Mitchell Weiss................. 39 Vice President, Thin Print/Book Manufacturing, and Director
Louis LaSorsa has been with the Company since its inception in 1979, when he
became Vice President, Sales and Marketing. Mr. LaSorsa has been President of
the Company since 1982, was elected Chairman and Chief Executive Officer in
1996, and is involved in the management of all areas of the Company's
operations, planning and growth.
Edward Lieberman joined the Company in 1981, has been Executive Vice President,
Chief Financial Officer and Secretary since February 1988, and is responsible
for financial information, general financing, legal matters, human resources and
benefits. From 1967 to 1981, Mr. Lieberman, a certified public accountant, was a
principal of Louis Lieberman & Company, an independent public accounting firm.
John Carbone joined the Company in 1981, has been Vice President, Manufacturing,
for the Book Component Divisions since December 1997, and is responsible for all
component printing operations. Mr. Carbone was Vice President of
Manufacturing/Hagerstown from June 1996 to December 1997, Vice President of
Operations/New York from 1993 to 1996 and Vice President of Sales from 1990 to
1993.
David Rubin was elected a director of the Company in February 1998, and is
Corporate Vice President and a director of Don Aux Associates, a privately-held
management consulting firm which services a wide range of manufacturing,
distribution and service-oriented client companies. Mr. Rubin has been employed
by Don Aux Associates since 1984, and has served as Director of Corporate
Analysis and Director of Consulting Services.
Thomas Newell has been Chief Information Officer since May 1988 and is
responsible for developing, implementing and managing the Company's digital
communications and information network.
Earl S. Wellschlager has served as a director of the Company since March, 2000.
Mr. Wellschlager is a partner at the law firm of Piper Marbury Rudnick & Wolfe
LLP, specializing in general corporate law. He has served as an Adjunct
Professor at the University of Maryland Law School and at the University of
Baltimore School of Law.
18
Mitchell Weiss joined the Company in 1984, first in customer service and later
as a sales representative. In 1993, Mr. Weiss joined R.R. Donnelley & Sons
Company as a salesman, and returned to the Company as a sales representative in
1995, becoming a Regional Sales Manager in 1996. Since January 1998 Mr. Weiss
has been responsible for developing the Company's new complete book
manufacturing facility in New Jersey and will manage the facility's operations.
On March 4, 2000, Mr. Weiss became a director of the Company.
Directors Compensation
Directors of the Company who are also employees of the Company do not
receive additional compensation for their services as directors. Non-employee
directors of the Company receive annual director compensation of $10,000 cash.
Committees of the Board of Directors
The Company has an audit committee consisting of its outside directors,
Earl. S. Wellschlager and David Rubin.
The Company has a compensation committee consisting of Earl S.
Wellschlager, David Rubin and Mitchel Weiss, Vice President, Thin Book
Manufacturing.
Employment Agreements
None of the Company's officers have employment agreements.
Employee Stock Bonus and Ownership Plan
The Company's Employee Stock Bonus and Ownership Plan (the "Stock Bonus
Plan") was established in 1980, initially as a profit-sharing, tax-qualified
retirement plan, and later as a stock bonus plan. Employees become participants
on any June 30 or December 31 after they complete one year of service. Annual
Company contributions to the Stock Bonus Plan are discretionary, and have been
made in the form of Company stock and cash. Contributions are allocated among
all Stock Bonus Plan participants, based on the proportion which each
participant's eligible compensation bears to the total compensation of all
participants. Company contributions for participants become vested for each
participant in equal installments over a six-year period of continuing service.
The Trustees of the Stock Bonus Plan are Louis LaSorsa and Edward Lieberman, and
the Stock Bonus Plan held 6,794 shares of Class B Common Stock of the Company as
of December 31, 2001. The Class B Common Stock is non-voting stock. See
"Security Ownership of Certain Beneficial Owners and Management."
19
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the three
years ended December 31, 2001 for the Chief Executive Officer and the three
other most highly compensated executive officers of the Company, including both
fixed salary compensation and discretionary management incentive compensation
("Bonus"):
Summary Compensation Table
Annual Compensation
Name and Principal Position Other Annual
Year Salary Bonus Compensation
Louis LaSorsa...................... 2001 $554,163 $439,330 $ --
Chief Executive Officer 2000 541,423 451,540 --
1999 544,284 565,000 --
Edward Lieberman................... 2001 368,457 219,665 --
Chief Financial Officer 2000 368,457 230,770 --
1999 365,275 282,000 --
Mitchel Weiss...................... 2001 193,234 131,799 --
Vice President 2000 190,565 115,385 --
1999 193,109 113,744 --
John Carbone....................... 2001 272,626 219,665 --
Vice President 2000 273,447 230,770 --
1999 274,670 226,000 --
No information is presented for options, restricted stock awards, long-term
incentive or other compensation because no such compensation has been awarded.
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the Company's Class A and Class B Common Stock as of March 15, 2001
by (i) each person known by the Company to own beneficially more than five
percent of the outstanding Class A Common Stock and Class B Common Stock, (ii)
each director of the Company, (iii) each of the named executive officers listed
under "Executive Compensation", and (iv) all executive officers and directors as
a group. Except as otherwise noted, the persons named in the table have sole
voting and investment powers with respect to all shares of Common Stock shown as
beneficially owned by them. The Company's capital stock is not registered under
Section 12 of the Securities Exchange Act of 1934, as amended, and, as a result,
stockholders holding more than five percent of any class of the Company's
capital stock are not required to file beneficial ownership reports with the
Securities and Exchange Commission.
Class A(1) % Class B(2) % Total %
---------- --- ---------- --- ----- ---
Louis LaSorsa................................... 1,000 9.0 592 7.6 1,592 8.4
Edward Lieberman................................ 1,000 9.0 450 5.8 1,450 7.7
John Biancolli.................................. 1,000 9.0 221 2.8 1,221 6.5
John Carbone.................................... 1,000 9.0 215 2.8 1,215 6.4
Thomas Newell................................... 1,000 9.0 146 1.9 1,146 6.1
Mitchell Weiss.................................. 1,000 9.0 115 1.5 1,115 5.9
Dion von der Lieth.............................. 1,000 9.0 47 0.6 1,047 5.5
Henry Burk...................................... 1,000 9.0 -- -- 1,000 5.3
Ronald Burk..................................... 1,000 9.0 -- -- 1,000 5.3
Anthony DiMartino............................... 1,000 9.0 448 5.7 1,448 7.7
Bruno Jung...................................... 1,000 9.0 318 4.1 1,318 7.0
Judith Lieberman................................ -- -- 1,000 12.8 1,000 5.3
David Rubin..................................... -- -- -- -- -- --
Earl S. Wellschlager............................ -- -- -- -- -- --
Louis LaSorsa and Edward Lieberman, as Trustees
under the Stock Bonus Plan(3)................ -- -- 6,794 87.2 6,794 36.0
All directors and executive officers as a group
(7 persons).................................. 5,000 45.0 1,518 19.5 6,518 34.5
- ------
(1) All Class A voting shares are held directly by the named individuals.
(2) Indicates each named individual's vested interest in Class B non-voting
shares held in the Stock Bonus Plan, except for Judith Lieberman, whose
Class B shares are held directly.
(3) See "Directors and Executive Officers of the Registrant Employee Stock
Bonus and Ownership Plan."
The address of all stockholders listed in the above table is c/o Phoenix
Color Corp., 540 Western Maryland Parkway, Hagerstown, Maryland, 21740.
21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 15, 1998, in connection with the senior credit facility
between the Company and First Union National Bank, all of the Company's
shareholders except Anthony DiMartino, Judith Lieberman and the Stock Bonus Plan
executed a Stock Pledge Agreement, pursuant to which all of their respective
shares of the Company's stock were pledged as security for the Company's
obligations under the loan agreement. The Stock Pledge Agreement requires such
shares to remain pledged during the term of the senior credit facility. For
information regarding each of the Company's shareholders, see "Security
Ownership of Certain Beneficial Owners and Management."
Earl S. Wellschlager, a director of the Company, is a partner in a law firm
that served as counsel to the Company in 2000 and 2001 (See note 10 of the Notes
to the Consolidated Financial Statements).
David Rubin, a director of the Company, is an officer and principal of Don
Aux Associates, which furnishes management consulting services to the Company
(See note 10 of Notes to the Consolidated Financial Statements).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1) The following consolidated financial statements of the Company are
included in Item 8 of the Form 10-K
Index to Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 2000 and December 31, 2001
Consolidated Statements of Operations as of December 31, 1999, December 31,
2000 and December 31, 2001
Consolidated Statements of Changes in Stockholders' Equity as of December
31, 1999, December 31, 2000 and December 31, 2001
Consolidated Statements of Cash Flows as of December 31, 1999, December 31,
2000 and December 31, 2001
Notes to Consolidated Financial Statements
(a)(2) Report of Independent Accountants on Financial Statement Schedule
Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they
are either not required or not applicable or because the required
information has been included elsewhere in the financial statements or
notes thereto.
22
(a)(3) See Item 14(c) of this Form 10-K
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of its
fiscal year ended December 31, 2001.
(c) Exhibits.
Exhibit
Number Description
- ------ -----------
2.1 Acquisition Agreement dated as of November 30, 1998 among the Company,
Carl E. Carlson, Wayne L. Sorensen, Donald Davis, Margaret Davis and
Viking Leasing Partnership (schedules and exhibits omitted)**
2.2 Acquisition Agreement dated as of February 3, 1999 among the Company,
TechniGraphix, Inc., Debra A. Barry and Jack L. Tiner (schedules and
exhibits omitted)**
2.3 Stock Purchase Agreement dated as of December 27, 1995 among the
Company and various stockholders of New England Book Holding
Corporation*
2.4 Plan and Agreement of Merger of Phoenix Color Corp. (New York) into
Phoenix Merger Corp. (Delaware)*
3.1 Certificate of Incorporation of the Company*
3.2 By-Laws of the Company*
4.1 Note Purchase Agreement dated January 28, 1999 among the Company, the
Guarantors and the Initial Purchasers**
4.2 Indenture dated as of February 2, 1999 among the Company, the
Guarantors and Chase Manhattan Trust Company, National Association,
Trustee**
4.3 Registration Rights Agreement dated as of February 2, 1999 among the
Company, the Guarantors and the Initial Purchasers**
4.4 Form of Initial Global Note (included as Exhibit A to Exhibit 4.2)**
4.5 Form of Initial Certificated Note (included as Exhibit B to Exhibit
4.2)**
4.6 Form of Exchange Global Note (included as Exhibit C to Exhibit 4.2)**
4.7 Form of Exchange Certificated Note (included as Exhibit D to Exhibit
4.2)**
10.1 Employment Agreement dated as of February 12, 1999 between the Company
and Jack L. Tiner**
10.4(a) Credit Agreement dated as of September 15, 1998 among the Company, the
Guarantors and First Union National Bank as Agent, as Issuer and as
Lender (schedules omitted)**
10.4(b) First Amendment to Credit Agreement dated as of March 31, 1999 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.****
10.4(c) Second Amendment to Credit Agreement dated as of March 23, 2000 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.****
10.4(d) Third Amendment to Credit Agreement dated as of November 13, 2000 by
and among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.*****
10.4(e) Fourth Amendment to Credit Agreement dated as of March 30, 2001 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.******
23
10.4(f) Fifth Amendment to Credit Agreement dated as of August 13, 2001 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent. *******
10.4(g) Sixth Amendment to Credit Agreement dated as of December 26, 2001 by
and among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.
10.4(h) Seventh Amendment to Credit Agreement dated as of March 15 2002 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.
10.5 Revolving Credit Note dated as of September 15, 1998 executed by the
Company and the Guarantors**
10.6 Master Security Agreement dated as of September 15, 1998 among the
Company, the Guarantors and First Union National Bank as Collateral
Agent (schedules omitted)***
10.7 Master Pledge Agreement dated as of September 15, 1998 executed by the
stockholders of the Company in favor of First Union National Bank, as
Collateral Agent (schedules omitted)**
10.8 Subsidiary Pledge Agreement dated as of September 15, 1998 executed by
the Company (schedules omitted**)
10.10 Lease Agreement dated as of March 20, 1998 between the Company and
Maurice M. Weill, Trustee Under Indenture Dated December 6, 1984 for
the facility located at 40 Green Pond Road, Rockaway, NJ 07866**
10.11 Lease Agreement dated as of March 31, 1997 between the Company and
Constitution Realty Company, LLC for the facility located at 555
Constitution Drive, Taunton, MA 02780**
10.12 Lease Agreement dated as of December 19, 1996 between the Company and
CMC Factory Holding Company, L.L.C. for the facility located at 47-07
30th Place, Long Island City, NY 11101**
12.1 Statement regarding Ratios of Earnings to Fixed Charges
12.2 Statement concerning calculation of EBITDA
21.1 Subsidiaries of the Company
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-50995), filed on April 24, 1998.
** Incorporated by reference to the Company's Amendment No. 1 on Form S-4
to Registration Statement on Form S-1 (Reg. No. 333-50995), filed on
March 8, 1999.
*** Incorporated by reference to the Company's Amendment No. 2 on Form S-4
to Registration Statement on Form S-1 (Reg. No. 333-50995), filed on
May 5, 1999.
**** Incorporated by reference in the Company's 1999 Annual Report on Form
10-K filed on March 29, 2000. (Reg. No. 333-50995)
***** Incorporated by reference in the Company's 1999 Quarterly Report on
Form 10-Q filed on November 14, 2000. (Reg. No. 333-50995)
****** Incorporated by reference in the Company's 2000 Annual Report on Form
10-K filed on April 2, 2001. (Reg. No. 333-50995)
******* Incorporated by reference in the Company's 2001 Quarterly Report on
Form 10-Q filed on August 14, 2001. (Reg. No. 333-50995)
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Phoenix Color Corp. has duly caused this Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Hagerstown, State of Maryland, on March 26, 2002.
PHOENIX COLOR CORP.
By: /s/ Louis LaSorsa
------------------------------------
Louis LaSorsa
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this form 10-K been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
/s/ Louis LaSorsa Chairman, Chief Executive Officer March 26, 2002
- --------------------------------------- and Director
Louis LaSorsa
/s/ Edward Lieberman Executive Vice President, Chief March 26, 2002
- --------------------------------------- Financial Officer, Secretary and Director
Edward Lieberman
/s/ John Carbone Vice President, Manufacturing, Book March 26, 2002
- --------------------------------------- Component Manufacturing, and Director
John Carbone
s/ Mitchel Weiss Vice President, Manufacturing, Thin Book March 26, 2002
- --------------------------------------- Manufacturing, and Director
Mitchel Weiss
/s/ Earl S. Wellschlager Director March 26, 2002
- ---------------------------------------
Earl S. Wellschlager
/s/ David Rubin Director March 26, 2002
- ---------------------------------------
David Rubin
25
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Securities Exchange Act of 1934 as amended, by Registrants That
Have Not Registered Securities Pursuant to Section 12 of such Act
The Company has not provided any of its security holders a proxy statement,
form of proxy or other proxy soliciting material sent to more than ten of the
Company's security holders with respect to any annual or other meeting of its
security holders. As of the date of this Form 10-K, the Company has not provided
to its security holders an annual report covering the Company's last fiscal
year.
26
PHOENIX COLOR CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants................................ F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statements of Changes in Stockholders' Equity....... F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-8
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of
Phoenix Color Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Phoenix Color Corp. and its subsidiaries (the "Company") as of December 31,
2000 and 2001 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 22, 2002
F-2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2000 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 367,866 $ 122,101
Accounts receivable, net of allowance for doubtful accounts and rebates
of $1,084,800 in 2000 and $1,780,704 in 2001 ............................ 20,296,011 19,606,187
Inventory ............................................................... 5,501,544 6,428,524
Income tax receivable ................................................... 805,905 748,142
Prepaid expenses and other current assets ............................... 1,321,909 2,600,140
Deferred income taxes ................................................... 1,032,798 --
------------- -------------
Total current assets .................................................... 29,326,033 29,505,094
Property, plant and equipment, net ....................................... 73,552,022 66,794,386
Goodwill, net ............................................................ 15,984,065 13,302,809
Deferred financing costs, net ............................................ 3,650,637 3,434,959
Other assets ............................................................. 10,559,495 9,364,936
------------- -------------
Total assets ............................................................ $ 133,072,252 $ 122,402,184
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable ........................................................... $ 20,806 $ 7,418
Accounts payable ........................................................ 10,489,654 10,884,790
Accrued expenses ........................................................ 11,055,808 10,613,097
------------- -------------
Total current liabilities ............................................... 21,566,268 21,505,305
10 3/8% Senior subordinated notes ........................................ 105,000,000 105,000,000
MICRF Loan ............................................................... 500,000 500,000
Revolving line of credit ................................................. 8,659,042 12,394,941
Deferred income taxes .................................................... -- 625,457
------------- -------------
Total liabilities ...................................................... 135,725,310 140,025,703
------------- -------------
Commitments and contingencies
Stockholders' deficit
Common Stock, Class A, voting, par value $0.01 per share, authorized
20,000 shares, 14,560 issued shares and 11,100 outstanding shares ....... 146 146
Common Stock, Class B, non-voting, par value $0.01 per share, authorized
200,000 shares, 9,794 issued shares and 7,794 outstanding shares ........ 98 98
Additional paid in capital .............................................. 2,126,804 2,126,804
Accumulated deficit ..................................................... (2,911,384) (17,920,245)
Stock subscriptions receivable .......................................... (99,492) (61,092)
Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares (1,769,230) (1,769,230)
------------- -------------
Total stockholders' deficit ............................................. (2,653,058) (17,623,519)
------------- -------------
Total liabilities & stockholders' deficit ............................... $ 133,072,252 $ 122,402,184
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------
1999 2000 2001
------------- ------------- -------------
Sales .............................. $ 141,338,367 $ 147,544,151 $ 129,364,616
Cost of sales ...................... 109,357,385 117,873,719 104,369,705
------------- ------------- -------------
Gross profit ....................... 31,980,982 29,670,432 24,994,911
------------- ------------- -------------
Operating expenses:
Selling and marketing expenses .... 5,688,212 7,493,814 8,046,359
General and administrative expenses 17,167,869 17,510,857 15,619,292
Loss on disposal of assets ........ 358,174 2,630,285 121,782
Restructuring charge .............. -- 11,425,000 (303,881)
------------- ------------- -------------
Total operating expenses ........... 23,214,255 39,059,956 23,483,552
------------- ------------- -------------
Income (loss) from operations ...... 8,766,727 (9,389,524) 1,511,359
Other expenses:
Interest expense .................. 14,939,009 12,942,862 12,374,252
Other income ...................... (282,682) (115,807) (253,693)
------------- ------------- -------------
Loss before income taxes ........... (5,889,600) (22,216,579) (10,609,200)
Income tax (benefit) provision ..... (1,045,309) (7,055,000) 4,399,661
------------- ------------- -------------
Net loss ........................... $ (4,844,291) $ (15,161,579) $ (15,008,861)
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
---------------------------------------------------------
Class A Class B Additional
--------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 14,560 $ 146 9,794 $ 98 $ 2,126,804
Payment of stock subscription -- -- -- -- --
Net loss .................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 14,560 146 9,794 98 2,126,804
Payment of stock subscription -- -- -- -- --
Net loss .................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 14,560 146 9,794 98 2,126,804
Payment of stock subscription -- -- -- -- --
Net loss .................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 14,560 $ 146 9,794 $ 98 $ 2,126,804
============ ============ ============ ============ ============
Retained
Earnings Stock Treasury Stock Total
Accumulated Subscription --------------------------- Stockholders'
(Deficit) Receivable Shares Amount Equity (Deficit)
------------ ------------ ------------ ------------ ---------------
Balance at December 31, 1998 $ 17,094,486 $ (169,792) 5,460 $ (1,769,230) $ 17,282,512
Payment of stock subscription -- 32,400 -- -- 32,400
Net loss .................... (4,844,291) -- -- -- (4,844,291)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 12,250,195 (137,392) 5,460 (1,769,230) 12,470,621
Payment of stock subscription -- 37,900 -- -- 37,900
Net loss .................... (15,161,579) -- -- -- (15,161,579)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 (2,911,384) (99,492) 5,460 (1,769,230) (2,653,058)
Payment of stock subscription -- 38,400 -- -- 38,400
Net loss .................... (15,008,861) -- -- -- (15,008,861)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 $(17,920,245) $ (61,092) 5,460 $ (1,769,230) $(17,623,519)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1999 2000 2001
------------- ------------- -------------
Operating activities:
Net loss ........................................................ $ (4,844,291) $ (15,161,579) $ (15,008,861)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property, plant and equipment . 12,513,790 12,510,539 11,274,079
Amortization of goodwill ....................................... 3,122,712 2,925,380 2,681,256
Amortization of deferred financing costs ....................... 1,537,684 520,369 528,701
Provision for uncollectible accounts ........................... 220,000 485,000 413,125
Deferred income taxes .......................................... 478,796 (7,344,934) 5,025,118
Restructuring charge ........................................... -- 7,461,307 (303,881)
Loss on disposal of assets ..................................... 358,174 2,630,285 386,179
Increase (decrease) in cash resulting from changes in assets and
liabilities:
Accounts receivable ............................................ (4,490,823) 403,272 276,700
Inventory ...................................................... (414,407) (125,769) (926,980)
Prepaid expenses and other assets .............................. 442,553 (81,853) (3,416,082)
Accounts payable ............................................... (4,805,691) (3,333,599) 321,027
Accrued expenses ............................................... 4,120,225 3,111,219 (138,830)
Income tax refund receivable ................................... (1,593,869) 2,021,518 57,763
------------- ------------- -------------
Net cash provided by operating activities ...................... 6,644,853 6,021,155 1,169,314
------------- ------------- -------------
Investing activities:
Proceeds from sale of equipment ................................ 1,362,607 1,059,306 391,500
Capital expenditures ........................................... (17,871,249) (6,838,595) (5,294,122)
Increase in equipment deposits ................................. -- -- 39,656
Purchase of businesses, net of cash acquired ................... (17,617,055) -- --
------------- ------------- -------------
Net cash used in investing activities .......................... (34,125,697) (5,779,289) (4,862,966)
------------- ------------- -------------
Financing activities:
Proceeds from issuance of senior subordinated notes ............ 105,000,000 -- --
Net (payments) proceeds on revolving line of credit ............ (2,103,449) (605,011) 3,735,899
Proceeds from long term borrowings ............................. -- 500,000 --
Principal payments on long term borrowings ..................... (78,224,270) (77,474) (13,388)
Principal payments on capital lease obligations ................ (7,653,925) -- --
Debt financing costs ........................................... (4,133,362) -- (313,024)
Payment of stock subscription .................................. 32,400 37,900 38,400
------------- ------------- -------------
Net cash provided by (used in) financing activities ............ 12,917,394 (144,585) 3,447,887
------------- ------------- -------------
Net (decrease) increase in cash ................................ (14,563,450) 97,281 (245,765)
Cash and cash equivalents at beginning of year ................. 14,834,035 270,585 367,866
------------- ------------- -------------
Cash and cash equivalents at end of year ....................... $ 270,585 $ 367,866 $ 122,101
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
Year Ended December 31,
1999 2000 2001
------------ ------------ ------------
Supplemental cash flow disclosures:
Cash paid for interest .............................. $ 9,977,620 $ 12,477,684 $ 11,928,179
Cash paid for income taxes, net of (refunds) received $ 67,892 $ (1,733,468) $ (683,220)
Non-cash investing and financing activities:
Equipment and deposits included in accounts payable .... $ -- $ 592,230 $ 74,109
Acquisitions:
Fair value of assets acquired ....................... $ 22,230,528 $ -- $ --
Less: Liabilities assumed and cash acquired ........ $ 4,613,473 $ -- $ --
------------ ------------ ------------
Acquisitions net of cash acquired ................... $ 17,617,055 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
PHOENIX COLOR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Phoenix Color Corp. (the "Company") manufactures book components, which
include book jackets, paperback covers, pre-printed case covers, inserts and
endpapers at its headquarters in Hagerstown, MD and complete books at its
facilities in Rockaway, NJ and Hagerstown, MD. Customers consist of major
publishing companies as well as smaller publishing companies throughout the
United States.
2. Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All intercompany accounts and transactions have been
eliminated.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at date of acquisition to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market value as determined by
the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property and equipment are stated at cost, except when acquired through a
business acquisition, in which case they are stated at fair value. Depreciation
for all fixed assets is provided on the straight-line method over the assets'
estimated useful lives. Depreciable lives range from 3-40 years: 5-40 years for
buildings and improvements, 3-10 years for machinery and equipment, and 3-5
years for transportation equipment.
Expenditures for maintenance and repairs are charged to operations when
incurred. Expenditures determined to represent additions and betterments are
capitalized. Gains and losses from disposals, if any, are included in earnings.
The Company has purchased additional equipment, which is either on order or
in various stages of installation. Depreciation begins at the time installation
is completed.
Fair Value of Certain Financial Instruments
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts receivable, accounts
payable, and accrued expenses, approximates fair value, due to the relatively
short maturity of these instruments.
F-8
2. Significant Accounting Policies (Continued)
Concentration of Risk
Financial instruments that subject the Company to significant concentration
of credit risk consist primarily of accounts receivable. The Company sells
products to customers located throughout the United States without requiring
collateral. However, the Company assesses the financial strength of its
customers and provides allowances for anticipated losses when necessary. The
Company has not experienced any losses on its investments.
Customers that accounted for more than 10% of net sales or accounts
receivable are as follows:
Customers
---------------------------------------------
A B C
--------------- -------------- --------------
Net Sales
2001.............. 11% 12% --
2000.............. 11% 13% 10%
1999.............. 11% 12% --
The Company currently purchases its paper and printing supplies from a
limited number of suppliers. There are a number of other suppliers of these
materials throughout the U.S. and management believes that these other suppliers
could provide similar printing supplies and paper on comparable terms. A change
in suppliers, however, could cause a delay in manufacturing, and a possible loss
of sales, which could adversely affect operating results.
Because the Company derives all of its revenues from customers in the book
publishing and book printing industries, the Company's business, financial
condition and results of operations could be adversely affected by changes which
have a negative impact on these industries.
Intangible Assets
Goodwill represents the excess of the purchase price (see Note 7) over the
fair value of identifiable net tangible assets acquired and is being amortized
using the straight-line method. Goodwill consists of $17.8 million associated
with the 1996 acquisition of New England Book Holding Corporation, which is
being amortized over eight years, and $9.9 million associated with the 1999
acquisitions of Mid-City Lithographers, Inc. and TechniGraphix, Inc.,
respectively, which is being amortized over twenty years. The Company
periodically evaluates the carrying value of goodwill and recognizes impairment
charges as required. In 2000, the Company closed its TechniGraphix, Inc.
subsidiary and accordingly charged operations with the unamortized cost of
acquired goodwill (see Note 8).
Deferred financing costs incurred in connection with the 1998 financing
discussed in Note 5 were deferred and were amortized using the straight-line
method, which approximates the interest method, over the life of the related
loan. These costs were written off in their entirety in 1999 as a result of the
issuance of 10 3/8% Senior Subordinated Notes in February 1999 (see Note 5).
Costs incurred in connection with the 1999 issuance of the 10 3/8% Senior
Subordinated Notes maturing February 1, 2009 have been deferred and are being
amortized using the straight-line method over a ten year period.
F-9
2. Significant Accounting Policies (Continued)
Long-lived Assets
The Company evaluates quarterly the recoverability of the carrying value of
property and equipment and intangible assets. The Company considers historical
performance and anticipated future results in its evaluation of any potential
impairment. Accordingly, when the indicators of impairment are present, the
Company evaluates the carrying value of these assets in relation to the
operating performance of the business and future undiscounted cash flows
expected to result from the use of these assets. Impairment losses are
recognized when the sum of the expected future cash flows is less than the
assets' carrying value.
In 2000, the Company sold various assets, the carrying value of which
exceeded the sales price, and accordingly the Company recognized a loss of
approximately $2.6 million. In addition, in 2000, the Company restructured its
operations, closing the Taunton, Massachusetts facility, and accordingly,
charged income for the unamortized cost of leasehold improvements (see Note 8).
Revenue Recognition
The Company recognizes revenue on product sales upon shipment on behalf of
or to the customer.
Income Taxes
Deferred income taxes are recognized for the tax consequences in the future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at year end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. Income tax expense is the tax payable for the period and
the change during the period in deferred tax assets and liabilities. Valuation
allowances are provided when necessary to reduce deferred tax assets to the
amount expected to be realized.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and contingent liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
Reclassifications
Certain 1999 and 2000 amounts have been reclassified to conform to the 2001
presentation.
Implication of New Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board ("FASB")
finalized SFAS 141, "Business Combinations"("SFAS 141") and SFAS 142, "Goodwill
and Other intangible Assets," ("SFAS 142"), which
F-10
2. Significant Accounting Policies (Continued)
are effective for fiscal years beginning after December 15, 2001. The Company is
required to and will adopt both SFAS 141 and SFAS 142 beginning in 2002. Upon
adoption of SFAS 141 and SFAS 142, the Company will cease to amortize goodwill
recorded on prior business combinations and will annually review the recorded
goodwill for impairment. The Company's management does not expect that the
application of the provisions of SFAS 141 and SFAS 142 will have a material
impact on the Company's consolidated financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses the accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 will be effective for the Company in the first quarter of 2002.
The Company's management does not expect that the application of the provisions
of SFAS 143 will have a material impact on the Company's consolidated financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 clarifies the accounting for the impairment of long-lived assets
and for long-lived assets to be disposed of, including the disposal of business
segments and major lines of business. SFAS 144 will be effective for the Company
in the first quarter of 2002. The Company's management does not expect that the
application of the provisions of SFAS 144 will have a material impact on the
Company's consolidated financial statements.
3. Inventory
Inventories consist of the following:
December 31,
-------------------------------
2000 2001
--------------- ---------------
Raw Materials........ $ 4,273,345 $ 4,002,663
Work in process...... 1,228,199 2,425,862
--------------- ---------------
$ 5,501,544 $ 6,428,525
=============== ===============
4. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of the following:
December 31,
------------------------
2000 2001
------------------------
Land............................................$ 2,998,006 $ 2,998,006
Buildings and improvements...................... 33,015,751 33,096,264
Machinery and equipment......................... 80,091,789 78,072,838
Transportation equipment........................ 2,024,464 2,070,049
------------------------
118,130,010 116,237,157
Less: Accumulated depreciation and amortization 44,577,988 49,442,771
------------------------
$73,552,022 $66,794,386
========================
F-11
4. Property, Plant and Equipment (Continued)
Included in other long-term assets are equipment deposits (see Note 9) in
the amount of $3,632,963 and $3,667,416 as of December 31, 2000 and 2001,
respectively.
5. Debt
At December 31, notes payable consisted of the following:
December 31,
Maturity --------------------------
Notes Date 2000 2001
----- -------- ------------ ------------
Senior Subordinated Notes ...... 2009 $105,000,000 $105,000,000
Revolving Line of Credit ....... 2004 8,659,042 12,394,941
MICRF Loan ..................... 2005 500,000 500,000
Equipment Notes ................ 2002 20,806 7,418
---------------------------
Total .................. 114,179,848 117,902,359
Less current portion ... 20,806 7,418
---------------------------
Long-term portion ...... $114,159,042 $117,894,941
===========================
Senior Subordinated Notes
On February 2, 1999, the Company issued $105.0 million of 10 3/8% Senior
Subordinated Notes due 2009 ("Senior Notes") in a private offering. The Senior
Notes were issued under an indenture and are uncollateralized senior
subordinated obligations of the Company with interest payable semiannually on
February 1 and August 1 of each year, beginning on August 1, 1999. Net proceeds
of approximately $101.0 million from the Senior Notes were used to repay
substantially all short and long term debt facilities and capital leases
existing at December 31, 1998 and to fund the acquisition of TechniGraphix (see
Note 7) and working capital requirements. Although not due until 2009, the
Senior Notes are redeemable, at the option of the Company, on or after February
1, 2004, at declining premiums through January 2007 and at their principal
amount thereafter. If a third party acquires control of the Company, the Senior
Note holders have the right to require the Company to repurchase the Senior
Notes at a price equal to 101% of the principal amount of the notes plus accrued
and unpaid interest to the date of purchase. All current and future "restricted
subsidiaries," as defined in the Senior Notes indenture, are guarantors of the
Senior Notes on an uncollateralized senior subordinated basis (see Note 13). In
May 1999, the Company exchanged new registered 10 3/8% Senior Subordinated Notes
for the original notes. The terms of the registered notes are equivalent to the
original notes in all material respects.
MICRF Loan
In May 2000, the Company entered into a five year $500,000 loan agreement
with Maryland Industrial and Commercial Redevelopment Fund (MICRF) bearing
interest at 4.38% per annum. Pursuant to its terms, if the Company employs 543
people in Maryland in each of the years of the loan, then the loan and
F-12
5. Debt (Continued)
all accrued interest thereon shall be forgiven. If the Company does not meet the
employment requirements, it will be required to repay the loan and accrued
interest thereon in quarterly installments until repaid in full. As of December
31, 2001, the Company employed over 690 people in the State of Maryland. The
Company has included the principal amount of this loan in long term debt on the
consolidated balance sheet at December 31, 2001.
Revolving Line of Credit
In September 1998, the Company entered into an Amended and Restated Loan
Agreement (the "Senior Credit Facility") with a commercial bank for a three year
$20,000,000 revolving credit facility, the proceeds of which were used to repay
the balance of the previous revolving credit facility. Borrowings under the
Senior Credit Facility are subject to a borrowing base and are collateralized by
all of the assets of the Company. On March 30, 2001 the Senior Credit Facility
was amended to extend its maturity date to March 31, 2002. On August 14, 2001
the Senior Credit Facility was further amended to extend the maturity date to
August 1, 2004 and provide increased availability by reducing the borrowing base
limitation. The Company's availability under the Senior Credit Facility, as
amended, was $7.6 million as of December 31, 2001.
The Senior Credit Facility provides for interest at a base rate plus an
applicable margin which varies depending on the Company's attaining certain
leverage ratios, or at the LIBOR rate plus an applicable margin which varies
depending on the Company attaining certain leverage ratios but only if the
Company is not in default of any of the covenants of the Senior Credit Facility.
At December 31, 2000 and 2001, the weighted average interest rates on its
borrowings were 10.6% and 6.8%, respectively.
Included in accrued expenses is accrued interest for all Company debt in
the amount of $4,558,462 and $4,550,833 as of December 31, 2000 and 2001,
respectively.
Compliance with Debt Covenants
Prior to August 14, 2001, the Senior Credit Facility contained certain
covenants that required the Company to maintain certain financial and
non-financial covenants, the most restrictive of which required the Company to
maintain certain interest coverage and leverage ratios as defined in the Senior
Credit Facility. The Senior Credit Facility was amended on November 13, 2000 to
adjust financial covenants with which the Company was not in compliance. As of
December 31, 2000, the Company was in compliance with the Senior Credit Facility
as amended in November 2000. On August 14, 2001, the Senior Credit Facility was
amended to require the Company to maintain a fixed coverage charge ratio as
defined in the amendment. As of December 31, 2001, the Company was in compliance
with the Senior Credit Facility covenants. As of December 31, 2000 and 2001, the
Company has not met the required consolidated coverage ratio under the Senior
Notes and therefore, is unable to incur more than $5 million of additional new
indebtedness until the Company attains the consolidated coverage ratio as
defined in the Senior Note agreement. The Senior Notes also contain limitations
on the payment of dividends, the distribution or redemption of stock, sales of
assets and subsidiary stock, as well as limitations on additional Company and
subsidiary debt, and require the Company to maintain certain non-financial
covenants.
F-13
5. Debt (Continued)
Fair Value
The carrying value of the revolving line of credit, MICRF loan and
equipment notes approximated their fair value at December 31, 2001. The fair
value of the Senior Notes at December 31, 2001 was approximately $77,700,000 and
was estimated based on quoted market rate for instruments with similar terms and
remaining maturities.
6. Income Taxes
(Benefit) provision for income taxes is summarized as follows:
For the year December 31,
-----------------------------------------
1999 2000 2001
----------- ----------- -----------
Current:
Federal .......................................... $(1,498,218) $ 237,439 $ (625,457)
State ............................................ (331,255) 52,495 --
State payments (refunds) resulting from changes in
estimates on prior year returns ............... 111,456 -- --
----------- ----------- -----------
(1,718,017) 289,934 (625,457)
----------- ----------- -----------
Deferred:
Federal .......................................... 550,903 (6,015,010) 4,221,691
State ............................................ 121,805 (1,329,924) 803,427
----------- ----------- -----------
672,708 (7,344,934) 5,025,118
----------- ----------- -----------
$(1,045,309) $(7,055,000) $ 4,399,661
=========== =========== ===========
The (benefit) provision for income taxes differed from the amount of income
tax determined by applying the applicable U.S. statutory rate to income before
taxes as a result of the following:
For the year ended December 31,
----------------------------------
1999 2000 2001
-------- -------- --------
Statutory U.S. rate .............. (34.0)% (34.0)% (34.0)%
State taxes net of federal benefit (2.3) (3.9) (3.3)
Goodwill amortization ............ 15.4 4.1 8.6
Other permanent differences ...... 3.2 2.0 1.7
Valuation allowance .............. 68.5
-------- -------- --------
Effective tax rate ............... (17.7)% (31.8)% (41.5)%
======== ======== ========
F-14
6. Income Taxes (Continued)
The source and tax effects of the temporary differences giving rise to the
Company's net deferred tax asset (liability) are as follows:
December 31,
----------------------------
2000 2001
------------ ------------
Deferred income tax assets:
Covenant not to compete .................. $ 32,483 $ 29,261
Allowance for doubtful accounts .......... 209,299 336,326
Accrued liabilities ...................... 779,061 1,364,952
AMT credit carryforward .................. 625,457 --
Contribution and loss carryforward ....... 6,506,259 11,550,351
------------ ------------
Total deferred income tax assets .... 8,152,559 13,280,890
Valuation allowance ...................... -- (7,266,470)
------------ ------------
Net deferred tax asset .............. 8,152,559 6,014,420
------------ ------------
Deferred income tax liabilities:
Property and equipment ................... (3,723,474) (6,634,816)
Inventory ................................ (29,424) (5,061)
------------ ------------
Total deferred income tax liabilities (3,752,898) (6,639,877)
------------ ------------
Net deferred asset (liability) ...... $ 4,399,661 $ (625,457)
============ ============
During the year ended December 31, 2001, the Company established against
its deferred tax assets a valuation allowance of $7.3 million. The valuation
allowance was established against substantially all of the Company's net
operating loss carryforwards due to the uncertainty of their realizability. As
of December 31, 2001, the Company had net operating loss carryforwards of $18.8
million, which begins to expire in 2018, and a charitable contribution
carryforward of $313,000, which begins to expire in 2003.
On March 9, 2002, the "Job Creation and Worker Assistance Act" (H.R. 3090),
was signed into law. The law temporarily extends the general NOL carryback
period to five years (from two years under present law) for NOLs arising in
taxable years ending in 2001 and 2002. As a result of the law change, the
Company will be able to apply for carryback claims for approximately $2.7
million. The Company will account for this law change during the first quarter
of 2002 which corresponds with the law's enactment date.
7. Acquisitions
On January 4, 1999, the Company acquired the outstanding capital stock of
Mid-City Lithographers, Inc. ("Mid-City") and certain assets of Viking Leasing
Partnership, a related party of Mid-City, for $10.8 million in cash and the
assumption of $1.7 million of indebtedness. Mid-City, located in Lake Forest,
Illinois, supplied book components primarily to the elementary and high school
textbook segment of the book publishing market. Mid-City was merged into the
Company and does not exist as a subsidiary. On February 12, 1999, the Company
acquired the outstanding capital stock of TechniGraphix,
F-15
7. Acquisitions (Continued)
Inc. ("TechniGraphix") for a purchase price of $7.3 million. TechniGraphix, Inc.
was a producer of print-on-demand books formerly located in Sterling, Virginia.
(See Note 8) These transactions were accounted for as purchase business
combinations.
8. Restructuring
In September 2000, the Company announced a plan to restructure its
operations, which resulted in the Company recording a one-time operating expense
totaling $11.4 million. The restructuring plan involved the closing of
TechniGraphix, Inc. and the Company's Taunton, Massachusetts facility in order
to reduce costs and improve productivity. In 2001, the Company negotiated a
settlement with respect to certain operating leases for equipment, which
resulted in a reduction of $304,000 of the amount accrued for restructuring
costs.
The following table displays the activity and balances of the restructuring
accrual account from January 1, 2000 to December 31, 2001:
Lease
Termination Facility
Costs Closing Totals
----------- ---------- ----------
January 1, 2000 ......... $ -- $ -- $ --
Additions ............... 3,729,000 325,000 4,054,000
Payments ................ 73,000 325,000 398,000
---------- ---------- ----------
Balance December 31, 2000 3,656,000 -- 3,656,000
Reductions .............. 304,000 -- 304,000
Payments ................ 378,000 -- 378,000
---------- ---------- ----------
Balance December 31, 2001 $2,974,000 $ -- $2,974,000
====================================
Also included in restructuring and exit costs for the year ended December
31, 2000 were impairment charges of approximately $7.5 million related to the
write-down of unrecoverable assets and goodwill in TechniGraphix and the
Taunton, Massachusetts facility, in which the carrying value was no longer
supported by future cash flows.
The following information sets forth the results of operations of
TechniGraphix, Inc. for the year ended December 31, 2000.
Net sales $ 3,480,935
Net loss $(14,401,114)
F-16
9. Commitments and Contingencies
Operating Leases
The Company leases certain office, manufacturing facilities and equipment
under operating leases. Lease terms generally range from 1 to 10 years with
options to renew at varying terms. The leases generally provide for the lessee
to pay taxes, maintenance, insurance and other operating costs of the leased
property. Rent expense under all leases is recognized ratably over the lease
terms. Rent expense under all operating leases was approximately $4,943,092,
$7,759,638 and $6,414,062 for the years ending December 31, 1999, 2000, and
2001, respectively.
Future minimum lease payments under operating leases as of December 31,
2001 are as follows:
Total
----------------
2002.................................. $ 6,387,045
2003.................................. 6,410,327
2004.................................. 6,310,378
2005.................................. 6,388,823
2006.................................. 5,768,381
Thereafter............................ 8,224,129
----------------
$39,489,083
================
Effective March 1, 2000, the Company sublet the TechniGraphix, Inc.
manufacturing facility in Sterling, Virginia for the remainder of the term of
the prime lease, and on the same terms as the prime lease. The Company remained
liable under the terms of the prime lease in the event of a default by the
subtenant. In the fourth quarter of 2001 the subtenant defaulted on the lease.
In January 2002, the Company, in order to avoid protracted litigation agreed to
pay the landlord $50,000 and forfeit its security deposit of $13,000 to
terminate the lease.
Legal Contingencies
In December 1998, the Company filed a complaint against Krause Biagosch
GmbH ("Krause Germany") and Krause America, Inc. ("Krause America" and together
with Krause Germany "Krause"), which was tried in October 2000 in the United
States District Court for the District of Maryland, based on breach of contract
and statutory warranties on certain prepress equipment which the Company had
agreed to purchase from Krause. The Company attempted to operate the equipment,
and contended that the equipment failed to perform as warranted. During 1999,
the Company removed the portion of the equipment actually delivered, and sought
recovery of the approximately $2.0 million paid on this equipment, which
included amounts for deposits on the balance of the equipment not yet delivered.
As of December 31, 2000 and 2001, the Company included in other non-current
assets a receivable from Krause of approximately $2.0 million. On January 27,
2000, the court granted summary judgment in favor of the Company with respect to
the three machines previously delivered to the Company. On October 24, 2000, a
jury rendered a verdict against Krause for $1.9 million. On December 27, 2001
the Federal Court of Appears for the 4th Circuit rendered a decision confirming
the lower court's decision without modification. Due to recent efforts by Krause
America to avoid enforcement of the judgment, the Company has been forced to
file a new lawsuit in the U.S.
F-17
District Court for the District of Maryland against Krause America, Krause CTP,
Limited, Krause Germany, and Jurgen Horstmann, Krause Germany's sole
shareholder.
In August 1999, the Company filed a complaint against Motion Technology
Horizons, Inc. ("Motion Technology") in the Circuit Court for Washington County,
Maryland to recover approximately $300,000 in deposits made on equipment which
failed to perform in accordance with manufacturer's warranties, and $703,000 for
the purchase of substitute equipment. Motion Technology has counterclaimed for
$250,000 for the balance of the purchase price for the equipment, plus
incidental charges. In March 2001, the Company amended its complaint, adding
Eagles Systems, Inc. ("Eagle") as a defendant in the case. In November 2001, the
Company obtained an order of default against Eagle. The Company has filed a
motion for summary judgment against Eagle and Motion Technology. On February 25,
2002, the court granted the Company's motions for summary judgment and entry of
an order of default and entered a judgment against Eagle and Motion Technology
in the amount of $1,006,750. Defendants had thirty (30) days from that date to
appeal the judgment. On February 26, 2002, defendants filed for bankruptcy.
The Company is not a party to any other legal proceedings, other than
claims and lawsuits arising in the normal course of the Company's business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows for any quarterly or
annual period.
Purchase Commitments
As of December 31, 2001, the Company has contractual commitments totaling
approximately $7.8 million for the purchase of various equipment to be funded
through operating leases in 2002. As of December 31, 2001, the Company had
commitments for $4.0 million of operating deposits to be funded in 2002.
10. Related Party Transactions
The Company formerly utilized the services of a law firm in which a former
director of the Company is also a partner. The Company paid the law firm
approximately $315,000 for the year ended December 31, 1999.
Earl S. Wellschlager, director of the Company, is a partner in a law firm
that serves as counsel to the Company. The Company paid the law firm
approximately $610,000, $694,000 and $180,000 for the years ended December 31,
2001, 2000 and 1999, respectively. As of December 31, 2001 and 2000, $-0- and
$65,027, respectively, is owed to the law firm and is included in accounts
payable.
The Company utilizes the services of a management consulting firm in which
a director of the Company is also a principal. The Company paid the consulting
firm approximately $143,000, $7,000, and $31,000 for the years ended December
31, 2001, 2000, and 1999, respectively. As of December 31, 2001 and 2000,
$22,866 and $4,837, respectively, is owed to the consulting firm and is included
in accounts payable.
F-18
11. Retirement Programs
Phoenix Color Corp.'s Employee Stock Bonus and Ownership Plan (the "Plan")
is the primary retirement program of the Company. Contributions to the Plan are
made at the discretion of management. No contributions were made to the plan
during the three year period ended December 31, 2001.
The Company offers a 401(k) Employee Savings and Investment Plan to all
employees of the Company who have completed at least one year of service (1,000
hours) during the plan year. The Company may, at its discretion, make
contributions to the plan. No contributions were made to the plan during the
three year period ended December 31, 2001.
12. Unaudited Quarterly Financial Data
Quarterly Financial Information
First Second Third Fourth Total
--------------------------------------------------------------------------
2001
Net sales ................... 32,144,028 32,359,481 35,275,912 29,585,195 129,364,616
Cost of sales ............... 25,482,523 26,108,143 27,803,101 24,975,938 104,369,705
Income (loss) from operations 533,149 386,768 1,771,963 (1,180,521) 1,511,359
Net loss .................... (1,249,749) (3,637,395) (6,059,360) (4,062,357) (15,008,861)
2000
Net sales ................... 36,283,486 37,057,467 40,631,522 33,571,676 147,544,151
Cost of sales ............... 28,173,852 29,141,035 32,174,986 28,383,846 117,873,719
Income (loss) from operations 2,018,661 (267,751) (9,492,239) (1,648,195) (9,389,524)
Net loss .................... (581,277) (929,343) (10,576,180) (3,074,779) (15,161,579)
1999
Net sales ................... 33,303,845 35,860,929 36,266,441 35,907,152 141,338,367
Cost of sales ............... 25,675,791 26,771,962 28,147,120 28,762,512 109,357,385
Income from operations ...... 1,552,557 3,555,978 2,742,317 915,875 8,766,727
Net loss .................... (2,860,238) (58,227) (345,653) (1,580,173) (4,844,291)
13. Guarantor Subsidiaries:
Phoenix Color Corp. ("Parent") currently has no independent operations and
the guarantees made by all of its subsidiaries, which are all 100% owned, are
full and unconditional and joint and several. The Company currently does not
have any direct or indirect non-guarantor subsidiaries. All consolidated amounts
in the Parent's financial statements would be representative of the combined
guarantors.
F-19
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
Phoenix Color Corp.
Our audits of the consolidated financial statements referred to in our report
dated February 22, 2002 included in this Annual Report on Form 10-K also
included an audit of the financial statement schedule, Valuation and Qualifying
Accounts, for each of the three fiscal years in the period ended December 31,
2001, which is also included in this Form 10-K. In our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 22, 2001
S-1
Schedule II - Valuation and Qualifying
Accounts For Each of the three Years in the Period
Ended December 31, 2001
(in thousands)
Additions
---------
Balance Charged to Balance
at Costs Rebates at
Beginning and Charged to End
of Year Expenses Sales Deductions of Year
------- -------- ----- ---------- -------
Description
- -----------
Allowance for doubtful Accounts Receivable and Rebates
Year ended December 31, 2001 .......................... $1,085 $ 414 $ 888 $ 606 $ 1,781
=======================================================
Year ended December 31, 2000 .......................... $1,119 $ 492 $ 760 $1,286 $ 1,085
=======================================================
Year ended December 31, 1999 .......................... $1,114 $ 220 $ 814 $1,029 $ 1,119
=======================================================
Restructuring Reserve
Year ended December 31, 2001............................ $3,656 $ (304) $ -- $ 378 $ 2,974
=======================================================
Year ended December 31, 2000 .......................... $ -- $4,054 $ -- $ 398 $ 3,656
=======================================================
S-2