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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, 2000 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, 2000, the Registrant had no capital stock or other
securities registered under the Securities Exchange Act of 1934, as amended.
As of March 15, 2001, 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... 16
Item 8. Financial Statements and Supplementary Data.................. 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 16
Part III
Item 10. Directors and Executive Officers of the Registrant........... 16
Item 11. Executive Compensation....................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 20
Item 13. Certain Relationships and Related Transactions............... 21
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 21
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. In 1998, the
Company increased its services to include book components for the general
interest, religious and other markets of the book publishing industry, thin book
and paperback book manufacturing and on-demand printing. Early operations were
conducted in a single
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production facility in Long Island City, New York. In 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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. discontinued 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 20 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 two presses capable of printing up to ten colors on a single
side 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
styles including, smythe
3
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 paperback 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. Its binding equipment requires fewer workers to operate it than
older bindery equipment.
Before printing, the Company provides its customer a proof of the
job, which must be approved by the customer. The Company has developed the
Phoenix Colornet(R) system, a proprietary system that permits the electronic
transfer of digital files within the Company's facilities and to its customers
who have been provided with the Phoenix Colornet(R) system. Further, the Phoenix
Colornet(R) system provides more reliable, consistently color-accurate, digital
proofs. Virtually all of the Company's proofs for book components are generated
digitally through its Phoenix Colornet(R) system. Proofs for book manufacturing
consist of bound galleys, which are digitally printed and bound. The Company may
also transfer files by mechanical transfer or 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.
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 78.3% of the
Company's net sales in 2000 and 86.9% of net sales in 1999. Sales of book
components for use in general interest books accounted for 48.5% of the
Company's net book component sales in each of the years 2000 and 1999. Sales of
book components to publishers of educational materials accounted for 23.9% and
24.1% of net book component sales in 2000 and 1999, respectively, and sales to
publishers of business-related books accounted for 8.1% and 9.3% of net book
component sales in 2000 and 1999, respectively. Sales of book components to all
other book publishers, including juvenile, computer and religious, accounted for
19.5% and 18.4% of net book component sales in 2000 and 1999, 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, and currently has 107 active
customers providing repetitive business. Sales of thin books represented 13.9%
and 7.5% of the Company's net sales for the years ended December 31, 2000 and
1999, 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 8.9% and
1.4% of the Company's net sales for the years ended December 31, 2000 and 1999,
respectively. The Company manufactures hard and soft cover books for virtually
all segments of the book publishing industry with over 150 active customers.
TechniGraphix Inc., the Company's print-on-demand subsidiary
operated for nine months of the year 2000, discontinuing operations in September
2000. Sales of print-on-demand books represented 2.0% and 4.2% of the Company's
net sales for the years ended December 31, 2000 and 1999, respectively.
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, HarperCollins Publishers and Random House Inc. accounted for 13.3%,
11.3% and 10.1% , respectively, of the Company's net sales in 2000. Pearson
Publishing and HarperCollins Publishers accounted for 11.8% and 11.3%,
respectively, of the Company's net sales in 1999. Our ten largest customers
accounted for approximately 70.1% and 69.4% of net sales in 2000 and 1999,
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, 2000, the Company had 899 employees, of whom 14
were engaged in management, 57 in finance, administration and billing, 116 in
sales, sales support and customer service, 15 in information systems and
technological development, 15 in transportation and 682 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:
Leased/Owned; Square
Location Use Expiration Date Footage
- -------- --- ------------------ --------
Hagerstown, MD ........... Corporate offices; printing, prepress and finishing for Owned 114,000
book components
Hagerstown, MD ........... Printing, prepress and finishing for book components Owned 86,000
New York City, NY ........ Prepress and sales Leased; 10/31/09 11,000
Taunton, MA .............. Discontinued operations Leased; 12/31/12 53,000
Rockaway, NJ ............. Printing, prepress and finishing for complete books Leased; 3/31/08 90,000
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 and Krause America, Inc. ("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. 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 26, 2000, a jury rendered a verdict in favor of the
Company on all but one of the remaining pieces of equipment. A judgment of
$1,899,247 has been entered against Krause America, Inc. Krause America, Inc.
has filed an appeal, and the Company has filed a cross appeal with respect to
the piece of equipment which was not included in the original verdict and
judgment, and on the issue of pre-judgment interest. As of December 31, 1999 and
2000, the Company included in other non-current assets a receivable from Krause
of approximately $2.0 million.
In August 1999, the Company filed a complaint against Motion
Technology Horizons, Inc. 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. The case is currently in the early stages of discovery.
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.
8
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,
1996 through 2000 and for the years then ended. Our Consolidated Financial
Statements for the years ended December 31, 1996 through 2000 have been audited
by PricewaterhouseCoopers LLP, independent accountants. PricewaterhouseCoopers
LLP's report on the Company's Consolidated Financial Statements as of December
31, 1999 and 2000 and for each of the three years in the period ended December
31, 2000 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,
-----------------------------------------------------------
1996(1) 1997 1998 1999(1) 2000
------- -------- -------- -------- ----------
(dollars in thousands)
Statement of Operations Data:
Sales .............................................. $95,262 $104,794 $107,491 $141,338 $147,544
Cost of sales ...................................... 71,116 73,722 80,627 109,357 117,874
Gross profit ....................................... 24,146 31,072 26,864 31,981 29,670
Operating expenses:
Selling and marketing expenses ..................... 6,089 5,881 6,278 5,688 7,494
General and administrative ......................... 8,920 12,265 12,934 17,168 17,511
(Gain) loss on sale of assets (2) .................. -- -- (133) 358 2,630
Restructuring charge (3) ........................... -- -- -- -- 11,425
Impairment loss (4) ................................ 1,268 -- -- -- --
Total operating expenses ........................... 16,277 18,146 19,079 23,214 39,060
Income (loss) from operations ...................... 7,869 12,926 7,785 8,767 (9,390)
Interest expense ................................... 4,937 4,484 5,076 14,939 12,943
Other (income) expense ............................. (241) 62 (327) (283) (116)
Income (loss) before income taxes: ................. 3,173 8,380 3,036 (5,889) (22,217)
Income tax (benefit) provision ..................... 1,807 3,898 2,008 (1,045) (7,055)
Net income (loss) .................................. $ 1,366 $ 4,482 $ 1,028 ($ 4,844) ($15,162)
Balance Sheet Data (at year end):
Cash and cash equivalents .......................... $ 158 $ 1,045 $ 14,834 $ 271 $ 368
Total assets ....................................... 76,113 84,993 132,440 151,505 133,072
Total debt (including capital lease obligations) ... 49,939 46,726 95,447 114,362 114,180
Total stockholders' equity (deficit) ............... 11,610 16,154 17,283 12,471 (2,653)
Other Financial Data:
Depreciation and amortization expense .............. $ 8,389 $ 9,142 $ 10,834 $ 17,174 $ 15,956
Capital expenditures (5) ........................... 11,052 15,131 48,168 17,871 6,839
EBITDA (6) ......................................... 16,499 22,005 18,946 26,224 6,682
EBITDA margin (7) .................................. 17.3% 21.0% 17.6% 18.6% 4.5%
Ratio of earnings to fixed charges (8) ............. 1.6x 2.7x 1.5x -- --
10
(1) On February 1, 1996, the Company acquired New England Book Holding
Corporation ("NEBC"). 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) Reflects the write-down of real estate assets held for sale to their
estimated net realizable value.
(5) Includes property and equipment financed through notes, deposits and
capital leases. See Consolidated Statements of Cash Flows in the
Consolidated Financial Statements.
(6) 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 and Note 2 in Notes to Consolidated Financial
Statements.
(7) EBITDA margin represents EBITDA divided by sales.
(8) 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 and 2000 the ratio of earnings to fixed charges was less
than one-to-one. The dollar amount by which the earning, defined above, was
insufficient to cover fixed charges was $6,316,000 and $22,217,000 in 1999
and 2000, 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,
-------------------------------------------------------
1998 1999 2000
----------------- ---------------- -----------------
$ % $ % $ %
------- ------ ------- ----- ------- ------
Sales ................................... 107,491 100.0 141,338 100.0 147,544 100.0
Cost of sales ........................... 80,627 75.0 109,357 77.4 117,874 79.9
Gross profit ............................ 26,864 25.0 31,981 22.6 29,670 20.1
Operating Expenses:
Selling and marketing expenses ....... 6,278 5.9 5,688 4.0 7,494 5.1
General and administrative expenses... 12,934 12.0 17,168 12.1 17,511 11.9
(Gain) loss on sale of assets ........ (133) (0.1) 358 0.2 2,630 1.8
Restructuring charge ................. -- -- -- -- 11,425 7.7
Total operating expenses ................ 19,079 17.8 23,214 16.3 39,060 26.5
Income (loss) from operations ........... 7,785 7.2 8,767 6.3 (9,390) (6.4)
Interest expense ........................ 5,076 4.7 14,939 10.6 12,943 8.8
Other (income) expense .................. (327) (.3) (283) (0.2) (116) (0.1)
Income (loss) before income taxes ....... 3,036 2.8 (5,889) (4.1) (22,217) (15.1)
Income tax (benefit) provision .......... 2,008 1.8 (1,045) (0.7) (7,055) (4.8)
Net income (loss) ....................... 1,028 1.0 (4,844) (3.4) (15,162) (10.3)
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
12
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 $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.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Sales increased $33.8 million or 31.4% to $141.3 million for the
year ended December 31, 1999 from $107.5 million for the same period in 1998.
This increase was a result of higher unit volume in book component sales, book
manufacturing sales, and the Company's acquisitions of Mid-City Lithographers,
Inc. and of TechniGraphix, Inc. in 1999.
Grossprofit increased $5.1 million or 19.0% to $32.0 million for the year
ended December 31, 1999, from $26.9 million for the same period in 1998, but the
gross profit margin decreased to 22.6% for the year ended December 31, 1999 from
25.0% for the same period in 1998. The decline in gross profit margin resulted
primarily from the operations of the Company's new thin book manufacturing
facility in New Jersey, which opened in September 1998, and by the Company's new
paperback book manufacturing facility in Maryland, which opened in July 1999.
The thin book facility incurred $12.4 million of costs, of which $2.4 million
represented depreciation, with sales of $10.6 million. The paperback book
facility incurred $4.0 million of costs, including approximately $2.0 million
excess capacity and start up costs with offsetting sales of $2.0 million. The
Company estimates that the thin book facility, in Rockaway, New Jersey, has the
13
capacity to produce a sufficient amount of books to generate $30.0 million in
sales with its current equipment, and the paperback book facility has the
capacity to produce a sufficient amount of books to generate $20.0 million in
sales with its current equipment.
Operating expenses increased $4.1 million or 21.5% to $23.2 million
for the year ended December 31, 1999, from $19.1 million for the same period in
1998. This increase was attributable to expenses at the Mid-City and
TechniGraphix, Inc. locations as well as the Company's new book manufacturing
facilities in New Jersey and Maryland. Operating expenses decreased 1.7% as a
percentage of sales to 16.2% for the year ended December 31, 1999 from 17.9% for
the same period in 1998. In the fourth quarter of 1999, because of over
capacity, the Company decided, to close the Mid-City facility and consolidate
the Company's book components operations. The facility was closed by December
31, 1999 without incurring any significant exit costs. The Company also decided
in the fourth quarter of 1999, to consolidate the operations of TechniGraphix,
Inc. to provide for greater efficiencies and reduce overhead. The TechniGraphix,
Inc. facility was closed by January 31, 2000 without incurring significant exit
costs. The Company has sublet the facility on the same terms and conditions as
the prime lease. The operations of Mid-City and TechniGraphix, Inc. were
relocated to Company facilities in Hagerstown, Maryland. The Company estimates
that the closing of these facilities will save the Company in excess of $2.0
million a year.
Interest expense increased $9.8 million or 192.2% to $14.9 million
for the year ended December 31, 1999 from $5.1 million for the same period in
1998. The increase was due to the Company's issuance of $105.0 million in 10
3/8% Senior Subordinated Notes and includes a one time charge of $1.1 million
associated with finance costs on the 1998 bridge note with First Union National
Bank (the "Bridge Note") and prepayment premiums of $1.6 million incurred in
connection with the early repayment of equipment debt.
The Company's effective tax rate was a benefit of 17.7% and a
provision of 66.1% for the years ended December 31, 1999 and 1998, respectively.
The change in the effective rate is primarily attributable to the net loss in
1999 and the proportion of non-deductible amortization expense for goodwill
resulting from certain acquisitions.
Net income declined $5.8 million to a loss of $4.8 million for the
year ended December 31, 1999 from net income of $1.0 million for the same period
in 1998. The decrease 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 $14.2 million
for 1998, $6.6 million for 1999 and $6.0 million for 2000.
On September 15, 1998, the Company entered into a three year $20.0
million revolving credit facility with First Union National Bank (the "Senior
Credit Facility"). As of December 31, 2000, the outstanding aggregate principal
of the senior credit facility was $8.7 million, bearing interest at the rate of
11.25% 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, limitations on additional
Company and subsidiary debt and require the Company to maintain certain
financial and non-financial covenants, the most restrictive of which requires
the Company to maintain certain interest coverage and leverage ratios as
14
defined in the Senior Credit Facility. As of December 31, 1999, the Company was
not in compliance with the interest coverage ratio. On March 23, 2000, the
Company and its lender amended the 1998 Loan Agreement effective December 31,
1999, which redefined the interest coverage ratio and brought the Company into
compliance with this covenant as of December 31, 1999. 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 1998 Loan Agreement as amended in November 2000. On
March 30, 2001 the Senior Credit Facility was amended to extend its maturity
date to March 31, 2002.
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 $540,000 for 1998, $3.2
million for 1999 and $5.8 million for 2000. The increase from 1998 to 1999 was
substantially due to the operating leases for digital printing presses
associated with the operations of TechniGraphix, Inc. The increase from 1999 to
2000 was substantially due to the operating leases for printing and binding
equipment at the Maryland book manufacturing facility.
Capital expenditures totaled $48.2 million for 1998, $16.5 million
for 1999 and $6.8 million for 2000. 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's capital expenditures for 2001 are currently estimated
to total approximately $7.0 million. The expenditures are principally for the
replacement of existing equipment including printing presses, finishing
equipment and prepress equipment. The Company also intends to acquire through
operating leases, $13.0 million of presses and bindery equipment for its book
manufacturing facility in Hagerstown, Maryland. The Company has in place the
necessary commitments for financing the operating leases. The Company believes
that in 2001 funds generated from operations and funds available under the
Senior Credit Facility will be sufficient to complete its capital expenditures
and service its debt. As of December 31, 2000, 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 June 1998, the FASB issued Statement No. 133 (SFAS 133)
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company does not hold derivatives and,
as such, SFAS 133 has not had an impact.
15
Forward Looking Statements
The statements in this report that relate to future plans,
expectations, events or performance, or which use forward-looking terminology
such as "estimate," "anticipate,", "intends," "will," "should," "expects,"
"believes," or "continue" contain forward-looking information. Actual results,
events or performance may differ materially from such forward-looking
statements, due to a variety of factors, including the risk factors and other
information presented in the Company's Registration Statement (the "Registration
Statement") filed with the Securities and Exchange Commission (the "SEC") File
No. 333-50995, and which became effective on May 13, 1999. 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 result 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has some exposure to market risk based upon interest
rate changes. Because approximately 93% of the Company's debt bears a fixed rate
of interest, the Company's exposure is immaterial.
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.
16
The following table sets forth certain information regarding the
Company's current directors and executive officers:
Directors and Executive Officers Age Positions
- ----------------------------------- --- -------------------------------------------------------------------------
Louis LaSorsa...................... 54 Chairman, Chief Executive Officer and Director
Edward Lieberman................... 58 Executive Vice President, Chief Financial Officer, Secretary and Director
John Carbone....................... 42 Vice President, Manufacturing, Book Components, and Director
David Rubin........................ 44 Director
Thomas Newell...................... 57 Chief Information Officer
Earl S. Wellschlager............... 53 Director
Mitchell Weiss..................... 38 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.
17
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, 2000. The Class B Common Stock is non-voting stock. See
"Security Ownership of Certain Beneficial Owners and Management."
18
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, 2000 for the Chief Executive Officer and the four
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
-------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- -------- -------- ------------
Louis LaSorsa.............. 2000 $541,423 $451,540 $ -
Chief Executive Officer 1999 544,284 565,000 -
1998 549,979 422,652 -
Edward Lieberman........... 2000 368,457 230,770 -
Chief Financial Officer 1999 365,275 282,000 -
1998 361,350 226,326 -
Mitchel Weiss.............. 2000 190,565 115,385 -
Vice President 1999 193,109 113,744 -
1998 164,621 37,711 -
John Carbone............... 2000 273,447 230,770 -
Vice President 1999 274,670 226,000 -
1998 267,315 94,303 -
No information is presented for options, restricted stock awards,
long-term incentive or other compensation because no such compensation has been
awarded.
19
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 9.0 580 7.4 1,580 8.4
Edward Lieberman................................ 1,000 9.0 405 5.2 1,405 7.4
John Biancolli.................................. 1,000 9.0 217 2.8 1,217 6.4
John Carbone.................................... 1,000 9.0 210 2.7 1,210 6.4
Thomas Newell................................... 1,000 9.0 143 1.8 1,143 6.0
Mitchell Weiss.................................. 1,000 9.0 112 1.4 1,112 5.9
Dion von der Lieth.............................. 1,000 9.0 46 0.6 1,046 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 9.0 435 5.6 1,435 7.6
Bruno Jung...................................... 1,000 9.0 312 4.0 1,312 6.9
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 1,450 18.6 6,450 34.1
(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.
20
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 1999 and 2000.
David Rubin, a director of the Company, is an officer and principal of Don
Aux Associates, which furnishes management consulting services to the Company.
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, 1999 and December 31, 2000
Consolidated Statements of Operations as of December 31, 1998, December 31,
1999 and December 31, 2000
Consolidated Statements of Changes in Stockholders' Equity as of December
31, 1998, December 31, 1999 and December 31, 2000
Consolidated Statements of Cash Flows as of December 31, 1998, December 31,
1999 and December 31, 2000
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.
(a)(3) See Item 14(c) of this Form 10-K
21
(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, 2000.
(c) Exhibits.
Exhibit Description
Number
- ------- ----------------------------------------------------------------------------------------------------
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 date 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 date 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.****
22
(c) Exhibits (continued).
Exhibit Description
Number
- ------- ----------------------------------------------------------------------------------------------------
10.4(d) Third Amendment to Credit Agreement date 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 date 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.
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
27 Financial Data Schedule
* 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)
23
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 April 2, 2001.
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 April 2, 2001
- ------------------------- and Director
Louis LaSorsa
/s/ Edward Lieberman Executive Vice President, Chief April 2, 2001
- ------------------------- Financial Officer, Secretary and Director
Edward Lieberman
/s/ John Carbone Vice President, Manufacturing, Book April 2, 2001
- ------------------------- Component Manufacturing, and Director
John Carbone
s/ Mitchel Weiss Vice President, Manufacturing, Thin Book April 2, 2001
- ------------------------- Manufacturing, and Director
Mitchel Weiss
/s/ Earl S. Wellschlager Director April 2, 2001
- -------------------------
Earl S. Wellschlager
/s/ David Rubin Director April 2, 2001
- -------------------------
David Rubin
24
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.
25
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,
1999 and 2000 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, 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 16, 2001, except Note 5,
as to which the date is March 30, 2001
F-2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------
December 31,
------------------------------
1999 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 270,585 $ 367,866
Accounts receivable, net of allowance for doubtful accounts and rebates of
$1,119,300 in 1999 and $1,084,800 in 2000 .............................. 21,184,283 20,296,011
Inventory .................................................................. 5,375,775 5,501,544
Income tax receivable ...................................................... 2,827,423 805,905
Prepaid expenses and other current assets .................................. 1,070,989 1,321,909
Deferred income taxes ...................................................... 627,438 1,032,798
------------- -------------
Total current assets ................................................... 31,356,493 29,326,033
Property, plant and equipment, net .............................................. 81,942,743 73,552,022
Goodwill, net ................................................................... 24,905,065 15,984,065
Deferred financing costs, net ................................................... 4,171,005 3,650,637
Other assets .................................................................... 9,129,466 10,559,495
------------- -------------
Total assets ........................................................... $ 151,504,772 $ 133,072,252
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable .............................................................. $ 45,684 $ 20,806
Accounts payable ........................................................... 13,154,518 10,489,654
Accrued expenses ........................................................... 7,944,589 11,055,808
------------- -------------
Total current liabilities .............................................. 21,144,791 21,566,268
10 3/8% Senior subordinated notes ............................................... 105,000,000 105,000,000
MICRF Loan ...................................................................... -- 500,000
Revolving line of credit ........................................................ 9,264,053 8,659,042
Notes payable ................................................................... 52,596 --
Deferred income taxes ........................................................... 3,572,711 --
------------- -------------
Total liabilities ...................................................... 139,034,151 135,725,310
------------- -------------
Commitments and contingencies
Stockholders' equity (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
Retained earnings (deficit) ................................................ 12,250,195 (2,911,384)
Stock subscriptions receivable ............................................. (137,392) (99,492)
Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares .. (1,769,230) (1,769,230)
------------- -------------
Total stockholders' equity (deficit) ................................... 12,470,621 (2,653,058)
------------- -------------
Total liabilities & stockholders' equity ............................... $ 151,504,772 $ 133,072,252
============= =============
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,
-----------------------------------------------
1998 1999 2000
------------- ------------- -------------
Sales ..................................... $ 107,491,045 $ 141,338,367 $ 147,544,151
Cost of sales ............................. 80,627,039 109,357,385 117,873,719
------------- ------------- -------------
Gross profit .............................. 26,864,006 31,980,982 29,670,432
------------- ------------- -------------
Operating expenses:
Selling and marketing expenses ....... 6,278,379 5,688,212 7,493,814
General and administrative expenses... 12,933,474 17,167,869 17,510,857
Loss (gain) on disposal of assets .... (132,862) 358,174 2,630,285
Restructuring charge ................. -- -- 11,425,000
------------- ------------- -------------
Total operating expenses .................. 19,078,991 23,214,255 39,059,956
------------- ------------- -------------
Income (loss) from operations ............. 7,785,015 8,766,727 (9,389,524)
Other expenses:
Interest expense ..................... 5,076,057 14,939,009 12,942,862
Other income ......................... (327,095) (282,682) (115,807)
------------- ------------- -------------
Income (loss) before income taxes ......... 3,036,053 (5,889,600) (22,216,579)
Income tax provision (benefit) ............ 2,007,767 (1,045,309) (7,055,000)
------------- ------------- -------------
Net income (loss) ......................... $ 1,028,286 $ (4,844,291) $ (15,161,579)
============= ============= =============
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
Common Stock
---------------------------- Total
Class A Class B Additional Retained Stock Treasury Stock Stockholders'
------------- ------------- Paid-in Earnings Subscription -------------------- Equity
Shares Amount Shares Amount Capital (Deficit) Receivable Shares Amount (Deficit)
------ ------ ------ ------ ---------- ------------ ------------ ------ ------------ -------------
Balance at December 31, 1997.. 14,560 $146 9,794 $98 $2,126,804 $16,066,200 $(270,544) 5,460 $(1,769,230) $16,153,474
Payment of stock subscription. - - - - - - 100,752 - - 100,752
Net income.................... - - - - - 1,028,286 - - - 1,028,286
------ ------ ------ ------ ---------- ------------ ------------ ------ ------------ -------------
Balance at December 31, 1998.. 14,560 146 9,794 98 2,126,804 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.. 14,560 146 9,794 98 2,126,804 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.. 14,560 $146 9,794 $98 $2,126,804 $(2,911,384) $ (99,492) 5,460 $(1,769,230) $(2,653,058)
====== ====== ====== ====== ========== ============ ============ ====== ============ =============
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,
-----------------------------------------------
1998 1999 2000
------------- -------------- --------------
Operating activities:
Net income (loss) ........................................................... $ 1,028,286 $ (4,844,291) $ (15,161,579)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property, plant and equipment ............ 8,710,352 12,513,790 12,510,539
Amortization of goodwill .................................................. 2,123,529 3,122,712 2,925,380
Amortization of deferred financing costs .................................. 210,000 1,537,684 520,369
Provision for uncollectible accounts ...................................... 150,000 220,000 485,000
Deferred income taxes ..................................................... 1,450,245 478,796 (7,344,934)
Restructuring charge ...................................................... -- -- 7,461,307
Loss (gain) on disposal of assets ......................................... (132,862) 358,174 2,630,285
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable ....................................................... 4,785,085 (4,490,823) 403,272
Inventory ................................................................. 512,878 (414,407) (125,769)
Prepaid expenses and other assets ......................................... (1,061,399) 442,553 (81,853)
Accounts payable .......................................................... (3,224,538) (4,805,691) (3,333,599)
Accrued expenses .......................................................... (542,561) 4,120,225 3,111,219
Income tax refund receivable .............................................. 143,423 (1,593,869) 2,021,518
------------ ------------- -------------
Net cash provided by operating activities ...................... 14,152,438 6,644,853 6,021,155
------------ ------------- -------------
Investing activities:
Proceeds from sale of equipment ........................................... 876,247 1,362,607 1,059,306
Capital expenditures ...................................................... (9,415,529) (17,871,249) (6,838,595)
Increase in equipment deposits ............................................ (5,262,490) -- --
Purchase of businesses, net of cash acquired .............................. -- (17,617,055) --
------------ ------------- -------------
Net cash used in investing activities .......................... (13,801,772) (34,125,697) (5,779,289)
------------ ------------- -------------
Financing activities:
Proceeds from issuance of senior subordinated notes ....................... -- 105,000,000 --
Net payments on revolving line of credit .................................. (3,000,520) (2,103,449) (605,011)
Proceeds from long term borrowings ........................................ 40,000,000 -- 500,000
Principal payments on long term borrowings ................................ (18,089,753) (78,224,270) (77,474)
Principal payments on capital lease obligations ........................... (3,679,350) (7,653,925) --
Debt financing costs ...................................................... (1,892,726) (4,133,362) --
Payment of stock subscription ............................................. 100,752 32,400 37,900
------------ ------------- -------------
Net cash provided by (used in) financing activities ............ 13,438,403 12,917,394 (144,585)
------------ ------------- -------------
Net increase (decrease) in cash ................................ 13,789,069 (14,563,450) 97,281
Cash and cash equivalents at beginning of year ............................ 1,044,966 14,834,035 270,585
------------ ------------- -------------
Cash and cash equivalents at end of year .................................. $ 14,834,035 $ 270,585 $ 367,866
============ ============= =============
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,
-------------------------------------------
1998 1999 2000
------------ ------------ -------------
Supplemental cash flow disclosures:
Cash paid for interest ................................. $ 4,722,336 $ 9,977,620 $ 12,477,684
Cash paid for income taxes, net of (refunds) received... $ 414,099 $ 67,892 $ (1,733,468)
Non-cash investing and financing activities:
Equipment acquired under capital leases ..................... $ 555,476 $ -- $ --
Equipment acquired under notes payable ...................... $ 32,934,848 $ -- $ --
Equipment and deposits included in accounts payable ......... $ -- $ -- $ 592,230
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, approximate 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
2000.............. 11% 13% 10%
1999.............. 11% 12% --
1998.............. 15% 15% --
Accounts receivable
2000.............. -- -- --
1999.............. -- -- --
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).
F-9
2. Significant Accounting Policies (Continued)
Deferred financing costs incurred in connection with the Company's bank
credit agreements with its financial institutions in 1996 (see Note 5) were
written off to interest expense in 1998 upon consummation of the financing
agreements discussed in Note 5. 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.
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 1998, the Company sold certain of its real estate holdings in
Connecticut for approximately $87,000, which had been reflected on its balance
sheet as assets held for sale at a net realizable value of $364,000.
Accordingly, in 1998, the Company recognized a loss on the disposal of this
asset of approximately $277,000. 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
F-10
2. Significant Accounting Policies (Continued)
and the reported amounts of revenue and expenses during the period. Actual
results could differ from these estimates.
Reclassifications
Certain 1998 and 1999 amounts have been reclassified to conform to the
2000 presentation.
Implication of New Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133 (SFAS 133) "Accounting
for Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,2000.
The Company does not hold derivatives and, as such, SFAS 133 has not had an
impact.
3. Inventory
Inventories consist of the following:
December 31,
-------------------------
1999 2000
----------- ----------
Raw Materials ...... $3,943,701 $4,273,345
Work in process .... 1,432,074 1,228,199
---------- ----------
$5,375,775 $5,501,544
========== ==========
4. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of the following:
December 31,
-----------------------------
1999 2000
------------ ------------
Land .................................................. $ 2,998,006 $ 2,998,006
Buildings and improvements ............................ 34,129,309 33,015,751
Machinery and equipment ............................... 85,165,991 80,091,789
Transportation equipment .............................. 4,945,816 2,024,464
------------ ------------
127,239,122 118,130,010
Less: Accumulated depreciation and amortization ...... 45,296,379 44,577,988
------------ ------------
$ 81,942,743 $ 73,552,022
============ ============
Included in other long-term assets are equipment deposits (see Note 9)
in the amount of $5,196,228 and $3,636,062 as of December 31, 1999 and 2000,
respectively.
F-11
5. Debt
At December 31, 1999 and 2000, notes payable consisted of the following:
Maturity December 31,
---------------------------
Notes Date 1999 2000
- --------- -------- ------------ ------------
Senior Subordinated Notes ...... 2009 $105,000,000 $105,000,000
Revolving Line of Credit ....... 2002 9,264,053 8,659,042
MICRF Loan ..................... 2005 -- 500,000
Equipment Notes ................ 2001 98,280 20,806
------------ ------------
Total .................. 114,362,333 114,179,848
Less current portion ... 45,684 20,806
------------ ------------
Long-term portion ...... $114,316,649 $114,159,042
============ ============
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 (discussed below) 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. Until February 1, 2002, the Company may also redeem
up to 25% of the Senior Notes at a price of 110.375% of their face amount with
the net cash proceeds from one or more public equity offerings. 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 12). 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 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, 2000, the Company employed over 720 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, 2000.
F-12
5. Debt (Continued)
Revolving Line of Credit
Prior to 1998, the Company entered into a joint $40.0 million Loan and
Security Agreement ("the 1996 Loan Agreement") with two commercial banks. In
September 1998, the Company entered into an Amended and Restated Loan Agreement
(the "1998 Loan Agreement") 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 1998 Loan
Agreement are subject to a borrowing base as defined in the Agreement. The
Company's unused availability under the 1998 Loan Agreement was $9,763,027 as of
December 31, 2000. Borrowings under the 1998 Loan Agreement and Senior Notes 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.
The 1998 Loan Agreement 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 and only if the
Company is not in default of any of the covenants of the 1998 Loan Agreement. At
December 31, 1999 and 2000, the weighted average interest rates on its
borrowings were 10.8% and 10.6%, respectively.
Included in accrued expenses is accrued interest in the amount of
$4,558,462 and $4,664,445 as of December 31, 2000 and 1999, respectively.
Compliance with Debt Covenants
The 1998 Loan Agreement contains certain covenants that requires the
Company to maintain certain financial and non-financial covenants, the most
restrictive of which requires the Company to maintain certain interest coverage
and leverage ratios as defined in the 1998 Loan Agreement. As of December 31,
1999, the Company was not in compliance with the interest coverage ratio. On
March 23, 2000, the Company and its lender amended the 1998 Loan Agreement
effective December 31, 1999, which redefined the interest coverage ratio and
brought the Company into compliance with this covenant as of December 31, 1999.
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 1998 Loan Agreement as amended in
November 2000. As of December 31, 1999 and 2000, 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, 2000. The fair
value of the Senior Notes at December 31, 2000, was approximately $75,075,000
and was estimated based on quoted market rate for instruments with similar terms
and remaining maturities.
6. Income Taxes
Provision (benefit) for income taxes is summarized as follows:
For the year December 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
Current:
Federal ................................................. $ 592,145 $(1,498,218) $ 237,439
State ................................................... 130,103 (331,255) 52,495
State payments (refunds) resulting from changes in
estimates on prior year returns ...................... (164,726) 111,456 --
------------ ------------ ------------
557 522 (1,718,017) 289,934
------------ ------------ ------------
Deferred:
Federal ................................................. 1,190,866 550,903 (6,015,010)
State ................................................... 259,379 121,805 (1,329,924)
------------ ------------ ------------
1,450,245 672,708 (7,344,934)
------------ ------------ ------------
$ 2,007,767 $(1,045,309) $(7,055,000)
============ ============ ============
The source and tax effects of the temporary differences giving rise to
the Company's net deferred tax (liability) asset are as follows:
December 31,
---------------------------
1999 2000
----------- ------------
Deferred income tax assets:
Covenant not to compete ....................... $ 31,828 $ 32,483
Allowance for doubtful accounts ............... 120,708 209,299
Accrued liabilities ........................... 459,507 779,061
AMT credit carryforward ....................... 625,457 625,457
Contribution and loss carryforward ............ 295,575 6,506,259
----------- -----------
Total deferred income tax assets ......... 1,533,075 8,152,559
----------- -----------
Deferred income tax liabilities:
Property and equipment ........................ (4,427,799) (3,723,474)
Inventory ..................................... (50,549) (29,424)
----------- -----------
Total deferred income tax liabilities .... (4,478,348) (3,752,898)
----------- -----------
Net deferred tax (liability) asset ....... $(2,945,273) $ 4,399,661
=========== ===========
F-14
6. Income Taxes (Continued)
As of December 31, 2000, the Company had net operating loss
carryforwards of $18.8 million, which begins to expire in 2018, and a charitable
contribution carryforward of $270,000, which begins to expire in 2003.
The provision (benefit) 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,
-------------------------------
1998 1999 2000
------- -------- --------
Statutory U.S. rate ................... 34.0% (34.0)% (34.0)%
State taxes net of federal benefit .... 4.9 (2.3) (3.9)
Goodwill amortization ................. 23.8 15.4 4.1
Other permanent differences ........... 3.4 3.2 2.0
------- -------- --------
Effective tax rate .................... 66.1% (17.7)% (31.8)%
======= ======== ========
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, 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.
F-15
8. Restructuring (Continued)
The following table displays the activity and balances of the
restructuring accrual account from January 1, 2000 to December 31, 2000:
January 1, December 31,
2000 2000
Type of Cost Balance Additions Deductions Balance
- ------------ ---------- ---------- ----------- -----------
Lease termination costs .... $ -- $3,729,000 $ 73,000 $3,656,000
Facility closings .......... -- 325,000 325,000 --
---------- ---------- ----------- -----------
Total ................. $ -- $4,054,000 $398,000 $3,656,000
========== ========== =========== ===========
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 following periods:
Year Ended December 31,
-----------------------------
1999 2000
------------- -------------
Net sales ..... $ 5,881,533 $ 3,480,935
Net loss ...... $ (2,845,775) $(14,401,114)
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
$2,154,522, $4,943,092 and $7,759,638 for the years ending December 31, 1998,
1999, and 2000, respectively.
F-16
9. Commitments and Contingencies (Continued)
Future minimum lease payments under operating leases as of December 31,
2000 are as follows:
Total
-----------
2001 .......... $ 6,004,843
2002 .......... 5,965,718
2003 .......... 6,000,832
2004 .......... 5,908,177
2005 .......... 5,655,928
Thereafter .... 13,788,834
-----------
$43,324,332
===========
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 remains
liable under the terms of the prime lease in the event of a default by the
subtenant.
Legal Contingencies
In December 1998, the Company filed a complaint against Krause Biagosch
GmbH and Krause America, Inc. ("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. 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 26, 2000, a jury rendered a verdict in favor of the
Company on all but one of the remaining pieces of equipment. A judgment of
$1,899,247 has been entered against Krause America, Inc. Krause America, Inc.
has filed an appeal, and the Company has filed a cross appeal with respect to
the piece of equipment which was not included in the original verdict and
judgment, and on the issue of pre-judgment interest. As of December 31, 1999 and
2000, the Company included in other non-current assets a receivable from Krause
of approximately $2.0 million.
In August 1999, the Company filed a complaint against Motion Technology
Horizons, Inc. 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. The
case is currently in the early stages of discovery.
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.
F-17
9. Commitments and Contingencies (Continued)
Purchase Commitments
The Company has contractual commitments totaling approximately $4.4
million for the purchase of various equipment.
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 and $514,000 for the years ended December 31, 1999 and
1998 respectively. As of December 31, 2000 and 1999, no amounts were due law
firm.
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 $694,000 and $180,000 for the years ended December 31, 2000 and
1999 respectively. As of December 31, 2000 and 1999, $65,027 and $51,948,
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 $7,000, $31,000 and $38,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000 and
1999, $4,837 and $0, respectively, is owed to the consulting firm and is
included in accounts payable.
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, 2000.
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, 2000.
F-18
12. Unaudited Quarterly Financial Data
Quarterly Financial Information
First Second Third Fourth Total
----------- ----------- ------------ ----------- ------------
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 3,785,003 2,871,466 915,875 9,124,901
Net (loss) income .............. (2,860,238) (58,227) (345,653) (1,580,173) (4,844,291)
1998:
Net sales ...................... 24,620,306 25,167,939 31,443,964 26,258,836 107,491,045
Cost of sales .................. 19,973,761 19,143,343 20,791,748 20,718,187 80,627,039
Income (loss) from operations... 846,919 1,983,586 5,076,207 (254,559) 7,652,153
Net (loss) income .............. (44,784) 569,790 1,707,431 (1,204,151) 1,028,286
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 16, 2001 except Note 5, as to which the date is March 30, 2001
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, 2000, 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 16, 2001, except Note 5,
as to which the date is March 30, 2001
S-1
Schedule II - Valuation and Qualifying
Accounts For Each of the three Years in the Period
Ended December 31, 2000
(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, 2000 ......................... $ 1,119 $ 492 $ 760 $ 1,286 $ 1,085
=========== ======== ======= ======== =======
Year ended December 31, 1999 ......................... $ 1,114 $ 220 $ 814 $ 1,029 $ 1,119
=========== ======== ======= ======== =======
Year ended December 31, 1998 ......................... $ 674 $ 150 $ 823 $ 533 $ 1,114
=========== ======== ======= ======== =======
Restructuring Reserve
Year ended December 31, 2000 ......................... $ -- $ 4,054 $ -- $ 398 $ 3,656
=========== ======== ======= ======== =======
S-2